<PAGE> 1
As filed with the Securities and Exchange Commission on November 24, 1998
Registration No. 333-58231
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
iMALL, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
NEVADA 8200 87-0553169
(State or Other Jurisdiction of (Primary Standard Industrial I.R.S. Employer
Incorporation or Organization) Classification Code Number) (Identification Number)
</TABLE>
233 WILSHIRE BOULEVARD
SUITE 820
SANTA MONICA, CALIFORNIA 90401
(310) 309-4000
(Address and Telephone Number of Principal Executive Offices)
RICHARD M. ROSENBLATT
233 WILSHIRE BOULEVARD
SUITE 820
SANTA MONICA, CALIFORNIA 90401
(310) 309-4000
(Name, Address, and Telephone Number of Agent For Service)
-------------------
Copies of all communications to:
DAVID L. FICKSMAN, ESQ.
LOEB & LOEB LLP
1000 WILSHIRE BOULEVARD, SUITE 1800
LOS ANGELES, CALIFORNIA 90017
TELEPHONE: (213) 688-3400
FACSIMILE: (213) 688-3460
---------------------------
Approximate Date of Proposed Sale to the Public: As soon as practicable after
the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
[ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Titles of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Share(1) Offering Price(1) Fee
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.008 per
share ......................................... 317,192 $ 9.00 $ 2,854,728 $ 793.61
Common Stock, par value $0.008 per
share, underlying Convertible Preferred
Stock ......................................... 6,945,006 $ 9.00 $62,505,054 $17,376.41
Common Stock, par value $.008 per share,
underlying Initial Warrants ................... 1,568,751 $ 3.20(2) $ 5,020,003 $ 1,395.56
Common Stock, par value $.008 per share,
underlying Placement Agent Warrants ........... 1,500,000 $ 3.20(2) $ 4,800,000 $ 1,334.40
Common Stock, par value $0.008 per
share underlying the Investor Warrants ........ 25,749 $ 3.20(2) $ 82,397 $ 22.91
Common Stock, par value $0.008 per
share underlying the Additional Warrants ...... 375,000 $ 3.20(2) $ 1,200,000 $ 333.60
Initial Warrants to purchase .125 share of
Common Stock .................................. 12,550,005 --(3) -- --
Placement Agent Warrants to purchase one
share of Common Stock ......................... 1,500,000 --(3) -- --
Investor Warrants to purchase .125 share
of Common Stock ............................... 205,990 --(3) -- --
Additional Warrants to purchase one share
of Common Stock ............................... 375,000 --(3) -- --
Total ......................................... $21,256.49*
=========================================================================================================================
</TABLE>
* $20,711.11 has been previously paid
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended ("Securities Act")
using the last reported sale price reported on the OTC Electronic Bulletin
Board for the Registrant's Common Stock on November 19, 1998.
(2) The maximum offering price per share of the Common Stock has been calculated
pursuant to Rule 467(g).
(3) No additional fee pursuant to Rule 457(g).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION"), ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 2
PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1998
iMALL, INC.
10,036,697 SHARES OF COMMON STOCK
12,550,005 INITIAL WARRANTS
1,500,000 PLACEMENT AGENT WARRANTS
205,990 INVESTOR WARRANTS
375,000 ADDITIONAL WARRANTS
----------
This Prospectus relates to the following securities of iMall,
Inc., a Nevada corporation (the "Company"): (i) 317,192 shares of common stock,
par value $.008 per share ("Common Stock") issued to accredited investors in a
private placement completed in October 1997 (the "Bridge Financing"); (ii)
6,945,006 shares of Common Stock issuable upon conversion of 5,000,004 shares of
the Company's 9% Convertible Preferred Stock (the "Convertible Preferred Stock")
issued in a private placement completed in December 1997 (the "Private
Placement"); (iii) 1,568,751 shares of Common Stock underlying warrants, issued
in connection with the Private Placement, which entitles the holder to purchase
.125 share of Common Stock exercisable at $3.20 per share, subject to adjustment
in certain circumstances (the "Initial Warrants"); (iv) 12,550,005 Initial
Warrants issued in connection with the Private Placement; (v) 1,500,000 warrants
issued to Commonwealth Associates (the "Placement Agent"), in connection with
the Private Placement, to purchase one share of Common Stock exercisable at
$3.20 per share, subject to adjustment in certain circumstances (the "Placement
Agent Warrants"); (vi) 1,500,000 shares of Common Stock underlying the Placement
Agent Warrants; (vii) 205,990 warrants issued to a group of investors in
connection with the Bridge Financing to purchase .125 share of Common Stock
exercisable at $3.20 per share, subject to adjustment in certain circumstances
(the "Investor Warrants"); (viii) 25,749 shares of Common Stock underlying the
Investor Warrants; (ix) 375,000 warrants issued to the Company's financial
advisors in connection with the Private Placement to purchase one share of
Common Stock exercisable at $3.20 per share, subject to adjustment in certain
circumstances (the "Additional Warrants"); and (x) 375,000 shares of Common
Stock underlying the Additional Warrants. The Initial Warrants, Placement Agent
Warrants, Investor Warrants and the Additional Warrants are referred to herein
as the "Warrants." The Common Stock offered hereby and the Common Stock
underlying the Convertible Preferred Stock and the Warrants (the "Underlying
Common Stock") together with the Warrants are referred herein as the
"Securities."
The Common Stock and Warrants are being offered by certain
securityholders of the Company (the "Selling Securityholders"). See "PRINCIPAL
AND SELLING SECURITYHOLDERS," and "PLAN OF DISTRIBUTION." The Underlying Common
Stock is being offered by the Company upon the conversion of the Convertible
Preferred Stock and the exercise of the Warrants. The Company will receive the
proceeds from the exercise of the Warrants; however, the Company will not
receive any proceeds from the sales of the Common Stock offered hereby, the
Warrants or the Underlying Common Stock by or for the accounts of the Selling
Securityholders. See "USE OF PROCEEDS."
The Company's Common Stock is presently quoted on the
Nasdaq SmallCap Market under the Symbol "IMAL." On November 19,
1998, the last reported sale price of the Common Stock, as reported on the
Nasdaq SmallCap Market was $9.00 per share.
----------
THE SECURITIES OFFERED HEREBY INVOLVE SUBSTANTIAL RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
The date of this Prospectus is __________, 1998
<PAGE> 3
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024 at its principal office, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the Company's Common Stock is
presently traded on the NASDAQ SmallCap Market. Reports and other information
concerning the Company may be inspected at the Records Department of the NASDAQ
Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission, a registration
statement on Form SB-2 (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby made
to the Registration Statement.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in its
entirety by the more detailed information and financial statements and the
related notes thereto appearing elsewhere in this Prospectus. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in such forward-looking statements. Factors that might cause a
difference include, but are not limited to, those discussed in "RISK FACTORS."
The Company effected a 1 for 19 reserve stock split on
January 8, 1996. In addition, on May 22, 1996, the Company effected a 4 for 1
forward stock split, and, effective February 12, 1998, the Company effected a 1
for 8 reverse stock split. All references to this Prospectus take these stock
splits into effect when referring to the number of shares of the Company's
Common Stock or per share data.
THE COMPANY
The Company is an electronic commerce and Internet services
company that operates "iMALL," currently the largest shopping mall destination
on the Internet, located at www.imall.com., as well as malls for Sage Networks
and animalhouse.com. The Company recently launched an innovative shopping portal
and proprietary product-level search engine, located at www.stuff.com.
The Company's mission is to maintain and expand its position
as a pioneer and leader in electronic commerce services by providing merchants
the ability, through its proprietary software, to transact commerce on line.
Electronic commerce services ("EC services") include the ability to import,
organize and retrieve products electronically, process transactions securely,
and receive credit card payments over the Internet.
Prior to August 28, 1998, the Company derived its revenues
principally from Internet training, education and consulting services, Web site
sales and pre-paid maintenance fees, all of which were generated by the
operations of the Company's seminar and training division (the "Seminar
Division"). While the Seminar Division historically accounted for approximately
95% of the Company's revenues, including approximately $1 million of revenue for
the quarter ended September 30, 1998, the Seminar Division was not profitable.
Effective August 28, 1998, the Company discontinued the operations of the
Seminar Division and is currently engaged in discussions for the sale of some or
all of such division's assets. Management believed that the low margin, highly
competitive, and non-recurring nature of the revenue stream from the Seminar
Division made it incompatible with the Company's strategy of expanding revenue
generation from the provision of EC services and capabilities.
The Company is now focusing on what it believes to be more
profitable areas of its business such as the building and hosting of Web sites
equipped with the tools necessary to process on line transactions
("Transactional Web Sites"), the sale of the Company's proprietary EC services,
maximizing the Company's internet advertising revenues, and growing its on line
commerce revenue (by earning a percentage of the gross sales made through iMALL
merchants' Web sites).
3
<PAGE> 5
During the third quarter of 1998, the Company focused much of
its resources on the expansion of its EC service business. The Company began
marketing its new product, Bolt-on e-commerce(TM), which allows any existing Web
Site to be upgraded seamlessly to a fully commerce-enabled Web site without
having to rebuild the site from scratch. Using the Company's proprietary Web
design tools, these EC services can also be incorporated into any newly
constructed Web site. When using the Company's EC services, the merchant's
product data and purchase transactions are hosted on the Company's servers,
freeing the merchant from needing to purchase or install hardware or software.
The Company offers its EC services primarily through its
partnerships with Internet Service Providers, Web hosting firms, and financial
service companies with an Internet focus. As of the end of the third quarter,
the Company began offering its EC services through reseller arrangements with
Verio Web Hosting, Sage Networks, and Cardservice International. In addition to
receiving a unique Web site address, businesses that utilize the Company's EC
services have their products automatically listed in stuff.com and have the
option to be listed in imall.com or other Internet properties iMALL operates.
Management believes the Company's reseller partnerships afford the Company the
ability to leverage the partners' large sales forces and bases of existing
clients, in the pursuit of revenue growth.
On November 1, 1998, the Company launched its shopping
portal, located at www.stuff.com. This portal is a product-level search engine
designed specifically for on line shopping. Visitors to stuff.com can search a
proprietary index of over a million products offered among numerous merchant
sites across the Internet. The search experience is efficient and specific to
products for sale, in that it does not clutter the search results with generic
keywords or extraneous non-retail Web sites. Further, when the user clicks on a
chosen product in the listing of search results, the user is linked directly to
the relevant product page within the merchant Web site, rather than having to
restart a search from the top page of a merchant's Web site. The Company plans
to devote marketing and advertising resources to the expansion of its Stuff.com
shopping portal during the next several quarters. The Company anticipates that
Stuff.com will provide the Company revenues through advertising sold on the
site, royalties earned from referral fee contracts and through upgrades to the
Company's other e-commerce services.
On October 30, 1998, the Company entered into a strategic
marketing agreement with First Data Merchant Services ("FDMS"), a subsidiary of
First Data Corporation. In connection with this agreement, FDMS purchased two
million shares of the Company common stock for a total purchase price of $14
million. $10.8 million of this amount was funded on November 2, 1998. The
remaining amount will be funded in early 1999, subject to the Company obtaining
shareholder approval.
The Company's executive office is located at 233 Wilshire
Boulevard, Suite 820, Santa Monica, California 90401, and its telephone number
is (310) 309-4000.
4
<PAGE> 6
USE OF PROCEEDS
No proceeds are to be paid to the Company from the sale of shares of the
Common Stock offered hereby, Underlying Common Stock or Warrants. The Company
will receive the proceeds from the exercise of the Warrants. See "USE OF
PROCEEDS."
RISK FACTORS
Investment in the Securities involves a substantial degree of risk,
including possible regulatory constraints and possible need for additional
financing. See "RISK FACTORS."
5
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
The following table sets forth for the periods indicated and
at the dates indicated, historical summary financial information of the Company
restated to reflect the discontinuance of the Seminar Division. The historical
information contained in the table as of December 31, 1997 and for the years
ended December 31, 1997 and 1996 has been derived from audited consolidated
financial statements, and is qualified in its entirety by, and should be read in
connection with, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,"
the audited consolidated financial statements (and notes thereto) and other
financial and statistical information of the Company appearing elsewhere in this
Prospectus. The statements of operations and balance sheet data as of September
30, 1998 and for the nine months ended September 30, 1998 and 1997, as so
restated, have been derived from unaudited condensed consolidated financial
statements. The condensed consolidated financial statements as of September 30,
1998 and for the nine months ended September 30, 1998 and 1997 appearing
elsewhere in this Prospectus are unaudited; however in the opinion of Management
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial results and condition for interim
periods have been made. The results of interim periods are not necessarily
indicative of the results to be obtained in a full fiscal year.
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
---------------------- ------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Revenues $ 973,635 $ 676,812 $ 842,386 $ 754,226
Gross profit 785,997 379,043 673,545 135,545
Loss from operations (2,579,633) (2,324,525) (6,223,964) (1,918,303)
Loss before provision
for income taxes (2,602,705) (2,310,373) (5,719,384) (1,922,869)
Loss from continuing
operations (2,586,159) (2,348,301) (5,719,384) (2,037,875)
(Loss) income from
discontinued operations (2,116,815) 2,413,119 (1,883,406) (668,172)
Net (loss) income $(4,702,974) $ 64,818 $(7,602,790) $(2,706,047)
Net (loss) income per
common share--basic and
diluted(1):
Loss from continuing
operations $ (0.36) $ (0.32) $ (0.92) $ (0.27)
Loss (income) from
discontinued operations $ (0.28) $ 0.33 $ (0.24) $ (0.09)
Net (loss) income $ (0.64) $ 0.01 $ (1.16) $ (0.36)
Weighted average common
shares outstanding(1) 7,526,967 7,252,584 7,703,591 7,447,285
</TABLE>
(1) See Note 10 of Notes to Consolidated Financial Statements and Note 3 to
Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1998
----------------- ------------------
(unaudited)
<S> <C> <C>
BALANCE SHEET
DATA:
Working capital $13,474,100 $3,746,042
Fixed assets, net 337,610 1,776,471
Total assets 16,016,812 8,281,089
Total liabilities 1,662,597 2,261,859
Stockholders' equity 14,354,215 6,019,230
</TABLE>
7
<PAGE> 9
RISK FACTORS
An investment in the securities offered hereby involves a
substantial degree of risk. Prospective investors, prior to making an investment
decision, should carefully consider the following risk factors. This Prospectus
contains, in addition to historical information, certain forward-looking
statements that involve risks and uncertainties. Reference is made in particular
to the description of the Company's plans and objectives for future operations,
assumptions underlying such plans and objectives and other forward-looking
statements included in "PROSPECTUS SUMMARY," "USE OF PROCEEDS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" and "BUSINESS" in this
Prospectus. Such statements are based on Management's current expectations and
are subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements. Factors which could cause such results to differ materially from
those described in such forward-looking statements include, but are not limited
to, those set forth in the risk factors below.
LIMITED OPERATING HISTORY
The Company has existed in its present state since January
1996 and, until August 28, 1998, has generated the majority of its revenues from
Internet training, education and consulting services, Web site sales and
pre-paid maintenance fees, all of which were generated by the operations of the
Seminar Division. However, effective August 28, 1998, the Company discontinued
the operations of the Seminar Division as well as from Web site sales and
maintenance fees. The Company has not begun to generate significant recurring
revenues from on line EC services which is to be the Company's focus for the
future. Accordingly, the Company has a limited operating history on which to
base an evaluation of its business and prospects. The Company's business and
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as on line
commerce. Such risks for the Company include, but are not limited to, an
evolving and unpredictable business model, management of growth, the Company's
ability to anticipate and adapt to a developing market and unforeseen changes
and developments in the Company's strategic partners' activities and direction.
To address these risks, the Company must, among other things, implement and
successfully execute its business strategy, continue to develop and upgrade its
technology, improve its Web site, provide superior customer service, respond to
competitive developments and attract, retain and motivate qualified personnel
and meet the expectations of its strategic partners. There can be no assurance
that the Company will be successful in addressing such risks, and the failure to
do so could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
HISTORICAL LOSSES; ANTICIPATED LOSSES
Since inception, the Company has incurred significant
operating losses, and as of September 30, 1998 had an accumulated deficit of
$13,250,445. The Company expects to significantly increase its operating
expenses to expand its marketing operations, and increase its level of capital
expenditures to further develop and maintain its proprietary software. Such
increases in operating expense levels and capital expenditures will adversely
effect operating results and the Company believes that it will incur substantial
losses for the foreseeable future. There can be no assurance that the Company
will ever achieve or maintain profitability or generate cash from operations in
the future. Further, in view of the rapidly evolving nature of the Company's
business, its limited operating history and the discontinuance of the Seminar
Division, the Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION."
8
<PAGE> 10
FLUCTUATIONS IN OPERATING RESULTS
As a result of the Company's limited operating history and
the emerging nature of the markets in which it competes, the Company may not be
able to accurately predict its revenues. The Company expects to experience
significant fluctuations in its future quarterly operating results due to a
variety of factors, many of which are outside the Company's control. Factors
that may adversely affect the Company's quarterly operating results include (i)
the Company's ability to retain and attract merchants on its Web site, (ii) the
level of traffic on the Company's Web site, (iii) consumer confidence in
encrypted transactions on the Internet, (iv) the level of use of the Internet
and on line services and increasing consumer acceptance of the Internet as a
medium for commerce, (v) the Company's ability to upgrade and develop its
systems and infrastructure and attract new personnel in a timely and effective
manner, (vi) the announcement or introduction of new sites, services and
products by the Company and its competitors, (vii) technical difficulties,
system downtime or Internet brownouts, (viii) the amount and timing of operating
costs and capital expenditures relating to expansion of the Company's business,
operations and infrastructure, (ix) governmental regulation, (x) implementation,
renewal or expiration of significant contracts with Verio, Inc., Cardservice
International and Animalhouse.com, FDMS and others the Company may enter into in
the future, and (xi) general economic conditions and economic conditions
specific to the Internet and on line commerce. The Company also faces
unforeseeable seasonal sales fluctuations related to its increasing focus on
retail Internet commerce. Due to the foregoing factors, in one or more future
quarters the Company's operating results may fall below the expectations of
securities analysts and investors. In such event, the trading price of the
Company's Common Stock would likely be materially adversely affected.
NEED TO DEVELOP RECURRING REVENUE
Prior to August 28, 1998, the Company generated the majority
of its revenues from the Seminar Division. Effective August 28, 1998, the
Company discontinued the operations of the Seminar Division. The Company's
future success will depend in part on its ability to generate substantial
recurring revenue from the provision of EC services. There can be no assurance
that the Company's efforts will be successful. See "BUSINESS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
MANAGEMENT OF GROWTH
The Company anticipates that significant expansion of its
present operations will be required to address potential growth in its market
opportunities. This expansion has placed, and is expected to continue to place,
a significant strain on the Company's management, operational and financial
resources. The Company's new employees include a number of key managerial and
technical employees who have not yet been fully integrated into the Company's
management team, and the Company expects to add additional key personnel in the
near future. In order to manage its growth, the Company will be required to
continue to implement and improve its operational and financial systems, to
expand existing operations, to attract and retain superior management and to
train, manage and expand its employee base. Further, the Company's management
will be required to maintain relationships with various merchants and other
third parties. There can be no assurance that the Company will be able to
effectively manage the expansion of its operations, that the Company's systems,
procedures or controls will be adequate to support the Company's operations or
that the Company's management will be able to successfully implement its
business plan. If the Company is unable to manage growth effectively, the
Company's business, financial condition and results of operations could be
materially adversely affected. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION" and "BUSINESS."
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company may require additional financing in order to
expand its business. The Company's working capital requirements in the
foreseeable future will depend on a variety of factors including the Company's
9
<PAGE> 11
ability to implement its business plan. There can be no assurance that the
Company will be able to successfully negotiate or obtain additional financing,
or that such financing will be on terms favorable or acceptable to the Company.
The Company does not have any commitments for additional financing. The
Company's ability to obtain additional capital will be dependent on market
conditions, the national economy and others factors outside the Company's
control. If adequate funds are not available or are not available at acceptable
terms, the Company's ability to finance its expansion, develop or enhance
services or products or respond to competitive pressures would be significantly
limited. The failure to secure necessary financing could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR
PLAN OF OPERATION-LIQUIDITY AND CAPITAL RESOURCES" and "BUSINESS."
DEPENDENCE ON THE INTERNET
The Company's ability to derive revenues by providing on line
commerce is substantially dependent upon continued growth in the use of the
Internet and the infrastructure for providing Internet access and carrying
Internet traffic. There can be no assurance that the necessary infrastructure,
such as a reliable network backbone, or complementary products will be developed
or that the Internet will prove to be a viable commercial marketplace. To the
extent that the Internet continues to experience significant growth in the level
of use and the number of users, there can be no assurance that the
infrastructure will continue to be able to support the demands placed upon it by
such potential growth. In addition, delays in the development or adoption of new
standards or protocols required to handle levels of Internet activity, or
increased governmental regulation may restrict the growth of the Internet.
Critical issues concerning the commercial use of the Internet, including but not
limited to, security, reliability, cost, ease of use and access, and quality of
service, remain unresolved and may impact the growth of Internet use. If the
necessary infrastructure or complementary products and services are not
developed or if the Internet does not become a viable commercial marketplace,
the business, operating results and financial condition of the Company would be
materially adversely affected.
DEVELOPING MARKET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS MEDIUM FOR COMMERCE
The market for the Company's services has only recently begun
to develop and is rapidly evolving. As is typical for a new and rapidly evolving
industry, demand and market acceptance for recently introduced products and
services over the Internet are subject to a high level of uncertainty and risk.
Moreover, since the market for the Company's services is new and evolving, it is
difficult to predict the size of this market and the future growth rate, if any.
The success of the Company's services will be substantially dependent upon the
widespread acceptance and use of the Internet as a medium for commerce by a
broad base of consumers. Rapid growth in the use of the Internet is a recent
phenomenon, and the Company relies on consumers who have historically used
traditional means of commerce to buy goods and services. For the Company to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. There can be no assurance that there will
be broad acceptance of the Internet as an effective medium for commerce by
consumers. If the Company's on line services do not achieve market acceptance or
if the Internet does not become a viable commercial marketplace, the Company's
business, results of operations and financial condition would be materially
adversely affected. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION" and "BUSINESS."
The Company recently entered into and may continue to enter
into strategic alliances and partnerships, such as the Company's relationships
with Verio, Inc., Cardservice International, Animalhouse.com, Sage Networks and
FDMS. The Company's revenues in the past have been, and in the future continue
to be, partially dependent on these relationships. There can be no assurance
that any of these alliances will be developed successfully, if at all, or that
these alliances will generate revenues or earnings for the Company.
10
<PAGE> 12
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success is substantially dependent upon its
proprietary technology. The Company relies on a combination of trademark,
copyright and trade secret laws, as well as confidentiality agreements and
technical measures to protect its proprietary rights. Much of the Company's
proprietary information may not be patentable, and the Company does not
currently possess any patents. There can be no assurance that the Company will
develop proprietary products or technologies that are patentable, that any
issued patent will provide the Company with any competitive advantage or will
not be challenged by third parties, or that the patents of others will not have
a material adverse effect on the Company's ability to do business. The Company
has registered the iMALL trademark in the United States and claims trademark
rights in, and has applied for trademark registrations in the United States for,
a number of other marks. There can be no assurance that the Company will be able
to secure significant protection for these trademarks. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or services or to obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology or duplicate the Company's products or design around patents issued
to the Company or other intellectual property rights of the Company.
There have been substantial amounts of litigation in the
computer industry regarding intellectual property rights. There can be no
assurance that third parties will not in the future claim infringement by the
Company with respect to current or future products, trademarks or other
proprietary rights, that the Company will counterclaim against any such parties
in such actions or that if the Company makes claims against third parties with
respect thereto, that any such party will not counterclaim against the Company
in such action. Any such claims or counterclaims could be time-consuming and
result in costly litigation, require the Company to redesign its products or
require the Company to enter into royalty or licensing agreements, any of which
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the Company
or at all.
RAPID TECHNOLOGICAL CHANGE
The Internet and on line commerce industries are
characterized by rapid technological change, changing market conditions and
customer demands and the emergence of new industry standards and practices that
could render the Company's existing Web site and proprietary technology
obsolete. The Company's future success will substantially depend on its ability
to enhance its existing services, develop new services and proprietary
technology and respond to technological advances in a timely and cost-effective
manner. The development of Web site and other proprietary technology entails
significant technical and business risk. There can be no assurance that the
Company will be successful in developing and using new technologies or adapt its
proprietary technology and systems to meet emerging industry standards and
customer requirements. If the Company is unable, for technical, legal,
financial, or other reasons, to adapt in a timely manner in response to changing
market conditions or customer requirements, or if the Company's new products and
EC services do not achieve market acceptance, the Company's business, prospects,
results of operations and financial condition would be materially adversely
affected.
RELIANCE ON KEY MANAGEMENT PERSONNEL
The Company's performance is substantially dependent on the
continued services and the performance of its senior management and other key
personnel. The Company's performance also depends on the Company's ability to
retain and motivate its other officers and key employees. The loss of the
services of any of its executive officers or other key employees could have a
material adverse effect on the Company's business, prospects,
11
<PAGE> 13
financial condition and results of operations. The Company's future success also
depends on its ability to identify, attract, hire, train, retain and motivate
other highly skilled technical, managerial and marketing personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. The failure to
attract and retain the necessary technical, managerial and marketing personnel
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. See "BUSINESS-EMPLOYEES" and
"MANAGEMENT."
COMPETITION
The on line commerce market, particularly over the Web, is
new, rapidly evolving and intensely competitive. The Company's current or
potential competitors include (i) E-commerce solution providers that provide
shopping cart based transaction products such as: Yahoo/Viaweb, icat, Pandesic;
(ii) Web developers that incorporate E-commerce products in their solutions such
as Mercantec, Hiway, and Simplenet; (iii) on line shopping malls and auction
houses such as The Internet Mall, Branch Mall, the Yahoo Shopping Guide, Ebay;
and (iv) product search engines and comparison shopping sites such as Excite's
Jango, Yahoo Junglee, and Webmarket.com. The Company believes that the principal
competitive factors in its market are brand recognition, selection, personalized
services, convenience, price, accessibility, customer service, quality of search
tools, quality of editorial and other site content and reliability and speed of
fulfillment. Many of the Company's competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than the Company. Certain of the
Company's competitors may be able to secure merchandise from vendors on more
favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and
devote substantially more resources to Web site and systems development than the
Company. Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors.
The Company expects that competition in the on line commerce
market will intensify in the future. For example, as various market segments
obtain large, loyal customer bases, participants in those segments may seek to
leverage their market power to the detriment of participants in other market
segments. Competitive pressures created by any one of the Company's competitors,
or by the Company's competitors collectively, could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
INTERNET COMMERCE SECURITY RISKS
A significant barrier to on line commerce is the secure
transmission of confidential information over public networks. The Company
relies on encryption and authentication technology to provide the security and
authentication necessary to effect secure transmission of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other developments will not
result in a compromise or breach of the algorithms used by the Company to
protect consumer's transaction data. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. A party who
is able to circumvent the Company's security measures could misappropriate
proprietary information or cause interruptions in the Company's operations. The
Company may be required to expend significant capital and other resources to
protect against such security breaches or to alleviate problems caused by such
breaches.
Concerns over the security of transactions conducted on the
Internet and the privacy of users may also hinder the growth of on line services
generally, especially as a means of conducting commercial transactions. To
12
<PAGE> 14
the extent that activities of the Company or third-party contractors involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage the Company's reputation and expose the
Company to a risk of loss or litigation and possible liability. There can be no
assurance that the Company's security measures will not prevent security
breaches or that failure to prevent such security breaches will not have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "BUSINESS-iMALL SECURITY."
RISK OF SYSTEM FAILURE
The success of the Company is substantially dependent upon
its ability to deliver high quality, uninterrupted Internet hosting, which
requires that the Company protect its computer equipment and the information
stored in its servers, substantially all of which is located at the Company's
office in Provo, Utah. The Company's systems are vulnerable to damage by fire,
natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. Any substantial interruption in the
Company's systems would have a material adverse effect on Company's business,
prospects, financial condition and results of operations. Although the Company
carries property and business interruption insurance, its coverage may not be
adequate to compensate for the losses that may occur. In addition, the Company's
systems may be vulnerable to computer viruses, physical or electronic break-ins
and other similar disruptive events. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays, loss of
data or cessation in service to users of the Company's services. The occurrence
of any of these risks could have a material adverse effect on the Company's
business, prospects, financial condition or results of operations.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by
any government agency, other than regulations applicable to businesses, and
there are currently few laws or regulations directly applicable to access to or
commerce on the Web. It is possible, however, that a number of laws and
regulations may be adopted with respect to the Web, covering issues such as user
privacy, pricing and characteristics and quality of products and services. The
adoption of any such laws or regulations may decrease the growth of the
Internet, which in turn, could decrease the demand for the Company's services
and increase the Company's cost of doing business or otherwise have an material
adverse effect on the Company's business, prospects, financial condition and
results of operations. Moreover, the applicability to the Internet or other on
line services of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes, libel and personal privacy is
uncertain and may take years to resolve. Any such new legislation or regulation,
the application of laws and regulations from jurisdictions whose laws do not
currently apply to the Company's business, or the application of existing laws
and regulations to the Internet or other on line services could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
The Federal Trade Commission ("FTC") has conducted a
nonpublic investigation of the Company's Internet related business opportunity
programs. The Company has entered into settlement discussions with the FTC. In
connection therewith, the Company has reserved $750,000, representing the
Company's present estimate of the amount required to settle the investigation.
There can be no assurance, however, that the Company will be able to reach a
settlement with the FTC for such amount, if at all. If the Company is unable to
reach a settlement, the FTC could bring a formal action seeking substantial
monetary damages or injunctive relief, or both, which if ultimately resolved
unfavorably to the Company, could have a material adverse effect on the
Company's financial condition and earnings. See "BUSINESS-LEGAL MATTERS."
13
<PAGE> 15
CONTROL BY MANAGEMENT
As of November 19, 1998, the Company's officers, directors
and greater than 5% shareholders (and their affiliates) will, in the aggregate,
beneficially own approximately 69.36% of the issued and outstanding voting
shares of the Company's capital stock. As a result, such persons, acting
together, will have the ability to control all matters submitted to shareholders
of the Company for approval (including the election and removal of directors and
any merger, consolidation or sale of all or substantially all of the Company's
assets) and to control the management and affairs of the Company. Accordingly,
such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company, impede a merger, consolidation, takeover or
other business combination involving the Company or discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control of
the Company, which in turn could have an adverse effect on the market price of
the Company's Common Stock. See "MANAGEMENT" and "PRINCIPAL STOCKHOLDERS."
SHARES ELIGIBLE FOR FUTURE SALE
Of the approximately 19,847,237 shares of Common Stock
estimated to be outstanding (on a fully diluted basis including shares issuable
upon the exercise of outstanding Warrants and upon conversion of the Convertible
Preferred Stock), approximately 10,731,698 shares (including for this purpose an
estimated 3,469,500 shares of Common Stock issuable upon the exercise of the
Warrants and 6,945,006 shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock) will have been registered under the Securities Act
and/or otherwise freely tradeable, subject to the lock-up agreement among
certain Selling Securityholders and Commonwealth Associates (see "SHARES
ELIGIBLE FOR FUTURE SALES"). Approximately 2,068,000 shares of Common Stock
will be tradeable subject to the one-year holding period restrictions under, and
compliance with the other requirements of Rule 144 discussed above. Certain of
the officers, directors and shareholders of the Company holding in the aggregate
4,481,667, shares of Common Stock have entered into lock-up agreements with
Commonwealth Associates, the placement agent in the December 1997 private
placement, which provide that, absent the consent of Commonwealth Associates,
they will be prohibited from selling their Common Stock until December 19, 1998.
Any future sale of such shares, including sale upon the expiration of such
lock-up agreements, could have an adverse effect on the market, if any, for the
Company's Common Stock.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of
preferred stock, $.001 par value, of which 5,000,000 shares of Convertible
Preferred Stock are outstanding. The preferred stock may be issued in series
from time to time with such designations, rights, preferences and limitations as
the Board of Directors of the Company may determine by resolution. Unless the
nature of a particular transaction and applicable statutes require such
approval, the Board of Directors has the authority to issue these shares without
shareholder approval. The potential exists, therefore, that preferred stock
might be issued which would grant dividend preferences, liquidation preferences,
voting or other rights to preferred shareholders over common shareholders or,
subject to approval of the holders of the Convertible Preferred Stock, over the
Convertible Preferred Stock. The issuance of preferred stock may have the effect
of delaying or preventing a change in control of the Company without any further
action by shareholders. See "DESCRIPTION OF SECURITIES."
LIMITED TRADING MARKET FOR WARRANTS
The Warrants are not currently included on any exchange or
securities quotation system. Consequently, the trading market for, and liquidity
of, the Warrants, if any, is limited.
14
<PAGE> 16
USE OF PROCEEDS
The Company will receive the proceeds from the exercise of
the Warrants, if any Warrants are exercised. The Company expects to use these
proceeds, if any, for working capital. The Company will not receive any proceeds
from the conversion of the Convertible Preferred Stock or the sale by the
selling shareholders of the Warrants or the Underlying Common Stock. See "PLAN
OF DISTRIBUTION."
15
<PAGE> 17
MARKET PRICE FOR THE COMMON STOCK
The Company was formed as a result of a reverse acquisition
effective January 16, 1996, whereby the Company, acquired all of the issued and
outstanding capital stock of Madison, York & Associates, Inc. ("Madison"), a
Utah corporation, from its shareholders in exchange for the controlling interest
in the Company to such shareholders. On July 13, 1998, the Company's Common
Stock commenced trading on the Nasdaq SmallCap Market ("Nasdaq") under the
symbol "IIML." Prior thereto, the Company's Common Stock traded on the OTC
Electronic Bulletin Board. Prior to trading on the Nasdaq, the trading market
was limited and sporadic and did not constitute an "established trading market."
The following table sets forth the range of sales prices of
the Common Stock as quoted on Nasdaq and the OTC Electronic Bulletin Board
during the periods indicated. Such prices reflect prices between dealers in
securities and do not include any retail markup, markdown or commission and may
not necessarily represent actual transactions. All sales prices take into effect
all stock splits. The Company did not exist in its present form prior to January
1996; therefore, stock prices prior to that date are not applicable.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1996
Quarter Ended March 31, 1996 $ 26.00 $ 18.00
Quarter Ended June 30, 1996 112.00 17.52
Quarter Ended September 30, 1996 97.04 34.24
Quarter Ended December 31, 1996 47.04 16.00
FISCAL YEAR ENDED DECEMBER 31, 1997
Quarter Ended March 31, 1997 36.00 13.04
Quarter Ended June 30, 1997 24.00 8.48
Quarter Ended September 30, 1997 13.04 6.48
Quarter Ended December 31, 1997 8.48 3.44
FISCAL YEAR ENDING DECEMBER 31, 1998
Quarter Ended March 31, 1998 12.50 4.00
Quarter Ended June 30, 1998 13.00 3.00
Quarter Ended September 30, 1998 13.13 6.50
Period from October 1, 1998 to November 19, 1998 10.63 5.88
</TABLE>
On November 19, 1998, the last reported sale price of the Common Stock
as reported by Nasdaq and was $9.00.
As of November 19, 1998, the number of shareholders of record of the
Company's Common Stock was 599. As of such date, 9,432,731 shares were
outstanding.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the
Company as of September 30, 1998:
<TABLE>
<CAPTION>
September 30, 1998
------------------
(Unaudited)
<S> <C>
Stockholders' Equity:
Preferred Stock, liquidation value of $20,000,000;
10,000,000 shares authorized; 5,000,000 shares
issued and outstanding ........................................ $ 19,611,778
Common Stock $0.008 par value, 37,500,000
shares authorized; 7,743,082 shares
issued and outstanding ........................................ 62,897
Common stock held in treasury, at cost ........................................... (405,000)
Accumulated deficit .............................................................. (13,250,445)
------------
Total stockholders' equity ....................................................... 6,019,230
------------
Total capitalization .................................................. $ 6,019,230
============
</TABLE>
17
<PAGE> 19
DIVIDEND POLICY
The Company has never paid dividends on the Common Stock and
does not anticipate paying dividends on its Common Stock in the foreseeable
future. It is the present policy of the Board of Directors to retain all
earnings to provide for the future growth of the Company. Earnings of the
Company, if any, not paid as dividends are expected to be retained to finance
the expansion of the Company's business. The payment of dividends on its Common
Stock in the future will depend on the results of operations, financial
condition, capital expenditure plans and other cash obligations of the Company
and will be at the sole discretion of the Board of Directors. See "DESCRIPTION
OF SECURITIES."
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains forward-looking statements
involving risks and uncertainties based on management's current expectations,
estimates and projections about the Internet industry and the evolution of
on-line commerce and EC services. All statements in this Registration Statement
related to the Company's changing financial operations and expected future
growth constitute forward-looking statements. The actual results may differ
materially from those anticipated or expressed in such statements. The following
discussion and analysis of the Company's financial condition and the Company's
results of operations reflects the discontinuance of the Seminar Division and
should be read in conjunction with the Company's condensed consolidated
financial statements and notes thereto included elsewhere in this Registration
Statement. These results are not necessarily indicative of the results that may
be achieved by the Company for the entire year ending December 31, 1998.
RESULTS OF OPERATIONS
Comparison of Nine-Month Periods Ended September 30, 1998 and 1997
Revenues. Revenues for the nine months ended September 30, 1998 were $842,000
compared to $754,000 for the nine months ended September 30, 1997, an increase
of $88,000 or 12%. The increase was due primarily to an increase in advertising
revenue as part of the Company's continuing move toward recurring revenue
streams and EC services in 1998. Management expects its advertising revenues to
continue to increase in conjunction with its product level search engine roll
out, which, if successful, will create a substantial amount of new page views
available for advertising. Web site sales and related maintenance fees derived
from the Company's internal sales force increased as part of a planned effort to
better diversify the product selection on the shopping mall. During the 1998
period, the Company continued the process of shifting resources to develop its
new businesses in electronic commerce.
Cost of Revenues. The cost of revenues for the nine months ended September 30,
1998 was $169,000 compared to $136,000 for the nine months ended September 30,
1997, an increase of $33,000 or 24%. Cost of revenues consisted primarily of
labor and related costs to build Web sites. The cost of revenues also includes
the cost of any products sold on-line directly by the Company. The gross profit
margin was approximately 80% of revenues, which is reflective of the Company's
new revenue streams from EC services and Internet advertising.
Selling Expenses. Selling expenses increased by $1,445,000 for the nine months
ended September 30, 1998. The increase is primarily due to the implementation of
an on-line advertising campaign that began at the end of 1997. All of the
selling expenses incurred through the third quarter of 1997 was in support of
the seminar and training division. These expenses are now reflected in the loss
from discontinued operations. The Company spent $985,000 on its on line
advertising campaign during the first nine months of 1998 in support of its
branding efforts, and to further promote its new focus on on line commerce.
Corporate personnel expenses relating to sales and marketing are reflected in
total general and administrative expenses. The Company expects to increase its
selling expenses in the fourth quarter of 1998 and into 1999 to promote its new
product level search engine.
Product Development. Product development expenses for the nine months ended
September 30, 1998 were $1,581,000 compared to $507,000 for the nine months
ended September 30, 1997, an increase of $1,074,000 or 212%. This increase is
due to the change in the Company's focus in mid 1997 toward EC services. In
January, 1998 the Company created its Electronic Commerce
19
<PAGE> 21
Services Group (ECSG) in a separate office in Provo, Utah. This office
represents the technology arm of the Company and is focused on the development
of the Company's e-commerce software, creating the technology behind the new
product level search engine, rebuilding the overall technical infrastructure and
the programming of all Web sites that make up the iMALL and the Company's
various partner malls. The product development expenses consist primarily of
payroll and related costs for programmers and software developers in the ECSG
office. During the nine months ended September 30, 1997, the Company's product
development efforts were focused mainly on the development of the iMALL Web site
and related infrastructure.
General and Administrative Expenses. General and administrative expenses for the
nine months ended September 30, 1998 were $3,871,000 compared to $2,030,000 for
the nine months ended September 30, 1997, an increase of $1,841,000 or 91%. This
increase was largely due to an increase of $600,000 in payroll expense resulting
from the hiring of a new management team in order to evolve the Company toward
its current focus on EC services. The total marketing and corporate sales
personnel increased from twenty-four people in September 1997 to over 40 people
in September 1998. The Company also incurred approximately $700,000 in
professional fees during the nine months ended September 30, 1998. These fees
include the hiring of a new PR firm, an investor relations firm, legal and
accounting fees. A large portion of these related expenses in the nine months
ended September 30, 1997 were in support of the seminar and training division,
which is now included in the loss from discontinued operations.
Other income (expense), net. Net other income increased by $76,000 for the nine
months ended September 30, 1998. This was primarily due to an out of court
settlement for a copyright infringement claim for $75,000 during 1998.
Interest income (expense), net. Net interest income for the nine months ended
September 30, 1998 was $429,000 compared to net expense of $5,000 for the nine
months ended September 30, 1997. This increase was due to the investment of
available funds in short-term debt securities during 1998 as well as the
repayment of all outstanding debt in the first quarter of 1998.
Comparison of Years Ended December 31, 1997 and 1996
Revenues. Revenues for the fiscal year ended December 31, 1997 were $974,000
compared to $677,000 for the fiscal year ended December 31, 1996, an increase of
$297,000 or 44%. The increase was due primarily to an increase in advertising
revenue as part of the Company's continuing move toward recurring revenue
streams and EC services in the latter half of 1997. Management expects its
advertising revenues to continue to increase in conjunction with its product
level search engine roll out, which, if successful, will create a substantial
amount of new page views available for advertising. Web site sales and related
maintenance fees derived from the Company's internal sales force increased as
part of a planned effort to better diversify the product selection on the
shopping mall.
Cost of Revenues. The cost of revenues for the fiscal year ended December 31,
1997 was $188,000 compared to $298,000 for fiscal year ended December 31, 1996,
a decrease of $110,000 or 37%. Cost of revenues consisted primarily of labor and
related costs to build Web sites. The cost of revenues also includes the cost of
any products sold on-line directly by the Company. The gross profit margin was
increased from 56% in
20
<PAGE> 22
the fiscal year ended December 31, 1996 to 81% in the fiscal year ended December
31, 1997, which is reflective of the Company's new revenue streams from EC
services and Internet advertising. In 1996 the Company had a higher percentage
of its revenue from hourly billed labor for Web sites which has a higher direct
cost than Web site hosting and advertising driving the profit margin down.
Selling Expenses. Selling expenses increased by $20,000 for the fiscal year
ended December 31, 1997. The increase is primarily due to the implementation of
an on-line advertising campaign that began at the end of 1997. Substantially all
of the selling expenses incurred in 1996 was in support of the Seminar Division.
These expenses are now reflected in the loss from discontinued operations.
Product Development. Product development expenses for fiscal year ended December
31, 1997 were $669,000 compared to $406,000 for the fiscal year ended December
31, 1996, an increase of $264,000 or 65%. This increase is due to the change in
the Company's focus in mid 1997 from Internet training and Web site sales toward
electronic commerce. The product development expenses consist primarily of
payroll and related costs for programmers and software developers. During 1997,
the Company's product development efforts were focused mainly on the development
of the iMALL Web site and related infrastructure.
General and Administrative Expenses. General and administrative expenses for
fiscal year ended December 31, 1997 were $2,677,000 compared to $2,298,000 for
fiscal year ended December 31, 1996, an increase of $378,000 or 16%. This
increase was largely due to increases in personnel and other related expenses.
Other Income (Expense), Net. Net other income decreased by $20,000 for fiscal
year ended December 31, 1997.
Interest Income (Expense), Net. Net interest expense for fiscal year ended
December 31, 1997 was $23,000 compared to net expense of $6,000 for fiscal year
ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
In October 1998, the Company entered into a strategic marketing
agreement with FDMS. In connection with this agreement, FDMS purchased two
million shares of the Company's common stock for a total purchase price of
$14,000,000. $10,780,000 of this amount was funded on November 2, 1998. The
remaining amount will be funded in early 1999, subject to approval of the
Company's shareholders. See "DESCRIPTION OF SECURITIES - AGREEMENT WITH FDMS."
As of September 30, 1998, the Company had current assets of $6,008,000
and current liabilities of $2,262,000.
The Company is currently generating cash receipts (exclusive of
financing activities) of approximately $100,000 per month and incurring cash
expenses in the amount of approximately $1,200,000 per month, of which fixed
costs account for approximately $400,000. The Company anticipates capital
expenditures will total approximately $2,700,000 in 1998 of which $1,970,000 has
been spent through September 1998. In August 1998, the Company signed an
amendment to its pre-existing contract with Animalhouse.com securing a five year
exclusive right to sell all travel and music sold on the animalhouse.com Web
site. The Company paid an additional $300,000 to Animalhouse.com as an advance
against first year royalties in accordance with this amendment. In July 1998,
the Company paid a cash dividend of $989,000 on its Convertible Preferred Stock.
The Company may also spend funds to invest in various forms of advertising to
increase awareness of the Company and its services. The Company believes that it
will be able to fund its continuing operations with existing cash and cash
expected to be generated by continuing operations for at least the next 12
months.
21
<PAGE> 23
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Based on a recent internal assessment, the Company has determined that
certain of its Internet and accounting software programs will have to be
modified or replaced so that its computer systems will properly utilize dates
beyond December 31, 1999. The Company presently believes that the cost to modify
its existing software and/or convert to new software will not be significant.
However, the Company utilizes third-party equipment and software that may not be
Year 2000 compliant. The Company believes that the third-party systems that are
material to its business are Year 2000 compliant based on information provided
by these suppliers. Failure of such third-party equipment or software to
properly process dates for the year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company continues to monitor and evaluate its ability
to confront Year 2000 issues and allocate resources accordingly. In addition,
the Company's business is dependent on the continued successful operation of the
Internet and any interruption or significant degradation of Internet operations,
whether due to Year 2000 problems or otherwise, could have a material adverse
effect on the Company's business, results of operations and financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustment and
unrealized gain/loss on available for sale securities. The Company had no income
that would fall under the comprehensive income rules in the 1998 or 1997
periods.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
believes that its operations do not include multiple segments and therefore no
disclosures are necessary at this time. The disclosures prescribed by SFAS No.
131 are effective for fiscal years beginning after December 15, 1997.
In February 1998, the FASB issued Statement of Financial Accounting
Standard No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". This statement, which is effective for financial
periods ending after December 15, 1998, requires full disclosure of all pensions
plans and other postretirement benefit plans. The Company does not currently
have any pensions or other postretirement benefit plans.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
statement, which is effective for financial periods beginning after June 15,
1999, addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Company has not historically or does not currently hold any derivative
instruments or participate in any hedging activities.
22
<PAGE> 24
BUSINESS
OVERVIEW
The Company is an electronic commerce and Internet services company that
operates "iMALL," currently the largest shopping mall destination on the
Internet, located at www.imall.com. The Company is also developing new malls for
Sage Networks and animalhouse.com. On November 1, 1998, the Company launched an
innovative shopping portal and proprietary product-level search engine, located
at www.stuff.com.
The Company's mission is to maintain and expand its position as a
pioneer and leader in EC services by providing merchants the ability, through
its proprietary software, to transact commerce on line. EC services include the
ability to import, organize and retrieve products electronically, process
transactions securely, and receive credit card payments over the Internet.
Prior to August 28, 1998, the Company derived its revenues principally
from Internet training, education and consulting services, Web site sales and
pre-paid maintenance fees, all of which were generated by the operations of the
Seminar Division. While the Seminar Division historically accounted for
approximately 95% of the Company's revenues, including approximately $1 million
of revenue for the quarter ended September 30, 1998, the Seminar Division was
not profitable. Effective August 28, 1998, the Company discontinued the
operations of the Seminar Division and is currently engaged in discussions for
the sale of such division's assets. Management believed that the low margin,
highly competitive, and non-recurring nature of the revenue stream from the
Seminar Division made it incompatible with the Company's strategy of expanding
revenue generation from the provision of on line commerce services and
capabilities.
INDUSTRY BACKGROUND
GENERAL
The Internet is a world-wide series of interconnected electronic and/or
computer networks. Individuals and companies have recently recognized that the
technological capabilities of the Internet provide a medium for not only the
promotion and communication of ideas and concepts, but also for the presentation
and sale of information, goods and services. Historically, the Internet has been
accessible principally through personal computers. Recently, several companies
have announced "Web TV" products designed for attachment to television sets for
the purpose of allowing access to the Internet without the need for a personal
computer. Although these products do not permit the full range of functions
provided by personal computers, they do permit many of the features of the
Internet to be viewed on television sets. Management believes that these new Web
TV products may increase the number of people who will shop on line by accessing
the Internet.
23
<PAGE> 25
The term "Internet commerce" encompasses the use of the Internet for
selling goods and services. The use of the Internet as a marketing and
advertising tool is enhanced by the ability to communicate information through
the Internet to a large number of individuals, businesses and other entities.
Because of the "virtual" nature of electronic commerce, an on line presence in
the form of a Web site for certain merchants can significantly reduce or
eliminate the costs of maintaining a physical retail facility. On line merchants
can also achieve significant savings by eliminating traditional product
packaging, print advertising and other point of purchase materials. Marketing on
the Internet can be especially advantageous for smaller companies because it
removes many physical and capital barriers to entry and serves to level the
competitive playing field by allowing smaller companies to effectively compete
with larger companies.
Most larger companies have some form of Web site used as a
cost-effective way of communicating with customers, investors, suppliers, etc.
Larger companies either build and maintain their Web site internally, using
their own Management Informations Systems (MIS) department, or contract with a
Web site design firm to provide the services. Smaller and medium sized companies
are rapidly adopting the Internet for similar reasons. Most such companies have
limited resources to devote to Internet Web sites, and will generally seek a
solution which is designed for them by a consultant or Web site design firm, or
provided in a "turn key" manner by an Internet Service Provider or Web site
hosting firm.
HOW ACTIVITY IS TRACKED
It is important to track activity at a Web site because one of the
currently significant revenue streams associated with Web sites is Internet
advertising, which is priced according to the amount of audience to which the
Web site exposes the advertisement(s). Further, if the Web site is intended to
sell goods or services directly to visitors, the amount of product sales revenue
is also driven largely by the amount of visitor activity the Web site generates.
There are three different methods to measure Internet activity for a
particular Web site. The first method is to count the number of "hits" on the
site. Hits refers to the total number of files retrieved from a Web page. These
files can either be text documents, executable files (i.e., downloaded
programs), or graphic images. A file is deemed a hit whether it is simply
accessed or actually downloaded. Depending on how much activity is generated, a
single visitor to iMALL could result in numerous hits.
The second method of measuring activity on a Web site is to count
"impressions." Impressions usually refer to the total number of banners or pages
imposed into a user's line of sight. Because items creating impressions may
change while a viewer is still viewing a single page, more impressions than
visitors may be generated by a Web page.
A third method of measuring activity is to count the number of
"visitors" to a Web site. Visitors (or accesses to a site) are the total number
of people coming to a particular Web site.
INTERNET SECURITY
One of the largest barriers to a potential customer's willingness to
conduct commerce over the Internet is the perceived ability of unauthorized
persons to access and use personal information about the user, such as credit
card account numbers, social security numbers and bank account information.
Concerns about the security of the Internet include the authenticity of the user
(i.e., is the user accurately identified), verification and certification
methods of who these users are, and privacy protection for access to private
information transmitted over the Internet. However, the Company believes recent
advances in this area have greatly reduced the possibility of such unauthorized
access or use, which in turn may increase acceptance by consumers of electronic
commerce. The Company is not aware of any occasion in which a user's credit card
was misappropriated while transacting business on iMALL. See "RISK FACTORS
INTERNET COMMERCE SECURITY RISKS."
PRODUCTS AND SERVICES
As a result of the discontinuance of the Seminar Division, the Company
is now deriving substantially all of its revenue from Web site sales and
maintenance fees, Internet advertising sales and recurring monthly fees for EC
services. The Company believes its future revenues will consist increasingly of
revenue from providing EC services to businesses (through Web sites which
include the tools necessary to consummate transactions online), selling Internet
advertising and selling products over the Internet.
EC SERVICES
24
<PAGE> 26
EC services include the ability to import, organize and retrieve
products electronically, process transactions securely, and receive credit card
payments over the Internet. The Company has developed proprietary software which
is offered through several distribution channels to provide small to medium
sized businesses the ability to present their products and services on line, as
well as directly transact actual sales.
Transactional Web Sites
The Company builds Transactional Web Sites with its proprietary Web site
development tool, called "iSTORE." iSTORE facilitates the development of basic
Web sites, the enhancing of Web sites, and the creation of fully customized Web
sites. iSTORE also supports electronic commerce components which merchants may
employ on their iMALL sites. Basic Web sites contain text of various fonts and
font sizes as well as simple images. Enhanced sites contain more advanced text,
images, forms and tables that are generated through the use of Java applets (a
small computer application written in the Java language that is downloaded to a
browser), JavaScripting (a language that is interpreted by Web browsers and used
to enhance content that is downloaded to a browser), and similar tools. iSTORE
provides several stylized templates for basic Web site designs and a more
limited number for enhanced Web site designs. Fully customized Web sites contain
features similar to those contained in enhanced Web sites but require several
sophisticated design and programming resources that are not currently provided
in iSTORE. The Company anticipates that as demand grows for the more
sophisticated features found in enhanced and fully customized sites, the Company
will integrate the tools for creating these features into iSTORE.
Bolt-On E-Commerce
During the third quarter of 1998, the Company began marketing its new
product, Bolt-on e-commerce(TM), which allows any existing Web site to be
upgraded seamlessly to a fully commerce-enabled Web site without having to
rebuild the site from scratch. Using the Company's proprietary Web design tools,
these EC services can also be incorporated into any newly constructed Web site.
When using the Company's EC services, the merchant's product data and purchase
transactions are hosted on the Company's servers, freeing the merchant from
needing to purchase or install any hardware or software.
Security Protocols
The Company's current EC services include the use of secure sockets
layer ("SSL") protocol. SSL supports a fully DES encrypted session (up to
128-bit, depending on the browser) between the Web browser and the Web server.
Additional security is provided by CyberCash's Secure Internet Payment Service.
This service incorporates an RSA encryption method between a shopper on iMALL
and a merchant on iMALL. See "--ON LINE SHOPPING." These security methods
provide a high level of encryption protection for users' credit card numbers,
bank account numbers, and other personal information. To the Company's
knowledge, the Company has never experienced any significant problems with
security. However, there can be no assurance that the Company will never
experience such a problem.
ON LINE SHOPPING
The following section describes the Company's two primary shopping Web
sites, www.imall.com and www.stuff.com. These Web sites provide consumers an
opportunity to purchase goods and services over the Internet using the Company's
state of the art software.
iMall
The Company maintains an Internet Web site called "iMALL," currently the
largest shopping mall destination on the Internet, located on the World Wide Web
at www.imall.com. iMALL's key merchants include AT&T WorldNet Service, American
Express Travel, Barnes & Noble, Hanes, Circus Circus' fourteen casinos and
resorts, Breath Asure, Checker Auto, and Disney. iMALL has also recently started
selling through licensed distributors certain Coca-Cola, Disney, and Speedo
products for which it receives a percentage of all gross sales made through the
iMALL Web site.
Upon accessing the iMALL Web site, a user can view each of iMALL's
approximately 1,600 Web sites for merchants ("storefronts"), thousands of
classified advertisements, and the iMALL directory. The iMALL directory lists
sites by product or service categories and allows users to perform global
searches of the entire iMALL. Users may also use the "power shopping" function
to narrow their search to a specific area of iMALL, a specific product, or even
merchants or products from a particular region of the country. A viewer who
wishes to purchase items offered on iMALL can do so simply by submitting an
order on line and entering a credit card number. In addition to the traditional
search options, iMALL offers a special
25
<PAGE> 27
function called "Deals of the Day." This service is updated daily and alerts
iMALL users to special manufacturer discounts on quality name-brand merchandise.
From January 1996 to October 1998, iMALL's hits have increased from
approximately 1 million per month to over 35 million per month. The Company
intends to continue to attracting visitors to the iMALL in order to increase the
Company's advertising revenue and to increase the sales achieved by the
Company's merchants. The Company receives a percentage of sales generated by
over one hundred of its merchants. This percentage ranges from 4% to 15% of
sales.
Stuff.com
On November 1, 1998, the Company launched its shopping portal, located
at www.stuff.com. This portal is a product-level search engine designed
specifically for online shopping. Visitors to stuff.com can search a proprietary
index of over a million products offered among numerous merchant sites across
the Internet. The search experience is efficient and specific to products for
sale, in that it does not clutter the search results with generic keywords or
extraneous non-retail Web sites. Further, when the user clicks on a chosen
product in the listing of search results, the user is linked directly to the
relevant product page within the merchant Web site, rather than having to
restart a search from the top page of a merchant's Web site. The Company plans
to devote marketing and advertising resources to the expansion of its stuff.com
shopping portal during the next several quarters. The Company anticipates that
stuff.com will provide the Company revenues through advertising sold on the
site, royalties earned from referral fee contracts and through upgrades to the
Company's other EC services.
TECHNICAL INFRASTRUCTURE
The following section describes both the hardware and software
facilities used by iMALL for its electronic commerce suite, as well as all its
internet properties (imall.com, stuff.com, etc).
The Company's Web server computing infrastructure is composed of a
number (currently 8) of front end UNIX web servers running the latest release
Stronghold Secure Webserver and a back end set of UNIX database and file
servers. The database servers are using ODI's ObjectStore database technology.
The system is connected to the Internet via a DS3 (45Mb/s) line with redundant
links through Sprint and MCI. Backup connections to the Internet provide service
in the event of catastrophic failure. The server platform is protected by both
UPS and an onsite emergency generator.
The Company's electronic commerce infrastructure is based on a
combination of commercial software (such as Net Perceptions "GroupLens") and
proprietary technology. The e-commerce system is designed to provide all
merchant and shopper services required for the Company's business.
SALES AND MARKETING
The Company offers its EC services primarily through its partnerships
with Internet Service Providers, Web hosting firms, and financial service
companies with an Internet focus. As of the end of the third quarter, the
Company began offering its EC services through reseller arrangements with Verio
Web Hosting, Sage Networks, and Cardservice International. In addition to
receiving a unique Web site address, businesses that utilize the Company's EC
services have their products automatically listed in stuff.com and have the
option to be listed in imall.com or other Internet properties iMALL operates.
Management believes the Company's reseller partnerships afford the Company the
ability to leverage the partners' large sales forces and bases of existing
clients, in the pursuit of revenue growth.
The Company's strategy includes the continued development of strategic
alliances as a key to building the acceptance and the revenue base of the
Company. However, there can be no assurance that the Company will be successful
in developing additional strategic alliances or maintaining existing strategic
alliances in the future.
First Data Alliance
In November 1998, the Company and FDMS entered into a Development and
Marketing Agreement (the "Marketing Agreement") pursuant to which the Company
and FDMS will jointly market Internet commerce solutions to FDMS' clients and
their merchant businesses. The Marketing Agreement has an initial term of ten
years and, unless terminated by either party, will be renewed for additional
two-year terms thereafter. Under the terms of the Marketing Agreement, FDMS is
obligated to use its commercially reasonable efforts to offer the Company's
26
<PAGE> 28
e-commerce tools, e-commerce enabled Web sites and non-commerce enabled Web
sites to all of its domestic alliances and to name the Company as its preferred
e-commerce provider in such offers. iMall will bill FDMS monthly recurring fees
based upon the number of Web sites hosted and types of services provided. The
Marketing Agreement requires the Company to maintain and upgrade, if necessary,
the technology used in connection with the Stuff.com site and certain other mall
sites to ensure that such technology is equal to or better than that of the top
ten percent of all similar services. In the event that the Company fails to meet
the foregoing standard and such failure substantially impairs the ability of
FDMS to service its current customers or add additional customers, FDMS will
have the right to reduce its payments to the Company under the Marketing
Agreement by fifty percent, and if such technology is not upgraded to meet the
standard described above within a set period of time, require the Company to pay
FDMS for all reasonable conversion costs and expenses incurred by FDMS and its
affiliates associated with the deconversion of FDMS merchants.
The Marketing Agreement provides that each of the following constitutes
an event of default by the Company: (i) failure to make certain payment
obligations owed to FDMS under the Marketing Agreement, (ii) failure to perform
a material term or obligation under the Marketing Agreement which substantially
impairs the ability of FDMS to service its customers or add additional
customers, (iii) failure to issue the warrants in accordance with the Investment
Agreement, (iv) a material breach of certain representations, warranties or
covenants contained in the Marketing Agreement, (v) certain events of bankruptcy
or insolvency with respect to the Company, (vi) a material change to the
Stuff.com product or brand to which FDMS reasonably objects, or (vii) certain
change-of-control events specific to the Company and FDMS competitors. If any
such event of default occurs and is not cured within a set period of time, FDMS
will have the right to terminate the Marketing Agreement.
The Company and FDMS also entered into a source code escrow agreement
(the Escrow Agreement ) pursuant to which the Company will be required to
deposit in an escrow account the source code for certain Company software and
certain e-commerce tools (the Source Code ). The Escrow Agreement provides that
any termination by FDMS of the Marketing Agreement for the events of default
described above will cause the escrow agent under the Escrow Agreement to,
without any further payment by FDMS to the Company, release the Source Code
deposited in the escrow account to FDMS. In addition, the Company is obligated
under the Marketing Agreement to build, at FDMS' expense, a duplicate and
redundant data center and computer system which would be transferred to FDMS in
the event of certain defaults by the Company. The Marketing Agreement also
contains certain other events of default that would give either party the right
to terminate the agreement without the transfer of technology described above.
In connection with the Marketing Agreement, the Company agreed to sell
to FDMS two million shares of its Common Stock for an aggregate consideration of
$14,000,000 representing a purchase price of $7.00 per share. The Company has
issued FDMS 1,540,000 of such shares. Sale of the balance is subject to the
Company obtaining approval from its shareholders. See "DESCRIPTION OF
SECURITIES-AGREEMENTS WITH FDMS."
INTERNET EDUCATION AND CONSULTING
In the past, the Company found that an effective method of selling Web
sites was in conjunction with Internet education. Therefore, through the Seminar
Division, the Company conducted Internet training workshops for which the
Company received a fee. These Internet training workshops included extensive
instruction about the Internet and were taught by instructors who had experience
in areas such as marketing, business development, Internet commerce, and Web
site design. Internet workshop participants received Web site certificates and
classified advertisements on iMALL, all designed by the Company. Upon submitting
a Web site certificate for insertion on the iMALL, the participant was required
to purchase a Web site Maintenance Agreement. The foregoing Internet education
and consulting business was discontinued by the Company on August 28, 1998. See
"BUSINESS - OVERVIEW."
27
<PAGE> 29
INDEPENDENT SALES CONSULTANTS
In connection with the Company's Seminar Division's education and
consulting business, many workshop participants had asked if they could receive
the Web sites and training even if they did not have a specific business,
product or service to market. These participants wanted to resell Web sites to
their colleagues who had a business, product or service. Moreover, many of these
participants sold multiple Web sites and asked if they could purchase additional
ones to resell. As a result, the Company's participants were able to use their
Web sites for their own business or resell them to others. The Company refers to
those participants who choose to market Web sites as Internet consultants.
INTERNAL SALES FORCE
The majority of iMALL's merchants have been acquired through its now
discontinued Seminar Division. However, the Company has also utilized a small
internal sales force, to sign contracts with such large clients as AT&T WorldNet
Service, American Express Travel, Barnes & Noble, Hanes, Circus Circus' fourteen
casinos and resorts, Breath Asure, Checker Auto, and Disney.
Prior to the discontinuation of the Seminar Division, the Company
concentrated its efforts on the sale of Web sites through Internet marketing and
education workshops and other consulting services with the objective of
expanding its base of iMALL merchants and advertisers. The Company believes the
merchant base it developed through the Seminar Division was important for its
long-term success. The Company has established an in-house sales force
responsible for obtaining additional merchants and advertisers for the on line
shopping sites it operates.
COMPETITION
The on line commerce market, particularly over the Web, is new, rapidly
evolving and intensely competitive. The Company's current or potential
competitors include (i) E-commerce solution providers that provide shopping cart
based transaction products such as: Yahoo/Viaweb, Icat, Pandesic; (ii) Web
developers that incorporate E-commerce products in their solutions such as
Mercantec, Hiway, and Simplenet; (iii) on line shopping malls and auction houses
such as The Internet Mall, Branch Mall, the Yahoo Store, Ebay and Zauction; and
(iv) product search engines and comparison shopping sites such as Excite's
Jengo, Yahoo Junglee, and Webmarket.com.
The Company believes that the principal competitive factors in its
market are brand recognition, selection, personalized services, convenience,
price, accessibility, customer service, quality of search tools, quality of
editorial and other site content and reliability and speed of fulfillment. Many
of the Company's competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than the Company. Certain of the Company's competitors may
be able to secure merchandise from vendors on more favorable terms, devote
greater resources to marketing and promotional campaigns, adopt more aggressive
pricing or inventory availability policies and devote substantially more
resources to Web site and systems development than the Company. Increased
competition may result in reduced operating margins, loss of market share and a
diminished brand franchise.
28
<PAGE> 30
EMPLOYEES
As of November 17, 1998, the Company and its subsidiaries had a total of
91 full-time employees. 42 full-time employees are located in Santa Monica,
California, and 49 are located in Provo, Utah. None of the Company's employees
are covered by an ongoing collective bargaining agreement with the Company and
the Company believes that its relationship with its employees is good.
HISTORY OF THE COMPANY
The Company's predecessor for accounting purposes is Madison, which was
incorporated on November 2, 1994. On January 16, 1996, Madison engaged in a
share exchange with iMALL, Inc., a Nevada corporation, which had been the
surviving company in a change of domicile merger with Natures Gift, Inc., a Utah
corporation ("Natures Gift"), on January 8, 1996. Natures Gift was incorporated
under the laws of the State of Utah on February 9, 1984 as Brickland
Corporation, and changed its name to Natures Gift, Inc. on May 23, 1991. Natures
Gift did not transact any significant business from the date of its inception
until January 1996. As a result of this share exchange between Madison and
iMALL, Inc., Madison became a wholly owned subsidiary of iMALL, Inc. This share
exchange was accounted for as a reverse acquisition and Madison is considered
the predecessor of the Company because it had operations at the time of the
share exchange. In this share exchange, the shareholders of Madison received
2,103,112 shares of common stock of iMALL, Inc. in exchange for all of the
issued and outstanding shares of common stock of Madison. The number of shares
outstanding after this transaction consisted of the 2,103,112 shares issued to
the shareholders of Madison, and 2,701,848 shares existing in connection with
the reverse acquisition accounting.
On January 16, 1996, the Company also entered into share exchange
agreements with Cabot, Richards & Reed, Inc., a Utah corporation ("Cabot"), and
R&R Advertising, Inc., a California corporation ("R&R"), wherein the
shareholders of Cabot received 1,400,000 shares of common stock of iMALL, Inc.
in exchange for all of the outstanding shares of common stock of Cabot and the
shareholders of R&R received 600,000 shares of common stock of iMALL, Inc. in
exchange for all of the outstanding shares of common stock of R&R. Each of Cabot
and R&R became wholly owned subsidiaries of iMALL, Inc. On March 5, 1996, the
Company entered into a share exchange agreement with Inter Active Marketing
Group, Inc., a Utah corporation ("IMG"), wherein the shareholders of IMG
received 52,563 shares of common stock of the Company in exchange for all of the
outstanding shares of common stock of IMG, and IMG became a wholly owned
subsidiary of the Company. On April 26, 1996, the Company entered into a share
exchange agreement with Physicomp, Inc. (d.b.a. "e.m.a.N.a.t.e."), a California
corporation wherein the shareholders of e.m.a.N.a.t.e. received 200,000 shares
of common stock of the Company in exchange for all of the outstanding shares of
common stock of e.m.a.N.a.t.e., and e.m.a.N.a.t.e. became a wholly owned
subsidiary of the Company. The amount of shares issued in each of these share
exchanges was determined by the percentage ownership interest in the Company to
which the Company's Management determined the acquired entity would be entitled
through negotiation. Certain additional information concerning these
transactions is set forth in "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
and in the notes to the consolidated financial statements of the Company
appearing elsewhere in this Prospectus.
Madison was incorporated in 1994 and commenced business in 1995
providing Web site sales and consulting services to merchants and Internet
entrepreneurs. Madison developed the Internet specific techniques used by the
Company in its now discontinued seminar division. In September 1995, Madison had
acquired all of the issued and outstanding common stock of EMS, Inc., which
owned the Internet site called "iMALL". Madison issued 20 shares of its common
stock to the shareholders of EMS, Inc., and accounted for this transaction as a
purchase.
29
<PAGE> 31
Cabot was incorporated in December 1992 and became a well known
educational workshop company. Cabot developed the marketing and training
techniques used by the Company today in its now discontinued seminar division.
R&R was formed in January 1991 in California. R&R was an advertising
agency that catered to small businesses. Services included commercial and
infomercial production, art and graphics design, as well as print, television
and radio advertising. The television department placed its clients'
advertisements on hundreds of network, cable, and independent stations
throughout the United States. R&R contributed its computer advertising expertise
to iMALL Services, Inc., a wholly owned subsidiary of the Company.
IMG has changed its name to "Internet Yellow Pages, Inc." Internet
Yellow Pages, Inc. maintains a Web site similar to regular yellow pages and
allows for different types of advertising and listing enhancements which
businesses can purchase for greater exposure.
e.m.a.N.a.t.e. was formed by three individuals who worked on Department
of Defense and NASA contracts using state-of-the-art computer and Internet
technology. The founders were involved with the Internet since its infancy and
in 1994 began to focus on generating revenue from the Internet by designing Web
sites. Thus, while e.m.a.N.a.t.e. currently has contracts with or has recently
completed projects for Lockheed-Martin, United Defense, and NASA, most of the
personnel are involved with creating Internet web pages and programming advanced
features such as Java, Shockwave and Virtual Reality applications for customers.
In connection with the Company's acquisitions in January 1996, the
Company effected a 1 for 19 reverse stock split on January 8, 1996. In addition,
on May 22, 1996, the Company effected a 4 for 1 forward stock split, and,
effective February 12, 1998, the Company effected a 1 for 8 reverse stock split.
All references in this Prospectus take these splits into effect when referring
to the number of shares of the Company's common stock or per share data.
Effective August 28, 1998, the Company discontinued the operations of
the Seminar Division based in Provo, Utah. The Company is currently engaged in
discussions for the sale of the assets associated with the Division.
GOVERNMENT REGULATIONS
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses, and there
are currently few laws or regulations directly applicable to access to or
commerce on the Web. It is possible, however, that a number of laws and
regulations may be adopted with respect to the Web, covering issues such as user
privacy, pricing and characteristics and quality of products and services.
Moreover, the applicability to the Internet or other on line services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve.
30
<PAGE> 32
PROPERTIES
The Company maintains offices in Santa Monica, California, and Provo,
Utah. Pursuant to a ten year lease commencing on September 1, 1998, the Company
leases its executive offices at 233 Wilshire Boulevard, Santa Monica,
California. The initial rent is $22,836.80 per month (8,156 square feet). The
Company leases office space, at 1185 South Mike Jense Circle, Provo, Utah, for
$12,108 per month from a related party which lease expires in March 1999. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." The Company also leases office
space at 5314 North 250 West, Suite 110, Provo, Utah, at a current rent of
$6,440 per month, which lease expires in December 2000. The Company believes
that it currently has sufficient space to carry on its operations for the
foreseeable future.
PATENTS AND TRADEMARKS
The Company relies on a combination of trademark, copyright and trade
secret laws, as well as confidentiality agreements and technical measures to
protect its proprietary rights. Much of the Company's proprietary information
may not be patentable, and the Company does not currently possess any patents.
The Company has registered the iMALL trademark in the United States and claims
trademark rights in, and has applied for trademark registrations in the United
States for, a number of other marks.
LEGAL MATTERS
The Company is a defendant in various legal proceedings in the ordinary
course of business. Except for the litigation set forth below, the Company is
not aware of any legal proceedings which appear at this time as if they might
have a material impact on its financial position, results of operations or
business.
1. RMS Internet Marketing Group, Inc. v. iMall, Inc., Docket No.:
C-97-458-B, filed in the United States District Court for the District of New
Hampshire. RMS Internet Market Group, Inc. ("RMS") has instituted an action
against the Company arising from a relationship between RMS and the Company
whereby RMS sold business opportunity packages to Internet consultants who in
turn were to sell advertising for the Company's Internet Yellow Pages. RMS'
claims include: (a) claims that the Company breached a number of obligations
under an agreement between the parties including an alleged obligation to use
its best efforts to maintain the Internet Yellow Pages as a first class web site
and to provide certain promotions and advertising with respect to the Internet
Yellow Pages. RMS also contends that after RMS asked the Company to process RMS'
credit card transactions through the Company's merchant account, and after it
became apparent that some of these transactions already had been processed, thus
resulting in double charges to a number of customers, that the Company
improperly refused to credit erroneous double billing. RMS contends that this
constituted interference with prospective business relations and contractual
relations and resulted in damages to RMS in that relationships with customers
were damaged. RMS also contends that the Company was required to pay a 10
percent commission on sales made. The Company has asserted counterclaims against
RMS including claims of misrepresentation, unjust enrichment, breach of
fiduciary duty, breach of covenant of good faith and fair dealing, unfair
competition and unfair trade practices. These claims are based on RMS' actions
with respect to the credit card transactions that were double billed and also
are based on RMS' actions with respect to establishing a competing business. The
Company is pursuing its counterclaims and vigorously defending the claims
asserted by RMS.
2. The FTC has conducted a nonpublic investigation of the Company's
Internet related business opportunity programs. The Company has entered into
settlement discussions with the FTC. In connection therewith, the Company has
reserved $750,000, representing the Company's present estimate of the amount
required to settle the investigation. There can be no assurance, however, that
the Company will be able to reach a settlement with
31
<PAGE> 33
the FTC for such amount, if at all. If the Company is unable to reach a
settlement, the FTC could bring a formal action seeking substantial monetary
damages or injunctive relief, or both, which if ultimately resolved unfavorably
to the Company, could have a material adverse effect on the Company's financial
condition and earnings.
32
<PAGE> 34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table and text sets forth the names and
ages of all directors and executive officers of the Company and
the key management personnel as of November 19, 1998. The Board of Directors of
the Company is comprised of only one class. All of the directors will serve
until the next annual meeting of shareholders and until their successors are
elected and qualified, or until their earlier death, retirement, resignation or
removal. Executive officers serve at the discretion of the Board of Directors,
and are appointed to serve until the first Board of Directors meeting following
the annual meeting of shareholders. Except as otherwise noted, there are no
family relationships among directors and executive officers. Also provided is a
brief description of the business experience of each director and executive
officer and the key management personnel during the past five years and an
indication of directorships held by each director in other companies subject to
the reporting requirements under the Federal securities laws.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard M. Rosenblatt 29 Chairman and Chief Executive Officer
Anthony P. Mazzarella 41 Executive Vice President, Secretary/Treasurer, Chief Financial Officer
and Director
Phillip J. Windley 40 Chief Technology Officer
Steven E. Rossow 41 Senior Vice President
Stephen W. Fulling 34 Vice President
Marshall S. Geller 59 Director
Harold S. Blue(1) 37 Director
Leonard M. Schiller 56 Director
Howard A. Goldberg 52 Director
Richard H. Rogel 49 Director
</TABLE>
(1) Pursuant to an Agency Agreement between the Company and Commonwealth
Associates, the placement agent of the Private Placement,
Commonwealth Associates may at its option nominate its designee to
the Company's Board of Directors or appoint an observer to attend
all meetings of the Company's Board of Directors for a period of up
to three years following the closing of the Private Placement. Mr.
Blue is Commonwealth Associates' designee.
BACKGROUND AND EXPERIENCE
RICHARD M. ROSENBLATT. Mr. Rosenblatt is Chairman of the Board of
Directors and Chief Executive Officer the Company. In 1991, Mr. Rosenblatt
formed R&R Advertising, Inc. which specialized in advertising and marketing for
small to mid size businesses, and co-founded Madison in 1994. Mr. Rosenblatt has
been an officer of the Company since January 1996, became Chief Executive
Officer in July 1997 and was elected Chairman in January 1998. Mr. Rosenblatt
received his Bachelor of Arts degree in political science from the University of
California at Los Angeles, where he graduated Magna Cum Laude and Phi Beta Kappa
in 1991. He received his Juris Doctorate from the University of Southern
California, where he graduated with honors in 1994.
ANTHONY P. MAZZARELLA. Mr. Mazzarella is the Chief Financial Officer and
a director of the Company. Mr. Mazzarella was formerly Managing Director of
Geller & Friend Capital Partners, Inc., a merchant banking firm. From 1991 to
1995, he was Executive Vice President of Drake Capital Securities, Inc., a
California-
33
<PAGE> 35
based investment banking firm. From 1987 to 1991, he served as Vice
President of The Davis Companies, a private holding company owned by Marvin
Davis, where he was responsible for corporate finance and acquisition
activities. Mr. Mazzarella also held management positions with Twentieth Century
Fox Film Corporation and United Airlines, and was a management consultant with
Deloitte & Touche. Mr. Mazzarella has been a director of the Company and has
held his current position since January 1998. Mr. Mazzarella holds a BA in
Physics from Pomona College and an MBA from the Harvard Business School.
PHILLIP J. WINDLEY, PHD. Dr. Windley is Chief Technology Officer of the
Company. He has been a consultant to the Company and its predecessor since 1994.
Dr. Windley received his PhD in computer science from the University of
California (Davis) in 1990 and is presently a professor of computer science at
Brigham Young University. Prior to earning his PhD, Dr. Windley was a member of
the technical staff at the Department of Energy's Division of Naval Reactors.
Dr. Windley has held his present position with the Company since January 1998.
STEVEN E. ROSSOW. Mr. Rossow is Senior Vice President of Business
Development of the Company. Mr. Rossow was formerly director of business
alliances with AT&T WorldNet Service, developing programs for customer
acquisitions, promotion marketing and production of on line content development
for shopping and gaming. Mr. Rossow also worked with CMP MEDIA's Channel
Consulting Services, where he developed marketing, merchandising and branding
programs for Motorola, Intel, Apple Computer, Word Perfect, Mattel and Epson as
well as a number of entertainment software companies. Mr. Rossow has held his
present position with the Company since January 1998.
STEPHEN W. FULLING. Mr. Fulling is Vice President of
Information--Technology Services of the Company. Mr. Fulling served as Senior
Network Research Assistant for the College of Engineering at Oregon State
University and Network Operations Manager for the NERO project for Oregon Joint
Graduate Schools of Engineering, where he designed, built, and deployed
state-of-the-art wide area networking systems. Mr. Fulling has a broad
background in Internet technologies and more than 15 years experience in the
telecommunications industry. He received his Bachelor of Science in Computer
Science from the University of California (Davis).
MARSHALL S. GELLER. Mr. Geller is a director of the Company. Mr. Geller
is currently the Chairman, Chief Executive Officer and Founding Partner of
Geller & Friend Capital Partners, Inc., a merchant banking firm. From 1991 to
1995, Mr. Geller was the Senior Managing Partner and founder of Golenberg &
Geller, Inc., a merchant banking and investment company. From 1988 to 1990, he
was the Vice Chairman of Gruntal & Company, a New York Stock Exchange investment
banking firm. From 1967 to 1988, Mr. Geller was a Senior Managing Director for
Bear Stearns & Company. While at Bear Stearns, Mr. Geller was the Managing
Partner in charge of all areas of Corporate Finance, Public Finance,
Institutional Equities & Debt for Bear Stearns' offices in Los Angeles, San
Francisco, Chicago and Hong Kong. He was also a director of Shun Loong-Bear
Stearns Far East and Sun Hung Kai-Bear Stearns, both leading Chinese investment
banking firms. Mr. Geller formerly served as Interim Co-Chairman of Hexcel
Corporation and is currently on its board of directors. Mr. Geller was formerly
Interim President and Chief Operating Officer of Players International, Inc.,
and now serves on its board and is Chairman of its Investment Committee. Mr.
Geller also serves as Vice Chairman of the board of Value Vision International,
Inc., and serves as Chairman of their Investment Committee. He also serves on
the boards of Ballantyne of Omaha, Inc., Datalink Corporation, and Cabletel
Communications Corporation. Mr. Geller has been a director of the Company since
January 1998.
HAROLD S. BLUE. Mr. Blue is a director of the Company. Mr. Blue is
currently Chairman and Chief Executive Officer of ProxyMed, Inc., a publicly
traded medical information technology company engaged in providing on line
services to physicians and other healthcare providers, since February 1993, and
has been a director of such company since August 1991. He served as interim
President and Chief Operating Officer of ProxyMed from March 1994 to June 1995.
From August 1991 until February 1993, Mr. Blue served as Vice
34
<PAGE> 36
President of ProxyMed. From July 1992 until February 1995, Mr. Blue served as
Chairman of the Board and Chief Executive Officer of Health Services, Inc., a
physician practice management company, which was sold to Inphynet in 1995. From
June 1979 to February 1992, Mr. Blue was the President and Chief Executive
Officer of Budget Drugs, Inc., a retail discount pharmacy chain comprised of six
stores located in South Florida. From September 1984 to August 1988, Mr. Blue
founded and was the Executive Vice President of Best Generics Incorporated, a
generic pharmaceutical distribution company. In August 1988, Best Generics was
sold to Ivax Corporation, a publicly traded pharmaceutical manufacturer. Mr.
Blue served as a member of the Board of Directors of Ivax for approximately two
years before resigning, and continued to serve as a consultant to Ivax pursuant
to a consulting agreement that expired in August 1993. Mr. Blue has been a
director of the Company since January 1998.
LEONARD M. SCHILLER. Mr. Schiller is a director of the Company. Mr.
Schiller has been a practicing attorney for over 25 years and is a partner in
the law firm of Schiller, Klein & McElroy, P.C. in Illinois. Mr. Schiller is the
President of The Dearborn Group, a residential property management and real
estate company and is involved in the ownership of residential properties
throughout the Midwest. He is currently a director of AccuMed International,
Inc., a publicly traded company which manufactures and markets diagnostic
screening products for clinical laboratories, and Milestone Scientific, Inc., a
dentistry products company. Mr. Schiller has been a director of the Company
since January 1998.
HOWARD A. GOLDBERG. Mr. Goldberg is a director of the Company. Mr.
Goldberg currently serves as Chief Executive Officer of Players International,
Inc. Prior to 1993, he was the managing shareholder practicing law in the firm
of Horn, Goldberg, Gorny, Plackter & Weiss, a professional corporation, which is
general counsel to Players. Mr. Goldberg is a graduate of Franklin & Marshall
College and received his law degree from New York University. He is a member of
the New Jersey State and American Bar Associations. Mr. Goldberg has been a
director of the Company since January 1998.
RICHARD H. ROGEL. Mr. Rogel is a director of the Company. Mr. Rogel is
an independent investor and a director of CoolSavings.com, an on line commerce
company providing specialized Internet merchandising. Mr. Rogel was Chief
Executive Officer of the Preferred Provider Organization of Michigan, a firm
that he founded in 1982 and sold in 1997. Previously, Mr. Rogel was President
and Chief Executive Officer of Suburban Medical Center, President of
Strick-Stylehomes, and Treasurer of Seligman and Associates. He has also worked
with Burnham and Company, investment bankers, and Arthur Young and Company. Mr.
Rogel has been a director of the Company since January 1998.
35
<PAGE> 37
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during fiscal year
ended December 31, 1996 and 1997 to the Company's Chief Executive Officer and
each of the Company's officers and directors, and persons who received
compensation in amounts equal to or exceeding $100,000. No person received any
compensation from the Company or its predecessor in any fiscal year prior to
1996. Figures listed below do not include automobile and entertainment
allowances for certain executive officers of the Company which total, in the
aggregate, $100,000 for the year ended December 31, 1996 and $60,000 for the
year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
Name and
Principal Position Year Salary $ (1)
------------------ ---- -------------
Tracy W. Scott (2) 1996 36,919
1997 62,250
Craig R. Pickering (3) 1996 117,250
1997 119,217
Richard M. Rosenblatt (4) 1996 118,712
1997 119,792
Mark R. Comer (5) 1996 117,975
1997 119,217
(1) The Company's officers were paid no additional cash or non-cash
compensation of any sort during the years ended December 31, 1996 and
1997, other than the total salary shown.
(2) Tracy W. Scott was the Chief Executive Officer of the Company from
October 1996 to June 1997. Mr. Scott has not been an officer or director
of the Company since June 1997.
(3) Craig R. Pickering was President of the Company from January 1996 to
July 1997.
(4) Richard M. Rosenblatt was Executive Vice President of the Company until
July 1997, at which time he became Chief Executive Officer.
(5) Mark R. Comer was Executive Vice President of the Company until July
1997, at which time he became President. Mr. Comer resigned as President
in August 1998.
None of the named individuals were granted options in 1996 or 1997 nor did any
such individual exercise or own options at any time during 1996 or 1997.
36
<PAGE> 38
EMPLOYMENT AGREEMENTS
RICHARD ROSENBLATT. Pursuant to an Employment Agreement entered into as
of January 5, 1998, the Company employed Richard Rosenblatt as its Chief
Executive Officer. The term of such employment commenced on February 2, 1998 and
terminates five years thereafter. Mr. Rosenblatt is paid a salary of $195,000
per annum, which may be increased in such amounts as the Compensation Committee
of the Company determines in good faith. In addition, Mr. Rosenblatt is entitled
to an annual bonus in an amount at least equal to 20% of the salary paid to
Rosenblatt during the immediately preceding year. Pursuant to the Employment
Agreement, the Company granted Mr. Rosenblatt options to purchase 375,000 shares
of the common stock of the Company at the exercise price of $5.20 per share.
Such options will vest as follows: (i) 125,000 options vested immediately upon
the date of the Employment Agreement and (ii) the remaining 250,000 options will
vest at the rate of 125,000 options on each of the first and second anniversary
dates of Mr. Rosenblatt's employment with the Company. All unexercised options
expire five years after the date on which such options have vested.
ANTHONY MAZZARELLA. Pursuant to an Employment Agreement entered into as
of December 30, 1997, the Company employed Mr. Mazzarella as its Executive Vice
President and Chief Financial Officer. The term of such employment commenced on
January 15, 1998 and terminates five years thereafter. Mr. Mazzarella is paid a
salary of $180,000 per annum through the calendar year ending December 31, 1998.
Thereafter, Mr. Mazzarella is entitled to annual salary increases as determined
by the Board of Directors but in no event less than 16%. Prior to the end of
each year, the Board of Directors is to review the compensation of Mr.
Mazzarella and pay to him a cash bonus not less than 20% of his salary for that
year. Pursuant to the Employment Agreement, Company granted Mr. Mazzarella
options to purchase an aggregate of 375,000 shares of the Common Stock of the
Company at an exercise price of $4.00 per share. Such options vest as follows:
(i) 125,000 options vested immediately and (ii) 125,000 options will vest on
January 15, 1999, and 125,000 options will vest on January 15, 2000. The options
expire 10 years after the date of grant.
PHILLIP J. WINDLEY, PHD. Pursuant to an Employment Agreement entered
into as of December 9, 1997, the Company employed Phillip J. Windley as its
Chief Technology Officer. The term of such employment commenced on January 1,
1998 and terminates two years thereafter. Dr. Windley is paid a salary of
$145,000 per annum. The Company may grant to Dr. Windley an annual bonus or
bonuses up to a maximum aggregate annual amount of $35,000, at the sole and
exclusive discretion of the Chief Executive Officer and the Compensation
Committee of the Company and at such times and in such manner as the Chief
Executive Officer and the Compensation Committee may determine. Pursuant to the
Employment Agreement, the Company granted Dr. Windley options to purchase 87,500
shares of the common stock of the Company at the exercise price of $5.20 per
share. Such options vest as follows: (i) at the rate of 12,500 options per full
quarter for the first year during which Dr. Windley remains employed by the
Company, commencing as of January 1, 1998, and (ii) at the rate of 9,375 options
per full quarter for the second year during which Dr. Windley remains employed
by the Company, commencing one year after January 1, 1998. All unexercised
options expire five years after the date on which such options have vested.
37
<PAGE> 39
STEVE ROSSOW. Pursuant to an Employment Agreement entered into as of
December 9, 1997, the Company employed Steve Rossow as its Vice President
Marketing & Sales. The term of such employment commenced on January 12, 1998 and
terminates four years thereafter. Mr. Rossow is paid a salary of $120,000 per
annum and received a one-time signing bonus in the amount of $20,000. The
Company may grant to Mr. Rossow an annual bonus or bonuses up to a maximum
aggregate annual amount of $30,000, at the sole and exclusive discretion of the
Chief Executive Officer and the Compensation Committee of the Company and at
such times and in such manner as the Chief Executive Officer and the
Compensation Committee may determine. Pursuant to the Employment Agreement, the
Company granted Mr. Rossow options to purchase 125,000 shares of the common
stock of the Company at the exercise price of $5.20 per share. Such options vest
as follows: (i) at the rate of 15,625 options per full quarter for the first
year during which Mr. Rossow remains employed by the Company, commencing as of
January 12, 1998, and (ii) at the rate of 7,813 options per full quarter for the
second and third years during which Mr. Rossow remains employed by the Company,
commencing one year after January 12, 1998. All unexercised options expire five
years after the date on which such options have vested.
STEPHEN W. FULLING. Pursuant to an Employment Agreement entered into as
of December 9, 1997, the Company employed Stephen W. Fulling as its Vice
President of Technology. The term of such employment commenced on January 1,
1998 and terminates three years thereafter. Mr. Fulling is paid a salary of
$85,000 per annum, which may be increased in such amounts as the Chief Executive
Officer and the Compensation Committee of the Company determine at their sole
discretion, except that at a minimum the Company shall increase the salary for
the second and third years of Mr. Fulling's employment by an amount equal to 7%
of the total amount of salary due to Mr. Fulling during the
immediately-preceding year. The Company may grant to Mr. Fulling an annual bonus
or bonuses up to a maximum aggregate annual amount of $25,000, at the sole and
exclusive discretion of the Chief Executive Officer and the Compensation
Committee of the Company and at such times and in such manner as the Chief
Executive Officer and the Compensation Committee may determine. Pursuant to the
Employment Agreement, the Company granted Mr. Fulling options to purchase 85,000
shares of the common stock of the Company at the exercise price of $5.20 per
share. Such options vest as follows: (i) at the rate of 10,833 options per full
quarter for the first year during which Mr. Fulling remains employed by the
Company, commencing as of January 1, 1998, (ii) at the rate of 5,208 options per
full quarter for the second year and per the first three full quarters of the
third year during which Mr. Fulling remains employed by the Company, commencing
one year after January 1, 1998, and (iii) at the rate of 5,208 options per the
fourth full quarter of the third year during which Mr. Fulling remains employed
by the Company. All unexercised options expire five years after the date on
which such options have vested.
DIRECTOR COMPENSATION
The non-employee directors of the Company are paid cash compensation of
$2,000 per quarter plus $500 per meeting attended (either in person or
telephonically). In addition each non-employee director receives options to
purchase 12,500 shares of the Company's common stock per year for each of 1998
and 1999 at the market price as of January 26, 1998.
Each of the three members of the Audit Committee of the Board of
Directors receives $250 per meeting attended (either in person or
telephonically). In addition, the Chairman of the Audit Committee receives cash
compensation of $2,500 annually.
Each of the three members of the Compensation Committee of the Board of
Directors receives $250 per meeting attended (either in person or
telephonically). In addition, the Chairman of the Compensation Committee
receives cash compensation of $2,500 annually.
Employee directors do not receive any additional compensation for
serving as a director.
38
<PAGE> 40
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As authorized by Section 78.751 of the Nevada General Corporation Law,
the Company may indemnify its officers and directors against expenses incurred
by such persons in connection with any threatened, pending or completed action,
suit or proceedings, whether civil, criminal, administrative or investigative,
involving such persons in their capacities as officers and directors, so long as
such persons acted in good faith and in a manner which they reasonably believed
to be in the best interests of the Company. If the legal proceeding, however, is
by or in the right of the Company, the director or officer may not be
indemnified in respect of any claim, issue or matter as to which he is adjudged
to be liable for negligence or misconduct in the performance of his duty to the
Company unless a court determines otherwise.
Under Nevada law, corporations may also purchase and maintain insurance
or make other financial arrangements on behalf of any person who is or was a
director or officer (or is serving at the request of the corporation as a
director or officer of another corporation) for any liability asserted against
such person and any expenses incurred by him in his capacity as a director or
officer. These financial arrangements may include trust funds, self insurance
programs, guarantees and insurance policies.
Article 6.E of the Articles of Incorporation, as amended, of the Company
and Article 5 of the Bylaws of the Company provide that, to the fullest extent
permitted by law, directors of the Company will not be liable for monetary
damages to the Company or its shareholders for breaches of their fiduciary
duties.
The Company maintains Director and Officer liability insurance with an
aggregate coverage amount of $10,000,000.
The Company has been advised that it is the position of the Commission
that insofar as the provision of the Company's Articles of Incorporation, as
amended, and By-laws may be invoked for liabilities arising under the Securities
Act, the provision is against public policy as expressed in the Securities Act
and is therefore unenforceable.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10 percent of
the Company's common stock to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors, and
greater than 10 percent shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Management
believes all such individuals were in compliance with Section 16(a) at June 25,
1998.
39
<PAGE> 41
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date of
November 19, 1998 with respect to (i) the beneficial ownership of the Common
Stock of the Company by each beneficial owner of more than 5% of the outstanding
shares of Common Stock of the Company, each director, each executive officer and
all executive officers and directors of the Company as a group and the
percentage of the Company's Common Stock so owned.
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Exchange Act as consisting of sole
or shared voting power (including the power to vote or direct the vote) and/or
sole or shared investment power (including the power to dispose of or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, subject to community property laws
where applicable. Each person has sole voting and investment power with respect
to the shares of Common Stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of Common Stock, except as
otherwise indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
NAME OF BENEFICIAL OWNER COMMON STOCK
OWNED(1)
<S> <C> <C>
OFFICERS AND DIRECTORS
Richard Rosenblatt 1,750,000(2) 18.31%
233 Wilshire Boulevard
Suite 820
Santa Monica, California 90401
Anthony P. Mazzarella 403,449(3) 4.39%
233 Wilshire Boulevard
Suite 820
Santa Monica, California 90401
Philip J. Windley 185.449(4) 1.96%
5314 North 250 West #110
Provo, Utah 84604
Steven Rossow 70,313(5) --%
233 Wilshire Boulevard
Suite 820
Santa Monica, California 90401
Stephen Fulling 48,542(6) --%
5314 North 250 West #110
Provo, Utah 84604
Marshall S. Geller 373,098(7) 3.84%
1875 Century Park East
Suite 2200
Los Angeles, California 90067
Harold S. Blue 21,267(8) --%
2501 Davie Road
Ft. Lauderdale, Florida 33317
</TABLE>
40
<PAGE> 42
<TABLE>
<S> <C> <C>
Leonard M. Schiller 45,653(9) --%
33 N. Dearborn, #1030
Chicago, Illinois 60602
Howard A. Goldberg 12,500(10) --%
1300 Atlantic Avenue, #800
Atlantic City, New Jersey 08401
Richard H. Rogel 12,500(11) --%
56 Rosecrown
Avon, Colorado 81620
Total of Directors and Executive Officers as a group 2,950,282 27.98%
(10 persons)
5% OR MORE BENEFICIAL OWNERS
Mark R. Comer 1,250,000 13.25%
223 Wilshire Boulevard
Suite 820
Santa Monica, California 90401
Commonwealth Associates 761,749(12) 7.47%
830 Third Avenue
New York, New York 10022
Commonwealth Management Co., Inc. 1,223,356(13) 11.48%
830 Third Avenue
New York, New York 10022
Michael S. Falk 437,114(14) 4.43%
830 Third Avenue
New York, New York 10022
FDMS 1,540,000(16) 16.33%
6200 South Quebec Street
Englewood, Colorado 80111
Cramer Rosenthal McGlynn Inc. 1,607,811(15) 14.88%
707 Westchester Avenue
White Plains, New York 10604
Craig R. Pickering 1,637,000(17) 14.79%
1185 South Mike Jense Circle
Provo, Utah 84601
</TABLE>
(1) Calculations based upon 9,432,731 shares of Common Stock issued and
outstanding on November 19, 1998.
(2) Includes 125,000 shares issuable upon currently exercisable options.
Does not include 1,500,000 shares issuable upon the exercise of options
to Commonwealth Associates and its affiliates with respect to which Mr.
Rosenblatt is the beneficiary of a proxy.
(3) Includes 125,000 shares issuable upon currently exercisable warrants,
125,000 shares issuable upon currently exercisable options and 125,000
shares and 4,167 shares issuable upon warrants and options,
respectively, exercisable within the next sixty days.
(4) Includes 62,500 shares issuable upon currently exercisable options and
9,375 shares issuable upon options exercisable within the next sixty
days.
(5) Includes 62,500 shares issuable upon currently exercisable options and
7,813 shares issuable upon options exercisable within the next sixty
days.
(6) Includes 43,334 shares issuable upon currently exercisable options and
5,208 shares issuable upon options exercisable within the next sixty
days.
(7) Includes 250,000 shares issuable upon currently exercisable warrants,
12,500 shares issuable upon currently exercisable options and 8,333
shares issuable upon warrants exercisable within sixty days.
41
<PAGE> 43
(8) Consists of 17,361 shares issuable upon conversion of Company's Series A
Convertible Preferred Stock, 12,500 shares issuable upon currently
exercisable options and 3,906 shares issuable upon warrants exercisable
within sixty days.
(9) Consists of 26,044 shares issuable upon conversion of the Company's
Series A Convertible Preferred Stock, 12,500 shares issuable upon the
exercise of currently exercisable options and 7,109 shares issuable upon
warrants exercisable within sixty days.
(10) Includes 12,500 shares issuable upon the exercise of currently
exercisable options.
(11) Includes 12,500 shares issuable upon currently exercisable options.
(12) Consists of shares issuable upon the exercise of currently exercisable
options issued to Commonwealth Associates. Commonwealth Management Co.,
Inc. is the corporate general partner of Commonwealth Associates.
(13) Includes 761,749 shares and 343,307 issuable upon the exercise of
currently exercisable warrants owned by Commonwealth Associates and Mr.
Michael Falk, respectively. Mr. Falk is the Chairman and controlling
equity owner of Commonwealth Management Co., Inc., the corporate general
partner of Commonwealth Associates. Also includes 12,115 shares issuable
upon the exercise of currently exercisable warrants and 60,560 shares
issuable upon the conversion of 43,600 shares of the Company's Series A
Convertible Preferred Stock of which Mr. Falk directly owns 37,500
shares and The Falk Family Foundation, a charitable trust for which Mr.
Falk serves as trustee, owns 6,100 shares and 15,625 shares issuable
upon warrants exercisable within sixty days of which Mr. Falk directly
owns 11,719 and the Falk Family Foundation owns 3,906.
(14) Consists of shares issuable upon the exercise of currently exercisable
warrants and conversion of the Company's Series A Convertible Preferred
Stock and warrants exercisable within sixty days.
(15) Includes (i) 105,000 shares owned by third parties of which Cramer
Rosenthal McGlynn, LLC, a registered investment advisor (CRM Inc.) has
the sole voting and investment power; (ii) 441,009 shares issuable upon
conversion of the Company's Series A Convertible Preferred Stock of
which CRM, Inc. has the sole voting and investment power; (iii) 74,219
shares issuable upon warrants exercisable within the next sixty days of
which CRM, Inc. has the sole voting and investment power; (iv) 129,824
shares owned by limited partnerships of which Cramer Rosenthal McGlynn
Inc. ("CRM Inc.") is the general partner and has the sole voting and
investment power; (v) 775,757 shares issuable upon conversion of the
Company's Series A Convertible Preferred Stock owned by limited
partnerships of which CRM Inc. is the general partner and has the sole
voting and investment power; and (vi) 82,032 shares issuable upon
warrants exercisable within the next sixty days owned by limited
partnerships of which CRM, Inc. is the general partner and has the sole
voting and investment power. CRM Inc. owns in excess of 50% of the
membership interest of CRM LLC.
(16) Does not include (a) 460,000 shares of the Company's Common Stock which
the Company has agreed to issue to FDMS upon approval by the Company's
shareholders and (b) up to 5,000,000 shares issuable upon exercise of
warrants of warrants at an exercise price of $17.00 per share, which
warrants are earned if at any time through the second anniversary of the
successful testing of the systems and technologies provided by the
Company to logistically support the Company?s Internet shopping mall to
be used by FDMS, FDMS has implemented either 25,000 merchant web sites
using the Company's e-commerce services or 50,000 total merchant web
sites using any Company products or services.
(17) Includes 12,500 shares issuable upon currently exercisable options.
CHANGES IN CONTROL
The Company is unaware of any contract or other arrangement, the
operation of which may at a subsequent date result in a change in control of the
Company.
42
<PAGE> 44
CERTAIN TRANSACTIONS
In connection with the Company's discontinued operations, the Company
paid certain related parties for advertising, rent and computer graphic design.
Sierra Advertising received $1,794,237 in 1997 and $2,116,607 in 1996 for
advertising expenses, all of which was distributed directly for advertising
costs, and is owned by officers of the Company. The sole purpose for the
existence of Sierra Advertising was to pass through certain costs of advertising
at reduced rates. No officers of the Company received any monetary compensation
from the Company through Sierra Advertising. Sierra Advertising made no profit
on funds received from the Company. All funds paid to Sierra Advertising were
used by Sierra Advertising for the purchase of air time for advertising.
The share exchanges described in "BUSINESS--HISTORY OF THE COMPANY"
involved certain executive officers of the Company. At the time of the share
exchanges described therein, the shareholders of Madison were Craig Pickering,
Richard Rosenblatt, Mark Comer, JCH Trust, MJB Trust, CSW Trust, Ross Jardine,
Phil Windley and Michael Beck; the shareholders of Cabot were Craig Pickering,
Mark Comer and JCH Trust; and the sole shareholder of R&R was Richard
Rosenblatt.
The Company's offices located at 1185 South Mike Jense Circle, Provo,
Utah are leased from RDR Properties for $12,108 per month, which lease expires
in March 1999. Craig Pickering and Mark Comer, former directors and executive
officers, each own 33.33% of RDR Properties.
The Company retained Geller & Friend Capital Partners, Inc. ("Geller &
Friend"), a merchant banking firm, in August 1997 to assist in arranging equity
financing. Geller & Friend earned a fee of $150,000 and was granted 375,000
warrants in connection with its role in the private placement completed in
December 1997. Of the $150,000 fee, Geller & Friend was paid $50,000 in 1997,
and paid the remaining $100,000 during 1998. Marshall Geller, chairman and chief
executive officer of Geller & Friend, became a director of the Company in
January 1998. Also in January 1998, the Company employed Anthony Mazzarella,
formerly managing director of Geller & Friend, as its Executive Vice President
and Chief Financial Officer. Mr. Mazzarella is also a director of the Company.
43
<PAGE> 45
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Articles of Incorporation, as amended,
to issue an aggregate of 37,500,000 shares of Common Stock, par value $.008 per
share and 10,000,000 shares of preferred stock par value $.001 per share which
preferred stock may be issued with such rights, designations and privileges
(including redemption and voting rights) as the Board of Directors may from time
to time determine.
The following summary descriptions are qualified in their entirety by
reference to the Company's Articles of Incorporation, as amended.
SERIES A CONVERTIBLE PREFERRED STOCK
The authorized capital stock of the Company includes 10,000,000 shares
of preferred stock of which 5,250,000 shares are designated as Series A
Convertible Preferred Stock. Holders of the Preferred Shares are entitled to
receive, when as and if declared by the Board of Directors, a cumulative
dividend of $.36 per share (9% per annum) payable semi-annually in cash or
Preferred Shares valued at $4.00 per share at the discretion of the Board. In
the event of any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company, the holders of the Series A Convertible Preferred
Stock are entitled to receive out of the assets of the Company available for
distribution to its shareholders, before any payment or distribution shall be
made on the Common Stock, an amount per share equal to $4.00. The Series A
Convertible Preferred Stock and the Common Stock vote together as a single
class, with each share of Preferred Stock being entitled to cast a number of
votes equal to the number of shares of Common Stock into which such share of
Preferred Stock could then be converted.
Each share of the Series A Convertible Preferred Stock may at any time
be converted into 1.25 shares of the Company's Common Stock reflecting an
initial Conversion Price of $3.20 per share. In the event that at any time prior
to June 19, 1999 the market price of the Company's Common Stock is less than
$3.20 the Conversion Price will be automatically adjusted to equal such lower
market price. The Conversion Price will also be subject to adjustment in the
event of a stock split of, stock dividend on, or a subdivision, combination or
recapitalization of the Common Stock, or if the Company fails to meet certain
registration commitments. The Company has not met these registration
commitments, and if the Company is unable to secure waivers from holders of
two-thirds of the Series A Convertible Preferred Stock, each Series A
Convertible Preferred share will convert into 1.389 shares of Common Stock.
Commencing on December 19, 1998 and terminating on December 19, 2003,
the shares of Series A Convertible Preferred Stock will be automatically
converted into shares of Common Stock at the Company's option upon 30 days'
prior written notice provided (i) the Common Stock to be issued upon such
conversion has been registered under the Securities Act and (ii) the Common
Stock has traded at or above $8.00 per share for 30 consecutive trading days.
WARRANTS
The following discussion is a summary of certain terms and provisions of
the Initial Warrants contained in the Warrant Agreement between the Company and
Signature Stock Transfer, Inc. (the "Warrant Agent"). The Initial Warrants were
issued to investors as part of a private placement of Units in December 1997.
44
<PAGE> 46
Each Warrant entitles the holder to purchase, at a price of $3.20 per
share, subject to adjustment, .125 share of Common Stock during the period
commencing on December 4, 1998 and ending on December 4, 2002. Commencing on
December 4, 1998, the Company may redeem the Warrants at $0.05 per Warrant upon
30 days' prior written notice in the event that (1) there is a current
registration statement in effect covering the shares of Common Stock underlying
the Warrants and the Warrants separately and (2) the Common Stock has traded at
or above $8.00 per share for at least 30 consecutive trading days.
Any Warrantholders who do not exercise their Warrants prior to the
redemption date, as set forth in the Company's notice of redemption, will
forfeit the right to purchase the shares of Common Stock underlying the Warrants
and, after the redemption date, any outstanding Warrants will become void and be
of no further force or effect. If the Company does not redeem the Warrants, the
Warrants will expire, become void and be of no further force or effect on
conclusion of the exercise period.
The exercise price of the Warrants and the number of shares to be
obtained upon the exercise of the Warrants are subject to adjustment in certain
circumstances including a stock split of, or stock dividend on, or a
subdivision, combination, or recapitalization of the Common Stock. In the event
of liquidation, dissolution or winding up of the Company, holders of the
Warrants, unless exercised, will not be entitled to participate in the assets of
the Company. Holders of the Warrants will have no voting, preemptive,
liquidation or other rights of a shareholder, and no dividends will be declared
on the Warrants.
REGISTRATION RIGHTS
The holders of the Placement Agent Warrants will have certain demand and
piggy-back registration rights with respect to such Warrants and the underlying
Common Shares exercisable commencing six months after the Closing of the private
placement of Units in December 1997. The registration statements will be
maintained effective until all of the securities covered thereby have been sold,
or all of the securities covered thereby may be sold under Rule 144 without
regard to volume limitations. The Company will pay all registration expenses
incurred in connection with the registration of the securities. In addition, the
Company will comply with all necessary state securities laws so as to permit the
sale by the investors of the securities.
Pursuant to a Registration Rights Agreement dated as of October 30, 1998
between the Company and FDMS, the Company granted to FDMS certain demand
registration and piggy-back registration with respect to the Common Shares
issued and to be issued to FDMS and the Common Shares underlying the contingent
warrant. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --
LIQUIDITY AND CAPITAL RESOURCES."
COMMON STOCK
The authorized capital stock of the Company includes 37,500,000 shares
of $.008 par value Common Stock. All shares have equal voting rights. Voting
rights are not cumulative, and, therefore, the holders of more than 50% of the
Common Stock of the Company could, if they chose to do so, elect all of the
Directors.
Upon liquidation, dissolution or winding up of the Company, the assets
of the Company, after the payment of liabilities and any distributions to the
holders of outstanding shares of Series A Convertible Preferred Stock, will be
distributed pro rata to the holders of the Common Stock. The holders of the
Common Stock do not have preemptive rights to subscribe for any securities of
the Company and have no right to require the Company to redeem or purchase their
shares.
Holders of Common Stock are entitled to share equally in dividends when,
as and if declared by the Board of Directors of the Company, out of funds
legally available therefor. The Company has not paid any
45
<PAGE> 47
cash dividends on its Common Stock, and it is unlikely that any such dividends
will be declared in the foreseeable future.
PREFERRED STOCK
The Company's Articles of Incorporation, as amended, authorize the Board
of Directors to issue 10,000,000 shares of preferred stock, $.001 par value. The
preferred stock may be issued in series from time to time with such designation,
rights, preferences and limitations as the Board of Directors of the Company may
determine by resolution. The rights, preferences and limitations of separate
series of preferred stock may differ with respect to such matters as may be
determined by the Board of Directors, including, without limitation, the rate of
dividends, method and nature of payment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions (if any), conversion
rights (if any), and voting rights. The potential exists, therefore, that
preferred stock might be issued which would grant dividend preferences and
liquidation preferences to preferred shareholders. Unless the nature of a
particular transaction and applicable statutes require such approval, and
subject to the required approval of the Series A Preferred Securityholders for
issuances of preferred stock which have liquidation or dividend rights senior to
theirs, the Board of Directors has the authority to issue these shares without
shareholder approval. The issuance of preferred stock may have the affect of
delaying or preventing a change in control of the Company without any further
action by shareholders. As of November 19, 1998, there were 5,000,004 shares of
Series A Convertible Preferred Stock outstanding.
AGREEMENTS WITH FDMS
On October 30, 1998, the Company entered into agreements with FDMS
relating to the issuance of common stock of the Company, par value $.008 per
share (the "Common Stock"), and warrants to purchase shares of Common Stock of
the Company to FDMS and the joint marketing of certain Internet commerce
services by the Company and FDMS.
Under the terms of an Investment Agreement, FDMS purchased 1.54 million
shares of Common Stock at a cash price of $7.00 per share and, subject to
approval by shareholders of the Company in satisfaction of the rules of The
Nasdaq Stock Market, will purchase an additional 460,000 shares of Common Stock
at a cash price of $7.00 per share. Immediately after its initial purchase of
1.54 million shares of Common Stock, FDMS held 16.6% of the Common Stock of the
Company then outstanding, and 7.4% of such Common Stock on a fully diluted basis
after giving effect to the exercise or conversion of all then outstanding
warrants, options and convertible securities. After giving effect to the
anticipated purchase by FDMS of the additional 460,000 shares of Common Stock,
FDMS would have held at such time 21.5% of the Common Stock of the Company then
outstanding, and 9.6% of such Common Stock on a fully diluted basis after giving
effect to the exercise or conversion of all then outstanding warrants, options
and convertible securities. Although definitive agreements with FDMS were
entered into on October 30, 1998, the purchase price of $7.00 per share was
agreed upon by representatives of FDMS and the Company during the third week of
October, at which time the market price of the Company's Common Stock had been
below such price for more than one week.
The Investment Agreement further provides that FDMS may earn warrants to
purchase up to 5 million shares of Common Stock at an exercise price of $17.00
per share. The warrants are earned if at any time through the second anniversary
of the successful testing of the systems and technologies provided by the
Company to logistically support the Company?s Internet shopping mall to be used
by FDMS, FDMS has implemented either 25,000 merchant web sites using the
Company's e-commerce services or 50,000 total merchant web sites using any
Company products or services. The warrants, if issued, will expire in October
2003, and may be redeemed, at the option of the Company, at a redemption price
equal to 0.266 shares of Common Stock per warrant share if the market price of
the Common Stock is equal to or exceeds $25.50 for at least twenty out of thirty
consecutive
46
<PAGE> 48
trading days. FDMS also received certain registration rights covering the Common
Stock and the shares underlying the warrants. The Investment Agreement also
provides that FDMS will be subject to certain standstill restrictions and
generally will be restricted from owning more than 39.9% of the Company?s voting
securities as calculated pursuant to the terms of the Investment Agreement.
TRANSFER AND WARRANT AGENT
American Stock Transfer Trust Company, 40 Wall Street, New York, New
York 10005, serves as Transfer Agent for the Company's Common Stock, and serves
as Transfer and Warrant Agent for the Series A Convertible Preferred Stock and
Warrants.
47
<PAGE> 49
PLAN OF DISTRIBUTION
The sale or distribution of the Underlying Common Stock and Warrants may
be effected, subject to the lock-up agreement among certain Selling
Securityholders and Commonwealth Associates (see "SHARES ELIGIBLE FOR FUTURE
SALES"), directly to purchasers by the Selling Securityholders or by pledgees,
donees, transferees or other successors in interest, as principals or through
one or more underwriters, brokers, dealers or agents from time to time in one or
more transactions (which may involve crosses or block transactions) (i) on any
stock exchange, in the Nasdaq SmallCap Market, or in the over the counter
market, (ii) in transactions otherwise than on any stock exchange or in the
over-the-counter market, or (iii) through the writing of options (whether such
options are listed on an options exchange or otherwise) on, or settlement of
short sales, of the Underlying Common Stock or Warrants. The Securities may also
be sold pursuant to Rule 144. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by the Selling Securityholder or by
agreement between the Selling Securityholder and underwriters, brokers, dealers
or agents, or purchasers. If the Selling Securityholders effect such
transactions by selling Underlying Common Stock and/or Warrants to or through
underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or
agents may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders or commissions from purchasers of
Underlying Common Stock and/or Warrants for whom they may act as agent (which
discounts, concessions or commissions as to particular underwriters, brokers,
dealers or agents may be in excess of those customary in the types of
transactions involved). The Selling Securityholders and any brokers, dealers or
agents that participate in the distribution of the Underlying Common Stock
and/or Warrants may be deemed to be underwriters, and any profit on the sale of
Underlying Common Stock and/or Warrants by them and any discounts, concessions
or commissions received by any such underwriters, brokers, dealers or agents may
be deemed to be underwriting discounts and commissions under the Securities Act.
Under the securities law of certain states, the Underlying Common Stock
and/or Warrants may be sold in such states only through registered or licensed
brokers or dealers. In addition, in certain states the Underlying Common Stock
and/or Warrants may not be sold unless the Underlying Common Stock and Warrants
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
The Company will pay all the expenses incident to the registration,
offering and sale of the Underlying Common Stock and Warrants to the public
hereunder other than commissions, fees and discounts of underwriters, brokers,
dealers and agents. The Company has agreed to indemnify the Selling
Securityholders and their controlling persons against certain liabilities,
including liabilities under the Securities Act. The Company estimates that the
expenses of this Offering to be borne by it will be approximately $68,000. The
Company will not receive any proceeds from the sale of any of the Underlying
Common Stock or Warrants by the Selling Securityholders.
48
<PAGE> 50
SELLING SECURITYHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock and Warrants of each Selling Securityholder and as
adjusted to give effect to the sale of the Securities offered hereby.
Information concerning the Selling Securityholders may change from time to time;
any changes of which the Company is advised will be set forth in a Prospectus
Supplement to the extent required. See "PLAN OF DISTRIBUTION."
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
-------------------------------- ---------------------------------
NUMBER NUMBER
NUMBER NUMBER OF NUMBER NUMBER OF OF
OF OF INITIAL PLACEMENT OF SHARES INITIAL PLACEMENT
SHARES OF AND AGENT AND SECURITIES OF AND AGENTS AND
COMMON INVESTOR ADDITIONAL BEING COMMON INVESTOR ADDITIONAL
STOCK WARRANTS WARRANTS OFFERED STOCK WARRANTS WARRANTS
NAME OF BENEFICIAL OWNER (1)(2) (3) (4)
<S> <C> <C> <C> <C> <C> <C> <C>
Michael F. A'Hern & Maxine C. A'Hern J/T 8,508 12,500 -- -- -0- -0- -0-
Dean Abraham 5,142 11,719 -- -- -0- -0- -0-
Richard Abrams 21,269 31,250 -- -- -0- -0- -0-
Rodney Abrams 21,269 31,250 -- -- -0- -0- -0-
AC Isreal Enterprises Inc. 55,560 -- -- -- -0- -0- -0-
Shannon P. Acks 12,585 31,250 -- -- -0- -0- -0-
James Adametz 15,314 22,500 -- -- -0- -0- -0-
Daryl-Joy Adkins 6,381 9,375 -- -- -0- -0- -0-
Mary Alloy 21,269 31,250 -- -- -0- -0- -0-
Anasazi Partners Limited Partnerships 17,363 -- -- -- -0- -0- -0-
Ferdinano Anderson 10,634 15,625 -- -- -0- -0- -0-
Michael Appelbaum 2,681 -- 2,681 -- -0- -0- -0-
Michael R. L. Astor 10,634 15,625 -- -- -0- -0- -0-
James G. Aukstolis 17,484 31,250 -- -- -0- -0- -0-
Richard L. Bazelon & Eileen A. Bazelon 42,538 62,500 -- -- -0- -0- -0-
J/T
Bear Stearns Security C/F Irving Curtins 6,120 15,625 -- -- -0- -0- -0-
IRA
Bear Stearns Security C/F Richard 2,127 3,125 -- -- -0- -0- -0-
Campanella IRA
Bear Stearns Security Corp. C/F Gary 25,185 62,500 -- -- -0- -0- -0-
Gaines IRA
Bear Stearns Security Corp. C/F Paul F 21,269 31,250 -- -- -0- -0- -0-
Petrus IRA
Edwin J. Beattie 21,269 31,250 -- -- -0- -0- -0-
John P. Becker 6,285 12,500 -- -- -0- -0- -0-
Becker & Becker 21,269 31,250 -- -- -0- -0- -0-
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
----------------------------------- ---------------------------------
NUMBER SECURITIES NUMBER
NUMBER NUMBER OF BEING NUMBER NUMBER OF OF
NAME OF BENEFICIAL OWNER OF OF INITIAL PLACEMENT OFFERED OF SHARES INITIAL PLACEMENT
SHARES OF AND AGENT AND (4) OF AND AGENTS AND
COMMON INVESTOR ADDITIONAL COMMON INVESTOR ADDITIONAL
STOCK WARRANTS WARRANTS STOCK WARRANTS WARRANTS
(1)(2) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Niles H. Bell 3,234 7,813 -- -- -0- -0- -0-
William D. Bennett Jr 6,294 15,625 -- -- -0- -0- -0-
Marc G. Berman 5,142 11,719 -- -- -0- -0- -0-
Sandra Bernstein & Howard 25,870 62,500 -- -- -0- -0- -0-
Bernstein J/T
Robert Bettinger 21,269 31,250 -- -- -0- -0- -0-
Robert Beuret 16,196 -- 16,196 -- -0- -0- -0-
Lincoln Edward Black 4,112 9,375 -- -- -0- -0- -0-
Gerald Blank 977 7,813 -- -- -0- -0- -0-
Craig Blitz & Annette Blitz 6,328 15,625 -- -- -0- -0- -0-
J/T
Jeffrey Blomstedt & Susan J 6,855 15,625 -- -- -0- -0- -0-
Lascala J/T
Harold Blue(5) 21,269 31,250 -- -- 12,500 -0- -0-
Hans C. Bodmer 31,426 62,500 -- -- -0- -0- -0-
Mody K. Bootright 4,254 6,250 -- -- -0- -0- -0-
Benjamin Bollag 31,903 46,875 -- -- -0- -0- -0-
Michael Bollag 26,044 -- -- -- -0- -0- -0-
Tom P. Briggs TR Tom P 8,508 12,500 -- -- -0- -0- -0-
Briggs Attn'y at Law
Pen/Pft Sh/Pl
Travis Brock 2,250 -- 2,250 -- -0- -0- -0-
Elizabeth D. Buchman C/F 4,254 6,250 -- -- -0- -0- -0-
Norman L. Buchman Ugma
MA
Leslie G. Callahan III 42,538 62,500 -- -- -0- -0- -0-
Feliz Campos 6,305 10,938 -- -- -0- -0- -0-
J.A. Cardwell 8,810 21,875 -- -- -0- -0- -0-
Anders Carlegren 4,254 6,250 -- -- -0- -0- -0-
C. Wyllys Cass IV & Ellen 4,254 6,250 -- -- -0- -0- -0-
M. Cass J/T
William R. Cline 4,032 -- -- -- -0- -0- -0-
David Cohen 53,172 78,125 -- -- -0- -0- -0-
Harriet H. Cohen 5,317 7,813 -- -- -0- -0- -0-
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
-------------------------------- ---------------------------------
NUMBER NUMBER
NUMBER NUMBER OF NUMBER NUMBER OF OF
OF OF INITIAL PLACEMENT OF SHARES INITIAL PLACEMENT
SHARES OF AND AGENT AND SECURITIES OF AND AGENTS AND
COMMON INVESTOR ADDITIONAL BEING COMMON INVESTOR ADDITIONAL
STOCK WARRANTS WARRANTS OFFERED STOCK WARRANTS WARRANTS
NAME OF BENEFICIAL OWNER (1)(2) (3) (4)
<S> <C> <C> <C> <C> <C> <C> <C>
Jonathon Cohen & Nancy Shapiro J/T 5,174 12,500 -- -- -0- -0- -0-
Julia R. Cole 42,538 62,500 -- -- -0- -0- -0-
Commonwealth Associates(6) 761,749 -- 761,749 -- -0- -0- -0-
Conzett Europa Invest 150,183 312,500 -- -- -0- -0- -0-
Bruce Corbin 2,587 6,250 -- -- -0- -0- -0-
Jeffrey Corbin 2,127 3,125 -- -- -0- -0- -0-
Richard Corbin 6,381 9,375 -- -- -0- -0- -0-
Richard Corbin IRA Sec Corp. Cust. for 6,381 9,375 -- -- -0- -0- -0-
CP Baker Venture Fund 1 Limited 8,681 -- -- -- -0- -0- -0-
Partnership
Daphna Cramer 2,419 -- -- -- -0- -0- -0-
Gerald Cramer 1997 Charitable Remainder 4,839 -- -- -- -0- -0- -0-
Unitrust
Gerald and Daphna Cramer 1997 Charitable 4,839 -- -- -- -0- -0- -0-
Remainder Unitrust
Leroy Cramer Family Limited Partner 2,419 -- -- -- -0- -0- -0-
Cramer Rosenthal McGlynn Inc. 21,269 31,250 -- -- -0- -0- -0-
Cramer Rosenthal McGlynn, LLC Money 1,935 -- -- -- -0- -0- -0-
Purchase Plan
Cramer Taos Partners 146,022 156,250 -- -- 30,000 -0- -0-
James P. Crandall & Claudia P. Crandall 5,396 12,500 -- -- -0- -0- -0-
J/T
Cresvale Far East Ltd. 85,075 125,000 -- -- -0- -0- -0-
CRM 1997 Enterprise Fund LLC 212,688 312,500 -- -- -0- -0- -0-
CRM 1998 Enterprises Fund LLC 111,120 -- -- -- -0- -0- -0-
CRM Madison Partners LP 170,523 156,250 -- -- 20,800 -0- -0-
CRM Partners LP 437,187 312,500 -- -- 58,000 -0- -0-
CRM Retirement Partners LP 335,458 187,500 -- -- 45,000 -0- -0-
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
-------------------------------- ---------------------------------
NUMBER NUMBER
NUMBER NUMBER OF NUMBER NUMBER OF OF
OF OF INITIAL PLACEMENT OF SHARES INITIAL PLACEMENT
SHARES OF AND AGENT AND SECURITIES OF AND AGENTS AND
COMMON INVESTOR ADDITIONAL BEING COMMON INVESTOR ADDITIONAL
STOCK WARRANTS WARRANTS OFFERED STOCK WARRANTS WARRANTS
NAME OF BENEFICIAL OWNER (1)(2) (3) (4)
<S> <C> <C> <C> <C> <C> <C> <C>
CRM U S Value Fund Ltd 63,806 93,750 -- -- -0- -0- -0-
CRM EFO Partners LP 86,863 -- -- -- 6,024 -0- -0-
Orman F. Cummings 10,634 15,625 -- -- -0- -0- -0-
Thomas D'Avanzo & Marie D'Avanzo J/T 8,508 12,500 -- -- -0- -0- -0-
Richard Dahlen & Priscilla Dahlen J/T 11,966 37,500 -- -- -0- -0- -0-
Mark Danielli 4,859 -- 4,859 -- -0- -0- -0-
James A. Davenport 10,282 23,438 -- -- -0- -0- -0-
Richard G. David 15,435 31,250 -- -- -0- -0- -0-
David Deatkine Jr 6,120 15,625 -- -- -0- -0- -0-
Morris Deckelbaum 30,037 62,500 -- -- -0- -0- -0-
David Dercher & Suelen Dercher J/T 21,269 31,250 -- -- -0- -0- -0-
David Dickerson and 42,538 62,500 -- -- -0- -0- -0-
Mary Jane Dickerson TIC
David L. Dickey and 781 6,250 -- -- -0- -0- -0-
Susan M. Dickey J/T
Donaldson Lufkin and Jenrette 5,860 46,875 -- -- 1 -0- -0-
Securities Corporation
Jeanette Dorfman 4,254 6,250 -- -- -0- -0- -0-
Robert Dozier & Debbie Dozier J/T 10,634 15,625 -- -- -0- -0- -0-
DW Trustees (BVI) Limited 31,903 46,875 -- -- -0- -0- -0-
Cornelia Eldridge 30,000 -- 30,000 -- -0- -0- -0-
Stephen Elkin & Diane Elkin J/T 8,508 12,500 -- -- -0- -0- -0-
Lang Elliot 42,538 62,500 -- -- -0- -0- -0-
Seth Elliot 5,000 -- 5,000 -- -0- -0- -0-
Joseph A. Ens Jr. & Shirley A. Ens J/T 10,634 15,625 -- -- -0- -0- -0-
Frederick Epstein 42,538 62,500 -- -- -0- -0- -0-
Kenneth R. Falchuk 42,538 62,500 -- -- -0- -0- -0-
Michael Falk 437,113 93,750 373,307 -- -0- -0- -0-
</TABLE>
52
<PAGE> 54
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
----------------------------------- ---------------------------------
NUMBER NUMBER
NUMBER NUMBER OF NUMBER NUMBER OF OF
OF OF INITIAL PLACEMENT OF SHARES INITIAL PLACEMENT
SHARES OF AND AGENT AND SECURITIES OF AND AGENTS AND
COMMON INVESTOR ADDITIONAL BEING COMMON INVESTOR ADDITIONAL
STOCK WARRANTS WARRANTS OFFERED STOCK WARRANTS WARRANTS
NAME OF BENEFICIAL OWNER (1)(2) (3) (4)
<S> <C> <C> <C> <C> <C> <C> <C>
Michael Falk Tr The Falk Family 12,379 31,250 -- -- -0- -0- -0-
Foundation
Michael J. Feldman 21,894 36,250 -- -- -0- -0- -0-
Hilaire Fernandes 3,497 6,250 -- -- -0- -0- -0-
Fred M. Filoon 1,935 -- -- -- -0- -0- -0-
S. Marcus Finkle 15,522 37,500 -- -- -0- -0- -0-
Baruch Fischhoff & Andrea Fischoff J/T 8,508 12,500 -- -- -0- -0- -0-
Eileen Fitzsimons 323 -- -- -- -0- -0- -0-
Michael Flynn 3,125 25,000 -- -- -0- -0- -0-
Flynn Corp 212,688 312,500 -- -- -0- -0- -0-
Charles Friedlander 10,634 15,625 -- -- -0- -0- -0-
Peter Fulton 2,324 -- 2,324 -- -0- -0- -0-
Gallagher Corp 212,688 312,500 -- -- -0- -0- -0-
Richard Galterio 2,844 -- 2,844 -- -0- -0- -0-
Martin Gangel 21,269 31,250 -- -- -0- -0- -0-
Joe Maria Salema Carcao Quina da Marioha 85,075 125,000 -- -- -0- -0- -0-
David Gartenberg 10,634 15,625 -- -- -0- -0- -0-
Evan Gartenberg 10,634 15,625 -- -- -0- -0- -0-
Marshall S. Geller(5) 476,063 66,667 250,000 -- 12,500 -0- -0-
Scott L. Geller 210 -- -- -- -0- -0- -0-
Anthony Giardina 4,219 -- 4,219 -- -0- -0- -0-
John J. Giuffrida & Jacqueline P 34,759 62,500 -- -- -0- -0- -0-
Giuffrida J/T
Edwin M. Glazier 4,254 6,250 -- -- -0- -0- -0-
Mark Goldberg 8,508 12,500 -- -- -0- -0- -0-
Paul Goldenheim 10,634 15,625 -- -- -0- -0- -0-
Fred Goldman 2,865 6,250 -- -- -0- -0- -0-
Jay Goldstein 6,667 -- -- -- -0- -0- -0-
Sydney J. Barbara B. Goldstein Tr 10,634 15,625 -- -- -0- -0- -0-
Goldstein Family Loving Tr
Zachary Gomes 42,538 62,500 -- -- -0- -0- -0-
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------------------ ----------------------------------
NUMBER SECURITIES NUMBER
NUMBER NUMBER OF BEING NUMBER NUMBER OF OF
NAME OF BENEFICIAL OWNER OF OF INITIAL PLACEMENT OFFERED OF SHARES INITIAL PLACEMENT
SHARES OF AND AGENT AND (4) OF AND AGENTS AND
COMMON INVESTOR ADDITIONAL COMMON INVESTOR ADDITIONAL
STOCK WARRANTS WARRANTS STOCK WARRANTS WARRANTS
(1)(2) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew Gonchar 10,634 15,625 -- -- -0- -0- -0-
Roger H Grace 10,634 15,625 -- -- -0- -0- -0-
H. Eugene Graves 42,538 62,500 -- -- -0- -0- -0-
Andrienne Gray 3,334 -- -- -- -0- -0- -0-
Barry Gray 11,112 -- -- -- -0- -0- -0-
Jonathan D. Green 21,269 31,250 -- -- -0- -0- -0-
Paul Gubitosa 6,381 9,375 -- -- -0- -0- -0-
Richard M. Gunsel 4,254 6,250 -- -- -0- -0- -0-
Howard Habousch & Joan Haboush J/T 42,538 62,500 -- -- -0- -0- -0-
Robert Hammer 10,634 15,625 -- -- -0- -0- -0-
Alan H. Hammerman 1,953 15,625 -- -- -0- -0- -0-
Eric Handler 2,500 -- 2,500 -- -0- -0- -0-
Hare & Co. 134,904 312,500 -- -- -0- -0- -0-
Mel Harris Preferred Employes Group 30,957 58,750 -- -- -0- -0- -0-
M. Ponder Harrison 6,301 15,625 -- -- -0- -0- -0-
William O.E. Henry 12,601 31,250 -- -- -0- -0- -0-
Hercules Systems Inc. 31,903 46,875 -- -- -0- -0- -0-
Timothy Herrmann 1,595 -- 1,595 -- -0- -0- -0-
Henry Herzing Tr Henry G. Herzing Rev 35,870 62,500 -- -- -0- -0- -0-
Liv Tr
William L. Hickey Jr. & Pamela T. Hickey 31,903 46,875 -- -- -0- -0- -0-
J/T
S. Maurice Hicks Jr 6,381 9,375 -- -- -0- -0- -0-
High Bridge Fund Limited 85,075 125,000 -- -- -0- -0- -0-
Hilltop Offshore Limited 559 4,469 -- -- -0- -0- -0-
Hilltop Partners LP 2,539 20,312 -- -- -0- -0- -0-
Alan Hirsch 21,269 31,250 -- -- -0- -0- -0-
Fred Hirt 17,015 25,000 -- -- -0- -0- -0-
Edward S. Hochuli 4,254 6,250 -- -- -0- -0- -0-
Susan Hoffman 1,250 -- 1,250 -- -0- -0- -0-
Annette Holtvogt 8,508 12,500 -- -- -0- -0- -0-
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
----------------------------------------- ------------------------------------
NUMBER SECURITIES NUMBER
NUMBER NUMBER OF BEING NUMBER NUMBER OF OF
NAME OF BENEFICIAL OWNER OF OF INITIAL PLACEMENT OFFERED OF SHARES INITIAL PLACEMENT
SHARES OF AND AGENT AND (4) OF AND AGENTS AND
COMMON INVESTOR ADDITIONAL COMMON INVESTOR ADDITIONAL
STOCK WARRANTS WARRANTS STOCK WARRANTS WARRANTS
(1)(2) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Wilfred Huse & Margaret R 10,634 15,625 -- -- -0- -0- -0-
Huse J/T
Ingleside Co. 212,688 312,500 -- -- -0- -0- -0-
Andre Iseli 21,269 31,250 -- -- -0- -0- -0-
James Israel 1,111 -- -- -- -0- -0- -0-
Thomas Israel 11,112 -- -- -- -0- -0- -0-
J.F. Shea Co. Inc. 638,063 937,500 -- -- -0- -0- -0-
Ann Street Jackson 42,538 62,500 -- -- -0- -0- -0-
Norman Jacobs 10,634 15,625 -- -- -0- -0- -0-
Robert J. Jahn 10,634 15,625 -- -- -0- -0- -0-
Gad Janay & Marlene Janay 15,018 31,250 -- -- -0- -0- -0-
J/T
Michael Janis & Rosamond 13,907 31,250 -- -- -0- -0- -0-
Janis J/T
Robert G. Jeffers & Theresa 3,322 7,656 -- -- -0- -0- -0-
W. Jeffers J/T
Ramesh Jhunjhnuwala 8,508 12,500 -- -- -0- -0- -0-
Chatri Jhunjhnuwala & 17,015 25,000 -- -- -0- -0- -0-
Lourdes Jhunjhnuwala J/T
Chatri Jhunjhnuwala C/F 8,933 13,125 -- -- -0- -0- -0-
Giselle Jhunjhnuwala UTMA CA
Chatri Jhunjhnuwala C/F 8,082 11,875 -- -- -0- -0- -0-
Nadia Jhunjhnuwala UTMA CA
M L P F & S CU FPO 8,144 -- -- -- -0- -0- -0-
Chatri RA FBO Chatri
Jhunjhnuwala
Jo-Bar Enterprises L I C 21,269 31,250 -- -- -0- -0- -0-
L. Wayne Johnson 10,634 15,625 -- -- -0- -0- -0-
John Joos-vandewalle 10,634 15,625 -- -- -0- -0- -0-
Peggy Jordan 62,851 125,000 -- -- -0- -0- -0-
Edward C. Jordan & Carol 8,508 12,500 -- -- -0- -0- -0-
S. Jordan J/T
K & K Development Corp 10,634 15,625 -- -- -0- -0- -0-
Kabuki Partners Adp Gp 32,120 62,500 -- -- -0- -0- -0-
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
-------------------------------------------- -------------------------------------
NUMBER SECURITIES NUMBER
NUMBER NUMBER OF BEING NUMBER NUMBER OF OF
NAME OF BENEFICIAL OWNER OF OF INITIAL PLACEMENT OFFERED OF SHARES INITIAL PLACEMENT
SHARES OF AND AGENT AND (4) OF AND AGENTS AND
COMMON INVESTOR ADDITIONAL COMMON INVESTOR ADDITIONAL
STOCK WARRANTS WARRANTS STOCK WARRANTS WARRANTS
(1)(2) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Robert Kantor 21,269 31,250 -- -- -0- -0- -0-
Fred Kassner 92,563 156,250 -- -- -0- -0- -0-
Patrick N. Keating 5,078 15,625 -- -- -0- -0- -0-
David R. Kenneth & Joyce 5,142 11,719 -- -- -0- -0- -0-
A. Kennett J/T
Lena Khatcherian 532 -- -- -- -0- -0- -0-
Mansour Khayyam & 42,538 62,500 -- -- -0- -0- -0-
Victoria Khayyam J/T
Neekianund Khulpateea 10,634 15,625 -- -- -0- -0- -0-
Robert B. Kimball Iiic/o 10,634 15,625 -- -- -0- -0- -0-
Corbin Corp
Bernard Kirsner Tr Bernard 6,301 15,625 -- -- -0- -0- -0-
Kirsner Rev Tr
Christopher Krecke 250 -- 250 -- -0- -0- -0-
Richard Kurtz 42,538 62,500 -- -- -0- -0- -0-
Stephen Labararer 3,437 -- 3,437 -- -0- -0- -0-
Vincent Labararer 11,250 -- 11,250 -- -0- -0- -0-
L.A.D. Equity Partners, L.P. 10,485 -- -- -- -0- -0- -0-
Peter Latour 3,143 6,250 -- -- -0- -0- -0-
Daniel R. Lee 85,075 25,000 -- -- -0- -0- -0-
Charles Leithauser 21,269 31,250 -- -- -0- -0- -0-
Craig Leppla 1,406 -- 1,406 -- -0- -0- -0-
Lisa Letteri 8,109 -- 8,109 -- -0- -0- -0-
C. William Liebel & Roberta 4,254 6,250 -- -- -0- -0- -0-
D. Liebel J/T
Chris Loeb 4,254 6,250 -- -- -0- -0- -0-
Charles J. Loegering 42,538 62,500 -- -- -0- -0- -0-
Juan Lopera 1,788 -- 1,788 -- -0- -0- -0-
John Luck 8,529 15,625 -- -- -0- -0- -0-
Michael R. Lyall 5,625 -- 5,625 -- -0- -0- -0-
Jeffrey P. Macnell & Shelly 21,269 31,250 -- -- -0- -0- -0-
& Macnell J/T
Stephen Mallis 5,317 7,813 -- -- -0- -0- -0-
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------------------------ -------------------------------------
NUMBER NUMBER
NUMBER NUMBER OF NUMBER NUMBER OF OF
NAME OF BENEFICIAL OWNER OF OF INITIAL PLACEMENT OF SHARES INITIAL PLACEMENT
SHARES OF AND AGENT AND SECURITIES OF AND AGENTS AND
COMMON INVESTOR ADDITIONAL BEING COMMON INVESTOR ADDITIONAL
STOCK WARRANTS WARRANTS OFFERED STOCK WARRANTS WARRANTS
(1)(2) (3) (4)
<S> <C> <C> <C> <C> <C> <C> <C>
Gregory Manocherian Tr 12,848 25,000 -- -- -0- -0- -0-
The Family Grandchildren Trust
Greg Manochorian 4,254 6,250 -- -- -0- -0- -0-
Jed Marcus 4,158 9,375 -- -- -0- -0- -0-
Michael Marianaccio 10,634 15,625 -- -- -0- -0- -0-
Michael J. Marrone 645 -- -- -- -0- -0- -0-
Mario Marsillo 2,133 -- 2,133 -- -0- -0- -0-
Richard R. Martella & 7,301 15,625 -- -- -0- -0- -0-
Jennifer Martella J/T/
John R. Martin & Victoria 10,634 15,625 -- -- -0- -0- -0-
A. Martin J/T
Anthony P. Mazzarella(7) 555,398 33,340 125,000 -- 375,000 -0- -0-
Robert A. Mccleeary 5,142 11,719 -- -- -0- -0- -0-
McGlynn Family Partnership 2,419 -- -- -- -0- -0- -0-
LP
Patricia C. McKeon 645 -- -- -- -0- -0- -0-
Alan Meinershagen 21,269 31,250 -- -- -0- -0- -0-
Herbeart Meislich 21,269 31,250 -- -- -0- -0- -0-
Venugopal K. Menan 10,634 15,625 -- -- -0- -0- -0-
Merrill Lynch Pierce 7,691 61,531 -- -- -0- -0- -0-
Fenner & Smith
Jerry Messana 406 -- 406 -- -0- -0- -0-
Patrick H. Miller Jr. & Lee 85,075 125,000 -- -- -0- -0- -0-
M. Miller Incorporated J/T
John E. Moravec 4,254 6,250 -- -- -0- -0- -0-
Andrew Morfesis & Gail 21,269 31,250 -- -- -0- -0- -0-
Morfesis J/T
David Morley 3,125 25,000 -- -- -0- -0- -0-
Ronald Moschetta 16,876 -- 16,876 -- -0- -0- -0-
Mulkey II Limited 42,538 62,500 -- -- -0- -0- -0-
Partnership
Robert Nass 1,406 -- 1,406 -- -0- -0- -0-
David R. Nelson & Donna I 12,761 18,750 -- -- -0- -0- -0-
Nelson J/T
</TABLE>
57
<PAGE> 59
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------------------------- -----------------------------------
NUMBER
NUMBER NUMBER NUMBER SECURITIES NUMBER NUMBER OF OF
NAME OF BENEFICIAL OWNER OF OF INITIAL OF BEING OF SHARES INITIAL PLACEMENT
SHARES OF AND PLACEMENT OFFERED OF AND AGENTS AND
COMMON INVESTOR AGENT AND (4) COMMON INVESTOR ADDITIONAL
STOCK WARRANTS ADDITIONAL STOCK WARRANTS WARRANTS
(1)(2) (3) WARRANTS
<S> <C> <C> <C> <C> <C> <C> <C>
Chuck Norris 33,269 20,000 -- -- -0- -0- -0-
Allen Notowitz 10,157 31,250 -- -- -0- -0- -0-
Samuel Nussbaum 42,538 62,500 -- -- -0- -0- -0-
David & Robert O'Sullivan 10,634 15,625 -- -- -0- -0- -0-
Tr The Robert A. O'sullivan
Fam/Tr
Robert O'Sullivan 49,937 -- 49,937 -- -0- -0- -0-
David Olson 42,538 62,500 -- -- -0- -0- -0-
Orbis Pension Trustee Limited 425,375 625,000 -- -- -0- -0- -0-
Fredrick J. Oswald 10,634 15,625 -- -- -0- -0- -0-
Allen Ozdemir 42,538 62,500 -- -- -0- -0- -0-
Larry H. Pallini 17,015 25,000 -- -- -0- -0- -0-
Richard Palmer & Lynne 10,634 15,625 -- -- -0- -0- -0-
Marie Palmer J/T
Peter Palmerie 2,031 -- 2,031 -- -0- -0- -0-
Pamela Equities Corp 12,848 25,000 -- -- -0- -0- -0-
G.A. Partoyan 17,102 31,250 -- -- -0- -0- -0-
Jayakumar Patil & Pumina 85,075 125,000 -- -- -0- -0- -0-
Patil J/T
Carmen Pecord 7,977 11,719 -- -- -0- -0- -0-
John Piccolo 21,269 31,250 -- -- -0- -0- -0-
Anna M. Pocisk 10.634 15,625 -- -- -0- -0- -0-
P. Tony Polyviou 10,634 15,625 -- -- -0- -0- -0-
Barry Porter 8,317 5,000 -- -- -0- -0- -0-
Robert Priddy 10,634 15,625 -- -- -0- -0- -0-
Robert L. Priddy 319,031 468,750 -- -- -0- -0- -0-
Kenneth Puttick 33,269 20,000 -- -- -0- -0- -0-
Eric Rand 18,282 -- 18,282 -- -0- -0- -0-
Lori A. Rausch 21,269 31,250 -- -- -0- -0- -0-
Kurt Reichelt & Laura 10,634 15,625 -- -- -0- -0- -0-
Reichelt J/T
Donald R. Richardson 6,381 9,375 -- -- -0- -0- -0-
</TABLE>
58
<PAGE> 60
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------------------------- -------------------------------------
NUMBER
NUMBER NUMBER NUMBER SECURITIES NUMBER NUMBER OF OF
NAME OF BENEFICIAL OWNER OF OF INITIAL OF BEING OF SHARES INITIAL PLACEMENT
SHARES OF AND PLACEMENT OFFERED OF AND AGENTS AND
COMMON INVESTOR AGENT AND (4) COMMON INVESTOR ADDITIONAL
STOCK WARRANTS ADDITIONAL STOCK WARRANTS WARRANTS
(1)(2) (3) WARRANTS
<S> <C> <C> <C> <C> <C> <C> <C>
James H. Rion & Jean R 6,381 9,375 -- -- -0- -0- -0-
Rion J/T
Lawrence Rooler 10,634 15,625 -- -- -0- -0- -0-
Richard Rogel(5) 118,844 156,250 -- -- 12,500 -0- -0-
Keith Rosenbloom 101,671 9,375 100,499 -- -0- -0- -0-
Lawrence Rosenfield & 10,634 15,625 -- -- -0- -0- -0-
Janet Rosenfield J/T
Edward J. Rosenthal Keogh 3,226 -- -- -- -0- -0- -0-
Brian Ross 4,990 3,000 -- -- -0- -0- -0-
Richard Ross 4,990 3,000 -- -- -0- -0- -0-
Adam Ross & Lisa Falk- 8,508 12,500 -- -- -0- -0- -0-
Ross J/T
Rovest Partners 3,226 -- -- -- -0- -0- -0-
Roybec & Co. 31,903 46,875 -- -- -0- -0- -0-
Roycan & Co. 21,269 31,250 -- -- -0- -0- -0-
Eric Rubenstein 24,792 15,625 14,158 -- -0- -0- -0-
Douglas H. Runckel & 42,538 62,500 -- -- -0- -0- -0-
Evelyn Runckel J/T
Bernard Sadow 21,269 31,250 -- -- -0- -0- -0-
Keyvan Saghafi 4,254 6,250 -- -- -0- -0- -0-
Scott Salkind 21,269 31,250 -- -- -0- -0- -0-
Darren Salzberg 425 -- 425 -- -0- -0- -0-
Stephanie Sanderson 1,563 12,500 -- -- -0- -0- -0-
Avtar Singh Sandhu 6,618 12,500 -- -- -0- -0- -0-
Christopher Binyon Sardfim 21,269 31,250 -- -- -0- -0- -0-
Michael Scalfani 406 -- 406 -- -0- -0- -0-
Monroe H. Schenker & 14,888 21,875 -- -- -0- -0- -0-
Barbara P. Schenker J/T
Leonard Schiller(5) 35,019 41,250 -- -- 12,500 -0- -0-
Phillip Schiller 33,153 56,875 -- -- -0- -0- -0-
Suzanne Schiller 10,634 15,625 -- -- -0- -0- -0-
Lance Schiller & 1,953 15,625 -- -- -0- -0- -0-
Sheila Schiller J/T
Edward T. Schneider 42,538 62,500 -- -- -0- -0- -0-
</TABLE>
59
<PAGE> 61
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------------------------- -----------------------------------------------
NUMBER NUMBER NUMBER SECURITIES NUMBER NUMBER OF NUMBER
NAME OF BENEFICIAL OWNER OF OF INITIAL OF BEING OF SHARES INITIAL OF
SHARES OF AND PLACEMENT OFFERED OF AND PLACEMENT
COMMON INVESTOR AGENT AND (4) COMMON INVESTOR AGENTS AND
STOCK WARRANTS ADDITIONAL STOCK WARRANTS ADDITIONAL
(1)(2) (3) WARRANTS WARRANTS
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas E. Schneider 10,634 15,625 -- -- -0- -0- -0-
Thomas Schneider Trustee 42,538 62,500 -- -- -0- -0- -0-
John J. Schob & Jean S 10,634 15,625 -- -- -0- -0- -0-
Schob J/T
William Schoen & Barbara 10,634 15,625 -- -- -0- -0- -0-
Schoen J/T
Rodney Schorlemmer Sep 21,269 31,250 -- -- -0- -0- -0-
IRA
James E. Schriber & Jayne 3,428 7,813 -- -- -0- -0- -0-
Schriber J/T
Charles F.A. Schroeder IRA 17,015 25,000 -- -- -0- -0- -0-
Bear Stearns Sec Corp Cust
Gary D. Schultz & Barbara 32,537 62,500 -- -- -0- -0- -0-
A. Schultz J/T
Douglas Schwarzwaelder 10,634 15,625 -- -- -0- -0- -0-
Sandesh Seth 2,500 -- 2,500 -- -0- -0- -0-
Angelo M. Sferazza 7,679 11,281 -- -- -0- -0- -0-
Charles Sheaff IRA Bear 10,634 15,625 -- -- -0- -0- -0-
Stearns Sec Corp Cust
Fred B. Sheats c/o Agee 13,490 31,250 -- -- -0- -0- -0-
Fisher LLC
Jay Shrager & Carole 21,269 31,250 -- -- -0- -0- -0-
Shrager J/T
Sigler & Co. 31,903 46,875 -- -- -0- -0- -0-
Michael Singer 25,175 62,500 -- -- -0- -0- -0-
Jaswant Singh & Debra 4,254 6,250 -- -- -0- -0- -0-
Pannu J/T
Stephen Skoly, Jr 5,317 7,813 -- -- -0- -0- -0-
Mitchell J. Sleeper 21,269 31,250 -- -- -0- -0- -0-
George L. Smith 42,538 62,500 -- -- -0- -0- -0-
Thomas C. Smith & Liz 10,851 31,250 -- -- -0- -0- -0-
Smith J/T
Lawrence H. Smith & Toni 14,324 31,250 -- -- -0- -0- -0-
Smith J/T
Michael Smooke 8,317 5,000 -- -- -0- -0- -0-
Peter Sola 6,294 15,625 -- -- -0- -0- -0-
</TABLE>
60
<PAGE> 62
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
--------------------------------------- ---------------------------------
NUMBER NUMBER NUMBER SECURITIES NUMBER NUMBER OF NUMBER
NAME OF BENEFICIAL OWNER OF OF INITIAL OF BEING OF SHARES INITIAL OF
SHARES OF AND PLACEMENT OFFERED OF AND PLACEMENT
COMMON INVESTOR AGENT AND (4) COMMON INVESTOR AGENTS AND
STOCK WARRANTS ADDITIONAL STOCK WARRANTS ADDITIONAL
(1)(2) (3) WARRANTS WARRANTS
<S> <C> <C> <C> <C> <C> <C> <C>
Fred Sommer 1,828 -- 1,828 -- -0- -0- -0-
Lee H. Spence 5,317 7,813 -- -- -0- -0- -0-
David Stein 2,397 -- 2,397 -- -0- -0- -0-
David Stellway 10,634 15,625 -- -- -0- -0- -0-
Theodore Stern & Elizabeth S Stern J/T 85,075 125,000 -- -- -0- -0- -0-
David Stollwerk & Ida Stollwerk J/T 10,634 15,625 -- -- -0- -0- -0-
Joel A. Stone 42,538 62,500 -- -- -0- -0- -0-
Louis Sudler 21,269 31,250 -- -- -0- -0- -0-
William G. Sybesma 21,269 31,250 -- -- -0- -0- -0-
Inder Tallur 21,875 -- 21,875 -- -0- -0- -0-
Rick Glenn Tachibana 8,745 15,625 -- -- -0- -0- -0-
Milton A. Teplin 7,934 31,250 -- -- -0- -0- -0-
George L. Thompson 10,634 15,625 -- -- -0- -0- -0-
Walter F. Toumbs 25,870 62,500 -- -- -0- -0- -0-
George Tsamutalis 2,192 -- 2,192 -- -0- -0- -0-
Vladik Vainberg 2,417 -- 2,417 -- -0- -0- -0-
Syd Verbin Tr Syd Verbin Trust 4,254 6,250 -- -- -0- -0- -0-
Brad Van Siclen 1,250 -- 1,250 -- -0- -0- -0-
Angelo Vivolo 21,269 31,250 -- -- -0- -0- -0-
Kevin J. Voigt & Cindy G. Voigt J/T 10,634 15,625 -- -- -0- -0- -0-
Byron Voight & Jacelyn K. Voight J/T 21,269 31,250 -- -- -0- -0- -0-
Michael Volpe 3,437 -- 3,437 -- -0- -0- -0-
Warren Voss & Doris C. Voss J/T 6,381 9,375 -- -- -0- -0- -0-
James Walker 1,250 -- 1,250 -- -0- -0- -0-
Erich Weidenbewer 6,381 9,375 -- -- -0- -0- -0-
The Wertheimer Partnership 13,490 31,250 -- -- -0- -0- -0-
Joyce N. Westmoreland 21,269 31,250 -- -- -0- -0- -0-
Edward L. Wilson Jr 13,490 31,250 -- -- -0- -0- -0-
</TABLE>
61
<PAGE> 63
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
-------------------------------------- ---------------------------------
NUMBER NUMBER NUMBER SECURITIES NUMBER NUMBER OF NUMBER
NAME OF BENEFICIAL OWNER OF OF INITIAL OF BEING OF SHARES INITIAL OF
SHARES OF AND PLACEMENT OFFERED OF AND PLACEMENT
COMMON INVESTOR AGENT AND (4) COMMON INVESTOR AGENTS AND
STOCK WARRANTS ADDITIONAL STOCK WARRANTS ADDITIONAL
(1)(2) (3) WARRANTS WARRANTS
<S> <C> <C> <C> <C> <C> <C> <C>
Charles L. Wisseman III 10,634 15,625 -- -- -0- -0- -0-
Charles L. Wisseman III 3,151 25,209 -- -- -0- -0- -0-
FBO Zev Wolfson IRA
Rollover
W.O.W. Associates Limited 5,806 -- -- -- -0- -0- -0-
Partnership
David Wynn 406 -- 406 -- -0- -0- -0-
Joseph P. Wynne 11,250 -- 11,250 -- -0- -0- -0-
WPLS Investments LLC 42,538 62,500 -- -- -0- -0- -0-
John H. Zale 10,634 15,625 -- -- -0- -0- -0-
Kenneth J. Zises 42,538 62,500 -- -- -0- -0- -0-
</TABLE>
(1) Except as otherwise indicated, such beneficial ownership assumes the
exercise of all Warrants and the conversion of the Convertible Preferred
Stock.
(2) All fractional shares upon conversion of the Convertible Preferred Stock and
exercise of the Initial Warrants and the Investor Warrants have been rounded
up to the next whole share.
(3) As a result of the 1 for 8 reverse stock split of the Company's Common
Stock, effective February 12, 1998, the Initial Warrants and Investor
Warrants were adjusted such that each Initial Warrant and each Investor
Warrant is exercisable for .125 share of Common Stock at the exercise price
of $3.20 per share (i.e., 8 Initial Warrants or 8 Investor Warrants are
exercisable for one share of Common Stock at the exercise price of $3.20 per
share).
(4) All Securities listed in this table will be offered unless otherwise
indicated.
(5) Messrs. Blue, Geller, Rogel and Schiller are directors of the Company.
(6) Commonwealth Associates acted as placement agent in connection with the
issuance of the Convertible Preferred Stock and the Initial Warrants.
(7) Mr. Mazzarella is the Executive Vice President, Secretary/Treasurer, Chief
Financial Officer and a director of the Company.
62
<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Generally, under Rule 144, each person holding restricted securities of
a period of one year may, every three months, sell in ordinary brokerage
transactions or to market makers an amount of shares equal to no more than the
greater of 1% of the Company's then outstanding Common Stock or the average
weekly trading volume for the four weeks prior to the proposed sale. This
limitation on the amount of shares which may be sold under the Rule 144 does not
apply to restricted securities sold for the account of a person who is not or
has not been an affiliate of the Company during the three months prior to the
sale and who has beneficially owned the restricted securities for at least two
years. Any sales of restricted securities must be in compliance with Rule 144,
pursuant to registration under the Securities Act or pursuant to an exemption
therefrom. The public sale of restricted securities pursuant to Rule 144, an
effective registration statement, or otherwise, may have an adverse affect on
the market price of the Common Stock.
Of the approximately 19,847,237 shares of Common Stock estimated to be
outstanding (on a fully diluted basis including shares issuable upon the
exercise of outstanding Warrants and upon conversion of the Convertible
Preferred Stock), approximately 10,731,698 shares (including for this purpose an
estimated 3,469,500 shares of Common Stock issuable upon the exercise of the
Warrants and 6,945,006 shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock) will have been registered under the Securities Act
and/or otherwise freely tradeable, subject to the lock-up agreement among the
investors in the December 1997 private placement and Commonwealth Associates,
the placement agent (the "Shareholders Lock-Up Agreement). Approximately
2,068,000 shares of Common Stock will be tradeable subject to the one-year
holding period restrictions under, and compliance with the other requirements of
Rule 144 discussed above. The Shareholders Lock-Up Agreement provides that,
notwithstanding any registration statement covering the resale of the
Convertible Preferred Stock, Initial Warrants and the Common Stock underlying
the Convertible Preferred Stock and the Initial Warrants, the investors are
prohibited from selling their Initial Warrants or their Common Stock underlying
the Convertible Preferred Stock and the Initial Warrants until December 19,
1998. However, Commonwealth Associates may consent to the release of the
foregoing transfer restrictions at any time after July 19, 1998 for all, but not
less than all, of the investors. In addition Messrs. Comer, Pickering, Richard
Rosenblatt and Martin Rosenblatt, holding in the aggregate 4,481,667 shares of
Common Stock, have entered into lock-up agreements with Commonwealth Associates,
which provide that, absent the consent of Commonwealth Associates, they will be
prohibited from selling their Common Stock until December 19, 1998.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Loeb & Loeb LLP, Los Angeles, California.
EXPERTS
The financial statements of the Company at December 31, 1997 and for the
years ended December 31, 1997 and 1996, included in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto and are
included herein in reliance upon authority of said firm as experts in giving
said reports.
63
<PAGE> 65
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
On December 10, 1996, the Company engaged Arthur Andersen, LLP as its
independent public accountants. The Company had no disagreements with its prior
independent auditor, Crouch, Bierwolf & Chisholm. See the Company's Report on
Form 8-K filed with the SEC on June 20, 1997.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a registration statement ("Registration Statement"),
together with exhibits thereto, under the Securities Act with respect to the
Securities offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, omits certain of the information set forth in the
Registration Statement in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
Securities offered hereby, reference is made to such Registration Statement and
such exhibits filed as a part thereof. Statements contained in this Prospectus
as to the content of any contract or other document referred to are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement and exhibits can be inspected and copied
at the public reference section at the Commission's principal office, 450 5th
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, the Commission's Regional
Offices located at the Northwestern Atrium Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New
York, New York 10048 and through the Commission's Web site (http://www.sec.gov).
Copies may be obtained from the Commission's principal office upon payment of
the fees prescribed by the Commission.
64
<PAGE> 66
IMALL, INC.
iMall, Inc. and Subsidiaries
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
Number
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1997 AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Report of Independent Public Accountants -
Arthur Andersen LLP.................................................................................. F-2
Consolidated Balance Sheet -
December 31, 1997.................................................................................... F-3
Consolidated Statements of Operations -
Years Ended December 31, 1997 and 1996............................................................... F-5
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1997 and 1996............................................................... F-6
Consolidated Statements of Cash Flows -
Years Ended December 31, 1997 and 1996............................................................... F-7
Notes to Consolidated Financial Statements.............................................................F-10
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1998 AND 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997.............................................................F-22
Condensed Consolidated Statements of Operations -
Nine Months Ended September 30, 1998 and 1997........................................................F-23
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997........................................................F-24
Notes to Condensed Consolidated Financial Statements...................................................F-25
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the stockholders of iMALL, Inc.:
We have audited the accompanying consolidated balance sheet of iMALL, Inc., a
Nevada corporation, and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of iMALL, Inc. and subsidiaries as
of December 31, 1997, and the results of their operations and their cash flows
for the years ended December 31, 1997 and 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 25, 1998 (except
with respect to the
matter discussed in
Note 11, as to which the
date is August 28, 1998).
F-2
<PAGE> 68
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,775,127
Short-term investments 10,000,600
Accounts receivable, net of allowance
for doubtful accounts of $ 60,000 57,419
Prepaid expenses 18,113
Income tax receivable 166,231
Other current assets 119,207
-------------
Total current assets 15,136,697
-------------
PROPERTY AND EQUIPMENT:
Computer equipment and software 422,107
Office equipment 106,735
Furniture and fixtures 58,095
Leased office equipment 15,853
Leasehold improvements 28,289
-------------
631,079
Less accumulated depreciation
and amortization (293,469)
-------------
Net property and equipment 337,610
-------------
OTHER ASSETS:
Intangibles, net of accumulated amortization
of $252,948 258,482
Deposits 21,411
Net long-term assets of discontinued operations 262,612
------------
542,505
-------------
$ 16,016,812
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 69
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997
------------
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 172,373
Accrued expenses 101,539
Deferred revenues 73,322
Current portion of capitalized lease obligations 5,901
Net short-term liabilities of discontinued operations 1,309,462
------------
Total current liabilities 1,662,597
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, liquidation value of $20,000,000;
10,000,000 shares authorized, 5,000,000
shares issued and outstanding 19,355,788
Common stock, par value $.008; 37,500,000
shares authorized, 7,651,810 shares issued
and outstanding 62,114
Retained deficit (4,658,687)
Less common stock held in treasury, at cost (405,000)
------------
Total stockholders' equity 14,354,215
------------
$ 16,016,812
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-4
<PAGE> 70
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET REVENUES $ 973,635 $ 676,812
COST OF REVENUES 187,638 297,769
----------- -----------
Gross profit 785,997 379,043
----------- -----------
SELLING EXPENSES 20,000 --
PRODUCT DEVELOPMENT 669,126 405,535
GENERAL AND ADMINISTRATIVE EXPENSES 2,676,504 2,298,033
----------- -----------
Loss from operations (2,579,633) (2,324,525)
----------- -----------
OTHER (EXPENSE) INCOME:
Other income -- 19,891
Interest expense, net (23,072) (5,739)
----------- -----------
Net other (expense) income (23,072) 14,152
----------- -----------
Loss before provision for income taxes (2,602,705) (2,310,373)
BENEFIT (PROVISION) FOR INCOME TAXES 16,546 (37,928)
----------- -----------
LOSS FROM CONTINUING OPERATIONS (2,586,159) (2,348,301)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (2,116,815) 2,413,119
----------- -----------
NET (LOSS) INCOME $(4,702,974) $ 64,818
=========== ===========
NET (LOSS) INCOME PER COMMON SHARE
- BASIC AND DILUTED:
Loss from continuing operations $ (.36) $ (.32)
(Loss) income from discontinued operations $ (.28) $ .33
----------- -----------
NET (LOSS) INCOME $ (.64) $ .01
=========== ===========
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING 7,526,967 7,252,584
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 71
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PREFERRED STOCK PAID-IN TREASURY EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES (DEFICIT)
---------- ------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 1,743 $ 14 -- $-- $ 264,798 $-- $ (20,531)
Adjustments due to
fractional shares
in stock split 175 -- -- -- -- -- --
Reverse acquisition
for accounting
purposes of Madison,
York & Associates, Inc 4,804,960 38,440 -- -- (40,786) -- --
Shares issued for
acquisition of Cabot,
Richards & Reed, Inc. 1,400,000 11,200 -- -- (131,216) -- --
Shares issued for
acquisition of
R&R Advertising, Inc. 600,000 4,800 -- -- 283,000 -- --
Shares issued for services 351,125 2,809 -- -- 59,550 -- --
Shares issued for
acquisition of
Physicomp, Inc.
(EmaNate, Inc.) 200,000 1,600 -- -- 158,400 -- --
Shares issued for
acquisition of Interactive
Marketing Group, Inc. 52,563 421 -- -- 41,629 -- --
Distribution of
S-Corporation earnings to
stockholders -- -- -- -- (25,000) -- --
Net income -- -- -- -- -- -- 64,818
---------- ------- --------- ----------- ----------- --------- -----------
Balance,
December 31, 1996 7,410,566 59,284 -- -- 610,375 -- 44,287
Common shares issued
in private placements 316,923 2,535 -- -- 1,027,465 -- --
Common shares issued
for services 36,821 295 -- -- 165,400 -- --
Preferred shares issued
in private placement,
net of issuance costs -- -- 4,893,750 18,930,788 (1,803,240) -- --
Preferred shares issued
in private placement
to retire debt -- -- 106,250 425,000 -- -- --
Treasury
shares repurchased (112,500) -- -- -- -- (405,000) --
Net loss -- -- -- -- -- -- (4,702,974)
---------- ------- --------- ----------- ----------- --------- -----------
Balance,
December 31, 1997 7,651,810 $62,114 5,000,000 $19,355,788 $-- $(405,000) $(4,658,687)
========== ======= ========= =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 72
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,586,159) $(2,348,301)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 319,614 413,818
Provision for doubtful accounts 33,600 26,400
Provision for notes receivable 50,000 --
Change in assets and liabilities
Accounts receivable (24,767) (92,652)
Income tax receivable 110,709 (276,940)
Prepaid expenses (19,379) (8,836)
Deferred income tax asset 163,715 (163,715)
Deposits 1,415 (22,826)
Accounts payable 151,579 20,794
Accrued expenses 26,273 256,253
Deferred revenues 50,822 22,500
----------- -----------
Net cash used in operating activities $(1,722,578) $(2,173,505)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 73
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (10,000,600) --
Purchase of property and equipment (34,202) (794,289)
Increase in intangibles (44,932) --
Principal payments to related parties -- (242,000)
Principal payments received on
notes receivable from related parties 82,895
------------ -----------
Net cash used in investing
Activities (9,996,839) (1,036,289)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution of S Corporation retained earnings -- (25,000)
Proceeds from issuance of shares of
common stock 1,030,000 --
Proceeds from issuance of shares of
preferred stock 17,552,549 --
Purchase of treasury stock (405,000) --
Borrowings from related parties -- 122,705
Principal payments on notes payable
to related parties (145,082) --
Principal payments on capitalized lease obligations (769) --
Principal payments on notes payable (12,500) --
------------ -----------
Net cash provided by
financing activities 18,019,198 97,705
------------ -----------
Cash provided by (used in) continuing operations 6,299,781 (3,112,089)
Cash (used in) provided by discontinued operations (1,581,709) 3,169,144
------------ -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 4,718,072 57,055
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 57,055 --
------------ -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 4,775,127 $ 57,055
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 74
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 23,072 $ 5,739
Cash paid for income taxes $ 37,479 $437,516
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING TRANSACTIONS:
Conversion of bridge loans to
preferred stock $425,000 $ --
</TABLE>
During 1996, the Company exchanged capital stock for all issued and outstanding
capital stock of Cabot, Richards & Reed, Inc. ("Cabot"), R&R Advertising, Inc.
("R&R"), Physicomp, Inc. ("Physicomp"), and Interactive Marketing Group, Inc.
("IMG") (see Note 7). In conjunction with these acquisitions, the assets and
liabilities acquired and assumed were as follows:
<TABLE>
<CAPTION>
PHYSICOMP R&R CABOT IMG
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fair value of non-cash
assets acquired $ 159,323 $ 304,198 $ 280,196 $ 58,766
Cash acquired 31,963 115,863 (40,170) 2,694
Liabilities assumed (255,793) (132,261) (360,042) --
Goodwill 224,507 -- -- (19,410)
--------- --------- --------- ---------
Equity recorded $ 160,000 $ 287,800 $(120,016) $ 42,050
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE> 75
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) ORGANIZATION AND NATURE OF OPERATIONS
The consolidated financial statements presented are those of iMALL, Inc. (a
Nevada corporation) and its wholly owned subsidiaries (collectively, the
"Company"). On January 16, 1996, iMALL, Inc., which had been the surviving
company in a change of domicile merger with Natures Gift, Inc. (an inactive
corporation) on January 8, 1996, engaged in a share exchange with Madison, York
& Associates, Inc. ("Madison"). The share exchange with Madison, a Utah
corporation, was accounted for as a reverse acquisition.
The Company's mission is to maintain and expand its position as a pioneer and
leader in electronic commerce services by providing merchants the ability,
through its proprietary software, to transact commerce online. The Company's
headquarters are located in Santa Monica, California with additional offices in
Provo, Utah. The training is conducted at sites across the United States (See
Note 11).
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
iMALL, Inc., iMALL Services, Inc., iMALL Consulting, Inc., R&R, Cabot, EmaNate
and IMG. All material intercompany transactions and accounts have been
eliminated in consolidation. In August 1998, the Company discontinued some of
its operations. (See Note 11)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
less than three months to be cash equivalents. The carrying value of cash
equivalents approximates fair value. The Company invests in highly qualified
financial institutions. At times, such investments may be in excess of insured
limits. At December 31, 1997, approximately $491,000 of cash was held as
reserves for credit card transactions. The holders released approximately
$425,000 subsequent to year-end and the remaining balance is expected to be
received in the first half of 1998.
Short-term Investments
Short-term investments have an original maturity of three months or more and a
remaining maturity of less than one year. These investments are stated at cost
as it is the intent of the Company to hold these securities until maturity. The
funds invested are diversified in high grade commercial paper.
F-10
<PAGE> 76
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets. The
estimated useful lives of fixed assets are as follows:
<TABLE>
<CAPTION>
CAPTION USEFUL LIFE
<S> <C>
Computer equipment and software 3 years
Office equipment 3 years
Leased office equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements lesser of 10 years or
the life of the lease
</TABLE>
Major renewals and betterments are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred.
Intangibles
Organization costs have been capitalized and are being amortized over a
five-year period.
The Company capitalizes internally developed software in accordance with SFAS
No. 86 and is amortizing the amounts over a two-year period. In March 1998, the
Accounting Standards Executive Committee issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires adoption of its provisions for fiscal years
beginning after December 15, 1998. The provisions require the capitalization of
certain costs related to the development of software for internal use. The
Company does not believe the effect of adoption will be material.
Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses, is stated at cost and is
amortized on a straight-line basis over five years. Amortization of $51,987 and
$27,214 was charged to expense for the years ended December 31, 1997 and 1996,
respectively.
Impairment of Long-Lived Assets
Under the provisions of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company has evaluated its long-lived assets for financial
impairment, and will continue to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable.
The Company evaluates the recoverability of long-lived assets not held for sale
by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time, such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are sufficient to recover the carrying value of such assets.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
temporary differences between the tax bases of assets or liabilities and their
reported amounts in the financial statements. These temporary
F-11
<PAGE> 77
differences will result in taxable or deductible amounts in future years when
the reported amounts of the assets or liabilities are recovered or settled.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year's presentation.
Recognition of Revenues
The Company generates revenue from its training and internet commerce
businesses. The major sources of revenue and the timing of revenue recognition
are set forth below:
Internet training workshop revenues - The Company presents training
workshops to businesses and individuals introducing them to the Internet
and the iMALL, a shopping mall on the Internet. The attendees pay a fee for
the workshop in advance. Recognition of revenue occurs at the completion of
the workshop. Any cash received in advance of the completion of the
workshop is accounted for as deferred revenue (See note 11).
Home study revenues - The Company offers home study courses on the same
material discussed in its Internet workshops. The customer pays the home
study fee before receiving the materials. Recognition of the revenue occurs
when an order is shipped (See note 11).
Maintenance fee revenues - The Company maintains web sites on an annual
basis for customers for a fee. The fee may be prepaid in full or paid
monthly by the customer. Recognition of revenue occurs as payments are
received if the fee is collected monthly. Revenue is recognized on a
straight-line basis over 12 months if the annual fee is prepaid. Cash
received but not yet recognized under maintenance agreements totaled
$73,322 as of December 31, 1997 and is included in deferred revenues in the
accompanying consolidated balance sheet.
Web site design revenues - The Company designs and upgrades web sites for
customers. The customer is provided with bids on the design and approves
the design prior to the Company beginning the work. Recognition of the
revenue occurs when the design work is completed.
Commissions from sales on the iMALL - The Company participates in the
commerce generated by the businesses on the iMALL. A percentage of certain
revenue generated is recognized as commissions when the sale is made to the
buyer.
Advertising revenues - Advertising revenues on banner contracts are
recognized ratably over the period in which the advertisement is displayed,
provided that no significant Company obligations remain and collection of
the resulting receivable is probable. Company obligations typically include
guarantees of minimum number of "impressions," or times that an
advertisement appears in pages viewed by users of the Company's online
properties. The Company defers recognition of the corresponding revenues
until the remaining guaranteed impression levels are achieved. For 1997,
this revenue was not significant.
F-12
<PAGE> 78
(3) CAPITALIZED LEASE OBLIGATIONS
Certain equipment is leased under capitalized lease obligations. The following
is a summary of assets held under capital lease agreements as of December 31,
1997:
<TABLE>
<S> <C>
Equipment $ 111,490
Less accumulated amortization (61,734)
---------
$ 49,756
=========
</TABLE>
The following is a schedule of future minimum lease payments under capitalized
lease obligations together with the present value of the minimum lease payments
at December 31, 1997:
<TABLE>
<S> <C>
Years Ending December 31,
1998 $ 23,115
1999 11,224
--------
Total minimum lease payments 34,339
Less amount representing interest (2,716)
--------
Present value of minimum lease payments 31,623
Less current portion (20,835)
--------
$ 10,788
========
</TABLE>
A portion of the capital leases above are included in discontinued operations
(See Note 11).
(4) NOTES PAYABLE TO RELATED PARTIES (See Note 11)
Notes payable to related parties at December 31, 1997 represented $662,420 of
various demand notes to shareholders, bearing interest from 10 to 12 percent.
All of these notes were repaid in January and February 1998.
(5) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain facilities used in its operations. The approximate
aggregate commitments under noncancellable operating leases in effect at
December 31, 1997 were as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 $ 181,000
1999 79,000
2000 79,000
------------
$ 339,000
============
</TABLE>
F-13
<PAGE> 79
The Company incurred rent expense of approximately $393,000 and $301,000 in
connection with operating leases during 1997 and 1996, respectively. A portion
of the operating leases above are included in discontinued operations (See Note
11).
Employment Agreements
The Company has various employment agreements with officers, some of which
include bonuses, stock options, and participation in the net profit of the
Company.
Legal Matters
The Company is a defendant in various lawsuits which are incidental to the
Company's business. Management, after consultation with legal counsel, is of the
opinion that liabilities, if any, resulting from these matters will not have a
material effect on the Company's results of operations or financial position
except for a lawsuit with a probable loss of $25,000. The probable loss has been
included in accrued expenses in the accompanying consolidated balance sheet.
(6) INCOME TAXES
The benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Current (Benefit) Provision:
Federal $(151,419) $ 160,575
State (28,842) 41,068
--------- ---------
(180,261) 201,643
--------- ---------
Deferred Provision (Benefit):
Federal 132,610 (132,610)
State 31,105 (31,105)
--------- ---------
163,715 (163,715)
--------- ---------
(Benefit) provision for
income taxes $ (16,546) $ 37,928
========= =========
</TABLE>
F-14
<PAGE> 80
The differences between the effective income tax rate and the Federal statutory
income tax rate consist of the following:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Provision at the federal statutory
rate of 34 percent $(1,604,637) $ 34,933
State income taxes, net of federal benefit (283,171) 5,425
Nondeductible items for tax purposes -- 13,218
Change in valuation allowance 1,871,262 (6,980)
Other -- (8,668)
----------- -----------
Total (benefit) provision
for income taxes $ (16,546) $ 37,928
=========== ===========
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $4,000,000 available to reduce future taxable income. All deferred
tax assets, primarily related to net operating loss carryforwards and deferred
revenue, have all been reserved for through use of a valuation reserve.
(7) CAPITAL STOCK
Stock Transactions
On January 8, 1996, the Company effected a reverse split of 1 for 19 shares. On
May 22, 1996, the Company effected a stock split of 4 for 1. On February 12,
1998 the Company effected a reverse split of 1 for 8 shares. All share and per
share amounts have been retroactively restated to reflect the stock splits. In
1996, the Company increased its authorized common stock to 37,500,000 shares
with a par value of $.008.
In January 1996, the Company issued 600,000 common shares to R&R Advertising
(R&R) for all of its outstanding stock. R&R's net book value of $287,800 was
recorded as the value of the acquisition. On January 16, 1996, 1,400,000 common
shares were issued for all of Cabot, Richards & Reed, Inc.'s (Cabot) outstanding
stock. On January 16, 1996, 4,804,960 shares were issued to Madison (See Note 1)
for all of its outstanding stock. The net book value of Madison of $244,281 was
recorded as the value of this acquisition (reverse merger). The Company issued
350,000 shares to an investment banking firm for services valued at $28,000
which were rendered in connection with the transaction. R&R and Cabot were in
the training, advertising and Internet businesses.
In April 1996, the Company acquired EmaNate, a company specializing in
information systems, Internet consulting and front-page creations for web sites
on the Internet, in a business combination accounted for as a purchase. The
results of operations of EmaNate are included in the accompanying financial
statements since the date of acquisition. The Company issued 200,000 shares of
common stock for all of the outstanding stock of EmaNate. The acquisition
resulted in goodwill of $224,507. The Company is amortizing the resulting
goodwill over a five-year period.
In March 1996, the Company acquired Interactive Marketing Group, Inc. ("IMG"), a
company specializing in yellow-page advertising on the Internet, in a business
combination accounted for as a purchase. The results of operations of IMG are
included in the accompanying financial statements since the date of acquisition.
The Company issued 204,350 shares of common stock (of which 151,788 shares are
being held in escrow contingent
F-15
<PAGE> 81
on specified events occurring in the future) for all of the outstanding stock of
IMG. In December 1996, the Company canceled the 151,788 shares held in escrow as
the specified events did not occur.
In August 1997, the Company issued 36,821 unregistered shares of common stock to
individuals who provided speaking services to the Company in 1997. The Company
recorded compensation expense of $165,695 related to this stock issuance (See
Note 11).
In October 1997, the Company completed the issuance of common stock to qualified
investors in a private placement. At December 31, 1997, 316,923 shares were
issued at a price per share of $3.25. The Company received net proceeds of
$1,030,000. In December 1997, the Company also issued these investors 205,990
warrants with the same terms as the warrants in the private placement of
Preferred Stock discussed below. The common shares and warrants issued are not
registered.
In October 1997, the Company purchased 112,500 shares of common stock from
certain shareholders at a price of $3.60 per share.
In November 1997, the Company received $500,000 in financing from four
individuals in the form of notes bearing 10 percent interest. The notes were
convertible into 9 percent Convertible Preferred A Shares (Preferred Stock) in
increments of $25,000. In December 1997, $425,000 of principal was converted
into 106,250 shares of preferred stock and warrants under the terms of the
private placement discussed below. The remaining balance of the notes and
interest was paid in cash in December 1997.
In December 1997, the Company completed the issuance of Preferred Stock and
warrants to purchase common stock to qualified investors in a private placement.
At December 31, 1997, 5,000,000 shares of preferred stock were issued at a price
per share of $4 and a total of 12,755,990 warrants were issued. The Company
received net proceeds (after deducting issuance costs) of $17,552,548. Each
share of preferred stock has a liquidation value of $4 and earns 9 percent
cumulative dividends, payable semi-annually in cash or preferred shares at the
discretion of management. Each preferred share can be converted at any time into
1.25 shares of common stock. This conversion ratio is subject to adjustment
under certain circumstances, and if the Company is unable to secure waivers from
each of the preferred stockholders, each preferred share will convert into 1.389
shares of common stock. Each warrant may be exercised for .125 common shares,
subject to certain anti-dilution provisions, at a price of $3.20 per share,
beginning December 19, 1998 and extending for a period of four years. All
investors in the private placement agreed to a one-year lock-up of the preferred
shares, the warrants, and the common shares issuable upon the conversion of
preferred shares or exercise of the warrants. Preferred and common shares vote
as one class, and each preferred share is entitled to 1.25 votes while each
common share is entitled to one vote. The common shares, preferred shares, and
warrants issued in this offering were not registered. The Company is required to
use best efforts to register the warrants and all common shares issuable upon
the conversion of the preferred shares or exercise of warrants within seven
months of the initial closing date of December 5, 1997.
As additional compensation for completion of the private placement, the Company
issued 1,500,000 warrants to the placement agent and 375,000 warrants to their
financial advisors. Each warrant may be exercised for one common share, subject
to certain anti-dilution provisions, at a price of $3.20 per share from December
15, 1997 to December 5, 2002.
In December 1997, the Company agreed to issue 61,555 shares of common stock to
individuals who provided speaking services to the Company in 1997. The Company
recorded compensation expense of $195,746 and an accrued expense related to
these agreements.
(8) STOCK OPTIONS
The Company has granted incentive stock options and nonqualified stock options
to officers, directors and key employees under a stock compensation plan at
prices not less than fair market value on the date of grant. The
F-16
<PAGE> 82
incentive and nonqualified stock options become exercisable between one and four
years from the grant date. The incentive stock options have a maximum term of
ten years from the date of grant, or five years if the employee is a ten-percent
stockholder. The nonqualified stock options have a maximum term of ten years and
one day from the date of grant. There are no shares available for future grants
of stock options.
A summary of the status of the Company's stock option plan and changes in
outstanding options is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE
------- ---------
<S> <C> <C>
Options outstanding at
December 31, 1996 -- $ --
Options granted 954,970 4.81
Options exercised -- --
Options canceled -- --
-------
Options outstanding at
December 31, 1997 954,970 $ 4.81
=======
Options exercisable at
December 31, 1997 153,014 $ 4.22
=======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING EXERCISABLE
PRICE AT 12/31/97 LIFE AT 12/31/97
-------- ----------- --------- -----------
<S> <C> <C> <C> <C>
$ 4.00 375,000 10 125,000
$ 5.20 482,765 5 28,014
$ 6.00 97,205 5 --
------- -------
954,970 153,014
======= =======
</TABLE>
In accordance with the terms of APB No. 25, the Company records no compensation
expense for its stock option awards. As required by SFAS No. 123, the Company
provides the following disclosure of hypothetical values for these awards. The
weighted-average grant-date fair value of options granted during 1997 was
estimated to be $3.44. The value was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for 1997:
risk-free interest rate of 5.79 percent; expected life of 3.5 years; expected
volatility of 134 percent; and no expected dividends. Had compensation expense
been recorded based on these hypothetical values, the Company's net loss for
December 31, 1997 would have been $5,208,696 or $.69 per share. Because options
vest over several years and additional option grants are expected, the effects
of these hypothetical calculations are not likely to be representative of
similar future calculations.
(9) RELATED-PARTY TRANSACTIONS
The Company pays certain related parties for advertising, rent and computer
graphic design. Sierra Advertising received $1,794,237 in 1997 and $2,116,607 in
1996 for advertising expenses, all of which is distributed directly for
advertising costs, and is owned by officers of the Company. The purpose for the
existence of Sierra
F-17
<PAGE> 83
Advertising is to pass through certain costs of advertising at reduced rates.
The Company believes that funds paid to Sierra Advertising are used by Sierra
Advertising for the purchase of air time for advertising (See Note 11).
The share exchanges described in footnote 7, involved certain executive officers
of the Company.
The Company's offices located in Provo, Utah are leased from RDR Properties for
$12,108 per month, which lease expires in March 1999. Two officers/directors
each own 33.33 percent of RDR Properties (See Note 11).
The Company retained Geller & Friend Capital Partners, Inc. ("Geller & Friend"),
a merchant banking firm, in August 1997 to assist in arranging equity financing.
Geller & Friend earned a fee of $150,000 and was granted 375,000 warrants in
connection with its role in the private placement completed in December 1997. Of
the $150,000 fee, Geller & Friend was paid $50,000 in 1997, and will be paid the
remaining $100,000 in equal quarterly installments during 1998. Marshall Geller,
chairman and chief executive officer of Geller & Friend, became a director of
the Company in January 1998. Also in January 1998, the Company employed Anthony
Mazzarella, formerly managing director of Geller & Friend, as its Executive Vice
President and Chief Financial Officer. Mr. Mazzarella is also a director of the
Company.
(10) EARNINGS PER SHARE
Earnings per share amounts have been reflected in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Earnings per share
are computed as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net loss from continuing operations $(2,586,159) $(2,348,301)
Add preferred stock dividends (96,067) --
----------- -----------
Loss from continuing operations
available for common stock $(2,682,226) $(2,348,301)
=========== ===========
Weighted-average common stock outstanding 7,526,967 7,252,584
=========== ===========
Basic and diluted loss per common share $ (0.36) $ (0.32)
=========== ===========
</TABLE>
The earnings per share computation for 1997 excludes 954,970 shares for stock
options/compensation plans, 6.25 million shares for convertible securities, and
warrants convertible into 3.5 million shares of common stock because their
effect would have been antidilutive. There were no common stock equivalents in
existence during 1996.
(11) SUBSEQUENT EVENT DATED AUGUST 28, 1998
Effective August 28, 1998, the Company discontinued the operations of its
seminar and training division. The Company also discontinued operations of R&R
Advertising and Cabot, Richards and Reed, Inc. The discontinued operations
historically have accounted for approximately 95% of the revenues of the
Company, and operated at a loss in 1997. In accordance with generally accepted
accounting principles, the operations of this division have been included in the
accompanying income statements as loss from discontinued operations. The
following is a summary of the revenue and expenses related to the discontinued
operations for the year ended December 31, 1997 and 1996:
F-18
<PAGE> 84
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Net revenues $ 15,803,026 $ 15,370,121
Cost of revenues 4,838,627 5,166,674
Selling expenses 8,770,739 3,129,012
General and administrative expenses 4,396,535 4,777,120
Other Income 139,729 113,417
Interest (Expense) Income, net (53,669) 2,387
------------ ------------
(Loss) Income from discontinued operations $ (2,116,815) $ 2,413,119
============ ============
</TABLE>
In accordance with generally accepted accounting principles, all assets and
liabilities of this division have been reflected in the accompanying balance
sheet as net long term assets and net short term liabilities of discontinued
operations. The components of the net assets of the discontinued operations to
be sold included in the accompanying consolidated balance sheet are as follows:
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 761,851
Accounts receivable - trade, net 80,271
Inventory 134,843
Prepaid expenses 51,107
Less current liabilities:
Accounts payable 888,426
Accrued expenses 452,298
Deferred revenues 319,456
Notes payable to related parties 662,420
Current portion of capitalized lease obligations 14,934
----------
Net short-term liabilities $1,309,462
==========
Long-term assets:
Net property and equipment $ 272,867
Net Intangibles 533
Less long-term liabilities:
Capitalized Lease Obligations, net
of current portion 10,788
----------
Net long-term assets $ 262,612
==========
</TABLE>
F-19
<PAGE> 85
The Company is currently engaged in discussions for the sale of the assets
associated with the division. The Company expects to sell the division's assets
for approximately their net book value and does not expect to recognize a
material loss as a result of the transaction.
The interest paid by the discontinued operations was $53,669 and $7,158 for the
years ended December 31, 1997 and 1996, respectively.
As of December 31, 1997 the discontinued operations had leased office equipment
totaling $95,637 and obligations under capital leases of $25,722.
In 1997, the Company issued 36,821 unregistered shares to individuals who
provided speaking services to the Company in connection with its discontinued
operations. The compensation expense of $165,695 is included in the loss from
discontinued operations in the accompanying income statement.
As of December 31, 1997 the Company had notes payable of $662,420 which were
borrowed by the Company to fund its discontinued operations. As a result, entire
amount is classified as short-term liabilities of discontinued operations in the
accompanying balance sheet.
The discontinued operations incurred rent expense of approximately $145,000 and
$118,000 in connection with its operating lease during the years ended December
31, 1997 and 1996, respectively. The total payment under operating leases
subsequent to December 31, 1997 for the discontinued operations is approximately
$182,000.
The discontinued operations did not create any material amount of severance
liability and their are no longer any employees sharing in the net profits of
the Company.
All services received by the Company from Sierra Advertising and RDR properties
related to the discontinued operations and are not expected to recur in the
future. The officers/directors with an interest in Sierra Advertising and RDR
Properties are no longer employed by the Company and do not serve as officers or
directors of the Company.
(12) Events subsequent to date of Auditors Report (Unaudited)
On October 30, 1998, the Company entered into agreements with First Data
Merchant Services Corporation, a Florida corporation ("FDMS"), relating to the
issuance of common stock of the Company, par value $.008 per share (the "Common
Stock"), and warrants to purchase shares of Common Stock of the Company to FDMS
and the joint marketing of certain Internet commerce services by the Company and
FDMS.
Under the terms of an Investment Agreement, FDMS purchased 1.54 million shares
of Common Stock at a cash price of $7.00 per share and, subject to approval by
shareholders of the Company in satisfaction of the rules of The Nasdaq Stock
Market, will purchase an additional 460,000 shares of Common Stock at a cash
price of $7.00 per share. Immediately after its initial purchase of 1.54 million
shares of Common Stock, FDMS held 16.6% of the Common Stock of the Company then
outstanding, and 7.4% of such Common Stock on a fully diluted basis after giving
effect to the exercise or conversion of all then outstanding warrants, options
and convertible securities. After giving effect to the anticipated purchase by
FDMS of the additional 460,000 shares of Common Stock, FDMS would have held at
such time 21.5% of the Common Stock of the Company then
F-20
<PAGE> 86
outstanding, and 9.6% of such Common Stock on a fully diluted basis after giving
effect to the exercise or conversion of all then outstanding warrants, options
and convertible securities. Although definitive agreements with FDMS were
entered into on October 30, 1998, the purchase price of $7.00 per share was
agreed upon by representatives of FDMS and the Company during the third week of
October, at which time the market price of the Company's Common Stock had been
below such price for more than one week.
The Investment Agreement further provides that FDMS may earn warrants to
purchase up to 5 million shares of Common Stock at an exercise price of $17.00
per share. The warrants are earned if at any time through the second anniversary
of the successful testing of the systems and technologies provided by the
Company to logistically support the Company's Internet shopping mall to be used
by FDMS, FDMS has implemented either 25,000 merchant web sites using the
Company's e-commerce services or 50,000 total merchant web sites using any
Company products or services. The warrants, if issued, will expire in October
2003, and may be redeemed, at the option of the Company, at a redemption price
equal to 0.266 shares of Common Stock per warrant share if the market price of
the Common Stock is equal to or exceeds $25.50 for at least twenty out of thirty
consecutive trading days. FDMS also received certain registration rights
covering the Common Stock and the shares underlying the warrants. The Investment
Agreement also provides that FDMS will be subject to certain standstill
restrictions and generally will be restricted from owning more than 39.9% of the
Company's voting securities as calculated pursuant to the terms of the
Investment Agreement.
From January 1, 1998 through November 23, 1998, the Company granted a total of
1,004,100 new stock options, 65,477 options were exercised and 87,770 options
were cancelled during this period bringing the total outstanding options at
November 23, 1998 to 1,805,823.
The Federal Trade Commission ("FTC") has conducted a nonpublic investigation of
the Company's Internet related business opportunity programs. The Company has
entered into settlement discussions with the FTC. In connection therewith, the
Company has reserved $750,000, representing the Company's present estimate of
the amount required to settle the investigation. There can be no assurance,
however, that the Company will be able to reach a settlement with the FTC for
such amount, if at all. If the Company is unable to reach a settlement, the FTC
could bring a formal action seeking substantial monetary damages or injunctive
relief, or both, which if ultimately resolved unfavorably to the Company, could
have a material adverse effect on the Company's financial condition and
earnings.
F-21
<PAGE> 87
IMALL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,834,825 $ 4,775,127
Short term investments -- 10,000,600
Accounts receivable, net 125,940 57,419
Prepaid expenses 846,332 18,113
Income tax receivable 166,231 166,231
Other current assets 34,573 119,207
------------ ------------
Total Current Assets 6,007,901 15,136,697
------------ ------------
Property and Equipment, Net 1,776,471 337,610
------------ ------------
Other Assets:
Intangible assets, net 184,210 258,482
Deposits and other assets 57,721 21,411
Net long term assets of discontinued operations 254,786 262,612
------------ ------------
Total Other Assets 496,717 542,505
------------ ------------
Total Assets $ 8,281,089 $ 16,016,812
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 502,160 $ 172,373
Accrued expenses and other current liabilities 1,414,562 101,539
Deferred revenues 345,137 73,322
Current portion of capitalized lease obligations -- 5,901
Net short term liabilities of discontinued operations -- 1,309,462
------------ ------------
Total Current Liabilities 2,261,859 1,662,597
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, liquidation value of
$20,000,000; 10,000,000 shares
authorized, 5,000,000 shares issued
and outstanding at September 30, 1998 and
December 31, 1997 19,611,778 19,355,788
Common stock, par value $.008; 37,500,000
shares authorized, 7,743,082 and 7,651,810
shares issued and outstanding at
September 30, 1998 and December 31,
1997 respectively 62,897 62,114
Accumulated deficit (13,250,445) (4,658,687)
Common stock held in treasury, at cost (405,000) (405,000)
------------ ------------
Total Stockholders' Equity 6,019,230 14,354,215
------------ ------------
Total Liabilities and Stockholders' Equity $ 8,281,089 $ 16,016,812
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE> 88
IMALL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUES $ 842,386 $ 754,226
COST OF REVENUES 168,841 135,545
----------- -----------
Gross Margins 673,545 618,681
SELLING EXPENSES 1,445,450 --
PRODUCT DEVELOPMENT 1,581,097 507,397
GENERAL AND ADMINISTRATIVE EXPENSES 3,870,962 2,029,588
----------- -----------
Loss from operations (6,223,964) (1,918,303)
----------- -----------
OTHER INCOME (EXPENSES):
Other Income, net 75,957 --
Interest Income (Expense), net 428,623 (4,566)
----------- -----------
Total Other Income (Expense), net 504,580 (4,566)
----------- -----------
Loss before provision for
Income taxes (5,719,384) (1,922,869)
PROVISION FOR INCOME TAXES -- (115,006)
----------- -----------
LOSS FROM CONTINUING OPERATIONS (5,719,384) (2,037,875)
LOSS FROM DISCONTINUED OPERATIONS (1,883,406) (668,172)
----------- -----------
NET LOSS $(7,602,790) $(2,706,047)
=========== ===========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Loss from continuing operations $ (0.92) $ (0.27)
Loss from discontinued operations $ (0.24) $ (0.09)
----------- -----------
NET LOSS $ (1.16) $ (0.36)
=========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING 7,703,591 7,447,285
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE> 89
IMALL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (5,719,384) $(2,037,875)
Adjustments to reconcile net
loss to net cash used in operating activities
Depreciation and amortization 438,492 120,719
Provision for losses on accounts receivable 30,000 12,923
Provision for losses on notes receivable 109,105 --
Provision for income taxes -- 115,006
Changes in assets and liabilities, net of effects from purchase of
subsidiaries:
(Increase) decrease in:
Accounts receivable (98,521) (43,623)
Prepaid expenses (828,219) 6,045
Income tax receivable -- 276,940
Other current assets (11,224) 160,536
Deposits (36,310) (4,323)
Increase (decrease) in:
Accounts payable 329,787 93,639
Accrued liabilities 1,458,769 313,757
Deferred revenues 271,815 (22,500)
------------ -----------
Net Cash Used in Operating Activities (4,055,690) (1,008,756)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,816,328) (26,541)
Proceeds from sales and maturity of investments in marketable securities 10,000,600 --
------------ -----------
Net Cash Provided by (Used In) Investing Activities 8,184,272 (26,541)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 187,618 --
Proceeds from private placement of common stock -- 875,000
Financing cost related to equity funding (76,591) --
Principal payments on notes payable -- (12,500)
Proceeds from notes payable to related parties -- 175,303
Proceeds from repayment of notes receivable -- 75,750
Dividends paid on preferred stock (988,968) --
Principal payments on obligations under capital leases (5,901) (4,362)
------------ -----------
Net Cash (Used In) Provided by Financing Activities (883,842) 1,109,191
------------ -----------
Cash provided by continuing operations 3,244,740 73,894
Cash used in discontinued operations (3,185,042) (95,077)
------------ -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,698 (21,183)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,775,127 57,055
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,834,825 $ 35,872
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 222 $ 4,566
============ ===========
Income taxes paid $ 1,800 $ --
============ ===========
</TABLE>
See notes to condensed consolidated financial statements
F-24
<PAGE> 90
IMALL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Interim Condensed Consolidated Financial Statements.
The accompanying condensed consolidated financial statements have been prepared
by the Company and have not been audited. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows as of the
dates and for the periods presented herein have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form 10K-SB.
The results of operations for the nine months ended September 30, 1998, are not
necessarily indicative of the operating results for the year ended December 31,
1998. The accounting policies followed by the Company are set forth in the notes
to the Company's consolidated financial statements in its Form 10K-SB.
(2) Discontinued Operations.
Effective August 28, 1998, the Company discontinued the operations of its
seminar and training division. The Company is currently engaged in discussions
for the sale of the assets associated with the division. The Company expects to
sell the division's assets for approximately their net book value and does not
expect to recognize a loss as a result of the transaction. The division
historically has accounted for approximately 95% of the revenues of the Company,
and operated at a loss in 1997 and to date in 1998. In accordance with generally
accepted accounting principles, the operations of this division have been
included in the accompanying income statements as loss from discontinued
operations and all assets and liabilities of this division have been reflected
in the accompanying balance sheets as net long term assets and net short term
liabilities of discontinued operations.
F-25
<PAGE> 91
(3) Net (Loss) Per Common Share.
Net (loss) per common share is based on the weighted average number of common
shares outstanding for each period reported. In February 1997, the Financial
Accounting Standards Board released Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS No. 128"). This statement specifies the
computation, presentation, and disclosure requirements for earnings per share
("EPS") for financial statements issued for all periods ending after December
15, 1997. SFAS No. 128 simplifies the standards for computing EPS in comparison
to APB Opinion No. 15 and replaces the presentations of Primary EPS and Fully
Diluted EPS with a presentation of Basic EPS and Diluted EPS. In preparing the
calculation of earnings per share, the net loss was increased by $1,350,000 to
$8,953,000 or $1.16 per common share for the nine months ended September 30,
1998 due to the effect of cumulative preferred stock dividends. The earnings per
share computation for the 1998 period excludes 1.8 million shares for stock
options/compensation plans, 6.25 million shares for convertible securities, and
warrants convertible into 3.5 million shares of common stock because their
effect would have been antidilutive. There were no common stock equivalents in
existence during the first three quarters of 1997.
Share and per share data presented reflect a one for eight reverse stock split
effective February 12, 1998.
F-26
<PAGE> 92
<TABLE>
<S> <C>
===================================================== ============================================
No dealer, salesperson or other person has
been authorized to give any information or
to make any representation other than those iMALL, INC.
contained in this Prospectus in connection
with the offer made by this Prospectus. If
given or made, such information or
representations must not be relied upon as
having been authorized by the Company or
the Underwriters. Neither the delivery of
this Prospectus nor any sale made hereunder
shall under any circumstances create any COMMON STOCK
implication that there has been no change AND
in the affairs of the Company since the WARRANTS
date hereof. This Prospectus does not
constitute an offer to, or solicitation
anyone in any jurisdiction in which such
offer or solicitation is not authorized or
in which the person making such offer or
solicitation is not qualified to do so or
to anyone to whom it is unlawful to make
such offer or solicitation.
--------------------
_____________
TABLE OF CONTENTS
Page PROSPECTUS
Prospectus Summary............................. 3 _____________
Risk Factors................................... 8
Use of Proceeds................................ 15
Market Price for the Common Stock.............. 16
Capitalization................................. 17
Dividend Policy................................ 18
Management's Discussion and Analysis
or Plan of Operation................. 19
Business....................................... 23
Management..................................... 33
Security Ownership of Certain Beneficial
Owners and Management................ 40
Certain Transactions .......................... 43
Description of Securities...................... 44
Plan of Distribution........................... 48
Selling Securityholders........................ 49
Shares Eligible for Future Sale................ 63
Legal Matters.................................. 63
Experts........................................ 63
Changes in Registrant's
Certifying Accountants............... 64
Additional Information......................... 64 _______________, 1998
Index to Financial Statements.................. F-1
--------------------
Until __________, 1998 (25 days after the date of
this Prospectus), all dealers effecting transactions
in the registered securities offered hereby, whether
or not participating in the Offering, may be required
to deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their
unsold allotments or subscriptions.
===================================================== =============================================
</TABLE>
<PAGE> 93
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As authorized by Section 78.751 of the Nevada General Corporation
Law, the Company may indemnify its officers and directors against expenses
incurred by such persons in connection with any threatened, pending or completed
action, suit or proceedings, whether civil, criminal, administrative or
investigative, involving such persons in their capacities as officers and
directors, so long as such persons acted in good faith and in a manner which
they reasonably believed to be in the best interests of the Company. If the
legal proceeding, however, is by or in the right of the Company, the director or
officer may not be indemnified in respect of any claim, issue or matter as to
which he is adjudged to be liable for negligence or misconduct in the
performance of his duty to the Company unless a court determines otherwise.
Under Nevada law, corporations may also purchase and maintain
insurance or make other financial arrangements on behalf of any person who is or
was a director or officer (or is serving at the request of the corporation as a
director or officer of another corporation) for any liability asserted against
such person and any expenses incurred by him in his capacity as a director or
officer. These financial arrangements may include trust funds, self insurance
programs, guarantees and insurance policies.
Article 6.E of the Articles of Incorporation of the Company, as
amended, and Article 5 of the Bylaws of the Company provide that, to the fullest
extent permitted by law, directors of the Company will not be liable for
monetary damages to the Company or its shareholders for breaches of their
fiduciary duties.
The Company maintains Director and Officer liability insurance with
an aggregate coverage amount of $10,000,000.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses for the issuance and distribution of the
Securities registered hereby are set forth in the following table:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ------
<S> <C>
SEC Registration Fee............................. $ 21,256
Transfer Agent Fees.............................. 200
Legal Fees....................................... 60,000
Accounting Fees.................................. 15,000
Printing and Engraving Costs..................... 4,500
Miscellaneous.................................... 2,590
--------
Total $103,546
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following list shows all sales of unregistered securities in the
past three years. The information has been adjusted to take in to account all
stock splits, including a 1 for 19 reverse stock split in January 8, 1996, the 4
for 1 forward stock split in May 22, 1996 and a 1 to 8 reverse stock split on
February 12, 1998. All shares of securities issued in these transactions bear
restrictive legends. Unless otherwise noted, the consideration given in each of
the share exchanges was all of the outstanding common stock of the other
constituent company. No underwriters or agents were involved in any of the share
exchanges. Each share exchange was exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"), as issuances
not involving a public offering. The consideration in the International
Marketing Associates private placement was
II-1
<PAGE> 94
services in the nature of promotional work at industry conventions, and was
intended to approximate the value of the services they were to render for the
Company at such conventions. This private placement was exempt from registration
pursuant to Regulation D of the Securities Act as an issuance not involving a
public offering. All persons receiving shares in the transactions described
below were allowed access to the Company's books and records and made
representations to the Company that they were acquiring shares of the Company's
common stock for their own account and for investment purposes only.
Share Exchange with Madison York & Associates, Inc. January 16, 1996
Number of shares issued: 2,103,112
The number of shares listed in the Company's Statement of Stockholders' Equity
in connection with this transaction consists of the 2,103,112 shares issued to
the shareholders of Madison York & Associates, Inc., and 2,701,848 shares
existing in connection with the reverse acquisition accounting.
Share Exchange with Cabot Richards & Reed, Inc. January 16, 1996
Number of shares issued: 1,400,000
Share Exchange with R&R Advertising, Inc. January 16, 1996
Number of shares issued: 600,000
Share Exchange with Inter Active Marketing Group, Inc. March 5, 1996
Amount of shares issued: 52,563
In addition, 151,787 shares were placed in escrow in accordance with certain
earn-out provisions in the Company's share exchange agreement with IMG. The
Company has since retired such shares with the consent of IMG because it became
clear that IMG would not obtain the targets for the earn-out provisions.
Share Exchange with e.m.a.N.a.t.e., Inc. April 26, 1996
Amount of shares issued: 200,000
In January 1996, the Company also issued 350,000 shares to an investment banking
firm for services valued at $28,000 which were rendered in connection with the
reverse acquisition. No relationship existed between the Company and the
investment banking firm prior to the services performed.
The Company issued 315,384 shares of common stock in August,
September and October 1997 at a purchase price of $3.25 per share to private
investors in a transaction exempt from registration under Section 4(2) of the
Securities Act and Regulation D thereunder as an issuance not involving a public
offering. Additionally, in January 1998, the Company issued to such investors
warrants to purchase an aggregate of 25,749 of the Company's common stock at an
exercise price of $3.20 per share, subject to adjustment. No agents or
underwriters were involved in this transaction.
The Company issued 200 "Units" at a price of $100,000 per unit in
December 1997. Each Unit consisted of (i) 25,000 shares of the Series A 9%
Convertible Preferred Stock, par value $.001 per share, each convertible into
1.25 shares of the Company's common stock, and (ii) warrants to purchase 7,813
shares of the Company's common stock at an exercise price of $3.20 per share,
subject to adjustment. This transaction was exempt from registration under
Section 4(2) of the Securities Act and Regulation D thereunder as an issuance
not involving a public offering. Commonwealth Associates acted as placement
agent in this transaction and received a fee of $2,000,000, plus expenses, and
warrants to purchase 1,500,000 shares of the Company's common stock at an
exercise price of $3.20 per share, subject to adjustment. Prior to the initial
closing of the Units, the Company issued warrants to purchase an aggregate of
6,250 shares of the Company's Common Stock at an exercise price of $3.20 per
share for making certain bridge loans to the Company. The issuance was in a
transaction exempt from registration under Section 4(2) of the Securities Act
and Regulation D thereunder.
II-2
<PAGE> 95
In August 1997, the Company issued 36,821 shares of Common Stock,
and in December 1997, the Company issued 59,208 shares of Common Stock, to
consultants for services rendered in connection with Internet training and
consulting. The issuances were in transactions exempt from registration under
Section 4(2) of the Securities Act.
On November 2, 1998, the Company issued 1,540,000 shares of Common
Stock to FDMS at a cash price of $7.00 per share and, subject to approval by the
shareholders of the Company, the Company has agreed to sell an additional
460,000 shares of Common Stock at a cash price of $7.00 per share. The issuance
was in a transaction exempt from registration under Section 4(2) of the
Securities Act and Regulation D thereunder.
II-3
<PAGE> 96
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Title
- ------- -----
<S> <C>
3.1 Articles of Incorporation, as amended, as filed with the Nevada Secretary of State(1)
3.2 By-laws, as amended(2)
5.1 Opinion of Loeb & Loeb LLP
10.1 Software License and Distribution Agreement between the Company and AT&T(1)
10.2 Agreement with Positive Response T.V.(1)
10.3 Memorandum of Understanding between the Company and Softbank(1)
10.4 Employment Agreement with Richard Rosenblatt(3)
10.5 Employment Agreement with Anthony Mazzarella(3)
10.6 Employment Agreement with Phillip Windley(3)
10.7 Employment Agreement with Steve Rossow(3)
10.8 Employment Agreement with Stephen Fulling(3)
10.9 Services and License Agreement between the Company and Koinonia System Co. Ltd.(3)
10.10 On line Commerce Representation Agreement between Universal/Hyundai LLC dba Animalhouse.com and the Company,
dated April 1, 1998(4)
10.11 Investment Agreement dated as of October 30, 1998 by and between the Company and FDMS Corporation(2)
10.12 Stockholders Agreement dated as of October 30, 1998 by and between the Company, FDMS Corporation,
Richard M. Rosenblatt, Mark R. Comer and Craig R. Pickering(2)
10.13 Registration Rights Agreement dated as of October 30, 1998 by and between the Company and FDMS Corporation(2)
10.14 Form of Warrant issuable to FDMS Corporation pursuant to the Investment Agreement dated as of October 30, 1998
by and between the Company and FDMS Corporation(2)
10.15 Development and Marketing Agreement dated as of October 30, 1998 by and between the Company and FDMS Corporation(2)
10.16 Form of Source Code Escrow Agreement dated as of October 31, 1998 by and among the Company, Data Securities
International, Inc. and FDMS Corporation(2)
21.1 Subsidiaries of Registrant(1)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Loeb & Loeb LLP (included in the opinion to be filed as Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Amended Financial Data Schedule
</TABLE>
- --------------------
(1) Incorporated by reference to the Exhibits to the Registration
Statement on Form 10-SB as filed with the Securities and Exchange
Commission on August 4, 1997.
(2) Incorporated by reference to the Exhibits to the Quarterly Report on
Form 10-QSB as filed with the Securities and Exchange Commission on
November 12, 1998
(3) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Registration Statement on Form 10-SB as filed with the Securities
and Exchange Commission on February 3, 1997.
(4) Incorporated by reference to the Exhibits to the Quarterly Report on
Form 10-QSB as filed with the Securities and Exchange Commission on
May 14, 1998.
II-4
<PAGE> 97
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts
or events which, individually or together, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) To include any material information
with respect to the plan of distribution not previously disclosed in the
Registration Statement.
(2) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described above in Item 24,
or otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction of the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the
Securities Act, to treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it effective.
(4) For the purpose of determining any liability under
the Securities Act, to treat each post-effective amendment that contains a form
of prospectus as a new registration statement for the securities offered in the
Registration Statement, and the offering of such securities at that time as the
initial bona fide offering of those securities.
II-5
<PAGE> 98
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Los
Angeles, State of California, on the 24th day of November, 1998.
iMALL, INC.
By: /s/ Richard M. Rosenblatt
------------------------------------
Richard M. Rosenblatt
Chairman and Chief Executive Officer
II-6
<PAGE> 99
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard M. Rosenblatt, as his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement on Form SB-2 of iMall, Inc., and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, grant unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the foregoing, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933,
as amended, this Registration Statement has been signed by the following persons
in the capacities and on the date stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Richard M. Rosenblatt Chairman and Chief November 24, 1998
- -------------------------- Executive Officer
Richard M. Rosenblatt
* Executive Vice President, November 24, 1998
- -------------------------- Secretary/Treasurer,
Anthony P. Mazzarella Chief Financial Officer
and Director
* Director November 24, 1998
- --------------------------
Marshall S. Geller
* Director November 24, 1998
- --------------------------
Harold S. Blue
* Director November 24, 1998
- --------------------------
Leonard M. Schiller
* Director November 24, 1998
- --------------------------
Howard A. Goldberg
* Director November 24, 1998
- --------------------------
Richard H. Rogel
* Previously filed.
</TABLE>
II-7
<PAGE> 1
EXHIBIT 5.1
[LOEB & LOEB LLP LETTERHEAD]
November 24, 1998
iMall, Inc.
233 Wilshire Boulevard, Suite 820
Santa Monica, CA 90401
Ladies and Gentlemen:
We have acted as counsel to iMall, Inc., a Nevada corporation (the
"Company"), in connection with the preparation and filing with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), of a Registration Statement on Form SB-2 (the "Registration
Statement"), relating to the proposed sale by certain shareholders of the
Company (the "Selling Stockholders") of (i) 317,192 shares of common stock, par
value $0.008 per share ("Common Stock") issued to certain investors in a private
placement completed in October 1997; (ii) 6,945,006 shares of Common Stock
issuable upon conversion of 5,000,004 shares of the Company's 9% Convertible
Preferred Stock issued in a private placement in December 1997 (the "Convertible
Preferred Stock"); (iii) 1,568,751 shares of Common Stock underlying warrants
issued in connection with the December 1997 private placement, which entitles
the holder to purchase .125 share of Common Stock exercisable at $3.20 per
share, subject to adjustment in certain circumstances (the "Initial Warrants");
(iv) 12,550,005 Initial Warrants issued in connection with the December 1997
private placement; (v) 1,500,000 warrants issued to Commonwealth Associates, in
connection with the December 1997 private placement, to purchase one share of
Common Stock exercisable at $3.20 per share, subject to adjustment in certain
circumstances (the "Placement Agent Warrants"); (vi) 1,500,000 shares of Common
Stock underlying the Placement Agent Warrants; (vii) 205,990 warrants issued to
a group of investors in connection with the October 1997 private placement to
purchase .125 share of Common Stock exercisable at $3.20 per share, subject to
adjustment in certain circumstances (the "Investor Warrants"); (viii) 25,749
shares of Common Stock underlying the Investor Warrants; (ix) 375,000 warrants
issued to the Company's financial advisors in connection with the December 1997
private placement to purchase one share of Common Stock exercisable at $3.20 per
share, subject to adjustment in certain circumstances (the "Additional
Warrants"); and (x) 375,000 shares of Common Stock underlying the Additional
Warrants. The Initial Warrants, Placement Agent Warrants, Investor Warrants and
the Additional Warrants are referred to herein as the "Warrants." The Common
Stock offered pursuant to the Registration Statement and the Common Stock
underlying the Convertible Preferred Stock and the Warrants together with the
Warrants are referred herein as the "Securities."
<PAGE> 2
iMall, Inc.
November 24, 1998
Page 2
In so acting, we have examined and relied upon the originals or copies,
certified or otherwise identified to our satisfaction, of such Company records,
documents, certificates and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinions expressed below. Based upon
the foregoing and such examination of law as we have deemed necessary, we are of
the opinion that:
1. The Securities to be offered by the Selling Stockholders, when sold
under the circumstances contemplated in the Registration Statement, will be
legally issued, fully paid and non-assessable.
2. The shares of Common Stock issuable upon exercise of the Warrants,
when issued upon exercise of the Warrants in accordance with their terms, will
be legally issued, fully paid and non-assessable.
We consent to the use of this letter as an Exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" included
in the Prospectus forming a part of the Registration Statement.
By: /s/ DAVID L. FICKSMAN
-------------------------------------
David L. Ficksman,
a Partner of the Firm
<PAGE> 1
EXHIBIT 23.1
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of
our reports (and to all references to our Firm) included in or made a part of
this registration statement.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
November 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,834,825
<SECURITIES> 0
<RECEIVABLES> 215,940
<ALLOWANCES> 90,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,007,901
<PP&E> 2,447,409
<DEPRECIATION> 670,938
<TOTAL-ASSETS> 8,281,089
<CURRENT-LIABILITIES> 2,261,859
<BONDS> 0
0
19,611,778
<COMMON> 62,897
<OTHER-SE> (405,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,281,089
<SALES> 0
<TOTAL-REVENUES> 842,386
<CGS> 0
<TOTAL-COSTS> 168,841
<OTHER-EXPENSES> 6,897,509
<LOSS-PROVISION> 159,105
<INTEREST-EXPENSE> 222
<INCOME-PRETAX> (5,719,384)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,719,384)
<DISCONTINUED> (1,883,406)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,602,790)
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
</TABLE>
