SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission Only
[ X ] Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
JPAL, INC.
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(Name of Registrant as specified in its charter)
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(Name of Person(s) Filing Proxy Statement), if other than Registrant
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and how it was
determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ X ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
(1) Amount Previously Paid: $4,419.83
(2) Form, Schedule or Registration Statement No.: PRES 14A
(3) Filing Party: JPAL, Inc.
(4) Date Filed: 12-21-01
JPAL, INC.
17620 Oak Street
Fountain Valley, California 92708
NOTICE OF THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 5, 2002
NOTICE IS HEREBY GIVEN, that the Special Meeting (the "Meeting") of
shareholders (the "Shareholders") of JPAL, Inc. (the "Company") will be held at
2:00 P.M. on June 5, 2002 at the offices of Gersten, Savage, Kaplowitz, Wolf &
Marcus, LLP, at 101 East 52nd Street, New York, NY, 10022 for the following
purpose:
1. To consider and vote upon a proposal (the "Proposal") to
approve the Amended Contribution Agreement, dated as of April
24, 2002, and all transactions and developments contemplated
thereby (the "Exchange") by and among the Company, Essential
Reality, LLC, a Delaware limited liability company
("Essential") and the other signatories thereto, a copy of
which is attached hereto as Exhibit A, which Amended
Contribution Agreement (the "Agreement") amends and restates
that certain Contribution Agreement approved by the
Shareholders at a meeting thereof on February 1, 2002 (the
"Original Agreement").
The Shareholders voted on and approved the Original Agreement and all
of the transactions and developments contemplated thereby on February 1, 2002
(referred to herein as the "Previous Exchange") as described in that definitive
proxy statement related thereto filed with the Securities and Exchange
Commission on January 18, 2002. The purpose of the Previous Exchange was to have
the Company acquire and assume the business of Essential. The parties to the
Original Agreement have since determined to modify certain of its terms while
retaining the purpose manifested therein. The Company is therefore resubmitting
the agreement for Shareholder approval due to the modifications which, in the
aggregate, it deems sufficiently material to motivate such resubmission. If the
Exchange is approved, the Company will issue up to 17,280,000 shares of its
common stock in exchange for all of the outstanding membership interests of
Essential (subject to adjustment as set forth hereinafter). The Shareholders
will not receive any cash, stock or other property in connection with, or as a
result of, the Exchange.
Shareholders of record at the close of business on April 19, 2002 are
entitled to notice of and to vote at the Meeting or any adjournment or
postponement thereof. Whether you expect to attend the Meeting in person or not,
please sign, fill out, date and return the enclosed proxy in the self-addressed,
postage-paid envelope also enclosed. If you attend the Meeting and prefer to
vote in person, you can revoke your proxy.
PLEASE NOTE THAT MR. DRECHSLER, THE COMPANY'S CONTROLLING SHAREHOLDER,
HAS INFORMED THE COMPANY THAT HE WILL BE VOTING "FOR" THE PROPOSAL. THE NUMBER
OF VOTES HELD BY THE CONTROLLING SHAREHOLDER IS SUFFICIENT TO SATISFY THE
SHAREHOLDER VOTE REQUIREMENT FOR THE PROPOSAL AND NO ADDITIONAL VOTES WILL
CONSEQUENTLY BE NEEDED TO APPROVE THE PROPOSAL.
By Order of the Sole Director,
Frank Drechsler
President, CEO and Sole Director
May 21, 2002
JPAL, INC.
17620 Oak Street
Fountain Valley, California 92708
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PROXY STATEMENT
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SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 5, 2002
This Proxy Statement is being furnished in connection with the
solicitation by the sole director of JPAL, Inc. (the "Company"), for use at the
Special Meeting (the "Meeting") of shareholders (the "Shareholders") of the
Company to be held on June 5, 2002 at 2:00 P.M. at the offices of Gersten,
Savage, Kaplowitz, Wolf & Marcus, LLP, at 101 East 52nd Street, New York, NY,
10022 and at any adjournment or postponement thereof.
Only Shareholders of record at the close of business on April 19, 2002
(the "Record Date") are entitled to vote at the Meeting. As of the Record Date,
there were issued and outstanding 8,645,260 shares of the Company's common stock
(the "Common Stock"). Each outstanding share of Common Stock is entitled to one
vote on all matters properly coming before the Meeting. All properly executed,
unrevoked proxies on the enclosed form of proxy that are received in time will
be voted in accordance with the Shareholder's directions and, unless contrary
directions are given, will be voted for the proposal (the "Proposal") described
below. Anyone giving a proxy may revoke it at any time before it is exercised by
giving the Board of Directors of the Company written notice of the revocation,
by submitting a proxy bearing a later date or by attending the Meeting and
voting in person.
The presence in person or by properly executed proxy of holders
representing a majority of the issued and outstanding shares of Common Stock
entitled to vote is necessary to constitute a quorum for the transaction of
business at the Meeting. Votes cast by proxy or in person at the Meeting will be
tabulated by the inspector of elections appointed for the Meeting, who will
determine whether or not a quorum is present. Shares of Common Stock represented
by proxies that are marked "abstain" will be included in the determination of
the number of such shares present and voting for purposes of determining the
presence or absence of a quorum for the transaction of business at the Meeting.
Abstentions will not be counted as voted either for or against the Proposal.
Brokers holding shares of Common Stock for beneficial owners in "street name"
must vote those shares according to specific instructions they receive from the
owners. However, brokers have discretionary authority to vote on "routine"
matters. Absent specific instructions from the beneficial owners in the case of
"non-routine" matters, the brokers may not vote the shares. "Broker non-votes"
result when brokers are precluded from exercising their discretion on certain
types of proposals. Shares of Common Stock that are not voted by brokers in a
delivered proxy will be treated as shares present for purposes of determining
the presence of a quorum, but will not be treated as shares entitled to vote at
the Meeting.
Mr. Frank Drechsler, the sole member of the Board of Directors of the
Company (the "Sole Director"), has adopted and approved the Proposal set forth
herein and recommends that the Shareholders vote "FOR" the Proposal.
Approval of the Proposal requires the affirmative vote of a majority of
the Company's outstanding shares of Common Stock.
PLEASE NOTE THAT MR. DRECHSLER, THE COMPANY'S CONTROLLING SHAREHOLDER,
HAS INFORMED THE COMPANY THAT HE WILL BE VOTING "FOR" THE PROPOSAL. THE NUMBER
OF VOTES HELD BY THE CONTROLLING SHAREHOLDER IS SUFFICIENT TO SATISFY THE
SHAREHOLDER VOTE REQUIREMENT FOR THE PROPOSAL AND NO ADDITIONAL VOTES WILL
CONSEQUENTLY BE NEEDED TO APPROVE THE PROPOSAL.
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This Proxy Statement, the accompanying Notice of Meeting and the form
of proxy have been first sent to the Shareholders on or about May 22, 2002.
The date of this Proxy Statement is May 21, 2002
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TABLE OF CONTENTS
Page
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SUMMARY...........................................................................................................5
DIFFERENCES BETWEEN THE EXCHANGE AND THE PREVIOUS EXCHANGE........................................................6
QUESTIONS AND ANSWERS ABOUT THE MEETING...........................................................................7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.................................................................8
PROPOSAL 1: APPROVAL OF THE EXCHANGE.............................................................................9
Description of the Exchange..............................................................................9
Material Terms of the Exchange..........................................................................11
Certain United States Federal Income Tax Consequences...................................................15
Accounting Treatment of the Exchange....................................................................15
Appraisal Rights........................................................................................15
Interest of Certain Persons in the Exchange.............................................................15
Federal Securities Law Consequences.....................................................................16
BUSINESS OF THE COMPANY.................................................................................17
BUSINESS OF ESSENTIAL REALITY...........................................................................18
MANAGEMENT OF ESSENTIAL REALITY.........................................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS....................................................................24
DESCRIPTION OF SECURITIES...............................................................................28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................30
Shareholder Vote Required...............................................................................31
GENERAL AND OTHER MATTERS........................................................................................32
SOLICITATION OF PROXIES..........................................................................................32
SHAREHOLDER PROPOSALS............................................................................................32
EXHIBIT A - Amended Contribution Agreement...................................................................
EXHIBIT B - JPAL, Inc.'s Annual Report on Form 10-KSB/A for the Fiscal Year Ended December 31, 2001..........
EXHIBIT C - Pro Forma Information............................................................................
EXHIBIT D - Essential Reality, LLC's Financial Statements for the years ended December 31, 2001 and 2000 and
the period from June 1, 1999 (Date of Commencement) to December 31, 1999.........................
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SUMMARY
The following is a summary of the terms of the Proposal. This summary
is qualified by the more detailed description appearing elsewhere in this Proxy
Statement. We urge you to carefully read this Proxy Statement, and the exhibits
hereto, in their entirety because the information in this summary is not
complete.
o We intend to issue up to 17,280,000 shares of our common stock in
exchange for all of the outstanding membership interests of Essential
(subject to adjustment as described under "Proposal 1: Approval of the
Exchange"), including 9,600,000 shares to be issued to Essential's
current members. As a result of this transaction, we will acquire and
assume the business of Essential. See "Proposal 1: Approval of the
Exchange - Description of the Exchange."
o Essential will consummate a private placement of its membership
interests prior to the exchange transaction, which will be contributed
to us in exchange for shares of our common stock. Essential may sell up
to 7,680,000 of its membership interests in its private placement. See
"Proposal 1: Approval of the Exchange - Material Terms of the
Exchange."
o Upon completion of the exchange transaction, our business will be the
business currently being conducted by Essential. See "Business of
Essential Reality."
o Our shareholders will not receive any cash, stock or other property in
connection with, or as a result of, the exchange transaction. See
Section "Proposal 1- Approval of the Exchange - Description of
Exchange."
o Shareholder approval of the Proposal will require the affirmative vote
of a majority of our outstanding shares of common stock. Our
controlling Shareholder has already informed us that he will be voting
in favor of the proposal set forth herein. The number of votes held by
the controlling Shareholder is sufficient to satisfy the Shareholder
vote requirement for the Proposal. Therefore, no additional votes will
be needed to approve the Proposal. See "Questions and Answers About the
Meeting."
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DIFFERENCES BETWEEN THE EXCHANGE AND THE PREVIOUS EXCHANGE
The Shareholders approved the Original Agreement on February 1, 2002.
The Agreement submitted for approval of Shareholders hereby modifies the
Original Agreement in certain respects. The principal modifications are
summarized below. You are hereby cautioned that the following is a summary only,
qualified in its entirety by reference to other sections of this Proxy Statement
and the exhibits hereto. Certain defined terms used elsewhere herein are avoided
in this section due to the potential conflict between such terms in this Proxy
Statement and the proxy statement relating to the Previous Exchange.
As a general rule, the terms of the Exchange and related transactions
are considerably less intricate than in the earlier version of the same.
o Under the Original Agreement, the Company was to consummate a private
placement prior to the Closing of the Previous Exchange. Under the
modified structure, the Private Placement is instead to be conducted by
Essential. While the difference is superficially considerable, since it
significantly increases the relative number of shares of Common Stock
issuable to holders of membership interests in Essential immediately
prior to the Closing, there is less of a difference from the
post-Closing perspective, where every individual or entity involved in
the Exchange, as the case may be, will be a shareholder of the Company.
o Current Shareholders will own a smaller percentage of the Company
subsequent to the Closing of the Exchange. See, e.g., "Material Terms
of the Exchange" and "Security Ownership of Certain Beneficial Owners
and Management."
o The concept of Additional Shares has been eliminated. As a result, the
concept of Additional Warrants has also been eliminated. Any
uncertainty relating to subscriptions for securities has been
transferred to Essential since it will conduct the Private Placement.
In any event such uncertainty will have disappeared by the Closing
Date, simplifying the structure of the Exchange and its implications.
See "Material Terms of the Exchange."
o The terms of the Warrants to be issued are far less complex. See
"Description of Securities."
o Certain prepayment terms of the Bridge Loans have been agreed upon. The
Agreement provides for specific instances pursuant to which such
prepayment will be made. In addition, notes representing a portion of
the bridge loans have become convertible into securities of Essential
as well as of the Company. See "Material Terms of the Exchange."
o Certain minor alterations to the registration, escrow and restrictions
on trading of shares of Common Stock subsequent to Closing have been
made. See "Material Terms of the Exchange."
As the above-referenced modifications to the contemplated transaction
makes clear, the original structure has for all practical purposes remained
intact. Certain of the modifications are material, while others are cosmetic
only. You are urged to carefully read the entirety of this Proxy Statement for a
full rendition of the terms of the Exchange.
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QUESTIONS AND ANSWERS ABOUT THE MEETING
What is being voted on at the Meeting?
Our sole director is asking shareholders to consider one item at this
Special Meeting of Shareholders:
(i) To approve the Agreement attached hereto as Exhibit A and all
transactions and developments contemplated thereby (which we
refer to as the "Exchange");
What is the purpose of the Exchange?
The purpose of the Exchange is to allow us to acquire and carry on the
business of Essential and to allow Essential to become a public reporting
company under the Securities Exchange Act of 1934, as amended. It is anticipated
that becoming a publicly reporting company will further enhance Essential's
business visibility and ability to attract and utilize additional sources of
capital.
Is the purpose of the Exchange different from that of the Previous Exchange?
No. The purpose of the Exchange remains the same. However, certain
modifications to the terms of the Agreement governing its terms have been made.
See "Differences between the Exchange and the Previous Exchange."
Who can vote at the Meeting?
Our sole director has set April 19, 2002 as the Record Date for the
Meeting. Only persons holding shares of our common stock of record at the close
of business on the Record Date will be entitled to receive notice of and to vote
at the Meeting. Each share of our common stock will be entitled to one vote per
share on each matter properly submitted for vote to our shareholders at the
Meeting. On the Record Date there were 8,645,260 shares of our common stock
outstanding held by a total of 24 shareholders of record.
What constitutes a quorum for the Meeting?
To have a quorum, we need the majority of the votes entitled to be cast
to be present, in person or by proxy, including votes as to which authority to
vote on the proposal is withheld. Shares of stock abstaining as to the proposal,
and broker non-votes (where a broker submits a proxy but does not have authority
to vote a customer's shares of stock on one or more matters) on the proposal,
will be considered present at the Meeting for purposes of establishing a quorum
for the transaction of business at the Meeting. The shares held by Mr. Frank
Drechsler, our controlling shareholder, are sufficient to form a quorum. Mr.
Drechsler has informed us that he will be present, in person or by proxy, at the
Meeting.
How do I vote?
If you complete and properly sign the accompanying proxy card and
return it to us, it will be voted as you direct, unless you later revoke the
proxy. Unless instructions to the contrary are marked, or if no instructions are
specified, shares of our common stock represented by a proxy will be voted for
the proposal set forth on the proxy, and in the discretion of the persons named
as proxies on such other matters as may properly come before the Meeting. If you
are a registered shareholder, that is, if you hold your shares of our common
stock in certificate form, and you attend the Meeting, you may deliver your
completed proxy card in person. If you hold your shares of stock in "street
name," that is, if you hold your shares of our common stock through a broker or
other nominee, and you wish to vote in person at the Meeting, you will need to
obtain a proxy form from the institution that holds your shares.
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Can I change my vote after I return my proxy card?
Yes. Even after you have submitted your proxy, you may change your vote
at any time before the proxy is exercised either by filing with our Secretary,
at the address indicated above, a written notice of revocation or a duly
executed proxy bearing a later date, or by voting in person at the Meeting. The
powers of the proxy holders will be suspended if you attend the Meeting in
person and so request. However, attendance at the Meeting will not by itself
revoke a previously granted proxy.
Any written notice of revocation sent to us must include the
shareholder's name and must be received prior to the Meeting to be effective.
What vote is required to approve the Proposal?
The approval of the business combination with Essential, which we refer
to as the Exchange will require the affirmative vote of a majority of our
outstanding shares of common stock.
PLEASE NOTE THAT MR. DRECHSLER, OUR CONTROLLING SHAREHOLDER, HAS INFORMED US
THAT HE WILL BE VOTING "FOR" THE PROPOSAL. THE NUMBER OF VOTES HELD BY OUR
CONTROLLING SHAREHOLDER IS SUFFICIENT TO SATISFY THE SHAREHOLDER VOTE
REQUIREMENT FOR THE PROPOSAL AND NO ADDITIONAL VOTES WILL CONSEQUENTLY BE NEEDED
TO APPROVE THE PROPOSAL.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information included in this Proxy Statement may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This information may involve known and unknown risks,
uncertainties and other factors which may cause the Company's and/or Essential's
actual results, performance or achievements to be materially different from
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe the Company's and Essential's future plans, strategies
and expectations, are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend" or "project"
or the negative of these words or other variations on these words or comparable
terminology. These forward-looking statements are based on assumptions that may
be incorrect, and there can be no assurance that these projections included in
these forward-looking statements will come to pass. The Company's and
Essential's actual results could differ materially from those expressed or
implied by the forward-looking statements as a result of various factors.
Neither the Company nor Essential undertakes an obligation to update publicly
any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
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PROPOSAL 1
APPROVAL OF THE EXCHANGE
Description of the Exchange
On August 23, 2001, a Contribution Agreement was executed by and among
JPAL, Essential Reality, LLC and the other signatories thereto. The Contribution
Agreement was amended on October 30, 2001, November 30, 2001 and January 31,
2002 and approved by our shareholders on February 1, 2002 at a duly called
meeting thereof. The Contribution Agreement, as amended, is referred to in this
Proxy Statement as the "Original Agreement." While the intent of the parties to
the Original Agreement remains the same, certain terms of the Original Agreement
have been amended to an extent where we believe it necessary to resubmit the
agreement (referred to herein as the "Agreement") for the approval of our
shareholders.
The Agreement provides for a tax-free exchange of securities pursuant
to the provisions of Section 351 of the Internal Revenue Code (the "Code"),
whereby we have agreed to acquire all the membership interests of Essential in
exchange for up to 17,280,000 shares of our common stock (a transaction we refer
to as the "Exchange"), including 9,600,000 shares of our common stock that will
be issued to the current members of Essential and up to 7,680,000 shares of our
common stock that will be issued to investors in a private placement that
Essential will consummate prior to the closing of the Exchange. The 9,600,000
shares (the "Contribution Shares") and the up to 7,680,000 shares (the "Private
Placement Shares") will represent at least 80% of the shares of our common stock
issued and outstanding after the closing of the Exchange. We and Essential have
determined that the Exchange represents an opportunity for both companies to
achieve long-term strategic and financial benefits.
The following are answers to some of the questions about the Exchange
that you, as one of our shareholders, may have. We urge you to read this Proxy
Statement, including the Agreement, carefully because the information in this
section is not complete.
Has the Board of Directors Approved the Exchange?
Yes. On April 25, 2002 our sole director approved the Agreement and all of the
transactions and developments contemplated thereby.
Shareholders already approved a transaction with Essential on February 1, 2002.
Was that transaction effectuated?
No. Shareholder approval is a necessary condition for the consummation of the
Exchange; however, the parties to the Exchange may nonetheless determine to
renegotiate certain terms, which we and Essential did. Having come to an accord
with Essential we are hereby resubmitting the Exchange for our shareholders'
approval.
What are the differences between the Exchange and the transaction that the
shareholders approved on February 1, 2002?
Primarily that Essential rather than JPAL will conduct the private placement.
Please see "Differences between the Exchange and the Previous Exchange" for a
brief description of this and other modifications.
What would happen if the shareholders do not approve the proposal?
We would continue in our present form and the Exchange would not occur. We would
have an option plan, which we did not have prior to its approval by our
shareholders at the February Meeting.
Why are shareholders not voting on the other proposals that were submitted for
approval at the February Meeting?
Shareholders approved the adoption of the stock incentive plan and the
appointment of Deloitte & Touche, LLP as our independent auditors. The other
proposals were also approved at the February Meeting, but they are subject to
the approval of the Exchange. If our shareholders approve the Exchange, all
other proposals will have been approved and can be implemented.
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Why are the two companies proposing to combine?
Founded in 1999, Essential is a developer of real-time tracking and sensory
technologies. Essential focuses on combining these technologies into products
that enhance the interaction between human beings and computer platforms.
We were founded in March 1999 and were engaged in the business of providing
vacation rental properties and services over the Internet. We no longer conduct
any business. We believe that the combination of JPAL and Essential will prove
beneficial to both companies in that we will once again become an operating
company and Essential will acquire access to greater capital resources through
being a publicly traded company.
How will the Exchange work?
The Exchange will be a very simple, straight-forward transaction. We will issue
shares of our common stock in exchange for all of the membership interests of
Essential, which will subsequently be dissolved. Our name will be changed to
Essential Reality, Inc.
Do I have the right to vote on the Exchange?
Yes, you do. That is the purpose of this proxy statement. We are soliciting your
vote in favor of the Exchange.
Will my vote have any effect on the outcome?
No, it will not. Mr. Drechsler, our sole director and controlling Shareholder,
holds enough votes to approve the proposal to approve the Exchange and he has
informed us that he will be voting his shares in favor of the proposal.
If the Exchange is approved, do I need to exchange my shares of common stock?
You do not. Since we are the acquiring entity, you will not be exchanging your
shares.
How many shares will I have after the Exchange?
The number of shares you own will remain the same. Nonetheless, your ownership
percentage will be diluted. In the Exchange, we are issuing 9,600,000 shares of
our common stock to the current members of Essential as well as up to 7,680,000
shares of our common stock to investors in a private placement that Essential
will consummate prior to the closing of the Exchange. We cannot assure you what
your exact percentage will be. However, the shares of our common stock currently
held by Mr. Drechsler, our president and sole director, will be canceled prior
to the closing of the Exchange, as will shares of common stock held by certain
of our other shareholders. If we issue 7,680,000 shares of common stock to the
investors in the private placement, the total number of shares of our common
stock that will be issued in connection with the Exchange is 17,280,000. Our
shareholders will in that event retain 1,106,891 shares of common stock and the
aggregate number of shares of common stock issued and outstanding after the
Exchange will increase from the current 8,645,260 to 18,386,891. However, this
aggregate figure may increase in the event that certain warrants to purchase
membership interests are exercised prior to the closing of the Exchange (see
"Material Terms of the Exchange" below).
When and where can I trade my shares after the Exchange?
Our shares of common stock are currently traded on the NASD Over-the-Counter
Bulletin Board ("OTC BB") under the symbol "JPAL." The Exchange will not affect
where our shares are traded, though we anticipate changing our ticker symbol to
"ESSE," subject to approval of the Exchange and availability of the symbol.
Will the shares to be issued in the Exchange be freely trading?
The shares that will be issued to the members of Essential will not be
registered upon issuance. Section 5 of the Securities Act prohibits the sale of
unregistered securities. The person and entities to whom or to which, as the
case may be, shares of our common stock shall be issued under the Agreement will
be granted registration rights with respect to all or some of such shares of
common stock, depending on the identity of the person or entity.
Even if the shares of common stock are registered, however, other restrictions
may still apply. Certain securities may not be freely traded by affiliates,
generally defined by the Commission as being in a control relationship with the
issuer.
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None of the foregoing, however, will affect the status of the currently issued
and freely trading shares of our common stock.
When do you expect the Exchange to be completed?
We hope to complete the Exchange as soon as possible, assuming that all of the
conditions to the closing of the Exchange as set forth in the Agreement are
either waived or completed to the satisfaction of the parties. The Exchange will
be effected through the filing of Articles of Exchange in the state of Nevada.
What are the tax consequences of the Exchange?
The Exchange is intended to qualify as a tax-free reorganization for United
States federal income tax purposes. If the Exchange does so qualify, United
States members of Essential generally would recognize no gain or loss upon
receipt of our shares of common stock in exchange for their membership interests
in Essential. We believe, but cannot assure you, that there will be no fiscal
consequences for holders of our shares. You are urged to consult your own tax
advisor for tax implications related to your particular situation.
What do I need to do in order to vote?
After reading this document, you will need to execute the proxy card provided
along with this proxy statement and any other documents applicable to you that
are included in this packet. Alternatively, you may appear at the Meeting and
vote in person.
Who can help answer my questions?
If you have any questions about the Exchange, you should contact Arthur Marcus,
Esq., at:
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
101 East 52nd Street
New York, NY 10022
Telephone No.: (212) 752-9700
Facsimile No.: (212) 980-5192
If you have questions about our business, you should contact Frank Drechsler,
President, at:
JPAL, Inc.
17620 Oak Street
Fountain Valley, CA 92708
Telephone No.: (714) 785-2095
Facsimile No.: (949) 660-9010
If you have questions about the business of Essential, you should contact Reuben
Levine, Essential's President and COO, at:
Essential Reality, LLC
49 West 27th Street
New York, NY 10001
Telephone No.: (212) 244-3200
Facsimile No.: (212) 244-9550
Material Terms of the Exchange
The parties to the Agreement submitted for approval hereby have
executed a previous form thereof (the "Original Agreement"), which Original
Agreement contemplated what is referred to herein, including all the
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developments and transactions contemplated thereby, as the Previous Exchange.
The Agreement is attached hereto as Exhibit A. The Previous Exchange, as well as
certain other proposals, were submitted for and received approval of
Shareholders on February 1, 2002 (collectively, the "Prior Proposals" -- see
below). While the modification of certain terms incorporated in the Original
Agreement led the Company to resubmit the Proposal for Shareholders' approval,
the Shareholders' earlier approval of the Prior Proposals is unaffected by the
resubmission. Accordingly, such Prior Proposals will not be resubmitted for the
approval of Shareholders at the Meeting. At the earlier meeting, Shareholders
approved Prior Proposals to: (i) change the Company's name to "Essential
Reality, Inc."; (ii) allow for "blank check" preferred stock; (iii) adopt the
2001 Stock Incentive Plan, and (iv) ratify the appointment of Deloitte & Touche
LLP as the Company's independent auditors for the ensuing year. Effectuation of
the Prior Proposals to change the Company's name and allow for "blank check"
preferred stock is contingent upon approval of the Proposal.
According to the terms of the Agreement by and among the Company on the
one side and LCG Capital Group, LLC, Martin Abrams, John Gentile and Anthony
Gentile, being all of the members of Essential (the "Essential Members") as of
the date of the Agreement and Essential Reality, LLC, on the other side, the
Company and the Essential Members have determined that the business combination
referred to herein as the Exchange between the Company and Essential presents an
opportunity for their respective companies to achieve long-term strategic and
financial benefits.
Prior to the closing of the Exchange (the "Closing"), Essential will
consummate a private placement (the "Private Placement") for up to 7,680,000
membership interests (the "Private Placement Interests") for gross proceeds of
up to $8,000,000. The Private Placement Interests will upon Closing be exchanged
for shares of Common Stock on a one-for-one basis (the "Private Placement
Shares"). In addition, the Essential Members will transfer all their respective
membership interests (the "Membership Interests") in Essential to the Company in
exchange for 9,600,000 shares of Common Stock on a one-for-one basis (the
"Contribution Shares"). The Exchange, as that term is used herein, includes both
these transactions. The Private Placement Shares together with the Contribution
Shares (collectively, the "Exchange Shares"), will equal no less than 80% of the
outstanding shares of Common Stock of the Company. The Closing is conditioned
upon, among other things, Shareholder approval of the Exchange.
Frank Drechsler, who currently owns 5,100,260 of the 8,645,260
outstanding shares of Common Stock (representing approximately 59% of the
outstanding shares of the Common Stock) has executed a written consent to
approve and adopt the Agreement. Mr. Drechsler has agreed to the cancellation of
all of his shares of the Common Stock, effective upon Closing. Shares of Common
Stock held by certain other Shareholders will also be cancelled prior to
Closing. The Company and Essential have agreed that the current Shareholders
shall, subsequent to the Closing, hold 6.02% of the aggregate number of issued
and outstanding shares of Common Stock (the "Public Shares"), subject to certain
adjustment related to the potential exercise of certain warrants as further
described below. In the event that 7,680,000 Private Placement Interests are
sold in the Private Placement, the aggregate number of Exchange Shares to be
issued will be 17,280,000, in which event the Shareholders would retain
1,106,891 shares of Common Stock and the aggregate number of shares of common
Stock issued and outstanding after the Closing would be 18,386,891.
Essential may, in connection with the Private Placement, issue warrants
to purchase membership interests (the "Agent Warrants") to certain of its
financial advisors. Such financial advisors shall be entitled to receive Agent
Warrants to purchase such number of membership interests as shall be equal to up
to six percent (6%) of the Private Placement Interests sold in the Private
Placement. The financial advisors shall also be entitled to receive cash
compensation of up to (6%) of the gross proceeds raised in the Private
Placement. Any Agent Warrants issued but unexercised at the time of Closing will
be exchanged for warrants to purchase a like number of shares of Common Stock of
the Company (the "JPAL Agent Warrants"). Any membership interests issued by
Essential pursuant to exercise prior to Closing of the Agent Warrants will be
contributed to the Company in exchange for shares of Common Stock upon
consummation of the Exchange. Thus, the aggregate number of shares of Common
Stock issued and outstanding may be greater than the 18,386,891 referred to
above. If Essential sells 7,680,000 Private Placement Interests and issues Agent
Warrants to purchase 6% of that figure, the aggregate number of shares of Common
Stock issued and outstanding subsequent to Closing would be 18,847,691 assuming
all such Agent Warrants were exercised. If all such Agent Warrants were issued
but none was exercised, there would subsequent to Closing be 18,386,891 shares
of Common Stock issued and outstanding but 18,847,691 on a fully diluted basis,
since any unexercised Agent Warrants would be exchanged for JPAL Agent Warrants.
12
According to the terms of the Agreement, certain Shareholders have
agreed to place certain of their shares of Common Stock into escrow for a
maximum of one year subsequent to Closing. The number of such shares to be
escrowed (the "Escrow Shares") will be thirty percent (30%) of the Public
Shares. Pursuant to the terms of the Escrow Agreement governing the Escrow
Shares, one third of the Escrow Shares will each be released therefrom on the
dates corresponding to four (4), eight (8) and twelve (12) months from the
Closing.
The terms of the Agreement are more fully described below.
Terms of the Agreement
The following discussion summarizes the material terms of the Agreement
but does not purport to be a complete statement of all provisions of the
Agreement and is qualified in its entirety by reference to the Agreement, a copy
of which is attached to this Proxy Statement as Exhibit A. Shareholders are
urged to read the Agreement carefully as it is the legal document that governs
the Exchange.
The Exchange. Subject to the terms and conditions of the Agreement, all
of the members of Essential will transfer all of their membership interests in
Essential to the Company in exchange for up to 17,280,000 shares of Common
Stock. Following the Exchange, the Company will continue under the name
"Essential Reality, Inc."
Closing. The closing of the Exchange (the "Closing") will take place at
a mutually agreed upon time after the satisfaction or waiver of the conditions
set forth in the Agreement (the "Closing Date").
Effective Time of the Exchange. As soon as practicable following the
satisfaction (or waiver) of all of the conditions to the Exchange, the Company
will file articles of exchange in such form as is required by and executed in
accordance with the relevant provisions of Nevada law and make all other filings
or recordings required under Nevada law. The Exchange will become effective at
such time as the articles of exchange are duly filed with the Secretary of State
of the State of Nevada or at such subsequent time as the Company and Essential
agree and specify in the articles of exchange (the "Effective Time").
Articles of Incorporation and Bylaws of the Company Following the
Exchange. The Agreement provides that the Articles of Incorporation and Bylaws
of the Company, as in effect at the Effective Time, will be the Articles of
Incorporation and Bylaws, respectively, of the Company following the Exchange.
Notwithstanding the foregoing, Shareholders approved two amendments to the
Articles of Incorporation at the February Meeting (the "Amendments"). The
Amendments, which were recommended by the Sole Director to the Stockholders at
the request of Essential, will change the Company's name to Essential Reality,
Inc. and provide for the authorization of "blank check" preferred stock. The
Amendments have yet to be filed with the Secretary of State of Nevada since the
approval was conditioned on the approval of the Exchange. The Amendments will,
subject to Shareholder approval hereof, be effective upon filing of the Articles
of Exchange.
Directors and Officers of the Company Following the Exchange. The
Agreement provides that the directors and officers of the Company shall resign
effective as of the Effective Time and shall be replaced by the directors and
officers of Essential immediately prior to the Effective Time, who shall serve
as directors and officers of the Company until their respective successors are
duly elected or appointed and qualified.
Representations and Warranties. The Agreement contains various
representations and warranties of the Company and Essential. The Company
represents and warrants to Essential as to, among other things: (i) capital
structure; (ii) financial statements; (iii) absence of certain changes; (iv) no
liabilities or debts; (v) litigation; (vi) contracts; and (vii) SEC filings.
Essential represents and warrants to the Company as to, among other things: (i)
financial statements; (ii) absence of certain changes; and (iii) absence of
litigation. All representations and warranties in the Agreement expire as of the
Closing, with the exception of certain indemnification provisions.
13
Certain Covenants of the Parties. Pursuant to the Agreement, the
Company has agreed, among other things, that: (i) at the time of the Closing its
outstanding capitalization shall consist of 6.02% of the aggregate number of
Exchange Shares; (ii) it shall procure the consent of its creditors to the terms
of the Agreement; (iii) immediately prior to the Closing, except for certain
permitted loans set forth in the Agreement, the Company shall have no
liabilities or debts whatsoever; (iv) it shall prepare and file this Proxy
Statement; (v) the Company shall indemnify Essential and its officers, members
and employees from any losses, claims, damages or expenses incurred as a result
of breaches of the Agreement by the Company (which indemnification shall survive
the Closing); and (vi) between the date of the execution of the Agreement and
the Closing Date, it shall not conduct any business whatsoever without the prior
written consent of Essential.
Pursuant to the Agreement, Essential and its members have agreed, among
other things, that promptly following the Closing Date, they will cause the
Company to file a registration statement covering the resale of certain shares
of Common Stock (see "Registration Rights" hereinafter), including 25% of the
Contribution Shares. Notwithstanding the registration rights attached to the
Contribution Shares, however, no more than 10% of the average weekly trading
volume in the shares of Common Stock during the preceding four weeks on a
rolling basis may be sold.
In addition, subject to the terms and conditions of the Agreement, each
of the parties has agreed: (i) to keep confidential all information furnished in
connection with the Exchange; (ii) to promptly inform the other parties of the
occurrence of certain events; (iii) to use reasonable best efforts to effectuate
the Exchange, and (iv) to consult each other before issuing any press release
with respect to the Exchange.
Conditions to the Exchange. The obligations of the Company and
Essential to effect the Exchange are subject to the satisfaction or waiver on or
prior to the Closing Date of a number of conditions, including but not limited
to the following:
(a) The Company delivering evidence satisfactory to Essential that
a majority of the Company's Shareholders approved the Exchange
and the transactions contemplated thereby;
(b) Each of the representations and warranties of the Company and
Essential, as applicable, set forth in the Agreement shall
have been true and correct in all material respects as of the
date of the Agreement and as of the Closing Date, except where
the failure to be so true and correct would not have a
material adverse effect on the party making such
representation or warranty;
(c) The Company and Essential, as applicable, shall have performed
in all material respects all obligations required to be
performed by it under the Agreement at or prior to the Closing
Date;
(d) All notes evidencing the Bridge Loans (as defined below) shall
have been exchanged pursuant to Agreement; and
(e) Essential shall have consummated the Private Placement with no
less than $6,500,000 in gross proceeds.
Termination. The Agreement may be terminated at any time prior to the Closing as
follows:
(a) By mutual written consent of the parties to the Agreement;
(b) By either the Company or Essential, if without fault of the
terminating party the Closing shall not have occurred on or
before August 31, 2002, unless such date is extended for up to
thirty days by the Company (the "Termination Date"); and
14
(c) By the Company or Essential, if the other party shall have
failed to comply in any material respect with any of its
covenants or agreements contained in the Agreement or if any
representation or warranty of the other party made in the
Agreement shall not have been true when made or on and as of
the Closing Date, except (i) for those representations and
warranties that address matters only as of a particular date
(which shall remain true and complete when given and at any
time thereafter as of such date) and (ii) where the failure to
be so true and correct would not have a material adverse
effect on the applicable party.
Effect of Termination. In the event of termination of the Agreement as
provided under "-- Termination," the Agreement will become void and there will
be no liability or obligation on the part of the parties, except with respect to
certain provisions of the Agreement regarding maintaining the confidentiality of
non-public information, the payment of fees and expenses, the indemnification by
the Company and the making of public announcements.
Registration Rights. Pursuant to the Agreement, the Company will
promptly following the Closing file a registration statement covering the resale
of: (i) up to one hundred percent (100%) of the Private Placement Shares; (ii)
all shares of Common Stock underlying the Bridge Warrants (see "Description of
Securities" below); (iii) all shares of Common Stock underlying the JPAL Agent
Warrants, if any; (iv) all shares reserved for issuance pursuant to conversion
of the JPAL Convertible Notes (see "Description of Securities" below), and (v)
twenty-five percent (25%) of the Contribution Shares. See "Federal Securities
Law Consequences" herein.
Certain United States Federal Income Tax Consequences
Since no action is being taken in connection with the currently
outstanding shares of the Company's Common Stock, no gain or loss will be
recognized by the Shareholders in connection with the Exchange.
It is expected that the transfer of the membership interests of
Essential from the Members pursuant to the Exchange will be tax-free to such
Members in reliance on Section 351 of the Code. Accordingly, the aggregate tax
basis of Essential's assets after the Exchange will equal the aggregate tax
basis of the Essential membership interests in the hands of the Members
immediately prior to the Exchange.
Accounting Treatment of the Exchange
The transaction is expected to be accounted for as a reverse
acquisition in which Essential is the accounting acquiror and the Company is the
legal acquiror. The management of Essential Reality, Inc.,which is to be the
name of the Company subsequent to the filing of the Articles of Exchange, will
be the current management of Essential. Since the Exchange is expected to be
accounted for as a reverse acquisition and not a business combination, no
goodwill is expected to be recorded in connection therewith and the costs
incurred in connection with the Exchange are expected to be accounted for as a
reduction of additional paid-in capital.
Appraisal Rights
Under Nevada law, the state in which the Company is incorporated, the
Company is not required to provide dissenting Shareholders with a right of
appraisal in any matter to be voted upon in connection herewith and Shareholders
are accordingly not provided with such right.
Interests of Certain Persons in the Exchange
No director, executive officer, associate of any director or executive
officer, or any other person has any substantial interest, direct or indirect,
by security holdings or otherwise, resulting form the proposals set forth
herein, which is not shared by all other Shareholders pro rata, and in
accordance with their respective interests.
15
Federal Securities Law Consequences
The shares of Common Stock to be issued to the owners of Essential in
exchange for the membership interests of Essential pursuant to the Exchange are
not registered under the Securities Act. It is intended that such shares be
issued pursuant to the private placement exemption under Section 4(2) and
Regulation D of the Securities Act.
The Exchange Shares are deemed "restricted stock" and will bear a
legend indicating that the resale of such shares may be made only pursuant to
registration under the Securities Act or pursuant to an available exemption from
such registration. The Company has agreed to file a registration statement
covering up to one hundred percent (100%) of the Private Placement Shares and
twenty-five percent (25%) of the Contribution Shares pursuant to the terms of
the Agreement.
16
BUSINESS OF THE COMPANY
General
The Company was incorporated in March 1999 under the laws of the State
of Nevada. From the date of incorporation, the Company has engaged in the
business of providing vacation rental properties and services over the Internet.
Since the end of the fiscal year 2000, the Company's revenues have decreased
significantly because its management began focusing on redeveloping its web site
and therefore conducted no marketing activities. More recently, the Company has
been seeking businesses and business opportunities with the intent to acquire or
merge with an operating business, which resulted in the Company entering into
the Agreement with Essential. Upon consummation of the Exchange, the Company's
business will be Essential's current business.
On June 15, 2001, Mr. Frank Drechsler acquired 1,020,052 shares of
Common Stock from the two officers and directors of the Company at such time. On
June 25, 2001, Mr. Drechsler was appointed a director of the Company and the two
other directors and officers resigned. On June 26, 2001, Mr. Drechsler was
appointed as the President and Secretary of the Company.
Until consummation of the Exchange, the Company's principal executive
offices will be located at 17620 Oak Street, Fountain Valley, California 92708.
After the Exchange, the Company's principal executive offices will be located at
Essential Reality, Inc., 49 West 27th Street, New York, New York 10001.
Financial Statements
The Company's financial statements are included herewith as part of the
Company's annual report on Form 10-KSB/A for the fiscal year ended December 31,
2001, attached hereto as Exhibit B. The pro forma financial information showing
the effects of the Exchange is attached hereto as Exhibit C.
Market for Common Equity and Related Shareholder Matters
On April 19, 2001, the Company was approved for quotation on the
Over-the-Counter Bulletin Board ("OTC BB") under the ticker symbol "JPAL." The
following table sets forth, for the periods indicated, the range of the high and
low bid quotations for the shares of common stock as quoted on the OTC BB. The
reported bid quotations reflect inter-dealer prices, without retail markup,
markdown or commissions, and may not necessarily represent actual transactions.
As of the Record Date, there were 8,645,260 shares of the Company's common stock
outstanding.
2001 HIGH LOW
---- ---- ---
2nd Quarter $1.00 $0.263
3rd Quarter $7.00 $1.00
4th Quarter $6.05 $2.97
2002
----
1st Quarter $4.65 $4.00
2nd Quarter (through May 20, 2002) $4.30 $3.00
The closing price for the Common Stock on May 20, 2002, was $3.00.
The Company has never paid or declared a dividend on the Common Stock.
The Company intends, for the foreseeable future, to retain all future earnings
for use in its business. The amount of dividends the Company pays in the future,
if any, will be in the discretion of the Board of Directors and will depend upon
the Company's earnings, capital requirements, financial condition and other
relevant factors. As of the Record Date, there were approximately 24 holders of
record of the Common Stock. The Company effectuated a five-for-one forward split
as of July 5, 2001.
17
BUSINESS OF ESSENTIAL REALITY
General
Founded in 1999, Essential is a developer of real-time tracking and
sensory technologies. Essential focuses on combining these technologies into
products that enhance the interaction between human beings and computer
platforms.
Essential expects to have its first product, the P5(TM), available for
sale during the second half of 2002. The P5(TM) is a glove-like peripheral
device that could substantially improve the way individuals interact with
computer platforms. The P5(TM), which can be offered at a mass market price
point, addresses technological limitations of current input devices. Essential
expects the P5(TM) to be suitable for multiple applications including:
o Electronic Gaming - games produced for play on PCs, game consoles, and
location-based entertainment sites;
o Commercial Applications - such as animation, computer aided design
(CAD), simulation training, disability and education; and
o Other Computer Interactions - Internet browsing and navigation, and
general computer interaction.
Since the advent of the mouse, relatively little has changed in the way
of computer input devices, despite the fact that computers and applications have
changed dramatically, growing increasingly complex and specialized.
Applications, particularly in the electronic gaming and commercial markets, have
migrated from flat two-dimensional (2D) interfaces to intuitive,
three-dimensional (3D) environments. However, input devices continue to be
dominated by 2D products including mouse controllers and gaming-specific
peripherals such as joysticks, steering wheels, proprietary console controllers
and the like.
The P5(TM) is based on Essential's patented and several patent-pending
technologies, one of which was incorporated in the "Power Glove." The Power
Glove was introduced to the market in the late 1980s as an alternative
controller for use only with the 8-bit Nintendo Entertainment System, part of
the first generation of game consoles sold to the mass market. The product
eventually sold approximately one million units in the United States, Europe and
Japan. Subsequent to a decline in consumer demand for first-generation gaming
consoles in the early 1990s, such Nintendo system ceased sales. Therefore, the
Power Glove technology was not used nor further developed awaiting the return of
computer platforms and applications that could benefit from its utility.
With the significant increase in sales of computer platforms and
applications in the late 1990s, Essential engaged developers in 1999 to create a
peripheral device based on Essential's belief that the consumer and commercial
markets were ripe for a product with the capabilities of the P5(TM). The P5(TM)
is a glove-like peripheral that has been engineered to capture five-finger bend
sensitivity enabling gesture recognition, combined with an optical tracking
technology that will capture the movement of the hand in 3D space with six
degrees of freedom (X, Y, Z, yaw, pitch and roll), without the use of the mouse,
joystick, keyboard or the like.
The P5(TM) is a lightweight and comfortable peripheral, which is a
Universal Serial Bus (USB) based product that will allow for direct "plug and
play" in personal computers as well as the Sony PlayStation2 game console.
Essential anticipates compatibility with additional computer platforms, such as
the Microsoft Xbox, in the future. According to a Dataquest Inc. market study,
100% of PC shipments in 2001 were USB-compatible units, with an installed base
of over 500 million PC units. There are approximately 27 million computer
peripherals that are USB- compatible and the growth of these products is
anticipated to reach over 400 million by the year 2003.
18
Business Strategy
Essential's strategy is to establish itself as a leading developer of
real-time tracking and sensory technologies by establishing and fostering demand
for its initial product, the P5(TM), in three distinct markets - electronic
gaming, commercial markets and other applications. In order to achieve this,
Essential expects to promote content integration and development across all
applicable markets through various initiatives such as providing free SDKs,
allocating resources for content integration initiatives, and by bundling
product with new content that is P5(TM)-enabled. By leveraging the unique
functionality of the P5(TM) at a mass market price point, Essential expects to
differentiate itself from its competitors. Furthermore, Essential is pursuing a
product development plan for enhanced versions of the P5(TM) and new products
that leverage its core technologies.
Essential expects to have multiple revenue streams based on its current
and future product initiatives via retail sales, direct sales and/or royalty
streams, depending on the target market. Over time, these multiple revenue
streams are expected to diversify Essential's customer base and reduce operating
risk.
Product Overview
The P5(TM) is designed as a low-cost and intuitive man-machine
interface for both 2D and 3D software applications. Essential anticipates that
the P5(TM) will serve as a peripheral to personal computers, game consoles and
other USB-compatible platforms.
Bend-Sensor Capabilities
The P5(TM) consists of a hand-worn glove-like device with embedded
electronics. The product utilizes Essential's patented bend sensor technology to
accurately determine the bend of the user's five fingers. The sensing of the
finger bend is accomplished via conductive inks with variable electrical
resistance, detected by position changes of hand digits above a baseline bias
voltage and resistance. The P5(TM) is capable of gesture recognition of specific
placement of thumb/finger digits and can detect whether or not your digits are
in the same position as previously recorded.
Motion-Capture Capabilities
The P5(TM) also tracks the relative position of the hand in space using
a patent-pending optical tracking technology. Utilizing triangulation, the
P5(TM) optical tracking receptor tracks the starting position and movement of
the glove-like device with electronics and firmware/software supporting X, Y, Z,
yaw, pitch and roll positioning. In addition, these same components will provide
3D positioning information. The P5(TM) will measure yaw, pitch and roll as
defined below:
Yaw is defined as movement along a plane parallel to the ground. Yaw
motion is achieved by holding the hand palm-downward and parallel to
the ground, and pivoting the hand side to side on a horizontal plane.
Pitch is defined as movement along an axis that is parallel to the top
of the hand and perpendicular to the wrist, such that it would enter
the wrist below the thumb and exit below the little finger. Pitch is
accomplished by pivoting the hand up and down while holding the forearm
parallel to the ground.
Roll is defined as rotation of the hand about an axis parallel to the
ground, entering the hand at the tip of the middle finger and running
through the wrist parallel to the forearm. Roll is accomplished by
holding the hand flat with the palm facing the ground and turning the
arm such that the thumb rises and the little finger falls or vice
versa.
Research & Product Development
Essential has planned for future products that will take the initial
P5(TM) through several stages of evolution. Essential is also seeking to develop
other products, of which several are currently in initial phases of development,
that will utilize one or more of Essential's technologies. The combination of
future generations of the P5(TM) and the creation of new products will increase
the commercial opportunities for Essential in both existing and new markets.
19
Intellectual Property
Essential has been awarded one U.S. patent, has two patents pending and
has filed two provisional patents.
Competition
Essential faces competition in the electronic gaming peripheral market
from high-end mouse controller and joystick manufacturers such as Logitech and
Microsoft. While several peripherals provide high levels of precision, user
programmability and in some cases a limited amount of tactile feedback,
Essential is not aware of any peripherals that offer the combination of tracking
and gesture recognition that is found in the P5(TM).
Companies such as Immersion, Gyration, Fifth Dimension Technologies and
Ascension Technologies provide various higher-priced peripherals and
motion-capture products for commercial applications. These entities produce
systems for relatively complex commercial applications. Prices of these
competing products typically run in excess of $1,000 and can exceed $10,000 for
advanced models.
Essential believes the P5(TM) possesses unique competitive advantages
due in part to (i) the functionality derived from its patented and
patent-pending technologies, (ii) its ease of integration and (iii) its mass
market price point. Essential believes these advantages will enable it to
penetrate its target markets.
Employees
As of the date of this Proxy Statement, Essential has ten full-time
salaried employees. Essential believes that its relationship with its employees
is satisfactory. Following the Closing, Essential plans on adding additional
staff in areas of senior management, business development, customer and product
support.
Facilities
Essential currently leases approximately 4,300 square feet of office
space at 49 West 27th Street, New York, New York 10001, at a price of $10,570
per month. The lease provides for annual increases in the monthly rent to a
maximum monthly rental price of $11,575. Essential believes that the office
space will adequately accommodate its expected growth during the upcoming year.
Legal Proceedings
Essential is not a party, nor to the knowledge of its management and
board of directors threatened to be made a party, to any litigation or
governmental proceeding.
20
MANAGEMENT OF ESSENTIAL REALITY
The following table sets forth certain information concerning the
current directors and executive officers of Essential. Prior to the Closing,
Essential shall determine who the directors and officers of the Company will be
immediately following the Closing.
Name Age Position
---- --- --------
Humbert B. Powell, III 63 Chief Executive Officer (Acting)
Reuben Levine 36 President and Chief Operating Officer
Stanley Friedman 59 Vice President, Manufacturing
Richard Rubin 44 Vice President, Product Development
Aaron Gavios 43 Vice President, Sales and Distributions
David Devor 38 Vice President, Marketing
Ian Benoliel 38 Vice President, Finance (Acting)
Martin Currie 36 Vice President, Business Development
Humbert B. Powell, III, Essential's acting Chief Executive Officer,
spends as much time as he deems necessary to fulfill such duties. He has since
November, 1996, been a Managing Director at Sanders Morris Harris, a regional
investment-banking firm headquartered in Houston, Texas, with a branch in New
York City, where he resides. Mr. Powell served as Chairman of Marleau, Lemire
USA and Vice Chairman of Marleau, Lemire Securities, Inc. between 1994 and 1996.
Prior to his employment with Marleau, Lemire he served as a Senior Managing
Director in the Corporate Finance Department of Bear Stearns & Co., from 1984 to
1994, with responsibilities for the Investment Banking effort both domestically
and internationally. He is also a Director of Lawman Armour Corp., Bikers Dream
Inc., World Water Corp., and a trustee of Salem-Teikyo University.
Reuben Levine, Essential's President and Chief Operating Officer, is
responsible for day-to-day operations of Essential. Mr. Levine was the president
of Biz Definitions LLC from March, 2000 until November of 2001, when he accepted
his position with Essential. Prior thereto he was a vice president of Chase
Manhattan Bank, where he spent six years leading some of its mission-critical
business and technology transformation initiatives in its retail and wholesale
operations. Most recently, he served as the Director of Business Development for
the bank's Internet Division, Chase.com. While at Chase.com, Mr. Levine managed
ongoing business development activities relating to numerous lines of business,
which included initiating, screening and coordinating all aspects of over a
dozen transactions. Additionally, Mr. Levine managed teams of over 30 internal
staff members and external consultants for numerous high-priority process
re-engineering initiatives. Throughout Chase's (and formerly Chemical Bank's)
mergers, Mr. Levine managed organization-wide milestones throughout the bank's
retail division that contained high- risk implications in the event of failure.
From August 1993 to September, 1994, Mr. Levine was employed by BDO Seidman,
where he held the title of Senior Analyst. He began his career in investment
banking, with four years in Fortune 500 structured finance and trade finance
while at Bankers Trust Company and Bank Leumi Trust Company of New York. Over
the past year and a half he has also served as advisor to over a dozen
technology start-ups in a broad range of industries. Mr. Levine holds
professional certifications in the areas of strategic design and operational
modeling/simulation, developed and facilitated by MIT and Stanford University
graduate level programs.
21
Stanley Friedman, Essential's Vice President of Manufacturing, manages
manufacturing and production control for Essential and has held this position
since March, 2000. Mr. Friedman served as a consultant to various firms from
October of 1999 to February of 2000. From September of 1998 to September of
1999, Mr. Friedman served as Head of Purchasing and Production at Gund, Inc. and
was prior thereto employed by Eden, LLC, where he managed overseas vendors while
directing daily purchasing, production, inventory control, quality assurance and
logistics operations. He was also involved in Eden LLC's product forecasting and
source selection, negotiation of purchase orders as well as recruiting, training
and supervising managerial staff. He graduated with a Bachelor of Science degree
in Accounting from Duquesne University in Pennsylvania and has completed
graduate courses in Industrial Management and Cost Estimating. Mr. Friedman
holds advanced licenses from the FAA and FCC, as well as USAF training in
electronics.
Richard Rubin, Essential's Vice President of Product Development, has
twenty years of experience in engineering management positions. Prior to joining
Essential in April, 2001, he was the vice president of Product Development for
Akrion, a semiconductor equipment manufacturer, a position he held since
November, 1999. Prior thereto, he was since June, 1998, the vice president of
Engineering & Manufacturing for ActiMed Laboratories, a producer of medical
devices. From April, 1995 through June, 1998, Mr. Rubin served as the Senior
Engineering Program Manager/Operations Manager for Materials Research
Corporation/Veeco Industries, Inc., a manufacturer of state-of-the-art
sputtering cluster systems for the thin film industry. Before that he was
Director of Engineering for Eden Toys, a global manufacturer and distributor of
interactive toys, where he was employed since August, 1992. He has a Bachelor of
Industrial Design degree from Rhode Island School of Design and has done
advanced study in design in the United Kingdom at the City of London
Polytechnic.
Aaron Gavios, Essential's Vice President of Sales and Distribution, is
an experienced marketer of products and services with nearly twenty years of
experience managing marketing and sales for large companies. From September 2000
until October 2001, he was Vice President of Business Development at K2 Digital,
a leading Internet business strategy firm. In that position, he headed up K2's
marketing and business development efforts, including the areas of public
relations and strategic alliances. From March 1999 until September 2000, Mr.
Gavios served as Vice President of Global Sales for MondoSoft, a Danish
developer and marketer of Web site search engine technology (ASP solution). From
September 1996 until March 1999, he was the Executive Vice President of DSTV
Holdings, in which he developed and executed a successful marketing strategy for
the sale of digital satellite television in a joint marketing effort with
electric utility companies. From February 1994 until September 1996, Mr. Gavios
was National Sales Manager at Rolodex, where he oversaw the sales growth of the
Electronic Organizer Division. From February 1993 until February 1994, he was
the Regional Sales Manager of the Eastern Region at Casio, where he helped
successfully introduce several products including "My Magic Diary" and the
"Z-7000 PDA." Prior to working at Casio, Mr. Gavios worked at Nintendo as an
Area Sales Manager for the Eastern Region, and helped manage some of the firm's
largest accounts, including Toys R Us, Kmart and KB Toys. While at Nintendo, he
played an important role in rolling out the "World of Nintendo" store within a
store concept. Mr. Gavios received his B.A. in Sociology from Brandeis
University and his M.B.A. in Marketing/International Business from New York
University (Stern) Graduate School of Business Administration.
David Devor, Essential's Vice President of Marketing, is responsible
for marketing and branding of Essential's products. Prior to joining ER, Mr.
Devor founded and managed a large chain of home entertainment furnishings
centers. Mr. Devor also has many years of experience managing private equity
investments through his position with Devor Capital Investments LLC, which
constituted the principal focus of his activities from 1991 until June of 1999,
when he joined Essential. The investment firm specializes in high-tech companies
with a primary focus on interactive entertainment, electronic gaming and
Internet-related opportunities. On February 27, 1996, Mr. Devor pleaded guilty
to the crime of offering a false instrument for filing. He received a three-year
conditional discharge, paid $10,000, and was obligated to perform 40 hours of
community service.
Ian Benoliel, Essential's Acting Vice President of Finance, has over 15
years of business, finance and accounting experience. Mr. Benoliel is a
Principal of NumberCruncher.com, Inc., a company that develops business decision
software for small businesses and provides outsourced CFO services to small and
mid-size companies. In this capacity, Mr. Benoliel has provided financial
consulting services to the Company since February 2000. From May 1999 to
February 2000, Mr. Benoliel served as the CFO of Cortex Telecom International,
Inc., a VOIP technology company. From May 1996 to April 1999, Mr. Benoliel was
the CFO and Treasurer of BrandEra, Inc. (NASDAQ-BRND), formerly Warp 10
Technologies, Inc. BrandEra's web site serves as the business-to-business
destination for the marketing communications industry. Mr. Benoliel was
responsible for all of BrandEra's SEC filings, accounting and taxation as well
as administration and investor relations. During a one-year period while at
BrandEra he also acted as the company's COO. From October 1990 to April 1996 Mr.
Benoliel was a partner at Benoliel, Kay - Chartered Accountants. Mr. Benoliel is
a Certified Public Accountant and a Chartered Accountant and NumberCruncher.com,
Inc. is a member of the Intuit Developer Network.
22
Martin Currie, Essential's Vice President of Business Development, is a
seasoned marketing executive who has been immersed in the video game industry
for over seven years. Prior to June, 2001, when Mr. Currie accepted his current
position with Essential, he served as a consultant to various firms. From
January, 1998 until January, 2001, he was Director of Marketing for Infogames,
Inc. (formerly GT Interactive), where he oversaw the launch of numerous titles.
From January, 1995 until December, 1997, Mr. Currie was Marketing Director for
RDA International, an advertising agency for Acclaim Entertainment and GT
Interactive, where he took a lead role in the development of various major
marketing campaigns. Before entering the video game industry, Mr. Currie honed
his marketing skills at a number of prestigious advertising and design agencies
in New York City, including the Arnell Group where he worked on the Donna Karan
and DKNY accounts, and Frankfurt Balkind Partners, where he worked on many high-
profile projects.
Promptly following the Closing, the Company plans on hiring additional
management personnel including but not limited to a full-time Chief Executive
Officer and Chief Financial Officer. In addition, the Company anticipates that
it will appoint up to five members for its Board of Directors.
No family relationships exist between any of Essential's directors or
executive officers.
Except as set forth herein, no officer or director of Essential has,
during the last five years: (i) been convicted in or is currently subject to a
pending a criminal proceeding; (ii) been a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to any
Federal or state securities or banking laws including, without limitation, in
any way limiting involvement in any business activity, or finding any violation
with respect to such law, nor (iii) has any bankruptcy petition been filed by or
against the business of which such person was an executive officer or a general
partner, whether at the time of the bankruptcy of for the two years prior
thereto.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
Founded in 1999, Essential is a developer of real-time tracking and
sensory technologies. Essential focuses on combining these technologies into
products that enhance the interaction between human beings and computer
platforms with initial emphasis on a product called "P5(TM)." P5(TM) is a device
shaped in the form of a glove that controls the movement of the cursor on a
computer screen. P5(TM) enables three-dimensional movement of the cursor as well
as pitch, yaw and roll. P5(TM) is controlled by the user moving his hand or
bending his fingers.
Essential is in the development stage. Successful completion of
Essential's development program and, ultimately, the attainment of profitable
operations are dependent upon future events, including obtaining adequate
financing to fulfill its development activities, and achieving a level of
revenue adequate to support Essential's cost structure. The financial statements
of Essential are attached hereto as Exhibit D.
Since its commencement, Essential has not generated revenues and has
incurred significant recurring losses from operations, working capital deficit
and deficit in members' capital. As a result, substantial doubt exists regarding
Essential's ability to continue as a going concern. Management is attempting to
obtain adequate resources for Essential to complete its development plan and
produce, market and sell its primary product. Should management not be able to
obtain the necessary financing, Essential would not be able to continue as a
going concern. Management of Essential anticipates that the contemplated
Exchange with the Company will lead to greater opportunities to obtain the
requisite resources.
Product development costs are expensed until such time as Essential
determines that a product is technologically feasible. Product development costs
are capitalized from such date until such time as product development is
substantially complete. Capitalized product development costs will be amortized
on the straight-line basis over the lesser of the estimated useful life of the
product or three years. For the cumulative period from June 1, 1999 (Date of
Commencement) to December 31, 2001, Essential has expensed all product
development costs.
For the year ended December 31, 2001
Revenue. For the year ended December 31, 2001, Essential has not
recognized product-related revenues. Management of Essential does not anticipate
recognizing product related revenue until the second half of 2002, at the
earliest.
Interest income, which was earned from the note receivable for Members'
capital as described in the Liquidity and Capital Resources section, was $20,465
compared to $104,652 for the year ended December 31, 2000. The decrease in
interest income resulted from the decreases in notes receivable for Members'
during the year ended December 31, 2001.
Operating Expenses. For the year ended December 31, 2001, operating
expenses totaled $3,131,444 compared to $1,521,672 for the year ended December
31, 2000. The increase in operating expenses resulted from the increase in
product development, marketing and general and administrative expenses as
described below.
Interest expense for the year ended December 31, 2001 was $20,505
compared with $1,934 for the year ended December 31, 2000. $3,819 of the
interest incurred in 2001 was interest on advances from entities that are
affiliated with LCG Capital Group, LLC ("LCG"), an entity that owns 50% of
Essential, and $16,686 was incurred in relation to the Bridge Loans described in
the Liquidity and Capital Resources section.
24
Product development expense for the year ended December 31, 2001 was
$1,579,129 compared with $679,891 for the year ended December 31, 2000. The
increase in product development reflects increases in salaries and benefits,
fees paid to third party developers and materials used in the development and
manufacturing of Essential's P5 product. Included in product development costs
are $91,300 and $0 for years ended December 31, 2001 and 2000, respectively,
paid to a company owned by certain members of Essential. In addition, included
in product development costs are $0 and $105,000 for the years ended December
31, 2001 and 2000, respectively, paid to a company owned by an individual
related to certain members of Essential.
Marketing expense for the year ended December 31, 2001 was $716,674
compared with $349,851 for the year ended December 31, 2000. The increase is due
to an increase in public relations, corporate identity, trade shows and related
travel.
General and administrative expenses for the year ended December 31,
2001 was $823,791 compared to $491,930 for the year ended December 31, 2000. The
increase is due to increased resources required to support the development and
marketing activities of Essential. Included in general and administrative
expenses are costs incurred of approximately $242,000 and $147,840 for the years
ended December 31, 2001 and 2000, respectively, by two entities that are related
to certain members of LCG. Such costs include consulting fees, employee
salaries, occupancy, telephone and computer leases. In the case of employee
salaries, costs are allocated to Essential based on the time each employee
conducts business specific to Essential. In the case of the other expenses,
costs are allocated based on a percentage of resources used by Essential.
Net loss for the year ended December 31, 2001 was $3,131,484.
For the year ended December 31, 2000
Revenue. For the year ended December 31, 2000, Essential has not
recognized product-related revenues. Management of Essential does not anticipate
recognizing product-related revenue until the second half of 2002 at the
earliest.
Interest income, which was earned from a note receivable for Members'
capital as described in the Liquidity and Capital Resources section, was
$104,652.
Operating Expenses. For the year ended December 31, 2000, operating
expenses totaled $1,521,672 compared to $221,804 for the period from June 1,
1999 to December 31, 1999. The increase is due to an increase in product
development, marketing and general and administrative expenses, as described
below.
Product development costs consist of employee salaries and benefits,
fees paid to third-party developers and materials used in the development and
manufacturing of P5(TM). Product development expense for the year ended December
31, 2000 was $679,891 compared to $221,524 for the period from June 1, 1999 to
December 31, 1999. The increase is due to the hiring of development staff and
the increase in fees paid to third-party developers. Included in product
development costs are $105,000 and $145,000 for the year ended December 31, 2000
and for the period from June 1, 1999 to December 31, 1999, respectively, paid to
a company owned by an individual related to certain Members of Essential.
Marketing expense consists of promotion, public relations, corporate
identity, trade shows and related travel. Marketing expense for the year ended
December 31, 2000 was $349,851. No such expenses were incurred in the period
from June 1, 1999 to December 31, 1999.
General and administrative expenses consisted principally of
administrative employee salaries and benefits, consulting, professional fees and
facilities. General and administrative expenses for the year ended December 31,
2000 was $491,930. General and administrative expenses were $280 for the period
June 1, 1999 to December 31, 1999. Included in general and administrative
expenses are costs incurred of $147,840 by two entities that are related to
certain members of LCG, an entity that owns 50% of Essential. Such costs include
consulting fees, employee salaries, occupancy, telephone and computer leases. In
the case of employee salaries, costs are allocated to Essential based on the
time each employee conducts business specific to Essential. In the case of the
other expenses, costs are allocated based on a percentage of resources used by
Essential.
25
Net loss for the year ended December 31, 2000 was $1,418,954.
Liquidity and Capital Resources
Since inception, Essential has not generated revenues and has incurred
significant recurring losses from operations, working capital deficit and
deficit in Members' capital. For the period from June 1, 1999 (date of
commencement) to December 31, 2001, Essential has incurred losses of $4,772,242
and negative cash flow from operating activities and investing activities of
$4,057,437 and $30,949, respectively.
In December 1999, LCG acquired a 50% interest in Essential for an
aggregate purchase price of $2,500,000. The consideration received was comprised
of $500,000 in cash and a further $2,000,000 evidenced by a note. The note bore
interest at the rate of 6% per annum, had a maturity date of December 13, 2002
and was secured by the membership interest of LCG. The debt due under the note
was fully repaid in July, 2001.
Cash provided by financing activities for the period from June 1, 1999
to December 31, 2001 was $4,102,249, which was derived principally from proceeds
from the issuance of Members' capital of $500,000, proceeds from the repayments
of note receivable for Members' capital in the amount of $2,000,000 and Bridge
Loans in the amount of $1,500,000.
Through December 31, 2001, Essential received total Bridge Loans of
$1,500,000 from the Company. From January 1, 2002 through April 24, 2002,
Essential received an additional $1,025,000 in Bridge Loans from the Company and
$500,000 from a third-party lender. All such loans are unsecured and bear
interest at rates of between 8 1/2% and 18% per annum; however, interest does
not begin to accrue until January 31, 2002. The Bridge Loans will, subject to
Closing, be repaid as set forth in the Agreement.
Plan of Operations
Management of Essential does not anticipate recognizing product-related
revenue until the second half of 2002, at the earliest.
Product development expenses for fiscal 2002 are expected to be
approximately $2.5 million. The increase in product development is related to
expenses incurred for tooling, ASIC design and new game development.
Marketing expense is expected to be approximately $3 million for fiscal
2002. The significant increase in marketing expense is due to anticipated
increases in the number of marketing and sales employees, as well as increases
in advertising and promotion, trade shows and commission expenses.
General and administrative expenses are expected to be approximately
$2.5 million for fiscal 2002. The increase in general and administrative is due
to anticipated increases in the number of administrative employees required to
support Essential's product development and marketing activities.
Management of Essential expects interest expense to be approximately
$400,000 for fiscal 2002. In addition to interest on the Bridge Loans, Essential
will incur interest on purchase order financing and accounts receivable
factoring.
Management of Essential expects that approximately $5 million will be
required to purchase inventory and for other working capital purposes for fiscal
2002.
Management of Essential expects that Bridge Loan principal and interest
in the amount of $1,025,000 will be repaid during fiscal 2002.
26
It is expected that up to $8 million will be raised through the Private
Placement (see "Material Terms of the Exchange," above). In addition, during
fiscal 2002, Essential anticipates arranging purchase order financing and
accounts receivable factoring which will provide cash of approximately $3
million.
For fiscal 2002, it is expected that Essential will require a total of
approximately $14 million in cash or cash equivalents in order to repay
$1,025,000 of the Bridge Loans, complete its development plan and to begin to
produce, market and sell its primary product. Management of Essential
anticipates, based on currently proposed plans and assumptions relating to the
implementation of its business plan (including the timetable of costs and
expenses associated with, and success of, its marketing efforts), that following
the consummation of the Private Placement, the net proceeds of the Private
Placement together with purchase order financing, accounts receivable factoring
and projected revenues from operations, will be sufficient to satisfy
Essential's operations for approximately 5 months if $4 million is raised in the
Private Placement and approximately 8 months if $8 million is raised in the
Private Placement. Management of Essential expects to raise the estimated
additional cash required from the exercise of certain warrants and/or through
additional offerings of its securities.
27
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock. As of the date hereof,
there were issued and outstanding 8,645,260 shares of Common Stock, and no
shares of preferred stock.
Common Stock
On June 14, 2001 the Company redeemed 2,068,417 shares of its Common
Stock for $2,068. These shares of common stock were previously held by a total
of 27 of the Company's shareholders, including Messrs. Neely and Ortega.
On July 2, 2001, the Company declared a stock split effected in the
form of a dividend to shareholders of record on June 14, 2001. The payment date
for the stock split was July 5, 2001. Four additional shares of Common Stock
were issued for each one such share issued and outstanding. As a result of the
stock split, each shareholder of record as of such date received four additional
shares of Common Stock for each share of Common Stock owned as of the record
date. Following the stock split, the Company had 8,645,260 shares of $.001 par
value Common Stock issued and outstanding.
Voting Rights. The holders of shares of Common Stock are entitled to
one vote for each share on all matters to be voted on by shareholders. There is
no cumulative voting with respect to the election of the Company's directors or
any other matter. Therefore, the holders of more than 50% of the shares voted
for the election of directors can elect all of the directors.
Dividends; Redemption; Liquidation. The holders of shares of Common
Stock are entitled to receive dividends when, as and if declared by the Board of
Directors from funds legally available therefor. Cash dividends are at the sole
discretion of the Board of Directors. In the event of the Company's liquidation,
dissolution or winding up, the holders of shares of Common Stock are entitled to
participate ratably in all assets remaining available for distribution to them
after payment of the Company's liabilities and after provision has been made for
each class of stock, if any, having any preference in relation to the Common
Stock.
The Company has never declared or paid a cash dividend on the capital
stock, nor does it expect to pay cash dividends on the Common Stock within the
foreseeable future. The Company currently intends to retain its earnings, if
any, for use in its business. Any dividends declared in the future will be at
the discretion of the Board of Directors and subject to any restrictions that
may be imposed by the Company's lenders.
Holders of shares of Common Stock have no preemptive rights.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
par value $.001 per share ("Preferred Stock"), none of which is outstanding. The
Board of Directors is, pursuant to the approval by the Shareholders as of
February 1, 2002, vested with authority to divide the class of shares of
Preferred Stock into series and to fix and determine the relative rights and
preferences of the shares of any such series.
Warrants
As discussed under "Material Terms of the Exchange," Essential may
issue Agent Warrants, any of which would if unexercised be exchanged for JPAL
Agent Warrants upon Closing. In addition, JPAL has issued warrants to certain of
its creditors in connection with its receipt of certain bridge loans (the
"Bridge Warrants").
28
JPAL Agent Warrants. Up to 460,800 shares of Common Stock will be
reserved for issuance pursuant to the exercise of the JPAL Agent Warrants. The
figure would be reduced in proportion to: (i) the sale by Essential of fewer
than the up to 7,680,000 Private Placement Interests offered in the Private
Placement, since any reduction thereof would diminish the maximum number of
Agent Warrants issuable pursuant thereto; (ii) the issuance by Essential of less
than the maximum six percent (6%) of the aggregate number of Private Placement
Interests sold in the Private Placement, and (iii) any exercise prior to Closing
of Agent Warrants. Any reduction pursuant to (i) and (ii) above would result in
an absolute decrease in the number of shares of Common Stock outstanding on a
fully diluted basis, whereas any reduction pursuant to (iii) would reduce the
number of shares of Common Stock reserved for issuance pursuant to the JPAL
Agent Warrants but a concomitant increase in shares issued and outstanding; the
number of shares of Common Stock issued and outstanding on a fully diluted basis
would be unaffected by (iii) above. The JPAL Agent Warrants shall be exercisable
for approximately $1.30 per share, vest immediately and expire up to five (5)
years from Closing.
Bridge Warrants. The Company has received bridge financing (the "Bridge
Loans") in the amount of $2,525,000. In consideration for the Bridge Loans, the
lender(s) shall receive warrants (the "Bridge Warrants") to purchase an
aggregate of 750,000 shares of Common Stock.
The Bridge Warrants expire two (2) years from Closing and are
exercisable at $1.90 per share of Common Stock, subject to decrease as
determined by the Board of Directors of the Company, provided, that no such
decrease may be effected prior to Closing. The Bridge Warrants are callable
pursuant to certain conditions related to average closing price and volume of
the Common Stock in addition to the effectiveness of the registration statement
discussed under "Terms of the Contribution Agreement -- Registration Rights"
above.
Convertible Notes
JPAL has offered the right to certain of its creditors to convert up to
$500,000 of notes (the "JPAL Convertible Notes") into a maximum of 263,158
shares of Common Stock. The offer will be available for acceptance for a period
of six (6) months following the Closing. Conversion of this debt raises the
maximum number of shares of Common Stock issued and outstanding subsequent to
the Closing to 19,044,214.
Options
The Company will reserve 3,500,000 shares of Common Stock for issuance
under the 2001 Stock Incentive Plan approved by the Shareholders as of February
1, 2002. As of the date hereof, no options (the "Options") have been issued. The
2001 Stock Incentive Plan was described in the proxy statement filed in
connection with the February 1, 2002 meeting of Shareholders and filed as an
exhibit thereto.
Change in Control
A director may be removed, whether with or without cause, solely upon
the affirmative vote of holders of no less than two thirds of the issued and
outstanding shares entitled to vote on the election of directors.
Transfer Agent
The Company's transfer agent is Pacific Stock Transfer Company. The
transfer agent's mailing address is 500 East Warm Springs Road, Suite 240, Las
Vegas, Nevada, 89119.
29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth ownership information as of the Record
Date and immediately following the Closing, with respect to (i) each current
director or executive officer of the Company, (ii) each current director and
executive officer of Essential, (iii) all directors and executive officers of
the Company and Essential as a group and (iii) each person known to the Company
to be a beneficial owner of more than 5% of the outstanding voting securities of
the Company. As of the Record Date, there were 8,645,260 shares of common stock
and no shares of preferred stock outstanding (the "Preferred Stock"). Each share
of common stock is entitled to one vote. Unless otherwise noted, the address of
each of the individuals listed below is c/o Essential Reality, LLC, 49 West 27th
Street, New York, NY 10001.
Number of Shares Percentage of Number of Shares Percentage of Shares
Beneficially Owned as Shares Owned as of Beneficially Owned Owned After the
Name of the Record Date (1) the Record Date(2) After the Exchange Exchange(3)
---- ------------------- --------------- ------------------ --------
Frank Drechsler
17620 Oak Street
Fountain Valley, CA 92708 5,100,260 59.0 0 0
LCG Capital Group, LLC 0 0 4,800,000 26.1%
Martin Abrams 0 0 2,400,480 13.1%
John Gentile 0 0 1,199,760 6.5%
Anthony Gentile 0 0 1,199,760 6.5%
Humbert B. Powell, III 0 0 0 0
Reuben Levine 0 0 0 0
Martin Currie 0 0 0 0
David Devor 0 0 0 0
Stanley Friedman 0 0 0 0
Aaron Gavios 0 0 0 0
Richard Rubin 0 0 0 0
Ian Benoliel 0 0 0 0
All directors and executive
officers as a group 5,100,260 59.0 9,600,000 52.2%
---------------
(1) Beneficial ownership is determined in accordance with the Rule 13d-3(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and generally includes voting or investment power with respect
to securities. Except as subject to community property laws, where
applicable, the person named above has sole voting and investment power
with respect to all shares of the Company's common stock shown as
beneficially owned by him.
(2) Based on 8,645,260 shares of the Company's common stock outstanding.
Excludes all outstanding warrants.
(3) Based on 17,280,000 Exchange Shares and 1,106,891 Public Shares
outstanding. Excludes all JPAL Convertible Notes, Bridge Warrants and
any potential JPAL Agent Warrants.
30
Shareholder Vote Required
Ratification of the Agreement will, pursuant to Section 120 of Chapter
92A, Mergers and Exchanges of Interest, Title 7, Business Associations;
Securities; Commodities, of the Nevada Revised Statutes (the "NRS"), require the
affirmative vote of a majority of the shares entitled to be cast therefor.
PLEASE NOTE THAT THE COMPANY'S CONTROLLING SHAREHOLDER HAS ALREADY INFORMED THE
COMPANY THAT HE WILL BE VOTING "FOR" THE PROPOSAL SET FORTH HEREIN. THE NUMBER
OF VOTES HELD BY THE CONTROLLING SHAREHOLDER IS SUFFICIENT TO SATISFY THE
SHAREHOLDER VOTE REQUIREMENT FOR THE PROPOSAL AND, THEREFORE, NO ADDITIONAL
VOTES WILL BE NEEDED TO APPROVE THE PROPOSAL.
The Sole Director recommends that the Shareholders vote "FOR" the
proposal to approve the Agreement and the Exchange.
31
GENERAL AND OTHER MATTERS
Management knows of no matters other than the matter described above
that will be presented to the Meeting. However, if any other matters properly
come before the Meeting, or any of its postponements or adjournments, the person
or persons voting the proxies will vote them in accordance with his or their
best judgment on such matters.
SOLICITATION OF PROXIES
The Company is making the solicitation of proxies and will bear the
costs associated therewith. Solicitations will be made by mail only. The Company
will reimburse banks, brokerage firms, other custodians, nominees and
fiduciaries for reasonable expenses incurred in sending proxy material to
beneficial owners of the Company's Common Stock.
SHAREHOLDER PROPOSALS
The Board of Directors has not yet determined the date on which the
next annual meeting of Shareholder of the Company will be held. Any proposal
intended to be presented at the Company's next annual meeting of Shareholders
must be received at the offices of the Company a reasonable amount of time prior
to the date on which the information or proxy statement for that meeting are
mailed to Shareholders in order to be included in the Company's information or
proxy statement relating to that meeting.
By Order of the Board of Directors,
/s/ Frank Drechsler
-------------------
Frank Drechsler,
Sole Director
May 21, 2002
32
Exhibit A
AMENDED CONTRIBUTION AGREEMENT
dated as of
April 24, 2002
by and among
JPAL, INC.,
ESSENTIAL REALITY, LLC,
MARTIN ABRAMS,
JOHN GENTILE,
ANTHONY GENTILE
and
LCG CAPITAL GROUP, LLC
AMENDED CONTRIBUTION AGREEMENT
AMENDED CONTRIBUTION AGREEMENT dated as of April 24, 2002 (this
"Amended Agreement"), by and among ESSENTIAL REALITY, LLC, a Delaware limited
liability company (the "Company"), JPAL, Inc., a Nevada corporation ("JPAL"),
and MARTIN ABRAMS, JOHN GENTILE, ANTHONY GENTILE and LCG CAPITAL GROUP, LLC
(collectively referred to as the "Company Members") amends, restates and
supplements, where applicable, the Contribution Agreement dated as of August 23,
2001, as amended as of October 30, 2001, November 30, 2001 and January 31, 2002
and approved by shareholders of JPAL at a duly called and held meeting on
February 1, 2002 (the "February Meeting").
WHEREAS, the Company and JPAL have determined that a business
combination between JPAL and the Company is advisable and in the best interests
of their respective companies, members and shareholders, and presents an
opportunity for their respective companies to achieve long_term strategic and
financial benefits;
WHEREAS, the Company and JPAL have determined to modify the
structure of the transaction previously approved by JPAL's shareholders (the
"Exchange") and submit such modified transaction (the "Modified Exchange") for
approval by such shareholders (the "Shareholders") at a meeting called therefor
(the "Meeting") while reaffirming the parties' collective determination that a
business combination, structured as hereinafter set forth, is and remains
advisable and in the best interests of the such respective companies, members
and Shareholders;
WHEREAS, the Company and JPAL have determined that the
Modified Exchange is to be effected by a transfer described in Section 1.1
hereof by the Company Members of all of their respective membership interests in
the Company (the "Membership Interests") to JPAL in exchange for an aggregate of
9,600,000 shares (the "Contribution Shares") of common stock, par value $.001
per share, of JPAL (the "Common Stock"), upon the terms and subject to the
conditions set forth herein;
WHEREAS, JPAL has (a) determined that the Modified Exchange is
fair to, and in the best interests of, JPAL and the Shareholders, (b) approved
and declared the advisability of entering into this Amended Agreement, and (c)
recommended that its Shareholders approve and adopt this Amended Agreement;
WHEREAS, Frank Drechsler ("Drechsler") owns more than 50% of
the outstanding Common Stock and has consented in writing to the approval and
adoption of this Amended Agreement and the Modified Exchange;
WHEREAS, JPAL and the Company agree that the Company may
consummate a private placement (the "Private Placement") for membership
interests (the "Private Placement Interests") in an amount up to $8,000,000,
which Private Placement Interests shall in such event be transferable as
provided in Section 1.1 hereof upon the closing of the Modified Exchange (the
"Closing") in exchange for shares of Common Stock (the "Private Placement
Shares") and that JPAL shall take all action requisite to the issuance
contemporaneously with the Closing of such Private Placement Shares;
WHEREAS, the obligations of each of JPAL and the Company to
effect the Modified Exchange is conditioned as further described in Article 9
hereof;
WHEREAS, at the Closing the aggregate of the Private Placement
Shares and the Contribution Shares will represent ownership of JPAL stock
possessing at least 80% of the total combined voting power of all classes of
JPAL stock entitled to vote and at least 80% of the total number of shares of
all other classes of JPAL stock;
WHEREAS, the parties hereto intend that the Modified Exchange
qualify for income tax purposes as a tax_free exchange pursuant to Section 351
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and the
mutual covenants, representations and warranties contained herein, the parties
hereto, intending to be legally bound, hereby agree as follows:
ARTICLE 1
The Modified Exchange
Section 1.1 Modified Exchange.
(a) JPAL's transfer agent, Pacific Stock Transfer Company, shall act as
the exchange agent (the "Exchange Agent") for the purpose of exchanging
Membership Interests for the Contribution Shares and Private Placement Interests
for Private Placement Shares. At or prior to the Closing, JPAL shall deliver to
the Exchange Agent 9,600,000 shares of Common Stock and up to an additional
7,680,000 shares of Common Stock to be used as the Contribution Shares and
Private Placement Shares, respectively.
(b) At the Closing, and subject to the terms and conditions of this
Amended Agreement, the Company Members shall contribute their respective
Membership Interests, as such Membership Interests are set forth on Schedule 1.1
hereto, to JPAL in exchange for the Contribution Shares.
(c) At the Closing, and subject to the terms and conditions of this
Amended Agreement, the investors in the Private Placement (the "Investors")
shall contribute their respective Private Placement Interests to JPAL in
exchange for the Private Placement Shares. The identity of each Investor and the
number of Private Placement Interests held thereby shall be provided by the
Company to JPAL as soon as practicable after the closing of the Private
Placement. The Company shall contemporaneously therewith furnish to JPAL a
representation as to "accredited investor" status within the meaning of Section
501 under Regulation D of the Securities Act of 1933, as amended (the
"Securities Act") with respect to each Investor.
(d) If any portion of the Contribution Shares or the Private Placement
Shares is to be delivered to any Person other than the Company Members or
Investor, it shall be a condition that such Person shall pay to the Exchange
Agent any transfer or other taxes (as defined in Section 11.13) required as a
result of such delivery to other than the Company Member or Investor or
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
Section 1.2 JPAL Shareholders' Approval. Drechsler is the holder of
more than 50% of the outstanding shares of Common Stock. The written consent of
Drechsler to the approval and adoption of this Amended Agreement and the
Modified Exchange is attached as Exhibit A hereto. No other approval, with the
exception of the approval by the Shareholders at a meeting thereof duly called
and held, is required in order to consummate the Modified Exchange.
Section 1.3 Closing. The Closing of the Modified Exchange and the other
transactions contemplated by this Amended Agreement shall take place at 11:00
a.m. on a date to be specified by the parties, which shall be the date of
satisfaction (or waiver in accordance with this Amended Agreement) of all of the
conditions set forth in Article 9 (the "Closing Date"), unless another time or
date is agreed to by the parties hereto. The Closing shall be held at the
offices of Olshan Grundman Frome Rosenzweig & Wolosky LLP, 505 Park Avenue, New
York, New York 10022.
ARTICLE 2
JPAL Post-Closing
Section 2.1 Charter Amendments. JPAL has taken all necessary corporate
action to effect the following changes to its Articles of Incorporation as of
the Closing: (a) change its name to "Essential Reality, Inc." and (b) authorize
the Board of Directors to set forth the rights and preferences of the preferred
stock. JPAL will file all necessary documents with the State of Nevada
subsequent to the approval of the Modified Exchange.
Section 2.2 Resignation of Directors and Officers. Effective as of the
Closing, each of the Officers and Directors of JPAL then in office shall resign.
Section 2.3 Appointment of New Directors and Officers. Effective as of
the Closing, the Officers and Directors of the Company immediately prior to the
Closing shall assume their respective positions as Officers and Directors of
JPAL.
2
ARTICLE 3
Representations and Warranties of JPAL
JPAL represents and warrants to the Company that:
Section 3.1 Corporate Existence and Power. JPAL is a corporation duly
incorporated, validly existing and in good standing under the Nevada Revised
Statutes (the "NRS") and has all corporate powers and all governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for those licenses, authorizations, permits,
consents and approvals the absence of which would not, individually or in the
aggregate, have a Material Adverse Effect (as defined in Section 11.13) on JPAL.
JPAL is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where such qualification is necessary, except for
those jurisdictions where failure to be so qualified would not, individually or
in the aggregate, have a Material Adverse Effect on JPAL. JPAL has heretofore
delivered to the Company true and complete copies of its Articles of
Incorporation and By-laws as currently in effect.
Section 3.2 Authorization.
The execution, delivery and performance by JPAL of this Amended
Agreement, the performance of its obligations hereunder, and the consummation of
the transactions contemplated hereby are within JPAL's corporate powers and have
been duly authorized by all necessary corporate action with the exception of the
approval of its Shareholders, the affirmative vote of which holding more than
50% of the outstanding shares of Common Stock is the only action of JPAL
necessary in connection with its execution and delivery of this Amended
Agreement, the performance of its obligations hereunder and the consummation of
the Modified Exchange. This Amended Agreement has been duly and validly executed
and delivered by JPAL and, assuming the due authorization, execution and
delivery thereof by the Company, is a legal, valid and binding obligation of
JPAL, enforceable against it in accordance with its terms, except as
enforceability thereof may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium, or other similar laws now or hereafter
in effect relating to creditors' rights generally or by general principles of
equity (regardless of whether enforceability is considered in a proceeding at
law or in equity).
JPAL's Board of Directors, at a meeting duly called and held, has (a)
determined that this Amended Agreement and the transactions contemplated hereby,
including the Modified Exchange, are fair to and in the best interests of the
Shareholders, (b) approved and adopted this Amended Agreement and the
transactions contemplated hereby, including the Modified Exchange, which
approval satisfies in full any applicable requirements of the NRS, and (c)
resolved to recommend, and recommended, approval and adoption of this Amended
Agreement by such Shareholders.
Section 3.3 Governmental Authorization. The execution and delivery of
this Amended Agreement and the performance by JPAL of its obligations under this
Amended Agreement relating to the Closing and the transactions contemplated
hereby require no action by or in respect of, or filing with, any governmental
body, agency, official or authority other than (a) compliance with any
applicable requirements of the Securities Act, the Securities Exchange Act of
1934, as amended (the "Exchange Act"), foreign or state securities laws or
regulations of various states ("Blue Sky Laws") or takeover laws, and (b) any
other filings, approvals or authorizations which, if not obtained, would not,
individually or in the aggregate, have a Material Adverse Effect on JPAL, or
materially impair the ability of JPAL to consummate the Modified Exchange and
the transactions contemplated by this Amended Agreement.
Section 3.4 Non-contravention. The execution and delivery by JPAL of
this Amended Agreement and the consummation by JPAL of the transactions
contemplated hereby and performance of its obligations under this Amended
Agreement do not and will not (a) violate JPAL's Articles of Incorporation or
By-Laws, (b) violate any applicable law, rule, regulation, judgment, injunction,
order or decree, (c) require any consent or other action by any Person under,
constitute a default under, result in a violation of, conflict with, or give
rise to any right of termination, cancellation or acceleration of any right or
obligation of JPAL, or to a loss of any benefit to which JPAL is entitled under
any provision of any agreement or other instrument binding upon JPAL, or any
license, franchise, permit, certificate, approval or other similar authorization
affecting, or relating in any way to, the assets or business of JPAL, or (d)
result in the creation or imposition of any Lien (as defined herein) on any
asset of JPAL.
3
Section 3.5 Capitalization.
(a) The authorized capital stock of JPAL consists of 50,000,000 shares
of Common Stock and 5,000,000 shares of preferred stock, par value $.001 per
share (the "Preferred Stock"). The Shareholders have approved, though JPAL has
not as of yet caused to be filed the articles of amendment setting forth, an
amendment to its Articles of Incorporation providing for "blank check" preferred
stock. As of the date of this Amended Agreement, the outstanding capitalization
of JPAL consists of (i) 8,645,260 shares of Common Stock, (ii) no shares of
Preferred Stock, and (iii) no options and warrants to purchase shares of Common
Stock. The list of Shareholders attached hereto as Schedule 3.5 is the true and
correct list of such Shareholders of record of outstanding shares of Common
Stock on the record date established with respect to the Meeting. All
outstanding shares of capital stock of JPAL have been duly authorized and
validly issued and are fully paid and non-assessable and were not issued in
violation of any preemptive rights or other preferential rights of subscription
or purchase other than those that have been waived or otherwise cured or
satisfied. Except as set forth herein, as of the date hereof there are no
outstanding options, warrants, subscriptions, conversion or other rights,
agreements or other commitments obligating JPAL to issue any shares of its
capital stock or any securities convertible into, exchangeable for or evidencing
the right to subscribe for any shares of its capital stock.
(b) There are no outstanding obligations, contingent or otherwise, of
JPAL to redeem, purchase or otherwise acquire any capital stock or other
securities of JPAL.
(c) JPAL is not in violation of and has not violated any federal or
state securities laws in connection with any transaction relating to JPAL and/or
an Affiliate, including without limitation, the acquisition of any stock,
business or assets of any third party or the issuance of any capital stock of
JPAL.
(d) There are not as of the date hereof, and there will not be at the
Closing, any shareholder agreements, voting trusts or other agreements or
understandings to which JPAL is a party or by which it is bound relating to the
voting of any shares of the capital stock of JPAL.
(e) The shares of Common Stock to be issued as part of the Contribution
Shares and Private Placement Shares will be duly authorized for issuance and
when issued and delivered in accordance with the terms of this Amended
Agreement, will be validly issued, fully paid and non-assessable and the
issuance thereof will not be subject to any preemptive or other similar right.
Section 3.6 Subsidiaries. JPAL has no subsidiaries.
Section 3.7 Financial Statements.
(a) Attached hereto as Schedule 3.7 is a copy of JPAL's audited
financial statements as of and for the fiscal year ended December 31, 2001 (the
"JPAL Financial Statement Date"), certified by Lesley, Thomas, Schwarz & Postma,
Inc. (the "JPAL Financial Statements"). The JPAL Financial Statements were
prepared in accordance with the books and records of JPAL in all material
respects and were prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved, except as otherwise noted therein. The JPAL Financial Statements
fairly present the financial position of JPAL as of the dates set forth therein
or the results of operations and changes in financial position of JPAL for the
fiscal periods or as of the dates set forth therein.
(b) Other than in connection with this Amended Agreement and the
Private Placement, JPAL has no current business activity whatsoever.
4
Section 3.8 Absence of Certain Changes. Since the JPAL Financial
Statements Date there has not, with the exception of any matter related to the
February Meeting or any document executed and/or filed in connection therewith,
been:
(a) any event, occurrence, development or state of circumstances or
facts which would, individually or in the aggregate, have a Material Adverse
Effect on JPAL;
(b) any amendment of any material term of any outstanding security of
JPAL;
(c) any incurrence, assumption or guarantee by JPAL of any indebtedness
for borrowed money;
(d) any creation or other incurrence by JPAL of any Lien on any
material asset;
(e) the making of any loan, advance or capital contributions to or
investment in any Person;
(f) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or any asset(s) of JPAL which
would, individually or in the aggregate, have a Material Adverse Effect on JPAL;
(g) any transaction or commitment made, or any contract or agreement
entered into, by JPAL or any relinquishment by JPAL of any contract or other
right;
(h) any change in any method of accounting, method of tax accounting,
or accounting practice by JPAL;
(i) any (i) grant of any severance or termination pay to any current or
former director, officer or employee of JPAL, (ii) increase in benefits payable
under any existing severance or termination pay policies or employment
agreements, (iii) entering into any employment, deferred compensation or other
similar agreement (or any amendment to any such existing agreement) with any
current or former director, officer or employee of JPAL, (iv) establishment,
adoption or amendment (except as required by applicable law) of any collective
bargaining, bonus, profit sharing, thrift, pension, retirement, deferred
compensation, compensation, stock option, restricted stock or other benefit plan
or arrangement covering any current or former director, officer or employee of
JPAL, or (v) increase in compensation, bonus or other benefits payable or
otherwise made available to any current or former director, officer or employee
of JPAL;
(j) any labor dispute, other than routine individual grievances; or
(k) any tax election or any settlement or compromise of any tax
liability, in either case that is material to JPAL.
Section 3.9 No Liabilities or Debts. Except for the Bridge Notes
described herein and as set forth on Schedule 3.9 hereto, there are no
liabilities or debts of JPAL of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there is no
existing condition, situation or set of circumstances which could reasonably be
expected to result in such a liability or debt.
Section 3.10 Compliance with Laws and Court Orders. JPAL holds all
permits, licenses, variances, exemptions, orders, franchises and approvals of
all governmental entities necessary for the lawful conduct of its business (the
"JPAL Permits"), except where the failure so to hold would not have a Material
Adverse Effect on JPAL. JPAL is in compliance with the terms of JPAL Permits,
except where the failure so to comply would not have a Material Adverse Effect
on JPAL. JPAL is and has been in compliance with, and to the best knowledge of
JPAL, is not under investigation with respect to and has not been threatened to
be charged with or given notice of any violation of, any applicable law, rule,
regulation, judgment, injunction, order or decree, except for such matters as
would not, individually or in the aggregate, have a Material Adverse Effect on
JPAL.
5
Section 3.11 Litigation. There is no action, suit, investigation, audit
or proceeding pending against, or to the best knowledge of JPAL threatened
against or affecting, JPAL or any of its assets or properties before any court
or arbitrator or any governmental body, agency or official.
Section 3.12 Finder's Fees. There is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to act
on behalf of JPAL who might be entitled to any fee or commission in connection
with the transactions contemplated by this Amended Agreement.
Section 3.13 Taxes. (a) JPAL has (i) duly filed with the appropriate
taxing authorities all Tax Returns required to be filed by or with respect to
its business, or are properly on extension and all such duly filed Tax Returns
are true, correct and complete in all material respects, and (ii) paid in full
or made adequate provisions for on its respective balance sheet (in accordance
with GAAP) all Taxes shown to be due on such Tax Returns. There are no liens for
Taxes upon the assets of JPAL except for statutory liens for current Taxes not
yet due and payable or which may thereafter be paid without penalty or are being
contested in good faith. JPAL has not received any notice of audit, is not
undergoing any audit of its Tax Returns, or has received any notice of
deficiency or assessment from any taxing authority with respect to liability for
Taxes of its business which has not been fully paid or finally settled. There
have been no waivers of statutes of limitations by JPAL with respect to any Tax
Returns. JPAL has not filed a request with the Internal Revenue Service for
changes in accounting methods within the last two years which change would
effect the accounting for tax purposes, directly or indirectly, of its business.
JPAL has not executed an extension or waiver of any statute of limitations on
the assessment or collection of any Taxes due (excluding such statutes that
relate to years currently under examination by the Internal Revenue Service or
other applicable taxing authorities) that is currently in effect. The provision
for Taxes, if any, due or to become due for JPAL for the period or periods
through and including the date of the JPAL Financial Statements that has been
made and is reflected on such financial statements is sufficient to cover all
such Taxes. Deferred Taxes, if any, of JPAL included in the JPAL Financial
Statements have been computed in accordance with GAAP. JPAL is not a party to
any Tax allocation or Tax sharing agreement and JPAL has not been a member of an
affiliated group filing a consolidated federal income Tax Return or has any
Liability for Taxes of any Person under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local or foreign Law) as a transferee or
successor or by Contract or otherwise. JPAL has not made any payments, is not
obligated to make any payments, and is not a party to any Contract that could
obligate it to make any payments that would be disallowed as a deduction under
Section 280G or 162(m) of the Internal Revenue Code.
(b) The term "Taxes" shall mean all taxes, charges, fees, levies or
other assessments, including, without limitation, income, gross receipts,
excise, property, sales, license, payroll and franchise taxes, imposed by the
United States, or any state, local or foreign government or subdivision or
agency thereof whether computed on a unitary, combined or any other basis; and
such term shall include any interest and penalties or additions to tax. The term
"Tax Return" shall mean any report, return or other information required to be
filed with, supplied to or otherwise made available to a taxing authority in
connection with Taxes.
Section 3.14 Employee Benefit Plans. Schedule 3.14 comprises a listing
of each bonus, stock option, stock purchase, benefit, profit sharing, savings,
retirement, liability, insurance, incentive, deferred compensation, and other
similar fringe or employee benefit plans, programs or arrangements for the
benefit of or relating to, any employee of, or independent contractor or
consultant to, and all other compensation practices, policies, terms or
conditions, whether written or unwritten (the "Employee Benefit Plans") which
JPAL presently maintains, to which JPAL presently contributes or under which
JPAL has any liability and which relate to employees (current or former) or
independent contractors of JPAL. Each of the Employee Benefit Plans administered
by JPAL have been administered in accordance with all requirements of applicable
law and terms of each such plan. Each Employee Benefit Plan that is required to
be qualified under the Employment Retirement Income Security Act of 1974, or
registered or approved by a regulatory authority, has been so qualified,
registered or approved by the appropriate governmental agency or authority and
such qualification, registration or approval has not been revoked. All
contributions (including premiums) required by law or contract to have been made
or accrued by JPAL under or with respect to the Employee Benefit Plans have been
paid or accrued by JPAL or will be paid in the ordinary course within 90 days.
Without limiting the foregoing, there are no unfunded liabilities under any
Employee Benefit Plan. JPAL has not received notice of any investigations,
litigation or other enforcement actions against it with respect to any of the
Employee Benefit Plans. To JPAL's knowledge, there are no pending actions, suits
or claims by former or present employees of JPAL (or their beneficiaries) with
respect to Employee Benefit Plans or the assets or fiduciaries thereof (other
than routine claims for benefits).
6
Section 3.15 Environmental Matters.
(a) Except as would not, individually or in the aggregate, have a
Material Adverse Effect on JPAL:
(i) no notice, notification, demand, request for information,
citation, summons or order has been received, no complaint has been filed, no
penalty has been assessed, and no investigation, action, claim, suit, proceeding
or review is pending or, to the best knowledge of JPAL, is threatened by any
governmental entity or other Person relating to or arising out of any
Environmental Law;
(ii) JPAL is and has been in compliance with all Environmental
Laws and all Environmental Permits; and
(iii) there are no liabilities of or relating to JPAL of any
kind whatsoever, whether accrued, contingent, absolute, determined, determinable
or otherwise arising under or relating to any Environmental Law and there are no
facts, conditions, situations or set of circumstances which could reasonably be
expected to result in or be the basis for any such liability.
(b) The following terms shall have the meaning set forth below:
"JPAL" shall, for purposes of this Section, include any entity
which is, in whole or in part, a corporate predecessor of JPAL.
"Environmental Laws" means any federal, state, local or
foreign law (including, without limitation, common law), treaty, judicial
decision, regulation, rule, judgment, order, decree, injunction, permit or
governmental restriction or requirement or any agreement with any governmental
authority or other third party, relating to human health and safety or the
environment and arising from the use, presence, disposal, discharge or release
of pollutants, contaminants, wastes or chemicals or any toxic, radioactive,
ignitable, corrosive, reactive or otherwise hazardous substances, wastes or
materials.
"Environmental Permits" means, with respect to any Person, all
permits, licenses, franchises, certificates, approvals and other similar
authorizations of governmental authorities relating to or required by
Environmental Laws and affecting, or relating in any way to, the business of
such Person as currently conducted.
Section 3.16 Patents and Other Proprietary Rights. JPAL does not have
rights to use, whether through ownership, licensing or otherwise any patents,
trademarks, service marks, trade names, copyrights, trade secrets or other
proprietary rights and processes. JPAL has not and does not violate or infringe
any intellectual property right of any Person, and JPAL has not received any
communication alleging that it violates or infringes the intellectual property
right of any other Person. JPAL has not been sued for infringing any
intellectual property right of another Person.
Section 3.17 Anti-takeover Statutes. The Board of Directors of JPAL has
approved this Amended Agreement and the transactions contemplated hereby, and
neither the anti-takeover provisions of the NRS nor those of any other similar
statute or regulation applies to the Modified Exchange or any of the other
transactions contemplated hereby.
Section 3.18 Disclosure. Neither this Amended Agreement nor any exhibit
or schedule hereto nor any statement, list or certificate delivered to the
Company pursuant hereto or pursuant to any written request therefor, contains an
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein and therein, in light of the
circumstances in which they were made, not misleading.
7
Section 3.19. Labor Matters. Drechsler is the only current employee of
JPAL. JPAL has never been a party to any collective bargaining agreement or
other labor agreement with any labor union or organization. There is no unfair
labor practice charge or other grievance procedure against JPAL pending, or, to
the best knowledge of JPAL, threatened. There is no complaint, lawsuit or
proceeding in any forum by or on behalf of any present or former employee, any
applicant for employment or any classes of the foregoing alleging breach of any
express or implied contract of employment, any law or regulation governing
employment or the termination thereof or other discriminatory, wrongful or
tortious conduct in connection with the employment relationship against JPAL,
pending, or, to the best knowledge of JPAL, threatened. JPAL is in compliance
with all applicable laws respecting employment and employment practices, terms
and conditions of employment, wages, hours of work and occupational safety and
health. There is no proceeding, claim, suit, action or governmental
investigation pending or, to the best knowledge of JPAL, threatened, in respect
to which any current or former director, officer, employee or agent of JPAL, may
be entitled to claim indemnification from JPAL.
Section 3.20. Contracts. Schedule 3.20 hereto sets forth a complete and
accurate list and description of all of the following contracts and agreements,
with the exception of any contract or agreement related to the February Meeting
or any document executed and/or filed in connection therewith, whether written
or oral, of JPAL:
(a) agreements, contracts or instruments to which JPAL is a party that
relate to the borrowing of money, the capital lease or purchase on an
installment basis of any property or asset or the guarantee of any of the
foregoing (including without limitation pledged receivables);
(b) licenses, leases, contracts and other arrangements with respect to
any property of JPAL, and all contracts, agreements, commitments, purchase
orders or other understandings or arrangements with respect to which JPAL has
any liability or obligation (contingent or otherwise) or which may otherwise
have any continuing effect after the date of this Amended Agreement;
(c) contracts, agreements or other understandings or arrangements
(including without limitation those with respect to compensation) between JPAL
and any current or former shareholder, officer, director, consultant, agent
and/or Affiliate (or any spouse or relative of any of the foregoing);
(d) management, operating, service, joint venture, partnership or
limited liability company agreements;
(e) any contract or agreement pursuant to which JPAL has agreed to
indemnify or hold harmless any other Person or to pay liquidated damages of any
kind;
(f) any contract or agreement creating any Lien on any property or
assets of JPAL;
(g) any contract or agreement relating to the capital stock of JPAL; or
(h) any other material agreement, lease, commitment, instrument, plan,
arrangement or contract entered into by JPAL, or to which any of its assets may
be subject.
All the foregoing are herein called "Contracts." Such list includes
with respect to each Contract the names of the parties, the date thereof, and
its title or other general description. The Contracts listed on Schedule 3.20
set forth the entire arrangement and understanding between JPAL and the
respective third parties with respect to the subject matter thereof, and, except
as indicated in such Schedule, there have been no amendments or waivers or side
or supplemental arrangements to or in respect of any Contract. JPAL will furnish
any further information that the Company may reasonably request in connection
therewith. Each Contract is valid, binding and enforceable against JPAL, and to
the best knowledge of JPAL, each other party thereto, in accordance with its
terms and in full force and effect. There is no event that has occurred or
existing condition that constitutes or that, with notice, the happening of an
event and/or the passage of time, would constitute a default or breach under any
Contract by JPAL, or would cause the acceleration of any obligation of any party
thereto, give rise to any right of termination or cancellation or cause the
creation of any Lien by reason of the failure of JPAL to fulfill the obligations
thereunder.
8
Section 3.21. SEC Filings. JPAL has filed all forms, reports and
documents (the "SEC Documents") required to be filed with the Securities and
Exchange Commission (the "SEC") since its inception and has heretofore delivered
all the SEC Documents to the Company. The SEC Documents (a) were prepared in all
material respects in accordance with the requirements of the Securities Act or
the Exchange Act, as the case may be, and (b) did not at the time they were
filed contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading.
Section 3.22. Maturity Of Bridge Loans. None of the Bridge Loans (as
defined in Section 6.1 hereof) shall mature prior to January 1, 2003.
ARTICLE 4
Representations and Warranties of the Company
The Company represents and warrants to JPAL that:
Section 4.1 Corporate Existence and Power. The Company is a limited
liability company duly organized and in good standing under the laws of the
State of Delaware. The Company has all powers and governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for those licenses, authorizations, permits,
consents and approvals the absence of which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. At the Closing, the
Company will be duly qualified to do business as a foreign corporation and will
be in good standing in each jurisdiction where such qualification is necessary,
except for those jurisdictions where failure to be so qualified would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
The Company has heretofore delivered to JPAL true and complete copies of the
Articles of Formation and Operating Agreement as currently in effect.
Section 4.2 Authorization. The execution, delivery and performance by
the Company of this Amended Agreement and the consummation by the Company of the
transactions contemplated hereby are within the powers of the Company, and have
been duly authorized by all necessary action. This Amended Agreement, assuming
the due authorization, execution and delivery thereof by JPAL, is a legal, valid
and binding obligation of the Company, enforceable against it in accordance with
its terms, except as enforceability thereof may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium, or other similar
laws now or hereafter in effect relating to creditors' rights generally or by
general principles of equity (regardless of whether enforceability is considered
in a proceeding at law or in equity).
Section 4.3 Governmental Authorization. The execution and delivery of
this Amended Agreement and the performance by the Company of its obligations
under this Amended Agreement relating to the Modified Exchange, the Closing and
the transactions contemplated hereby require no action by or in respect of, or
filing with, any governmental body, agency, official or authority other than (a)
compliance with any applicable requirements of the Securities Act, the Exchange
Act, Blue Sky Laws or takeover laws, and (b) any other filings, approvals or
authorizations which, if not obtained, would not, individually or in the
aggregate, have a Material Adverse Effect on the Company or materially impair
the ability of the Company to consummate the Modified Exchange and the
transactions contemplated by this Amended Agreement.
Section 4.4 Non_contravention. The execution and delivery by the
Company of this Amended Agreement and the consummation by the Company of the
transactions contemplated hereby and performance of its obligations under this
Amended Agreement do not and will not (a) violate the Company's Certificate of
Formation or Operating Agreement, (b) assuming compliance with the matters
referred to in Section 4.3, violate any applicable law, rule, regulation,
judgment, injunction, order or decree, (c) require any consent or other action
by any Person under, constitute a default under, result in a violation of,
conflict with, or give rise to any right of termination, cancellation or
acceleration of any right or obligation of the Company, or to a loss of any
benefit to which the Company is entitled under any provision of any agreement or
other instrument binding upon the Company, or any license, franchise, permit,
certificate, approval or other similar authorization affecting, or relating in
any way to, the assets or business of the Company or (d) result in the creation
or imposition of any Lien on any asset of the Company, except, in the case of
clauses (b), (c) and (d), for such matters as would not, individually or in the
aggregate, have a Material Adverse Effect on the Company or materially impair
the ability of the Company to consummate the transactions contemplated by this
Amended Agreement.
9
Section 4.5 Subsidiaries. The Company has no subsidiaries.
Section 4.6 Financial Statements. The Company Financial Statements (as
defined in Section 7.3 below) were prepared in accordance with the books and
records of the Company in all material respects and were prepared in accordance
with GAAP applied on a consistent basis throughout the periods involved, except
as otherwise noted therein. Each of the Company Financial Statements fairly
presents the financial position of the Company as of the respective dates set
forth therein or the results of operations and changes in financial position of
the Company for the respective fiscal periods or as of the respective dates set
forth therein.
Section 4.7 Absence of Certain Changes. From December 31, 2001 until
the date hereof, the business of the Company has been conducted in the ordinary
course and there has not, with the exception of any Bridge Loans discussed in
Section 6.1 hereof as well as certain other bridge loans for up to $1,000,000,
been:
(a) any event, occurrence, development or state of circumstances or
facts which would, individually or in the aggregate, have a Material Adverse
Effect on the Company;
(b) any incurrence, assumption or guarantee by the Company of any
material indebtedness for borrowed money;
(c) any creation or other incurrence by the Company of any Lien on any
material asset;
(d) the making of any material loan, advance or capital contributions
to or investment in any Person;
(e) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or any asset(s) of the Company
which would, individually or in the aggregate, have a Material Adverse Effect on
the Company;
(f) any transaction or commitment made, or any contract or agreement
entered into, by the Company relating to its business or any of its assets
(including the acquisition or disposition of any assets) or any relinquishment
by the Company of any contract or other right, in any case material to the
Company except in the ordinary course of business of the Company;
(g) any material labor dispute, other than routine individual
grievances; or
(h) any tax election or any settlement or compromise of any tax
liability, in either case that is material to the Company.
Section 4.8 Compliance with Laws and Court Orders. The Company is and
has been in compliance with, and to the best of its knowledge is not under
investigation with respect to and has not been threatened to be charged with or
given notice of any violation of, any applicable law, rule, regulation,
judgment, injunction, order or decree, except for such matters as would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
10
Section 4.9 Litigation. Except as set forth on Schedule 4.9 hereto,
there is no action, suit, investigation, audit or proceeding pending against, or
to the best knowledge of the Company threatened against or affecting, the
Company or any of its assets or properties before any court or arbitrator or any
governmental body, agency or official.
Section 4.10 Patents and Other Proprietary Rights. Except as set forth
on Schedule 4.10 hereto (which Schedule 4.10 shall be delivered by the Company
to JPAL no later than ten (10) days following the date of this Amended
Agreement), (a) the Company does not have rights to use, whether through
ownership, licensing or otherwise, any patents, trademarks, service marks, trade
names, copyrights, trade secrets or other proprietary rights and processes, (b)
to the Company's knowledge, the Company has not and does not violate or infringe
any intellectual property right of any Person, (c) the Company has not received
any written communication alleging that it violates or infringes the
intellectual property right of any other Person and (d) the Company has not been
sued for infringing any intellectual property right of another Person.
Section 4.11 Disclosure. Neither this Amended Agreement nor any exhibit
or schedule hereto nor any statement, list or certificate delivered to JPAL
pursuant hereto or pursuant to any written request therefor, contains an untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein and therein, in light of the
circumstances in which they were made, not misleading.
ARTICLE 5
Covenants of JPAL, the Company, Drechsler and Appel
Section 5.1 Pre-Closing Transactions. Prior to Closing, the Company
shall have consummated the Private Placement of up to 7,680,000 Private
Placement Interests for an aggregate of up to $8,000,000 in gross proceeds. All
Private Placement Interests will be sold at the equivalent of approximately
$1.04167 (the "Offering Price") each and be contributed to JPAL in exchange for
Private Placement Shares on a one-for-one basis upon Closing, subject to the
provisions of Article 9 hereof.
In addition, the following actions shall have been taken:
(a) Escrow Shares. Prior to or upon consummation of the Closing,
certain Shareholders shall place thirty percent (30%) of the Public Shares (as
further described in Section 5.2 below) into escrow (the "Escrow Shares"),
pursuant to the terms of an escrow agreement in a form reasonably satisfactory
to the Company. The Escrow Shares shall be released from escrow on the following
terms: (i) one third of the Escrow Shares four (4) months from the Closing Date;
(ii) another third of the Escrow Shares eight (8) months from the Closing Date ,
and (iii) the remaining third of the Escrow Shares twelve (12) months from the
Closing Date.
The Company shall inform JPAL of the number of Private
Placement Interests sold in the Private Placement as soon as practicable after
the closing thereof, subsequent to which JPAL and the Company shall determine
the number of Public Shares to be issued and outstanding subsequent to the
Closing pursuant to Section 5.2 below. The Company shall in connection therewith
determine the identity of the Shareholders whose Public Shares will be placed in
escrow. The Company's determination thereof shall be made in consultation with
and subject to the consent of JPAL, which consent shall not be unreasonably
withheld.
(b) Assignment of Convertible Company Notes. Prior to the closing of
the Private Placement, JPAL shall assign, convey, transfer and deliver to
certain Lenders (see Section 6.1 below), and such Lenders shall acquire from
JPAL, pursuant to an assignment and transfer agreement in a form reasonably
satisfactory to the Company (each such agreement, an "Assignment and Transfer
Agreement") to be executed by and between JPAL and each such respective Lender,
all right, title and interest in and to certain convertible promissory notes
(the "Convertible Company Notes" as further described hereinafter) to be issued
by the Company to JPAL (the "Assignment"), which Convertible Company Notes shall
have the same terms and provisions as the form of note attached hereto as
Exhibit B (the "Current Company Note"), with the exception of the conversion
feature described in Section 5.1(c) below, the prepayment provisions set forth
in Section 6.1(c) below and a maturity date of December 31, 2003.
11
The Assignment and Transfer Agreement(s) shall provide for
each such Lender's acquisition and assumption, prior to the closing of the
Private Placement, of all right, title and interest in and to the Convertible
Company Notes in consideration for the cancellation of all right, title and
interest held by each such Lender in and to certain notes (the "JPAL Notes")
issued by JPAL to such Lenders in consideration for the Bridge Loans (as further
described in Section 6.1 hereof). The aggregate amount and proportion between
principal and interest of such JPAL Notes shall be identical in amount and
proportion to the Conversion Amount (as defined in Section 5.1(c)(i) hereof).
JPAL undertakes, in connection herewith, to cause such
Lender(s) to agree to execute the Assignment and Transfer Agreement(s) within
fifteen (15) calendar days of the execution of this Amended Agreement. JPAL and
the Company agree and accept that the contemplated Assignment constitutes a
material condition of JPAL to effect the Modified Exchange and the Company
consents to such Assignment, provided, that the terms of such Assignment and
Transfer Agreement require each Lender to agree to the terms of this Amended
Agreement, including with specific reference the repayment terms of the
Convertible Company Notes (see Section 6.1(c) below).
Anything to the contrary herein notwithstanding, in the event
the Modified Exchange is not consummated by August 31, 2002, then the Assignment
and Transfer Agreements shall be null and void and all conversions that may have
been effectuated prior to such date shall be rescinded.
(c) Conversion of Notes Prior to Closing. In connection with the
foregoing, the parties hereto agree that the Convertible Company Notes to be
assigned by JPAL to the Lenders and described in the foregoing paragraph shall:
(i) constitute notes for an aggregate dollar amount of
$250,000 (the "Conversion Amount"), which Conversion Amount shall consist of
principal and accrued interest thereon in proportionate amounts;
(ii) prior to the closing of the Private Placement be issued
by the Company to JPAL in return for the cancellation of presently issued and
outstanding notes issued by the Company for the like amount; and
(iii) carry a conversion feature enabling the holder thereof
to convert such Conversion Amount into Private Placement Interests as if such
Conversion Amount were provided by means of a cashier's check or wire transfer
to the Company.
Assuming delivery to the Company of the Company Convertible
Notes for conversion into Private Placement Interests in accordance with the
terms set forth in the subscription agreement attached to the Confidential
Private Placement Memorandum governing the Private Placement, including
execution of such subscription agreement and related confidential prospective
purchaser questionnaire, the Company hereby undertakes to accept such Company
Convertible Notes as constituting good and valid consideration for subscription
of an aggregate of 240,000 Private Placement Interests in the Private Placement;
provided, however, that such Company Convertible Notes may only be delivered to
the Company for conversion if the Company has not already closed on
subscriptions for aggregate gross proceeds of at least $4,000,000 in the Private
Placement.
(d) Conversion of Notes Subsequent to Closing. Within fifteen (15)
calendar days of the execution of this Amended Agreement, JPAL shall issue
convertible notes in the aggregate amount of $500,000, consisting of principal
and accrued interest thereon in proportionate amounts (the "JPAL Convertible
Notes"), to certain Lender(s) in consideration for the cancellation of all
right, title and interest held by each such Lender in and to certain JPAL Notes
for the like amount. For a period of six (6) months following the Closing, the
JPAL Convertible Notes may be converted, in the sole and absolute discretion of
the holders thereof, into an aggregate of 263,158 shares of Common Stock at a
conversion price of $1.90 per share. The JPAL Convertible Notes (with the
Company Convertible Notes, the "Convertible Notes") shall have the same terms
and provisions as the Current Company Note attached hereto as Exhibit B, with
the exception of the conversion feature described in this Section 5.1(d), the
prepayment provisions set forth in Section 6.1(c) below and a maturity date of
December 31, 2003. No conversion of any Convertible Notes shall in any way
reduce the number of Bridge Warrants hereinafter provided for (see Section 6.1).
12
Anything to the contrary herein notwithstanding, in the event
the Modified Exchange is not consummated by August 31, 2002, then the issuance
of the JPAL Convertible Notes in consideration for the cancellation of the JPAL
Notes shall be null and void.
(e) Non-Convertible Notes. Within fifteen (15) calendar days of the
execution of this Amended Agreement, JPAL shall issue non-convertible notes in
an aggregate amount equal to the amount of the Bridge Loans less the amount of
the Convertible Notes (the "Non-Convertible Notes") to certain Lender(s) in
consideration for the cancellation of all right, title and interest held by each
such Lender in and to certain JPAL Notes for the like amount. The
Non-Convertible Notes (with the Convertible Notes, the "Bridge Notes") shall
have the same terms and provisions as the Current Company Note attached hereto
as Exhibit B, with the exception of the prepayment provisions set forth in
Section 6.1(c) below and a maturity date of December 31, 2003.
Anything to the contrary herein notwithstanding, in the event
the Modified Exchange is not consummated by August 31, 2002, then the issuance
of the Non-Convertible Notes in consideration for the cancellation of the JPAL
Notes shall be null and void.
(f) Agent Warrants. Contemporaneously with the closing of the Private
Placement, the Company may issue warrants (the "Agent Warrants") to certain of
its financial advisors (the "Agents"). The Agent Warrants shall enable their
holders to purchase membership interests of the Company up to an aggregate of
six percent (6%) of the number of Private Placement Interests sold in the
Private Placement at an exercise price of one hundred and twenty-five percent
(125%) of the Offering Price. The Agent Warrants issued shall be in addition to
the cash compensation of up to six percent (6%) of the dollar amount raised in
the Private Placement.
Upon Closing, the Agent Warrants shall unless earlier
exercised automatically be cancelled in exchange for warrants to purchase that
number of shares of Common Stock of JPAL (the "JPAL Agent Warrants") as would
have been received from the Company had the Agent Warrants been exercised for
membership interests of the Company prior to Closing. The Company shall inform
JPAL of the number of Agent Warrants issued but not exercised as soon as
practicable after the closing of the Private Placement, subsequent to which time
the Company shall accept no Agent Warrants for exercise. The JPAL Agent Warrants
shall have the same terms and features as the Agent Warrants except that they
shall vest immediately, not be callable, expire up to 5 years from date of
issuance and not provide for cashless exercise.
Section 5.2 Capitalization; No Liabilities or Debts.
(a) JPAL shall take all necessary actions so that there shall; (i)
immediately prior to the Closing be issued and outstanding that number of shares
of Common Stock as would represent 6.02% of the aggregate capitalization
presuming effectuation of the Modified Exchange (the "Public Shares"), and (ii)
be reserved for issuance pending the effectuation of the Modified Exchange the
aggregate number of shares of Common Stock as shall immediately subsequent to
Closing constitute the remaining 93.98% shares of Common Stock to be issued and
outstanding, provided, however, that the number represented by the Public Shares
shall exclude any shares of Common Stock: (i) issued or to be issued to the
Lender(s) in connection with the exercise of their Bridge Warrants (see Section
6.1 below); (ii) exchanged for membership interests of the Company having been
issued pursuant to the exercise of Agent Warrants, and (iii) reserved for
issuance pursuant to the exercise of JPAL Agent Warrants to be issued in
consideration for the cancellation of the Agent Warrants.
Except as set forth immediately above, there shall as of
Closing be no other outstanding shares of capital stock, options, warrants,
subscriptions, conversions or other rights, agreements or commitments obligating
JPAL to issue any shares of its capital stock or any securities convertible
into, exchangeable for or evidencing the right to subscribe for any shares of
its capital stock, with the exception of the Bridge Warrants, JPAL Convertible
Notes, JPAL Agent Warrants, shares of Common Stock reserved for issuance
pursuant to exercise of the JPAL Agent Warrants, the Private Placement Shares
and the Contribution Shares (collectively, the "Securities"), nor any options,
warrants, subscriptions, conversions or other rights, agreements or commitments
relating to such Securities or the Public Shares.
13
(b) JPAL shall take all necessary actions so that immediately prior to
the Closing, except for the Bridge Loans, there shall be no liabilities or debts
of JPAL of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there shall be no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a liability or debt.
Section 5.3 Public Company Status. JPAL shall make any and all necessary filings
so that at the Closing the Common Stock shall still be a publicly-traded
security.
Section 5.4 Shareholder Approval. In connection with obtaining shareholder
approval for this Amended Agreement and the transactions contemplated hereby,
JPAL shall comply with all applicable requirements of the NRS and federal
securities law, including but not limited to the mailing to its Shareholders of
a written proxy statement containing the information specified in Schedule 14A
of the Exchange Act (the "JPAL Proxy Statement"). The JPAL Proxy Statement shall
be prepared in accordance with the requirements of the Exchange Act and will not
at the time it is filed contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances in which they were
made, not misleading.
Section 5.5 Indemnification.
(a) Each of JPAL and Howard Appel shall, jointly and severally,
indemnify, defend and hold harmless each of the Company Members and each person
who is now, or has been at any time prior to the date hereof or who becomes
prior to the Closing, an officer or member of the Company or an employee of the
Company, and their respective heirs, legal representatives, successors and
assigns (the "Indemnified Parties") against all losses, claims, damages, costs,
expenses (including attorneys' fees), liabilities or judgments or amounts that
are paid in settlement of or in connection with any threatened or actual claim,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of (i) any breach of this Amended Agreement by
JPAL or HMA (see below), including but not limited to failure of any
representation or warranty to be true and correct at or before the Closing, or
(ii) any act, omission or conduct of Drechsler or JPAL prior to the Closing,
whether asserted or claimed prior to, or at or after, the Closing, or (iii)
relating to the consummation of the transactions contemplated herein, and any
action taken in connection therewith ("Indemnified Liabilities"). Any
Indemnified Party wishing to claim indemnification under this Section 5.5, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify Howard Appel and JPAL, but the failure so to notify shall not relieve a
party from any liability that it may have under this Section 5.5, except to the
extent such failure materially prejudices such party.
(b) All rights to indemnification under this Section 5.5 shall survive
the consummation of the Modified Exchange and the termination of this Amended
Agreement. The provisions of this Section 5.5 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, and his or her heirs
and representatives. No party shall enter into any settlement regarding the
foregoing without prior approval of the Indemnified Party.
Section 5.6 Drechsler Release. At the Closing, Drechsler shall deliver
to the Company an executed copy of the Release attached hereto as Exhibit C.
Section 5.7 Conduct of Business of JPAL. Except as contemplated by this
Amended Agreement, during the period commencing on the date hereof and ending as
of the Closing Date or the termination of this Amended Agreement, JPAL shall not
conduct any business activities whatsoever without the prior written consent of
the Company.
14
ARTICLE 6
Covenants of HMA and JPAL
Section 6.1 Bridge Financings. (a) HMA Advisors, Inc. ("HMA") shall
have loaned or arranged for an aggregate of $2,525,000 of bridge financings (the
"Bridge Loans") for the Company, and in connection therewith HMA and/or the
bridge investors (collectively, the "Lenders") shall receive warrants (the
"Bridge Warrants") to purchase 750,000 shares of Common Stock at an exercise
price of $1.90 per share, subject to decrease as determined in the discretion of
board of directors of JPAL as constituted subsequent to the Closing. The Bridge
Warrants shall be immediately exercisable and expire two (2) years from the date
of the Closing. JPAL shall be able to call the Bridge Warrants, provided: (i)
that the shares of Common Stock shall have traded for an average closing market
price of $1.50 above the prevailing exercise price for a period of no less than
fifteen (15) business days (the "Period"); (ii) that the SEC shall have declared
effective the registration statement under the Securities Act (the "Statement,"
as further described in Section 7.1 below) pursuant to which the shares of
Common Stock underlying such Bridge Warrants shall have been registered prior to
the commencement of such period, and (iii) that the average daily volume of the
Common Stock traded during the Period shall have been no less than 100,000.
(b) No fees or commissions shall be payable in connection with any of
the above-mentioned bridge financings.
(c) Subject to Closing, JPAL undertakes to prepay the Bridge Loans
(including all loans evidenced by Bridge Notes), excluding any Bridge Loans
converted into Private Placement Interests or shares of Common Stock as provided
for in Sections 5.1(c) and 5.1(d) hereof, respectively, in the following manner:
(i) at Closing, principal plus a proportionate amount of
accrued interest equal to 15% of all cash amounts raised in the Private
Placement between $4,000,000 and $6,250,000, provided, however, that if
$6,250,000 or greater is raised, then such prepayment amount shall equal an
aggregate of $500,000.
(ii) 15 days following each of the four calendar quarters in
2003, principal plus a proportionate amount of accrued interest equal to
$100,000.
(iii) 50% of the proceeds received by JPAL from the exercise
of any Bridge Warrants, within 15 days of receipt by JPAL.
(iv) For any proceeds raised by issuance of securities that
were deemed equity at time of issuance:
A. In the year 2002. 15% of the net proceeds received
from the sale of such equity above $10,000,000 (including proceeds raised in the
Private Placement) shall become immediately due and payable within 15 days of
receipt thereof by JPAL, subject to a maximum of up to $700,000; and
B. In the year 2003. 20% of the net proceeds received
from the sale of any such equity shall become immediately due and payable within
15 days of receipt thereof by JPAL, subject to a maximum of $700,000, provided,
that in the event the aggregate principal amount of Bridge Loans remaining
outstanding at the time such equity is raised shall exceed $1,000,000, then the
maximum amount due and payable within fifteen days of receipt by JPAL shall be
$900,000.
Anything to the contrary in Section 6.1(c)(iv) notwithstanding, if at
any time during either 2002 or 2003 the equity raised from unrelated sales is
$1,000,000 or less and the investor(s) in each such unrelated sale objects to
the repayment of the Bridge Loans, then no such repayment shall be made. For
purposes of calculating the proceeds received and amounts raised set forth in
this Section 6.1(c)(iv): (A) any non-cash investment, or (B) any amounts raised
from strategic investors that are either (1) earmarked for specific use, or (2)
received in connection with actual or anticipated other relationship(s) with
such investor(s) that exist(s) or may exist, shall not be counted in such
calculation.
(v) within 45 days following the end of each calendar quarter
(except 90 days with respect to the last quarter in a year) beginning on October
1, 2002, 35% of any Excess Cash greater than $2,000,000, up to a maximum of
$200,000 (in addition to amounts received under clause (ii) above) in any
quarter, where "Excess Cash" means any cash on the books of JPAL at the end of a
quarter that is not restricted by an agreement or covenant providing for such
restriction minus any equity and/or debt raised during such quarter.
15
For purposes of this Section 6.1(c), in no event may the amounts paid
be greater than the amounts owed to the Bridge Note holders. In addition; (i)
all payments to be made under this Section 6.1(c) are subordinate to obligations
to financing sources, and may be subject to restrictive covenants imposed by
either trade or secured creditors, and (ii) the holders of the notes
representing the Bridge Loans have agreed not to take any action on the
prepayment obligations until any such restrictive covenants are eliminated or
terminated. To the extent that a cash payment is not made when due, all unpaid
amounts not paid at maturity shall earn interest at a rate of 12% per annum.
ARTICLE 7
Covenants of the Company and the Company Members
Section 7.1 Registration Statement. Promptly following the Closing, the
Company Members shall cause JPAL to file the Statement, which Statement shall
cover the resale of; (a) up to one hundred percent (100%) of the Private
Placement Shares; (b) all shares of Common Stock underlying the Bridge Warrants;
(c) all shares of Common Stock underlying the JPAL Agent Warrants, if any; (d)
all shares reserved for issuance pursuant to conversion of the JPAL Convertible
Notes, and (e) twenty-five percent (25%) of the Contribution Shares. Holders of
all Private Placement Shares not included in the Statement shall be given
piggy-back registration rights applicable to all such shares with respect to any
registration statement on an appropriate form that JPAL may file subsequent to
the filing of the Statement.
Section 7.2 Restrictions on Trading. Notwithstanding the provisions of
Section 7.1 above, the twenty-five percent (25%) of the Contribution Shares
being registered above may be sold only to the extent of such number of shares
(in the aggregate) that is equal to 10% of the average weekly volume of the
Common Stock during the preceding four weeks, on a rolling basis. Any
Contribution Shares that become available for sale pursuant hereto shall be
released from these restrictions on a pro rata basis. In addition, the
Shareholders referenced in Section 5.1(a) hereinabove shall execute letters
whereby they agree that the Escrow Shares shall not be sold during the terms
provided in such Section, and shall include a statement representing to JPAL
that no shares of Common Stock will be sold short for twelve (12) months
following the Closing Date.
Section 7.3 Financial Statements. The Company shall deliver to JPAL, as
soon as they become available but in no event later than 30 business days after
the date hereof, copies of the Company's audited financial statements as of and
for the fiscal year ended December 31, 2001, certified by Deloitte & Touche LLP
(the "Company Financial Statements").
ARTICLE 8
Covenants of the Parties
The parties hereto agree that:
Section 8.1 Reasonable Best Efforts. Subject to the terms and
conditions of this Amended Agreement, each party will use its reasonable best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate the transactions contemplated by this Amended
Agreement.
Section 8.2 Filings; Other Action. Subject to the terms and conditions
herein provided, the Company and JPAL shall promptly use reasonable best efforts
to cooperate with one another in (a) determining whether any filings are
required to be made with, or consents, permits, authorizations or approvals are
required to be obtained from, any third party, the United States government or
any agencies, departments or instrumentalities thereof or other governmental or
regulatory bodies or authorities of federal, state, local and foreign
jurisdictions in connection with the execution and delivery of this Amended
Agreement and the consummation of the transactions contemplated hereby and (b)
timely making all such filings and timely seeking all such consents, permits,
authorizations or approvals, and (c) taking or causing to be taken, all other
actions and do, or cause to be done, all other things necessary, proper or
advisable to consummate and make effective the transactions contemplated hereby.
16
Section 8.3 Public Announcements. The Company and JPAL shall consult
with each other before issuing any press release or making any public statement
with respect to this Amended Agreement or the transactions contemplated hereby
and will not issue any such press release or make any such public statement
prior to such consultation and without the written consent of the other party.
Section 8.4 Notices of Certain Events. In addition to any other notice
required to be given by the terms of this Amended Agreement, each of the parties
shall promptly notify the other party hereto of:
(a) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with any of the
transactions contemplated by this Amended Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Amended Agreement; and
(c) any actions, suits, claims, investigations or proceedings commenced
or, to its knowledge threatened against, relating to or involving or otherwise
affecting such party that, if pending on the date of this Amended Agreement,
would have been required to have been disclosed pursuant to Section 3 and
Section 4 (as the case may be) or that relate to the consummation of the
transactions contemplated by this Amended Agreement.
Section 8.5 Access to Information; Confidentiality.
(a) Following the date hereof, until consummation of all transactions
contemplated hereby, the Company, on the one hand, and JPAL, on the other, will
give to the other party, its counsel, financial advisers, auditors and other
authorized representatives reasonable access to the offices, properties, books
and records of such party, furnish to the other party and its representatives
such financial and other data and information as such party and its
representatives may reasonably request and instruct its own employees and
representatives (including, without limitation, insurance agents and
underwriters) to cooperate with the other party in its investigations. Any
investigation pursuant to this Section shall be conducted in such manner as not
to interfere unreasonably with the conduct of the business of the other parties.
No investigation pursuant to this Section shall affect any representation or
warranty made by any party hereunder.
(b) All information obtained by the Company or JPAL in connection with
the transactions contemplated hereby shall be kept confidential and will not be
used for any purpose unrelated to the consummation of the transactions
contemplated by this Amended Agreement. Should the Closing not occur for any
reason, all such information and copies thereof shall promptly be returned to
each respective party.
ARTICLE 9
Conditions Precedent
Section 9.1 Conditions of Obligations of the Company Members. The
obligations of the Company Members to effect the Modified Exchange are subject
to the satisfaction of the following conditions, any or all of which may be
waived in whole or in part by the Company Members:
(a) Representations and Warranties. Each of the representations and
warranties of JPAL set forth in this Amended Agreement shall be true and correct
in all material respects as of the date of this Amended Agreement and (except to
the extent such representations and warranties speak as of an earlier date) as
of the Closing Date as though made on and as of the Closing Date, except where
the failure to be so true and correct would not have a Material Adverse Effect
on JPAL.
(b) Performance of Obligations of JPAL. JPAL shall have performed in
all material respects all obligations required to be performed by it under this
Amended Agreement at or prior to the Closing.
17
(c) Secretary's Certificate. The Secretary of JPAL shall deliver to the
Company at the Closing a certificate certifying: (i) that attached thereto is a
true and complete copy of its Articles of Incorporation (including all
amendments thereto) as in effect at the Closing; (ii) that attached thereto is a
true and complete copy of its By-laws as in effect at the Closing; (iii) that
attached thereto is a true and complete copy of all resolutions duly adopted by
its Board of Directors (x) authorizing the execution, delivery and performance
of this Amended Agreement, (y) authorizing the consummation of the transactions
contemplated hereby and (z) directing the submission of the Modified Exchange to
a vote of the Shareholders, and that such resolutions have not been amended or
modified and are in full force and effect; and (iv) that attached thereto is a
true and complete copy of (x) the Certificate of the Inspector of Elections
appointed to serve as such at the Meeting of Shareholders called to vote on this
Amended Agreement attesting to validity of inspected proxies and presence of
sufficient number thereof to constitute quorum thereat, and (y) the Minutes of
the Meeting of Shareholders attesting to the vote at such Meeting executed by
Drechsler and a Secretary whom JPAL shall duly have appointed.
(d) Legal Opinion. The Company shall have received an opinion, dated
the Closing Date, of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, counsel to
JPAL, in the form attached hereto as Exhibit D.
(e) Good Standing Certificate. JPAL shall have furnished the Company
with good standing and existence certificates for JPAL in its jurisdiction of
incorporation and other jurisdictions as the Company shall reasonably request.
(f) Certified List of Record Holders. The Company shall have received a
certified list from JPAL's transfer agent of the holders of record of JPAL's
Common Stock as of the Closing Date.
(g) Shareholders' Vote. JPAL shall have delivered to the Company
evidence satisfactory to the Company that a majority of the Shareholders
approved the transactions contemplated hereby in accordance with applicable
state and federal securities laws at the Meeting.
(h) Due Diligence. JPAL shall have delivered to the Company's counsel
all due diligence materials requested by the Company and the Company is
satisfied with the results of its review thereof.
(i) Bridge Notes. All Bridge Notes shall have been exchanged pursuant
to Sections 5.1(b), (d) and (e) above.
(j) Private Placement. The Company shall have consummated the Private
Placement with no less than $6,500,000 in gross proceeds.
Section 9.2 Conditions of Obligations of JPAL. The obligations of JPAL
to effect the Modified Exchange are subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by JPAL:
(a) Representations and Warranties. Each of the representations and
warranties of the Company set forth in this Amended Agreement shall be true and
correct in all material respects as of the date of this Amended Agreement and
(except to the extent such representations and warranties speak as of an earlier
date) as of the Closing Date as though made on and as of the Closing Date,
except where the failure to be so true and correct would not have a Material
Adverse Effect on the Company.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Amended Agreement at or prior to the Closing Date.
(c) Officer's Certificate. An officer of the Company shall deliver to
JPAL at the Closing a certificate certifying: (i) that attached thereto is a
true and complete copy of the Company's Certificate of Formation (including all
amendments thereto) as in effect at the Closing; (ii) that attached thereto is a
true and complete copy of the Operating Agreement of the Company, and (iii) that
attached thereto is a true and complete copy of all resolutions duly adopted by
the Board of Managers of the Company (x) authorizing the execution, delivery and
performance of this Amended Agreement, (y) authorizing the consummation of the
transactions contemplated hereby and (z) directing the submission of the
Modified Exchange to a vote, and that such resolutions have not been amended or
modified and are in full force and effect.
18
(d) Legal Opinions. JPAL shall have received an opinion, dated the
Closing Date, of (i) Olshan Grundman Frome Rosenzweig & Wolosky LLP in the form
attached hereto as Exhibit E and (ii) the Company's patent counsel in a form
reasonably satisfactory to JPAL.
(e) The Assignment. The Company shall have consented to the Assignment
as described in Section 5.1(b) hereof.
ARTICLE 10
Termination
Section 10.1 Termination. This Amended Agreement may be terminated and
the Modified Exchange may be abandoned at any time prior to the Closing:
(a) by mutual written consent of the parties hereto;
(b) by either the Company or JPAL if the Closing shall not have
occurred on or before August 31, 2002, which date may be extended for up to 30
days in the discretion of the Company (unless the failure to consummate the
transactions by such date shall be due to the action or failure to act of the
party seeking to terminate this Amended Agreement);
(c) by the Company if (i) JPAL shall have failed to comply in any
material respect with any of the covenants or agreements contained in this
Amended Agreement to be complied with or performed by JPAL; or (ii) any
representations and warranties of JPAL contained in this Amended Agreement shall
not have been true when made or on and as of the Closing Date as if made on and
as of Closing Date (except to the extent it relates to a particular date),
except where the failure to be so true and correct would not have a Material
Adverse Effect on JPAL; or
(d) by JPAL if (i) the Company shall have failed to comply in any
material respect with any of the covenants or agreements contained in this
Amended Agreement to be complied with or performed by them; or (ii) any
representations and warranties of the Company contained in this Amended
Agreement shall not have been true when made or on and as of the Closing Date as
if made on and as of the Closing Date (except to the extent it relates to a
particular date), except where the failure to be so true and correct would not
have a Material Adverse Effect on the Company.
Section 10.2 Effect of Termination. In the event of the termination of
this Amended Agreement pursuant to Section 10.1, all further obligations of the
parties under this Amended Agreement, other than the provisions of this Section
10.2, Section 11.4 (fees and expenses), Section 8.5(b) (confidentiality),
Section 8.3 (public announcements) and Section 5.5 (indemnification), shall
forthwith be terminated without any further liability of any party to the other
parties. Nothing contained in this Section 10.2 shall relieve any party from
liability for any breach of this Amended Agreement.
ARTICLE 11
Miscellaneous
Section 11.1 Notices. All notices, requests and other communications to
any party hereunder shall be in writing and either delivered personally,
telecopied or sent by certified or registered mail, postage prepaid,
19
if to the Company, to:
Essential Reality, LLC
49 West 27th Street
New York, New York 10001
Fax: (212) 244-9550
Attention: General Counsel
with a copy to (which shall not constitute notice):
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, New York 10022
Fax: (212) 755-1467
Attention: Steven Wolosky, Esq.
if to JPAL, to:
JPAL, Inc.
17620 Oak Street
Fountain Valley, California 92708
Fax: (949) 660-9010
Attention: Frank Drechsler
with a copy to (which shall not constitute notice):
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
101 East 52nd Street
New York, New York 10022
Fax: (212) 980-5192
Attention: Arthur S. Marcus, Esq.
if to Howard Appel, to:
HMA Advisors, Inc.
One Belmont Avenue, Suite 417
Bala Cynwyd, PA 19004
Fax: (610) 660-5905
Attention: Howard Appel
with a copy to (which shall not constitute notice):
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
101 East 52nd Street
New York, New York 10022
Fax: (212) 980-5192
Attention: Arthur S. Marcus, Esq.
or such other address or fax number as such party may hereafter specify for the
purpose by notice to the other parties hereto. All such notices, requests and
other communications shall be deemed received on the date delivered personally,
telecopied or, if mailed, five business days after the date of mailing if
received prior to 5 p.m. in the place of receipt and such day is a business day
in the place of receipt. Otherwise, any such notice, request or communication
shall be deemed not to have been received until the next succeeding business day
in the place of receipt.
20
Section 11.2 Survival of Representations and Warranties. Except as set
forth in Section 5.5(b) above, the representations and warranties and agreements
contained herein and in any certificate or other writing delivered pursuant
hereto shall not survive the Closing.
Section 11.3 Amendments; No Waivers.
(a) Any provision of this Amended Agreement with respect to
transactions other than the Modified Exchange contemplated hereby may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed,
in the case of an amendment, by the Company and JPAL; or in the case of a
waiver, by the party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
Section 11.4 Fees and Expenses. Except for all transfer taxes which
shall be paid by JPAL, all costs and expenses incurred in connection with this
Amended Agreement shall be paid by the party incurring such cost or expense.
Section 11.5 Successors and Assigns. The provisions of this Amended
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Amended Agreement without the consent of each other party hereto, but any such
transfer or assignment will not relieve the appropriate party of its obligations
hereunder.
Section 11.6 Governing Law. This Amended Agreement shall be governed by
and construed in accordance with the laws of the State of New York, without
giving effect to the principles of conflicts of law thereof.
Section 11.7 Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Amended Agreement or the transactions contemplated hereby may be
brought in any federal or state court located in the City of New York, Borough
of Manhattan, and each of the parties hereby consents to the jurisdiction of
such courts (and of the appropriate appellate courts therefrom) in any such
suit, action or proceeding and irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such suit, action or proceeding in any such court or that
any such suit, action or proceeding which is brought in any such court has been
brought in an inconvenient forum. Process in any such suit, action or proceeding
may be served on any party anywhere in the world, whether within or without the
jurisdiction of any such court. Without limiting the foregoing, each party
agrees that service of process on such party as provided in Section 11.1 shall
be deemed effective service of process on such party.
Section 11.8 Counterparts; Effectiveness. This Amended Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Amended Agreement shall become effective when each party hereto
shall have received counterparts hereof signed by all of the other parties
hereto. No provision of this Amended Agreement is intended to confer upon any
Person other than the parties hereto any rights or remedies hereunder.
Section 11.9 Entire Agreement. This Amended Agreement and the Exhibits
and Schedules hereto constitutes the entire agreement between the parties with
respect to the subject matter of this Amended Agreement and supersedes all prior
agreements and understandings, both oral and written, between the parties with
respect to the subject matter hereof. Neither JPAL nor the Company makes any
representations or warranties, except as set forth in this Amended Agreement.
21
Section 11.10 Captions. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof.
Section 11.11 Severability. If any term, provision, covenant or
restriction of this Amended Agreement is held by a court of competent
jurisdiction or other authority to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Amended
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any parties. Upon such a determination, the parties shall negotiate
in good faith to modify this Amended Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner in order
that the transactions contemplated hereby be consummated as originally
contemplated to the fullest extent possible.
Section 11.12 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Amended
Agreement was not performed in accordance with the terms hereof and that the
parties shall be entitled to specific performance of the terms hereof in
addition to any other remedy to which they are entitled at law or in equity.
Section 11.13 Definition and Usage.
For purposes of this Amended Agreement:
"Affiliate" means, with respect to any Person, any other
Person, or indirectly controlling, controlled by, or under common control with
such Person.
"knowledge" of any Person which is not an individual means the
knowledge of such person's officers after reasonable inquiry.
"Lien" means, with respect to any property or asset, any
mortgage, lien, pledge, charge, security interest, encumbrance or other adverse
claim of any kind in respect of such property or asset.
"Material Adverse Effect" means any effect or change that is
or would be materially adverse to the business, operations, assets, prospects,
condition (financial or otherwise) or results of operations of an entity and any
of its subsidiaries, taken as a whole.
"Person" means an individual, corporation, partnership,
limited liability company, association, trust or other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"subsidiary" means, with respect to any Person, any entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at any time directly or indirectly owned by such Person.
"taxes" means any and all federal, state, local, foreign or
other taxes of any kind (together with any and all interest, penalties,
additions to tax and additional amounts imposed with respect thereto) imposed by
any taxing authority, including, without limitation, taxes or other charges on
or with respect to income, franchises, windfall or other profits, gross
receipts, sales, use, capital stock, payroll, employment, social security,
workers' compensation, unemployment compensation, or net worth, and taxes or
other charges in the nature of excise, withholding, ad valorem or value added.
A reference in this Amended Agreement to any statute shall be to such
statute as amended from time to time, and to the rules and regulations
promulgated thereunder.
22
[SIGNATURE PAGE FOLLOWS]
23
IN WITNESS WHEREOF, each of the following individuals has
caused this Amended Agreement to be signed, and each party that is not an
individual has caused this Amended Agreement to be duly executed under seal by
its respective authorized officer, all as of the day and year first above
written.
JPAL, INC.
/s/ Martin Abrams By: /s/ Frank Drechsler
--------------------------- -------------------
Martin Abrams Name: Frank Drechsler
An individual Title: President
LCG CAPITAL GROUP, LLC
/s/ John Gentile By: /s/ Michael Alpert
----------------------------------- -----------------------------------
John Gentile Name: Michael Alpert
An individual Title: President of Winchester Capital Group, LLC,
its Managing Member
ESSENTIAL REALITY, LLC
/s/ Anthony Gentile By: /s/ Humbert Powell
----------------------------------- -----------------------------------
Anthony Gentile Name: Humbert powell
An individual Title: Acting CEO
FOR PURPOSES OF SECTION 5.5 ONLY: FOR PURPOSES OF SECTION 5.6 ONLY:
/s/ Howard Appel /s/ Frank Drechsler
----------------------------------- -----------------------------------
Howard Appel Frank Drechsler
An individual An individual
FOR PURPOSES OF ARTICLE 6 ONLY:
HMA ADVISORS, INC.
By: /s/ Howard Appel
-----------------------------------
Name: Howard Appel
Title: President
24
Schedule 1.1
MEMBERSHIP INTERESTS
--------------------
Name of Member Percentage Interest Membership Interests
-------------- ------------------- --------------------
LCG Capital Group, LLC 50.0% 4,800,000
Martin Abrams 25.005% 2,400,480
John Gentile 12.4975% 1,199,760
Anthony Gentile 12.4975% 1,199,760
Notwithstanding anything to the contrary contained in this Amended
Agreement, the following transfers of securities shall be permitted:
(a) prior to the Closing, the Company Members may transfer all or a
portion of their Membership Interests to affiliated entities and/or family
members, and such Persons shall then be deemed to be Company Members for
purposes of this Amended Agreement; and
(b) prior to or following the Closing, LCG Capital Group, LLC may
transfer all or a portion of its Contribution Shares pro rata to its members,
based on such members' ownership percentage in LCG Capital Group, LLC.
25
EXHIBIT B
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB,
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ------------------
Commission File Number: 000-32319
JPAL, Inc.
----------
(Exact name of registrant as specified in its charter)
Nevada 33-0851302
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
17620 Oak Street, Fountain Valley, California 92708
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714) 785.2095
--------------
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
Title of each class registered: Name of each exchange on which registered:
------------------------------- ------------------------------------------
None None
Securities registered under Section 12(g) of the Act:
Common Stock, Par Value $.001
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $1,039.00
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) As of April 12, 2002, approximately $14,534,500.
As of April 12, 2002, there were 8,645,260 shares of the issuer's $.001 par
value common stock issued and outstanding.
Documents incorporated by reference. There are no annual reports to security
holders, proxy information statements, or any prospectus filed pursuant to Rule
424 of the Securities Act of 1933 incorporated herein by reference.
Transitional Small Business Disclosure format (check one):
Yes[X] No [ ]
PART I
Item 1. Description of Business.
Our Background. JPAL, Inc. was incorporated pursuant to the laws of the State of
Nevada on March 31, 1999. On April 6, 2000, we filed Amended and Restated
Articles of Incorporation with the Secretary of State of Nevada to amend and
restate Articles of Incorporation in their entirety and specifically to
authorize 50,000,000 shares of $.001 par value common stock.
Our Business. We were originally formed to provide vacation rental properties
and services for the Year 2000 New Year's Eve celebration in Las Vegas, and
continued to provide vacation rental properties and services after the Year 2000
New Year's Eve celebration. We generated revenues of approximately $6,793
through December 31, 1999, and $2,462 through December 31, 2000. As an Internet
based provider of vacation rental properties and services, we had been in the
process of redesigning our website to provide a wide range of services to both
vacationers and property owners. Our primary source of revenue was property
rental fees, which were charged to the property owners as a percentage of the
vacationers' total rental price. Those fees were our primary source of revenue,
although we also attempted to generate additional revenue sources such as
Internet advertising.
In August 2001, we suspended further development of our website that was
intended to provide vacation rental properties and services because we entered
into a contribution agreement with Essential Reality LLC, a Delaware limited
liability company. Essential Reality LLC is a privately held New York-based
technology firm specializing in the development of innovative computer and game
console peripherals. Pursuant to the terms of the contribution agreement, we
will issue 11 million shares of our common stock to the current shareholders of
Essential Reality LLC in exchange for all of the equity interests of Essential
Reality LLC. The consummation of the transaction is contingent on a number of
factors, including, but not limited to, that we raise a minimum of $4.5 million
dollars.
Essential Reality LLC is positioning itself to take advantage of the
opportunities in this marketplace with the development of its first product,
P5(TM), a 3D input device capturing finger-bend and relative hand-position to
enable intuitive interaction with 3D environments. P5(TM) is designed as a
low-cost natural interface for the computer, game consoles and other
USB-compatible 3D-software platforms. The product will utilize a patented bend
sensor technology to accurately determine the bend of the user's five fingers.
In addition, P5(TM) will track the relative position of the hand in space.
Competition. If we consummate the acquisition of Essential Reality LLC, we will
enter the market for peripheral input devices, including mouses and joysticks,
which is very competitive. In addition, Sony and Nintendo, who currently
dominate the interactive entertainment software industry, may determine to
develop their own 3D peripheral port device and have the financial resources to
withstand significant price competition and to implement extensive advertising
campaigns. If we consummate the acquisition of Essential Reality LLC, many of
our competitors have far greater financial, technical, personnel and other
resources than we do, and many are able to carry larger inventories and adopt
more aggressive pricing policies. Prolonged price competition or reduced
operating margins would cause our profits to decrease significantly.
Patents and Proprietary Rights. We own the Internet domain name
"www.jpalco.com." Under current domain name registration practices, no one else
can obtain an identical domain name, but someone might obtain a similar name, or
the identical name with a different suffix, such as ".org", or with a country
designation. The regulation of domain names in the United States and in foreign
countries is subject to change, and we could be unable to prevent third parties
from acquiring domain names that infringe or otherwise decrease the value of our
domain names.
Essential Reality LLC is exploring intellectual property protection of P5(TM)
for dynamic manipulation of computer- generated objects in a multi-dimensional
environment. P5(TM) will benefit from Essential Reality LLC's proprietary bend
sensor and tracking technology as a means for coordination of movement between
human and machine. Essential Reality LLC believes that the integration of such
technologies into the glove interface, in combination with proprietary software
and firmware applications and drivers, will result in a superior product at a
low, cost effective price point not previously recognized in the field. The
securing of intellectual property rights in its glove device should enable
Essential Reality LLC to control, market, license, manufacture and distribute
P5(TM) in the United States and potentially worldwide.
2
Research and Development. We are not currently conducting any research and
development activities. We do not anticipate conducting any other such
activities in the next twelve months, unless we complete the acquisition of
Essential Reality LLC.
Employees. As of April 12, 2002, we have no employees, other than our sole
officer. We anticipate that we will not hire any employees in the next six
months, unless we consummate the acquisition of Essential Reality LLC.
Item 2. Description of Property.
Our Facilities. Our executive, administrative and operating offices are located
at 17620 Oak Street, Fountain Valley, California 92708. Frank Drechsler, our
president, secretary and director, currently provides office space to us at no
charge. We do not have a written lease or sublease agreement and Mr. Drechsler
does not expect to be paid or reimbursed for providing office facilities.
Item 3. Legal Proceedings.
There are no legal actions pending against us nor are any legal actions
contemplated by us at this time.
Item 4. Submission of Matters to Vote of Security Holders
There were no matters submitted for vote of our security holders during the year
ended December 31, 2001.
PART II
Item 5. Market Price for Common Equity and Related Stockholder Matters.
Reports to Security Holders. We are a reporting company with the Securities and
Exchange Commission, or SEC. The public may read and copy any materials filed
with the SEC at the SEC's Public Reference Room at 450 Fifth Street N.W.,
Washington, D.C. 20549. The public may also obtain information 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. The address of that site is http://www.sec.gov.
On April 19, 2001, we were approved for quotation on the Over-the-Counter
Bulletin Board ("OTC BB") under the ticker symbol JPAL. The following table sets
forth, for the periods indicated, the range of the high and low bid quotations
for the shares of common stock as quoted on the OTC BB. The reported bid
quotations reflect inter-dealer prices, without retail markup, markdown or
commissions, and may not necessarily represent actual transactions. As of
December 31, 2001, there were 8,645,260 shares of our common stock outstanding.
-------------------------------------------------------------------------------
2001 HIGH LOW
-------------------------------------------------------------------------------
2nd Quarter $1.00 $0.263
-------------------------------------------------------------------------------
3rd Quarter $7.00 $1.00
-------------------------------------------------------------------------------
4th Quarter $6.05 $2.97
-------------------------------------------------------------------------------
The closing price for our common stock on April 12, 2002, was $3.95.
On June 14, 2001, we redeemed 2,068,417 shares of its common stock for $2,068.
On July 2, 2001, we approved a 5 for 1 forward stock split of its common stock.
Accordingly, all share and per share amounts have been retroactively restated in
the financial statements to reflect this split.
During 2001, we issued 610,560 warrants, which were valued at $838,276, in
connection with short term promissory notes executed from August 23, 2001, to
December 31, 2001. The warrants were issued for the purchase of common stock at
$3.00 per share. These warrants are exercisable at the option of warrant holder
and expire three years from the date of issuance.
3
During January and February 2002, we issued additional warrants to acquire
353,040 shares of our common stock at a purchase price of $3.00 per share in
connection with the issuances of additional notes payable.
There are no outstanding shares of our common stock that we have agreed to
register under the Securities Act for sale by security holders.
As of December 31, 2001, the approximate number of holders of record of shares
of our common stock is thirty.
There have been no cash dividends declared on our common stock. Dividends are
declared at the sole discretion of our Board of Directors.
Penny Stock Regulation. Shares of our common stock are subject to rules adopted
by the Securities and Exchange Commission that regulate broker-dealer practices
in connection with transactions in "penny stocks". Penny stocks are generally
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in those securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from those rules, deliver a standardized risk
disclosure document prepared by the Securities and Exchange Commission, which
contains the following:
o a description of the nature and level of risk in the market
for penny stocks in both public offerings and secondary
trading;
o a description of the broker's or dealer's duties to the
customer and of the rights and remedies available to the
customer with respect to violation to such duties or other
requirements of securities' laws;
o a brief, clear, narrative description of a dealer market,
including "bid" and "ask" prices for penny stocks and the
significance of the spread between the "bid" and "ask" price;
o a toll-free telephone number for inquiries on disciplinary
actions;
o definitions of significant terms in the disclosure document or
in the conduct of trading in penny stocks; and
o such other information and is in such form (including
language, type, size and format), as the Securities and
Exchange Commission shall require by rule or regulation.
Prior to effecting any transaction in penny stock, the broker-dealer also must
provide the customer the following:
o the bid and offer quotations for the penny stock;
o the compensation of the broker-dealer and its salesperson in
the transaction;
o the number of shares to which such bid and ask prices apply,
or other comparable information relating to the depth and
liquidity of the market for such stock; and
o monthly account statements showing the market value of each
penny stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitably statement. These
disclosure requirements may have the effect of reducing the trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
Holders of shares of our common stock may have difficulty selling those shares
because our common stock will probably be subject to the penny stock rules.
Item 6. Management's Discussion and Analysis of Financial Condition or Plan of
Operation.
This following information specifies certain forward-looking statements of
management of the company. Forward-looking statements are statements that
estimate the happening of future events are not based on historical fact.
Forward-looking statements may be identified by the use of forward-looking
terminology, such as "may", "shall", "will", "could", "expect", "estimate",
"anticipate", "predict", "probable", "possible", "should", "continue", or
similar terms, variations of those terms or the negative of those terms. The
forward-looking statements specified in the following information have been
compiled by our management on the basis of assumptions made by management and
considered by management to be reasonable. Our future operating results,
however, are impossible to predict and no representation, guaranty, or warranty
is to be inferred from those forward-looking statements.
4
The assumptions used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject
to uncertainty as to possible changes in economic, legislative, industry, and
other circumstances. As a result, the identification and interpretation of data
and other information and their use in developing and selecting assumptions from
and among reasonable alternatives require the exercise of judgment. To the
extent that the assumed events do not occur, the outcome may vary substantially
from anticipated or projected results, and, accordingly, no opinion is expressed
on the achievability of those forward-looking statements. No assurance can be
given that any of the assumptions relating to the forward-looking statements
specified in the following information are accurate, and we assume no obligation
to update any such forward-looking statements.
Liquidity and Capital Resources. We had cash of $1,770 as of December 31, 2001.
Our total assets were $1,522,983, of which approximately $1,500,000 is due from
Essential Reality LLC. Our total liabilities were approximately $1,314,601 as of
December 31, 2001. From August through December 2001, we entered into several
unsecured notes payable in order to memorialize certain bridge financings
relating to the contemplated transaction with Essential Reality LLC. Those
unsecured notes payable bear interest rates ranging from 8.00% to 8.50%. Notes
totaling $650,000 will mature on the earliest of (i) March 1, 2002, or (ii) the
sale or exchange of all or substantially all of the outstanding shares of common
stock. As of April 12, 2002, those notes and accrued interest have not been
repaid. The note holders have not called the notes. In the event that on of
those notes is called, other notes holders have agreed to fund us to satisfy
this debt.
Notes totaling $911,400 will mature on the earliest of (i) January 1, 2003 or
(ii) the sale or exchange of all or substantially all of the outstanding shares
of common stock. The total amount of notes payable was $1,561,400 at December
31, 2001. Our total interest expense on these notes during the year ended
December 31, 2001 was $25,824. We issued warrants to acquire 610,560 shares of
our common stock at a purchase price of $3.00 per share in connection with the
issuances of those notes payable. Those warrants were valued at $838,276. The
value of such warrants has been reflected as a discount to the related notes
payable, and is being amortized to interest expense over the original terms of
the notes. Deferred interest of $560,788 has been amortized as interest expense
during the year ended December 31, 2001. The remaining balance of deferred
interest of $277,488 has been netted with the outstanding principal balance of
$650,000 for the current notes payable. Therefore, our current notes payable,
net of deferred interest, was $372,512 as of December 31, 2001. Our long term
notes payable were $911,400 as of December 31, 2001.
Pursuant to the contribution agreement, we loaned $1,500,000 of the proceeds
from those notes payable to Essential Reality LLC. The note from Essential
Reality LLC is unsecured and bears interest of 8.5%; however, interest did not
begin to accrue until December 31, 2001. The principal together with accrued
interest is due on the earliest of (i) January 31, 2004, (ii) the closing of the
transactions contemplated by the contribution agreement, or (iii) the sale or
exchange of substantially all of the membership interests of Essential Reality
LLC. Although none of those events have occurred, we believe that this note is
collectible because of the financial backing of the members of Essential Reality
LLC and projected cash flows from their future operations. In addition, certain
of our note holders have indicated that they will fund us if the need arises.
During January and February 2002, we executed several notes payable agreements.
Those notes total $882,600 and bear an interest rate of 8.50% with maturity
dates from January 15, 2002, through January 31, 2003. We issued warrants to
acquire 353,040 shares of our common stock at a purchase price of $3.00 per
share in connection with the issuances of those notes payable. A note of
$100,000 was due on January 15, 2002, and other notes totaling were due March 1,
2002. As of April 12, 2002, these notes and accrued interest have not been
repaid. The note holders have not called the notes. In the event that on of
those notes is called, other notes holders have agreed to fund us to satisfy
this debt.
5
Results of Operations.
Revenue. For the year ended December 31, 2001, we generated revenues of
approximately $1,039, compared to revenues of approximately $2,462 during the
year ended December 31, 2000. The decline in our revenues is due to the fact
that we have suspended the redevelopment of our website and all marketing
activities because of our pending acquisition of Essential Reality LLC. We do
not expect that we will generate any significant revenues until such time as we
complete the acquisition of Essential Reality LLC.
Operating Expenses. For the year ended December 31, 2001, operating expenses
totaled $653,436. $586,612 of those expenses is for interest expense. Interest
expense includes the interest of $25,824 due on the notes payable during the
year ended December 31, 2001, and the deferred interest of $560,788 from the
valuation of the warrants. The value of the warrants, which has been reflected
as a discount to the related notes payable, and is being amortized to interest
expense over the original terms of the notes. Deferred interest of $560,788 has
been amortized as interest expense during the year ended December 31, 2001. We
also have incurred significant general and administrative expenses. We
anticipate that we will continue to incur significant general and administrative
expenses with respect the contemplated acquisition of Essential Reality LLC.
Our Plan of Operation for the Next Twelve Months. Our plan of operation is
dependent on our ability to complete the acquisition of Essential Reality LLC or
complete the redevelopment of our website so that we can generate more revenues.
If we are unable to complete the acquisition of Essential Reality LLC, then we
intend to complete the redevelopment of our website.
In the opinion of management, available funds will satisfy our working capital
requirements for the next twelve months. Our forecast for the period for which
our financial resources will be adequate to support our operations involves
risks and uncertainties and actual results could fail as a result of a number of
factors. We will need to raise additional capital to complete the acquisition of
Essential Reality LLC. Such additional capital may be raised through public or
private financing as well as borrowings and other sources. We cannot guaranty
that additional funding will be available on favorable terms, if at all.
We are not currently conducting any research and development activities. We do
not anticipate conducting any other such activities in the next twelve months,
unless we complete the acquisition of Essential Reality LLC. We do not
anticipate that we will purchase or sell any significant equipment in the next
six to twelve months unless we complete the acquisition of Essential Reality
LLC. We do not anticipate that we will hire any employees in the next six to
twelve months, unless complete the acquisition of Essential Reality LLC.
Item 7. Financial Statements
The financial statements required by Item 7 are presented in the following
order:
Item 8. Changes in and Disagreements with Accountants.
There have been no changes in or disagreements with our accountants since our
formation required to be disclosed pursuant to Item 304 of Regulation S-B.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.
Our directors and principal executive officers are as specified on the following
table:
================================================================================
Name Age Position
--------------------------------------------------------------------------------
Frank Drechsler 34 president, secretary, treasurer and a director
================================================================================
Frank Drechsler. Mr. Drechsler has been one of our directors since June 2001.
Since July 2001, Mr. Drechsler has also been the president, secretary and a
director of Finger Tip Drive, Inc., a Nevada corporation which provides online
computer data storage services. Also since July 2001, Mr. Drechsler has been a
director of Zowcom, Inc., a Nevada corporation which designs customized websites
and web-based business planning applications. From October 1998 to May 2001, Mr.
Drechsler was the president and a director of Pacific Trading Post, Inc., a
Nevada corporation, which marketed and sold products on the Internet within the
outdoor sports industries, specifically in the areas of skate, surf and snow. In
January 1998, Mr. Drechsler co-founded and developed the business model for
skatesurfsnow.com, where he was responsible for the day-to-day operations.
During 1997, Mr. Drechsler was self-employed as a consultant and helped start up
companies develop sales and marketing programs. From 1995 to December 1996, Mr.
Drechsler was the international sales manager for Select Distribution. Mr.
Drechsler graduated from California State University, Fullerton with a Bachelor
of Science degree in International Business in 1992. Mr. Drechsler is not an
officer or director of any other reporting company.
6
There is no family relationship between any of our officers or directors. There
are no orders, judgments, or decrees of any governmental agency or
administrator, or of any court of competent jurisdiction, revoking or suspending
for cause any license, permit or other authority to engage in the securities
business or in the sale of a particular security or temporarily or permanently
restraining any of our officers or directors from engaging in or continuing any
conduct, practice or employment in connection with the purchase or sale of
securities, or convicting such person of any felony or misdemeanor involving a
security, or any aspect of the securities business or of theft or of any felony.
Nor are any of the officers or directors of any corporation or entity affiliated
with us so enjoined.
Our director will serve until the next annual meeting of stockholders. Our
executive officers are appointed by our Board of Directors and serve at the
discretion of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance. We believe that our
officers, directors, and principal shareholders have filed all reports required
to be filed on, respectively, a Form 3 (Initial Statement of Beneficial
Ownership of Securities), a Form 4 (Statement of Changes of Beneficial Ownership
of Securities), or a Form 5 (Annual Statement of Beneficial Ownership of
Securities).
Item 10. Executive Compensation
Any compensation received by our officers, directors, and management personnel
will be determined from time to time by our board of directors. Our officers,
directors, and management personnel will be reimbursed for any out-of-pocket
expenses incurred on our behalf.
Summary Compensation Table. The table set forth below summarizes the annual and
long-term compensation for services payable to our former and current officers
during the year ended December 31, 2001, and our current officer for the year
ending December 31, 2002. Our board of directors may adopt an incentive stock
option plan for our executive officers which would result in additional
compensation.
============================================ ======= ============= ============= ===================== =========================
Name and Principal Position Year Annual Bonus ($) Other Annual All Other Compensation
Salary ($) Compensation ($)
-------------------------------------------- ------- ------------- ------------- --------------------- -------------------------
Ryan Neely - former president and former 2001 None None None None
secretary
-------------------------------------------- ------- ------------- ------------- --------------------- -------------------------
Jason Ortega - former treasurer 2001 None None None None
-------------------------------------------- ------- ------------- ------------- --------------------- -------------------------
Frank Drechsler - president, secretary, 2001 None None $11,000 None
treasurer and director
-------------------------------------------- ------- ------------- ------------- --------------------- -------------------------
2002 None None None None
============================================ ======= ============= ============= ===================== =========================
Compensation of Directors. Our director receives no compensation for his service
on our board of directors.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 12, 2002, by each person or entity
known by us to be the beneficial owner of more than 5% of the outstanding shares
of common stock, each of our directors and named executive officers, and all of
our directors and executive officers as a group.
7
================================================================================================================================
Title of Class Name and Address Amount and Nature Percent of Class
of Beneficial Owner of Beneficial Owner
--------------------------------------------------------------------------------------------------------------------------------
Common Stock Frank Drechsler 5,100,260 shares
17620 Oak Street president, secretary, treasurer, 58.99%
Fountain Valley, CA 92708 director
--------------------------------------------------------------------------------------------------------------------------------
Common Stock All directors and named executive 5,100,260 shares 58.99%
officers as a group
================================================================================================================================
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. In accordance with Securities and Exchange
Commission rules, shares of our common stock which may be acquired upon exercise
of stock options or warrants which are currently exercisable or which become
exercisable within 60 days of the date of the table are deemed beneficially
owned by the optionees. Subject to community property laws, where applicable,
the persons or entities named in the table above have sole voting and investment
power with respect to all shares of our common stock indicated as beneficially
owned by them.
Changes in Control. Our management is not aware of any arrangements which may
result in "changes in control" as that term is defined by the provisions of Item
403(c) of Regulation S-B.
Item 12. Certain Relationships and Related Transactions.
Related Party Transactions. There have been no related party transactions,
except for the following:
Frank Drechsler, our president, secretary, treasurer and director, currently
provides office space to us at no charge. Mr. Drechsler does not expect to be
paid or reimbursed for providing office facilities. We do not have a written
lease or sublease agreement with Mr. Drechsler.
During the period ended December 31, 2001, we recorded rent expense of $3,900
which represents our pro rata share of the office space being provided by our
current and past presidents. We also recorded computer consulting services of
$4,625 which were provided by our previous president. The services were valued
using hourly rates at estimated fair market value of similar services. We have
recorded $10,979 for legal, accounting and other administrative expenses that
were paid for by our current and past presidents. The presidents have waived
reimbursement of the allocated rent, computer consulting services, legal,
accounting and other administrative services provided and have considered them
as additional paid-in capital. During the period ended December 31, 2001, our
current president received $11,000 as compensation which is included in selling,
general and administrative expense.
With regard to any future related party transaction, we plan to fully disclose
any and all related party transactions, including, but not limited to, the
following:
o disclosing such transactions in prospectuses where required;
o disclosing in any and all filings with the Securities and Exchange
Commission, where required;
o obtaining disinterested directors consent; and
o obtaining shareholder consent where required.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibit No.
3.1 Articles of Incorporation*
(Charter Document)
3.2 Bylaws*
* Included in the registration statement on Form SB-2 filed on February 1, 2001.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period covered
by this annual report on Form 10-KSB.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned in the Fountain Valley, California, on May 8, 2002.
JPAL, Inc.,
a Nevada corporation
By:
------------------------------------
Frank Drechsler
Its: principal executive, financial and accounting officer
president, secretary, treasurer, director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
JPAL, Inc.
By: May 8, 2002
------------------------------------
Frank Drechsler
Its: principal executive, financial and accounting officer
president, secretary, treasurer, director
9
EXHIBIT C
JPAL, INC.
(A Development Stage Company)
Unaudited Pro Forma Financial Statements
December 31, 2001
On April 24, 2002, JPAL, Inc. ("JPAL") entered into an agreement (the "Amended
Contribution Agreement") with Essential Reality, LLC ("Essential") and its
members whereby the members of Essential are to contribute their membership
interests in Essential in exchange for up to 17,280,000 common shares of JPAL
(the "Exchange"). Pursuant to the Amended Contribution Agreement, the
shareholders of JPAL will own no more than 6.02% of the merged entity.
Prior to the Exchange, Essential is expected to close on an offering for a
minimum of 3,840,000 membership units for gross proceeds of $4,000,000 and a
maximum of 7,680,000 membership units for gross proceeds of $8,000,000 (the
"Offering"). Following the closing of the Offering in which the maximum amount
of membership units were subscribed for, Essential will have 17,280,000
membership units and as a result of the Exchange, each member will receive one
common share of JPAL for each membership unit in Essential. Cash fees and
expenses of the Offering are estimated at approximately $180,000. In addition,
Essential reserves the right to pay its financial advisors (i) an aggregate cash
commission of up to six percent (6.0%) of the aggregate price actually paid for
the membership units by such investors and/or (ii) warrants to purchase up to an
aggregate number of membership units equal to six percent (6.0%) of the
membership units purchased by such investors. Such warrants shall have an
exercise price per membership unit equal to 125% of the price per membership
unit in this Offering and shall be exercisable for a period of up to five years
(to be determined by Essential prior to issuance). As a result of the Exchange,
warrants to purchase membership units in Essential shall become warrants to
purchase common shares of JPAL on the basis of one warrant to purchase a
membership unit of Essential to one warrant to purchase a common share of JPAL.
HMA Advisors, Inc. ("HMA") shall have loaned or arranged for an aggregate of
$2,525,000 of short-term financing for JPAL (the "JPAL Notes Payable"), and in
connection therewith HMA and/or the Notes Payable investors (collectively, the
"Lenders") shall receive warrants (the "Bridge Warrants") to purchase 750,000
common shares of JPAL at an exercise price of $1.90 per share. The Bridge
Warrants shall be immediately exercisable and expire two (2) years from the date
of the closing of the Exchange. JPAL shall be able to call the Bridge Warrants,
provided: (i) that its common shares shall have traded for an average closing
market price of $1.50 above the prevailing exercise price for a period of no
less than fifteen (15) business days (the "Period"); (ii) that the SEC shall
have declared effective the registration statement under the Securities Act
pursuant to which the common shares underlying such Bridge Warrants shall have
been registered prior to the commencement of such period, and (iii) that the
average weekly volume of the common shares traded during the Period shall have
been no less than 75,000.
Prior to the closing of the Exchange, the JPAL Notes Payable will be replaced
with the following:
(i) notes for an aggregate dollar amount of $250,000 consisting of
principal and accrued interest thereon in proportionate amounts,
which may be used by the holders thereof, at their sole discretion,
to subscribe to up to 240,000 membership units of Essential pursuant
to the Offering (the "Essential Convertible Notes");
(ii) notes for an aggregate dollar amount of $500,000 consisting of
principal and accrued interest thereon in proportionate amounts,
which may be converted into an aggregate of 263,158 shares of JPAL
common shares at a conversion price of $1.90 per share (the "JPAL
Convertible Notes"), none of which shall be deemed to constitute
shares issued in the Offering. The JPAL Convertible Notes shall be
convertible into common shares of JPAL, in the sole and absolute
discretion of the holders thereof, for a period of six (6) months
following the Closing of the Exchange.
-1-
(iii) Non-convertible notes (the "JPAL Non-convertible Notes") in the
amount of the JPAL Notes Payable plus accrued interest thereon less
the Essential Convertible Notes and the JPAL Convertible Notes.
The Essential Convertible Notes, the JPAL Convertible Notes and the JPAL
Non-convertibles Notes (collectively, the "Bridge Loans"), together with accrued
interest thereon will mature on December 31, 2003. Upon the closing of the
Exchange, JPAL undertakes to repay the Bridge Loans, excluding any Bridge Loans
converted into membership units of Essential or common shares of JPAL as
described above;
(i) at closing of the Exchange, principal plus a proportionate amount of
accrued interest equal to 15% of all cash amounts raised in the
Offering between $4,000,000 and $6,250,000, provided, however, that
if $6,250,000 or greater is raised, then such prepayment amount
shall equal an aggregate of $500,000;
(ii) During fiscal 2003, $100,000 payments per quarter representing
interest and principal;
(iii) 50% of the proceeds received by JPAL from the exercise of any Bridge
Warrants;
(iv) For any proceeds raised by issuance of securities that were deemed
equity at time of issuance:
A. In the year 2002. 15% of the net proceeds received from the sale
of such equity above $10,000,000 shall become immediately due and
payable within 15 days of receipt thereof by JPAL, subject to a
maximum of up to $700,000;
B. In the year 2003. 20% of the net proceeds received from the sale
of any such equity shall become immediately due and payable within
15 days of receipt thereof by JPAL, subject to a maximum of
$700,000.
Anything to the contrary in (iv) (A) or (B) above notwithstanding,
in the event that the aggregate principal amount of Bridge Loans
remaining outstanding at the point such equity is raised shall
exceed $1,000,000, then the maximum amount due and payable shall be
$900,000, provided, that if at any time during either 2002 or 2003
the equity raised from unrelated sales is less than $1,000,000 and
the investor(s) in each such unrelated sale objects to the repayment
of the Bridge Loans, then no such repayment shall be made. No amount
raised from a strategic investor (including but not limited to any
amount earmarked for specific use or received in connection with
actual or anticipated other relationship(s) with such investor which
exist(s) or may exist) or any non-cash investment shall be counted
towards any of the criteria referred to herein.
(v) Beginning October 1, 2002, 35% of any Excess Cash greater than $2
million, up to a maximum of $200,000 (in addition to amounts
received under clause (ii) above) in any quarter, where "Excess
Cash" means any cash on the books of JPAL at the end of a quarter
minus any equity and/or debt raised during such quarter; and
(vi) The remaining balance of interest and principal, if any, on December
31, 2003.
In no event may the amounts paid be greater than the amounts owed to the Bridge
Loans then outstanding. In addition, all payments to be made on the Bridge Loans
may be subject to restrictive covenants imposed by either trade or secured
creditors. To the extent that a cash payment is not made when due, all unpaid
amounts not paid at maturity shall earn interest at a rate of 12% per annum.
-2-
The Exchange is expected to be accounted for as a reverse acquisition in which
Essential is the accounting acquirer and JPAL is the legal acquirer. The
management of Essential is expected to remain the management of the merged
entity. Since the Exchange is expected to be accounted for as a reverse
acquisition and not a business combination, no goodwill is expected to be
recorded in connection with the Exchange and the costs incurred in connection
with the Exchange are expected to be accounted for as a reduction of additional
paid-in capital.
The following unaudited pro forma financial statements give effect to the
Exchange, as well as the Offering. The unaudited pro forma statement of
operations for the year ended December 31, 2001, gives effect to the Exchange
and Offering as if these transactions had occurred on January 1, 2001. The
unaudited pro forma balance sheet as of December 31, 2001, gives effect to the
Exchange and Offering as if these transactions had occurred on December 31,
2001.
The unaudited pro forma financial statements should be read in conjunction with
the historical financial statements and notes thereto incorporated herein by
reference of JPAL and Essential. The pro forma financial information is
presented for illustrative purposes only and is not necessarily indicative of
the future financial position or future results of operations of the Company
after the Exchange and the Offering.
-3-
JPAL, INC.
(A Development Stage Entity)
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 2001
------------------------------------------------------------------------------------------------------------------------------------
JPAL, Inc. Essential Reality, LLC Pro Forma Pro Forma After
December 31, 2001 December 31, 2001 Adjustments Completion of Offering
and Exchange
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,770 $ 13,863 $ 7,750,000 (1) $ 6,665,633
(600,000) (2)
(500,000) (7)
Deferred financing costs - 217,755 (217,755) (2) -
Prepaid expenses and deposits 121 34,337 - 34,458
------------ --------- ------------ -----------
Total current assets 1,891 265,955 6,432,245 6,700,091
NOTE RECEIVABLE - ESSENTIAL REALITY 1,500,000 - (1,500,000) (5) -
ACCRUED INTEREST ON NOTE RECEIVABLE 19,615 - (19,615) (5) -
DOMAIN NAMES - Net - 9,000 - 9,000
FIXED ASSETS - Net 1,477 10,099 - 11,576
OTHER ASSETS - 80,550 - 80,550
DEFERRED INTEREST EXPENSE - BRIDGE LOANS - 232,389 (38,732) (1) 116,194
(77,463) (7)
------------ --------- ------------ -----------
TOTAL ASSETS $ 1,522,983 $ 597,993 $ 4,796,435 $ 6,917,411
============ ========= ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 4,865 $ 676,133 $ - $ 680,998
Accounts payable - related parties - 84,000 - 84,000
Accrued interest - bridge loans - 250,750 (38,732) (1) 134,555
(77,463) (7)
Accrued compensation - 257,103 - 257,103
Bridge loans - JPAL, Inc. - 1,500,000 (1,500,000) (5) -
Notes payable (see Supplementary Schedule) 1,283,912 - (250,000) (1) 66,715
(71,144) (6a)
(396,053) (6b)
(500,000) (7)
Accrued interest payable 25,824 - (19,615) (5) 6,209
Advances from LCG Capital Group, LLC - 76,617 - 76,617
Advances from affiliated companies - 25,632 - 25,632
------------ --------- ----------- -----------
Total current liabilities 1,314,601 2,870,235 (2,853,007) 1,331,829
------------ --------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 1,729 - 17,280 (4) 18,387
(622) (8)
Additional paid-in capital 894,548 - - (3) 11,133,716
9,665,587 (4)
120,949 (6a)
452,632 (6b)
Members' capital - 2,500,000 8,000,000 (1) -
(817,755) (2)
(9,682,245) (4)
Accumulated deficit (687,895) (4,772,242) (49,805) (6a) (5,566,521)
(56,579) (6b)
------------ --------- ------------ -----------
Total stockholders' equity (deficit) 208,382 (2,272,242) 7,649,442 5,585,582
------------ --------- ------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 1,522,983 $ 597,993 $ 4,796,435 $ 6,917,411
============ ========= ============ ===========
See notes to unaudited pro forma financial statements.
-4-
JPAL, INC.
(A Development Stage Entity)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
JPAL, Inc. Essential Reality, LLC Pro Forma Pro Forma After
Year Ended Year Ended Adjustments Completion of Offering
December 31, 2001 December 31, 2001 and Exchange
OPERATING EXPENSES:
Product development $ - $ 1,579,129 $ - $ 1,579,129
Marketing - 716,674 - 716,674
General and administrative 85,842 823,791 - 909,633
Depreciation and amortization 597 11,850 - 12,447
---------- ------------ ----------- ------------
Total operating expenses 86,439 3,131,444 - 3,217,883
---------- ------------ ----------- ------------
LOSS FROM OPERATIONS (86,439) (3,131,444) - (3,217,883)
INTEREST INCOME 19,615 20,465 - 40,080
INTEREST EXPENSE (586,612) (20,505) (49,805) (6a) (713,501)
(56,579) (6b)
OTHER INCOME 1,039 - - 1,039
---------- ------------ ----------- ------------
NET LOSS $ (652,397) $ (3,131,484) $ (106,384) $ (3,890,265)
========== ============ =========== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING -
BASIC AND DILUTED 8,645,260 17,280,000 (4) 18,386,891
(7,538,369) (8)
NET LOSS PER SHARE $ (0.08) $ (0.21)
========== ============
See notes to unaudited pro forma financial statements.
-5-
JPAL, INC.
(A Development Stage Entity)
PRO FORMA SUPPLEMENTARY SCHEDULE OF NOTES PAYABLE
DECEMBER 31, 2001
Face Value of Notes Deferred Interest Net
Balance per JPAL, Inc. $ 1,561,400 $ 277,488 $ 1,283,912
Pro forma adjustment #1 (250,000) - (250,000)
Pro forma adjustment #6a 71,144 (71,144)
Pro forma adjustment #6b 396,053 (396,053)
Pro forma adjustment #7 (500,000) - (500,000)
---------- --------- ---------
Pro Forma After Completion of Offering
and Exchange $ 811,400 $ 744,685 $ 66,715
========== ========= =========
See notes to unaudited pro forma financial statements.
-6-
JPAL, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
DECEMBER 31, 2001
--------------------------------------------------------------------------------
I. ASSUMPTIONS
a. The pro forma financial statements reflect the terms of the Amended
Contribution Agreement between JPAL and Essential and its members
whereby the members of Essential are to contribute their membership
interests in Essential in exchange for up to 17,280,000 common
shares of JPAL and the shareholders of JPAL will own no more than
6.02% of the merged entity.
b. The pro forma financial statements reflect the issuance of 7,680,000
membership units of Essential for gross proceeds of $7,750,000 and
conversion of $250,000 of the Essential Convertible Notes.
c. The pro forma financial statements reflect the repayment of $500,000
of Bridge Loans.
II. PRO FORMA ADJUSTMENTS
1) Reflects the issuance of 7,680,000 membership units of Essential for
gross proceeds of $7,500,000, the conversion of $250,000 of the
Essential Convertible Notes and the reversal of related deferred
interest of $38,732.
2) Reflects the payment of $600,000 of closing costs and recognition of
deferred closing costs of $217,755. It is assumed that not all the
proceeds raised in the Offering will be subject to the maximum cash
commission of 6%.
3) The 460,800 warrants issued to Essential's financial advisors
pursuant to the Offering have an imputed value of $1,830,000. The
value of these warrants was computed using the Black-Scholes method
and has no net-effect on member's capital.
4) Reflects the exchange of the membership interest in Essential of
$9,682,245 for 17,280,000 shares of common stock of JPAL. The
transaction is expected to be accounted for as a reverse acquisition
in which Essential is the accounting acquirer and JPAL is the legal
acquirer. The management of Essential is expected to remain the
management of the merged entity. Since the Exchange is expected to
be accounted for as a reverse acquisition and not a business
combination, no goodwill is expected to be recorded in connection
with the Exchange and the costs incurred in connection with the
Exchange are expected to be accounted for as a reduction of
additional paid-in capital.
5) Reflects the elimination of intercompany debt upon consolidation of
the accounts of JPAL and Essential.
6) Reflects the replacement of the JPAL Notes Payable resulting in:
a. The cancellation of 610,560 warrants to purchase common shares
of JPAL at $3.00 per share and the issuance of approximately
392,000 Bridge Warrants. The value of the Bridge Warrants of
$398,437 was computed using the Black-Scholes and relative
fair value methods, of which, $49,805 has been charged to
earnings as interest expense and $348,632 has been netted
against notes payable. The value of the Bridge Warrants was
computed using $3.62 as the market price, $1.90 as the
exercise price, 2 year expiration, volatility of 80% and a
risk free rate of 5%.
b. the beneficial conversion feature of the JPAL Convertible
Notes at their inception in the amount of $452,632 of which
$56,579 has been charged to earnings as interest expense and
$396,053 has been netted against notes payable.
7) Reflects the repayment of $500,000 of the Bridge Loans and the
reversal of related deferred interest of $77,463.
8) Reflects the cancellation of 7,538,369 common shares of JPAL held by
current JPAL stockholders.
-7-
Exhibit D
Essential Reality, LLC
(A Development Stage Entity)
Independent Auditors' Report
Financial Statements
For the Years Ended December 31, 2001 and 2000
and for the Period from June 1, 1999 (Date of
Commencement) to December 31, 2001
ESSENTIAL REALITY, LLC
(A Development Stage Entity)
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2001
AND 2000 AND FOR THE PERIOD FROM JUNE 1, 1999 (DATE OF COMMENCEMENT)
TO DECEMBER 31, 2001
Balance Sheets 2
Statements of Operations 3
Statements of Members' Equity (Deficit) 4
Statements of Cash Flows 5
Notes to Financial Statements 6-12
INDEPENDENT AUDITORS' REPORT
To the Members and Board of Managers of
Essential Reality, LLC:
We have audited the accompanying balance sheets of Essential Reality, LLC (a
development stage entity) (the "Company") as of December 31, 2001 and 2000, and
the related statements of operations, members' deficit, and cash flows for the
years ended December 31, 2001 and 2000 and for the period from June 1, 1999
(date of commencement) to December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2001 and
2000, and the results of its operations and its cash flows for the years then
ended and for the period from June 1, 1999 (date of commencement) to December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in the development, manufacture and marketing of a gloved
shaped device that controls the movement of objects on a computer screen. As
discussed in Note 1 to the financial statements, the Company has experienced
cumulative net losses of $4,772,242 and cumulative negative operating cash flows
of $4,057,437, which raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
January 21, 2002 (April 24, 2002 as to Notes 4, 8 and 9)
1
ESSENTIAL REALITY, LLC
(A Development Stage Entity)
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
December 31,
2001 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 13,863 $ 231,905
Interest receivable - 48,716
Deferred financing costs 217,755 -
Prepaid expenses and deposits 34,337 6,820
---------- -----------
Total current assets 265,955 287,441
DOMAIN NAMES - Net (Note 2) 9,000 -
FIXED ASSETS - Net (Note 3) 10,099 -
OTHER ASSETS 80,550 22,500
DEFERRED INTEREST EXPENSE - BRIDGE LOANS 232,389 -
---------- -----------
TOTAL ASSETS $ 597,993 $ 309,941
========== ===========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 676,133 $ 75,238
Accounts payable - related parties 84,000 -
Accrued interest expense - bridge loans (Note 4) 250,750 -
Accrued compensation (Note 7) 257,103 221,267
Bridge loans (Note 4) 1,500,000 -
Advances from LCG Capital Group, LLC 76,617 -
Advances from affiliated companies 25,632 19,647
---------- ----------
Total current liabilities 2,870,235 316,152
---------- ----------
COMMITMENTS AND CONTINGENCIES
MEMBERS' DEFICIT:
Members' capital 2,500,000 2,500,000
Note receivable for members' capital - (865,453)
Deficit accumulated during development stage (4,772,242) (1,640,758)
---------- ----------
Total members' deficit (2,272,242) (6,211)
---------- ----------
TOTAL LIABILITIES AND MEMBERS' DEFICIT $ 597,993 $ 309,941
========== ==========
See notes to financial statements.
2
ESSENTIAL REALITY, LLC
(A Development Stage Entity)
STATEMENTS OF OPERATIONS
CUMULATIVE PERIOD FROM JUNE 1, 1999 (DATE OF COMMENCEMENT) TO DECEMBER 31, 2001
AND YEARS ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
Cumulative
Period from
June 1, 1999 (Date
of Commencement) Year Ended Year Ended
to December 31, December 31, December 31,
2001 2001 2000
OPERATING EXPENSES:
Product development $ 2,480,544 $ 1,579,129 $ 679,891
Marketing 1,066,525 716,674 349,851
General and administrative 1,316,001 823,791 491,930
Depreciation and amortization 11,850 11,850 -
------------ ------------ ------------
Total operating expenses 4,874,920 3,131,444 1,521,672
------------ ------------ ------------
LOSS FROM OPERATIONS (4,874,920) (3,131,444) (1,521,672)
INTEREST INCOME 125,117 20,465 104,652
INTEREST EXPENSE (22,439) (20,505) (1,934)
------------ ------------ ------------
NET LOSS $ (4,772,242) $ (3,131,484) $ (1,418,954)
============ ============ ============
See notes to financial statements.
3
ESSENTIAL REALITY, LLC
(A Development Stage Entity)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
PERIOD FROM JUNE 1, 1999 (DATE OF COMMENCEMENT) TO
DECEMBER 31, 1999 AND YEARS ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
Note Deficit
Receivable Accumulated
Members' For Members' During
Capital Capital Development Stage Total
BALANCE JUNE 1, 1999 $ - $ - $ - $ -
Issuance of members' capital 2,500,000 (2,000,000) - 500,000
Net loss - - (221,804) (221,804)
----------- ----------- ------------ ----------
BALANCE, DECEMBER 31, 1999 2,500,000 (2,000,000) (221,804) 278,196
Collection of note receivable - 1,134,547 - 1,134,547
Net loss - - (1,418,954) (1,418,954)
----------- ----------- ------------ ----------
BALANCE, DECEMBER 31, 2000 2,500,000 (865,453) (1,640,758) (6,211)
Collection of note receivable - 865,453 - 865,453
Net loss - - (3,131,484) (3,131,484)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2001 $ 2,500,000 $ - $ (4,772,242) $ (2,272,242)
============ ============ ============ ============
See notes to financial statements.
4
ESSENTIAL REALITY, LLC
(A Development Stage Entity)
STATEMENTS OF CASH FLOWS
CUMULATIVE PERIOD FROM JUNE 1, 1999 (DATE OF COMMENCEMENT) TO DECEMBER 31, 2001
AND YEARS ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
Cumulative
Period from
June 1, 1999 (Date
of Commencement) Year Ended Year Ended
to December 31, December 31, December 31,
2001 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,772,242) $(3,131,484) $(1,418,954)
Depreciation and amortization 11,850 11,850 --
Amortization of deferred interest 18,361 18,361 --
Changes in assets and liabilities:
Deferred financing costs (217,755) (217,755) --
Prepaid expenses, deposits and other assets (114,887) (85,567) (29,320)
Interest receivable -- 48,716 (48,716)
Accounts payable 676,133 600,895 62,820
Accounts payable - related parties 84,000 84,000 --
Accrued compensation 257,103 35,836 221,267
----------- ----------- -----------
Net cash used in operating activities (4,057,437) (2,635,148) (1,212,903)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of domain names (18,000) (18,000) --
Payments for purchase of fixed assets (12,949) (12,949) --
----------- ----------- -----------
Net cash used in investing activities (30,949) (30,949) --
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of members' capital 500,000 -- --
Proceeds from repayment of note
receivable for members' capital 2,000,000 865,453 1,134,547
Proceeds from bridge loans 1,500,000 1,500,000 --
Proceeds from advances from
LCG Capital Group, LLC 76,617 76,617 --
Proceeds of advances from
affiliated companies - net 25,632 5,985 15,547
----------- ----------- -----------
Net cash provided by financing activities 4,102,249 2,448,055 1,150,094
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 13,863 (218,042) (62,809)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD -- 231,905 294,714
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 13,863 $ 13,863 $ 231,905
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Note received for members' capital $ 2,000,000 $ -- $ --
Deferred interest expense - bridge loans $ 232,389 $ 232,389 $ --
Accrued interest expense - bridge loans $ 250,750 $ 250,750 $ --
See notes to financial statements.
5
ESSENTIAL REALITY, LLC
(A Development Stage Entity)
NOTES TO FINANCIAL STATEMENTS
CUMULATIVE PERIOD FROM JUNE 1, 1999 (DATE OF COMMENCEMENT) TO DECEMBER 31, 2001
AND YEARS ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
1. THE COMPANY
Essential Reality, LLC (the "Company") was formed as Freedom Multimedia,
LLC in the State of Delaware on July 9, 1998 and began active operations on
June 1, 1999. The Company changed its name to Essential Reality, LLC on
December 29, 1999. The Company was formed to develop, manufacture and
market computer peripheral devices, with initial emphasis on a product
called "P5." P5 is a gloved shaped device that controls the movement of
objects on a computer screen. P5 enables three-dimensional movement of the
cursor as well as allowing pitch and yaw, as well as roll, which should be
completed in the near future. P5 is controlled by the user moving their
hand or bending their fingers.
The Company is in the development stage. Successful completion of the
Company's development program and ultimately, the attainment of profitable
operations are dependent upon future events, including obtaining adequate
financing to fulfill its development activities, and achieving a level of
revenue adequate to support the Company's cost structure.
Since its commencement, the Company has not generated revenues and has
incurred significant recurring losses from operations, working capital
deficit and deficit in members' capital. As a result, substantial doubt
exists regarding the Company's ability to continue as a going concern.
Management is attempting to obtain adequate resources for the Company to
complete its development plan and produce, market and sell its primary
product. In this regard, management of the Company believes that upon
closing of the transaction described in Note 8, it will have sufficient
funds to operate for at least the next five months. Should the transaction
not close, the Company would be required to seek alternative sources of
financing in order to stay in business.
The financial statements have been prepared in conformity with the
Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and
Reporting by Development Stage Enterprises. As a development stage entity
with no commercial operating history, the Company is subject to all of the
risks and uncertainties inherent in the establishment of a new business
enterprise. To address these risks and uncertainties, the Company must,
among other things, respond to competitive developments; attract, retain,
and motivate qualified personnel; and support the expense of marketing new
products based upon innovative technology. To date, the Company has not
recognized product related revenues. As a result of incurring expenses in
these developmental activities without generating revenues, the Company has
incurred significant losses and negative cash flow from operating
activities for the period the cumulative period from June 1, 1999 (Date of
Commencement) to December 31, 2001. During this period, the Company had
cumulative net losses of $4,772,242 and cumulative negative cash flow from
operating activities of $4,057,437. The Company expects to incur
substantial losses and negative cash flow from operating activities for the
near future.
6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Comprehensive Loss - Comprehensive loss is the same as net loss.
Cash and Cash Equivalents - Cash equivalents include time deposits with
maturities of three months or less on the date of purchase.
Domain Name and Fixed Assets - Domain names are recorded at cost, net of
accumulated amortization. Fixed assets are recorded at cost, net of related
accumulated depreciation. Upon sale or retirement, the cost and related
accumulated depreciation and amortization are removed from the respective
accounts, and any gain or loss is included in the statement of operations.
Maintenance and repair costs are expensed as incurred. Depreciation of
fixed assets is computed using the straight-line method based on the
estimated useful lives of the assets, which is three to five years,
beginning when assets are placed in service. Amortization of domain names
is computed using the straight-line method over a period of two years,
taking a full year's depreciation in the year of acquisition.
Product Development - Product development costs include expenses incurred
by the Company to research and develop the P5 product. Product development
costs are expensed until such time as the Company determines that a product
is technologically feasible. Product development costs are capitalized from
such date until such time as product development is substantially complete.
Product development costs capitalized will be amortized on the
straight-line basis over the lesser of the estimated useful life of the
product or three years. All of the costs to date have been expensed.
Impairment of Assets - In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, the Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. When such events occur, the Company compares the
carrying amount of the assets to undiscounted expected future cash flows.
If this comparison indicates that there is impairment, the amount of the
impairment loss is then based on the fair value of the asset compared with
its carrying value. No impairment of assets existed at December 31, 2001.
Fair Market Value of Financial Instruments - The carrying amount of the
Company's cash and cash equivalents, interest receivable, prepaid expenses
and deposits, accounts payable, accrued liabilities, accrued compensation
and advances from affiliated companies approximates fair market value
because of the short maturity of those instruments.
Income Taxes - The Company is not subject to federal or state income tax.
The taxable income or loss applicable to the operations of the Company is
includable in the federal and state income tax returns of the members. The
Company will become subject to federal and state income taxes after
completion of the transaction described in Note 8.
Effects of Recently Issued Accounting Standards - In June 1998, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments
and hedging activities. Generally, it requires that an entity recognize all
derivatives as either an asset or liability and measure those instruments
at fair value as well as identify the conditions for which a derivative may
be specifically designed as a hedge. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. The adoption of SFAS 133, effective
January 1, 2001, did not have an impact on the Company's financial
position, results of operations, or cash flows. The Company currently does
not have any derivative instruments and is not engaged in hedging
activities.
On June 29, 2001, the FASB approved for issuance SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Intangibles Assets". Major
provisions of these statements are as follows: all business combinations
initiated after June 30, 2001 must use the purchase method of accounting;
the pooling of interest method of accounting is prohibited except for
transactions initiated before July 1, 2001; intangible assets acquired in a
business combination must be recorded separately from goodwill if they
arise from contractual or other legal rights or are separable from the
acquired entity and can be sold, transferred, licensed, rented or
exchanged, either individually or as part of a related contract, asset or
liability; goodwill and intangible assets with indefinite lives are not
amortized but are tested for impairment annually, except in certain
circumstances, and whenever there is an impairment indicator; adjustments
are made. All acquired goodwill must be assigned to reporting units for
purposes of impairment testing, and effective January 1, 2002, goodwill
will no longer be subject to amortization. Although it is still reviewing
the provisions of these statements, management's preliminary assessment is
that these statements will not have a material impact on the Company's
financial position or results of operations.
7
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires companies to record the fair
value of a liability for asset retirement obligations in the period in
which they are incurred. The statement applies to a company's legal
obligations associated with the retirement of tangible long-lived assets
that result from the acquisition, construction and development or through
the normal operation of a long-lived asset. When a liability is initially
recorded, the company would capitalize the cost, thereby increasing the
capital amount of the related asset. The capitalized asset retirement cost
is depreciated over the life of the respective asset while the liability in
accreted to its present value. Upon settlement of the liability, the
obligation is settled at its recorded amount or the company incurs a gain
or loss. This statement is effective for fiscal years beginning after June
15, 2002. The Company does not expect that adoption of SFAS No. 143 will
have a material impact on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
accounting and reporting for the impairment or disposal of long-lived
assets. The statement provides a single accounting model for long-lived
assets to be disposed of. New criteria must be met to classify the asset as
an asset for sale. This statement also focuses on reporting the effects of
a disposal of a segment of a business. This statement is effective for
years beginning after December 15, 2001. The Company does not expect that
adoption of SFAS No. 144 will have a material impact on the Company's
financial position or results of operations.
Reclassification - Certain amounts in the 2000 financial statements have
been reclassified to conform with the basis of presentation used in 2001.
3. FIXED ASSETS AND DOMAIN NAMES
At December 31, 2001 the fixed assets were comprised of $10,949 of office
furniture and equipment and $2,000 for computer equipment. Depreciation
expense and accumulated amortization for the years ended December 31, 2001
and 2000 and for the period from June 1, 1999 (Date of Commencement) to
December 31, 1999 amounted to $2,850, $0 and $0, respectively.
Amortization and accumulated amortization of domain names for the years
ended December 31, 2001 and 2000 and for the period from June 1, 1999 (Date
of Commencement) to December 31, 1999 amounted to $9,000, 0 and 0,
respectively.
8
4. BRIDGE LOANS
Through December 31, 2001, the Company received bridge loans of $1,500,000.
From January 1, 2002 to April 24, 2002, the Company received an additional
$1,525,000 of bridge loans.
Certain bridge loans include the issuance to the lenders of up to 750,000
warrants (the "New Warrants") to purchase common shares of JPAL, Inc.
(JPAL) for an exercise price of $1.90 per common share. Such warrants will
expire two years from the date of closing of the merger agreement. JPAL is
a publicly traded corporation with which the Company has entered into a
merger agreement as described more fully in Note 9. Since these warrants
pertain to JPAL and not the Company, the Company has not recorded any
expense related to the warrants. During 2001, JPAL issued 610,560 warrants
in connection with the bridge loans, which warrants shall be replaced by a
portion of the New Warrants upon closing of the merger agreement.
The bridge loans are unsecured and bear interest at the rate of 8 1/2 % per
annum, however interest does not begin to accrue until January 31, 2002.
The bridge loans, together with accrued interest thereon, become payable
from December 31, 2001 through December 31, 2003. Should the Offering
described in Note 8 and contemplated merger with JPAL described in Note 9
occur, the bridge loans will be repaid as follows:
(i) Up to $500,000 of bridge loans and accrued interest may be converted
in to up to 480,000 membership units of the Company pursuant to the
Offering;
(ii) Up to $500,000 of bridge loans and accrued interest may be converted
in to up to 263,158 common shares of JPAL;
(iii) Up to $1,000,000 will be repaid upon closing of the Offering and
Merger;
(iv) During fiscal 2003, $100,000 payments per quarter representing
interest and principal;
(v) 50% of the proceeds received as a result of the exercise of bridge
loan warrants described above;
(vi) During fiscal 2002, 15% of the net proceeds received from the sale
of equity in the Company above $10,000,000, subject to a maximum of
up to $700,000;
(vii) During fiscal 2003, 20% of the net proceeds received from the sale
of equity in the Company, subject to a maximum of up to $700,000,
provided, that in the event the aggregate principal amount of bridge
loans remaining outstanding at the time such equity is raised shall
exceed $1,000,000, then the maximum amount due and payable shall be
$900,000.
(viii) Beginning October 1, 2002, 35% of any Excess Cash greater than $2
million, up to a maximum of $200,000 (in addition to amounts
received under clause (iv) above) in any quarter, where "Excess
Cash" means any cash on the books of JPAL at the end of a quarter
minus any equity and/or debt raised during such quarter; and
(ix) The remaining balance of interest and principal, if any, on December
31, 2003.
Anything to the contrary in (vi) and (vii) above notwithstanding, if at any
time during either 2002 or 2003 the equity raised from unrelated sales is
$1,000,000 or less and the investor(s) in each such unrelated sale objects
to the repayment of the bridge loans, then no such repayment shall be made.
For purposes of calculating the proceeds received and amounts raised set
forth in (vi) and (vii) above, (A) any non-cash investment, or (B) any
amounts raised from strategic investors that are either (1) earmarked for
specific use, or (2) received in connection with actual or anticipated
other relationship(s) with such investor(s) that exist(s) or may exist,
shall not be counted in such calculation.
9
In no event shall any repayment be made in excess of bridge loans and
accrued interest then outstanding. In addition; (i) all payments to be made
pursuant to (iv) through (ix) above are subordinate to obligations to
financing sources, and may be subject to restrictive covenants imposed by
either trade or secured creditors, and (ii) the holders of the notes
representing the bridge loans have agreed not to take any action on the
prepayment obligations until any such restrictive covenants are eliminated
or terminated. To the extent that a cash payment is not made when due, all
unpaid amounts not paid at maturity shall earn interest at a rate of 12%
per annum.
Although interest on the bridge loans does not begin to accrue until
January 31, 2002, interest on the bridge loans in the amount of $250,750
has been imputed and accrued representing the interest payable on the
bridge loans advanced from inception through December 31, 2001 and will be
amortized over the life of the loans through December 31, 2003. Deferred
interest will be amortized on a daily basis from the date of the loan to
December 31, 2003, which resulted in a charge to earnings in the amount of
$18,361 for year ended December 31, 2001.
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
a. Premises - In November 2001, the Company entered a lease for
premises which provides for the following rental payments:
Year Ending December 31,
2002 $119,000
2003 132,000
2004 135,000
2005 138,000
2006 141,000
Thereafter 14,000
--------
$679,000
========
Rent expense for the years ended December 31, 2001 and 2000 amounted
to approximately $39,000 and $27,000, respectively.
b. Computer Leases - The Company is allocated costs of computer leases
under leases assumed by a company related to a certain member of
LCG. The Company is not directly obligated under the leases, however
its portion of the minimum payments under the leases are as follows:
Year Ending December 31,
2002 $35,000
2003 11,000
-------
$46,000
Computer lease expense for the years ended December 31, 2001 and
2000 amounted to approximately $13,000 and $5,000, respectively.
10
Development Contracts
a. In March 2000, the Company entered into a consulting
agreement, which requires the Company to pay to the
consultant, $0.25 for each of the first 150,000 units of the
P5 sold.
b. In July 2000, the Company entered into an agreement for
product development with a company, which is owned by a person
who is related to certain members of the Company (see Note 7).
Pursuant to the agreement, the Company is required to pay
royalties of 1.8% on net sales of P5 and 9% of the license fee
collected by the Company with respect to P5, indefinitely.
c. In August 2000, the Company entered into a memorandum of
understanding, which provides for a renewable, two-year
license for a certain component of P5. Royalties are
calculated as the number of units of P5 sold multiplied by the
greater of a) $0.25 and b) the difference between the
manufacturing cost of the licensed component and an
alternative component with a minimum license fee of $125,000
per annum. Should the Company not use the licensed component
no royalties would be due pursuant to the memorandum of
understanding. Included in product development expense for the
years ended December 31, 2001 and 2000 are development fees of
$25,000 and $25,000, respectively.
d. In October 2000, the Company entered into an agreement for the
provision of inspection services relating to the manufacture
and packaging of P5. Pursuant to the agreement, the Company is
required to pay an inspection fee of the greater of a) $7,500
per month and b) 1% of the freight-on-board value of P5. This
agreement expires in September 2002 and may be terminated at
any time giving three-months notice.
e. In January 2001, the Company entered into memorandum of
understanding for the development of certain components of P5.
Pursuant to the memorandum of understanding, the Company is
required to pay royalties of 1% of P5's net sales to the
developer, indefinitely. A nonrefundable royalty advance of
$5,000 and $10,000 is included in product development for the
years ended December 31, 2001 and 2000, respectively. The
Company is required to pay a further royalty advance of
$35,000 should the Company incorporate the component developed
pursuant to the memorandum of understanding into P5. Should
the Company not incorporate the component developed pursuant
to the memorandum of understanding into P5, it will not to be
obligated to pay the $35,000 royalty advance nor the 1%
royalty on future sales.
f. In July 2001, the Company entered a development agreement for
the development of certain components of P5. Should the
developer accomplish the goals set forth in the agreement, the
Company is required to pay base royalties of 1% of net sales
generated from P5, indefinitely and an additional 0.5% of net
sales generated from P5, indefinitely, if the developer meets
certain milestones defined in this development agreement.
6. MEMBERS' CAPITAL AND NOTE RECEIVABLE
In December 1999, LCG Capital Group, LLC ("LCG") acquired a 50% interest in
the Company for an aggregate purchase price of $2,500,000. The
consideration received was comprised of $500,000 in cash and a $2,000,000
note. The note bore interest at the rate of 6% per annum, had a maturity
date of December 13, 2002 and was secured by the membership interest of
LCG. The remaining 50% interest in the Company represents ownership by the
founders of the Company. The note receivable for members' capital was fully
repaid in July 2001.
The Company recorded interest income on this note of $20,465 and $103,459
for the years ended December 31, 2001 and 2000, respectively.
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The company currently has 9,600,000 membership units issued and
outstanding.
7. RELATED PARTY BALANCES AND TRANSACTIONS
Accrued compensation of $257,103 and $221,267 at December 31, 2001 and
2000, respectively, is payable to certain officers and members of the
Company. The amounts are due on demand and are non-interest bearing.
Advances are from entities that are affiliated with LCG. The advances are
payable on demand and bear interest at the rate of 10% per annum.
Advances from LCG are non-interest bearing and payable on demand.
Included in other assets at December 31, 2001 and 2000 is $22,500 which
represents the Company's portion of a letter of credit required to secure
computer leases. Included in prepaid expenses and deposits at December 31,
2000 is $6,000 relating to a security deposit on premises due from LCG.
Included in product development costs are $0 and $105,000 for the years
ended December 31, 2001 and 2000 and, respectively, paid to a company owned
by an individual related to certain members of the Company.
Included in product development costs are $91,300 and $0 for years ended
December 31, 2001 and 2000, respectively, paid to a company owned by
certain members of the Company.
Included in general and administrative expenses are costs incurred of
approximately $242,000 and $148,000 for the years ended December 31, 2001
and 2000 and, respectively, by two entities that are related to certain
members of LCG. Such costs include consulting fees, employee salaries,
occupancy, telephone and computer leases. In the case of employee salaries,
costs are allocated to the Company based on the time each employee conducts
business specific to the Company. In the case of the other expenses, costs
are allocated based on a percentage of resources used by the Company.
Included in accounts payable at December 31, 2001 and 2000 are
approximately $26,000 and $0, respectively, payable to a company owned by a
person related to certain members of the Company.
Included in accounts payable at December 31, 2001 and 2000 are
approximately $58,000 and $0, respectively, payable to a company that is
related to certain members of LCG.
8. PRIVATE PLACEMENT
Pursuant to a private placement memorandum (the "Offering") dated April 10,
2002, the Company is offering a minimum of 3,840,000 membership units in
the Company for gross proceeds of $4,000,000 and a maximum of 7,680,000
membership units in the Company for gross proceeds of $8,000,000.
As part of the Offering, bridge loans and accrued interest thereon in the
amount of up to $500,000 may be converted to 480,000 membership units of
the Company.
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Cash fees and expenses of the Offering are estimated at approximately
$180,000. In addition, the Company reserves the right to pay its financial
advisors (i) an aggregate cash commission of up to six percent (6.0%) of
the aggregate price actually paid for the membership units by such
investors and/or (ii) warrants to purchase up to an aggregate number of
membership units equal to six percent (6.0%) of the membership units
purchased by such investors. Such warrants shall have an exercise price
per membership unit equal to 125% of the price per membership unit in the
Offering and shall be exercisable for a period of up to five years (to be
determined by the Company prior to issuance). As a result of the merger
discussed in note 9, warrants to purchase membership units in the Company
shall become warrants to purchase common shares of JPAL on the basis of
one warrant to purchase a membership unit of the Company to one warrant to
purchase a common share of JPAL.
9. MERGER WITH JPAL
On April 24, 2002, the Company entered into the Amended Contribution
Agreement with JPAL, a publicly traded company, whereby the Company's
current members would contribute all of their membership units in the
Company to JPAL in return for 9,600,000 shares of JPAL's common stock. In
addition, JPAL will deliver one of its shares of common stock for every
membership unit sold by the Company in the Offering described in Note 8, up
to a maximum 7,680,000 shares. The effect of such exchange is to merge the
Company with JPAL (the "Merger"), with the Company's members controlling
the surviving public company. The shareholders of JPAL will own no more
than 6.02% of the surviving entity. In the event the Company consummates
the Merger, all investors in this Offering who received membership
interests will receive a number of shares of JPAL common stock equal to the
number of membership interests such investors had in the Company. To the
extent the Company does not consummate the Merger, the investor shall
continue to hold the membership interests until the Company merges with
another entity, which may or may not ever occur.
The Merger is expected to be accounted for as a reverse acquisition in
which the Company is the accounting acquirer and JPAL is the legal
acquirer. The management of the Company is expected to remain the
management of the merged entity. Since the Merger is expected to be
accounted for as a reverse acquisition and not a business combination, no
goodwill is expected to be recorded in connection with the Merger and the
costs incurred in connection with the Merger are expected to be accounted
for as a reduction of additional paid-in capital.
As a result of the Merger, the warrants issued to the Company's financial
advisors to acquire membership units (see Note 8), will become warrants to
purchase the same amount of JPAL common shares at the same exercise price
and having the same expiration date.
Upon closing of the Merger, the Company expects to use the stock incentive plan
established by JPAL pursuant to which the Company may grant options, stock
appreciation rights, restricted stock and/or other equity-based incentives to
its directors, employees, consultants and advisors for up to an aggregate of
3,500,000 shares of the merged entity's common stock.
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GENERAL PROXY - SPECIAL MEETING OF SHAREHOLDERS OF JPAL, INC.
The undersigned hereby appoints Frank Drechsler, with full power of
substitution, proxy to vote all of the shares of common stock of JPAL, Inc. ,a
Nevada corporation (the "Company") held by the undersigned and with all of the
powers the undersigned would possess if personally present at the Special
Meeting of shareholders of the Company to be held at the offices of Gersten,
Savage, Kaplowitz, Wolf & Marcus, LLP, 101 East 52nd Street, New York, NY, 10022
on June 5, 2002 at 2:00 P.M. local time and at all adjournments thereof, upon
the matters specified below, all as more fully described in the Proxy Statement
dated May 21, 2002 and with the discretionary powers upon all other matters
which come before the meeting or any adjournment thereof.
This Proxy is solicited on behalf of JPAL, Inc.'s Board of Directors.
1. To approve the Amended Contribution Agreement attached as Exhibit A to
the Proxy Statement as executed by and among the Company, Essential
Reality, LLC, a Delaware limited liability company, and the other
signatories thereto as of April 24, 2002, and all transactions and
developments contemplated thereby.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Every properly signed proxy will be voted in accordance with the
specifications made thereon. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1.
The undersigned hereby acknowledges receipt of a copy of the
accompanying Notice of Meeting and Proxy Statement and hereby revokes any proxy
or proxies heretofore given.
Please mark, date, sign and mail your proxy promptly in the envelope
provided.
Date: May ___, 2002
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(Print name of Shareholder)
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(Print name of Shareholder)
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Signature
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Signature
Number of Shares __________________________
Note: Please sign exactly as name appears in the Company's
records. Joint owners should each sign. When signing as
attorney, executor or trustee, please give title as such.