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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934
JUMPTV INC.
(Exact
name of registrant as specified in its charter)
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Canada
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None
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1600
Old Country Road, Plainview, New York
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11803
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s telephone
number, including area code:
(516) 622-8300
Securities to be registered
pursuant to Section 12(b) of the Act:
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Title of each class
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Name of exchange on which
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to be so registered
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each class is to be registered
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Securities to be registered
pursuant to Section 12(g) of the Act:
Common
Stock
(Title of class)
(Title of class)
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated
filer (Do not check if a smaller reporting company)
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o
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Smaller reporting company
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x
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WHERE YOU CAN FIND MORE INFORMATION
JumpTV Inc. (“JumpTV” or the
“Company”) will prepare and file annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and certain other
information with the United States Securities and Exchange Commission (the “SEC”). Persons may read and copy any materials the
Company files with the SEC at the SEC’s public reference room at 100 F Street,
NE, Washington D.C. 20549, on official business days during the hours of 10 a.m.
to 3 p.m. Eastern Time. Information
may be obtained on the operation of the public reference room by calling the
SEC at 1-800-SEC-0330. The SEC maintains
an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC at
http://www.sec.gov. Moreover, the
Company maintains a website at http://www.neulion.com that contains important
information about the Company, including biographies of key management
personnel, as well as information about the Company’s business. This information is publicly available (i.e.,
not password protected) and is updated regularly.
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ITEM 1.
BUSINESS
Overview
JumpTV,
a corporation incorporated on January 14, 2000 under the Canada Business
Corporations Act (“CBCA”) whose s
hares of common stock (the “Shares”)
are listed on the Toronto Stock
Exchange, is a leading Internet Protocol (“IP”) television company. It began as a professional services provider
and has evolved since its inception to become a provider of a comprehensive
suite of technology and other services to sports and international content
owners and aggregators, affording them an end-to-end enterprise “IPTV”
solution. “IPTV” refers to the
distribution over an IP network of streamed audio, video and other multimedia
content, similar to television programming content, using industry-standard
streaming protocols. By “end-to-end
enterprise IPTV solution,” the Company means that it provides the following
services:
·
content
management — encoding of various digital and analog TV and video formats
·
subscriber
management — managing subscriber access and control of subscriber accounts
·
digital
rights management — preserving the integrity of the content and protecting it
from unauthorized access
·
billing
services — enabling customers to view subscription accounts and providing
pay-per-view transactional billing, payment, processing and advertising
insertion
·
delivery
— delivering streamed audio, video and other multimedia content anywhere,
anytime through JumpTV’s IPTV service and infrastructure
JumpTV’s
business objective is to enter into agreements with companies seeking private
networks to reach target audiences and to provide complete IPTV services to
these companies.
Customer
Relationships
JumpTV
has two types of relationships — business-to-consumer (“B2C”) and
business-to-business (“B2B”).
The
B2C relationships are more individual consumer oriented. JumpTV has signed distribution agreements
with individual channel or content providers in exchange for royalty payments
to such providers. JumpTV then markets
the content on one (or more) of the targeted websites that the company has
developed which is focused on a specific diaspora community (e.g. Talfazat, LLC
for the Middle East community; TV-Desi, Inc. for the South Asian
community), as well as on the general JumpTV website for purchase by an end
user. The Company often aggregates the
content into bundles or packages of similar interest. The Company incurs marketing expenses in
promoting the availability of the content.
JumpTV expects to have this group of customer relationships migrate to a
B2B relationship over time through partnerships and/or affiliates (partially or
wholly owned) that group the content into similar interests.
The
B2B relationships have been the focus of the Company in the past and are
expected to be the focus in the future.
A B2B relationship is focused on providing an end-to-end solution to a
customer to enable that customer to provide IPTV to its end users. This type of relationship is different than
above in that the B2B customer typically aggregates the content, negotiates the
licensing rights and markets
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directly the availability of the
content. This customer avails itself of
the full services of the Company in delivery to its end users. This type of relationship is typical in the
professional and sports properties and our agreement with Sky Angel U.S. LLC (“Sky
Angel”), a
faith-based-programming content provider.
The
United States and Canada are the principal markets in which our sales occur.
Products
Sports
Programming
JumpTV
offers live and on-demand sports content.
JumpTV has content and distribution agreements with leading professional
and collegiate sports properties.
Amongst professional sports leagues, JumpTV counts the National Football
League (“NFL”), the National Hockey League (“NHL”), the American Hockey League,
and Universal Sports as clients. JumpTV
also owns IPTV rights to distribute in North America live streaming of South
American Fédération Internationale de Football Association (FIFA) World Cup
Qualifier games in 2009. JumpTV also
operates a portfolio of sports-oriented web sites, including Jumptv.com,
Sportsya.com, Cycling.tv and CollegeSportsDirect.com. On the collegiate landscape, JumpTV is the
premier partner for National Collegiate Athletic Association (NCAA) colleges
and universities, with agreements in place with approximately 170 colleges,
universities or related sites.
Ethnic/International
and Specialty Programming
JumpTV
also offers what is referred to in the industry as “ethnic television,” which
JumpTV defines as television directed at a specific diaspora community, as
determined by a shared nationality, language or culture, generally excluding
communities for which English is the primary language. JumpTV has license agreements directly with
television broadcasters (referred to as “channel partners”) representing
approximately 160 channels in 35 countries that give the Company rights to
stream, predominantly on an exclusive world-wide basis and generally for an
initial four-year term, the channel partners’ live linear television feeds over
the public Internet.
Distribution
Methods
JumpTV
distributes content through two primary distribution methods:
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Internet-connected
browser-based devices such as personal computers, laptops and mobile devices;
and
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Standard
television through use of a JumpTV Internet-connected set top box (“STB”).
Both
of JumpTV’s distribution methods take advantage of an open IPTV network, the
public Internet. As a result, content
delivered by JumpTV is available globally and is potentially unlimited in
breadth.
Revenue
JumpTV
earns revenue in four broad categories:
·
Subscriber
revenue consists of recurring revenue based on subscriber usage, bandwidth
usage fees for the JumpTV infrastructure and/or technology usage fees based on
the number of subscribers. The
subscriber revenue is typically based on a monthly, quarterly or annual
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billing cycle to end users through our billing
systems and can be either a fixed fee per user or a variable fee measured as a
percentage of the end user pricing.
·
eCommerce
revenue consists of JumpTV services provided to its content providers, which
services include software applications for merchandising (i.e. sale of
merchandise), ticketing for a content provider’s events and management of a
content provider’s donor efforts.
Included in eCommerce revenue is advertising revenue earned through the
insertion of Internet advertising on websites and in streaming video.
·
Technology
services revenue consists of the set up and maintenance services JumpTV provides
related to our technology such as website (Internet) or console (STBs) design,
user interface optimization and streaming configuration. Included in technology services revenue is
the licensing of the technology required to convert, compress and transmit the
video signals to our content distribution network and ultimately the end users.
·
Equipment
revenue consists of the sale of STBs to content partners and/or end users to
enable the end user to receive the content over the Internet and display the
signal on a standard television.
Competition
JumpTV
faces competition from other online content providers who also offer sports,
entertainment, and/or international programming. In addition, there are multiple operators of
pirated video content who stream content for which they have not received
consent from the legal and beneficial owners of such content. Furthermore, there are multiple front-end
providers that provide a menu of links to streaming video content via websites
on the Internet. These bootleggers and front-end
providers have varying menus of ethnic content and offer such content at
varying degrees of streaming quality.
Moreover, certain IPTV service providers have an internal IP
distribution strategy whereby they make their live linear feeds, as well as
repurposed content, available through their own websites on a paid basis or
free advertisement-supported basis.
New
technologies and entrants could also have a material adverse effect on the
demand for JumpTV’s IPTV offerings. For
example, fixed line telecommunications and mobile telephony companies who offer
or plan to offer video services may be competitors to JumpTV. Together with other industry observers,
JumpTV has witnessed and expects to witness the launch of various closed
network IPTV services around the world.
As they strive to maintain and grow their customer bases, fixed line
telecommunications companies will likely see closed network IPTV as a central
element of a “triple-play” strategy that will package telephone, television and
Internet services in a single offering.
Finally,
JumpTV may be placed at a competitive disadvantage to the extent that other
video providers are able to offer programming in higher definition than
JumpTV. While the Company expects that
it will continue to offer its video content at increasingly higher streaming
speeds, there can be no assurance that it will be able to compete effectively
with high definition program offerings from other video providers.
To
distinguish our product line from our competitors’ offerings, we seek to be a “one-stop
shopping” source for our customers. Our
suite of technology and other services is directed at the entire spectrum of
content aggregation and delivery. Our
services include:
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content
ingestion;
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web site design
and hosting;
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·
live and
on-demand streaming of content on multiple platforms;
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billing
services;
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facilitating
online merchandise sales;
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mobile features
(streaming highlights, alerts, wallpaper and ring tones);
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online
ticketing;
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auction engine
(jerseys, tickets);
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social
networking;
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customer and
fan support; and
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marketing and
advertising sales.
Many
competitors in our markets offer far narrower choices of services than we offer. For example, some content providers deliver
only their own content, while we offer the content of multiple providers. Or, an agency may provide only online
ticketing services, while we also provide related online shopping and fan
networking. We also provide the STBs
used to view our content on a television set.
We strive to meet every customer’s needs at every level and partner with
them across product lines and extensions.
Supplier
Dependence
The
Company depends significantly upon TransVideo International, Ltd. (“TransVideo”),
a related party, to provide the STBs used by the Company’s customers.
Customer
Dependence
For
the year ended December 31, 2008, three customers accounted for 54% of
revenue as follows: 32%, 12% and
10%. For the year ended December 31,
2007, two customers accounted for 85% of revenue as follows: 68% and 17%.
For the year ended December 31, 2006, four customers accounted for
72% of revenue as follows: 33%, 16%, 13% and 10%.
Seasonality
Our
sports content business is subject to fluctuation because demand for our sports
programming corresponds to the lengths of the seasons of the sports for which
we stream content.
Patents,
Trademarks and Licenses
It
is JumpTV’s policy to be globally compliant with intellectual property rights. Channel partners are contractually obligated
to advise the Company when they schedule for airing content for which they do
not hold the international distribution rights, to enable the Company to
substitute compliant content in its place.
The Company will rely significantly on its channel partners to ensure
that the content it distributes does not infringe on the intellectual property
rights of others.
Regulation
Governments
and regulatory authorities in some jurisdictions in which our subscribers
reside or JumpTV content originates may impose rules and regulations
requiring licensing for distribution of IPTV content over the Internet. Regulatory schemes can vary significantly
from country to country. JumpTV may be
subject to broadcasting or other regulations in countries in which it has
subscribers or from which
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its channel partners distribute their live
linear feeds to JumpTV and may not be aware of those regulations or their
application to JumpTV. Further,
governments and regulatory authorities in many jurisdictions regularly review
their broadcasting rules and policies, including the application of those rules and
policies to new and emerging media.
Traditional
over-the-air and cable television broadcasting businesses are generally subject
to extensive government regulation and significant regulatory oversight in most
jurisdictions, including many of the countries from which JumpTV’s channels
originate and many of the countries into which JumpTV distributes its content
to subscribers. Regulations typically
govern the issuance, amendment, renewal, transfer and ownership of over-the-air
broadcast licenses, cable franchise licenses, competition and cross ownership
and sometimes also govern the timing and content of programming, the timing,
content and amount of commercial advertising and the amount of foreign versus
domestically produced programming. In
many jurisdictions, including Canada and the United States, there are also
significant restrictions on the ability of foreign entities to own or control
traditional over-the-air television broadcasting businesses. JumpTV is not aware of any regulations in any
of the jurisdictions in which its subscribers reside that would require JumpTV
to be licensed to distribute content over the public Internet.
Governments
and regulatory authorities in some jurisdictions in which our subscribers
reside may impose rules and regulations affecting the content distributed
over IPTV:
·
In
the United States, JumpTV may fall within the statutory definition of a
multichannel video program distributor (“MVPD”), making it subject to the
provisions of the Communications Act of 1934, as amended, and Federal
Communications Commission (“FCC”) regulations applicable to MVPDs. In August 2008, the FCC sought comments
regarding whether regulatory fees should be imposed on IPTV service. The FCC, however, has not ruled whether
providers of IPTV content over the public Internet are MVPDs, and as such, we
do not consider that the statutory and regulatory requirements of MVPDs apply
to JumpTV. If we were found to be an
MVPD, we would be required to scramble any sexually explicit programming we
distributed, close caption programs we offered subscribers, comply with certain
FCC advertising regulations and be subject to the FCC’s equal employment
opportunity rules, but we would not be subject to licensing or rate regulation
or be required to secure approval to deliver IPTV content over the public
Internet to subscribers residing in the United States.
·
A
European Union directive, entitled the “Audiovisual and Media Services
Directive,” was adopted on December 19, 2007. This directive could subject IPTV service
providers and content, including subscription-based IPTV content that is
distributed over the public Internet in the United Kingdom and to other
European Union member states, to regulatory requirements. European Union member states have until December 19,
2009 to implement this directive.
Whether JumpTV will be subject to such requirements is currently
unclear.
The
service will be regulated if it is an on-demand service which contains
primarily programs. The services will be
regulated in the member state in which the service provider is established (for
example where it has its head office and editorial control is exercised), but
the service will be able to be received freely throughout the other European
Union member states.
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The
United Kingdom has announced that:
(a)
It
will adopt a co-regulatory structure with an industry regulator having primary
responsibility over content issues and the Advertising Standards Association
will regulate advertising on voice-on-demand services;
(b)
The
Office of Communications (“Ofcom”) will have backstop powers to regulate both
content and advertising on such services;
(c)
It
will be up to the industry regulator to issue guidance on what on-demand
services fall within its regulatory scope.
If
JumpTV merely provides access but does not exercise editorial control over the
content of a voice-on-demand service, it will not be regulated. Ofcom will not regulate JumpTV’s streamed or
web cast services over the Internet.
·
In
Canada, the Canadian Radio-television and Telecommunications Commission (“CRTC”)
recently held public hearings with respect to, among other things, two
exemption orders. The first is an
exemption order for new media broadcasting undertakings in Public Notice
1999-197, which exempted from regulation, without terms or conditions, all new
media broadcasting undertakings (defined as those undertakings that provide
broadcasting services delivered and accessed over the Internet) that operate in
whole or in part in Canada, and certain other related orders. The second is an exemption order for mobile
television broadcasting undertakings which exempted from regulation
broadcasting undertakings that provide television programming received by way
of mobile devices. The CRTC asked
parties to comment on whether the exemption orders for new media broadcasting
undertakings and mobile television broadcasting undertakings continue to be
appropriate and whether new measures and/or regulatory amendments were
required. The deadline for final reply
was March 27, 2009. A decision is
expected in summer 2009.
Except
as otherwise described, while JumpTV is not aware of any proposed regulatory
initiatives regulating IPTV content in any of the jurisdictions in which its
subscribers reside, we cannot assure you that regulations or orders will not be
amended in the future in a manner that requires JumpTV to modify or block
content in particular jurisdictions in order to continue distributing its IPTV
services to subscribers in those jurisdictions or that otherwise affects JumpTV’s
operations in a materially adverse manner.
JumpTV’s
business may be adversely affected by foreign import, export and currency
regulations and global economic conditions.
JumpTV’s current and future development opportunities partly relate to
geographical areas outside of the United States and Canada. There are a number of risks inherent in
international business activities, including government policies concerning the
import and export of goods and services, costs of localizing products and
subcontractors in foreign countries, costs associated with the use of foreign
agents, potentially adverse tax consequences, limits on repatriation of
earnings, the burdens of complying with a wide variety of foreign laws,
nationalization and possible social, labor, political and economic
instability. There can be no assurance
that such risks will not adversely affect JumpTV’s business, financial
condition and results of operations.
Furthermore,
a small portion of JumpTV’s expenditures and revenues will be in currencies
other than the U.S. dollar. JumpTV’s
foreign exchange exposure may vary over time with changes in the geographic mix
of its business activities. Foreign
currencies may be unfavorably impacted by global
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developments, country specific events and
many other factors. As a result, JumpTV’s
future results may be adversely affected by significant foreign exchange
fluctuations.
Employees
As of March 15, 2009,
JumpTV had 237 total employees, all of whom were full-time employees. A breakdown by department is as follows:
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Department
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Numbers
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Senior Leadership
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3
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Business Operations
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77
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Sales
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81
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Research and Development
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57
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Finance, Human Resources and Legal
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19
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Total
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237
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ITEM 1A.
RISK FACTORS
An investment in our Shares is
highly speculative and involves a high degree of risk. The following are specific and general risks
that could affect JumpTV. If any of the
circumstances described in these risk factors actually occur, or if additional
risks and uncertainties not presently known to JumpTV or that JumpTV does not
currently believe to be material in fact occur, our business, financial
condition or results of operations could be materially adversely affected. In that event, the trading price of our
Shares could decline, and you may lose part or all of your investment. In addition to carefully considering the
risks described below, together with the other information contained in this
Registration Statement on Form 10 (the “Registration Statement”), you
should also consider the risks described in Item 1 of the Registration
Statement under the subheading “Regulation,” which risk factors are
incorporated by reference into this Item 1A.
In addition, these factors represent risks and uncertainties that could
cause actual results to differ materially from those implied by forward-looking
statements contained in the Registration Statement.
The global economic crisis could
result in decreases in customer traffic and otherwise adversely affect the
Company’s business and financial results and have a material adverse effect on
JumpTV’s liquidity and capital resources.
The global economy,
including the U.S. economy, is experiencing a severe recession. As a business that is dependent upon consumer
discretionary spending, JumpTV faces a challenging fiscal 2009 because its
customers may have less money for discretionary spending as a result of job
losses, foreclosures, bankruptcies, reduced access to credit and sharply
falling home prices. Any resulting
decreases in customer traffic and revenue will negatively impact our financial
performance because reduced revenue results in smaller profit margins. Additionally, many of the effects and
consequences of the economic recession are currently unknown; any one or all of
them could potentially have a material adverse effect on our liquidity and
capital resources, including our ability to raise additional capital if needed,
or otherwise negatively impact our business and financial results.
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JumpTV may need additional
financing to fund its continued growth, which may not be available.
JumpTV’s ability to increase
revenue will depend in part on its ability to continue growing the business by
maintaining and increasing its subscriber base, which may require significant
additional capital that may not be available to JumpTV. JumpTV may need additional financing due to
future developments, changes in its business plan or failure of its current
business plan to succeed, which could result from increased marketing,
distribution or programming costs.
JumpTV’s actual funding requirements could vary materially from its current
estimates. If additional financing is
needed, JumpTV may not be able to raise sufficient funds on favorable terms or
at all. If JumpTV issues Shares in the
future, such issuance will result in the then-existing shareholders sustaining
dilution to their relative proportion of the equity in JumpTV. If JumpTV fails to obtain any necessary
financing on a timely basis, then its ability to execute the current business
plan may be limited, and its business could be adversely affected.
JumpTV is an early-stage
enterprise with a short operating history, which makes it difficult to evaluate
JumpTV’s prospects.
JumpTV is still in the early
stage of building out its business. Many
of the expenses, problems and delays encountered by an enterprise in its early
stage may be beyond JumpTV’s control. As
an early-stage enterprise, JumpTV expends significant funds on:
·
marketing;
·
building its
subscriber management systems;
·
programming and
website development;
·
maintaining
adequate video-streaming and database software;
·
pursuing and
maintaining content distribution agreements with its content partners; and
·
acquiring and
maintaining Internet distribution rights to its content.
From JumpTV’s inception, it has incurred substantial net losses, and
JumpTV expects to continue operating at a loss in the near future. If JumpTV is ultimately unable to generate
sufficient revenue to become profitable and have sustainable positive cash
flows, its investors could lose their investment.
JumpTV may also encounter
certain problems or delays in building its business, including those related
to:
·
regulatory
policies and compliance;
·
marketing;
·
consumer
acceptance of Internet based television;
·
unsuccessful
commercial launches of new programming content;
·
costs and
expenses that exceed current estimates;
·
financing
needs; and
·
the construction,
integration, testing or upgrading of the JumpTV distribution infrastructure and
other systems.
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Delays in the timely design, construction, deployment and commercial
operation of JumpTV’s business, and consequently the achievement of positive
cash flow, could result from a variety of causes, many of which are beyond
JumpTV’s control. Substantial delays in
any of these matters could delay or prevent JumpTV from achieving profitable
operations.
JumpTV may have difficulty and
incur substantial costs in scaling and adapting its existing systems
architecture to accommodate increased traffic, technology advances or customer
requirements.
JumpTV’s future success will
depend on its ability to adapt to rapidly changing technologies, to adapt its
services to evolving industry standards and to improve the performance and
reliability of its services. The IPTV
industry and the Internet and the video entertainment industries in general are
characterized by rapid technological change, frequent new product innovations,
changes in customer requirements and expectations and evolving industry
standards. There is no assurance that
one or more of the technologies utilized by JumpTV will not become obsolete or
that JumpTV’s services will be in demand at the time they are offered. If JumpTV or its suppliers are unable to keep
pace with technological and industry changes, JumpTV’s business may be
unsuccessful.
In the future, JumpTV may be
required to make changes to its systems architecture or move to a completely
new architecture. To the extent that
demand for JumpTV’s services, content and other media offerings increases, it
will need to expand its infrastructure, including the capacity of its hardware
servers and the sophistication of its software.
If it is required to switch architectures, JumpTV may incur substantial
costs and experience delays or interruptions in its service. These delays or interruptions in its service
may cause users and customers to become dissatisfied and move to competing
providers of IPTV services. An
unanticipated loss of traffic, increased costs, inefficiencies or failures to
adapt to new technologies or user requirements and the associated adjustments
to its systems architecture could harm JumpTV’s operating results and financial
condition.
JumpTV depends on third
parties to develop technologies used in key elements of IPTV services. More advanced technologies that JumpTV may
wish to use may not be available to it on reasonable terms or in a timely
manner. Further, JumpTV’s competitors
may have access to technologies not available to JumpTV, which may enable its
competitors to offer entertainment products of greater interest to consumers or
at more competitive costs.
Demand for IPTV may be
insufficient for us to achieve and sustain profitability.
IPTV is an emerging
service. Potential customers of JumpTV
may be slow to adopt, or may refuse to adopt, the Internet as the medium
through which they receive television programming. We cannot estimate with any certainty the
potential subscriber demand for our service or our ability to satisfy that
demand. Among other things, subscriber
acceptance of our service will depend upon:
·
whether we
acquire, market and distribute high-quality programming consistent with
subscribers’ tastes;
·
the willingness
of subscribers to pay pay-per-view or subscription fees to obtain our service;
·
the cost and
availability of technology, such as computer hardware and high-speed Internet
connections, that are required to utilize our service;
·
our ability to
develop and introduce new services that offer enhanced performance and
functionality, in a timely manner, in response to changing market conditions,
customer requirements or our competitors’ technological advances;
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·
the acceptance
of our subscriber management systems; and
·
the marketing
and pricing strategies that we employ relative to those of our competitors.
Our results of operations will depend largely upon our ability to
increase our subscriber base while maintaining our preferred pricing structure,
managing costs and controlling subscriber churn rates. If demand for our service does not develop as
expected, then we may not be able to generate enough revenue to generate
positive cash flow or achieve and sustain profitability.
Our objective is to acquire
and maintain programming that sustains loyal audiences in or across various
demographic groups. The attractiveness
of our content offerings and our ability to retain and grow the audiences for
our programs will be an important factor in our ability to sell subscriptions
and advertising. Our content offerings
may not attract or retain the number of subscribers that we anticipate and some
content may offend or alienate subscribers that are outside of the target
audience for that content. There can be
no assurance that our content offerings will enable us to retain our various
audiences. If we lose the rights to
distribute any specific programming or channels and fail to attract comparable
programming with similar audience loyalty, the attractiveness of our service to
subscribers or advertisers could decline and our business could be adversely
affected.
JumpTV operates in competitive
and evolving markets.
JumpTV operates in
competitive and evolving markets locally, nationally and globally. These markets are subject to rapid
technological change and changes in customer preferences and demand. In seeking market acceptance, JumpTV will
encounter competition for both subscribers and advertising revenue from many
sources, including other IPTV services, direct broadcast satellite television
services and digital and traditional cable systems that carry sports and ethnic
television programming. Traditional
cable and satellite television already has a well-established and dominant
market presence for its services, and Internet portals, video file-sharing
service providers and other third-party providers of video content over the
Internet may distribute ethnic video content.
Many of these competitors have substantially greater financial,
marketing and other resources than JumpTV.
As the IPTV market grows (resulting from higher bandwidths, faster
modems and wider programming selections), an increasing number of
Internet-based video program offerings will be available to current and
potential customers of JumpTV. In
addition, JumpTV’s competitors, in both the traditional satellite and cable
television broadcasting and IPTV markets, could exclusively contract with
sports and ethnic content providers that are not under contract with JumpTV,
creating significant competition in both the sports and ethnic programming and
IPTV markets. JumpTV’s revenue could be
materially adversely affected if it is unable to compete successfully with
traditional and other emerging providers of video programming services.
JumpTV relies on its partners for
the provision of its content.
JumpTV’s success as a
business depends significantly on its relationships with its channel
partners. JumpTV enters into channel
partner agreements to acquire the Internet distribution rights to sports and
ethnic content. JumpTV’s success as a
business depends on the cooperation, good faith, programming and overall
success of its content partners in providing marketable television programming. Because of JumpTV’s dependency on its content
partners, should a content partner’s business suffer as a result of increased
competition, increased costs of programming, technological problems, regulatory
changes, adverse effects of litigation or other factors, JumpTV’s business may
suffer as well.
Furthermore, a failure by a
content partner to perform its obligations under its agreement could have
detrimental financial consequences for JumpTV’s business. The agreements are for various terms
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and have varying provisions regarding renewal or extension. If JumpTV is unable to renew or extend these
agreements at the conclusion of their respective terms, JumpTV may not be able
to obtain substitute programming, or substitute programming may not be
comparable in quality or cost to its existing programming, which could
materially adversely affect JumpTV’s business, financial condition and results
of operations.
JumpTV does not have exclusive
Internet distribution rights to all of its content and the cost of renewing
such rights or obtaining such rights for new content may be higher than
expected.
Many of JumpTV’s content
partner agreements give JumpTV the exclusive Internet distribution rights to
the related channels. If these channels
are offered elsewhere on the Internet on more attractive terms, JumpTV could
lose these subscribers, which would have an adverse effect on its results of
operations.
JumpTV must negotiate with
potential content partners to acquire the Internet distribution rights for its
television programming. In addition,
JumpTV will need to renew its agreements with existing content partners. JumpTV anticipates that, as the IPTV market
grows, license fees relating to Internet distribution rights for television
programming (including sports and ethnic television programming), or for the
rights to substitute advertising into the live video streamers of the content,
will increase. License fees payable under
the content partner agreements may be significantly more costly to renew than
anticipated.
In addition, some of the
existing content partner agreements that give JumpTV exclusive Internet
distribution rights have renewal mechanisms that are tied to JumpTV’s ability
to generate specified revenue share amounts or specified subscriber numbers in
respect of particular channels. If
JumpTV is unable to meet these targets, then JumpTV may have to renegotiate the
content partner agreements when they come up for renewal or may lose one or
more of its exclusive licenses.
Renegotiated license fees may be more expensive than anticipated. JumpTV may be unable to obtain its television
programming consistently at a cost that is reasonable or appealing to its
customers, which may adversely affect JumpTV’s marketing efforts, reputation,
brand and revenue.
There is uncertainty relating to
the ability of JumpTV to enforce its rights under the content partner
agreements.
Many of the content partner
agreements for ethnic programming are with foreign entities and are governed by
the laws of foreign jurisdictions. If a
content partner breaches a content partner agreement, then JumpTV will incur
the additional costs of determining its rights and obligations under the agreement
under applicable foreign laws and enforcing the agreement in a foreign
jurisdiction. Many of the jurisdictions
to which content partner agreements are subject do not have sophisticated
and/or impartial legal systems and JumpTV may face practical difficulties in
enforcing any of its rights in such jurisdictions. JumpTV may not be able to enforce such rights
or may determine that it would be too costly to enforce such rights. In addition, many of the content partner
agreements contain arbitration provisions that govern disputes under the
agreements and there is uncertainty with respect to the enforceability of such
arbitration provisions under the laws of related foreign jurisdictions. If a dispute were to arise under a content
partner agreement and the related arbitration provision was not effective, then
JumpTV would be exposed to the additional costs of settling the dispute through
traditional legal avenues rather than through an arbitration process.
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JumpTV’s business may be impaired
by third-party intellectual property rights in the programming content of its
content partners.
JumpTV relies on its content
partners to secure the primary rights to redistribute programming and other
content over the Internet. There is no
assurance that the content partners have successfully licensed all relevant
programming components that are necessary for Internet re-distribution. Other parties may claim certain intellectual
property rights in the content that JumpTV licenses from its content
partners. For example, content partners
may not have sufficient rights in the underlying content to license
distribution rights to their content to JumpTV, or a content partner may not
identify programming that JumpTV is not permitted to distribute in time for
JumpTV to stop distribution of the offending programming. In addition, as the IPTV market grows,
advertisers may begin to attempt to enforce intellectual property rights in
advertisements included in JumpTV’s content partners’ programming, and JumpTV
may inadvertently infringe the intellectual property rights of such advertisers
by distributing such advertisements over the Internet or by inserting its own
advertising in replacement of such advertisements.
In the event that the
content partners are in breach of the distribution rights related to specific
programming and other content, JumpTV may be required to cease distributing or
marketing the relevant content to prevent any infringement of related rights,
and may be subject to claims of damages for infringement of such rights. JumpTV may also be required to claim against
the content partners if the distribution rights related to specific programming
is breached, and there is no assurance that JumpTV would be successful in any
such claim.
JumpTV may be subject to other
third-party intellectual property rights claims.
Companies in the Internet,
technology and media industries often own large numbers of patents, copyrights,
trademarks and trade secrets and frequently enter into litigation based on
allegations of infringement or other violations of intellectual property
rights. As JumpTV faces increasing competition, the possibility of intellectual
property rights claims against it grows. JumpTV’s technologies may not be able
to withstand third-party claims or rights against their use. Intellectual property claims, whether having
merit or otherwise, could be time consuming and expensive to litigate or settle
and could divert management resources and attention. In addition, many of its
agreements with network service providers require JumpTV to indemnify them for
third-party intellectual property infringement claims, which could increase
JumpTV’s costs as a result of defending such claims and may require that JumpTV
pays the network service providers’ damages if there were an adverse ruling in
any such claims.
If litigation is
successfully brought by a third party against JumpTV in respect of intellectual
property, JumpTV may be required to cease distributing or marketing certain
products or services, obtain licenses from the holders of the intellectual
property at material cost, redesign affected products in such a way as to avoid
infringing intellectual property rights or seek alternative licenses from other
third parties which may offer inferior programming, any or all of which could
materially adversely affect JumpTV’s business, financial condition and results
of operations. If those intellectual
property rights are held by a competitor, JumpTV may be unable to obtain the
intellectual property at any price, which could also adversely affect JumpTV’s
competitive position. An adverse
determination could also prevent JumpTV from offering its services and could
require that JumpTV procure substitute products or services. Any of these results could harm JumpTV’s
business, financial condition and results of operations.
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JumpTV relies on its content
partners to ensure intellectual property rights compliance globally.
JumpTV is exposed to
liability risk in respect of the content that it redistributes over the
Internet, relating to both infringement of third-party rights to the content,
and infringement of the laws of various jurisdictions governing the type and/or
nature of the content. JumpTV relies in
large part on the content partners’ obligations under the content partner
agreements to advise JumpTV of its content so that JumpTV may take appropriate
action if such content is not intellectual property rights compliant or is
otherwise obscene, defamatory or indecent.
There is a risk that the content partners will not advise JumpTV in
time, or at all, in respect of such content, and expose JumpTV to liability for
its redistribution of such content over the Internet. Any alleged liability could harm JumpTV’s
business by damaging its reputation, requiring JumpTV to incur legal costs in
defense of any such claim, exposing JumpTV to significant awards of damages and
costs and diverting management’s attention, any of which could have an adverse
effect on JumpTV’s business, results of operations and financial condition.
We could suffer failures or
damage due to events that are beyond our control, which could adversely affect
our brand and operating results.
Our success as a business
depends, in part, on our ability to provide consistently high-quality video
streams to subscribers via the JumpTV distribution infrastructure and IPTV
technology on a consistent basis. Our
distribution infrastructure is susceptible to natural or man-made disasters
such as earthquakes, floods, fires, power loss and sabotage, as well as
interruptions from technology malfunctions, computer viruses and hacker
attacks. Other potential service
interruptions may result from unanticipated demands on network infrastructure,
increased traffic or problems in customer service. Our ability to control technical and customer
service issues is further limited by our dependence on our channel partners for
technical integration of the JumpTV distribution infrastructure. Significant disruptions in the JumpTV
distribution infrastructure would likely affect the quality and continuity of
our service, could harm our goodwill and the JumpTV brand and ultimately could
significantly and negatively impact the amount of revenue we may earn from our
service. We may not carry sufficient
business interruption insurance to compensate for losses that could occur as a
result of an interruption in JumpTV’s services.
We depend upon third parties
for:
·
the provision
of programming in connection with our service, including our channel partners
and other third-party content providers; and
·
the
availability and performance of STBs, substantially all of which we purchase
from TransVideo.
Any failure by third parties
to provide these services could significantly harm our ability to conduct our
business. Furthermore, financial
difficulties experienced by our third-party providers — such as bankruptcy,
insolvency, liquidation or winding up of daily operations — for any reason
whatsoever could also have negative consequences on our business.
JumpTV depends on key personnel
and relationships.
JumpTV is dependent on key
members of its senior management, including Nancy Li and G. Scott
Paterson. JumpTV has not obtained
key-man insurance for any member of senior management other than Mr. Paterson. In addition, innovation is important to
JumpTV’s success, and JumpTV depends on the continued efforts of its executive
officers and key employees, who have specialized technical knowledge regarding
the JumpTV distribution infrastructure and information technology systems and
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significant business knowledge regarding the IPTV industry and
subscription services. The market for the
services of qualified personnel is competitive and JumpTV may not be able to
attract and retain key employees. If
JumpTV loses the services of one or more of its key senior officers or
employees, or fails to attract qualified replacement personnel, then JumpTV’s
business and future prospects could be materially adversely affected.
Increased subscriber turnover
could adversely affect JumpTV’s financial performance.
Customer subscriber churn
has a significant financial impact on JumpTV’s results of operations, and
JumpTV cannot reliably predict the amount of churn that it will experience over
the long term. Given the increasingly
competitive nature of the IPTV industry, JumpTV may not be able to reduce churn
without significantly increasing its spending on customer retention incentives,
which would have a negative effect on its earnings and free cash flow. There can be no assurance that an increase in
competition from other IPTV providers, new technology entrants, programming
theft and other factors will not contribute to a relatively higher churn than
JumpTV has experienced historically. To
the extent that JumpTV’s churn is greater than currently anticipated, it may be
more costly for the Company to acquire a sufficient customer base to generate
revenue.
Current economic conditions
have led certain consumers to reduce their spending on non-essential
items. A reduction in consumer
discretionary spending or an inability to pay for subscribed services could
result in a decrease in or loss of subscribers, which would reduce JumpTV’s
future revenue and negatively impact its business, financial condition and
results of operations.
Increased subscriber acquisition
costs could adversely affect JumpTV’s financial performance.
JumpTV anticipates spending
substantial funds on advertising and other marketing to attract new subscribers
and maintain JumpTV’s subscriber base.
JumpTV’s ability to achieve break-even cash flows depends in part on its
ability to achieve and maintain lower subscriber acquisition costs over
time. JumpTV’s subscriber acquisition
costs, both in the aggregate and on a per-new-subscriber basis, may materially
increase in the future to the extent that JumpTV introduces new promotions,
whether in response to competition or otherwise. Any material increase in subscriber
acquisition or retention costs from current levels could have a material
adverse effect on JumpTV’s business, financial condition and results of
operations.
JumpTV may not be successful in
developing a version of its service that will gain widespread adoption by users
of alternate devices to access the Internet.
In the coming years, the
number of individuals who access the Internet through devices other than a
personal computer, such as personal digital assistants, mobile telephones and
television set top devices, is expected to increase dramatically. JumpTV’s services are designed for rich,
graphical environments such as those available on personal and laptop
computers. The lower resolution,
functionality and memory associated with alternative devices may make the
distribution of content through such devices difficult, and JumpTV may be
unsuccessful in its efforts to provide a compelling service for users of
alternative devices. If JumpTV is unable
to attract and retain a substantial number of alternative device users to its
services, it will fail to capture a sufficient share of an increasingly
important portion of the market for online media.
In addition, JumpTV intends
to introduce new services and/or functionalities to increase its subscriber
base and long-term profitability, such as targeted advertising insertion and
personal video recording. These services
are dependent on successful integration of new technologies into the JumpTV
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distribution infrastructure, negotiations with third-party content and
network system providers, subscriber acceptance and the maintenance of future
technologies to support these services.
If JumpTV is unsuccessful in implementing such services, or the economic
attractiveness of these services is lower than anticipated, then JumpTV’s
business and operating results could be adversely affected.
JumpTV may not realize synergies
from the combination of the operations of JumpTV and NeuLion.
On October 20, 2008,
JumpTV Acquisition Corp., a wholly-owned subsidiary of JumpTV, merged with and
into NeuLion, Inc. (“NeuLion”), with NeuLion as the surviving corporation,
pursuant to the Agreement and Plan of Merger, dated June 26, 2008, among
NeuLion, JumpTV and JumpTV Acquisition Corp. (the “Merger”). As consideration in the Merger, JumpTV issued
Shares, without registration under the Securities Act of 1933, as amended (the
“Securities Act”), to the former stockholders of NeuLion, and NeuLion became a
wholly-owned subsidiary of JumpTV.
JumpTV anticipated realizing certain synergies from the combination of
its operations with those of NeuLion. If
such synergies are not realized, they could have a material adverse affect on
JumpTV’s financial condition, profitability and cash flows.
JumpTV may be unable to manage
rapidly expanding operations.
JumpTV is continuing to grow
and diversify its business both domestically and internationally. As a result, JumpTV will need to expand and
adapt its operational infrastructure. If
JumpTV is unable to manage its growth effectively, it could have a material
adverse effect on JumpTV’s business, financial condition and results of
operations. To manage growth
effectively, JumpTV must, among other things, continue to develop its internal
and external sales forces, the JumpTV distribution infrastructure capability,
its customer service operations and its information systems, maintain its
relationships with channel partners, effectively enter new areas of the sports
and ethnic television markets, effectively manage the demands of day-to-day
operations in new areas while attempting to execute its business strategy and
realize the projected growth and revenue targets developed by its
management. JumpTV will also need to
continue to expand, train and manage its employee base, and JumpTV’s management
must assume even greater levels of responsibility. If JumpTV is unable to manage growth
effectively, it may experience a decrease in subscriber growth and an increase
in subscriber churn, which could have a material adverse effect on JumpTV’s
financial condition, profitability and cash flows.
Acquisitions and strategic
investments could adversely affect JumpTV’s operations and result in
unanticipated liabilities.
JumpTV may in the future
acquire or make strategic investments in a number of companies, including
through joint ventures. Such
transactions may result in dilutive issuances of equity securities, use of cash
resources, incurrence of debt and amortization of expenses related to
intangible assets. JumpTV’s acquisitions and strategic investments would be
accompanied by a number of risks, including:
·
the difficulty
of assimilating operations and personnel of acquired companies into JumpTV’s
operations;
·
the potential
disruption of ongoing business and distraction of management;
·
additional
operating losses and expenses of the businesses acquired or in which JumpTV
invests;
·
the difficulty
of integrating acquired technology and rights into JumpTV’s services and
unanticipated expenses related to such integration;
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·
the potential
for patent and trademark infringement claims against the acquired company;
·
the impairment
of relationships with customers and partners of the companies JumpTV acquired
or with JumpTV’s customers and partners as a result of the integration of
acquired operations;
·
the impairment
of relationships with employees of the acquired companies or JumpTV’s employees
as a result of integration of new management personnel;
·
the difficulty
of integrating the acquired company’s accounting, management information, human
resources and other administrative systems;
·
in the case of
foreign acquisitions, uncertainty regarding foreign laws and regulations and
difficulty integrating operations and systems as a result of cultural, systems
and operational differences; and
·
the impact of
known potential liabilities or unknown liabilities associated with the
companies JumpTV acquires or in which it invests.
JumpTV’s failure in
addressing such risks in connection with future acquisitions and strategic
investments could prevent JumpTV from realizing the anticipated benefits of
such acquisitions or investments, causing it to incur unanticipated liabilities
and harming JumpTV’s business generally.
Internet transmissions may be
subject to theft and malicious attacks, which could cause JumpTV to lose
subscribers and revenue.
Like all Internet
transmissions, JumpTV’s streaming content may be subject to interception and
malicious attack. Pirates may be able to
obtain or redistribute JumpTV’s programs without paying fees to JumpTV. The JumpTV distribution infrastructure is
exposed to spam, viruses, worms, spyware, denial of service or other attacks by
hackers and other acts of malice. Theft
of JumpTV’s content or attacks on JumpTV’s distribution infrastructure would
reduce future potential revenue and increase JumpTV’s net subscriber
acquisition costs. In addition, theft of
programming from JumpTV’s competitors could increase JumpTV’s own subscriber
churn rate.
Compromises of JumpTV’s
security technology could also adversely affect its ability to contract for
licenses to distribute television programming over the Internet. JumpTV uses security measures intended to
make theft of its content more difficult.
However, if JumpTV is required to upgrade or replace existing security
technology, the cost of such security upgrades or replacements could have a
material adverse effect on JumpTV’s financial condition, profitability and cash
flows. In addition, other illegal
methods that compromise Internet transmissions may be developed in the
future. If JumpTV cannot control
compromises of its channels, then its revenue, net subscriber acquisition
costs, churn and ability to contract for licenses to distribute television
programming over the Internet could be materially adversely affected.
There is no assurance that the
current costs of Internet connections and network access will not rise with
increasing popularity of IPTV services, which would adversely affect JumpTV’s
business.
JumpTV relies on Internet
service providers for its principal connections and network access and to
stream audio and video content to subscribers.
As demand for IPTV services increases, there can be no assurance that
Internet service providers will continue to price their network access services
on reasonable terms. The distribution of
streaming media requires distribution of large content files and providers of
network access may change their business model and increase their prices
significantly, which could slow the widespread acceptance of such
services. In order for JumpTV’s media
content services to be
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successful, there must be a reasonable price model in place to allow
for the continuous distribution of large streaming media files. JumpTV has limited or no control over the
extent to which any of these circumstances may occur, and if network access
prices rise significantly, then JumpTV’s business and operating results would
likely be adversely affected.
JumpTV’s business depends on the
continued growth and maintenance of the Internet infrastructure.
The success and the
availability of Internet-based products and services depends in part upon the
continued growth and maintenance of the Internet infrastructure itself, including
its protocols, architecture, network backbone, data capacity and security. Spam, viruses, worms, spyware, denial of
service or other attacks by hackers and other acts of malice may affect not
only the Internet’s speed, reliability and availability but also its continued
desirability as a vehicle for commerce, information and user engagement. If the Internet proves unable to meet the new
threats and increased demands placed upon it, JumpTV’s business plans, user and
advertiser relationships, site traffic and revenues could be adversely
affected.
Privacy concerns relating to
elements of JumpTV’s service could damage its reputation and deter current and
potential users from using its products and services.
From time to time, concerns
may be expressed about whether JumpTV’s products and services compromise the
privacy of users and others. Concerns
about JumpTV’s collection, use or sharing of personal information or other
privacy related matters, even if unfounded, could damage JumpTV’s reputation
and result in a loss of user confidence and ultimately in a loss of users,
partners or advertisers, which could adversely affect JumpTV’s business and
operating results.
JumpTV may have exposure to
greater than anticipated tax liabilities.
JumpTV is subject to income
taxes and non-income taxes in a variety of jurisdictions and its tax structure
is subject to review by both domestic and foreign taxation authorities. The determination of its world-wide provision
for income taxes and other tax liabilities requires significant judgment and,
in the ordinary course of its business, there are many transactions and
calculations where the ultimate tax determination is uncertain. Although JumpTV believes that its estimates
are reasonable, the ultimate tax outcome may differ from the amounts recorded
on JumpTV’s consolidated financial statements and may materially affect
JumpTV’s financial results in the period or periods for which such
determination is made.
JumpTV relies on insurance to
mitigate certain risks and to the extent the cost of insurance increases or
JumpTV is unable or chooses not to maintain sufficient insurance, its operating
results may be adversely affected.
JumpTV contracts for
insurance to cover certain potential risks and liabilities. In the current economic environment,
insurance companies are increasingly specific about what they will and will not
insure. It is possible that JumpTV may
not be able to get enough insurance to meet its needs, may have to pay very
high prices for the coverage or may not be able to acquire any insurance for
certain types of business risk. In
addition, JumpTV has in the past and may in the future choose not to obtain
insurance for certain risks facing its business. This could leave JumpTV exposed to potential
claims. If JumpTV was found liable for a
significant claim in the future, its operating results could be negatively
impacted. Also, to the extent the cost
of maintaining insurance increases, its operating results will be negatively
affected.
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JumpTV has operated during
periods in which it was not covered by adequate insurance. JumpTV is therefore exposed to the risk of
having to finance any potential claims against JumpTV relating to the periods
in which it was not covered.
JumpTV is subject to foreign
business, political and economic disruption risks.
JumpTV contracts with
various entities from around the world, including in respect of the acquisition
of the Internet distribution rights to the content. As a result, JumpTV is exposed to foreign
business, political and economic risks, which could adversely affect JumpTV’s
financial position and results of operations, including:
·
difficulties
in managing content partner relationships from outside of a content partner’s
jurisdiction;
·
political
and economic instability;
·
less
developed infrastructures in newly industrializing countries;
·
susceptibility
to interruption of channel feeds in foreign areas due to war, terrorist
attacks, medical epidemics, changes in political regimes and general interest
rate and currency instability;
·
exposure
to possible litigation or claims in foreign jurisdictions; and
·
competition
from foreign-based IPTV providers and the existence of protectionist laws and
business practices that favor such providers.
|
ITEM 2.
|
FINANCIAL
INFORMATION
|
A.
Selected Financial Data
Not required.
B.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following Management’s Discussion & Analysis (“MD&A”) of JumpTV’s
financial condition and results of operations should be read in conjunction
with the Company’s audited consolidated financial statements and accompanying
notes for the years ended December 31, 2008 and 2007, which have been
prepared in accordance with United States generally accepted accounting
principles (“GAAP”). All dollar amounts
are in U.S. dollars (“US$” or “$”) unless stated otherwise.
On October 20,
2008, JumpTV completed the Merger with NeuLion, which was (as described later
in this MD&A) a reverse takeover for accounting purposes. Therefore, this MD&A is for the years
ended December 31, 2008 and 2007, reflects the assets, liabilities and
results of operations of NeuLion, the accounting acquirer, and only includes
the assets, liabilities and results of operations of JumpTV, the legal
acquirer, subsequent to the reverse takeover on October 20, 2008 (the “Acquired
Business”). This MD&A is issued
under the name of the legal acquirer (JumpTV), but is deemed to be a
continuation of the accounting acquirer (NeuLion).
Our
MD&A is intended to enable readers to gain an understanding of JumpTV’s
current results and financial position.
To do so, we provide information and analysis comparing the results of
operations and financial position for the current year to those of the
preceding comparable twelve-month period.
We also provide analysis and commentary that we believe is required to
assess the Company’s future
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prospects. Accordingly, certain sections of this report
contain forward-looking statements that are based on current plans and
expectations. These forward-looking
statements are affected by risks and uncertainties that are discussed in Item
1A of the Registration Statement and could have a material impact on future
prospects. Readers are cautioned that
actual results could vary.
Cautions
regarding forward-looking statements
This
MD&A contains certain forward-looking statements, which reflect management’s
expectations regarding the Company’s growth, results of operations, performance
and business prospects and opportunities.
Statements
about the Company’s future plans and intentions, results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. Wherever
possible, words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,”
“anticipate,” “believe,” “estimate,” “predict,” or “potential” or the negative
or other variations of these words, or similar words or phrases, have been used
to identify these forward-looking statements.
These statements reflect management’s current beliefs and are based on
information currently available to management as at the date hereof.
Forward-looking
statements involve significant risk, uncertainties and assumptions. Many factors could cause actual results,
performance or achievements to differ materially from the results discussed or
implied in the forward-looking statements.
These factors should be considered carefully and readers should not
place undue reliance on the forward-looking statements. Although the forward-looking statements
contained in this MD&A are based upon what management believes to be
reasonable assumptions, the Company cannot assure readers that actual results
will be consistent with these forward-looking statements. These forward-looking statements are made as
of the date of this MD&A, and the Company assumes no obligation to update
or revise them to reflect new events or circumstances, except as required by
law. Many factors could cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements that may be expressed or
implied by such forward-looking statements, including: general economic and
market segment conditions, competitor activity, product capability and
acceptance, international risk and currency exchange rates and technology
changes. More detailed assessment of the
risks that could cause actual results to materially differ from current
expectations is contained in
Item 1A of the Registration Statement.
Merger and
Reverse Take-Over
On October 20,
2008, the Company completed the Merger with NeuLion, an end-to-end IPTV service
provider of live and on-demand sports, international and religious programming
over the Internet to computers and/or through STBs to televisions. Under the terms of the Merger, JumpTV issued
49,577,427 Shares directly, as well as 1,840,097 Shares subject to a
performance escrow relating to a prior acquisition, which represented
approximately the entire issued and outstanding Shares of JumpTV prior to
closing, to the securityholders of NeuLion in exchange for their NeuLion
securities. Pursuant to the Merger, the
Company also issued 5,000,000 warrants, fully vested and exercisable for two
years at $0.63, and 2,700,000 employee stock options, vesting in equal monthly
amounts over 48 months and exercisable for five years at $0.60, to employees of
NeuLion who became employees of the Company.
On October 20,
2008, AvantaLion LLC (“AvantaLion”), an entity controlled by Mr. Wang, our
Chairman and the spouse of Ms. Li, our CEO and the founder and CEO of
NeuLion, purchased 10,000,000 units from JumpTV’s treasury at a price of
CAD$1.00 per unit. Each unit (a “Unit”) consists
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of one Share, one-half of one
Share purchase warrant exercisable at CAD$1.25 and one-half of one Share
purchase warrant exercisable at CAD$1.50. The warrants partially comprising the
Units are exercisable for a period of two years from the date of issuance. Mr. Paterson, our Vice Chairman, also
purchased 1,000,000 Units on the same terms. The aggregate gross proceeds from
the sale of Units (the “Private Placement”) were CAD$11.0 million or US$9.2
million
In
accordance with Statement of Financial Accounting Standards No. 141,
Business Combinations
(“FAS 141”), the Company has
determined that NeuLion was the accounting acquirer and accordingly has
accounted for the Merger as a reverse takeover.
Therefore, the financial statements and this MD&A for the years
ended December 31, 2008 and 2007 reflect the assets, liabilities and
results of operations of NeuLion, the accounting acquirer, and only include the
assets, liabilities and results of operations of the Acquired Business
subsequent to the reverse takeover on October 20, 2008. This MD&A is issued under the name of the
legal acquirer (JumpTV), but is deemed to be a continuation of the accounting
acquirer (NeuLion).
Overview
JumpTV is an IPTV service
and technology provider that builds and manages private networks for companies
interested in reaching specific target audiences. JumpTV provides an end-to-end
IPTV service of live and on-demand sports, international television content and
family programming.
This end-to-end enterprise
technology solution enables the distribution of IPTV content to subscribers and
pay-per-view customers for viewing on multiple platforms, including
Internet-connected browser-based devices such as personal computers, laptops
and mobile devices and standard television sets through Internet-connected
STBs.
JumpTV’s business model has
evolved from its inception as a professional services provider to, in fiscal
2006, an end-to-end provider of the following IPTV services:
·
content
management — encoding of various digital and analog TV and video formats
·
subscriber
management — managing subscriber access and control of subscriber accounts
·
digital
rights management — preserving the integrity of the content and protecting it
from unauthorized access
·
billing
services — enabling customers to view subscription accounts, providing
pay-per-view transactional billing, payment, processing and advertising
insertion
·
delivery
— delivering streamed audio, video and other multimedia content anywhere,
anytime through JumpTV’s IPTV service and infrastructure
This evolution commenced in
2006 and is the one of the reasons for the increase in revenue, cost of sales
and expenses between fiscal 2007 and fiscal 2008.
Through the acquisition of
the Acquired Business on October 20, 2008, JumpTV has expanded its
portfolio of content from professional sports (the NHL and the NFL),
international content (Chinese programming through KyLinTV, Inc. (“KyLinTV”))
and faith-based programming (Sky Angel) to include college sports, cycling
events, soccer events and additional international channels.
21
Table of Contents
JumpTV’s success is
dependent upon several factors, including securing contractual relationships,
maintaining technological advantage in a rapidly changing industry and
efficiently operating the distribution network.
Fiscal
2008
On October 20,
2008, the Company completed the acquisition of the Acquired Business described
above. The acquisition has been accounted for as a reverse take over using the
purchase method, with the results of the Acquired Business included in the
Company’s results of operations from the date of acquisition.
The net
assets acquired (in millions) are as follows:
|
Cash
|
|
$
|
22.9
|
|
|
Current assets
|
|
5.0
|
|
|
Property, plant and equipment
|
|
5.1
|
|
|
Long-term assets
|
|
1.0
|
|
|
Intangible assets
|
|
6.0
|
|
|
Goodwill
|
|
6.8
|
|
|
Total assets
|
|
$
|
46.8
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
$
|
12.4
|
|
|
Long term
liabilities
|
|
0.8
|
|
|
Total
liabilities
|
|
$
|
13.2
|
|
|
|
|
|
|
|
Net assets
acquired
|
|
$
|
33.6
|
|
The
intangible assets included in the table above consist of customer relationships
of $5.9 million which are being amortized over a five-year period and
trademarks of $0.1 million which are being amortized over a one-year
period. The software fixed asset of $2.0
million included in the Acquired Business is being amortized over a three-year
period.
Operating Performance
Revenue
for fiscal 2008 was $13.4 million, up 72% from $7.8 million in fiscal
2007. The revenue growth of $5.6 million
was due to an increase in services revenue of $8.2 million and was offset by a
decrease in our equipment revenue of $2.6 million. In part, the revenue growth is due to the
acquisition of the Acquired Business, which contributed $3.3 million of the
growth. The organic increase (excluding
the results of the Acquired Business) in services revenue is consistent with
the increasing scope of operations. As
the number of subscribers increases, there is a cumulative effect of increasing
subscriber revenue on a month over month basis.
The decrease in equipment revenue is a result of the uneven nature of
this revenue stream — customers often place large single orders made to meet
minimum order requirements, to manage the lead time between ordering and
shipping and to minimize the related shipping costs. The lead time on new orders is approximately
12 weeks from order to receipt. The
purchase by customers of STBs is a leading indicator of future subscriptions.
Our
net loss for 2008 was $11.6
million, or a
loss of $0.21
per fully diluted share, compared
with a net loss of $4.5 million or a loss of $0.11
per
fully diluted share in 2007. The
increase in net loss of $7.1 million is due to increased organic expenses as we
expanded our operations to support new and potential clients of $4.8
million, impairment of long-lived assets of $1.0 million,
losses incurred in the Acquired Business of $2.2 million subsequent to October 20,
2008, stock-based compensation incurred upon closing the Merger of $1.8
million, and increased depreciation and amortization of $1.0 million, which was
offset by improved organic gross margin of $2.3
million,
increased investment income and
22
Table of Contents
foreign
exchange of $0.4 million, a reduction in the equity losses of affiliate of $1.1
million and other miscellaneous items.
Our
Non-GAAP Adjusted EBITDA loss was $6.6 million compared with a Non-GAAP
Adjusted EBITDA loss of $1.9 million in 2007.
The increase is Non-GAAP Adjusted EBITDA is due to the cash impact of
the items noted above. The reconciliation
from net loss to Non-GAAP Adjusted EBITDA loss is as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
(11,637,260
|
)
|
(4,515,759
|
)
|
|
|
|
|
|
|
|
|
Add back:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
1,572,492
|
|
561,077
|
|
|
Stock-based compensation
|
|
1,848,906
|
|
—
|
|
|
Impairment of long-lived assets
|
|
1,036,993
|
|
—
|
|
|
Equity in loss of affiliate
|
|
1,006,386
|
|
2,083,943
|
|
|
Investment income and foreign exchange gain
|
|
(395,768
|
)
|
(33,161
|
)
|
|
|
|
|
|
|
|
|
Non-GAAP Adjusted EBITDA loss
|
|
(6,568,251
|
)
|
(1,903,900
|
)
|
Non-GAAP
Adjusted EBITDA is defined as net earnings before interest, taxes, depreciation
and amortization, and, as presented above, represents our company’s net
earnings or loss adjusted to exclude depreciation and amortization expenses,
net investment income and foreign exchange, equity losses in affiliate,
non-cash impairment charges and non-cash stock compensation expense. We present Non-GAAP Adjusted EBITDA to
enhance understanding of our operating performance. We use Non-GAAP Adjusted EBITDA as one
criterion for evaluating our performance relative to that of our peers. We believe that Non-GAAP Adjusted EBITDA is
an operating performance measure, and not a liquidity measure, that provides
investors and analysts with a measure of operating results unaffected by
differences in capital structures, capital investment cycles and ages of
related assets among otherwise comparable companies. However, Non-GAAP Adjusted EBITDA is not a recognized
term under financial performance under GAAP, and our Non-GAAP Adjusted EBITDA
may not be comparable to similarly titled measures of other companies. Non-GAAP Adjusted EBITDA should not be
considered as an alternative to operating income or net income, determined in
accordance with GAAP, as an indicator of our operating performance, or as an
alternative to cash flows from operating activities, determined in accordance
with GAAP, as an indicator of cash flows, or as a measure of liquidity. There are limitations to using non-GAAP
financial measures, including the difficulty associated with comparing
companies that use similar performance measures whose calculations may differ
from ours.
Operations
Revenue
As discussed in Item 1 of
the Registration Statement, JumpTV earns revenue in four broad categories:
·
Subscriber
revenue, which is recognized over the period of service or usage.
·
eCommerce
revenue, which is recognized as the service is performed.
23
Table of Contents
·
Technology
services revenue, which consists of set up and transcoder revenue and is
recognized over the life of the contract.
·
Equipment
revenue, which is recognized when title of the STB passes to the customer.
Service
revenue includes subscriber revenue, eCommerce revenue and technology services
revenue. While our revenues have been
growing due to the organic growth in our existing business and the Merger, we
are uncertain as to how our revenues will be impacted by the current downturn
in the global economy.
Cost of Sales
Cost
of services revenue primarily consists of:
·
Cost of
Subscriber revenue consists of three primary components:
·
Royalty
payments
·
Network
operating costs
·
Bandwidth
usage fees
·
Cost of
eCommerce revenue consists of:
·
Merchandising,
donor and ticket sales, which has no associated cost — revenue is booked on a
net basis
·
Cost of
Advertising revenue is subject to revenue shares with the content provider
·
Cost of
Technology services revenue consists of:
·
Third-party
transcoder software purchased
·
Maintenance
costs for transcoders
Cost
of Equipment revenue consists of the sale of STBs to content partners and/or
end users to enable the end user to receive the content over the Internet and
display the signal on a television.
Cost of equipment revenues primarily consists of purchases from
TransVideo of the products and parts for resale to customers. Shipping revenue and costs are included in
equipment revenue and cost of equipment revenue, respectively.
Selling, General and Administrative expenses
Selling, general and administrative (“SG&A”)
costs include:
·
Wages and benefits
—
represents compensation for the Company’s full-time and part-time employees as
well as fees for consultants who are used by the Company from time to time;
·
Marketing —
represents
expenses for both global and local marketing programs that
focus on various target sports properties and ethnic communities. These initiatives include both on-line and
off-line marketing expenditures. These
expenditures also include search engine marketing and search engine
optimization;
·
Professional fees
—
represents legal, recruiting and accounting fees; and
·
Other SG&A expenses
—
represents expenses for travel
expenses, rent, office supplies, corporate IT services, credit card processing
fees and other general operating expenses.
24
Table
of Contents
Stock-based compensation
We
estimate the fair value of our options, warrants, retention warrants (“Retention
Warrants”), awards under the restricted share plan (the “Restricted Share Plan”)
and stock appreciation rights (“SARs”) (collectively, “Convertible Securities”)
for financial accounting purposes using the Black-Scholes-Merton model, which
requires a number of subjective assumptions, including the expected life of the
Convertible Securities, risk-free interest rate, dividend rate, forfeiture
rate, future volatility of the price of our Shares and vesting period. Based on
the estimated fair value of the Convertible Securities, we expense the
estimated fair value over the vesting period of the Convertible Securities. The vesting period is normally over a four
year period, vesting in an equal amount each month; however, the Board of
Directors has the discretion to grant options with different vesting periods.
Equity Losses of Affiliate
On July 1,
2006, the Company acquired a 20.2% equity interest in KyLinTV through the
conversion of $4,100,000 that was due from KyLinTV. The acquisition has been accounted for using
the purchase method, with the net results of KyLinTV included in the Company’s
results of operations from the date of acquisition. The Company is accounting for its pro-rata
share of the results of operations based on its equity interest in KyLinTV,
20.2% from July 1, 2006 to September 31, 2007 and 17.1% from October 1,
2007 to December 31, 2008.
The
Company provides KyLinTV with administrative and general corporate
support. Management has determined that
as a result of the 17.1% equity interest combined with the services that JumpTV
provides KyLinTV, the Company continues to have significant influence on the
operating activities of KyLinTV; therefore, the Company continues to account
for KyLinTV using the equity method of accounting for its investment.
The
Company’s proportionate share of the applicable equity loss from KyLinTV has
been accounted for as a charge on the Company’s consolidated statements of
operations and comprehensive loss. In
2008 the cumulative losses were equal to the total value of the equity interest
and no further losses have been recorded.
The Company retains its 17.1% interest in KyLinTV.
Impairment of Long-Lived Assets
As
at December 31, 2008, management determined that the recoverable value of
certain long-lived assets did not support the carrying amount of the assets,
accordingly the Company recorded a non-cash long-lived asset impairment charge
of $1.0 million during the year. There
were no such comparable amounts for the prior year.
25
Table
of Contents
Results
of Operations
Comparison of Fiscal Year Ended December 31,
2008 to Fiscal Year Ended December 31, 2007
Our consolidated financial statements for our fiscal year ended December 31,
2008 have been prepared in accordance with GAAP. Included in Note 17
of the financial statements
is the reconciliation between
our consolidated financial statements prepared in accordance with GAAP and
those prepared in accordance with Canadian generally accepted accounting
principles.
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
$
|
|
$
|
|
%
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Services revenue
|
|
9,542,689
|
|
1,284,142
|
|
643
|
%
|
|
Equipment revenue
|
|
3,900,650
|
|
6,526,569
|
|
-40
|
%
|
|
Total Revenue
|
|
13,443,339
|
|
7,810,711
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
Services revenue
|
|
4,519,062
|
|
325,097
|
|
1290
|
%
|
|
Equipment revenue
|
|
3,120,087
|
|
5,179,157
|
|
-40
|
%
|
|
Total Cost of Sales
|
|
7,639,149
|
|
5,504,254
|
|
39
|
%
|
|
|
|
5,804,190
|
|
2,306,457
|
|
152
|
%
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
12,372,441
|
|
4,210,357
|
|
194
|
%
|
|
Stock-based compensation
|
|
1,848,906
|
|
—
|
|
—
|
|
|
Depreciation and amortization
|
|
1,572,492
|
|
561,077
|
|
180
|
%
|
|
Impairment of long-lived assets
|
|
1,036,993
|
|
—
|
|
—
|
|
|
|
|
16,830,832
|
|
4,771,434
|
|
253
|
%
|
|
Operating loss
|
|
(11,026,642
|
)
|
(2,464,977
|
)
|
347
|
%
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Gain on foreign exchange
|
|
265,720
|
|
—
|
|
—
|
|
|
Investment income
|
|
130,048
|
|
33,161
|
|
292
|
%
|
|
Equity loss in affiliate
|
|
(1,006,386
|
)
|
(2,083,943
|
)
|
-52
|
%
|
|
|
|
(610,618
|
)
|
(2,050,782
|
)
|
-70
|
%
|
|
Net and comprehensive loss for the year
|
|
(11,637,260
|
)
|
(4,515,759
|
)
|
158
|
%
|
Revenue
Services Revenue
Services
revenue includes revenue from subscribers, eCommerce and technology
services. Services revenue increased
from $1.3 million for the year ended December 31, 2007 to $9.5 million for
the year ended December 31, 2008.
The increase is a combination of the organic growth in services
26
Table of Contents
revenue
and the effect of the Merger on October 20, 2008. The organic growth in
our services revenue was $4.9 million.
The Acquired Business comprised $3.3
million of
total services revenue for the year.
Subscriber
revenue increased from $0.6 million for the year ended December 31, 2007
to $7.0 million for the year ended December 31, 2008. The increase is a combination of the growth
in subscribers and the effect of the Merger on October 20, 2008. The
organic growth in our subscriber revenue was $4.4 million. The Acquired Business comprised $2.0
million of total subscriber revenue for the year.
eCommerce
revenue increased from zero for the year ended December 31, 2007 to $0.9
million for the year ended December 31, 2008. The Acquired Business comprised all of
eCommerce revenue for the year.
Technology
services revenue increased from $0.7 million for the year ended December 31,
2007 to $1.6 million for the year ended December 31, 2008. The increase is a combination of the growth
in technology services revenue and the effect of the Merger on October 20,
2008. The organic growth in our technology services revenue was $0.5
million. As new customers begin
streaming video or develop their user interface, we earn technology services
revenue. This revenue is recognized over
the life of the contractual relationship.
The Acquired Business comprised $0.4
million of
total technology services revenue for the year.
Equipment revenue
Equipment
revenue decreased from $6.5 million for the year ended December 31, 2007
to $3.9 million for the year ended December 31, 2008. In 2007, two customers purchased significant
quantities of STBs ($6.4 million) as they began operations in anticipation of
initial demand in their customer base.
While both of these customers continued to purchase STBs in 2008, one of
the customers reduced its purchases as it consumed its inventory.
Cost of Sales
Cost of Services Revenue
Cost
of sales for services revenue increased from $0.3 million for the year ended December 31,
2007 to $4.5 million for the year ended December 31, 2008. This increase was a combination of the costs
associated with increased revenue and the effect of the Merger on October 20,
2008. As a result of the Merger, the
Acquired Business comprised $2.0 million of total costs of services revenue for
the year.
Gross
margin on services increased from $1.0 million or 75% for the year ended December 31,
2007 to $5.0 million or 53% for the year ended December 31, 2008. The increase in gross margin of $4.0 million
is attributable to increased revenue ($2.8 million) and the Acquired Business
($1.2 million).
Cost of Equipment revenue
Cost
of sales for equipment revenue decreased from $5.2 million for the year ended December 31,
2007 to $3.1 million for the year ended December 31, 2008 on lower
revenue. Cost of equipment revenue is
directly variable with changes in revenue
.
Gross margin decreased from 21% for the year
ended December 31, 2007 to 20% for the year ended December 31,
2008. Gross margin on equipment revenue
is expected to be consistent at 20% for the next year.
27
Selling,
General and Administrative Costs
Selling,
general and administrative costs increased from $4.2 million for the year ended
December 31, 2007 to $14.2 million
for the year
ended December 31, 2008. As a
result of the Merger on October 20, 2008, the Acquired Business increased
by $3.4 million the total selling, general and administrative costs for the
year. The individual variances are due to the following:
·
Wages and benefits
increased from $3.9
million for
the year ended December 31, 2007 to $8.8 million
for
the year ended December 31, 2008. As a result of the Merger on October 20, 2008, the Acquired Business
increased by $2.1 million the total wages and benefits for the year. The
organic increase of $2.8
million was
primarily related to the increase in employees to support the increased revenue
and the Merger with the Acquired Business.
In conjunction with the Merger, the Company added senior management and
provided market level compensation for the CEO in the fourth quarter of 2008.
·
Stock-based compensation expense increased
from zero for the year ended December 31, 2007 to $1.8 million
for the year ended December 31,
2008. This increase was due to the
Company granting, under the terms of the agreement relating to the Merger,
5,000,000 incentive warrants that vested immediately to employees of NeuLion
who became employees of JumpTV in the Merger.
There was no granting of Convertible Securities in the corresponding
prior year. As a result of the
immediate vesting the full value of the warrants is recorded as an expense. The fair value of these warrants was $1.7
million.
As
a result of the Merger on October 20, 2008, all previously issued
Convertible Securities of the Acquired Business were fair valued. The fair value of all Convertible Instruments
which had vested was included in the purchase price allocation and the fair
value of any Convertible Securities with future vesting will be expensed over
the remaining vesting period.
Finally,
there were additional Convertible Securities issued following the acquisition
which are being expensed over the vesting period of the Convertible Securities.
·
Marketing
increased from $
0.1
million for the year ended
December 31, 2007
to $0.4
million
for
the year ended December 31, 2008.
As a result of the Merger on October 20, 2008,
the Acquired Business increased by $0.2 million the marketing expenses for the
year. The Acquired Business is more of a
business-to-consumer focused business and incurs higher marketing expenses in
search engine marketing and search engine optimization on the Internet.
·
Professional fees
increased from a nominal amount for the year ended
December 31, 2007
to $
1.2
million
for
the year ended December 31 2008.
As a result of the Merger
on October 20, 2008, the Acquired Business increased by $0.2 million the
professional fees for the year. The organic increase of $1.0 million was
primarily related to the audit fees for the fiscal years 2005 to 2007, which
was a condition of the Merger on October 20, 2008, and the audit fees for
the current year. Professional fees
related to the Merger have been included in the acquisition costs and accounted
for in the purchase price accounting.
·
Other SG&A expenses
increased from $
0.2
million
for the year ended
December 31,
2007
to $2.0
million
for
the year ended December 31, 2008.
As a result of the Merger on October 20, 2008,
the Acquired Business increased by $0.9 million the other SG&A expenses for
the year. The organic increase of
$0.9 million was primarily related to increased travel incurred during the
Merger due diligence and general office expenses.
28
Table of
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Equity Losses of Affiliate
Equity
losses of affiliate decreased from $2.1 million for the year ended December 31,
2007 to $1.0 million
for
the year ended December 31, 2008.
The decrease is as a result of the cumulative losses exceeding the full
value of the Company’s investment. Due
to KyLinTV’s accumulated losses, the investment has been reduced to zero. The Company still owns its equity position in
the affiliate, however the Company is not required to fund any additional
losses, and as such no further charges will be incurred.
Depreciation and Amortization
Depreciation and
amortization increased from $0.6 million for the year ended December 31,
2007 to $1.6 million for the year ended December 31,
2008. The increase was due to
amortization on assets acquired on the Merger with the Acquired Business ($0.6
million) and the increased capital assets required to support the increased
revenue.
Impairment
of Long-Lived Assets
Long-lived assets must be tested
for recoverability whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable.
For JumpTV, long-lived assets include intangible and capital assets. As at December 31, 2008, the Company’s
market capitalization decreased below the carrying value of the Company. As well, ongoing negative developments in the
general economic climate would be considered an event that would be a possible
indicator of impairment. Management
considered these events to be an indicator of impairment. An impairment loss is
recognized as the difference between fair value and carrying amount when the
carrying amount of a long-lived asset is not recoverable and exceeds its fair
value. The fair value of the intangible
assets acquired in the Merger was determined on October 20, 2008;
therefore, management believes the fair value of the assets acquired in the
Merger is consistent with the carrying amount at December 31, 2008. The Company therefore tested the fair value
of the non-Merger long-lived assets. The
Company has determined that the carrying value of capital assets exceed their
fair value by $1.0 million. Accordingly
the Company recorded a non-cash impairment charge of $1.0 million during the
year.
Liquidity and Capital Resources
As of December 31, 2008, our principal
sources of liquidity include cash and cash equivalents of $27.3 million and
trade accounts receivable of $2.4 million. We do not have a line of credit
facility.
At December 31, 2008, approximately 72%
of our cash and cash equivalents are held in money market funds and another 15%
of our cash and cash equivalents are held in bank accounts with two of the top
five Canadian commercial banks. The
Company believes these financial institutions to be secure in the current
global economy. We believe that we will
be able to access the remaining balance of bank deposits outside of Canada as
these deposits are with large reputable banks. We have and will continue to
make a series of short-term investments in term deposits and commercial paper.
Our investment policy is to invest in low risk short-term investments which are
highly graded commercial paper and term deposits. We have not had a history of
any defaults on this commercial paper, nor do we expect any in the future given
the grade and short term to maturity of these investments. All commercial paper
on hand at December 31, 2008 have been repaid, and subsequently
reinvested.
In fiscal 2009, based on our current business
plan, internal forecasts and considering the risks that are present in the
current global economy, we believe that cash on hand will be sufficient to meet
our working capital and operating cash requirements for the next fiscal year.
The Company is still in the early
29
Table of
Contents
stage of business.
From JumpTV’s inception it has incurred substantial net losses. The Company continues to review its operating
structure to reduce costs. Cash from
operations could be affected by various risks and uncertainties, including, but
not limited to, the risks detailed in or incorporated by reference to
Item 1A of the
Registration Statement.
In fiscal 2008, the Company generated an
increase in cash of $26.7 million. The
primary changes in cash were from the following items: $22.9 million in cash
was acquired through the Merger; $9.2 million was raised through the Private
Placement described above; and $2.6 million was received from a capital
contribution by the founder and CEO prior to the Merger. The Company used $5.6 million to fund
operations and working capital, $2.0 million in transaction and share issue
costs and $1.5 million to purchase fixed assets. These changes, plus other miscellaneous
items, increased our cash and cash equivalents to $27.3 million at December 31,
2008.
Working Capital Requirements
The net working capital at December 31,
2008 was $18.1 million, an increase of $17.9 million from the December 31,
2007 net working capital of $0.2 million. The increased working capital is
primarily due to the Merger, which contributed $15.5 million.
Current assets at December 31, 2008 were
$33.3 million, an increase of $29.6 million from the December 31, 2007
balance of $3.7 million. The change is due to an increase in our cash and cash
equivalents of $26.7 million, an increase in prepaid expenses and deposits of
$1.3 million and an increase in our taxes receivable of $1.0 million. The
increase in our cash position was attributable to the Merger. The increase in the prepaid expenses and
deposits and taxes receivable is due to the Merger.
Current liabilities at December 31, 2008
were $15.2 million, an increase of $11.8 million from the December 31,
2007 balance of $3.4 million. The increase primarily resulted from the increase
in accounts payable of $4.4 million, an increase in accrued liabilities of $6.8
million and an increase in deferred revenue of $2.6 million, offset by a
decrease in due to related parties of $2.0 million.
The increases in the
accounts payable, accrued liabilities and deferred revenue were balances
acquired on October 20, 2008 as a result of the Merger of $4.6 million,
$5.2 million and $2.5 million, respectively.
The additional $1.6 million of accrued liabilities were primarily due to
increased payables related to expenses of the Merger.
The reduction in the
amounts due to related parties was caused by payments to bring these balances
to a current position.
Cash Flows
JumpTV’s
business is still in the early stages, with only a few years of operating
history. As at December 31, 2008,
the Company had cash and cash equivalent balances of $27.3 million. From JumpTV’s inception, it has incurred net
losses and has an accumulated deficit of $26.0 million; management expects
these losses to continue in the short term.
JumpTV will require expenditures of significant funds for marketing,
building its subscriber management systems, programming and website
development, maintaining adequate video streaming and database software,
pursuing and maintaining channel distribution agreements with its channel
partners, fees relating to acquiring and maintaining Internet streaming rights
to its content and the construction and maintenance of the JumpTV delivery
infrastructure and office facilities.
There is no guarantee that JumpTV will ultimately be able to generate
sufficient revenue or reduce its costs in the anticipated time frame to become
profitable and have sustainable cash flows.
30
Table of Contents
Summary Balance Sheet
Data:
|
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
27,323,021
|
|
608,464
|
|
|
Accounts receivable, net
|
|
2,284,242
|
|
2,017,137
|
|
|
Taxes receivable
|
|
983,253
|
|
|
|
|
Other receivable
|
|
227,711
|
|
|
|
|
Inventory
|
|
347,600
|
|
323,500
|
|
|
Prepaid expenses and deposits
|
|
1,830,260
|
|
525,637
|
|
|
Due from related parties
|
|
324,059
|
|
188,855
|
|
|
Total current assets
|
|
33,320,146
|
|
3,663,593
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
Accounts payable
|
|
4,465,388
|
|
67,295
|
|
|
Accrued liabilities
|
|
7,595,116
|
|
830,371
|
|
|
Deferred revenues
|
|
3,091,993
|
|
429,246
|
|
|
Due to related parties
|
|
56,826
|
|
2,093,907
|
|
|
Total current liabilities
|
|
15,209,323
|
|
3,420,819
|
|
|
|
|
|
|
|
|
|
Working capital ratio
|
|
2.19
|
|
1.07
|
|
Comparative Summarized Cash Flows
|
|
|
Year ended, December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Cash flows used in operating activities
|
|
(5,614,501
|
)
|
(85,006
|
)
|
|
Cash flows provided by (used in) investing activities
|
|
20,294,983
|
|
(1,628,411
|
)
|
|
Cash flows provided by financing activities
|
|
12,034,075
|
|
670,000
|
|
Operating
Activities
Cash used in operating activities for the year ended December 31,
2008 was $5.6 million. Changes in net
cash used in operating activities reflect the following:
·
net loss of $11.6 million
for the year
then ended; less
·
non-cash items adjusted to net loss in the amount of $5.5
million,
which relates
to stock-based compensation, impairment of long-lived assets, equity losses of
affiliate, depreciation and amortization; and
·
changes in working capital of $0.5 million.
Investing
Activities
Cash provided by investing activities for the year ended December 31,
2008 was $20.3 million. These funds
primarily came from cash in the amount of $22.9 million acquired in the Merger
with the Acquired Business, offset by transaction and share issue costs of $1.2
million and purchase of fixed assets of $1.4 million.
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Table
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A summary of JumpTV’s equipment,
including delivery infrastructure equipment (at original cost), is as follows:
Property, plant and equipment
|
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Computer hardware
|
|
5,655,658
|
|
1,933,047
|
|
|
Computer software
|
|
3,812,944
|
|
1,123,053
|
|
|
Furniture and fixtures
|
|
184,062
|
|
71,557
|
|
|
Leasehold improvements
|
|
6,471
|
|
775
|
|
|
|
|
9,659,135
|
|
3,128,432
|
|
Financing
Activities
Cash provided by financing activities was $12.0 million
for the year ended December 31, 2008. This primarily reflects net proceeds received
from the Private Placement in the amount of $9.3 million and, prior to the
Merger, capital contributions of $2.6 million by the CEO and founder of NeuLion
to the Company.
In
the near future, JumpTV expects that it will continue to use its cash resources
to fund working capital requirements.
The Company believes existing cash, cash equivalents and short-term
investments will be sufficient to satisfy normal working capital needs and capital
expenditures for at least the next twelve months. However, the Company may sell additional
equity securities to further enhance its liquidity position, and the sale of
additional equity securities could result in dilution to its shareholders.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet
arrangements as of December 31, 2008.
Financial Instruments
The Company’s financial instruments are
comprised of cash and cash equivalents, accounts receivable, other receivables,
taxes receivable, other receivables, deposits, accounts payable, accrued
liabilities, amounts due to/from related parties, and deferred revenue.
Fair value of financial
instruments
Fair
value of a financial instrument is defined as the amount for which the
instrument could be exchanged in a current transaction between willing
parties. The estimated fair value of our
financial instruments approximates their carrying value due to the short
maturity term of these financial instruments.
Risks associated with financial instruments
[i] Currency risk
The Company’s activities that
result in exposure to fluctuations in foreign exchange rates consist of its
customer billings being in U.S. dollars and the majority of expenses being
paid in foreign currencies. The Company
does not use derivative financial instruments to reduce its currency risk.
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Table of Contents
[ii] Interest rate risk
The Company is exposed to
interest rate risk on its invested cash and cash equivalents and its short-term
investments. The interest rates on these
instruments are based on the bank’s prime rate and therefore are subject to
change with the market. The Company does
not use derivative financial instruments to reduce its interest rate risk.
[iii] Credit Risk
The
Company sells its services to a variety of customers under various payment
terms and therefore is exposed to credit risk.
The Company has adopted policies and procedures designed to limit this
risk. The maximum exposure to credit
risk at the reporting date is the carrying value of receivables. The Company establishes an allowance for
doubtful accounts that represents its estimate of incurred losses in respect of
accounts receivable. The Company
believes that the concentration of credit risk is limited due to the Company’s
primary source of revenues to date being the sale of STBs, for which 50% of
monies are received in advance of shipment.
Related Party Transactions
Certain Relationships and
Related Transactions
The Company has entered into
transactions and agreements in the normal course of operations with related
parties. For a discussion of these
transactions, see Item 7 hereof under the header “Certain Relationships and
Related Transactions.”
The
Company recognized revenue from the related parties described in Item 7 hereof
for each of the years ended December 31 as follows:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
New York Islanders
|
|
296,451
|
|
240,000
|
|
|
Renaissance
|
|
120,000
|
|
120,000
|
|
|
Smile Train
|
|
120,000
|
|
108,000
|
|
|
Hawaii
|
|
57,577
|
|
44,070
|
|
|
KyLinTV
|
|
920,550
|
|
—
|
|
|
|
|
1,514,578
|
|
512,070
|
|
The
Company also provides KyLinTV with administrative and general corporate
support. For each of the years
presented, the amounts paid for these services provided by NeuLion for the
years ended December 31, 2008 and 2007 were $1,233,353 and $1,722,862,
respectively. Additionally, during the
year ended December 31, 2008, the Company acquired equipment from KyLinTV
in the amount of $620,000.
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As
at December 31, 2008 and 2007, the amounts due from (to) related parties
are as follows:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
New York Islanders
|
|
29,189
|
|
103,702
|
|
|
Renaissance
|
|
(1,146
|
)
|
43,153
|
|
|
Smile Train
|
|
27,000
|
|
27,000
|
|
|
Hawaii
|
|
17,527
|
|
15,000
|
|
|
TransVideo
|
|
(55,680
|
)
|
(1,964,616
|
)
|
|
KyLinTV
|
|
250,343
|
|
(129,291
|
)
|
|
|
|
267,233
|
|
(1,905,052
|
)
|
Investment
in affiliate — KyLinTV
The results of operations and
financial position of the Company’s equity basis investment in KyLinTV are
summarized below for the years ended December 31:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Condensed income statement information:
|
|
|
|
|
|
|
Net sales
|
|
6,568,101
|
|
3,316,364
|
|
|
Net loss
|
|
(8,148,974
|
)
|
(7,751,433
|
)
|
|
|
|
|
|
|
|
|
Condensed balance sheet information:
|
|
|
|
|
|
|
Current assets
|
|
927,427
|
|
777,368
|
|
|
Non-current assets
|
|
2,411,319
|
|
1,851,677
|
|
|
Total assets
|
|
3,338,746
|
|
2,629,045
|
|
|
Current liabilities
|
|
10,063,909
|
|
1,405,235
|
|
|
Non-current liabilities
|
|
—
|
|
—
|
|
|
Equity (deficiency)
|
|
(6,725,163
|
)
|
1,223,810
|
|
|
Total liabilities and equity (deficiency)
|
|
3,338,746
|
|
2,629,045
|
|
The Company is accounting for its
pro-rata share of the above based on its equity interest in KyLinTV, which was
20.2% from July 1, 2006 to September 31, 2007 and 17.1% from October 1,
2007 to December 31, 2008. As previously discussed, the Company also
provides KyLinTV with administrative and general corporate support. Management has determined that as a result of
the 17.1% equity interest combined with the services that JumpTV provides
KyLinTV, the Company continues to have significant influence on the operating
activities of KyLinTV; therefore the Company continues to account for KyLinTV
using the equity method of accounting for investment.
The Company’s proportionate share
of the equity loss from KyLinTV has been accounted for as a charge on the
Company’s consolidated statements of operations and comprehensive loss. Due to KyLinTV’s accumulated losses, the
investment has been reduced to zero. No
further charges will be recorded as the Company has no obligation to fund these
losses.
34
Table of
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Critical Accounting Estimates
The 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 consistently applied throughout all periods. The preparation
of these 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 ongoing basis,
we evaluate our estimates, including those related to inventory allowances, bad
debts, long-lived assets, goodwill, income taxes, contingencies and litigation,
the determination of the useful lives of long-lived assets, allocation of the
purchase price for acquisitions and the assumptions used in determining the
fair value of stock options and warrants.
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 believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Business Combinations
We account for acquisitions of businesses in accordance with FAS
141. We allocate the purchase price to
tangible assets, intangible assets, and liabilities based on fair values, with
the excess of purchase price being allocated to goodwill.
In 2008, our acquisition of the Acquired Business resulted in the
allocation of a portion of the purchase price to goodwill and acquired
intangible assets. In order to determine the fair value of these intangible
assets, we make estimates and judgments based on assumptions about the future
income producing capabilities of these assets and related future expected cash flows.
We also make estimates about the useful life of those acquired intangible
assets. Should different conditions prevail, we could record write-downs of
intangible assets or changes in the estimate of useful life of those intangible
assets, which would result in changes to amortization expense.
Acquired definite lived intangible assets are initially recorded at
fair value based on the present value of the estimated net future
income-producing capabilities of the assets acquired. A significant change to
the initial value assigned to the definite lived intangible assets could result
if different assumptions are used in determining the present value of the
estimated net future income producing capabilities of the asset. Acquired
definite lived intangible assets are amortized over the future income producing
period, which we consider to be the useful life, on a straight-line basis,
which are amortized over the pattern in which we expect to generate economic
benefits from the asset.
For business combinations made subsequent to or on January 1,
2009, we will follow the guidelines of Statement of Financial Accounting
Standards No. 141 (revised 2007),
Business Combinations
(“FAS 141(R)”).
Goodwill
In accordance with Statement of Accounting Standards No. 142,
Goodwill and Other Intangible Assets
, goodwill is subject to
annual impairment tests or on a more frequent basis if events or conditions
indicate that goodwill may be impaired.
Goodwill is tested for impairment at the beginning of the fourth
35
Table of
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quarter
of each fiscal year. We also test for
impairment more frequently if indicators of impairment are noted. JumpTV as a whole is considered one reporting
unit. We estimate the fair value of
reporting unit based on estimated cash flows, market capitalization and other
factors. If we determine that our carrying value exceeds our fair value, we
would conduct the second step of the goodwill impairment test. The second step compares the implied fair
value of the goodwill (determined as the excess fair value over the fair value
assigned to our other assets and liabilities) to the carrying amount of
goodwill. If the carrying value of the
goodwill were to exceed the implied fair value of goodwill, an impairment loss
would be recognized.
At December 31, 2008, given the current disruption and uncertainty
in the global economy and the decrease in our stock price over the last fiscal
quarter, we determined that certain indicators had been noted to perform an
impairment test beyond the annual goodwill impairment test. Our fair value exceeded the carrying value of
the reporting unit, including goodwill.
We therefore determined that there had been no impairment of goodwill.
Long-Lived Assets
We amortize our long-lived assets over the estimated useful life of the
asset. We evaluate all of our long-lived
assets, excluding goodwill, periodically for impairment in accordance with Statement
of Financial Accounting Standards No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets
(“FAS 144”). FAS 144 requires that long-lived assets be
evaluated for impairment when events or changes in facts and circumstances
indicate that their carrying value may not be recoverable. Events or changes in factor circumstances can
include a significant adverse change in the business climate, strategic change
in business direction, decline or discontinuance of a product line or service,
a reduction in our customer base or a restructuring. If one of these events or
circumstances indicates that the carrying value of an asset may not be
recoverable, or that our estimated amortization period was not appropriate, we
would record and impairment charge against our long-lived assets. The amount of impairment would be measured as
the difference between the carrying value and the fair value of the impaired
asset as calculated using a net realizable value methodology. An impairment charge would be recorded as an
operating expense in the period of the impairment and as a reduction in the
carrying value of that asset.
At December 31, 2008, given the current disruption and uncertainty
in the global economy, we determined that the indicators of impairment had been
noted to perform an impairment test on our long-lived assets. Our definite lived intangible assets are
client relationships, software and trademarks purchased with the Acquired
Business. The definite lived intangibles
from this acquisition have net book values, as at December 31, 2008 of
$5.7 million, $1.9 million and $0.1 million, respectively. Due to the short period between the
acquisition date of October 20, 2008 (for which all assets of the Acquired
Business were recorded at fair value) and December 31, 2008 (the
impairment measurement date), the Company determined that there was no
impairment of these assets. The
Company then tested the recoverable value and the fair value of the non-Merger
related long-lived assets. The Company
has determined that the carrying value of the capital assets exceed their fair
value by $1.0 million and recorded a non-cash impairment charge at December 31,
2008.
Stock-based compensation and other stock-based payments
In accordance with Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment
(“FAS 123(R)”), we
estimate the fair value of our Convertible Securities for financial accounting
purposes using the Black-Scholes-Merton model, which requires a number of
subjective assumptions, including the expected life of the Convertible
Securities, risk-free interest rate, dividend rate, forfeiture rate,
36
Table of
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future
volatility of the price of our Shares and vesting period. The use of subjective
assumptions could materially affect the fair value estimate.
For a period of time prior to our initial public offering (“IPO”),
there was no active market for our Shares.
Since we have been public for less than the vesting period of our
Convertible Instruments, we do not consider the volatility of our share price
to be representative of the estimated future volatility when computing the fair
value of options granted. Accordingly,
until such time that a representative volatility can be determined based on our
share price, we will use a blended rate of our own share price volatility for
the period we have been public and the average of three similar companies for
the pre-IPO period. We estimate the
risk-free interest rate based on Bank of Canada interest rates with an average
yield of five years. Since we do not
have a sufficient history relating to options granted and exercised subsequent
to our IPO, we base our estimate of the expected life of the Convertible
Instrument using the simplified method based on the period for which our
Convertible Instruments vest or 4 years.
Our Convertible Instruments vest on a monthly basis; therefore we have
estimated our forfeiture rate at zero.
The fair values of the Convertible Instruments issued are being
recognized as compensation expense over the applicable vesting period, which
for the majority of Convertible Instruments is four years.
We determine the fair value of awards made under the Restricted Share
Plan based on our share price on the date the awards are granted. The awards have no characteristics which
would require classification as a liability, and as such they are not revalued
in subsequent periods. Such awards give
the holder the right to one Share for each vested restricted share plan
unit. These awards vest on a monthly
basis over the vesting period, which is four years. Stock-based compensation expense related to
such awards is accrued based on the market value of the shares when the shares
are issued, which generally coincides with the vesting period of these awards.
SARs give the holder the right to elect either to receive cash in an
amount equal to the excess of the quoted market price over the SARs price or to
receive Shares equal to the fair value of the Shares less the exercise price
divided by the market value of the Shares from treasury or receive Shares by
making a cash payment equal to the exercise price. The Board of Directors has discretionary authority
to accept or reject a cash payment request in whole or in part. Stock-based compensation expense is
calculated as the fair value of all vested stock appreciation rights on each
reporting date. The liability is
included in accrued liabilities and is classified as a current liability on the
consolidated balance sheets. If the
holder elects to purchase Shares, the liability is credited to additional paid
in capital.
Based on equity awards outstanding as of December 31, 2008, we had
unrecognized stock-based compensation totaling $2.7 million and we expect to
record approximately $0.9
million in
stock-based compensation in our fiscal year ending December 31, 2009. To
the extent we continue to grant equity awards in the future, the amounts of
stock-based compensation recorded in future periods may be greater than these
expectations.
Stock-based compensation expense is reported in our Consolidated
Statements of Operations and Comprehensive Loss within Selling, general and
administrative.
Accounts receivable
Accounts receivable are
carried at original invoice amount. The
Company maintains a provision for estimated losses resulting from the inability
of its customers to make required payments. Management considers the following
factors when determining the collectability of specific customer accounts:
customer credit-worthiness, past transaction history with the customer, current
economic industry trends and changes
37
Table of Contents
in customer payment terms. If the financial
conditions of the Company’s customers were to deteriorate, adversely affecting
their ability to make payments, additional allowances would be required.
Inventory
Inventory consists of STBs and is recorded at the lower of cost and net
realizable value and consists of finished goods. Cost is accounted for on a
first-in, first-out basis. The Company evaluates its ending inventories for
estimated excess quantities and obsolescence. This evaluation includes analyses
of sales levels and projections of future demand within specific time horizons.
Inventories in excess of future demand are reserved. In addition, the Company
assesses the impact of changing technology and market conditions on its
inventory-on-hand and writes off inventories that are considered obsolete. As
at December 31, 2008 and 2007, the Company had inventory reserves of
$9,700 and zero, respectively. For each of the years ended December 31,
2008 and 2007, the Company expensed amounts related to inventory reserves of
$9,700 and zero, respectively.
Amortization Policies and Useful Lives
The Company amortizes the cost of property, plant and equipment and
intangible assets over the estimated useful service lives of these items. The
determinations of estimated useful lives of these long-lived assets involve
considerable judgment. In determining these estimates, the Company takes into
account industry trends and company specific factors including changing
technologies and expectations for the in-service period of these assets. On an
annual basis, the Company reassesses its existing estimates of useful lives to
ensure they match the anticipated life of the technology from a revenue
producing perspective. If technological change happens more quickly than
anticipated, the Company might have to shorten its estimate of the useful life
of certain equipment which could result in higher amortization expense in
future periods or an impairment charge to write down the value of this
equipment.
Taxes
We
have tax loss carryforwards available to offset future taxable income of $78.1
million as of December 31, 2008 that expire between the tax years 2009 and
2028, which have not been fully audited by relevant authorities. We have not recorded a financial
statement benefit for these attributes as we have no history of
profitability. To the extent we use tax
loss carryforwards subsequent to 2008, we expect to record the benefit first as
a reduction of goodwill to the extent that the loss was from the Acquired
Business and then as a reduction in income tax expense.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued FAS 141(R). FAS 141(R) retains the fundamental
requirements of the original pronouncement requiring that the purchase method
be used for all business combinations.
FAS 141(R) defines the acquirer as the entity that obtains control
of one or more businesses in the business combination, establishes the
acquisition date as the date that the acquirer achieves control and requires
the acquirer to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition date. FAS 141(R) also requires that
acquisition-related costs be recognized separately from the acquisition. FAS 141(R) is effective for fiscal years
beginning on or after December 15, 2008, which for us is the fiscal year
beginning January 1, 2009.
In May 2008, the FASB issued FASB Staff Position Financial
Accounting Standard 142-3,
Determination of the
Useful Life of Intangible Assets
(“FSP FAS 142-3”), which is
effective for fiscal years beginning after December 15, 2008 and for
interim periods within those years, which for us is the
38
Table of Contents
fiscal
year beginning January 1, 2009. FSP FAS 142-3 provides guidance on the
renewal or extension assumptions used in the determination of the useful life
of a recognized intangible asset. The
intent of FSP FAS 142-3 is to better match the useful life of the recognized
intangible asset to the period of the expected cash flows used to measure its
fair value. We do not expect FSP FAS 142-3 to have a material effect on our
consolidated financial statements.
In
February 2008, the Canadian Institute of Chartered Accountants (CICA)
Accounting Standards Board confirmed that the changeover to International
Financial Reporting Standards (“IFRS”) from Canadian generally accepted
accounting principles will be required for publicly accountable enterprises,
effective for the interim and annual financial statements relating to fiscal
years beginning on or after January 1, 2011. As the Company will be a “reporting company”
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) upon
the effectiveness of the Registration Statement, it expects to continue to use
GAAP until the IFRS implementation date in the United States — currently
estimated as no sooner than 2014.
C.
Quantitative and Qualitative
Disclosures About Market Risk
Not required.
ITEM 3.
PROPERTIES
|
Description
|
|
Location
|
|
Expiration of Lease
|
|
Use of
Property
|
|
Lease
|
|
Buenos
Aires, Argentina
|
|
September 2011
|
|
Business office
|
|
Lease
|
|
Toronto,
Ontario, Canada
|
|
December 2009
|
|
Business office
|
|
Lease
|
|
Shanghai,
China
|
|
May 2009
|
|
Business office
|
|
Lease
|
|
Sanford,
Florida
|
|
December 2013
|
|
Business office
|
|
Lease
|
|
New
York, New York
|
|
August 2009
|
|
Business office
|
|
Lease
|
|
Plainview,
New York
|
|
December 2013
|
|
Business office
|
|
Lease
|
|
London,
England
|
|
August 2009
|
|
Business office
|
ITEM 4.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets
forth information with respect to beneficial ownership of the Shares as of March 15,
2009 by:
·
each director;
·
each named executive officer;
·
all of the directors and executive officers
as a group; and
·
each other person known to the Company to be
the beneficial owner of more than five percent of the Shares.
Beneficial ownership is
determined in accordance with the rules of the SEC and includes voting or
investment power with respect to the securities. Except as indicated by footnote, and subject
to applicable community property laws, the persons named in the table below
have sole voting and investment power with respect to all Shares shown as
beneficially owned by them. Percentage
of beneficial ownership is based on 110,094,874 Shares outstanding at March 15,
2009 (which figure does not include 3,680,194 Shares held in escrow whose
release is subject to the achievement of certain milestones). Other than as
39
Table of Contents
indicated below, no
executive officer or director owns any Shares, and no executive officer or
director has pledged Shares as security.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
|
|
|
|
|
|
|
|
Beneficially
|
|
Number of
|
|
Convertible
|
|
% of
|
|
|
Name
|
|
Owned
|
|
Shares Owned
|
|
Instruments
|
|
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy Li
|
|
39,207,769
|
(1)(2)
|
39,160,894
|
|
46,875
|
|
35.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles B. Wang
|
|
22,023,000
|
(2)(3)
|
12,023,000
|
|
10,000,000
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Scott Paterson
|
|
8,496,998
|
(2)(4)
|
6,379,290
|
|
2,117,708
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Horngwei (Michael) Her
|
|
3,799,042
|
|
2,656,417
|
|
1,142,625
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Christopher Wagner
|
|
3,485,728
|
|
2,145,103
|
|
1,340,625
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Roy E. Reichbach
|
|
191,875
|
|
120,000
|
|
71,875
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
John R. Anderson
|
|
96,614
|
|
19,531
|
|
77,083
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Gabriel A. Battista
|
|
148,958
|
|
71,875
|
|
77,083
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Shirley Strum Kenny
|
|
0
|
|
0
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
David Kronfeld
|
|
443,300
|
|
443,300
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Jordan Banks
|
|
52,450
|
(5)
|
52,450
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill Stephen
|
|
0
|
(6)
|
0
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Nada Usina
|
|
0
|
(7)
|
0
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
AvantaLion LLC
|
|
|
(8)
|
|
(8)
|
|
(8)
|
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
All current directors and executive
officers (14 persons)
|
|
81,976,515
|
|
65,695,827
|
|
16,280,688
|
|
64.9
|
%
|
* Less than 1%
(1) Excludes 12,023,000
Shares beneficially owned by Mr. Wang, Ms. Li’s spouse, and
10,000,000 Shares and 10,000,000 warrants beneficially owned by AvantaLion, an
entity controlled by Mr. Wang. Ms. Li
disclaims beneficial ownership of all such Shares. Ms. Li’s address is c/o NeuLion, Inc.,
1600 Old Country Road, Plainview, New York 11803.
(2) In connection with
the Merger, AvantaLion, Mr. Wang and Ms. Li, among others, have
entered into a voting trust agreement (the “Voting Trust Agreement”) pursuant
to which all securities of JumpTV directly or indirectly controlled by them are
to be deposited with Computershare Trust Company of Canada (“Computershare”) so
that securities controlled by AvantaLion,
40
Table of Contents
Mr. Wang and Ms. Li
representing more than 9.9% of the votes attaching to all of the then-issued
Shares of JumpTV shall not be voted in relation to:
·
the
election of directors;
·
any
matters related to security-based compensation; and
·
any
other matters which may change the governance structure of JumpTV.
The voting restriction does
not apply to any arm’s-length transferee of any of the securities held by
AvantaLion, Mr. Wang or Ms. Li.
The Voting Trust Agreement will terminate on the first to occur of:
·
five
years from October 20, 2008;
·
the
date when the Shares cease to be listed and posted for trading on the Toronto
Stock Exchange; and
·
the
date that AvantaLion, Mr. Wang and Ms. Li no longer own any
securities.
Computershare’s address is
100 University Avenue, 9th Floor, Toronto, Ontario M5J 2Y1 Canada.
(3) Excludes 39,207,769
Shares beneficially owned by Ms. Li, Mr. Wang’s spouse, as to which Mr. Wang
disclaims beneficial ownership. Includes
10,000,000 Shares and 10,000,000 warrants beneficially owned by AvantaLion, an
entity controlled by Mr. Wang. Mr. Wang’s
address is c/o NeuLion, Inc., 1600 Old Country Road, Plainview, New York
11803.
(4) Excludes 85,000
Shares beneficially owned by Mr. Paterson’s spouse and 696,826 Shares held
by Mr. Paterson’s Family Trust. Mr. Paterson
disclaims beneficial ownership of all such Shares. Mr. Paterson’s address is c/o JumpTV
Inc., 463 King Street West, 3rd Floor, Toronto, Ontario, M5K 1V4, Canada.
(5) Held through Minga
Capital Inc. as of March 15, 2009 and based on the representation of Mr. Banks
to management. Mr. Banks left the
Company on June 27, 2008.
(6) As of March 15,
2009 and based on the representation of Mr. Stephen to management. Mr. Stephen left the Company on October 17,
2008.
(7) As of March 15,
2009 and based on the representation of Ms. Usina to management. Ms. Usina left the Company on September 5, 2008.
(8) AvantaLion’s
holdings are included in Mr. Wang’s holdings in this table. If considered separately, AvantaLion
beneficially owns 10,000,000 Shares and 10,000,000 warrants, which represent
16.7% of the Shares outstanding at March 15, 2009. AvantaLion’s address is 1600 Old Country
Road, Plainview, New York 11803.
41
Table of Contents
ITEM 5.
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following table sets
forth, as of March 15, 2009: (i) the
names and ages of each director of the Company, and the names and ages of each
executive officer of the Company who does not also serve as a director of the
Company; (ii) the other positions and offices presently held by such
persons with the Company, if any; (iii) the period during which such
persons have served on the Board of Directors of the Company (the “Board”) or
as an officer of the Company; (iv) the expiration of each director’s term
as director; and (v) the principal occupations and employment of such
persons. Additional biographical
information for each person follows the tables.
|
Name and Position
with the Company
|
|
Age
|
|
Director/
Officer
Since
|
|
Expiration
of Term as
Director
|
|
Principal Occupation
|
|
Charles B. Wang
Chairman
|
|
64
|
|
10/20/08
|
|
2009
|
|
Owner, New York Islanders
|
|
|
|
|
|
|
|
|
|
|
|
G. Scott Paterson
Vice Chairman
|
|
45
|
|
1/30/02
|
|
2009
|
|
Vice Chairman of the
Company
|
|
|
|
|
|
|
|
|
|
|
|
Nancy Li
Chief Executive Officer
and Director
|
|
51
|
|
10/20/08
|
|
2009
|
|
Chief Executive Officer of
the Company
|
|
|
|
|
|
|
|
|
|
|
|
Roy E. Reichbach
General Counsel, Corporate
Secretary and Director
|
|
46
|
|
10/20/08
|
|
2009
|
|
General Counsel and
Corporate Secretary of the Company; Alternate Governor of the New York
Islanders on the NHL Board of Governors
|
|
|
|
|
|
|
|
|
|
|
|
John R. Anderson
Director
|
|
63
|
|
3/31/08
|
|
2009
|
|
Chief Financial Officer,
Impax Energy Services Income Trust and Tailwind Financial Inc.; Chief
Executive Officer and Chief Financial Officer, LBBP Inc.
|
|
|
|
|
|
|
|
|
|
|
|
Gabriel A. Battista
Director
|
|
64
|
|
3/31/08
|
|
2009
|
|
Vice Chairman of the Board
of Directors of Trustees of Capitol College
|
|
|
|
|
|
|
|
|
|
|
|
Shirley Strum Kenny
Director
|
|
73
|
|
10/20/08
|
|
2009
|
|
President of the State
University of New York at Stony Brook
|
|
|
|
|
|
|
|
|
|
|
|
David Kronfeld
Director
|
|
61
|
|
10/20/08
|
|
2009
|
|
Chairman of JK&B
Capital
|
|
|
|
|
|
|
|
|
|
|
|
Arthur J. McCarthy
Chief Financial Officer
|
|
52
|
|
10/20/08
|
|
N/A
|
|
Chief Financial Officer of
the Company; Alternate Governor of the New York Islanders on the NHL Board of
Governors
|
|
|
|
|
|
|
|
|
|
|
|
Horngwei (Michael) Her
Executive Vice President
|
|
45
|
|
10/20/08
|
|
N/A
|
|
Executive Vice President
of the Company
|
|
|
|
|
|
|
|
|
|
|
|
Ronald Nunn
Executive Vice President
|
|
56
|
|
10/20/08
|
|
N/A
|
|
Executive Vice President
of the Company
|
|
|
|
|
|
|
|
|
|
|
|
J. Christopher Wagner
Executive Vice President
|
|
49
|
|
10/20/08
|
|
N/A
|
|
Executive Vice President
of the Company
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Bradley
Senior Vice President
|
|
29
|
|
12/1/08
|
|
N/A
|
|
Senior Vice President of
the Company
|
|
|
|
|
|
|
|
|
|
|
|
Blair R. Baxter
Vice President
|
|
52
|
|
3/31/08
|
|
N/A
|
|
Vice President of the
Company
|
42
Table of Contents
The following table sets
forth the committee memberships of each of our directors:
|
|
|
Audit Committee
|
|
Corporate Governance
Committee
|
|
Compensation
Committee
|
|
John R. Anderson
|
|
X*
|
|
X*
|
|
|
|
Gabriel A. Battista
|
|
|
|
X
|
|
X
|
|
Shirley Strum Kenny
|
|
X
|
|
X
|
|
X
|
|
David Kronfeld
|
|
X
|
|
|
|
X*
|
|
Nancy Li
|
|
|
|
|
|
|
|
G. Scott Paterson
|
|
|
|
|
|
|
|
Roy E. Reichbach
|
|
|
|
X
|
|
|
|
Charles B. Wang
|
|
|
|
|
|
|
Committee membership denoted
with an X
Committee chairmanship
denoted with an *
Our disclosure committee,
which is comprised of executive management of the company, currently is
constituted of Ms. Li and Messrs. Reichbach and McCarthy.
Set forth below are the
names of, and certain biographical information regarding, the directors and
executive officers of the Company.
Charles
B. Wang
Charles
B. Wang has been the Chairman of the Board of JumpTV since October 2008. Mr. Wang also has been the owner of the
New York Islanders of the National Hockey League since July 2000 and is
the founder of the Lighthouse Development Group, LLC, the developer of the
Lighthouse Project, which seeks to redevelop and revitalize the Nassau Veterans
Memorial Coliseum site and its surrounding area on Long Island. In 1976, he founded Computer Associates
International, Inc. (“Computer Associates”), a provider of information
technology management services now known as CA Inc., and served as its Chairman
until November 2002. Mr. Wang
created the New York Islanders Children’s Foundation, has his own charitable
foundation and is extremely active in supporting charitable causes such as The
Smile Train, Inc. (“Smile Train”), which he co-founded, and the National
Center for Missing and Exploited Children.
He is the author of “TECHNOVISION II:
Every Executive’s Guide to Understanding and Mastering Technology and
the Internet.” Mr. Wang earned a
Bachelor of Science degree from Queens College and began his computer career at
Columbia University’s Riverside Research Institute as a programming
trainee. Mr. Wang is married to Ms. Li.
G.
Scott Paterson
G.
Scott Paterson is Vice Chairman of JumpTV, having been Chairman from January 2002
until October 2008 and Chief Executive Officer from May 2005 until October 2007
and again from June 2008 until October 2008.
Mr. Paterson
is a Director of Lions Gate Entertainment (NYSE:LGF), Chairman of its Audit
Committee and a member of its Strategic Committee. Mr. Paterson is also Chairman of
Automated Benefits Corp. (TSXV:AUT) and a Director of Run of River Power Inc
(TSXV:ROR). Mr. Paterson is also
currently Chairman of the Merry Go Round Children’s Foundation and also a
Governor of Ridley College.
43
Table of Contents
From
October 1998 until December 2001, Mr. Paterson was Chairman and
CEO of Yorkton Securities Inc., which under his leadership became Canada’s
leading technology investment bank.
Mr. Paterson
has served as the past Chairman of the Canadian Venture Stock Exchange and as a
former Vice Chairman of the Toronto Stock Exchange.
Mr. Paterson
is a graduate of Ridley College and earned a Bachelor of Arts (Economics)
degree from the University of Western Ontario.
In
2009, Mr. Paterson obtained the ICD.D designation by graduating from the
Rotman Institute of Corporate Directors at the University of Toronto.
In
December 2001, Mr. Paterson entered into a settlement agreement with
the Ontario Securities Commission (the “Commission”) in connection with conduct
that was, in the view of the Commission, contrary to the public interest in
connection with certain corporate finance and trading activities engaged in by Mr. Paterson
and the investment dealer with which he was associated. Mr. Paterson has fulfilled the terms of
the settlement agreement, which provided that he could not be registered under
the Ontario Securities Act until December 19, 2003, that he make a
voluntary payment to the Commission of one million Canadian dollars and that he
temporarily cease trading for a six-month period. There were no allegations of securities rule or
law breaches.
Nancy
Li
Nancy
Li has been the Chief Executive Officer of JumpTV since October 2008 and
the founder and Chief Executive Officer of NeuLion, a wholly-owned subsidiary
of JumpTV, since its inception in 2003.
In 2001 Ms. Li established iCan SP, a provider of end-to-end
service management software for information technology operations and a wholly
owned subsidiary of CA Inc. From 1990 to
2001 Ms. Li was Executive Vice President and Chief Technology Officer for
Computer Associates, and prior to that held a variety of management positions
covering virtually every facet of Computer Associates’ business from a
development and engineering perspective.
Ms. Li holds a Bachelor of Science degree from New York
University. Ms. Li is married to Mr. Wang.
Roy E.
Reichbach
Roy
E. Reichbach has been the General Counsel and Corporate Secretary of JumpTV
since October 2008 and has been the General Counsel and Corporate
Secretary of NeuLion, a wholly-owned subsidiary of JumpTV, since 2003. Mr. Reichbach is an Alternate Governor
of the New York Islanders on the NHL Board of Governors. From 2000 until October 2008 he was also
the General Counsel of the New York Islanders and was responsible for the legal
affairs of its affiliated real estate companies, including Lighthouse
Development Group, LLC. From 1994 until
2000 Mr. Reichbach was Vice President — Legal at Computer Associates. Prior to that, he was a trial lawyer in
private practice. Mr. Reichbach
holds a Bachelor of Arts degree from Fordham University and a Juris Doctorate
degree from Fordham Law School. He has
been admitted to practice law since 1988.
John R.
Anderson
John
R. Anderson has been the Chief Financial Officer of Impax Energy Services
Income Trust, an income trust, since June 2006. Mr. Anderson has also been the Chief
Financial Officer of Tailwind Financial Inc., a special acquisition company,
since April 2007, and Chief Executive Officer and Chief Financial Officer
of LPBP Inc., a corporation with investments in health science-focused
partnerships,
44
Table of Contents
since
May 2004. He was the Chief
Financial Officer of The T. Eaton Company Limited and was also a partner with
Ernst & Young LLP. Mr. Anderson
is a director of the Canadian Medical Discoveries Fund and Chairman of the
Board of Directors of Ridley College. Mr. Anderson
holds a Bachelor of Arts degree from the University of Toronto and is a
chartered accountant in Canada.
Gabriel
A. Battista
Gabriel
A. Battista has been the Vice Chairman of the Board of Directors of Trustees of
Capitol College since 1994, having become a member of the board in 1992, and
has also been a member of the Board of Directors of Trustees of the American
University of Rome since 2006. Mr. Battista
serves as a member of the Boards of Directors of Sentrillion, Network Alliance,
TEOCO and the National Italian American Foundation. From 1999 until December 2006, Mr. Battista
was the President, Chairman and Chief Executive Officer of Talk America. Mr. Battista received a Bachelor of
Science degree from Villanova University, a Master of Science degree from
Drexel University and a Master of Business Administration degree from Temple
University. He is also a registered professional
engineer in the State of Pennsylvania.
Shirley
Strum Kenny
Shirley
Strum Kenny has been President of the State University of New York at Stony
Brook since 1994. Dr. Kenny was
President of Queens College and has taught at the University of Texas,
Gallaudet College, the Catholic University of America, the University of
Delaware and the University of Maryland.
She is a member of the Boards of Directors of Goodwill Industries of
Greater New York and the Long Island Association. She is also the vice chair of the Board of
Directors of the Brookhaven Science Associates, which oversees the Brookhaven
National Laboratory. In addition, she
has previously served on the Board of Directors of Computer Associates, among
others. Dr. Kenny holds a Bachelor of
Arts degree from the University of Texas, a Master of Arts degree from the
University of Minnesota and a Ph.D. from the University of Chicago.
David
Kronfeld
David
Kronfeld is the Chairman of JK&B Capital, a venture capital firm, which he
founded in 1996. He has been a General
Partner at Boston Capital Ventures, the Vice President of Acquisitions and
Venture Investments at Ameritech, a Senior Manager at Booz Allen &
Hamilton and a Systems Analyst at Electronic Data Systems. Mr. Kronfeld earned a Bachelor of
Science degree with high honors and a Master of Science degree from Stevens
Institute of Technology, and a Master of Business Administration degree from
The Wharton School of Business of the University of Pennsylvania.
Arthur
J. McCarthy
Arthur
J. McCarthy has been the Chief Financial Officer of JumpTV since November 2008. Mr. McCarthy is an Alternate Governor of
the New York Islanders on the NHL Board of Governors. From 1985 until 2008 he was the Senior Vice
President and Chief Financial Officer for the New York Islanders and was
responsible for the New York Islanders’ financial affairs and its affiliated
companies, including the Lighthouse Development Group, LLC. From 1977 to 1985, Mr. McCarthy was a
member of the Audit Practice of KPMG Peat Marwick, reaching the position of
Senior Manager. Mr. McCarthy was
licensed in the State of New York as a Certified Public Accountant in 1980 and
holds a Bachelor of Science degree from Long Island University — C.W. Post
College.
45
Table of Contents
Horngwei
(Michael) Her
Horngwei
(Michael) Her has been an Executive Vice President of Research and Development
of JumpTV since October 2008 and the Executive Vice President of Research
and Development of NeuLion, a wholly-owned subsidiary of JumpTV, since its
inception in 2003. From 2000 to 2003 Mr. Her
ran the development team for iCan SP.
Prior to that, Mr. Her served as Senior Vice President for Research &
Development at Computer Associates. He
is also the co-inventor of the several computer systems patents. Mr. Her holds a college degree from
Taipei Teaching College and a Master of Science degree from the New York
Institute of Technology.
Ronald
Nunn
Ronald
Nunn has been an Executive Vice President of Operations of JumpTV since October 2008
and the Executive Vice President of Business Operations of NeuLion, a
wholly-owned subsidiary of JumpTV, since its inception in 2003. From 2000 to 2003 Mr. Nunn was in charge
of business operations at iCan SP.
Between 1987 and 2000, Mr. Nunn held a number of senior management
positions at Computer Associates. From
1982 to 1987 Mr. Nunn directed certain research and development and
operating projects with UCCEL (formerly University Computing Company).
J.
Christopher Wagner
J.
Christopher Wagner has been an Executive Vice President of Sales of JumpTV
since October 2008 and the Executive Vice President of Marketplace
Strategy of NeuLion, a wholly-owned subsidiary of JumpTV, since its inception
in 2003. From 1984 to 2000 Mr. Wagner
held several positions at Computer Associates, culminating in his becoming
Executive Vice President and General Manager of Services, responsible for
building that company’s Government Partner Program and Global Consulting
Business. From 2000 to 2003 Mr. Wagner
worked as the Chief Executive Officer and member of the Board of Directors of
several private equity and venture capital firms, including Metiom, MetaMatrix,
Exchange Applications and Digital Harbor.
Mr. Wagner received a Bachelor of Arts degree from Delaware
University.
Michael
J. Bradley
Michael
J. Bradley has been the Senior Vice President of Marketing of JumpTV since December 2008. From July 2008 until December 2008,
Mr. Bradley was the Head of Marketing of the Company. He joined the Company in November 2007
as the Head of Sports Marketing (International). From June 2006 until October 2007, Mr. Bradley
served as a Marketing Project Manager of eBay Canada. From 2003 until May 2006 he operated
Cadre Collective, a creative consulting and marketing agency in Ottawa,
Ontario. Mr. Bradley earned a
Bachelor of Science from the University of Waterloo.
Blair
R. Baxter
Blair
R. Baxter has been a Vice President of JumpTV since November 2008. He was the Chief Financial Officer of JumpTV
from March 2008 until November 2008.
From 1999 to 2002 and from 2004 to 2008 Mr. Baxter served as the
Chief Financial Officer of Burntsand Inc, a business consulting and information
technology services company, and also served variously as its Vice President
and Corporate Controller and Chief Operating Officer. Mr. Baxter serves on the Board of
Governors of The Michener Institute for Applied Health Sciences in Toronto,
Ontario and is a member of its audit committee.
46
Table of Contents
Mr. Baxter
holds a Bachelor of Commerce (Highest Honours) from Carleton University and is
a chartered accountant in Canada.
Involvement in Certain Legal
Proceedings
None.
ITEM 6.
EXECUTIVE COMPENSATION
The
Company has elected to use the SEC’s “smaller reporting company” rules regarding
the disclosure of executive compensation.
Under
these rules, the Company provides a Summary Compensation Table covering 2008
compensation for:
·
all individuals who served as the Company’s
principal executive officer or acted in a similar capacity in 2008;
·
the Company’s two most highly compensated
executive officers other than the principal executive officer who were serving
as executive officers at the end of 2008; and
·
up to two additional individuals for whom
disclosure would have been provided pursuant to the prior bullet point but for
the fact that the individual was not serving as an executive officer of the
Company at the end of 2008.
We refer collectively as these persons as our “named
executive officers.” We also provide:
·
a 2008 Outstanding Equity Awards at Fiscal
Year-End Table;
·
a 2008 Director Compensation Table; and
·
certain narrative disclosures.
Because the Company was not a “reporting company”
under the Exchange Act prior to the filing with the SEC of this Registration
Statement, we present compensation information in this section for 2008 only.
Overview of the Company’s Compensation Programs
JumpTV’s
executive compensation program is designed to:
·
attract and retain highly qualified
individuals by offering compensation that is competitive in the marketplace;
·
align executive interests with shareholder
interests; and
·
pay for performance.
There are three elements to JumpTV’s
executive compensation program:
·
base salary;
·
short-term compensation incentives to reward
corporate and personal performance; and
·
long-term compensation incentives related to
long-term increase in share value.
47
Table of Contents
The
mix of compensation elements varies by executive level. In determining the mix, our Compensation
Committee took into consideration the compensation principles and how the
elements of executive compensation align with long-term shareholder value
creation.
Base Salary
In
establishing base salaries, the objective of the Compensation Committee is to
establish levels that will enable JumpTV to attract and retain executives who
can effectively contribute to the long-term success of JumpTV. The base salary component of JumpTV’s
executive compensation program is designed to reflect and reward the skills,
abilities, knowledge and experience of, as well as the contribution to be made
by, each executive.
For
the 2008 fiscal year of JumpTV, the Compensation Committee reviewed and established
the base salary for the JumpTV executives based on:
·
the executive’s personal performance and
seniority;
·
the executive’s contribution to the business
of JumpTV; and
·
the size and stage of development of JumpTV.
For
the post-Merger period, executives of NeuLion who became executives of JumpTV
after the Merger were paid base salaries substantially consistent with those
they had previously received from NeuLion, with the exception of Ms. Li,
who received a base salary determined with reference to the salary of the
interim Chief Executive Officer, Mr. Paterson.
Short-Term Compensation Incentives
The
role of short-term compensation incentives is to reward corporate and personal
performance. Prior to the Merger, JumpTV
had periodically paid cash bonuses and, in March 2008, established an
annual cash bonus plan to be administered by the Compensation Committee. The cash bonus plan rewards contributions to
JumpTV for results within the current fiscal year. Payouts, made at the end of the year, are
based on how the executive and the Company performed against established
objectives.
Payment
of the Chief Executive Officer’s bonus is at the discretion of the Compensation
Committee and payment of bonuses to executives and employees is at the
discretion of the Chief Executive Officer.
The
role of long-term compensation incentives is to reward an executive’s
contribution to the long-term performance of the Company and potential for
future contribution. Long-term compensation incentives are intended to align an
executive’s performance with the long-term performance of JumpTV and to provide
an additional incentive for an executive to enhance shareholder value. Long-term incentive compensation for
directors, officers, employees and consultants is reviewed annually and
provided through grants of:
·
stock options pursuant to the Second Amended
and Restated Stock Option Plan (the “Stock Option Plan”);
·
awards pursuant to the Restricted Share Plan;
48
Table
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·
Retention Warrants pursuant to the Amended
and Restated Retention Warrants Plan (the “Retention Warrants Plan”) (grants of
Retention Warrants are not available for directors and officers); and
·
SARs pursuant to the 2006 Stock Appreciation
Rights Plan (the “SARs Plan”).
The
number of options granted for executives of JumpTV for the 2008 fiscal year was
based on each individual’s salary range, responsibility and performance and
took into account the number and terms of options that have been previously
granted to that individual.
Options
were granted to former NeuLion executives after the Merger on a basis
consistent with those previously granted to executives of JumpTV.
49
Table of Contents
2008 SUMMARY COMPENSATION
TABLE
The
following 2008 Summary Compensation Table sets forth for the year ended December 31,
2008 all compensation paid, distributed or accrued for services rendered in all
capacities by all individuals who served as executive officers during 2008 and
who were “named executive officers” under the applicable SEC definition.
|
Name and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Option
awards
(2)
($)
|
|
All other
compensation
($)
|
|
Total
($)
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(f)
|
|
(i)
|
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy Li, Chief Executive Officer
(1)
|
|
2008
|
|
62,397
|
|
0
|
|
3,861
|
|
0
|
|
66,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Scott Paterson, former Chief Executive
Officer
|
|
2008
|
|
300,000
|
|
0
|
|
888,194
|
(3)(4)
|
0
|
|
1,188,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jordan Banks, former Chief Executive
Officer
|
|
2008
|
|
181,166
|
(5)
|
0
|
|
611,240
|
(4)
|
437,730
|
(5)
|
1,214,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Christopher Wagner, Executive Vice
President
(1)
|
|
2008
|
|
49,315
|
|
0
|
|
441,916
|
|
0
|
|
491,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horngwei (Michael) Her, Executive Vice
President
(1)
|
|
2008
|
|
49,315
|
|
0
|
|
375,113
|
|
0
|
|
424,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nada Usina, former President
|
|
2008
|
|
213,803
|
|
119,110
|
|
133,534
|
(4)
|
370,757
|
(6)
|
837,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill Stephen, former Head of Global Sales
|
|
2008
|
|
155,695
|
|
122,500
|
|
27,392
|
(4)
|
15,385
|
(7)
|
320,972
|
|
(1) Includes compensation for the period from October 21,
2008 to December 31, 2008, the period subsequent to the Merger.
(2) In regard to “Option Awards”, in accordance
with the Company’s compensation plans the exercise price for convertible
instruments is based on the 5-day volume weighted average price preceding the
grant date. The grant date fair market
value price is based on the closing price on the grant date. As such, there generally is a difference
between the exercise price and the grant date fair market value price. In some cases the exercise price
pre-negotiated. See “Option Awards” for
additional information on option awards.
(3) During 2008, Mr. Paterson voluntarily
surrendered 200,000 of his vested options having an exercise price of $6.05 and
an equal number of options were granted to the non-executive directors. For additional information, see “Employment
Agreements—Employment Agreement with G. Scott Paterson, former Chief Executive
Officer.”
(4) As a result of the Merger on October 20,
2008, the Company was required to record at fair value all previously granted
convertible instruments, including option awards. As a consequence of this valuation, expense
recognized in respect of such option grants in accordance with FAS 123(R) for
the period from October 21, 2008 to December 31, 2008 was nominal.
(5) Mr. Banks’ salary, cash severance
payments, insurance premiums and charitable contributions were paid in Canadian
dollars. The amount reported above was
converted from Canadian to U.S. dollars using a rate of 1.06601429 Canadian
dollars per U.S. dollar, the average 2008 exchange rate published by the Bank
of Canada Financial Markets Department.
Amount represents $422,133 in severance paid pursuant to an agreement
with Mr. Banks, $1,993 paid to Mr. Banks in lieu of health
50
Table
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benefits,
$12,195 in charitable contributions made at the direction of Mr. Banks and
$1,409 in insurance premiums paid by the Company and attributable to the
ratable portion of a key-man life insurance policy the proceeds of which would
have been payable to Mr. Banks’ designated beneficiaries. For additional information, see “Employment
Agreements—Employment Agreement with Jordan Banks, former Chief Executive
Officer.”
(6) Amount represents severance payments under
the terms of the named executive officer’s severance agreement. For additional information, see “Employment
Agreements—Employment Agreement with Nada Usina, former President of JumpTV
Sports.”
(7) Amount represents severance payments under
the terms of the named executive officer’s severance agreement. For additional information, see “Employment
Agreements—Employment Agreement with Bill Stephen, former Head of Global Sales.”
Option
Awards
The
amounts reported in the Option Awards column represent the accounting expense
recognized in 2008 for option grants to the respective named executive
officers, calculated based on values determined as of the grant date in
accordance with FAS 123(R) utilizing a Black-Scholes-Merton model except
as follows. For financial statement
purposes in accordance with FAS 123(R), the Company calculates stock-based
compensation expense for awards under the Restricted Share Plan based on the
market price of the Company’s Shares on each vesting date.
These
amounts, however, will not agree to the Company’s financial statements as the
Company completed a “reverse take over” for accounting purposes on October 20,
2008. As such, U.S. generally accepted
accounting principles require that figures presented in the Company’s financial
statements reflect the assets, liabilities and results of operations of NeuLion
(as the “accounting acquirer”) for the period from January 1, 2008 to December 31,
2008 and January 1, 2007 to December 31, 2007 and only reflect the
assets, liabilities and results of operations of JumpTV from October 21,
2008 to December 31, 2008.
The
Company cautions that the amounts reported in the 2008 Summary Compensation
Table for these awards may not represent the amounts that the named executive
officers will actually realize from option awards. A named executive officer can only exercise
options that vest while he or she is employed by the Company, and will only
realize value if the options are exercised when the Company’s stock price
exceeds the option exercise price. As at
March 15, 2009, the Company’s stock price was less than the exercise price
for all options held by named executive officers. As such, no value can be realized by
exercising such options as of such date.
Additional information on all outstanding options awarded to the named
executive officers is reflected in the 2008 Outstanding Equity Awards at Fiscal
Year End table on page 57.
Additional information on grants to named executive officers is
reflected under “—Notes: Named Executive Officer Option Award Assumptions,” the
narrative text beneath that table and the “2008 Outstanding Equity Awards at
Fiscal Year-End” Table with accompanying notes.
The
assumptions used by the Company in calculating these amounts are set forth
below. The options and SARs were awarded
under the Stock Option Plan and the SARs Plan (the SARs Plan together with the
Stock Option Plan, the “Equity Plans”), respectively. Material provisions of the Equity Plans are
described beginning on page 57. The
incentive warrants were granted under stand-alone warrant certificates in
connection with the Merger.
51
Table
of Contents
Set
forth below is detail corresponding to the total amounts reported in the Option
Awards column above as it relates to accounting expense recognized in
2008. This expense arose from options,
SARs or incentive warrants granted to named executive officers in 2008, 2007
and 2006.
|
Name
|
|
2008 Grants
|
|
2007 Grants
|
|
2006 Grants
|
|
Option Awards in
2008 Summary
Compensation Table
|
|
|
Nancy Li
|
|
$
|
3,861
|
(a)
|
|
|
|
|
$
|
3,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Scott Paterson
|
|
|
|
$
|
530,544
|
(c)
|
$
|
357,650
|
(b)
|
$
|
888,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jordan Banks
|
|
$
|
91,464
|
(f)
|
$
|
87,271
|
(d)
|
|
|
$
|
611,240
|
|
|
|
|
|
|
$
|
432,505
|
(e)
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Christopher Wagner
|
|
$
|
1,287
|
(g)
|
|
|
|
|
$
|
441,916
|
|
|
|
|
$
|
436,410
|
(h)
|
—
|
|
—
|
|
|
|
|
|
|
$
|
4,218
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horngwei (Michael) Her
|
|
$
|
1,287
|
(g)
|
|
|
|
|
$
|
375,113
|
|
|
|
|
$
|
369,270
|
(h)
|
—
|
|
—
|
|
|
|
|
|
|
$
|
4,556
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nada Usina
|
|
$
|
6,653
|
(k)
|
$
|
126,881
|
(j)
|
—
|
|
$
|
133,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill Stephen
|
|
$
|
11,192
|
(k)
|
$
|
16,200
|
(l)
|
—
|
|
$
|
27,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: Named Executive Officer Option Award
Assumptions
|
Note
|
|
Security
|
|
Grant Date
|
|
Expected
Life
|
|
Volatility
|
|
Exercise
Price
|
|
Market
Price
|
|
Risk-Free
Interest
Rate
|
|
|
(a)
|
|
Options
|
|
11/17/08
|
|
4 years
|
|
79
|
%
|
$
|
0.47
|
|
$
|
0.48
|
|
2.17
|
%
|
|
(b)
|
|
SARs
|
|
3/26/06
|
|
4 years
|
|
72
|
%
|
$
|
4.00
|
|
$
|
2.50
|
|
3.57
|
%
|
|
(c)
|
|
Options
|
|
4/9/07
|
|
4 years
|
|
72
|
%
|
$
|
6.05
|
|
$
|
5.88
|
|
3.57
|
%
|
|
(d)
|
|
SARs
|
|
5/18/07
|
|
4 years
|
|
72
|
%
|
$
|
6.26
|
|
$
|
6.19
|
|
3.95
|
%
|
|
(e)
|
|
SARs
|
|
10/12/07
|
|
4 years
|
|
68
|
%
|
$
|
3.00
|
|
$
|
2.56
|
|
4.52
|
%
|
|
(f)
|
|
SARs
|
|
6/30/08
|
|
6 months
|
|
104
|
%
|
$
|
0.58
|
|
$
|
0.69
|
|
3.18
|
%
|
|
(g)
|
|
Options
|
|
11/17/08
|
|
4 years
|
|
79
|
%
|
$
|
0.47
|
|
$
|
0.48
|
|
2.17
|
%
|
|
(h)
|
|
Incentive Warrants
|
|
10/20/08
|
|
2 years
|
|
85
|
%
|
$
|
0.63
|
|
$
|
0.69
|
|
1.84
|
%
|
|
(i)
|
|
Options
|
|
10/20/08
|
|
4 years
|
|
79
|
%
|
$
|
0.60
|
|
$
|
0.69
|
|
2.17
|
%
|
|
(j)
|
|
Warrants
|
|
8/31/07
|
|
4 years
|
|
68
|
%
|
$
|
3.86
|
|
$
|
3.06
|
|
4.19
|
%
|
|
(k)
|
|
Options
|
|
3/31/08
|
|
4 years
|
|
68
|
%
|
$
|
0.64
|
|
$
|
0.69
|
|
2.88
|
%
|
|
(l)
|
|
Options
|
|
10/12/07
|
|
4 years
|
|
68
|
%
|
$
|
3.00
|
|
$
|
2.56
|
|
4.52
|
%
|
52
Table of Contents
The
number of Shares originally subject to the awards set forth in each row of the
table above are as follows:
|
Note
|
|
Security
|
|
Term of
Award
|
|
Number
|
|
|
(a)
|
|
Options
|
|
5 years
|
|
450,000
|
|
|
(b)
|
|
SARs
|
|
5 years
|
|
1,000,000
|
|
|
(c)
|
|
Options
|
|
5 years
|
|
650,000 (200,000 vested options were subsequently surrendered)
|
|
|
(d)
|
|
SARs
|
|
5 years
|
|
100,000
|
|
|
(e)
|
|
SARs
|
|
5 years
|
|
1,325,000
|
|
|
(f)
|
|
SARs
|
|
6 months
|
|
370,000
|
|
|
(g)
|
|
Options
|
|
5 years
|
|
150,000
|
|
|
(h)
|
|
Incentive Warrants
|
|
2 years
|
|
2,400,000 (Mr. Wagner – 1,100,000; Mr. Her – 1,300,000)
|
|
|
(i)
|
|
Options
|
|
5 years
|
|
416,000 (Mr. Wagner – 200,000; Mr. Her – 216,000)
|
|
|
(j)
|
|
Warrants
|
|
5 years
|
|
500,000
|
|
|
(k)
|
|
Options
|
|
5 years
|
|
187,500 (Ms. Usina – 125,000; Mr. Stephen – 62,500)
|
|
|
(l)
|
|
Options
|
|
5 years
|
|
62,500
|
|
Employment
Agreements
Employment
Agreement with G. Scott Paterson, former Chief Executive Officer
Mr. Paterson
and JumpTV entered into an employment agreement effective as of June 1,
2006 that provided for Mr. Paterson to act as JumpTV’s Chief Executive
Officer. The agreement is for an
indefinite term, subject to the provisions within the agreement. Mr. Paterson is permitted to terminate
the employment agreement upon 60 days’ notice and JumpTV is permitted to
terminate the employment agreement at any time for cause. The agreement provided for an annual base
salary of $90,000 and a bonus that is based on the attainment of certain
objectives to be determined by mutual agreement of the Board and Mr. Paterson
.
JumpTV
has arranged for and paid the premiums on CAD$10 million of key-man term life
insurance for Mr. Paterson to provide 24-hour all-peril coverage with
JumpTV as beneficiary of CAD$8 million of the proceeds, with the remaining
CAD$2 million to be paid to beneficiaries designated by Mr. Paterson. The annual premium payable by JumpTV in
respect of the portion of Mr. Paterson’s insurance to be paid to his
designated beneficiaries is CAD$1,973.
Effective
January 1, 2007, Mr. Paterson’s annual base salary was increased to
$300,000. In the event of a change of
control of JumpTV, all options, SARs or other incentive compensation held by Mr. Paterson
that are subject to vesting within a period of twelve months from the date of
the change of control will automatically vest.
The agreement contains (i) non-solicitation and non-competition
covenants in favor of JumpTV, which apply during the term of Mr. Paterson’s
employment and for a period of 24 months following the termination of his
employment (subject to exclusions to the non-solicitation covenant allowing Mr. Paterson
or his designates to solicit without restriction executives who had been
associated with Paterson Partners or its affiliated entities and exclusions to
the non-competition covenant in respect of commercial involvement that
encompasses an interest of less than five percent in a publicly traded
company), and (ii) confidentiality covenants in favor of JumpTV, which
apply indefinitely. In the event of
termination of the agreement by JumpTV without cause, Mr. Paterson is
entitled to a severance package consisting of 24 months’ compensation in lieu
of notice inclusive of base
53
Table of Contents
salary
and bonuses and a continuation of benefits for a period of 24 months. In addition, all options, SARs or other
incentive compensation held by Mr. Paterson that were subject to vesting
within a period of 24 months from the date of termination will automatically
vest. In addition, Mr. Paterson has
been granted 1,000,000 SARs pursuant to the SARs Plan, with an exercise price
of $4.00 per SAR, that vest at a rate of 1/48th per month. Effective as of the date of the grant of such
SARs, March 27, 2006, 11/48ths of Mr. Paterson’s SARs were deemed
vested. On April 9, 2007, Mr. Paterson
was granted 650,000 options to purchase Shares with an exercise price of $6.05
per option with such options vesting at a rate of 1/48th per month.
For
purposes of Mr. Paterson’s employment agreement, termination “without
cause” includes a change of control or a constructive dismissal after Mr. Paterson
provides specified notice to the Company.
“Change of control” means a transaction or series of transactions
whereby directly or indirectly:
(a)
any person or combination of persons obtains
Shares or other securities in excess of the number which, directly or following
conversion thereof, would entitle them to cast 50% or more of the votes
attaching to all Shares which may cast to elect directors; or
(b)
the Company shall consolidate or amalgamate with,
or enter into a statutory arrangement with, any other person (other than a
subsidiary of the Company (a “Subsidiary”)) or merge with and into any other
person (other than a Subsidiary) or another person shall merge with or into,
the Company, and, in connection therewith, all or part of the outstanding
voting Shares shall be changed in any way, reclassified or converted into,
exchanged or otherwise acquired for Shares or other securities of the Company
or any other person or for cash or any other property; or
(c)
the Company (or a Subsidiary) shall sell or
otherwise transfer, including by way of the grant of a leasehold interest
property or assets (A) aggregating more than 50% of the consolidated
assets (measured by either book value or fair market value) of the Company and
its subsidiaries as at the end of the most recently completed financial year of
the Company or (B) which during the most recently completed financial year
of the Company generated, or during the then current financial year of the Company
are expected to generate, more than 50% of the consolidated operating income or
cash flow of the Company and its subsidiaries; or
(d)
there occurs a change in the composition of
the Board which occurs at a single meeting, or a succession of meetings occurring
within six months, of the shareholders of the Company, whereby such individuals
who were members of the Board immediately prior to such meeting or succession
of meetings cease to constitute a majority of the Board without the Board, as
constituted immediately prior to such meeting, approving of such change.
A
“constructive dismissal” shall be deemed to have occurred if there occurs any
material and adverse change in the title, status, position, job function, job
responsibilities and/or reporting responsibilities of Mr. Paterson from
those current at the date of his employment agreement without his prior written
consent.
In
November 2007, Mr. Paterson resigned the position of Chief Executive
Officer and was appointed Executive Chairman of JumpTV effective such
date. Mr. Paterson’s employment
agreement was amended accordingly and all other terms of his agreement continue
in effect.
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In
May 2008, Mr. Paterson volunteered, on an unsolicited basis, to
surrender under certain circumstances certain options to purchase Shares that
were granted to him on April 9, 2007.
He offered, and the Board accepted, that at each juncture if and when
options were granted in the future to independent Board members that were in
addition to an initial grant of 100,000 incentive securities (consisting of
options or SARs) Mr. Paterson would surrender on a one-for-one basis up to
all of his 650,000 options currently outstanding with an exercise price of
$6.05 per option. For further
information, see the narrative discussion accompanying the Director
Compensation Table below.
Employment
Agreement with Jordan Banks, former Chief Executive Officer
Mr. Banks
and JumpTV entered into an employment agreement in October 2007 that
provided that Mr. Banks would act as JumpTV’s Chief Executive Officer
effective November 2007. The
agreement was for an indefinite term, subject to the provisions within the
agreement. Mr. Banks was permitted
to terminate the employment agreement upon 60 days notice and JumpTV was
permitted to terminate the employment agreement at any time for or without
cause. The agreement provided for a base
salary of CAD$375,000 in the first year of the agreement and for increases in
future years. In addition, Mr. Banks
was entitled to an annual bonus, at the discretion of the Board of Directors,
of up to 60% of his salary in the first year of the agreement and for increases
in future years, and was entitled to a one-time bonus based on the Share price
on the Toronto Stock Exchange.
JumpTV
had arranged for and paid the premiums on CAD$10 million of key-man life
insurance for Mr. Banks, to provide 24-hour all-peril coverage with JumpTV
as beneficiary of CAD$8 million of the proceeds, with the remaining CAD$2
million to be paid to beneficiaries designated by Mr. Banks. The annual premium payable by JumpTV in
respect of the portion of Mr. Banks’s insurance to be paid to his designated
beneficiaries was CAD$1,502. Mr. Banks’
agreement also provided for certain charitable contributions by the Company as
directed by Mr. Banks.
In
the event of termination without cause (which included a “change of control,”
as defined in the agreement), Mr. Banks was entitled to salary and pro
rata bonus payment to the date of termination, in addition to one year’s salary
and bonus (based on the previous year’s bonus) and employment benefits. However, if a severance payment was due in
the first six months of the agreement, Mr. Banks was entitled to receive a
bonus equal to 30% of his first year salary; if due within the first nine
months, a bonus equal to 45% of his first year salary; and if due within the
first twelve months of the agreement, a bonus equal to 60% of his first year
salary. If a severance payment was due
during the first year of the term as a result of a change of control, then the
bonus due was 60% of his first year salary regardless of when such change of
control occurred.
The
agreement provided that Mr. Banks would be granted 1,325,000 SARs on the
effective date of the agreement and, subject to his continued employment,
350,000 SARs the following year and 150,000 SARs a year after that. In the event of a change of control of JumpTV
(as defined in the agreement) or termination without cause, all incentive
compensation held by Mr. Banks that was subject to vesting within a period
of 12 months from the date of the change of control or termination without
cause would automatically vest (15 months if such change of control or
termination without cause occurred during the first year of the agreement).
Mr. Banks
ceased acting as Chief Executive Officer in June 2008. In connection with the termination of his
employment, Mr. Banks and JumpTV agreed that, notwithstanding anything to
the contrary in his employment agreement, in exchange for a mutually
satisfactory release of claims against JumpTV, that JumpTV would pay Mr. Banks
CAD$450,000 in cash, less statutory deductions, that the 1,325,000 SARs
previously granted to Mr. Banks would be accelerated such that they became
55
Table of Contents
immediately
fully vested, and would be exercisable until September 25, 2008, and that
JumpTV would grant to Mr. Banks 370,000 SARs at a price of $0.58, which
was the five day volume weighted average trading price of the Shares on the
Toronto Stock Exchange as of the date of the grant. JumpTV additionally agreed to transfer
ownership of certain nominal assets to Mr. Banks. Mr. Banks received payment of CAD$2,125
in lieu of health insurance benefits after his separation from the Company.
Employment
Agreement with Nada Usina, former President of JumpTV Sports and JumpTV
In
connection with her appointment as President of JumpTV Sports, the Company and Ms. Usina
entered into an employment agreement, dated August 31, 2007. Her agreement provided that Ms. Usina
would serve in this role beginning August 1, 2007 and was for an
indefinite term. The agreement provided
for an annual base salary of $234,000, a retention bonus of $22,000 to be paid
on January 1, 2008 (provided Ms. Usina was still employed with the
Company), an annual bonus of up to 50% of her base salary, provided that
predetermined objectives were met. In
addition, the agreement provided for a grant of 500,000 warrants to purchase
Shares. The agreement also provided for
benefits available to senior executives, participation in the Equity Plans and
eligibility for participation in future grants, including of incentive
compensation awards. The agreement also
contained non-solicitation, non-competition confidentiality covenants in favor
of the Company.
The
agreement provided for a severance payment, continuation of certain benefits to
Ms. Usina and accelerated vesting of certain unvested awards in the event
of termination without cause by the Company (or by Ms. Usina for “good
reason”) and for accelerated vesting in the case of a change in control of the
Company.
In
February 2008, Ms. Usina was named President of JumpTV. She ceased to be the President of JumpTV on September 5,
2008. In connection therewith, Ms. Usina
entered into a severance agreement with the Company and received a severance
package that included $369,368 in cash severance pay, with an installment of
$100,000 to be paid by each October 20, 2008, December 15, 2008 and April 15,
2009, and $69,368 to be paid by July 15, 2009. Ms. Usina received $1,389 in lieu of
health insurance benefits after her separation from the Company.
Employment
Agreement with Bill Stephen, former Head of Global Sales
In
connection with his appointment as Head of Global Sales of JumpTV, the Company
and Mr. Stephen entered into an employment agreement, dated August 10,
2007. This agreement provided that Mr. Stephen
would assume this office beginning August 15, 2007 and serve “at will.” The agreement provided for annual base salary
of $200,000, a $50,000 year-end bonus (so long as he was still employed with
the Company at that time), incentive compensation of up to $175,000 with the
achievement of 100% of the nine- and twelve-month revenue targets (with
additional compensation available if the plan is “overachieved”) and for
participation in the Company’s benefits plan.
In addition, the agreement provided for an initial grant of 125,000
options to be granted pursuant to the Stock Option Plan. All of such options expired unexercised on January 15,
2009.
Mr. Stephen
ceased to serve as the Company’s Head of Global Sales on October 17, 2008
and in connection therewith entered a separation agreement, pursuant to which
he was paid $15,385 in cash.
56
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2008 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
|
|
Number of securities
|
|
Number of securities
|
|
Option
|
|
|
|
|
|
|
underlying unexercised
options (#)
|
|
underlying unexercised
options (#)
|
|
exercise
price
|
|
Option
expiration
|
|
|
Name
|
|
exercisable
|
|
unexercisable
|
|
($)
|
|
date
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(e)
|
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy Li
|
|
9,375
|
|
440,625
|
(1)
|
$
|
0.47
|
|
11/17/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Scott
Paterson
|
|
895,833
|
|
104,167
|
(2)
|
$
|
4.00
|
|
03/27/11
|
|
|
|
|
500,000
|
|
0
|
|
$
|
1.05
|
|
10/20/10
|
|
|
|
|
500,000
|
|
0
|
|
$
|
1.26
|
|
10/20/10
|
|
|
|
|
70,833
|
|
379,167
|
(3)
|
$
|
6.05
|
|
04/09/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jordan Banks
|
|
0
|
|
0
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J.
Christopher Wagner
|
|
1,300,000
|
|
0
|
|
$
|
0.63
|
|
10/20/10
|
|
|
|
|
8,333
|
|
191,667
|
(4)
|
$
|
0.60
|
|
10/20/13
|
|
|
|
|
3,125
|
|
146,875
|
(1)
|
$
|
0.47
|
|
11/17/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horngwei
(Michael) Her
|
|
1,100,000
|
|
0
|
|
$
|
0.63
|
|
10/20/10
|
|
|
|
|
9,000
|
|
207,000
|
(4)
|
$
|
0.60
|
|
10/20/13
|
|
|
|
|
3,125
|
|
146,875
|
(1)
|
$
|
0.47
|
|
11/17/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nada Usina
|
|
0
|
|
0
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill Stephen
|
|
62,500
|
(5)
|
0
|
|
$
|
0.64
|
|
01/15/09
|
|
|
|
|
62,500
|
(5)
|
0
|
|
$
|
3.00
|
|
01/15/09
|
|
(1) These
options vest monthly in equal installments over a 48-month period beginning November 16,
2008.
(2) These stock appreciation rights vest monthly
in equal installments over a 48-month period beginning May 27, 2005.
(3) These stock options
vest monthly in equal installments over a 48-month period beginning April 9,
2007. During 2008, Mr. Paterson
voluntarily surrendered 200,000 of his vested options having an exercise price
of $6.05 and an equal number of options were granted to the non-executive
directors.
(4) These
options vest monthly in equal installments over a 48-month period beginning October 20,
2008.
(5) These options vested on October 17,
2008 due to Mr. Stephen’s termination in connection with a change of
control.
Equity
Compensation Plans
Second Amended and Restated Stock
Option Plan
The Stock Option Plan was
established to advance the interests of JumpTV by:
·
providing Eligible Persons (as defined below)
with additional incentives;
·
encouraging stock ownership by Eligible
Persons;
·
increasing the proprietary interest of
Eligible Persons in the success of JumpTV;
57
Table of Contents
·
encouraging Eligible Persons to remain loyal
to JumpTV or a related entity; and
·
attracting new employees, officers, directors
and consultants to JumpTV or a related entity.
The Stock Option Plan is
administered by the Board, or if so authorized by the Board, the Compensation
Committee. Under the Stock Option Plan,
options to purchase Shares may be granted by the Board of Directors to employees,
directors, officers and consultants of JumpTV or any related entity (“Eligible
Persons”). The Board or Compensation
Committee, as the case may be, also has the authority, subject to the terms of
the Stock Option Plan, to:
·
determine the terms, including the
limitations, restrictions and conditions, if any, upon such grants;
·
suspend or terminate the Stock Option Plan or
any Option Agreement (as defined in the Stock Option Plan);
·
interpret the Stock Option Plan and to adopt,
amend and rescind such administrative guidelines and other rules and
regulations relating to the Stock Option Plan as it may from time to time deem
advisable, subject to required prior approval by any applicable regulatory
authority; and
·
make all other determinations and to take all
other actions in connection with the implementation and administration of the
Stock Option Plan as it may deem necessary or advisable.
The Board’s guidelines,
rules, regulations, interpretations and determinations are conclusive and
binding upon all parties.
The Stock Option Plan
provides that, subject to any regulatory requirements, the exercise price for
any option granted under the Stock Option Plan is based on the closing market
price of the Shares on the market with the largest trading volume of the Shares
on the last trading date preceding the date of the grant. If there is no
trading on that date, the exercise price will be the average of the bid and ask
on the date preceding the date of the grant. If there is no trading market for
the Shares, the Board will in good faith determine the exercise price of an
option based on the fair market value of the Shares on the date of the grant.
If the option is to be granted on a pre-determined date in the future, the exercise
price will be the weighted average trading price, rounding up to the nearest
cent, of the Shares on the stock exchange or quotation system upon which any
shares of JumpTV are then listed and posted or quoted for trading for the five
trading dates preceding the date of the grant.
The maximum number of Shares
issuable upon exercise of options granted pursuant to the Stock Option Plan
shall be equal to the greater of (i) 4,000,000 Shares and (ii) 12.5%
of the number of issued and outstanding Shares from time to time. As a result, any increase in the issued and
outstanding shares will result in an increase in the available number of Shares
issuable under the Stock Option Plan, and any exercises of options will make new
grants available under the Stock Option Plan.
The maximum number of Shares issuable upon exercise of options granted
pursuant to the Stock Option Plan is exclusive of any awards made pursuant to
the Company’s Restricted Share Plan and SARs Plan.
Options are exercisable
during a period established at the time of their grant provided that such
period will expire no later than five years after the date of grant, subject to
early termination. Unless the Board decides otherwise, options granted under
the Stock Option Plan will vest over a 48-month period and may be exercised
after they have vested until the end of the five-year period. Options not
exercised
58
Table of Contents
prior to the expiry date will become null and void and the Shares
reserved for such issuance shall be made available for subsequent option
grants.
If a holder of options (an “Optionholder”)
ceases to be an Eligible Person on a particular date (the “Termination Date”)
for any reason whatsoever other than death, each option held by such
Optionholder, its permitted assigns or the Optionholder’s Registered Retirement
Savings Plan (“RRSP”) or a Registered Retirement Income Fund (“RRIF”) will
cease to be exercisable 90 days after the Termination Date. If any portion of an option has not vested by
the Termination Date, that portion of the option may not under any circumstances
be exercised by the Optionholder, or the Optionholder’s RRSP or RRIF or its
permitted assigns. In the event that an Optionholder’s employment, consultancy
or directorship, as applicable, is terminated by JumpTV for cause (as defined
in such Optionholder’s employment or consulting agreement, as applicable), such
Optionholder’s options, whether vested or otherwise, shall immediately
terminate unless the Board determines otherwise within 30 days. If an
Optionholder dies, the legal representatives of the Optionholder may exercise
the Optionholder’s options within 120 days after the date of such Optionholder’s
death (but only to the extent the options were by their terms exercisable on
the date of death).
If there is a “take-over bid”
or an “issuer bid” other than a “normal course issuer bid” (within the meaning
of each of these terms under applicable securities laws and stock exchange
rules) made for all or any of the issued and outstanding Shares, then the Board
may, in its sole discretion, permit any or all unvested options of any or all
Optionholders outstanding under the Stock Option Plan to become immediately
exercisable (subject to any limitations that the Board may impose) in order to
permit Shares issuable upon the exercise of such options to be tendered to such
bid. Unvested options do not automatically vest in the event of a change of
control (as defined in the Stock Option Plan) unless otherwise agreed in an
employment or consulting agreement between the Optionholder and JumpTV or
unless an Optionholder’s employment is terminated other than for cause, in
connection with a change of control. However, the Board may, in its sole
discretion, permit any or all unvested options of any or all Optionholders
outstanding under the Stock Option Plan to become immediately exercisable
(subject to any limitations the Board may impose) in the event of such a change
of control.
Options are personal to each
Eligible Person and its permitted assigns.
No Eligible Person may deal with any options or any interest in them or
transfer any options held by the Eligible Person except in accordance with the
Stock Option Plan.
At the 2007 annual and
special meeting of the shareholders of JumpTV, shareholders approved by
ordinary resolution amendments to the Stock Option Plan to:
·
specify the types of amendments to the
provisions of the Stock Option Plan or any options granted thereunder that
would require shareholder approval;
·
permit any option granted under the Stock
Option Plan that is scheduled to expire or terminate during, or within ten
business days following, a trading black-out period to be exercised within ten
business days following such trading black-out period;
·
specify the basis for the issuance and
exercise of options granted under the Stock Option Plan to or by United States
residents in compliance with applicable U.S. securities laws; and
·
clarify the provisions regarding vesting of
options upon termination of employment or consultancy. All such amendments were
previously approved by the Board.
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Table of Contents
As of March 15, 2009,
the maximum number of Shares issuable upon exercise of options was
14,221,884. Of that number, options to
purchase 9,230,579 Shares had been issued and are currently outstanding,
leaving options to purchase 4,991,305 Shares available for grant.
2006 Stock Appreciation Rights
Plan
JumpTV has established the
SARs Plan for senior officers and directors of JumpTV and any subsidiary or
affiliate thereof. The purpose of the
SARs Plan is to motivate senior officers and directors of JumpTV and any such
subsidiary or affiliate thereof to put forth their best efforts on behalf of
JumpTV (and any affiliate or subsidiary thereof) and to closely align the
personal interests of such senior officers and directors with those of the
shareholders.
The SARs Plan is
administered by the Board, or if so authorized by the Board, by the
Compensation Committee of the Board.
Under the SARs Plan, the Board may grant SARs awards to senior officers
or directors of JumpTV and any such subsidiary or affiliate thereof. Subject to
the provisions of the SARs Plan, the Board has the authority to:
·
determine and designate from time to time
those persons to whom SARs are to be granted and the number of Shares to be
subject to such SARs; and
·
determine the time or times when, and the
manner in which, each SAR will be exercisable and the duration of the exercise
period.
All discretionary awards to
non-executive directors shall be administered by the Compensation Committee,
being an independent committee of the Board.
Each SARs grant specifies:
·
the period for which the SARs thereunder are
exercisable, to a maximum term of five years from the date of grant; and
·
the exercise price of such SARs, as
determined by the Board at the time such SARs are granted, subject to a minimum
of the market price of the Shares (as determined in accordance with the SARs
Plan).
A holder of SARs may elect
to be paid the “in the money value” of each SAR upon exercise thereof in cash
or may be issued that number of Shares (which JumpTV may issue from treasury or
purchase on the secondary market) equal to the aggregate “in the money value”
of the SARs divided by the fair market value of one Share at the time of
exercise. Alternatively, a holder of SARs may choose to pay the exercise price
of the SARs and be issued Shares from treasury.
A holder of SARs may elect to receive any combination of the above. The Board of Directors has discretionary
authority to accept or reject a request for cash by a holder in whole or in
part.
At the 2007 annual and
special meeting of the shareholders, shareholders approved an increase in the
maximum number of Shares which may be issued pursuant to the SARs Plan from the
greater of 4,150,000 or 5% of the issued and outstanding Shares. The Shares
reserved for issuance upon the exercise of SARs that terminate, expire
unexercised or are cancelled shall be available for subsequent grants of SARs
under the SARs Plan.
Upon the death of a holder
of SARs while a senior officer or director of JumpTV (or within 30 days of such
senior officer or director’s termination of employment), the holder’s SARs will
expire upon
60
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the earlier of 12 months from the date of death and five years from the
date of grant. Upon the termination of an office or directorship due to
disability of a holder of SARs, the holder’s SARs will expire upon the earlier
of six months from the date of termination and five years from the date of
grant. Upon the termination of a holder of SARs’ employment with JumpTV for a reason
other than death or disability, the holder’s SARs will expire upon the earlier
of 90 days from the date of termination and five years from the date of grant
(except if such termination is for cause, in which case, such holder’s SARs
will expire immediately upon notice of termination).
If there is a “take-over bid”
or an “issuer bid” other than a “normal course issuer bid” (within the meaning
of each of these terms under applicable securities laws and stock exchange
rules) made for all or any of the issued and outstanding shares, then the Board
may, in its sole discretion, permit any or all unvested SARs of any or all
holders of SARs outstanding under the SARs Plan to become immediately
exercisable (subject to any limitations that the Board may impose) in order to
permit shares issuable under such SARs to be tendered to such bid. Unvested
SARs do not automatically vest in the event of a change of control (as defined
in the SARs Plan) unless otherwise agreed in an employment or consulting
agreement between the holder of SARs and JumpTV or unless the holder’s
employment or directorship is terminated due to a change of control (except in
the case of termination for cause).
Pursuant to an amendment to
the SARs Plan approved by the Board on May 13, 2008, the Board or any
committee of the Board shall not be permitted to accelerate the vesting of any
awards under the SARs Plan except in the case of death, disability, retirement,
change in control or pursuant to the terms and conditions of pre-existing
employment agreements. If the Board
and/or committee of the Board accelerates or waives the vesting period for any
reasons other than the instances above, the number of SARs to be accelerated or
waived for purposes other than death, disability, retirement, change of control
or pursuant to the terms and conditions of pre-existing employment agreements
shall be limited to 10% of the securities authorized for issuance under the
SARs Plan. The SARs Plan provides that
effective upon obtaining shareholder approval, the Board has the authority to
amend the SARs Plan to:
·
increase the benefits accrued to participants
under the SARs Plan;
·
increase the maximum number of Shares
issuable under the SARs Plan;
·
modify the requirements for participation
under the SARs Plan;
·
change the provisions relating to the
administration of the SARs Plan; and
·
change the terms of any awards including,
without limitation, any acceleration provisions.
No SARs holder shall have
any rights as a shareholder with respect to any Shares subject to the SARs
holder’s rights prior to the date of issuance of such SARs holder of a
certificate or certificates for such Shares in connection with a Securities
Settlement Request or a Treasury Shares Settlement Alternative Request (as each
are defined in the Stock Appreciation Rights Plan).
As of March 15, 2009,
the maximum number of SARs issuable upon exercise of JumpTV SARs was
5,688,753. Of that number, SARs to
purchase 1,898,116 Shares had been issued and are currently outstanding,
leaving SARs to purchase 3,790,637 Shares available for grant.
61
Table of Contents
Amended and Restated Retention
Warrants Plan
For purposes of the Retention
Warrants Plan summary, the term “Eligible Persons” should be understood to
exclude directors and officers of the Company.
JumpTV has established the
Retention Warrants Plan for JumpTV Eligible Persons, as the case may be, is to
advance the interests of JumpTV by:
·
providing Eligible Persons with additional
incentive;
·
encouraging share ownership by Eligible
Persons;
·
increasing the proprietary interest of
Eligible Persons in the success of JumpTV;
·
encouraging Eligible Persons to remain with
JumpTV or a related entity; and
·
attracting new employees, officers and
consultants to JumpTV or a related entity.
The Retention Warrants Plan
is administered by the Board or the Compensation Committee, as the case may
be. Subject to the limitations of the
Retention Warrants Plan, the Board or the Compensation Committee has the
authority to:
·
issue Retention Warrants to purchase Shares
to Eligible Persons;
·
determine the terms, including the
limitations, restrictions and conditions, if any, upon such issuances;
·
interpret the Retention Warrants Plan and
adopt, amend and rescind such administrative guidelines and other rules and
regulations relating to the Retention Warrants Plan as it may from time to time
deem advisable, subject to required prior approval by any applicable regulatory
authority;
·
suspend or terminate the Retention Warrants
Plan; and
·
make all other determinations and to take all
other actions in connection with the implementation and administration of the
Retention Warrants Plan as it may deem necessary or advisable.
Any discretionary awards
made to non-executive directors under the Retention Warrants Plan shall be
administered by the Compensation Committee, being an independent committee of
the Board.
The maximum number of Shares
available for issuance pursuant to the exercise of Retention Warrants issued
pursuant to the Retention Warrants Plan is limited to 2,500,000, inclusive of
those Share purchase warrants issued by JumpTV pursuant to its acquisition of
the XOS Network or issued pursuant to its acquisition of Cycling Television
Limited (“CyclingTV”), but exclusive of all other issuances of warrants made
prior to the establishment of the Retention Warrants Plan as well as any
warrants, options, or rights granted under any other security-based incentive
compensation plans of JumpTV and such warrants, options or rights, as the case
may be, are not subject to the terms of the Retention Warrants Plan.
Pursuant to the Retention
Warrants Plan and subject to the applicable rules of any stock exchange or
quotation system on which the Shares may be listed from time to time, the Board
shall establish the exercise price of a Retention Warrant at the time each
Retention Warrant is granted on the basis of the closing market price of the
Shares on the market with the largest trading volume of the Shares on the last
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Table of Contents
trading date preceding the date of the issuance. If there is no trading
on that date, the exercise price of a Retention Warrant will be the average of
the bid and ask on the date preceding the date of the issuance.
Subject to the regulations
of the applicable regulatory authorities, the aggregate number of securities
available for issuance under the Retention Warrants Plan to any one Eligible
Person and an RRSP or a RRIF of which that person is an annuitant, is 5% of the
Shares outstanding at the time of the grant (on a non-diluted basis). Retention
Warrants issued must be exercised no later than 5 years after the date of the
issuance or such lesser period as the applicable issuance, regulatory
authorities or the provisions of the Retention Warrants Plan may require (the “Expiry
Date”); provided, however, in the event that a Retention Warrant is scheduled
to expire or terminate during or within ten business days following a blackout
period, the Expiry Date shall be the date that is the tenth business day
following the date of expiry of the blackout period (the “Blackout Expiry Date”).
If a new blackout period is imposed prior to the Blackout Expiry Date, the
Blackout Expiry Date shall be the date that is the tenth business day following
the date of expiry of the new blackout period.
The Board may determine when any Retention Warrant will become
exercisable and may determine that the Retention Warrant will be exercisable in
installments. No fractional Shares may
be issued and the Board may determine the manner in which fractional Share
value will be treated. Not less than 100
Shares may be purchased at any one time except where the remainder totals less
than 100.
If an Eligible Person ceases
to be an Eligible Person for any reason whatsoever other than death, each
Retention Warrant held by such person, such person’s permitted assigns, or such
person’s RRSP or RRIF will cease to be exercisable 90 days after such person’s
termination date. If any portion of a
Retention Warrant has not vested by the termination date, that portion of the
Retention Warrant may not under any circumstances be exercised by such person,
such person’s permitted assigns or such person’s RRSP or RRIF, regardless of
whether such person received compensation in respect of dismissal or was
entitled to a period of notice of termination which would otherwise have
permitted a greater portion of the Retention Warrant to vest in such person,
their permitted assigns or their RRSP or RRIF.
If an Eligible Person dies,
the legal representatives of the Eligible Person may exercise the Eligible
Person’s Retention Warrants, the Eligible Person’s permitted assign’s Retention
Warrants and the Retention Warrants held by the Eligible Person’s RRSP or RRIF
within 120 days after the date of the Eligible Person’s death but only to the
extent the Retention Warrants were by their terms exercisable on the date of
death.
In the event that an
Eligible Person’s employment, consultancy or directorship, as applicable, is
terminated by Jump TV for cause (as defined in such Eligible Person’s
employment or consulting agreement, as applicable), such Eligible Person’s
Retention Warrants and its permitted assigns’ Retention Warrants, whether
vested or otherwise, shall immediately terminate. The Board shall have discretion to permit
such Eligible Participant and its permitted assigns to exercise the vested
portion of such Eligible Person’s Retention Warrants (as of the termination
date). The Board shall have a period of
30 days to exercise its discretion to permit the exercise of such Eligible
Person’s Retention Warrants and in the event of such exercise of discretion,
the Retention Warrants shall be deemed not to have been terminated as of the
termination date of the Eligible Person’s employment, consultancy or
directorship, as applicable.
If there is a “take-over bid”
or an “issuer bid” other than a “normal course issuer bid” (within the meaning
of each of these terms under applicable securities laws and stock exchange
rules) made for all or any of the issued and outstanding Shares, then the Board
may, in its sole discretion, by resolution permit any or all unvested Retention
Warrants outstanding under the Retention Warrants Plan to become immediately
exercisable (subject to any limitations the Board may impose) in order to
permit Shares issuable under such Retention Warrants to be tendered to such bid.
There shall be no automatic vesting of
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unvested Retention Warrants in the event of a change of control unless
otherwise agreed in an Eligible Person’s employment or consulting agreement;
however, the Board may, in its sole discretion, by resolution permit any or all
unvested Retention Warrants of any or all Participants outstanding under the
Retention Warrants Plan to become immediately exercisable (subject to any
limitations the Board may impose) in the event of a change of control.
Pursuant to an amendment to
the Retention Warrants Plan approved by the Board on May 13, 2008, the
Board or any committee of the Board shall not be permitted to accelerate the
vesting of any Retention Warrants under the Retention Warrants Plan except in
the case of death, disability, retirement, change in control or pursuant to the
terms and conditions of pre-existing employment agreements. If the Board and/or
a committee of the Board accelerates or waives the vesting period for any
reason other than the instances above, the number of Retention Warrants to be
accelerated or waived for purposes other than death, disability, retirement, change
of control or pursuant to the terms and conditions of pre-existing employment
agreements shall be limited to 10% of the securities authorized for issuance
under the Retention Warrants Plan.
Shareholder approval is required to increase the benefits accrued to
participants under the Retention Warrants Plan, when modifying the requirements
for participation under the Retention Warrants Plan, when changing the
provisions relating to the administration of the Retention Warrants Plan or
when changing the terms of a Retention Warrant including, without limitation,
any vesting provisions.
In the event that Retention
Warrants issued under the Retention Warrants Plan are surrendered in accordance
with the provisions of the Retention Warrants Plan, terminate or expire without
being exercised in whole or in part, the Shares reserved for issuance but not
purchased under such lapsed Retention Warrants shall be available for
subsequent Retention Warrants to be issued under the Retention Warrants Plan.
Retention Warrants are
personal to each Eligible Person and its permitted assigns. No Eligible Person may deal with any
Retention Warrants or any interest in them or transfer any Retention Warrants
held by the Eligible Person except in accordance with the Retention Warrants
Plan.
As of March 15, 2009,
the maximum number of Shares issuable upon exercise of Retention Warrants is
2,500,000. Of that number, Retention
Warrants to purchase 1,095,844 Shares had been granted and are currently
outstanding, leaving Retention Warrants to purchase 1,404,156 Shares available
for grant.
Restricted Share Plan
JumpTV has established a
Restricted Share Plan for employees and consultants of JumpTV and JumpTV’s
subsidiaries (“Eligible Participants”). The purpose of the Restricted Share
Plan is to encourage share ownership by Eligible Participants through the
issuance of awards to Eligible Participants based on an assessment of the
Eligible Participants’ current and potential ability to contribute to the
success of JumpTV. The Restricted Share Plan is administered by the Board, or
if so authorized by the Board, by the Compensation Committee. The Board or Compensation Committee, as the
case may be, has the authority, subject to the terms of the Restricted Share
Plan, to:
·
select those who are Eligible Participants;
·
grant awards under the Restricted Share Plan;
·
interpret the Restricted Share Plan; and
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Table of Contents
·
establish the rules and regulations
applying to the Restricted Share Plan and to make all other determinations it
deems necessary or useful for the administration of the Restricted Share Plan.
The vesting of an award
under the Restricted Share Plan is determined by the Board or Compensation
Committee, as the case may be, at the time of grant. Upon the vesting of an award under the
Restricted Share Plan, JumpTV, at its discretion, may issue from treasury the
number of Shares represented by such vested award, purchase the number of
Shares represented by such vested award on the secondary market for delivery to
the holder of such vested award or, unless the related award agreement provides
otherwise, pay to such holder an amount in cash equal to the market value of
the Shares represented thereby on the vesting date (where market value is
determined in accordance with the Restricted Share Plan). JumpTV has determined that it will issue
securities from treasury in all cases of vesting of an award under the
Restricted Share Plan. A holder of an
award under the Restricted Share Plan does not have any rights as a shareholder
until such award has vested in accordance with its terms and the underlying
Shares have been issued by JumpTV.
Awards under the Restricted
Share Plan are not generally assignable.
However, the Board or the Compensation Committee may determine at the
time of grant or thereafter that any award under the Restricted Share Plan is
assignable, to the extent permitted by applicable law, in whole or in part and
in such circumstances and under such conditions as specified by the Board or
the Compensation Committee, as the case may be.
Notwithstanding the foregoing, in the case where a holder of an award
under the Restricted Share Plan dies, his or her legal representative shall
have the rights of such holder under the Restricted Share Plan and the Award
Agreement (as defined in the Restricted Share Plan) for a period of 90 days
following the death of such holder, following which period all awards under the
Restricted Share Plan that have not vested shall terminate.
A maximum number of
1,000,000 Shares may be issued from JumpTV’s treasury pursuant to awards under
the Restricted Share Plan over the life of the Restricted Share Plan. As of March 15, 2009, 1,000,000 awards
had made, 135,050 had been forfeited and cancelled, 75,000 had been returned,
and 741,558 awards had vested and a like number of Shares been issued. There remain 48,392 Shares available for
issuance pursuant to prior awards under the Restricted Share Plan. Any of the Shares reserved for issuance
pursuant to an award under the Restricted Share Plan that has been cancelled,
expired, forfeited or terminated without having been exercised in full or
settled in cash or shares (either from treasury or purchased in the secondary
market) will not be subsequently awarded under the terms of the Restricted
Share Plan. No new grants are permitted
under the Restricted Share Plan.
Awards under the Restricted
Share Plan, whether or not subject to the attainment of performance objectives,
expire immediately, are forfeited and are of no further force and effect on the
date upon which the holder ceases to be an employee or consultant, as the case
may be, of JumpTV for any reason, unless otherwise determined by the Board or
Compensation Committee at or after the time of the grant. There is no automatic vesting of unvested
awards under the Restricted Share Plan in connection with a change of control (as
defined in the Restricted Share Plan) unless otherwise agreed in an employment
or consulting agreement. However, the
Board or the Compensation Committee, as the case may be, shall have, in its
sole discretion, the power to accelerate the time at which any or all awards
under the Restricted Share Plan may vest or the time during which any awards
under the Restricted Share Plan will become fully vested including, without
limitation, in connection with such a change of control.
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Table of Contents
Payments
in Connection with Termination or Change in Control
The
Equity Plans and the Company’s Retention Warrants Plan and Restricted Stock
Plan each provide for immediate vesting of all options, SARs, awards under the
Restricted Stock Plan or warrants held thereunder by plan participants if any
such person’s employment, directorship, or other association, as the case may
be, with the Company is terminated (other than for cause) prior to the expiry
of such options, SARs, awards under the Restricted Stock Plan or warrants by
virtue of, or in connection with, a change of control (as this term is defined
in the applicable plan) of the Company.
The Board of Directors of the Company may also provide in its discretion
for vesting under such plans if there is a take-over bid or issuer bid (as such
terms are defined in such plan) or in the event of a change of control. See “Equity Compensation Plans” for
additional information on these plans.
For
additional information regarding termination and change of control provisions
incorporated in Messrs. Paterson’s and Banks’ and Ms. Usina’s
employment agreements, see “Employment Agreements—G. Scott Paterson, former
Chief Executive Officer,” “—Jordan Banks, former Chief Executive Officer” and “—Employment
Agreement with Nada Usina, former President of JumpTV Sports and JumpTV.”
The
Company is party to no other contract, agreement, plan or arrangement (written
or unwritten) that provides for payment following a change a named executive
officer’s responsibilities or following a change in control. The Company has no other plan that provides
for the payment of retirement benefits, or other benefits that will be paid
primarily following retirement, or at, following, or in connection with
resignation, retirement or other termination of a named executive officer.
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Table of Contents
2008 DIRECTOR COMPENSATION TABLE
|
Name(1)
|
|
Fees earned or
paid in cash(2)
($)
|
|
Stock Awards(3)
($)
|
|
Option Awards(4)
($)
|
|
Total
($)
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(h)
|
|
|
Lorne Abony
|
|
|
2,375
|
|
2,227
|
|
20,799
|
|
25,401
|
|
|
Mark Amin
|
|
|
11,000
|
|
5,391
|
|
92,327
|
|
108,718
|
|
|
John R.
Anderson
|
|
|
16,375
|
|
3,398
|
|
24,824
|
|
44,597
|
|
|
Gabriel A.
Battista
|
|
|
9,000
|
|
5,156
|
|
24,824
|
|
38,480
|
|
|
Shirley
Strum Kenny
|
|
|
4,500
|
|
0
|
|
0
|
|
4,500
|
|
|
David
Kronfeld
|
|
|
4,500
|
|
0
|
|
0
|
|
4,500
|
|
|
Curt Marvis
|
|
|
10,125
|
|
5,273
|
|
55,118
|
|
70,516
|
|
|
James
McNamara
|
|
|
0
|
|
11,250
|
|
14,382
|
|
25,632
|
|
|
Gary Slaight
|
|
|
1,500
|
|
1,406
|
|
21,773
|
|
24,679
|
|
|
Charles B.
Wang
|
|
|
3,500
|
|
0
|
|
0
|
|
3,500
|
|
(1)
At fiscal year end, the Company’s directors held awards of options to
purchase Shares in the following respective amounts: Mr. Amin — 350,000 Shares; Mr. Anderson
— 50,000 Shares; Mr. Battista — 50,000 Shares; and Mr. Marvis —
215,000 Shares. Messrs. Anderson
and Battista each also held 100,000 SARs.
(2)
Messrs. McNamara and Battista elected, pursuant to the
Directors’ Compensation Plan, payment of 100% of their fees in Shares in lieu
of cash. Cash was foregone and Shares
granted in lieu thereof in the following respective amounts: Mr. McNamara: $5,625 foregone for 7,500 Shares; and Mr. Battista: $2,578 foregone for 3,594 Shares. All other directors received 50% of their
fees in cash and 50% in Shares.
(3)
Shares granted were valued at $0.75 per Share in accordance with FAS 123(R) on
the date of issuance. Grant information
is:
|
Name
|
|
# of
Shares
|
|
Value
|
|
|
Lorne Abony
|
|
2,969
|
|
$
|
2,227
|
|
|
Mark Amin
|
|
7,188
|
|
$
|
5,391
|
|
|
John R. Anderson
|
|
4,531
|
|
$
|
3,398
|
|
|
Gabriel A. Battista
|
|
6,875
|
|
$
|
5,156
|
|
|
Curt Marvis
|
|
7,031
|
|
$
|
5,273
|
|
|
James McNamara
|
|
15,000
|
|
$
|
11,250
|
|
|
Gary Slaight
|
|
1,875
|
|
$
|
1,406
|
|
(4)
In regard to “Option Awards”, in accordance with the Company’s
compensation plans the exercise price for convertible instruments is calculated
using the 5-day volume weighted average price preceding the grant date. The grant date fair market value price is
calculated using the closing price on the grant date. As such, there generally is a difference
between the exercise price and the grant date fair market value price. In some cases the exercise price is
pre-negotiated. See “Option Awards Under
2008 Director Compensation Table” for additional information.
Director
Compensation
Overview
Directors
who are also executives of JumpTV do not receive an annual retainer for service
on the Board and are not currently entitled to any compensation for attending meetings
of the Board, committees
67
Table of Contents
of the Board or meetings of shareholders of
the Company. None of Ms. Li, Mr. Paterson
and Mr. Reichbach received any compensation for service on the Board in
2008 as each is an executive officer of the Company. Non-executive directors were paid an annual
retainer of $10,000 and a fee of $500 per Board meeting and committee meeting
attended. Each committee Chairman
received an additional annual fee of $5,000 for acting in such capacity. Each non-executive director has been granted
options to purchase Shares, with such options vesting at a rate of 1/48th per
month, as discussed below in this section.
Non-executive directors are reimbursed for any out-of pocket travel
expenses incurred in order to attend meetings.
Pursuant
to the Amended and Restated Directors’ Compensation Plan (the “Directors’
Compensation Plan”) as approved by the shareholders of the Company at the 2007
annual and special meeting of the shareholders of JumpTV, the non-executive
directors of JumpTV receive at least 50% of their annual retainers and Board
meeting and committee meeting fees by way of issuance of Shares and may elect
to receive up to 100% of their retainers and fees in Shares in lieu of cash
compensation.
Directors
are also granted other equity-based compensation as determined by the
Compensation Committee.
The
Company’s practice since its initial public offering on August 10, 2006
has been to grant 100,000 incentive securities under the Stock Option Plan and
the SARs Plan to non-executive directors upon their appointment to the
Board. To better reflect the efforts
devoted by non-executive directors on behalf of the Company and its
shareholders, the Board, at the suggestion of Mr. Paterson, resolved on May 13,
2008 to grant to each non-executive director 100,000 options. The additional options to each non-executive
director were granted in four equal installments of 25,000 options on the final
day that the Shares were available to be traded on the Toronto Stock Exchange
in each of June 2008, September 2008, December 2008 and March 2009,
such grants to be governed by the terms of the Stock Option Plan. On his own initiative, in May 2008 Mr. Paterson
volunteered to have an equal number of his vested options having an exercise
price of $6.05 surrendered and cancelled on each such trading day in equal
number to the quantity of options to be granted to such non-executive
directors, resulting in a total cancellation of 200,000 of his vested
options. In 2008, Messrs. Anderson
and Battista also received grants of 100,000 SARs each.
Amended and Restated Directors’
Compensation Plan
The purpose of the Directors’
Compensation Plan is to advance the interests of JumpTV by:
·
encouraging its directors to acquire Shares,
thereby increasing the proprietary interests of such persons in JumpTV and
aligning the interests of such persons with the interests of shareholders
generally; and
·
preserving JumpTV’s cash for other corporate
purposes.
The Directors’ Compensation
Plan is administered by the Board or the Compensation Committee. Subject to the
limitations of the Directors’ Compensation Plan, the Board has the authority
to:
·
issue Shares to non-executive directors under
the Directors’ Compensation Plan;
·
determine the terms, including the
limitations, restrictions and conditions, if any, upon such grants;
·
interpret the Directors’ Compensation Plan
and to adopt, amend and rescind such administrative guidelines and other rules and
regulations relating to the Directors’
68
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Compensation
Plan as it may from time to time deem advisable, subject to required prior
approval by any applicable regulatory authority;
·
suspend or terminate the Directors’
Compensation Plan; and
·
make all other determinations and to take all
other actions in connection with the implementation and administration of the
Directors’ Compensation Plan as it may deem necessary or advisable.
The maximum number of Shares
available to be issued to non-executive directors pursuant to the Directors’
Compensation Plan is limited to 500,000.
Management directors are not eligible to receive Shares under the
Directors’ Compensation Plan because they do not receive compensation as
directors.
Under the Directors’
Compensation Plan, the non-executive directors of JumpTV receive at least 50%
of their annual retainers and Board and committee meeting fees in the form of
Shares and may elect to receive up to 100% of their retainers and fees in
Shares in lieu of cash compensation.
Non-executive directors of JumpTV are paid an annual retainer of $10,000
and a fee of $500 per Board meeting and committee meeting attended. Each committee Chairman receives an
additional annual fee of $5,000 for acting in such capacity. Subject to the overall maximum as described
in the preceding paragraph, there is no maximum number of Shares available to
be issued by JumpTV to any individual non-executive director under the
Directors’ Compensation Plan.
Following the end of the
second fiscal quarter and following the year end, each non-executive director
receives at least $2,500 of the non-executive director’s annual base
compensation and 50% of all accrued Board and Committee meeting fees in Shares in
full satisfaction of such amounts owing.
A non-executive director may elect to receive additional Shares in lieu
of cash compensation owing by JumpTV to the non-executive director. Following the end of the second fiscal
quarter and following the year end, JumpTV committee Chairmen receive at least
$3,750 of their annual base compensation and 50% of all accrued Board meeting
fees in Shares in full satisfaction of such amounts owing. A Committee Chairman may elect to receive
additional Shares in lieu of cash compensation owing by JumpTV to the
Chairman. The number of Shares issuable
to each non-executive director is determined by dividing the dollar value of
the retainers and fees to be paid in Shares by the closing price of the Shares
on the payment date.
Upon ceasing to be a
non-executive director, a director will no longer be eligible to receive Shares
under the Directors’ Compensation Plan and any amounts owing to such director
shall be paid in cash.
Pursuant to an amendment to
the Directors’ Compensation Plan approved by the Board on May 13, 2008,
shareholder approval is required to effect any Board amendment of the Directors’
Compensation Plan to:
·
increase the benefits accrued to participants
under the Directors’ Compensation Plan;
·
increase the maximum number of shares
issuable under the Directors’ Compensation Plan; and
·
modify the requirements for participation
under the Directors’ Compensation Plan.
For the fiscal year ended December 31,
2007, the non-executive directors of JumpTV earned a total of 4,646 Shares in
lieu of cash compensation pursuant to the Directors’ Compensation Plan. These Shares were issued to the non-executive
directors on January 16, 2008.
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Table of Contents
For the first half of the
fiscal year ended December 31, 2008, the non-executive directors of JumpTV
earned a total of 45,469 Shares in lieu of cash compensation pursuant to the
Directors’ Compensation Plan. These
Shares were issued to the non-executive directors on September 8,
2008. A portion of the fees earned in
2008 had not yet been paid as of March 15, 2009. The directors will be issued shares and cash
in April 2009 for 2008 compensation subject to their allocation election
pursuant to the Directors’ Compensation Plan.
As of March 15, 2009,
the maximum number of Shares issuable under the Directors’ Compensation Plan is
500,000. Of that number, 50,115 Shares
had been granted, leaving 449,885 Shares available for grant.
Option
Awards under the 2008 Director Compensation Table
Amounts
reported in the Option Awards column represent the accounting expense
recognized in 2008 for option grants to each of the Company’s directors therein
referenced. The amounts are calculated
in the same manner as the corresponding amounts set forth in the Summary
Compensation Table. See the text accompanying
the Summary Compensation Table for additional information concerning the
calculation of amounts presented, the relationship of these amounts to
information presented in the Company’s financial statements and the amounts
that recipients of option awards set forth in the 2008 Director Compensation
Table may realize on account of such awards.
The
assumptions used by the Company in calculating the amounts of Option Awards set
forth in the 2008 Director Compensation Table are set forth below. The options and SARs were awarded under the
Company’s Equity Plans.
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Table of Contents
Set
forth below is detail corresponding to the total amounts reported in the Option
Awards column above as it relates to accounting expense recognized in
2008. This expense arose from options,
warrants and SARs granted to Directors in 2008, 2007, 2006 and 2005.
|
Name
|
|
2008 Grants
|
|
2007 Grants
|
|
2006 Grants
|
|
2005 Grants
|
|
Option
Awards in
2008 Director
Compensation
Table
|
|
|
Lorne Abony
|
|
|
|
|
|
$
|
14,382
|
(d)
|
$
|
6,417
|
(b)
|
$
|
20,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Amin
|
|
$
|
4,935
|
(k)
|
$
|
24,431
|
(h)
|
|
|
$
|
19,050
|
(a)
|
$
|
92,327
|
|
|
|
|
$
|
3,240
|
(m)
|
$
|
21,240
|
(i)
|
—
|
|
$
|
19,251
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John R. Anderson
|
|
$
|
7,121
|
(j)
|
|
|
|
|
|
|
$
|
24,824
|
|
|
|
|
$
|
10,615
|
(l)
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
$
|
7,088
|
(n)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gabriel A. Battista
|
|
$
|
7,121
|
(j)
|
|
|
|
|
|
|
$
|
24,824
|
|
|
|
|
$
|
10,615
|
(l)
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
$
|
7,088
|
(n)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curt Marvis
|
|
$
|
4,935
|
(k)
|
$
|
18,365
|
(f)
|
$
|
3,596
|
(e)
|
$
|
19,251
|
(b)
|
$
|
55,118
|
|
|
|
|
$
|
3,240
|
(m)
|
$
|
3,054
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,678
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James McNamara
|
|
—
|
|
—
|
|
$
|
14,382
|
(c)
|
—
|
|
$
|
14,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Slaight
|
|
—
|
|
$
|
21,773
|
(g)
|
—
|
|
—
|
|
$
|
21,773
|
|
Notes: Director Option Award
Assumptions
|
Note
|
|
Security
|
|
Grant
Date
|
|
Expected
Life
|
|
Volatility
|
|
Exercise
Price
|
|
Market
Price
|
|
Risk-Free
Interest
Rate
|
|
|
(a)
|
|
Warrants
|
|
6/24/05
|
|
4 years
|
|
72
|
%
|
$
|
1.80
|
|
$
|
1.80
|
|
3.85
|
%
|
|
(b)
|
|
Options
|
|
11/10/05
|
|
4 years
|
|
72
|
%
|
$
|
1.80
|
|
$
|
1.80
|
|
3.85
|
%
|
|
(c)
|
|
SARs
|
|
4/26/06
|
|
4 years
|
|
72
|
%
|
$
|
4.00
|
|
$
|
4.00
|
|
5.02
|
%
|
|
(d)
|
|
Options
|
|
4/26/06
|
|
4 years
|
|
72
|
%
|
$
|
4.00
|
|
$
|
4.00
|
|
5.02
|
%
|
|
(e)
|
|
Options
|
|
6/7/06
|
|
4 years
|
|
72
|
%
|
$
|
6.00
|
|
$
|
4.00
|
|
4.97
|
%
|
|
(f)
|
|
Options
|
|
4/9/07
|
|
4 years
|
|
72
|
%
|
$
|
6.05
|
|
$
|
5.88
|
|
3.57
|
%
|
|
(g)
|
|
SARs
|
|
5/18/07
|
|
4 years
|
|
72
|
%
|
$
|
6.26
|
|
$
|
6.19
|
|
3.63
|
%
|
|
(h)
|
|
Options
|
|
10/12/07
|
|
4 years
|
|
68
|
%
|
$
|
3.00
|
|
$
|
2.56
|
|
4.52
|
%
|
|
(i)
|
|
Options
|
|
10/12/07
|
|
4 years
|
|
68
|
%
|
$
|
3.86
|
|
$
|
2.56
|
|
4.52
|
%
|
|
(j)
|
|
SARs
|
|
3/31/08
|
|
4 years
|
|
68
|
%
|
$
|
0.64
|
|
$
|
0.69
|
|
2.88
|
%
|
|
(k)
|
|
Options
|
|
7/1/08
|
|
6 months
|
|
75
|
%
|
$
|
0.58
|
|
$
|
0.69
|
|
3.23
|
%
|
|
(l)
|
|
Options
|
|
7/1/08
|
|
4 years
|
|
75
|
%
|
$
|
0.58
|
|
$
|
0.69
|
|
3.40
|
%
|
|
(m)
|
|
Options
|
|
10/1/08
|
|
3 months
|
|
153
|
%
|
$
|
0.60
|
|
$
|
0.52
|
|
2.54
|
%
|
|
(n)
|
|
Options
|
|
10/1/08
|
|
4 years
|
|
75
|
%
|
$
|
0.60
|
|
$
|
0.52
|
|
3.40
|
%
|
71
Table of Contents
ITEM 7.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related
Transactions
The
Company has entered into the following transactions and agreements in the
normal course of operations with Mr. Wang, our Chairman and the spouse of Ms. Li,
our Chief Executive Officer:
New York Islanders
The Company provides
IT-related professional services to the New York Islanders, a professional
hockey club owned by Mr. Wang. The
approximate dollar value of the services was $296,451, $240,000 and $240,000
for the years ended December 31, 2008, 2007 and 2006, respectively.
Plainview Properties
The Company formerly leased
its office premises in Plainview, N.Y., from Plainview Properties, a real
estate company that was 100%-owned through January 2007 and 50%-owned from
late January 2007 through March 2008 by Mr. Wang. The property and the lease were acquired by
an unrelated third party in March 2008.
The approximate dollar value of the services was $170,000, $100,000 and
$83,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
Renaissance
The Company provides
IT-related professional services to Renaissance, a real estate management
company owned by Mr. Wang. The
approximate dollar value of the services was $120,000 for each the years ended December 31,
2008, 2007 and 2006, respectively.
Smile Train
The Company provides
IT-related professional services to Smile Train, a public charity whose
co-founder and significant benefactor is Mr. Wang. The approximate dollar value of the services
was $120,000, $108,000 and $108,000 for the years ended December 31, 2008,
2007 and 2006, respectively.
Hawaii IPTV
Hawaii IPTV is an IPTV
customer of the Company whose principals are family members of Mr. Wang. The approximate dollar value of the services
was $57,577, $44,070 and $1,800 for the years ended December 31, 2008,
2007 and 2006, respectively.
TransVideo
The Company purchases a
substantial portion of its goods for sale from TransVideo, an entity controlled
by Mr. Wang. STB purchases amounted
to $2,745,000, $5,369,500 and $420,000, and transcoder licensing fees amounted
to $125,000, $282,000 and $21,000, for the years ended December 31, 2008,
2007 and 2006, respectively.
KyLinTV
The Company provides
administrative and general corporate support to KyLinTV, an IPTV service
provider whose majority owner, AvantaLion, is controlled by Mr. Wang. The approximate dollar
72
Table of Contents
value of the services was $1,233,353, $1,722,862 and $1,652,250 for the
years ended December 31, 2008, 2007 and 2006, respectively
Additionally, during the
year ended December 31, 2008, the Company acquired equipment from KyLinTV
valued at $620,000 and charged KyLinTV an aggregate STB operations fee of
$920,550.
Other than the foregoing, no
director, executive officer or shareholder who beneficially owns, directly or
indirectly, or exercises control or direction over more than 5% of the
outstanding Shares or immediate family member, known associate or affiliate of
any such person, has or had any material interest, direct or indirect, in any
transaction with the Company within the last three fiscal years, or in any
proposed transaction with the Company, that exceeded the lesser of $120,000 or
one percent of the average of JumpTV’s total assets at year end for the last
two fiscal years.
Charles B. Wang and G. Scott
Paterson
In October 2008, Messrs. Wang
and Paterson purchased securities from the Company, as described below in paragraph
11 of Item 10.
Director Independence
The Company is not subject
to the listing requirements of any U.S. national securities exchange; the
Shares are listed and traded on the Toronto Stock Exchange. To make the independence determinations that
follow, the Board applied the criteria established by the SEC, The Nasdaq Stock
Market (“Nasdaq”), and the Internal Revenue Service, as applicable, for
determining director and committee member independence.
The Board determines the
independence of its members through a broad consideration of all relevant facts
and circumstances, including an assessment of the materiality of any
relationship between the Company and a director. In making each of the following independence
determinations, the Board considered and broadly assessed, from the standpoint
of materiality and independence, all of the information provided by each
director in response to detailed inquiries concerning his independence and any
direct or indirect business, family, employment, transactional or other
relationship or affiliation of such director with the Company.
Board of Directors
The Board is currently
comprised of eight members: Charles B.
Wang, G. Scott Paterson, Nancy Li, Roy E. Reichbach, John R. Anderson, Gabriel
A. Battista, Shirley Strum Kenny and David Kronfeld. Using the objective and subjective
independence criteria enumerated in the Nasdaq Marketplace Rules’ listing
requirements and the SEC rules, the Board has reviewed all relationships
between each director and the Company and, based on this review, the Board has
affirmatively determined that Dr. Kenny and Messrs. Anderson,
Battista and Kronfeld are each independent in accordance with Nasdaq
independence criteria. A lead
independent director, Mr. Anderson, provides overall leadership to the
Board and ensures that the Board’s agenda will enable it to successfully carry
out its duties.
Audit Committee
The Board has determined
that each of its Audit Committee members, Dr. Kenny and Messrs. Anderson
and Kronfeld, is independent in accordance with the independence criteria of
Nasdaq and for purposes of Rule 10A-3(b)(1) promulgated under the
Exchange Act. The Board has determined
that the
73
Table of Contents
Audit Committee members has sufficient knowledge in reading and
understanding the Company’s financial statements to serve on the Audit
Committee. The Board has also determined
that each of Messrs. Anderson and Kronfeld has the accounting or related
financial management expertise necessary for him to be considered an “audit
committee financial expert” under SEC rules.
Compensation Committee
The Board has determined
that each of its Compensation Committee members, Dr. Kenny and Messrs. Anderson
and Battista, is independent in accordance with Nasdaq’s independence criteria,
is an “outside director” pursuant to criteria established by the Internal
Revenue Service and is a “non-employee” director pursuant to criteria
established by the SEC.
Corporate Governance Committee
The Board has determined
that three of its Corporate Governance Committee members, Dr. Kenny and Messrs. Battista
and Kronfeld, are independent in accordance with Nasdaq’s independence criteria. Mr. Reichbach is not independent in
accordance with these criteria as he is an executive officer of the Company.
ITEM 8.
LEGAL PROCEEDINGS
None.
ITEM 9.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
There
is no established public trading market for the Shares in the United
States. The principal established
foreign public trading market for the Shares is the Toronto Stock Exchange. The table below sets forth, for the periods indicated,
the high and low sales prices of the Shares on the Toronto Stock Exchange, in
Canadian dollars, for each full quarterly period within its two most recent
fiscal years, as reported by the Toronto Stock Exchange.
|
|
|
JumpTV Shares
|
|
|
Two Most Recent Full Financial Years
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.33
|
|
$
|
0.52
|
|
|
Second Quarter
|
|
$
|
0.99
|
|
$
|
0.49
|
|
|
Third Quarter
|
|
$
|
1.28
|
|
$
|
0.45
|
|
|
Fourth Quarter
|
|
$
|
0.83
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
First Quarter
|
|
$
|
9.89
|
|
$
|
6.60
|
|
|
Second Quarter
|
|
$
|
7.70
|
|
$
|
4.77
|
|
|
Third Quarter
|
|
$
|
5.10
|
|
$
|
2.60
|
|
|
Fourth Quarter
|
|
$
|
3.14
|
|
$
|
1.78
|
|
74
Table of Contents
As of March 15, 2009,
28,470,431 Shares were subject to outstanding options or warrants to purchase,
or securities convertible into, our Shares.
Shareholders
As of March 15, 2009,
there were approximately 1,250 holders of Shares.
Dividends
The Company has paid no dividends
on the Shares since its inception. At
the present time, the Company intends to retain earnings, if any, to finance
the expansion of its business. The
payment of dividends in the future will depend on the earnings and financial
condition of the Company and on such other factors as the Board may consider
appropriate. The CBCA sets out specific
tests that a company must meet in order to declare or pay dividends. Under Section 42 of the CBCA, a company
shall not declare or pay a dividend if there are reasonable grounds for
believing that:
·
the company is, or would after the payment
be, unable to pay its liabilities as they become due; or
·
the realizable value of the company’s assets
would thereby be less than the aggregate of its liabilities and stated capital
of all classes.
75
Table of Contents
Securities Authorized for
Issuance Under Equity Compensation Plans
The following table sets
out, as of December 31, 2008: (i) the
number of securities to be issued upon the exercise of outstanding options,
warrants and rights; (ii) the weighted-average exercise price of such
outstanding options, warrants and rights; and (iii) the number of
securities (other than those covered in (i)) remaining available for future
issuance under the particular equity compensation plan:
|
Plan Category
|
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
Equity compensation plans approved by
security holders
|
|
|
|
|
|
|
|
|
Second Amended and Restated Stock Option
Plan
|
|
10,298,707
|
(1)
|
$
|
1.19
|
(1)
|
3,921,822
|
|
|
Restricted Share Plan
|
|
59,222
|
|
N/A
|
|
0
|
|
|
2006 Stock Appreciation Rights Plan
|
|
1,947,177
|
(2)
|
$
|
2.97
|
(2)
|
3,741,034
|
|
|
Directors’ Compensation Plan
|
|
0
|
(3)
|
N/A
|
(3)
|
449,885
|
|
|
Amended and Restated Retention Warrants
Plan
|
|
1,350,440
|
|
$
|
2.68
|
|
1,149,560
|
|
|
Employee Share Purchase Plan
|
|
0
|
(4)
|
N/A
|
|
N/A
|
|
|
Equity compensation plans not approved by
security holders
|
|
|
|
|
|
|
|
|
None
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Total
|
|
13,655,546
|
|
$
|
1.59
|
|
9,262,301
|
|
(1)
The maximum number of Shares issuable upon
exercise of options granted pursuant to the Stock Option Plan shall be equal to
the greater of (i) 4,000,000 Shares and (ii) 12.5% of the number of
issued and outstanding Shares from time to time. As a result, any increase in the issued and
outstanding shares will result in an increase in the available number of Shares
issuable under the Stock Option Plan, and any exercises of options will make
new grants available under the Stock Option Plan.
(2)
The maximum number of Shares which may be
issued pursuant to the SARs Plan is the greater of 4,150,000 or 5% of the
issued and outstanding Shares. The
Shares reserved for issuance upon the exercise of SARs that terminate, expire
unexercised or are cancelled shall be available for subsequent grants of SARs
under the SARs Plan.
(3)
Shares are issued directly under the Directors’
Compensation Plan without exercise of any option, warrant or right.
(4)
JumpTV has not implemented the ESPP since its
approval by shareholders.
Certain warrants were issued
by the Company independently of a plan.
As of December 31, 2008, these warrants could be exercised for
16,538,800 Shares at a weighted average exercise price of $1.09. These warrants are discussed in more detail
in Item 10 of this Registration Statement.
A summary description of the
Employee Share Purchase Plan is provided below.
A summary of each of the other equity compensation plans set forth in
the above table is provided in Item 6 hereof.
76
Table of Contents
Employee Share Purchase Plan
At the annual and special
meeting of shareholders of JumpTV held on June 26, 2008, shareholders
approved JumpTV’s Employee Share Purchase Plan (the “ESPP”), pursuant to which
certain employees of JumpTV may elect to purchase Shares from treasury. Upon implementation of the ESPP, senior
employees of JumpTV will be eligible to participate in the ESPP following six
months of continuous employment with JumpTV. Participating employees will be
able to make contributions, by payroll deduction only, at a rate of not less
than 10% of their salary or such other integer percentage rate up to and
including 100% of their salary as such participating employee shall elect,
which contribution rate may be changed at the election of the employee from
time to time in accordance with the terms of the ESPP. Participating employees will be able to
choose to suspend participation in the ESPP provided proper notice in writing
is filed with JumpTV at least 15 days prior to the first of the month in which
payroll deductions are to be suspended.
The Board has the power and
authority, without notice or shareholder approval, at any time and from time to
time, to suspend or terminate the ESPP and to establish the rules and
regulations relating to ESPP and to make all determinations necessary or
advisable for administration of the ESPP.
Without limiting the foregoing, the Board shall have the authority to
amend the ESPP as follows without seeking shareholder approval:
·
amendments as may be necessary to comply with
applicable law or the requirements of any applicable regulatory authority or
stock exchange;
·
an amendment to correct or rectify any
ambiguity, defective provision, error or omission in the ESPP;
·
an amendment to change the provisions
relating to the administration of the ESPP; and
·
to make any other amendment to the ESPP that
does not require shareholder approval by virtue of the provisions of the ESPP,
applicable laws or relevant regulatory or stock exchange requirements.
In the event of termination
of the ESPP, each participating employee shall receive the number of whole
Shares in his or her account and a cash payment by check for any fractional
Shares held in his account, as soon as practicable following the effective date
of termination of the ESPP.
Any amendment of the ESPP to
increase the maximum number of Shares issuable under the ESPP shall become
effective only upon shareholder approval thereof, such approval to be obtained
in accordance with applicable corporate and securities laws and the rules of
the stock exchanges on which the Shares are listed.
A maximum of 2,000,000
Shares have been reserved for issuance under the ESPP from treasury of JumpTV
at a 15% discount to the 10 day volume weighted average price of the Shares
traded on the Toronto Stock Exchange provided, however, that the aggregate of
JumpTV’s securities (i) issued to insiders of JumpTV, within any one year
period, and (ii) issuable to insiders of JumpTV, at any time, under the
ESPP, or when combined with all of JumpTV’s other security based compensation
arrangements, could not exceed 10% of JumpTV’s total issued and outstanding
securities.
The administrator of the
ESPP will hold the Shares credited to a participating employee’s account for
the whole period of participation of such participating employee in the
ESPP. A participating employee who
terminates employment (with or without cause at law), retires or otherwise
elects to
77
Table of Contents
withdraw from participation in the ESPP, or, the participating employee’s
beneficiary in the event of the participating employee’s death, shall receive,
subject to applicable withholding taxes:
·
the number of whole Shares credited to his or
her account; or
·
the cash equivalent of the value of the whole
Shares to his or her account, less any brokerage fees, as determined by the
administrator, as of the date of termination of employment, retirement, death
or withdrawal from the ESPP, whichever the case may be.
Any fractional Shares
remaining in the participating employee’s account will be paid in cash by check
in an amount equal to the value of the fractional Shares as determined by the
administrator.
A participating employee who
terminates employment (with or without cause) may, upon notice to Jump TV,
request that all or a portion of the Shares in that participating employee’s
account be transferred to his or her name, or an external account in his or her
name, or be sold or, where the participating employee holds Shares in a
registered retirement plan, that all or a portion of the Shares in that
participating employees’ registered retirement plan be transferred to, be sold
and the proceeds transferred to another registered retirement plan in the
participating employee’s name, or be sold and the proceeds, net of withholding
tax, be remitted to the participating employee.
Any fractional Shares credited to the participating employee’s account
shall be disregarded on any sale or transfer and the participating employee
shall be entitled to receive the cash equivalent thereof.
Each participating employee
of a subsidiary company shall, upon such company ceasing to be a subsidiary,
cease to be a participating employee of the ESPP and will receive the number of
whole Shares in his account and a cash payment by check for any fractional
shares held in his account as soon as practicable following such participating
employee ceasing to be a participant of the ESPP.
JumpTV is responsible for
the administration of the ESPP and the payment of any fees or charges incurred
in the operation of the ESPP, including payments to the administrator, counsel
and other agents employed by JumpTV in connection with the operation of the
ESPP.
JumpTV has not implemented
the ESPP since its approval by shareholders.
Canadian
Exchange Controls and Other Limitations on Security Holders
To
the Company’s knowledge, there are no governmental laws, decrees, regulations
or other legislation in Canada which may affect the import or export of capital
by the Company, or, except as described below, the remittance of dividends,
interest or other payments to a non-resident holder of the Company’s
securities. JumpTV is a corporation
existing under the federal corporate laws of Canada; such laws restrict
corporations from declaring or paying dividends on any class of its shares
where there are reasonable grounds for believing that the corporation is, or
would be after the payment, unable to pay its liabilities as they become due,
or the realizable value of the corporation’s assets would thereby be less than
the aggregate of its liabilities and stated capital of all classes of
shares. There is no limitation imposed
by Canadian law or by the charter or other constating documents of the Company
on the right of a non-Canadian to hold or vote Shares of the Company, other
than in the possible application of the
Investment Canada Act
(Canada) to the extent that the non-Canadian acquires control of the Company.
78
Table of
Contents
Certain
Canadian Federal Income Tax Consequences
The following is
a brief description of the principal Canadian federal income tax considerations
under the Income Tax Act (Canada) (the “Canadian Tax Act”), as of the date
hereof, generally applicable to a holder of Shares of the Company in respect of
holding and disposing of its Shares (other than a disposition to the Company)
where, at all relevant times for purposes of the Canadian Tax Act and any
applicable income tax treaty or convention, such holder (i) holds its
Shares as capital property, (ii) deals at arm’s length and is not
affiliated with the Company, (iii) is not resident, nor deemed to be
resident, in Canada, and (iv) does not use or hold and is not deemed to
use or hold Shares in connection with carrying on a business in Canada (a “Non-Canadian
Shareholder”).
Special rules,
which are not discussed in this summary, may apply to a Non-Canadian
Shareholder that is an insurer carrying on business in Canada and elsewhere or
an authorized foreign bank. Such holders
should consult their own tax advisors.
This summary does
not apply in respect of a disposition of Shares to the Company and assumes
that, at all relevant times, the Company will be a resident of Canada for
purposes of the Canadian Tax Act and the Shares will be listed on the Toronto
Stock Exchange.
This summary is
based on the provisions of the Canadian Tax Act and the regulations thereunder
(the “Regulations”) in force on the date hereof and the current administrative
policies and practices of the Canada Revenue Agency (“CRA”) published in
writing by the CRA prior to the date hereof.
This summary takes into account all specific proposals to amend the
Canadian Tax Act and the Regulations which have been publicly announced by or
on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Proposed
Amendments”) and assumes that all such Proposed Amendments will be enacted in
their present form. No assurance can be
given that the Proposed Amendments will be enacted in the form proposed, if at
all. This summary does not otherwise
take into account or anticipate any changes in law, whether by judicial,
governmental or legislative decision or action, or changes in the
administrative policies and practices of the CRA.
This
summary is of a general nature only and is not intended to be, nor should it be
construed to be, legal or tax advice or representations to any particular
Non-Canadian Shareholder. This summary is not exhaustive of all possible
Canadian federal income tax considerations applicable to a Non-Canadian
Shareholder in respect of its Shares.
The income or other tax consequences will vary depending on a
Non-Canadian Shareholder’s particular circumstances, including the country,
province or other jurisdiction in which such holder resides or carries on
business. This summary does not take
into account provincial, territorial or foreign income tax legislation or
considerations which may differ materially from those described herein. Non-Canadian Shareholders should consult
their own legal and tax advisors with respect to the tax consequences to them
based on their particular circumstances.
Dividends
on the Shares
Dividends paid or
credited, or deemed to be paid or credited, on the Shares to a Non-Canadian
Shareholder will be subject to withholding tax under the Canadian Tax Act at a
rate of 25%, subject to reduction under the provisions of an applicable tax
treaty or convention.
For example,
under the
Canada-United States Income Tax Convention
,
as amended (the “U.S. Convention”) the withholding tax rate is generally
reduced to 15% in respect of a dividend paid to a person who is the beneficial
owner of the dividend and who is resident in the United States for purposes
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of the U.S. Convention. Where a
Non-Canadian Shareholder is a ‘fiscally transparent entity’ within the meaning
of the U.S. Convention (for example, a U.S. limited liability company that is
disregarded for U.S. tax purposes) a reduced rate of withholding tax may be
available based on a look-through approach described under the U.S.
Convention. Subject to certain detailed rules in
the U.S. Convention, the benefits of the U.S. Convention (such as reduced rates
of withholding tax) are only available to qualifying persons (the “LOB
constraints”), as defined in the U.S. Convention. A ‘qualifying person’ for this purpose
generally includes a person which is a resident of the United States for
purposes of the U.S. Convention which is a natural person or a company whose
shares are listed and substantially and regularly traded on a recognized stock
exchange. Non-Canadian Shareholders
seeking to rely on the U.S. Convention should consult their tax advisors
concerning the applicability of tax treaty benefits and the LOB constraints,
having regard to their particular circumstances.
Under the U.S.
Convention, a dividend paid to certain tax-exempt entities that are resident in
the United States may be exempt from Canadian withholding tax levied in respect
of dividends paid on the Shares. Such tax-exempt
entities should consult their own tax advisors.
A Non-Canadian
Shareholder should consult its own tax advisors regarding its ability to claim
foreign tax credits with respect to any Canadian withholding tax.
Dispositions
of Shares
A Non-Canadian
Shareholder will not be subject to tax under the Canadian Tax Act in respect of
any capital gain realized on the disposition of its Shares, unless the Shares
constitute or are deemed to constitute ‘taxable Canadian property’ (as defined
in the Canadian Tax Act) to the Shareholder and the Non-Canadian Shareholder is
not otherwise entitled to relief under the terms of any applicable tax treaty.
In general,
provided the Shares are listed on a “designated stock exchange” (which
currently includes the Toronto Stock Exchange), the Shares will not constitute ‘taxable
Canadian property’ of a Non-Canadian Shareholder so long as it has not, either
alone or in combination with persons with whom the holder does not deal at arm’s
length, owned (or had an option to acquire) 25% or more of the issued shares of
any class or series of the capital stock of the Company at any time within the
60 month period preceding the disposition.
Subject to an
exemption pursuant to an applicable tax treaty or convention, a Non-Canadian
Shareholder will be subject to tax under the Canadian Tax Act in respect of a
capital gain realized on the disposition of the Shares where the Shares are
taxable Canadian property. Such a
Non-Canadian Shareholder will realize a capital gain (or capital loss) equal to
the amount by which the proceeds of disposition for such Shares, net of any
reasonable costs of disposition, exceed (or are less than) the adjusted cost
base of such Shares to the Non-Canadian Shareholder. A Non-Canadian Shareholder will be required
to include one-half of the amount of any resulting capital gain (a “taxable
capital gain”) in income, and will be required to deduct one-half of the amount
of any resulting capital loss (an “allowable capital loss”) against taxable
capital gains realized in the year of disposition.
Allowable capital losses not
deducted in the taxation year in which they are realized may be carried back
and deducted in any of the three preceding years, or carried forward and
deducted in any following year, against taxable capital gains realized in such years,
to the extent and under the circumstances specified in the Canadian Tax Act.
Under the U.S.
Convention, a person who is resident in the United States for purposes of the
U.S. Convention who realizes a capital gain on a disposition of shares which do
not derive their value principally from real property situated in Canada is
generally exempt from tax in respect of the capital gain under the Canadian Tax
Act. These provisions are subject to the
LOB constraints (described above).
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Non-Canadian Shareholders to whom the Shares constitute taxable
Canadian property should consult their own tax advisors.
Other
Limitations on Security Holders
Canadian law
imposes regulatory requirements when a non-Canadian acquires control of a
Canadian business that depends on the dollar amount of the transaction and the
nature of the acquired business.
Pursuant to the Investment Canada Act, a non-Canadian acquiring control
of a Canadian business must deliver a “notification” of such investment to the
applicable minister (the “Notification”),
unless the acquisition is subject to review and approval. The investment is generally reviewable and subject to
approval if the total asset value of the Canadian business, control of which is
being acquired, is greater than $312 million (as of the date hereof) or greater
than $5 million if the Canadian business is a “cultural business”, within the
meaning of the Investment Canada Act. To
the extent that an acquisition of control of a Canadian business that carries
on certain cultural business activities is not reviewable, the Minister of
Canadian Heritage may, nonetheless, within 21 days of the receipt of a
Notification, seek an order requiring the investor to apply for review and seek
approval of the acquisition.
An acquisition of
control is approved under the Investment Canada Act if the applicable minister
is satisfied (or is deemed to be satisfied) that the acquisition is likely to
be of net benefit to Canada.
ITEM 10.
RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth
information regarding securities sold by the registrant but not registered
under the Securities Act between March 14, 2006 and March 15, 2009:
1.
In March 2006,
the registrant issued and sold 300,984 Shares to accredited investors for cash
consideration of $1,183,335. The
registrant offered and sold these securities to persons residing outside the
United States in reliance on Regulation S adopted under the Securities
Act. It offered and sold these
securities to persons residing in the United States in reliance on the
exemption from the registration requirements of the Securities Act afforded by Section 4(2) thereof.
2.
In July 2006,
the registrant issued 32,800 Shares to a Canadian service provider resident
outside of the United States in exchange for future advertising services valued
at $180,400. The registrant offered and
sold these securities in reliance on Regulation S adopted under the Securities
Act.
3.
In August 2006,
the registrant issued and sold 13,273,500 Shares to various investors at
CAD$5.50/Share for gross proceeds of $59,121,585 as part of the registrant’s
initial public offering on the Toronto Stock Exchange. The principal underwriters were Morgan
Stanley Securities Limited and Canaccord Adams Capital Corporation. The aggregate underwriting commission was
$5,718,575. The registrant offered and
sold these securities to persons residing outside the United States in reliance
on Regulation S adopted under the Securities Act (and pursuant to the
prospectus delivery requirements of Canadian provincial securities laws). It offered and sold these securities to
persons residing in the United States in reliance on the exemption from the
registration requirements of the Securities Act afforded by Section 4(2) thereof.
4.
In January 2007,
the registrant issued 530,845 Shares to the shareholders of SportsYa, to
acquire 100% of the outstanding common stock of SportsYa, for an aggregate
consideration of $1,209,582. The
registrant offered and sold these securities in reliance on the exemption from
the registration requirements of the Securities Act afforded by Section 4(2) thereof.
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5.
In February 2007,
the registrant issued and sold 13,043,479 Shares to various investors at
CAD$9.00/Share for gross proceeds of $101,001,311 as part of the registrant’s
secondary offering. The lead
underwriters were Morgan Stanley Securities Limited and Canaccord Adams Capital
Corporation. The aggregate underwriting
commission was $6,060,079. The
registrant offered and sold these securities to persons residing outside the
United States in reliance on Regulation S adopted under the Securities Act (and
pursuant to the prospectus delivery requirements of Canadian provincial
securities laws). It offered and sold
these securities to persons residing in the United States in reliance on the
exemption from the registration requirements of the Securities Act afforded by Section 4(2) thereof.
6.
In June 2007,
the registrant issued 197,628 Shares to a Canadian service provider resident outside
of the United States in exchange for future advertising services valued at
$934,900. The registrant offered and
sold these securities in reliance on Regulation S adopted under the Securities
Act.
7.
In September 2007,
the registrant issued 743,349 Shares to the shareholders of CyclingTV, all of
whom resided outside of the United States, to acquire 100% of the outstanding
common stock of CyclingTV, for an aggregate consideration of $2,267,214. Additionally, the registrant issued 1,840,097
Shares into escrow, to be released to the former CyclingTV shareholders if
certain revenue milestones were met. The
registrant has not placed any value on the 1,840,097 Shares in accordance with
FAS 141, as the registrant does not believe that CyclingTV will meet the
revenue milestones. The registrant
offered and sold these securities in reliance on Regulation S adopted under the
Securities Act.
8.
Between January 15,
2008 and September 8, 2008, as part of the registrant’s Directors’
Compensation Plan, the registrant issued 50,115 Shares to its non-executive
directors for services valued at $41,918.
The registrant offered and sold these securities to persons residing
outside the United States in reliance on Regulation S adopted under the
Securities Act. It issued these
securities to persons residing in the United States in reliance on the
exemption from the registration requirements of the Securities Act afforded by Rule 701
promulgated thereunder.
9.
In October 2008,
the registrant issued 49,577,427 Shares to the shareholders of NeuLion, all
persons residing in the United States, to acquire 100% of the outstanding
common stock of NeuLion, for an aggregate consideration of $34,054,734. Additionally, the registrant issued 1,840,097
Shares into escrow, to be released to the former NeuLion shareholders if
CyclingTV achieves certain revenue milestones.
The registrant has not placed any value on the 1,840,097 Shares in
accordance with FAS 141, as the registrant does not believe that CyclingTV will
meet the revenue milestones. The
registrant offered and sold these securities in reliance on the exemption from
the registration requirements of the Securities Act afforded by Section 4(2) thereof.
10.
In October 2008,
AvantaLion, an entity controlled by Mr. Wang, our Chairman, purchased
10,000,000 Units from JumpTV’s treasury at a price of CAD$1.00 per Unit. The warrants partially comprising the Units
are exercisable for a period of two years from the date of grant. Mr. Paterson, our Vice Chairman,
purchased 1,000,000 Units on the same terms.
The aggregate proceeds from the sale of Units were CAD$11,000,000, or
U.S.$9,214,700. The registrant offered
and sold these securities to the person residing outside the United States in
reliance on Regulation S adopted under the Securities Act. It offered and sold these securities to the
person residing in the United States in reliance on the exemption from the
registration requirements of the Securities Act afforded by Section 4(2) thereof.
11.
In October 2008,
in connection with a settlement agreement, the registrant issued to a Canadian
former employee resident outside of the United States 85,000 Shares with an
aggregate value on
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the issue date of
$45,101. The registrant offered and sold
these securities in reliance on Regulation S adopted under the Securities Act.
12.
Since March 14,
2006, the registrant has issued 741,558 Shares to its officers, employees and
consultants for no consideration upon the vesting of awards under the
Restricted Share Plan. The registrant
offered and sold these securities to persons residing outside the United States
in reliance on Regulation S adopted under the Securities Act. It issued these securities to persons
residing in the United States in reliance on the exemption from the
registration requirements of the Securities Act afforded by Rule 701
promulgated thereunder.
13.
Since March 14,
2006, the registrant has granted to its directors, officers, employees and
consultants:
·
options to
purchase 11,992,313 Shares under the Stock Option Plan with an aggregate
exercise price of $19,096,875, and has issued 347,213 Shares for an aggregate
exercise price of $653,346 upon exercise of such options;
·
SARs to
purchase 2,557,500 Shares under the SARs Plan with an aggregate exercise price
of $7,494,225 (no Shares have been issued in connection with these SARs).
The registrant offered and
sold these securities to persons residing outside the United States in reliance
on Regulation S adopted under the Securities Act. It issued these securities to persons
residing in the United States in reliance on the exemption from the
registration requirements of the Securities Act afforded by Rule 701
promulgated thereunder.
14.
Since March 14,
2006, the registrant has granted to its employees and consultants Retention
Warrants to purchase 1,732,500 Shares under the Retention Warrants Plan with an
aggregate exercise price of $4,476,735.
No Shares have been issued in connection with these Retention Warrants. The registrant offered and sold these
securities to persons residing outside the United States in reliance on
Regulation S adopted under the Securities Act.
It issued these securities to persons residing in the United States in
reliance on the exemption from the registration requirements of the Securities
Act afforded by Rule 701 promulgated thereunder.
15.
Since March 14,
2006, the registrant has granted to its directors, officers, employees and
consultants warrants to purchase 6,042,500 Shares with an aggregate exercise
price of $7,309,000, and has issued 103,700 Shares for an aggregate exercise
price of $194,800 upon exercise of such warrants. The registrant offered and sold these
securities to persons residing outside the United States in reliance on
Regulation S adopted under the Securities Act.
It offered and sold these securities to persons residing in the United
States in reliance on the exemption from the registration requirements of the
Securities Act afforded by Section 4(2) thereof.
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ITEM 11.
DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED
At its annual and special meeting
of shareholders in May 2009 (the “Annual Meeting”), the Company will seek
the approval of its shareholders to pursue, in accordance with Canadian and
Delaware law and in the sole discretion of the Board without further approval
of or notice to its shareholders, a change in the Company’s domicile to the
State of Delaware. If such proposal is
adopted at the Annual Meeting, and if the Board subsequently pursues the change
in domicile, the rights of the Company’s shareholders will change and will be
governed by Delaware law. The
differences between such rights under Canadian and Delaware law will be set
forth in the Annual Meeting management information circular.
The Shares to be registered
hereunder are common shares of the Company, which is a corporation incorporated
under the CBCA. The Shares are listed
and trade on the Toronto Stock Exchange.
The following is a summary of certain provisions of the Company’s
Articles of Incorporation, as amended, regarding the Shares:
The authorized capital of
JumpTV consists of an unlimited number of Shares, of which 110,094,874 are
issued and outstanding as of March 15, 2009 (this figure does not include
3,680,194 issued and outstanding Shares held in escrow whose release is subject
to the achievement of certain milestones), an unlimited number of Class 1
preference shares, issuable in series, and an unlimited number of Class 2
preference shares, issuable in series.
No Class 1 or Class 2 preference shares have been issued as of
the date hereof. All shares in the
capital of JumpTV are without par value.
The holders of the Shares
are entitled to one vote in respect of each share held at all meetings of
shareholders. The holders of the Shares
are entitled to receive dividends if, as and when declared by the Board. In the event of the liquidation, dissolution
or winding-up of the Company, after payment of all outstanding debts and
liabilities, the holders of the Shares are entitled to participate in any
distribution of the Company’s net assets.
The holders of the Shares have no pre-emptive, redemption, purchase or
conversion rights.
The Class 1 preference
shares and the Class 2 preference shares may at any time or from time to
time be approved for issuance and be issued by the Board in one or more
series. Prior to the issue of the shares
of any such series, the Board shall, subject to the limitations set out below,
fix the number of shares in, and determine the designation, rights, privileges,
restrictions and conditions attaching to, the shares of such series.
The Class 1 preference
shares of each series shall, with respect to the payment of dividends and the
distribution of assets in the event of the liquidation, dissolution or
winding-up of JumpTV, whether voluntary or involuntary, or any other
distribution of the assets of JumpTV among the shareholders for the purpose of
winding-up its affairs, rank on a parity with the Class 1 preference
shares of every other series and be entitled to a preference over the Shares
and the Class 2 preference shares and the shares of any other class
ranking junior to the Class 1 preference shares.
The Class 2 preference
shares of each series shall, with respect to the payment of dividends and the
distribution of assets in the event of the liquidation, dissolution or
winding-up of the JumpTV, whether voluntary or involuntary, or any other
distribution of the assets of the JumpTV among the shareholders for the purpose
of winding-up its affairs, rank on a parity with the Class 2 preference
shares of every other series and be entitled to a preference over the Shares
and the shares of any other class ranking junior to the Class 2 preference
shares.
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ITEM 12. INDEMNIFICATION
OF DIRECTORS AND OFFICERS
At the Annual Meeting, the Company will seek the approval of its
shareholders to pursue, in accordance with Canadian and Delaware law and in the
sole discretion of the Board without further approval of or notice to its
shareholders, a change in the Company’s domicile to the State of Delaware. If such proposal is adopted at the Annual
Meeting, and if the Board subsequently pursues the change in domicile, the
rights of the Company’s shareholders will change and will be governed by
Delaware law. The differences between
such rights under Canadian and Delaware law will be set forth in the Annual
Meeting management information circular.
Bylaws
Section 7.01
of the bylaws of JumpTV (the “Bylaws”) provides that every director and officer
of the Company must, in exercising the powers and discharging the duties of
office, act honestly and in good faith with a view to the best interests of the
Company and exercise the care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances. Subject to the foregoing, no director or
officer will be liable:
·
for the acts, receipts,
neglects or defaults of any other director, officer or employee;
·
for joining in any receipt
or other act for conformity;
·
for any loss, damage or
expense happening to the Company through the insufficiency or deficiency of title
to any property acquired for or on behalf of JumpTV;
·
for the insufficiency or
deficiency of any security in or upon which any of the monies of the Company
shall be invested;
·
for any loss or damage
arising from the bankruptcy, insolvency or tortious acts of any person with
whom any of the monies, securities or effects of the Company shall be
deposited;
·
for any loss occasioned by
any error of judgment or oversight on the part of such director or officer; or
·
for any other loss, damage
or misfortune whatever which shall happen in the execution of the duties of
office or in relation thereto;
provided,
that nothing in the Bylaws will relieve any director or officer from the duty
to act in accordance with the CBCA and the regulations thereunder or from
liability for any breach thereof.
Subject
to the limitations contained in the CBCA, Section 7.02 of the Bylaws
provides that JumpTV shall indemnify a director or officer of the Company, a
former director or officer of the Company, or another individual who acts or
acted at the Company’s request as a director or officer, or an individual
acting in a similar capacity, of another entity, against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by the individual in respect of any civil, criminal,
administrative, investigative or other proceeding in which the individual is
involved because of that association with JumpTV or other entity, provided:
·
the individual acted
honestly and in good faith with a view to the best interests of the Company or,
as the case may be, to the best interests of the other entity for which the
individual acted as director or officer or in a similar capacity at the Company’s
request; and
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·
in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, the
individual had reasonable grounds for believing that the individual’s conduct
was lawful.
JumpTV
will also indemnify the individual in other circumstances permitted or required
by the CBCA.
Section 7.03
of the Bylaws provides that, subject to the CBCA, the Company may purchase and
maintain insurance for the benefit of any individual referred to in Section 7.02
against such liabilities and in such amounts as the Board may from time to time
determine and as permitted by the CBCA.
JumpTV
has also entered into an indemnity agreement with each of its directors
pursuant to which JumpTV has agreed to indemnify each director against certain
losses (including, in certain cases, all costs, charges and expenses reasonably
incurred by a director in connection with the defense of a claim against such
director), provided that such director acted honestly and in good faith with a
view to the best interests of JumpTV or, in the case of a criminal or
administrative proceeding or a proceeding involving a monetary penalty, that
such director had reasonable grounds for believing that his or her conduct was
lawful.
Directors
and Officers Insurance
JumpTV
maintains insurance for the benefit of the directors and officers of JumpTV
against liability in their respective capacities as directors and officers of
JumpTV pursuant to s. 124(1) of the CBCA.
The limit of liability of such insurance is $20,000,000 and is subject
to a per incident deductible. There is a
$150,000 deductible on securities claims, and a $100,000 deductible on all
other claims. The aggregate annual
premium payable by JumpTV in respect of such insurance is $105,025.
ITEM 13.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information regarding
the Company’s financial statements and supplementary data that is contained in
Item 15. “Financial Statements and Exhibits” of this Registration Statement is
incorporated herein by reference.
ITEM 14.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Ernst & Young LLP
(Canada) (“E&Y Canada”) have served as auditors of the Company since October 6,
2005 and as auditors of NeuLion since June 6, 2008.
In connection with the
Merger, the Audit Committee determined to recommend the appointment of Ernst &
Young LLP (US) (“E&Y US”) as the Company’s auditors. No reportable event has occurred in
connection with the audits of the Company’s financial statements by its former
auditors, E&Y Canada.
At the Annual Meeting,
shareholders will be asked to appoint E&Y US as auditors of the Company and
authorize the Board of Directors to fix the remuneration of the auditors.
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ITEM 15.
FINANCIAL STATEMENTS AND EXHIBITS
(a)
List of
Financial Statements
See “Index to Financial
Statements” set forth on page F-1.
(b)
Exhibits
The following exhibits are
filed as part of this Registration Statement:
|
EXHIBIT
|
|
|
|
|
|
NUMBER
|
|
|
|
TITLE
OF EXHIBIT
|
|
|
|
|
|
|
|
2.1
|
|
*
|
|
Agreement and Plan of
Merger, dated June 26, 2008, among NeuLion, Inc., JumpTV Inc. and
JumpTV Acquisition Corp.
|
|
|
|
|
|
|
|
3.1(i)
|
|
*
|
|
Articles of Incorporation,
as amended, of JumpTV
|
|
|
|
|
|
|
|
3.1(ii)
|
|
*
|
|
Amended By-law No. 1
of JumpTV
|
|
|
|
|
|
|
|
4
|
|
*
|
|
Form of stock
specimen
|
|
|
|
|
|
|
|
9
|
|
*
|
|
Voting Trust Agreement,
dated as of October 20, 2008, among Charles B. Wang, Nancy Li,
AvantaLion LLC, Jianbing Duan, Computershare Trust Company of Canada and
JumpTV Inc.
|
|
|
|
|
|
|
|
10.1
|
|
* #
|
|
Employment Agreement,
dated as of June 1, 2006, between JumpTV Inc. and G. Scott Paterson
|
|
|
|
|
|
|
|
10.2
|
|
* #
|
|
Employment Agreement,
dated as of February 11, 2008, between JumpTV Inc. and Blair Baxter
|
|
|
|
|
|
|
|
10.3
|
|
* #
|
|
Amendment, dated
March 31, 2008, to Employment Agreement between JumpTV Inc. and Blair
Baxter
|
|
|
|
|
|
|
|
10.4
|
|
* #
|
|
Termination Letter, dated
September 9, 2008, between JumpTV Inc. and Blair Baxter
|
|
|
|
|
|
|
|
10.5
|
|
* #
|
|
Agreement for Services,
dated February 23, 2009, between JumpTV Inc. and Blair Baxter
|
|
|
|
|
|
|
|
10.6
|
|
* #
|
|
Employment Agreement,
dated October 12, 2007, between JumpTV Inc. and Jordan Banks
|
|
|
|
|
|
|
|
10.7
|
|
* #
|
|
Termination Letter, dated
as of June 27, 2008, between JumpTV Inc. and Jordan Banks
|
|
|
|
|
|
|
|
10.8
|
|
* #
|
|
Employment Agreement,
dated August 31, 2007, between JumpTV Inc. and Nada Usina
|
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|
10.9
|
|
* #
|
|
Termination Letter, dated
October 14, 2008, between JumpTV Inc. and Nadezda Usina
|
|
|
|
|
|
|
|
10.10
|
|
* #
|
|
Employment Agreement,
dated August 10, 2007, between JumpTV Inc. and Bill Stephen
|
|
|
|
|
|
|
|
10.11
|
|
* #
|
|
Termination Fact
Sheet/Separation Agreement, dated September 23, 2008, between JumpTV
Inc. and William Stephen
|
|
|
|
|
|
|
|
10.12
|
|
* #
|
|
Second Amended and
Restated Stock Option Plan and form of option agreement
|
|
|
|
|
|
|
|
10.13
|
|
* #
|
|
2006 Stock Appreciation
Rights Plan, as amended
|
|
|
|
|
|
|
|
10.14
|
|
* #
|
|
Amended and Restated
Retention Warrants Plan and form of retention warrant agreement
|
|
|
|
|
|
|
|
10.15
|
|
* #
|
|
Restricted Share Plan and
form of award agreement
|
|
|
|
|
|
|
|
10.16
|
|
* #
|
|
Amended and Restated
Directors’ Compensation Plan
|
|
|
|
|
|
|
|
10.17
|
|
* #
|
|
Employee Share Purchase
Plan
|
|
|
|
|
|
|
|
10.18
|
|
* #
|
|
Form of Rights
Agreement under the 2006 Stock Appreciation Rights Plan
|
|
|
|
|
|
|
|
10.19
|
|
*
|
|
Contract for Services,
dated as of June 1, 2008, between KyLinTV, Inc. and
NeuLion, Inc. (portions of this exhibit have been omitted pursuant to a
request for confidential treatment on file with the Securities and Exchange
Commission)
|
|
|
|
|
|
|
|
10.20
|
|
*
|
|
Software License and
Product Distribution Agreement, dated as of September 29, 2006, between
NeuLion, Inc. and TransVideo International Ltd. (portions of this
exhibit have been omitted pursuant to a request for confidential treatment on
file with the Securities and Exchange Commission)
|
|
|
|
|
|
|
|
10.21
|
|
*
|
|
Amendment, dated as of
July 1, 2008, to Software and Product Distribution Agreement between
NeuLion, Inc. and TransVideo International Ltd. (portions of this
exhibit have been omitted pursuant to a request for confidential treatment on
file with the Securities and Exchange Commission)
|
|
|
|
|
|
|
|
10.22
|
|
*
|
|
License Agreement, dated
as of June 1, 2006, between NeuLion, Inc. and ABS-CBN Global
Limited (portions of this exhibit have been omitted pursuant to a request for
confidential treatment on file with the Securities and Exchange Commission)
|
|
|
|
|
|
|
|
10.23
|
|
*
|
|
Contract for Services,
dated as of June 22, 2007, between Sky Angel U.S., LLC and
NeuLion, Inc. (portions of this exhibit have been omitted pursuant to a
request for confidential treatment on file with the Securities and Exchange
Commission)
|
|
|
|
|
|
|
|
10.24
|
|
*
|
|
Contract for Services,
dated as of June 25, 2007, between NHL Interactive CyberEnterprises, LLC
and NeuLion, Inc. (portions of this exhibit have been
|
88
Table of Contents
|
|
|
|
omitted pursuant to a
request for confidential treatment on file with the Securities and Exchange
Commission)
|
|
|
|
|
|
|
10.25
|
*
|
|
Amendment to Contract for
Services Agreement, dated as of August 1, 2008, between NHL Interactive
CyberEnterprises, LLC and NeuLion, Inc. (portions of this exhibit have
been omitted pursuant to a request for confidential treatment on file with
the Securities and Exchange Commission)
|
|
|
|
|
|
|
10.26
|
*
|
|
Agreement, dated
August 2007, among JumpTV Inc. and the sellers named therein
|
|
|
|
|
|
|
10.27
|
*
|
|
Asset Purchase Agreement,
dated as of July 15, 2007, among JumpTV Inc., JumpTV USA Inc. and XOS
|
|
|
|
|
|
|
16
|
*
|
|
Letter regarding change in
accountant
|
|
|
|
|
|
|
21
|
*
|
|
Subsidiaries of JumpTV
|
* Filed herewith
# Management contract or compensatory plan or
arrangement
89
Table of Contents
INDEX TO FINANCIAL STATEMENTS
|
JumpTV Inc. (f/k/a
NeuLion, Inc. and Subsidiary)
|
|
|
|
|
|
Audited Consolidated Financial
Statements for the years ended December 31, 2008 and 2007
|
|
|
|
|
|
Report of Ernst & Young LLP, independent
registered public accounting firm dated March 26, 2009
|
F-3
|
|
|
|
|
Report
of Ernst & Young LLP, independent registered public accounting firm
dated August 22, 2008
|
F-4
|
|
|
|
|
Consolidated
Balance Sheets as at December 31, 2008 and 2007
|
F-5
|
|
|
|
|
Consolidated Statements of Operations and
Comprehensive Loss for the years ended December 31, 2008 and 2007
|
F-6
|
|
|
|
|
Consolidated Statements of Shareholders’ Equity for
the years ended December 31, 2008 and 2007
|
F-7
|
|
|
|
|
Consolidated Statements of Cash Flows for the years
ended December 31, 2008 and 2007
|
F-8
|
|
|
|
|
Notes to Consolidated Financial Statements
|
F-9
|
|
|
|
|
JumpTV Inc. (Acquired Business)
|
|
|
|
|
|
Audited Consolidated Financial
Statements for the years ended December 31, 2007 and 2006
|
|
|
|
|
|
Report
of Ernst & Young LLP, independent registered public accounting firm
dated March 26, 2008 and April 9, 2009
|
F-40
|
|
|
|
|
Consolidated
Balance Sheets as at December 31, 2007 and 2006
|
F-41
|
|
|
|
|
Consolidated Statements of Operations and
Comprehensive Loss for the years ended December 31, 2007 and 2006
|
F-42
|
|
|
|
|
Consolidated Statements of Shareholders’ Equity for
the years ended December 31, 2007 and 2006
|
F-43
|
|
|
|
|
Consolidated Statements of Cash Flows for the years
ended December 31, 2007 and 2006
|
F-45
|
|
|
|
|
Notes to Consolidated Financial Statements
|
F-46
|
F-1
Table of Contents
|
JumpTV Inc. (Acquired Business)
|
|
|
|
|
|
Unaudited Financial Statements
as at September 30, 2008 and for the three and nine months ended
September 30, 2008 and 2007
|
|
|
|
|
|
Consolidated
Balance Sheets (unaudited) as at September 30, 2008 and
December 31, 2007
|
F-84
|
|
|
|
|
Consolidated Statements of Operations and
Comprehensive Loss (unaudited) for the three months ended September 30,
2008 and 2007 and the nine months ended September 30, 2008 and 2007
|
F-85
|
|
|
|
|
Consolidated Statements of Shareholders’ Equity
(unaudited) for the nine months ended
September 30, 2008 and 2007
|
F-86
|
|
|
|
|
Consolidated Statements of Cash Flows (unaudited) for
the three months ended September 30, 2008 and 2007 and the nine months
ended September 30, 2008 and 2007
|
F-88
|
|
|
|
|
Notes to Consolidated Financial Statements
|
F-89
|
|
|
|
|
Pro Forma Financial Information
|
|
|
|
|
|
Pro Forma Consolidated
Financial Statements (unaudited) for the fiscal year ended December 31,
2008
|
|
|
|
|
|
Pro Forma Consolidated Statement of Operations
(Unaudited) for the fiscal year ended December 31, 2008
|
F-112
|
|
|
|
|
Notes to Pro Forma Consolidated Financial Statements
|
F-113
|
F-2
Table
of Contents
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders of
JumpTV Inc.
We have audited the
consolidated balance sheet of
JumpTV Inc
.
[the “Company”] as of December 31, 2008, and the related consolidated
statements of operations and comprehensive loss, shareholders’ equity, and cash
flows for the year 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. The financial statements of JumpTV Inc. for the
year ended December 31, 2007, were audited by other auditors whose report
dated August 22, 2008, expressed an unqualified opinion on those
statements.
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. We were not engaged to perform an audit of the
Company’s internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the 2008
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of December 31,
2008 and the consolidated results of its operations and its cash flows for the
year then ended in accordance with United States generally accepted accounting
principles.
|
Melville, New York
|
|
|
March 26, 2009
|
/s/ Ernst &
Young LLP
|
F-3
Table of Contents
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
JumpTV Inc. (formerly
NeuLion, Inc. and Subsidiary)
We have audited the consolidated balance
sheets of
JumpTV Inc. (formerly
NeuLion, Inc. and Subsidiary)
[the
“Company”] as at December 31, 2007 and the consolidated statements of
operations and comprehensive loss, stockholders’ equity and cash flows for the
year 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 audit in accordance with
Canadian generally accepted auditing standards and with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform an audit to obtain reasonable assurance
whether the financial statements are free of material misstatement.
We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting, Accordingly we express no
such opinion.
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.
In our opinion, these consolidated financial
statements present fairly, in all material respects, the financial position of
the Company as at December 31, 2007 and the results of its operations and
its cash flows for the year then ended December 31, 2007 in accordance
with United States generally accepted accounting principles.
|
Toronto, Canada,
|
/s/ Ernst & Young LLP
|
|
August 22, 2008
|
Chartered Accountants
|
|
|
Licensed Public Accountants
|
F-4
Table of Contents
JUMPTV INC.
CONSOLIDATED BALANCE SHEETS
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
As at December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
27,323,021
|
|
608,464
|
|
|
Accounts
receivable, net
[notes 2 and 11]
|
|
2,284,242
|
|
2,017,137
|
|
|
Taxes receivable
|
|
983,253
|
|
—
|
|
|
Other
receivables
|
|
227,711
|
|
—
|
|
|
Inventory
|
|
347,600
|
|
323,500
|
|
|
Prepaid expenses
and deposits
|
|
1,830,260
|
|
525,637
|
|
|
Due from related
parties
[note 7]
|
|
324,059
|
|
188,855
|
|
|
Total
current assets
|
|
33,320,146
|
|
3,663,593
|
|
|
Property, plant
and equipment, net
[note 5]
|
|
6,474,989
|
|
2,281,667
|
|
|
Intangible
assets, net
[notes 3 and 6]
|
|
5,749,332
|
|
—
|
|
|
Goodwill
[notes 2 and 3]
|
|
6,846,183
|
|
—
|
|
|
Other assets
|
|
1,347,032
|
|
260,305
|
|
|
Investment in
affiliate
[note 7]
|
|
—
|
|
1,006,386
|
|
|
Total
assets
|
|
53,737,682
|
|
7,211,951
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Accounts payable
|
|
4,465,388
|
|
67,295
|
|
|
Accrued
liabilities
|
|
7,595,116
|
|
830,371
|
|
|
Due to related
parties
[note 7]
|
|
56,826
|
|
2,093,907
|
|
|
Deferred revenue
|
|
3,091,993
|
|
429,246
|
|
|
Total
current liabilities
|
|
15,209,323
|
|
3,420,819
|
|
|
Long-term
deferred revenue
|
|
638,510
|
|
544,199
|
|
|
Other long-term
liabilities
|
|
876,271
|
|
—
|
|
|
Total
liabilities
|
|
16,724,104
|
|
3,965,018
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
[note 14]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
Share capital
[note 9]
|
|
6,762,097
|
|
68,871
|
|
|
Common shares,
no par value, authorized unlimited; 110,084,044 issued and outstanding
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
56,500,258
|
|
17,580,329
|
|
|
Promissory note
receivable
[note 9]
|
|
(209,250
|
)
|
—
|
|
|
Accumulated
deficit
|
|
(26,039,527
|
)
|
(14,402,267
|
)
|
|
Total
shareholders’ equity
|
|
37,013,578
|
|
3,246,933
|
|
|
Total
liabilities and shareholders’ equity
|
|
53,737,682
|
|
7,211,951
|
|
See accompanying notes
On
behalf of the Board:
F-5
Table of Contents
JUMPTV INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
Years ended December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
Services revenue
|
|
9,542,689
|
|
1,284,142
|
|
|
Equipment
revenue
|
|
3,900,650
|
|
6,526,569
|
|
|
Total Revenue
|
|
13,443,339
|
|
7,810,711
|
|
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Services revenue
|
|
4,519,062
|
|
325,097
|
|
|
Equipment
revenue
|
|
3,120,087
|
|
5,179,157
|
|
|
Total Cost of
Sales
|
|
7,639,149
|
|
5,504,254
|
|
|
|
|
5,804,190
|
|
2,306,457
|
|
|
Costs
and Expenses
|
|
|
|
|
|
|
Selling, general
and administrative, including stock-based compensation
[note 10]
|
|
14,221,347
|
|
4,210,357
|
|
|
Depreciation and
amortization
|
|
1,572,492
|
|
561,077
|
|
|
Impairment of
long-lived assets
[note 5]
|
|
1,036,993
|
|
—
|
|
|
|
|
16,830,832
|
|
4,771,434
|
|
|
Operating
loss
|
|
(11,026,642
|
)
|
(2,464,977
|
)
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
Gain on foreign
exchange
|
|
265,720
|
|
—
|
|
|
Investment
income
|
|
130,048
|
|
33,161
|
|
|
Equity in loss
of affiliate
[note 7]
|
|
(1,006,386
|
)
|
(2,083,943
|
)
|
|
|
|
(610,618
|
)
|
(2,050,782
|
)
|
|
Net and
comprehensive loss for the year
|
|
(11,637,260
|
)
|
(4,515,759
|
)
|
|
|
|
|
|
|
|
|
Net loss per
weighted average number of shares outstanding - basic and diluted
[note 12]
|
|
$
|
(0.21
|
)
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding - basic and diluted
[note 12]
|
|
55,995,297
|
|
42,680,587
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-6
Table of Contents
JUMPTV INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Additional
|
|
Promissory
|
|
Accumulated
|
|
shareholders’
|
|
|
|
|
Common shares
|
|
paid-in capital
|
|
Notes
|
|
deficit
|
|
equity
|
|
|
|
|
#
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
Balance,
December 31, 2006
|
|
39,160,900
|
|
61,271
|
|
16,910,329
|
|
—
|
|
(9,886,508
|
)
|
7,085,092
|
|
|
Issuance of
common stock
|
|
4,857,483
|
|
7,600
|
|
—
|
|
—
|
|
—
|
|
7,600
|
|
|
Capital
contribution
|
|
—
|
|
—
|
|
670,000
|
|
—
|
|
—
|
|
670,000
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(4,515,759
|
)
|
(4,515,759
|
)
|
|
Balance,
December 31, 2007
|
|
44,018,383
|
|
68,871
|
|
17,580,329
|
|
—
|
|
(14,402,267
|
)
|
3,246,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contribution
|
|
—
|
|
—
|
|
2,600,000
|
|
—
|
|
—
|
|
2,600,000
|
|
|
Exercise of
stock options
|
|
5,559,044
|
|
8,698
|
|
419,927
|
|
(209,250
|
)
|
—
|
|
219,375
|
|
|
|
|
49,577,427
|
|
77,569
|
|
20,600,256
|
|
(209,250
|
)
|
(14,402,267
|
)
|
6,066,308
|
|
|
Issuance of
shares in connection with merger
[note 3]
|
|
49,490,372
|
|
(77,569
|
)
|
31,615,091
|
|
—
|
|
—
|
|
31,537,522
|
|
|
Private
placement
[note 9]
|
|
11,000,000
|
|
6,750,700
|
|
2,464,000
|
|
—
|
|
—
|
|
9,214,700
|
|
|
Issuance of
common shares for RSUs
|
|
16,245
|
|
6,518
|
|
—
|
|
—
|
|
—
|
|
6,518
|
|
|
Release of
common shares from escrow for services
|
|
—
|
|
4,879
|
|
—
|
|
—
|
|
—
|
|
4,879
|
|
|
Stock-based
compensation
[note 10]
|
|
—
|
|
—
|
|
1,820,911
|
|
—
|
|
—
|
|
1,820,911
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(11,637,260
|
)
|
(11,637,260
|
)
|
|
Balance,
December 31, 2008
|
|
110,084,044
|
|
6,762,097
|
|
56,500,258
|
|
(209,250
|
)
|
(26,039,527
|
)
|
37,013,578
|
|
See accompanying notes
F-7
Table of Contents
JUMPTV INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
Years ended December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
(11,637,260
|
)
|
(4,515,759
|
)
|
|
Adjustments to
reconcile net loss to cash used in operating activities
|
|
|
|
|
|
|
Depreciation and
amortization
[notes 5 and 6]
|
|
1,572,492
|
|
561,077
|
|
|
Equity in loss
of affiliate
[note 7]
|
|
1,006,386
|
|
2,083,943
|
|
|
Stock-based
compensation
[note 10]
|
|
1,848,906
|
|
—
|
|
|
Impairment of
long-lived assets
[note 6]
|
|
1,036,993
|
|
—
|
|
|
|
|
|
|
|
|
|
Changes in
operating assets and liabilities
|
|
|
|
|
|
|
Accounts
receivable
|
|
1,943,307
|
|
(2,011,788
|
)
|
|
Inventory
|
|
(24,100
|
)
|
(323,500
|
)
|
|
Prepaid
expenses, deposits and other assets
|
|
191,621
|
|
(731,361
|
)
|
|
Other
receivables
|
|
4,441
|
|
—
|
|
|
Taxes receivable
|
|
37,398
|
|
—
|
|
|
Due from related
parties
|
|
(135,204
|
)
|
1,371,074
|
|
|
Accounts payable
|
|
(306,999
|
)
|
(176
|
)
|
|
Accrued
liabilities
|
|
604,465
|
|
484,084
|
|
|
Deferred revenue
|
|
244,846
|
|
921,195
|
|
|
Long-term
liabilities
|
|
41,833
|
|
—
|
|
|
Due to related
parties
|
|
(2,043,626
|
)
|
2,076,205
|
|
|
Cash
used in operating activities
|
|
(5,614,501
|
)
|
(85,006
|
)
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
Purchase of
property, plant and equipment
|
|
(1,443,438
|
)
|
(1,628,411
|
)
|
|
Acquisition of
NeuLion, Inc., net of cash of $22,884,683
[note 3]
|
|
21,738,421
|
|
—
|
|
|
Cash
provided by (used in) investing activities
|
|
20,294,983
|
|
(1,628,411
|
)
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
Capital contributions
|
|
2,600,000
|
|
670,000
|
|
|
Private
placement
[note 9]
|
|
9,214,700
|
|
—
|
|
|
Proceeds from
exercise of stock options
|
|
219,375
|
|
—
|
|
|
Cash
provided by financing activities
|
|
12,034,075
|
|
670,000
|
|
|
Net
decrease in cash and cash equivalents during the year
|
|
26,714,557
|
|
(1,043,417
|
)
|
|
Cash an
d
cash equivalents, beginning of year
|
|
608,464
|
|
1,651,881
|
|
|
Cash
and cash equivalents, end of year
|
|
27,323,021
|
|
608,464
|
|
See accompanying notes
F-8
Table
of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
1.
Nature of Operations
Further
to the reverse takeover transaction described below, these consolidated
financial statements for the years ended December 31, 2008 and 2007
reflect the assets, liabilities and results of operations of NeuLion Inc. [“NeuLion”],
the legal subsidiary, prior to the reverse takeover and the consolidated
assets, liabilities and results of operations of JumpTV and NeuLion subsequent
to the reverse takeover. These
consolidated financial statements are issued under the name of the legal
acquirer (JumpTV), but are deemed to be a continuation of the accounting
acquirer (NeuLion).
JumpTV’s primary
business is working with content partners to develop end-to-end solutions for
multimedia IPTV services.
On October 20,
2008, the Company completed a merger with NeuLion, an end-to-end IPTV service
provider of live and on-demand sports, international and religious programming
over the Internet to a computer and/or through set top boxes [“STBs” or “STB”]
to a television. Under the terms of the
merger, JumpTV issued 49,577,427 common shares, 1,840,097 contingent shares,
which represented approximately the entire issued and outstanding shares of
JumpTV prior to closing, to the security holders of NeuLion, in exchange for
their NeuLion securities. Pursuant to
the merger, the Company issued 5,000,000 warrants exercisable for two years at
US$0.63 and 2,700,000 employee stock options exercisable for five years at
US$0.60 to employees of the Company.
On October 20,
2008, AvantaLion LLC, an entity controlled by Mr. Charles B. Wang, the
Chairman of our Board of Directors, purchased 10,000,000 units from JumpTV’s
treasury at a price of CDN$1.00 per unit. Each unit (a “Unit”) consists of one (1) common
share and one-half of one common share purchase warrant exercisable at CDN$1.25
and one-half of one common share purchase warrant exercisable at CDN$1.50. The
warrants partially comprising the Units are exercisable for a period of two
years from the date of issuance. G. Scott Paterson, Vice-Chairman of the Board
of Directors, also purchased 1,000,000 Units on the same terms. The aggregate
gross proceeds from the sale of Units were CDN$11 million [US$9,214,700].
2. Basis of Presentation and Significant Accounting Policies
On October 20,
2008, in accordance with SFAS 141,
Business Combinations
,
the Company determined that NeuLion was the accounting acquirer and accordingly
has accounted for this merger as a reverse take over.
The accompanying
consolidated financial statements include all of our wholly-owned subsidiaries
and have been prepared in accordance with United States generally accepted
accounting principles [“U.S. GAAP”]. See
Note 17 for reconciliation of United States to Canadian GAAP. The Company also has an investment in KyLinTV, Inc.
[“KyLinTV”] in which, as at December 31, 2008, it has a 17.1% equity
interest [2007 — 17.1%]. KyLinTV is
accounted for using the equity method of accounting.
Use
of estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates. Significant estimates made by
management include the determination of the useful lives of long-lived assets,
impairment of investment in affiliate including intangible assets and goodwill,
inventory obsolescence, assumptions used in determining the fair value of the
Company’s shares and the allowance for doubtful accounts. On an ongoing basis, management reviews its
estimates to ensure they appropriately reflect changes in the Company’s
business and new information as it becomes
F-9
Table
of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
available. If
historical experience and other factors used by management to make these
estimates do not reasonably reflect future actual results, the Company’s
consolidated financial position and results of operations could be materially
impacted.
Revenue
recognition
Revenue is
recognized when an arrangement exists, prices are determinable, collectability
is reasonably assured and the goods or services have been delivered. If any of these criteria are not met, revenue
is deferred until such time as all of the criteria are met.
In addition, the
Company recognizes revenue in accordance with Emerging Issues Task Force No. 00-21,
Revenue Arrangements with Multiple
Deliverables
and Staff Accounting Bulletin No. 104,
Revenue Recognition
[“SAB 104”] when
persuasive evidence of an arrangement exists, delivery has occurred or when
risk of ownership has passed, the fee is fixed or determinable and
collectability is probable.
For arrangements with multiple elements, the Company allocates revenue to
each element using the residual method; this allocation is based on vendor
specific objective evidence
[“VSOE”]
of fair value of the undelivered items. VSOE is
based on the price that the Company charges for the undelivered element based
on the sales price of each element when sold on a standalone basis. In addition, the Company defers the portion
of the arrangement fee equal to the fair value of the undelivered elements
until they are delivered.
The Company, at
the request of one customer, has entered into a “Bill and Hold”
arrangement. The Company accounts for
its bill and hold revenue arrangement consistent with the provisions of SAB 104
and recognizes revenue when the risk of ownership has passed to the customer
and a fixed commitment to purchase the goods is received. The Company does not retain any specific
performance obligations such that the earning process is not complete and
ordered goods are segregated from the Company’s inventory and not subject to
fulfilling other orders. Inventory
consists of finished goods. For the
years ended December 31, 2008 and 2007, the Company recognized $2,500,000
and $1,250,000 in revenue associated with this arrangement, respectively.
JumpTV earns
revenue as follows:
[i] Subscriber Revenue
:
Subscriber revenue
Subscriber revenue consists of recurring revenue based on subscriber usage,
bandwidth usage fees for the JumpTV infrastructure and/or technology usage fees
based on the number of subscribers. The
subscriber revenue is typically generated on a monthly, quarterly or annual
basis and can be either a fixed fee per user or a variable fee measured by
bandwidth use or as a percentage of end user pricing. Revenue is recognized over the term of the
subscription.
eCommerce revenue
eCommerce revenue consists of JumpTV services provided to its content
providers which include software applications for merchandising (i.e. sale of
merchandise), ticketing for a content provider’s events and management of a
content provider’s donor efforts.
Included in eCommerce revenue is advertising revenue earned through the
insertion of internet advertising on websites and in streaming video. Revenue is recognized as the service is
performed.
F-10
Table
of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
Technology services revenue
Technology services revenue consists of the set up and maintenance services
JumpTV provides related to our technology such as website (internet) or console
(STB) design, user interface optimization and streaming configuration. Included in technology services revenue is
the licensing of the technology required to convert, compress and transmit
video signals to our content distribution network and ultimately to end
users. Revenue is recognized as the
service is performed.
[ii] Equipment revenue
Equipment revenue consists of the sale of STB to content partners and/or
end users to enable the end user to receive the content over the internet and
display the signal on a standard television.
Shipping charges are included in total equipment revenue. Revenue is recognized generally upon shipment
to the customer.
Cash
and cash equivalents
Cash and cash
equivalents consist of cash and short-term investments, such as money market
funds, that have maturities of less than three months.
Accounts receivable
Accounts
receivable are carried at original invoice amount. The Company maintains a provision for
estimated losses resulting from the inability of its customers to make required
payments. Management considers the following factors when determining the
collectability of specific customer accounts: customer credit-worthiness, past
transaction history with the customer, current economic industry trends and
changes in customer payment terms. If the financial conditions of the Company’s
customers were to deteriorate, adversely affecting their ability to make
payments, additional allowances would be required. As of December 31, 2008 and 2007, the
allowance for doubtful accounts was $290,538 and $45,000, respectively.
Inventory
Inventory consists
of set top boxes and is recorded at the lower of cost and net realizable value
and consists of finished goods. Cost is accounted for on a first-in, first-out
basis. The Company evaluates its ending inventories for estimated excess
quantities and obsolescence. This evaluation includes analyses of sales levels
and projections of future demand within specific time horizons. Inventories in
excess of future demand are reserved. In addition, the Company assesses the
impact of changing technology and market conditions on its inventory-on-hand
and writes off inventories that are considered obsolete. As at December 31,
2008 and 2007, the Company’s inventory reserves were $9,700 and zero,
respectively. For each of the years ended December 31, 2008 and 2007, the
Company expensed amounts related to inventory reserves of $9,700 and zero,
respectively.
Property, plant and equipment
Property, plant
and equipment are carried at cost less accumulated depreciation. Expenditures
for maintenance and repairs are expensed currently, while renewals and
betterments that materially extend the life of an asset are capitalized. The
cost of assets sold, retired or otherwise disposed of, and the related
allowance for depreciation, are eliminated from the accounts, and any resulting
gain or loss is recognized.
F-11
Table
of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets, which are as follows:
|
Computer hardware
|
|
5 years
|
|
Computer software
|
|
3 years
|
|
Furniture and fixtures
|
|
7 years
|
|
Leasehold improvements
|
|
Shorter of useful life
and lease term
|
The Company
reviews the carrying value of property, plant and equipment for impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable from the estimated future cash flows expected to result
from its use and eventual disposition. If these future undiscounted cash flows
are less than the carrying value of the asset, then the carrying amount of the
asset is written down to its fair value, based on the related estimated
discounted future cash flows. The factors considered by management in
performing this assessment include current operating results, trends and
prospects, the manner in which the property, plant and equipment is used and
the effects of obsolescence, demand, competition and other economic factors.
Based on this assessment, there was an impairment loss of $1,036,993 and zero
in the years ended December 31, 2008 and 2007, respectively.
Intangible Assets
Intangible
assets are recorded at cost less amortization.
Cost for intangible assets acquired through business combinations
represents their fair market value at the date of acquisition. Amortization is calculated using the
straight-line method over the estimated useful lives of the intangible assets
which are as follows:
|
Customer relationships
|
|
5 years
|
|
Trademarks
|
|
1 year
|
The Company
reviews the carrying value of intangible assets for impairment whenever events
and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its
use and eventual disposition. If these future undiscounted cash flows are less
than the carrying value of the asset, then the carrying amount of the asset is
written down to its fair value, based on the related estimated discounted
future cash flows. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the manner
in which the intangible assets are used and the effects of obsolescence,
demand, competition and other economic factors. Based on this assessment, no
impairment was recorded for the years ended December 31, 2008 and 2007.
Goodwill
Goodwill
represents the excess, at the date of acquisition, of the cost of an acquired
business over the fair value of the identifiable assets acquired and
liabilities assumed. Goodwill is not amortized but is subject to an annual
impairment test at the reporting unit level and between annual tests if changes
in circumstances indicate a potential impairment. Goodwill impairment is
assessed based on a comparison of the fair value of each reporting unit to the
underlying carrying value of the reporting unit’s net assets, including
goodwill. If the carrying value of the reporting unit exceeds its fair value,
the Company performs the second step of the goodwill impairment test to
determine the amount of the impairment loss. The second step of the impairment
test involves comparing the implied fair value of the reporting unit’s goodwill
with its carrying amount to measure the amount of impairment loss, if any. The
Company’s impairment test was based on its single operating segment and
reporting unit structure. For the years
ended December 31, 2008 and 2007, there was no impairment loss.
F-12
Table
of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
Investment
in affiliate
Investee companies
that are not consolidated, but over which the Company exercises significant
influence, are accounted for under the equity method of accounting. Whether or
not the Company exercises significant influence with respect to an investee
depends on an evaluation of several factors including, among others,
representation on the investee’s board of directors and voting rights. Under
the equity method of accounting, an investee’s accounts are not reflected
within the Company’s consolidated balance sheets and statements of operations
and comprehensive loss; however, the Company’s share of the losses of the
investee company is reflected in the caption “Equity in loss of affiliate” in
the consolidated statements of operations and comprehensive loss. The Company’s
carrying value in an equity method investee company is reflected in the caption
“Investment in affiliate” on the Company’s consolidated balance sheets. Due
to KyLinTV’s accumulated losses as of December 31, 2008, the investment
has been reduced to zero. No further
charges will be recorded as the Company has no obligation to fund the losses of
KyLinTV.
Deferred
transcoder costs
Deferred
transcoder costs represent the unamortized costs of licensing fees incurred
related to the setup of new channels for NeuLion’s customers. These costs are being recognized as a charge
to the consolidated statements of operations and comprehensive loss consistent
with the related revenue over the remaining initial contractual term between NeuLion
and its customers, which typically ranges from two to five years. Deferred transcoder costs are included in
other assets on the consolidated balance sheet.
Income taxes
The Company has
implemented the provisions on Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires that income tax
accounts be computed using the liability method. Deferred taxes are determined
based upon the estimated future tax effects of differences between the
financial reporting and tax reporting bases of assets and liabilities given the
provisions of currently enacted tax laws.
Effective January 1,
2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”),
which provides guidance for the recognition, derecognition and measurement in
financial statements of tax positions taken in previously filed tax returns or
tax positions expected to be taken in tax returns. FIN 48 requires an
entity to recognize the financial statement impact of a tax position when it is
more likely than not that the position will be sustained upon examination. If
the tax position meets the more-likely-than-not recognition threshold, the tax
effect is recognized at the largest amount of the benefit that has greater than
a fifty percent likelihood of being realized upon ultimate settlement.
FIN 48 also provides guidance for classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 requires
that a liability created for unrecognized tax benefits be presented as a
separate liability and not combined with deferred tax liabilities or assets.
We have operations in a
number of countries worldwide. Our income tax liability is therefore a
consolidation of the tax liabilities we expect to have in various locations.
Our tax rate is affected by the profitability of our operations in all
locations, tax rates and taxation systems of the countries in which we operate
our tax policies and the impact of certain tax planning strategies which we
have implemented.
F-13
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
To determine our
worldwide tax liability we make estimates of possible tax liabilities. Our tax
filings, positions and strategies are subject to review under local or
international tax audit and the outcomes of such reviews are uncertain. In
addition, these audits generally take place years after the period in which the
tax provision in question was provided and it may take a substantial amount of
time before the final outcome of any audit is known. Future tax audits could
differ materially from the amounts recorded in our financial statements.
We record a valuation
allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. We have had substantial tax losses over the years,
therefore we have recorded a valuation allowance against all of our tax assets.
Foreign currency translation
The functional
currency of the Company is the U.S. dollar.
Monetary assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect at the balance sheet
dates, and non-monetary assets and liabilities in foreign currencies are
translated at exchange rates in effect on the date of the transaction. These transactional foreign exchange gains or
losses are included in the consolidated statements of operations and
comprehensive loss.
Financial instruments
The Company’s
financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable, other receivables, due from/to related
parties, deposits, accounts payable and accrued liabilities, notes payable,
obligations under capital lease and customer advances which are primarily
denominated in U.S. dollars. Unless
otherwise noted, it is management’s opinion that the Company is not exposed to
significant interest rate, currency or credit risk arising from these financial
instruments.
The Company is
exposed to credit risk with respect to accounts receivable arising from the
potential for counterparties to default on their contractual obligations to the
Company. The Company controls credit
risk through credit approvals, credit limits and monitoring procedures. The
Company performs credit evaluations on its customers, but generally does not
require collateral to support accounts receivable. The Company establishes an allowance for
doubtful accounts that corresponds with the specific credit risk of its
customers, historical trends and economic circumstances.
Advertising
Advertising costs
are expensed as incurred and totaled $366,756 and $138,000 for the years ended December 31,
2008 and 2007, respectively.
Stock-based
compensation and other stock-based payments
The Company
accounts for all stock options and warrants using a fair value-based
method. The fair value of each stock
option and warrant granted is estimated on the date of the grant using the
Black-Scholes option pricing model and the related stock-based compensation
expense is recognized over the vesting period.
The fair value of stock options, retention warrants and warrants granted
to employees is measured at the date of the grant. The fair value of the warrants granted to
non-employees is measured as the warrants vest.
The offsetting entry is an increase to additional paid-in capital for an
amount equal to the stock-based compensation expense related to the issuance of
stock options. Upon exercise, the proceeds of the options and warrants together
with the fair value recorded in additional paid-in capital are reclassified to
share capital.
F-14
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
Stock appreciation rights give the holder the right to
elect to either receive cash in an amount equal to the excess of the quoted
market price over the stock appreciation right price or to receive common
shares equal to the fair value of the common shares less the exercise price
divided by the market value of the common shares from treasury or receive
common shares by making a cash payment equal to the exercise price. The Board of Directors has discretionary
authority to accept or reject a cash payment request in whole or in part. Stock-based compensation expense is
calculated as the fair value of the vested portion of the stock appreciation
rights outstanding, with ongoing measurement of the outstanding liability. The liability is entitled accrued stock
appreciation rights and is classified as a current liability on the
consolidated balance sheets. If the
holder elects to purchase common shares, the liability is credited to
additional paid-in capital.
Restricted share units give the holder the right to
one common share for each vested restricted share plan unit. These awards vest on a monthly basis over the
vesting period which is four years.
Stock-based compensation expense related to restricted share units is
accrued based on the market value of the shares when the shares are issued, which
generally coincides with the vesting period of these awards.
Recently issued accounting standards
In
December 2007, Financial Accounting Standards Board [“FASB”] issued SFAS No. 141
(revised 2007), “Business Combinations” (“SFAS 141(R)”). This statement
replaces SFAS No. 141, “Business Combinations” and requires an acquirer to
recognize the assets acquired, the liabilities assumed, including those arising
from contractual contingencies, any contingent consideration, and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the
statement. SFAS 141(R) also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to
recognize the identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with SFAS 141(R)). In
addition, SFAS 141(R)’s requirement to measure the noncontrolling interest in
the acquiree at fair value will result in recognizing the goodwill attributable
to the noncontrolling interest in addition to that attributable to the
acquirer. SFAS 141(R) amends SFAS No. 109, “Accounting for Income
Taxes”, to require the acquirer to recognize changes in the amount of its
deferred tax benefits that are recognizable because of a business combination
either in income from continuing operations in the period of the combination or
directly in contributed capital, depending on the circumstances. It also amends
SFAS 142, “Goodwill and Other Intangible Assets”, to, among other things,
provide guidance on the impairment testing of acquired research and development
intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15,
2008.
The guidance is to be applied prospectively, therefore, the impact
of the implementation of this pronouncement cannot be determined until the
transaction occurs.
In April 2008, the FASB issued FASB Staff
Position (“FSP”) FAS 142-3, Determination of the Useful Life of Intangible Assets
(“FSP FAS 142-3”). FSP FAS 142-3 amends SFAS No. 142, Goodwill
and Other Intangible Assets, to improve the consistency between the useful life
of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS No
141, Business Combinations, and other U.S. GAAP. FSP FAS 142-3 is
effective for fiscal years beginning after December 15,
2008. The guidance for determining the useful life of a recognized
intangible asset is to be applied prospectively, therefore, the impact of the
implementation of this pronouncement cannot be determined until the
transactions occur.
In May 2008, the FASB issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This
statement identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally accepted
accounting principles (GAAP) in the United States. This Statement
shall be effective sixty days following the SEC’s approval of the Public
Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411,
The Meaning of Present Fairly in Conformity With Generally Accepted
F-15
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
Accounting Principles. The Company does not
believe the adoption of SFAS No. 162 will have a material impact on its
financial condition, results of operations or cash flows.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements”. SFAS No. 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. SFAS No. 157
applies whenever other standards require assets or liabilities to be measured
at fair value and does not expand the use of fair value in any new
circumstances. SFAS No. 157 establishes a hierarchy that prioritizes the
information used in developing fair value estimates. The hierarchy gives the
highest priority to quoted prices in active markets and the lowest priority to
unobservable data, such as the reporting entity’s own data. SFAS No. 157
requires fair value measurements to be disclosed by level within the fair value
hierarchy. In February 2008, the FASB issued FASB Staff Position No. FAS
157-2, “Effective Date of FASB Statement No. 157”, which deferred the
effective date of SFAS No. 157 for all nonrecurring fair value
measurements of non-financial assets and non-financial liabilities until fiscal
years beginning after November 15, 2008. The provisions of SFAS No. 157
are applicable to recurring fair value measurements of financial assets and
liabilities for fiscal years beginning after November 15, 2007, which for
the Company is generally limited to annual disclosures required by SFAS No. 107.
The Company adopted the provisions of SFAS No. 157 effective January 1,
2008, and at that time determined no transition adjustment was required.
In June 2008, the
FASB ratified EITF No. 07-5, “Determining Whether an Instrument (or an
Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5
provides that an entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument’s contingent exercise and settlement
provisions. EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early application is not
permitted. The Company is assessing the potential impact of this EITF 07-5 on
the financial condition and results of operations.
In October 2008, the
FASB issued SFAS No. 157-3, “Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active.” This standard expands upon
the implementation guidance in SFAS No. 157 for estimating the present
value of future cash flows for some hard-to-value financial instruments, such
as collateralized debt obligations. This statement became effective upon
issuance. The Company doesn’t believe that SFAS 157-3 will have a material
impact on the Company’s consolidated financial statements.
In October 2008, the
FASB issued Emerging Issues Task Force (“EITF”) 08-6 “Equity Method Investment
Accounting Considerations”, on how the initial carrying value of an equity
method investment should be determined, how an impairment assessment of an
underlying indefinite-lived intangible asset of an equity method investment
should be performed, and how an equity method investee’s issuance of shares
should be accounted for. The Company doesn’t believe that EITF 08-06 will have
a material impact on the Company’s consolidated financial statements.
Comparative Information
We have reclassified certain prior
year information to conform with the current year’s presentation.
3. Business Combination
On October 20,
2008, the Company completed a merger with NeuLion. Under the terms of the merger, JumpTV issued
49,577,427 common shares and 1,840,097 contingent shares, which represented
approximately the entire issued and outstanding shares of JumpTV prior to
closing, to the securityholders of NeuLion, in exchange for their NeuLion
securities.
F-16
Table
of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
In accordance with
SFAS 141,
Business Combinations
, the Company
determined that NeuLion was the accounting acquirer and accordingly has
accounted for this merger as a reverse take over.
NeuLion is a full
end-to-end enterprise level internet protocol television [“IPTV”] service and
technology provider that builds and manages private networks for companies
interested in reaching a specific target audience. By using the public internet, customers of
NeuLion’s clients can reach the broadcast service from most places in the world
— on the television, through the web to a computer via STBs or through other
consumer devices.
The purchase price of
$33,558,784
represents the fair value of
49,577,427 of common shares issued of $31,990,711, the fair value of vested
equity instruments in the amount of $515,364 and $1,052,709 in direct
transaction costs. The merger had been
previously announced on June 9, 2008.
In addition to the transaction costs there were $968,553 of share
issuance costs required under the merger agreement.
The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition. The
Company is obtaining third party valuations of certain intangible assets and
evaluating certain liabilities and assets, thus the allocations of the purchase
price is preliminary.
As at October 20, 2008
|
Cash
|
|
$
|
22,884,683
|
|
|
Current assets
|
|
5,005,670
|
|
|
Property, plant
and equipment
|
|
5,046,405
|
|
|
Other long-term
assets
|
|
1,040,516
|
|
|
Intangible
assets
|
|
6,000,000
|
|
|
Goodwill
|
|
6,846,183
|
|
|
Total assets
|
|
46,823,457
|
|
|
Current
liabilities
|
|
(12,430,235
|
)
|
|
Other long-term
liabilities
|
|
(834,438
|
)
|
|
Net assets
acquired
|
|
$
|
33,558,784
|
|
Of the $6,000,000 of
acquired intangible assets, $100,000 was assigned to the JumpTV brand, and
$5,900,000 was assigned to customer relationships. None of the intangible assets are expected to
be deductible for tax purposes
All of the $6,846,183 of
goodwill was assigned to the Company as a whole as the company operates in one
segment. The goodwill is not expected to
be deductible for tax purposes.
The purchase price of
NeuLion contains contingent purchase price consideration of 1,840,097 common
shares. The number of shares will be
based on a 24 month revenue milestone for Cycling TV ending on July 31,
2009. The contingent consideration will
be accounted for as an addition to the purchase price consideration when the
shares are issued or become issuable. As
at December 31, 2008, the Company does not believe Cycling TV will achieve
the revenue milestone.
As noted above, the purchase price allocation of the
tangible and intangible assets is preliminary and may be adjusted as a result
of obtaining additional information regarding preliminary estimates of fair
values made at the date of purchase.
F-17
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
Proforma
The results of operations for JumpTV and NeuLion have
been included in the Company’s consolidated statements of operations since the
completion of the merger on October 20, 2008. The following unaudited pro forma financial
information presents the combined results of the Company and the merger as if
the merger had occurred at the beginning of 2007:
Unaudited Proforma
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
25,708,760
|
|
16,785,370
|
|
|
Total cost of
sales
|
|
(18,836,212
|
)
|
(14,282,438
|
)
|
|
|
|
6,872,548
|
|
2,502,932
|
|
|
Total sales,
general and administrative
|
|
(38,482,996
|
)
|
(32,487,244
|
)
|
|
Stock-based
compensation [ii]
|
|
(3,374,767
|
)
|
(5,293,738
|
)
|
|
Impairment of
goodwill [iii]
|
|
(47,882,317
|
)
|
—
|
|
|
Impairment of
long-lived assets [iv]
|
|
(5,982,030
|
)
|
—
|
|
|
Depreciation and
amortization
|
|
(3,602,169
|
)
|
(3,202,306
|
)
|
|
Operating loss
|
|
(92,451,731
|
)
|
(38,480,356
|
)
|
|
Net loss
|
|
(92,459,364
|
)
|
(36,019,502
|
)
|
|
Net loss per
weighted average number of shares outstanding — basic and diluted
|
|
(0.90
|
)
|
(0.35
|
)
|
[i] In determining the
pro forma amounts above, the Company made adjustments to depreciation and
amortization as a result of the revised fair values of tangible and intangible
assets performed as a result of the acquisition.
[ii] In accordance with
FASB 123R, these amounts represent stock-based compensation for the Company’s
stock options, restricted share units, stock appreciation rights, warrants and
retention warrants.
[iii] As at March 31,
2008, the Company’s market capitalization decreased below the carrying value of
the Company. Management considered this to be an indicator of impairment,
accordingly, as at March 31, 2008, performed a goodwill impairment test
and, accordingly the Company recorded a non-cash goodwill impairment charge of
$47,882,317.
[iv]
The Company determined that the business
climate had changed such that the carrying value of the Company’s long-lived
assets may not be fully recoverable. Accordingly, the Company recorded non-cash
impairment charges of $4,945,037 prior to the merger and $1,036,993 subsequent
to the merger.
F-18
Table of
Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
4. Economic Dependence and Concentration of Credit
Risk
For the year ended
December 31, 2008, three customers accounted for 54% of revenue as
follows: 32%, 12% and 10%. For the year ended December 31, 2007, two
customers accounted for 85% of revenue as follows: 68% and 17%.
As at December 31,
2008, one customer accounted for 25% of the accounts receivable. For the year
ended December 31, 2007, two customers accounted for 90% of the accounts
receivable as follows: 74% and 16%.
The Company is
economically dependent upon TransVideo International, Ltd. [“TransVideo”], a
related party
[note 6]
, to provide set top
boxes used by Company’s customers.
5.
Property, Plant and Equipment
The details of
property and equipment and the related accumulated depreciation are set forth
below:
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Accumulated
|
|
Non-cash
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
Impairment
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer
hardware
|
|
5,655,658
|
|
1,101,877
|
|
978,720
|
|
3,575,061
|
|
|
Computer
software
|
|
3,812,944
|
|
1,003,139
|
|
—
|
|
2,809,805
|
|
|
Furniture and
fixtures
|
|
184,062
|
|
35,666
|
|
58,273
|
|
90,123
|
|
|
Leasehold
improvements
|
|
6,471
|
|
6,471
|
|
—
|
|
—
|
|
|
|
|
9,659,135
|
|
2,147,153
|
|
1,036,993
|
|
6,474,989
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Accumulated
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Computer
hardware
|
|
1,933,047
|
|
468,984
|
|
1,464,063
|
|
|
Computer
software
|
|
1,123,053
|
|
355,827
|
|
767,226
|
|
|
Furniture,
fixtures and equipment
|
|
71,557
|
|
21,179
|
|
50,378
|
|
|
Leasehold
improvements
|
|
775
|
|
775
|
|
—
|
|
|
|
|
3,128,432
|
|
846,765
|
|
2,281,667
|
|
FASB 144,
Accounting for Disposal and Impairment of Long-Lived Assets
,
requires that a long-lived asset be tested for recoverability whenever events
or changes in circumstances indicate that its carrying amount may not be
recoverable. An impairment loss is recognized as the difference between fair
value and carrying amount when the carrying amount of a long-lived asset is not
recoverable and exceeds its fair value. The Company determined that during the
year ended December 31, 2008 the business climate had changed such that
the carrying value of the Company’s property, plant and equipment may not be
fully recoverable. Accordingly, the Company recorded a non-cash impairment
charge of $1,036,993 for the year ended December 31, 2008. There were no
such comparable amounts in the prior year.
Depreciation expense for
the years ended December 31, 2008 and 2007 was $1,321,824 and $561,077,
respectively.
F-19
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
6.
Intangible Assets
The details of
intangible assets and the related accumulated amortization are set forth below:
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Accumulated
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
5,900,000
|
|
231,084
|
|
5,668,916
|
|
|
Trademarks
|
|
100,000
|
|
19,584
|
|
80,416
|
|
|
|
|
6,000,000
|
|
250,668
|
|
5,749,332
|
|
Amortization
expense for the years ended December 31, 2008 and 2007 was $250,668 and
zero, respectively.
Based on the
amount of intangible assets subject to amortization, the Company’s estimated
amortization expense over the next five years is as follows:
|
|
|
$
|
|
|
|
|
|
|
|
2009
|
|
1,260,416
|
|
|
2010
|
|
1,180,000
|
|
|
2011
|
|
1,180,000
|
|
|
2012
|
|
1,180,000
|
|
|
2013
|
|
948,916
|
|
7.
Related Party Transactions
The Company has
entered into certain transactions and agreements in the normal course of
operations with related parties. Significant related party transactions are as
follows:
New
York Islanders Hockey Club, LP
[“New York Islanders”]
The Company has a
professional hockey club as a customer, which is owned by the Chairman of the
Board of Directors of the Company. The Company provides IT related professional
services to the New York Islanders.
Plainview Properties, LLC
[
“
Plainview
”
]
Plainview is a real estate ownership company owned by
the Chairman of the Board of Directors of the Company. Plainview
was 100%-owned through January 2007
and 50%-owned from late January 2007 through March 2008.
The Company has leased its office
premises in Plainview, N.Y., from Plainview. The property and the lease were
acquired by an unrelated third party in March 2008.
Renaissance Property Associates, LLC
[“Renaissance”]
Renaissance is a real estate management company owned by the Chairman of
the Board of Directors of the Company
. The Company provides IT related professional
services to Renaissance.
F-20
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
The
Smile Train, Inc.
[“Smile Train”]
The Company has a
public charity as a customer whose founder and significant benefactor is the
Chairman of the Board of Directors of the Company. The Company provides IT
related professional services to Smile Train.
Hawaii
IPTV, LLC
[“Hawaii”]
The Company has an
IPTV customer whose principals are family members of the Chairman of the Board
of Directors of the Company.
TransVideo
International, Ltd.
[“Transvideo”]
The Company
purchases a substantial portion of its goods for sale from TransVideo, an
entity controlled by the Chairman of the Board of Directors of the Company. Set
top box purchases amounted to $2,745,000 and $5,369,500 and transcoder
licensing fees amounted to $125,000 and $282,000 for the years ended December 31,
2008 and 2007, respectively. Included in cost of sales is the amount incurred
from TransVideo of $2,816,490 and $5,047,000 for the years ended December 31,
2008 and 2007, respectively.
KyLinTV,
Inc
[“KyLinTV”]
KyLinTV is an IPTV
service provider that is controlled by Chairman of the Board of Directors of
the Company. The Company also provides KyLinTV with administrative and general
corporate support.
Patstar,
Inc
[“Patstar”]
On occasion,
Patstar, a company controlled by the Vice-Chairman of the Board Directors of
the Company, receives reimbursement of expenditures on behalf of the Company. The
nature of these reimbursements relates to expenses that the Company has
incurred in the normal course of business. As at December 31, 2008 and
2007, the Company did not have any balances due from/to Patstar. In addition,
rent expense paid by Patstar of $2,596 is included as a recovery in selling,
general and administrative expense for the year ended December 31, 2008.
G.
Scott Paterson and Charles B. Wang
In October 2008, Mr. Paterson
and Mr. Wang purchased securities from the Company, as described in note
9.
The Company
recognized revenue from the above described related parties for each of the
years ended December 31 as follows:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
New York
Islanders
|
|
296,451
|
|
240,000
|
|
|
Renaissance
|
|
120,000
|
|
120,000
|
|
|
Smile Train
|
|
120,000
|
|
108,000
|
|
|
Hawaii
|
|
57,577
|
|
44,070
|
|
|
KyLinTV
|
|
920,550
|
|
—
|
|
|
|
|
1,514,578
|
|
512,070
|
|
F-21
Table of
Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
The Company also
provides KyLinTV with administrative and general corporate support. For each of
the years presented, the amounts paid for these services provided by NeuLion
for the years ended December 31, 2008 and 2007 were $1,233,353
and $1,722,862, respectively. Additionally, during the year
ended December 31, 2008, the Company acquired equipment from KyLinTV in
the amount of $620,000.
As at December 31,
2008 and 2007, the amounts due from (to) related parties are as follows:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
New York
Islanders
|
|
29,189
|
|
103,702
|
|
|
Renaissance
|
|
(1,146
|
)
|
43,153
|
|
|
Smile Train
|
|
27,000
|
|
27,000
|
|
|
Hawaii
|
|
17,527
|
|
15,000
|
|
|
TransVideo
|
|
(55,680
|
)
|
(1,964,616
|
)
|
|
KyLinTV
|
|
250,343
|
|
(129,291
|
)
|
|
|
|
267,233
|
|
(1,905,052
|
)
|
Investment in affiliate – KyLinTV
The Company
records its investment in KyLinTV using the equity method.
On July 1,
2006, the Company acquired a 20.2% equity interest in KyLinTV through the
conversion of $4,100,000 that was due from KyLinTV. The acquisition has been
accounted for using the purchase method, with the results of KyLinTV included
in the Company’s results of operations from the date of acquisition.
As of October 1,
2007, the Company’s equity interest in the affiliate decreased to 17.1%. As
previously discussed, the Company also provides KyLinTV with administrative and
general corporate support. Management has determined that as a result of the
17.1% equity interest combined with the services that NeuLion provides KyLinTV,
the Company continues to have significant influence on the operating activities
of KyLinTV, therefore the Company continues to account for KyLinTV using the
equity method of accounting for investment.
The Company is
accounting for its pro-rata share of their equity interest in KyLinTV, 20.2%
from July 1, 2006 to September 31, 2007 and 17.1% from October 1,
2007 to December 31, 2008.
The Company’s
proportionate share of the equity loss from KyLinTV has been accounted for as a
charge on the Company’s consolidated statements of operations and comprehensive
loss. Due to KyLinTV’s accumulated losses, the investment has been reduced to
zero. No further charges will be recorded as the Company has no obligation to
fund the losses of KyLinTV.
F-22
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
The results of
operations and financial position of the Company’s equity basis investment in
KyLinTV are summarized below for the years ended December 31:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Condensed income
statement information:
|
|
|
|
|
|
|
Net sales
|
|
6,568,101
|
|
3,316,364
|
|
|
Net loss
|
|
(8,148,974
|
)
|
(7,751,433
|
)
|
|
Condensed
balance sheet information:
|
|
|
|
|
|
|
Current assets
|
|
927,427
|
|
777,368
|
|
|
Non-current
assets
|
|
2,411,319
|
|
1,851,677
|
|
|
Total assets
|
|
3,338,746
|
|
2,629,045
|
|
|
Current
liabilities
|
|
10,063,909
|
|
1,405,235
|
|
|
Non-current
liabilities
|
|
—
|
|
—
|
|
|
Equity
(deficiency)
|
|
(6,725,163
|
)
|
1,223,810
|
|
|
Total liabilities
and equity
|
|
3,338,746
|
|
2,629,045
|
|
8.
401(K) Profit
Sharing Plan
The Company
sponsors a 401(k) Profit Sharing Plan to provide retirement and incidental
benefits for its eligible employees. Employees may contribute a percentage of
their annual compensation through salary reduction, subject to certain
qualifications and Internal Revenue Code limitations. The Company provides for
voluntary matching contributions up to certain limits. Matching contributions
vest over five years.
For the years
ended December 31, 2008 and 2007, the Company made aggregate net matching
contributions of $113,000 and $81,000, respectively.
9.
Share Capital
As a result of the
reverse-take over that occurred on October 20, 2008, the share capital
account represents the historical share capital of the accounting acquirer
adjusted to reflect the par value of the outstanding shares of the legal
acquirer, including the number of shares issued in the business combination.
[note 3]
F-23
Table of
Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
Share capital
consists of the following:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
|
|
|
|
Unlimited common
shares, voting, no par value, discretionary non-cumulative dividend
|
|
|
|
|
|
|
Unlimited
Class 1 preference shares, non-voting, no par value, discretionary partly
cumulative or non-cumulative dividends
|
|
|
|
|
|
|
Unlimited
Class 2 preference shares, non-voting, no par value, discretionary
partly cumulative or non-cumulative dividends
|
|
|
|
|
|
|
Issued
and outstanding
|
|
|
|
|
|
|
Common shares
|
|
|
|
|
|
|
December 31,
2008: Issued and outstanding: 110,084,044
|
|
|
|
|
|
|
[December 31,
2007: Issued and outstanding: 44,018,383]
|
|
6,762,097
|
|
68,871
|
|
During the year
ended December 31, 2008, the Company completed the following issuances:
|
Date
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Balance –
December 31, 2007
|
|
44,018,383
|
|
68,871
|
|
|
Exercise of
stock options [i]
|
|
5,559,044
|
|
8,698
|
|
|
|
|
49,577,427
|
|
77,569
|
|
|
Issuance
of share in connection with merger [note 3]
|
|
49,490,372
|
|
(77,569
|
)
|
|
Private
placement [ii]
|
|
11,000,000
|
|
6,750,700
|
|
|
Issuance of
restricted share plan units
|
|
16,245
|
|
6,518
|
|
|
Release of
common shares from escrow for services
|
|
—
|
|
4,879
|
|
|
Balance –
December 31, 2008 [iii]
|
|
110,084,044
|
|
6,762,097
|
|
[i] On October 17,
2008, a total of 5,559,044 NeuLion stock options with an exercise price of
$0.24 were exercised for gross proceeds of $1,328,625. Of this amount $219,375
was received in cash and $209,250 was received through promissory notes from
employees, bearing interest at 3.16% per annum, repayable in 5 years with
annual repayments. Three senior officers of NeuLion repaid their option
exercise by returning 193,134 common shares valued at $900,000 to NeuLion.
[ii] On October 20,
2008, AvantaLion LLC, an entity controlled by Mr. Charles B. Wang, the
Chairman of the Board of Directors of the Company, purchased 10,000,000 units
from JumpTV’s treasury at a price of CDN$1.00 per unit. Each unit (a “Unit”)
consists of one (1) common share and one-half of one common share purchase
warrant exercisable at CDN$1.25 and one-half of one common share purchase
warrant exercisable at CDN$1.50. The warrants partially comprising the Units
are exercisable for a period of two years from the date of issuance. G. Scott
Paterson also purchased 1,000,000 Units on the same terms. The aggregate gross
proceeds from the sale of Units were CDN$11 million. Proceeds of this
transaction were $9,214,700 of which $6,750,700 was allocated to common shares
and $2,464,000 was allocated to private placement warrants using a
Black-Scholes fair value method.
F-24
Table of
Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
[iii] The Company
legally has 113,764,238 common shares outstanding. The difference of 3,680,194
represents common shares issued into escrow, which will only be released if
Cycling TV is able to achieve certain revenue milestones. As at December 31,
2008, the Company does not believe Cycling TV will achieve these milestones and
as such has not recorded these shares as outstanding.
10.
Stock Option and Stock-Based Compensation Plans
[i] Stock Option Plans
2004 stock option plan [the “2004 Plan”]
On January 1,
2006, the Company adopted the provisions of SFAS No. 123R, requiring the
recognition of expense related to the fair value of its stock-based
compensation awards. The Company elected to use the modified prospective
transition method as permitted by SFAS No. 123R and therefore has not
restated its financial results for prior periods. Under this transition method,
stock-based compensation expense for the years ended December 31, 2007 and
2006 includes compensation expense for all stock-based compensation awards
granted prior to, but not yet vested as of, January 1, 2006 based on the
grant date fair value estimated in accordance with the original provisions of
SFAS No. 123. Stock-based compensation expense for all
stock-based compensation awards granted subsequent to January 1, 2006 was
based on the grant date fair value estimated in accordance with the provisions
of SFAS No. 123R. The Company recognizes compensation expense
for stock option awards on a straight-line basis over the requisite service
period of the award.
NeuLion had a
stock option plan dated February 1, 2004. Under the plan, employees may be
granted options intended to comply with Section 422 of the Internal
Revenue Code. In addition, the plan provides for the grant of options to
non-employee directors or consultants of NeuLion. Option awards are generally
granted with an exercise price equal to an amount determined by the plan’s
administering committee, which cannot be less than the fair market value of
NeuLion’s common stock at the date of grant. Options granted generally have
10-year contractual terms and vest over four years.
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
Outstanding,
December 31, 2007
|
|
5,559,044
|
|
0.24
|
|
|
Exercised
|
|
(5,559,044
|
)
|
0.24
|
|
|
Outstanding,
December 31, 2008
|
|
—
|
|
—
|
|
For the year ended
December 31, 2008 and 2007, no compensation expense was recorded for total
stock-based compensation expense related to stock options under the 2004 Plan,
as the fair value of those stock options was determined to be nominal on the
grant date.
F-25
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
New Stock Option Plan [the “New Plan”]
On October 20,
2008, as a result of the merger, the Company adopted JumpTV’s stock option
plan. The New Plan applies to all previous grants to JumpTV employees and
future grants of options to directors, officers, employees and consultants of
the Company or any entity controlled by the Company. The exercise price for any
new option granted under the New Plan is determined by the five-day volume
weighted average price of the Company’s common shares prior to the date of
grant but cannot be less than such a price. Options are exercisable during a
period established at the time of their grant provided that such period will
expire no later than five years after the date of grant, subject to early
termination of the option in the event the holder of the option dies or ceases
to be a director, officer or employee of the Company or ceases to provide
ongoing management or consulting services to the Company or entity controlled
by the Company. The maximum number of common shares issuable upon exercise of
options granted pursuant to the New Plan is equal to the greater of
[i] 4,000,000 common shares; and [ii] 12.5% of the number of issued
and outstanding common shares.
A summary of stock
option activity under the New Plan is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
—
|
|
—
|
|
|
Options assumed
in merger
|
|
4,979,786
|
|
2.88
|
|
|
Granted
|
|
7,523,000
|
|
0.52
|
|
|
Forfeited
|
|
(2,204,079
|
)
|
2.68
|
|
|
Outstanding,
December 31, 2008
|
|
10,298,707
|
|
1.19
|
|
The following
table summarizes stock option information of the New Plan as at December 31,
2008:
|
|
|
|
|
Weighted average
|
|
|
|
|
Exercise
|
|
Number
|
|
remaining
|
|
Number
|
|
|
price
|
|
outstanding
|
|
contractual life
|
|
exercisable
|
|
|
$
|
|
#
|
|
[years]
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
0.47
|
|
4,793,000
|
|
4.88
|
|
144,348
|
|
|
0.58
|
|
100,000
|
|
2.28
|
|
100,000
|
|
|
0.60
|
|
2,800,000
|
|
4.72
|
|
233,060
|
|
|
0.64
|
|
517,500
|
|
0.98
|
|
277,825
|
|
|
0.70
|
|
27,500
|
|
0.25
|
|
27,500
|
|
|
1.80
|
|
370,583
|
|
0.53
|
|
358,126
|
|
|
2.50
|
|
266,708
|
|
1.76
|
|
211,374
|
|
|
3.00
|
|
502,250
|
|
0.87
|
|
445,167
|
|
|
3.86
|
|
112,500
|
|
0.05
|
|
112,500
|
|
|
4.00
|
|
50,000
|
|
1.61
|
|
41,800
|
|
|
5.00
|
|
100,000
|
|
2.61
|
|
59,754
|
|
|
5.82
|
|
25,000
|
|
0.13
|
|
25,000
|
|
|
6.00
|
|
17,291
|
|
0.17
|
|
16,420
|
|
|
6.05
|
|
498,750
|
|
2.96
|
|
129,927
|
|
|
6.08
|
|
26,750
|
|
2.78
|
|
26,750
|
|
|
6.26
|
|
69,375
|
|
3.30
|
|
32,445
|
|
|
6.43
|
|
21,500
|
|
0.45
|
|
20,290
|
|
|
|
|
10,298,707
|
|
3.94
|
|
2,262,286
|
|
F-26
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
For the year ended
December 31, 2008 and 2007, $127,243 and nil, respectively, were recorded
for total stock-based compensation expense related to stock options under the
New Plan. The weighted average exercise price of options exercisable as at December 31,
2008 was $2.39.
There were no
stock options granted during 2007.
The Company estimates the
fair value of stock options granted using a Black-Scholes option pricing model.
The assumptions used in determining the fair value of stock options granted are
as follows:
The exercise price of
stock options is calculated using the five day volume weighted average price of
the Company’s common shares on the TSX preceding the grant date. The Company
estimates volatility based on a blended rate between the Company’s historical
volatility and the volatility of comparable companies. The Company estimates
the risk-free rate based on the federal reserve rate. The Company estimates the
expected life of stock options to be four years for all option grants.
The weighted
average fair value of all stock options granted during the year ended December 31,
2008 was $0.34
based on the following
assumptions:
|
Years ended December 31
|
|
2008
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
Exercise price
of stock options granted
|
|
$
|
0.51
|
|
|
Expected
volatility
|
|
79
|
%
|
|
Risk-free
interest rate
|
|
2.26
|
%
|
|
Expected life
[years]
|
|
4
|
|
|
Dividend yield
|
|
0
|
%
|
|
|
|
|
|
|
[ii] Restricted Share Plan
On October 20, 2008, as a result of the merger, the Company
assumed JumpTV’s restricted share plan [“Restricted Share Plan”]. Restricted
share units give the holder the right to one common share for each vested
restricted share plan unit. These awards vest on a monthly basis over a
48-month period. The maximum number of restricted shares issuable shall be no
greater than the equivalent of 1,000,000 common shares.
A summary of restricted share activity under the restricted share plan
is as follows:
|
|
|
#
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
—
|
|
|
Assumed on
merger
|
|
75,467
|
|
|
Vested and issued
for common shares
|
|
(16,245
|
)
|
|
Outstanding,
December 31, 2008
|
|
59,222
|
|
During the years
ended December 31, 2008 and 2007, the Company recognized stock-based
compensation expense of $6,518 and nil, respectively related to its restricted
share plan.
F-27
Table
of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31,
2008
[iii] Warrants
On October 20, 2008, as a result of the merger, the Company
assumed warrants that are convertible into common shares of the Company
as follows:
The Company granted 100,000 warrants with an exercise price of
$1.80 to one of its directors related to consulting services provided. For the
years ended December 31, 2008 and 2007, no compensation expense was
recognized related to these warrants. These warrants expired on January 18,
2009.
The Company granted to a channel partner 7,500 warrants with an expiry
of five years from the date of issuance at an exercise price of $6.00 per
warrant. For the years ended December 31, 2008 and 2007, no compensation
expense was recognized related to these warrants. These warrants expire on April 27,
2011.
The Company granted, as part of an acquisition, 75,000 warrants at an
exercise price of $5.00 [Cdn$5.50] per warrant. For the years ended December 31,
2008 and 2007, the Company expensed $215 and nil, respectively. These warrants
expired on January 29, 2009.
In addition, as part of an acquisition, the Company granted 10,000
warrants at an exercise price of $6.00 per warrant. Each warrant is exercisable
into one common share, vest immediately and expires on May 31, 2011. The
fair value of these warrants in the amount of $229, have been included in the
purchase price.
In connection with the Company obtaining broadcast rights from a
channel partner, the Company granted 100,000 warrants with an exercise
price of $6.23 to purchase common shares of the Company. For the years ended December 31,
2008 and 2007, the Company expensed $182 and nil, respectively. These warrants
expire on November 30, 2011.
The Company granted 156,300 warrants to members of the Advisory
Board of the Company at exercise prices of $4.00 to $6.00 per warrant. Each
warrant is exercisable into one common share of the Company, vests over
four years and expires after five years. For the years ended December 31,
2008 and 2007, no compensation expense was recognized related to these
warrants. These warrants expired on January 18, 2009.
The Company granted 50,000 warrants to a television manufacturer. The
exercise price of these warrants will be determined based on meeting certain
milestones. As at December 31, 2008, these milestones have not been met,
therefore the measurement date has not occurred. Accordingly, for the year
ended December 31, 2008 and 2007, no compensation expense was recognized
related to these warrants. Each warrant is exercisable into one common share of
the Company, vests over four years and expire on August 3, 2012.
The Company issued
30,000 warrants to a sports media broadcaster at an exercise price of $2.20 per
warrant. Each warrant is exercisable into one common share of the Company,
vests immediately and expires on November 5, 2017. The fair value of these
warrants in the amount of $7,341 was included as part of the purchase price.
Additionally, the Company granted the following warrants following the
merger:
On October 20,
2008, AvantaLion LLC, an entity controlled by Mr. Charles B. Wang, the
Chairman of JumpTV, purchased 10,000,000 units from JumpTV’s treasury at a
price of Cdn$1.00 per unit. Each unit (a “Unit”) consists of one (1) common
share and one-half of one common share purchase warrant exercisable at Cdn$1.25
and one-half of one common share purchase warrant exercisable at Cdn$1.50. The
warrants partially comprising the Units are exercisable for a period of two
years from the date of grant. G. Scott Paterson, Vice-Chairman of the Company,
also purchased 1,000,000 Units on the same terms. The aggregate gross proceeds
from the sale of Units were Cdn$11 million.
F-28
Table of
Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
Under the terms of the merger, JumpTV issued 5,000,000 fully-vested
warrants with an exercise price of $0.63 exercisable for two years to employees
of the Company.
The total
stock-based compensation expense related to warrants during the years ended December 31,
2008 and 2007 was $1,678,896 and nil, respectively.
A summary of the warrant activity is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise
price
|
|
|
|
|
#
|
|
$
|
|
|
Outstanding,
December 31, 2007
|
|
—
|
|
—
|
|
|
Assumed on
merger
|
|
663,800
|
|
4.12
|
|
|
Private
placement
|
|
11,000,000
|
|
1.16
|
|
|
Granted
|
|
5,000,000
|
|
0.63
|
|
|
Forfeited
|
|
(125,000
|
)
|
3.86
|
|
|
Outstanding,
December 31, 2008
|
|
16,538,800
|
|
1.09
|
|
The fair value of
warrants was determined using the Black-Scholes option pricing model.
The
following table summarizes the warrant information as at December 31,
2008:
|
|
|
|
|
Weighted average
|
|
|
|
|
Exercise
|
|
Number
|
|
remaining
|
|
Number
|
|
|
price
|
|
outstanding
|
|
contractual life
|
|
exercisable
|
|
|
$
|
|
#
|
|
[years]
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
0.63
|
|
5,000,000
|
|
1.80
|
|
5,000,000
|
|
|
1.05
|
|
5,500,000
|
|
1.80
|
|
5,500,000
|
|
|
1.26
|
|
5,500,000
|
|
1.80
|
|
5,500,000
|
|
|
1.80
|
|
100,000
|
|
0.05
|
|
88,022
|
|
|
2.20
|
|
30,000
|
|
8.85
|
|
30,000
|
|
|
4.00
|
|
66,300
|
|
0.05
|
|
66,300
|
|
|
5.00
|
|
75,000
|
|
0.08
|
|
47,947
|
|
|
6.00
|
|
117,500
|
|
0.39
|
|
115,185
|
|
|
6.23
|
|
100,000
|
|
2.92
|
|
52,156
|
|
|
n/a
|
|
50,000
|
|
—
|
|
—
|
|
|
|
|
16,538,800
|
|
1.78
|
|
16,399,609
|
|
There were no
warrants granted during 2007.
F-29
Table of
Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
The weighted fair
value of warrants granted during the year ended December 31, 2008 was,
based on the following assumptions:
|
Weighted
average
|
|
|
|
|
Exercise price
of warrants granted
|
|
$
|
0.99
|
|
|
Expected
volatility
|
|
85
|
%
|
|
Risk-free
interest rate
|
|
1.84
|
%
|
|
Expected life
[years]
|
|
2
|
|
|
Dividend yield
|
|
0
|
%
|
|
|
|
|
|
|
[iv] Retention Warrant Plan [“Warrant Plan”]
On October 20,
2008, as a result of the merger, the Company adopted JumpTV’s retention warrant
plan [the “Warrant Plan”] which applies to all previous grants to JumpTV
employees and all future grants of retention warrants to employees and
consultants of the Company or any entity controlled by the Company. The exercise price for any retention warrant
granted under the Warrant Plan will be determined by the five-day average
closing price of the Company’s common shares prior to the date of grant but
cannot be less than such a price.
Retention warrants are exercisable during a period established at the
time of their grant provided that such period will expire no later than five
years after the date of grant, subject to early termination of the retention
warrant in the event the holder of the retention warrant dies or ceases to be
an employee or consultant of the Company or ceases to provide ongoing
management or consulting services to the Company or entity controlled by the
Company. The maximum number of common
shares issuable upon exercise of retention warrants granted pursuant to the Warrant
Plan is equal to 2,500,000 common shares.
A summary of the retention warrant activity
during the year ended December 31, 2008 is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
Outstanding,
December 31, 2007
|
|
—
|
|
—
|
|
|
Assumed on
merger
|
|
1,579,976
|
|
2.58
|
|
|
Forfeited
|
|
(229,536
|
)
|
1.98
|
|
|
Outstanding,
December 31, 2008
|
|
1,350,440
|
|
2.68
|
|
The
following table summarizes the retention warrant information as at December 31,
2008:
|
|
|
|
|
Weighted average
|
|
|
|
|
Exercise
|
|
Number
|
|
remaining
|
|
Number
|
|
|
price
|
|
outstanding
|
|
contractual life
|
|
exercisable
|
|
|
$
|
|
#
|
|
[years]
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
0.64
|
|
296,145
|
|
4.09
|
|
68,760
|
|
|
0.70
|
|
164,215
|
|
4.38
|
|
27,649
|
|
|
0.80
|
|
37.906
|
|
4.31
|
|
9,760
|
|
|
3.86
|
|
852,174
|
|
3.66
|
|
295,080
|
|
|
|
|
1,350,440
|
|
3.86
|
|
401,249
|
|
F-30
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
There were no retention warrants granted during the years ended December 31,
2008 and 2007.
[v] Stock Appreciation Rights Plan [“SARS”]
On October 20, 2008, as a result of the merger, the Company
adopted JumpTV’s stock appreciation rights plan [“SARS Plan”]. The maximum number of units that can be
granted under the SARS Plan is equivalent to the greater of 4,150,000 or 5% of
the aggregate number of issued and outstanding common shares. The exercise price shall be determined by the
Board of Directors at the time of grant but in no event shall the exercise
price be lower than the market price of the common shares at the time of the
grant. Each unit granted under the SARS
Plan has a maximum life of five years from the date of the grant. The SARS Plan provides the unitholder the
right to settle the award as follows:
|
[1]
|
|
Receive cash compensation less the exercise price or
to purchase or receive an equivalent number of common shares, less the
exercise price;
|
|
|
|
|
|
[2]
|
|
In lieu of receiving a cash settlement, the
unitholder can elect to receive a number of common shares equal to the fair
value of the common shares less the exercise price divided by the market
value of the common shares from treasury; or
|
|
|
|
|
|
[3]
|
|
Elect to pay the Company the exercise price and
receive common shares equal to the number of units granted under the SARS
Plan from treasury.
|
The Board of Directors has discretionary authority to
accept or reject a cash payment request in whole or in part.
A summary of the
SARS activity during the year ended December 31, 2008 is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
Outstanding,
December 31, 2007
|
|
—
|
|
—
|
|
|
Assumed on
merger
|
|
1,892,177
|
|
3.23
|
|
|
Granted
|
|
490,000
|
|
0.60
|
|
|
Forfeited
|
|
(435,000
|
)
|
1.43
|
|
|
Outstanding,
December 31, 2008
|
|
1,947,177
|
|
2.97
|
|
The
following table summarizes the SARS information as at December 31, 2008:
|
|
|
|
|
Weighted average
|
|
|
|
|
Exercise
|
|
Number
|
|
remaining
|
|
Number
|
|
|
price
|
|
outstanding
|
|
contractual life
|
|
exercisable
|
|
|
$
|
|
#
|
|
[years]
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
0.60
|
|
490,000
|
|
4.81
|
|
24,148
|
|
|
0.64
|
|
200,000
|
|
4.33
|
|
37,509
|
|
|
3.00
|
|
78,750
|
|
1.82
|
|
60,613
|
|
|
4.00
|
|
1,000,000
|
|
2.24
|
|
899,384
|
|
|
6.26
|
|
178,427
|
|
0.59
|
|
169,358
|
|
|
|
|
1,947,177
|
|
2.93
|
|
1,191,011
|
|
F-31
Table of
Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
There were no
stock appreciation rights granted during 2007.
The weighted fair
value of stock appreciation rights granted during the year ended December 31,
2008 was $0.05 based on the following assumptions:
|
Years ended December 31
|
|
2008
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
Exercise price
of warrants granted
|
|
$
|
0.60
|
|
|
Expected
volatility
|
|
79
|
%
|
|
Risk-free
interest rate
|
|
2.41
|
%
|
|
Expected life
[years]
|
|
4
|
|
|
Dividend yield
|
|
0
|
%
|
|
|
|
|
|
|
11.
Valuation Allowances and Reserves
For the years
ended December 31, 2008 and 2007, continuity of the Company’s reserves are
as follows:
|
|
|
Bad Debt
|
|
Inventory
|
|
|
|
|
Reserve
|
|
Reserve
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Balance —
December 31, 2007
|
|
45,000
|
|
—
|
|
|
Charged to costs
and expenses
|
|
245,538
|
|
9,700
|
|
|
Balance —
December 31, 2008
|
|
290,538
|
|
9,700
|
|
12.
Loss per Share
Basic loss per
share is computed by dividing net loss for the year by the weighted average
number of shares outstanding for the year. Diluted loss per share is computed
by dividing net loss for the year by the weighted average number of shares
outstanding and, if dilutive, potential common shares using the treasury stock
method. Potential common shares consist
of stock options.
For the years
ended December 31, 2008 and 2007, the Company had potential common shares
which, due to the losses incurred, were considered anti-dilutive equity
instruments. Accordingly, the effect of stock options for each of the years has
not been reflected in computing diluted loss per share for the years ended December 31,
2008 and 2007.
The following
table summarizes the different potential common shares that were outstanding as
at December 31, 2008 and 2007 but were not included in the computation of
diluted loss per share as their effect would have been anti-dilutive. See note 10 for additional details.
F-32
Table
of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2008
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
#
|
|
#
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
10,298,707
|
|
5,559,044
|
|
|
Restricted share
plan units
|
|
59,222
|
|
—
|
|
|
Stock
appreciation rights
|
|
1,947,177
|
|
—
|
|
|
Warrants
|
|
16,538,800
|
|
—
|
|
|
Retention
warrants
|
|
1,350,440
|
|
—
|
|
|
Contingent
performance consideration
|
|
3,680,194
|
|
—
|
|
13.
Supplemental Cash Flow Information
For each of the
years presented, the Company did not pay any cash income taxes or cash interest
expense.
14.
Commitments and Contingencies
Commitments
The Company has
operating lease commitments for its premises in Plainview, United States,
Toronto, Canada, Sanford, United States, London, England, New York, United
States and Buenos Aires, Argentina. In
addition, the Company has operating leases for certain computer hardware and
infrastructure equipment. Furthermore,
the Company has marketing and content license fee commitments to channel
partners. Future minimum annual payments
over the next five years and thereafter [exclusive of taxes, insurance and
maintenance costs] under these commitments are as follows:
|
|
|
$
|
|
|
|
|
|
|
|
2009
|
|
4,931,281
|
|
|
2010
|
|
2,984,872
|
|
|
2011
|
|
1,496,589
|
|
|
2012
|
|
1,324,485
|
|
|
2013
|
|
1,040,023
|
|
|
Thereafter
|
|
591,552
|
|
|
|
|
12,368,802
|
|
Rent expense for the
years ended December 31, 2008 and 2007 was $448,854 and $100,000,
respectively.
The Company has signed a
sublease for its Toronto office, which will create a total recovery of
$5,057,673.
Contingencies
During the
ordinary course of business activities, the Company may be contingently liable
for litigation and a party to claims.
Management believes that adequate provisions have been made in the
accounts where required. Although the
extent of potential costs and losses, if any is uncertain, management believes
that the ultimate resolution of such contingencies will not have an adverse
effect on the consolidated financial position or results of operations of the
Company.
F-33
Table of Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
15. Segmented Information
The Company operates as one reportable segment — to p
rovide a
full end-to-end enterprise-level IPTV and other professional services
. Substantially
all of Company’s revenues and long-lived assets are in the United States.
16.
Income Taxes
The reconciliation
of income taxes computed at the Canadian statutory tax rate to the Company’s effective
income tax rate for the years ended December 31, 2008 and 2007 is as
follows:
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
Combined basic
federal and provincial rates
|
|
33.5
|
%
|
36.1
|
%
|
|
Income tax
benefit based on statutory income tax rate
|
|
(3,898,482
|
)
|
(1,631,092
|
)
|
|
Increase in
income taxes resulting from:
|
|
|
|
|
|
|
Non-deductible
expenses
|
|
631,824
|
|
—
|
|
|
Income while
Company was an S Corp. and not subject to tax
|
|
1,597,396
|
|
1,631,092
|
|
|
Increase in
valuation allowance
|
|
1,669,262
|
|
—
|
|
|
Income tax
expense
|
|
—
|
|
—
|
|
The increase in
valuation allowance consists of the creation of additional tax losses which
have not been recognized for accounting purposes.
Deferred income
taxes result principally from temporary differences in the recognition of loss
carry forwards and expense items for financial and income tax reporting
purposes. Significant components of the
Company’s deferred tax assets as of December 31, 2008 and 2007 were as
follows:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
1,129,610
|
|
—
|
|
|
Property, plant
and equipment
|
|
1,719,527
|
|
—
|
|
|
Intangible
assets
|
|
2,093,849
|
|
—
|
|
|
Software
|
|
(542,139
|
)
|
—
|
|
|
Trade names
|
|
(23,321
|
)
|
—
|
|
|
Customer
relationships
|
|
(1,643,986
|
)
|
—
|
|
|
Share issue
costs
|
|
3,143,219
|
|
—
|
|
|
Net operating
losses
|
|
22,155,774
|
|
—
|
|
|
|
|
28,032,533
|
|
—
|
|
|
Valuation
allowance
|
|
(28,032,533
|
)
|
—
|
|
|
Total deferred
tax assets
|
|
—
|
|
—
|
|
F-34
Table of
Contents
JUMPTV INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31,
2008
The Company has
approximately $76,399,216 in non-capital tax losses available to be applied
against future years’ income which expire as follows:
|
|
|
$
|
|
|
|
|
|
|
|
2009
|
|
541,836
|
|
|
2010
|
|
198,000
|
|
|
2026
|
|
21,263,325
|
|
|
2027
|
|
25,544,598
|
|
|
2028
|
|
28,851,457
|
|
|
|
|
76,399,216
|
|
Due to the losses
incurred since inception and expected future operating results, a 100%
valuation allowance has been recorded against the Company’s net deferred tax
assets as it is more likely than not that the future tax asset resulting from
the tax losses available for carryforward will not be realized through the
reduction of future income tax payments.
The Company does
not have any uncertain tax provisions under FIN 48.
17. Reconciliation of U.S. GAAP to Canadian GAAP
The consolidated
financial statements of the Company are prepared in U.S. dollars in accordance
with United States GAAP. The following adjustments and disclosures would be
required in order to present these consolidated financial statements in
accordance with Canadian GAAP:
Reconciliation
to Canadian GAAP
Income Statements Items using Canadian GAAP
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
NET LOSS USING
UNITED STATES GAAP
|
|
(11,637,260
|
)
|
(4,515,759
|
)
|
|
Add (deduct)
adjustments for:
|
|
|
|
|
|
|
Adjustment for
stock based compensation on SARS[i]
|
|
16,599
|
|
—
|
|
|
NET LOSS USING
CANADIAN GAAP
|
|
(11,620,661
|
)
|
(4,515,759
|
)
|
|
|
|
|
|
|
|
|
NET AND
COMPREHENSIVE LOSS PER SHARE USING CANADIAN GAAP - basic and diluted
|
|
$
|
(0.21
|
)
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
F-35
Table of
Contents
JUMPTV
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless
otherwise noted]
December 31, 2008
Balance Sheet Items using Canadian GAAP
|
|
|
2008
|
|
2007
|
|
|
|
|
U.S.
|
|
Canadian
|
|
U.S.
|
|
Canadian
|
|
|
|
|
GAAP
|
|
GAAP
|
|
GAAP
|
|
GAAP
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities [i]
|
|
15,209,323
|
|
15,192,724
|
|
3,420,819
|
|
3,420,819
|
|
|
Total
liabilities [i]
|
|
16,724,104
|
|
16,707,505
|
|
3,965,018
|
|
3,965,018
|
|
|
Accumulated
deficit [i]
|
|
(26,039,527
|
)
|
(26,022,928
|
)
|
(14,402,267
|
)
|
(14,402,267
|
)
|
|
Total
shareholders’ equity [i]
|
|
37,013,578
|
|
37,030,177
|
|
3,246,933
|
|
3,246,933
|
|
Cash Flows Items using Canadian GAAP
|
|
|
2008
|
|
2007
|
|
|
|
|
U.S.
|
|
Canadian
|
|
U.S.
|
|
Canadian
|
|
|
|
|
GAAP
|
|
GAAP
|
|
GAAP
|
|
GAAP
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss [ii]
|
|
(11,637,260
|
)
|
(11,620,661
|
)
|
(4,515,759
|
)
|
(4,515,759
|
)
|
|
Stock-based
compensation [ii]
|
|
1,848,906
|
|
1,832,307
|
|
—
|
|
—
|
|
Areas
of material difference between Canadian GAAP and U.S. GAAP and their impact on
the consolidated financial statements are as follows:
[i] Stock
Appreciation Rights [“SARS”]
On January 1,
2007, the Company adopted, on a modified prospective basis, CICA Handbook Section 3870,
Stock-Based Compensation and Other Stock Based
Payments,
for new awards granted on or after this date under the
Company’s stock appreciation rights plan.
Under
US GAAP, the Company recognizes a liability and compensation expense for the
fair value of the SARS on each reporting date.
Under
Canadian GAAP, the Company recognizes a liability and compensation expense for
the “in the money” value of the SARS on each reporting date.
The
cumulative effects of adopting CICA Handbook Section 3870 on January 1,
2007 in 2008 and 2007 were $16,599 and nil, respectively.
[ii] In
addition, recent Canadian GAAP accounting pronouncements that may impact the
Company
’
s financial position and
results of operations and disclosure requirements are as follows:
F-36
Table of
Contents
JUMPTV
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless
otherwise noted]
December 31, 2008
CICA Handbook Section 1535 —
Capital Disclosures
The Company manages the following
accounts in regards to capital management:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
Share capital
|
|
6,762,097
|
|
68,871
|
|
|
Additional paid
in capital
|
|
56,500,258
|
|
17,580,329
|
|
|
Promissory note
receivable
|
|
(209,250
|
)
|
—
|
|
|
Accumulated
deficit
|
|
(26,039,527
|
)
|
(14,402,267
|
)
|
|
|
|
37,013,578
|
|
3,246,951
|
|
(the figures in the table above are
in accordance with U.S. GAAP)
The Company’s outstanding share capital is comprised
of common shares. At December 31, 2008, an unlimited number of common
shares were authorized and
110,084,044
(December 2007 – 44,018,373) common shares were
issued and outstanding. Approximately 60%
of the common
shares are held by insiders, and the remaining shares are widely held. Further
information on the Company’s outstanding share capital is provided in note 8 of
these consolidated financial statements.
On October 20, 2008, the Company completed a
private placement for gross proceeds of Cdn$11,000,000 [US$9,214,700] [note 9].
At December 31, 2008, a total of 10,298,707 stock
options were outstanding, 59,222 restricted share units, 16,538,800 warrants,
1,350,440 retention warrants and 1,947,177 SARs, which convertible securities cumulatively
represented 27% of the Company’s issued and outstanding share capital. Pursuant
to guidelines set by the Company’s respective equity plans, stock option grants
are limited to the greater of 12.5% of the issued and outstanding common shares
outstanding and 4,000,000, restricted share unit grants have been fully
granted, retention warrants are limited to 2,500,000 and SARs grants are
limited to the greater of 5% of the issued and outstanding common shares and
4,150,000. The Company is currently in
compliance with these guidelines.
The Company’s objective in managing
capital is to ensure a sufficient liquidity position to finance its revenue
growth, general and administrative expenses, working capital and capital
expenditures.
In order to maintain or adjust its
capital structure, the Company may issue new shares and/or purchase shares for
cancellation pursuant to normal course issuer bids.
To finance its activities, the
Company has relied on revenue growth and issuance of common equity. Since inception, the Company has financed its
activities primarily through public offerings of common shares.
The Company’s policy is to maintain
a minimal level of debt. At this time
the Company has not utilized debt facilities as part of its capital management
program nor has it paid dividends to its shareholders.
The capital management objectives
for the period ended December 31, 2008 remained the same as those of the
previous fiscal period.
The Company is not subject to any
externally imposed capital requirements.
F-37
Table of
Contents
JUMPTV
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless
otherwise noted]
December 31, 2008
CICA Handbook Sections 3862 and
3863 — Financial Instruments — Disclosures and Presentation
The Company’s
financial instruments are comprised of cash and cash equivalents, short-term
investments, accounts receivable, interest receivable, other receivables,
accounts payable, other accrued liabilities, amounts due to/from related party,
notes payable and obligations under capital lease.
The fair value of
a financial instrument is defined as the amount at which the instrument could
be exchanged in a current transaction between willing parties.
The fair value of
assets and liabilities were as follows:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
Held-for-Trading
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
27,323,021
|
|
608,464
|
|
|
Loans and
Receivables
|
|
|
|
|
|
|
Accounts
receivable
|
|
2,284,242
|
|
2,017,137
|
|
|
Other
receivables
|
|
227,711
|
|
—
|
|
|
Due from related
parties
|
|
324,059
|
|
188,855
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
Other Financial
Liabilities
|
|
|
|
|
|
|
Accounts payable
|
|
4,465,388
|
|
67,295
|
|
|
Accrued
liabilities
|
|
7,595,116
|
|
830,371
|
|
|
Due to related
parties
|
|
56,826
|
|
2,093,907
|
|
All fair values
denoted above approximate their carrying values due to their short term nature
and/or variable interest rates.
Risk management is
primarily the responsibility of the Company’s corporate finance function. Significant risks are regularly monitored and
actions are taken, when appropriate, according to the Company’s approved
policies, established for that purpose. In addition, as required, these risks are
reviewed with the Company’s Board of Directors.
Foreign Exchange
Risk
The Company is
exposed to foreign exchange risk as a result of transactions in currencies
other than its functional currency of the United States dollar. The majority of the Company’s revenues are
transacted in U.S. dollars, whereas the majority of expenses are transacted in
U.S. or Canadian dollars. The Company
does not use derivative instruments to hedge against foreign exchange risk.
Interest Rate Risk
The Company is
exposed to interest rate risk on its invested cash and cash equivalents and its
short-term investments. The interest
rates on these instruments are based on the banks’ applicable prime rate and
therefore are subject to change with the market. The Company does not use derivative financial
instruments to reduce its interest rate risk.
F-38
Table of
Contents
JUMPTV
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless
otherwise noted]
December 31, 2008
Credit Risk
The Company sells its services to a variety of
customers under various payment terms and therefore is exposed to credit
risk. The Company has adopted policies
and procedures designed to limit this risk.
The maximum exposure to credit risk at the reporting date is the
carrying value of receivables. The
Company establishes an allowance for doubtful accounts that represents its
estimate of incurred losses in respect of accounts receivable. The Company believes that the concentration
of credit risk is limited due to the Company’s primary source of revenues to
date being subscription revenues, for which monies are received in advance
principally through credit cards.
There is no significant credit risk related to the
Company’s cash and cash equivalents and short-term investments. Credit risk is
managed through conducting financial and other assessments of these investments
on an ongoing basis.
The following table sets out details of the age of
accounts receivable that are outstanding and related allowance for doubtful
accounts:
|
|
|
December 31, 2008
|
|
|
|
|
$
|
|
|
|
|
|
|
|
Current
|
|
1,697,271
|
|
|
31-60 days
|
|
287,070
|
|
|
61-90 days
|
|
105,525
|
|
|
Over 90 days
|
|
484,914
|
|
|
Less: Allowance
for doubtful accounts
|
|
(290,538
|
)
|
|
Total accounts
receivable, net
|
|
2,284,242
|
|
The carrying amount of accounts receivable is reduced
through the use of an allowance account and the amount of the loss is
recognized in the consolidated statements of operations and comprehensive
loss. When a receivable balance is
considered uncollectible, it is written off against the allowance for accounts
receivable. Subsequent recoveries of amounts previously written off are
credited against operating expenses in the consolidated statements of
operations and comprehensive loss.
Recent Accounting Pronouncements
In February 2008,
the CICA issued new Handbook Section 3064,
Goodwill and Intangible Assets
, which replaces Section 3062,
Goodwill and Other Intangible Assets
,
and Section 3450,
Research and Development
Costs
. The new standard addresses when an internally developed
intangible asset meets the criteria for recognition as an asset. The section
also issued amendments to Section 1000,
Financial
Statement Concepts
. These changes are effective for fiscal years
beginning on or after October 1, 2008, with earlier adoption permitted,
and will be adopted by the Company effective January 1, 2009. The
objectives of the changes are to reinforce a principle-based approach to the
recognition of costs as assets and to clarify the application of the concept of
matching revenues and expenses in Section 1000. Collectively, these
changes bring Canadian practice closer to International Financial Reporting
Standards [“IFRS”] by eliminating the practice of recognizing as assets a
variety of startup, pre-production and similar costs that do not meet the
definition and recognition criteria of an asset. The Company is currently
evaluating the effects of adopting these changes.
In
2006, Canada
’
s Accounting Standards
Board ratified a strategic plan that will result in the adoption by Canadian
public companies of IFRS. The Company may be required to report using the
converged standards effective for interim and annual financial statements
relating to fiscal years beginning on or after January 1, 2011. The
Company is currently evaluating the effects of adopting these changes.
F-39
Table
of Contents
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
JumpTV Inc.
We have audited the
consolidated balance sheets of
JumpTV Inc.
as at December 31, 2007 and 2006 and the consolidated statements of
operations and comprehensive loss, shareholders’ equity and cash flows for each
of 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 audits.
We conducted our audits
in accordance with Canadian and United States generally accepted auditing
standards. Those standards require that
we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. We were not engaged to perform an audit of
the Company’s internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting, Accordingly we express no
such opinion. 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.
In our opinion, these
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2007 and 2006 and the
results of its operations and its cash flows for the years then ended in
accordance with Canadian generally accepted accounting principles.
|
Toronto, Canada
|
/s/
Ernst & Young LLP
|
|
March 26, 2008
(except as to notes 21(ii) and 22,
|
Chartered
Accountants
|
|
which are
as of April 9, 2009)
|
Licensed Public
Accountants
|
F-40
Table of Contents
JumpTV Inc.
CONSOLIDATED BALANCE SHEETS
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
2007
|
|
2006
|
|
|
As at December 31
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash and cash
equivalents
[note 5]
|
|
51,202,984
|
|
21,936,878
|
|
|
Short-term
investments
[note 6]
|
|
130,640
|
|
28,115,378
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $395,175 [2006 — nil]
|
|
1,782,280
|
|
—
|
|
|
Interest
receivable
|
|
726,995
|
|
117,947
|
|
|
Taxes receivable
|
|
659,000
|
|
602,152
|
|
|
Other
receivables
|
|
79,385
|
|
3,522
|
|
|
Prepaid expenses
and deposits
[note 7]
|
|
1,044,921
|
|
1,178,119
|
|
|
Total
current assets
|
|
55,626,205
|
|
51,953,996
|
|
|
Property, plant
and equipment, net
[note 8]
|
|
6,760,565
|
|
1,269,488
|
|
|
Intangible
assets, net
[notes 3 and 9]
|
|
18,305,881
|
|
312,140
|
|
|
Goodwill
[note 3]
|
|
47,970,833
|
|
102,069
|
|
|
Other assets
|
|
1,234,038
|
|
161,246
|
|
|
Deferred direct
broadcast operating costs, net
[note 15[iii]]
|
|
76,409
|
|
61,605
|
|
|
Total
assets
|
|
129,973,931
|
|
53,860,544
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Accounts payable
|
|
3,296,858
|
|
1,931,589
|
|
|
Other accrued
liabilities
|
|
5,247,328
|
|
2,497,393
|
|
|
Bank
indebtedness
[note 10]
|
|
—
|
|
1,287,150
|
|
|
Due to related
party
[note 7]
|
|
37,229
|
|
14,676
|
|
|
Current portion
of notes payable
[note 11]
|
|
13,586
|
|
—
|
|
|
Current portion
of obligations under capital lease
[note 12]
|
|
120,465
|
|
—
|
|
|
Accrued stock
appreciation rights
[note 15[v]]
|
|
—
|
|
1,087,760
|
|
|
Deferred revenue
|
|
1,980,169
|
|
205,314
|
|
|
Income taxes
payable
|
|
115,050
|
|
61,800
|
|
|
Total
current liabilities
|
|
10,810,685
|
|
7,085,682
|
|
|
Deferred rent
|
|
599,440
|
|
18,502
|
|
|
Notes payable
[note 11]
|
|
31,881
|
|
—
|
|
|
Obligations
under capital lease
[note 12]
|
|
80,299
|
|
—
|
|
|
Total
liabilities
|
|
11,522,305
|
|
7,104,184
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
Share capital
[note 14]
|
|
172,697,828
|
|
75,227,648
|
|
|
Contributed
surplus
[note 15]
|
|
7,740,531
|
|
2,937,219
|
|
|
Accumulated
other comprehensive loss
|
|
(40,355
|
)
|
(32,240
|
)
|
|
Accumulated
deficit
|
|
(61,946,378
|
)
|
(31,376,267
|
)
|
|
Total
shareholders’ equity
|
|
118,451,626
|
|
46,756,360
|
|
|
Total
liabilities and shareholders’ equity
|
|
129,973,931
|
|
53,860,544
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
[notes 12 and 13]
|
|
|
|
|
|
See accompanying notes
F-41
Table of Contents
JumpTV
Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
2007
|
|
2006
|
|
|
Years ended December 31
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
8,974,659
|
|
2,061,031
|
|
|
Direct broadcast
operating costs
[notes 8, 9 and 15[iii]]
|
|
(10,422,335
|
)
|
(2,569,648
|
)
|
|
|
|
(1,447,676
|
)
|
(508,617
|
)
|
|
|
|
|
|
|
|
|
Other
costs and expenses
|
|
|
|
|
|
|
Selling, general
and administrative
[note 7]
|
|
28,205,105
|
|
21,690,938
|
|
|
Stock-based
compensation and other compensation payments
[note 15]
|
|
4,701,029
|
|
4,097,351
|
|
|
Interest
|
|
18,532
|
|
—
|
|
|
Amortization of
property, plant and equipment
|
|
564,365
|
|
128,549
|
|
|
Amortization of
intangible assets
|
|
91,790
|
|
22,401
|
|
|
|
|
33,580,821
|
|
25,939,239
|
|
|
Loss before the
following:
|
|
(35,028,497
|
)
|
(26,447,856
|
)
|
|
Loss on foreign
exchange
|
|
(57,346
|
)
|
(186,990
|
)
|
|
Investment
income
[note 6]
|
|
4,568,982
|
|
1,083,050
|
|
|
Loss before
income taxes
|
|
(30,516,861
|
)
|
(25,551,796
|
)
|
|
Provision for
income taxes
[note 17]
|
|
53,250
|
|
45,300
|
|
|
Net
loss for the year
|
|
(30,570,111
|
)
|
(25,597,096
|
)
|
|
|
|
|
|
|
|
|
Unrealized gain
on short-term investments
|
|
287,511
|
|
295,626
|
|
|
Reclassification
of unrealized gain on short-term investments
|
|
(295,626
|
)
|
(287,511
|
)
|
|
Comprehensive
loss for the year
|
|
(30,578,226
|
)
|
(25,588,981
|
)
|
|
|
|
|
|
|
|
|
Net loss per
weighted average number of shares outstanding - basic and diluted
[note 4]
|
|
$
|
(0.66
|
)
|
$
|
(0.99
|
)
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding - basic and diluted
[note 4]
|
|
46,586,730
|
|
25,848,396
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
F-42
Table of Contents
JumpTV
Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
Total
|
|
|
|
|
Share capital
|
|
Contributed
|
|
comprehensive
|
|
Accumulated
|
|
shareholders’
|
|
|
|
|
Common shares
|
|
surplus
|
|
loss
|
|
deficit
|
|
equity
|
|
|
|
|
#
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
34,821,121
|
|
75,227,648
|
|
2,937,219
|
|
(32,240
|
)
|
(31,376,267
|
)
|
46,756,360
|
|
|
Net loss for the
year
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(30,570,111
|
)
|
(30,570,111
|
)
|
|
Unrealized gain
on short-term investments
|
|
—
|
|
—
|
|
—
|
|
287,511
|
|
—
|
|
287,511
|
|
|
Reclassification
of unrealized gain on short-term investments
|
|
—
|
|
—
|
|
—
|
|
(295,626
|
)
|
—
|
|
(295,626
|
)
|
|
Issuance of
common shares on acquisition of SportsYa
[note 3[i] and 14[i]]
|
|
191,345
|
|
1,182,295
|
|
—
|
|
—
|
|
—
|
|
1,182,295
|
|
|
Exercise of
stock options for common shares
[note 15[i]]
|
|
238,355
|
|
824,404
|
|
(320,542
|
)
|
—
|
|
—
|
|
503,862
|
|
|
Exercise of warrants
for common shares
[note 15[iii]]
|
|
3,700
|
|
23,422
|
|
(8,622
|
)
|
—
|
|
—
|
|
14,800
|
|
|
Net proceeds
from issuance of common shares through secondary public offering
[note 14[ii]]
|
|
13,043,479
|
|
93,104,131
|
|
—
|
|
—
|
|
—
|
|
93,104,131
|
|
|
Issuance of
common shares into escrow on acquisition of SportsYa
[notes 3[i] and 14[i]]
|
|
330,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of
common shares for advertising services
[note 14[iii]]
|
|
197,628
|
|
934,900
|
|
—
|
|
—
|
|
—
|
|
934,900
|
|
|
Stock-based
compensation
[note 15]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share
plan units
|
|
—
|
|
—
|
|
1,135,896
|
|
—
|
|
—
|
|
1,135,896
|
|
|
Stock options
|
|
—
|
|
—
|
|
3,722,600
|
|
—
|
|
—
|
|
3,722,600
|
|
|
Warrants
|
|
—
|
|
—
|
|
466,910
|
|
—
|
|
—
|
|
466,910
|
|
|
Retention
warrants
|
|
—
|
|
—
|
|
143,127
|
|
—
|
|
—
|
|
143,127
|
|
|
Release of
common shares from escrow for services
[notes 3[i] and
14[i]]
|
|
—
|
|
385,208
|
|
—
|
|
—
|
|
—
|
|
385,208
|
|
|
Issuance of
common shares for restricted share plan units
[note 15[ii]]
|
|
199,536
|
|
949,936
|
|
(949,936
|
)
|
—
|
|
—
|
|
—
|
|
|
Issuance of
common shares for services
[notes 3[ii] and
14[iv]]
|
|
9,500
|
|
27,287
|
|
—
|
|
—
|
|
—
|
|
27,287
|
|
|
Repurchase and
cancellation of common shares
[note 14[v]]
|
|
(633,700
|
)
|
(2,228,617
|
)
|
613,879
|
|
—
|
|
—
|
|
(1,614,738
|
)
|
|
Issuance of
common shares on acquisition of Cycling TV
[notes 3[ii] and
14[vi]]
|
|
743,349
|
|
2,267,214
|
|
—
|
|
—
|
|
—
|
|
2,267,214
|
|
|
Issuance of
common shares into escrow on acquisition of Cycling TV
[notes 3[ii] and 14[vi]]
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Balance,
December 31, 2007
|
|
49,144,313
|
|
172,697,828
|
|
7,740,531
|
|
(40,355
|
)
|
(61,946,378
|
)
|
118,451,626
|
|
See accompanying notes
F-43
Table of Contents
JumpTV
Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(cont’d)
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
|
other
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Class A
|
|
Class C
|
|
Contributed
|
|
comprehensive
|
|
Accumulated
|
|
shareholders’
|
|
|
|
|
Common
shares
|
|
common shares
|
|
common shares
|
|
surplus
|
|
loss
|
|
deficit
|
|
equity
|
|
|
|
|
#
|
|
$
|
|
#
|
|
$
|
|
#
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
—
|
|
—
|
|
16,245,556
|
|
9,744,083
|
|
1
|
|
1
|
|
609,908
|
|
(40,355
|
)
|
(5,779,171
|
)
|
4,534,466
|
|
|
Net loss for the
year
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(25,597,096
|
)
|
(25,597,096
|
)
|
|
Unrealized gain
on short-term investments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
8,115
|
|
—
|
|
8,115
|
|
|
Exercise of
stock options for Class A shares
|
|
—
|
|
—
|
|
1,772,420
|
|
918,284
|
|
—
|
|
—
|
|
(318,238
|
)
|
—
|
|
—
|
|
600,046
|
|
|
Net proceeds
from issuance of Class A common shares through private placements
|
|
—
|
|
—
|
|
3,066,784
|
|
8,179,046
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
8,179,046
|
|
|
Issuance of
restricted share units
|
|
—
|
|
—
|
|
171,427
|
|
685,800
|
|
—
|
|
—
|
|
(685,800
|
)
|
—
|
|
—
|
|
—
|
|
|
Exchange of
Class A common shares for common shares
|
|
21,256,187
|
|
19,527,213
|
|
(21,256,187
|
)
|
(19,527,213
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Net proceeds
from issuance of common shares through initial public offering
|
|
12,000,000
|
|
48,528,346
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,260,540
|
|
—
|
|
—
|
|
49,788,886
|
|
|
Net proceeds
from issuance of common shares through underwriters’ over-allotment option
|
|
1,273,500
|
|
5,707,632
|
|
—
|
|
—
|
|
—
|
|
—
|
|
133,773
|
|
—
|
|
—
|
|
5,841,405
|
|
|
Exercise of
stock options for common shares
|
|
39,275
|
|
209,583
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(96,248
|
)
|
—
|
|
—
|
|
113,335
|
|
|
Exercise of warrants
for common shares
|
|
100,000
|
|
282,670
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(102,670
|
)
|
—
|
|
—
|
|
180,000
|
|
|
Redemption of
Class C common share
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,231,434
|
|
—
|
|
—
|
|
1,231,434
|
|
|
Restricted share
units
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,658,004
|
|
—
|
|
—
|
|
1,658,004
|
|
|
Warrants
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
146,776
|
|
—
|
|
—
|
|
146,776
|
|
|
Issuance of
restricted share units
|
|
152,159
|
|
972,204
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(972,204
|
)
|
—
|
|
—
|
|
—
|
|
|
Warrants issued
to agent on HVMedia acquisition
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
19,222
|
|
—
|
|
——
|
|
19,222
|
|
|
Issuance of
warrants for services
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
52,722
|
|
—
|
|
—
|
|
52,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
34,821,121
|
|
75,227,648
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,937,219
|
|
(32,240
|
)
|
(31,376,267
|
)
|
46,756,360
|
|
See accompanying notes
F-44
Table
of Contents
JumpTV
Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
2007
|
|
2006
|
|
|
Years ended December 31
|
|
$
|
|
$
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net loss for the
year
|
|
(30,570,111
|
)
|
(25,597,096
|
)
|
|
Adjustments to
reconcile net loss to cash used in operating activities
|
|
|
|
|
|
|
Amortization
|
|
2,300,306
|
|
314,543
|
|
|
Unrealized gain
on short-term investments
|
|
(23,377
|
)
|
—
|
|
|
Stock-based compensation
[note 15]
|
|
5,763,357
|
|
4,123,974
|
|
|
Amortization of
deferred direct broadcast operating costs
[note 15[iii]]
|
|
75,581
|
|
87,920
|
|
|
|
|
|
|
|
|
|
Changes in
operating assets and liabilities
|
|
|
|
|
|
|
Accounts
receivable
|
|
(1,774,695
|
)
|
—
|
|
|
Other receivables
|
|
1,167,239
|
|
3,918
|
|
|
Interest
receivable
|
|
(484,673
|
)
|
(113,663
|
)
|
|
Taxes receivable
|
|
(45,239
|
)
|
(520,829
|
)
|
|
Prepaid
expenses, deposits and other assets
|
|
188,305
|
|
(1,219,337
|
)
|
|
Accounts payable
|
|
75,496
|
|
1,411,416
|
|
|
Other accrued
liabilities
|
|
1,537,855
|
|
1,670,360
|
|
|
Due to related
party
|
|
22,553
|
|
(123,647
|
)
|
|
Accrued stock
appreciation rights payable
|
|
(1,087,760
|
)
|
—
|
|
|
Obligations
under capital lease
|
|
(53,603
|
)
|
—
|
|
|
Note payable
|
|
(37,139
|
)
|
—
|
|
|
Deferred revenue
|
|
507,745
|
|
149,046
|
|
|
Income taxes
payable
|
|
53,250
|
|
45,000
|
|
|
Deferred rent
|
|
580,938
|
|
18,502
|
|
|
Cash
used in operating activities
|
|
(21,803,972
|
)
|
(19,749,893
|
)
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
(Purchase)
redemption of short-term investments
|
|
28,000,000
|
|
(28,107,263
|
)
|
|
Purchase of
property, plant and equipment
|
|
(3,783,306
|
)
|
(1,145,977
|
)
|
|
Purchase of
intangible assets
|
|
—
|
|
(12,500
|
)
|
|
Acquisition of
HV Media Limited
[note 3[iv]]
|
|
(14,552
|
)
|
(440,847
|
)
|
|
Acquisition of
SportsYA, net of cash acquired of $3,308
[note
3[i]]
|
|
(180,917
|
)
|
—
|
|
|
Acquisition of
Cycling TV Limited, net of cash acquired of $77,237
[note 3[ii]]
|
|
(2,383,491
|
)
|
—
|
|
|
Acquisition of
Broadband Network Division of
XOS Technologies Inc.
[note 3[iii]]
|
|
(60,926,708
|
)
|
—
|
|
|
Cash
used in investing activities
|
|
(39,288,974
|
)
|
(29,706,587
|
)
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
Proceeds from
share issuances, net
[note 14]
|
|
93,104,131
|
|
63,809,337
|
|
|
Bank
indebtedness
[note 10]
|
|
(1,287,150
|
)
|
1,287,150
|
|
|
Proceeds from
(redemption of) Class C common share
|
|
—
|
|
(1
|
)
|
|
Proceeds from
exercise of stock options
|
|
503,861
|
|
713,381
|
|
|
Proceeds from
exercise of warrants
|
|
14,800
|
|
180,000
|
|
|
Normal course
issuer bid
[note 14[v]]
|
|
(1,614,738
|
)
|
—
|
|
|
Cash
provided by financing activities
|
|
90,720,904
|
|
65,989,867
|
|
|
Effect of
foreign exchange rate changes on cash and cash equivalents
|
|
(361,852
|
)
|
(71,561
|
)
|
|
Net
increase in cash and cash equivalents during the year
|
|
29,266,106
|
|
16,461,826
|
|
|
Cash an
d
cash equivalents, beginning of year
|
|
21,936,878
|
|
5,475,052
|
|
|
Cash
and cash equivalents, end of year
|
|
51,202,984
|
|
21,936,878
|
|
See
accompanying notes
F-45
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2007
1.
Nature of Operations and Basis of Presentation
JumpTV Inc. [“JumpTV”
or the “Company”], formerly JumpTV.com Inc., was incorporated in January 2000
under the laws of Canada. JumpTV’s primary
business is providing online broadcasting of international ethnic television
channels and sports content over the Internet on a subscription basis.
On August 31,
2007, the Company acquired the Broadband Network business unit of XOS
Technologies, Inc. [“XOS Network Division”], based in Sanford, Florida,
through an asset purchase agreement from XOS Technologies, Inc.
On July 31,
2007, the Company acquired all of the issued and outstanding shares of Cycling
TV Limited [“Cycling TV”]. Cycling TV is
based in London, England and is a broadcaster of top-tier international cycling
races.
On May 24,
2007, the Company launched selected channels on a free-to-consumer basis in the
United States with a view to generating revenue through advertising.
On August 10,
2006, the Company completed its initial public offering [“IPO”] of its common
shares. On February 23, 2007, the
Company completed a public offering of its common shares
[note 14]
. The Company’s common shares are listed on
both the Toronto Stock Exchange [“TSX”] and the Alternative Investment Market [“AIM”].
2. Principles of Consolidation and Significant Accounting Policies
The consolidated
financial statements include the accounts of JumpTV, JumpTV Ltd., a
wholly-owned subsidiary in the United Kingdom, JumpTV International FZ LLC, a
wholly-owned subsidiary in the United Arab Emirates, JumpTV USA Inc. [“JumpTV
Sports”], a wholly-owned subsidiary in the United States, Sports International
Group LLC [“SportsYA”], a wholly-owned subsidiary of JumpTV International FZ
LLC in the United States, Deportes Ya S.A., a wholly-owned subsidiary of
SportsYA, Cycling TV, a wholly-owned subsidiary in England, and KIT Capital
Ltda. [formerly JumpTV Colombia Ltda.], a variable interest entity in Colombia
where JumpTV has been determined to be the primary beneficiary [collectively,
the “Company”]. All significant
inter-company transactions and balances have been eliminated on consolidation.
The consolidated
financial statements of JumpTV have been prepared in U.S. dollars in
accordance with Canadian generally accepted accounting principles [“GAAP”]. The effects of differences between the
application of Canadian and United States (“U.S.”) GAAP on the consolidated
financial statements of the Company is described in note 22. The more significant accounting policies are
summarized as follows:
F-46
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2007
Use
of estimates
The
preparation of consolidated financial statements in conformity with Canadian
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenue and expenses during the reporting year. Actual results could differ from those
estimates. Significant estimates made by
management include the determination of the useful lives of long-lived assets,
allocation of the purchase price for acquisitions, impairment of identifiable
intangible assets, the assumptions used in determining the fair value of stock
options, retention warrants and warrants and the allowance for doubtful
accounts. On an ongoing basis,
management reviews its estimates to ensure they appropriately reflect changes
in the Company’s business and new information as it becomes available. If historical experience and other factors
used by management to make these estimates do not reasonably reflect future
actual results, the Company’s financial position and results of operations
could be materially impacted.
Revenue
recognition
The Company
recognizes revenue when it is realized or realizable and earned. Revenues are earned through subscriptions,
pay-per views, advertising, web hosting, site setup fees, ticketing and donor
management services. The Company
considers revenues realized or realizable and earned when it has persuasive
evidence of an arrangement, the product has been delivered or services have
been provided to the customer, the sales price is fixed or determinable and the
collectibility is reasonably assured.
The company’s different revenue streams are recognized as follows:
[a] Subscription Revenue
Subscription
revenue is recognized on a straight-line basis over the subscription period
which generally ranges from 30 days to one year. The Company defers the appropriate portion of
cash received for which services have not been rendered. Revenue is presented net of refunds. Pay-per-view revenues are deferred and
recognized in the period when the content is viewed.
[b] Advertising Revenue
Advertising
revenue is generated by selling advertising impressions and sponsorship
deals. Advertising impressions include
banner and pre-roll advertisements which are delivered through the Company’s
website as well as through client or third-party sites delivering the Company’s
content. Advertising is sold through
various means including: the Company, third-party advertising agents, content
partners and distribution partners. CPM
(cost per thousand) advertising revenue is generated by displaying an “impression”
of an advertisement to a website user.
The CPM advertising revenue is calculated by tracking “impression counts”
via a third-party advertising serving software.
The third party software will provide the total number of impressions
during a time period to the Company. The
Company then applies the contracted
F-47
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2007
impression rate to
the number of impressions in order to calculate advertising revenue. Advertising revenue is recognized in the
period in which the impressions are served.
[c] Annual Fees for Web Hosting
These fees are
billed and deferred at the beginning of the service period and are amortized
over the term of the arrangement.
[d] Ticketing, Donor and Guest Management
Services
Ticketing and
donor management services fees are based on a percentage of sales and typically
have a minimum revenue guarantee to the Company along with a percentage of
sales clause. As the contract year for
the services progresses, the Company will monitor the actual sales of the client
and will accrue revenue according to the percent of sales clause in the
contracts. At the end of the contract
year, the Company will issue an invoice to the client for the unbilled portion
of the percent of sales clause.
[e] Merchandise and Auction Revenue
The Company offers
services to clients that allow them to sell merchandise and conduct auctions
from the websites. The Company receives
a revenue share from all merchandise and auction sales. The Company records the revenue share as
revenue in the period in which the sale or auction takes place.
[f] Text Messaging
The Company
recognizes revenue from fees earned for the delivery of sports content such as
scores, news and programming reminders through a text messaging service to cell
phone users. This revenue is recorded
when the text messages are billed by the cell phone providers to their users,
net of provision for doubtful accounts.
Stock-based compensation and other
stock-based payments
The Company
accounts for all stock options and warrants using a fair value-based
method. The fair value of each stock
option and warrant granted is estimated on the date of the grant using the
Black-Scholes option pricing model and the related stock-based compensation expense
is recognized over the vesting period
[note 15]
. The fair value of stock options, retention
warrants and warrants granted to employees is measured at the date of the
grant. The fair value of the warrants
granted to non-employees is measured as the warrants vest. The offsetting entry is an increase to
contributed surplus for an amount equal to the stock-based compensation expense
related to the issuance of stock options. Upon exercise, the proceeds of the
options and warrants together with the fair value recorded in contributed
surplus are reclassified to share capital.
Stock appreciation rights give the holder the right to
elect to either receive cash in an amount equal to the excess of the quoted
market price over the stock appreciation right price or to receive common
shares equal to the fair value of the common shares less the exercise price
divided by the market value of the common shares from treasury or receive
common shares by making a cash payment equal to the exercise price. The Board of Directors has discretionary
authority to accept
F-48
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2007
or reject a cash payment request in whole or in
part. Stock-based compensation expense
is calculated as the amount by which the quoted market price exceeds the option
price with ongoing measurement of the outstanding liability. The liability is entitled accrued stock
appreciation rights and is classified as a current liability on the
consolidated balance sheets. If the
holder elects to purchase common shares, the liability is credited to
contributed surplus.
Restricted share
units give the holder the right to one common share for each vested restricted
share plan unit. These awards vest on a
monthly basis over the vesting period which is four years. Stock-based compensation expense related to
restricted share units is accrued based on the market value of the shares when
the shares are issued, which generally coincides with the vesting period of
these awards
[note 14].
Variable interest entities
Accounting
Guideline No. 15, “Consolidation of Variable Interest Entities”, provides
guidance on the identification of, and financial reporting for, entities over
which control is achieved through means other than voting rights; such entities
are known as variable interest entities.
The guideline requires variable interest entities to be consolidated by
the primary beneficiary of the variable interest entities and expands
disclosure requirements for both variable interest entities that are
consolidated as well as those of which an enterprise holds a significant
variable interest.
The
Company has a variable interest in KIT Capital Ltda. for which the Company is
the primary beneficiary and has consolidated KIT Capital Ltda.’s financial
results since its inception date [August 22, 2005] within the consolidated
financial statements. As at December 31,
2007, the carrying value of the assets associated with KIT Capital Ltda.
included in the consolidated balance sheets was $22,085 [as at December 31,
2006 - $14,035] and the carrying value of the liabilities was $3,518 [as
at December 31, 2006 - $51,216].
For the year ended December 31, 2007, revenues associated with KIT
Capital Ltda. included in the consolidated statements of operations were
$88,132 [year ended December 31, 2006 - $67,162] and operating costs
included within selling, general and administrative expenses were $150,456
[year ended December 31, 2006 - $67,924].
Cash and cash equivalents
Cash and cash
equivalents consist of cash and short-term interest-bearing deposits with
original maturities of approximately 90 days or less at the date
of purchase.
F-49
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2007
Accounts
receivable
Accounts receivable are
carried at original invoice amount. If a
portion of the account balance is deemed uncollectible, the Company will either
write off the amount owed or provide a reserve based on the uncollectible
portion of the account. Management determines the collectibility of accounts by
regularly evaluating individual customer receivables and considering a customer’s
financial condition, credit history and current economic conditions.
Property,
plant and equipment
Property, plant
and equipment are reported at cost less accumulated amortization. Amortization is calculated using the
declining balance method on a monthly-basis at the annual rates outlined below,
which allocates the cost of the property, plant and equipment over their
estimated useful lives as follows:
|
Computer
equipment
|
|
30
|
%
|
|
Infrastructure
equipment
|
|
30
|
%
|
|
Computer
software
|
|
50
|
%
|
|
Furniture and
fixtures
|
|
20
|
%
|
|
Website
development costs
|
|
50
|
%
|
Leasehold
improvements are amortized over the shorter of their useful lives and the lease
term.
Intangible assets
Intangible assets are recorded at cost less
amortization. Cost for intangible assets
acquired through business combinations represents the fair market value at the
date of acquisition. Amortization is
calculated using the straight-line method over the estimated useful lives of
the intangible assets which are as follows:
|
Contractual
agreements
|
|
3-8 years
|
|
|
Trademarks,
tradenames and domain names
|
|
2-5 years
|
|
|
Non-competition
agreements
|
|
term of agreement
|
|
Impairment of long-lived assets
The Company
evaluates its property, plant and equipment and indefinite life intangible
assets for impairment when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Conditions that would necessitate an
impairment assessment include a significant decline in the observable market
value of an asset, a significant change in the extent or manner in which an
asset is used, or a significant adverse change that would indicate that the
carrying amount of an asset or group of assets is not recoverable. Recoverability of these assets is measured by
comparison of the carrying amounts to the future estimated undiscounted cash
flows
F-50
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2007
expected to be
derived from these assets. If these
future cash flows are less than the carrying amount of the asset, then the
carrying amount of the asset is written down to its fair value, based on the
related estimated discounted future cash flows.
The Company has made no adjustments to its long-lived assets in any of
the periods presented.
Goodwill
Goodwill represents the excess, at the date of
acquisition, of the cost of an acquired business over the fair value of the
identifiable assets acquired and liabilities assumed. Goodwill is not amortized but is subject to
an annual impairment test at the reporting unit level (operating segment or one
level below an operating segment) and between annual tests if changes in
circumstances indicate a potential impairment. Goodwill impairment is assessed
based on a comparison of the fair value of each reporting unit to the
underlying carrying value of the reporting unit’s net assets, including
goodwill. If the carrying value of the
reporting unit exceeds its fair value, the Company performs the second step of
the goodwill impairment test to determine the amount of the impairment
loss. The second step of the impairment
test involves comparing the implied fair value of the reporting unit’s goodwill
with its carrying amount to measure the amount of impairment loss, if any. The Company’s impairment test was based on
its single operating segment and reporting unit structure. There was no impairment in the year ended December 31,
2007.
Financial instruments
Financial
instruments comprise cash and cash equivalents, short-term investments, other
receivables, deposits, accounts payable, other accrued liabilities, due to
related party, notes payable, obligations under capital lease and deferred revenue. They have been classified as one of the
following: held-for-trading; available-for-sale, held-to-maturity; loans and
receivables; or other financial assets and liabilities. Cash is classified as “held-for-trading” and
is measured at fair value with gains and losses recognized in net loss for the
year. Short-term investments are
classified as “available-for-sale” and are measured at fair value with
unrealized gains and losses recognized within accumulated other
comprehensive income (loss).
The fair value of
a financial instrument is defined as the amount at which the instrument could
be exchanged in a current transaction between willing parties.
Comprehensive loss
Comprehensive loss
is defined as the overall change in the net assets of an entity for a period,
other than changes attributable to transactions with owners. Major components of comprehensive loss
include unrealized gains and losses on financial assets classified as
available-for-sale.
F-51
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2007
Foreign
currency translation
Until March 31,
2005, the Company’s functional currency was the Canadian dollar. Accordingly, for reporting purposes, the
Company translated its Canadian dollar accounts into the United States [“U.S.”]
reporting currency using the current rate method whereby assets and liabilities
are translated at the consolidated balance sheet date exchange rates and
revenues and expenses are translated at the average rate for the period. Adjustments resulting from the translation of
the consolidated financial statements from their functional currency into
U.S. dollars through March 31, 2005 are included within accumulated
other comprehensive loss and have not been included in the determination of net
loss for the relevant periods.
Beginning April 1,
2005, the Company’s functional currency was determined to be the
U.S. dollar. This change resulted
from several significant economic and operational changes within the Company,
including an increase in U.S. dollar vendors, increased U.S. dollar
revenues and the movement of certain operations to locations in the
United States. The Company’s
foreign operations are considered to be integrated with the reporting entity
and therefore, transactions denominated in other than U.S. dollars are
translated into U.S. dollars using the exchange rate at the dates they
occur. Monetary assets and liabilities
denominated in other than U.S. dollars are translated into
U.S. dollars at the consolidated balance sheet date exchange rate and any
resulting gains or losses are recognized in the net loss for the relevant
periods. Non-monetary assets and
liabilities are translated at rates of exchange in effect when the assets were
acquired or obligations were incurred.
Income taxes
Income taxes are
accounted for under the liability method of accounting for income taxes. Under this method, future tax assets and
liabilities are recognized for the differences between the financial statement
and income tax bases of assets and liabilities, and for operating losses. A valuation allowance is provided for the
portion of future tax assets that is more likely than not to remain
unrealized. Future tax assets and
liabilities are measured using substantively enacted tax rates and laws
expected to apply when these assets or liabilities are expected to be realized
or settled.
Operating lease
s
The
Company leases office space under operating lease agreements with original
lease periods up to five years. Certain of the lease agreements contain
rent holidays and rent escalation provisions. Rent holidays and rent escalation
provisions are considered in determining straight-line rent expense to be
recorded over the lease term. The lease term begins on the date of
initial possession of the lease property for purposes of recognizing lease
expense on a straight-line basis over the term of the lease. Lease
renewal periods are considered on a lease-by-lease basis and are generally not
included in the initial lease term.
F-52
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2007
Capital lease
s
Leases entered
into by the Company in which substantially all of the benefits and risk of
ownership are transferred to the Company are recorded as capital leases and
classified as property, plant and equipment and obligations under capital
lease. Obligations under capital lease
reflect the present value of future minimum lease payments, discounted at an
appropriate rate, and are reduced by rental payments net of imputed
interest. Assets under capital leases
are depreciated based on the useful life of the asset. All other leases are classified as operating
leases and leasing costs are expensed in the period in which they are incurred.
3.
Business Acquisitions
[i] SportsYA
On January 5, 2007,
the Company completed the acquisition of all of the outstanding shares of
SportsYA, the owner of www.SportsYA.com, a sports content website targeting the
Hispanic market residing in the United States and Latin America. The acquisition has been accounted for using
the purchase method. The results of SportsYA
have been consolidated from January 5, 2007 and are included in the Company’s
results of operations.
The purchase price of
$1,363,212 consisted of 177,995 common shares of JumpTV with a fair value of
approximately $1,100,000 and $266,520 in direct transaction costs including
non-cash consideration of 13,350 common shares with a fair value of $82,295,
net of cash acquired of $3,308.
The acquisition has been
accounted for using the purchase method, with the results of SportsYA included
in the Company’s results of operations from the date of acquisition.
The allocation of the purchase
price to the net assets acquired is as follows:
|
Non-cash working
capital
|
|
$
|
19,090
|
|
|
Contractual
agreements
|
|
97,700
|
|
|
Trademarks,
tradenames and domain names
|
|
106,600
|
|
|
Non-competition
agreements
|
|
83,300
|
|
|
Goodwill
|
|
1,056,522
|
|
|
Net assets acquired
and total purchase price, net of cash acquired
|
|
$
|
1,363,212
|
|
In connection with the
acquisition, the principal former owner of SportsYA signed a consulting
agreement with JumpTV. Accordingly,
330,000 common shares of JumpTV were placed into escrow and will be earned and
paid in 48 equal monthly installments.
The fair value of these shares will be recorded in stock-based
compensation expense on the consolidated statements of operations over the
48-month vesting period. As at December 31,
2007, 82,500 common shares have been issued.
For the year ended December 31, 2007, the Company recognized
stock-based
F-53
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
December 31, 2007
compensation expense of
$385,206 related to the consulting agreement. There were no such comparable
amounts for the prior year.
[ii] Cycling TV
On July 31, 2007,
the Company completed the acquisition of all of the outstanding shares of
Cycling TV, an Internet broadcaster of top-tier international cycling
races. The acquisition has been
accounted for using the purchase method.
The results of Cycling TV have been consolidated from August 1,
2007 and are included in the Company’s results of operations.
The purchase price of
$4,690,906 consists of cash consideration of $2,267,000, 743,349 common shares
of JumpTV with a fair value of approximately $2,267,214 and direct transaction
costs of $233,929 including non-cash consideration of 9,500 common shares with
a fair value of $27,287, net of cash acquired of $77,237.
The allocation of the
purchase price to the net assets acquired is as follows:
|
Non-cash working
capital
|
|
$
|
(338,996
|
)
|
|
Property, plant
and equipment
|
|
105,119
|
|
|
Contractual
agreements
|
|
471,800
|
|
|
Trademarks,
tradenames and domain names
|
|
19,800
|
|
|
Non-competition
agreements
|
|
287,400
|
|
|
Goodwill
|
|
4,160,355
|
|
|
Long-term
liability
|
|
(14,572
|
)
|
|
|
|
$
|
4,690,906
|
|
The purchase price of
Cycling TV contains contingent purchase price consideration of 1,840,097 common
shares. The number of shares will be
based on a July 31, 2009, 24 month revenue milestone.
The contingent consideration
will be accounted for as an addition to the purchase price consideration when
the shares are issued or become issuable.
In addition, a portion of the shares are subject to continuing
employment of the former owner. This
portion of the contingent consideration will be recorded as compensation
expense. As at December 31, 2007,
the Company’s uncertain as to whether Cycling TV will achieve the revenue
milestone.
The purchase price
allocation of the tangible and intangible assets is preliminary and may be
adjusted as a result of obtaining additional information regarding preliminary
estimates of fair values made at the date of purchase.
[iii] Broadband
Network Division of XOS Technologies Inc.
On August 31, 2007,
the Company entered into an asset purchase agreement to acquire the XOS Network
Division. The acquisition has been
accounted for using the purchase method.
The
F-54
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
results of the JumpTV
Sports have been consolidated from September 1, 2007 and are included in
the Company’s results of operations.
The purchase price of
$60,926,708 consists of cash paid on closing in the amount of $60,250,000, and
direct transaction costs of $754,195, net of cash acquired of $77,487.
The allocation of the
purchase price to the net assets acquired is as follows:
|
Non-cash working
capital
|
|
$
|
(2,318,523
|
)
|
|
Property, plant
and equipment
|
|
2,949,200
|
|
|
Contractual
agreements
|
|
17,860,000
|
|
|
Trademarks,
tradenames and domain names
|
|
20,901
|
|
|
Goodwill
|
|
42,637,334
|
|
|
Long-term
liabilities
|
|
(222,204
|
)
|
|
|
|
$
|
60,926,708
|
|
The purchase price
allocation of the tangible and intangible assets is preliminary and may be
adjusted as a result of obtaining additional information regarding preliminary
estimates of fair values made at the date of purchase.
[iv] HV Media, Limited
On June 11, 2006, the Company completed the
acquisition of the assets of HVMedia, Limited [“HVMedia”], a company operating
in Trinidad and Tobago offering broadcasting over the Internet targeted to the
Caribbean market. The total purchase price of $478,747 consisted of cash
consideration of $375,000, of which $25,000 is to be held in escrow for the
next 3 years and approximately $103,500 in direct transaction costs including
non cash consideration relating to warrants of approximately $19,000. The
assets purchased primarily represent agreements with television and radio
channels, and right to Internet domain names. In addition, the Company acquired
employment contracts for certain employees of HVMedia.
The acquisition has been accounted for using the
purchase method, with the results of HVMedia included in the Company’s results
of operations from the date of acquisition. The allocation of the purchase
price to the assets acquired based on fair values is as follows:
F-55
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
|
Cash acquired
|
|
$
|
4,126
|
|
|
Contractual
agreements
|
|
330,800
|
|
|
Trademarks,
trade names and domain names
|
|
27,200
|
|
|
Goodwill
|
|
116,621
|
|
|
|
|
$
|
478,747
|
|
The amortizable intangible assets have useful lives
between 2 and 4 years and the goodwill is not deductible for tax purposes. Further, in connection with the acquisition,
two key employees of HVMedia received 75,000 warrants each, with an exercise
price of $4.97 [Cdn$5.50] per share. The fair value of these warrants is being
recorded as compensation expense over the vesting period of four years. In
addition, the Company issued 10,000 warrants to acquire common shares at $6.00
per share to a third party as a finder’s fee in connection with the
acquisition. The fair value of these warrants has been included in direct
transaction costs which are part of the total purchase price.
4.
Loss per Share
Basic loss per
share is computed by dividing net loss for the year by the weighted average
number of shares outstanding for the year.
Diluted loss per share is computed by dividing net loss for the year by
the weighted average number of shares outstanding and, if dilutive, potential
common shares using the treasury stock method.
Potential common shares consist of stock options, restricted share
units, stock appreciation rights and warrants.
For the years
ended December 31, 2007 and 2006, the Company had potential common shares
which, due to the losses incurred, were considered anti-dilutive equity instruments. Accordingly, the effect of these instruments
has not been reflected in computing diluted loss per share for the years ended December 31,
2007 and 2006.
The following
table summarizes the different potential common shares that were outstanding as
at December 31, 2007 and 2006 but were not included in the computation of
diluted loss per share as their effect would have been anti-dilutive. See note 15 for additional details.
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
#
|
|
#
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
5,605,184
|
|
4,112,059
|
|
|
Restricted share
plan units
|
|
315,926
|
|
591,414
|
|
|
Stock
appreciation rights
|
|
3,384,020
|
|
1,300,000
|
|
|
Warrants
|
|
1,937,474
|
|
1,261,174
|
|
|
Retention
warrants
|
|
1,135,894
|
|
—
|
|
|
Common shares
held in escrow
[note 3[i]]
|
|
247,500
|
|
—
|
|
|
Contingent
performance consideration
[note
3[ii]]
|
|
1,840,097
|
|
—
|
|
F-56
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
5.
Cash and Cash Equivalents
Cash consists of
the following:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Cash [i]
|
|
15,229,098
|
|
6,220,296
|
|
|
Money market
funds [ii]
|
|
2,972,983
|
|
15,637,690
|
|
|
Global bond
[iii]
|
|
22,993,351
|
|
—
|
|
|
Corporate bond
[iv]
|
|
10,007,552
|
|
—
|
|
|
Unrestricted
funds held in trust [v]
|
|
—
|
|
78,892
|
|
|
|
|
51,202,984
|
|
21,936,878
|
|
[i]
Cash consists
primarily of U.S. and Canadian dollar accounts which earn interest at
approximately 2% to 5%.
[ii]
Money market funds
consist of a U.S. [$2,619,419] and a Canadian dollar account [Cdn$311,978]
which earn interest at approximately 3% to 5%.
[iii]
Global bond represents a
78-day global bond with a cost plus accrued interest of $22,993,351 which earns
interest at approximately 4% and matured on January 15, 2008.
[iv]
Corporate bond represents
a 95-day global bond with a cost plus accrued interest of $10,007,552 which
earns interest at approximately 5.75% and matured on February 1, 2008.
[v]
Unrestricted funds
held in trust relate to monies held to fund costs for a subsidiary of the
Company and monies held by underwriters to fund future expenditures. There are no restrictions related to monies
held in trust.
6.
Short-term Investments
During the year ended December 31,
2007, the Company redeemed investments with a cost of $28,000,000 for proceeds
of $28,295,626. As at December 31,
2007, short-term investments consisted of a guaranteed investment certificate
at cost plus accrued interest totaling $130,640 [December 31, 2006 -
$107,263] which matures on July 17, 2008 and bears interest at 3.75%.
F-57
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
7.
Related Party Transactions
The Company has entered into
certain transactions and agreements in the normal course of operations with
related parties as follows:
Patstar Inc.
On occasion, Patstar Inc., a company controlled by the
Company’s Executive Chairman, receives reimbursement of expenditures incurred
on behalf of the Company. The nature
of these
reimbursements relates to
expenses that the
Company has incurred in the
normal course of
business. At December 31,
2007, the Company had balances due to Patstar Inc. of $37,229 [December 31,
2006 — $14,676] related to these reimbursements. In addition, rent expense paid by Patstar
Inc. of $36,472 is included in selling, general and administrative expenses for
the year ended December 31, 2007 [2006 — $47,818]. All reimbursements and rent expense are
recorded at the exchange amount.
Advances
During 2006, the Company advanced funds to an officer
who is no longer with the Company.
During 2007, these advances were being paid down on a monthly
basis. During the year, the outstanding
amount owing of $78,266 was settled, with a corresponding charge to selling,
general and administrative expenses within the consolidated statement of
operations. The balance of the advance
at December 31, 2006 was
$
15,743, which
is included in prepaid expenses and deposits.
8.
Property, Plant and Equipment
The details of
property, plant and equipment and the related accumulated amortization are set
forth below for the following periods:
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Accumulated
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Computer
equipment
|
|
2,196,670
|
|
437,707
|
|
1,758,963
|
|
|
Infrastructure
equipment
|
|
1,906,798
|
|
475,966
|
|
1,430,832
|
|
|
Computer
software
|
|
2,651,640
|
|
517,023
|
|
2,134,617
|
|
|
Furniture and
fixtures
|
|
507,406
|
|
81,468
|
|
425,938
|
|
|
Leasehold
improvements
|
|
1,040,039
|
|
154,246
|
|
885,793
|
|
|
Website
development costs
|
|
161,059
|
|
36,637
|
|
124,422
|
|
|
|
|
8,463,612
|
|
1,703,047
|
|
6,760,565
|
|
F-58
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Accumulated
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Computer
equipment
|
|
507,217
|
|
155,049
|
|
352,168
|
|
|
Infrastructure
equipment
|
|
773,198
|
|
139,861
|
|
633,337
|
|
|
Computer
software
|
|
169,614
|
|
49,752
|
|
119,862
|
|
|
Furniture and
fixtures
|
|
124,683
|
|
14,528
|
|
110,155
|
|
|
Leasehold
improvements
|
|
58,386
|
|
4,420
|
|
53,966
|
|
|
|
|
1,633,098
|
|
363,610
|
|
1,269,488
|
|
The
following amortization expense is included with direct broadcast operating
costs on the consolidated statements of operations:
Years
ended December 31
|
|
|
2007
|
|
2006
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Infrastructure
equipment
|
|
376,449
|
|
127,634
|
|
|
Computer
software
|
|
379,496
|
|
—
|
|
|
Website
development costs
|
|
26,236
|
|
—
|
|
|
|
|
782,181
|
|
127,634
|
|
9.
Intangible Assets
The details of
intangible assets and the related accumulated amortization are set forth below:
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Accumulated
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
agreements
|
|
19,131,000
|
|
974,387
|
|
18,156,613
|
|
|
Trademarks,
tradenames and domain names
|
|
187,001
|
|
37,733
|
|
149,268
|
|
|
|
|
19,318,001
|
|
1,012,120
|
|
18,305,881
|
|
F-59
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Accumulated
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
agreements
|
|
330,800
|
|
48,967
|
|
281,833
|
|
|
Trademarks,
tradenames and domain names
|
|
39,700
|
|
9,393
|
|
30,307
|
|
|
|
|
370,500
|
|
58,360
|
|
312,140
|
|
Amortization
expense related to the Company’s acquired contractual agreements with content
partners for the year ended December 31, 2007 of $861,970 [year ended December 31,
2006 — nil] is included within direct broadcast operating costs on the
consolidated statements of operations.
Based on the
preliminary estimated amount of intangible assets subject to amortization, the
Company’s estimated amortization expense over the next five years is as
follows:
|
|
|
$
|
|
|
|
|
|
|
|
2008
|
|
2,529,758
|
|
|
2009
|
|
2,507,183
|
|
|
2010
|
|
2,453,934
|
|
|
2011
|
|
2,398,817
|
|
|
2012
|
|
2,387,167
|
|
10.
Bank Indebtedness
On December 31,
2006, the Company had a $1,287,150 [Cdn$1,500,000] credit facility with a
Canadian chartered bank to finance general corporate requirements, which was
fully drawn upon as of December 31, 2006.
The loan was repayable on demand bearing interest at prime [6% as of December 31,
2006]. During the year ended December 31,
2007, this loan was repaid in full.
F-60
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
11. Notes Payable
The first promissory note
requires the Company to make equal annual payments of principal and interest
through November 2010. The
outstanding balance on the note at December 31, 2007 was $45,467 [December 31,
2006 — nil]. Interest is charged on the
outstanding balance at the rate of 11.14% per annum.
The second promissory
note requires the Company to make monthly payments of principal and interest
through January 2008. The
outstanding balance on the note at December 31, 2007 was nil [December 31,
2006 — nil]. Interest is charged on the
outstanding balance at the rate of 4.34% per annum.
Annual principal payments
of the notes payable are as follows:
|
|
|
$
|
|
|
|
|
|
|
|
2008
|
|
13,586
|
|
|
2009
|
|
15,099
|
|
|
2010
|
|
16,782
|
|
The promissory notes are recorded
at their fair values, which is determined based on the present value of cash
flows.
On August 31, 2007, the
Company assumed the obligation for two promissory notes in connection with the
acquisition of the XOS Network Division.
F-61
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
12.
Obligations under Capital Lease
In conjunction with the
acquisitions of XOS Network Division and Cycling TV, the Company assumed the
following capital lease obligations:
[i] The Company assumed a
capital lease obligation from XOS Network Division whereby the Company is
required to make monthly payments of $8,782 through September 2009. Interest is computed monthly at 12.5% per
annum. The fair value of the equipment
of $161,655 is included in computer equipment in the accompanying consolidated
balance sheets at December 31, 2007.
Amortization of $15,569 was recognized for the year ended December 31,
2007 [year ended December 31, 2006 — nil].
As at December 31, 2007, the remaining principal balance of the
capital lease was $157,809 [December 31, 2006 — nil].
[ii] The Company assumed
a capital lease obligation from XOS Network Division whereby the Company is
required to make monthly payments of $1,695 through November 2009. Interest is computed monthly at 8.6% per
annum. The fair value of the equipment
of $20,751 is included in computer equipment in the accompanying consolidated
balance sheets at December 31, 2007.
Amortization of $1,999
was recognized
for the year ended December 31, 2007 [year ended December 31, 2006 —
nil]. As at December 31, 2007, the
remaining principal balance of the capital lease was $16,399
[December 31, 2006 — nil].
[iii] The Company assumed
a capital lease obligation from CyclingTV whereby the Company is required to
make monthly payments of $2,078 through March 2009. Interest is
computed monthly at 7.5% per annum. The fair value of the equipment of
$28,638 is included in infrastructure equipment in the accompanying
consolidated balance sheets at December 31, 2007. Amortization of
$3,484 was recognized for the year ended December 31, 2007 [year ended December 31,
2006 — nil]. As at December 31, 2007, the remaining principal
balance of the capital lease was $26,555 [December 31, 2006 - nil]
Annual principal payments
of these capital lease obligations are as follows:
|
|
|
Computer
|
|
Infrastructure
|
|
|
|
|
|
|
equipment
|
|
equipment
|
|
Total
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
99,136
|
|
21,329
|
|
120,465
|
|
|
2009
|
|
75,072
|
|
5,227
|
|
80,299
|
|
|
|
|
174,208
|
|
26,556
|
|
200,764
|
|
The obligations under capital lease
are recorded at their fair values, which is determined based on the present
value of cash flows.
F-62
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
13.
Commitments and Contingencies
Commitments
The Company has
operating lease commitments for its premises in New York,
United States, Toronto, Canada, Sanford, United States and London,
England. In addition, the Company has
operating leases for certain computer hardware and infrastructure
equipment. Furthermore, the Company has
marketing and content license fee commitments to channel partners. Future minimum annual payments per fiscal
year [exclusive of taxes, insurance and maintenance costs] under these
commitments are as follows:
|
|
|
Marketing and license
|
|
Operating
|
|
|
|
|
fees
|
|
leases
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
2008
|
|
5,844,223
|
|
2,402,311
|
|
|
2009
|
|
1,290,795
|
|
1,417,272
|
|
|
2010
|
|
1,168,280
|
|
1,153,128
|
|
|
2011
|
|
367,543
|
|
1,238,535
|
|
|
2012
|
|
—
|
|
357,909
|
|
|
|
|
8,670,841
|
|
6,569,155
|
|
Contingencies
On June 12, 2006, an
online media broadcaster filed a complaint in the Florida State court
against XOS Technologies, Inc. and a co-defendant. The
complaint alleges a claim for tortious interference with contractual relations
against XOS Technologies, Inc.; a breach of contract,
misappropriation of trade secrets and confidential information under Florida
and New York laws, and a breach of fiduciary duty against the co-defendant; and
conspiracy to misappropriate trade secrets and conspiracy to breach fiduciary
duty against both defendants. On August 31,
2007, in conjunction with the acquisition of XOS Network Division, JumpTV
assumed this claim. It is management’s
opinion that the claim will not be successful, and accordingly the Company has
not accrued for any amounts relating to this claim.
During the
ordinary course of business activities, the Company may be contingently liable
for litigation and a party to claims, including claims that content broadcast
by the Company may infringe on the intellectual property rights of others. Management believes that adequate provisions
have been made in the accounts where required.
Although it is not possible to estimate the extent of potential costs
and losses, if any, management believes that the ultimate resolution of any
such contingencies will not have a material adverse effect on the financial
position and results of operations of the Company.
F-63
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
14.
Share Capital
Share capital
consists of the following:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
|
|
|
|
Unlimited common
shares, voting, no par value, discretionary non-cumulative dividend
|
|
|
|
|
|
|
Unlimited
Class 1 preference shares, non-voting, no par value, discretionary
partly cumulative or non-cumulative dividends
|
|
|
|
|
|
|
Unlimited
Class 2 preference shares, non-voting, no par value, discretionary
partly cumulative or non-cumulative dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding
|
|
|
|
|
|
|
Common shares
|
|
|
|
|
|
|
December 31,
2007: Issued and outstanding: 49,144,313
|
|
|
|
|
|
|
[December 31,
2006: 34,821,121]
|
|
172,697,828
|
|
75,227,648
|
|
During the year
ended December 31, 2007, the Company completed the following issuances and
cancellations of its common shares, excluding issuances relating to stock
options, warrants, retention warrants and restricted share plan units
[note 15]
:
|
Date
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
January 5,
2007 [i]
|
|
521,345
|
|
1,182,295
|
|
|
February 23,
2007 [ii]
|
|
13,043,479
|
|
93,104,131
|
|
|
June 26,
2007 [iii]
|
|
197,628
|
|
934,900
|
|
|
August 17,
2007 [iv]
|
|
9,500
|
|
27,287
|
|
|
September 11,
2007 [v]
|
|
(50,000
|
)
|
(176,084
|
)
|
|
September 28,
2007[v]
|
|
(176,100
|
)
|
(620,269
|
)
|
|
September 28,
2007[vi]
|
|
743,349
|
|
2,267,214
|
|
|
October 3,
2007 [v]
|
|
(45,900
|
)
|
(161,407
|
)
|
|
December 24,
2007 [v]
|
|
(361,700
|
)
|
(1,270,857
|
)
|
|
|
|
13,881,601
|
|
95,287,210
|
|
F-64
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
[i] On January 5,
2007, the Company issued 191,345 common shares with a fair value of
approximately $1,182,295 to complete the purchase of 100% of the outstanding
shares of SportsYA
[note 3[i]].
On January 5, 2007, the Company issued 330,000 common shares into
escrow in respect o
f a consulting agreement signed with the principal former owner of
SportsYA. Accordingly, 330,000 common
shares of JumpTV were placed into escrow and will be released and paid in 48
equal monthly installments. The fair
value of these shares will be recorded in stock-based compensation expense on
the consolidated statements of operations over the 48-month vesting
period. During the year ended December 31,
2007 and 2006, 82,500 and nil shares have been released from escrow with fair
values of $385,206 and nil, respectively, that have been recorded in
stock-based compensation expense on the consolidated statements of operations
[note 3[i]]
. For
accounting purposes, the common shares issued into escrow are treated as a
variable interest entity and are consolidated in the accounts of the Company.
[ii] On February 23,
2007, in connection with a secondary public offering of the Company, the
Company issued 13,043,479 common shares for net proceeds of $93,104,131.
[iii] On June 26,
2007, in connection with an advertising agreement, the Company issued 197,628
common shares with a fair value of $934,900.
[iv] On August 17,
2007, in connection the acquisition of Cycling TV, the Company issued 9,500
common shares with a fair value of $27,287 as a finder’s fee
[note 3[ii]].
[v] In connection
with the Company’s normal course issuer bid, the Company purchased and
cancelled the following common shares:
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
September 11,
2007
|
|
(50,000
|
)
|
(176,084
|
)
|
|
September 28,
2007
|
|
(176,100
|
)
|
(620,269
|
)
|
|
October 3,
2007
|
|
(45,900
|
)
|
(161,407
|
)
|
|
December 24,
2007 (1)
|
|
(361,700
|
)
|
(1,270,857
|
)
|
|
|
|
(633,700
|
)
|
(2,228,617
|
)
|
(1) The
shares were only cancelled on January 3, 2008 due to an administrative
error.
[vi] On September 28,
2007, in connection with the acquisition of Cycling TV, the Company issued
743,349 common shares with a fair value of $2,267,214 as initial share
consideration
[note 3[ii]].
The purchase price
consideration of Cycling TV includes a contingent consideration of 1,840,097
common shares of the Company subject to Cycling TV achieving a revenue
milestone
[note 3[ii]].
F-65
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
15.
Stock Option and Stock-Based Compensation Plans
[i] Stock Option Plan
On September 2,
2005, a new stock option plan [the “New Plan”] was created that applies to all
future grants of options to directors, officers, employees and consultants of
the Company or any entity controlled by the Company. The exercise price for any option granted
under the New Plan will be determined by the five-day average closing
price of the Company’s common shares prior to the date of grant but cannot be
less than such a price. Prior to the
Company completing its initial public offering, the exercise price of any stock
options granted under the New Plan was determined by the Company’s Board
of Directors. Options are exercisable
during a period established at the time of their grant provided that such
period will expire no later than five years after the date of grant, subject to
early termination of the option in the event the holder of the option dies or
ceases to be a director, officer or employee of the Company or ceases to
provide ongoing management or consulting services to the Company or entity
controlled by the Company. The maximum
number of common shares issuable upon exercise of options granted pursuant to
the New Plan is equal to the greater of [i] 4,000,000 common
shares; and [ii] 12.5% of the number of issued and outstanding common shares.
A summary of stock
option activity under the Plan is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
4,112,059
|
|
3.07
|
|
|
Granted
|
|
3,050,750
|
|
5.51
|
|
|
Re-priced to
$3.00
|
|
569,000
|
|
3.00
|
|
|
Re-priced
greater than $5.80
|
|
(569,000
|
)
|
6.20
|
|
|
Exercised
|
|
(238,355
|
)
|
2.11
|
|
|
Cancelled/forfeited
|
|
(1,319,270
|
)
|
4.56
|
|
|
Outstanding,
December 31, 2007
|
|
5,605,184
|
|
3.76
|
|
F-66
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
The following
table summarizes stock option information of the New Plan as at December 31,
2007:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
Number
|
|
remaining
|
|
Number
|
|
|
Exercise price
|
|
outstanding
|
|
contractual life
|
|
exercisable
|
|
|
$
|
|
#
|
|
[years]
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
1.80
|
|
1,375,471
|
|
1.65
|
|
1,096,533
|
|
|
2.50
|
|
799,602
|
|
2.44
|
|
521,497
|
|
|
3.00
|
|
1,118,000
|
|
4.28
|
|
358,941
|
|
|
3.86
|
|
112,500
|
|
4.79
|
|
4,688
|
|
|
4.00
|
|
251,570
|
|
3.18
|
|
113,703
|
|
|
5.00
|
|
100,000
|
|
3.61
|
|
33,333
|
|
|
5.82
|
|
25,000
|
|
3.68
|
|
—
|
|
|
6.00
|
|
55,417
|
|
2.94
|
|
23,938
|
|
|
6.05
|
|
1,098,750
|
|
4.28
|
|
180,000
|
|
|
6.08
|
|
26,750
|
|
3.84
|
|
—
|
|
|
6.26
|
|
583,562
|
|
4.14
|
|
126,051
|
|
|
6.43
|
|
58,562
|
|
2.66
|
|
20,656
|
|
|
|
|
5,605,184
|
|
3.27
|
|
2,479,340
|
|
For the year ended
December 31, 2007 and 2006, $3,722,600 and $1,231,434 were recorded for
total stock-based compensation expense related to stock options. The weighted average exercise price of
options exercisable as at December 31, 2007 was $2.88 [December 31,
2006 - $2.29].
The weighted
average fair value of all stock options granted during the year ended December 31,
2007 and 2006 was $2.92 and $2.14 based on the following assumptions:
Years
ended December 31
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
Exercise price
of stock options granted
|
|
$
|
5.51
|
|
$
|
3.95
|
|
|
Expected
volatility
|
|
71
|
%
|
72
|
%
|
|
Risk-free
interest rate
|
|
3.93
|
%
|
4.52
|
%
|
|
Expected life
[years]
|
|
4
|
|
4
|
|
|
Dividend yield
|
|
nil
|
|
nil
|
|
|
|
|
|
|
|
|
|
|
F-67
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
During the year ended December 31, 2007,
the Company agreed, as part of severance conditions, to extend or accelerate
the vesting of stock options for certain employees who left the Company and to
extend the expiry term to various periods beyond the 90-day period from
departure as detailed in the Company’s stock option plan. Accordingly, the Company has accounted for
these modifications as additional grants and has recognized additional
stock-based compensation expense in the amount of $582,388 relating to the fair
value of these additional awards.
No
such expense was recognized during the comparative year December 2006.
On November 13, 2007, the shareholders
of the Company approved a resolution to provide employees/consultants (officers
and directors not being able to participate) holding options with an exercise
price of $5.80 or great to elect to:
(i)
continue status quo with these options;
(ii)
elect to forfeit 25% of their current
holdings with any unvested options being forfeited prior to any vested options
in exchange for 50% of their remaining options being re-priced to $3.00 and the
remaining 25% remaining at the same price
As such, 569,000 options that were originally
priced at $5.80 or greater were re-priced to $3.00 and 284,500 options were
forfeited. Accordingly, the Company has
accounted for these modifications as additional grants and has recognized
additional stock-based compensation expense in the amount of $117,789 relating
to the fair value of these additional awards.
No such expense was recognized during the comparative year December 2006.
[ii] Restricted Share Plan
On September 2, 2005, the Board of Directors approved a restricted
share plan [“Restricted Share Plan”] that applies to all future grants of
restricted shares to employees and consultants of the Company. Restricted share units give the holder the
right to one common share for each vested restricted share plan unit. These awards vest on a monthly basis over a
48-month period. The maximum number of
restricted shares issuable shall be no greater than the equivalent of
1,000,000 common shares.
A summary of restricted share activity under the restricted share plan
is as follows:
|
|
|
#
|
|
|
Outstanding,
December 31, 2006
|
|
591,414
|
|
|
Granted
|
|
10,000
|
|
|
Forfeited
|
|
(85,952
|
)
|
|
Vested and
issued for common shares
|
|
(199,536
|
)
|
|
Outstanding,
December 31, 2007
|
|
315,926
|
|
F-68
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
December 31, 2007
During the years
ended December 31, 2007 and 2006, the Company recognized stock-based
compensation expense of $1,161,328 and $1,631,382, respectively related to its
restricted share plan. In addition, the
Company issued common shares in 2006 and 2007 related to restricted share plan
units with a fair value of $43,368 which is being expensed in 2007. Prior to the IPO on August 10, 2006,
stock-based compensation expense was based on the fair value of the Company’s
common shares as indicated through the most recent common share issuances. After August 9, 2006, compensation
expense was determined based on the Company’s closing market price on the TSX
per common share. During the year ended December 31,
2007, 199,536 restricted share plan units were vested and issued for common
shares of the Company.
[iii] Warrants
The Company issued warrants that are convertible into common shares of
the Company as follows:
On September 2, 2005, the Company granted 100,000 warrants
with an exercise price of $1.80 to one of its directors related to consulting
services provided. For the years ended December 31,
2007 and 2006, the Company expensed $25,400 and $25,400, respectively, which
are included within stock-based compensation and other compensation payments
expense on the consolidated statements of operations.
In connection with the Company obtaining broadcast rights from a
channel partner, the Company issued 100,000 warrants with an exercise
price of $1.80 to purchase common shares of the Company. The total estimated fair value of $102,670
has been capitalized in deferred direct broadcast operating costs and are
amortized to direct broadcast operating costs over the 35-month term of the
related agreement. For the years ended December 31,
2007 and 2006, the Company expensed $35,196 and $35,198, respectively which are
included within direct broadcast operating costs on the consolidated statements
of operations.
On June 5, 2006, the Company amended the terms of this channel
partner agreement such that the Company was required to complete an initial
public offering by August 15, 2006 as opposed to the original agreed upon
date of June 30, 2006. In
consideration of this amendment, the Company issued to the channel partner
7,500 warrants with an expiry of five years from the date of issuance at an
exercise price of $6.00 per warrant. For
the years ended December 31, 2007 and 2006, the Company expensed $3,907
and $2,440, respectively which are included within stock-based compensation and
other compensation payments expense on the consolidated statements of
operations.
On May 31, 2006, as part of the HVMedia asset purchase, two key
employees of HVMedia received 75,000 warrants each at an exercise price of
$4.97 [Cdn$5.50] per warrant. For the
years ended December 31, 2007 and 2006, the Company expensed $97,952 and
$57,137, respectively which are included within stock-based compensation and other
compensation payments expense on the consolidated statements of operations.
F-69
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
On August 10,
2006, the Company issued 663,674 warrants to its underwriters at an exercise
price of $5.00 [Cdn$5.50] per warrant.
Each warrant is exercisable into one common share of the Company and
expires within two years. The fair value
of these warrants in the amount of $1,394,313 has been recorded in share
capital as a share issuance cost.
On November 30, 2006, in connection with the Company obtaining
broadcast rights from a channel partner, the Company issued
100,000 warrants with an exercise price of $6.23 to purchase common shares
of the Company. For the years ended December 31,
2007 and 2006, the Company expensed $90,384 and $52,722, respectively which are
included within direct broadcast operating costs on the consolidated statements
of operations.
In addition, during 2006, the Company issued 230,000 warrants to
members of the Advisory Board of the Company at exercise prices of $4.00 to
$6.00 per warrant. Each warrant is
exercisable into one common share of the Company, vests over
four years and expires after five years. For the years ended December 31, 2007
and 2006, the Company expensed $131,898 and $61,798, respectively which are
included within stock-based compensation and other compensation payments
expense on the consolidated statements of operations.
On August 3, 2007, the Company issued 50,000 warrants to a
television manufacturer. The exercise
price of these warrants will be determined based on meeting certain
milestones. As at December 31,
2007, these milestones have not been met, therefore the measurement date has
not occurred. Accordingly, for the year
ended December 31, 2007, no compensation expense was recognized related to
these warrants. Each warrant is
exercisable into one common share of the Company, vests over
four years and expires after five years.
On August 10, 2007, the Company issued 100,000 warrants to the
president and CEO of Cycling TV at an exercise price of $3.86 per warrant. Each warrant is exercisable into one common
share of the Company, vests over four years and expires after
five years. For the years ended December 31,
2007, the Company expensed $14,609 which are included within stock-based
compensation and other compensation payments expense on the consolidated
statements of operations.
On August 21, 2007, the Company issued 500,000 warrants to the
current President of the Company at an exercise price of $3.86 per
warrant. Each warrant is exercisable
into one common share of the Company, vests over four years and
expires after five years. For the
years ended December 31, 2007, the Company expensed $67,424 which are
included within stock-based compensation and other compensation payments
expense on the consolidated statements of operations.
On November 13,
2007, the Company issued 30,000 warrants to a sports media broadcaster at an
exercise price of $2.20 per warrant.
Each warrant is exercisable into one common share of the Company, vests
immediately and expires after fives years.
For the years ended December 31, 2007, the Company expensed $35,643
which are included in stock-based compensation and other compensation payments
expense on the consolidated statements of operations.
F-70
Table
of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
The total
stock-based compensation expense related to warrants expensed during the years
ended December 31, 2007 and 2006 was $376,525 and $146,676,
respectively. The total direct broadcast
operating costs related to warrants expensed during the years ended December 31,
2007 and 2006 were $125,580 and nil, respectively.
A summary of the warrant activity during the year
ended December 31, 2007 is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
1,261,174
|
|
4.88
|
|
|
Granted
|
|
630,000
|
|
3.78
|
|
|
Granted – no
strike price
|
|
50,000
|
|
n/a
|
|
|
Exercised
|
|
(3,700
|
)
|
4.00
|
|
|
Outstanding,
December 31, 2007
|
|
1,937,474
|
|
4.51
|
|
The fair value of
warrants was determined using the Black-Scholes option pricing model.
The
following table summarizes the warrant information as at December 31,
2007:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
Number
|
|
remaining
|
|
Number
|
|
|
Exercise price
|
|
outstanding
|
|
contractual life
|
|
exercisable
|
|
|
$
|
|
#
|
|
[years]
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
1.80
|
|
100,000
|
|
1.75
|
|
62,500
|
|
|
2.20
|
|
30,000
|
|
9.85
|
|
30,000
|
|
|
3.86
|
|
600,000
|
|
4.66
|
|
50,000
|
|
|
4.00
|
|
96,300
|
|
3.25
|
|
39,738
|
|
|
4.97
|
|
150,000
|
|
3.44
|
|
56,250
|
|
|
5.00
|
|
663,674
|
|
0.61
|
|
663,674
|
|
|
6.00
|
|
147,500
|
|
3.31
|
|
67,813
|
|
|
6.23
|
|
100,000
|
|
3.92
|
|
39,583
|
|
|
n/a
|
|
50,000
|
|
5.00
|
|
—
|
|
|
|
|
1,937,474
|
|
2.91
|
|
1,009,558
|
|
The weighted fair
value of warrants granted during the years ended December 31, 2007 and
2006 was $1.48 and $2.08,
respectively,
based on the following assumptions:
F-71
Table
of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
|
Years ended December 31
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
Exercise price
of warrants granted
|
|
$
|
3.78
|
|
$
|
5.14
|
|
|
Expected
volatility
|
|
68
|
%
|
72
|
%
|
|
Risk-free
interest rate
|
|
4.20
|
%
|
4.80
|
%
|
|
Expected life
[years]
|
|
4
|
|
4
|
|
|
Dividend yield
|
|
nil
|
|
nil
|
|
|
|
|
|
|
|
|
|
|
[iv] Retention Warrant Plan [“Warrant Plan”]
On November 13,
2007, a retention warrant plan [the “Warrant Plan”] was created that applies to
all future grants of retention warrants to employees and consultants of the
Company or any entity controlled by the Company. The exercise price for any retention warrant
granted under the Warrant Plan will be determined by the five-day average
closing price of the Company’s common shares prior to the date of grant but
cannot be less than such a price.
Retention warrants are exercisable during a period established at the
time of their grant provided that such period will expire no later than five
years after the date of grant, subject to early termination of the retention
warrant in the event the holder of the retention warrant dies or ceases to be
an employee or consultant of the Company or ceases to provide ongoing
management or consulting services to the Company or entity controlled by the
Company. The maximum number of common
shares issuable upon exercise of retention warrants granted pursuant to
the Warrant Plan is equal to 2,500,000 common shares.
A summary of the warrant activity during the
year ended December 31, 2007 is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
—
|
|
—
|
|
|
Granted
|
|
1,176,000
|
|
3.86
|
|
|
Forfeited
|
|
(40,106
|
)
|
3.86
|
|
|
Outstanding,
December 31, 2007
|
|
1,135,894
|
|
3.86
|
|
F-72
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2007
The
following table summarizes the warrant information as at December 31,
2007:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
Number
|
|
remaining
|
|
Number
|
|
|
Exercise
price
|
|
outstanding
|
|
contractual
life
|
|
exercisable
|
|
|
$
|
|
#
|
|
[years]
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
3.86
|
|
1,135,894
|
|
4.67
|
|
95,028
|
|
The weighted fair
value of warrants granted during the year ended December 31, 2007 was
$1.49 based on the following assumptions:
|
Years ended December 31
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
Exercise price
of warrants granted
|
|
$
|
3.86
|
|
n/a
|
|
|
Expected volatility
|
|
68
|
%
|
n/a
|
|
|
Risk-free
interest rate
|
|
4.19
|
%
|
n/a
|
|
|
Expected life
[years]
|
|
4
|
|
n/a
|
|
|
Dividend yield
|
|
nil
|
|
n/a
|
|
|
|
|
|
|
|
|
|
[v] Stock Appreciation Rights Plan [“SARS”]
On September 2, 2005, the Company established a stock appreciation
rights plan [“SARS Plan”]. The maximum
number of units that can be granted under the SARS Plan is equivalent to the
greater of 1,500,000 or 5% of the aggregate number of issued and outstanding
common shares. The exercise price shall
be determined by the Board of Directors at the time of grant but in no event
shall the exercise price be lower than the market price of the common shares at
the time of the grant. Each unit granted
under the SARS Plan has a maximum life of five years from the date of the
grant. The SARS Plan provides the
unitholder the right to settle the award as follows:
[1]
Receive cash compensation
less the exercise price or to purchase or receive an equivalent number of
common shares, less the exercise price;
[2]
In lieu of receiving a
cash settlement, the unitholder can elect to receive a number of common shares
equal to the fair value of the common shares less the exercise price divided by
the market value of the common shares from treasury; or
[3]
Elect to pay the Company
the exercise price and receive common shares equal to the number of units
granted under the SARS Plan from treasury.
F-73
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
The Board of Directors has discretionary authority to
accept or reject a cash payment request in whole or in part.
On November 13,
2007, the Company increased the maximum number of units that can be granted
under the SARS Plan to the greater of 4,150,000 or 5% of the issued and
outstanding common shares of the Company.
A summary of the
SARS activity during the year ended December 31, 2007 is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
1,300,000
|
|
4.15
|
|
|
Granted
|
|
2,535,500
|
|
4.56
|
|
|
Re-priced to
$3.00
|
|
216,250
|
|
3.00
|
|
|
Re-priced from
$6.26
|
|
(216,250
|
)
|
6.26
|
|
|
Forfeited
|
|
(451,480
|
)
|
5.70
|
|
|
Outstanding,
December 31, 2007
|
|
3,384,020
|
|
4.04
|
|
The
following table summarizes the SARS information as at December 31, 2007:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
Number
|
|
remaining
|
|
Number
|
|
|
Exercise price
|
|
outstanding
|
|
contractual life
|
|
exercisable
|
|
|
$
|
|
#
|
|
[years]
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
3.00
|
|
1,541,250
|
|
4.73
|
|
164,882
|
|
|
4.00
|
|
1,100,000
|
|
3.31
|
|
708,316
|
|
|
6.26
|
|
742,770
|
|
4.38
|
|
135,868
|
|
|
|
|
3,384,020
|
|
4.19
|
|
1,009,066
|
|
On November 13, 2007, the shareholders
of the Company approved a resolution to provide employees/consultants (officers
and directors not being able to participate) holding SARS with an exercise
price of $5.80 or greater to elect to:
|
(iii)
|
|
continue status quo with
these SARS;
|
|
(iv)
|
|
elect to forfeit 25% of
their current holdings with any unvested SARS being forfeited prior to any
vested SARS in exchange for 50% of their remaining SARS being re-priced to
$3.00 and the remaining 25% remaining at the same price
|
As such, 216,250 SARS that were originally
priced at $5.80 or greater were re-priced to $3.00 and 108,125 SARS were
fofeited.
F-74
Table
of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
Prior to the IPO on August 10, 2006, stock-based compensation
expense was based on the change in the fair value of the Company’s common
shares as indicated through the most recent common share issuances. After August 9, 2006, stock-based
compensation expense was determined based on the Company’s closing market price
on the TSX which as at December 31, 2007 was $2.30 [Cdn$2.26] per
common share. Accordingly, the
Company recognized a stock-based compensation recovery of $1,087,760 and an
expense of $1,087,760 for the years ended December 31, 2007 and 2006
related to outstanding units granted under the Company’s SARS Plan.
In summary, as at December 31,
2007 and 2006, the number of common shares of the Company reserved for issuance
is as follows:
|
|
|
Exercise
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
price
|
|
Expiry/
|
|
2007
|
|
2006
|
|
|
|
|
$
|
|
vesting date
|
|
#
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
[note 15[i]]
|
|
1.80
|
|
June 2006 - November 2010
|
|
1,375,471
|
|
1,662,254
|
|
|
|
|
2.50
|
|
March 2011
|
|
799,602
|
|
1,289,501
|
|
|
|
|
3.00
|
|
April 2011 – October
2012
|
|
1,118,000
|
|
—
|
|
|
|
|
3.86
|
|
October 2012
|
|
112,500
|
|
—
|
|
|
|
|
4.00
|
|
April 2011
|
|
251,570
|
|
316,627
|
|
|
|
|
5.00
|
|
August 2011
|
|
100,000
|
|
100,000
|
|
|
|
|
5.82
|
|
September 2011
|
|
25,000
|
|
100,000
|
|
|
|
|
6.00
|
|
April 2011 – June 2011
|
|
55,417
|
|
171,177
|
|
|
|
|
6.05
|
|
April 2012
|
|
1,098,750
|
|
—
|
|
|
|
|
6.08
|
|
November 2011
|
|
26,750
|
|
111,000
|
|
|
|
|
6.26
|
|
June 2010 – May 2011
|
|
583,562
|
|
—
|
|
|
|
|
6.43
|
|
December 2011
|
|
58,562
|
|
301,500
|
|
|
|
|
7.16
|
|
November 2011
|
|
—
|
|
60,000
|
|
|
Restricted share units
|
|
|
|
|
|
|
|
|
|
|
[note 15[ii]]
|
|
—
|
|
July 2009 -
March 2011
|
|
315,926
|
|
591,414
|
|
|
Warrants
[note 15[iii]]
|
|
1.80 - 6.23
|
|
September 2009 -
August 31, 2012
|
|
1,937,474
|
|
1,261,174
|
|
|
Retention
Warrants
|
|
|
|
|
|
|
|
|
|
|
[note 15[iv]]
|
|
3.86
|
|
August 31, 2012
|
|
1,135,894
|
|
—
|
|
|
Stock
appreciation rights
|
|
|
|
|
|
|
|
|
|
|
[note 15[v]]
|
|
3.00 - 6.26
|
|
April 2011 –
October 2012
|
|
3,384,020
|
|
1,300,000
|
|
|
|
|
|
|
|
|
12,378,498
|
|
7,264,647
|
|
F-75
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
16.
Supplemental Cash Flow Information
During the years
ended December 31, 2007 and 2006, the Company paid the following interest
and taxes:
|
|
|
2007
|
|
2006
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Interest
|
|
18,532
|
|
—
|
|
|
Taxes
|
|
—
|
|
—
|
|
Excluded from the
consolidated statements of cash flows are the following non-cash transactions:
For the year ended
December 31, 2007:
|
[i]
|
|
reclassification of amounts from contributed surplus
to share capital in regards to the exercise of stock options and warrants of
$329,164.
|
|
|
|
|
|
[ii]
|
|
issuance of 199,536 common shares with a fair market
value of approximately $949,936 in regards to the vesting of restricted share
plan units.
|
|
|
|
|
|
[iii]
|
|
issuance of 191,345 common shares with a fair market
value of $1,182,295 in regards to the acquisitions of Sports YA.
|
|
|
|
|
|
[iv]
|
|
issuance of 743,349 common shares with a fair market
value of $2,267,214 in regards to the initial share consideration for Cycling
TV.
|
|
|
|
|
|
For the year ended December 31, 2006:
|
|
|
|
|
|
[i]
|
|
reclassification of amounts from contributed surplus
to share capital in regards to the exercise of stock options and warrants of
$517,156.
|
F-76
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
17.
Income Taxes
Future income taxes
reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
Significant
components of the Company’s future tax assets and liabilities are
as follows:
|
|
|
2007
|
|
2006
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Tax basis in excess of book value
|
|
5,540,800
|
|
3,507,144
|
|
|
Non-capital loss
carryforwards
|
|
13,825,024
|
|
7,302,206
|
|
|
Total future tax
assets
|
|
19,365,824
|
|
10,809,350
|
|
|
Valuation
allowance for future tax assets
|
|
(19,365,824
|
)
|
(10,809,350
|
)
|
|
Net future tax
asset
|
|
—
|
|
—
|
|
The reconciliation
of income taxes at the statutory rates of 36.12% and 33%, respectively to the
provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Years ending December 31
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Income tax
recovery at combined federal and provincial rate
|
|
(11,022,690
|
)
|
(8,432,093
|
)
|
|
Stock-based
compensation
|
|
1,682,012
|
|
1,352,126
|
|
|
Non-deductible
items
|
|
36,412
|
|
28,372
|
|
|
Financing fees
|
|
(1,379,627
|
)
|
(287,424
|
)
|
|
Non taxable portion
of capital gains
|
|
(104,923
|
)
|
—
|
|
|
Amortization of
intangible assets
|
|
—
|
|
14,590
|
|
|
Reserves
|
|
—
|
|
15,510
|
|
|
Foreign losses
not benefited
|
|
—
|
|
804,324
|
|
|
Foreign tax rate
differential
|
|
—
|
|
(123,906
|
)
|
|
Valuation
allowance
|
|
10,842,066
|
|
6,673,801
|
|
|
|
|
53,250
|
|
45,300
|
|
F-77
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
The Company has
approximately Cdn$47,671,000 in Canadian non-capital tax losses available to be
applied against future years’ income which expire as follows:
|
|
|
Canadian
|
|
|
|
|
$
|
|
|
|
|
|
|
|
2008
|
|
230,000
|
|
|
2009
|
|
315,000
|
|
|
2010
|
|
198,000
|
|
|
2011
|
|
—
|
|
|
2012 to 2027
|
|
46,928,000
|
|
|
|
|
47,671,000
|
|
Due to the losses
incurred since inception and expected future operating results, in accordance
with CICA Handbook Section 3465, “Income Taxes”, a 100% valuation
allowance has been recorded against the Company’s future tax assets as it is
more likely than not that the future tax asset resulting from the tax losses
available for carryforward will not be realized through the reduction of future
income tax payments.
18.
Financial Instruments
The Company’s
financial instruments are comprised of cash and cash equivalents, short-term
investments, accounts receivable, other receivables, deposits, accounts
payable, other accrued liabilities, amounts due to related parties, accrued
license fees, accrued professional fees, notes payable, obligations under
capital lease, income taxes payable and deferred revenue.
Fair value of financial
instruments
Fair value of a
financial instrument is defined as the amount for which the instrument could be
exchanged in a current transaction between willing parties. The estimated fair value of our financial
instruments approximates their carrying value due to the short maturity term of
these financial instruments. Notes
payable and obligations under capital leases are measured at their fair value
as determined based on the present value of cash flows.
Risks associated with financial
instruments
[i] Currency risk
The Company’s
activities which result in exposure to fluctuations in foreign exchange rates
consist of its customer billings being in U.S. dollars and the majority of
expenses being paid in foreign currencies.
The Company does not use derivative financial instruments to reduce its
currency risk.
F-78
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
[ii] Interest rate risk
The Company is
exposed to interest rate risk on its invested cash and cash equivalents and its
short-term investments. The interest
rates on these instruments are based on the bank’s prime rate and therefore are
subject to change with the market. The
Company does not use derivative financial instruments to reduce its interest
rate risk.
19.
Segmented Information
The Company has
one operating segment and one reportable segment, online broadcasting of
international and sports content over the Internet. Substantially all of the operations of the
Company are directly engaged in or support this operating segment.
The following
table presents the Company’s subscription revenue by geographical region based
on location of the Company’s subscribers:
|
|
|
2007
|
|
2006
|
|
|
Years ending December 31
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
United States
|
|
62
|
|
53
|
|
|
Europe
|
|
18
|
|
23
|
|
|
Canada
|
|
7
|
|
10
|
|
|
Rest of world
|
|
13
|
|
14
|
|
|
|
|
100
|
|
100
|
|
The following
table presents the geographical location of the Company’s long-lived
assets:
|
|
|
2007
|
|
2006
|
|
|
As at December 31
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
United States
|
|
86
|
|
24
|
|
|
Europe
|
|
7
|
|
8
|
|
|
Canada
|
|
4
|
|
39
|
|
|
Trinidad and Tobago
|
|
—
|
|
25
|
|
|
Rest of world
|
|
3
|
|
4
|
|
|
|
|
100
|
|
100
|
|
F-79
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December 31, 2007
20.
Comparative Information
We have reclassified certain prior year information to conform to the current year’s presentation.
21.
Subsequent Events
[i] On February 14, 2008, the Company announced as part of its refined strategic focus to explore the sale of the JumpTV content delivery network to maximize the value of their assets while minimizing the related ongoing operational cost to JumpTV.
[ii] On October 20, 2008, the Company
completed a merger with NeuLion, an end-to-end IPTV service provider of live
and on-demand sports, international and religious programming over the Internet
to a computer and/or through set top boxes [“STBs” or “STB”] to a
television. Under the terms of the
merger, JumpTV issued 49,577,427 common shares, 1,840,097 contingent shares,
which represented approximately the entire issued and outstanding shares of
JumpTV prior to closing, to the security holders of NeuLion, in exchange for
their NeuLion securities. Pursuant to
the merger, the Company issued 5,000,000 warrants exercisable for two years at
US$0.63 and 2,700,000 employee stock options exercisable for five years at
US$0.60 to employees of the Company.
On October 20,
2008, AvantaLion LLC, an entity controlled by Mr. Charles B. Wang, the
Chairman of our Board of Directors, purchased 10,000,000 units from JumpTV’s
treasury at a price of CDN$1.00 per unit. Each unit (a “Unit”) consists of one (1)
common share and one-half of one common share purchase warrant exercisable at
CDN$1.25 and one-half of one common share purchase warrant exercisable at
CDN$1.50. The warrants partially comprising the Units are exercisable for a
period of two years from the date of issuance. G. Scott Paterson, Vice-Chairman
of the Board of Directors, also purchased 1,000,000 Units on the same terms.
The aggregate gross proceeds from the sale of Units were CDN$11 million
[US$9,214,700].
22. Reconciliation of Canadian GAAP to U.S. GAAP
The consolidated
financial statements of the Company are prepared in U.S. dollars in accordance
with Canadian GAAP which differ in some respects from U.S. GAAP. The following tables set forth the impact of
the material differences between Canadian and U.S. GAAP on the Company’s
consolidated financial statements.
F-80
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2007
|
|
|
2007
|
|
2006
|
|
|
Consolidated Statements of Operations
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net
loss for the year per Canadian GAAP
|
|
(30,570,111
|
)
|
(25,597,096
|
)
|
|
Adjustment to
net loss:
|
|
|
|
|
|
|
Stock-based
compensation on SARS [ii]
|
|
127,290
|
|
(785,144
|
)
|
|
Net
loss for the year per U.S. GAAP
|
|
(30,442,821
|
)
|
(26,382,240
|
)
|
|
|
|
|
|
|
|
|
Net loss per
share using U.S. GAAP- basic and diluted
|
|
$
|
(0.67
|
)
|
$
|
(1.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss for the year per Canadian GAAP
|
|
(30,578,226
|
)
|
(25,588,981
|
)
|
|
Adjustment to
net loss:
|
|
|
|
|
|
|
Stock-based
compensation on SARS [ii]
|
|
127,290
|
|
(785,144
|
)
|
|
Comprehensive
loss for the year per U.S. GAAP
|
|
(30,450,936
|
)
|
(26,374,125
|
)
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
|
Canadian
|
|
U.S.
|
|
Canadian
|
|
U.S.
|
|
|
|
|
GAAP
|
|
GAAP
|
|
GAAP
|
|
GAAP
|
|
|
Consolidated
Balance Sheet data
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued stock
appreciation rights [ii]
|
|
—
|
|
657,854
|
|
1,087,760
|
|
1,872,904
|
|
|
Total current
liabilities
|
|
10,810,685
|
|
11,468,539
|
|
7,085,682
|
|
7,870,826
|
|
|
Total
liabilities
|
|
11,522,305
|
|
12,180,159
|
|
7,104,184
|
|
7,889,328
|
|
|
Accumulated
deficit
|
|
(61,946,378
|
)
|
(62,604,232
|
)
|
(31,376,267
|
)
|
(32,161,411
|
)
|
|
Total
shareholders’ equity
|
|
118,451,626
|
|
117,793,772
|
|
46,756,360
|
|
45,971,216
|
|
[i]
Consolidated statement of cash flows
The
disclosure of a subtotal of the amount of cash used by operating activities
before changes in non cash balances related to operating assets and liabilities
in the consolidated statements of cash flow is allowed under Canadian GAAP
while it is not allowed under U.S. GAAP
F-81
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars,
unless otherwise noted]
December 31, 2007
[ii] Stock appreciation rights (“SARS”)
Under
U.S. GAAP, in accordance with SFAS No. 123R,
Share-Based
Payments,
the liability related to stock-based awards that call for
settlement in cash or other assets must be measured at its fair value based on
the fair value of stock option awards and is to be re-measured at the end of
each reporting period. Under Canadian
GAAP, the liability is measured and re-measured on the intrinsic values of the
SARS awards instead of at their fair values.
[iii]
Recent accounting developments
In September 2006,
the FASB issued FASB Statement No. 157, “Fair Value Measurements”. This new standard defines fair value,
establishes a framework for measuring fair value under U.S. GAAP and expands
disclosures about fair value measurements. This new standard is effective for
the Company beginning September 1, 2008. The Company has assessed the
impact of this new standard on the consolidated financial statements and has
concluded that there are no material impacts on the consolidated financial
statements as a result of the new standard.
In February 2007,
the FASB issued FASB Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. This statement permits entities
the option to measure financial instruments at fair value, thereby achieving an
offsetting effect for accounting purposes for certain changes in fair value of
certain related assets and liabilities without having to apply hedge
accounting. This statement is effective for the Company beginning September 1,
2008. The Company has assessed the impact of this new standard on the
consolidated financial statements and has concluded that there are no material
impacts on the consolidated financial statements as a result of the new
standard.
The FASB issued FASB Interpretation No. 48 (“FIN
48”), “Accounting for Uncertainty in Income Taxes”, effective for fiscal years
beginning October 1, 2007. FIN 48 describes the accounting for income
taxes by prescribing the minimum recognition threshold a tax position must meet
before being recognized in the financial statements. The interpretation also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The
adoption of this new section did not have a material impact on the consolidated
financial statements.
In December 2007,
the FASB issued FASB Statement No. 141R, “Business Combinations”. The statement will require all business
acquisitions to be measured at fair value; the existing definition of a
business would be expanded; pre-acquisition contingencies would be measured at
fair value; most acquisition-related costs would be recognized as expenses as
incurred; as well as other changes. The statement is effective for the Company
beginning September 1, 2009. The Company is currently assessing the impact
of this new standard on its consolidated financial statements.
F-82
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars,
unless otherwise noted]
December 31, 2007
In December 2007,
the FASB issued FASB Statement No. 160, “Non-controlling Interests in
Financial Statements”. The statement will improve the relevance, comparability
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing new accounting and
reporting standards. This statement is
effective for the Company beginning September 1, 2009. The Company is
currently assessing the impact of this new standard on its consolidated
financial statements
[iv]
Supplementary information using US GAAP
Advertising
costs
Advertising costs are expensed as incurred and were
$2,089,670 and $1,668,626 in December 2007 and 2006, respectively.
Variable
interest entity
KIT
Capital Ltda. was an entity incorporated in Colombia for the sole purpose of
signing channel contracts with Colombian entities as this is a requirement by
Colombian law.
F-83
Table of Contents
JumpTV Inc.
CONSOLIDATED BALANCE SHEETS
[unaudited]
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
As at
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash and cash
equivalents
[note 5]
|
|
24,099,765
|
|
51,202,984
|
|
|
Short-term
investments
[note 6]
|
|
121,691
|
|
130,640
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $314,200 [2007 -
$395,175]
|
|
2,326,362
|
|
1,782,280
|
|
|
Interest
receivable
|
|
44,146
|
|
726,995
|
|
|
Taxes receivable
|
|
1,130,189
|
|
659,000
|
|
|
Other
receivables
|
|
76,010
|
|
79,385
|
|
|
Due from related
part
y
[note 10]
|
|
2,831
|
|
—
|
|
|
Prepaid expenses
and deposits
|
|
1,633,951
|
|
1,044,921
|
|
|
Total current
assets
|
|
29,434,945
|
|
55,626,205
|
|
|
Property, plant
and equipment, net
[note 7]
|
|
5,482,236
|
|
6,760,565
|
|
|
Intangible
assets, net
[note 8]
|
|
12,237,963
|
|
18,305,881
|
|
|
Goodwill
[note 9]
|
|
—
|
|
47,970,833
|
|
|
Other assets
|
|
2,109,076
|
|
1,234,038
|
|
|
Deferred direct
broadcast operating costs
|
|
1,972,223
|
|
76,409
|
|
|
Total
assets
|
|
51,236,443
|
|
129,973,931
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Accounts payable
|
|
3,072,052
|
|
3,296,858
|
|
|
Other accrued
liabilities
|
|
5,903,971
|
|
5,247,328
|
|
|
Due to related
party
[note 10]
|
|
—
|
|
37,229
|
|
|
Current portion
of note payable
|
|
13,586
|
|
13,586
|
|
|
Current portion
of obligations under capital lease
|
|
99,558
|
|
120,465
|
|
|
Deferred revenue
|
|
2,746,337
|
|
1,752,042
|
|
|
Income taxes
payable
|
|
124,348
|
|
115,050
|
|
|
Total
current liabilities
|
|
11,959,852
|
|
10,582,558
|
|
|
Deferred rent
|
|
535,731
|
|
599,440
|
|
|
Deferred revenue
|
|
173,477
|
|
228,127
|
|
|
Note payable
|
|
31,881
|
|
31,881
|
|
|
Obligations
under capital lease
|
|
—
|
|
80,299
|
|
|
Total
liabilities
|
|
12,700,941
|
|
11,522,305
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
Share capita
l
[note 12]
|
|
173,087,962
|
|
172,697,828
|
|
|
Contributed
surplus
|
|
9,551,454
|
|
7,740,531
|
|
|
Accumulated
other comprehensive loss
|
|
(40,355
|
)
|
(40,355
|
)
|
|
Accumulated
deficit
|
|
(144,063,559
|
)
|
(61,946,378
|
)
|
|
Total
shareholders’ equity
|
|
38,535,502
|
|
118,451,626
|
|
|
Total
liabilities and shareholders’ equity
|
|
51,236,443
|
|
129,973,931
|
|
Commitments
and contingencies
[note 11]
See accompanying notes
On
behalf of the Board
F-84
Table of Contents
JumpTV
Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
[unaudited]
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
Three months
|
|
Nine months
|
|
|
|
|
ended
|
|
ended
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
3,938,242
|
|
2,004,056
|
|
11,146,751
|
|
4,183,126
|
|
|
Direct broadcast
operating costs
[notes 7, 8 and 13[iii]]
|
|
(3,835,580
|
)
|
(2,874,920
|
)
|
(13,343,192
|
)
|
(5,786,509
|
)
|
|
|
|
102,662
|
|
(870,864
|
)
|
(2,196,441
|
)
|
(1,603,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
costs and expenses
|
|
|
|
|
|
|
|
|
|
|
Selling, general
and administrative
[note 10]
|
|
6,652,681
|
|
5,971,444
|
|
24,980,142
|
|
19,239,821
|
|
|
Stock-based
compensation and other compensation payments
[note 13]
|
|
570,591
|
|
686,113
|
|
2,110,810
|
|
2,635,953
|
|
|
Amortization of
property, plant and equipment
|
|
187,120
|
|
157,591
|
|
607,896
|
|
373,474
|
|
|
Amortization of
intangible assets
|
|
34,690
|
|
76,204
|
|
133,397
|
|
96,021
|
|
|
|
|
7,445,082
|
|
6,891,352
|
|
27,832,245
|
|
22,345,269
|
|
|
Loss before the
following:
|
|
(7,342,420
|
)
|
(7,762,216
|
)
|
(30,028,686
|
)
|
(23,948,652
|
)
|
|
Impairment of
goodwill
[note 9]
|
|
—
|
|
—
|
|
47,882,317
|
|
—
|
|
|
Impairment of
long-lived assets
[notes 7 and 8]
|
|
4,771,251
|
|
—
|
|
4,945,037
|
|
—
|
|
|
(Gain) loss on
foreign exchange
|
|
(42,207
|
)
|
(47,341
|
)
|
6,361
|
|
38,962
|
|
|
Investment
income, net
|
|
155,362
|
|
1,234,190
|
|
757,894
|
|
3,932,411
|
|
|
Loss before
income taxes
|
|
(11,916,102
|
)
|
(6,480,685
|
)
|
(82,104,507
|
)
|
(20,055,203
|
)
|
|
Provision for
income taxes
|
|
2,598
|
|
8,300
|
|
12,674
|
|
33,250
|
|
|
Future income
tax recovery
|
|
—
|
|
(22,924
|
)
|
—
|
|
(22,924
|
)
|
|
Net
loss for the period
|
|
(11,918,700
|
)
|
(6,466,061
|
)
|
(82,117,181
|
)
|
(20,065,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
on short-term investments
|
|
—
|
|
287,511
|
|
—
|
|
287,511
|
|
|
Reclassification
of unrealized gain on short-term investments
|
|
—
|
|
(295,626
|
)
|
—
|
|
(295,626
|
)
|
|
Comprehensive
loss for the period
|
|
(11,918,700
|
)
|
(6,474,176
|
)
|
(82,117,181
|
)
|
(20,073,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per weighted
average number of shares outstanding - basic and diluted
[note 4]
|
|
$
|
(0.24
|
)
|
$
|
(0.13
|
)
|
$
|
(1.67
|
)
|
$
|
(0.44
|
)
|
|
Weighted average
number of shares outstanding - basic and diluted
[note 4]
|
|
49,348,618
|
|
48,803,530
|
|
49,307,841
|
|
45,737,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
F-85
Table of Contents
JumpTV
Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
[unaudited]
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
|
|
|
|
|
|
Accumulated other
|
|
|
|
Total
|
|
|
|
|
Share capital
|
|
Contributed
|
|
comprehensive
|
|
Accumulated
|
|
shareholders’
|
|
|
|
|
Common shares
|
|
surplus
|
|
loss
|
|
deficit
|
|
equity
|
|
|
Nine Months Ending
September 30, 2008
|
|
#
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
Balance,
December 31, 2007
|
|
49,144,313
|
|
172,697,828
|
|
7,740,531
|
|
(40,355
|
)
|
(61,946,378
|
)
|
118,451,626
|
|
|
Net loss for the
period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(82,117,181
|
)
|
(82,117,181
|
)
|
|
Exercise of
stock options for common shares
[note 13[i]]
|
|
9,583
|
|
27,088
|
|
(9,839
|
)
|
—
|
|
—
|
|
17,249
|
|
|
Exercise of
retention warrants for common shares
[note 13[iv]]
|
|
10,000
|
|
6,640
|
|
(238
|
)
|
—
|
|
—
|
|
6,402
|
|
|
Stock-based
compensation
[note 13]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share
plan units
|
|
—
|
|
—
|
|
74,082
|
|
—
|
|
—
|
|
74,082
|
|
|
Stock options
|
|
—
|
|
—
|
|
1,359,981
|
|
—
|
|
—
|
|
1,359,981
|
|
|
Warrants
|
|
—
|
|
—
|
|
292,632
|
|
—
|
|
—
|
|
292,632
|
|
|
Retention
warrants
|
|
—
|
|
—
|
|
354,346
|
|
—
|
|
—
|
|
354,346
|
|
|
Directors’
compensation
|
|
—
|
|
—
|
|
41,918
|
|
—
|
|
—
|
|
41,918
|
|
|
Release of
common shares from escrow for services
|
|
—
|
|
54,447
|
|
—
|
|
—
|
|
—
|
|
54,447
|
|
|
Issuance of
common shares for directors’ compensation plan
[note 13[vi]]
|
|
50,115
|
|
41,918
|
|
(41,918
|
)
|
—
|
|
—
|
|
—
|
|
|
Issuance of
common shares for restricted share plan units
[note 13[ii]]
|
|
191,361
|
|
260,041
|
|
(260,041
|
)
|
—
|
|
—
|
|
—
|
|
|
Balance,
September 30, 2008
|
|
49,405,372
|
|
173,087,962
|
|
9,551,454
|
|
(40,355
|
)
|
(144,063,559
|
)
|
38,535,502
|
|
See accompanying notes
F-86
Table of Contents
JumpTV
Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(cont’d)
[unaudited]
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
|
|
|
|
|
|
Accumulated other
|
|
|
|
Total
|
|
|
|
|
Share capital
|
|
Contributed
|
|
comprehensive
|
|
Accumulated
|
|
shareholders’
|
|
|
|
|
Common shares
|
|
surplus
|
|
loss
|
|
deficit
|
|
equity
|
|
|
Nine Months Ending
September 30, 2007
|
|
#
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
Balance,
December 31, 2006
|
|
34,821,121
|
|
75,227,648
|
|
2,937,219
|
|
(32,240
|
)
|
(31,376,267
|
)
|
46,756,360
|
|
|
Net loss for the
period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(20,065,529
|
)
|
(20,065,529
|
)
|
|
Unrealized gain
on short-term investments
|
|
—
|
|
—
|
|
—
|
|
287,511
|
|
—
|
|
287,511
|
|
|
Reclassification
of unrealized gain on short-term investments
|
|
—
|
|
—
|
|
—
|
|
(295,626
|
)
|
—
|
|
(295,626
|
)
|
|
Comprehensive
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
26,682,716
|
|
|
Issuance of
common shares on acquisition of SportsYA
|
|
191,345
|
|
1,182,295
|
|
—
|
|
—
|
|
—
|
|
1,182,295
|
|
|
Exercise of
stock options for common shares
|
|
133,355
|
|
555,058
|
|
(240,197
|
)
|
—
|
|
—
|
|
314,861
|
|
|
Exercise of
warrants for common shares
|
|
3,700
|
|
23,422
|
|
(8,622
|
)
|
—
|
|
—
|
|
14,800
|
|
|
Net proceeds
from issuance of common shares through secondary public offering
|
|
13,043,479
|
|
93,104,131
|
|
—
|
|
—
|
|
—
|
|
93,104,131
|
|
|
Issuance of
common shares into escrow on acquisition of SportsYA
|
|
330,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of
common shares for advertising services
|
|
197,628
|
|
934,900
|
|
—
|
|
—
|
|
—
|
|
934,900
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share
plan units
|
|
—
|
|
—
|
|
851,653
|
|
—
|
|
—
|
|
851,653
|
|
|
Stock options
|
|
—
|
|
—
|
|
2,337,195
|
|
—
|
|
—
|
|
2,337,195
|
|
|
Warrants
|
|
—
|
|
—
|
|
257,602
|
|
—
|
|
—
|
|
257,602
|
|
|
Release of
common shares from escrow for services
|
|
—
|
|
340,657
|
|
—
|
|
—
|
|
—
|
|
340,657
|
|
|
Issuance of
common shares for restricted share plan units
|
|
153,609
|
|
851,653
|
|
(851,653
|
)
|
—
|
|
—
|
|
—
|
|
|
Issuance of
common shares for services
|
|
9,500
|
|
27,287
|
|
—
|
|
—
|
|
—
|
|
27,287
|
|
|
Repurchase and
cancellation of common shares
|
|
(226,100
|
)
|
(796,353
|
)
|
64,945
|
|
—
|
|
—
|
|
(731,408
|
)
|
|
Issuance of
common shares on acquisition of Cycling TV Limited
|
|
743,349
|
|
2,267,214
|
|
—
|
|
—
|
|
—
|
|
2,267,214
|
|
|
Issuance of
common shares into escrow on acquisition of Cycling TV Limited
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Balance,
September 30, 2007
|
|
49,400,986
|
|
173,717,912
|
|
5,348,142
|
|
(40,355
|
)
|
(51,441,796
|
)
|
127,583,903
|
|
F-87
Table of
Contents
JumpTV
Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[unaudited]
[Expressed in U.S. dollars, unless otherwise noted]
|
|
|
Three months
|
|
Nine months
|
|
|
|
|
ended
|
|
ended
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net loss for the
period
|
|
(11,918,700
|
)
|
(6,466,061
|
)
|
(82,117,181
|
)
|
(20,065,529
|
)
|
|
Adjustments to
reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
1,205,673
|
|
1,003,239
|
|
3,789,535
|
|
1,440,248
|
|
|
Impairment of
goodwill
[note 9]
|
|
—
|
|
—
|
|
47,882,317
|
|
—
|
|
|
Impairment of
long-lived assets
[notes 7 and 8]
|
|
4,771,251
|
|
—
|
|
4,945,037
|
|
—
|
|
|
Unrealized gain
on short-term investments
|
|
—
|
|
—
|
|
—
|
|
(22,910
|
)
|
|
Stock-based
compensation, excluding change in accrued stock appreciation rights as noted
below
[note 13]
|
|
611,915
|
|
1,130,567
|
|
2,110,810
|
|
3,719,318
|
|
|
Amortization of
deferred direct broadcast operating costs
[note 13[iii]]
|
|
31,407
|
|
31,395
|
|
94,197
|
|
94,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
Funds held in
trust
|
|
—
|
|
14,884
|
|
—
|
|
—
|
|
|
Accounts
receivable
|
|
(871,791
|
)
|
(351,380
|
)
|
(544,082
|
)
|
(477,680
|
)
|
|
Interest
receivable
|
|
22,044
|
|
—
|
|
682,849
|
|
—
|
|
|
Taxes receivable
|
|
(289,509
|
)
|
—
|
|
(471,189
|
)
|
—
|
|
|
Other
receivables
|
|
56,819
|
|
478,710
|
|
3,375
|
|
172,617
|
|
|
Prepaid
expenses, deposits and other assets
|
|
(346,610
|
)
|
(24,656
|
)
|
(1,465,260
|
)
|
304,364
|
|
|
Deferred direct
broadcast operating costs
|
|
(54,444
|
)
|
—
|
|
(1,922,223
|
)
|
—
|
|
|
Accounts payable
|
|
1,291,428
|
|
337,390
|
|
(224,805
|
)
|
(222,988
|
)
|
|
Other accrued
liabilities
|
|
(582,376
|
)
|
—
|
|
656,642
|
|
(3,480
|
)
|
|
Due to/from
related party
|
|
(20,321
|
)
|
18,059
|
|
(40,060
|
)
|
—
|
|
|
Obligations
under capital lease
|
|
(34,883
|
)
|
(20,659
|
)
|
(101,206
|
)
|
(20,659
|
)
|
|
Accrued stock
appreciation rights
|
|
(41,325
|
)
|
(449,653
|
)
|
—
|
|
(1,087,760
|
)
|
|
Deferred revenue
|
|
496,386
|
|
481,114
|
|
939,645
|
|
556,404
|
|
|
Income taxes
payable
|
|
2,598
|
|
8,300
|
|
9,298
|
|
33,250
|
|
|
Future tax
liability
|
|
—
|
|
(22,924
|
)
|
—
|
|
(22,924
|
)
|
|
Deferred rent
|
|
(26,515
|
)
|
308,857
|
|
(63,709
|
)
|
567,447
|
|
|
Cash
used in operating activities
|
|
(5,696,953
|
)
|
(3,522,818
|
)
|
(25,836,010
|
)
|
(15,036,096
|
)
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Redemption
(purchase) of short-term investments, net
|
|
5,310
|
|
(12,848
|
)
|
8,949
|
|
28,000,000
|
|
|
Purchase of
equipment
|
|
(15,078
|
)
|
(284,675
|
)
|
(1,271,525
|
)
|
(2,886,812
|
)
|
|
Acquisition of
SportsYA
|
|
—
|
|
1,200
|
|
—
|
|
(146,439
|
)
|
|
Acquisition of
Broadband Network Division of XOS Technologies Inc.
|
|
—
|
|
(60,584,537
|
)
|
(23,413
|
)
|
(60,584,537
|
)
|
|
Acquisition of
Cycling TV, Limited
|
|
—
|
|
(2,357,360
|
)
|
(4,871
|
)
|
(2,357,360
|
)
|
|
Cash
used in investing activities
|
|
(9,768
|
)
|
(63,238,220
|
)
|
(1,290,860
|
)
|
(37,975,148
|
)
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
share issuances, net
|
|
—
|
|
7,433
|
|
—
|
|
93,104,131
|
|
|
Bank
indebtedness
|
|
—
|
|
—
|
|
—
|
|
(1,287,150
|
)
|
|
Proceeds from
exercise of stock options
|
|
—
|
|
186,963
|
|
17,249
|
|
314,861
|
|
|
Proceeds from
exercise of warrants
|
|
—
|
|
—
|
|
—
|
|
14,800
|
|
|
Proceeds from
exercise of retention warrants
|
|
6,402
|
|
—
|
|
6,402
|
|
—
|
|
|
Normal course
issuer bid
|
|
—
|
|
(870,133
|
)
|
—
|
|
(870,133
|
)
|
|
Cash
provided by (used in) financing activities
|
|
6,402
|
|
(675,737
|
)
|
23,651
|
|
91,276,509
|
|
|
Net
increase (decrease) in cash and cash equivalents during the period
|
|
(5,700,319
|
)
|
(67,436,775
|
)
|
(27,103,219
|
)
|
38,265,265
|
|
|
Cash and cash
equivalents, beginning of period
|
|
29,800,084
|
|
127,638,918
|
|
51,202,984
|
|
21,936,878
|
|
|
Cash
and cash equivalents, end of period
|
|
24,099,765
|
|
60,202,143
|
|
24,099,765
|
|
60,202,143
|
|
See accompanying notes
F-88
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
1.
Nature of Operations
JumpTV Inc. [“JumpTV”
or the “Company”], formerly JumpTV.com Inc., was incorporated in January 2000
under the laws of Canada. JumpTV’s primary business is providing online
broadcasting of international ethnic television channels and sports content
over the Internet.
JumpTV’s business is still in the early stages with
only a few years of operating history. As at September 30, 2008, the Company
had cash and cash equivalent balances of $24,099,765. From JumpTV’s inception,
it has incurred net losses and has an accumulated deficit of $144,063,559;
management expects these losses to continue in the short term. JumpTV will
require expenditures of significant funds for marketing, building its
subscriber management systems, programming and website development, maintaining
adequate video streaming and database software, pursuing and maintaining
channel distribution agreements with its channel partners, fees relating to
acquiring and maintaining Internet broadcasting rights to its content and the
construction and maintenance of the JumpTV Delivery Infrastructure and office
facilities. There is no guarantee that JumpTV will ultimately be able to
generate sufficient revenue, reduce its costs in the anticipated time frame, to
become profitable and have sustainable cash flows
[note 18]
.
The Company’s
revenues and expenses are seasonal, with the fourth quarter (ending December 31)
being the quarter with the highest revenues and expenses. This is primarily
reflective of the revenues and expenses generated and incurred from college
sports in the United States. Therefore, one quarter’s operating results are not
necessarily indicative of the performance for the balance of the year.
On June 9,
2008, the Company announced that it signed a binding letter of intent to merge
with NeuLion, an end-to-end IPTV service of live and on-demand sports,
international and religious programming over the Internet and through set top
boxes. The merger closed on October 20, 2008. Under the terms of the merger,
JumpTV issued 49,577,427 common shares, 1,840,097 contingent shares, which
represented approximately the entire issued and outstanding shares of JumpTV
prior to closing, and 5,000,000 warrants exercisable for two years at US$0.63,
to the securityholders of NeuLion, in exchange for their NeuLion securities. The
Company also granted 2,700,000 employee stock options exercisable for five
years at US$0.60 to employees of the Company. As at September 30, 2008,
$1,233,945 in direct costs relating to this merger have been included in other
assets on the Company’s consolidated balance sheet.
F-89
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
On October 20,
2008, AvantaLion LLC, an entity controlled by Mr. Charles Wang, the spouse
of the Founder and CEO of NeuLion, purchased 10,000,000 units from JumpTV’s
treasury at a price of Cdn$1.00 per unit. Each unit (a “Unit”) consists of one (1) common
share and one-half of one common share purchase warrant exercisable at Cdn$1.25
and one-half of one common share purchase warrant exercisable at Cdn$1.50. The
warrants partially comprising the Units are exercisable for a period of two
years from the date of grant. G. Scott Paterson, Executive Vice-Chairman of the
Company, also purchased 1,000,000 Units on the same terms. The aggregate gross
proceeds from the sale of Units were Cdn$11 million.
On October 20,
2008, in accordance with CICA Handbook Section 1581,
Business
Combinations
, and EIC 10,
Reverse Takeover
Accounting
, the Company determined that NeuLion is the acquirer and
accordingly will account for this merger as a reverse take over.
2. Significant Accounting Policies
The notes
presented in these interim consolidated financial statements are not fully
inclusive of all matters normally disclosed in the Company’s annual audited
consolidated financial statements. As a result, these interim consolidated
financial statements should be read in conjunction with the Company’s audited
consolidated financial statements as at and for the year ended December 31,
2007.
The consolidated
financial statements of JumpTV have been prepared in U.S. dollars in
accordance with Canadian generally accepted accounting principles [“GAAP”]. The
effects of differences between the application of Canadian and United States (“U.S.”)
GAAP on the consolidated financial statements of the Company is described in
note 19.
These interim
consolidated financial statements follow the same policies and methods of
application as the most recent audited consolidated financial statements as at
and for the year ended December 31, 2007, except for the following:
CICA Handbook Section 1535,
Capital Disclosures
This section
requires the Company to disclose its objectives, policies and processes for
managing capital. The adoption of this new standard resulted in additional
disclosures with regard to the Company’s objectives, policies and process for
managing capital which is discussed in note 17. This new standard had no impact
on the classification and measurement of the transactions in the Company’s
interim consolidated financial statements.
CICA
Handbook Sections 3862 and 3863,
Financial Instruments —
Disclosures and Presentation
These
sections enhance the disclosure and presentation required on the nature and
extent of risks arising from financial instruments and how the Company manages
those risks. The adoption of these new standards resulted in additional
disclosures with regard to the Company’s financial instruments which are
discussed in note 15. These new standards had no impact on the
F-90
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
classification
and measurement of the transactions in the Company’s interim consolidated
financial statements.
3.
Future Accounting Standards
The CICA has issued the following handbook sections,
which applies commencing with the Company’s 2009 fiscal year:
Goodwill, Intangible Assets and Financial Statement
Concepts
In February 2008, the CICA issued Section 3064
Goodwill and Intangible Assets
,
replacing Section 3062,
Goodwill and Other
Intangible Assets
and Section 3450,
Research and
Development Cost
s. The new section establishes standards on the
recognition, measurement, presentation and disclosure for goodwill and
intangible assets subsequent to their initial recognition. The standard
requires retroactive application to prior period financial statements.
International Financial Reporting Standards
In January 2006, the CICA Accounting Standards
Board [“AcSB”] adopted a strategic plan for the direction of accounting
standards in Canada. As part of that plan, accounting standards for public
companies would be required to converge with International Financial Reporting
Standards [“IFRS”] for fiscal years beginning on or after January 1, 2011
with comparative figures presented on the same basis. In February 2008,
the CICA AcSB confirmed the effective date of the initial adoption of IFRS. The
impact of the transition to IFRS on the Company’s consolidated financial
statements has not yet been determined.
4.
Loss per Share
Basic loss per
share is computed by dividing net loss for the period by the weighted average
number of shares outstanding for the period. Diluted loss per share is computed
by dividing net loss for the period by the weighted average number of shares
outstanding and, if dilutive, potential common shares using the treasury stock
method. Potential common shares consist of stock options, restricted share
units, stock appreciation rights and warrants.
For the three and
nine months ended September 30, 2008 and 2007, the Company had potential
common shares which, due to the losses incurred, were considered anti-dilutive
equity instruments. Accordingly, the effect of these instruments has not been
reflected in computing diluted loss per share for the three and nine months
ended September 30, 2008 and 2007.
F-91
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
5.
Cash and Cash Equivalents
Cash and cash
equivalents consist of the following:
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Cash [i]
|
|
5,212,565
|
|
15,229,098
|
|
|
Money market
funds [ii]
|
|
18,887,200
|
|
2,972,983
|
|
|
Global bond
[iii]
|
|
—
|
|
22,993,351
|
|
|
Corporate bond
[iv]
|
|
—
|
|
10,007,552
|
|
|
|
|
24,099,765
|
|
51,202,984
|
|
|
[i]
|
Cash consists primarily of U.S. and Canadian dollar
accounts which earn interest at approximately 2% to 5%.
|
|
|
|
|
|
[ii]
|
Money market funds consist of U.S. accounts
[$18,883,806] and a Canadian dollar account [$3,394] which earn interest at
approximately 3% to 5%.
|
|
|
|
|
|
[iii]
|
Global bond represented a 78-day global bond which
earned interest at approximately 4% and matured on January 15, 2008.
|
|
|
|
|
|
[iv]
|
Corporate bond represented a 95-day global bond
which earned interest at approximately 5.75% and matured on February 1,
2008.
|
6.
Short-term Investments
As at September 30, 2008,
short-term investments consisted of a guaranteed investment certificate at
amortized cost plus accrued interest totaling $121,691
[December 31, 2007 - $130,640]
which matures on July 16, 2009 and bears interest at 2.85%.
F-92
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
7.
Property, Plant and Equipment
The details of
property, plant and equipment and the related accumulated amortization are set
forth below for the following periods:
|
|
|
September 30, 2008
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
Impairment
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer
equipment
|
|
2,918,469
|
|
880,241
|
|
—
|
|
2,038,228
|
|
|
Infrastructure
equipment
|
|
2,299,093
|
|
843,616
|
|
727,739
|
|
727,738
|
|
|
Computer
software
|
|
2,734,572
|
|
1,221,377
|
|
—
|
|
1,513,195
|
|
|
Furniture and
fixtures
|
|
576,201
|
|
144,063
|
|
—
|
|
432,138
|
|
|
Leasehold
improvements
|
|
1,044,613
|
|
356,849
|
|
—
|
|
687,764
|
|
|
Website
development costs
|
|
161,060
|
|
77,887
|
|
—
|
|
83,173
|
|
|
|
|
9,734,008
|
|
3,524,033
|
|
727,739
|
|
5,482,236
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Accumulated
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Computer
equipment
|
|
2,196,670
|
|
437,707
|
|
1,758,963
|
|
|
Infrastructure
equipment
|
|
1,906,798
|
|
475,966
|
|
1,430,832
|
|
|
Computer
software
|
|
2,651,640
|
|
517,023
|
|
2,134,617
|
|
|
Furniture and
fixtures
|
|
507,406
|
|
81,468
|
|
425,938
|
|
|
Leasehold
improvements
|
|
1,040,039
|
|
154,246
|
|
885,793
|
|
|
Website
development costs
|
|
161,059
|
|
36,637
|
|
124,422
|
|
|
|
|
8,463,612
|
|
1,703,047
|
|
6,760,565
|
|
CICA Handbook Section 3063,
Impairment of Long-Lived Assets
,
requires the Company to evaluate its long-lived asset for impairment when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
Recoverability of these
assets is measured by comparison of the carrying amounts to the future
estimated undiscounted cash flows expected to be derived from these assets. If
these future cash flows are less than the carrying amount of the asset, then
the carrying amount of the asset is written down to its fair value, based on
the related estimated discounted future cash flows.
The Company determined that
during the three months ended September 30, 2008 the business climate had
changed such that the carrying value of the Company’s property, plant and
equipment may not be fully recoverable. Accordingly, the Company recorded an
impairment of $727,739 for the three and nine months ended September 30,
2008. There were no such comparable amounts for the prior periods.
On February 14,
2008, the Company announced as part of its refined strategic focus to explore
the sale of their content delivery network, after receiving approval from the
Company’s Board of
F-93
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
Directors. In
accordance with CICA Handbook, Section 3475,
Disposal of
Long-Lived Assets and Discontinued Operations
, the Company
reclassified its content delivery network assets from property, plant and
equipment to assets held for sale as set forth below. These assets were
intended to be sold within the next year and amortization was no longer being
taken from February 14, 2008 to March 31, 2008. On June 9, 2008,
the Company announced as part of its merger with NeuLion, that it would retain
these assets to leverage in the combined Company. In accordance with CICA Handbook
Section 3475, the Company reclassified these assets from assets held for
sale to property, plant and equipment. The assets were recorded at their
carrying amounts before they were classified as assets held for sale, adjusted
for amortization expense by $74,894 in the three month period ended June 30,
2008 that would have been recognized had they been continuously classified as
held and used.
The
following amortization expense is included within direct broadcast operating
costs on the consolidated statements of operations and comprehensive loss:
|
|
|
Three months
|
|
Nine months
|
|
|
|
|
ended
|
|
ended
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure
equipment
|
|
187,769
|
|
88,622
|
|
560,235
|
|
238,507
|
|
|
Computer software
|
|
185,713
|
|
14,844
|
|
612,734
|
|
19,412
|
|
|
Website
development costs
|
|
11,313
|
|
121,383
|
|
41,250
|
|
140,440
|
|
|
|
|
384,795
|
|
224,849
|
|
1,214,219
|
|
398,359
|
|
8.
Intangible Assets
The details of
intangible assets and the related accumulated amortization are set forth below:
|
|
|
September 30, 2008
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
Impairment
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
agreements
|
|
19,227,200
|
|
2,915,587
|
|
4,214,616
|
|
12,096,997
|
|
|
Trademarks,
tradenames and domain names
|
|
207,601
|
|
63,953
|
|
2,682
|
|
140,966
|
|
|
|
|
19,434,801
|
|
2,979,540
|
|
4,217,298
|
|
12,237,963
|
|
F-94
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Accumulated
|
|
Net book
|
|
|
|
|
Cost
|
|
amortization
|
|
value
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
agreements
|
|
19,131,000
|
|
974,387
|
|
18,156,613
|
|
|
Trademarks,
tradenames and domain names
|
|
187,001
|
|
37,733
|
|
149,268
|
|
|
|
|
19,318,001
|
|
1,012,120
|
|
18,305,881
|
|
The Company’s
intangible assets are subject to the provisions of CICA 3063 (see note 7,
Property, Plant and Equipment). During the three months ended September 30,
2008, the Company determined, that the business climate had changed such that
the carrying value of the Company’s intangible assets may not be fully
recoverable. Accordingly, the Company recorded an impairment of $4,043,512 for
the three and nine months ended September 30, 2008. There were no such
comparable amounts for the prior periods. No other impairment related to the
remaining intangible assets was evidenced.
Additionally, the
Company determined during the three months ended March 31, 2008 that the
carrying value of intangible assets relating to HV Media, Limited, exceed their
fair value. Accordingly, the Company recorded an impairment of $173,786 for the
three months ended March 31, 2008, which is included in the nine months
ended September 30, 2008. There were no such comparable amounts for the
prior periods. No other impairment related to the remaining intangible assets
was evidenced.
Amortization
expense related to the Company’s acquired contractual agreements with content
partners for the three and nine months ended September 30, 2008 of
$599,068 and $1,834,023 [three and nine months ended September 30, 2007 —
$540,642 and $573,167] is included within direct broadcast operating costs on
the consolidated statements of operations and comprehensive loss. Based on the
amount of intangible assets subject to amortization, the Company’s estimated
amortization expense over the next five years is as follows:
|
|
|
$
|
|
|
|
|
|
|
|
2008
|
|
487,607
|
|
|
2009
|
|
1,946,944
|
|
|
2010
|
|
1,893,072
|
|
|
2011
|
|
1,885,719
|
|
|
2012
|
|
1,661,312
|
|
F-95
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
9. Goodwill
Goodwill represents the excess, at the date of
acquisition, of the cost of an acquired business over the fair value of the
identifiable assets acquired and liabilities assumed. Goodwill impairment is assessed based on a
comparison of the fair value of the reporting unit (which is the Company as a
whole) to the underlying carrying value of the Company’s net assets, including
goodwill. If the carrying value of the Company exceeds its fair value, the
Company performs the second step of the goodwill impairment test to determine
the amount of the impairment loss. The
second step of the impairment test involves comparing the implied fair value of
the Company’s goodwill with its carrying amount to measure the amount of
impairment loss, if any.
Goodwill is not amortized but is subject to an annual
impairment test at the Company level (operating segment or one level below an
operating segment) and between annual tests if changes in circumstances
indicate a potential impairment. The
Company’s impairment test was based on its single operating segment and
reporting unit structure.
The Company determined during the three months ended March 31,
2008 that the Company’s market capitalization decreased below the carrying
value of the Company. Management
considered this to be an indicator of impairment and, accordingly, as at March 31,
2008, performed a goodwill impairment test and determined that the Company
failed step one. As a result of performing
step two of the impairment analysis, management determined that the fair value
of the Company, including unidentifiable assets, did not support the carrying
amount of goodwill; accordingly the Company recorded a non-cash goodwill
impairment charge $47,882,317 during the three months ended March 31,
2008, which is included in the nine months ended September 30, 2008. There were no such comparable amounts for the
prior periods.
F-96
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine months
ended
September 30, 2008 and 2007 is unaudited]
10.
Related Party Transactions
In addition to other related party
transactions disclosed elsewhere in the consolidated financial statements, the
Company has entered into certain transactions and agreements in the normal
course of operations with a related party as follows:
Patstar Inc.
On occasion, Patstar Inc. [“Patstar”], a company
controlled by the Company’s Executive Chairman, receives reimbursement of
expenditures incurred on behalf of the Company.
The nature of these
reimbursements relates to
expenses that the
Company has incurred in the
normal course of
business. In June 2008, the
Company’s Board of Directors approved a retroactive reduction in rent payable
by Patstar in the amount of $16,164 due to a clerical error. At September 30, 2008, the Company had
balances due from Patstar of $2,831 [December 31, 2007 — due to Patstar -
$37,229] related to the reimbursements and the retroactive reduction of
rent. In addition, rent paid by Patstar
of $7,975 and $29,203 is included as a reduction in the Company’s selling,
general and administrative expenses for the three and nine months ended September 30,
2008 [three and nine months ended September 30, 2007 rent paid by Patstar —
$9,983 and $25,787], respectively. All
reimbursements and rent expense are recorded at the exchange amount.
11.
Commitments and Contingencies
Commitments
The Company has
operating lease commitments for its premises in Toronto, Canada, Sanford,
United States, New York, United States, and London, England. In addition, the Company has operating leases
for certain computer hardware and infrastructure equipment. Furthermore, the Company has marketing and
content license fee commitments to channel partners. Future minimum annual payments over the next
five years per fiscal year and thereafter [exclusive of taxes, insurance and
maintenance costs] under these commitments are as follows:
|
|
|
Marketing and license
|
|
Operating
|
|
|
|
|
fees
|
|
leases
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
2008
|
|
919,512
|
|
817,062
|
|
|
2009
|
|
2,607,620
|
|
2,591,490
|
|
|
2010
|
|
1,653,961
|
|
1,380,551
|
|
|
2011
|
|
418,239
|
|
939,155
|
|
|
2012
|
|
325,000
|
|
817,161
|
|
|
Thereafter
|
|
—
|
|
3,700,899
|
|
|
|
|
5,924,332
|
|
10,246,318
|
|
F-97
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
The Company has signed a
sublease for its Toronto office, effective November 1, 2008, which will
create a total recovery of $6,836,230.
Of the total recovery, $733,081 will be recovered in 2009, $800,501 will
be recovered in each year from 2010 to 2012, and $3,700,899 will be recovered
thereafter.
Contingencies
The Company is involved
in various legal claims associated with the normal course of business. Although the outcome of such claims is not
determinable at this time, the Company believes it has made adequate provisions
for these claims and that the outcomes will not have any material adverse
affect on the Company’s consolidated financial position or results of
operations.
During the
ordinary course of business activities, the Company may become contingently
liable for damages arising from litigation and a party to claims, including
claims that content broadcast by the Company may infringe on the intellectual
property rights of others. Management believes
that adequate provisions have been made in the accounts where required. Although it is not possible to estimate the
extent of potential costs and losses, if any, management believes that the
ultimate resolution of any such contingencies will not have a material adverse
effect on the consolidated financial position and results of operations of the
Company.
12.
Share Capital
Share capital
consists of the following:
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
|
|
|
|
Unlimited common
shares, voting, no par value, discretionary non-cumulative dividend
|
|
|
|
|
|
|
Unlimited
Class 1 preference shares, non-voting, no par value, discretionary
partly cumulative or non-cumulative dividends
|
|
|
|
|
|
|
Unlimited
Class 2 preference shares, non-voting, no par value, discretionary
partly cumulative or non-cumulative dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding
|
|
|
|
|
|
|
Common shares
|
|
|
|
|
|
|
September 30,
2008: Issued and outstanding: 49,405,372
|
|
|
|
|
|
|
[December 31,
2007: 49,144,313]
|
|
173,087,962
|
|
172,697,828
|
|
F-98
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
On June 26, 2008, the
shareholders of the Company approved an Employee Share Purchase Plan [“ESPP”],
whereby certain employees of the Company will be provided with an opportunity
to acquire an ownership interest in the Company. The shares will be purchased
from treasury and the purchase price will be the 10-day volume weighted average
price of the common shares on the Toronto Stock Exchange less a 15% discount. The
Company has not implemented this plan since its approval by shareholders and no
shares have been issued under this Plan.
On October 20, 2008,
AvantaLion LLC, an entity controlled by Mr. Wang, the spouse of the
Founder and CEO of NeuLion, purchased 10,000,000 Units from JumpTV’s treasury
at a price of Cdn$1.00 per unit. Each unit consists of one (1) common
share and one-half of one common share purchase warrant exercisable at Cdn$1.25
and one-half of one common share purchase warrant exercisable at Cdn$1.50. The
warrants partially comprising the Units will be exercisable for a period of two
years from the date of issuance. G. Scott Paterson has also purchased 1,000,000
Units on the same terms for gross proceeds of Cdn$11 million
[note 18]
.
13.
Stock Option and Stock-Based Compensation Plans
On June 9, 2008, the Company announced that it
had signed a binding letter of intent to merge with NeuLion, an end-to-end IPTV
service of live and on-demand sports, international and religious programming
over the Internet and through set top boxes. Under the terms of the Company’s
stock option and stock-based compensation plans, all unvested securities vest
immediately if an employee or consultant’s employment is terminated as a result
of a change of control. Accordingly, the Company has accounted for these
modifications as additional grants and has recognized additional stock-based
compensation expense in the amount of $29,541
and
$63,543
for the three
and nine months ended September 30, 2008, respectively, relating to the
fair value of these additional awards. No such expense was recognized during
the comparative three and nine month periods for 2007.
[i] Stock Option Plan
A summary of stock
option activity is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
5,605,184
|
|
3.76
|
|
|
Granted
|
|
1,175,000
|
|
0.64
|
|
|
Exercised
|
|
(9,583
|
)
|
1.80
|
|
|
Forfeited
|
|
(1,775,634
|
)
|
3.87
|
|
|
Outstanding,
September 30, 2008
|
|
4,994,967
|
|
2.99
|
|
F-99
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
For the three and
nine months ended September 30, 2008, $364,542 and $1,359,981,
respectively, were recorded for total stock-based compensation expense related
to stock options [three and nine months ended September 30, 2007 -
$818,851
and
$2,337,195],
respectively. The weighted average exercise price of options exercisable as at September 30,
2008 was $2.77 [September 30, 2007 - $3.14].
The weighted
average fair value of all stock options granted during the nine months ended September 30,
2008 was $0.38 [September 30, 2007 - $3.38]
based
on the following assumptions:
|
Nine months ended September 30
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
Exercise price
of stock options granted
|
|
$
|
0.64
|
|
$
|
6.16
|
|
|
Expected
volatility
|
|
69
|
%
|
72
|
%
|
|
Risk-free
interest rate
|
|
2.95
|
%
|
3.77
|
%
|
|
Expected life
[years]
|
|
4
|
|
4
|
|
|
Dividend yield
|
|
nil
|
|
nil
|
|
|
|
|
|
|
|
|
|
|
[ii] Restricted Share Plan
A summary of restricted share activity under the restricted share plan
is as follows:
|
|
|
#
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
315,926
|
|
|
Forfeited
|
|
(49,098
|
)
|
|
Vested and
issued for common shares
|
|
(191,361
|
)
|
|
Outstanding,
September 30, 2008
|
|
75,467
|
|
During the three
and nine months ended September 30, 2008, the Company recognized
stock-based compensation expense of $19,725
and $74,716,
respectively [three and nine months ended September 30, 2007 - $161,096
and
$856,047],
respectively,
related to its restricted share
plan. Compensation expense was determined based on the Company’s closing market
price on the TSX per common share on the date of vesting and issuance.
[iii] Warrants
The total
compensation expense related to warrants expensed during the three and nine
months ended September 30, 2008 was $52,316
and
$224,844, respectively [three and nine months ended September 30, 2007 -
$82,531 and $189,813], respectively. The total direct broadcast operating costs
related to warrants expensed during the three and nine months ended September 30,
2008 were $31,407
and $94,197, respectively [three
and nine months ended September 30, 2007 - $20,432 and $20,432],
respectively.
F-100
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
A summary of the warrant activity during the nine
months ended September 30, 2008 is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
1,937,474
|
|
4.51
|
|
|
Forfeited
|
|
(898,674
|
)
|
4.87
|
|
|
Outstanding,
September 30, 2008
|
|
1,038,800
|
|
4.20
|
|
The fair value of
warrants was determined using the Black-Scholes option pricing model.
During the nine months ended September 30, 2008 and 2007, the
Company did not grant any warrants.
[iv] Retention Warrant Plan [“Retention
Warrant Plan”]
A summary of the retention warrant activity
during the nine months ended September 30, 2008 is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
1,135,894
|
|
3.86
|
|
|
Granted
|
|
787,000
|
|
0.67
|
|
|
Exercised
|
|
(10,000
|
)
|
0.64
|
|
|
Forfeited
|
|
(329,607
|
)
|
2.50
|
|
|
Outstanding,
September 30, 2008
|
|
1,583,287
|
|
2.58
|
|
During the three
and nine months ended September 30, 2008, the Company recognized
stock-based compensation expense of $125,435
and
$354,346, respectively [three and nine months ended September 30, 2007 -
nil and
nil]
related
to its Retention Warrant Plan.
The weighted fair
value of retention warrants granted during the nine months ended September 30,
2008 was $0.67
based on the following
assumptions:
F-101
Table of
Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
|
Nine months ended September 30
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
Exercise price of
retention warrants granted
|
|
$
|
0.67
|
|
n/a
|
|
|
Expected
volatility
|
|
69
|
%
|
n/a
|
|
|
Risk-free
interest rate
|
|
2.97
|
%
|
n/a
|
|
|
Expected life
[years]
|
|
4
|
|
n/a
|
|
|
Dividend yield
|
|
nil
|
|
n/a
|
|
|
|
|
|
|
|
|
|
[v] Stock Appreciation Rights Plan [“SARs”]
A summary of the
SARs activity during the nine months ended September 30, 2008 is as
follows:
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise price
|
|
|
|
|
#
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
3,384,020
|
|
4.04
|
|
|
Granted
|
|
570,000
|
|
0.60
|
|
|
Forfeited
|
|
(1,789,654
|
)
|
3.72
|
|
|
Outstanding,
September 30, 2008
|
|
2,164,366
|
|
3.40
|
|
During the three
and nine months ended September 30, 2008, the Company recognized
stock-based compensation recovery of $41,325 and nil, respectively, [three and
nine months ended September 30, 2007 — recovery of $449,654 and
$1,087,761], respectively
related
to its SARs plan.
[vi] Directors’ Compensation Plan [“Directors’
Plan”]
On November 13, 2007, a Directors’ Compensation Plan was
implemented, whereby non-management Directors of JumpTV will receive a minimum
50% of their retainers and fees in the form of common shares and may elect to
receive a greater portion of their retainers and fees in common shares. The
number of common shares to be issued to non-management Directors is determined
by dividing the dollar value of the retainers and fees by the closing price of
the common shares on the relevant payment date. The maximum number of common
shares available to be issued by the Company under the Directors’ Plan is
500,000.
During the nine
months ended September 30, 2008, the Company issued 50,115
common shares with a fair value of $41,918
in regards to fees and retainers to non-management
directors.
F-102
Table of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
14.
Supplemental Cash Flow Information
During the three
and nine months ended September 30, 2008 and 2007, the Company did not pay
any interest or taxes.
Excluded from the
consolidated statements of cash flows are the following non-cash transactions:
For the three
months ended September 30, 2008:
|
[i]
|
issuance of 25,001 common shares with a fair market
value of $19,725 in regards to the vesting of restricted share plan units.
|
|
|
|
|
[ii]
|
issuance of 45,469 common shares with a fair market
value of $34,164 in regards to the Directors’ Plan.
|
|
|
|
|
For the nine months ended September 30, 2008:
|
|
|
|
[i]
|
reclassification of amounts from contributed surplus
to share capital in regards to the exercise of stock options of $9,839.
|
|
|
|
|
[ii]
|
reclassification of amounts from contributed surplus
to share capital in regards to the exercise of retention warrants of $237.
|
|
|
|
|
[iii]
|
issuance of 191,361 common shares with a fair market
value of $260,041 in regards to the vesting of restricted share plan units.
|
|
|
|
|
[iv]
|
issuance of 50,115 common shares with a fair market
value of $41,918 in regards to the Directors’ Plan.
|
|
|
|
|
For the three months ended September 30, 2007:
|
|
|
|
[i]
|
reclassification of amounts from contributed surplus
to share capital in regards to the exercise of stock options of $106,361.
|
|
|
|
|
[ii]
|
issuance of 46,863 common shares with a fair market
value of approximately $155,897 in regards to the vesting of restricted share
plan units.
|
|
|
|
|
[iii]
|
issuance of 743,349 common shares with a fair market
value of $2,267,214 in regards to the initial share consideration for Cycling
TV.
|
|
|
|
|
For the nine months ended September 30, 2007:
|
|
|
|
[i]
|
reclassification of amounts from contributed surplus
to share capital in regards to the exercise of stock options and warrants of
$248,819.
|
F-103
Table
of Contents
JumpTV Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S. dollars, unless otherwise noted]
[Information as at September 30, 2008 and for the three and nine
months ended
September 30, 2008 and 2007 is unaudited]
|
[ii]
|
issuance of 191,345 common shares with a fair market value of
approximately $1,182,295 in regards to the acquisition of SportsYA.
|
|
|
|
|
[iii]
|
issuance of 153,609 common shares with a fair market
value of approximately $851,652 in regards to the vesting of restricted share
plan units.
|
|
|
|
|
[iv]
|
issuance of 743,349 common shares with a fair market
value of $2,267,214 in regards to the initial share consideration for Cycling
TV.
|
15.
Financial Instruments and Risk Management
The Company’s
financial instruments are comprised of cash and cash equivalents, short-term
investments, accounts receivable, interest receivable, other receivables,
accounts payable, other accrued liabilities, amounts due to/from related party,
notes payable and obligations under capital lease.
The fair value of
a financial instrument is defined as the amount at which the instrument could
be exchanged in a current transaction between willing parties.
The fair value of
assets and liabilities were as follows:
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
Held-for-Trading
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
24,099,765
|
|
51,202,984
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
Short-term
investments
|
|
121,691
|
|
130,640
|
|
|
Loans and
Receivables
|
|
|
|
|
|
|
Accounts
receivable
|
|
2,326,362
|
|
1,782,280
|
|
|
Interest
receivable
|
|
44,146
|
|
726,995
|
|
|
Other
receivables
|
|
76,010
|
|
79,385
|
|
|
Due from related
party
|
|
2,831
|
|
—
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
Other Financial
Liabilities
|
|
|
|
|
|
|
Accounts payable
|
|
3,072,052
|
|
3,296,858
|
|
|
Other accrued
liabilities
|
|
5,903,971
|
|
5,247,328
|
|
|
Due to related
party
|
|
—
|
|
37,229
|
|
|
Note payable
|
|
45,467
|
|
45,467
|
|
|
Obligations
under capital lease
|
|
99,558
|
|
200,764
|
|
F-104
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
[Information as at
September 30, 2008 and for the three and nine months ended
September 30, 2008
and 2007 is unaudited]
All fair values
denoted above approximate their carrying values due to their short term nature
and/or variable interest rates.
Risk management is
primarily the responsibility of the Company’s corporate finance function. Significant risks are regularly monitored and
actions are taken, when appropriate, according to the Company’s approved
policies, established for that purpose.
In addition, as required, these risks are reviewed with the Company’s
Board of Directors.
Foreign Exchange
Risk
The Company is
exposed to foreign exchange risk as a result of transactions in currencies
other than its functional currency of the United States dollar. The majority of the Company’s revenues are
transacted in U.S. dollars, whereas the majority of expenses are transacted in
U.S. or Canadian dollars. The Company
does not use derivative instruments to hedge against foreign exchange risk.
Interest Rate Risk
The Company is
exposed to interest rate risk on its invested cash and cash equivalents and its
short-term investments. The interest
rates on these instruments are based on the banks’ applicable prime rate and
therefore are subject to change with the market. The Company does not use derivative financial
instruments to reduce its interest rate risk.
Credit Risk
The Company sells its services to a variety of
customers under various payment terms and therefore is exposed to credit
risks. The Company has adopted policies
and procedures designed to limit these risks.
The maximum exposure to credit risk at the reporting date is the
carrying value of receivables. The
Company establishes an allowance for doubtful accounts that represents its
estimate of incurred losses in respect of accounts receivable. The Company believes that the concentration
of credit risk is limited due to the Company’s primary source of revenues to
date being subscription revenues, for which monies are received in advance
principally through credit cards.
There is no significant credit risk related to the
Company’s cash and cash equivalents and short-term investments. Credit risk is
managed through conducting financial and other assessments of these investments
on an ongoing basis.
F-105
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
[Information as at
September 30, 2008 and for the three and nine months ended
September 30, 2008
and 2007 is unaudited]
The following table sets out details of the age of
accounts receivable that are outstanding and related allowance for doubtful
accounts:
|
|
|
September 30, 2008
|
|
|
|
|
$
|
|
|
|
|
|
|
|
Current
|
|
1,793,932
|
|
|
31-60 days
|
|
234,632
|
|
|
61-90 days
|
|
208,659
|
|
|
Over 90 days
|
|
403,339
|
|
|
Less: Allowance
for doubtful accounts
|
|
(314,200
|
)
|
|
Total accounts
receivable, net
|
|
2,326,362
|
|
The carrying amount of accounts receivable is reduced
through the use of an allowance account and the amount of the loss is
recognized in the consolidated statements of operations and comprehensive
loss. When a receivable balance is
considered uncollectible, it is written off against the allowance for accounts
receivable. Subsequent recoveries of amounts previously written off are
credited against operating expenses in the consolidated statements of
operations and comprehensive loss.
16.
Segmented Information
The Company has
one operating segment and one reportable segment, online broadcasting of
international and sports content over the Internet. Substantially all of the operations of the
Company are directly engaged in or support this operating segment.
The following
table presents the Company’s subscription revenue by geographical region based
on location of the Company’s subscribers:
|
|
|
Three months
|
|
Nine months
|
|
|
|
|
ended
|
|
ended
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
69
|
|
63
|
|
65
|
|
55
|
|
|
Europe
|
|
11
|
|
22
|
|
20
|
|
23
|
|
|
Canada
|
|
5
|
|
5
|
|
5
|
|
7
|
|
|
Rest of world
|
|
15
|
|
10
|
|
10
|
|
15
|
|
|
|
|
100
|
|
100
|
|
100
|
|
100
|
|
F-106
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
[Information as at
September 30, 2008 and for the three and nine months ended
September 30, 2008
and 2007 is unaudited]
The following
table presents the geographical location of the Company’s long-lived
assets:
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
United States
|
|
82
|
|
86
|
|
|
Europe
|
|
5
|
|
7
|
|
|
Canada
|
|
12
|
|
4
|
|
|
Rest of world
|
|
1
|
|
3
|
|
|
|
|
100
|
|
100
|
|
17.
Capital Management
The Company manages the following
accounts in regards to capital management:
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
Share capital
|
|
173,087,962
|
|
172,697,828
|
|
|
Contributed
surplus
|
|
9,551,454
|
|
7,740,531
|
|
|
Accumulated
deficit
|
|
(144,063,559
|
)
|
(61,946,378
|
)
|
|
|
|
38,575,857
|
|
118,491,981
|
|
The Company’s outstanding share capital is comprised
of common shares. At the end of the third quarter of 2008, an unlimited number
of common shares were authorized and 49,405,372 (December 2007 -
49,144,313) common shares were issued and outstanding. Approximately 12% of the
common shares are owned by Fidelity Management and Research Company; 11% are
owned by the Company’s Executive Chairman, G. Scott Paterson, and the remaining
shares are widely held. Further information on the Company’s outstanding share
capital is provided in note 14 to the consolidated financial statements for the
year ended December 31, 2007.
On October 20, 2008, the Company completed a
private placement for gross proceeds of Cdn$11,000,000 [note 18].
F-107
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
[Information as at
September 30, 2008 and for the three and nine months ended
September 30, 2008
and 2007 is unaudited]
At September 30, 2008, a total of 4,994,967 stock
options were outstanding, 75,467
restricted
share units, 1,038,800
warrants,
1,583,287
retention warrants and 2,164,366
SARs, which convertible securities cumulatively represented
20%
of the Company’s issued and
outstanding share capital. Pursuant to guidelines set by the Company’s
respective equity plans, stock option grants are limited to the greater of
12.5% of the issued and outstanding common shares outstanding and 4,000,000,
restricted share unit grants have been fully granted, retention warrants are
limited to 2,500,000 and SARs grants are limited to the greater of 5% of the
issued and outstanding common shares and 4,150,000. The Company is currently in compliance with
these guidelines.
The Company’s objective in managing
capital is to ensure a sufficient liquidity position to finance its revenue
growth, general and administrative expenses, working capital and capital
expenditures.
In order to maintain or adjust its
capital structure, the Company may issue new shares and/or purchase shares for
cancellation pursuant to normal course issuer bids.
To finance its activities, the
Company has relied on revenue growth and issuance of common equity. Since inception, the Company has financed its
activities primarily through public offerings of common shares.
The Company’s policy is to maintain
a minimal level of debt. At this time
the Company has not utilized debt facilities as part of its capital management
program nor has it paid dividends to its shareholders.
The capital management objectives
for the period ended September 30, 2008 remained the same as those of the
previous fiscal period.
The Company is not subject to any
externally imposed capital requirements.
18.
Subsequent Event
On October 20,
2008 , the Company completed the previously announced merger with NeuLion, an
end-to-end IPTV service of live and on-demand sports, international and
religious programming over the Internet and through set top boxes. Under the terms of the merger, JumpTV issued
49,577,427 common shares, 1,840,097 contingent shares, which represented
approximately the entire issued and outstanding shares of JumpTV prior to
closing, to the securityholders of NeuLion, in exchange for their NeuLion
securities. Pursuant to the merger, the
Company issued 5,000,000 warrants exercisable for two years at US$0.63 and
2,700,000 employee stock options exercisable for five years at US$0.60 to
employees of the Company.
On October 20,
2008, AvantaLion LLC, an entity controlled by Mr. Charles Wang, the spouse
of the Founder and CEO of NeuLion, purchased 10,000,000 units from JumpTV’s
treasury at a price of Cdn$1.00 per unit. Each unit (a “Unit”) consists of one (1) common
share and one-half of one common share purchase warrant exercisable at Cdn$1.25
and one-half of one common share
F-108
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
[Information as at
September 30, 2008 and for the three and nine months ended
September 30, 2008
and 2007 is unaudited]
purchase warrant
exercisable at Cdn$1.50. The warrants partially comprising the Units are
exercisable for a period of two years from the date of issuance. G. Scott
Paterson also purchased 1,000,000 Units on the same terms. The aggregate gross
proceeds from the sale of Units were Cdn$11 million.
On October 20,
2008, in accordance with CICA Handbook Section 1581,
Business
Combinations
, and EIC 10,
Reverse Takeover
Accounting
, the Company determined that NeuLion is the acquirer and
accordingly will account for this merger as a reverse take over.
19. Reconciliation of Canadian GAAP to U.S. GAAP
The consolidated
financial statements of the Company are prepared in U.S. dollars in accordance
with Canadian GAAP, which differ in some respects from U.S. GAAP. The following tables set forth the impact of
the material differences between Canadian and U.S. GAAP on the Company’s
consolidated financial statements.
Consolidated
statements of operations
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year per Canadian GAAP
|
|
(11,918,700
|
)
|
(6,466,061
|
)
|
(82,117,181
|
)
|
(20,065,529
|
)
|
|
Adjustment to
net loss:
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation on SARS [ii]
|
|
23,393
|
|
379,074
|
|
634,217
|
|
(107,430
|
)
|
|
Net
loss for the year per U.S. GAAP
|
|
(11,895,307
|
)
|
(6,086,987
|
)
|
(81,482,964
|
)
|
(20,172,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share using U.S. GAAP- basic and diluted
|
|
$
|
(0.24
|
)
|
$
|
(0.12
|
)
|
$
|
(1.65
|
)
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
Nine months
|
|
|
|
|
ended
|
|
ended
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss for the year per Canadian GAAP
|
|
(11,918,700
|
)
|
(6,474,176
|
)
|
(82,117,181
|
)
|
(20,073,644
|
)
|
|
Adjustment to
net loss:
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation on SARS [ii]
|
|
23,393
|
|
379,074
|
|
634,217
|
|
(107,430
|
)
|
|
Comprehensive
loss for the year per U.S. GAAP
|
|
(11,895,307
|
)
|
(6,096,102
|
)
|
(81,482,964
|
)
|
(20,172,959
|
)
|
F-109
Table of
Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
[Information as at
September 30, 2008 and for the three and nine months ended
September 30, 2008
and 2007 is unaudited]
Consolidated Balance Sheet data
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
Canadian
|
|
U.S.
|
|
Canadian
|
|
U.S.
|
|
|
|
|
GAAP
|
|
GAAP
|
|
GAAP
|
|
GAAP
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued stock
appreciation rights [ii]
|
|
—
|
|
23,637
|
|
—
|
|
657,854
|
|
|
Total current
liabilities
|
|
11,959,852
|
|
11,983,489
|
|
10,810,865
|
|
11,468,539
|
|
|
Total
liabilities
|
|
12,700,941
|
|
12,724,578
|
|
11,522,305
|
|
12,180,159
|
|
|
Accumulated
deficit
|
|
(144,063,559
|
)
|
(144,087,196
|
)
|
(61,946,378
|
)
|
(62,604,232
|
)
|
|
Total
shareholders’ equity
|
|
38,535,502
|
|
38,511,865
|
|
118,451,626
|
|
117,793,772
|
|
[i]
Consolidated statement of cash flows
The
disclosure of a subtotal of the amount of cash used by operating activities
before changes in non cash balances related to operating assets and liabilities
in the consolidated statements of cash flow is allowed under Canadian GAAP
while it is not allowed under U.S. GAAP
[ii] Stock appreciation rights (“SARS”)
Under
U.S. GAAP, in accordance with SFAS No. 123R,
Share-Based
Payments,
the liability related to stock-based awards that call for
settlement in cash or other assets must be measured at its fair value based on
the fair value of stock option awards and is to be re-measured at the end of
each reporting period. Under Canadian
GAAP, the liability is measured and re-measured on the intrinsic values of the
SARS awards instead of at their fair values.
[iii]
Recent accounting developments
In September 2006,
the FASB issued FASB Statement No. 157, “Fair Value Measurements”. This new standard defines fair value,
establishes a framework for measuring fair value under U.S. GAAP and expands
disclosures about fair value measurements. This new standard is effective for
the Company beginning September 1, 2008. The Company has assessed the
impact of this new standard on the consolidated financial statements and has
concluded that there are no material impacts on the consolidated financial
statements as a result of the new standard.
In February 2007,
the FASB issued FASB Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. This statement permits entities
the option to measure financial instruments at fair value, thereby achieving an
offsetting effect for accounting purposes for certain changes in fair value of
certain related assets and liabilities without having to apply hedge
accounting. This statement is effective for the Company beginning September 1,
2008. The Company has assessed the impact of this new standard on the
consolidated financial statements and has concluded that there are no material
impacts on the consolidated financial statements as a result of the new
standard.
F-110
Table of Contents
JumpTV Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in U.S.
dollars, unless otherwise noted]
[Information as at
September 30, 2008 and for the three and nine months ended
September 30, 2008
and 2007 is unaudited]
The FASB issued FASB Interpretation No. 48 (“FIN
48”), “Accounting for Uncertainty in Income Taxes”, effective for fiscal years
beginning October 1, 2007. FIN 48 describes the accounting for income
taxes by prescribing the minimum recognition threshold a tax position must meet
before being recognized in the financial statements. The interpretation also
provides guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The adoption of this
new section did not have a material impact on the consolidated financial
statements.
In December 2007,
the FASB issued FASB Statement No. 141R, “Business Combinations”. The statement will require all business
acquisitions to be measured at fair value; the existing definition of a
business would be expanded; pre-acquisition contingencies would be measured at
fair value; most acquisition-related costs would be recognized as expenses as
incurred; as well as other changes. The statement is effective for the Company
beginning September 1, 2009. The Company is currently assessing the impact
of this new standard on its consolidated financial statements.
In December 2007,
the FASB issued FASB Statement No. 160, “Non-controlling Interests in
Financial Statements”. The statement will improve the relevance, comparability
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing new accounting and
reporting standards. The statement is effective for the Company beginning September 1,
2009. The Company is currently assessing the impact of this new standard on its
consolidated financial statements.
[iv]
Supplementary information using US GAAP
Advertising
costs
Advertising costs are expensed as incurred and were
$433,334 and $1,226,621 for the three and nine months ended September 30,
2008, respectively. [three and nine
months ended September 30, 2007 - $311,812 and $1,762,592, respectively].
Variable
interest entity
KIT
Capital Ltda. was an entity incorporated in Colombia for the sole purpose of
signing channel contracts with Colombian entities as this is a requirement by
Colombian law.
F-111
Table of Contents
JUMPTV INC.
PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
Unaudited
[Expressed in U.S. dollars, except for number of shares]
|
|
|
1/1 - 12/31
|
|
|
|
|
|
|
|
|
|
|
|
|
JumpTV
|
|
Acquired
|
|
Pro Forma
|
|
|
|
Pro Forma
|
|
|
|
|
Business
|
|
Business
|
|
Adjustments
|
|
|
|
Total
|
|
|
For the fiscal year ended December 31, 2008
|
|
$
|
|
$
|
|
$
|
|
Notes
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Services revenue
|
|
3,900,650
|
|
12,265,421
|
|
0
|
|
|
|
16,166,071
|
|
|
Equipment revenue
|
|
9,542,689
|
|
0
|
|
0
|
|
|
|
9,542,689
|
|
|
Total Revenue
|
|
13,443,339
|
|
12,265,421
|
|
0
|
|
|
|
25,708,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Services revenue
|
|
3,120,087
|
|
14,245,305
|
|
(3,048,242
|
)
|
4(i)
|
|
14,317,150
|
|
|
Equipment revenue
|
|
4,519,062
|
|
0
|
|
0
|
|
|
|
4,519,062
|
|
|
Total Cost of Sales, exclusive of
amortization and depreciation shown separately below
|
|
7,639,149
|
|
14,245,305
|
|
(3,048,242
|
)
|
|
|
18,836,212
|
|
|
|
|
5,804,190
|
|
(1,979,884
|
)
|
3,048,242
|
|
|
|
6,872,548
|
|
|
Other costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
12,372,441
|
|
26,110,555
|
|
0
|
|
|
|
38,482,996
|
|
|
Stock-based compensation
|
|
1,848,906
|
|
1,525,861
|
|
0
|
|
5(i)
|
|
3,374,767
|
|
|
Depreciation and amortization
|
|
1,572,492
|
|
788,319
|
|
1,332,051
|
|
4(ii), 4(iii)
|
|
3,692,862
|
|
|
|
|
15,793,839
|
|
28,424,735
|
|
1,332,051
|
|
|
|
45,550,625
|
|
|
Operating loss
|
|
(9,989,649
|
)
|
(30,404,619
|
)
|
1,716,191
|
|
|
|
(38,678,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
0
|
|
(47,882,317
|
)
|
0
|
|
5(ii)
|
|
(47,882,317
|
)
|
|
Impairment of long-lived assets
|
|
(1,036,993
|
)
|
(4,945,037
|
)
|
0
|
|
5(iii), 5(iv)
|
|
(5,982,030
|
)
|
|
Gain on foreign exchange
|
|
265,720
|
|
(184,457
|
)
|
0
|
|
|
|
81,263
|
|
|
Investment income
|
|
130,048
|
|
787,442
|
|
0
|
|
|
|
917,490
|
|
|
Equity in loss of affiliate
|
|
(1,006,386
|
)
|
0
|
|
0
|
|
|
|
(1,006,386
|
)
|
|
|
|
(1,647,611
|
)
|
(52,224,369
|
)
|
0
|
|
|
|
(53,871,980
|
)
|
|
Net loss
|
|
(11,637,260
|
)
|
(82,628,988
|
)
|
1,716,191
|
|
|
|
(92,550,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per weighted average number of shares
outstanding — basic and diluted
|
|
|
|
|
|
|
|
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding — basic and diluted
|
|
|
|
|
|
|
|
|
|
103,259,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-112
Table
of Contents
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
[Expressed in U.S. dollars, unless otherwise
noted]
1. Description of Transaction
On October 20, 2008, the Company
completed the Merger with NeuLion, an end-to-end IPTV service provider of live
and on-demand sports, international and religious programming over the Internet
to a computer and/or through a set top box (“STB”) to a television. Under the terms of the Merger, JumpTV issued
49,577,427 common shares directly, as well as 1,840,097 common shares subject
to a performance escrow relating to a prior acquisition, which represented
approximately the entire issued and outstanding common shares of JumpTV prior
to closing, to the securityholders of NeuLion in exchange for their NeuLion
securities. The common shares of JumpTV
are referred to herein as “Shares,” or each individually as a “Share.” Pursuant to the Merger, the Company also
issued 5,000,000 warrants, fully vested and exercisable for two years at
US$0.63, and 2,700,000 employee stock options, vesting in equal monthly amounts
over 48 months and exercisable for five years at US$0.60, to employees of
NeuLion who became employees of the Company.
On October 20, 2008, AvantaLion LLC, an
entity controlled by Charles B. Wang, our Chairman and the spouse of Nancy Li,
our CEO and the founder and CEO of NeuLion, purchased 10,000,000 units from
JumpTV’s treasury at a price of CDN$1.00 per unit. Each unit (a “Unit”)
consists of one Share, one-half of one Share purchase warrant exercisable at
CDN$1.25 and one-half of one Share purchase warrant exercisable at CDN$1.50.
The warrants partially comprising the Units are exercisable for a period of two
years from the date of issuance. G. Scott Paterson, Vice Chairman, also purchased
1,000,000 Units on the same terms. The aggregate gross proceeds from the sale
of Units (the “Private Placement”) were CDN$11.0 million or US$9.2 million
In accordance with SFAS 141,
Business Combinations
, the Company has determined that
NeuLion was the accounting acquirer and accordingly has accounted for the
Merger as a reverse takeover. Therefore,
the financial statements and this MD&A for the years ended December 31,
2008 and 2007 reflect the assets, liabilities and results of operations of
NeuLion, the accounting acquirer, and only include the assets, liabilities and
results of operations of JumpTV, the legal acquirer, subsequent to the reverse
takeover on October 20, 2008 (the “Acquired Business”). This MD&A is issued under the name of the
legal acquirer (JumpTV), but is deemed to be a continuation of the accounting
acquirer (NeuLion).
2. Basis of Presentation
The accompanying unaudited
pro forma consolidated statements of operations give effect to the merger as if
it had occurred on January 1, 2008.
Upon closing
of the merger, the Company determined that NeuLion is the acquirer and
accordingly has accounted for this merger as a reverse take over (“RTO”).
RTO accounting requires that
assets and liabilities of the acquired entity be recorded at fair value as of
the date of the merger. Historical costs
bases of assets and liabilities of the acquired entity (the accounting
acquirer) are maintained in the consolidated financial statements of the merged
entity and the assets and liabilities of the acquired entity (the legal
acquirer) are accounted for under the purchase method. Results of operations of the acquired entity
(the legal acquirer) are included in the financial statements of the combined
company only from the date of acquisition.
The Pro Forma Statements
have been prepared and should be read in conjunction with the following
information:
(i)
Audited consolidated financial statements of
JumpTV, Inc. for the fiscal year ended December 31, 2008;
(ii)
Unaudited consolidated financial statements of JumpTV, Inc. for
the nine month period ended September 30, 2008;
(iii)
Such other supplementary information as was considered necessary to
reflect the Acquisition in the Pro Forma Statements.
F-113
Table of Contents
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
[Expressed in U.S. dollars, unless otherwise
noted]
The Pro Forma Statements do
not include any anticipated financial benefits from such items as cost savings
arising from the Acquisition. The Pro Forma Statements are not necessarily
indicative of the results of operations or the financial position that would
have resulted had the Acquisition been effected on the dates indicated, or the
results that may be obtained in the future.
In
the preparation of the Pro Forma Statements,
the purchase price
allocation of the tangible and intangible assets is preliminary and may be
adjusted as a result of obtaining additional information regarding preliminary
estimates of fair values made at the date of purchase.
3. Accounting for the Acquisition
The purchase price of $33,558,784
represents the
fair value of 49,577,427 of common shares issued of $31,990,711, the fair value
of vested equity instruments in the amount of $515,364 and $1,052,709 in direct
transaction costs. In addition to the
transaction costs there were $968,553 of share issuance costs required under
the merger agreement.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The Company is obtaining third party
valuations of certain intangible assets and evaluating certain liabilities and
assets, thus the allocations of the purchase price are preliminary.
As at October 20, 2008
|
Cash
|
|
$
|
22,884,683
|
|
|
Current assets
|
|
5,005,670
|
|
|
Property, plant and equipment
|
|
5,046,405
|
|
|
Other long-term assets
|
|
1,040,516
|
|
|
Intangible assets
|
|
6,000,000
|
|
|
Goodwill
|
|
6,846,183
|
|
|
Total assets
|
|
46,823,457
|
|
|
Current liabilities
|
|
(12,430,235
|
)
|
|
Other long-term liabilities
|
|
(834,438
|
)
|
|
Net assets acquired
|
|
$
|
33,558,784
|
|
Of the $6,000,000 of acquired intangible assets, $100,000 was assigned
to the JumpTV brand, and $5,900,000 was assigned to customer relationships.
The purchase price of NeuLion contains contingent purchase price
consideration of 1,840,097 common shares.
The number of shares will be based on a 24 month revenue milestone for
Cycling TV ending on July 31, 2009.
The contingent consideration will be accounted for as an addition to the
purchase price consideration when the shares are issued or become
issuable. As at December 31, 2008,
the Company does not believe Cycling TV will achieve the revenue milestone.
As noted above, the purchase price allocation of the tangible and
intangible assets are preliminary and may be adjusted as a result of obtaining
additional information regarding preliminary estimates of fair values made at
the date of purchase.
F-114
Table of Contents
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
[Expressed in U.S. dollars, unless otherwise
noted]
4. Pro forma Statement of Operations
Adjustments
The unaudited pro forma
consolidated statement of operations for the year ending December 31, 2008
incorporates the following adjustments:
(i)
Reclassification of $3,048,242 in
depreciation and amortization from Cost of Sales to Depreciation and
Amortization for the year ended December 31, 2008, to conform with the
current year’s financial statement presentation.
(ii)
Reversal of $3,836,561 in depreciation and
amortization relating to the Acquired Business for the year ended December 31,
2008, as a result of the revised fair value of tangible and intangible assets
required on acquisition.
(iii)
Recording of $2,120,370 in depreciation and
amortization for the year ended December 31, 2008, as a result of the
revised fair value of tangible and intangible assets required on acquisition.
5. Material Non-Recurring Items Included in
the Pro forma Statement of Operations
The unaudited pro forma
consolidated statement of operations for the year ending December 31,
2008, includes the following expenses:
(i)
These
amounts represent stock-based compensation for the Company’s stock options,
restricted share units, stock appreciation rights, warrants and retention
warrants. The Company was required to
fair value these equity instruments on the acquisition date. As a result, the compensation expense going
forward relating to these equity instruments is nominal.
(ii) Management determined that the fair value of the Company,
including unidentifiable intangible assets, did not support the carrying amount
of goodwill, accordingly the Company recorded a non-cash goodwill impairment
charge in the Acquired business of $47,882,317.
(iii) Management
determined that the business climate had changed such that the carrying
value of the Company’s long-lived assets may not be fully recoverable. Accordingly, the Company recorded non-cash
impairment charges totaling $4,945,037 during 2008 in the Acquired Business.
(iv)
In addition to the non-cash impairment charges described above, the Company
recorded a non-cash impairment charge of $1,036,993 at December 31, 2008.
6. Loss per Share
Basic
loss per share is computed by dividing net loss for the period by the weighted
average number of shares outstanding for the period. Diluted loss per share is computed by
dividing net loss for the period by the weighted average number of shares
outstanding and if dilutive, potential common shares using the treasury stock
method. Potential common shares consist of stock options, restricted share
units, stock appreciation rights and warrants.
None of the Company’s convertible instruments are dilutive.
EPS for periods prior to the
business combination are restated. The retroactive restatement is based on the
same number of weighted-average shares outstanding that the accounting acquirer
used in each historic period. The denominator of the historical, restated EPS
calculation has been adjusted by multiplying the weighted-average shares used
in each historically reported EPS calculation by the agreed-upon exchange ratio.
F-115
Table of Contents
SIGNATURES
Pursuant to the requirements
of Section 12 of the Securities Exchange Act of 1934, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
JUMPTV
INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/ Nancy Li
|
|
Date: April 9,
2009
|
Name: Nancy Li
|
|
|
Title: Chief Executive
Officer
|
Table of Contents
|
EXHIBIT
|
|
|
|
NUMBER
|
|
TITLE OF EXHIBIT
|
|
|
|
|
|
|
2.1
|
|
*
|
Agreement and Plan of
Merger, dated June 26, 2008, among NeuLion, Inc., JumpTV Inc. and
JumpTV Acquisition Corp.
|
|
|
|
|
|
|
3.1(i)
|
|
*
|
Articles of Incorporation,
as amended, of JumpTV
|
|
|
|
|
|
|
3.1(ii)
|
|
*
|
Amended By-law No. 1
of JumpTV
|
|
|
|
|
|
|
4
|
|
*
|
Form of stock
specimen
|
|
|
|
|
|
|
9
|
|
*
|
Voting Trust Agreement,
dated as of October 20, 2008, among Charles B. Wang, Nancy Li,
AvantaLion LLC, Jianbing Duan, Computershare Trust Company of Canada and
JumpTV Inc.
|
|
|
|
|
|
|
10.1
|
|
* #
|
Employment Agreement,
dated as of June 1, 2006, between JumpTV Inc. and G. Scott Paterson
|
|
|
|
|
|
|
10.2
|
|
* #
|
Employment Agreement,
dated as of February 11, 2008, between JumpTV Inc. and Blair Baxter
|
|
|
|
|
|
|
10.3
|
|
* #
|
Amendment, dated
March 31, 2008, to Employment Agreement between JumpTV Inc. and Blair
Baxter
|
|
|
|
|
|
|
10.4
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|
* #
|
Termination Letter, dated
September 9, 2008, between JumpTV Inc. and Blair Baxter
|
|
|
|
|
|
|
10.5
|
|
*
#
|
Agreement for Services,
dated February 23, 2009, between JumpTV Inc. and Blair Baxter
|
|
|
|
|
|
|
10.6
|
|
* #
|
Employment Agreement,
dated October 12, 2007, between JumpTV Inc. and Jordan Banks
|
|
|
|
|
|
|
10.7
|
|
* #
|
Termination Letter, dated
as of June 27, 2008, between JumpTV Inc. and Jordan Banks
|
|
|
|
|
|
|
10.8
|
|
* #
|
Employment Agreement,
dated August 31, 2007, between JumpTV Inc. and Nada Usina
|
|
|
|
|
|
|
10.9
|
|
* #
|
Termination Letter, dated
October 14, 2008, between JumpTV Inc. and Nadezda Usina
|
|
|
|
|
|
|
10.10
|
|
* #
|
Employment Agreement,
dated August 10, 2007, between JumpTV Inc. and Bill Stephen
|
|
|
|
|
|
|
10.11
|
|
* #
|
Termination Fact
Sheet/Separation Agreement, dated September 23, 2008, between JumpTV
Inc. and William Stephen
|
|
|
|
|
|
|
10.12
|
|
* #
|
Second Amended and
Restated Stock Option Plan and form of option agreement
|
Table of Contents
|
10.13
|
|
* #
|
2006 Stock Appreciation
Rights Plan, as amended
|
|
|
|
|
|
|
10.14
|
|
* #
|
Amended and Restated
Retention Warrants Plan and form of retention warrant agreement
|
|
|
|
|
|
|
10.15
|
|
* #
|
Restricted Share Plan and
form of award agreement
|
|
|
|
|
|
|
10.16
|
|
* #
|
Amended and Restated
Directors’ Compensation Plan
|
|
|
|
|
|
|
10.17
|
|
* #
|
Employee Share Purchase
Plan
|
|
|
|
|
|
|
10.18
|
|
* #
|
Form of Rights
Agreement under the 2006 Stock Appreciation Rights Plan
|
|
|
|
|
|
|
10.19
|
|
*
|
Contract for Services,
dated as of June 1, 2008, between KyLinTV, Inc. and
NeuLion, Inc. (portions of this exhibit have been omitted pursuant to a
request for confidential treatment on file with the Securities and Exchange
Commission)
|
|
|
|
|
|
|
10.20
|
|
*
|
Software License and Product
Distribution Agreement, dated as of September 29, 2006, between
NeuLion, Inc. and TransVideo International Ltd. (portions of this
exhibit have been omitted pursuant to a request for confidential treatment on
file with the Securities and Exchange Commission)
|
|
|
|
|
|
|
10.21
|
|
*
|
Amendment, dated as of
July 1, 2008, to Software and Product Distribution Agreement between
NeuLion, Inc. and TransVideo International Ltd. (portions of this
exhibit have been omitted pursuant to a request for confidential treatment on
file with the Securities and Exchange Commission)
|
|
|
|
|
|
|
10.22
|
|
*
|
License Agreement, dated
as of June 1, 2006, between NeuLion, Inc. and ABS-CBN Global
Limited (portions of this exhibit have been omitted pursuant to a request for
confidential treatment on file with the Securities and Exchange Commission)
|
|
|
|
|
|
|
10.23
|
|
*
|
Contract for Services,
dated as of June 22, 2007, between Sky Angel U.S., LLC and
NeuLion, Inc. (portions of this exhibit have been omitted pursuant to a
request for confidential treatment on file with the Securities and Exchange
Commission)
|
|
|
|
|
|
|
10.24
|
|
*
|
Contract for Services,
dated as of June 25, 2007, between NHL Interactive CyberEnterprises, LLC
and NeuLion, Inc. (portions of this exhibit have been omitted pursuant
to a request for confidential treatment on file with the Securities and
Exchange Commission)
|
|
|
|
|
|
|
10.25
|
|
*
|
Amendment to Contract for
Services Agreement, dated as of August 1, 2008, between NHL Interactive
CyberEnterprises, LLC and NeuLion, Inc. (portions of this exhibit have been
omitted pursuant to a request for confidential treatment on file with the
Securities and Exchange Commission)
|
|
|
|
|
|
|
10.26
|
|
*
|
Agreement, dated
August 2007, among JumpTV Inc. and the sellers named therein
|
Table of Contents
|
10.27
|
|
*
|
Asset Purchase Agreement,
dated as of July 15, 2007, among JumpTV Inc., JumpTV USA Inc. and XOS
|
|
|
|
|
|
|
16
|
|
*
|
Letter regarding change in
accountant
|
|
|
|
|
|
|
21
|
|
*
|
Subsidiaries of JumpTV
|
* Filed herewith
# Management contract or compensatory plan or
arrangement
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
AMONG
JUMPTV INC.
-AND-
JUMPTV ACQUISITION CORP.
-AND-
NEULION, INC.
TABLE OF CONTENTS
|
ARTICLE I - DEFINITIONS
|
|
1
|
|
ARTICLE II - MERGER, CLOSING AND CONVERSION OF
SHARES; THE MERGED COMPANY
|
|
6
|
|
2.1
|
|
The Merger
|
|
6
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|
2.2
|
|
Closing
|
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7
|
|
2.3
|
|
Conversion
of Shares
|
|
7
|
|
2.4
|
|
Exchange
of Certificates
|
|
8
|
|
2.5
|
|
Dissenting
Stockholders
|
|
9
|
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2.6
|
|
Company
Options
|
|
10
|
|
2.7
|
|
Withholding
Rights
|
|
10
|
|
2.8
|
|
Certificate
of Incorporation of Surviving Corporation
|
|
10
|
|
2.9
|
|
Directors
and Officers of Surviving Corporation
|
|
10
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|
2.10
|
|
Directors
and Officers of Purchaser
|
|
11
|
|
ARTICLE
III - REPRESENTATIONS OF THE COMPANY
|
|
11
|
|
3.1
|
|
Disclosure
|
|
11
|
|
3.2
|
|
Corporate
Organization
|
|
11
|
|
3.3
|
|
Authorization;
No Violation
|
|
12
|
|
3.4
|
|
Capitalization
|
|
12
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|
3.5
|
|
Consents
and Approvals
|
|
13
|
|
3.6
|
|
Financial
Statements
|
|
13
|
|
3.7
|
|
Litigation
|
|
14
|
|
3.8
|
|
Intellectual
Property
|
|
14
|
|
3.9
|
|
Compliance
with Agreements and Laws
|
|
17
|
|
3.10
|
|
Environmental
|
|
18
|
|
3.11
|
|
Contracts
and Commitments
|
|
18
|
|
3.12
|
|
Related-Party
Transactions
|
|
19
|
|
3.13
|
|
Changes
|
|
19
|
|
3.14
|
|
Company
Assets
|
|
20
|
|
3.15
|
|
Insurance
|
|
20
|
|
3.16
|
|
Employee
Benefit Plans
|
|
20
|
|
3.17
|
|
Labor
Matters, Agreements and Actions
|
|
22
|
|
3.18
|
|
Banking
Facilities
|
|
23
|
|
3.19
|
|
Powers
of Attorney and Suretyships
|
|
23
|
|
3.20
|
|
Brokers
and Finders
|
|
23
|
|
3.21
|
|
Compliance
with Laws; Permits
|
|
23
|
|
3.22
|
|
Approvals;
Takeover Statutes
|
|
24
|
|
ARTICLE
IV - REPRESENTATIONS OF PURCHASER
|
|
24
|
|
4.1
|
|
Disclosure
|
|
24
|
|
4.2
|
|
Corporate
Organization
|
|
24
|
|
4.3
|
|
Authorization;
No Violation
|
|
25
|
|
4.4
|
|
Capitalization
|
|
25
|
|
4.5
|
|
Issuance
of Purchaser Common Shares
|
|
26
|
|
4.6
|
|
Merger
Sub
|
|
26
|
|
4.7
|
|
Consents
and Approvals
|
|
26
|
|
4.8
|
|
Securities
Filings; Financial Statements
|
|
27
|
|
4.9
|
|
Litigation
|
|
27
|
|
4.10
|
|
Intellectual
Property
|
|
27
|
|
4.11
|
|
Compliance
with Agreements and Laws
|
|
31
|
|
4.12
|
|
Environmental
|
|
31
|
|
4.13
|
|
Contracts
and Commitments
|
|
31
|
|
4.14
|
|
Related-Party
Transactions
|
|
32
|
|
4.15
|
|
Changes
|
|
32
|
|
4.16
|
|
Purchaser
Assets
|
|
33
|
|
4.17
|
|
Insurance
|
|
34
|
|
4.18
|
|
Employee
Benefit Plans
|
|
34
|
i
|
4.19
|
|
Labor
Matters, Agreements and Actions
|
|
36
|
|
4.20
|
|
Banking
Facilities
|
|
36
|
|
4.21
|
|
Powers
of Attorney and Suretyships
|
|
36
|
|
4.22
|
|
Brokers
or Finders
|
|
36
|
|
4.23
|
|
Compliance
with Laws; Permits
|
|
37
|
|
4.24
|
|
Approvals;
Takeover Statutes
|
|
37
|
|
ARTICLE
V - CERTAIN COVENANTS OF THE PARTIES
|
|
37
|
|
5.1
|
|
Conduct
of the Company’s Business Prior to the Effective Time
|
|
37
|
|
5.2
|
|
Conduct
of the Purchaser’s Business Prior to the Effective Time
|
|
38
|
|
5.3
|
|
Reports,
Taxes
|
|
40
|
|
5.4
|
|
Non-Solicitation
|
|
40
|
|
5.5
|
|
Intellectual
Property
|
|
40
|
|
5.6
|
|
Stock
Option Grants; Warrants
|
|
41
|
|
5.7
|
|
Delivery
of Audited Financial Statements
|
|
42
|
|
ARTICLE
VI - ADDITIONAL MUTUAL COVENANTS
|
|
42
|
|
6.1
|
|
Access
to Information
|
|
42
|
|
6.2
|
|
Stockholder
Approvals
|
|
42
|
|
6.3
|
|
Legal
Conditions to Merger
|
|
43
|
|
6.4
|
|
Public
Disclosure
|
|
43
|
|
6.5
|
|
Consents
|
|
44
|
|
6.6
|
|
Securities
Compliance
|
|
44
|
|
6.7
|
|
Expenses
|
|
44
|
|
6.8
|
|
Additional
Agreements; Reasonable Commercial Efforts
|
|
45
|
|
6.9
|
|
Supplements
to Disclosure Letters
|
|
45
|
|
6.10
|
|
Non-Solicitation
of Employees
|
|
45
|
|
6.11
|
|
Indemnification
|
|
45
|
|
6.12
|
|
Tax
Treatment of Merger
|
|
46
|
|
ARTICLE
VII - CONDITIONS TO THE OBLIGATIONS OF PURCHASER AND MERGER SUB
|
|
46
|
|
7.1
|
|
Accuracy
of Representations and Warranties
|
|
46
|
|
7.2
|
|
Covenants
Performed
|
|
46
|
|
7.3
|
|
Company
Working Capital
|
|
46
|
|
7.4
|
|
Certificate
|
|
46
|
|
7.5
|
|
Company
Stockholder Approval
|
|
46
|
|
7.6
|
|
No
Injunctions or Litigation
|
|
46
|
|
7.7
|
|
Consents
|
|
47
|
|
7.8
|
|
Receipt
of Regulatory Approvals
|
|
47
|
|
7.9
|
|
Third
Party Consents
|
|
47
|
|
7.10
|
|
Approval
by Purchaser’s Shareholders
|
|
47
|
|
7.11
|
|
TSX
and AIM Approval
|
|
47
|
|
7.12
|
|
Tax
Certificates
|
|
47
|
|
7.13
|
|
Company
Options
|
|
47
|
|
ARTICLE
VIII - CONDITIONS TO THE OBLIGATIONS OF COMPANY
|
|
47
|
|
8.1
|
|
Accuracy
of Representations and Warranties
|
|
47
|
|
8.2
|
|
Covenants
Performed
|
|
48
|
|
8.3
|
|
Certificate
|
|
48
|
|
8.4
|
|
Purchaser
and Merger Sub Shareholder Approval
|
|
48
|
|
8.5
|
|
No
Injunctions or Litigation
|
|
48
|
|
8.6
|
|
Consents
|
|
48
|
|
8.7
|
|
Receipt
of Regulatory Approvals
|
|
48
|
|
8.8
|
|
Third
Party Consents
|
|
48
|
|
8.9
|
|
Approval
by Company’s Stockholders
|
|
48
|
|
8.10
|
|
TSX
and AIM Approval
|
|
49
|
|
ARTICLE
IX - SURVIVAL OF REPRESENTATIONS AND WARRANTIES
|
|
49
|
|
9.1
|
|
Non-Survival
of Representations and Warranties
|
|
49
|
|
ARTICLE
X - TERMINATION
|
|
49
|
|
10.1
|
|
Termination
|
|
49
|
ii
|
10.2
|
|
Effect
of Termination
|
|
49
|
|
10.3
|
|
Extension;
Waiver
|
|
49
|
|
ARTICLE
XI - MISCELLANEOUS
|
|
50
|
|
11.1
|
|
Amendment
|
|
50
|
|
11.2
|
|
Entire
Agreement
|
|
50
|
|
11.3
|
|
Governing
Law
|
|
50
|
|
11.4
|
|
Headings
|
|
50
|
|
11.5
|
|
Notices
|
|
50
|
|
11.6
|
|
Severability
|
|
51
|
|
11.7
|
|
Interpretation
|
|
52
|
|
11.8
|
|
Waiver
|
|
52
|
|
11.9
|
|
Waiver
of Jury Trial
|
|
52
|
|
11.10
|
|
Assignment
|
|
52
|
|
11.11
|
|
Counterparts
|
|
52
|
|
11.12
|
|
Attorneys
Fees
|
|
52
|
Exhibits and Schedules
:
|
Exhibit 1
|
-
|
Stockholders’
Letters
|
|
Schedule 1
|
-
|
Certificate of Incorporation of Surviving
Corporation
|
|
Schedule 2
|
-
|
Bylaws of Surviving Corporation
|
|
Schedule 3
|
-
|
Officers and Directors of Surviving Corporation
|
|
Schedule 4
|
-
|
Officers and Directors of Purchaser
|
iii
AGREEMENT
AND PLAN OF MERGER
This Agreement and Plan of
Merger (“
Agreement
”)
is made and
entered into as of June 26
,
2008 by and
among JumpTV Inc., a corporation existing under the federal laws of Canada (“
Purchaser
”),
JumpTV
Acquisition Corp., a corporation existing under the laws of Delaware and a
wholly owned subsidiary of Purchaser (“
Merger Sub
”) and NeuLion, Inc., a corporation existing under the laws
of Delaware (the “
Company
”). Capitalized terms shall have the
meanings set forth in Article I.
RECITALS
WHEREAS
,
the Boards of Directors of the Company,
Purchaser and Merger Sub have each determined that the Merger is advisable,
fair to and in the best interests of their respective stockholders and approved
the Merger on the terms and subject to the conditions set forth in this
Agreement;
WHEREAS
,
the combination of the Company and Purchaser
shall be effected by the terms of this Agreement through a transaction in which
Merger Sub shall merge with and into the Company in accordance with the
provisions of the DGCL and this Agreement pursuant to which the Company shall
survive the Merger and become a wholly owned subsidiary of Purchaser, the
stockholders of the Company shall become shareholders of Purchaser;
WHEREAS
,
at the Effective Time (as defined below), the
outstanding Company Common Shares (as calculated pursuant to Section 2.3(a)(ii) of
this Agreement) shall be converted into shares of Purchaser Common Shares to be
issued at Closing; and
WHEREAS
,
G. Scott Paterson and Nancy Li have each
entered into irrevocable proxy and voting agreements (the “
Voting
Agreements
”), pursuant to which such shareholders have agreed to vote
in favor of the Merger and the other transactions contemplated by this
Agreement.
NOW
THEREFORE,
in
consideration of the foregoing premises and the representations, warranties,
covenants and agreements herein contained and intending to be legally bound hereby,
the Company, the Purchaser and the Merger Sub hereby agree as follows:
ARTICLE
I -
DEFINITIONS
The terms defined in this Article I
shall, for purposes of this Agreement, have the meanings specified in this Article I
unless the context otherwise requires:
1.1
“
Acquisition Proposal
” shall have the
meaning set forth in Section 5.4 of this Agreement.
1.2
“
Affiliates
” of any party to the
Agreement shall be persons that directly or indirectly through one or more
intermediaries, control, or are controlled by, or are under common control
with, such party.
1.3
“
AvantaLion Subscription Agreement
”
shall mean the Amended and Restated Subscription Agreement of AvantaLion dated June 26,
2008.
1.4
“
Authorizations
” shall have the meaning
set forth in Section 3.9(a) of this Agreement.
1.5
“
AvantaLion
” shall mean AvantaLion LLC,
a limited liability company existing under the laws of Delaware.
1.6
“
By-Laws
” shall mean the By-laws of the
Company as in effect as of the date hereof.
1.7
“
Certificate of Incorporation
” shall
mean the certificate of incorporation of the Company as in effect as of the
date hereof.
1.8
“
Certificates
” shall have the meaning
set forth in Section 2.4(b) of this Agreement.
1.9
“
Closing
” shall mean the delivery by the
parties hereto of the various documents contemplated by this Agreement or
otherwise required in order to consummate the Merger.
1.10
“
Closing Merger Shares
” shall have the
meaning set forth in Section 2.3(a)(ii) of this Agreement.
1.11
“
Closing Date
” shall have the meaning
set forth in Section 2.2 of this Agreement.
1.12
“
Code
” shall mean the Internal Revenue
Code of 1986, as amended.
1.13
“
Company
” shall have the meaning set
forth in the introductory paragraph to this Agreement.
1.14
“
Company Assets
” shall have the meaning
set forth in Section 3.14 of this Agreement.
1.15
“
Company Common Shares
” shall mean the
shares of common stock, $0.01 par value per share, of the Company.
1.16
“
Company Disclosure Letter
” shall have
the meaning set forth in Article III of this Agreement.
1.17
“
Company Employee Plans
” shall have the
meaning set forth in Section 3.16(a) of this Agreement;
1.18
“
Company ERISA Affiliate
” shall have the
meaning set forth in Section 3.16(a) of this Agreement;
1.19
“
Company Financial Statements
” shall have
the meaning set forth in Section 3.6(a) of this Agreement.
1.20
“
Company Entity
” or “
Company Entities
” shall have the meaning set forth in Section 3.2(b) of
this Agreement.
1.21
“
Company Information Circular
” shall
have the meaning set forth in Section 6.2(a) of this Agreement.
1.22
“
Company
Insurance
Policies
” shall have the meaning set forth in Section 3.15 of
this Agreement.
1.23
“
Company IP
” shall have the meaning set
forth in Section 3.8(a)(iv) of this Agreement.
1.24
“
Company IP Contract
” shall have the
meaning set forth in Section 3.8(a)(v) of this Agreement.
1.25
“
Company Material Adverse Effect
” shall
mean any effect that is, or would be reasonably likely to have, a material
adverse effect on the condition, business, commercial relationships, assets,
operating results, customer/supplier or employee relationships, properties or
financial affairs or results of operations of the Company Entities taken as a
whole, other than (i) any economic, political or industry condition or
effect that affects the economy in general or affects any Company Entity’s
industry on an industry-wide basis, and in each case not specifically or
uniquely relating to such Company Entity or (ii) the effect of any changes
in Laws and Regulations or accounting rules.
1.26
“
Company Option
” shall have the meaning
set forth in Section 2.6 of this Agreement.
1.27
“
Company Product
” shall mean each
proprietary product or service (i) that is currently manufactured,
marketed, or sold by any Company Entity, (ii) that is currently under
active development by the Company or (iii) that was distributed by the
Company at any time since such Company Entity’s inception.
1.28
“
Company Registered IP
” shall have the
meaning set forth in Section 3.8(a)(iii) of this Agreement.
2
1.29
“
Company Stockholders Meeting
” shall
have the meaning set forth in Section 6.2 of this Agreement.
1.30
“
Company Stock Option Plan
” shall have
the meaning set forth in Section 2.6 of this Agreement.
1.31
“
Confidentiality Agreement
” shall mean
the mutual non-disclosure agreement between Purchaser and the Company, dated May 23,
2008.
1.32
“
Contract
” shall mean any written or
oral agreement, contract, subcontract, lease, understanding, instrument, note
or commitment that is legally binding.
1.33
“
DGCL
” shall mean the Delaware General
Corporation Law, as amended.
1.34
“
Dissenting Stockholder
” shall have the
meaning set forth in Section 2.5 of this Agreement.
1.35
“
Dissenting Shares
” shall have the
meaning set forth in Section 2.6 of this Agreement.
1.36
“
Effective Time
” shall have the meaning
set forth in Section 2.1(b) of this Agreement.
1.34
“
Employee
Plans
” shall mean any pension or other retirement benefit, profit
sharing, medical, life or other insurance coverage, severance benefit,
disability benefit, salary continuation, unemployment benefit, vacation,
deferred compensation, bonus, stock option, stock purchase, phantom stock,
stock appreciation, incentive compensation, employment or consulting, retention,
change in control, savings, welfare benefit, fringe benefit, cafeteria or other
forms of incentive compensation plans or agreements, including, without
limitation, any “employee benefit plan” (as such term is defined in Section 3(3) of
ERISA).
1.37
“
Environmental Laws
” shall have the
meaning set forth in Section 3.10 of this Agreement.
1.38
“
ERISA
” shall mean the Employee
Retirement Income Security Act of 1974 (US), as amended.
1.39
“
Exchange Act
” shall mean the Securities
Exchange Act of 1934 (US), as amended.
1.40
“
ERISA Affiliate
” shall mean, with
respect to a Person, any trade or business, whether or not incorporated, that
together with such Person would be deemed a “single employer” under Section 414
of the Code.
1.41
“
Exchange Agent
” shall have the meaning
set forth in Section 2.4(a) of this Agreement.
1.42
“
Exchange Ratio
” shall have the meaning
set forth in Section 2.3(a)(ii) of this Agreement.
1.43
“
FIRPTA
” shall mean the Foreign
Investment Real Property Tax Act of 1980, as amended.
1.44
“
GAAP
” shall mean generally accepted
accounting principles in Canada or the United States of America, as applicable,
applied consistently with past practices.
1.45
“Governmental
Entity
” shall mean any government, municipality or political
subdivision thereof, whether federal, state, local, provincial, municipal or
foreign, or any governmental or quasi-governmental agency or regulatory agency,
authority, board, bureau, commission, department, instrumentality or public
body, or any court, arbitrator, administrative tribunal or public utility.
1.46
“
Governmental Order
” shall mean any
order, consent, writ, judgment, injunction, decree, stipulation or award
entered by or with any Governmental Entity.
1.47
“
Holders
” shall mean holders of Company
Common Shares immediately prior to the Effective Time.
1.48
“
Intellectual Property
” shall have the
meaning set forth in Section 3.8(a)(i) of this Agreement.
3
1.49
“
Intellectual Property Rights
” shall
have the meaning set forth in Section 3.8(a)(ii) of this Agreement.
1.50
“
Laws and Regulations
” shall mean all
laws, statutes, codes, rules, regulations and ordinances of all Governmental
Entities.
1.51
“
Legal Proceeding
” shall mean any
action, suit, litigation, arbitration, proceeding (including any civil,
criminal, administrative, investigative or appellate proceeding), hearing,
inquiry, audit, examination or investigation commenced, brought, conducted or
heard by or before, or otherwise involving, any court or other Governmental
Entity or any arbitrator or arbitration panel.
1.52
“
Lien
” shall mean any lien, claim,
charge, option, encumbrance, mortgage, pledge or security interest or other
transfer restrictions, except for any restrictions on transfer generally
arising under any applicable securities Laws and Regulations.
1.53
“
Material Contracts
” means all
contracts material to the business of the Company or the Purchaser, as the
context requires, to which the Company or the Purchaser, as applicable, or any
of their subsidiaries is a party, including all agreements, leases of real
property, licences, undertakings, engagements or commitments of any nature,
written or oral;
1.54
“
Merger
” shall have the meaning set
forth in Section 2.1(a) of this Agreement.
1.55
“
Merger Consideration
” shall have the
meaning set forth in Section 2.3(a) of this Agreement.
1.56
“
Merger Sub
” shall have the meaning set
forth in the introductory paragraph to this Agreement.
1.57
“
Paterson Subscription Agreement
” shall
mean the Amended and Restated Subscription Agreement of G. Scott Paterson dated
June 26, 2008.
1.58
“
Permitted Liens
” shall mean any Lien
consisting of (a) carriers’, warehousemen’s, mechanics’, landlords’,
materialmen’s, repairmen’s, construction or similar common law or statutory liens
or encumbrances arising in the ordinary course of business which are not
delinquent or remain payable without penalty, (b) encumbrances for Taxes
and other assessments or governmental charges or levies not yet due or payable
and (c) any other Liens that individually or in the aggregate are not
material to the Company or Purchaser, as the case may be, and its Subsidiaries,
taken as a whole.
1.59
“
Person
” shall mean any individual,
corporation, partnership, limited liability company, association, joint venture,
trust, Governmental Entity or other entity or organization.
1.60
“
Pre-Closing Period
” shall have the
meaning set forth in Section 5.1 of this Agreement.
1.61
“
Purchaser
” shall have the meaning set
forth in the introductory paragraph to this Agreement.
1.62
“
Purchaser Authorizations
” shall have
the meaning set forth in Section 4.11(a).
1.63
“
Purchaser Common Shares
” shall mean the
common stock of Purchaser.
1.64
“
Purchaser
Designated Individuals
”
shall have the meaning set forth in Section 4.10(a)(vi) of
this Agreement.
1.65
“
Purchaser Disclosure Letter
” shall have
the meaning set forth in Article IV of this Agreement.
1.66
“
Purchaser Entities
” shall have the
meaning set forth in Section 4.2(b) of this Agreement.
1.67
“
Purchaser Information Circular
” shall
have the meaning set forth in Section 6.2(b) of this Agreement.
1.68
“
Purchaser
Insurance Policies
” shall
have the meaning set forth in Section 4.17 of this Agreement.
4
1.69
“
Purchaser Intellectual Property
” shall
have the meaning set forth in Section 4.10(a)(i) of this Agreement.
1.70
“
Purchaser Intellectual Property Rights
”
shall have the meaning set forth in Section 4.10(a)(ii) of this
Agreement.
1.71
“
Purchaser
IP
” shall have
the meaning set forth in Section 4.10(a)(iv) of this Agreement.
1.72
“
Purchaser
IP Contract
” shall
have the meaning set forth in Section 4.10(a)(v) of this Agreement.
1.73
“
Purchaser Material Adverse Effect
”
shall mean any effect that is, or would be reasonably likely to have, a
material adverse effect on the condition, business, commercial relationships,
assets, operating results, customer/supplier and employee relationships,
properties or financial affairs or results of operations of Purchaser, other
than (i) any economic, political or industry condition or effect that
affects the economy in general or affects the Purchaser’s industry on an
industry-wide basis, and in each case not specifically or uniquely relating to,
as applicable, Purchaser or Merger Sub, (ii) any change in the price of
shares of Purchaser Common Shares (it being understood that an effect relating
directly to the operations of the Purchaser that results from or occurs or
exists separately from any such price change and that is not otherwise an effect
identified in (i) above shall not be precluded from being a Purchaser
Material Adverse Effect), or (iii) the effect of any changes in Laws and
Regulations or accounting rules.
1.74
“
Purchaser Product
” shall mean each
proprietary product or service (i) that is currently manufactured,
marketed, or sold by any Purchaser Entity, (ii) that is currently under
active development by any Purchaser Entity or (iii) that was distributed
by any Purchaser Entity at any time since such Purchaser Entity’s inception.
1.75
“
Purchaser Public Filings
” shall have
the meaning set forth in Section 4.8(a) of this Agreement.
1.76
“
Purchaser Registered IP
” shall have the
meaning set forth in Section 4.10(a)(iii) of this Agreement.
1.77
“
Purchaser Stock Option Plan
” means any Purchaser stock option plan.
1.78
“
Purchaser Stock Price
” shall mean the
average closing sale price of a share of Purchaser Common Shares on the Toronto
Stock Exchange for the five (5) consecutive trading days immediately prior
to but not including the day on which the Effective Time occurs.
1.79
“
SEC
” shall mean the United States
Securities and Exchange Commission.
1.80
“
Secretary
” shall have the meaning set
forth in Section 2.1(b) of this Agreement.
1.81
“
Securities Commissions
” shall mean the
securities commissions or similar entities in each of the Provinces of Canada;
1.82
“
Securities Laws
” shall mean, unless
the context otherwise requires, all applicable securities laws in each of the
Provinces of Canada and in the United States and the applicable securities laws
of all other jurisdictions other than each of the Provinces of Canada and the
United States, as applicable, and the respective regulations made thereunder,
together with applicable published fee schedules, prescribed forms, policy statements,
national or multilateral instruments, orders, blanket rulings and other
regulatory instruments of the securities regulatory authorities in such
jurisdictions.
1.83
“
Securities Regulator
” means the applicable securities
commission or other securities regulatory authority in each of the Provinces of
Canada and in the United States and any other relevant jurisdictions.
1.84
“
Securities Act
” shall mean the
Securities Act of 1933, as amended.
5
1.85
“
Shares
” shall mean the issued and
outstanding Company Common Shares.
1.86
“
Subscription Agreements
” shall mean the
AvantaLion Subscription Agreement and the Paterson Subscription Agreement,
collectively.
1.87
“
Subsidiary
” shall mean any Person of
which another Person (i) (a) owns, directly or indirectly, fifty
percent (50%) or more of the outstanding voting securities or equity interests
or (b) is a general partner or managing member, or (ii) owns or
controls, directly or indirectly, securities or other ownership interests
having by their terms the power to elect a majority of the board of directors
of such Person or other persons performing similar functions.
1.88
“
Surviving Corporation
” shall have the
meaning set forth in Section 2.1(a) of this Agreement.
1.89
“
Tax Returns
” shall mean all reports,
elections, declarations, claims for refund, estimates and returns (including
any schedules and attachments thereto) relating to, or required to be filed in
connection with, any Taxes, including material information, returns or reports
with respect to withholding or payments to third parties, pursuant to the
statutes, rules and regulations of any federal, state, local or foreign
Governmental Entity.
1.90
“
Taxes
” shall mean all federal, state,
local, or foreign income, gross receipts, government annual fee, ad valorem,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Section 59A of the
Code), customs duties, capital stock, net worth, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
workers compensation, production, alternative or add-on minimum, estimated, or
other tax of any kind whatsoever imposed by any Governmental Entity, including
any interest, penalties, or additions with respect to such Taxes and any
interest in respect of such penalties or additions, without regard to whether
such tax is disputed or not or arose before, on or after the Closing Date.
1.91
“
Total Outstanding Share Number
” shall
have the meaning set forth in Section 2.3(a)(ii) of this Agreement.
1.92
“
Voting Agreements
” shall have the
meaning set forth in the recitals of this Agreement.
1.93
“
WWW
”
shall have the meaning set forth
in Section 3.8(g) of this Agreement
ARTICLE
II -
MERGER,
CLOSING AND CONVERSION OF SHARES; THE
MERGED COMPANY
2.1
The Merger
(a)
At the Effective Time, Merger Sub shall, and
Purchaser shall cause Merger Sub to, be merged (the “
Merger
”)
with and into the Company in
accordance with the provisions of the DGCL and this Agreement and the separate
existence of Merger Sub shall cease. The
Company shall be the surviving entity (the “
Surviving
Corporation
”) and shall succeed to and assume all the rights and
obligations of Merger Sub in accordance with Section 259 of the DGCL.
(b)
The Merger shall be consummated by filing
with the Secretary of State of the State of Delaware (the “
Secretary
”)
a duly executed Certificate of Merger and such other documents as are required
by the DGCL to consummate the Merger. The Merger shall be effective at such
time as the Certificate of Merger has been duly filed with the Secretary or at
such later date or time as may be specified in the Certificate of Merger in
accordance with DGCL on the date shown on the certified Certificate of Merger
issued by the Secretary (the “
Effective Time
”).
(c)
From and after the Effective Time, the
Surviving Corporation shall possess all the rights, powers, privileges and
franchises and be subject to all of the obligations, liabilities, restrictions
and
6
disabilities of the Company
and Merger Sub, all as provided in the applicable provisions of the DGCL.
(d)
If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary or desirable (i) to
vest, perfect or confirm, of record or otherwise, in the Surviving Corporation,
title to and possession of any property or right of either Merger Sub or the
Company acquired or to be acquired by reason of, or as a result of, the Merger,
or (ii) otherwise to carry out the purposes of this Agreement, each of
Merger Sub and the Company hereby grants to the Surviving Corporation,
effective after the Effective Time, an irrevocable power of attorney to execute
and deliver all such deeds, assignments and assurances in law and to do all
acts necessary or proper to vest, perfect or confirm title to and possession of
such property or rights in the Surviving Corporation and otherwise to carry out
the purposes of this Agreement. The
officers and directors of the Surviving Corporation shall be fully authorized
in the name of either Merger Sub or the Company to take any and all such
action.
2.2
Closing.
Prior to the Effective Time,
the Closing shall take place at the offices of Wildeboer Dellelce LLP, 365 Bay
Street, Suite 800, Toronto, Ontario M5H 2V1 on October 1, 2008 or at
such other mutually acceptable time and manner after the satisfaction or waiver
of each of the conditions set forth in Articles VII and VIII hereof (the “
Closing Date
”).
2.3
Conversion
of Shares.
(a)
By virtue of the Merger and without any
action on the part of Purchaser, Merger Sub, the Company, or the Holders, at
the Effective Time:
(i)
all shares of common stock in Merger Sub
issued and outstanding immediately prior to the Effective Time by virtue of the
Merger and without any action on the part of the holder thereof shall be
converted into and become an equal number of shares of common stock of the
Surviving Corporation;
(ii)
each Company Common Share issued and
outstanding immediately prior to the Effective Time (except those Company
Common Shares subject to the rights of Dissenting Stockholders) shall be
converted into and become the right to receive a number of Purchaser Common Shares
(the “
Merger Consideration
”) equal to the amount determined by
dividing (A) 49,521,958
Purchaser Common Shares
plus
a number
of Purchaser Common Shares equal to the number of Purchaser Common Shares
issued from and after June 9, 2008 until the Effective Time as a result of
the exercise or conversion of options, warrants, rights (including conversion
or preemptive rights but excluding any Purchaser Common Shares issued to
AvantaLion or G. Scott Paterson pursuant to the Subscription Agreements or
Purchaser Common Shares issued on exercise of warrants issued pursuant to the
Subscription Agreements) or agreements for the purchase or acquisition of
Purchase Common Shares issued prior to the Effective Time (the “
Closing Merger Shares
”) by (B) the total number of
Company Common Shares outstanding immediately prior to the Effective Time (the “
Total Outstanding Share Number
”), and carrying the quotient thereof
out to six (6) decimal places and rounding the sixth decimal place down to
the nearest whole number (the “
Exchange Ratio
”);
(iii)
to the extent that any of the 1,840,097 Purchaser Common Shares issued
pursuant to the Purchaser’s acquisition of Cycling TV which are currently held
in escrow are released from escrow (other than to be returned to the Purchaser for
non-compliance with the
7
escrow release conditions),
each Company Common Share issued and outstanding immediately prior to the
Effective Time (except those Company Common Shares subject to the rights of
Dissenting Stockholders) shall further become the right to receive an
additional number of Purchaser Common Shares equal to the amount determined by
dividing (A) the number of Purchaser Common Shares released from such
escrow (other than to be returned to the Purchaser for non-compliance with the
escrow release conditions) by (B) the Total Outstanding Share Number, and
carrying the quotient thereof out to six (6) decimal places and rounding
the sixth decimal place down to the nearest whole number, and such Purchaser
Common Shares so issued shall be Closing Merger Shares for all purposes
hereunder; and
(iv)
for every 5,000 shares of Purchaser Common
Shares issued by Purchaser pursuant to subsections 2.3(a)(ii) and (iii),
the Surviving Entity shall contemporaneously therewith issue one share in the
capital stock of the Surviving Entity to
Purchaser.
(b)
The Closing Merger Shares shall be
appropriately adjusted to fully reflect the effect of any stock dividend, stock
split, reclassification, combination, exchange of shares, or similar change in
the capitalization of Purchaser after the date hereof but prior to the
Effective Time.
(c)
Holders shall receive only whole shares of
Purchaser Common Shares. In lieu of any fractional share of Purchaser Common Shares,
the number of Purchaser Common Shares to be issued to any Holder shall be
rounded down to the prior whole number of Purchaser Common Shares.
2.4
Exchange
of Certificates.
(a)
At the Effective Time, Purchaser shall issue
and deliver to its transfer agent (the “
Exchange
Agent
”), for the
benefit of the Holders, for exchange in accordance with this Section 2.4,
the Purchaser Common Shares issuable as Closing Merger Shares pursuant to Section 2.3(a)(ii) and
(iii).
(b)
As soon as practicable (and in any event
within five (5) business days) after the Effective Time, Purchaser shall
cause the Exchange Agent to mail to each Holder of record of a stock
certificate or certificates that, immediately prior to the Effective Time,
represented outstanding Company Common Shares (a “
Certificate
”), which
Holder’s Shares are being converted into the Merger Consideration pursuant to Section 2.3,
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such form
and have such other provisions not inconsistent with the terms of this
Agreement as Purchaser and the Company may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for the
Merger Consideration. Upon surrender of a Certificate for cancellation to the
Exchange Agent, together with such letter of transmittal, duly executed, the
Holder of such Certificate shall be entitled to receive in exchange therefor
the Merger Consideration (subject to the provisions of Section 2.3(a)(ii) and
(iii)). Until surrendered as contemplated by this Section 2.4(b), each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration.
(c)
No dividends or distributions payable to
holders of record of Purchaser Common Shares after the Effective Time shall be
paid to the Holder of any unsurrendered Certificate until the Holder of the
Certificate shall surrender such Certificate. Subject to the effect of
applicable laws, following surrender of any such Certificate there shall be
paid to the record holder of the Certificates representing those Purchaser
Common Shares issued in exchange therefor without interest (i) the amount
of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such number of whole Purchaser Common Shares
and (ii) at the appropriate
8
payment date the amount of
dividends or other distributions with a record date after the Effective Time
but prior to surrender and a payment date subsequent to surrender payable with
respect to such whole Purchaser Common Shares.
(d)
In the event that any Certificate shall have
been lost, stolen or destroyed, the Exchange Agent shall issue in exchange
therefor, upon the making of an affidavit of that fact by the Holder thereof in
a form reasonably acceptable to Purchaser, the Merger Consideration to be paid
in respect of the Company Common Shares represented by such Certificate, as may
be required pursuant to this Agreement.
(e)
All Merger Consideration issued in exchange
for Company Common Shares in accordance with the terms hereof shall be deemed
to have been issued in full satisfaction of all rights pertaining to such
shares; subject, however, to the Surviving Corporation’s obligation to pay any
dividends or make any other distributions with a record date prior to the date
hereof that remain unpaid at the Effective Time, and after the Effective Time
there shall be no further registration of transfers on the share transfer books
of the Surviving Corporation of the shares of the Company that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Section 2.5.
(f)
Any portion of the Merger Consideration
deposited with the Exchange Agent (and any interest or other income earned
thereon) that remains undistributed to the stockholders of the Company upon the
expiration of twelve (12) months after the Effective Time shall be delivered to
Purchaser upon demand and any stockholder of the Company who has not
theretofore complied with this Section 2.4 shall thereafter look only to
Purchaser as general creditors for payment of their claim for Merger
Consideration, and any applicable dividends or distributions with respect to
Purchaser Common Shares.
(g)
None of Purchaser, Merger Sub, the Company,
any of their respective Subsidiaries, or the Surviving Corporation shall be
liable to any holder of Company Common Shares for such Purchaser Common Shares
(or dividends or distributions with respect thereto) or cash deposited with the
Exchange Agent that is subsequently delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
(h)
If any portion of the Merger Consideration is
to be paid to a Person other than the Person in whose name the surrendered
Certificate is registered, it shall be a condition to such payment that the
Certificate so surrendered shall be properly endorsed or otherwise be in proper
form for transfer and that the Person requesting such payment shall pay to the
Exchange Agent any transfer or other Taxes required as a result of such payment
to a Person other than the registered holder of such Shares or establish to the
satisfaction of the Exchange Agent that such Tax has been paid or is not
payable.
(i)
Any portion of the Merger Consideration made
available to the Exchange Agent pursuant to this Section 2.4 to pay for
Shares for which appraisal rights have been perfected as set forth in Section 2.5
shall be returned to Purchaser upon demand.
2.5
Dissenting
Stockholders.
Notwithstanding anything in this Agreement to the contrary, any Shares
that are held by any stockholder of the Company who did not vote in favor of
the Merger and who is entitled to demand and properly demands, exercises and
perfects his or her demand for appraisal pursuant to Section 262 of the
DGCL (“
Dissenting Shares
”)
shall not be
converted into the right to receive Merger Consideration, unless and until such
holder shall have effectively withdrawn or lost such holder’s right to
appraisal under the DGCL. Dissenting Shares shall be treated in accordance with
Section 262 of the DGCL and shall be
9
entitled to receive consideration thereunder. If any such holder fails to perfect or
withdraws or loses any such right to appraisal, each such Share of such holder
shall thereupon be converted into and become exchangeable only for the right to
receive, as of the later of the Effective Time and the time that such right to
appraisal has been irrevocably lost, withdrawn or expired, the Merger
Consideration in accordance with Section 2.3. The Company shall give Purchaser (i) prompt
notice of any written demands for appraisal of Dissenting Shares or withdrawals
of such demands received by the Company pursuant to the DGCL and (ii) the
opportunity to participate in all negotiations and proceedings with respect to
demands by Dissenting Stockholders for appraisal of Dissenting Shares under the
DGCL. Except with the prior written
consent of the Purchaser, prior to the Effective Time, the Company shall not
make any payment with respect to any demands for appraisal of Dissenting Shares
or offer to settle or settle or otherwise negotiate any such demands.
2.6
Company
Options.
(a)
The Company has taken all steps necessary to
terminate, effective at the Effective Time, all Company stock option plans
(collectively, the “
Company Stock Option Plan
”).
All
outstanding options to acquire Company Common Shares (each, a “
Company Option
”), shall, pursuant to the terms of the Company Stock Option Plan,
accelerate and be vested in full on or prior to the Closing Date and shall
terminate if not exercised as of the Closing Date, such that as of the Closing
Date, there shall be no Company Options or other securities convertible into
Company Common Shares outstanding.
(b)
The Company shall take all actions that may
be necessary (under the Company Stock Option Plan and otherwise) to effectuate
the provisions of this Section 2.6.
2.7
Withholding
Rights.
Purchaser shall be entitled
to deduct and withhold from the consideration otherwise payable to any Person
pursuant to this Article II such amounts as it is required to deduct and
withhold with respect to the making of such payment under any provision of
federal, state, local or foreign tax law. If Purchaser so withholds amounts,
such amounts shall be treated for all purposes of this Agreement as having been
paid to the Holder of the Shares in respect of which Purchaser made such
deduction or withholding.
2.8
Certificate
of Incorporation of Surviving Corporation.
At the Effective Time, (a) the
Certificate of Incorporation of the Surviving Corporation shall be amended to
read in its entirety as set forth on Schedule 1 attached hereto, until
thereafter amended in accordance herewith and applicable Laws and Regulations,
and (b) the bylaws of the Surviving Corporation shall be amended to read
as set forth on Schedule 2 attached hereto, until thereafter amended in accordance
with the certificate of incorporation of the Surviving Corporation, such bylaws
and applicable Laws and Regulations.
2.9
Directors
and Officers of Surviving Corporation.
From and after the Effective
Time, until successors are duly elected or appointed and qualified in
accordance with applicable law, (i) the directors of the Company at the
Effective Time shall be the directors of the Surviving Corporation, and (ii) the
officers of the Company at the Effective Time shall be the officers of the
Surviving Corporation. The names of such officers and directors are set forth
in Schedule 3.
10
2.10
Directors
and Officers of Purchaser.
From
and after the Effective Time,
until successors are duly elected or appointed and qualified in
accordance with applicable law, the directors and officers of the Purchaser
shall be as set forth in Schedule 4.
ARTICLE
III -
REPRESENTATIONS
OF THE COMPANY
The Company represents and
warrants to Purchaser that, except as set forth in the disclosure letter of the
Company dated as of the date hereof (the “
Company Disclosure Letter
”), each of which exceptions shall
specifically identify the relevant Section hereof to which it relates or
be reasonably clear that it is relevant to such Section:
3.1
Disclosure.
No representation or
warranty of the Company contained in this Agreement, and no statement contained
in the Company Disclosure Letter or in any certificate or other information
furnished or to be furnished, including all information required to be included
in the Company Information Circular to be sent to the stockholders of the
Company in connection with the meeting of shareholders of the Company to
approve the Agreement and the Merger pursuant hereto contains or will contain
any untrue statement of a material fact or omits to state a material fact
required to be stated herein or therein or necessary to make the statements and
facts contained herein or therein, in the light of the circumstances under
which they are made, not misleading. The
information disclosed to the Purchaser pursuant to the diligence requisition
list provided to the Company by the Purchaser in connection with the Purchaser’s
due diligence investigations of the Company Entities was in all material
respects true, accurate and complete.
Notwithstanding anything to the contrary, the Company shall not be
deemed to make to Purchaser any representation or warranty (express or implied)
other than as expressly made by the Company in this Agreement.
3.2
Corporate
Organization.
(a)
The Company is duly incorporated and in good
standing under the Laws and Regulations of the State of Delaware. The Company
has property or conducts business in each of the jurisdictions identified in Section 3.2(a) of
the Company Disclosure Letter and is qualified to transact business in each of
the jurisdictions identified in Section 3.2(a) of the Company
Disclosure Letter. The Company is duly qualified to transact business and is in
good standing in each jurisdiction in which the ownership of property or the
character of its business requires such qualification, except those
jurisdictions where the failure to be so qualified or to be in good standing
would not have a Company Material Adverse Effect. The Company has all required
corporate power and authority necessary to own and operate its property, to
carry on its business as now conducted, to execute and deliver the Agreement
and the agreements contemplated herein and to consummate the transactions
contemplated hereby and thereby.
(b)
Except as set forth in Section 3.2(b) of
the Company Disclosure Letter, the Company does not (i) have any
Subsidiaries, (ii) presently own or control, directly or indirectly, or
hold any rights to acquire, any interest in any other Person or (iii) have
any contract or other obligation to provide funds to, or make any investment
in, any other Person. The Company is not a participant in any joint venture,
partnership or similar arrangement. The
Company, together with any Subsidiary of the Company, are herein referred to as
“
Company Entities
.”
(c)
The Certificate of Incorporation and the
By-laws of the Company as currently in effect are in the form previously
provided to counsel for the Purchaser and no amendments have been made thereto
or have been authorized since the date thereof.
11
3.3
Authorization;
No Violation.
(a)
The execution and delivery by the Company of
this Agreement and the agreements provided herein, and the consummation of all
transactions contemplated hereunder and thereunder by the Company have been
duly authorized by all requisite corporate action on the part of the Company
and has been recommended to the stockholders of the Company for adoption and
approval. This Agreement has been duly and validly executed and delivered by
the Company. Assuming the due authorization, execution and delivery of this
Agreement by Purchaser and the other parties hereto, other than the Company
and, in the case of the other agreements, by the parties thereto, other than
the Company, this Agreement and each other agreement contemplated hereby to
which the Company is a party constitute valid and legally binding obligations
of the Company, enforceable in accordance with its respective terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors’ rights
generally and (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies.
(b)
The execution, delivery and performance by
the Company of this Agreement and the agreements provided for herein, the
consummation by the Company of the transactions contemplated hereby and
thereby, will not, with or without the giving of notice or the passage of time
or both, (i) violate the provisions of the Certificate of Incorporation or
By-laws of the Company or the certificates of incorporation or bylaws or other
charter or organizational documents of any Company Entity, or (ii) assuming
that the consents and approvals specifically referred to in Section 3.5 of
the Company Disclosure Letter (as to clause (x), with respect to Governmental
Entities and as to clause (y), with respect to Governmental Entities and
non-Governmental Entities) are duly obtained, (x) violate any Laws and
Regulations applicable to any Company Entity or any of their respective Assets,
or (y) violate, conflict with, result in a breach of any provision of or
the loss of any benefit, constitute a default (or an event which, with notice
or lapse of time, or both, would constitute a default), result in the
termination of or a right of termination or cancellation, accelerate the
performance required by or rights or obligations, or result in the creation of
any Lien (other than Permitted Liens) upon any of the respective Assets of any
Company Entity, under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement, contract,
or other instrument or obligation to which any Company Entity is a party, or by
which they or any of their respective Assets or business activities may be
bound or affected, except (with respect to this clause (y) only) for any
such violations, conflicts or breaches that would not have, individually or in
the aggregate, a Company Material Adverse Effect.
3.4
Capitalization.
(a)
Authorized Capital Shares
. The authorized capital shares of the
Company consists of 10,000,000 Company Common Shares, of which 6,887,100 shares
are issued and outstanding as of the date hereof and 1,112,900 have been
reserved for issuance upon the exercise of outstanding Company Options. Section 3.4(a) of
the Company Disclosure Letter sets forth a true and complete list of the
holders of the outstanding Company Common Shares, the respective number of
shares held thereby and the country of residence of each such holder. Each
outstanding Company Common Share has been duly and validly authorized and
issued, is fully paid and non-assessable, was issued in compliance with all
applicable securities laws, is free of any Liens and is not subject to
preemptive rights or rights of first refusal created by statute, the
Certificate of Incorporation, the By-laws or any agreement to which the Company
is a party or by which it is bound.
(b)
Other Rights
. Except for currently outstanding Company
Options that are identified in Section 3.4(b) of the Company
Disclosure Letter, as of the date hereof there are no outstanding options,
warrants, rights (including conversion or preemptive rights) or agreements for
the purchase or
12
acquisition from any Company
Entity of any, or rights to acquire from any Company Entity any, capital
shares. Section 3.4(b) of the Company Disclosure Letter accurately
sets forth as of the date hereof the following information with respect to all
outstanding options, warrants and rights to acquire the Company’s capital
shares: the holder; the number of shares covered; the exercise price; the
expiration date; whether the grant is an “incentive stock option” within the
meaning of Section 422 of the Code; the vesting schedule; the number of
shares currently vested and the country of residence of each such holder. No
Company Option has had any term amended, including without limitation any
amendment to its vesting schedule, since the date of its initial grant. A true and complete copy of the Company Stock
Option Plan has been provided to Purchaser, and except as requested by
Purchaser or contemplated in Section 2.6, such Company Stock Option Plan
has not been amended, modified or supplemented. All currently outstanding
options to acquire Company Common Shares were issued in compliance with the
terms of the Company Stock Option Plan. All registrations and approvals of the
Company Stock Option Plan required by, and necessary to obtain any right or
benefit under, applicable Laws and Regulations to be made by the Company or its
respective stockholders have been made. Except for the Voting Agreements, the
Company is not a party or subject to any agreement or understanding, and to the
Company’s knowledge, there is no agreement or understanding between any Person,
which affects or relates to the ownership, voting or giving of written consents
with respect to any security or by a director of the Company.
(c)
Subsidiaries
. All of the outstanding shares of capital
stock and voting securities or other interests of each Subsidiary of the
Company are duly and validly authorized and issued, fully paid and
non-assessable, were issued in compliance with all applicable securities laws
and are free of any Liens.
3.5
Consents
and Approvals.
Except as set forth in Section 3.5
of the Company Disclosure Letter, no consents or approvals of any Governmental
Entity or any third parties are required in connection with the execution,
delivery or performance of this Agreement and the agreements provided for
herein by the Company or the consummation of the transactions contemplated
hereby or thereby.
3.6
Financial
Statements.
(a)
The Company has delivered to Purchaser (i) the
consolidated financial statements (balance sheet and statement of operations,
statement of stockholders’ equity and statement of cash flows, including notes
thereto) at each of December 31, 2007, December 31, 2006 and December 31,
2005, and for the fiscal years then ended, and (ii) the financial
statements as, at and for the three (3) month period ended March 31,
2008 (the “
Company Financial Statements
”).
Each
of the Company Financial Statements is in accordance with the books and records
of the Company and has been prepared in accordance with generally accepted
accounting principles of the United States applied on a consistent basis
throughout the periods indicated and with each other, except that unaudited Company
Financial Statements may not contain all footnotes required by generally
accepted accounting principles. The books and records of each Company Entity
are true and complete in all material respects.
(b)
The Company Financial Statements fairly
present in all material respects the consolidated financial condition, retained
earnings, assets and liabilities and operating results of the Company Entities
and as of the dates, and for the periods, indicated therein.
(c)
Except as set forth in the Company Financial
Statements, no Company Entity has any liabilities or obligations (whether
accrued, absolute, unliquidated, contingent or otherwise) other than (i) liabilities
and obligations that have arisen after June 9, 2008 in the ordinary course
of business
13
consistent with past
practice which, individually or in the aggregate, have not had a Company
Material Adverse Effect and (ii) obligations under contracts and
commitments incurred in the ordinary course of business consistent with past
practice that would not be required to be reflected in financial statements (or
the notes thereto) prepared in accordance with U.S. GAAP.
(d)
Except as disclosed in the Company Financial
Statements, no Company Entity is a guarantor or indemnitor of any indebtedness
for borrowed money of any other Person.
3.7
Litigation.
There is no Legal Proceeding
or investigation (or any basis therefor) pending or, to the knowledge of the
Company, currently threatened against any Company Entity that questions the
validity of this Agreement, any agreement contemplated hereby or the right of
the Company to enter into this Agreement or any agreement contemplated hereby
or thereby or to consummate the transactions contemplated hereby or thereby.
3.8
Intellectual
Property.
(a)
Definitions.
(i)
“
Intellectual
Property
”
means all algorithms, application
programming interfaces, apparatus, databases and data collections, diagrams,
formulae, inventions (whether or not patentable), know-how, logos, marks
(including brand names, product names, logos, and slogans), methods, network
configurations and architectures, processes, proprietary information,
protocols, schematics, specifications, software, software code (in any form
including source code and executable or object code), subroutines, user
interfaces, techniques, URLs, web sites, works of authorship and other forms of
technology (whether or not embodied in any tangible form and including all
tangible embodiments of the foregoing such as instruction manuals, laboratory
notebooks, prototypes, samples, studies and summaries).
(ii)
“
I
ntellectual Property Rights
”
means,
under the laws of any jurisdiction in the world, all copyrights, patent rights,
trademark and trade name rights, trade secret rights, industrial property
rights, moral rights, and other similar types of proprietary rights in
Intellectual Property, and all applications, registrations, renewals, and other
filings with respect to any of the foregoing.
(iii)
“
Company
Registered IP
”
means
all Intellectual Property Rights that are registered, filed, or issued under
the authority of any Governmental Entity, including all patents, registered
copyrights, and registered trademarks and all applications for any of the
foregoing.
(iv)
“
Company IP
”
means
all Intellectual Property Rights and Intellectual Property owned by or licensed
to the Company.
(v)
“
Company IP
Contract
”
means any Contract to which the
Company is a party or by which the Company is bound, that contains any
assignment or license of, or covenant not to assert or enforce, any
Intellectual Property Right or that otherwise relates to any Company IP or any
Intellectual Property developed by, with, or for any Company Entity.
(vi)
“
Designated
Individuals
”
means, for the purpose of this Section 3.8
only, the employees of the Company.
(b)
To the knowledge of the Company after
reasonable inquiry, the Company owns or has the full and unfettered right and
license, or other written, valid, and enforceable consent or permission to use,
all of the Intellectual Property and Intellectual Property Rights that are used
in or necessary
14
to the present conduct and
reasonably anticipated future conduct (as such future conduct is reasonably
anticipated as of the date hereof by the Designated Individuals) of its
businesses, including the development, distribution, manufacture or other
exploitation of its products or services. All such Intellectual Property and
Intellectual Property Rights constitute Company IP and (i) all such
Company IP that consists of Intellectual Property Rights and Intellectual
Property owned by the Company Entities is valid and subsisting and (ii) to
the knowledge of the Company Entities, all such Company IP that consists of
Intellectual Property Rights and Intellectual Property that is exclusively
licensed to the Company Entities is valid and subsisting. Clause (i) of
the immediately foregoing sentence is not and shall not be construed to be
knowledge qualified in any respect.
(c)
To the extent that any of the Intellectual
Property or Intellectual Property Rights used in or necessary to the present
conduct of the Company Entities’ businesses, including the development,
distribution, manufacture or other exploitation of their products or services,
has been created, developed or invented by a third party, each of the Company
Entities has, with respect to such Intellectual Property or Intellectual
Property Rights, obtained either ownership of and is the exclusive owner of or
has obtained a valid license, or other written, valid, and enforceable consent
or permission, sufficient for the present conduct of its business. All such
rights shall survive the Merger, and be fully exercisable by the Company
following the Merger without payment of any amounts or other consideration
(including additional royalties) to any third party triggered as a result of
such Merger or other change of control resulting therefrom.
(d)
(i) The past conduct of the Company
Entities’ businesses relating to the design, development, manufacture,
importation, license or sale by the Company Entities of any Company Product (as
defined below) and the use of any product, service, process or method in
connection therewith, and, to the knowledge of the Company Entities after
reasonable inquiry of the Designated Individuals, the past conduct of the
Company Entities’ businesses other than as set forth in this clause (i) of
this paragraph (d), has not infringed, misappropriated or otherwise breached;
and (ii) the present conduct of the Company Entities’ businesses relating
to the design, development, manufacture, importation, license or sale by the
Company Entities of any Company Product and the use of any product, service,
process or method in connection therewith, and, to the knowledge of the Company
Entities after reasonable inquiry of the Designated Individuals, the present
conduct of the Company Entities’ business other than as set forth in this
clause (ii) of this paragraph (d), does not infringe, misappropriate or
otherwise breach; with respect to each of Clauses (i) and (ii), above, any
Intellectual Property Rights held by any other Person that alone or in the
aggregate would reasonably be likely to have a Company Material Adverse Effect.
No claim or litigation regarding any Company Entity, nor any such product,
service, process or method, is pending or, to the Company Entities’ knowledge
based upon reasonable inquiry of the Designated Individuals, threatened.
(e)
The Company Entities have obtained or will
have obtained as of the Closing, all certificates, registrations and permits in
connection with the Intellectual Property owned or licensed by the Company
Entities (excluding the issuance of patents, trademark registrations and
copyright registrations), any Company IP Contracts or any other agreements
related thereto that materially alter or amend any Company IP Contracts or
rights in such Intellectual Property, as may be required under the laws of the
applicable jurisdiction or Governmental Entities (including without limitation
any Governmental Entities) of countries in which the Company currently conducts
business.
(f)
(A) The Company is not in material
breach of, nor has the Company failed to perform in any material manner under,
any of the Company IP Contracts and, to the Company’s knowledge, no other party
to any such Company IP Contract is in material breach thereof or has failed to
perform in any material manner thereunder, and (B) the Company is not in
breach of, nor has the
15
Company failed to perform
under, any of the Company IP Contracts, which such breach or failure to perform
either individually or in the aggregate would cause a Company Material Adverse
Effect. The consummation of the transactions contemplated by this Agreement
will neither violate nor result in the breach, modification, cancellation,
termination or suspension of any Company IP Contracts or entitle the other
party or parties to such Company IP Contracts to terminate such Company IP
Contracts or any licenses thereunder. Immediately following the Closing Date,
the Company will be permitted to exercise all of the Company’s rights under the
Company IP Contracts to the same extent the Company would have been able to had
the transactions contemplated by this Agreement not occurred and without the
payment of any additional amounts or consideration other than ongoing fees,
royalties or payments which the Company would be required to pay had the
transactions contemplated by this Agreement not occurred. Neither the Merger nor any merger of the
Surviving Company with Purchaser will, in and of itself, trigger any third
party being granted any rights to any Intellectual Property Rights that are in
addition to, or greater than, such third party currently has under such Company
IP Contracts, including any access to or release of any source code owned by or
licensed to the Company. To the knowledge of the Company, there are no
contracts, licenses or agreements between the Company and any other Person with
respect to Company IP under which there is any dispute regarding the scope of
such agreement, or performance under such agreement, including with respect to
any payments to be made or received by the Company thereunder. To the knowledge
of the Company, no person is infringing or misappropriating any Intellectual
Property Right owned by or exclusively licensed to the Company.
(g)
Each Company Entity has an industry standard
privacy or data rights policy available on all relevant world wide web (“
WWW
”) sites of such Company Entity and has complied, and is
in compliance, with such policy in all material respects. No Company Entity has
received any notice claiming or alleging that it has not complied with its
privacy policy or any Laws and Regulations governing the operation of any
Company Entity’s WWW sites, nor does any Company Entity know of any facts or
circumstances that would give rise to such claim or allegations.
(h)
In each case in which any Company Entity has
acquired ownership of any Intellectual Property or Intellectual Property Right
from any Person, the Company Entity has obtained a valid and enforceable
assignment sufficient to irrevocably transfer all rights in and to all such
Intellectual Property and the associated Intellectual Property Rights (including
the right to seek past and future damages with respect thereto) to the Company
Entity. In accordance with applicable Laws and Regulations, each Company Entity
has recorded each such assignment of Registered IP assigned to the Company
Entity with the relevant Governmental Entity.
(i)
To the knowledge of the Company Entities, (i) there
are no facts or circumstances existing that would render any Company IP invalid
or unenforceable, and (ii) no Company Entity has taken, or failed to take,
any action in the application for or prosecution of any Registered IP that
would render such Registered IP invalid or unenforceable.
(j)
Each Company Entity has the right to use,
pursuant to valid licenses or other written, valid, and enforceable consents or
permissions, all data (including personal data of third parties), software
development tools, library functions, operating systems, data bases, compilers
and all other third-party software that are used in the operation of the
Company Entities as currently conducted or that are required to create, modify,
compile, operate or support any software that is Company IP or is incorporated
into any Company Product.
(k)
No funding from a Governmental Entity,
facilities of or funding from a university, college, other educational
institution or research center or funding from third parties (other than
funding from banks or lending institutions or other customary sources of equity
financing that are not Governmental Entities) was used in the development of
any Company IP. To the knowledge of
16
the Company, no current
employee of any Company Entity who was involved in, or who contributed to, the
creation or development of any Company IP has performed services for any
Governmental Entity, university, college, or other educational institution or research
center during a period of time during which such current employee was also
performing services for any Company Entity where such services would result in
a transfer or other impairment or limitation on the Company Entities’ use of
the Intellectual Property or Intellectual Property Rights invented, created or
authored by such individual. To the knowledge of the Company Entities after
reasonable inquiry of the Designated Individuals, no former employee,
consultant or independent contractor of any Company Entity who was involved in,
or who contributed to, the creation or development of any Company IP has
performed services for any Governmental Entity, university, college, or other
educational institution or research center during a period of time during which
such former employee, consultant or independent contractor was also performing
services for any Company Entity where such services would result in a transfer
or other impairment or limitation on the Company Entities’ use of the
Intellectual Property or Intellectual Property Rights invented, created or
authored by such individual.
(l)
No Company IP owned by any Company Entity, no
Company Products, and to the knowledge of any Company Entity no Company IP
exclusively licensed to any Company Entity is subject to any Legal Proceeding
or outstanding Governmental Order or written settlement agreement or
stipulation to which any Company Entity is a party or of which it is aware that
restricts in any material manner the use, transfer or licensing thereof by any
Company Entity or that may adversely affect the validity or enforceability of
such Company IP or Company Product.
(m)
Neither this Agreement nor the transactions
contemplated by this Agreement will result in, to the knowledge of the Company
Entities, the Surviving Corporation’s granting to any third party any right to
any Intellectual Property or Intellectual Property Right owned by, or licensed
to, the Surviving Corporation.
3.9
Compliance
with Agreements and Laws.
(a)
No Company Entity is in violation in any
material respect of any Laws and Regulations relating to its respective
properties or the conduct of its respective business, except where,
individually or in the aggregate, such violation would not have a Company
Material Adverse Effect. No Company Entity has had notice or communication from
any Governmental Entity or otherwise of any such violation or noncompliance
and, to the best knowledge of the Company, no such violation or noncompliance
exists. Each Company Entity has all franchises, permits, licenses and any
similar authorizations and certificates from all Governmental Entities
necessary for the conduct of its business as currently conducted (collectively,
the “
Authorizations
”).
No
Company Entity is in default in any material respect under any of such
Authorizations. All such Authorizations are in full force and effect and there
are no proceedings pending or, to the knowledge of the Company, threatened that
seek the revocation, cancellation, suspension or adverse modification thereof.
The execution, delivery and performance of this Agreement and all other
agreements contemplated hereby to which the Company is a party and the
consummation of the transactions contemplated hereby and thereby will not
result in the suspension, revocation, impairment, forfeiture or nonrenewal of
any such Authorizations.
(b)
Section 3.9(b) of the Company
Disclosure Letter sets forth a description of each Governmental Order
applicable to any Company Entity, and no such Governmental Order, individually
or in the aggregate, has had a Company Material Adverse Effect.
17
3.10
Environmental.
There
are no Legal Proceedings or investigations of any nature that would be
reasonably likely to result in the imposition on any Company Entity of any
liability or obligation arising under common law or under any local, state,
provincial, municipal or federal environmental statute, regulation or ordinance
pending or, to the knowledge of the Company, threatened against any Company
Entity, which liability or obligation would be material to the Company. To the
knowledge of the Company, there is no reasonable basis for any such Legal
Proceeding or investigation. No Company Entity is subject to any Governmental
Order imposing any material liability or material obligation with respect to
the foregoing. Each Company Entity is in material compliance with all
Authorizations and with applicable Laws and Regulations relating to the
environment, human health and safety, hazardous substances and waste material (“
Environmental
Laws
”), and there are
no liabilities under any Environmental Laws with respect to any Company Entity,
other than failures to comply or liabilities that would not, individually or in
the aggregate, have a Company Material Adverse Effect. No Company Entity has
received any notice from any Governmental Entity during the past five years
relating to or alleging a violation of any Environmental Law. No Company Entity
has any indemnification obligation with any Person with respect to
Environmental Laws.
3.11
Contracts
and Commitments.
(a)
Except as set forth in the Company Financial
Statements, no Company Entity has, since June 9, 2008, (i) declared
or paid any dividends or authorized or made any distribution upon or with
respect to any class or series of its capital shares or corporate interests, (ii) incurred
any indebtedness for money borrowed or any other liabilities individually in
excess of $100,000 or, in the case of indebtedness and/or liabilities
individually less than $100,000, in excess of $200,000 in the aggregate, (iii) made
any loans or advances to any Person, other than ordinary course advances for
business expenses, or (iv) sold, exchanged or otherwise disposed of any of
its Assets or rights, other than the sale of its inventory in the ordinary
course of business.
(b)
All of the Material Contracts are valid,
binding and enforceable (and, if applicable, were registered with the
appropriate Governmental Entity, as required in order to be enforceable) in
accordance with their respective terms and in full force and effect, without
amendment (except as disclosed on Section 3.11(b) of the Company
Disclosure Letter). No Material Contract requires the consent by the other
parties thereto in order to consummate the transactions contemplated by this
Agreement. Immediately after giving effect to the Merger, the Surviving
Corporation or the Company Entities will be permitted to exercise all of such
Company Entities’ rights under the Material Contracts to the same extent the
Company Entities would have been able to had the transactions contemplated by
this Agreement not occurred and without the payment of any additional amounts
or consideration other than ongoing payments which the Company Entities would
otherwise be required to pay. The Company Entity party thereto has performed in
all material respects all obligations required to be performed by it and is not
in default under or in breach of nor in receipt of any claim of default or
breach under any Material Contract, and such Company Entity does not have any
present expectation or intention of not fully performing all such obligations,
except where any such default or non-performance would not constitute a Company
Material Adverse Effect. No event has occurred which with the passage of time
or the giving of notice or both would result in a default, breach or event of
noncompliance by the Company Entity party thereto under any Material Contract,
except where such event would not constitute a Company Material Adverse Effect.
The Company has no knowledge of any material breach or anticipated material
breach by the other parties to any Material Contract. True, correct and
complete copies of each written Material Contract and an accurate description
of each oral Material Contract, together with all amendments, waivers or other
changes thereto, have been made available to counsel to Purchaser.
18
3.12
Related-Party
Transactions.
Except
as set forth in Section 3.12 of the Company Disclosure Letter, no
employee, stockholder, officer or director of any Company Entity or member of
his/her immediate family is indebted to any Company Entity, nor is any Company
Entity indebted (or committed to make loans or extend or guarantee credit) to
any of them. All commercial transactions
are negotiated on an arms length basis and at fair market value.
3.13
Changes.
Since
June 9, 2008 and except as otherwise reflected in the Company Financial
Statements, each Company Entity has conducted its business, in all material
respects, in the ordinary course consistent with past practice and there has
not occurred:
(a)
any change, event or condition that,
individually or in the aggregate, is a Company Material Adverse Effect;
(b)
any material damage, destruction or loss to
Company Assets, whether or not covered by insurance, having a Company Material
Adverse Effect;
(c)
any waiver by any Company Entity of a
valuable right or of a debt owed to it, in an amount exceeding $100,000
individually or $200,000 in the aggregate;
(d)
any satisfaction or discharge of any Lien or
payment of any obligation by any Company Entity, except in the ordinary course
of business consistent with past practice and that is not material to the
Company Assets, financial condition, operating results or business of the
Company Entities, taken as a whole;
(e)
any contract entered into by any Company
Entity, other than in the ordinary course of business consistent with past
practice or any change or amendment to a contract or arrangement by which any
Company Entity or any of its Company Assets is bound or subject, other than in
the ordinary course of business consistent with past practice;
(f)
any change in any Material Contract or other
arrangement (including any Company Employee Plan) providing for compensation to
any officer or key employee of any Company Entity;
(g)
any sale, assignment or transfer of any
patents or patent applications, trademarks or trademark applications, service
marks, trade names, corporate names, copyrights or copyright registrations,
trade secrets or other intangible Company Assets, or disclosure of any
proprietary confidential information to any Person;
(h)
any acquisition, sale or transfer of any
material asset of any Company Entity;
(i)
any resignation or termination of employment
of any officer or key employee of any Company Entity;
(j)
any declaration, payment, setting aside or
other distribution of cash or other property to its stockholders or interest
holders with respect to its common shares, other equity securities or other
interests (including without limitation, any warrants, options or other rights
to acquire Company Common Shares or other equity securities), or any direct or
indirect redemption, purchase or other acquisition by the Company of any Company
Common Shares or interests;
(k)
any mortgage, pledge, transfer of a security
interest in, or Lien, created by any Company Entity, with respect to any of
Company Assets, except for Permitted Liens;
(l)
any notice that there has been a loss of, or
order cancellation by, any major customer of any Company Entity;
19
(m)
any capital expenditures or commitments
therefor that are in an amount exceeding $100,000 in the case of any individual
item or $200,000 in the aggregate;
(n)
any loans or advances to, guarantees for the
benefit of, or any investments in, any Person (including, without limitation,
any employees, officers or directors, or any members of their immediate
families, of any Company Entity);
(n)
any change in the accounting methods or
practices (including any change in depreciation or amortization policies or
rates) materially affecting the Company Assets;
(o)
any amendment or change to the Certificate of
Incorporation or By-laws, or the certificates of incorporation or bylaws or
other charter or organizational documents of any Company Entity;
(p)
any election with respect to taxes or changes
in tax accounting methods;
(q)
to the knowledge of the Company, any other
event or condition of any character that would have a Company Material Adverse
Effect; or
(r)
any agreement by any Company Entity to do any
of the things described in the preceding clauses (a) through (r) (other
than negotiations with Purchaser and its representatives regarding the transactions
contemplated by this Agreement).
3.14
Company
Assets.
Each
Company Entity has good and marketable title to, or valid leasehold interest
in, its respective properties and assets (all such properties and assets being
referred to as the “
Company
Assets
”),
other than such
property and assets as to which the failure to have the title or lease rights,
individually or in the aggregate, would not have a Company Material Adverse
Effect. The Company Assets are free and clear of all Liens, except (a) as
reflected in the Company Financial Statements and (b) Permitted Liens. The
Company Assets constitute all the assets used or held for use in the conduct of
the respective businesses of the Company Entities and necessary for Purchaser
to operate such businesses as currently conducted by such Company Entities. No
Company Entity owns any real property. All of the tangible Company Assets of
each Company Entity are in good operating condition, subject to normal wear and
tear, and are reasonably fit and useable for the purposes for which they are
currently being used.
3.15
Insurance.
There
is no claim pending under any fire, theft, casualty, general liability, workers
compensation, business interruption, environmental impairment, product
liability, automobile and other insurance policies maintained by each Company
Entity and of all life insurance policies maintained by each Company Entity on
the lives of its respective employees, specifying the type of coverage, the
amount of coverage, the premium, the insurer and the expiration date of each
such policy (collectively, the “
Company
Insurance Policies
”) as to which coverage has been
questioned, denied or disputed by the underwriters of such policies. All
premiums due and payable on the Insurance Policies or renewals thereof have
been paid and each Company Entity is otherwise in material compliance with the
material terms of such policies. All Company Insurance Policies will remain in
full force and effect through the Closing Date and also as to claims arising
out of events that occur prior to the Closing. The Company has no knowledge of
any threatened termination of, or premium increase with respect to, any of the
Company Insurance Policies.
3.16
Employee
Benefit Plans.
(a)
Section
3.16(a) to the Company Disclosure Letter contains a true and complete list
of each Company Employee Plan sponsored, maintained or contributed to or
required to be contributed to by any Company Entity or by any ERISA Affiliate
of a Company Entity (a “
Company ERISA Affiliate
”)
or as to which any Company Entity or any Company ERISA Affiliate has, or may
20
have, any liability or obligation, contingent or otherwise, whether
written or oral and whether legally binding or not (collectively, the “
Company Employee Plans
”).
(b)
With respect to each of the
Company Employee Plans, the Company has heretofore delivered to the Buyer true
and complete copies of each of the following documents: (i) the Company Employee Plan, the
related trust agreement (if any) and any other related documents (including all
amendments to such Company Employee Plan and related documents); (ii) the
most recent annual reports, actuarial reports, and financial statements, if
any; (iii) the most recent summary plan description, together with each
summary of material modifications, required under ERISA with respect to such
Company Employee Plan; and (iv) the most recent determination letter or
opinion letter received from the IRS with respect to each Company Employee Plan
that is intended to be qualified under the Code.
(c)
No liability under Title IV
of ERISA has been incurred by any Company Entity or any Company ERISA Affiliate
that has not been satisfied in full, and no condition exists that presents a
material risk to any Company Entity or any Company ERISA Affiliate of incurring
a liability under such Title. No Company
Employee Plan is subject to Section 412, 430, 431 or 432 of the Code or
Title IV or Section 302, 303, 304 or 305 of ERISA. None of the assets of any Company Entity or
any Company ERISA Affiliate are subject to any lien arising under ERISA or
Subchapter D of Chapter 1 of the Code, and no condition exists that presents a
material risk of any such lien arising.
(d)
Neither any Company Entity,
nor any Company ERISA Affiliate, nor any of the Company Employee Plans, nor any
trust created thereunder, nor any trustee or administrator thereof has engaged
in a transaction in connection with which any Company Entity, any Company ERISA
Affiliate, any of the Company Employee Plans or any such trust could, directly
or indirectly, be subject to any material civil liability or penalty pursuant
to Title I of ERISA, a tax imposed pursuant to Chapter 43 of the Code in an
amount that would be material, or any other material liability.
(e)
None of the Company Employee
Plans is, and neither any Company Entity nor any Company ERISA Affiliate has
ever contributed to or had an obligation to contribute to or incurred any
liability in respect of, any “multiemployer plan” (as defined in Section 3(37)
of ERISA), a “multiple employer welfare arrangement” (as defined in Section 3(40)
of ERISA), or a single employer plan that has two or more contributing
sponsors, at least two of whom are not under common control, within the meaning
of Section 4063(a) of ERISA.
(f)
Each of the
Company Employee Plans that is intended to be “qualified” within the meaning of
Section 401(a) of the Code has obtained a favorable determination or
opinion letter to that effect from the IRS, and nothing has occurred that would
reasonably be expected to result in the revocation of any such letter or
require the filing of a submission under the IRS’s employee plans compliance
resolution system or the taking of other corrective action pursuant to such
system in order to maintain the qualified status of such Company Employee
Plan. Each of the Company Employee Plans
that is intended to satisfy the requirements of Section 125 or 501(c)(9) of
the Code satisfies such requirements.
Each of the Company Employee Plans has been operated and administered in
all material respects in accordance with its terms and applicable Laws and
Regulations, including but not limited to ERISA and the Code.
(g)
No payment or benefit paid
or provided, or to be paid or provided, to current or former employees,
directors or other service providers of or to any Company Entity (including
pursuant
21
to this Agreement or any other Contract to be entered into in
connection with this Agreement) will fail to be deductible for federal income
Tax purposes under Section 280G of the Code.
(h)
There are no material claims
pending, or, to the knowledge of the Company, threatened or anticipated (other
than routine claims for benefits) against or involving any Company Employee
Plan, the assets of any Company Employee Plans or against any Company Entity or
any Company ERISA Affiliate with respect to any Company Employee Plan. There is no Governmental Order or order of
any arbitrator outstanding against or in favor of any Company Employee Plan or
any fiduciary thereof (other than rules of general applicability). There are no pending or threatened Legal
Proceedings involving any Company Employee Plan.
(i)
No Company Employee Plan
provides benefits, including without limitation death or medical benefits
(whether or not insured), with respect to current or former employees,
directors or other service providers after retirement or other termination of
service (other than (i) coverage mandated by applicable Laws and Regulations,
(ii) death benefits or retirement benefits under any “employee pension
benefit plan” (as defined in Section 3(2) of ERISA), or (iii) deferred
compensation benefits accrued as liabilities in the Company Financial
Statements. No Company Employee Plan is
funded through a “welfare benefit fund” as defined in Section 419 of the
Code.
(j)
Except as
expressly provided herein, neither the execution of this Agreement or any other
Contract to be entered into in connection with this Agreement, nor the consummation
of the transactions contemplated hereby or thereby, will (either alone or
together with any other event) result in or is a precondition to (i) any
current or former employee, director or other service provider of or to any
Company Entity becoming entitled to severance pay or any similar payment, (ii) the
acceleration of the time of payment or vesting of, or an increase in the amount
of, any compensation due to any current or former employee, director or other
service provider of or to any Company Entity, or (iii) the renewal or
extension of the term of any Contract regarding the compensation of any current
or former employee, director or other service provider of or to any Company
Entity.
(k)
No Company Employee Plan subject to Title I
of ERISA holds any “employer security” or “employer real property” (each as
defined in Section 407(d) of ERISA).
3.17
Labor
Matters, Agreements and Actions.
(a)
Each Company Entity is current in the payment
of all wages and benefits owed to its employees.
(b)
Each Company Entity has made all
contributions required by Laws and Regulations to be made on behalf of such
Company Entity’s current and former employees into social welfare plans
(including contributions required to be made by a Company Entity or to be
withheld from and paid on behalf of any employee of a Company Entity into the
unemployment insurance, pension, medicine insurance and disability injury
insurance funds pursuant to the laws of any jurisdiction in which the Company
Entities operate).
(c)
Except as disclosed in Section 3.17(c) of
the Company Disclosure Letter, as of the date hereof, no Company Entity is
aware that any executive officer, or that any group of employees of any Company
Entity, intends to terminate their employment with such Company Entity, nor
does such Company Entity have a present intention to terminate the employment
of any of the foregoing. The employment of each officer and employee of each
Company Entity is terminable at the will of such Company Entity. Each Company
Entity has complied in all material respects with all applicable state,
provincial, municipal and federal equal employment opportunity and other laws
related to employment (including without limitation, provisions thereof
relating to wages, hours, equal opportunity, collective bargaining and the
payment of social security and
22
other
taxes and union dues), and no Company Entity is aware that it has any labor
relations problems (including without limitation any union organization
activities, threatened or actual strikes or work stoppages or material
grievances). No Company Entity is bound by or subject to (and none of its
Assets is bound by or subject to) any written or oral, express or implied,
contract, commitment or arrangement with any labor union.
(d)
Except as disclosed in Section 3.17(d) of
the Company Disclosure Letter, each current and former employee and consultant
to each Company Entity has entered into a confidentiality and assignment of
inventions agreement with such Company Entity, a copy of each of which has
previously been delivered to Purchaser.
No Company Entity has agreements or arrangements with persons titled as
independent contractors or consultants, as a result of which, by virtue of the
control exercised by such Company Entity, the type of work performed by the
persons or any other circumstances, such persons could reasonably be deemed to
be employees of such Company Entity.
3.18
Banking
Facilities.
Section 3.18
of the Company Disclosure Letter sets forth a true, correct and complete list
of:
(a)
each bank, savings and loan or other
financial institution in which any Company Entity has an account or safety
deposit box and the numbers of the accounts or safety deposit boxes maintained
thereat; and
(b)
the names of all persons authorized to draw
on each such account or to have access to any such safety deposit box facility.
3.19
Powers
of Attorney and Suretyships.
No
Company Entity has any general or special powers of attorney outstanding
(whether as grantor or grantee thereof) or has any obligation or liability
(whether actual, accrued, accruing, contingent or otherwise) as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of
the obligation of any Person, except as endorser or maker of checks or letters
of credit, respectively, endorsed or made in the ordinary course of business.
3.20
Brokers
and Finders.
No
Company Entity is obligated to pay any broker’s or finder’s fee or any other
commission or similar fee to any agent, broker, investment banker, financial
advisor or other firm or Person in connection with any of the transactions
contemplated by this Agreement.
3.21
Compliance
with Laws; Permits
The
Company Entities are, and at all times have been, in full material compliance
with all Laws of any Governmental Body applicable to their respective
businesses or operations. Except with
respect to immaterial violations of any Laws and Regulations, no Company Entity
has received any written notice of, has knowledge of or has been charged with,
the violation of any Laws.
The
Company and its Subsidiaries have all permits which are required for the
operation of their respective businesses as presently conducted, except where
the absence of which would not, individually or in the aggregate, materially
affect the business of the Company Entities.
No Company Entity is in default or violation (and no event has occurred
which, with notice or the lapse of time or both, would constitute a default or
violation) of any term, condition or provision of any permit to which it is a
party, except where such default or violation would not, individually or in the
aggregate, materially affect the business of the Company Entities.
23
3.22
Approvals;
Takeover Statutes
(a)
No state takeover statute or similar statute
or regulation or charter or by-law anti-takeover provision applies or purports
to apply to the Company with respect to this Agreement, the Merger or any other
transaction contemplated hereby. The
board of directors of the Company has taken all action necessary to ensure that
any restrictions on business combinations contained in the DGCL, including Section 203
of the DGCL, will not apply to the Merger.
(b)
The only required approvals of the Holders of
this Agreement and the Merger are the approvals of the Holders of a majority of
the issued and outstanding Company Common Shares.
ARTICLE IV -
REPRESENTATIONS OF
PURCHASER
Purchaser
represents and warrants to the Company that, except as set forth in the
disclosure letter of the Purchaser dated as of the date hereof (the “
Purchaser Disclosure Letter
”), each of which exceptions shall specifically identify the
relevant Section hereof to which it relates or be reasonably clear that it
is relevant to such Section:
4.1
Disclosure.
No
representation or warranty of the Purchaser contained in this Agreement, and no
statement contained in the Purchaser Disclosure Letter or in any certificate or
other information furnished or to be furnished, including all information
required to be included in the Purchaser Information Circular to be sent to the
stockholders of the Purchaser in connection with the meeting of shareholders of
the Purchaser to approve the Agreement and the Merger pursuant hereto contains
or will contain any untrue statement of a material fact or omits to state a
material fact required to be stated herein or therein or necessary to make the
statements and facts contained herein or therein, in the light of the
circumstances under which they are made, not misleading. The information
disclosed to the Company pursuant to the diligence requisition list provided to
the Purchaser by the Company in connection with the Company’s due diligence
investigations of the Purchaser Entities was in all material respects true,
accurate and complete. Notwithstanding anything to the contrary, the Purchaser
shall not be deemed to make to the Company any representation or warranty
(express or implied) other than as expressly made by the Purchaser in this
Agreement
4.2
Corporate
Organization.
(a)
Purchaser is a corporation duly organized,
validly existing and in good standing under the federal laws of Canada. Merger Sub is a corporation duly organized,
validly existing and in good standing under the laws of Delaware. Purchaser has property or conducts business
in each of the jurisdictions identified on Section 4.2(a) of the
Purchaser Disclosure Letter and is qualified to transact business in each of
the jurisdictions identified on Section 4.2(a) of the Purchaser
Disclosure Letter. Each of Purchaser and
Merger Sub is duly qualified to transact business and is in good standing in
each jurisdiction in which the ownership of property or the character of its
business requires such qualification, except those jurisdictions where the
failure to be so qualified or to be in good standing would not have a Purchaser
Material Adverse Effect. Each of
Purchaser and Merger Sub has all required corporate power and authority
necessary to own and operate its property, to carry on its business as now
conducted and presently proposed to be conducted, to execute and deliver the
Agreement and the agreements contemplated herein and to consummate the
transactions contemplated hereby and thereby.
(b)
Except as set forth in the Purchaser
Disclosure Letter, Purchaser does not (i) have any Subsidiaries, (ii) presently
own or control, directly or indirectly, or hold any rights to acquire, any
interest in any other Person or (iii) have any contract or other
obligation to provide funds to, or
24
make
any investment in, any other Person.
Purchaser is not a participant in any joint venture, partnership or
similar arrangement. Purchaser, together
with any Subsidiary of Purchaser, are herein referred to as “
Purchaser Entities
.”
(c)
The organizational documents of each of
Purchaser and Merger Sub as currently in effect are in the form previously
provided to counsel for the Company and no amendments have been made thereto or
have been authorized since the date thereof.
4.3
Authorization;
No Violation.
(a)
The execution and delivery by each of
Purchaser and Merger Sub of this Agreement and the agreements provided herein,
and the consummation of all transactions contemplated hereunder and thereunder
by each of Purchaser and Merger Sub, have been duly authorized by all requisite
corporate action on the part of Purchaser the Purchaser Entities and has been
recommended to the sole stockholder of Merger Sub for adoption and approval. This Agreement has been duly and validly
executed and delivered by each of Purchaser and Merger Sub. Assuming the due
authorization, execution and delivery of this Agreement by the Company and the
other parties hereto, other than Purchaser and Merger Sub and, in the case of
the other agreements, by the parties thereto, other than Purchaser and Merger
Sub, this Agreement and each other agreement contemplated hereby to which each
of Purchaser and Merger Sub is a party constitute valid and legally binding
obligations of each of Purchaser and Merger Sub, enforceable in accordance with
its respective terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights generally and (ii) as limited
by laws relating to the availability of specific performance, injunctive relief
or other equitable remedies.
(b)
The execution, delivery and performance by
each of Purchaser and Merger Sub of this Agreement and the agreements provided
for herein, the consummation by each of Purchaser and Merger Sub of the
transactions contemplated hereby and thereby, will not, with or without the
giving of notice or the passage of time or both, (i) violate the
provisions of the organizational documents of any Purchaser Entity or (ii) assuming
that the consents and approvals specifically referred to in Section 4.7 of
the Purchaser Disclosure Letter (as to clause (x), with respect to Governmental
Entities and as to clause (y), with respect to Governmental Entities and
non-Governmental Entities) are duly obtained, (x) violate any Laws and
Regulations applicable to any Purchaser Entity or any of their respective
Purchaser Assets, or (y) violate, conflict with, result in a breach of any
provision of or the loss of any benefit, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default),
result in the termination of or a right of termination or cancellation,
accelerate the performance required by or rights or obligations, or result in
the creation of any Lien (other than Permitted Liens) upon any of the
respective Purchaser Assets of any Purchaser Entity, under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement, contract, or other instrument or obligation to which
any Purchaser Entity is a party, or by which they or any of their respective
Purchaser Assets or business activities may be bound or affected, except (with
respect to this clause (y) only) for any such violations, conflicts or
breaches that would not have, individually or in the aggregate, a Purchaser
Material Adverse Effect.
4.4
Capitalization.
(a)
Authorized Capital Shares.
The
authorized share capital of the Corporation consists of an unlimited number of
Purchaser Common Shares, an unlimited number of Class 1 preference shares,
issuable in series, and an unlimited number of Class 2 preference shares,
issuable in series. As of the date
hereof, 51,158,855 Common Shares and no Class 1 or Class 2 preference
shares were issued and outstanding. Each
outstanding Purchaser Common Share has been duly
25
and
validly authorized and issued, is fully paid and non-assessable, was issued in
compliance with all applicable securities laws and is not subject to preemptive
rights or rights of first refusal created by its incorporating statute, the
organizational documents of Purchaser or any agreement to which Purchaser is a
party. The Purchaser Entities are not in
violation of Rule 12g3-2 under the Exchange Act.
(b)
Other Rights.
Except as set forth in the Purchaser Disclosure Letter, there are no
outstanding options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from Purchaser of any, or
rights to acquire from the Company any, capital shares. Section 4.4(b) of the Purchaser
Disclosure Letter accurately sets forth the following information with respect
to all outstanding options, warrants and rights to acquire Purchaser’s capital
shares: the holder; the number of shares
covered; the exercise price; the expiration date; the vesting schedule; and the
number of shares currently vested. No
option to purchase Purchaser Common Shares has had any term amended, including
without limitation any amendment to its vesting schedule, since the date of its
initial grant. A true and complete copy
of the Purchaser Stock Option Plan has been provided to the Company, and except
as requested by Purchaser, such Purchaser Stock Option Plan has not been
amended, modified or supplemented. All
currently outstanding options to acquire shares of Purchaser Common Shares were
issued in compliance with the terms of the Purchaser Stock Option Plan. All registrations and approvals of the
Purchaser Stock Option Plan required by, and necessary to obtain any right or
benefit under, applicable Laws and Regulations to be made by Purchaser or its
respective stockholders have been made. Purchaser has no knowledge of any
intention by a shareholder, or group of shareholders, of Purchaser beneficially
holding in the aggregate 10% or more of the issued and outstanding Purchaser
Common Shares to vote such shares against the Merger.
(c)
Subsidiaries.
All
of the outstanding shares of capital stock and voting securities or other
interests of each Subsidiary of Purchaser are duly and validly authorized and
issued, fully paid and non-assessable, were issued in compliance with all
applicable securities laws and are free of any Liens.
4.5
Issuance
of Purchaser Common Shares.
The
shares of Purchaser Common Shares to be issued pursuant to the Merger, when
issued, will be duly authorized, validly issued, fully paid, non-assessable and
issued in compliance with applicable federal, state and provincial securities
Laws and Regulations.
4.6
Merger
Sub.
Merger
Sub has been formed by Purchaser for the purpose of effecting the Merger. The
authorized capital securities of Merger Sub consist of an unlimited number of
common shares, of which one share is issued and outstanding. All of the issued and outstanding shares of
Merger Sub are owned by Purchaser and are validly issued, fully paid and
non-assessable. Except for obligations
incurred in connection with its formation or organization or the negotiation
and consummation of this Agreement and any related documentation to which it is
a party, and the transactions contemplated hereby and thereby, Merger Sub has
neither incurred any obligation or liability nor engaged in any business or
activity of any type or kind whatsoever or entered into any agreement or
arrangement with any Person.
4.7
Consents
and Approvals.
Other
than shareholder, stock exchange and regulatory approvals, and except as set
forth in Section 4.7 of the Purchaser Disclosure Letter, no consents or
approvals of any Governmental Entity or any third parties are required in
connection with the execution, delivery or performance of this Agreement and
the agreements provided for herein by Purchaser or Merger Sub or the consummation
of the transactions contemplated hereby or thereby by Purchaser or Merger Sub.
26
4.8
Securities
Filings; Financial Statements.
(a)
Purchaser has filed and made available to the
Company all forms, reports and documents required to be filed by Purchaser with
the Securities Commissions since August 10, 2006 (collectively, the “
Purchaser Public Filings
”). The
Purchaser Public Filings (i) at the time filed, complied in all material
respects with the applicable requirements of the Securities Law, 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 in such Purchaser Public Filings or necessary in order to make the
statements in such Purchaser Public Filings, in the light of the circumstances
under which they were made, not misleading.
(b)
Each of the consolidated financial statements
(including, in each case, any related notes) contained in the Purchaser Public
Filings complied as to form in all material respects with the applicable
published rules and regulations of the Securities Commissions with respect
thereto, was prepared in accordance with Canadian GAAP (except as may be
indicated in the notes to such financial statements or, in the case of
unaudited statements, as permitted under applicable law) and fairly presented
the consolidated financial position of Purchaser and its Subsidiaries as of the
respective dates and the consolidated results of their operations and cash
flows, retained earnings, assets and liabilities and operating results for the
periods indicated, except that the unaudited interim financial statements do
not include notes, but do include all adjustments, which consist only of normal
recurring adjustments, necessary for fair presentation. The books and records of each Purchaser
Entity are true and complete in all material respects.
(c)
Except as set forth in the Purchaser Public
Filings, no Purchaser Entity has any liabilities or obligations (whether
accrued, absolute, unliquidated, contingent or otherwise) other than (i) liabilities
and obligations that have arisen after June 9, 2008 in the ordinary course
of business consistent with past practice which, individually or in the
aggregate, have not had a Purchaser Material Adverse Effect and (ii) obligations
under contracts and commitments incurred in the ordinary course of business
consistent with past practice that would not be required to be reflected in
financial statements (or the notes thereto) prepared in accordance with
Canadian GAAP.
(d)
Except as disclosed in the Purchaser Public
Filings, no Purchaser Entity is a guarantor or indemnitor of any indebtedness
for borrowed money of any other Person.
(e)
Since June 9, 2008, there has been no
event which has had a Purchaser Material Adverse Effect.
4.9
Litigation.
There
is no Legal Proceeding or investigation (or any basis therefor) pending or, to
the knowledge of Purchaser, currently threatened against any Purchaser Entity
that questions the validity of this Agreement, any agreement contemplated
hereby or the right of Purchaser to enter into this Agreement or any agreement
contemplated hereby or thereby or to consummate the transactions contemplated
hereby or thereby.
4.10
Intellectual
Property.
(a)
Definitions.
(i)
“
Purchaser Intellectual
Property
” means all algorithms, application programming interfaces,
apparatus, databases and data collections, diagrams, formulae, inventions
(whether or not patentable), know-how, logos, marks (including brand names,
product names, logos, and slogans), methods, network configurations and
architectures, processes, proprietary information, protocols, schematics,
specifications, software,
27
software
code (in any form including source code and executable or object code),
subroutines, user interfaces, techniques, URLs, web sites, works of authorship
and other forms of technology (whether or not embodied in any tangible form and
including all tangible embodiments of the foregoing such as instruction
manuals, laboratory notebooks, prototypes, samples, studies and summaries).
(ii)
“
Purchaser Intellectual
Property Rights
” means, under the laws of any jurisdiction in the
world, all copyrights, patent rights, trademark and trade name rights, trade
secret rights, industrial property rights, moral rights, and other similar
types of proprietary rights in Purchaser Intellectual Property, and all
applications, registrations, renewals, and other filings with respect to any of
the foregoing.
(iii)
“
Purchaser Registered IP
”
means all Purchaser Intellectual Property Rights that are registered, filed, or
issued under the authority of any Governmental Entity, including all patents,
registered copyrights, and registered trademarks and all applications for any
of the foregoing.
(iv)
“
Purchaser
IP
”
means all Purchaser
Intellectual Property Rights and Purchaser Intellectual Property owned by or
licensed to Purchaser.
(v)
“
Purchaser
IP Contract
”
means
any Contract to which Purchaser is a party or by which Purchaser is bound that
contains any assignment or license of, or covenant not to assert or enforce,
any Purchaser Intellectual Property Right or that otherwise relates to any
Purchaser IP or any Purchaser Intellectual Property developed by, with, or for
any Purchaser Entity.
(vi)
“
Purchaser
Designated Individuals
”
means,
for the purpose of this Section 4.10 only, the employees of Purchaser.
(b)
To the knowledge of Purchaser after
reasonable inquiry, Purchaser owns or has the full and unfettered right and
license, or other written, valid, and enforceable consent or permission to use,
all of the Purchaser Intellectual Property and Purchaser Intellectual Property
Rights that are used in or necessary to the present conduct and reasonably
anticipated future conduct (as such future conduct is reasonably anticipated as
of the date hereof by the Purchaser Designated Individuals) of the businesses
of the Purchaser Entities, including the development, distribution, manufacture
or other exploitation of their products or services. All such Purchaser Intellectual Property and
Purchaser Intellectual Property Rights constitute Purchaser IP and (i) all
such Purchaser IP that consists of Purchaser Intellectual Property Rights and
Purchaser Intellectual Property owned by the Purchaser Entities is valid and
subsisting and (ii) to the knowledge of the Purchaser Entities, all such
Purchaser IP that consists of Purchaser Intellectual Property Rights and
Purchaser Intellectual Property that is exclusively licensed to the Purchaser
Entities is valid and subsisting. Clause
(i) of the immediately foregoing sentence is not and shall not be
construed to be knowledge qualified in any respect.
(c)
To the extent that any of the Purchaser
Intellectual Property or Purchaser Intellectual Property Rights used in or
necessary to the present conduct of the Purchaser Entities’ businesses,
including the development, distribution, manufacture or other exploitation of
their products or services, has been created, developed or invented by a third
party, each of the Purchaser Entities has, with respect to such Purchaser
Intellectual Property or Purchaser Intellectual Property Rights, obtained
either ownership of and is the exclusive owner of or has obtained a valid
license, or other written, valid, and enforceable consent or permission,
sufficient for the present conduct of its business. All such rights shall survive the Merger, and
be fully exercisable by Purchaser following the Merger without payment of any
amounts or other consideration (including additional royalties) to any third
party triggered as a result of such Merger or other change of control resulting
therefrom.
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(d)
(i) The past conduct of the Purchaser
Entities’ businesses relating to the design, development, manufacture,
importation, license or sale by the Purchaser Entities of any Purchaser Product
(as defined below) and the use of any product, service, process or method in
connection therewith, and, to the knowledge of the Purchaser Entities after
reasonable inquiry of the Purchaser Designated Individuals, the past conduct of
the Purchaser Entities’ businesses other than as set forth in this clause (i) of
this paragraph (d), has not infringed, misappropriated or otherwise breached;
and (ii) the present conduct of the Purchaser Entities’ businesses
relating to the design, development, manufacture, importation, license or sale
by the Purchaser Entities of any Purchaser Product and the use of any product,
service, process or method in connection therewith, and, to the knowledge of
the Purchaser Entities after reasonable inquiry of the Purchaser Designated
Individuals, the present conduct of the Purchaser Entities’ business other than
as set forth in this clause (ii) of this paragraph (d), does not infringe,
misappropriate or otherwise breach; with respect to each of Clauses (i) and
(ii), above, any Intellectual Property Rights held by any other Person that
alone or in the aggregate would reasonably be likely to have a Purchaser Material
Adverse Effect. No claim or litigation
regarding any Purchaser Entity, nor any such product, service, process or
method, is pending or, to the Purchaser Entities’ knowledge based upon
reasonable inquiry of the Purchaser Designated Individuals, threatened.
(e)
The Purchaser Entities have obtained or will
have obtained as of the Closing, all certificates, registrations and permits in
connection with the Intellectual Property owned or licensed by the Purchaser
Entities (excluding the issuance of patents, trademark registrations and
copyright registrations), any Purchaser IP Contracts or any other agreements
related thereto that materially alter or amend any Purchaser IP Contracts or
rights in such Intellectual Property, as may be required under the laws of the
applicable jurisdiction or Governmental Entities (including without limitation
any Governmental Entities) of countries in which the Purchaser currently
conducts business.
(f)
(A) Purchaser is not in material breach
of, nor has Purchaser failed to perform in any material manner under, any of
the Purchaser IP Contracts and, to Purchaser’s knowledge, no other party to any
such Purchaser IP Contract is in material breach thereof or has failed to
perform in any material manner thereunder, and (B) Purchaser is not in
breach of, nor has Purchaser failed to perform under, any of the Purchaser IP
Contracts, which such breach or failure to perform either individually or in
the aggregate would cause a Purchaser Material Adverse Effect. The consummation of the transactions
contemplated by this Agreement will neither violate nor result in the breach,
modification, cancellation, termination or suspension of any Purchaser IP
Contracts or entitle the other party or parties to such Purchaser IP Contracts
to terminate such Purchaser IP Contracts or any licenses thereunder. Immediately following the Closing Date,
Purchaser will be permitted to exercise all of Purchaser’s rights under the
Purchaser IP Contracts to the same extent Purchaser would have been able to had
the transactions contemplated by this Agreement not occurred and without the
payment of any additional amounts or consideration other than ongoing fees,
royalties or payments which Purchaser would be required to pay had the
transactions contemplated by this Agreement not occurred. Neither the Merger nor any merger of the
Surviving Company with Purchaser will, in and of itself, trigger any third
party being granted any rights to any Purchaser Intellectual Property Rights
that are in addition to, or greater than, such third party currently has under
such Purchaser IP Contracts, including any access to or release of any source
code owned by or licensed to Purchaser.
To the knowledge of Purchaser, there are no contracts, licenses or
agreements between Purchaser and any other Person with respect to Purchaser IP
under which there is any dispute regarding the scope of such agreement, or
performance under such agreement, including with respect to any payments to be
made or received by Purchaser thereunder.
To the knowledge of Purchaser, no person is infringing or
misappropriating any Purchaser Intellectual Property Right owned by or
exclusively licensed to Purchaser.
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(g)
Each Purchaser Entity has an industry standard
privacy or data rights policy available on all relevant WWW sites of such
Purchaser Entity and has complied, and is in compliance, with such policy in
all material respects. No Purchaser
Entity has received any notice claiming or alleging that it has not complied
with its privacy policy or any Laws and Regulations governing the operation of
any Purchaser Entity’s WWW sites, nor does any Purchaser Entity know of any
facts or circumstances that would give rise to such claim or allegations.
(h)
In each case in which any Purchaser Entity
has acquired any Purchaser Intellectual Property or Purchaser Intellectual
Property Right from any Person, the Purchaser Entity has obtained a valid and
enforceable assignment sufficient to irrevocably transfer all rights in and to
all such Purchaser Intellectual Property and the associated Purchaser
Intellectual Property Rights (including the right to seek past and future
damages with respect thereto) to the Purchaser Entity. In accordance with applicable Laws and Regulations,
each Purchaser Entity has recorded each such assignment of Purchaser Registered
IP assigned to the Purchaser Entity with the relevant Governmental Entity.
(i)
To the knowledge of the Purchaser Entities, (i) there
are no facts or circumstances that would render any Purchaser IP invalid or
unenforceable, and (ii) no Purchaser Entity has taken, or failed to take,
any action in the application for or prosecution of any Purchaser Registered IP
that would render such Purchaser Registered IP invalid or unenforceable.
(j)
Each Purchaser Entity has the right to use,
pursuant to valid licenses or other written, valid, and enforceable consents or
permissions, all data (including personal data of third parties), software
development tools, library functions, operating systems, data bases, compilers
and all other third-party software that are used in the operation of the
Purchaser Entities as currently conducted or that are required to create,
modify, compile, operate or support any software that is Purchaser IP or is
incorporated into any Purchaser Product.
(k)
No funding from a Governmental Entity,
facilities of or funding from a university, college, other educational
institution or research center or funding from third parties (other than
funding from banks or lending institutions or other customary sources of equity
financing that are not Governmental Entities) was used in the development of
any Purchaser IP. To the knowledge of
Purchaser, no current employee of any Purchaser Entity who was involved in, or
who contributed to, the creation or development of any Purchaser IP has
performed services for any Governmental Entity, university, college, or other
educational institution or research center during a period of time during which
such current employee was also performing services for any Purchaser Entity
where such services would result in a transfer or other impairment or
limitation on the Purchaser Entities’ use of the Purchaser Intellectual
Property or Purchaser Intellectual Property Rights invented, created or
authored by such individual. To the
knowledge of the Purchaser Entities, after reasonable inquiry of the Purchaser
Designated Individuals, no former employee, consultant or independent
contractor of any Purchaser Entity who was involved in, or who contributed to,
the creation or development of any Purchaser IP has performed services for any
Governmental Entity, university, college, or other educational institution or
research center during a period of time during which such former employee,
consultant or independent contractor was also performing services for any
Purchaser Entity where such services would result in a transfer or other
impairment or limitation on the Purchaser Entities’ use of the Purchaser
Intellectual Property or Purchaser Intellectual Property Rights invented,
created or authored by such individual.
(l)
No Purchaser IP owned by any Purchaser
Entity, no Purchaser Products, and to the knowledge of any Purchaser Entity no
Purchaser IP exclusively licensed to any Purchaser Entity is subject to any
Legal Proceeding or outstanding Governmental Order or written settlement
agreement or stipulation to which any Purchaser Entity is a party or of which
it is aware that restricts in any
30
material
manner the use, transfer or licensing thereof by any Purchaser Entity or that
may adversely affect the validity or enforceability of such Purchaser IP or
Purchaser Product.
(m)
Neither this Agreement nor the transactions
contemplated by this Agreement will result in, to the knowledge of the
Purchaser Entities, Purchaser granting to any third party any right to any
Purchaser Intellectual Property or Purchaser Intellectual Property Right owned
by, or licensed to, the Purchaser.
4.11
Compliance
with Agreements and Laws.
(a)
No Purchaser Entity is in violation in any
material respect of any Laws and Regulations relating to its respective
properties or the conduct of its respective business, except where,
individually or in the aggregate, such violation would not have a Purchaser
Material Adverse Effect. No Purchaser
Entity has had notice or communication from any Governmental Entity or
otherwise of any such violation or noncompliance and, to the best knowledge of
Purchaser, no such violation or noncompliance exists. Each Purchaser Entity has all franchises,
permits, licenses and any similar authorizations and certificates from all
Governmental Entities necessary for the conduct of its business as currently
conducted (collectively, the “
Purchaser
Authorizations
”). No Purchaser Entity is in default
in any material respect under any of such Purchaser Authorizations. All such Purchaser Authorizations are in full
force and effect and there are no proceedings pending or, to the knowledge of
Purchaser, threatened that seek the revocation, cancellation, suspension or
adverse modification thereof. The
execution, delivery and performance of this Agreement and all other agreements
contemplated hereby to which Purchaser is a party and the consummation of the
transactions contemplated hereby and thereby will not result in the suspension,
revocation, impairment, forfeiture or nonrenewal of any such Authorizations.
(b)
Section 4.11(b) of the Purchaser
Disclosure Letter sets forth a description of each Governmental Order
applicable to any Purchaser Entity. No
such Governmental Order, individually or in the aggregate, has had a Purchaser
Material Adverse Effect.
4.12
Environmental.
There
are no Legal Proceedings or investigations of any nature that would be
reasonably likely to result in the imposition on any Purchaser Entity of any
liability or obligation arising under common law or under any local, state,
provincial, municipal or federal environmental statute, regulation or ordinance
pending or, to the knowledge of Purchaser, threatened against any Purchaser
Entity, which liability or obligation would be material to Purchaser. To the knowledge of Purchaser, there is no
reasonable basis for any such Legal Proceeding or investigation. No Purchaser Entity is subject to any
Governmental Order imposing any material liability or material obligation with
respect to the foregoing. Each Purchaser
Entity is in material compliance with all Purchaser Authorizations and with
applicable Laws and Regulations relating to Environmental Laws, and there are no liabilities under
any Purchaser Environmental Laws with respect to any Purchaser Entity, other
than failures to comply or liabilities that would not, individually or in the
aggregate, have a Purchaser Material Adverse Effect. No Purchaser Entity has received any notice
from any Governmental Entity during the past five years relating to or alleging
a violation of any Purchaser Environmental Law.
No Purchaser Entity has any indemnification obligation with any Person
with respect to Purchaser Environmental Laws.
4.13
Contracts
and Commitments.
(a)
Except as set forth in the Purchaser’s
financial statements available on www.SEDAR.com, no Purchaser Entity has, since
June 9, 2008, (i) declared or paid any dividends or authorized or made
any distribution upon or with respect to any class or series of its capital
shares or corporate interests, (ii) incurred any indebtedness for money
borrowed or any other liabilities individually in excess of $100,000 or, in the
case of indebtedness and/or liabilities individually less than
31
$100,000,
in excess of $200,000 in the aggregate, (iii) made any loans or advances
to any Person, other than ordinary course advances for business expenses, or (iv) sold,
exchanged or otherwise disposed of any of its Purchaser Assets or rights, other
than the sale of its inventory in the ordinary course of business.
(b)
All of the Material Contracts are valid,
binding and enforceable (and, if applicable, were registered with the
appropriate Governmental Entity, as required in order to be enforceable) in
accordance with their respective terms and in full force and effect, without
amendment (except as disclosed on Section 4.13(b) of the Purchaser
Disclosure Letter). No Material Contract requires the consent by the other
parties thereto in order to consummate the transactions contemplated by this
Agreement. The Purchaser Entity party thereto has performed in all material
respects all obligations required to be performed by it and is not in default
under or in breach of nor in receipt of any claim of default or breach under
any Material Contract, and such Purchaser Entity does not have any present
expectation or intention of not fully performing all such obligations, except
where any such default or non-performance would not constitute a Purchaser
Material Adverse Effect. No event has occurred which with the passage of time
or the giving of notice or both would result in a default, breach or event of
noncompliance by the Purchaser Entity party thereto under any Material
Contract, except where such event would not constitute a Purchaser Material
Adverse Effect. The Company has no knowledge of any material breach or
anticipated material breach by the other parties to any Material Contract.
True, correct and complete copies of each written Material Contract and an
accurate description of each oral Material Contract, together with all
amendments, waivers or other changes thereto, have been made available to
counsel to the Company.
4.14
Related-Party
Transactions.
Except
as set forth in the Purchaser Public Filings, no employee, stockholder, officer
or director of any Purchaser Entity or member of his/her immediate family is
indebted to any Purchaser Entity, nor is any Purchaser Entity indebted (or
committed to make loans or extend or guarantee credit) to any of them. All commercial transactions are negotiated on
an arms length basis and at fair market value.
4.15
Changes.
Since
June 9, 2008 and except as otherwise reflected in the Purchaser Public
Filings, each Purchaser Entity has conducted its business, in all material
respects, in the ordinary course consistent with past practice and there has
not occurred:
(a)
any change, event or condition that,
individually or in the aggregate, is a Purchaser Material Adverse Effect;
(b)
any material damage, destruction or loss to
Purchaser Assets, whether or not covered by insurance having a Purchaser
Material Adverse Effect;
(c)
any waiver by any Purchaser Entity of a
valuable right or of a debt owed to it, in an amount exceeding $100,000
individually or $200,000 in the aggregate;
(d)
any satisfaction or discharge of any Lien or
payment of any obligation by any Purchaser Entity, except in the ordinary
course of business consistent with past practice and that is not material to
the Purchaser Assets, financial condition, operating results or business of the
Purchaser Entities, taken as a whole;
(e)
any contract entered into by any Purchaser
Entity, other than in the ordinary course of business consistent with past
practice or any change or amendment to a contract or arrangement by which any
Purchaser Entity or any of its Purchaser Assets is bound or subject, other than
in the ordinary course of business consistent with past practice;
32
(f)
any change in any Material Contract or other
arrangement (including any Purchaser Employee Plan) providing for compensation
to any officer or key employee of any Purchaser Entity;
(g)
any sale, assignment or transfer of any
patents or patent applications, trademarks or trademark applications, service
marks, trade names, corporate names, copyrights or copyright registrations,
trade secrets or other intangible Purchaser Assets, or disclosure of any proprietary
confidential information to any Person;
(h)
any acquisition, sale or transfer of any
material asset of any Purchaser Entity;
(i)
any resignation or termination of employment
of any officer or key employee of any Purchaser Entity;
(j)
any declaration, payment, setting aside or
other distribution of cash or other property to its stockholders or interest
holders with respect to its common shares, other equity securities or other
interests (including without limitation, any warrants, options or other rights
to acquire its common shares or other equity securities), or any direct or
indirect redemption, purchase or other acquisition by Purchaser of any of its
common shares or interests;
(k)
any mortgage, pledge, transfer of a security
interest in, or Lien, created by any Purchaser Entity, with respect to any of
its Purchaser Assets, except for Permitted Liens;
(l)
any notice that there has been a loss of, or
order cancellation by, any major customer of any Purchaser Entity;
(m)
any capital expenditures or commitments
therefor that are in an amount exceeding $100,000 in the case of any individual
item or $200,000 in the aggregate;
(n)
any loans or advances to, guarantees for the
benefit of, or any investments in, any Person (including, without limitation,
any employees, officers or directors, or any members of their immediate
families, of any Purchaser Entity);
(o)
any change in the accounting methods or
practices (including any change in depreciation or amortization policies or
rates) materially affecting the Purchaser Assets of any Purchaser Entity;
(p)
any amendment or change to the organizational
documents of any Purchaser Entity;
(q)
any election with respect to taxes or changes
in tax accounting methods;
(r)
to the knowledge of Purchaser , any other
event or condition of any character that would have a Purchaser Material
Adverse Effect; or
(s)
any agreement by any Purchaser Entity to do
any of the things described in the preceding clauses (a) through (r) (other
than negotiations with the Company and its representatives regarding the
transactions contemplated by this Agreement).
4.16
Purchaser
Assets.
Each
Purchaser Entity has good and marketable title to, or valid leasehold interest
in, its respective properties and assets (all such properties and assets being
referred to as the “
Purchaser
Assets
”), other than such property and assets as to which the failure to
have the title or lease rights, individually or in the aggregate, would not
have a Purchaser Material Adverse Effect.
The Purchaser Assets are free and clear of all Liens, except (a) as
reflected in the Purchaser Public Filings and (b) Permitted Liens. The Purchaser Assets constitute all the
assets used or held for use in the conduct of the respective businesses of the
Purchaser Entities and necessary for Purchaser to operate such businesses as
currently conducted by such Purchaser Entities.
No Purchaser Entity owns any real property. All of the tangible Purchaser Assets of each
Purchaser Entity are in good operating condition, subject to normal wear and
tear, and are reasonably fit and useable for the purposes for which they are
currently being used.
33
4.17
Insurance.
There
is no claim pending under any of the fire, theft, casualty, general liability,
workers compensation, business interruption, environmental impairment, product
liability, automobile and other insurance policies maintained by each Purchaser
Entity and of all life insurance policies maintained by each Purchaser Entity
on the lives of its respective employees, specifying the type of coverage, the
amount of coverage, the premium, the insurer and the expiration date of each
such policy (collectively, the “
Purchaser
Insurance Policies
”) as to which coverage has been
questioned, denied or disputed by the underwriters of such policies. All premiums due and payable on the Purchaser
Insurance Policies or renewals thereof have been paid and each Purchaser Entity
is otherwise in material compliance with the material terms of such policies. All Purchaser Insurance Policies will remain
in full force and effect through the Closing Date and also as to claims arising
out of events that occur prior to the Closing.
Purchaser has no knowledge of any threatened termination of, or premium
increase with respect to, any of the Purchaser Insurance Policies.
4.18
Employee
Benefit Plans.
(a)
Section 4.18(a) to
the Purchaser Disclosure Letter contains a true and complete list of each
Purchaser Employee Plan sponsored, maintained or contributed to or required to
be contributed to by any Purchaser Entity or by any ERISA Affiliate of a
Purchaser Entity (a “
Purchaser ERISA Affiliate
”)
or as to which any Purchaser Entity or any Purchaser ERISA Affiliate has, or
may have, any liability or obligation, contingent or otherwise, whether written
or oral and whether legally binding or not (collectively, the “
Purchaser Employee Plans
”).
(b)
With respect to each of the
Purchaser Employee Plans, the Purchaser has heretofore delivered to the Buyer
true and complete copies of each of the following documents: (i) the Purchaser Employee Plan, the
related trust agreement (if any) and any other related documents (including all
amendments to such Purchaser Employee Plan and related documents); (ii) the
most recent annual reports, actuarial reports, and financial statements, if
any; (iii) the most recent summary plan description, together with each
summary of material modifications, required under ERISA with respect to such
Purchaser Employee Plan; and (iv) the most recent determination letter or
opinion letter received from the IRS with respect to each Purchaser Employee
Plan that is intended to be qualified under the Code.
(c)
No liability under Title IV
of ERISA has been incurred by any Purchaser Entity or any Purchaser ERISA
Affiliate that has not been satisfied in full, and no condition exists that
presents a material risk to any Purchaser Entity or any Purchaser ERISA
Affiliate of incurring a liability under such Title. No Purchaser Employee Plan is subject to Section 412,
430, 431 or 432 of the Code or Title IV or Section 302, 303, 304 or 305 of
ERISA. None of the assets of any
Purchaser Entity or any Purchaser ERISA Affiliate are subject to any lien
arising under ERISA or Subchapter D of Chapter 1 of the Code, and no condition
exists that presents a material risk of any such lien arising.
(d)
Neither any Purchaser
Entity, nor any Purchaser ERISA Affiliate, nor any of the Purchaser Employee
Plans, nor any trust created thereunder, nor any trustee or administrator thereof
has engaged in a transaction in connection with which any Purchaser Entity, any
Purchaser ERISA Affiliate, any of the Purchaser Employee Plans or any such
trust could, directly or indirectly, be subject to any material civil liability
or penalty pursuant to Title I of ERISA, a tax imposed pursuant to Chapter 43
of the Code in an amount that would be material, or any other material
liability.
34
(e)
None of the Purchaser
Employee Plans is, and neither any Purchaser Entity nor any Purchaser ERISA
Affiliate has ever contributed to or had an obligation to contribute to or
incurred any liability in respect of, any “multiemployer plan” (as defined in Section 3(37)
of ERISA), a “multiple employer welfare arrangement” (as defined in Section 3(40)
of ERISA), or a single employer plan that has two or more contributing
sponsors, at least two of whom are not under common control, within the meaning
of Section 4063(a) of ERISA.
(f)
Each of the Purchaser
Employee Plans that is intended to be “qualified” within the meaning of Section 401(a) of
the Code has obtained a favorable determination or opinion letter to that
effect from the IRS, and nothing has occurred that would reasonably be expected
to result in the revocation of any such letter or require the filing of a
submission under the IRS’s employee plans compliance resolution system or the
taking of other corrective action pursuant to such system in order to maintain
the qualified status of such Purchaser Employee Plan. Each of the Purchaser Employee Plans that is
intended to satisfy the requirements of Section 125 or 501(c)(9) of
the Code satisfies such requirements.
Each of the Purchaser Employee Plans has been operated and administered
in all material respects in accordance with its terms and applicable Laws and
Regulations, including but not limited to ERISA and the Code.
(g)
No payment or benefit paid
or provided, or to be paid or provided, to current or former employees,
directors or other service providers of or to any Purchaser Entity (including
pursuant to this Agreement or any other Contract to be entered into in
connection with this Agreement) will fail to be deductible for federal income
Tax purposes under Section 280G of the Code.
(h)
There are no material claims
pending, or, to the knowledge of the Purchaser, threatened or anticipated
(other than routine claims for benefits) against or involving any Purchaser
Employee Plan, the assets of any Purchaser Employee Plans or against any
Purchaser Entity or any Purchaser ERISA Affiliate with respect to any Purchaser
Employee Plan. There is no Governmental
Order or order of any arbitrator outstanding against or in favor of any
Purchaser Employee Plan or any fiduciary thereof (other than rules of
general applicability). There are no
pending or threatened Legal Proceedings involving any Purchaser Employee Plan.
(i)
No Purchaser Employee Plan
provides benefits, including without limitation death or medical benefits
(whether or not insured), with respect to current or former employees,
directors or other service providers after retirement or other termination of
service (other than (i) coverage mandated by applicable Laws and
Regulations, (ii) death benefits or retirement benefits under any “employee
pension benefit plan” (as defined in Section 3(2) of ERISA), or (iii) deferred
compensation benefits accrued as liabilities in the Purchaser Financial
Statements. No Purchaser Employee Plan
is funded through a “welfare benefit fund” as defined in Section 419 of
the Code.
(j)
Except as expressly provided
herein or as disclosed in Schedule 4.18(j) of the Purchaser Disclosure
Letter, neither the execution of this Agreement or any other Contract to be
entered into in connection with this Agreement, nor the consummation of the
transactions contemplated hereby or thereby, will (either alone or together
with any other event) result in or is a precondition to (i) any current or
former employee, director or other service provider of or to any Purchaser
Entity becoming entitled to severance pay or any similar payment, (ii) the
acceleration of the time of payment or vesting of, or an increase in the amount
of, any compensation due to any current or former employee, director or other
service provider of or to any Purchaser Entity, or (iii) the renewal or
extension of the term of any Contract regarding the compensation of any current
or former employee, director or other service provider of or to any Purchaser
Entity.
35
(k)
No Purchaser Employee Plan subject to Title I
of ERISA holds any “employer security” or “employer real property” (each as
defined in Section 407(d) of ERISA).
4.19
Labor
Matters, Agreements and Actions.
(a)
Each Purchaser Entity is current in the
payment of all wages and benefits owed to its employees.
(b)
Each Purchaser Entity has made all
contributions required by Laws and Regulations to be made on behalf of such
Purchaser Entity’s current and former employees into social welfare plans
(including contributions required to be made by a Purchaser Entity or to be
withheld from and paid on behalf of any employee of a Purchaser Entity into the
unemployment insurance, pension, medicine insurance and disability injury
insurance funds pursuant to the laws of any jurisdiction in which the Purchaser
Entities operate).
(c)
Each Purchaser Entity has complied in all
material respects with all applicable state, provincial, municipal and federal
equal employment opportunity and other laws related to employment (including
without limitation, provisions thereof relating to wages, hours, equal
opportunity, collective bargaining and the payment of social security and other
taxes and union dues), and no Purchaser Entity is aware that it has any labor
relations problems (including without limitation any union organization
activities, threatened or actual strikes or work stoppages or material
grievances). No Purchaser Entity is bound by or subject to (and none of its
Assets is bound by or subject to) any written or oral, express or implied,
contract, commitment or arrangement with any labor union.
(d)
Except as set out in Section 4.19(d) of
the Purchaser Disclosure Letter, each current and former employee and
consultant to each Purchaser Entity has entered into a confidentiality and assignment
of inventions agreement with such Purchaser Entity, a copy of each of which has
previously been delivered to the Company.
No Purchaser Entity has agreements or arrangements with persons titled
as independent contractors or consultants, as a result of which, by virtue of
the control exercised by such Purchaser Entity, the type of work performed by
the persons or any other circumstances, such persons could reasonably be deemed
to be employees of such Purchaser Entity.
4.20
Banking
Facilities.
Section 4.20
of the Purchaser Disclosure Letter sets forth a true, correct and complete list
of:
(a)
each bank, savings and loan or other
financial institution in which any Purchaser Entity has an account or safety
deposit box and the numbers of the accounts or safety deposit boxes maintained
thereat; and
(b)
the names of all persons authorized to draw
on each such account or to have access to any such safety deposit box facility.
4.21
Powers
of Attorney and Suretyships.
No
Purchaser Entity has any general or special powers of attorney outstanding
(whether as grantor or grantee thereof) or has any obligation or liability
(whether actual, accrued, accruing, contingent or otherwise) as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of
the obligation of any Person, except as endorser or maker of checks or letters
of credit, respectively, endorsed or made in the ordinary course of business.
4.22
Brokers
or Finders.
Other than to Canaccord Adams and Oppenheimer &
Co., no Purchaser Entity is obligated to pay any broker’s or finder’s fee or
any other commission or similar fee to any agent, broker, investment
36
banker, financial advisor
or other firm or Person in connection with any of the transactions contemplated
by this Agreement.
4.23
Compliance
with Laws; Permits.
The
Purchaser Entities are, and at all times have been, in full material compliance
with all Laws of any Governmental Body applicable to their respective
businesses or operations. Except with
respect to immaterial violations of any Laws and Regulations, no Purchaser
Entity has received any written notice of, has knowledge of or has been charged
with, the violation of any Laws.
The
Purchaser Entities have all permits which are required for the operation of
their respective businesses as presently conducted, except where the absence of
which would not, individually or in the aggregate, materially affect the
business of the Purchaser Entities. No
Purchaser Entity is in default or violation (and no event has occurred which,
with notice or the lapse of time or both, would constitute a default or
violation) of any term, condition or provision of any permit to which it is a
party, except where such default or violation would not, individually or in the
aggregate, materially affect the business of the Purchaser Entities.
4.24
Approvals;
Takeover Statutes.
(a)
No state takeover statute or similar statute
or regulation or charter or by-law anti-takeover provision applies or purports
to apply to Purchaser with respect to this Agreement, the Merger or any other
transaction contemplated hereby.
(b)
The only required approvals of the holders of
Purchaser Common Shares of this Agreement and the Merger are the approvals of
the holders of a majority of the issued and outstanding shares of Purchaser
Common Shares, regulatory and Toronto Stock Exchange approvals.
ARTICLE
V -
CERTAIN
COVENANTS OF THE PARTIES
5.1
Conduct
of the Company’s Business Prior to the Effective Time.
During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement or the
Effective Time (the “
Pre-Closing Period
”),
except
as expressly contemplated or permitted by this Agreement, the Company:
(a)
shall, and shall cause its subsidiaries to
conduct business in, and not take any action except in, the usual and ordinary
course of business and consistent with past practice, and it shall and shall
cause its Subsidiaries to use best efforts to maintain and preserve its
business organization, assets, employees and advantageous business
relationships;
(b)
shall not, without prior consultation with
and the prior written consent of, Purchaser, directly or indirectly do,
solicit, agree to do, or permit to occur any of the following: (i) amend
the Certificate of Incorporation or By-laws; (ii) declare, set aside or
pay any dividend or other distribution or payment in respect any of its shares
of any outstanding class of stock; (iii) issue, grant, sell or pledge or
agree to issue, grant, sell or pledge any of its shares of any outstanding
class of stock, or securities convertible into or exchangeable or exercisable
for, or otherwise evidencing a right to acquire its shares of any outstanding
class of stock, other than in connection with the exercise of previously issued
convertible securities; (iv) redeem, purchase or otherwise acquire any of
its outstanding shares of any outstanding class of stock or other securities; (v) split,
combine or reclassify any of its shares of any outstanding class of stock; (vi) adopt
resolutions or enter into any agreement providing for the amalgamation, merger,
consolidation, reorganization, liquidation, dissolution or any other
extraordinary transaction in respect of itself or any of its
37
subsidiaries or affiliates or adopt any plan of
liquidation; or (vii) reduce its stated capital;
(c)
shall not, directly or indirectly, and it
shall cause its Subsidiaries not to, solicit or agree to, without prior
consultation with and the prior written consent of, Purchaser, do any of the
following: (i) sell, pledge, dispose of or encumber any assets; (ii) acquire
by any means any corporation, partnership or other business organization or
division thereof, or make any investment; (iii) acquire any material
assets; (iv) incur any indebtedness for borrowed money or any other
material liability or obligation or issue any debt securities or assume,
guarantee, endorse or otherwise as an accommodation become responsible for, the
obligations of any other individual or entity, or make any loans or advances; (v) authorize,
recommend or propose any release or relinquishment of any material contractual
right; (vi) waive, release, grant or transfer any material rights of value
or modify or change in any material respect any existing material license,
lease, contract, production sharing agreement, government land concession or
other material document; (vii) enter into or terminate any hedges, swaps
or other similar financial instruments or transactions; (viii) enter into
any agreements with its directors or officers or their respective Affiliates;
or (ix) authorize, propose, permit or agree to any of the above;
(d)
shall not, and it shall cause its
Subsidiaries not to, solicit or agree to, without prior consultation with and
the prior written consent of Purchaser, enter into new commitments of a capital
expenditure nature or incur any new contingent liabilities other than: (i) ordinary
course expenditures, (ii) expenditures required by Laws and Regulations, (iii) expenditures
made in connection with transactions contemplated in this Agreement, and (iv) capital
expenditures required to prevent the occurrence of a Company Material Adverse
Effect;
(e)
neither the Company nor any of its
Subsidiaries shall create any new obligations or liabilities or modify or in
any manner amend any existing obligations and liabilities to pay any amount,
including loan amounts, to its or their officers, directors, employees and
consultants, other than for salary, bonuses under its or their existing bonus
arrangements and directors’ fees in the ordinary course, in each case in
amounts consistent with historic practices and obligations or liabilities or
arising in the ordinary and usual course of business;
(f)
shall not, and it shall cause its
subsidiaries not to, without prior consultation with and the consent of
Purchaser, adopt or amend or make any contribution to any bonus, profit
sharing, option, deferred compensation, insurance, incentive compensation,
other compensation or other similar plan, agreement, trust, fund or
arrangements for the benefit of employees, except as is necessary to comply
with applicable Laws and Regulations or with respect to existing provisions of
any such plans, programs, arrangements or agreements (including severance
payments); and
(g)
shall not, and it shall cause its
Subsidiaries not to otherwise take actions that could reasonably be expected to
be prejudicial to Purchaser’s interest in the business, property or assets of
the Company Entities following the Effective Time.
Nothing in this Section 5.1
shall give Purchaser, directly or indirectly, the right to control or direct
the Company Entities’ operations prior to the Effective Time. The Company Entities shall exercise,
consistent with the terms and conditions of this Agreement, complete control
and supervision over the Company Entities’ operations prior to the Effective
Time.
5.2
Conduct
of the Purchaser’s Business Prior to the Effective Time.
During
the Pre-Closing Period, except as expressly contemplated by this Agreement,
Purchaser:
(a)
agrees that unless it obtains the Company’s
prior written consent, it shall, and shall cause its Subsidiaries to maintain
accessible cash and cash equivalents of not less than the aggregate amount of
CDN$19,000,000 (not including any amounts raised during the Pre-Closing Period
through the sale of treasury securities of the Purchaser, other than through
the exercise of
38
convertible
securities which were issued prior to the Pre-Closing Period)
and it shall and shall cause its Subsidiaries to use best
efforts to maintain and preserve its business organization, assets, employees
and advantageous business relationships;
(b)
shall not, without prior consultation with
and the prior written consent of the Company, directly or indirectly do,
solicit, agree to do, or permit to occur any of the following: (i) amend
its governing documents; (ii) declare, set aside or pay any dividend or
other distribution or payment in respect any of its capital stock outstanding; (iii) issue,
grant, sell or pledge or agree to issue, grant, sell or pledge any of its
capital stock, or securities convertible into or exchangeable or exercisable
for, or otherwise evidencing a right to acquire its capital stock, other than
in connection with the exercise of previously issued convertible securities; (iv) redeem,
purchase or otherwise acquire any of its outstanding capital stock or other
securities; (v) split, combine or reclassify any of its capital stock; (vi) adopt
resolutions or enter into any agreement providing for the amalgamation, merger,
consolidation, reorganization, liquidation, dissolution or any other
extraordinary transaction in respect of itself or any of the subsidiaries or
adopt any plan of liquidation; or (vii) reduce its stated capital;
(c)
shall not, directly or indirectly, and it
shall cause its Subsidiaries not to, and not to solicit or agree to, without
prior consultation with and the prior written consent of the Company do any of
the following: (i) sell, pledge, dispose of or encumber any assets; (ii) acquire
by any means any corporation, partnership or other business organization or
division thereof, or make any investment; (iii) acquire any material
assets; (iv) incur any indebtedness for borrowed money or any other
material liability or obligation or issue any debt securities or assume,
guarantee, endorse or otherwise as an accommodation become responsible for, the
obligations of any other individual or entity, or make any loans or advances; (v) authorize,
recommend or propose any release or relinquishment of any material contractual
right; (vi) waive, release, grant or transfer any material rights of value
or modify or change in any material respect any existing material license,
lease, contract, production sharing agreement, government land concession or
other material document; (vii) enter into or terminate any hedges, swaps
or other similar financial instruments or transactions; (viii) enter into
any agreements with its directors or officers or their respective affiliates;
or (ix) authorize, propose, permit or agree to any of the above;
(d)
shall not, and it shall cause its
Subsidiaries not to, and not to solicit or agree to, without prior consultation
with and the prior written consent of the Company, enter into new commitments
of a capital expenditure nature or incur any new contingent liabilities other
than (i) ordinary course expenditures, (ii) expenditures required by
law, (iii) expenditures made in connection with transactions contemplated
in this letter agreement, and (iv) capital expenditures required to
prevent the occurrence of a Purchaser Material Adverse Effect;
(e)
agrees that in no case shall Purchaser or its
Subsidiaries create any new obligations or liabilities or modify or in any
manner amend any existing obligations and liabilities to pay any amount,
including loan amounts, to its or their officers, directors, employees and
consultants, other than for salary, bonuses under its or their existing bonus
arrangements and directors’ fees in the ordinary course, in each case in
amounts consistent with historic practices and obligations or liabilities or
arising in the ordinary and usual course of business;
(f)
shall not, and it shall cause its
Subsidiaries not to, without prior consultation with and the prior written
consent of the Purchaser, adopt or amend or make any contribution to any bonus,
profit sharing, option, deferred compensation, insurance, incentive
compensation, other compensation or other similar plan, agreement, trust, fund
or arrangements for the benefit of employees, except: (i) as is necessary
to comply with Laws and Regulations or with respect to existing provisions of
any such plans, programs, arrangements or agreements (including severance
payments); or (ii) as disclosed in Purchaser’s current business plans; and
39
(g)
shall not, and it shall cause its
Subsidiaries not to otherwise take actions that could reasonably be expected to
be prejudicial to the Company’s interest in the business, property or assets of
the Purchaser and its Subsidiaries following the Effective Time.
Nothing in this Section 5.2
shall give the Company, directly or indirectly, the right to control or direct
the Purchaser’s operations prior to the Effective Time. The Purchaser shall exercise, consistent with
the terms and conditions of this Agreement, complete control and supervision
over the Purchaser’s operations prior to the Effective Time.
5.3
Reports,
Taxes.
During
the Pre-Closing Period, each of the Company and Purchaser shall duly and timely
file all Tax Returns or returns required to be filed with federal, provincial,
state, local and foreign authorities where the requirement to file such Tax
Returns or returns arose during the Pre-Closing Period, and shall promptly pay
all Taxes levied or assessed upon it or any of its properties (unless
contesting such in good faith, adequate provision has been made therefor and
notice of such contest has been previously provided or will be provided in
advance to the other party).
5.4
Non-Solicitation.
During
the Pre-Closing Period, except as expressly contemplated or permitted by this
Agreement:
(a)
Each of the Company and Purchaser shall not
directly or indirectly, through any officer, director, employee, representative
or agent, (i) solicit, initiate, or encourage any inquiries or proposals
that constitute, or could reasonably be expected to lead to, a proposal or
offer for (x) any amalgamation, merger, consolidation, reorganization,
recapitalization or similar transaction involving the Company or the Purchaser,
as the case may be, or any of their Subsidiaries, (y) the transfer or
issuance of any Company Common Shares or Purchaser Common Shares, as
applicable, equity interest or other securities of the Company or the
Purchaser, as applicable, or any of their Subsidiaries (excluding transfers or
issuances pursuant to outstanding Company Options or Purchaser Options, as
applicable, or other currently outstanding commitments to issue Company Common
Shares or Purchaser Common Shares, as the case may be, or equity interests or
other securities of either of them), or (z) any transfer of a material
portion of the Assets of the Company or the Purchaser, as applicable, or any of
their Subsidiaries (any of the foregoing inquiries or proposals being referred
to in this Agreement as an “
Acquisition
Proposal
”),
(ii) engage in negotiations or
discussions concerning, or provide any non-public information to any Person
relating to, any Acquisition Proposal, or (iii) agree to, approve or
recommend any Acquisition Proposal.
(b)
A party receiving an Acquisition Proposal
shall, as promptly as practicable (and in no event later than 48 hours) after
receipt of any Acquisition Proposal or any request for non-public information
in connection with an Acquisition Proposal or for access to the properties,
books or records of the Company or the Purchaser, as applicable, by any Person
that informs the Company or the Purchaser, as applicable, that it is
considering making an Acquisition Proposal. Such notice to the Company or
Purchaser, as the case may be, shall indicate in reasonable detail the identity
of the offeror and the terms and conditions of such Acquisition Proposal,
inquiry or contact.
5.5
Intellectual
Property.
(a)
During the Pre-Closing Period, except as
expressly contemplated or permitted by this Agreement, each of the Company and
Purchaser shall, and each shall cause each of their Subsidiaries, to use
commercially reasonable efforts to do or cause to be done all things necessary
to preserve and keep in full force and effect all licenses, approvals,
agreements, franchises, copyrights and patents, and all other rights (including
without limitation with respect to Company Intellectual
40
Property
and Purchaser Intellectual Property) used in or necessary to the present or
reasonably anticipated future conduct of the Company Entities’ or Purchaser
Entities’ businesses, as the case may be, the loss of which would reasonably be
likely to have a Company Material Adverse Effect or Purchaser Material Adverse
Effect, respectively.
(b)
Notwithstanding the foregoing, no Company
Entity or Purchaser Entity shall take any of the following actions during the
Pre-Closing Period without Purchaser’s or Company’s, respectively, prior
written consent (which consent shall not be unreasonably withheld, delayed or
conditioned, provided, however, that if Purchaser or Company, respectively,
does not respond within five (5) business days of Company Entity’s or
Purchaser Entity’s request to take such action, Purchaser or Company,
respectively, shall be deemed to have consented to such request):
(i)
Buy, or enter into any inbound license
agreement with respect to third party Intellectual Property or Intellectual
Property Rights to be incorporated in or used in connection with the Company
Products or Purchaser Products, as the case may be, or sell, lease or otherwise
transfer or dispose of, or enter into any outbound license agreement with
respect to, any of the Company Intellectual Property or Purchaser Intellectual
Property, as the case may be, or Company Products or Purchaser Products, as the
case may be;
(ii)
Propose or enter into any contract or
agreement, whether written or oral, with any Person, other than Purchaser,
providing for the possible acquisition, transfer or disposition (whether by way
of merger, purchase of capital stock, purchase of assets or otherwise) of any
of the Company IP;
(iii)
Enter into any contract or agreement, whether
written or oral, relating to (A) the sale or distribution of any Company
Product or Purchaser Product, as the case may be, (B) the provision of any
services, or (C) the exclusive license of any Company Intellectual
Property or Purchaser Intellectual Property, as the case may be;
(iv)
Change pricing or royalties charged to
customers or licensees of any Company Entity or Purchaser Entity, as the case
may be;
(v)
Enter into any strategic arrangement or
relationship or development or joint marketing arrangement or relationship
relating to the business of any Company Entity or Purchaser Entity, as
applicable; or
(vi)
Disclose or otherwise give a third party
access to the confidential information of any Company Entity or Purchaser
Entity, as the case may be, without adequate written obligations of
confidentiality sufficient to protect the Company Intellectual Property or
Purchaser Intellectual Property, as the case may be.
5.6
Stock
Option Grants; Warrants.
Promptly
following the Effective Time and subject to the approval of Purchaser’s board
of directors and compliance with applicable Laws and Regulations and the rules of
any stock exchange on which Purchaser Common Shares are listed:
(a)
Purchaser shall grant to employees of the
Surviving Corporation who were employees of the Company immediately prior to
the Merger options to purchase 2,700,000 Purchaser Common Shares with an exercise
price that reflects the then current market value of the shares at the time of
grant and will be exercisable for five years, vesting over four years on the
basis of 1/48 of such shares per month.
(b)
The number of Purchaser Common Shares
available under Purchaser’s Amended and Restated Stock Option Plan as of May 2007
shall be 12.5% of the total issued and outstanding shares of Purchaser (less
the number of shares previously subject to awards thereunder).
41
(c)
Purchaser shall issue
warrants for five (5) million Purchaser Common Shares with a two-year term
and strike price of US$0.05 above the average closing price of JumpTV common
shares during the five trading days preceding the date hereof
to Persons (other than Nancy Li) to be identified to Purchaser by the
Company prior to the Closing, which warrants shall vest and be exercisable
immediately upon issuance thereof; provided, however, that in the case of any
Person who is a service provider to the Surviving Corporation or any of its
Affiliates for purposes of Section 409A of the Code, the strike price of
any warrants granted to such Person shall be the higher of (i) an amount
that is US$0.05 above the average closing price of Purchaser Common Shares
during the five trading days preceding the date hereof and (ii) the fair
market value on the date of grant.
5.7
Delivery
of Audited Financial Statements.
The Company shall deliver to the Purchaser, in connection with the
Purchaser’s requirement to produce the Purchaser Information Circular
to be sent to the stockholders of the
Purchaser in connection with the meeting of stockholders of the Purchaser to
approve the Agreement and the Merger pursuant hereto, on or before August 18,
2008: (i) audited financial
statements, audited by a nationally recognized auditing firm, for the calendar
years 2007, 2006 and 2005; (ii) auditor reviewed interim financial
statements for the latest interim period ended prior to the mailing date of the
Circular; and (iii) auditor-reviewed interim financial statements for the
corresponding prior year period set forth in (ii) above (collectively, all
of the foregoing financial statements, the “
Audited
Company Financial Statements
”).
ARTICLE
VI -
ADDITIONAL
MUTUAL COVENANTS
6.1
Access
to Information.
Subject
to the Confidentiality Agreement and upon reasonable notice, the Company and
Purchaser shall each afford to the officers, employees, accountants, counsel
and other representatives of the other access, during normal business hours
during the Pre-Closing Period, to all information concerning its business,
properties and personnel, including the work papers of their respective
independent accountants, as may reasonably be requested. The Company and
Purchaser shall hold any such information which is nonpublic in accordance with
the Confidentiality Agreement. No information or knowledge obtained in any
investigation pursuant to this Section 6.1 shall affect or be deemed to
modify any representation or warranty contained in this Agreement or the
conditions to the obligations of the parties to consummate the Merger.
6.2
Stockholder
Approvals.
(a)
Company Stockholder Approval
. The
Company shall use commercially reasonable efforts to take all actions necessary
in accordance with the DGCL and its Certificate of Incorporation and By-Laws to
duly call, give notice of, convene and hold a meeting of its stockholders (the “
Company Stockholders Meeting
”)
as
promptly as practicable after the date hereof to obtain their vote for the
adoption and approval of the Merger, this Agreement and the transactions
contemplated hereby. In connection with
such meeting, the Company shall (a) promptly prepare and mail to its
stockholders as promptly as practicable an information circular (the “
Company
Information
Circular
”) describing
the material terms of the Merger, the AvantaLion Subscription Agreement, and
this Agreement and including a copy of the AvantaLion Subscription Agreement
and this Agreement, together with a statement of the fair value of the Company
Common Shares as determined by the Board of Directors of the Company and the
disclosure of the existence of appraisal rights pursuant to Section 262 of
the DGCL, (b) use its reasonable commercial efforts (not involving the
transfer of any thing of value or waiver or release of any right or benefit) to
obtain the necessary approvals by its stockholders of the Merger, this
Agreement and the
42
transactions
contemplated hereby, and (c) otherwise comply with all legal requirements
applicable to such meeting. Purchaser shall provide promptly to the Company
such information concerning its business and financial statements and affairs
as, in the reasonable judgment of the Company or its counsel, may be required
or appropriate for inclusion in the Company Information Circular, or in any
amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the Company in the preparation of the Company Information
Circular.
(b)
Purchaser Shareholder Approval
. The
Purchaser shall use commercially reasonable efforts to take all actions
necessary in accordance with the applicable corporate and securities laws and
stock exchange rules and its constating documents and by-laws to duly
call, give notice of, convene and hold a meeting of its stockholders (the “
Purchaser Stockholders Meeting
”) as promptly as practicable after
the date hereof to obtain their vote for the adoption and approval of the
Merger, the AvantaLion Subscription Agreement, this Agreement and the
transactions contemplated hereby. In
connection with such meeting, the Purchaser shall (a) promptly prepare and
mail to its stockholders as promptly as practicable an information circular
(the “
Purchaser I
nformation Circular
”) describing
the material terms of the Merger, the AvantaLion Subscription Agreement and
this Agreement and including a copy of the AvantaLion Subscription Agreement
and this Agreement, together with a statement of the fair value of the
Purchaser Common Shares as determined by the Board of Directors of the Company,
(b) use its reasonable commercial efforts (not involving the transfer of
any thing of value or waiver or release of any right or benefit) to obtain the
necessary approvals by its stockholders of the Merger, the AvantaLion
Subscription Agreement, this Agreement and the transactions contemplated
hereby, and (c) otherwise comply with all legal requirements applicable to
such meeting. Company shall provide
promptly to the Purchaser such information concerning its business and
financial statements and affairs as, in the reasonable judgment of the
Purchaser or its counsel, may be required or appropriate for inclusion in the
Purchaser Information Circular (including the Audited Company Financial
Statements) or in any amendments or supplements thereto, and to cause its
counsel and auditors to cooperate with the Purchaser in the preparation of the
Purchaser Information Circular.
6.3
Legal
Conditions to Merger.
Each
of Purchaser, Merger Sub and the Company shall take all reasonable actions
necessary to comply promptly with all Laws and Regulations which may be imposed
on itself with respect to the Merger (which actions shall include, without
limitation, furnishing all information required in connection with approvals of
or filings with any Governmental Entity and executing and verifying the
application for registration of the Merger with the Registrar) and shall
promptly cooperate with and furnish information to each other in connection
with any such requirements imposed in connection with the Merger.
6.4
Public
Disclosure.
During
the Pre-Closing Period, except as otherwise required by the Securities Laws and
any applicable Laws and Regulations (“
Required Disclosure
”),
and except as
required for the solicitation of the approval of the Company’s stockholders,
the pursuit of third-party consents, and announcements to and discussions with
employees of the Company reasonably required in furtherance of the Merger and
the performance of the parties’ obligations pursuant to this Agreement, neither
the Company nor Purchaser shall issue or cause the publication of any press
release or public announcement or disclosure to any third party of the
existence or any subject matter, terms or conditions of this Agreement unless
jointly approved by Purchaser and the Company prior to release, announcement or
disclosure. Notwithstanding the foregoing, if a party determines in its sole
discretion that a Required Disclosure of information relating to this Agreement
is required, such party shall provide the other party with as much prior
written notice (including the language, form and content of the Required
Disclosure) and an opportunity for consultation
43
as is reasonably practicable
under the circumstances of any intended Required Disclosure, it being
understood that nothing herein shall prevent the disclosing party from making
Required Disclosure. The Company and Purchaser further agree that the language,
form and content of any public disclosure of information relating to this
Agreement (whether through a press release, public filing (which filing a party
determines to be voluntary) or report, public statement or otherwise) that is
not a Required Disclosure shall be mutually agreed in advance by the parties,
which agreement shall not be unreasonably withheld.
6.5
Consents.
The
Company and Purchaser shall each use its respective reasonable commercial
efforts to obtain any necessary consents, waivers and approvals under any of
its material agreements, contracts, licenses or leases as may be required to
consummate the Merger.
6.6
Securities
Compliance.
(a)
Stockholders’ Letters; Exemption from
Registration
. Promptly
following the execution of this Agreement, the Company shall use commercially
reasonable efforts to obtain and deliver to Purchaser from each of the Holders
executed Stockholders’ Letters in substantially the form attached hereto as Exhibit 1 (collectively, the “
Stockholders’ Letters
”).
(b)
Private Placement
.
Based on the representations set forth in the Stockholders’ Letters,
Purchaser shall issue the Purchaser Common Shares issuable in the Merger to the
Holders pursuant to this Agreement under the Securities Act and the rules and
regulations promulgated thereunder, by virtue of the exemptions provided by Section 4(2) of
the Securities Act and Regulation D promulgated under the Securities Act.
(c)
Listing
. The Purchaser shall promptly
following the Closing cause all Closing Merger Shares to be listed on each
stock exchange on which similar securities issued by Purchaser are then listed
or quoted, and in connection therewith to file with the Toronto Stock Exchange
and the Alternative Investment Market of the London Stock Exchange (“AIM”) an
application for listing of additional shares with respect to the Closing Merger
Shares.
(d)
Compliance
. The Company, the Purchaser and the Merger Sub shall comply with all
applicable rules and regulations of the Securities Commissions in
connection with the transactions contemplated by this Agreement.
(e)
Restrictive Legend
. Each certificate representing Closing
Merger Shares, warrants or Purchaser Common Shares issued on due exercise of
warrants or options of Purchaser granted pursuant to sections 5.6(a) and (c) shall
bear substantially the following legend (in addition to any legends required
under applicable securities laws) for Holders located in the United States:
THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM.
6.7
Expenses.
Whether
or not the Merger is consummated, all fees, costs and expenses (including
legal, accounting and investment banking fees and expenses) incurred in
connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such fee, cost or expense.
44
6.8
Additional
Agreements; Reasonable Commercial Efforts.
Subject
to the terms and conditions of this Agreement, each of the parties agrees to
use reasonable commercial efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary under applicable Laws and
Regulations to consummate and make effective the transactions contemplated by
this Agreement. In case at any time after the Effective Time any further action
is reasonably necessary to carry out the purposes of this Agreement each party
to this Agreement shall use commercially reasonable efforts take all such
necessary action.
6.9
Supplements
to Disclosure Letters.
(a)
The Company shall from time to time, from the
date hereof until the Closing Date, supplement or amend the Company Disclosure
Letter with respect to any matter arising after the date hereof which, if
existing as of or prior to the date hereof, would have been required to be set
forth in the Company Disclosure Letter. No supplement or amendment to the
Company Disclosure Letter shall have any effect on the conditions to the
obligations of Purchaser and Merger Sub to consummate the Merger set forth in Article VII.
(b)
Purchaser shall from time to time, from the
date hereof until the Closing Date, supplement or amend the Purchaser
Disclosure Letter with respect to any matter arising after the date hereof
which, if existing as of or prior to the date hereof, would have been required
to be set forth in the Purchaser Disclosure Letter. No supplement or amendment
to the Purchaser Disclosure Letter shall have any effect on the conditions to
the obligations of the Company to consummate the Merger set forth in Article VIII.
6.10
Non-Solicitation
of Employees.
For
one (1) year following the termination of this Agreement pursuant to the
provisions of Article X hereof, Neither the Company nor the Purchaser
shall, either directly or indirectly (through a recruiter or intermediary)
solicit for employment any individual who is employed by the Purchaser or the
Company, respectively, as of the date of this Agreement;
provided, however
,
that this Section 6.10 shall not limit Purchaser’s or the Company’s right
to continue its customary general advertisement for employees. The parties
hereto agree that irreparable damage might occur in the event that the
provisions of this Section 6.10 were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed by
the parties hereto that the Purchaser or the Company, as the case may be, shall
be entitled to seek an injunction or injunctions to prevent breaches of the
provisions of this Section 6.10 and to seek to enforce specifically the
terms and provisions hereof in any court of Canada or the United States or any
province or state having jurisdiction, this being in addition to any other
remedy to which such party may be entitled at law or in equity.
6.11
Indemnification.
Purchaser
and the Company agree that all rights to indemnification or exculpation now
existing in favor of the employees, agents, directors or officers of the
Company (the “
Company Indemnified Parties
”)
as
provided in its Certificate of Incorporation or By-laws as in effect on the
date of this Agreement shall continue in full force and effect for any claims
(including, without limitation, regarding the transactions contemplated by this
Agreement) prior to the Effective Time for a period of six (6) years from
and after the Closing Date, assuming the consummation of the Merger;
provided,
however
, that, in the event any claim or claims are asserted or made within
such six year period, all rights to indemnification in respect of any such
claim or claims shall continue to disposition of any and all such claims. The
provisions of this Section 6.11 are in addition to, and not in substitution
for, any other rights to indemnification that the Company Indemnified Parties
may have.
45
6.12
Tax
Treatment of Merger.
The
Merger and the other transactions contemplated by this Agreement are intended
by the Company to qualify as a tax-free reorganization for U.S. federal income
tax purposes as described Section 368(a)(2)(E) of the Code. No party hereto shall take any position on
any U.S. tax return, or in connection with any proceeding related to U.S.
Taxes, inconsistent with the foregoing.
ARTICLE
VII -
CONDITIONS
TO THE OBLIGATIONS OF PURCHASER AND
MERGER SUB
The
obligations of Purchaser and Merger Sub to consummate the Merger are subject to
the fulfillment, at or before the Closing of all the following conditions, any
one or more of which may be waived by Purchaser:
7.1
Accuracy
of Representations and Warranties.
The
representations and warranties of the Company contained in this Agreement shall
be true and correct in all respects, in each case as of the date of this
Agreement and as of the Closing Date as though made on such date, except to the
extent such representations and warranties are expressly made only as of an
earlier date, in which case as of such earlier date, except for changes since
the date of this Agreement that individually or in the aggregate do not
constitute a Company Material Adverse Effect.
7.2
Covenants
Performed.
All
of the obligations of the Company to be performed at or before the Closing
pursuant to the terms of this Agreement shall have been duly performed in all
material respects.
7.3
Company
Working Capital.
On the Closing Date, the
Company shall have working capital in the amount of at least US$593,802, which
for the purposes of such calculation shall exclude investments in Subsidiaries
and Affiliates and loans to related parties and Affiliates.
7.4
Certificate.
At
the Closing, the Purchaser shall have received a certificate signed by the
Chief Executive Officer of the Company to the effect that the conditions set
forth in Sections 7.1, 7.2 and 7.3 hereof have been satisfied.
7.5
Company
Stockholder Approval.
The
Merger, this Agreement and the related transactions shall have been duly
approved and adopted by the requisite affirmative vote of the stockholders of
the Company at the Company Stockholders Meeting, or at any adjournment or
postponement thereof.
7.6
No
Injunctions or Litigation.
No action or proceeding shall have been instituted and continuing, or
threatened in writing, by any Governmental Entity or private party against any
of the parties hereto which seeks to impair, restrain, prohibit or invalidate
the Merger, or regarding the effectiveness or validity of any regulatory
approvals with respect to the Merger.
46
7.7
Consents.
Each of Purchaser, Merger Sub and the Company shall
have received in writing all material consents, approvals, and waivers required
in connection with the Merger that are set forth in Section 3.5 of the
Company Disclosure Letter and Section 4.7 of the Purchaser Disclosure
Letter.
7.8
Receipt of
Regulatory Approvals.
The Company and Purchaser
shall have received all required regulatory and stock exchange approvals.
7.9
Third Party
Consents.
The Purchaser being
satisfied, acting reasonably, that the Company has, prior to the closing date
of the Merger, received consents of all third parties necessary to permit the
Company to: (i) effect the Merger; and (ii) carry on its business in
the ordinary course as conducted prior to the date hereof consistent with past
practice.
7.10
Approval by
Purchaser’s Shareholders.
The
Purchaser shall have received the approval of the requisite affirmative vote of
its stockholders of the Merger, the AvantaLion Subscription Agreement, this
Agreement and the related transactions.
7.11
TSX and AIM
Approval.
Purchaser
shall have received the conditional approval of the Toronto Stock Exchange and
AIM (if necessary) with respect to the Purchaser Common Shares and other
securities to be issued pursuant to the transactions contemplated by this
Agreement.
7.12
Tax
Certificates.
The
Company shall, prior to the Closing Date, provide Purchaser with a properly
executed FIRPTA Notification Letter, which
states
that
the
Company
Common
Shares
do
not
constitute
“United
States
real
property
interests”
as
defined
in
Section
897(c)
of the Code, for purposes of satisfying Purchaser’s obligations under
Treasury Regulation Section 1.1445-2(c)(3). If Purchaser does not receive the notice
describe above prior to Closing, Purchaser shall be permitted to withhold from
the payments to be made pursuant to this Agreement any required withholding tax
under Section 1445 of the Code.
7.13
Company
Options.
All
outstanding Company Options and any other convertible securities of the Company
shall have been exercised, converted or terminated on or prior to the Closing
Date.
ARTICLE
VIII -
CONDITIONS TO THE OBLIGATIONS OF COMPANY
The
obligations of the Company to consummate the Merger are subject to the
fulfillment, at or before the Closing, of all of the following conditions, any
one or more of which may be waived by the Company:
8.1
Accuracy of
Representations and Warranties.
The
representations and warranties of Purchaser contained in this Agreement shall
be true and correct in all respects, in each case as of the date of this
Agreement and as of the Closing Date as though made on such date, except to the
extent such representations and warranties are expressly made only as of
47
an earlier date, in which case as of such earlier
date, except for changes since the date of this Agreement that individually or
in the aggregate do not constitute a Purchaser Material Adverse Effect..
8.2
Covenants
Performed.
All
of the obligations of Purchaser and Merger Sub to be performed at or before the
Closing pursuant to the terms of this Agreement shall have been duly performed
in all material respects.
8.3
Certificate.
At
the Closing, the Company shall have received a certificate signed by the Chief
Executive Officer of each of Purchaser and Merger Sub to the effect that the
conditions set forth in Sections 8.1 and 8.2 hereof have been satisfied.
8.4
Purchaser
and Merger Sub Shareholder Approval.
The
Merger, the AvantaLion Subscription Agreement, this Agreement and the related
transactions shall have been duly approved and adopted by the requisite
affirmative vote of the shareholders of the Purchaser at the Purchaser
Shareholders Meeting, or at any adjournment or postponement thereof, and shall
have been duly approved and adopted by the requisite affirmative vote of the
sole stockholder of Merger Sub. If the
stockholders of the Purchaser do not approve the AvantaLion Subscription
Agreement, the Company shall not be obliged to consummate the Merger or the
transactions contemplated by this Agreement.
8.5
No
Injunctions or Litigation.
No
action or proceeding shall have been instituted and continuing, or threatened
in writing, by any Governmental Entity or private party against any of the parties
hereto which seeks to impair, restrain, prohibit or invalidate the Merger, or
regarding the effectiveness or validity of any regulatory approvals with
respect to the Merger.
8.6
Consents.
Each of Purchaser, Merger Sub and the Company shall have received in
writing all material consents, approvals, and waivers required in connection
with the Merger that are set forth in Section 3.5 of the Company
Disclosure Letter and Section 4.7 of the Purchaser Disclosure Letter.
8.7
Receipt of
Regulatory Approvals.
Receipt by the Company and
Purchaser of all required regulatory and stock exchange approvals.
8.8
Third Party
Consents.
The Company being satisfied,
acting reasonably, that each of Purchaser and Merger Sub has, prior to the
closing date of the Merger, received consents of all third parties necessary to
permit Purchaser and Merger Sub to: (i) effect the Merger; and (ii) carry
on its business in the ordinary course as conducted prior to the date hereof
consistent with past practice.
8.9
Approval by
Company’s Stockholders.
The
Company shall have received the approval of its shareholders of the Merger,
this Agreement and the related transactions.
48
8.10
TSX and AIM
Approval.
Purchaser
shall have received the conditional approval of the Toronto Stock Exchange and
AIM (if necessary) with respect to the Purchaser Common Shares and other
securities to be issued pursuant to the transactions contemplated by this
Agreement.
ARTICLE
IX -
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
9.1
Non-Survival
of Representations and Warranties.
None
of the representations and warranties set forth in this Agreement or in any
instrument delivered pursuant to this Agreement, including any rights arising
out of any breach of such representations and warranties shall survive the
Effective Time, except for those set forth in this Article IX.
ARTICLE
X -
TERMINATION
10.1
Termination.
This
Agreement may be terminated:
(a)
by mutual consent of Purchaser and the Company at any time prior to the
Closing Date, even if and after the Holders have approved this Agreement and
the Merger;
(b)
by the Company, if the stockholders of the Purchaser do not approve the
AvantaLion Subscription Agreement; and
(c)
by either Purchaser or the Company at any time prior to the Closing
Date if the Closing shall not have occurred on or before December 31,
2008 (provided that the right to terminate this Agreement under this Section 10.1(b) shall
not be available to any party whose action or failure to act has been the cause
of or resulted in the failure to consummate the transactions contemplated by
this Agreement by the close of business on December 31, 2008 and such
action or failure to act constitutes a breach of this Agreement).
10.2
Effect of Termination.
In
the event of a valid termination of this Agreement as provided in Section 10.1,
this Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Purchaser, the Company or their respective officers,
directors, stockholders or Affiliates; provided that (a) the provisions of
Section 6.4 (Public Disclosure), Section 6.7 (Expenses), Section 6.10
(Non-Solicitation of Employees), Section 11.3 (Governing Law) and this Section 10.2
shall remain in full force and effect and survive any termination of this
Agreement, (b) the Confidentiality Agreement shall continue in full force
and effect, and shall survive any termination of this Agreement, in accordance
with its terms, and (c) nothing herein shall relieve any party from
liability for fraud or willful breach in connection with this Agreement or the
transactions contemplated hereby.
10.3
Extension;
Waiver.
At
any time prior to the Closing Date any party hereto may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (b) waive any inaccuracies in
the representations and warranties made to such party contained herein or in
any document delivered pursuant hereto, and (c) waive compliance with any
of the agreements or
49
conditions for the benefit of such party contained
herein, but any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE
XI -
MISCELLANEOUS
11.1
Amendment.
This
Agreement may not be amended except by a writing duly executed by the parties
hereto.
11.2
Entire
Agreement.
This
Agreement, including the Exhibits, Schedules, and other documents delivered
pursuant to this Agreement, contains all the terms and conditions agreed upon
by the parties relating to the subject matter of this Agreement and supersedes
all prior agreements (including the letter of intent dated June 9, 2008
between the Purchaser and the Company), negotiations, correspondence,
undertakings, and communications of the parties, whether oral or written,
respecting that subject matter, except for the confidentiality provisions of
the Confidentiality Agreement, which shall continue in full force and effect
and shall survive any termination of this Agreement in accordance with its
terms.
11.3
Governing
Law.
Except
to the extent that the rights of stockholders of Merger Sub and the Company are
governed by Delaware law, this Agreement shall be governed by and construed in
accordance with the laws of the Province of Ontario and the federal laws of
Canada applicable therein, without regard to conflicts of law principles. If the Company brings an action hereunder,
the parties shall submit to the exclusive jurisdiction of the courts located in
Toronto, Ontario and if Purchaser brings an action hereunder, the parties shall
submit to the exclusive jurisdiction of the state and federal courts located in
New York, New York.
11.4
Headings.
The
headings and table of contents contained in this Agreement are intended for
convenience and reference purposes only and shall not be used to determine the
rights of the parties or affect the meaning or interpretation of this Agreement
in any way.
11.5
Notices.
All
notices, requests, demands, and other communications made in connection with
this Agreement shall be in writing and shall be deemed to have been duly given (a) on
the date of delivery if delivered by hand delivery or by overnight courier service,
(b) on the date sent by facsimile, with confirmation of transmission, if
sent during normal business hours of the recipient, and if not, then on the
next day, or (c) three days after mailing if mailed by certified or
registered mail postage prepaid return receipt requested addressed as follows:
If to Purchaser:
|
JumpTV Inc.
|
|
463 King Street West
|
|
3
rd
Floor
|
|
Toronto, Ontario
|
|
M5V 1K4
|
|
|
|
Attention:
|
Jay Howard
|
|
Facsimile:
|
(416) 849-3701
|
50
|
With a copy to:
|
|
|
|
Wildeboer Dellelce LLP
|
|
365 Bay Street
|
|
Suite 800
|
|
Toronto, Ontario
|
|
M5H 2V1
|
|
|
|
Attention:
|
Perry Dellelce
|
|
Facsimile:
|
(416) 361-1790
|
|
|
|
If to the Company:
|
|
|
|
NeuLion, Inc.
|
|
1600 Old Country Road
|
|
Suite 101
|
|
Plainview, NY 11803
|
|
|
|
Attention:
|
Nancy Li
|
|
Facsimile:
|
516-622-7508
|
|
|
|
With a copy to:
|
|
|
|
NeuLion, Inc.
|
|
Attn: General Counsel
|
|
1600 Old Country Road
|
|
Suite 101
|
|
Plainview, NY 11803
|
|
|
|
Attention:
|
Roy Reichbach
|
|
Facsimile:
|
516-501-6729
|
|
and
|
|
|
|
Day Pitney LLP
|
|
7 Times Square
|
|
New York, NY 10036-7311
|
|
|
|
Attention:
|
Frank Lee
|
|
Facsimile:
|
(212) 916-2940
|
Such addresses may be
changed from time to time by means of a notice given in the manner provided in
this Section.
11.6
Severability.
In
the event that any provision of this Agreement, or the application thereof,
becomes or is declared by a court of competent jurisdiction to be illegal,
void, invalid or unenforceable, the remainder of this Agreement shall continue
in full force and effect and the application of such provision to other persons
or circumstances shall be interpreted so as reasonably to effect the intent of
the parties hereto.
51
11.7
Interpretation.
When
a reference is made in this Agreement to Exhibits or Schedules, such reference
shall be to an Exhibit or Schedule to this Agreement unless otherwise
indicated. The words “include,” “includes” and “including” when used herein
shall be deemed in each case to be followed by the words “without limitation.”
The phrase “made available” in this Agreement shall mean that the information
referred to has been made available if requested by the party to whom such
information is to be made available. The phrases “the date of this Agreement,” “the
date hereof,” and terms of similar import, unless the context otherwise
requires, shall be deemed to refer to the date set forth in the first paragraph
of this Agreement. All references to “$” or “dollar” are to U.S. dollars unless
otherwise indicated. When a reference is made to a contract or agreement in this
Agreement it shall be deemed to include any oral or written contract or
agreement.
11.8
Waiver.
Waiver
of any term or condition of this Agreement by any party shall not be construed
as a waiver of a subsequent breach or failure of the same term or condition, or
a waiver of any other term or condition in this Agreement.
11.9
Waiver of
Jury Trial.
THE
PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT WHICH
ANY PARTY MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY PROCEEDING, LITIGATION
OR COUNTERCLAIM BASED ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT, ANY ANCILLARY AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. IF THE SUBJECT
MATTER OF ANY LAWSUIT IS ONE IN WHICH THE WAIVER OF JURY TRIAL IS PROHIBITED,
NO PARTY TO THIS AGREEMENT SHALL PRESENT AS A NON-COMPULSORY COUNTERCLAIM
IN ANY SUCH LAWSUIT ANY CLAIM BASED ON, OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT. FURTHERMORE, NO PARTY TO THIS AGREEMENT SHALL
SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL CANNOT BE WAIVED.
11.10
Assignment.
Neither
party may assign, by operation of law or otherwise, all or any portion of its
rights or duties under this Agreement without the prior written consent of the
other party, which consent may be withheld in the absolute discretion of the
party asked to give consent; provided, however, Purchaser may assign its rights
or duties under this Agreement to any affiliates of Purchaser or to any
successor in interest to the assets or securities of Purchaser so long as
Purchaser remains liable thereon.
11.11
Counterparts.
This Agreement may be signed in counterparts with the same effect as if
the signatures to each party were upon a single instrument. All counterparts
shall be deemed an original of this Agreement.
11.12
Attorneys
Fees.
In
the event any dispute arises hereunder, the court shall have the authority to
award the costs and attorney’s fees to the prevailing party.
[
Signature page follows]
52
IN WITNESS WHEREOF,
Purchaser, Merger Sub and the Company have caused this Agreement and
Plan of Merger to be executed by their respective officers thereunto duly
authorized as of the date first above written.
|
|
JUMPTV
INC.
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|
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|
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By:
|
/s/ G. Scott Paterson
|
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|
Name:
G. Scott Paterson
|
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Title:
Executive Chairman
|
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JUMPTV
ACQUISITION CORP.
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By:
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/s/ G. Scott Paterson
|
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Name:
G. Scott Paterson
|
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Title:
Director
|
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NEULION,
INC.
|
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By:
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/s/ Nancy Li
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Name:
Nancy Li
|
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Title:
Chief Executive Officer
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53
EXHIBIT
1
SHAREHOLDERS LETTERS (U.S. HOLDERS)
JumpTV Inc.
In connection with the potential merger of
JumpTV Acquisition Corp. (“
Merger
Sub
”) with NeuLion Inc. (“
NeuLion
”)
(the “
Merger
”) pursuant to a merger agreement
among JumpTV Inc. (“
JumpTV
”),
NeuLion and Merger Sub (the “
Merger
Agreement
”), JumpTV is required
to determine whether you meet the investor suitability standards imposed by
Regulation D of the Securities Act of 1933, as amended (the “
Securities Act
”). Pursuant to the Merger Agreement, JumpTV
plans to offer common stock (the “
Common
Stock
”), in reliance on an exemption from the registration
requirements of the Securities Act and exemptions from applicable state
securities laws.
The undersigned understands that the
information provided in the attached Declaration will be relied upon by JumpTV
in its offering of Common Stock pursuant to the aforesaid exemptions. All
capitalized terms not otherwise defined herein shall have the meaning ascribed
thereto in the Merger Agreement.
Please complete and return this
Declaration and Questionnaire on or before
[
·
]
to:
Nancy Li
NeuLion Inc.
1600 Old Country Road, Suite 101
Plainview, NY
11803
Tel:
[
·
]
Fax:
[
·
]
Please respond to every item, even if your
response is “none.” If you need more
space for any response, please attach additional sheets of paper. Please be sure to indicate your name and the
number of the item being responded to on each such additional sheet of paper,
and to sign each such additional sheet of paper before attaching it to the
Declaration or Questionnaire. Please
note that you may be asked to answer additional questions depending on your responses
to the following questions.
54
DECLARATION
Accredited Investor
The undersigned hereby represents and
warrants that he, she or it is an “
Accredited
Investor
” within the meaning of Regulation D of the Securities Act
based upon the fact that he, she or it satisfies at least one of the following
requirements (check all that apply):
|
o
|
|
(1) he or she is a
natural person who had an individual income in excess of $200,000 in each of
the two most recent years, or joint income with his or her spouse in excess
of $300,000 in each of those years, and has a reasonable expectation of
reaching the same income level in the current year;
|
|
|
|
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|
o
|
|
(2) he or she is a
natural person whose individual net worth, or joint net worth with his or her
spouse, at the time of purchase exceeds $1,000,000;
|
|
|
|
|
|
o
|
|
(3) it is a bank
as defined in section 3(a)(2) of the Securities Act, or a savings and
loan association or other institution as defined in section
3(a)(5)(A) of the Securities Act whether acting in its individual or
fiduciary capacity; a broker or dealer registered pursuant to section 15 of
the Securities Exchange Act of 1934; an insurance company as defined in
section 2(13) of the Securities Act; an investment company registered under
the Investment Company Act of 1940 or a business development company as defined
in section 2(a)(48) of the Securities Act; a Small Business Investment
Company licensed by the U.S. Small Business Administration under section
301(c) or (d) of the Small Business Investment Act of 1958; a plan
established and maintained by a state, its political subdivisions, or any
agency or instrumentality of a state or its political subdivisions, for the
benefit of its employees, if such plan has total assets in excess of
$5,000,000; an employee benefit plan within the meaning of the Employee Retirement
Income Security Act of 1974 if the investment decision is made by a plan
fiduciary, as defined in section 3(21) of the Securities Act, which is either
a bank, savings and loan association, insurance company, or registered
adviser, or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions made solely
by persons that are accredited investors;
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o
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(4) it is a
private business development company as defined in section 202(a)(22) of the
Investment Advisers Act of 1940;
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o
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(5) it is an
organization described in section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or partnership,
not formed for the specific purpose of acquiring the securities offered, with
total assets in excess of $5,000,000;
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o
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(6) it is a trust,
with total assets in excess of $5,000,000, not formed for the specific
purpose of acquiring the securities offered, whose purchase is directed by a
sophisticated person as described in Rule 506(b)(2)(ii) of the
Securities Act; or
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o
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(7) it is an
entity in which all of the equity owners are Accredited Investors under any
of paragraphs (1) through (6) above.
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55
Sophisticated Investor
(
To be completed only if you were unable to answer affirmatively
that you are an Accredited Investor above.
)
The purpose of this
Questionnaire is to determine whether you meet the standards imposed by
Regulation D promulgated under the Securities Act of 1933, since the Common
Stock have not been and will not be registered under that Act and are being
sold in reliance upon the exemption provided by Section 4(2) of that
Act. Please complete these questions as thoroughly as possible.
(i) I have a net worth (exclusive of home,
furnishings and automobiles) either individually or jointly with my spouse of
at least three times my investment in JumpTV.
Yes
o
No
o
(ii) My gross income for each of the past two
years and my projected gross income for the current year is not less than three
times my investment in JumpTV.
Yes
o
No
o
(iii) In the space below, please provide
information regarding other types of investments which you have made during the
last five years:
(Check if applicable)
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Stocks
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o
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Limited Partnership Interests
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o
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Bonds
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o
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Real Estate
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o
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Mutual Funds
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o
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Oil and Gas
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o
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Commodities
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o
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Equipment
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o
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Options
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o
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Other (specify)
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o
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(iv) Please indicate below the highest
educational degree you hold.
(v) Describe below your principal business
activities during the last five years and provide any additional information
which would evidence your ability to evaluate the merits and risks of investing
in the Partnership.
(vi) If you cannot demonstrate to JumpTV’s
satisfaction that you have such knowledge and experience in financial and
business matters that you are capable of evaluating the merits and risks of
investment in JumpTV (e.g., you are a lawyer or accountant or you have sufficient
prior investment or business experience), you must seek advice from a Purchaser Representative.
In evaluating the merits and
risks of this investment, will you seek the advice of any other person?
Yes
o
No
o
If YES,
please identify below each such person and indicate his business address and
telephone number and have him complete and return one copy of the Purchaser
Representative Questionnaire attached as Exhibit A hereto.
56
If YES,
has your Purchaser Representative disclosed to you whether or not any material
relationship (that he has with JumpTV or any of its affiliates) exists and
whether or not he expects to receive any compensation from JumpTV or its
affiliates as a result of this sale?
Yes
o
No
o
57
Sophisticated Investor
Certification
The undersigned represents that:
(a)
the undersigned has received and
carefully reviewed the information furnished relating to JumpTV and any other
materials relating thereto that the undersigned has requested;
(b)
the undersigned has had an opportunity to
ask questions of and receive answers from the authorized representatives of
JumpTV, and to review any relevant documents and records concerning the
business of JumpTV and the terms and conditions of this investment, and that
any such questions have been answered to the undersigned’s full satisfaction;
(c)
no person or entity, other than JumpTV or
its authorized representatives, has offered the securities to the undersigned;
(d)
the Common Stock will be acquired for the
undersigned’s own account for investment and not with a view toward
subdivision, resale or redistribution thereof in a manner prohibited under the
Securities Act, and the undersigned does not presently have any reason to
anticipate any change in circumstances or other particular occasion or event
which would cause the undersigned to sell such securities; and
(e)
the undersigned has no contract,
undertaking, agreement, understanding or arrangement with any person to sell,
transfer, or pledge to any person any part or all of the securities which the
undersigned is acquiring, or any interest therein, and has no present plans to
enter into the same.
The undersigned understands that the information provided in this
Declaration will be relied upon by JumpTV in determining whether the offering
of Common Stock in connection with the Merger is exempt from the registration
requirements of the Securities Act and from applicable state securities laws.
By signing below, the undersigned represents that the information
provided herein is accurate and complete.
The undersigned agrees to promptly notify JumpTV of any inaccuracies or
changes in the information provided herein that may occur subsequent to the
date hereof.
IN WITNESS WHEREOF
the undersigned by authority duly given,
has caused this Declaration to be executed and delivered either in person or by
its duly authorized agent.
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Name:
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(Please Print)
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Signature:
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Name:
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Title:
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Citizenship:
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Social Security Number
or Tax Payer ID No.:
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Date:
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58
EXHIBIT
A
PURCHASER
REPRESENTATIVE QUESTIONNAIRE
(
To
be completed only if Purchaser is not an “accredited investor” or a “sophisticated
investor” and such Purchaser is relying on a Purchaser Representative.
)
This questionnaire should be completed by each person acting as a
Purchaser Representative in connection with the offering of common stock, par
value [
·
]
per share (“
Common Stock
”), of
JumpTV Inc. (“
JumpTV
”) pursuant to
a Merger Agreement among JumpTV, NeuLion, Inc., JumpTV USA Inc. and Nancy
Li. The Purchaser Representative should
complete the questionnaire concerning his/her/its background and qualifications
fully, attaching additional sheets if necessary.
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1.
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Name of Purchaser Representative:
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Business Address:
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2.
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Name of Represented Purchaser
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3.
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Present occupation or position of Purchaser
Representative, indicating period of such practice or employment and field or
professional specialization, if any:
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(a)
Please place
ONE
check mark next to the space which indicates the
HIGHEST
level of education you have completed; on the lines following,
PLEASE DESCRIBE IN DETAIL
any business or
professional education you have received, listing names of schools, degrees
received and dates of attendance.
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o
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Completed College,
awarded degree, B.A., B.S. or equivalent
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o
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Some Postgraduate
Education
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o
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Two years of
Postgraduate Training, awarded M.A. or equivalent
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o
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Completed Postgraduate
Training and received Ph.D. (list date degree obtained and awarding school)
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o
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Professional School,
awarded J.D., or M.B.A. (list date degree obtained and awarding school)
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o
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Other (
PLEASE EXPLAIN IN DETAIL YOUR EDUCATIONAL
BACKGROUND AND LIST DATES OF ATTENDANCE AND NAMES OF SCHOOLS
)
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(b)
List any professional licenses or registrations held
by you; if none are held please note this in writing on the space provided
below:
(c)
Are you registered as a broker-dealer within your
state?
Yes
o
No
o
59
(d)
Are you registered as an investment advisor in your
state?
Yes
o
No
o
(e)
List all membership in professional organizations; if
you belong to no professional organizations please indicate this on the space
provided below:
4.
Have you had prior
experience in advising purchasers with respect to investments of this type?
o
Yes
o
No
If you answered “yes,” to
this question, please describe briefly such experience indicating amounts you
have caused to be invested, number of offerings you have reviewed and their
names if possible:
5.
Have
you reviewed the Information Circular with regard to the offering of shares of
JumpTV which has previously been delivered to the purchase?
o
Yes
o
No
6.
Describe
generally any business, financial or investment experience that would help you
to evaluate the merits and risks of this investment:
60
7.
Do
you or any of your affiliates (as defined in Rule 405 under the Securities
Act of 1933, as amended) have any material relationship with JumpTV or any of
its affiliates, or has such material relationship existed at any time during
the previous two years, or is any such material relationship mutually
understood to be contemplated?
o
Yes
o
No
(a)
If you checked “yes,”
please describe
each
such relationship below or on a separate sheet of
paper:
(b)
If
a material relationship is disclosed in subparagraph (a) above, indicate
the amount of compensation received or to be received as a result of such
relationship:
8.
In
advising the purchaser in connection with the purchaser’s prospective
investment in JumpTV, will you be relying in the purchaser’s expertise in
certain areas?
o
Yes
o
No
If yes, please state the
basis for your reliance, i.e., number of deals you know this purchaser has
invested in, amounts invested and the dates of these previous investments.
Please note that what is sought here is not a reference to the general
soundness of the business judgment of the purchaser but rather a specific basis
for relying upon the purchaser own expertise:
9.
In
advising the purchasers in connection with the purchasers’ prospective
investment in JumpTV, will you be relying in
part on the expertise of an additional purchaser representative or
representatives?
o
Yes
o
No
NOTE: YOU MAY NOT
RELY ON AN ADDITIONAL PURCHASER REPRESENTATIVE UNLESS EACH ADDITIONAL PURCHASER
REPRESENTATIVE HAS COMPLETED A QUESTIONNAIRE AND HAS BEEN ACKNOWLEDGED BY THE
INVESTOR TO BE HIS PURCHASER REPRESENTATIVE.
61
If “Yes”, give the name
and address of such additional representative or representative, and their area
of expertise:
10.
Please confirm the
correctness of the following representation.
o
Yes
o
No
I understand that JumpTV will be relying on the accuracy and
completeness of my responses to the foregoing questions and I represent and
warrant to JumpTV as follows:
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(i)
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I am acting as
Purchaser Representative for the non-accredited purchaser in connection with
such purchaser’s prospective investment in JumpTV;
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(ii)
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The answers to the
above questions are complete and correct and may be relied upon by JumpTV in
determining whether the offering with respect to which I have executed this
questionnaire is exempt from registration under the Securities Act of 1933,
as amended, pursuant to Regulation D or otherwise, and applicable state
securities laws;
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(iii)
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I will notify JumpTV
immediately of any material change in any statement made herein occurring
prior to the closing of any purchase by any purchaser of an interest in the
proposed investment;
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(iv)
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I am not an affiliate
(as defined in Rule 405), director, officer, partner or other employee
of JumpTV, or a beneficial owner of 10 percent or more of any class of the
equity securities of JumpTV or any of its subsidiaries;
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(v)
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I have disclosed to the
purchaser in writing prior to the purchasers’ acknowledgment of me as his,
her or its Purchaser Representative in his, her or its Purchaser
Questionnaire, any material relationship with JumpTV or its affiliates
disclosed in answer to question 7 above;
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(vi)
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I personally (or, if I
have checked “Yes” in question 8 or 9 above, as applicable, together with the
purchasers or the additional purchaser representative or representatives
indicated above) have such knowledge and experience in financial and business
matters that I am capable of evaluating the merits and risks of the
purchaser’s prospective investment in JumpTV; and
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(vii)
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I have carefully read
and understand the Merger Agreement and exhibits thereto, have received
information with respect to all matters I consider material to the decision
whether or not to purchase the securities of JumpTV being offered, have had
the opportunity to ask questions and receive answers from JumpTV on any
matter material to the investment decision and have evaluated the risks of
the proposed investment.
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62
IN
WITNESS WHEREOF
, the undersigned Purchaser Representative has
executed this Purchaser Representative Questionnaire this day of , .
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PURCHASER REPRESENTATIVE
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Name:
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(Please Print)
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Signature:
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Name:
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Title:
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63
SCHEDULE
1
CERTIFICATE
OF INCORPORATION OF SURVIVING CORPORATION
64
SCHEDULE 2
BYLAWS OF
SURVIVING CORPORATION
65
SCHEDULE 3
OFFICERS
AND DIRECTORS OF SURVIVING CORPORATION
66
SCHEDULE 4
OFFICERS
AND DIRECTORS OF PURCHASER
67
Exhibit 10.26
DATE: August 2007
PARTIES:
(1)
THE SEVERAL
PERSONS
whose respective names and addresses are set out in column 1 of part 2
of schedule 1 (together the “
Sellers
”);
and
(2)
JUMPTV INC.
, a company
incorporated under the laws of Canada with registered number 369888-2 and
having its registered office at 463 King Street West, Suite 300, Toronto,
Ontario, M5V 1K4 Canada (“
Jump
” or
“
Purchaser
”).
RECITALS:
(A)
The Sellers have agreed to
sell and Jump has agreed to purchase the Shares on the terms set out in this
agreement.
(B)
Jump is a company that is
publicly traded on AIM and the Toronto Stock Exchange.
IT IS
AGREED
as follows:
1.
INTERPRETATION
1.1
Defined terms
In this agreement, the
following words and expressions shall have the following meanings:
“Accounting
Date”
means in relation to any Financial Year of the Company, the last day
of that Financial Year;
“Accounts”
means in
relation to any Financial Year of the Company:
(1)
the statutory balance sheets of the Company as at the
Accounting Date in respect of that Financial Year; and
(2)
the statutory profit and loss accounts of the
Company in respect of that Financial Year;
“AIM”
the market
operated under such name by the London Stock Exchange plc;
1
“Business
Day”
means a day (excluding Saturday) on which banks generally are open in
both Ontario, Canada and the City of London for the transaction of normal
banking business;
“Brydon”
means Simon
Brydon of 81 Devonport Road, Shepherds Bush, London, W12 8PB;
“CA85”
means the
Companies Act 1985;
“CHAPS”
means the
clearing houses automated payment system or any other method of electronic
transfer for same-day value;
“Cash
Deposit”
means the US$250,000 deposited with Seller’s Solicitors
prior to the date of this agreement;
“Claim”
means any
claim made by Jump against any or all of the Sellers under this agreement
including in particular (but without prejudice to the generality of the
foregoing) any claim for breach of the Warranties;
“Companies
Acts”
means CA85, Part V of the Criminal Justice Act 1993, the
Companies Consolidation (Consequential Provisions) Act 1985, the Companies Act
1989 and the Companies Act 2006 (to the extent enacted at the relevant time);
“Company”
means Cycling
Television Limited, a private company limited by shares and incorporated in
England and Wales, short particulars of which are set out in part 1 of schedule
1;
“
Completion
” means completion of the sale and purchase of the
Shares in accordance with clause 5;
“Completion
Accounts”
the profit and loss account and balance sheet of
the Company as at close of business on the Effective Date which may be prepared
by Jump’s accountants in accordance with Clause 4;
“
Completion Date
” means the date upon which Completion takes
place;
“Confidential
Information”
means know-how, trade secrets and other information
of a confidential nature wherever in the world enforceable (including, without
limitation, all proprietary technical and commercial information and techniques
in whatever form held, such as paper, electronically stored data, magnetic
media film and microfilm or orally);
“Consideration”
means the sum
of the Initial Consideration and the Deferred Share Consideration;
2
“Continuing
Director”
means Brydon, being one of the Directors;
“Continuing
Director’s Service Agreement”
means the service agreement
in the agreed form between the Company and Brydon;
“CCF”
means Creative
Capital Fund, limited partnership registered under the laws of England with
registered number LP010216 and having its registered office at 23 Clifton Hill,
London, NW8 0QE;
“CCF Group”
means CCF and
its partners, all of them and each of them as the context admits;
“Cause”
has the
meaning provided such term in the Continuing Director’s Service Agreement;
“Cost of
Goods Sold”
means all costs incurred in connection with the
sale of products and services by the Company, including, but not limited to (I) bandwidth,
co-location, hosting cost for streaming television feeds to the Company’s
audience, (ii) content licensing costs payable to the Company’s content
partners for Internet broadcast rights, (iii) cost of satellite, (iv) cost
of production, and (v) other direct cost that associate with providing
service to consumers.
“Deferred
Consideration Shares Payment Date”
means twenty (20) Business
Days after notice of the Post-Closing Revenue Amount has been given by Jump,
unless Jump or Sellers have requested an audit to determine the Post-Closing
Revenue Amount, in which case it is the 5th day after the such audit has been
completed and the results thereof delivered to Jump and the Sellers (unless
such day is not a Business Day in which case it shall be the next Business Day
after such 5th day);
“Deferred
Consideration Shares”
means such number (if any) of common shares
of Jump to be issued credited as fully paid up and free of any Encumbrances
(other than in accordance with clause 3.6) pursuant to clause 3.4 and which are
traded on AIM;
“Directors”
means the
persons listed as directors of the Company in part 1 of schedule 1;
“Disclosed”
means fairly
disclosed to an appropriate level of detail (i.e., with sufficient detail to
enable a reasonable buyer to identify the nature and scope of the matter
disclosed) by the Disclosure Letter in the case of the Warrantors and
“Disclosure”
shall be construed
accordingly;
3
“Disclosure
Bundle”
means the documents disclosed by or on behalf of the Sellers during
the course of Jump’s due diligence investigations and indexed and ordered into
disclosure bundles;
“Disclosure
Letter”
means the letter in the agreed form of the same date as this agreement
(including the contents of any schedule or appendix thereto and the Disclosure
Bundle) from the Warrantors to Jump together with all documents annexed to it;
“Effective
Date”
mean 31 July 2007, notwithstanding the date of this agreement;
“Encumbrance”
means any
Security Interest, Pre-emption Right, restriction, assignment, hypothecation,
or any other interest, equity or other right of any person, or any agreement or
arrangement to create any of the same and
Unencumbered”
shall be construed accordingly;
“Escrow
Account”
means the Escrow Agent’s ordinary escrow account in
which the Escrow Agent shall hold any distributions, dividends or other
payments payable in respect of the Escrow Deposit and all cash proceeds
realized upon the sale of any and all of the Escrow Deposit in accordance with
the Escrow Agreement;
“Escrow
Agent”
means Pedley, Zielke, Gordinier & Pence PLLC;
“Escrow
Agreement”
means the agreement in the agreed form between the
Sellers, Jump and the Escrow Agent relating to the Escrow Deposit;
“Escrow
Deposit”
means the Escrow Account and the Deferred Consideration
Shares delivered to, and held by the Escrow Agent pursuant to clause 3.4 and
the Escrow Agreement;
“Financial
Year”
shall be construed in accordance with s223 CA85;
“GAAP”
means Canadian
generally accepted accounting principles;
“Good
Reason”
has the meaning provided such term in the Continuing Director’s
Service Agreement;
“Gross
Margin”
means Gross Profit divided by Revenue;
“Gross
Profit”
means Revenues minus Cost of Goods Sold;
“Initial
Consideration”
means the aggregate amount of US$2,207,000 in cash
(which amount includes the Cash Deposit and all interest earned thereon) and
the Initial Consideration Shares;
4
“Initial
Consideration Shares”
means the number of common shares of Jump
calculated in accordance with clause 3.2 and issued credited as fully paid up
and free of any Encumbrances (other than in accordance with clause 3.6) and
which are traded on AIM;
“Intellectual
Property”
means rights in and in relation to Confidential
Information, trade marks, service marks, trade and business names, logos and
get up (including any and all goodwill associated with or attached to any of
the same), domain names, patents, inventions (whether or not patentable),
designs, copyrights (including, without limitation, rights in software),
database rights, semi-conductor topography rights, utility models and all
rights or forms of protection having an equivalent or similar nature or effect
anywhere in the world, whether enforceable, registered, unregistered or
registerable (including, where applicable, all renewals, extensions and
applications for registration) and the right to sue for damages for past and
current infringement (including passing off and unfair competition) in respect
of any of the same;
“Internet
TV”
means the delivery via Internet Protocol of video and related audio
content from a source to a target device whether it be to a regular TV
(including via a direct connection from a computer or set top box), a computer,
or a portable device (including but not limited to a mobile phone) with such
content being transmitted live or on and on demand basis;
“Issue
Price”
means the US$ price equal to the greater of (a) the volume
weighted-average closing price per common share of the Purchaser quoted on the
Toronto Stock Exchange based on the 5 Trading Days prior to the Completion Date
and (b) the sum of the closing price per common share of the Purchaser
quoted on the Toronto Stock Exchange on each of June 29 2007, July 31
2007, August 31 2007 and 28 September 2007, divided by four;
“Jump Group”
means the
group of companies comprising Jump , any holding company from time to time of
Jump and any subsidiary of Jump (including, following Completion, the Company)
or of any such holding company and
“member of
the Jump Group”
shall be construed accordingly;
“Last
Accounting Date”
means 31 December 2006;
“Last
Accounts”
means the Accounts of the Company in respect of the
Financial Year ended on the Last Accounting Date a true copy of which is
annexed to the Disclosure Letter;
5
“Losses”
includes, in
respect of any matter, event or circumstance, all demands, claims, actions,
proceedings, damages, payments, fines, penalties, losses (including direct,
indirect and consequential), costs (including legal costs), expenses (including
taxation), disbursements or other liabilities in any case of any nature
whatsoever;
“Management
Accounts”
means the unaudited balance sheet of the Company as
at 31 May 2007 and the unaudited profit and loss account of the Company
for each of the monthly periods from 1 January 2007 to 31 May 2007
inclusive in the agreed form;
“Moral
Rights”
means the rights of an author of a copyright literary, dramatic,
musical or artistic work or a director of a copyright film (“Work”) to be
identified as the author or director (as the case may be) of the Work, not to
have Work subjected to derogatory treatment and not to have a Work falsely
attributed to him as the author or director (as the case may be) in each case
wherever in the world enforceable;
“Post-Closing
Revenue Amount”
shall be the revenues of the Company for the period
beginning August 1, 2007 and ending on July 31, 2009 determined in
accordance with clause 3.4;
“Planning
Acts”
means the Town and Country Planning Act 1990, the Planning (Listed
Buildings and Conservation Areas) Act 1990, the Planning (Hazardous Substances)
Act 1990, the Planning (Consequential Provisions) Act 1990 and the Planning and
Compensation Act 1991 and any amendment or substitution of such act from time
to time and the Rules, Regulations and Orders made under them or continued by
them as they apply from time to time;
“Pre-emption
Right”
means any right to acquire, option, right of first refusal or other
right of pre-emption or any agreement or legally binding arrangement to create
any of the same;
“Proceedings”
means any
proceedings, suit or action arising out of or in connection with this
agreement;
“
Properties
” means the property or properties short particulars
of which are set out in schedule 8;
“Purchaser”
means JumpTV
Inc., a company incorporated under the laws of Canada with registered number
369888-2 and having its registered office at 463 King Street West, Suite 300,
Toronto, Ontario M5V 1K4 Canada;
6
“Purchaser’s
Senior Management”
means each of G. Scott Paterson, Kaleil Isaza
Tuzman and Jason Reid (or any subsequent CEOs, Presidents or CFOs);
“Purchaser’s
Solicitors”
means Pedley Zielke Gordinier & Pence,
PLLC of 2000 Meidinger Tower, 462 South 4th Street, Louisville, KY 40202 USA
and Berwin Leighton Paisner LLP of Adelaide House, London Bridge, London EC4R
9HA, UK,DX 92 London/Chancery Lane;
“Purchaser’s
Warranties”
the warranties given by the Purchaser in clause 7
and schedule 6;
“Relevant
Accounting Standards”
means, in relation to any Accounts, any of
the following in force on the relevant Accounting Date, namely any applicable
Statement of Standard Accounting Practice, Financial Reporting Standard, Urgent
Issues Task Force Abstract or Statement of Recommended Practice issued by the
UK Accounting Standards Board (or any successor body) or any committee of it or
body recognised by it;
“Remaining
Sellers”
means the Sellers other than the Warrantors;
“Remaining
Sellers’ Warranties”
means the warranties given by each of the Remaining
Sellers in Clause 8.2 and Schedule 4;
“Restricted
Shares”
means that portion of the Initial Consideration Shares and the
Deferred Consideration Shares as are subject to transfer restrictions pursuant
to clause 3.6;
“Revenues”
means
increases in economic resources, either by way of inflows or enhancements of
assets or reductions of liabilities, resulting from the ordinary activities of
an entity. Revenues are generally recognized
when performance is achieved and reasonable assurance regarding measurement and
collectibility of the consideration exists.
“Security
Interest”
means any mortgage, charge, pledge, lien, title
retention, sale and leaseback arrangement or any other agreement or arrangement
having the effect of conferring security;
“Sellers’
Representative”
shall mean John Handley of Mintz Cottage,
Chaddesley Corbett, Kidderminster, Worcestershire DY1O 4RF; or such other
person as notified in writing either by John Handley for by the remainder of
the Sellers;
“Sellers’
Solicitors”
means LLC Law of 4 Bramber Court, Bramber Road,
London, W14 9PW;
7
“Senior
Management”
means each of Brydon, Steven Masters, Anthony
McCrossan and Paul Thatcher;
“Shareholder
Guarantees”
means all guarantees, indemnities,
counter-indemnities and letters of comfort of any nature whatsoever (1) given
to any third party by the Company in respect of a liability of the Sellers
and/or as the context may require (2) given to any third party by all or
any of the Sellers in respect of a liability of the Company;
“Shareholder
Indebtedness”
means all borrowing or indebtedness in the nature
of borrowing (including any indebtedness for monies borrowed or raised under
any bank or third party guarantee, acceptance credit, bond, note, bill of
exchange or commercial paper, letter of credit, finance lease, hire purchase
agreement, forward sale or purchase agreement or conditional sale agreement or
other transaction having the commercial effect of borrowing and all finance,
loan and other obligations of a kind required to be included in the balance
sheet of a company or other entity pursuant to UK Relevant Accounting
Standards) outstanding between the Company on the one hand and any of the
Sellers on the other hand;
“Shares”
means the
entire issued share capital of the Company as shown in part 1 of schedule 1;
“Tax”
means:
(a)
any form of
tax, and any levy, duty impost, deduction, or withholding in the nature of tax
whether governmental, statutory, state, provincial, local governmental or
municipal whenever created or imposed and whether of the United Kingdom, part
of the United Kingdom or elsewhere; and
(b)
all charges, surcharges, interest, penalties and
fines relating to any Tax falling within paragraph (a) of this definition;
“Taxation Liability”
includes:
(a)
a liability to
make a payment of Tax where the Company is in receipt of a Tax claim whether or
not such Tax is also or alternatively chargeable against or attributable to any
other person;
(b)
the loss of any
relief taken into account in the Last Accounts; and
(c)
Tax arising in
the Company from the setting off or deduction in whole or in part of any
reliefs arising after the Effective Date against income, profits or gains
earned, accrued or received on or before
8
the Effective Date or any
Tax arising in respect of the period before the Effective Date;
“Tax
Authority”
means Her Majesty’s Revenue and Customs (which
shall include without limitation its predecessors, the Inland Revenue and HM
Customs and Excise) and any other governmental, state, federal or other fiscal,
revenue, customs, or excise authority, department, agency, body or office
whether in the United Kingdom or elsewhere in the world having authority or
jurisdiction for any Tax purpose;
“Tax Claim”
means any
assessment, notice, demand or other document issued or action taken by or on
behalf of any Tax Authority or any form of return, computation or
self-assessment required by law from which it appears that the Company is
subject to or is sought to be made subject to, or will or might become subject
to, any Taxation Liability;
“Taxes Act”
means the
Income and Corporation Taxes Act 1988;
“Trading
Day”
means a day on which the Toronto Stock Exchange is open for the
transaction of business;
“Transaction
Documents”
means this agreement, the Disclosure Letter and the
Continuing Director’s Employment;
“VATA”
means the
Value Added Tax Act 1994;
“Warranties”
means the
warranties given in clause 7 and schedule 3; and
“Warrantors”
means Brydon,
Steven Masters, Anthony McCrossan, Paul Thatcher and Euan Drummond.
1.2
Statutory provisions
All references to statutes,
statutory provisions, enactments, EU Directives or EU Regulations shall include
references to any consolidation, re-enactment, modification or replacement of
the same, any statute, statutory provision, enactment, EU Directive or EU
Regulation of which it is a consolidation, re-enactment, modification or
replacement and any subordinate legislation in force under any of the same from
time to time except to the extent that any consolidation, re-enactment,
modification or replacement enacted after the date of this agreement would
extend or increase the liability of any party to another under this agreement.
9
1.3
Holding company and
subsidiary
A company or other entity
shall be a
“holding company”
for
the purposes of this agreement if it falls within either the meaning attributed
to that term in ss736 and 736A CA85 or the meaning attributed to the term
“parent undertaking”
in s258 CA85, and a
company or other entity shall be a
“subsidiary”
for the purposes of this agreement if it falls within either the meaning
attributed to that term in ss736 and 736A CA85 or the meaning attributed to the
term
“subsidiary undertaking”
in
s258 CA85, and the terms
“subsidiaries”
and
“holding companies”
are to be
construed accordingly.
1.4
Recitals, schedules, etc.
References to this agreement
include the recitals and schedules which form part of this agreement for all
purposes. References in this agreement
to the parties, the recitals, schedules and clauses are references respectively
to the parties and their legal personal representatives, successors and
permitted assigns, the recitals and schedules to and clauses of this agreement.
1.5
Meaning of references
Save
where specifically required or indicated otherwise:
(a)
words importing
one gender shall be treated as importing any gender, words importing
individuals shall be treated as importing corporations and vice versa, words
importing the singular shall be treated as importing the plural and vice versa,
and words importing the whole shall be treated as including a reference to any
part thereof;
(b)
references to a
person shall include any individual, firm, body corporate, unincorporated
association, government, state or agency of state, association, joint venture
or partnership, in each case whether or not having a separate legal
personality. References to a company
shall be construed so as to include any company, corporation or other body
corporate wherever and however incorporated or established;
(c)
references to
the word
“include”
or
“including”
(or any similar term) are not
to be construed as implying any limitation and general words introduced by the
word
“other”
(or any similar term)
shall not be given a restrictive meaning by reason of the fact that they are
10
preceded by words indicating a particular
class of acts, matters or things;
(d)
references to
any English statutory provision or legal term for any action, remedy, method of
judicial proceeding, legal document, legal status, court, official or other
legal concept, state of affairs or thing shall in respect of any jurisdiction
other than England be deemed to include that which most nearly approximates in
that jurisdiction to the English statutory provision or legal term or other
legal concept, state of affairs or thing;
(e)
any reference
to
“writing”
or
“written”
includes any method of
reproducing words or text in a legible and non-transitory form but, for the
avoidance of doubt, shall not include e-mail;
(f)
references to
“indemnify”
and to
“indemnifying”
any person against any
Losses by reference to any matter, event or circumstance includes indemnifying
and keeping that person indemnified against all Losses from time to time made,
suffered or incurred as a direct or indirect consequence of or which would not
have arisen but for that matter, event or circumstance;
(g)
references to
“sterling”
or
“£”
or
“pounds”
are to the lawful currency of the United Kingdom as at the date of this
agreement. References to
“dollar”
or
“US$”
or
“$”
are
to the lawful currency of the United States of America at the date of this
agreement. References to
“Euro”
or
“€”
are to the single currency of the European Union constituted by the Treaty on
European Union; and
(h)
references to
times of the day are to that time in London and references to a day are to a
period of 24 hours running from midnight to midnight.
1.6
Headings
Clause and paragraph
headings and the table of contents are inserted for ease of reference only and
shall not affect construction.
1.7
Connected persons
Section 839 Taxes Act
is to apply to determine whether one person is connected with another for the
purposes of this agreement.
11
1.8
Awareness
(a)
Where any
statement is qualified by the expression “to the best of the knowledge of the
Warrantors” or “so far as the Warrantors are aware” or any similar expression,
the Warrantors shall be deemed to have knowledge of:
(i)
anything of which the
Warrantors have actual knowledge; and
(ii)
anything of which they would
have had knowledge had they made reasonable enquiry of the Senior Management
immediately before giving the statement.
(b)
Where any statement is
qualified by the expression “to the best of the knowledge of the Purchaser” or “so
far as the Purchaser are aware” or any similar expression, the Purchaser shall
be deemed to have knowledge of:
(i)
anything of which the
Purchaser has actual knowledge; and
(ii)
anything of which it would
have had knowledge had it made reasonable enquiry of the Purchaser’s Senior
Management immediately before giving the statement.
2.
SALE AND PURCHASE OF SHARES
2.1
Sale and purchase of Shares
(a)
Subject to the
provisions of clause 2.6, each Seller shall at Completion sell and the
Purchaser shall buy in the proportions shown in column 3 of Part 2 of
schedule 1 (relying on the Warranties and Creative Warranties and the other
obligations of the Sellers under this agreement) the entire legal and
beneficial ownership in the Shares listed against that Seller’s name in column
2 of part 2 of schedule 1 with the rights and subject to the restrictions
attaching to those Shares in the articles of association of the Company but
otherwise free from all Encumbrances.
(b)
Each Seller
severally and individually warrants and represents to the Purchaser that he/it
has full power and the right to sell and transfer the legal and beneficial
title in the Shares listed against that Seller’s name in column 2 of part 2 of
schedule 1 on the terms set out in this agreement with full title guarantee.
12
2.2
Rights
attaching to the Shares
The Shares shall be sold
together with all rights attaching to them, including all rights to any
dividend or other distribution declared, made or paid after the Effective Date.
2.3
Waiver of
restrictions on transfer
Each Seller hereby
irrevocably waives and agrees to procure the waiver of any restrictions on
transfer (including rights of pre-emption) which may exist in relation to the
Shares, whether under the articles of association of the Company, any existing
shareholders agreement in respect of the Shares or otherwise.
2.4
Sale of all the Shares
The Purchaser shall not be
obliged to complete the purchase of any of the Shares unless the sale of all
the Shares is completed simultaneously in accordance with this agreement.
2.5
Termination of any existing
agreements in respect of the Shares
Any agreement involving the
Sellers with respect to the Shares shall be terminated.
2.6
Effective Date
Notwithstanding the
Completion Date, but subject always to Completion having taken place and the
cash element of the Initial Consideration having been received by or on behalf
of the Sellers, ownership of, and all risk and benefit in, the Shares shall be
deemed to have passed from the Sellers to the Purchaser on the Effective Date.
3.
CONSIDERATION
3.1
Total price
The total price for the
Shares to be paid by the Purchaser to the Sellers shall be the Consideration.
3.2
Calculation of Initial
Consideration Shares
The number of Initial
Consideration Shares shall be such number of common shares of the Purchaser as
shall at the Issue Price have a value in aggregate of US$2,743,000.
13
3.3
Satisfaction of Initial
Consideration
The Initial Consideration
shall be satisfied by the allotment and issuance of the Initial Consideration
Shares by Jump in an amount to Brydon with a value equal to US$734,500 and to
the other Sellers (other than Brydon) with a value equal to US$2,008,500 on the
basis and to the extent and in the proportions indicated in column 4 of part 2
of schedule 1; and the payment of US$418,344 in cash to Brydon and US$1,788,656
in cash to the other Sellers (other than Brydon) by Jump on the basis and to
the extent and in the proportions indicated in column 4 of part 2 of schedule
1. No fraction of an Initial
Consideration Share shall be allotted or issued to the Sellers and the number
of Initial Consideration Shares shall be rounded to the nearest whole number. Of the total US$2,207,000 deliverable
pursuant to this clause 3.3, the Sellers acknowledge receipt of US$250,000
which was previously deposited with Seller’s Solicitors as the Cash Deposit and
is being applied to the Initial Consideration payable at Completion.
On September 28, 2007
the Initial Consideration Shares shall be issued or deemed issued by Jump and
shall thereafter be delivered by Jump on or before October 8, 2007 to each
of the Sellers in the form of share certificates made out in their respective
names or in the names of their nominees.
3.4
Calculation and satisfaction
of Deferred Consideration
Brydon and the Sellers will
be eligible to receive up to a maximum number of Deferred Consideration Shares
as is equal to the quotient of US$6,790,000 divided by the Issue Price, of
which 23.27% of such Deferred Consideration Shares shall be reserved
exclusively for issuance to Brydon and 76.73% of such Deferred Consideration
Shares shall be reserved exclusively for the Sellers other than Brydon. On September 28, 2007 the maximum number
of Deferred Consideration Shares shall be issued or deemed issued by Jump and
shall thereafter be delivered by Jump on or before October 8, 2007 to the
Escrow Agent to be held in accordance with the Escrow Agreement; the
certificates for which shall be made out in the names of the respective Sellers
or their nominees in accordance with the percentages set out in this clause
3.4, provided that any fractional shares resulting from such percentages shall
be disregarded. On the Deferred Consideration
Shares Payment Date:
(a)
Brydon, if he (i) is
then employed by the Company, (ii) has ceased to be employed by the
Company because his employment has been terminated by the Company for any
reason other than Cause or (iii) if he has ceased to be employed by the
Company because
14
he resigned for Good Reason, shall receive
(subject to the maximum provided above) in addition to Brydon’s portion of the
Initial Consideration, a number of Deferred Consideration Shares as is
determined by dividing (I) the sum of (A) US$1.00 for every £0.74
that Post-Closing Revenue Amount exceeds £3,341,493 up to a maximum
Post-Closing Revenue Amount of £4,176,866 and (B) US$1.00 for every £2.78
that the Post-Closing Revenue Amount exceeds £4,176,866 by (ii) the Issue
Price; and
(b)
the Sellers
other than Brydon shall receive in the proportions indicated in column 5 of
part 2 of schedule 1 a number of additional shares (subject to the maximum
provided above) as is determined by dividing (i) the sum of (A) US$1.00
for every £0.23 that Post-Closing Revenue Amount exceeds £3,341,493 up to a
maximum Post-Closing Revenue Amount of £4,176,866 and (B) US$1.00 for
every £0.81 that the Post-Closing Revenue Amount exceeds £4,176,866 by (ii) the
Issue Price;
and the Purchaser shall
instruct the Escrow Agent to deliver such Deferred Consideration Shares to the
Sellers in accordance with their pro-rata entitlement and any monies in the
Escrow Account to the Sellers’ Solicitors, PROVIDED THAT the Purchaser shall
not have notified the Sellers and/or Warrantors in writing of a Claim. If by such time such a Claim shall have been
so notified, the provisions of clause 3.5 shall apply.
Any conflicting provision of
this agreement notwithstanding, except as otherwise specifically agreed to in
writing by the Purchaser, the Post-Closing Revenue Amount shall include (a) all
revenue that is included in any revenue line of the three year financial
forecast for the Company, attached as Schedule 9 (the “Forecast”) and (b) all
other types of revenue generated by the Company which are not included in any
revenue line of the Forecast and which generate a Gross Margin of 73% or more
for the last 5 months in the year ending 31 December 2007, 75% or more in
the year ending 31 December 2008 and 73% or more for the first 7 months in
the year ending 31 December 2009.
The foregoing and clause 7.2 notwithstanding, the Company shall use its
best efforts to obtain and engage only in transactions or a series of related
transactions which it believes will make a positive Gross Profit as determined
by reference to its existing and historical operations and to its anticipated
future operating environment and shall not engage in any transactions or a
series of related transactions that it believes may not make a positive Gross
Profit unless it has been approved in writing by a majority of its then serving
directors. The Post-Closing Revenue
Amount shall be determined in
15
accordance with GAAP and in
accordance with the same methods used to calculate the Forecast, all as
determined in good faith by the Purchaser; provided that for a period of twenty
(20) Business Days after the Purchaser gives the Sellers its calculation of
such amount either the Purchaser or Sellers may request (by written notice to
the other) an audit to determine the Post-Closing Revenue Amount, which audit
will be conducted by a firm of accountants mutually agreed by the Purchaser and
Sellers, and failing such agreement within five (5) Business Days, such
firm of accountants as the President for the time being of the Institute of
Chartered Accountants in England and Wales may appoint (all costs and expenses
of which are to be shared) and the amount so determined by such firm of
accountants thereafter will be binding on the Purchaser and the Sellers as the
Post-Closing Revenue Amount for purposes of this agreement. Notice of the Post-Closing Revenue Amount
shall be given by Jump to the Sellers no later than the 13th of August 2009. Jump shall provide the Sellers, their
representatives and/or accountants, and the firm of accountants appointed to
audit the Post-Closing Revenue Amount, with such information, access and
assistance as they may reasonably require, including without limitation access
to the accounting records, software, books and registers of the Company, for
the purpose of reviewing and/or auditing the Post-Closing Revenue Amount. Should the notice of the Post-Closing Revenue
Amount be given by Jump to the Sellers after the 13th of August 2009 or
should Jump be the party to request an audit, then interest in accordance with
clause 17 on the value of the Deferred Consideration Shares shall be calculated
with effect from when the Deferred Consideration Shares Payment Date would have
fallen had such notice been given on the 13th of August 2009. For avoidance of doubt, any unearned Deferred
Consideration Shares will be deemed redeemed by Jump for no additional
consideration.
3.5
Consideration Settlement in
the Event of a Claim:
(a)
For purposes of
this Clause 3.5, the number of Deferred Consideration Shares that the Escrow
Agent shall retain or that the Purchaser shall be entitled to deduct as
satisfaction (or part satisfaction) of any liability, shall be the number as is
equal to the quotient of (i) the amount of the estimated liability or
actual liability (if same has been settled or determined) divided by (ii) the
volume weighted-average closing price per common share of the Purchaser quoted
on the Toronto Stock Exchange based on the 5 Trading Days prior to the Deferred
Consideration Shares Payment Date (in the case of clause 3.5(b)(iii) or
3.5(b)(iv)) or the date of actual release to the Purchaser (in the case of
clause 3.5(b)(vi)).
16
In the event that the common
stock of the Purchaser has been delisted, the number of Deferred Consideration
Shares that the Escrow Agent shall retain or that the Purchaser shall be
entitled to deduct as satisfaction (or part satisfaction) of any liability,
shall be the number as is equal to the quotient of (i) the amount of the
estimated liability or actual liability (if same has been settled or
determined) divided by (ii) the volume weighted-average closing price per
common share of the Purchaser quoted on the Toronto Stock Exchange based on the
30 Trading Days prior to the date such shares are delisted.
(b)
The Purchaser
and Sellers agree that:
(i)
No Deferred Consideration
Shares or anything else shall be released from the Escrow Deposit except as provided
in this clause 3.5.
(ii)
To the extent that there are
no Claims notified as of the eighteen month anniversary of the Effective Date,
then on the Deferred Consideration Shares Payment Date the Purchaser and the
Sellers shall instruct the Escrow Agent to release the Escrow Deposit and the
Escrow Agent shall promptly thereafter cause all the Deferred Consideration
Shares to be transferred to the Sellers in accordance with the requirements of
clause 3.4 and any monies in the Escrow Account to the Sellers’ Solicitors.
(iii)
To the extent that on the
Deferred Consideration Shares Payment Date any Claim against one or more
Sellers has been settled or determined, but not yet paid to the Purchaser, the
Purchaser shall be entitled to deduct pro-rata from such portion of the Escrow
Deposit as is payable to such Seller(s) an amount equal to the amount of
such Seller’s liability in respect of the Claim (as so settled or determined)
in satisfaction (or part satisfaction, as the case may be) of the relevant
Seller’s liability. Any Deferred
Consideration Shares so deducted will be deemed redeemed by Jump for no
additional consideration, apart from the settlement of all or a part of the
relevant Seller’s liability.
(iv)
To the extent that the
Sellers and Escrow Agent have been notified of one or more Claims against any
one or more Sellers, and provided that such Claims have not been settled or
determined and/or the amounts proven payable in respect
17
of such settlement or determination paid,
then the Sellers and the Purchaser shall instruct the Escrow Agent to retain
from each such Seller’s entitlement to the Escrow Deposit an amount equal to
such Seller’s pro rata share of the estimated liability of the Claims as notified,
provided that should any such Claim lapse or have lapsed in accordance with
paragraph 3.2 of Schedule 5, then the amounts so retained shall immediately be
released and transferred to the relevant Sellers.
(v)
The balance of the Escrow
Deposit which is not subject to any such Claims shall be released and
transferred to the Sellers in accordance with the provisions of clause 3.4.
(vi)
As soon as practicable after
any Claim against any one or more Sellers is settled or otherwise determined
(but in any event no more than 10 Business Days thereafter), the Purchaser and
Sellers shall instruct the Escrow Agent to release such amount of the relevant
Seller’s entitlement to the Escrow Deposit back to Purchaser, as necessary to
satisfy (or part satisfy) the settled or determined Claim, unless the Purchaser
has elected not to accept any shares making up part of the Deferred
Consideration Shares as settlement of such Claims. The Sellers acknowledge that their obligation
to pay or settle any Claim shall be their personal liability and shall not be
paid from a reduction of the Deferred Consideration Shares except with the
consent of Purchaser, which can be refused in its sole discretion. Where the Purchaser elects not to be paid
from a reduction of the Deferred Consideration Shares or where after the
satisfaction of any Seller’s liability a balance of the Escrow Deposit remains
payable to such Seller, then such Deferred Consideration Shares or balance of
Escrow Deposit shall immediately be released to the relevant Seller.
(vii)
Any bank or other charges
arising on the Escrow Account shall be charged to the Escrow Account.
(viii)
Any interest or
profit accruing to the Escrow Account (subject to any deduction of tax at
source and any bank or other charges properly charged to the Escrow Account)
shall be retained in the Escrow Account.
Each time funds are paid out of the Escrow Account such funds shall have
added to them the corresponding proportion of the interest and
18
profit accrued to the Escrow Account (subject
to any deductions as above).
(ix)
The Escrow
Deposit shall be held by the Escrow Agent for the benefit of the Sellers and
the Purchaser and on the terms set out in this clause 3.5(b). The Sellers and Purchaser shall as and when
necessary give instructions to the Escrow Agent in order to procure compliance
with this clause 3.5(b).
(x)
The Purchaser
and Sellers shall direct the Escrow Agent to maintain a ledger (the
“Escrow Ledger”
) setting forth (i) all
income or other items earned on and distributions from or other items charged
against the Escrow Deposit and (ii) with respect to any distribution
pursuant to this agreement, the provision of this agreement pursuant to which
such distribution has been made. The
Purchaser and Sellers shall each have access to the Escrow Ledger from time to
time during business hours.
(c)
For the
avoidance of doubt nothing contained in this clause 3.5 shall prejudice the
right of the Purchaser to recover against any Seller in respect of any Claim
(whether such Claim is made before or after the eighteen month anniversary of
the Effective Date) otherwise than in accordance with the provisions of this
clause 3.5.
(d)
Any amounts or
shares payable / transferable to the Purchaser out of the Escrow Deposit in
accordance with the terms of this clause 3.5 shall (to the extent permissible
at law) be treated as a reduction of the Consideration.
(e)
For the
purposes of clause 3.5,
“settlement”
shall mean an agreement in writing signed by or on behalf of the relevant
Sellers and the Purchaser in respect of one or more relevant Claims and a
“determination”
shall mean a judgement of
any court of competent jurisdiction in England and Wales and
“settled”
and
“determined”
shall be construed accordingly.
3.6
Transfer restrictions
(a)
On September 28,
2007 the Initial Consideration Shares shall be issued or deemed issued by Jump
and shall thereafter be delivered by Jump on or before October 8,
2007. The Initial Consideration Shares
shall constitute Restricted Shares. Of
the total Initial Consideration Shares received by each Seller, 38.5% shall
cease
19
to be Restricted Shares on each of the 6
month and 12 month anniversary of the Effective Date and the remaining 23%
shall cease to be Restricted Shares on the 18 month anniversary of the
Effective Date, subject always to clause 3.6(d) below. The Purchaser shall use its reasonable
efforts to introduce the Sellers to stockbrokers after Completion in order to
help facilitate their sale of the Initial Consideration Shares.
(b)
Subject always to clause 3.6(d) below,
with respect to the Deferred Consideration Shares delivered to the Sellers
pursuant to this agreement, and subject to applicable laws and regulations as
in effect from time to time 50% of such shares shall cease to be Restricted
Shares on the later of the date of receipt or 30 September 2009 and the
remainder of such shares shall cease to be restricted Shares on 30 September 2010. The delivery of any Deferred Consideration
Shares shall remain in all events subject to the foregoing parts of this clause
3.
(c)
Subject always
to clause 3.6(d) below, each Seller agrees that so long as any Initial
Consideration Shares or Deferred Consideration Shares it receives constitute
Restricted Shares it will not with respect to such Restricted Shares, (i) offer
to sell, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant for the sale of, or otherwise dispose of or transfer any Restricted
Shares or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Restricted Shares, whether any such
swap transaction is to be settled by delivery of the Restricted Shares or other
securities, in cash or otherwise.
(d)
Notwithstanding
the above, if a Claim against a Seller has been settled or determined, then all
restrictions, on such amount of the Initial Consideration Shares or Deferred
Consideration Shares (to the extent they have actually been “earned” by the
Sellers in accordance with clause 3.4) as is required by any Seller to satisfy
such Claim against such Seller, shall be removed and the Seller shall be
entitled to sell, transfer or otherwise dispose of such shares. Further, the Sellers shall be entitled to
transfer such shares amongst themselves or to a nominee, provided that any such
shares so transferred to another of the Sellers shall still be subject to the
restrictions in clause 3.6(c).
20
(e)
With respect to any Initial
Consideration Shares or Deferred Consideration Shares that cease to be Restricted
Shares, the Purchaser shall cause such shares to be freely tradable on AIM.
3.7
Costs of issuing shares
The Purchaser shall be
solely responsible for the payment of any tax, duty, fees, costs or other
amounts payable on the issue of the Initial Consideration Shares and the
Deferred Consideration Shares.
4.
COMPLETION ACCOUNTS
4.1
The Purchaser may wish to
prepare Completion Accounts after the Completion Date and the Sellers shall, at
the Purchaser’s cost, lend such reasonable assistance as required by the
Purchaser in the preparation of such accounts and shall use reasonable
endeavours to ensure that the Sellers’ accountants, at the Purchaser’s cost,
provide such reasonable assistance to the Purchaser and/or its accountants.
4.2
Notwithstanding the
preparation of the Completion Accounts, the outcome thereof shall not affect or
adjust the Consideration payable to the Sellers pursuant to this agreement.
4.4
All costs associated with
the preparation of the Completion Accounts will be borne by the Purchaser.
5.
COMPLETION
5.1
Timing
Completion shall take place
as soon as reasonably practical after the signing of this agreement.
5.2
Location
Completion shall take place
at the offices of the Purchaser’s UK Solicitors when all (but not some only) of
the events detailed in this clause 5 shall occur.
5.3
Sellers’ obligations at
Completion
At Completion, the Sellers
shall:
(a)
deliver (or
cause to be delivered) to the Purchaser the items listed in part 1 of schedule
2 (the Purchaser receiving those items, where appropriate, as agent of the
Company); and
21
(b)
procure that
all necessary steps have been taken properly to effect the matters listed in
part 2 of schedule 2 at a board meeting of the Company and deliver to the
Purchaser duly signed minutes of such board meeting.
5.4
Purchaser’s obligations at
Completion
At Completion, the Purchaser
shall do or deliver (or cause to be delivered) to the Sellers the matters or
items listed in part 3 of schedule 2.
5.5
Receipt of funds and stock
certificates
The Sellers hereby confirm
that the Sellers’ Solicitors are irrevocably authorised by the Sellers to
receive:
(a)
the payment of
the cash elements of the Initial Consideration and Deferred Consideration Shares
on the Sellers’ behalf and the receipt by the Sellers’ Solicitors shall be an
absolute discharge for the Purchaser who shall not be concerned to see to the
application thereof or be answerable for the loss or misapplication of such
sum; and
(b)
the share
certificates in respect of the Initial Consideration Shares and Deferred
Consideration Shares allotted and issued to any of the Sellers or their
nominees.
5.6
No Waiver
If, notwithstanding the
occurrence of any fact, matter or event which would otherwise give rise to a
right to terminate this agreement under this clause 5, any party proceeds to
Completion, the fact that they have proceeded to Completion shall not
constitute a waiver of any right or entitlement of that party to make any claim
under the Transaction Documents, provided that none of the parties shall be
entitled to rescind or terminate this agreement after Completion.
6.
COVENANTS
6.1
Restrictions of Brydon
Brydon covenants with the
Purchaser and the Company (with the intention of assuring to the Purchaser the
full benefit and value of the goodwill and connections of the Company and as a
constituent part of the agreement for the sale of the Shares) that, except with
the consent in writing of the
22
Purchaser or in the proper
performance of his duties under the Continuing Director’s Service Agreement:
(a)
for the period of two (2) years
after the Effective Date, he will not within any country in which the Company
is carrying on business at the Effective Date or anywhere else in the world
either on his own account or in conjunction with or on behalf of any other
person, carry on or be engaged, concerned or interested, directly or
indirectly, whether as shareholder, director, partner, agent or otherwise, in
carrying on any business involving the broadcast of cycling events or footage
through the medium of Internet TV which competes with the business carried on
by the Company at the Effective Date (other than as a holder of shares in a
company carrying on such a business where the shareholding is for investment
purposes only and does not confer any control over the business in question).
(b)
for the period of two (2) years
after the Effective Date, he will not, either on his own account or in
conjunction with or on behalf of any other person, interfere or seek to
interfere with the continuance of supplies to the Company from any person who
shall at any time within the 12 months preceding the Effective Date have been a
supplier of goods or services to the Company;
(c)
for the period of two (2) years
after the Effective Date, he will not, either on his own account or in
conjunction with or on behalf of any other person, solicit or entice away or
attempt to solicit or entice away from the Company, offer employment to or
employ any person (save where such person has voluntarily resigned prior to any
offer of employment or has responded to an advertisement made to the general
public) who is at the Effective Date or who was at any time during the period
of twelve months immediately preceding the Effective Date employed in a
managerial, supervisory, technical or sales capacity by, or engaged as a
consultant to, the Company and who remains so employed or engaged immediately
prior to the relevant breach of this clause 6.1(c) (whether or not such
person would commit a breach of contract by reason of leaving such employment
or engagement);
(d)
he will not for a period of
3 years after the termination of his employment make use of or disclose or
divulge to any person (other than to officers or employees of the Company whose
province it is to know the same) any Confidential Information relating to the
Company unless:
23
(i)
required by law or any
governmental or regulatory body in any jurisdiction; or
(ii)
the relevant information was
or becomes in the public domain (other than by reason of a breach of this
clause by Brydon);
(e)
if, in connection with the
business or affairs of the Company, he shall have obtained Confidential
Information belonging to any third party under an agreement purporting to bind
the Company which contained restrictions on disclosure, he will not without the
previous written consent of the Purchaser and, if appropriate, the relevant
third party at any time infringe such restrictions; and
(f)
he will not at any time
hereafter in relation to any trade, business or company use a trade name, trade
or service mark, design or logo in such a way as to be capable of or likely to
be confused with any trade name, trade or service mark, design or logo used by
the Company at the Effective Date (whether registered or not).
6.2
Severance
Each of the restrictions
contained in clauses 6.1(a) to 6.1(f) is separate and severable and
in the event of any such restriction being determined to be unenforceable in
whole or in part for any reason, that unenforceability shall not affect the
enforceability of the remaining restrictions or (in the case of restrictions
unenforceable in part) the remainder of that restriction.
6.3
Exception from Brydon
restrictions
The restrictions contained
in clause 6.1 shall be without prejudice to performance by and shall not limit
the restrictions on the Continuing Director under the terms of agreements
entered into pursuant to this agreement.
6.4
Modification of Brydon
restrictions
While the restrictions
contained in clauses 6.1, 6.2 and 6.3 are considered by the parties to be
reasonable in all the circumstances, it is recognised that restrictions of the
nature in question may fail for technical reasons and accordingly it is hereby
agreed and declared that if any of such restrictions shall be adjudged to be
void as going beyond what is reasonable in all the circumstances for the
protection of the interests of the Purchaser but would be valid if part of the
wording thereof were deleted or the periods thereof reduced or the range of
activities or area dealt with thereby
24
reduced in scope, the said
restriction shall apply with such modifications as may be necessary to make it
valid and effective.
7.
PURCHASER’S OBLIGATIONS
7.1
Working Capital
The Purchaser shall make a
total amount of US$260,000 (two hundred and sixty thousand US dollars)
available for use by the Company as working capital (the
“Working Capital Amount”
).
7.2
Restrictions on Purchaser
The Purchaser irrevocably
agrees and undertakes that until 31 July 2009 it shall not, without the
consent of the Sellers, such consent not to be unreasonably withheld,
conditioned or delayed,:
(a)
unless required by law, make
or pass or procure to be made or passed any petition or resolution for the
winding up or dissolution of the Company, or any other insolvency procedure, or
for the consolidation or amalgamation of the Company with any company,
association, partnership or legal entity and shall use its best endeavours to
resist any such petition or resolution;
(b)
cease (directly or
indirectly) to be the beneficial owner of the whole of the issued share capital
of the Company nor sell or otherwise dispose of or encumber any shares in the
Company (or any interest therein) or procure or allow the allotment of any
further shares in the Company;
(c)
procure or allow any change
in the registered or trading name(s) or corporate identity of the Company;
(d)
change the country or
territory in which the Company operates its business or is registered;
(e)
divert the revenue from any
current or prospective customers, subscribers, advertisers or other streams of
revenue of the Company to any member of the Jump Group or any other person nor
make a transfer to the Company of any onerous undertaking or obligation of the
Purchaser or any member of the Jump Group or any other person;
25
(f)
take or allow any member of
the Jump Group to take any act to deliberately frustrate or prejudice the
amount of revenue which the Company might otherwise achieve;
(g)
allow the sale or provision
by the Company of any goods or services to the Purchaser or any member of the
Jump Group, or the purchase by the Company from the Purchaser or any member of
the Jump Group of any goods or services at a price other than a commercial arms
length rate for the goods or services in question;
(h)
make any change to the
nature of the business of the Company or allow any business activities to be
merged with those of the Company and shall ensure that the business of the
Company shall be maintained as a separate business and will be carried on as a
going concern in the normal course and shall use its best endeavours to
maintain the trade and trade connections of the Company;
(i)
require any member of Senior
Management to work in any other business of the Jump Group, save where such
work shall not materially divert the time or energy of such Senior Management
from the business of the Company;
(j)
to the detriment or
exclusion of the Company, exploit or require or permit to be exploited any
business idea or plan, whether in the business plan of the Company or
otherwise, which was originally conceived by the Company, by the Purchaser of
any member of the Jump Group;
(k)
agree to terminate or allow
the termination of any material customer or supplier contract other than in the
ordinary course of business;
(l)
dispose of all or a material
part of the undertaking or business of the Company;
(m)
dispose of or remove from
the United Kingdom, any material assets used or required for the operation of
the Company’s business (otherwise than in the ordinary course of business) or
enter into any other transaction otherwise than in the ordinary course of
business;
(n)
procure or allow that the
Purchaser or any member of the Purchaser’s Group competes with the Company by
developing, broadcasting or having any other interest in another Internet TV cycling
channel; or
26
(o)
interfere or seek to
interfere with the Company’s renewal of any existing customer, supplier or
advertising contracts; or
(p)
allow any change to the
Company’s current or future:
(i)
organisational, business or
overhead structure;
(ii)
staffing arrangements;
(iii)
marketing plan spend or
sales budget;
(iv)
current or contingent
product or product development plans;
(v)
information technology and
accounting systems; or
(vi)
production and handling
systems;
except where such changes
are reasonably intended by Purchaser to either result in an increase in the
Company’s Revenue or its profitability.
8.
THE WARRANTORS’ WARRANTIES
AND INDEMNITY
8.1
Warranties of the Warrantors
Each of the Warrantors
warrants severally and individually to the Purchaser that, except as Disclosed,
each of the statements set out in schedule 3 will on exchange be true and
accurate. The Warrantors shall procure that,
save as may be necessary to give effect to this agreement, the Company shall
not, before Completion, without the prior written consent of the Purchaser do,
or procure or allow anything which might constitute or result in a material
breach of the Warranties, or make any of them inaccurate, if they were given at
Completion.
8.2
Warranties of the Remaining
Sellers
Each of the Remaining
Sellers warrants severally and individually to the Purchaser that each of the
statements set out in schedule 4 will at on exchange and thereafter at all
times up to and including Completion be true and accurate in respect of
him/her/itself.
8.3
Disclosures
No letter, document or other
communication (whether or not in writing) shall be deemed to constitute a
Disclosure unless it is expressly incorporated in or annexed to the Disclosure
Letter.
27
8.4
Warranties separate
Each of the Warranties and
Remaining Sellers’ Warranties shall be separate and independent and, save as
expressly provided to the contrary in this agreement, shall not be limited by
reference to or inference from any other Warranty or anything in the
Transaction Documents.
8.5
Information supplied to the
Warrantors
The Warrantors shall not be
entitled to raise as a defence to a claim by the Purchaser under any of the
Transaction Documents the fact that they had relied on information provided to
them by the Company or any of its officers, employees, workers or agents
(including advisers).
8.6
No claim against the Company
or employees
The Warrantors hereby
irrevocably waive any and all claims against the Company and any of its
officers, employees, workers and, in connection only with the sale of the
Shares, its agents (including advisers) and undertake (if any claim is made
against any of them in connection with the sale of the Shares to the Purchaser)
not to make any claim against or seek any contribution from any such person
(and undertake that no other person claiming under or through them will make
any such claim or seek any such contribution).
8.7
Limitation on liability of
the Warrantors under the Warranties.
The liability of the
Warrantors in respect of any claim under the Warranties or under the Tax
Indemnity in clause 8.8 shall be limited as set out in schedule 5.
8.8
Tax Indemnity
The Warrantors covenant
severally to pay to the Purchaser on an after-tax basis an amount equal to any
Taxation Liability of the Company arising from any matter, fact, event or
circumstance that has occurred on or before the Effective Date in respect of
the Company and/or its business and any Taxation Liability as set out in (c) of
the definition of Taxation Liability arising at any time and all the
limitations of liability as are set out in schedule 5 also apply to the Tax
Indemnity given in this clause.
9.
PURCHASER’S WARRANTIES AND
INDEMNITY
9.1
The Purchaser warrants to
the Sellers that each of the statements set out in schedule 6 will at
Completion be true and accurate.
28
9.2
Disclosures
No letter, document or other
communication (whether or not in writing) shall be deemed to constitute a
disclosure against any of the Purchaser’s Warranties unless it is expressly
disclosed in writing to Sellers.
9.3
Purchaser’s Warranties
separate
The Purchaser’s Warranties
shall be separate and independent and, save as expressly provided to the
contrary in this agreement, shall not be limited by reference to or inference
from any other Purchaser’s Warranty or anything in the Transaction Documents.
9.4
Limitation on liability of
the Purchaser under the Purchaser’s Warranties.
The liability of the
Purchaser in respect of any claim under the Purchaser’s Warranties shall be
limited as set out in schedule 7.
9.5
The Purchaser shall
indemnify and keep Brydon and Anthony McCrossan indemnified against any claim
made against them after the Effective Date in respect of the indebtedness of
the Company pursuant to personal guarantees given by Brydon in favour of Azule
Limited and by Brydon and Anthony McCrossan in favour of NetBanx Limited for
obligations owed by the Company to Azule Limited and NetBanx Limited.
10.
TIME OF THE ESSENCE
10.1
Time shall not be of the
essence of this agreement, either as regards times, dates and periods specified
in the agreement or as regards any times, dates or periods that may by
agreement between the parties be substituted for any of them unless:
(a)
time is expressly stated to
be of the essence in relation to that obligation; or
(b)
one party fails to perform
an obligation by the time specified in this agreement and the other parties
serve a notice on the defaulting party requiring it to perform the obligation
by a specified time and stating that time is of the essence in relation to that
obligation.
10.2
The provisions of clause
10.1 shall not apply to any claim relating to the failure by the Purchaser to
pay any Consideration when due and time for payment of any of the Consideration
shall be of the essence.
29
11.
ANNOUNCEMENTS
11.1
Prior approval of
announcements
Subject to the provisions of
clauses 11.2, 11.3 and 11.4 below, no disclosure or announcement relating to
the existence or subject matter of this agreement shall be made or issued by or
on behalf of the Sellers or the Purchaser or any member of the CCF Group or the
Company without the prior written approval of the other parties (which approval
may be subject to reasonable conditions but shall otherwise not be unreasonably
withheld or delayed) provided that these restrictions shall not apply to any
disclosure or announcement if required by any law, applicable securities
exchange, the nominated advisor of the Purchaser, supervisory, regulatory or
governmental body provided further that any such disclosure shall be consistent
with any disclosure previously approved by the other party and, if such
disclosure includes a press release, such press release shall first be subject
to this clause 11.1.
11.2
Disclosure in Public
Securities Filings
Nothing in this agreement
shall prevent the Purchaser from disclosing information regarding the Company
and its businesses, the terms of this transaction and all other relevant
information necessary for any filings the Purchaser is required to make under
the laws of any applicable jurisdiction or to comply with listing requirements
applicable to companies listed for trading on the Toronto Stock Exchange or
AIM.
11.3
Notices to customers etc.
The Purchaser shall not make
or send after Completion any announcement to a contract counter party,
customer, client or supplier of the Company informing it that the Purchaser has
purchased the Shares, without the prior consultation by the Sellers.
11.4
Consultation
Except in relation to clause
11.2 the party making the communication shall use its reasonable endeavours to
consult with the other party in advance as to the form, content and timing of
the communication.
12.
COUNTERPARTS
This agreement may be
executed in any number of counterparts and by the parties to it on separate
counterparts and each such counterpart shall constitute an original of this
agreement but all of which together constitute
30
one and the same
instrument. This agreement shall not be
effective until each party has executed at least one counterpart. This Agreement may be executed by facsimile
signatures, which shall be treated as originals for all purposes.
13.
FURTHER ASSURANCE
Each of the parties agree to
perform (or procure the performance of) all further acts and things, and execute
and deliver (or procure the execution and delivery of) such further documents,
as may be required by law or as any other party may reasonably require, whether
on or after Completion, to implement and/or give effect to this agreement and
the transaction contemplated by this agreement and for the purpose of vesting
in the parties the full benefit of the assets, rights and benefits to be
transferred to them under or pursuant to this agreement.
14.
VARIATION, WAIVER AND
CONSENT
14.1
No variation or waiver of
any provision or condition of this agreement shall be effective unless it is in
writing and signed by or on behalf of each of the parties (or, in the case of a
waiver, by or on behalf of the party waiving compliance).
14.2
Unless expressly agreed, no
variation or waiver of any provision or condition of this agreement shall
constitute a general variation or waiver of any provision or condition of this
agreement, nor shall it affect any rights, obligations or liabilities under or
pursuant to this agreement which have already accrued up to the date of
variation or waiver, and the rights and obligations of the parties under or
pursuant to this agreement shall remain in full force and effect, except and
only to the extent that they are so varied or waived.
14.3
Any consent granted under
this agreement shall be effective only if given in writing and signed by the
consenting party and then only in the instance and for the purpose for which it
was given.
15.
RIGHTS AND REMEDIES OF THE
PARTIES
15.1
No failure or delay by any
party in exercising any right or remedy provided by law under or pursuant to
this agreement shall impair such right or remedy or operate or be construed as
a waiver or variation of it or preclude its exercise at any subsequent time. No single or partial exercise of any right or
remedy by any party shall preclude any other or further exercise of such right
or remedy or the exercise of any other right or remedy.
31
15.2
The rights and remedies of
the parties under or pursuant to this agreement are cumulative, may be
exercised as often as the parties consider appropriate and are in addition to
their rights and remedies under general law.
15.3
The rights and remedies of
the parties under this agreement shall not be affected, and none of the parties’
liabilities under this agreement shall be released, discharged or impaired, by:
(a)
Completion;
(b)
any failure to terminate
this agreement;
(c)
any event or matter
whatsoever which otherwise might have affected such rights and remedies other
than a specific and duly authorised written waiver or release by the Purchaser
or the Sellers, as the case may be;
(d)
in the case of a liability
of the Sellers or the Warrantors, any imputed or constructive knowledge of the
Purchaser or any of its agents or advisors other than any matter Disclosed in
the Disclosure Letter.
16.
ENTIRE AGREEMENT
16.1
Entire agreement
Subject to any terms implied
by law, the Transaction Documents and any other documents relating to the
subject matter of any of the Transaction Documents and dated the same date as
this agreement together represent the whole and only agreement between the
parties in relation to their subject matter and supersede any previous
agreements (whether written or oral) between all or any of the parties in
relation to the subject matter of any such document.
Each
of the parties acknowledge that:
(a)
in entering into this
Agreement they do not rely on any statement or representation (in any case
whether oral or written, express or implied and whether negligently or
innocently made) of any person (whether a party to this Agreement or not) which
is not expressly set out in this Agreement;
(b)
any remedy available to them
under this agreement shall be a claim for breach of contract; and
32
(c)
nothing in this Clause 16 shall operate
to limit or exclude and liability arising from any fraudulent or dishonest
statement, act or omission.
17.
DEFAULT INTEREST
17.1
If any parties which are required to pay any sum under
this agreement fail to pay any sum payable by them under this agreement on the
due date for payment (the
“Defaulting
Parties”
), they shall pay interest on such sum for the period from
and including the due date up to the date of actual payment (after as well as
before judgement) in accordance with this clause.
17.2
The Defaulting Parties shall pay interest at the
annual rate which is the aggregate of 2 per cent per annum and the base rate
from time to time of National Westminster Bank Plc.
17.3
Interest under this clause 17 shall accrue on the
basis of the actual number of days elapsed and a 365-day year and shall be paid
by the Defaulting Parties on demand.
Unpaid interest shall compound monthly.
18.
WITHHOLDING AND GROSSING-UP
18.1
Save as otherwise permitted under the terms of this
agreement, each party shall pay all sums payable by them to the other under
this agreement free and clear of all deductions or withholdings unless the law
requires a deduction or withholding to be made.
Otherwise than in relation to a payment of interest, if a deduction or
withholding is so required the paying party shall pay such additional amount as
will ensure that the net amount the payee receives equals the full amount which
it would have received had the deduction or withholding not been required.
18.2
If any Tax Authority brings any sum (except for the
Consideration) paid by any party under or pursuant to this agreement into
charge to Tax, then the party liable to pay shall pay such additional amount as
will ensure that the total amount paid, less the Tax chargeable on such amount,
is equal to the amount that would otherwise be payable under this agreement.
19.
NOTICES
19.1
Save as otherwise provided in this agreement, any
notice, demand or other communication (
“Notice”
)
to be given by any party under, or in connection with, this agreement shall be
in writing and signed by or on behalf of the party giving it. Any Notice shall be served by sending it by
fax to the number set out in clause 19.2, or delivering it by hand to the
33
address set out in clause 19.2 and in each case marked
for the attention of the relevant party set out in clause 19.2 (or as otherwise
notified from time to time in accordance with the provisions of this clause 19). Any Notice so served by fax or hand shall be
deemed to have been duly given or made as follows:
(a)
if sent by fax, at the time of
transmission; or
(b)
in the case of delivery by hand, when
delivered,
provided that in each case where delivery by fax or by hand occurs
after 6 pm on a Business Day or on a day which is not a Business Day, service
shall be deemed to occur at 9 am on the next following Business Day.
References to time in this clause are to local time in the country of
the addressee.
19.2
The addresses and fax numbers of the parties for the
purpose of clause 19.1 are as follows:
(a)
Sellers’ Representative: John Handley
Address:
·
Copy to be sent (for information only) to: Jeremy Clarke of LLC Law, 4
Bramber Court, Bramber Road, London, W14 9PW (Fax: +44 (0)20 7471 0371)
Copy to be sent (for information only) to: Simon Brydon of
·
.
Copy to be sent (for information only) to: Creative Capital Fund:
Attention of
Fred
Mendelsohn
of CCF, Dilke House, 1 Malet Street, London, WC1E 73N
(Fax: +44 (0)870 133 6872)
Copy to be sent (for information only) to: Dov Black of Zatman & Co
of 1 The Cottages, Deva Centre, Trinity Way, Manchester M3 7BE (Fax: +44 (0)161
834 4826)
Copy to be sent (for information only) to: Paul Thatcher of
·
34
(b)
Purchaser: Attention of
G. Scott Paterson, Chairman & CEO
;
Address:
JumpTV Inc.
463 King Street West
Toronto, Ontario
M5V 1K4
Canada
Fax: +1
416 849 3700
A copy to be sent (for information only) to David M. Pedley at 2000
Meidinger Tower, 462 South 4th Street, Louisville, KY 40202, USA. (Fax: +11 502-584-0422)
19.3
A party may notify all other parties to this agreement
of a change to its name, relevant addressee, address or fax number for the
purposes of this clause 19, provided that such notice shall only be effective
on:
(a)
the date specified in the notification as
the date on which the change is to take place; or
(b)
if no date is specified or the date
specified is less than five Business Days after the date on which notice is
given, the date following five Business Days after notice of any change has
been given.
19.4
In proving service it shall be sufficient to prove
that the envelope containing such notice was properly addressed and delivered
to the address shown thereon or that the facsimile transmission was made and a
facsimile confirmation report was received, as the case may be.
20.
COSTS
20.1
Each of the parties shall be responsible for its own
legal, accountancy and other costs, charges and expenses incurred in connection
with the negotiation, preparation and implementation of this agreement and any
other agreement incidental to or referred to in this agreement.
20.2
Each Seller undertakes to the Purchaser that neither
the Company has paid or will pay (in connection with the sale and purchase
contemplated by this agreement) any legal, accounting or other professional
charges, fees, expenses or commissions relating to the sale of the Shares
including, without limitation, any such costs incurred in connection with any
investigation of the affairs of the Company or the negotiation, preparation,
execution and carrying into effect of this agreement.
35
20.3
The Purchaser undertakes to the Seller that neither
the Company nor the Company has paid or will pay (in connection with the sale
and purchase contemplated by this agreement) any legal, accounting or other
professional charges, fees, expenses or commissions relating to the sale of the
Shares including, without limitation, any such costs incurred in connection
with any investigation of the affairs of the Company or the negotiation,
preparation, execution and carrying into effect of this agreement.
21.
THIRD PARTY RIGHTS
21.1
Subject to the remaining provisions of this clause 21,
the Company and any other member of the Jump Group and any of their officers,
employees, workers or agents (including advisers) (
“Third Parties”
) may enforce the terms and accordingly shall
have the benefit of those provisions in this agreement contained in clause 6,
which is, or is stated to be, for their benefit subject to and in accordance
with the provisions of the Contracts (Rights of Third Parties) Act 1999.
21.2
For the avoidance of doubt, nothing in this Clause 21
shall have the effect of increasing any of the Sellers’ liability under this
agreement and/or the Transaction Documents.
21.3
The parties may by agreement terminate, rescind or
vary the terms of this agreement (including this clause 21) at any time and in
any way without the prior consent of or notice to any Third Party.
21.4
Except as provided in this clause 21 the Parties do
not intend that any terms of this agreement shall be enforceable by virtue of
the Contracts (Rights of Third Parties) Act 1999 by any person who is not a
party to this agreement.
22.
CONTINUING EFFECT
Each provision of this agreement shall continue in full force and
effect after Completion, except to the extent that a provision has been fully
performed on or before Completion.
23.
SEVERABILITY
If any provision of this agreement is held by a court of competent
jurisdiction to be illegal, invalid or unenforceable in any respect under the
law of any jurisdiction, then such provision shall (so far as it is invalid or
unenforceable) be given no effect and shall be deemed not to be included in
this agreement but without invalidating any of the remaining provisions
36
of this agreement. Any provision
of this agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or
unenforceable. The parties shall then
use all reasonable endeavours to replace the invalid or unenforceable
provision(s) by a valid and enforceable substitute provision the effect of
which is as close as possible to the intended effect of the invalid or
unenforceable provision.
24.
LIABILITY AND RELEASE
24.1
Several liability of the Sellers
Unless otherwise stated in this agreement, the obligations of the
Sellers under this agreement are several.
If any liability of one or some but not all of the Sellers is, or
becomes, illegal, invalid or unenforceable in any respect, that shall not
affect or impair the liabilities of the other Sellers under this agreement.
24.2
Release of Sellers
Any liability of the Sellers to any person under this agreement may in
whole or in part be released, compromised or compounded or time or indulgence
given by that person in its absolute discretion as regards any of the Sellers
in respect of such liability without in any way prejudicing or affecting that
person’s rights against any other or others of the Sellers under the same or
like liability, whether joint or several or otherwise, or any other person’s
rights against any of them in any respect.
24.3
Release of Purchaser
Any liability of the Purchaser to any person under this agreement may
in whole or in part be released, compromised or compounded or time or
indulgence given by that person in its absolute discretion as regards the
Purchaser in respect of such liability without in any way prejudicing or
affecting any other person’s rights to enforce any liability against the
Purchaser.
25.
ASSIGNMENT
25.1
Subject to clause 25.2, no party shall be entitled to
assign the benefit or burden of any provision of this agreement without the
prior written consent of each other party.
25.2
All or any of the Purchaser’s rights under this
agreement (including, without limitation, in respect of the Warranties) may
(notwithstanding any
37
other provisions contained in this agreement) be
assigned or transferred by the Purchaser to, or made the subject of a trust
created in favour of:
(a)
any other member of Jump Group (or by any
such member to or in favour of any other member of Jump Group) provided that if
such assignee company leaves Jump Group, such rights are assigned or
transferred to or made the subject of a trust in favour of another member of
Jump Group; and/or
(b)
by succession upon a merger with and into
another member of the Jump Group;
provided that such assignment shall not increase to any extent the
liability of any of the Sellers pursuant to any provision of this agreement or
any of the other Transaction Documents and provided further that as between the
Sellers and the Purchaser, the Sellers may nevertheless enforce this agreement
and the Transaction Documents against the Purchaser as if that assignment had
not occurred.
26.
CURRENCY CONVERSION AND EURO/SUBSTITUTED LAWFUL
CURRENCY
26.1
Rate of exchange
For the purpose of converting amounts specified in one currency into
another currency where required, the rate of exchange to be used in converting
amounts specified in one currency into another currency shall be the average
closing mid-point rate for exchanges between those currencies quoted in the
Financial Times (London edition) for the 30 days for which that rate is so
quoted prior to the date of the conversion.
26.2
Euro
If the United Kingdom becomes a participating member state for the
purposes of European Monetary Union and the Euro accordingly becomes the lawful
currency of the United Kingdom, then:
(a)
that shall not affect the validity of the
Transaction Documents or the rights and obligations of the parties under them,
nor shall it give any party the right to alter or terminate any Transaction
Document unilaterally; and
(b)
with effect from the date on which it
occurs, any amount referred to in any Transaction Document in sterling shall be
redenominated in
38
Euros at the rate and in
the manner determined by the relevant legislation.
27.
SET OFF
27.1
Without prejudice to clause 3.5, the Purchaser shall
be entitled but not obliged at any time or times to set off any liability of
the Purchaser to any of Sellers in his or its capacity as Seller and/or
Warrantor (where applicable) (in each case howsoever arising and whether any
such liability is present or future, liquidated or unliquidated and irrespective
of the currency of its denomination) against any liability of any of the Seller
in any such capacity to the Purchaser and may for such purpose convert or
exchange any currency. Any exercise by
the Purchaser of them of their rights under this clause shall be without
prejudice to any other rights or remedies available to the Purchaser under this
agreement or otherwise.
27.2
Each of the Sellers shall be entitled but not obliged
at any time or times to set off any liability of that Seller to the Purchaser in
its capacity as Purchaser (in each case howsoever arising and whether any such
liability is present or future, liquidated or unliquidated and irrespective of
the currency of its denomination) against any liability of the Purchaser in any
capacity to that Seller and may for such purpose convert or exchange any
currency. Any exercise by that Seller or
any of them of their rights under this clause shall be without prejudice to any
other rights or remedies available to any of the Sellers under this agreement
or otherwise.
28.
GOVERNING LAW AND SUBMISSION TO
JURISDICTION
28.1
Governing law
The construction, validity and performance of this agreement shall be
governed by the laws of England and Wales.
28.2
Submission to jurisdictions
The parties to this agreement irrevocably agree that the courts of
England and Wales shall have non-exclusive jurisdiction over any claim or
matter arising under or in connection with this agreement and that accordingly
any proceedings in respect of any such claim or matter may be brought in such
court.
The parties have
shown their acceptance of the terms of this agreement by executing it at the
end of the schedules.
39
29.
SELLERS’ REPRESENTATIVE
29.1
Subject to the provisions of clause 29.3, where any
consent or approval of, or consultation with, the Sellers is required pursuant
to this agreement or where any notice or other communication is required to be
given to the Sellers, the Purchaser shall communicate such request for consent,
approval, consultation or provide such notice to the Sellers’ Representative
(along with copies thereof, if in writing, to the persons stipulated in clause
19.2(a)).
29.2
The Sellers’ Representative shall be responsible for
liaising with the rest of the Sellers and communicating any response or
decision of the Sellers to the Purchaser.
29.3
Notwithstanding the above, any request for consent
required to be given by the Sellers pursuant to clause 7.2 shall, whilst he is
employed by any member of the Jump Group, be given to Brydon and he shall be
responsible for communicating the Sellers’ consent in respect of any of the
matters referred to in such clause 7.2.
In the event that Brydon is no longer employed by any member of the Jump
Group, any request for such consent and any response thereto shall be given to
or by, as the case may be, the Sellers’s Representative in accordance with
clause 29.1 and 29.2.
40
IN
WITNESS
of the
above the Parties or their duly authorized representatives have executed this
Agreement on the day and year first before written.
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SIGNED
by
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)
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/s/ Fred Mendelson
(Director)
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CREATIVE
CAPITAL FUND
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)
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GENERAL
PARTNER LIMITED
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)
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As general partner for
and on behalf of
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)
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CREATIVE
CAPITAL FUND
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)
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)
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)
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)
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acting by
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Robert Evans
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)
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/s/ Robert Evans
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SECRETARY
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)
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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SIGNED
by
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)
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EUAN
DRUMMOND
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)
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/s/ Euan Drummond
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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EWEN
ROBERTSON
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Acting under power of
attorney dated
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SIGNED
by
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)
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STEVE
MASTERS
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)
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/s/ Steve Masters
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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DAVID
GROUNDWATER
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Acting under power of
attorney dated
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SIGNED
by
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)
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ANTHONY
MCCROSSAN
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)
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/s/ Anthony McCrossan
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41
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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JULIAN
ASTON
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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)
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PETER
GEORGE FARQUHAR DIBBEN
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)
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Duly authorised trustee
for
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SALCOLM
PROPERTIES LTD PENSION
SCHEME
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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DAVID
A DA CUHNA
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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PETER
C NICHOLSON
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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ANDREW
C SMITH
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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IAN
ROBERT HUCK
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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DAVID
BRYDON
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Acting under power of
attorney dated
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42
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SIGNED
by
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)
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PAUL
THATCHER
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)
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/s/ Paul Thatcher
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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ANNE
BRYDON
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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STEVE
BAILEY
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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CHARLES
COLLETT
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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DAVID
MILLER
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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DAN
HOBBS
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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ANDY
SMITH
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Acting under power of
attorney dated
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43
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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NEVILLE
PRESSLEY
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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DARREN
WARD
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Acting under power of
attorney dated
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SIGNED
by
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)
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SIMON
ALEXANDER BRYDON
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)
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/s/ Simon A. Brydon
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As Attorney for
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JOHN
HANDLEY
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Acting under power of
attorney dated
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SIGNED
for and on behalf of
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)
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JUMPTV
INC
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)
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)
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acting by
G. SCOTT PATERSON
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)
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/s/ G. Scott Paterson
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Chairman &
CEO
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)
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44
SCHEDULE
1
Details of Company
and Sellers
Part 1: Short Particulars of Company
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1
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Name
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Cycling Television Limited
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2
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Registered number:
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04887821
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3
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Date of incorporation:
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4 September 2003
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4
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Place of incorporation:
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United Kingdom
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5
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Registered office address:
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34 Warple Way, London,W3 ORG
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6
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Type of company:
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Private Limited Company
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7
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Authorised share capital:
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(a) amount:
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£1,000
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(b) number and class
of shares:
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7,304 A Ordinary Shares of £0.01 each
92,696 Ordinary Shares of £0.01 each
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8
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Issued share capital:
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(a) amount:
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£219.52
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(b) number and class
of shares:
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4,748 A Ordinary Shares of £0.01 each
17,204 Ordinary Shares of £0.01 each
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9
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Directors:
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Simon Alexander Brydon
Euan Drummond
Anthony Hugh McCrossan
Paul John Hotson Brinton Thatcher
John Martin Handley
Julian Aston
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10
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Secretary:
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Simon Alexander Brydon
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11
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Accounting reference date:
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31 December
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12
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Auditors:
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N/A due to exemption
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45
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13
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Outstanding
Charges:
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Debenture
Chargee: The Royal Bank Of Scotland Plc
Date Created: 23 May 2005
Date Registered: 2 June 2005
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14
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46
SCHEDULE
2
Part 1: Sellers’ Obligations at Completion
At Completion,
the Sellers shall deliver to the Purchaser:
1.
duly
executed transfers of all of the Shares into the name of the Purchaser in the
number as set out in column 2 of part 2 of Schedule 1 with the relevant share
certificates (or indemnities in respect thereof in the agreed form);
2.
all the statutory and
other books (duly written up to, but not including, Completion) of the Company
and its certificate of incorporation and common seals in its possession;
3.
certified copies of
any powers of attorney under which any of the documents referred to in this
schedule is executed or evidence satisfactory to the Purchaser of the authority
of any person signing on behalf of the Sellers;
4.
duly executed
irrevocable powers of attorney in the agreed form in respect of the Shares;
5.
an unconditional
letter of release from the Company’s bankers evidencing the release and
discharge of all guarantees and indemnities granted by the Company and the
Company;
6.
duly executed
releases, in the agreed form, releasing the Company from the charge created by
the Royal Bank of Scotland together with forms 403a duly completed and sworn in
respect of the same;
7.
a duly executed
release, in the agreed form, releasing the Company from any liability
whatsoever (whether actual or contingent) which may be owing to the Sellers by
the Company at Completion;
8.
letters of
resignation in the agreed form from each of the Directors (other than the
Continuing Director) and the secretary of the Company, such resignations to
take effect from the close of the meeting of the Board referred to in part 2 of
this schedule 2.
9.
the Continuing
Directors Service Agreement duly executed by Brydon and the Company which
agreement shall contain non-compete provisions consistent with those set forth
in this agreement;
48
10.
a copy of a resolution
of the board of directors of the general partner of CCF (certified by a duly
appointed officer as true and correct) authorising the execution of and the
performance by CCF of its obligations under this agreement and each of the
other documents to be executed by each of them;
11.
waivers of pre-emption
by each of the Sellers waiving their rights of pre-emption rights as contained
in the articles of association of the Company in relation to the transfer of
the Shares to the Purchaser; and
12.
copies of all existing
bank mandates and statements of the balances of any bank accounts in the name
of the Company, as at the close of business on the last Business Day before the
Completion Date, together with a list of all unpresented cheques and uncleared
cheques which upon presentation or clearance would be debited or credited to
those accounts and the relevant cheque books;
13.
duly executed Escrow
Agreement in the agreed form appointing the Escrow Agent in respect of the
Escrow Deposit.
Part 2:
Sellers’ Further Obligations at Completion
At Completion,
the Sellers, including CCF, shall:
1.
pay and CCF shall
procure that all members of the CCF Group shall pay all Shareholder
Indebtedness (if any) then owing by them to the Company, whether due for
payment or not.
2.
release the Company from
any Shareholder Guarantees to which it is party.
3.
cause the Directors
to hold a meeting of the board of the Company at which the Directors shall pass
resolutions in the agreed form to:
3.1
in the case of the
Company only, approve the registration of the Purchaser or its nominees as
members of the Company subject only to the production of duly stamped and
completed transfers in respect of the Shares;
3.2
appoint such persons as
the Purchaser may nominate as directors and secretary of the Company; and
3.3
do and perform any
other business which may be necessary or desirable to give full and valid
effect to the sale and purchase of the Shares or as the Purchaser may
reasonably require; and
49
3.4
the Sellers shall
furnish to the Purchaser on Completion duly signed minutes of all necessary
meetings.
50
Part 3:
Purchaser’s Obligations at Completion
At Completion,
the Purchaser shall:
1.
pay the cash elements
of the Initial Consideration by CHAPS to the Sellers’ Solicitors’ account at
Allied Irish Bank (Sort Code:
·
,
Account Number:
·
,
IBAN:
·
).
2.
pass such directors
resolutions as are necessary to allot and issue the Initial Consideration
Shares and the Deferred Consideration Shares in accordance with this agreement
and deliver to the Sellers a certified copy of such resolution;
3.
deliver to the
Sellers an extract of the resolutions of the board of directors of Purchaser
(certified in each case by a duly appointed officer as true and correct)
authorising the execution of and the performance by the Purchaser of its
obligations under this agreement and each of the other documents to be executed
by it.
4.
execute and deliver
the Continuing Director’s Service Agreement.
5.
execute and deliver
the Escrow Agreement in the agreed form appointing the Escrow Agent in respect
of the Escrow Deposit;
51
SCHEDULE 3
Warranties
Part 1:
General Warranties
1.
INFORMATION
Quality of information
All
information contained in Part 1 of Schedule 1 (Details of the Company) and
Schedules 8 (Properties) is true and accurate in all material respects.
2.
THE WARRANTORS
2.1
Power
to contract
The Warrantors
have full power and authority to enter into and perform each of the Transaction
Documents to which they are a party and each of such Transaction Documents
constitutes or will, when executed, constitute binding obligations on the
Warrantors in accordance with their terms, subject to any principles of equity
or insolvency law.
2.2
Authorisations
The Warrantors
have obtained all applicable governmental, statutory, regulatory or other
consents, licences, waivers or exemptions required to empower them to enter
into and to perform their obligations under the Transaction Documents.
2.3
Simon
Brydon
So far as
Brydon or any of the other Warrantors are aware, Brydon is not suffering from
any medical or other condition or disability nor is he affected by any other
circumstance which would materially impair his ability to perform his duties as
a full time senior executive of the Company.
3.
THE COMPANY
3.1
Duly
constituted
The Company
has been duly incorporated, is duly organised and is validly existing under the
laws of England and Wales. The Company
has all requisite corporate powers and authority to own its assets and to
conduct the business being carried on by it at Completion.
52
3.2
Memorandum
and articles
The copies of
the memorandum and articles of association of the Company which are attached to
the Disclosure Letter are accurate, complete and up-to-date in all respects and
have attached to them copies of all resolutions and agreements passed prior to
the date of this agreement which are required to be so attached. The Company has complied with its memorandum
and articles of association in all material respects and none of the
activities, agreements, commitments or rights of the Company is ultra vires or
unauthorised.
3.3
Statutory
and other books and records
(a)
The register of members
and all other statutory books of the Company have been properly kept and are up
to date and the register of members contains true and accurate records of all
matters required to be dealt with therein.
(b)
The Company has not
received any notice of any application or intended application under the
Companies Acts for rectification of the Company’s register.
(c)
All annual or other
returns in relation to the Company required to be filed with the Registrar of
Companies have been duly and properly filed.
(d)
The Company has
complied with all legal requirements relating to the issue of shares and other
securities.
(e)
The Company has
complied with the material requirements of all other statutes, regulations or
laws binding on it as to the keeping of records and filing of documents with
any other agency or authority and the conduct of its business and affairs
generally.
3.4
All
charges registered
All Security
Interests granted to or by the Company have (if appropriate) been registered in
accordance with CA85 or comply with all necessary formalities as to
registration or otherwise in any foreign jurisdiction.
3.5
Original
documents in possession of Company
All title
deeds relating to the material assets of the Company and an executed copy of
all material agreements to which the Company is a party
53
are in the
possession of the Company or the Company’s professional advisers.
3.6
Directors
of the Company
The only
directors of the Company are the persons listed as such in the Disclosure
Letter and no person is a shadow director (within the meaning of s741 CA85) or
an alternate or de facto director of the Company.
4.
SHARE CAPITAL
4.1
Shares
allotted and fully paid
All of the
issued shares in the capital of the Company are validly allotted and issued and
fully paid or properly credited as fully paid.
4.2
Freedom
from Encumbrances
All unissued
shares and any debentures or other securities of the Company are free from and
unaffected by any Encumbrance other than under its articles or under an
agreement between shareholders which has been Disclosed.
4.3
No
options, etc.
There are in
existence no rights to or options for the issue, allotment or transfer of any
loan or share capital of the Company nor any rights to convert any loan or
share capital into share capital or share capital of a different description.
4.4
Repayment,
redemption and capitalisation
The Company
has not:
(a)
at any time repaid or
redeemed or agreed to repay or redeem any shares of its capital or in any way
effected any reduction of its issued share capital; or
(b)
at any time purchased
its own shares.
4.5
Commissions
Except for the
commission payable to Ardent Advisors disclosed to Purchaser, no person is
entitled to receive from the Company any fee, brokerage or commission in
connection with the Transaction Documents or anything contained in them.
54
5.
CONNECTED BUSINESS
5.1
Interests
in other companies
The Company
does not have any subsidiaries or hold any shares or other securities in any
other company, nor has it agreed to acquire any such share or securities.
5.2
No
shareholders’ agreement
Save as
Disclosed, the Company is not a party to any shareholders’ agreement or similar
arrangement or agreement which purports to regulate, control or otherwise
affect the voting or disposition of its shares.
5.3
Relationship
with CCF and other Sellers
Details of all
contractual arrangements under which services are provided by any Seller to the
Company (including as to fees payable) are set out in the Disclosure Letter.
5.4
Permanent
establishment outside of jurisdiction of incorporation
The Company
does not have any permanent establishment from which it conducts business
outside its jurisdiction of incorporation.
5.5
Warrantors
not interested in other related businesses
Save as
Disclosed, the Warrantors are not at the date hereof either on their own account
or in conjunction with or on behalf of any person, firm or company engaged,
concerned or interested, directly or indirectly, whether as shareholder,
director, partner, agent or otherwise (save as the holder of not more than 1%
of the issued share capital of any company whose shares are quoted on any
public stock exchange where such holding is for investment purposes only) in (i) any
business of a similar nature to or competitive with that carried on by the
Company, or (ii) which has a close trading relationship with the Company.
5.6
No
management of other companies
The Company
does not take part in or control the management of any other company or
business organisation other than performers, sportspersons, other individuals
with a public profile and any company or business organisation set up in
connection with their services or rights relating to their personalities,
names, services or creative activities.
55
6.
ACCOUNTING AND
RECORDS
6.1
Accounting
records
All the
accounts, ledgers and other financial records of the Company required to be
kept by law and Relevant Accounting Standards have to a material degree been
properly and accurately kept and all the material records and books of the
Company are in the possession of the Company or its accountants.
6.2
Accounting
reference date
Under s224
CA85, the accounting reference date of the Company has been, during the last
five years, the date specified in schedule 1.
6.3
The
Last Accounts The Last Accounts:
(a)
give a view of the
state of affairs of the Company as at the Last Accounting Date and of its
profits or losses for the Financial Year ended on the Last Accounting Date
which the Directors generally and the Continuing Director individually believe
is true and fair;
(b)
make adequate provision
or reserve for all actual liabilities;
(c)
make, to the extent
required by Relevant Accounting Standards, appropriate provision or reserve for
(or note in accordance with all Relevant Accounting Standards) all contingent,
unquantified or disputed liabilities, all capital commitments and deferred Tax;
(d)
make, to the extent
required by Relevant Accounting Standards, appropriate provision or reserve for
all Tax in respect of all accounting periods ended on or before the Last
Accounting Date for which the Company was then or would at any time thereafter
become liable including (to that extent but otherwise without limitation) Tax:
(i)
on or in respect of or
by reference to the profits, gains or income for any period ended on or before
the Last Accounting Date;
(ii)
in respect of any event
on or before the Last Accounting Date or provided for in the Last Accounts; and
56
(iii)
in respect of
distributions declared, made or deemed to be made on or before the Last
Accounting Date or provided for in the Last Accounts; and
(e)
have, to the extent
appropriate for a company growing and developing in the manner in which the
Company has grown and developed, been prepared in a manner consistent with that
used in preparing the Accounts for the Financial Year preceding the Financial
Year ended on the Last Accounting Date.
6.4
Accounts
The Accounts
for each of the three Financial Years ended on the Last Accounting Date:
(a)
comply with all the
requirements of CA85, all other relevant laws and all Relevant Accounting
Standards and in all other respects have been prepared in accordance with
generally accepted accounting practices in the United Kingdom;
(b)
are not affected by any
extraordinary or exceptional item (as defined under UK GAAP), other than to the
extent items are categorised in those Accounts as extraordinary or exceptional,
or by transactions entered into otherwise than on normal commercial terms; and
(c)
were prepared under the
historical cost convention.
6.5
Valuation
of fixed assets
In the Last
Accounts, each of the fixed assets is included at a value which is net of
depreciation in accordance with the depreciation policy applied in the
preceding three Financial Years.
6.6
Bad
debt provisions and write-offs
The Last
Accounts contain appropriate provision for bad and doubtful debts.
6.7
Management
Accounts
(a)
The Management Accounts
were prepared in accordance with the accounting policies of the Company to a
standard of detail appropriate for management accounts of a company of the size
and nature of the Company and in a manner consistent with that
57
adopted in the
preparation of its management accounts for all periods ended during the twelve
months prior to the Last Accounting Date.
(b)
Having regard to the
level of detail to which the Management Accounts were prepared, they are not
misleading in any material respect and neither materially overstate the value
of the assets nor materially understate the liabilities of the Company as at
the date to which they were drawn up and do not materially overstate the
profits of the Company in respect of the period to which they relate.
(c)
All work-in-progress
valued in the Management Accounts was valued on the lower of cost and the
amounts which could in the circumstances existing at 1 January 2007
reasonably be expected to be realised in the normal course of carrying on the
business of the Company.
7.
POSITION SINCE
MANAGEMENT ACCOUNTS AND LAST ACCOUNTING DATE
Since 1 January 2007:
7.1
there has been no
material adverse change in the financial or trading position of the Company and
no event, fact or matter has occurred of which the Warrantors are aware which a
reasonable person would believe to be likely to give rise to any such change,
and there has been no damage, destruction or loss (whether or not covered by
insurance) affecting the same. For the
purposes of this Warranty, a “material adverse change” shall mean any change
which would adversely affect the balance sheet or gross income of the Company
by at least £10,000 compared to the position which would have obtained if the
change had not taken place; the loss of any opportunity is not to be regarded as
a change for this purpose;
7.2
there has been no
interruption or material alteration in the nature, scope or manner of the
business of the Company as a whole which business has been carried on in the
ordinary and usual course of business so as to maintain it as a going concern;
7.3
the Company has not
changed the timescales within which it generally pays its creditors and except
as Disclosed no material undisputed amounts are owed by the Company which are
overdue for payment by more than 60 days;
58
7.4
the Company has not
repaid or become bound or liable to pay any borrowing or indebtedness in
advance of its stated maturity excluding any recoupable advances made to
members of the group under any ordinary course contract (other than financing
or banking type contracts);
7.5
the Company has not,
except in the ordinary course of business, acquired, sold, transferred or
otherwise disposed of any material assets of whatsoever nature;
7.6
the Company has not cancelled,
waived, released, compromised, assigned or discontinued any material debts or
claims nor cancelled, waived, released, compromised, assigned or discontinued
any material rights other than in the ordinary course of its business;
7.7
no contract or
commitment (whether in respect of capital expenditure or otherwise) has been
entered into by the Company which is of an unusual nature and involved or would
be likely to involve an obligation of a material nature or magnitude (a
liability for expenditure in excess of £15,000 being regarded as material for
this purpose);
7.8
(except for any
dividends provided for in the Last Accounts) no dividends, bonuses or other
distributions have been declared, paid or made by the Company;
7.9
except as Disclosed, no
share or loan capital of the Company has been allotted or issued or agreed to
be allotted or issued nor has any option or right thereover been granted;
7.10
except as Disclosed, the
Company has not undergone any capital reorganisation or change in its capital
structure;
7.11
except as Disclosed, no
resolution of the members of the Company has been passed (whether in general
meeting or otherwise);
7.13
there has been no
material increase or decrease in the levels of debtors or creditors (material
in this case being £15,000 or in the average collection or payment periods for
the debtors and creditors respectively of the Company as a whole outside the
range of levels or periods normally experienced by the Company as a whole;
7.14
no fees or other payments
have been made to any member of the CCF Group;
7.15
there has been no
material reduction in the cash balances of the company from those set out in
the Management Accounts or any unusual and
59
unplanned increase or decrease in the level of work in progress of the
Company;
7.16
there have been no
capital injections from or forgiveness of debt by the Sellers or any member of
the CCF Group.
8.
FINANCIAL MATTERS
In this
Schedule 3, the word
“Indebtedness”
means, in respect of any company or other entity, any borrowing or indebtedness
in the nature of borrowing (including any indebtedness for monies borrowed or
raised under any bank or third party guarantee, acceptance credit, bond, note,
bill of exchange or commercial paper, letter of credit, finance lease, hire
purchase agreement, forward sale or purchase agreement or conditional sale
agreement or other transaction having the commercial effect of a borrowing and
all finance, loan and other obligations of a kind required to be included in
the balance sheet of a company or other entity pursuant to Relevant Accounting
Standards);
8.1
All dividends lawful
All dividends
and distributions declared, made or paid by the Company at any time were, when
declared, made or paid, in accordance with the requirements of general law and
the articles of association of the Company.
8.2
Borrowing
(a)
Banking and other
facilities
Details of and copies of all relevant
documentation relating to the Indebtedness of the Company are contained in the
Disclosure Letter.
(b)
Borrowing within limits
The aggregate Indebtedness of the Company
does not exceed any maximum stipulated in any debenture, charge or other
document binding on the Company.
(c)
No factoring, etc
The Company has not factored any debts, or
engaged in any financing arrangements or arrangements having the commercial
effect of borrowing, not shown in the Last Accounts.
60
8.3
No
liability to affiliates or employees
There is no outstanding Indebtedness or
liability (actual or contingent) between the Company and the Sellers or any
member of the CCF Group or between the Company and any directors, officers or
employees of the Company or the Sellers or any member of the CCF Group (save
for accrued salary) or any relatives or controlled companies of any such
persons and no security for any such Indebtedness or liability has been given
and remains outstanding.
8.4
Grants
No act or transaction has been effected or
agreed to be effected by the Company or the Sellers including the sale of the
Shares in consequence of which:
(a)
the Company is or will
be liable to refund or repay the whole or part of any investment or other
grant, subsidy or allowance; or
(b)
any such grant, subsidy
or allowance for which application has been made by the Company will not be
paid or will be reduced.
8.5
No
guarantees, etc.
There is not outstanding any agreement or
arrangement which establishes any guarantee, indemnity, suretyship, form of
comfort or support (whether or not legally binding):
(a)
given by the Company in
respect of the obligations or solvency of any person;
(b)
given by any person in
respect of the obligations or solvency of the Company; or
(c)
given by the Sellers or
any member of CCF Group in respect of any liability of the Company, except as
Disclosed.
8.6
Debts
owed to the Company
There are no debts owing to the Company other
than trade debts incurred in the ordinary and usual course of business which
trade
61
debts do not exceed £125,000 in aggregate for
the Company as a whole.
8.7
No
deal bonus or finders fee
Except for the
commission payable to Ardent Advisors in the amount previously disclosed to
Purchaser, there is not outstanding any agreement or arrangement, nor has there
been any agreement or arrangement in the nature of a so-called finders fee in
relation to the proposed sale of the Company payable by or on behalf of the
Company or in the nature of a transaction related bonus or payment due to any
director, employee or consultant of the Company in relation to the proposed
sale of the Company.
9.
CONTRACTUAL MATTERS
9.1
Effect
of executing this agreement
So far as the
Warrantors are aware, the execution of and compliance with the terms of this
agreement will not:
(a)
result in a breach of
or give rise to any right of termination under the terms of any subsisting
agreement, arrangement or instrument binding on the Company;
(b)
cause the Company to
lose the benefit of any material contractual right, licence or privilege;
(c)
relieve any person of
any material contractual obligation to the Company or enable any person to
determine such obligation or any material contractual right or benefit enjoyed
by the Company or to exercise any material contractual right otherwise in
respect of the Company; or
(d)
result in any material
liability of the Company being created or increased;
(e)
prejudicially affect
the attitude or actions of contract counter-parties, clients, customers,
suppliers and employees with regard to the Company, provided that in the case
of this Warranty there is absolutely no obligation on the part of the
Warrantors to make any enquiry as provided for in clause 1.8.
62
9.2
Significant
counter-parties
(a)
Other than as Disclosed
no counter party on any contractual arrangements (including any person
connected in any way with any such party) accounts directly or indirectly
either for more than ten per cent of the annual aggregate turnover or for more
than ten per cent of the annual aggregate expenses of the Company.
(b)
No loss of significant
counter-parties
No significant counter-party of the Company
(that is to say a contractual counter-party who contributes directly or
indirectly to the Company as a whole income representing more than ten per cent
in value of turnover of the Company as a whole or representing payments by the
Company of more than ten per cent in value of the costs of sale of the Company
as a whole over any given period of 12 consecutive months within the last five
years prior to this agreement) has, during the period of 12 months prior to
this agreement, ceased to trade with or indicated in writing an intention to
cease to trade with, the Company either in whole or in part. During the period of 12 months prior to the
date of this agreement, the terms of trade of the Company with each significant
counter-party (as defined above) have not significantly changed to the
detriment of the Company. The Warrantors
are not aware that any cessation or substantial reduction in trade or change in
terms of dealing as described above is likely after Completion.
9.3
Stand-alone
business
The assets and
rights of the Company as a whole and the facilities and services to which the
Company has a contractual right are all that have been necessary to operate the
businesses of the Company as it has been operated historically and as reflected
in the Accounts for the last Financial Year.
9.4
Characteristics
of contracts
There is not
outstanding any contract, liability or arrangement to which the Company is a
party or by which it is bound which:
(a)
is outside the ordinary
course of business of the Company;
(b)
requires expenditure of
in excess of £25,000 per year;
(c)
is otherwise than by
way of a bargain at arm’s length;
63
(d)
is one pursuant to
which the Company has sold or otherwise disposed of any company or business in
circumstances such that it remains subject to any liability (whether contingent
or otherwise) which is not fully provided for in the Last Accounts;
(e)
is a currency and/or
interest rate swap agreement, asset swap, future rate or forward rate
agreement, interest cap, collar and/or floor agreement or other exchange or
rate protection transaction or combination thereof or any option with respect
to any such transaction or any other similar transaction to which the Company
is a party;
(f)
is a bid, tender,
proposal or offer entered into otherwise than in the ordinary course of
business of the Company which, if accepted, would result in the Company
becoming a party to any agreement or arrangement of a kind described in any of
paragraphs 9.3(a) to 9.3(d) above.
9.5
With
respect to each contract to which the Company is a party:
(i)
none of the Sellers or
any member of the CCF Group are interested;
(ii)
the Company has duly
performed and complied in all respects with each of its material obligations
thereunder;
(iii)
there has been no
material delay, negligence or other default on the part of the Company and no
event has occurred which, with the giving of notice or passage of time, would
constitute a material default thereunder;
(iv)
so far as the Warrantors
are aware, there are no grounds for rescission, avoidance, repudiation or
termination and the Company has not received any written notice of termination;
and
(v)
the Warrantors are not
aware of any of the other parties thereto is in material default or, so far as
the Warrantors are aware, is likely to become in material default thereunder.
9.6
Offers
and tenders
No offer or
tender issued by the Company and still outstanding is or will be capable of
giving rise to a contract merely by an order or acceptance or
64
other action
by another party which would, once accepted, result in the Company being
committed to expenditure of £10,000 or more.
9.7
Contracts
- connected persons
(a)
Save as Disclosed,
there is not outstanding any material agreement, arrangement or understanding
(whether legally enforceable or not) to which the Company is a party and in
which any current director of the Company or any connected person is
interested, whether directly or indirectly (save for any service or employment
agreement between the Company and any such persons).
(b)
Save as Disclosed, the
Company does not depend in any material respect upon the use of assets owned
by, or facilities or services provided by, the Sellers or any member of the CCF
Group, the cessation of which would materially adversely affect the Company or
the replacement of which would require material effort or expenditure by the
Company.
(c)
The Company’s profits
or financial position in each of the three financial years ended on the Last Accounting
Date have not been materially affected by any material agreement which is not
entirely of an arm’s length nature.
9.8
Partnerships
The Company is
not a member of, or party to, any partnership.
9.9
Competition
and fair trading
(a)
There are no contracts
or obligations, agreements, arrangements or concerted practices involving the
Company and no practices in which the Company is or has been engaged which are
void, illegal, unenforceable, registrable or notifiable under or which
contravene any competition, anti-trust, anti-monopoly or anti-cartel
legislation or regulations in the United Kingdom, nor has the Company received
any written threat or complaint or request for information or investigation in
relation to or in connection with any such legislation or regulations.
(b)
The Company is not
subject to any order, judgment, decision or direction given by any court or
governmental or regulatory authority in any jurisdiction other than one
generally affecting the industries in which it operates, nor is it party to any
undertaking or assurance
65
given to any
such court or authority, in relation to competition matters which is still in
force.
9.10
Vulnerable
antecedent transactions
So far as the
Warrantors are aware, the Company has not at any time in the two year period
prior to Completion:
(a)
entered into any
transaction at an undervalue (within the meaning of s238 or s339 or s423
Insolvency Act 1986) with any other person;
(b)
been given any preference
(within the meaning of s239 or s340 Insolvency Act 1986) by any other person;
or
(c)
entered into any other
material transaction which is void or voidable (whether in whole or in part) or
received any benefit or acquired any asset which is or will be liable to be
returned or repaid (whether in whole or in part).
9.11
Payments/political
donations
No act or
transaction has been effected by or on behalf of the Company involving the
making or authorising of any payment, or the giving of anything of value, to
any government official, political party, party official or candidate for
political office for the purpose of influencing the recipient in his or its
official capacity in order to obtain business, retain business or direct
business to the Company or any other person or firm.
10.
ASSETS
10.1
Title
to physical assets
All of the
material physical assets owned by the Company are the sole, absolute property
of the Company and there is not now outstanding any Encumbrance over the whole
or any part of any material physical assets of the Company and none of the
material physical assets now owned or used by the Company is subject of any
Encumbrance or any hire purchase, leasing, lease, purchase or credit sale
agreement, except as Disclosed.
66
10.2
Possession and third party
facilities
(a)
All
of the material physical assets owned by the Company, or in respect of which
the Company has a right of use, are in the possession or under the control of
the Company.
(b)
Where
any material physical assets are used but not owned by the Company or any
facilities or services are provided to the Company by any third party, there
has not so far as the Warrantors are aware occurred any event of default or any
other event or circumstance which would entitle any third party to terminate
any agreement or licence in respect of the provision of such facilities or
services (or any event or circumstance which with the giving of notice and/or
the lapse of time and/or a relevant determination would constitute such an event
or circumstance).
11.
LITIGATION
11.1
No litigation
The Company is
not engaged, either on its own account or vicariously, in any suit, action,
litigation, arbitration or tribunal proceedings or any governmental
investigations. In addition so far as
the Warrantors are aware, the Company has not received notice of any such suit,
action, litigation, arbitration or tribunal proceedings or governmental
investigations which are pending or threatened, by or against the Company.
12.
INSOLVENCY
ETC.
12.1
Company not insolvent
The Company
has not stopped payment, nor is it insolvent or deemed unable to pay its debts
within the meaning of s123 of the Insolvency Act 1986 other than immaterial
debts being contested by appropriate action.
12.2
No winding up
No order has
been made, petition presented or meeting convened for the purpose of
considering a resolution for the winding up of the Company or for the
appointment of any provisional liquidator.
No petition has been presented for an administration order to be made in
relation to the Company, and no administrator or receiver (including any
administrative receiver) has been appointed in respect of the whole or any part
of any of the property, assets and/or undertaking of the Company.
67
12.3
No composition, etc.
No composition
in satisfaction of the debts of the Company, or scheme of arrangement of its
affairs, or compromise or arrangement between it and its creditors and/or
members or any class of its creditors and/or members, has been proposed,
sanctioned or approved.
12.4
No distress, etc.
No distress,
distraint, charging order, garnishee order, execution or other process has been
levied or applied for in respect of the whole or any part of any of the
property, assets and/or undertaking of the Company.
12.5
No disqualification
So far as the
Warrantors are aware, no person who now is, or who at any time within the last
three years was, a director or officer of the Company is, or at any material
time was, subject to any disqualification order under CA85, the Insolvency Act
1986 or the Company Directors Disqualification Act 1986.
12.6
So far
as the Warrantors are aware, no circumstances exist which will give rise to the
occurrence of any events or circumstances described in the preceding paragraphs
12.1 to 12.5.
13.
POWERS
OF ATTORNEY
The Company
has given no powers of attorney and no other authority express, implied or
ostensible which is still outstanding or effective to any person to enter into
any contract or commitment to do anything on its behalf other than the
authority of employees and officers to enter into contracts in the ordinary
course of their duties.
14.
REGULATORY
MATTERS
14.1
Licences
(a)
The
Company has obtained all material licences, permissions, authorisations and
consents required for carrying on its business effectively in the places and in
the manner in which such business is now carried on.
(b)
The
licences, permissions, authorisations and consents referred to in paragraph 14.1(a) are
in full force and effect, are not subject to any unusual or onerous conditions
which would not ordinarily be
68
present in
such licences, permissions, authorisations or consents, and have been complied
with in all material respects.
(c)
So
far as the Warrantors are aware, the Company has not received any notice that
there are any circumstances currently existing which indicate that any of the
licences, permissions, authorisations or consents referred to in paragraph 14.1(a) will
be suspended, cancelled or revoked or not renewed, in whole or in part, in the
ordinary course of events.
(d)
This
clause 14.1 shall not refer to any licences, permissions, authorisations or
consents which relate to the Intellectual Property or to the Properties.
14.2
Compliance with laws
(a)
The
Company has conducted its business and corporate affairs in accordance with its
memorandum and articles of association and in all material respects in
compliance with all applicable laws and regulations (whether of the United
Kingdom or any other jurisdiction).
(b)
The
Company is not in breach of any order, decree or judgement of any court or any
governmental or regulatory authority (whether of the United Kingdom or any
other jurisdiction).
(c)
So
far as the Warrantors are aware, neither the Company nor any of its officers,
agents or employees during the course of carrying out duties for the Company
has done or omitted to do any act or thing, the commission or omission of which
is a contravention of any law or regulation (whether of the United Kingdom or
any other jurisdiction).
(d)
So
far as the Warrantors are aware, no commissions, discounts, rebates or other
inducements, whether of cash or in kind, have been given by the Company or its
officers or employees during the course of carrying out duties for the Company
where the same are capable of forming the basis of criminal prosecution of, or
civil action against, the Company or any of its officers or employees.
15.
INSURANCE
15.1
The
Company has at all times been adequately covered against accident, third party,
public liability and other risks normally covered by insurance and nothing has
been done or omitted to be done by or on behalf of the
69
Company which would make any policy of insurance void or voidable or
enable the insurers to avoid the same and there is no material claim
outstanding under any such policy and the Warrantors are not aware of any
circumstances which will give rise to such a claim or (other than generally
applicable market factors) result in a material increase in the rate of any
premium.
15.2
All
information furnished in obtaining or renewing the Insurance Policies was
correct and accurate when given and any change in that information required to
be given was correctly given. The
Company is not materially in default under any of those policies, which are in
full force and effect.
15.3
There
is set out in the Disclosure Letter a summary of the Insurance Policies.
15.4
The
Company has not suffered any material uninsured losses nor waived any rights of
material or substantial value.
Part 2: Employment Warranties
1.
INTERPRETATION
In this part 2
of schedule 3, the following words and expressions shall have the following
meanings:
“Employees”
means those persons employed by the Company;
“Employment
Law”
means all and any laws, common law, statutes,
directives, regulations, notices, judgments, decrees or orders, whether of the
European Community or the United Kingdom or any other relevant jurisdiction,
relating to or connected with the employment of employees and workers and/or
their health and safety at work;
“Employment
Liabilities”
means all Losses connected with or
arising from any Employment Law;
“Senior
Employee”
means any employee whose annual salary
exceeds £50,000.
2.
TRADE
UNION RECOGNITION
The Company
does not recognise any trade union or other body representing its Employees (or
any of them) for the purpose of collective bargaining or other negotiating
purposes, nor has the Company done any
70
act which
might be construed as recognition or received a request for recognition of any
such body and, so far as the Warrantors are aware, no such request is pending.
3.
TRADE
DISPUTES
So far as the
Warrantors are aware, no dispute, strike or other industrial action exists or
is threatened between the Company and a significant number or category of its
Employees or a trade union representing such Employees and no such dispute,
strike or other industrial action has occurred in the last 12 months.
4.
COMPLIANCES
WITH APPLICABLE LAW
The Company
has complied with all material obligations imposed on it by Employment Law,
collective agreements, recognition agreements and all material contractual
obligations applying to the jurisdiction in which such entity is incorporated
or carries on business which are owed to or in respect of its Employees.
5.
INFORMATION
5.1
The
Disclosure Letter contains:
(a)
the
names and dates of birth and commencement of employment of all persons who are
at the Completion Date Employees of the Company;
(b)
details
of all the remuneration paid and benefits (including, for the avoidance of
doubt, permanent health insurance) provided to or which the Company is bound to
provide to each of the Employees;
(c)
copies
of the contracts of Employment of each of the Senior Employees; and
(d)
details
of the terms on which all individual consultants providing to the Company
personal services which are considered by the Warrantors to be materially
significant in the context of the businesses of the Company are engaged;
all of which
information is true and complete in all material respects.
5.2
There
is no person other than those listed in the Disclosure Letter who is employed
in the business of the Company other than the Employees.
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5.3
No
full time Senior Employee is engaged for any material part of his usual working
time in the business of any company outside the Company.
6.
VARIATION
OF TERMS OF EMPLOYMENT
6.1
The
Company is not involved in negotiations (whether with Employees or any trade
union or other Employees’ representatives) to materially vary the terms and
conditions of employment or engagement of any of its Employees, directors or
consultants, nor has it during the three months up to Completion entered into
any obligation nor made any representations, promises, offers or proposals to
any of its Employees, directors or consultants or to any trade union or other
Employees’ representatives concerning or affecting the terms and conditions of
employment or engagement of any of its Employees, directors or consultants.
6.2
During
the last three months, the Company has not promised but failed to implement
prior to Completion any salary review in respect of any Employees.
7.
INCENTIVE
SCHEMES
The Company
has not introduced any share incentive scheme, share option scheme or profit
sharing, bonus, commission or other such incentive scheme for any of its
directors or Employees which remains in effect.
8.
RESIGNATIONS
8.1
No
Senior Employee or director of the Company has resigned in the last 12 months.
8.2
The
Company has not received any notice of resignation from any director or Senior
Employee that has not expired.
8.3
During
the last 6 months, the Company has not dismissed any employees nor is it under
any contractual or other obligation to change the term of service of any Senior
Employee.
9.
BENEFITS
The Company has discharged its obligations in full in relation to
salary, wages, fees, commission, bonuses, overtime pay, holiday pay, sick pay
and all other benefits and emoluments relating to its Employees, directors and
consultants in respect of all prior periods.
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10.
REDUNDANCIES
10.1
The
Company has neither given notice of any redundancies to the Secretary of State
or any other appropriate body in any other jurisdiction nor started
consultations with any independent trade union or Employees’ representatives
within the last 12 months in relation to any of the Company’s Employees.
10.2
The
Company has not adopted, whether informally or formally and whether in writing
or otherwise, any policy or practice of making redundancy payments in excess of
statutory minima nor has it historically made any such redundancy payments.
10.3
The
Company does not have, either formally or informally and whether or not reduced
to writing, any custom or practice of implementing redundancies on a selective
basis in accordance with specific procedures, criteria or formulae.
11.
CLAIMS
11.1
So
far as the Warrantors are aware, no circumstances have arisen or exist under
which the Company will be required to pay damages or compensation, or suffer
any penalty or be required to take corrective action or be subject to any form
of sanction under Employment Law. The
Company has not received written notice of any current, pending or threatened
claims of any type against the Company by any existing or former Employees or
directors of the Company or by any existing or former consultants to the
Company.
11.2
So
far as the Warrantors are aware no circumstances have arisen under which the
Company is likely to be required to pay damages for wrongful dismissal or breach
of contract, to make any contractual or statutory redundancy payment or make or
pay any compensation in respect of unfair dismissal, to make any other payment
under any Employment law or to reinstate or re-engage any former Employee.
12.
GRIEVANCE
PROCEDURES
No Employee
has instituted any internal grievance procedure, corporate information
disclosure procedure or malpractice notification procedure nor has any Senior
Employee been the subject of disciplinary proceedings in the last 12 months by
reason of misconduct or suspected misconduct.
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13.
EFFECT
OF COMPLETION
Completion
will not give rise to the payment of any remuneration, payments or benefits
(including severance payments or benefits) or any enhancements or accelerations
thereof to any Employee whether in accordance with the standard terms and
conditions of employment of such Employee or otherwise or entitle any Employee
to terminate his employment without serving his full notice period.
14.
INCENTIVE
SCHEMES
The Company
has not introduced any share incentive scheme, share option scheme or profit
sharing, bonus, commission or other such incentive scheme for any of its
directors or Employees which remains in effect.
15.
SIMON
BRYDON
For the purposes
of this Warranty, “Statutory Employment Protection Claim” means any claim under
the Employment Rights Act 1996 (as amended), Sex Discrimination Act 1975 (as
amended), Equal Pay Act1970 (as amended), Race Relations Act 1976, Disability
Discrimination Act 1995 (as amended), Transfer of Undertakings (Protection of
Employment) Regulations 1981 (as amended), Working Time Regulations 1998 (as
amended), Employment Relations Act 1999,Art.141 of the EC Treaty, Equal Pay
Directive No 75/117, other EU Directives, Trade Union & Labour
Relations (Consolidation) Act 1992(as amended), National Minimum Wage Act 1998,
Public Interest Disclosure Act 1998, Data Protection Act 1998, Part-Time
Workers(Prevention of Less Favourable) Treatment Regulations 2000, Fixed-Term Employees
(Prevention of Less Favourable Treatment)Regulations 2002, Employment Act 2002,
Employment Equality(Religion or Belief) Regulations 2003 and Employment
Equality (Sexual Orientation) Regulations 2003.
15.1
Brydon
has no claims or rights of action (whether under statute, common law or
otherwise), howsoever arising, (including but not limited to contractual
claims, breach of contract including for breach of his Service Agreement dated
21 April 2006 and amendments thereto, tort and Brydon’s prospective
entitlement to bring any other Statutory Employment Protection Claim which
could be brought in an Employment Tribunal) against the Company, its officers,
employees or shareholders, arising from or connected with the Executive’s
current employment with the Company, the termination thereof or any other
matter concerning the Company.
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15.2
Brydon
has no claims against the Company, its purchasers or successors in title,
concerning his pension entitlement under his Service Agreement dated 21 April 2006
or otherwise, and including any tax liabilities or national insurance
contributions that arise or may have arisen in respect thereof.
Part 3:
IP & IT Warranties
1.
DEFINITIONS
In this part 3
of schedule 3, the following words and expression shall have the following
meanings:
“Company
Systems”
means the computer and data processing
systems and information and communications technologies used in or for the
business of the Company including hardware, Software (whether proprietary or
third party owned), networks, data storage devices, printers, VDU’s, firmware,
dedicated power supplies, cabling, peripherals and associated documentation;
“Registered
Intellectual Property”
means those Intellectual
Property rights which have been applied for or which are registered with any
national or international registry, (including all renewals, extensions and
applications for registration) and which are owned by the Company; and
“Software”
means any and all forms of computer program, including, without limitation,
applications and operating systems and in each case whether in source, object
or machine-readable form.
2.
INTELLECTUAL
PROPERTY
2.1
General
The Company
has no Registered Intellectual Property.
2.2
Intellectual Property
(a)
The
Company owns or has authority to use all the Intellectual Property it requires
to carry on its business following Completion as such business has been carried
on in the last 2 years.
(b)
Any
persons who have been commissioned by the Company to create, develop or invent
any Intellectual Property for the Company in connection with any ongoing
projects of the Company to which
75
any value is
attributed in the work in progress referred to in the Last Accounts have
entered into a written agreement with the Company which obliges them to assign
such Intellectual Property to the Company.
(c)
The
Company has not reached any agreements with its employees that disapply or
exclude the provisions of any legislation, including but not limited to, the
Patents Act 1977, the Copyright, Designs and Patents Act 1988, the Registered
Designs Act 1949 and the Copyright and Rights in Databases Regulations 1997 (
SI 1997/3032
), relating to the
Company’s rights as employer, pursuant to such legislation, to the intellectual
property created by its employees.
2.3
Infringement
(a)
Save
as Disclosed, the Company has not received written notice of any claim by any
third party which alleges that the operations of the Company infringe or misuse
or are likely to infringe or misuse the Intellectual Property of a third party
or which otherwise disputes the right of the Company to use any Intellectual
Property owned or used by it. So far as
the Warrantors are aware, no third party has served notice on the Company of
any circumstances which are likely to give rise to such a claim.
(b)
No
claim has been made by the Company which alleges that a third party is
infringing or misusing or is likely to infringe or misuse the Registered
Intellectual Property owned by the Company.
(c)
As
far as the Warrantors are aware, and save as Disclosed, the operations of the
Company do not infringe or misuse any Intellectual Property.
3.
CONFIDENTIAL
INFORMATION
The Company
has not used any processes and is not engaged in any activities which involve
the misuse of any Confidential Information belonging to any third party, nor so
far as the Warrantors are aware does the Company otherwise have in its
possession or control any such Confidential Information without the licence or
authority or the relevant owner.
76
4.
INFORMATION
TECHNOLOGY
4.1
The
Company Systems are either owned by, or properly licensed or leased to the
Company and there are no circumstances of which the Warrantors are aware in
which the ownership, benefit, or right to use the Company Systems may be lost
solely by virtue of the acquisition of the Shares by the Purchaser.
4.2
The
Company has taken all reasonable steps to ensure that the Software used by the
Company in the carrying on of its business is free of any virus which would
threaten the ability of the Company to operate its normal business activities.
4.3
The
Company Systems are Date Compliant in all material respects. For the purposes of this paragraph 4.3 “Date
Compliant” means the ability of a computer system and/or related hardware
and/or Software to be unaffected, either in its performance or in its
functionality, by any dates (past, present and future) and in particular (but
without prejudice to the generality of the foregoing):
(a)
no
value for current date causes or will cause any interruption in operation;
(b)
date-based
functionality behaves and will behave consistently for all dates;
(c)
in
all interfaces and data storage, the century in any date is and will be
specified either explicitly or by unambiguous algorithms or inferencing rules;
and
5.
DATA
PROTECTION
5.1
The
Company has complied with its obligations under the Data Protection Act 1998
and with all material applicable data protection laws, guidelines and industry
standards.
5.2
No
notice or allegation has been received by the Company from a competent
authority alleging that the Company has not complied with any applicable data
protection laws.
5.3
The
Company has not received any written notice from any individual claiming from
the Company compensation for breaches of applicable data protection laws.
77
Part 4:
Pensions Warranties
1.
DEFINITIONS
In this part 4
of schedule 3, the following words and expressions shall have the following
meanings:
“Employee”
means any past or present officer or employee of the Company, including any
person who is on secondment overseas; and
“Pension
Arrangements”
means the Stakeholder Pension Scheme as
set out in the Disclosure Letter.
2.
DISCLOSURE
OF PENSION ARRANGEMENTS
Other than the
Pension Arrangements, there is no scheme, arrangement or agreement to which the
Company is a party o~ by which it is bound or under which it has an obligation
or liability (whether actual, contingent or prospective) to contribute or to
provide funding for the provision of life assurance, retirement, death,
disability or other like benefits (in the form of a pension, lump sum, gratuity
or otherwise) in respect of any Employee.
3.
INFORMATION
RELATING TO PENSION ARRANGEMENTS
Details of all
material documentation which the Company is holding in relation to Pension
Arrangements have been Disclosed.
4.
CONTRIBUTIONS
The Company is
not obliged to make any pension contributions to the Pension Arrangements for
any of its Employees or officers.
5.
DISPUTES
The Company is
not a party to any ombudsman, litigation or arbitration proceedings in respect
of the Pension Arrangements or benefits provided under the Pension Arrangements
6.
DISCONTINUANCE
No plan,
proposal or intention to amend or discontinue (in whole or in part) any of the
Pension Arrangements has been communicated to any Employee.
78
Part 5:
Property Warranties
1.
TITLE
1.1
The
Properties comprise all the land and premises owned or occupied or otherwise
used by the Company and all the estate, interest, right and title whatsoever of
the Company in, under, over or in respect of any land or premises and the
descriptions set out in schedule 9 are correct.
The Company does not have any other interest in any other land or
buildings other than the Properties and the Company has not entered into any legally
binding agreement for the purchase of any such interest.
1.2
The
documents of title to the Properties are in the possession or under the control
of the Company and such documents are original documents or properly examined
abstracts.
2.
ENCUMBRANCES
2.1
So
far as the Warrantors are aware, the Properties are free and clear of all
claims, Encumbrances, leases, tenancies, licences or other rights of
occupation, and other agreements affecting the same (other than the lease
referred to in schedule 8) and the Company has exclusive possession of the
whole of the Properties.
2.2
The
Properties are not subject to any outgoings other than business and water
rates, rent, insurance, council tax and service charges and those outgoings
referred to the Company’s lease of the Properties.
2.3
As
far as the Warrantor is aware there are no material covenants restrictions
burdens stipulations wayleaves easements grants conditions terms rights or
licences affecting the Properties listed at Schedule 8 which are of an unusual
or onerous nature or which have a material adverse affect on the use of the
Properties listed at Schedule 8.
2.5
The
Warrantors have not received written notice that any covenants, restrictions,
stipulations, conditions and other terms affecting the Properties and the uses
of the Properties have not been duly observed and performed.
2.6
So
far as the Warrantors are aware, the Company has not received written notice of
any outstanding disputes, notices or complaints which affect the use of any of
the Properties for the purposes for which they are now used and which would
prevent or impede the Company from operating and carrying on the business
currently carried out at each of the Properties.
79
3.
LEASEHOLD
PROPERTIES
3.1
Each
of the Properties is held under the lease details of which are set out in
schedule 8 and no licence or supplementary agreements and concessions have been
entered into or granted in respect of those leases as far as the Warrantors are
aware.
3.2
There
are no outstanding rent reviews.
4.
CONTINGENT
LIABILITIES
4.1
The
Company has not at any time assigned or otherwise disposed of any property,
leasehold or otherwise, in respect of which it has a continuing liability
(contingent or otherwise) for payment of rent and/or for any other liability.
4.2
The
Company is not the guarantor of or surety for any other party’s liability
(contingent or otherwise) for any obligations under any lease, tenancy,
agreement or any other deed or under any agreement relating to the assignment
of any lease or tenancy.
Part 6: Tax Warranties
1.
GENERAL
1.1
Provision
or reserve (as appropriate) has been made in the Last Accounts for (i) all
Tax for which the Company is liable or accountable (whether primarily or
otherwise) in respect of all income, profits or gains earned, accrued or
received on or before the Last Accounting Date or in respect of any Event
occurring on or before the Last Accounting Date and (ii) for all deferred
Tax assets and liabilities of the Company in accordance with generally accepted
accounting practice and all Relevant Accounting Standards.
1.2
The
Company has made all instalment payments required by the Corporation Tax
(Instalment Payments) Regulations 1998 and all such instalment payments were
made on the basis of a reasonable estimate of the Company’s total liability for
the relevant accounting period.
1.3
Since
the Last Accounting Date the Company has not incurred any material expenditure
which is not deductible for Tax purposes.
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2.
COMPLIANCE
2.1
All
information, notices, computations, claims, elections, assessments (including
self-assessments), registrations and returns which ought to have been submitted
have been punctually submitted by or on behalf of the Company to the relevant
Tax Authority and all information, notices, computations claims, assessments
(including self-assessments), registrations and returns submitted are so far as
the Warrantors are aware complete and accurate and, in the case of information,
remain complete and accurate in all material respects, and are not and so far
as the Warrantors are aware nor are likely to be or become the subject of any
dispute.
2.2
The
Company has not been subject to any non-routine audit, investigation, discovery
or access order by any Tax Authority or any non-routine visit by any VAT or
customs authority.
2.3
The
Warrantors are aware of no dispute at the date of this Agreement with any Tax
Authority regarding:
(i)
the
computation of any gains profits or losses of the Company for the purposes of
Tax;
(ii)
any
liability or potential liability to Tax (including interest or penalties)
recoverable from the Company; or
(iii)
the
availability to the Company of any relief from Tax.
2.4
The
Company has not been a party to any scheme or arrangement in respect of which
the main purpose or one of the main purposes was the avoidance of a liability
to Tax.
2.5
No
Tax Authority has agreed to operate any special arrangement in relation to the
Company other than an arrangement which is wholly in accordance with a strict
interpretation of the relevant law, published statements of practice or
published extra-statutory concessions of a relevant Tax Authority.
2.6
The
Company has maintained and is in possession of all records required for Tax
purposes and all such records remain true, complete and accurate. In particular, without limitation, the
Company has sufficient records to enable it to calculate any present or, so far
as possible, future liability for Tax of the Company or its entitlement to any
deduction, relief or repayment of Tax and any claims and elections it has made
relating to Tax.
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2.7
No
Tax has been or may be assessed on or required to be paid by the Company where
the amount in question is the primary liability of another person, and where
such assessment or requirement arises or arose by reason of the failure by any
other person to satisfy a Tax liability.
2.8
No
relief from Tax which has been claimed or given to the Company or which was
taken into account in determining the provision for Tax (or deferred Tax) in
the Accounts has been withdrawn, postponed, restricted or become liable to be
repaid and the Warrantors are not aware of any reason why said relief may be
withdrawn.
3.
CAPITAL
GAINS
3.1
The
book value in or adopted for the purposes of the Last Accounts as the value of
each of the assets of the Company on the disposal of which a chargeable gain or
allowable loss could arise does not exceed the amount deductible under s38 TCGA
in respect of each such asset. So far as
the Warrantors are aware, no chargeable gain would (or would but for any
relief, allowance, deduction or credit other than amounts falling to be deducted
under s38 TCGA) arise on the disposal of any asset acquired by the Company
since the Last Accounting Date for a consideration equal to that paid on its
acquisition.
3.2
So
far as the Warrantors are aware, the Company has not disposed of or acquired
any asset to or from any person in circumstances such that ssl7 or 18 TCGA
apply to such disposal or acquisition.
3.3
The
value of the consideration for the acquisition of any asset included in the
Last Accounts or acquired after the Last Accounting Date is not deemed for Tax
purposes to have been reduced by reason of any claim made to defer Tax whether
in relation to that or any other asset.
4.
INTERNATIONAL
4.1
The
Company is and always has been resident for all Tax purposes only in the
jurisdiction in which it was incorporated and has never been regarded as being
resident for Tax purposes in a jurisdiction outside its country of
incorporation.
4.2
The
Company is not liable to, and has at no time incurred any liability to Tax in
any jurisdiction other than the jurisdiction in which it was incorporated. So far as the Warrantors are aware, the
Company has never had a permanent establishment in any jurisdiction other than
in the jurisdiction in which it was incorporated.
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4.3
The
Company has not, without the prior consent of HM Treasury, caused or permitted
any such body corporate as is referred to in Section 765 Taxes Act 1988 to
enter into any transaction specified therein, nor has it entered into a
transaction of the type referred to in Section 765A Taxes Act 1988 without
fully complying with the information reporting requirements prescribed therein.
5.
TRANSFER
PRICING
No Company has
paid any amount for goods, services, or business or financial facilities which
amount has been disallowed or so far as the Warrantors are aware will be
disallowed by any relevant Tax Authority under relevant transfer pricing
legislation nor has any Company received any amount for goods, services or
business or financial facilities which amount has been increased or so far as
the Warrantors are aware will be increased under relevant transfer pricing
legislation.
6.
GROUPS
OF COMPANIES
The Company
has not been a member of any group for any tax purposes.
7.
VALUE
ADDED TAX
7.1
The
Company is a taxable person duly registered for the purposes of VAT and has
complied in all material respects with all statutory provisions, rules,
regulations, orders and directives in respect of VAT, has promptly submitted
accurate returns and maintains full and accurate VAT records and has not
suffered any liability to any interest, forfeiture, surcharge or penalty. VAT has been duly paid or provision has been
made in the Accounts for all amounts of VAT for which the Company is liable.
7.2
The
Company has not made an election to waive exemption under paragraph 2 Schedule
10 VATA (Election to waive exemption) and no notice has been received by the
Company and the Company is not aware of anything which indicates that the grant
to the Company of any interest in, right over or licence to occupy land is or
may not be an exempt supply for VAT purposes.
7.3
The
Company has no capital items to which Part XV VAT Regulations (Adjustments
to the deduction of input tax on capital items) applies.
8.
CLOSE
COMPANIES
8.1
The
Company is not, nor has it ever been, a close investment holding company for
the purposes of Section 13A ICTA.
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8.2
The
Company is not, nor has it ever been liable to make a payment to any Tax
Authority under the provisions of Sections 418 to 422 Taxes Act.
8.3
The
Company has never made any transfer of the kind described in Section 125
TCGA, nor has it made a transfer of value of any kind (whether under s94(1) Inheritance
Taxes Act 1984 or otherwise).
9.
INHERITANCE
TAX AND GIFTS
9.1
The
Warrantors are not aware of any circumstances whereby any such power as is
mentioned in s212 Inheritance Tax Act 1984 could be exercised in relation to
any shares in, securities of or assets of the Company.
9.2
Neither
the assets owned by nor the shares of the Company are subject to an outstanding
Inland Revenue charge as defined in s237 Inheritance Tax Act 1984.
10.
INTANGIBLES
10.1
There
are no assets held by the Company in respect of which it has brought into
account, or will before Completion be entitled to bring into account, any
debits under Schedule 29 FA 2002.
11.
TRANSFER
TAXES
11.1
There
is no instrument which is necessary to establish the Company’s right or title
to any asset which is or may become liable to stamp duty (or any like duty or
tax in a jurisdiction outside the United Kingdom) which has not been duly
stamped or which would attract stamp duty, interest or penalties if brought
within the relevant jurisdiction.
11.2
Any
stamp, stamp duty land, documentary, securities or other transfer Taxes which
any Company is required to pay have been duly paid.
11.3
The
Company has not:
(a)
entered
into a contract to purchase any land or an agreement to take a lease of any
land which in either case has not been completed by a conveyance or the grant
of a lease; or
(b)
entered
into a land transaction where there will or may be an obligation in the future
to make a further land transaction return; or
(c)
applied
to defer payment of stamp duty land tax under section 90 Finance Act 2003.
84
12.
EMPLOYEES
12.1
All
income tax deductible and payable in respect of employee Tax has, so far as it
is required to be deducted, been deducted from all payments made or treated as
made by the Company and all amounts so due to be paid to the relevant Tax
Authority prior to Completion have been so paid, including all Tax chargeable
on benefits provided for directors, employees or former employees of the
Company or any persons required to be treated as such.
12.2
Any
expenditure that has been incurred or that has been agreed to be incurred by
the Company in remunerating employees, officers, ex-employees and ex-officers
of the Company, including any salaries, bonuses, emoluments and any gratuitous payments
paid to such persons, is or will, so far as the Warrantors are aware, be
deductible for Tax purposes.
12.3
All
deductions and payments required to be made under any Tax legislation in
respect of national insurance and social security contributions (including
employer’s contributions) have been so made.
12.4
All
payments by the Company to any person which are required to have been made
under deduction of Tax have been so made and the Company (if required by law to
do so) has accounted to the Tax Authority for the Tax so deducted.
12.5
The
Company has not been granted any dispensations by any Tax Authority relating to
the taxation of its employees or the reporting of benefits provided to such
employees.
12.6
Proper
records have been maintained in respect of all such deductions and payments in
accordance with all applicable Tax legislation.
12.7
The
Company has never issued Enterprise Management Incentive options.
12.8
So
far as the Warrantors are aware, the return of benefits forms reporting benefits
provided for directors, employees or former employees of the Company have been
correctly reported to the Inland Revenue.
12.9
The
Company will not be liable after Completion to pay national insurance
contributions or account for income tax or national insurance under the PAYE
system in respect of, or in consequence of any event (including the sale of the
Shares) occurring in relation to, any shares, securities, options or interests
in the Company.
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12.11
No
security (within the meaning of s254(1) ICTA (Company distributions, tax
credits etc: interpretation)) of the Company has been issued in such
circumstances or on such terms (as amended from time to time) or is or has at
any time been held by such a person that (a) the interest (or any other
amount) paid or payable on it has fallen or when paid will fall to be treated
as a distribution under s209 ICTA (Meaning of “distribution”) or (b) the
debt represented by the security has fallen or falls to be treated as other
than a normal commercial loan (within the meaning of Schedule 18 paragraph 1(5) ICTA
(Group relief: equity holders and profits or assets available for
distribution)).
12.12
The
Company has not been engaged in, or been a party to, any of the transactions
set out in ss213 to 218 ICTA (Demergers) or has made or received a chargeable
payment as defined in s214 (Chargeable payments connected with exempt
distributions).
13.
CAPITAL
ALLOWANCES
13.1
All
capital expenditure on the provision of machinery or plant in respect of which
the Company has claimed writing-down allowances under Chapter 5 part 2 CAA
(Writing-down allowances and balancing adjustments) has qualified for such
allowances and all claims for such allowances have been validly made and
allowed.
13.2
The
value attributed in the Accounts to each asset, or the aggregates of the values
attributed to the assets in each pool of assets in respect of which separate
computations for capital allowances are required to be made or, as a result of
any election, are made, is such that on a disposal of each such asset or pool
of assets on the Accounts Date for a consideration equal to such a value or
aggregate value no balancing charge would arise.
13.3
The
Company has not claimed nor is it entitled to claim under section 253 TCGA
(Relief for loans to traders) or section 254 TCGA (Relief for debts on
qualifying corporate bonds) that an allowable loss has accrued in respect of a
loan made by it.
13.4
The
Company has not made a claim under section 24(2) TCGA (Disposals where
assets lost or destroyed, or become of negligible value), nor has it exercised
an option to pay tax by instalments under section 280 TCGA (Consideration
payable by instalments).
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13.5
No capital expenditure incurred
or agreed to be incurred by the Company:
(a)
has
been deemed under s5 CAA (When capital expenditure is incurred) to have been,
or may be deemed under that section to be, incurred on a date other than that
upon which the obligation to pay the expenditure became or becomes
unconditional; or
(b)
is
expenditure to which Chapter 10 Part 2 CAA (Long life assets) applies; or
(c)
has
been or is to be met directly or indirectly (whether by subsidy, grant,
contribution or otherwise) by a third party such that the expenditure may not
be regarded as incurred by the Company for any of the purposes of CM.
13.6
The
Company has not incurred or agreed to incur capital expenditure or entered into
a contract or assigned the benefit of a contract in circumstances such that ss
214 to 218 (Restrictions on Allowances) CAA has applied or could apply.
13.7
The
Company is not nor has it been entitled to claim any capital allowances under Part 3
CAA (Industrial buildings allowances).
14.
INDEMNITIES
14.1
The
Company has not given any warranty, indemnity or covenant to any other person
in relation to Tax under which it is or might be required to made a payment.
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SCHEDULE
4
Remaining
Sellers’ Warranties
1.1
Power to contract
Each of the
Remaining Sellers has the full power and authority to enter into and perform
each of the Transaction Documents to which it is a party and each of the
Transaction Documents constitutes or will, when executed, constitute binding
obligations on him/her/it in accordance with their terms, subject to any
principles of equity or insolvency law.
1.2
Authorisations
Each of the
Remaining Sellers has obtained all applicable governmental, statutory,
regulatory or other consents, licences, waivers or exemptions required to
empower it to enter into and to perform its obligations under the Transaction
Documents.
1.3
Title to Shares
Each of the
Remaining Sellers is the sole legal and beneficial owner of the number of
Shares set out against his/her/its name in part 2 of schedule 1 which are free
from and unaffected by any Encumbrance other than under the Articles of the
Company.
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SCHEDULE
5
Limitations
on the liability of the Warrantors under the Warranties and Tax Indemnity
1.
SCOPE
1.1
Save
as otherwise expressly provided in this schedule, the provisions of this
schedule shall operate to limit the liability of the Warrantors in respect of
any claim under the Warranties or Tax Indemnity (including, for the avoidance
of doubt, part 6 of schedule 3) and references in this Schedule 5 to “Claim”
and “Claims” shall be construed accordingly and any reference to “Warranties”
shall be deemed to include the Tax Indemnity.
1.2
All
of the limitations on the liability of the Warrantors contained in this
schedule are subject to paragraph 12 of this Schedule 5.
2.
LIMITATIONS
OF QUANTUM
2.1
Each
Warrantor shall only be liable for a pro rata portion of any Claim (being the
percentage of Shares held by such Warrantor in relation to the aggregate number
of Shares held by all the Warrantors) and the maximum aggregate liability of
each Warrantor in respect of all Claims shall not exceed the following amounts:
(a)
·
$1,218,000
(b)
·
$980,000
(c)
·
$210,000
(d)
·
$187,600
(e)
·
$204,400
2.2
The
Warrantors shall only be liable in respect of any claim brought by the
Purchaser for breach of any of the Warranties if the aggregate amount of all
claims brought by the Purchaser exceeds a total of £50,000 but once this
minimum is exceeded, the Warrantors shall be liable for the full aggregated
amount of the Claims and not just the excess, but subject always to the other
limitations contained in this schedule 5.
2.2
The
Warrantors shall not be liable for any damages or other amounts in respect of
any Claim or Claims under any of the Warranties unless the amount of an
individual Claim, or a series of related claims to such Claim and arising from
the same set of circumstances, exceeds £5,000.
For these purposes, where a Claim relates to more than one event,
circumstance, act or omission which event, circumstance, act or omission, would
separately constitute a breach of or give rise to a Claim for breach
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of any of the Warranties such Claim shall be treated as a separate
Claim in respect of each such event, circumstance, act or omission.
3.
TIME
LIMITS
3.1
The
Warrantors shall be under no liability in respect of any claim unless notice of
such claim giving reasonable details of the relevant facts, matters or
circumstances giving rise to the claim (including an estimate of the amount of
such claim if practicable and without prejudice to any claim the Purchaser
might actually make) shall have been served upon the Warrantors by the
Purchaser within 30 Business Days of the Purchaser becoming aware that such
facts, matters or circumstances may give rise to a claim and:
(a)
in
the case of a claim under the Warranties (other than the Warranties set out in
part 6 of schedule 3 (relating to Tax)) by no later than the eighteen month
anniversary of the Effective Date; and
(b)
in
the case of a claim under the Warranties set out in part 6 of schedule 3
(relating to Tax) or a claim under Clause 8.8 by no later than the seventh
anniversary of the Effective Date.
3.2
Any
claim notified in accordance with Paragraph 3.1 of this Schedule and not
satisfied, settled or withdrawn shall be unenforceable against the Warrantors
on the expiry of the period of 6 months starting on the date of notification of
the claim unless proceedings in respect of such claim have been issued and
served on the Warrantors in accordance with the terms of this agreement.
4.
GENERAL
4.1
The
Purchaser shall not be entitled to make any claim in respect of any facts,
matters or circumstances if such facts, matters or circumstances have been
Disclosed in this agreement and/or any of the other Transaction Documents, the
Disclosure Letter or the Disclosure Bundle.
4.2
The
Warrantors shall not be liable
(a)
in
respect of any claim:
(i)
if
and to the extent that such claim arises directly or indirectly from any
voluntary act, transaction or arrangement, entered into after Completion by the
Purchaser, the Company or any of their respective directors, officers,
employees or agents (other than a voluntary act, transaction or arrangement
90
carried out by
Brydon without the authority of the relevant Company), save where such act,
transaction or arrangement was pursuant to a legally binding obligation entered
into by the Company on or before Completion;
(ii)
if
and to the extent that the claim arises directly or indirectly from any act,
transaction or arrangement, in each case which is outside the ordinary course
of business of the relevant company at that time, authorised by or carried out
at the request of the Sellers;
(iii)
to
the extent that the Purchaser or the Company has recovered any loss or damage
suffered by arising out of such breach or claim from any third party, including
under the terms of any insurance policy of the Purchaser or the Company (net of
any costs of such recovery, including any increased premium payable as a result
of such recovery);
(iv)
to
the extent that proper allowance, provision or reserve in respect of the
subject-matter of the Claim has been made in the Last Accounts or the
Management Accounts;
(v)
any
contingency or other matter provided for in the Last Accounts or Management
Accounts has been over-provided for;
(vi)
the
Claim would not have arisen but for a change of accounting policy or practice
of the Company after Completion.
5.
CONDUCT
OF CLAIMS
5.1
Subject
to any obligations that the Purchaser may have under any applicable policy of
insurance, if the Purchaser becomes aware that any claim has been made against
the Company by a third party after Completion which is likely to result in the
Purchaser being entitled to make a claim against the Warrantors by virtue of a breach
of any Warranty the Purchaser shall, and shall procure that the Company shall:
(a)
give
notice of such claim to the Warrantors as soon as reasonably practicable, but
not later than 10 Business Days after becoming aware of such Claim, specifying
in reasonable detail to the extent then available, the nature of the potential
liability and so far as practicable, the likely amount of such third party
claim;
91
(b)
not
make any admission of liability, agreement or compromise with any person, body
or authority in relation thereto without, where practicable, having first
notified the Warrantors of its intention to do so;
(c)
take
such action as the Warrantors shall reasonably request to avoid, dispute,
resist, compromise, defend or mitigate any such claim (other than any claim the
avoidance, dispute, resistance, compromise, defence or mitigation of which
would be likely to materially adversely affect the goodwill of the business of
the relevant member of the Jump Group or any claim which seeks or in respect of
which there has been granted injunctive relief) (and subject to the Company
being entitled to employ its own legal advisers and being indemnified to its
reasonable satisfaction by the Warrantors against all Losses incurred in
connection with such claim) provided that the Warrantors shall jointly and
severally indemnify and hold harmless all members of the Jump Group against all
Losses incurred by any of them arising from any action taken by any member of the
Jump Group at the request of the Warrantors pursuant to this paragraph 5; and
(d)
consult
as fully as is reasonably practicable with the Warrantors as regards the
conduct of any proceedings arising out of such claim and keep the Warrantors
reasonably informed of the progress of such third party claim.
5.2
Notwithstanding
the preceding provisions of this Schedule, if at any time any of the Warrantors
pay the Purchaser an amount in respect of any claim and the Purchaser and/or
the Company subsequently becomes entitled to recover from any third party any
sum in respect of the facts, matters or circumstances giving rise to the claim
then the Purchaser shall or shall procure that the Company shall take all
necessary steps to enforce such recovery unless to do so would, in the opinion
of the Purchaser (acting reasonably) be to the material detriment of the
Company or any member of the Jump Group.
If the Purchaser and/or the Company shall at any time recover any sum
from a third party which is referable to the facts, matters or circumstances
giving rise to any claim in respect of which any of the Warrantors have paid
any sum to the Purchaser then provided that there are no outstanding claims or
disputes between the Purchaser or either of them and the Warrantors or either
of them (or, if there are any such disputes or claims, following the final
adjudication or settlement of them):
92
(a)
if
the amount paid by the Warrantors in respect of the claim is more than the Sum
Recovered, the Purchaser shall immediately pay to the Warrantors the Sum
Recovered; and
(b)
if
the amount paid by the Warrantors in respect of the claim is less than or equal
to the Sum Recovered, the Purchaser shall immediately pay to the Warrantors an
amount equal to the amount paid by the Warrantors;
For the
purpose of this Clause
“Sum Recovered”
means an amount equal to the total of the amount recovered from the relevant
third party plus any repayment, supplement or interest in respect of the amount
recovered from the person under Section 825 or 826 of ICTA less any tax
computed by reference to the amount recovered from the person payable by the
Purchaser or the Warrantors in recovering the amount from the third party and
all costs payable by the Purchaser and/or the Company in making any such
recovery.
6.
CHANGE
IN LEGISLATION
No liability
shall attach to any of the Warrantors in respect of any claim to the extent
that such claim would not have arisen (or the amount of the claim would not
have been increased) but for a change in legislation made after the Effective
Date or a change in the stated practice of any Tax Authority, a change in
relevant Accounting Standards, a change in the interpretation of the law after
the Effective Date (whether or not such change purports to be effective
retrospectively in whole or in part) or if such claim would not have arisen (or
the amount of the claim would not have been increased) but for any judgement
delivered after the Effective Date.
7.
CONTINGENT
AND UNQUANTIFIABLE LIABILITIES
No liability
shall attach to any of the Warrantors in respect of any claim to the extent
that the claim is based upon a liability which is contingent only or is
otherwise not capable of being quantified unless and until such liability
ceases to be contingent and becomes an actual liability or becomes capable of
being quantified, as the case may be, provided that this paragraph shall not
operate to avoid a claim made in respect of a contingent or unquantifiable
liability within the applicable time limits specified in paragraph 3 of this
schedule if the notice of such claim has been served before the expiry of the
relevant period (even if such liability does not become an actual or
quantifiable liability, as the case may be, until after the expiry of such
period).
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8.
PAYMENT
OF CLAIM TO BE IN REDUCTION OF CONSIDERATION
If any of the
Warrantors pay any sum to the Purchaser pursuant to a claim, that part of the
Consideration received by such Warrantor for the sale of its Shares shall be
deemed to be reduced by the amount of such payment.
9.
WAIVER
Purchaser
irrevocably and unconditionally waives any right it may have to rescind this
agreement.
10.
SURVIVAL
OF THESE PROVISIONS
The provisions
of this schedule 5 apply notwithstanding any other provision of this agreement
and will not be discharged or cease to have effect in consequence of any
termination of any other provisions of this agreement.
11.
MITIGATION
NOT AFFECTED
Nothing in
this agreement shall affect the application of the common law rules on
mitigation in respect of any claim or any matter giving rise to a claim.
12.
FRAUD
None of the
limitations on the liability of the Warrantors set out in this schedule
(whether as to the quantum of the claim, the time limit for notification of the
claim, the procedures or requirements for making a claim or otherwise) shall
apply to any claim against a Warrantor, including CCF, to the extent that the
liability of any of that Warrantor in respect of that claim arises from fraud,
wilful default, concealment, dishonesty or deliberate non-disclosure on the
part of any of that Warrantor.
13.
NO
DOUBLE RECOVERY
The Warrantors
shall not be liable for a breach of any Warranty to the extent that any damage,
liability or loss suffered or incurred by the Purchaser or the Company as a
result of such breach has been recovered under the Tax Indemnity given at
clause 8.8 or under any other Warranty.
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SCHEDULE
6
Purchaser’s
Warranties
1.
DEFINITIONS
In this
schedule 6, the following words and expressions shall have the following
meanings:
“GAAP”
means Canadian generally accepted accounting principles;
“Jump
Subsidiaries”
means members of the Jump Group (but
excluding for all purposes of this schedule the Company;
“Jump
Shares”
means the Initial Consideration Shares and the
Deferred Consideration Shares (if any);
“Person”
means any individual, partnership, limited liability company, corporation, joint
venture, association, trust, unincorporated organization, government or agency
or political subdivision thereof or any other entity of whatever nature;
“Purchaser
Sedar Documents”
means each of (i) the
Consolidated Financial Statements of the Purchaser, for the 3 month period
ended March 31, 2007 (filed on May 15, 2007), (ii) Audited
Annual Consolidated Financial Statements for the year-ended December 31,
2007 (filed March 30, 2007), (iii) Annual Information Statement of
the Purchaser dated March 22, 2007 (filed March 30, 2007) and
(iv)Annual Report for the year-ended December 31, 2007 (filed April 19,
2007), each of which is available at www.sedar.com.
2.
ORGANIZATION,
GOOD STANDING AND QUALIFICATION
Purchaser is a
corporation duly incorporated, validly existing and is in good standing under
the laws of the jurisdiction of its incorporation, and has all requisite
corporate power and authority to own its properties and to carry on its
business as now conducted and as currently proposed to be conducted after
giving effect to the consummation of the transactions contemplated by this
agreement.
3.
AUTHORISATION
Purchaser has
all requisite power and authority to execute and deliver this Agreement and the
other Transaction Documents to which it is a party and to carry out and perform
its obligations under this Agreement and the
95
Transaction
Documents to which it is a party and to consummate the transactions
contemplated hereby and thereby. The
execution and delivery of and the performance under this Agreement and the
Transaction Documents to which they are a party and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorised by all necessary corporate action and any required stockholder
action on the part of Purchaser. This
Agreement and the Transaction Documents to which they are a party have been
duly executed and delivered by the Purchaser and are legal, valid and binding
obligations of the Purchaser, enforceable against the Purchaser in accordance
with their respective terms, except as limited by (i) status of
limitation, lapse of time, bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting the
rights of creditors generally or by general principles of equity and (ii) laws
relating to the availability of specific performance, injunctive relief or
other equitable remedies. The Initial
Consideration Shares and the Deferred Consideration Shares, when issued in
compliance with the provisions of this Agreement, will be duly authorised,
validly issued, fully paid and nonassessable and in compliance with all
relevant securities laws and stock exchange rules. The Initial Consideration Shares and the
Deferred Consideration Shares will be free of any Encumbrances, charges or
liens other than those created by or imposed upon the holders thereof through
no action of the Purchaser, and the Initial Consideration Shares and the
Deferred Consideration Shares will be free of restrictions on transfer, other
than the restrictions on transfer under the Transaction Documents and pursuant
to applicable securities laws.
4.
ABSENCE
OF DEFAULTS AND CONFLICTS
The Purchaser
and the Jump Subsidiaries are not in violation of their respective articles of
incorporation, memorandum of association, certificate of formation, bylaws,
operating agreement or other organizational documents or in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any contract, agreement, lien, indenture, mortgage, loan
agreement, note, lease or other instrument to which it is a party or by which
it is bound, or to which either of the property or assets of Purchaser or any
of the Jump Subsidiaries is subject (collectively, the
“Agreements and Instruments”
), except where
the violation could not reasonably be expected to have a material adverse
effect; and the execution and delivery of and performance under this Agreement,
the Transaction Documents and any other Agreements and Instruments, and the
consummation of the transactions contemplated herein or therein (including
without limitation the issuance of the Initial Consideration Shares and the
Deferred
96
Consideration
Shares) and compliance by the Purchaser and the Jump Subsidiaries with their
respective obligations hereunder and thereunder, do not and will not, whether
with or without the giving of notice or passage of time or both, conflict with
or constitute a breach of or a default under, or result in the creation or
imposition of any Encumbrance upon any property or assets of the Purchaser or
any Jump Subsidiary pursuant to such Agreements and Instruments, nor will such
actions result in any violation of or require any notice, consent or waiver or
trigger any change of control provisions of the articles of incorporation or
formation, bylaws, operating agreement or other organizational documents of
Purchaser or any Jump Subsidiary or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any court or governmental
authority having jurisdiction over Purchaser, any Jump Subsidiary or any of
their respective assets or properties.
5.
ABSENCE
OF PROCEEDINGS
There is no action,
suit or proceeding, claim, arbitration or investigation before or by any court,
arbitrator, arbitrational body or governmental authority, pending or so far as
the Purchaser Warrantors are aware, threatened in writing, against Purchaser or
any of the Jump Subsidiaries, or affecting any of the properties or assets of
Purchaser or the Jump Subsidiaries which individually or in the aggregate would
have a material adverse effect or relating to the transactions contemplated by
this Agreement or the other Transaction Documents. So far as Purchaser is aware, there is no
action pending or threatened in writing against any of its officers, directors
or employees in connection with such officer’s, director’s or employee’s
relationship with, or actions taken on behalf of the Purchaser. None of Purchaser, the Jump Subsidiaries or
any of their respective assets or properties is subject to the provisions of
any order, writ, injunction, judgment, ruling, decision or decree of any court,
arbitrator, arbitrational body or governmental body which would reasonably be
expected to have a material adverse effect.
6.
CONSENTS
No
governmental approval, consent or authorization or other approval, consent or
authorization is required on the part of Purchaser or any of the Jump
Subsidiaries in connection with the execution, delivery or performance of this
Agreement or the other Transaction Documents to which they are a party and the
transactions to be consummated hereby and thereby, other than filings required
to be made after the Completion under applicable securities laws (which filings
will be made by the Purchaser in accordance with such laws).
97
7.
PUBLIC
FILINGS
The Purchaser
represents and warrants to Sellers that:
(a)
As
of their respective filing dates, none of the Purchaser Sedar Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b)
The
consolidated financial statements of the Purchaser included in the Purchaser
Sedar Documents have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except (i) with respect to
financial statements included in Company Sedar Documents filed as of the date
of this Agreement, as may be indicated in the notes thereto or (ii) as
permitted by applicable regulations) and fairly present in all material respects
the consolidated financial position of the Purchaser and the consolidated Jump
Subsidiaries as of the dates thereof and the consolidated results of their
operations and changes in shareholders’ equity and cash flows of such companies
as of the dates and for the periods shown.
(c)
Neither
the Purchaser nor any Jump Subsidiaries has any liabilities (whether accrued,
absolute, contingent or otherwise) which would be required to be reflected or
reserved against on a consolidated balance sheet of the Purchaser prepared in
accordance with GAAP or the notes thereto, except liabilities (i) reflected
or reserved against on the balance sheet of the Purchaser and the consolidated
Jump Subsidiaries as of March 31, 2007 (the “
Balance Sheet Date
”)
(including the notes thereto) included in the Purchaser Sedar Documents, (ii) incurred
after the Balance Sheet Date in the ordinary course of business, (iii) as
contemplated by this agreement or otherwise in connection with the Transactions
or (iv) as would not individually or in the aggregate be reasonably be
expected to have a material adverse effect on the business, properties or
prospects of the Jump Group taken as a whole.
8
PURCHASER’S
AWARENESS
As at the date
of this Agreement, the Purchaser is not actually aware (excluding, for the
avoidance of doubt, any imputed or constructive knowledge) of any fact, matter
or circumstances causing any of the Warranties to be breached other than as
disclosed in the Disclosure Letter; provided that the actual awareness of the
Purchaser for the
98
purposes of
this paragraph shall mean the actual awareness (excluding, for the avoidance of
doubt, any imputed or constructive knowledge) only of
·
,
·
and
·
.
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SCHEDULE
7
Limitations
on the liability of the Purchaser under the Purchaser’s Warranties
1.
SCOPE
1.1
Save
as otherwise expressly provided in this schedule, the provisions of this
schedule shall operate to limit the liability of the Purchaser in respect of
any claim under the Purchaser Warranties (including, for the avoidance of
doubt, clause 7 and references in this Schedule 7 to “claim” and “claims” shall
be construed accordingly.)
1.3
All
of the limitations on the liability of the Warrantors contained in this
schedule are subject to paragraph 12 of this Schedule 7.
2.
LIMITATIONS
OF QUANTUM
2.1
The
maximum aggregate liability of the Purchaser in respect of all claims shall not
exceed US$12,100,000.
2.2
The
liability of the Purchaser to any Seller shall not exceed the proportion of
total Consideration paid to such Seller.
2.3
The
Purchaser shall only be liable in respect of any Claim brought by any Seller
for breach of any of the Purchaser’s Warranties if the aggregate amount of all
claims brought by the Sellers exceeds a total of £50,000 but once this minimum
is exceeded, the Purchaser shall be liable for the full aggregated amount of
the Claims and not just the excess, but subject always to the other limitations
contained in this schedule 7.
2.4
The
Purchaser shall not be liable for any damages or other amounts in respect of
any Claim or Claims under any of the Purchaser’s Warranties unless the amount
of an individual Claim, or a series of related claims to such Claim and arising
from the same set of circumstances, exceeds £5,000. For these purposes, where a Claim relates to
more than one event, circumstance, act or omission which event, circumstance,
act or omission, would separately constitute a breach of or give rise to a
Claim for breach of any of the Purchaser’s Warranties such Claim shall be
treated as a separate Claim in respect of each such event, circumstance, act or
omission
100
3.
TIME
LIMITS
3.1
The
Purchaser shall be under no liability in respect of any claim unless notice of
such claim giving reasonable details of the relevant facts, matters or
circumstances giving rise to the claim (including an estimate of the amount of
such claim if practicable and without prejudice to any claim any of the Sellers
might actually make) shall have been served upon the Purchasers by the Sellers
within 30 Business Days of any of the Sellers becoming aware that such facts,
matters or circumstances may give rise to a claim and by no later than the
second anniversary of the Effective Date; and
3.2
Any
claim notified in accordance with Paragraph 3.1 of this Schedule and not
satisfied, settled or withdrawn shall be unenforceable against the Purchaser on
the expiry of the period of 6 months starting on the date of notification of
the claim unless proceedings in respect of such claim have been issued and
served on the Purchaser in accordance with the terms of this agreement.
4.
GENERAL
4.1
None
of the Sellers shall be entitled to make any claim in respect of any facts,
matters or circumstances if such facts, matters or circumstances have been
Disclosed in this agreement and/or any of the other Transaction Documents or
any agreed form disclosure letter from the Purchaser to the Sellers.
4.2
The
Purchaser shall not be liable in respect of any claim: where the Sellers had
actual knowledge of the facts, matters or circumstances which might give rise
to such claim at Completion
5.
CONDUCT
OF CLAIMS
5.1
Subject
to any obligations any of the Sellers may have under any applicable policy of
insurance, if any of the Sellers becomes aware that any claim has been made
against any member of the Jump Group by a third party after Completion which is
likely to result in any of the Sellers being entitled to make a claim against
the Purchaser by virtue of a breach of any Purchaser’s Warranty the Sellers
shall:
(a)
give
notice of such claim to the Purchaser as soon as reasonably practicable, but
not later than 10 Business Days after becoming aware of such Claim, specifying
in reasonable detail to the extent then available, the nature of the potential
liability and so far as practicable, the likely amount of such third party
claim;
101
(b)
not
make any admission of liability, agreement or compromise with any person, body
or authority in relation thereto without, where practicable, having first
notified the Purchaser of its intention to do so (unless to so notify would be
to the material detriment of the Sellers);
(c)
take
such action as the Purchaser shall reasonably request to avoid, dispute,
resist, compromise, defend or mitigate any such claim (other than any claim the
avoidance, dispute, resistance, compromise, defence or mitigation of which
would be likely to materially adversely affect the goodwill of the business of
the relevant Seller or any claim which seeks or in respect of which there has
been granted injunctive relief) provided that the Purchaser shall hold harmless
all the Sellers against all Losses incurred by any of them arising from any
action taken by any Seller at the request of the Purchaser pursuant to this
paragraph 5; and
(d)
consult
as fully as is reasonably practicable with the Purchaser as regards the conduct
of any proceedings arising out of such claim and keep the Purchaser reasonably
informed of the progress of such third party claim.
5.2
Notwithstanding
the preceding provisions of this Schedule, if at any time the Purchaser pays to
any of the Sellers an amount in respect of any claim and either of the Sellers
subsequently becomes entitled to recover from any third party any sum in
respect of the facts, matters or circumstances giving rise to the claim then
the Sellers shall take all necessary steps to enforce such recovery. If the Sellers shall at any time recover any
sum from a third party which is referable to the facts, matters or
circumstances giving rise to any claim in respect of which the Purchaser has
paid any sum to any of the Sellers then provided that there are no outstanding
claims or disputes between the Purchaser and the Sellers or any of them (or, if
there are any such disputes or claims, following the final adjudication or
settlement of them):
(a)
if
the amount paid by the Purchaser in respect of the claim is more than the Sum
Recovered, the Sellers shall immediately pay to the Purchaser the Sum
Recovered; and
(b)
if
the amount paid by the Purchaser in respect of the claim is less than or equal
to the Sum Recovered, the Sellers shall immediately pay to the Purchaser an
amount equal to the amount paid by the Purchaser;
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For the
purpose of this Clause
“Sum Recovered”
means an amount equal to the total of the amount recovered from the relevant
third party plus any repayment, supplement or interest in respect of the amount
recovered from the person under Section 825 or 826 of ICTA less any tax
computed by reference to the amount recovered from the person payable by the
Purchaser or the Sellers in recovering the amount from the third party and all
costs payable by the Sellers in making any such recovery.
6.
CHANGE
IN LEGISLATION
No liability
shall attach the Purchaser in respect of any claim to the extent that such
claim would not have arisen (or the amount of the claim would not have been
increased) but for a change in legislation made after the date hereof or a
change in the interpretation of the law after the date hereof (whether or not
such change purports to be effective retrospectively in whole or in part) or if
such claim would not have arisen (or the amount of the claim would not have
been increased) but for any judgement delivered after the date hereof.
7.
CONTINGENT
AND UNQUANTIFIABLE LIABILITIES
No liability
shall attach to the Purchaser in respect of any claim to the extent that the
claim is based upon a liability which is contingent only or is otherwise not
capable of being quantified unless and until such liability ceases to be
contingent and becomes an actual liability or becomes capable of being
quantified, as the case may be, provided that this paragraph shall not operate
to avoid a claim made in respect of a contingent or unquantifiable liability
within the applicable time limits specified in paragraph 3 of this schedule if
the notice of such claim has been served before the expiry of the relevant
period (even if such liability does not become an actual or quantifiable
liability, as the case may be, until after the expiry of such period).
8.
NO
DOUBLE RECOVERY
8.1
No
Seller shall be entitled to recover damages or obtain payment, reimbursement,
restitution or indemnity more than once for the same Loss.
9.
WAIVER
Each of the
Sellers irrevocably and unconditionally waives any right it may have to rescind
this agreement.
103
10.
SURVIVAL
OF THESE PROVISIONS
The provisions
of this schedule 7 apply notwithstanding any other provision of this agreement
and will not be discharged or cease to have effect in consequence of any
termination of any other provisions of this agreement.
11.
MITIGATION
NOT AFFECTED
Nothing in
this agreement shall affect the application of the common law rules on
mitigation in respect of any claim or any matter giving rise to a claim.
12.
FRAUD
None of the
limitations on the liability of the Purchaser set out in this schedule (whether
as to the quantum of the claim, the time limit for notification of the claim,
the procedures or requirements for making a claim or otherwise) shall apply to
any claim against the Purchaser to the extent that the liability of any of the
Purchaser in respect of that claim arises from fraud, wilful default,
concealment, dishonesty or deliberate non-disclosure on the part of the
Purchaser.
104
SCHEDULE
8
Short
Particulars of Properties
|
(1)
|
|
(2)
|
|
(3)
|
|
(4)
|
|
Legal
Owner
|
|
Description
|
|
Lease
|
|
Occupant
|
|
Dima Partnership (lessor)
|
|
Unit 4E & 4F, 33-34 Warple Way, London,
W3 ORG
|
|
Lease dated 19 January 2006 made
between Dima Partnership (1) and Cycling Television Limited (2) for
a term of 2 years from and including 19 January 2006
|
|
Cycling Television Limited
|
105
Industry Canada Industrie
Canada
