<PAGE>
As filed with the Securities and Exchange Commission on October 8, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
__________________________________
IMAGINON, INC.
(Exact name of Registrant specified in charter)
Delaware 7372 84-1217733
(State or Jurisdiction of (Primary Standard (IRS Employer
Incorporation or organization) Industrial Code) Identification No.)
1313 LAUREL STREET, SUITE 1
SAN CARLOS, CALIFORNIA 94070
PHONE 650-596-9300
(Address, including zip code, and telephone number, including area code,
Registrant's principal executive offices)
DAVID M. SCHWARTZ
1313 LAUREL STREET, SUITE 1
SAN CARLOS, CALIFORNIA 94070
PHONE 650-596-9300
(Name, address and telephone number, including area code, of agent for service)
Copies of communication, including all communication sent to the
agent for service, should be sent to:
GERALD RASKIN, ESQ.
JOHN W. KELLOGG, ESQ.
FRIEDLOB SANDERSON RASKIN PAULSON & TOURTILLOTT, LLC
1400 GLENARM PLACE, SUITE 300
DENVER, COLORADO 80202
(303) 571-1400
_____________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement as determined by
market conditions.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check this following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offer. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------
Title of each class of securities to Amount to be Proposed Proposed Amount of
be registered Registered Maximum Maximum Registration
Offering Price Per Aggregate Fee
Share Offering Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock issuable upon 2,836,905 $2.34375 $6,648,997 $1,849
conversion of Series F Preferred
Stock (1)(2)
- --------------------------------------------------------------------------------------------------------------
Common Stock issuable upon 122,553 $ 2.8125 $ 344,680 $ 96
exercise of Group F warrant (2)(3)
- --------------------------------------------------------------------------------------------------------------
TOTAL 2,959,458 $6,993,677 $1,945
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to Rule 457(c), the average of the bid and ask price of ImaginOn,
Inc. common stock as quoted on the Nasdaq SmallCap Market on October 4,
1999 was 2.34375.
(2) Plus such undeterminable number of shares of Common Stock as may be issued
by reason of the antidilution provision of such Convertible Preferred Stock
or Warrants.
(3) Pursuant to Rule 457(g), the proposed maximum offering price per share of
common stock is $2.34375. The current exercise price of the Group F Warrant
is $2.8125.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
-ii-
<PAGE>
Preliminary Prospectus, Subject to Completion dated October 8, 1999
Prospectus
[LOGO OF IMAGINON(TM) APPEARS HERE]
Shares of Common Stock
This prospectus relates to the proposed sale from time to time of up to
2,959,458 shares of our common stock by the selling securityholder. These
selling securityholders acquired their shares in connection with the Series F
12% Convertible Preferred Stock transaction. We will not receive any of the
proceeds from the sale of these securities.
The selling securityholder listed on page 15 is offering:
. 1,891,270 shares of common stock issuable upon conversion of
the Series F Convertible Preferred stock
. 122,553 shares of common stock issuable upon exercise of the
Group F Warrant
The selling securityholder may sell all or any portion of its shares of
common stock in one or more transactions on the Nasdaq SmallCap Market or in
private, negotiated transactions. The selling securityholder will pay all
selling expenses, including any brokerage commissions. ImaginOn will pay the
registration fee.
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read this entire prospectus
and any amendments or supplements carefully before you make your investment
decision.
Our common stock trades on the Nasdaq SmallCap Market under the symbol
IMON. On October 5, 1999, the last reported sale price of our common stock was
$2.375 per share.
Our business materially changed after December 31, 1998.
This prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
- --------------------------------------------------------------------------------
An investment in the stock of ImaginOn involves a high degree of risk.The
shares should only be purchased by persons who can afford a complete loss. See
"Risk Factors" beginning on page 8
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
_______________________________
The date of this prospectus is _____________, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
History...................................................... -3-
Prospectus Summary........................................... -4-
Risk Factors................................................. -8-
Forward Looking Statements................................... -12-
Use of Proceeds.............................................. -12-
Dividend Policy.............................................. -12-
Price Range of Our Common Stock.............................. -13-
Selling Securityholder....................................... -13-
Selected Financial Data...................................... -15-
Business..................................................... -16-
Management Discussion and Analysis
of Financial Condition and Results..................... -28-
Management................................................... -40-
Certain Relationships and Related Transactions............... -48-
Description of Securities.................................... -49-
Plan of Distribution......................................... -52-
Legal Matters................................................ -53-
Experts...................................................... -53-
Where You Can Find More Information.......................... -53-
Glossary..................................................... -54-
INDEX TO FINANCIAL STATEMENTS................................ F-1
</TABLE>
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<PAGE>
History
Prior to January 20, 1999, the company operated under the name of
California Pro Sports, Inc. and we imported and distributed products in three
participant sport categories:
. in-line skates,
. hockey equipment, and
. snowboard equipment
However, we were not successful in these businesses and sold the assets
related to these businesses in 1997. During 1998 we commenced negotiations with
ImaginOn.com and on January 20, 1999 we merged with ImaginOn.com and changed our
name to ImaginOn, Inc.
You will read about our operations under the name California Pro Sports,
Inc., in several sections of this prospectus, including, the Summary Financial
Statements, Selected Historical Financial Statements, Business, Management's
Discussion and Analysis of Financial Conditions and Results of Operations, and
our Consolidated Financial Statements. However, the information you will read
about California Pro Sports, Inc. is mainly historical and does not reflect our
current operations as an information technology company. Below is a schematic
drawing of the structure of our company and its subsidiaries.
-------------------------
ImaginOn, Inc.
"ImaginOn"
("Formerly California
Pro Sports, Inc.)
-------------------------
- ---------------------- --------------------------- ----------------------
INow. Inc. ImaginOn Digital ImaginOn.com
Our Productions, Inc. Our
Internet service Our technology
division advertising development
supported content division
"INOW" production
division "ImaginOn.com"
"IDP"
- ---------------------- --------------------------- ----------------------
-3-
<PAGE>
Prospectus Summary
The following summary contains only basic information about this offering.
It likely does not contain all information that is important to you. For a more
complete understanding of this offering, we encourage you to read this entire
document, including the "Risk Factors" beginning on page 8, the financial
statements and all notes to the financial statements.
ImaginOn's Business
We are an information technology company comprised of three operating
units, ImaginOn.com, our technology development division, iNOW, Inc. our
Internet service division, and ImaginOn Digital Productions, Inc., our
advertising supported content production division. We offer connectivity,
hosting and website design services and software applications. David Schwartz
and Leonard Kain started ImaginOn in 1996 to develop better ways for businesses
and consumers to take advantage of the Internet and personal computers.
Initially, we are targeting business and institutional Internet users in two
related markets:
. Internet connection services; and
. Internet-based value added software.
Our patented core software technology, Transformational Database Processing
and Playback has two primary functions:
. scanning large data sources such as the Internet with an "expert" system
to select and organize the most useful and relevant parts;
. playing back the families of selected data under the interactive control
of the user for entertainment or information purposes.
Our core technology has three components:
. database analysis
. network synthesis, and
. real-time adaptive playback.
We have three product lines:
. WebZinger(R) is a data mining "Research Engine" that not only searches
---------
the Web, but also downloads website highlights, then formats those into a
graphic slideshow, complete with audio and video presented in a printable
and browsable report.
. WorldCities 2000(TM) and Resorts 2000(TM) is a series of interactive
-------------------------------------
travel planners that facilitates "virtual tourism" by using CD/DVD or
broadband integrated web access to deliver up to 120 minutes of TV quality
video in-depth topical information and providing links to over 1,000
Websites and e-commerce sites.
. sellONstream(TM) is an e-commerce solution used by advertisers who want
------------
to sell products via the Web and at the same time use full-bandwidth video
content to motivate buyers with highly entertaining product-related pitches
and one-click access to e-commerce websites
We plan to launch our own high bandwidth Internet Portal "IMON.com"(TM),
that uses high bandwidth capabilities of ImaginOn's patented technology in a
wide variety of user applications, including:
. advanced on-line research,
. interactive travel planning,
. video e-commerce, and
. interactive movies and gameplay.
The goal of IMON.com is to make the Internet easier and more productive for
small businesses, educational institutions, and individuals. IMON.com will
integrate our WebZinger research engine, WorldCities 2000 Series of interactive
travel planners, sellONstream video e-commerce solutions and Resorts 2000
virtual destinations. Additionally, IMON.com will offer a downloadable software
tool, "ImaginAuthor", to corporate training departments and educational content
developers for creating learning on demand applications. IMON.com's features
will be useful in interactive
-4-
<PAGE>
education/training and interactive advertising markets.
Market Segment
The Internet service provider industry is a rapidly growing $20 billion per
year industry. Currently, iNOW is a very small Internet service provider,
serving the San Francisco Bay area.
Internet portals, such as Yahoo! and Excite, comprise an industry segment
estimated to be over $4 billion per year and growing. This industry segment is
made up of a relatively small number of brand-name portals.
Industry and Competition
We have no direct competitor in the high bandwidth interactive streaming
video authoring and playback software business. Among the competitors that
provide parts that can be used to build a similar, lower performance system, are
RealNetworks, Oracle and Macromedia.
We have no competitor in the Content Management Systems business. Among the
competitors that provide part of the solution, are Oracle and Macromedia.
Within the Internet "search engine" marketplace, there are at least two
dozen products aimed at Web users for the purpose of searching the Internet. All
of these search engines are primarily list generators; leaving the actual data
evaluation and retrieval to the user. The few search engines that do offer media
retrieval, do not provide much control or formatting of the output. Positioned
as a Research Engine, WebZinger finds and retrieves media assets from the Web
and presents them in a printable and browsable report.
Strategy
We compete with numerous companies, large and small, that offer Internet
and software services. Our competitive advantage is derived from our
relationship to IMON.com, our Internet portal that we plan to launch October 26,
1999. IMON.com will compete with many larger, more well known portals in the
Internet portal industry segment. IMON.com's advantages will be based on our
unique patented technology that implements interactive video and media-intensive
data mining. We anticipate that revenues will be generated by ISP services,
license agreements, memberships, advertising and commissions stemming from video
e-commerce sales.
New products created with our tools are characterized by seamless real-time
access to video, audio, graphics, text, HTML and 3D objects from multiple remote
or local databases. We will license our tool set to businesses for building e-
commerce, data mining, interactive entertainment and training applications.
Risk Factors
In connection with an investment in ImaginOn you should consider the
following risk factors which are more fully discussed beginning on Page 8:
. We are a development stage company and do not have a relevant operating
history to evaluate our performance or prospects.
. We will require additional financial resources to fund our new product
development and growth. The failure to acquire additional funding could impede
new product development and growth and ultimately affect our performance and
prospects.
. Our earnings growth depends primarily upon market acceptance of our
software products. Our products may not be able to be successfully marketed or
achieve customer acceptance.
. Our success is heavily dependent upon unpredictable consumer approval of
our products.
. Slow development of new or replacement software or products offered could
cause us to experience:
. lower operating revenues
. lower net revenues
. lower cash flows
. less liquidity
. The market for Internet products and computer software evolves rapidly
and is
-5-
<PAGE>
characterized by numerous industry participants with technology that may
dominate the market for Internet products and computer software.
. We are dependent upon our founders and executive officers. The loss of
the services of either individual could have a material adverse effect on our
business and prospects. We do not hold "key-person" life insurance on either of
our founders.
. We entered into agreements and informal relationships with other software
and computer companies that if terminated or altered could have any of the
following effects:
. limit or eliminate the market for our products
. limit or eliminate public recognition of the "ImaginOn"name
. reduce revenues
. lower cash flows
. impair liquidity
. Effective trademark, patent, copyright and trade secret protection may
not be available in every country in which our products and media properties
will be distributed or made available through the Internet.
. We could be held liable for some of the services we provide or may be
held liable for Year 2000 problems.
The Offering
Shares Offered The Selling Securityholder is offering up to 2,013,823 of
the aggregate 2,959,458 shares of common stock to be
registered.
Public Price The shares will be sold to the public at the prevailing
market price at the time of sale.
Use of Proceeds The net proceeds for the sale of the shares will be paid to
the Selling Securityholder. We will not receive any of the
proceeds from this offering, except to the extent that any
of the warrants are exercised. See "Use of Proceeds".
Our common stock currently trades on the Nasdaq SmallCap Market under the
symbol "IMON".
Principal Executive Offices
Our principal executive offices are located at 1313 Laurel Street, Suite 1
San Carlos, CA 94070. Our telephone number is (650) 596-9300.
-6-
<PAGE>
Summary Historical & Selected Financial Information
The following presents our summary financial information. You should also
refer to the more complete information contained in the consolidated financial
statements and the section entitled "Management Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Six Months Ended June 30 Years Ended December 31
------------------------------ ---------------------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales $ 91,062 $ 26 $ 0 $ 9,087,767
Gross Profit 30,357 26 0 1,642,423
Income (loss) (3,226,227) (911,039) ($ 2,729,826) (4,075,182)
from operations
Income (loss) (3,221,069) (930,754) (3,497,587) (5,192,920)
before extraordinary item
Net income (loss) (3,221,069) (930,754) (3,497,587) ($4,809,215)
Net income (loss) applicable to ($4,303,339) ($930,754) ($4,617,587) ($4,809,215)
common shareholders ============ ========== ============ ============
Earnings (loss)
per share:
before extraordinary items ($0.12) ($0.05) ($0.48) ($0.94)
Extraordinary item -- -- -- 0.07
------------ ---------- ------------ ------------
Loss per common share ($0.12) ($0.05) ($0.48) ($0.87)
============ ========== ============ ============
Weighted average common shares 36,053,963 20,585,369 9,549,353 5,544,833
outstanding ============ ========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets $ 5,414,833 $ 2,304,830
Total assets 7,202,620 2,558,615
Working capital 4,506,491 807,733
Shareholders' Equity 6,295,278 1,005,198
</TABLE>
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<PAGE>
Risk Factors
You should consider carefully the following risk factors, as well as the
other information contained in this prospectus, before making an investment in
the common stock. Any one or a combination of these risk factors may have a
material adverse effect on us.
We are a Development Stage Company with No Relevant Operating History to
Evaluate Performance or Prospects.
We are a development stage company and have only been operating in the
information technology industry since 1996. We have no relevant operating
history upon which we can evaluate our performance and prospects. We face all
the risks common to companies in their early stage of development, including:
. undercapitalization;
. cash shortages;
. high capital expenditures;
. unproven business model;
. difficulties in managing rapid growth; and
. lack of sufficient customers, revenue and cash flow
Although our founders have experience in developing and commercializing new
products based on innovative technologies, unanticipated expenses, problems or
technical difficulties could occur which would result in material delays in
product commercialization. Our efforts may not result in successful product
commercialization.
We Will Need Additional Capital to Fund Operations
We will require additional financial resources to fund our new product
development and growth. Although we are actively exploring options for funding,
we have received no commitment from any person or source for that financing, and
adequate financing may not be available on reasonable terms. Our failure to
acquire additional funding when required could impede new product development
and growth and, ultimately, our performance and prospects.
Our Earnings Growth is Dependent upon Acceptance of Our Products.
Our earnings growth depends primarily upon market acceptance of our
software products. Our products may not be able to be successfully marketed or
achieve customer acceptance.
Our Success Depends on the Introduction of New Products and Product
Enhancements.
Our success in the software development business is heavily dependent upon
the timely introduction of successful new products or enhancements of existing
products to replace declining revenues from products at the latter stage of a
product cycle. Consumer preferences for software products are difficult to
predict, and few consumer software products achieve sustained market acceptance.
If revenue from new products or enhancements does not replace declining revenues
from existing products, we may experience:
. lower operating revenues
. lower net revenues
. lower cash flows
. less liquidity
-8-
<PAGE>
Production Delays Could Inhibit Our Success.
The process of developing our software products is extremely complex. A
significant delay in the introduction of one or more new products or
enhancements could have a material adverse effect on the ultimate success of
such products and we may experience:
. lower operating revenues
. lower net revenues
. lower cash flows
. less liquidity
We Operate in a Developing Market with Increasing Participants.
The market for Internet products and computer software is rapidly evolving
and is characterized by an increasing number of market entrants who have
introduced or developed products and services. Although we believe that the
diverse segments of the Internet market will provide opportunities for more than
one supplier of products and services similar to those we possesses, it is
possible that a single supplier may dominate one or more market segments.
Additionally, there may be insufficient market acceptance of our products
because the market for Internet products and computer software changes rapidly.
We Face Significant Competition from other Providers of Internet Products and
Computer Software.
The markets that we intend to enter for our Internet products and computer
software are characterized by intense competition and an increasing number of
new market entrants who have developed or are developing potentially competitive
products. Further, the cost barriers to these markets are relatively low, which
means our competitors range from small companies with limited resources to
large, more established companies. Some competitors, regardless of size, have
substantially greater financial, technical, marketing, distribution, personnel
and other resources. For example, current and future competitors with greater
financial resources than us may be able to carry larger inventories, undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
make higher offers or guarantees to software developers and co-development
partners than us. It is possible that we may not have the resources to withstand
these and other competitive forces.
We May Become Subject to Government Regulation.
We are not currently subject to direct regulation by any government agency
in the United States, other than general business regulations applicable to
conduct businesses generally. Currently there are few laws or regulations
regarding access to or commerce on the Internet. Due to the increasing
popularity and use of the Internet, laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. These laws or regulations,
if adopted, could also limit the growth of the Internet, which could, in turn,
decrease the demand for our proposed products and services and increase our cost
of doing business. Inasmuch as the applicability to the Internet of the existing
laws governing issues such as property ownership, libel and personal privacy is
uncertain, any new legislation or regulation or the application of existing laws
and regulations to the Internet could have an adverse effect on our business and
prospects.
We are Heavily Dependent on Our Management.
Our success depends upon the personal efforts of our President and Chief
Executive Officer, David M. Schwartz, and our Vice President of Engineering,
Leonard W. Kain. The loss of the services of either individual could have a
material adverse effect on our business and prospects. We do not have "key-
person" life insurance on Messrs. Schwartz or Kain.
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<PAGE>
Our Success Is Linked to Our Ability to Hire and Maintain Personnel.
Our success depends on our ability to hire and retain additional qualified
management, marketing, technical, financial and other personnel. Competition for
qualified personnel is intense and we may not be able to hire or retain
qualified personnel.
We are Dependent on Contracts with Other Companies for Promotion of our Products
and Reputation.
We have entered into agreements and informal relationships with other
software and computer companies under which the companies will use our products.
We believe these arrangements are important to the promotion of our products and
the public recognition of the "ImaginOn" name. These arrangements typically are
not exclusive, and may be terminable upon little or no notice. Termination or
alteration of these agreements could have any of the following effects on us:
. limit or eliminate the market for our products
. limit or eliminate public recognition of the "ImaginOn" name
. reduce revenues
. lower cash flows
. impair liquidity
We Regard Our Patented Technology as Proprietary
Our success and ability to compete is dependent on our proprietary
technology. We regard our technology as proprietary and we rely primarily on
U.S. patent, trademark, copyright, trade secret laws, third-party non-disclosure
agreements and other methods to protect our proprietary rights. The steps taken
by us to protect our proprietary rights may not be adequate and third parties
may infringe or misappropriate our copyrights, trademarks, and similar
proprietary rights. Additionally, effective trademark, patent, copyright and
trade secret protection may not be available in every country in which our
products and media properties will be distributed or made available through the
Internet.
We Could be Held Liable for Some of Our Services
Because materials may be downloaded by the online or Internet services
operated or facilitated by us and may be subsequently distributed to others,
there is a potential that claims will be made against us for defamation,
negligence, copyright or trademark infringement, personal injury or other
theories based on the nature and content of these materials. These types of
claims have been brought, and sometimes successfully pressed, against online
service providers. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. Any impositions of liability or legal
defense expenses are not covered by insurance or in excess of insurance coverage
could effect our revenues, cash-flow and/or liquidity.
We Could be Affected by Year 2000
We are aware of the issues associated with the programming code and
embedded technology in existing systems as the Year 2000 approaches. The "Year
2000 Issue" arises from the potential for computers to fail or operate
incorrectly because the programs incorrectly interpret the two digit date fields
"00" as 1900 or some other year, rather than the Year 2000. The year 2000 issue
creates risk for us from unforeseen problems in its own computer systems and
from third parties, including customers, vendors, banks etc. Failures of our
and/or third parties' computer systems could result in an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect our results of operations, liquidity, and
financial condition, though the impact is unknown at this time.
-10-
<PAGE>
To minimize this risk, in the first quarter 1999, our board of directors
and management went through a series of Year 2000 questionnaires and assessments
that would impact our entire operation. These questionnaires and assessments
revealed no significant issues with our Internet service provider, technology
infrastructure, facilities or products. Certain vendors/partners/third parties
themselves have significant Year 2000 programs, the successes of which are also
important to us. We are establishing a contingency plan for each critical
partner, the activation of which will be dependent on the failure of the
vendor/partner/third party to achieve key milestones in their programs. The
total cost of Year 2000 activities is not expected to be material to our
operations, liquidity or capital resources. Costs are being managed within each
department unit. The total estimated costs are not expected to exceed $20,000.
Cost excludes expenditures for replacement systems.
While we believe that our efforts to address Year 2000 issues will be
successfully completed in a timely manner; we recognize that failing to resolve
Year 2000 issues could increase costs and limit our ability to conduct business
operations as well as limit customers utilization of the Internet services which
we provide.
The anticipated costs and timeliness of completion of Year 2000
modifications are based on management's best estimates, which were derived using
numerous assumptions relating to future events, including, without limitation,
the continued availability of certain resources and third party modification
plans. However, these estimates and assumptions may turn out to be inaccurate.
Some commentators have stated that a significant amount of litigation will
arise out of Year 2000 compliance issues, and we are aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be
affected.
-11-
<PAGE>
Forward Looking Statements
All statements contained in this Prospectus, as well as statements made in
press releases and oral statements that may be made by us or by officers,
directors or employees acting on our behalf, that are not statements of
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known or unknown risks, uncertainties and other factors that
could cause our actual results to be materially different from historical
results or from any future results expressed or implied by such forward-looking
statements. The "Risk Factors" section of this Prospectus, commencing on page 8,
summarizes certain material risks and uncertainties that could cause our actual
results to differ materially. In addition to statements that explicitly describe
such risks and uncertainties, you are urged to consider statements that include
the terms "believes," "belief," "expects," "plans," "anticipates," "intends" or
the like to be uncertain and forward-looking. All cautionary statements made
herein should be read as being applicable to all forward-looking statements
wherever they appear. You should consider the risks described herein and should
not place undue reliance on any forward-looking statements.
Use of Proceeds
We will not receive any proceeds from the issuance of the shares of common
stock issued upon conversion of the Series F Preferred Stock. We will receive
approximately $344,680 from the exercise of the Group F Warrant to purchase
122,553 shares of our common stock. However, we do not expect to receive these
proceeds until the exercise price of the Group F Warrant is below the market
price of the our common stock. In the event we do receive proceeds, the proceeds
from the exercise of the Group F Warrants will be used for working capital.
Dividend Policy
We have not paid any dividends since our inception and do not intend to pay
any dividends on our common stock in the foreseeable future. We currently intend
to retain any future earnings to fund operations and continue development of our
business.
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<PAGE>
Price Range of Our Common Stock
Our securities have been traded over-the-counter since January 18, 1995 and
were quoted on the Nasdaq SmallCap Market under the symbols CALP and CALPW,
respectively through January 3, 1999. On December 18, 1998, we changed our name
from California Pro Sports, Inc. to ImaginOn, Inc. On January 4, 1999, the
common stock and publically traded warrants began to trade under the symbols
IMON and IMONW, respectively. On June 7, 1999 our publically traded warrants
were redeemed and are no longer traded. The following table sets forth the range
of high and low bid prices of our common stock and warrants as quoted by Nasdaq.
These market quotations reflect inter-dealer prices without retail mark-up,
mark-down or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
Bid Prices Bid Prices
---------- ----------
1999 High Low High Low
---- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter (1/1/99-3/31/99) $ 15.25 $1.1875 * *
Second Quarter(4/1/99-6/30/99) $ 5.8125 $1.9375 * *
Third Quarter (7/01/99-9/30/99) $ 3.7183 $1.5625 * *
1998
----
First Quarter (1/1/98-3/31/98) $ 1.625 $ 1.125 $ .8125 $ .4375
Second Quarter (4/1/98-6/30/98) $ 1.9375 $1.1875 $ .875 $ .50
Third Quarter (7/1/98-9/30/98) $ 1.50 $ .75 $ .6875 $ .4375
Fourth Quarter (10/1/98-12/31/98) $ 2.625 $ .50 $ 1.375 $ .25
1997
----
First Quarter (1/1/97-3/31/97) $ 1.5312 $ .8125 $ .40625 $ .25
Second Quarter (4/1/9-6/30/97) $ 2.00 $ .9375 $ .6875 $.21875
Third Quarter (7/1/97-9/30/97) $ 2.375 $ 1.375 $ .75 $ .4375
Fourth Quarter (7/1/97-9/30/97) $ 3.0625 $1.0625 $1.15623 $ .6875
</TABLE>
The number of record holders of ImaginOn's common stock as of October 4,
1999 was approximately 307.
* Warrants were redeemed June 7, 1999 and no longer trade, but the high bid
price from January 1, 1999 to June 7, 1999 was $12.00 and the low bid price was
$ 0.65625.
Selling Securityholder
The following table lists the securities to be registered and offered for
sale by the selling securityholder including the total number of shares to be
registered by this registration statement. The term "selling securityholder"
include donees, pledgees, transferees and other successors in interest selling
shares received from the selling shareholder after the date of this prospectus.
Because the selling securityholder may offer all or part of the shares of
common stock received upon the conversion of the Series F Convertible Preferred
Stock or exercise of the Group F Warrant and because this offering is not being
underwritten on a firm commitment basis, no estimate can be given as to the
number of shares of common stock that the selling securityholder is going to
sell. The shares of common stock received upon conversion of the Series F
Convertible Preferred Stock or exercise of the Group F Warrant offered by this
prospectus may be offered from time to time by the selling securityholder.
-13-
<PAGE>
Shares Underlying
Warrants and Convertible Preferred Stock to Be Registered and
Offered by the Selling Securityholder
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Shares of Total Amount of Percent of
Common Stock Shares of Shares of Common Stock Outstanding
Issuable Upon Common Stock Common Stock Owned by Common Stock
Selling Conversion of the Exercisable to be Offered for Securityholder Owned by
Securityholder Series F Preferred Underlying Securityholder's After the Securityholder After
Name Stock Group F Warrant Account(2) Offering(1) the Offering(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gage LLC 1,891,270 122,553 2,013,823
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
___________________
(1) Securityholder cannot hold at any one time more than 4.99% of the
outstanding common stock. Prior to the offering, the securityholder could
not convert the Series F Preferred Stock and did not own any common stock.
A registration rights agreement requires ImaginOn to register up to 150% of
the number of shares of common stock convertible from the Series F
Preferred Stock which would be approximately 2,836,905 shares of common
stock.
(2) The selling securityholder may offer all or part of the shares of common
stock received upon the conversion of the Series F Convertible Preferred
Stock or exercise of the Group F Warrant.
-14-
<PAGE>
Selected Financial Data
The following table sets forth for the periods indicated, selected
consolidated financial data. The consolidated balance sheets and statements of
operations data as of and for each of the years ended December 31, 1998, 1997,
1996, 1995, and 1994 have been derived from our consolidated financial
statements which have been audited by Gelfond Hochstadt Pangburn & Co. The
consolidated balance sheet data and consolidated statement of operations data as
of June 30, 1999, and for each of the six month periods ended June 30, 1999 and
June 30, 1998, have been derived from unaudited consolidated financial
statements. In our opinion, the unaudited consolidated financial statements have
been prepared on the same basis as our audited consolidated financial
statements, and the unaudited financial statements reflect all adjustments,
consisting only of normal recurring adjustment, necessary for a fair
presentation of our results of operations and financial position for these
periods. The historical results are not necessarily indicative of results to be
expected for any future period. The following selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and the financial statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30 Years Ended December 31
-------------------------- -----------------------------------------------------------------------
1999(2) 1998(1) 1998(1) 1997 1996 1995 1994
------- ------ ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales $ 91,062 26 --- $ 9,087,767 $ 16,952,904 $17,128,711 $16,468,567
Gross Profit 30,357 26 --- 1,642,423 2,891,870 4,973,168 4,603,835
Income (loss) (3,226,227) (911,039) ($2,729,826) (4,075,182) (4,690,853) 428,847 302,126
from operations
Income (loss) (3,221,069) (930,754) (3,497,587) (5,192,920) (5,575,882) 35,456 (170,518)
before extraordinary item
Extraordinary item -- -- -- 383,705 -- -- --
------------ ---------- ------------ ------------ ------------ ----------- -----------
Net income (loss) ($3,221,069) ($930,754) ($3,497,587) ($4,809,215) ($5,575,882) $ 35,456 ($170,518)
============ ========== ============ ============ ============ =========== ===========
Net income (loss) ($4,303,339) ($930,754) ($4,617,587) ($4,809,215) ($5,575,882) $ 35,456 ($170,518)
applicable to common ============ ========== ============ ============ ============ =========== ===========
shareholders
Earnings (loss)
per share:
before extraordinary items ($0.12) ($0.05) ($0.48) ($0.94) ($1.37) $0.01 ($0.08)
Extraordinary item -- -- -- 0.07 -- -- --
------------ ---------- ------------ ------------ ------------ ----------- -----------
Loss per common share ($0.12) ($0.05) ($0.48) ($0.87) ($1.37) $0.01 ($0.08)
============ ========== ============ ============ ============ =========== ===========
Weighted average common 36,053,963 20,585,369 9,549,353 5,544,833 4,078,864 3,599,320 2,225,054
shares outstanding ============ ========== ============ ============ ============ =========== ===========
<CAPTION>
June 30, December 31,
-------------------------- ----------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Current assets $ 5,414,833 $2,740,783 $ 2,304,830 $ 1,377,907 $ 10,676,181 $ 7,699,602 $ 7,452,510
Total assets 7,202,620 3,516,179 2,558,615 2,268,627 21,069,743 10,290,350 10,181,601
Working capital 4,506,491 1,103,571 807,733 (400,625) (5,263,933) 2,399,163 (2,748,900)
(deficiency)
Shareholders' Equity 6,295,278 1,458,701 1,005,198 104,946 1,074,255 4,989,350 (19,809)
</TABLE>
(1) During 1998 we did not have any significant revenues.
(2) On January 20, 1999, the company completed a merger with Imaginon.com, Inc.
(IMON). The transaction was recorded as an acquisition of Imaginon, Inc. by
IMON and a recapitalization of IMON.
-15-
<PAGE>
Business
You should note that our business materially changed after December 31,
1998. We no longer are a participant in the in-line skate, hockey or snowboard
business. We are now an information technology company. Except as otherwise
described in this prospectus, the information in this prospectus is given
through June 30, 1999.
Overview
We are an information technology company comprised of three operating
units, ImaginOn.com, iNOW, Inc., both located in California, and ImaginOn
Digital Productions, located in Aspen, Colorado. ImaginOn.com is the technology
development division, iNOW is the Internet services division, and ImaginOn
Digital Productions is the advertiser-supported content producer division.
David Schwartz and Leonard Kain started ImaginOn in 1996 to develop better ways
for businesses and consumers to take advantage of the Internet and personal
computers. On January 20, 1999, ImaginOn became a public company by completing
a merger with California Pro Sports, Inc. ("CALP") in which their shareholders
retained 40% ownership of the merged entity and no representation on the
ImaginOn Board of Directors. All business operations of CALP were discontinued
prior to the merger and the name was changed to ImaginOn, Inc. ImaginOn
currently trades on the Nasdaq SmallCap Market under the symbol "IMON".
Since our inception, we have been engaged primarily in product development
activities. David M. Schwartz, our Chief Executive Officer, negotiated with JT
Storage, Inc., successor to Atari, Inc., for the purchase of the GameFilm tools,
know-how and a license for the GameFilm technology which he invented while a
vice president at Atari. In addition, Mr. Schwartz, in collaboration with Mr.
Leonard W. Kain, invented and patented our Transformational Database Processing
and Playback ("TDPP") technology. Both Mr. Schwartz and Mr. Kain assigned the
patent to ImaginOn.
In pursuing our business strategy, we have sought to take advantage of our
own patented TDPP technology and tool set to build and market innovative and
unique Internet application and software products quickly and at low cost.
During 1996, we concentrated on developing our intellectual property position.
A U.S. Patent covering our core technology, TDPP was filed in December 1996 and
granted on May 18, 1999. During 1997, we hired our core staff, set up our
offices and developed our tool set. Marketing activities were limited to web
site development and trade show participation in the booths of Intel and Sun
Microsystems. In 1998, we developed software applications based on our
technology and began field testing our software. Since becoming a publicly
owned company in 1999, we have concentrated on building a sales/marketing
organization and growing the business by acquisitions, while continuing product
development.
We currently have three product lines in the marketplace:
. WebZinger(R);
. WorldCities 2000; and
. sellONstream
In addition using our patented TDPP technology, these three products were
created using the license for the Game Film technology and know-how invented by
David Schwartz, one of our founders. Marketing and advertising began its ramp
up in the second quarter of 1999, with the first WebZinger ad for schools placed
during March 1999 in the Educational Technology Institute Spring 1999 Exploria
catalog. The first advertisement for WorldCities 2000 was placed during May
1999 in Sunset Magazine. The first sellONstream ad was placed on July 12, 1999
in AdWeek, Marketing Week and MediaWeek Magazines (in the Marketing With Video,
DVD & CD-ROM Sourcebook). As recently as November 1998, ImaginOn, Inc. employed
only 5 full time staff, and has now grown to a team of 46 people including
engineers, managers, software developers, administrators, consultants, and
contractors. Currently we lease approximately 5,000 square feet of office space
for its two California locations and location in Aspen, Colorado.
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<PAGE>
iNOW is an Internet Service Provider that offers dial up modem services;
dial up dedicated; ISDN Dial-up; ISDN for LAN; Frame Relay; Full and Fractional
Leased T1services and DSL services. Additional services include World Wide Web
server central office locations and space rental, secure transaction servers,
World Wide Web page authoring, domain name service, networking hardware sales,
and consulting services such as needs/cost analysis. iNOW currently covers all
of the San Francisco Bay Area and plans to serve the fifteen largest
metropolitan cities within the United States by the end of 2000. iNOW's prime
target markets are the thousands of home offices and small and medium-sized
businesses in Northern California. iNOW offers DSL, or Digital Subscriber Line,
a group of technologies that deliver high-speed connections over existing
telephone copper wiring. The two-wire copper phone line from a telephone
company's central office to a customer's premise is often referred to as "the
last mile". This "last mile" of copper wiring has long been the bottleneck to
providing fast data services to homes and businesses. DSL utilizes a new line-
coding scheme that allows very high-speed, affordable connections over this last
mile for the first time. DSL connections are "always on" or "always connected".
This means that users don't need to dial up each time they want a connection to
the network. Another benefit of having a "dedicated connection" is the fact
that busy signals and dropped connections will never again be an issue with the
Internet service. With iNOW's SDSL (Symmetric DSL) Service, a corporate LAN
will have bandwidth of up to 1.530 Mbps to the Internet for both uploads and
downloads. This is not the case with ADSL (Asymmetric DSL), which is limited to
384 kbps for uploads. At the click of an icon, iNOW DSL Service gives a
dedicated connection to destination without having to wait for the call to be
set up or get annoying busy signals. The main difference between ADSL and SDSL
is that ADSL upload and download speeds are different. You can download much
faster than you can upload. SDSL offers the same speed in both directions.
Imagine Digital Productions, Inc. ("IDP") is a multimedia production studio
and publishing company established in 1997. IDP's prime business is the
development of proprietary CD-ROM products and Internet multimedia Web sites on
a contract basis for resort area advertisers. IDP distinguishes itself from
competitors in the field by focusing on high quality user interface design.
This includes the use of the latest Internet technologies, including virtual
panoramas, streaming multimedia, and real-time databases. The completion of
this merger significantly extended the reach of our patented core technology.
IDP's software can be joined with our patented TDPP technology, extending the
business into advertiser supported destination resort guides, enhancing the
WorldCities 2000 series of real-time interactive travel planners. It will also
enable us to feature resort destination sites through expanded Internet
services.
Our Technology
The core software technology invented by our founders, TDPP, is protected
by a U.S. patent. Our technology has two primary functions;
. authoring media intensive data objects; and
. playback of media intensive data objects.
On the authoring side, our technology enables automated data collection and
structuring, manually-guided collection and structuring, or a combination of
automated and manual operations. Typically, our authoring processes are used to
create finished knowledge or entertainment content, based on vast, scattered
and/or noisy sources, such as the Internet or existing data warehouses. On the
playback side, our technology enables distribution, access and manipulation of
interactive high bandwidth content, such as streaming video. Unlike
RealNetworks, or Broadcast.com, our technology is focused primarily on
interactivity. Our interactivity goes beyond simple click-throughs. Real-time
seamless branching of video, and simultaneous real-time seamless integration of
Web data in video are fundamentally new features created by our technology.
Our core technology, TDPP has three components:
. database analysis
-17-
<PAGE>
. network synthesis
. real-time adaptive playback
The source database for our analysis can be any data file or set of data
files which may contain multiple classes of data, such as text, video or audio.
In the case of WebZinger, the source database is the entire World Wide Web,
where allowable data classes are images, movies, audio, text, HTML and Java
applets. In the case of WorldCities 2000, the source database contains text,
URLs, video, and audio files. During database analysis, filters based on
selection criteria are used to screen out irrelevant data and accept desirable
data. The organization of the data with respect to its position in the database
is preserved.
Our network synthesis is the process of creating a "playable" network
consisting of data items and decision points. The synthetic network is
hierarchical and tree-like in that it is the software equivalent of a "trunk",
"branches" and "leaves". Decision nodes connect the "branches" to the "trunk"
and the "leaves" to the "branches". The distance from the trunk at which a data
item or "leaf" is placed out on a "branch" is usually determined by its quality
of match to the database analysis criteria. The network synthesis process can
be entirely automatic, or manually guided.
Our real-time playback is the part of TDPP technology that most users see.
The desired data items selected during database analysis are organized within a
synthetic network and played in real time, sequentially and seamlessly. When
the synthetic network contains solely digitized film clips, the resulting
playback forms an interactive movie. If the network is populated with still
images, such as Web pages, the network playback forms an interactive slideshow.
Our network filled with text pages is a hypertext electronic book, magazine or
newspaper. Our synthetic networks can be layered one on top of the other, with
live cross-references. For example, in our WorldCities 2000 interactive travel
planners, a network made of video clips references the Web, providing a whole
new way of navigating data space visually.
Our Software Tools
The embodiment of the patented TDPP technology is a set of 12 software
tools. Each tool can be used as a stand-alone application when needed, plus
each tool is designed to communicate and inter-operate with every other tool in
the set. We package our tool set as a content management system. This tool set
package is marketed as an enterprise solution for delivering learning on demand.
To date no revenues have been recognized for this product. In the hands of
webmasters and programmers, these tools are used to create new applications and
content. New products created with our tools are characterized by seamless
real-time access to video, audio, graphics, text, HTML and 3D objects from
multiple remote or local databases. With our core technology secured by patent,
we will license our tool set to businesses for building e-commerce, data mining,
interactive entertainment and training applications. This technology is
incorporated in its three major desktop-based product lines:
. the WebZinger Research Engine family,
. WorldCities 2000 and Resorts 2000 Series of CD/Web interactive travel
planners, and
. sellONstream e-commerce solutions.
Our technology will be come Internet based with the opening of the IMON.com
Internet portal.
The following tools were created using our patented TDPP technology:
Smart Buffer reads the compiled network of links and objects, then fetches
data ahead of time, from disk or network, so Presenter, another of our software
tools described below, never has to stop or pause during playback.
User Profiler monitors the playback of data objects and decisions made by
the user with respect to those objects. The user profile derived from this
history can be used to automate playback as well as adapt playback to the user's
preferences.
-18-
<PAGE>
Formatter normalizes data objects so that they can be displayed or played
in real time. This process can be lossy or lossless, depending on user
requirements.
Live Linker manages a list of active Web addresses and the pointers to
specific data objects in the playback stream, enabling the Browser tool to
include live Web pages side by side with "canned" data objects, such as video
recordings. Live Linker is used to create the hybrid of CD data plus Web pages,
as in WorldCities 2000.
Network Analyzer takes a text description of a complex network, such as the
netlist of a drawing tree or a schematic diagram and determines the system
requirements for real-time playback of the data elements, or objects.
Network Builder constructs a synthetic network of data elements or objects
that can be traversed in real time.
Network Compiler takes the netlist created by Network Builder and data
objects processed by Formatter and generates an output file that Presenter can
use.
Network Walker traverses a data network such as a LAN or the Internet and
compiles a map that can be utilized by our other tools. Network Walker is
guided by user-controlled parameters.
Browser allows users to visit websites and hyperlink to other websites. It
is similar in functionality to Microsoft Internet Explorer and Netscape
Navigator, but does not have features like email and editing.
Filter filters data sets or data objects to determine the degree of match
to a set of user-defined parameters. The filtering process is based on the
digital signal processing (DSP) model in which filters can be cascaded, tapped
and fed back on each other in many configurations.
Presenter displays, or plays back, data objects to the user in real time.
Presenter allows the user to make real-time choices among data objects as they
are played back.
Search Driver contains a set of parameters and interfaces to commercially
available search engines and database query engines. Input to Search Driver is
plain English text. Search Driver's output is specific to every engine it
supports.
Our technology is useful in a wide range of business and scientific data
processing applications, including electronic commerce, in-service training,
research, education, as well as digital TV and home entertainment. The first
step in making the technology practical was the creation of software tools.
Then, applications were developed using those tools. The new applications, and
services based on them, are now being integrated into a unique, high-bandwidth,
high value added Internet portal, www.IMON.com, targeted at business,
institutional, and high net worth individual users. IMON.com will be launched
on October 26, 1999 at ISPCON, an industry convention, in San Jose, California.
IMON.com
IMON.com will showcase the high bandwidth capabilities of our patented
technology in a wide variety of user applications, including advanced on-line
research, interactive movies and gameplay, interactive travel planning, and
video e-commerce. This high bandwidth, high value added Internet portal will be
enabled by our patented TDPP technology. The goal of the new portal is to make
the Internet easier and more productive for small businesses, educational
institutions, and individuals. This new portal will integrate ImaginOn's
WebZinger Research Engine, WorldCities 2000 Series of interactive travel
planners, sellONstream video e-commerce solutions and Resorts 2000 virtual
destinations. ImaginOn anticipates that revenues will be generated by ISP
services, license agreements, memberships, advertising and commissions stemming
from video e-commerce sales.
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<PAGE>
Memberships in the IMON portal community will be made available free of charge
to businesses, schools, and individuals who connect to the Internet through our
wholly-owned subsidiary, iNOW Internet Services. A feature that is likely to
drive portal memberships in the short-run is the debut of the on-line version of
the WebZinger Research Engine, which will feature support for Real Audio and
Video, MP3 and quicker, more efficient audio and video retrieval.
The IMON.com portal will have a guest "lounge" where any visitor with a
connection speed of 384 kbps or higher will be able to preview all of the
features of the portal in a 3 minute presentation. This presentation will be
based entirely on our technology; clearly illustrating its key benefits. Guests
will experience our unique real-time seamless branching video with integral Web
data, plus a WebZinger research report on the same topic.
For IMON.com members, the portal will permit online access to all of our
products, applications, and a free downloadable ImaginAuthor tool for easily
creating small ImaginOn format presentations. Brief summaries of our IMON.com
Internet portal content are discussed below.
WebZinger(R)
WebZinger is a data mining "Research Engine" that not only searches the
Web, but also downloads website highlights, then formats those into a graphic
slideshow, complete with audio and video. A formatted printable and browsable
research report is produced at the same time. WebZinger acts as a personal
research assistant, substantially increasing the efficiency of Web and Intranet
searches for both naive and sophisticated users. Four specifically-targeted
versions of WebZinger are now available: WebZinger Personal Edition, School
Edition, Enterprise Edition, and WebZinger for Kids. WebZinger was released for
electronic distribution in March, 1998. To date, over 120,000 demo CDs have been
distributed.
WebZinger School Edition is a specific version of the product that is fine-
tuned for the educational environment. Students primarily use the Web to find
pictures and graphs for their reports and projects. Teachers mainly use the Web
to find curriculum materials. To meet these needs, the school edition is
configured so that teachers can password control the search and browsing
parameters of the product. These protected parameters include anti-pornography
filtering setup, picture size, slideshow length, search breadth/depth and
duration of search. When configured in a client-server architecture, WebZinger
School Edition can cue up hundreds of search requests for overnight processing.
When students arrive the next morning, their slide shows are ready.
WebZinger for Kids is intended for use by children at home. WebZinger for
Kids' anti-porn filter is enabled at all times and can not be turned off. The
user interface is simplified to the point that even pre-literate children can
search and browse, using pictographic icons instead of typing words. Parents
can add their own blocking words and phrases, to further limit their child's
access to certain materials during searching and browsing. WebZinger for Kids
provides parents with the peace of mind they need to leave their children alone
with the Web, confident that the kids will not be seeing inappropriate images,
visiting chat rooms, e-mailing, or searching "adult" topics.
WebZinger Enterprise Edition is a version of WebZinger that we customize on
a business by business basis to optimize its output for client-specific needs.
For example, the first customer for this product uses WebZinger to locate and
download resume of software engineers on the Internet. We modified WebZinger's
filters to home in on resume of software programmers and engineers and at the
same time reject websites that list job openings or positions available. This
automated "headhunting" saved many hours of manual pick and click operations.
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<PAGE>
WorldCities 2000(TM) and Resorts 2000(TM)
WorldCities 2000 is a series of interactive travel planners for
distribution on broadband Internet, CD and DVD. WorldCities 2000 travel
planners are "virtual tourism" that is useful to both business and consumer
travelers. On any PC or advanced digital cable TV, the user can navigate real
cities as if they, themselves, were driving a car through the city. The
camera's viewpoint is the driver's seat, looking through the windshield. At key
intersections, the user can turn the car left or right, without stopping.
Integrated Web access provides in-depth topical information about whatever is in
front of the "driver".
An on-screen button labeled "Go Online" instantly connects the user to the
Web page most relevant to the view ahead. For example, in WorldCities 2000 San
Francisco, when the user sees Pier 39's Underwater World, the Go Online button
causes the browser to open a window and display Underwater World's website,
live. Since the website is updated frequently by Underwater World, the
information about show times and pricing is always current.
For WorldCities 2000, our technology enables automated gathering of website
addresses, live updating of website addresses, authoring of the content and
seamless branching playback. Our high bandwidth Internet portal/interactive TV
solution is scalable, has low feedback latency, supports just-in-time ad
insertion and built-in I/O buffer-consolidation.
World Cities 2000 San Francisco was released in January 1999 and
WorldCities 2000 New York was released May 31, 1999. The filming of our third
and fourth interactive titles, "WorldCities 2000 Paris" and "WorldCities 2000
London" is complete and is expected to be launched in the fourth quarter of
1999.
Resorts 2000 is the extension of the WorldCities concept into destination
resorts. Aspen, Colorado is available now, with Park City, Utah in production.
All Resorts 2000 products are sponsored by advertising, which is sold prior to
media production. Future Resorts 2000 and WorldCities 2000 destinations will be
based on this same business model.
sellONstream(TM)
The same underlying software engine that powers WorldCities 2000 and
Resorts 2000 also powers "sellONstream", our video e-commerce solution.
Businesses that want to sell products via the Web, and at the same time use
full-bandwidth video content to motivate buyers will distribute sellONstream CD
ROMs as "stuff-ins" to catalogs, magazines and newspapers. Viewers will insert
the CD into their PC and get a highly entertaining product-related pitch with
one-click access to e-commerce websites. High bandwidth Internet users can
access sellONstream presentations directly from IMON.com, or similar portals,
without the CDs.
The unique selling proposition of sellONstream is that it is the only way
to deliver TV-quality interactive video fully integrated with the Internet to
users with 28.8 or 56 kbps modem connections. Even low bandwidth users do not
see any discontinuity between the video playback and Web pages. The single-
focus branded window approach guarantees businesses that their message is the
sole message the viewer will see when their presentation is on screen.
We offer sellONstream video e-commerce solutions to businesses for
increasing Internet sales. The sellONstream CDs combine broadcast quality video
presentations of products and fully integrated web site linkage within a branded
window. Any time viewers want to buy what they see in the video, or get more
product information, a mouse click brings up the appropriate web page. The
"Trashy Lingerie CD" is one example, enabling viewers to purchase any outfit
shown just by clicking the mouse once to go shopping online.
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<PAGE>
Initially, we will produce the sellONstream presentations for clients,
converting their existing videotape. Eventually, clients will license our
software tool, ImaginAuthor(TM) and produce the CDs or website-sourced
interactive streaming video themselves.
In addition to our license agreement with Trashy Lingerie, Inc. we have
entered into a license agreement with Times Mirror Publishing. Times Mirror
Publishing is the publisher of numerous magazines. Most specifically Times
Mirror Publishing Publishes GOLF MAGAZINE and other golf related magazines. Our
agreement with GOLF MAGAZINE and Senior Golfer magazine marks the first time our
sellONstream e-commerce technology will be used in the publishing field. We will
work with GOLF MAGAZINE and Senior Golfer Magazine to create specially themed
CD-ROMs that contain television quality video footage of leading golf
destinations, golf resorts and golf schools, with each video linked to each
advertiser's Web site. As planned, users will simply insert the CD-ROM into
their personal computer, sit back and watch the show and, at any time in the
course of the playback, click on to the advertiser's Web site. Once they do so,
they will be connected directly to the advertiser's site, where they can obtain
more information, plan a golf vacation or meeting, or enroll in a golf school.
The exclusive GOLF MAGAZINE and Senior Golf magazine branded CD-ROMs, which will
be promoted inside the pages of each magazine with special ads, will be made
available free to readers who pay only shipping and handling.
American Hero
The never-released interactive movie and PC videogame, American Hero, was
developed by our founders while at Atari Corp before that company's demise, and
our startup. The product is presently being ported to IMON.com, so portal users
will be able to play this interactive movie on the Internet. In addition to
being a novelty item for the portal, American Hero will also serve as an example
of how interactive film can be released on the Web. The goal is to attract film
producers, who will license our tools to create their own interactive movies.
ImaginAuthor(TM)
Our authoring tool for creating interactive video with integral Web data,
ImaginAuthor, is a large CAD system-like environment that enables the creation
of large, complex software products like WorldCities, sellONstream and American
Hero, without programming. To increase awareness of our technology, and to
generate "free" content for the IMON portal, a no-cost, limited, but fully
functional version of ImaginAuthor, including the ImaginOn Player, will be
downloadable from IMON.com. Content created with ImaginAuthor can then be
played back on any suitable PC, mastered onto CD ROM, or interactively streamed
from IMON.com.
Our Industry
According to Connor Publishing's Microprocessor Reports, personal computers
with MMX Technology, CD or DVD ROM disc drives and Internet World Wide Web
access are now the standard configuration in the marketplace. Dataquest, a
technology research firm, projects in its December 1998 report that the
installed base of such machines will be over 100 million by the year 2000. The
Software Publishers Association reports that over 50% of American homes now have
a computer. One in five online users say that they have purchased software
online at least once. E-commerce is expected to be a $20 billion business in
1999, and over $1 trillion by 2003. By many estimates, the total number of
"subscribers" to the Web exceeds 30 million in the USA alone. Virtually every
Fortune 1000 company has established Internet and Intranet electronic
information and commerce systems. These new systems connect corporate staff to
each other, suppliers to purchasers, and customers to vendors.
Our software products take advantage of the PC-Internet infrastructure in
both the business to business and consumer marketplaces. In the business
marketplace, our enterprise software and e-commerce solutions provide
significant competitive advantages to business users. For consumers, our
software delivers faster, higher quality experiences for information, education
and entertainment. For the emerging digital broadcast industry, we will offer a
comprehensive solution for creating interactive TV content, server data
management, ad insertion, user feedback and interactive advertising.
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Our Market Segment
We address Internet and Intranet users with services and applications.
Initially, we are targeting business and institutional Internet users in two
related markets:
. Internet connection services
. Internet-based value added software
ImaginOn offers connectivity, hosting, website design services and software
applications. Beginning October 26, 1999, we will operate a high-bandwidth
Internet portal, IMON.com, that will offer all of the unique Web-based content
and software developed by us, to date, including WorldCities 2000, Resorts 2000,
WebZinger Online, sellONstream and American Hero.
The Internet service provider industry is now over $20 billion per year,
and growing rapidly. Presently, iNOW is a very small ISP, serving the San
Francisco Bay area. By arrangement with Level 3, iNOW will gain transparent
"presence" in all 15 of the major U.S. metropolitan markets served by Level 3 in
the year 2000. As an ISP, iNOW is focused on the high end market, where clients
require at least 128 kbps service, and most want 500 kbps, or higher data rates.
These prospective clients can be served by iNOW with either DSL, T1 or frame
relay service.
Internet portals, such as Yahoo! and Excite, comprise an industry segment
estimated to be over $4 billion per year and growing. Currently, this industry
segment is made up of a relatively small number of brand-name portals. In the
future, as the industry matures, and users become more discriminating, the
industry may move towards more, smaller, specialized portals, such as IMON.com,
that service particular niches. Initially IMON.com will target Internet users
and advertisers who want the very best high bandwidth capability, content, and
research reports, as opposed to low bandwidth modem support, rudimentary video
quality and simple searches offered on today's portals.
IMON.com addresses the business market with e-commerce software. E-commerce
is a new and rapidly growing segment of the Internet, defined as transactions
made online. According to Intel Developer Group for the calendar year 1998,
e-commerce sales were estimated to be approximately $4 billion. Of this, $2.3
billion was during the holiday season alone, up from $1.1 billion in the same
period during 1997. The top items purchased online are software, books,
computers, travel, music, food/gifts and clothing. The software used by
businesses to accomplish e-commerce include website hosting applications, credit
transaction applications, website creation and editing applications, and
database management applications. IMON.com adds a new category to this set,
video e-commerce, with its sellONstream Internet sales promotion software.
Additional markets where IMON.com's features will be useful include
Interactive Education/Training and Interactive Advertising. The market for
computer-based educational and training systems is already a $6 billion industry
serviced by thousands of small vendors. Interactive advertising, advertising
based on Internet banner ads, is just beginning to become an industry. In the
near future, as digital HDTV is deployed, interactive advertising will enter the
TV mainstream.
IMON.com will offer a downloadable software tool, "ImaginAuthor", to
corporate training departments and educational content developers for creating
"Learning on Demand" applications. Learning on Demand, a term popularized by
Stanford Research Institute, is a feature of training systems that have very
rapid response and delivery capabilities. When any desired content is delivered
at the time it is requested, or shortly thereafter, for immediate consumption,
learning on demand is enabled. The learning may be about concepts, products,
business results or any topic at all. The data itself may be in the form of
digital video, text, audio, web pages, spreadsheets or any mix of those forms.
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As digital broadcast television emerges, and the Internet gains bandwidth,
methods of advertising are adapting; taking advantage of these new environments
to sell smarter and harder. The first new form of advertising to arrive in this
space is the banner ad. On some websites today, these small graphical displays
consume up to 20% of the display area on computer screens. Most banners are
composed of a stationary graphic image or message, like a small ad on a magazine
page. Some banners are animated, like simple TV cartoons, to improve their eye
appeal. It is estimated that the annual business of banner ads will reach $700
million in 1999. By the year 2000, this business may exceed $1 billion, not
counting ads within digital television.
Today's banner ads are weakly interactive; limited to hyperlinking to the
ad sponsor's website. When the ad is clicked, the user is transported by their
browser to a new website. This abrupt change of venue is cited by many Web
users as the primary reason they do not like banner ads. A more sensible,
effective, and user-friendly approach is needed. IMON.com's sellONstream
formatted ads are a more sensible, effective and user friendly solution because
the IMON.com ads respond to user "mouse-clicks" with context-based sensitivity.
Our Competition
In the Internet service provider industry segment, we compete with numerous
companies, large and small, that offer similar services. Our competitive
advantage in this area is derived from its relationship to IMON.com. In the
Internet portal industry segment, IMON.com will compete with many larger, more
well known portals. IMON.com's advantages will be based on its unique patented
TDPP technology that implements interactive video and media-intensive data
mining.
In the high bandwidth interactive streaming video authoring and playback
software business, we have no direct competitor, yet. Several companies offer
components that can be used to implement portions of a networked system, but no
other company offers a complete turnkey solution like ours. Among the
competitors that provide parts that can be used to build a similar, lower
performance system, are RealNetworks, Oracle and Macromedia.
In the Content Management Systems business, we have no direct competitor.
Several companies offer components that can be used to solve parts of the
Content Management problem. No other company offers a complete turnkey Content
Management System like ours. Among the competitors that provide part of the
solution are Oracle and Macromedia.
Oracle is a relational database management systems company whose products
work within any single operating system, operating on data collected by some
other system or process. Oracle's SQL database query system allows diverse data
display systems to access formatted data. Oracle's position is that of
"middleware"; processing data from one place and making it available to
someplace else. This arrangement suffices for conventional transactional and
customer information systems. However, when the data is of many types, spanning
multiple operating systems in diverse locations, timely response is not
guaranteed. Furthermore, when the requested data content is not in the system
at all, Oracle must request another system to search, locate and fetch the data.
On the display side, the fundamental design of Oracle's software dictates
that the playback of data content be handled by a separate process that usually
runs in a separate computer or playback device. This provides generality at the
expense of performance. For media-rich sets of data such as digital video,
audio and Web pages, the separation of processing systems from display systems
results in delays and difficulty in providing real-time playback. The
intermittent stop and start look of streaming video is partially caused by these
delays.
RealNetworks Realvideo and Microsoft's Mediaplayer are the main streaming-
only video players in the market today. Neither systems' authoring tools or
playback mechanism allows for real-time branching, or integrated Web browser
data. To get from one video clip to the next, these systems stop. To show Web
information, they require a separate browser window. Our authoring and playback
systems remove both of these limitations, enabling true, TV image quality and
videogame-like branching, with live Web pages inside the player.
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Our software tightly couples data acquisition, processing and display into
a single solution, which can be distributed among processors in a network or be
entirely located in a single PC. This architecture is the best guarantee that
data will always be presented in real time. For applications such as broadband
Internet, interactive TV, and hybrid CDs or DVDs, this is our main competitive
advantage.
Macromedia is another company that provides tools that can solve part of
real-time multimedia network delivery problem. Their "Director" software can
manage mixed data format objects within the context of creating a multimedia
application. Macromedia dominates the market for multimedia authoring.
However, Director is not a general-purpose system, nor does it support real-time
playback. To Director's further disadvantage, its content authoring system is
based on a proprietary non-standard programming language called "Lingo".
Our competitive advantage with respect to Macromedia is our software's
customizability based on a programming-free assemblage of software tools, and
its real-time playback capability. The steep and lengthy learning curve
associated with Director's Lingo programming language is a major barrier to its
widespread use for corporate training products. Director's sluggish almost-
real-time playback is one of the reasons multimedia in general has earned such a
poor reputation in the entertainment products marketplace.
Within the Internet "search engine" marketplace, there are at least two
dozen products aimed at Web users for the purpose of searching the Internet.
All of these search engines are primarily list generators; leaving the actual
data evaluation and retrieval to the user. The few search engines that do offer
media retrieval, do not provide much control or formatting of the output. Our
product, WebZinger, is positioned as a "Research Engine", that actually does the
data evaluation and retrieval of rich media assets from the Web.
Legal Proceedings
We were named as a co-defendant in a lawsuit filed by Cord Investment
Company and Frances Peppy. The action was filed March 12, 1999 in the District
Court, City and County of Denver, Colorado alleging violations of state
securities laws and other common law torts stemming from a private placement of
securities. The complaint does not specify the amount of relief, however, we are
vigorously defending against this lawsuit and believe this matter will be
resolved in our favor.
We were also named as a co-defendant in a lawsuit filed June 3, 1999 by
Bertrand T. Ungar in the U. S District Court for the District of Colorado
alleging among other things, conversion, civil theft and breach of fiduciary
duties stemming from the transfer of pledged securities. Plaintiff seeks damages
in the excess of $600,000. We are vigorously defending against this law suit and
believe that the matter will be resolved in our favor.
The company was named as a defendant in a lawsuit styled Timothy Wayne
Wooten and Tammy Marie Wooten v. Amy Marie Abott and California Pro Sports, Inc.
The action was filed on October 21, 1998 in the District Court of Midland,
Texas, 238/th/ Judicial District alleging a product defect that resulted in a
wrongful death. Plaintiffs seek damages in an amount not less than $10,000,000.
The company referred the petition to its insurer, which thereafter provided a
defense. The company intends to vigorously defend itself and believes the
matter will be resolved in its favor.
Prior Business
Prior to January 20, 1999, the company operated under the name California
Pro Sports, Inc., and we imported and distributed products in three participant
sport categories:
. in-line skates
. hockey equipment, and
. snowboard equipment
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In 1993, we acquired the California Pro(TM) in-line skate business from
California Pro USA Corp. Playmaker Co., LTD ("Playmaker"), the in-line skate
manufacturer and majority owner of the seller, granted to us, an exclusive,
perpetual, non-royalty bearing license to the California Pro names and
trademarks and entered into a five-year manufacturing agreement to supply
substantially all of our in-line skate products. In another acquisition
completed on August 1, 1994, the we purchased certain assets, including an
exclusive, perpetual world-wide license to the Kemper(R) name and trademark,
subject to a royalty. The company acquired its license directly from the
registered owner of the Kemper(R) name and trademark, Front 500 Corporation
("Front 500"). In 1995, the company formed USA Skate Corporation, a Delaware
corporation, ("Skate Corp."). Skate Corp. was a majority owned (approximately
62%) subsidiary of the company and its financial statements are consolidated
with those of the company in this prospectus. Effective as of April 30, 1996,
Skate Corp. acquired 100% of USA Skate Co., Inc. ("USA Skate"), a New York
corporation, in a stock purchase transaction. USA Skate owned, directly or
indirectly, all of the capital stock of Les Equipments Sportifs Davtec, Inc.
("Davtec"), a Canadian corporation.
The company's in-line skate products were sold in the United States,
Canada, the Caribbean and U.S. military bases world wide. Its snowboards and
related accessories were sold primarily in the United States and European
countries. Through September 1997, the company sold its hockey-related products
through independent sales representatives and independent distributors in the
United States, Canada and various other countries.
The company had continual operating losses and in 1996 and 1997, management
decided to restructure the company and reduce its debt. The components of the
restructuring plan included management's decision to
. cease operating its California Pro and Kemper licenses,
. begin to concentrate on sub-licensing its trademark rights
. eliminate most of the operating and overhead expenses, and
. look for a merger candidate in a new line of business.
Management's Plan of Restructure
As a result of continuing operating losses, the Board of Directors, early
in 1997, decided to restructure and deleverage the company. Accordingly, in
September 1997, the company and Skate Corp. sold assets of the ice hockey
related business (including the trademark rights to VIC(R), VICTORIAVILLE(TM)
and McMartin(TM)) to Rawlings for $14.5 million plus the assumption of $1million
of debt. The proceeds of the sale were substantially utilized to pay secured
revolving lines of credit, purchase the remainder of the trademarks from the
previous owner, and partially reduce notes payable of Skate Corp. to
unaffiliated note holders.
As a result of the sale to Rawlings, and other restructuring and
deleveraging activities, including the assumption and assignment of certain
notes and trade payables to third parties in exchange for common and/or
preferred stock of the company, the company reduced its liabilities from
approximately $18,988,000 at January 1, 1997 to approximately $1,500,000 at
December 31, 1998.
As part of the restructuring plan, the company eliminated most of the
overhead expenses associated with its sporting goods business and entered into
two sub license agreements regarding the use of the Kemper name. Effective May
1, 1997, the company entered into an agreement through April 30, 2000 with
United Merchandising Corp., a California corporation ("UMC"). The company
granted UMC a non-exclusive, non-transferrable license to manufacture and/or
purchase and sell various snowboarding apparel bearing the name and/or logo of
"Kemper", in its retail stores in the United States. The royalty rate was 7.5%
of the cost to UMC with a minimum of $30,000 per annum. UMC has an option to
renew for one or two additional years. From May 1, 1997 through April 30, 1998
the company received royalties of approximately $34,300.
Effective in February 1998 the company entered into a two year exclusive
Licensing Agreement with Jaysport International, Inc, ("Jaysport"). Subject to
the prior sub-license granted to UMC, the company sub-licensed to Jaysport the
exclusive worldwide right to use the Kemper name and trademark on snowboards,
related
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<PAGE>
equipment, clothing and accessories (the "Products"). Jaysport had the option to
renew the agreement for additional two year periods thereafter. The agreement
included a royalty payment of 3% of net sales on all products with a minimum
royalty of $25,000 per annum.
Accordingly, in the second quarter of 1997, the company began liquidating
remaining inventories and commenced a search for sub-licensees and a merger
candidate. As a result of its search, on October 2, 1997, the company signed a
letter of intent to merge with ImaginOn. Thereafter, the company signed an
agreement and plan of merger as of January 30, 1998 under which there was an
exchange of 100% of the outstanding shares of ImaginOn for approximately 60% of
the outstanding post merger common stock of the company. The transaction was
completed on January 20, 1999.
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<PAGE>
Management Discussion and Analysis
of Financial Condition and Results
Overview
You should note that the business of the company materially changed after
December 31, 1998. We are no longer a participant in the in-line skate
business, hockey business or snowboard business. We are an information
technology company. Except as otherwise described in this prospectus, the
financial information in this prospectus is given through June 30, 1999. The
information in this prospectus is mainly historical.
Recent Developments
On March 8, 1999, Network Specialists, Inc., an Internet service provider,
was merged into iNOW, our subsidiary. iNOW is an Internet service provider that
offers dial up modem services; dial up dedicated; ISDN dial-up; ISDN for LAN;
Frame Relay; Full and Fractional Leased T1services and DSL services. Additional
services include World Wide Web server central office locations and space
rental, secure transaction servers, World Wide Web page authoring, domain name
service, networking hardware sales, and consulting services such as needs/cost
analysis. iNOW currently covers all of the San Francisco Bay Area and plans to
serve the 15 largest metropolitan cities within the United States by the end of
2000. iNOW's prime target markets are the thousands of home offices and small
and medium-sized businesses in Northern California. iNOW offers DSL, or Digital
Subscriber Line, a group of technologies that deliver high-speed connections
over existing telephone copper wiring. The two-wire copper phone line from a
telephone company's central office to a customer's premise is often referred to
as "the last mile". This "last mile" of copper wiring has long been the
bottleneck to providing fast data services to homes and businesses. DSL utilizes
a new line-coding scheme that allows very high-speed, affordable connections
over this last mile for the first time. DSL connections are "always on" or
"always connected". This means that users don't need to dial up each time they
want a connection to the network. Another benefit of having a "dedicated
connection" is the fact that busy signals and dropped connections will never
again be an issue with the Internet service. With iNOW's SDSL (Symmetric DSL)
Service, a corporate LAN will have bandwidth of up to 1.530 Mbps to the Internet
for both uploads and downloads. This is not the case with ADSL (Asymmetric
DSL), which is limited to 384 kbps for uploads. At the click of an icon, iNOW
DSL Service gives a dedicated connection to destination without having to wait
for the call to be set up or get annoying busy signals. The main difference
between ADSL and SDSL is that ADSL upload and download speeds are different.
You can download much faster than you can upload. While SDSL offers the same
speed in both directions.
As of July 1, 1999, we acquired Imagine Digital Productions, Inc. ("IDP").
IDP was a multimedia production studio and publishing company established in
1997. IDP's prime business is the development of proprietary CD-ROM products
and Internet multimedia Web sites on a contract basis for resort area
advertisers. IDP distinguishes itself from competitors by focusing on high
quality user interface design. This includes the use of the latest Internet
technologies, including virtual panoramas, streaming multimedia, and real-time
databases. The completion of this merger significantly extended the reach of
ImaginOn's core technology. IDP's software can be joined with our patented
TDPP technology, extending the business into advertiser supported destination
resort guides, enhancing the WorldCities 2000 series of real-time interactive
travel planners. It will also enable us to feature resort destination sites
through expanded Internet services.
World Cities 2000 San Francisco was released in January 1999 and
WorldCities 2000 New York was released on May 31, 1999. The filming of our
third and fourth interactive titles, "WorldCities 2000 Paris" and "WorldCities
2000 London" is complete and is expected to be launched in the fourth quarter of
1999.
We have granted sellONstream video e-commerce technology licenses to Trashy
Lingerie, Inc. and Times Mirror Publishing.
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<PAGE>
During the second quarter of 1999, we announced the redemption of our
publicly traded warrants. Out of the 1,870,000 public warrants outstanding,
1,784,900 exercised at $1.50 per warrant after we served warrant holders with a
notice of redemption. As a result of these exercises, we received proceeds of
approximately $2,677,300. The shares of common stock underlying the warrants
were included on a registration statement filed by us and declared effective by
the Securities and Exchange Commission. At the close of the redemption period,
we automatically redeemed all remaining outstanding public warrants for $.05
each. All warrants not exercised by the warrant holders from and after June7,
1999 are of no further force and effect, and represent only the right to receive
the redemption price of $.05 per warrant for 85,100 warrants. The money derived
from the exercised warrants was used to help fund the beginning of our first
national consumer advertising program for the WebZinger product line. The
advertising launch began in late August, 1999. Additionally, the money was used
to support funding of advertising and product marketing for the WorldCities 2000
product line and sellONstream.
February 11, 1998, we entered into a co-marketing arrangement with AT&T
whereby the WebZinger CD includes the built-in option of using AT&T WorldNet as
an Internet service provider. WebZinger can also be purchased through Ed Tech,
Education Technology, Inc. Holcomb's Education Resource, School Vision, and is
currently listed in Education Resources, Fas-Track, and Learning Services
reseller catalogs. Additionally, co-marketing arrangements are under negotiation
with other leading software providers.
Discontinued Business
Effective December 31, 1998, the company, operating under the name of
California Pro Sports, Inc., materially changed it business operations from the
in-line skate, snowboard and hockey business to information technology. The
information in this section is mainly historical and does not reflect our
current operating business.
Until December 31, 1998, we operated under the name of California Pro
Sports, Inc. (hereinafter referred to as the "company"), and imported and
distributed products in three participant sports categories.
. in-line skates
. hockey
. snowboards
In-line skates and related accessory products were marketed under the brand
names California Pro(R) and Rolling Thunder(TM); since August 1, 1994,
snowboards and snowboard accessory products were marketed under the Kemper(R)
brand; and ice and street/roller hockey skates, sticks, related gear and
accessories, as well as figure skates were marketed under the VICTORIAVILLE(TM),
VIC(R), Hespeler(TM) and McMartin(R) brands. The company purchased most of its
in-line skate and snowboard products from manufacturers in Taiwan, mainland
China, Austria and Canada. Some of the company's accessory products were
purchased from domestic suppliers. Approximately 70% of all hockey products sold
were manufactured by Davtec, a subsidiary of the company, and skates and related
gear were purchased from foreign suppliers.
The company sold its in-line skate products principally to major retail
sporting goods chains in North America and to U.S. military exchanges worldwide,
through independent sales representative groups, under an exclusive royalty free
perpetual license. Snowboard products were sold to regional sporting goods
chains and specialty shops through independent sales agencies in the U.S. and
Canada and directly by the company to its foreign distributors. Hockey products
were sold in North America through a network of independent sales representative
groups to major retail sporting goods chains as well as smaller, specialized
independent sporting goods shops. Internationally, hockey products were sold to
and distributed by independent distributors located in Germany, Switzerland,
Italy, Austria, Czech Republic, Sweden, France, Finland and Brazil. In 1996 and
1997, due to continuing operating losses, management decided to restructure and
reduce its debt. Accordingly, in September 1997, the company completed the sale
of substantially all of its hockey business assets of Skate Corp.'s direct and
indirect operating subsidiaries, USA Skate and Davtec, to Rawlings Sporting
Goods company, Inc. and Rawlings Canada, Inc. Consideration to Skate Corp.
consisted of $14.5 million cash, including $1 million retained in escrow
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<PAGE>
for purchase price adjustments and proven claims by the purchasers, and
assumption of trade payables and accrued liabilities related to the assets
purchased.
An additional component of the restructuring plan included management's
decision to cease operating its California Pro and Kemper licenses, eliminate
most of the operating and overhead expenses associated with its sporting goods
business and begin to concentrate on sub-licensing its trademark rights.
Accordingly, in the second quarter of 1997, the company began liquidating
remaining inventories and commenced a search for sub-licensees and a merger
candidate. In 1998, the company had no operating revenues, but did realize
income from sub-licensing agreements.
The Merger Transaction
October 2, 1997 the company signed a Letter of Intent with ImaginOn.com to
merge a wholly owned subsidiary corporation with ImaginOn.com, whereby there
would be an exchange of 100% of the outstanding ImaginOn.com for an amount equal
to 60% of the outstanding post merger common stock of the company, subject to
certain adjustments.
At a special meeting of its stockholders, held December 10, 1998, the
stockholders approved the proposed merger and also approved changing the name of
the company from California Pro Sports, Inc. to ImaginOn, Inc. On January 20,
1999, ImaginOn through ImaginOn Acquisition Corp., completed the merger with
ImaginOn.com. The shareholders of ImaginOn.com became stockholders of ImaginOn,
Inc. and were issued 20,206,115 shares of ImaginOn common stock.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the condensed
consolidated financial statements and notes. The following table sets forth our
operating data for the periods as indicated below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- ----------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Revenues $ 77,361 $ (19) $ 91,062 $ 26
Gross Profit 27,888 (19) 30,357 26
Research & Development 308,787 354,788 611,675 531,483
Sales & Marketing 536,776 81,000 1,356,464 267,199
General Administrative 750,994 34,932 1,288,445 112,383
Net Loss (1,499,746) (484,061) (3,221,069) (930,754)
Net loss applicable to
common shareholder (1,748,705) (484,061) (4,303,334) (930,754)
</TABLE>
Net Revenues
Our consolidated net revenues for the three and six months ended June 30,
1999 were increased by $77,380 and $91,036 respectively. Approximately 93% of
this revenue was from iNOW, the Internet service provider. For the three and
six months ended June 30, 1998, we were in the developmental stage and thus
revenues were minimal.
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<PAGE>
Gross Profit
Gross profit for the three and six months ended June 30, 1999 and 1998
increased from $0 in 1998 to $27,888 in 1999 and from $26 to $30,357
respectively.
Research and Development Expenses
Research and development expense for the three months ended June 30, 1999
decreased by $46,001 compared to June 30, 1998. Nearly 71% of the costs in the
three months ended in June 30, 1998 were for the development of WorldCities 2000
San Francisco and New York. Nearly 50% of the costs in the three months ended
in June 30, 1999 were for WorldCities 2000 Paris and London. An additional 36%
of the costs for the World 2000 Paris and London projects were paid in the first
quarter of 1999. Research and Development for the six months ended June 30,
1999 were $ 611,675 compared to $531,483 for the six months ended June 30, 1998.
For the six months ended June 30, 1999, costs increased by $80,192 compared to
the six months ended June 30, 1998. This increase mainly pertained to new
personnel in the software and video production departments.
Sales and Marketing Expenses
Sales and marketing expense for the three months ended June 30, 1999,
increased by $455,776 compared to the three months ended June 30, 1998. Nearly
52% of this increase was attributed to advertising and marketing of WorldCities
2000, WebZinger, and sellONstream products. Another 35% of this increase is
from employee payroll and outside sales and consulting fees. In addition, iNOW
sales consulting and marketing comprised 9% of this $455,766 increase. The
remaining 4% is for general travel and office related expenses. For the six
months ended June 30, 1999, expenses increased by $1,089,265 compared to the six
months ended June 30, 1998. This increase is due to expenses pertaining to the
same areas as mentioned above in the 2nd quarter 1999. Other increases for the
cumulative six months were $454,688 that was a one time expense related to a
stock signing bonus given to a newly hired employee, as well as an increase of
$155,625 for additional staff, $45,000 for additional consulting, an increase of
$11,953 for public relations due to becoming a public company and an increase of
$11,223 due to five trade shows and conferences attended.
General and Administrative Expenses
For the three months ended June 30, 1999, expenses increased by $716,062
compared to the three months ended June 30, 1998. Nearly 8% of this increase is
from iNOW. About 56 % of this increase is from legal and accounting and audit
services mainly pertaining to acquisitions. About 19% of this increase is from
additional personnel hired. The remaining 17% is due to ImaginOn's growth that
included general expenses such as office supplies, furniture, computer
equipment, insurance, travel, communications and rent. For the six months ended
June 30, 1999, expenses increased by $1,176,062 compared to the six months ended
June 30, 1998. This is due to primarily to the same areas mentioned above for
the cumulative six months.
Other Expenses (Income)
For the three months ended June 30, 1999, we had other income of $68,901
compared to other expenses of $13,322 for the three months ended June 30, 1998.
The change was attributable to reduction of interest expense of $13,332 as we no
longer had the notes payable that existed in the three month period ended June
30, 1998. Additionally, we recognized interest income from cash on hand of
$28,018 and royalty and other income of $25,874.
For the six months ended June 30, 1999, we had other income of $5,158
compared to other expenses of $19,715 for the six months ended June 30, 1998.
In the 1999 period, we had $66,500 of expense/interest which represented a
penalty in connection with the redeemed Series B and C Preferred Stock which was
offset by $42,960 of interest income and $28,698 of royalty and other income.
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Liquidity and Capital Resources
On June 30, 1999 we had working capital of approximately $4,500,000
compared to approximately $800,000 at December 31, 1998. The increase in
working capital is attributed to the exercise of public and privately held
warrants which raised approximately $3,879,000 at exercise prices from $.05 to
$2.10, and the sale of 4,000 shares of Series F 12% Convertible Preferred Stock
at $1,000 per share for net proceeds of approximately $3,650,000. Approximately
$3,042,000 of the proceeds were utilized to redeem the remaining 2,510 shares of
Series D & E Preferred Stock as well as support our operating expenses.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Effective December 31, 1998 the company, operating under the name of California
Pro Sports, Inc. materially changed its operations and no longer operated in the
in-line skate, snowboard and hockey business. We are now an information
technology company as of January 20, 1999. The information in this section is
mainly historical and does not reflect our current operating business.
Net Sales. Net sales for the year ended December 31, 1997 were
$9,087,767; comprised of $7,777,000 for the 1997 period of hockey related
products (January 1 through August 31) and sales for the company's in-line skate
and snowboard products $1,311,000 in the 1997 period. In 1997 the company sold
substantially all of the assets of Skate Corp.'s direct and indirect operating
subsidiaries and also ceased operating its California Pro and Kemper licenses,
and began to seek sub-licenses for these brands. In 1998, the company
recognized $103,643 of royalty and other income compared to $1,642,423 in the
1997 period.
Gross Profit. Gross profit was $1,642,423 for the year ended December 31,
1997. As a percent of sales, gross profit was 18% in 1997.
General Administrative and Selling Expenses. General and administrative
expenses decreased to $2,060,000 for the year ended December 31, 1998, compared
to $5,270,153 for the year ended December 31, 1997. This represents a decrease
of $3,210,152. The primary reason for the decrease is attributable to the
company selling substantially all of the assets of the operating subsidiaries of
Skate Corp. in September 1997. Included in the 1997 expenses were approximately
$989,000 of selling expenses and $1,561,000 of general and administrative
expenses. Additionally, sales and marketing expenses related to in-line skates
and snowboards decreased by approximately $279,000 in 1998 compared to 1997 as
the company no longer directly marketed those product lines and relied instead
on its sub-licensees to market the brands.
Consulting Fees, Related Party. Consulting fees, related party decreased
to $180,000 for the year ended December 31, 1998 from $210,000 for the year
ended December 31, 1997. The company paid an officer/ stockholder $10,000 per
month for services primarily related to long-term strategic planning, financing
and acquisitions and paid an additional $30,000 from USA Skate during 1998.
Another officer/stockholder also received $30,000 from USA Skate during 1998.
In 1997 $5,000 was paid per month from USA Skate each to two officers/directors
prior to the time the company sold substantially all of the operating assets of
USA Skate's operating subsidiaries.
Impairment Charges. For the year ended December 31, 1998, the company had
impairment charges of $489,825. These charges related to management's re-
evaluation of certain trademarks and licenses ($327,273), other intangibles
($81,825) and goodwill ($80,723). In 1997 the company had impairment charges of
$237,452 related to its write-off of goodwill, which resulted from the sale of
the company's hockey assets.
Loss from Operations. For the year ended December 31, 1998 the company
had a loss from operations of $2,729,826 compared to $4,075,182 for the year
ended December 31, 1997. The decrease in the loss of $1,345,356 was a result of
lower operating expenses of $2,987,779 in 1998 compared to in 1997, which were
partially offset by the gross profit of $1,642,423 that was recognized in 1997.
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Other Income/Expenses. Other expenses for the year ended December 31,
1998 were $709,509 compared to $2,011,339 for the year ended December 31, 1997.
The decrease of $1,301,830 was primarily attributable to the 1997 loss on the
sale of USA Skate assets (see Note 4 to the consolidated financial statements)
of $751,522 and interest expense related to the operations of USA Skate.
Additionally, interest expense on USA Skate notes was approximately $265,000 in
1997, compared to $105,000 in 1998.
Income Tax Benefit. For the year ended December 31, 1997, the company had
an income tax benefit of $166,404.
Liquidity and Capital Resources. Through September 1, 1997, the company
funded its operations principally through a $5.5 million revolving credit
facility with a bank, and, to a lesser degree, loans from private investors and
trade credit. Concurrent with the sale of the USA Skate assets, the revolving
line of credit facility was repaid in full and other indebtedness of the company
was significantly reduced.
On September 12, 1997, the company sold substantially all of the assets of
its hockey business for $14,500,000 inclusive of $1,000,000 retained in escrow
for purchase price adjustments and proven claims by the purchasers, and
assumption of trade payables and accrued liabilities of approximately $1,600,000
related to the asset purchased. The proceeds were utilized as follows:
<TABLE>
<S> <C>
Secured revolving lines of credit $ 7,984,000
Convertible note holders 949,000
Secured debt 519,000
Other notes 100,000
Stockholder notes 505,000
Payment to previous USA Skate owners 2,678,000
Interest payments 85,000
Cash to escrow account 1,000,000
Cash in bank 680,000
-----------
$14,500,000
</TABLE>
In February 1998, Rawlings and the company agreed to a purchase price
reduction of $395,108 due to a final valuation by Rawlings of the fair value of
the net assets purchased.
During 1998, the company issued 167,754 shares of Series A preferred stock
in a private placement in which the company received $166,653. On July 15, 1998
the company issued 525,262 shares of its common stock in exchange for the
167,754 Series A preferred stock shares. Also in 1998 the company issued 2,080
shares of Series B and C convertible preferred stock (further described in note
7 to the consolidated financial statements) for $1,660,026 net of offering
costs.
Finally, during 1998 the company received $440,000 for the sale of 580,000
shares of restricted common stock.
At December 31, 1998, the company had working capital of approximately
$807,733 compared to a deficit of $400,625 at December 31, 1997. The increase
in working capital was primarily related to the company realizing net proceeds
of approximately $2,267,000 from various private placements as described above,
and the company converting approximately $684,000 of debt to equity.
On October 2, 1997, the company signed a letter of intent to merge with
ImaginOn. Subsequently, the company signed an agreement and plan of merger as
of January 30, 1998 whereby there was an exchange of 100% of the outstanding
shares of ImaginOn for an amount equal to 60% of the outstanding post merger
common stock of the company. ImaginOn is a developmental stage company engaged
in the business of designing, manufacturing and selling consumer software
products for the rapidly growing "edutainment" CD/DVD ROM market as well as an
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<PAGE>
Internet utility and an authoring tool. ImaginOn's proprietary technology,
TDPP, enables the creation of new business and consumer products that provide
user-friendly and entertaining access to multimedia and mixed-format databases
distributed across local disk storage and networks.
For payments to foreign suppliers, the company utilized trade acceptances,
which generally were paid upon receipt of documentation by the company's bank,
but no later than time of delivery, utilizing available cash under the company's
revolving line of credit. For 1997 the company negotiated with its suppliers to
be paid 50% upon shipment and 50% on 90 day terms.
Seasonality. The company's in-line skate and hockey related sales were
strongest in the second and third quarters of each calendar year. Snowboard
product sales were strongest during the third and fourth quarters of each
calendar year.
Foreign Exchange. Through September 1997, the company's products were
principally purchased from suppliers located in Taiwan, mainland China, Korea,
Austria and Canada. The company purchased its in-line skate products for set
prices negotiated annually in U.S. dollars at exchange rates reset annually.
The company purchased its snowboards in Deutsche Marks. The company sold its
snowboard and hockey products both domestically and internationally. The
company did not engage in hedging activities.
Legal Proceedings. The company was named as a defendant in a lawsuit
styled Timothy Wayne Wooten and Tammy Marie Wooten v. Amy Marie Abott and
California Pro Sports, Inc. The action was filed on October 21, 1998 in the
District Court of Midland, Texas, 238/th/ Judicial District alleging a product
defect that resulted in a wrongful death. Plaintiffs seek damages in an amount
not less than $10,000,000. The company referred the petition to its insurer,
which thereafter provided a defense. The company intends to vigorously defend
itself and believes the matter will be resolved in its favor.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales for the year ended December 31, 1997 decreased to
$9,087,767 from $16,952,904 or by $7,865,137 represented an approximate decrease
of 46%. This decrease was primarily caused by a reduction of sales of the
company's hockey products from $11,005,000 in the 1996 period (May 1 through
December 31) to $7,777,000 for the 1997 period (January 1 through August 31).
The reason for the decline in sales of the company's hockey products was
primarily due to the timing of the company's majority ownership position. The
1996 (May through December) period included the months when sales activity was
the highest while the 1997 time of majority ownership (January through August)
excluded some of the historically higher sales months. Additionally, sales for
the company's in-line skate and snowboard products decreased from $5,948,000 in
the 1996 period to $1,311,000 in the 1997 period. The cause of this decrease
included new competitors entering both the in-line skate and snowboard markets
with new product features that took away market share from the company. This
significant decrease was a major factor in management's decision to cease
operating its California Pro and Kemper licenses and concentrated on sub-
licensing its trademark rights.
Gross Profit. Gross profit decreased to $1,642,423 for the year ended
December 31, 1997 compared to $2,891,870 for the year ended December 31, 1996.
As a percent of sales, gross profit increased to 18.2% in 1997 from 17.1% in
1996. The primary reason for the increase in gross profit percentage was the
inventory markdowns and adjustments of $1,059,750 incurred by the company in
1996 attributable to remaining in-line skate and snowboard inventory. The
company believed the write downs and adjustments, which accounted for an
approximate 6.3% decline in its gross profit, were necessary to reflect the then
current market value of its inventory.
Sales and Marketing Expenses. Sales and marketing expenses decreased to
$1,253,670 for the year ended December 31, 1997, compared to $2,434,255 for the
year ended December 31, 1996. This represents a decrease of $1,180,585 or
48.4%. Of this decrease, sales and marketing expenses related to the company's
in-line
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<PAGE>
skate and snowboard business decreased by $1,059,319 to $263,829 in 1997
compared to $1,359,148 in 1996. This decrease was due to management's decision
to cease acting distribution of its California Pro and Kemper licensed products.
General and Administrative Expenses. General and administrative expenses
increased to $3,387,882 for the year ended December 31, 1997, compared to
$3,037,751 for the year ended December 31, 1996. This represented an increase
of $350,131. The primary reason for the increase was attributable to increases
in the following 1997 general and administrative expenses related to USA Skate;
professional fees ($209,250), consulting ($147,375) and bad debt expense
($293,672). Additionally in 1996, USA Skate reduced its accounts receivable
reserve by $208,000. These 1997 increases were partially offset by a reduction
in the company's general and administrative expenses related to in-line skates
and snowboards due to management's decision to cease active distribution of its
California Pro and Kemper licensed products.
Depreciation and Amortization. Depreciation and amortization decreased to
$628,601 for the year ended December 31, 1997 from $681,717 for the year ended
December 31, 1996. The decrease of $53,116 was mainly attributable to decreased
depreciation and amortization of intangible assets as a result of the USA Skate
sale on September 12, 1997.
Consulting Fees, Related Party. Consulting fees, related party increased
to $210,000 for the year ended December 31, 1997 from $200,000 for the year
ended December 31, 1996. The company paid an officer/stockholder $10,000 per
month for services primarily related to long-term strategic planning, financing
and acquisitions and an additional $5,000 from USA Skate during the time of the
company's majority ownership position. Another officer/stockholder received
$5,000 per month from USA Skate during the time of the company's majority
ownership position.
Restructuring Charges. For the year ended December 31, 1997 the company
recorded a restructuring charge of $237,452 related to the write down of the
company's investment in Skate Corp. For the year ended December 31, 1996, the
company had restructuring charges of $1,229,000. These charges related to
management's plan for restructuring operations, whereby, the company wrote off
$411,700 related to certain equipment (molds) for certain of its in-line skate
and snowboard product lines. Additionally, the company re-evaluated certain
trademarks and licenses and other intangibles and recorded expenses of $368,000
and $205,700, respectively. The company has signed a distribution agreement
with Skate Corp. to distribute California Pro and Kemper branded products,
resulting in the closure of the previous distribution facility and termination
of warehouse employees at an expense of $76,500 and $22,100, respectively.
Finally, the company wrote off previously deferred expenses related to a
potential acquisition that the company elected not to pursue to completion.
Loss From Operations. For the year ended December 31, 1997, the company
had a loss from operations of $4,075,182 compared to $4,690,853 for the year
ended December 31, 1996. The decrease in loss of $615,671 was a result of a
decrease in gross profit of $1,249,447 and an increase in operating expenses of
$1,865,118 offset by decreases in sales and marketing expenses of $1,180,855, as
described above. Additionally, the restructure charge of $1,229,000 negatively
affected the 1996 results of operations.
Other Income/expenses. Other expenses for the year ended December 31,
1997 were $2,011,339 compared to $935,848 for the year ended December 31, 1996.
The increase of $1,055,491 was primarily attributable to the loss on the sale of
USA Skate assets of $751,522 and other finance fees for the refinancing of the
USA Skate notes of $440,643. These increases were offset by decreases in
interest expense/other of $414,134 and a gain recorded in 1996 of $479,100 on
the book value of Skate Corp. stock held by California Pro. The 1996 gain was
offset by a loss on marketable securities of $144,457 that the company had
received in settlement of certain obligations.
Income Tax Benefit. For the year ended December 31, 1997, the company had
an income tax benefit of $166,404 compared to $244,500 for the year ended
December 31, 1996.
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<PAGE>
Liquidity and Capital Resources. During 1996 and through September 1,
1997, the company funded its operations principally through a revolving credit
facility with a bank, and, to a lesser degree, loans from private investors and
trade credit. Concurrent with the sale of the USA Skate assets, the revolving
line of credit facility was repaid in full and other indebtedness of the company
was significantly reduced.
On September 12, 1997, the company sold substantially all of the assets of
its hockey business for $14,500,000 inclusive of $1,000,000 retained in escrow
for purchase price adjustments and proven claims by the purchasers, and
assumption of trade payables and accrued liabilities of approximately $1,600,000
related to the assets purchased. The proceeds were utilized as follows:
<TABLE>
<S> <C>
Secured revolving lines of credit $ 7,984,000
Convertible noteholders 949,000
Secured debt 519,000
Other notes 100,000
Stockholder notes 505,000
Payment to previous USA Skate owners 2,678,000
Interest payments 85,000
Cash to escrow agent 1,000,000
Cash in bank 680,000
-----------
$14,500,000
===========
</TABLE>
In February 1998, Rawlings and the company agreed to a purchase price
reduction of $395,108 due to a final valuation by Rawlings of the fair value of
the net assets purchased. At December 31, 1997, the company had a working
capital deficit of approximately $400,625 compared to $5,264,000 at December 31,
1996. The reduction in the working capital deficit is primarily related to the
sale of USA Skate as well as converting debt to equity and negotiating
settlements at less than the recorded liability.
In addition, the company announced that the exercise price of its publicly
traded common stock purchase warrants were reduced from $6.00 to $1.50 per share
and the expiration date was extended from January 18, 1998 to December 31,
1998.
For payments to foreign suppliers, the company utilized trade acceptances,
which generally are payable upon receipt of documentation by the company's bank,
but no later than time of delivery, utilizing available cash under the company's
revolving line of credit.
Seasonality. The company's in-line skate and hockey related sales were
strongest in the second and third quarters of each calendar year. Snowboard
product sales were strongest during the third and fourth quarters of each
calendar year.
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<PAGE>
Foreign Exchange. The company's products were principally purchased from
suppliers located in Taiwan, mainland China, Korea, Austria and Canada. The
company purchased its in-line skate products for set prices negotiated annually
in U.S. dollars at exchange rates reset annually. The company purchased its
snowboards in Deutsche Marks. The company sold its snowboard and hockey
products both domestically and internationally. As a result, extreme exchange
rate fluctuations could have had a significant effect on its sales, costs of
goods sold and the company's gross margins.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The company commenced operations on April 1, 1993, when it acquired the
in-line skate business from SCYL, the predecessor company. The assets acquired
from the predecessor have been recorded at their carrying value to the
predecessor. Except for the amortization of the purchased intangibles, the
accounting bases used by the company are the same as used by the predecessor.
On August 1, 1994 the company acquired certain assets, including an
exclusive, perpetual worldwide license to the Kemper(R) name and trademark,
subject to a royalty, and approximately $3.5 million of existing purchase orders
for Kemper(R) snowboard products.
Effective April 30, 1996, the company, through its subsidiary, USA Skate
Corp., began selling hockey related products under an exclusive worldwide
license to the VIC(R), VICTORIAVILLE(TM) and McMartin(R) brand names.
Net Sales. Net sales for the year ended December 31, 1996 decreased to
$16,952,904 from $17,128,711 or by $175,807, representing an approximate
decrease of 1.0%. This decrease was primarily attributable to the decrease in
revenues of $6,126,000 and $5,055,000 of the company's California Pro in-line
skates and Kemper(R) snowboard products, respectively. This decrease was offset
by including $10,949,000 of the company's ice and street/roller hockey equipment
sales due to the acquisition of USA Skate effective April 30, 1996. The company
believed the decline in sales was caused by high inventory levels of in-line
skate and snowboard products at some of the company's major retail accounts as
well as more competitors entering the snowboard business, some with greater
financial and other resources than the company.
Gross Profit. Gross profit decreased to $2,891,870 for the year ended
December 31, 1996 compared to $4,973,168 for the year ended December 31, 1995.
As a percent of sales, gross profit decreased to 17.1% in 1996 from 29% in 1995.
The primary reasons for the decline in gross profit were sales at reduced
margins for the company's in-line skate and snowboard products. Additionally,
the company incurred inventory markdowns and adjustments of $1,059,750 in 1996
attributable to remaining in-line skate and snowboard inventory. The company
believes these write downs and adjustments, which accounted for an approximate
6.3% decline in its gross profit, were necessary to reflect the then current
market value of its inventory.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$2,434,255 for the year ended December 31, 1996, compared to $1,758,221 for the
year ended December 31, 1995. This represented an increase of $676,034 or
38.4%. Sales and marketing expenses related to the company's in-line skate and
snowboard business were $1,359,148 in 1996 compared to $1,758,221 in 1995, which
represented a decrease of $399,073. This decrease was offset by the additional
sales and marketing expenses of $1,075,107 related to the revenues of the
company's hockey business which it acquired effective April 30, 1996.
General and Administrative Expenses. General and administrative expenses
increased to $3,037,751 for the year ended December 31, 1996, compared to
$2,121,855 for the year ended December 31, 1995. This represented an increase
of $892,564. The primary reason for the increase was attributable to $746,887
of general and administrative expenses incurred within the company's acquired
(effective April 30, 1996) hockey business.
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<PAGE>
Depreciation and Amortization. Depreciation and amortization increased to
$681,717 for the year ended December 31, 1996 from $544,245 for the year ended
December 31, 1995. The increase of $137,472 was mainly attributable to
depreciation and amortization of $301,437 related to the company's acquisition
of USA Skate effective April 30, 1996.
Consulting Fees, Related Party. Consulting fees, related party were
$200,000 for the years ended December 31, 1996 an increase from $120,000 in
1995. The company paid an officer/shareholder $10,000 per month for services
primarily related to long-term strategic planning, financing and acquisitions.
Restructuring Charges. For the year ended December 31, 1996, the company
had restructuring charges of $1,229,000. These charges related to Management's
plan for restructuring operations. As a result of the restructuring plan, the
company wrote off $411,700 related to certain equipment (molds) for certain of
its in-line skate and snowboard product lines. Additionally, the company re-
evaluated certain trademarks and licenses and other intangibles and recorded
expenses of $368,000 and $205,700, respectively. The company signed a
distribution agreement with Skate Corp. to distribute California Pro and Kemper
branded products, which resulted in the closure of the previous distribution
facility and terminating warehouse employees at an expense of $76,500 and
$22,100. Lastly, the company wrote off previously deferred expenses related to
a potential acquisition that the company elected not to pursue to completion.
Income (Loss) from Operations. For the year ended December 31, 1996, the
company had a loss from operations of $4,690,853 compared to income from
operations of $428,847 for the year ended December 31, 1995. The decrease of
$5,119,700 was a result of a decrease in gross profit of $2,081,298 and
increases in sales and marketing and general and administrative of $676,034 and
$892,564, respectively as described above. Additionally, the restructure charge
of $1,229,000 negatively affected the results of operations.
Other Income/Expenses. Other expenses for the year ended December 31,
1996 were $935,848 compared to $280,491 for the year ended December 31, 1995.
The increase of $655,351 was primarily attributable to interest and other
expenses relating to the acquisition and operation of USA Skate of $1,047,308.
This was partially offset by a decrease of $391,951 within California Pro. This
decrease was a direct result of a gain recorded of $479,100 on the book value of
Skate Corp. stock held by California Pro as well as a gain recognized on debt
conversion of $111,366 which were offset by a loss on marketable securities of
$144,457 that the company received in settlement of certain obligations.
Income Tax Expense (Benefit). For the year ended December 31, 1996, the
company had an income tax benefit of $244,500 compared to an income tax expense
of $112,900 for the year ended December 31, 1995.
Liquidity and Capital Resources. During 1996, the company funded its in-
line skate and snowboard operations principally through a $5.5 million revolving
credit facility with a bank, and, to a lesser degree, loans from private
investors and trade credit. During the first quarter of 1995, the company
competed its IPO, realized net proceeds of approximately $4.2 million after
payment of offering expenses.
Under the bank credit facility related to the company's in-line skate and
snowboard businesses, the amount the company could have borrowed was limited by
the level of its eligible accounts receivable and inventory. As of December 31,
1996, based upon the agreed to formulas, the bank was under collateralized by
$808,000. Accordingly, there were no further advances under the in-line skate
and snowboard line of credit. The U.S. and Canadian bank credit facilities
related to the company's hockey business were structured the same. Borrowing
was limited to 50% of eligible inventory, plus 75% of accounts receivable, and
was collateralized by the accounts receivable and inventory. Loans under the
agreements beared interest at one percent above the bank's prime rate and were
due on demand. The loan agreement also required the respective operating
subsidiaries to maintain a certain tangible net worth and restricted its ability
to (i) incur additional obligations or debt; (ii) pay dividends on its capital
stock; (iii) enter into any transaction of merger, consolidation, acquisition or
sale of assets other than in the ordinary course of business, and (iv) pay
annual aggregate compensation of its officers and directors in excess of a
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<PAGE>
specified amount, unless the bank consented to such actions and waived or
amended the applicable restrictions in the loan agreement. At December 31, 1996,
based on the limitations described above, under the in-line skate/snowboard line
of credit the company was eligible to borrow $1,933,000 and the outstanding
balance was approximately $2,742,000. Under the hockey products lines of credit,
the company was eligible to borrow $4,893,000 and the outstanding balance was
approximately $5,308,000.
At December 31, 1996, the company had a working capital deficit of
approximately $5,264,000 compared to working capital of approximately $2,399,000
at December 31, 1995. The decrease in working capital was primarily related to
operating losses as well as debt issued and assumed in the acquisition of USA
Skate. In addition, as described in the foregoing paragraph, the company was in
default on substantially all three of its bank loan agreements.
In May 1996, the company, through USA, completed the acquisition of the
outstanding capital stock of USA Skate. Consideration for the purchase was
$10,500,000 which consisted of $3,650,000 of cash (including approximately
$98,000 of cash acquired), a $1,050,000 8% installment note payable, 250,000
shares of Skate Corp. common stock valued at $300,000, and assumption of
approximately $5,500,000 of debt. The cash portion of the purchase price was
paid with funds raised by Skate Corp., including the private placement of
884,667 shares of Skate Corp. common stock for $961,000, the issuance of
$1,080,000 of 9% notes payable to certain officers/shareholders, and the
issuance of $2,515,000 of 9% convertible promissory notes due January 1997
(which have been extended to July 1, 1997 with interest adjusted to 12% during
the extension period, and were convertible into Skate Corp. common stock under
certain conditions). The debt assumption was financed in part by a bank loan to
USA Skate. Additionally, the former controlling shareholder of USA Skate signed
consulting and noncompete agreements in consideration for the issuance of
400,000 shares of the company's common stock valued at $900,000, and USA Skate
also entered into a worldwide exclusive license agreement for use of certain
trademarks owned by the former controlling shareholder of USA Skate in exchange
for minimum royalty payments due on or before December 2001, with an imputed
(9.5%) present value of $2,213,235.
Seasonality. The company's in-line skate and hockey related sales were
strongest in the second and third quarters of each calendar year. Snowboard
product sales are strongest during the third and fourth quarters of each
calendar year.
Recently Adopted Accounting Standards
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, and in
February 1998, the FASB issued SFAS No. 132, EMPLOYER'S DISCLOSURE ABOUT
PENSIONS AND OTHER POST RETIREMENT BENEFITS. Both of these statements require
disclosure only and therefore will not impact the company's financial
statements.
On January 1, 1998, the company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. This standard establishes requirements for disclosure of
comprehensive income which includes certain items previously not included in the
statements of operations, including minimum pension liability adjustments and
foreign currency translation adjustments, among others. During the year ended
December 31, 1998, the company had no items of comprehensive income. The
financial statements for the year ended December 31, 1997 have been reclassified
to disclose items of comprehensive income. There were no significant tax
effects related to these items.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement is effective for fiscal
years beginning after June 15, 2000. Currently, the company does not have any
derivative financial instruments and does not participate in hedging activities.
Therefore, SFAS No. 133 will not have an impact on the financial statements.
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<PAGE>
Management
Directors and Executive Officers.
Our officers and directors are listed below. Our directors are elected to
hold office until the next annual meeting of stockholders and until their
respective successors have been elected and qualified. Officers are elected by
the Board of Directors and hold office until their successors are elected.
The chart below identifies persons who currently serve as officers and/or
directors.
<TABLE>
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
David M. Schwartz 51 Chairman, Chief Executive Officer, Chief
Financial Officer/Treasurer,
President and Director
Leonard W. Kain 38 Executive Vice President, Secretary and Director
Mary E. Finn 40 Director
Dennis Allison 57 Director
Jim Polizotto 63 Director
</TABLE>
David M. Schwartz has been Chairman, Chief Executive Officer, Chief
Financial Officer,/Treasurer, President and Director of ImaginOn since January
20, 1999. Mr. Schwartz has been principally employed as an officer and director
of ImaginOn.com Inc., our wholly-owned subsidiary, since its formation in 1996.
From 1992 until 1996, Mr. Schwartz served as Vice President of New Media Systems
and Technology at Atari Corporation, where he invented GameFilm technology for
video game applications, and served as a principal designer of the Atari Jaguar
CD peripheral. From 1990 to 1992, Mr. Schwartz was a senior member of the
technical staff at Tandy Electronics Research Labs in San Jose, California,
where he headed the software team developing the first erasable CD ROM. In 1983
Mr. Schwartz started and led CompuSonics Corporation which went public in 1984.
CompuSonics ceased operations in 1989. In 1985, CompuSonics introduced the
CompuSonics DSP1000, the first consumer audio recorder for floppy or optical
disks. The CompuSonics Video PC Movie-Maker, introduced in 1986, inaugurated
real-time digital video recording and editing on desktop PCS. Mr. Schwartz
earned a Bachelor of Arts in Architecture from Carnegie-Mellon University, after
completing a multidisciplinary program in Architecture, Engineering and Computer
Science in 1972. Mr. Schwartz is married to Mary E. Finn, another director of
the company.
Leonard W. Kain has been Executive Vice President, Secretary and a Director
of ImaginOn since January 20, 1999. Mr. Kain was principally employed as an
officer and director of ImaginOn.com, our wholly-owned subsidiary, since its
formation in 1996. From 1991 until July 1996, Mr. Kain served as the real-time
systems manager at Compression Labs, Inc., where he supervised all aspects of
multimedia and video communications, including networking, communications
framing, audio-video compression, real-time system design and user interface
design. From 1988 until 1991, Mr. Kain was software manager at Telebit
Corporation where he managed development of domestic and international high
speed modems and network products. From 1986 until 1988, Mr. Kain served with
Mr. Schwartz as director of software development at CompuSonics Corporation.
Mr. Kain earned a Bachelor's Degree in Engineering from Stevens Institute of
Technology in New Jersey in 1983, and a Masters Degree in Electrical Engineering
from Stanford University in 1985. In 1998, Mr. Kain earned a Masters of
Business Administration from the University of Phoenix.
Mary E. Finn has been a Director of ImaginOn since January 20, 1999. She
has more than 15 years experience in various media fields, utilizing her skills
in writing, editing, broadcasting, teaching and management. From 1994 to 1997,
Ms. Finn served as publicity director for the local chapter of FEMALE, a
national mother's support group. From 1988 to 1991, Ms. Finn served as a talk
show producer and engineer at KNBR in San Francisco, California. From 1982 to
1986, Ms. Finn taught radio production at Phillips Academy in Andover,
-40-
<PAGE>
Massachusetts. Ms. Finn earned a Bachelor of Arts degree in Communication from
the University of Michigan in 1981, and a Master's degree in Media Management
from Emerson College in Boston in 1987. Ms. Finn is married to David Schwartz,
Chairman, Chief Executive Officer and Director of the Company.
Dennis Allison, has been a Director of ImaginOn since March 4, 1999. He is
a Stanford University Computer Systems Laboratory Lecturer. Mr. Allison is also
an independent consultant and an editorial advisor on computer science and
electrical engineering to Addison-Wesley-Longham. A former Series Advisor on
the Prentice-Hall Series on Innovative Technology, Mr. Allison also served on
the editorial board of Microprocessor Report. He was also the co-founder of HaL
Computer Systems and of the People's Computer ImaginOn, a non-profit
organization that played a pivotal role in the development of the personal
computer. He is also a past IEEE CS Governing Board Member and a past member of
the editorial boards of IEEE Computer and IEEE Software.
Jim Polizotto has been a Director of ImaginOn since March 4, 1999. Mr.
Polizotto has served an Engineering Director of VTEL Corporation, Sunnyvale,
California, since 1994, where he is responsible for the Sunnyvale Validation
organization. He also has corporate responsibility to ensure interoperability
with other vendors' systems. VTEL Corporation is a world leader in Digital
Visual Communications. Prior to 1994, Polizotto helped to create a multimedia
development laboratory for IBM in Silicon Valley and was responsible for the
development of many IBM multimedia breakthroughs, including the 1993 launch of
IBM's Internet-based multimedia video streaming server. Mr. Polizotto also
serves on the board of the International Multimedia Teleconferencing Consortium,
Inc., a non-profit corporation comprised of more than 150 companies from around
the world.
Compensation of the Board of Directors
Our directors are not paid any fees for their services. However, directors
are reimbursed their expenses incurred in attending Board of Directors meetings.
In 1998, former directors Messrs. Simpson and Yang each received 10,000
shares of common stock in connection with their services as directors.
Additionally, Mr. Yang exercised 15,000 previously granted options. In 1998,
10,000 incentive stock options were granted to Messrs. Yang and Simpson each at
an exercise price of $1.42.
August 31, 1999, the Compensation Committee approved a $50,000 bonus to
each David Schwartz and Leonard Kain for recognition of their services to
ImaginOn and to reflect current compensation of executives at other information
technology companies.
Audit Committee
We have an Audit Committee that:
. monitors our financial reporting and our internal and external audits;
. reviews and approves material accounting policy changes;
. monitors internal accounting controls;
. recommends the engagement of independent auditors
. reviews transactions between ImaginOn and its officers or Directors;
and
. performs other duties when requested by the Board of Directors.
Directors, Allison, Polizotto and Finn are members of the Audit Committee.
-41-
<PAGE>
Compensation Committee
We also have a Compensation Committee that reviews and approves the
compensation and benefits paid to our executive officers, and administers our
employee stock option plan. Messrs. Allison and Polizotto are members of the
Compensation Committee.
1994 Stock Option Plan
Our stockholders adopted the 1994 Stock Option Plan (the "1994 Option
Plan") which provides for the issuance of options to purchase up to 200,000
shares of common stock to employees, officers, directors of, and consultants to
ImaginOn. The purposes of the 1994 Option Plan are to encourage stock ownership
by our employees, consultants and directors so that they may acquire or increase
their proprietary interest in us, to reward employees, directors and consultants
for past services to us and to encourage such persons to become employed by or
remain in the employ of or otherwise continue their association. All options
under the 1994 Plan have been granted.
1997 Stock Option Plan
Our stockholders adopted the 1997 Stock Option Plan (the "1997 Option
Plan") which provide for the reservation of up to 2,710,000 shares of our common
stock. The purpose of the 1997 Option Plan is to provide additional incentive
to our employees and consultants. Unless sooner terminated, the 1997 Option
Plan will expire in 2007.
The following table provides summary information about our stock option
plans as of September 30, 1999:
<TABLE>
<CAPTION>
Shares Authorized Options Outstanding Options Exercisable
------------------ --------------------- ---------------------
<S> <C> <C> <C>
1994 Plan 200,000 -0- -0-
1997 Plan 2,710,000 847,302 390,050
------------------ --------------------- ---------------------
Total 2,910,000 847,302 390,050
================== ===================== =====================
</TABLE>
Our stock option plans are administered by our Compensation Committee.
They determine additional conditions of the options granted, including the
exercise price and the number of shares to grant.
Options may be granted as incentive stock options ("Incentive Options")
intended to qualify for special treatment under the Internal Revenue Code of
1986, as amended (the "Code"), or as non-statutory stock options ("Non-statutory
Options") which are not intended to so qualify. Only employees of ImaginOn or
its subsidiary are eligible to receive Incentive Options. The period during
which options may be exercised may not exceed ten years. The exercise price for
Incentive Options may not be less than 100% of the fair market value of the
common stock on the date of grant; except that the exercise price for Incentive
Options granted to persons owning more than 10% of the total combined voting
power of the common stock may not be less than 110% of the fair market value of
the common stock on the date of grant and may not be exercisable for more than
five years. The exercise price for Non-statutory Options may not be less than
80% of the fair market value of the common stock on the date of grant.
The Option Plans contain provisions for proportionate adjustment of the
number of shares issuable upon the exercise of outstanding options and the
exercise price per share in the event of stock dividends, recapitalization
resulting in stock splits or combinations or exchanges of shares.
-42-
<PAGE>
In the event of the dissolution or liquidation of ImaginOn, a corporate
separation or division or the merger or consolidation of ImaginOn, the Board may
adopt resolutions which provide that all outstanding options under the Option
Plan may be exercised on such terms as it may have been exercised immediately
prior to, or will expire by a fixed date on or prior to, the date of such
dissolution, liquidation, corporate separation, division, merger or
consolidation. The Option Plan also provides for the acceleration of the
vesting of all outstanding options in the event of any merger or consolidation
in which ImaginOn is not the surviving corporation, or any sale or transfer by
ImaginOn of all or substantially all its assets or any tender offer or exchange
offer for or the acquisition, directly or indirectly, by any person or group or
all or a majority of the then outstanding voting securities of ImaginOn.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our officers and directors and persons who own more
than ten percent of a registered class of our securities (collectively,
"reporting persons"), to file reports of ownership and changes in ownership on
Forms 3, 4, and 5 with the Securities and Exchange Commission ("SEC").
Based solely upon a review of the copies of such forms it has received and
representations from the Reporting Persons, we believe all reporting persons
have complied with the applicable filing requirements.
Executive Compensation
Executives, David Schwartz and Leonard Kain each receive an annual salary
of $120,000 for the year ending December 31, 1999.
Summary Compensation Table
The following table sets forth information regarding compensation paid to
(i) our Chief Executive Officer and (ii) each of our other executive officers
whose total annual compensation exceeded $100,000 for the years ended December
31, 1996, 1997 and 1998. None of our executive officers received awards or
payments of any long-term compensation during the period covered. The
executives listed below resigned and are no longer ImaginOn employees.
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Compensation
---------------------------- -------------- ---------------
Securities
Underlying
Name and Position Year Salary Bonus Other Options /SARs
- ----------------- ---- ------ ----- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry Fong, 1998 150,000(1) -0- -0- -0- -0-
President, former Chief Executive 1997 165,000(1) -0- -0- -0- -0-
Officer and Chairman of the Board 1996 160,000(1) -0- -0- -0- $300,000(2)
Resigned January 20, 1999
Barry S. Hollander, 1998 155,000 76,313(3) -0- -0- -0-
Treasurer and 1997 117,738 -0- -0- -0- -0-
Chief Financial Officer 1996 125,000 -0- -0- -0- -0-
Resigned January 27, 1999
Michael S. Casazza, President 1998 -0- -0- -0- -0- -0-
Chief Operating Officer and Director 1997 157,500 413,00(4) -0-
Resigned September 1997 1996 190,000 -0- -0- -0- 300,000(2)
</TABLE>
__________
-43-
<PAGE>
(1) Mr. Fong was not an employee of the company and received fees of $10,000
per month for consulting services rendered to the company and received an
additional $30,000 fee primarily related to long-term strategic planning,
financing and acquisitions in connection with the Company's prior
business.
(2) Represents guaranty fees accrued in connection with the USA Skate
acquisition. These fees were paid at December 31, 1996 in shares of
common stock based on a price of $1.375 per share, the December 31, 1996
market price.
(3) In January 1998, the company issued 18,500 shares of Series A preferred
stock to Mr. Hollander. The shares were valued based upon the trading
price of the company's common stock, adjusted for the one for three
conversion feature of the preferred stock, and accordingly, the company
recognized an expense of $76,313.
(4) Represents a bonus of 236,000 shares of common stock of the company, for
among other things, the forgiveness of the remaining amount of $149,000 of
the $400,000 promissory note, making other loans to the company and/or its
subsidiaries in order for the company to meet immediately due obligations,
and his effort in negotiating and moving the USA Skate asset sale forward
to completion.
-44-
<PAGE>
Option/SAR Grants in Last Fiscal Year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Individual Grants
-----------------------------------------------------------------------
Number Of Percent Of
Securities Total Options/
Underlying SARs Granted Exercise Of
Options/SARs To Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/sh) Date
(a) (b) (c)(1) (d) (e)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Henry Fong 133,200 1.42 2003
148,000 1.70 2003
74,000 1.98 2003
74,000 2.27 2003
74,000 2.55 2003
74,000 2.83 2003
74,000 3.54 2003
74,000 4.25 2003
-------
66%
-----------------------------------------------------------------------
Barry Hollander 46,800 1.42 2003
52,000 1.70 2003
26,000 1.98 2003
26,000 2.27 2003
26,000 2.55 2003
26,000 2.83 2003
26,000 3.54 2003
26,000 4.25 2003
-------
23%
-----------------------------------------------------------------------
</TABLE>
(1) For the year ended December 31, 1998, 1,100,000 options were granted. The
percentage in this column is based on the total number of options granted to
Henry Fong (725,200) and Barry Hollander (254,800)by California Pro Sports,
Inc.
-45-
<PAGE>
Aggregated Option/SAR Exercises and Year-End 1998 Option/SAR Values.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Value Of
Number Of Securities Unexercised
Underlying Unexercised In-The-Money
Options/SARs Options/SARs
At December 31, 1998 At December 31, 1998
Shares Value (#) ($)
Acquired On Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Henry Fong 863,100 TBD 0/725,200 $83,025/0
- ------------------------------------------------------------------------------------------
Barry Hollander 405,500 TBD 0/254,800 $ 0/0
- ------------------------------------------------------------------------------------------
</TABLE>
-46-
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
Set forth below is certain information as of October 4, 1999, with
respect to ownership of our common and preferred stock held of record or
beneficially by (i) our executive officers named in the summary compensation
table, (ii) our directors, (iii) each person who owns beneficially more than
five percent of our outstanding common and preferred stock; (iv) all directors
and executive officers as a group and (v) the selling shareholder:
<TABLE>
<CAPTION>
Number of Common Percentage Owned of
Name and Address of Beneficial Owner Shares Owned Common Shares
------------------------------------ ------------ -------------
<S> <C> <C>
David Schwartz 5,431,743 13.26%
(Officer and Director)
1313 Laurel Street, Suite 1
San Carlos, CA 94070
Henry Fong 3,039,315(1) 9.19%
2401 PGA Blvd., Suite 190
Palm Beach Gardens, FL 33410
Leonard Kain 2,680,000 6.54%
(Director)
1313 Laurel Street, Suite 1
San Carlos, CA 94070
Mary E. Finn -0-(2) -0-
(Director)
1313 Laurel Street, Suite 1
San Carlos, CA 94070
Dennis Allison -0- -0-
(Director)
1313 Laurel Street, Suite 1
San Carlos, CA 94070
Jim Polizotto -0- -0-
(Director)
1313 Laurel Street, Suite 1
San Carlos, CA 94070
Wayne W. Mills 2,035,000 5.63%
c/o R. J. Steichen & Co.
5500 Wayzata Blvd., Suite 290
Golden Valley, MN 55402
Gage LLC 2,013,823(4) 4.58%
Attn: Sabrina Hew
c/o Citco Trustees Cayman Limited
Commercial Centre
P.O. Box 31106SmB
Grand Cayman, Cayman Islands
British West Indies
</TABLE>
-47-
<PAGE>
All Directors and executive officers as a 8,111,743 19.80%
group (5 persons)
_____________________
(1) These shares have been transferred to Gulfstream Irrevocable 1998 Trust.
(2) Does not include 5,431,743 shares owned by her spouse, David M. Schwartz,
as to which she disclaims beneficial ownership.
(3) The percentage is based on 43,930,179 shares of common stock after
2,959,458 shares of common stock have been registered pursuant to this
registration statement/prospectus.
Certain Relationships and Related Transactions
On January 8, 1998, the company lowered the exercise of all the warrants
held by Messrs. Fong and Casazza to $1.00 per share. In January 1999, Mr.
Casazza sold his 201,400 warrants.
In September 1997, Mr. Fong agreed to convert $181,000 owed to him by the
company, for a note payable of the company, assumed by Mr. Fong, at the
September 30, 1997 market price of $2.00 per share. In December 1997, Mr. Fong
agreed to convert the common shares issued September 30, 1997 to Series A
Preferred Shares of the company. Upon stockholder approval of a
recapitalization measure in July 1998, Mr. Fong received 90,500 shares of the
company's common stock in exchange for the Series A Preferred Stock.
In January 1998, so as to infuse the company with short-term working
capital, Mr. Hollander agreed to exercise 85,000 options to purchase shares of
common stock granted pursuant to an Incentive Stock Option Agreement dated April
23, 1997. In exchange for this exercise, the company awarded Mr. Hollander
29,500 non-statutory stock options and 18,500 shares of Series A Preferred
Stock. On July 15, 1998, the Series A Preferred Shares were converted to 55,500
shares of common stock.
In January 1998, the company authorized the issuance of 50,000 shares of
common stock to Mr. Casazza in exchange for consulting services for the period
September 12, 1997 through January 12, 1998, at the January 5, 1998 market price
of $1.375.
In May 1998, at the request of the company, Barry Hollander exercised
49,500 options so as to infuse the Company with short-term working capital.
In June of 1998, at the request of the company, Henry Fong exercised a
total of 77,200 options so as to infuse the Company with short-term working
capital.
Transactions between the company and its officers, directors, employees
and affiliates were on terms no less favorable to the company than would have
been available from unaffiliated parties. Any such transactions were subject to
the approval of a majority of the disinterested members of the Board of
Directors.
-48-
<PAGE>
Description of Securities
Common Stock
We are authorized to issue up to 50,000,000 shares of common stock, $.01
par value per share. As of October 4, 1999 40,970,721 shares are outstanding.
All outstanding shares of common stock are fully paid and non-assessable, and
all shares of common stock offered in the offering, when issued, will be fully
paid and non-assessable. The holders of ImaginOn common stock:
. have equal ratable dividends from funds legally available, when and if
declared by our Board of Directors;
. are entitled to share ratably in all our assets available for
distribution to holders of common stock upon liquidation, dissolution
or winding up of the affairs of ImaginOn;
. do not have preemptive, subscription or conversion rights and there
are no redemption or sinking fund provisions applicable thereto; and
. are entitled to one vote per share on all matters on which
stockholders may vote at all meetings of stockholders.
The holders of our common stock do not have cumulative voting rights,
which means that the holders of a majority of the outstanding shares represented
at any stockholder meeting at which a quorum is present, voting for the election
of directors, can elect all of the directors to be elected, if they so choose
and, in such event the holders of the remaining shares will not be able to elect
any of the directors.
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock with
such designations, rights and preferences as may be determined from time to time
by the Board of Directors. Accordingly the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidations, conversion, voting or other rights that adversely affect the
voting powers or other rights of ImaginOn's Common Stockholders. Currently there
are 4,000 shares of Series F 12% Convertible Preferred Stock (the "Series F
Preferred Stock") issued and outstanding.
On May 4, 1999 we issued 4,000 shares of Series F Preferred Stock and the
Group F Warrant to purchase 122,553 shares of our common stock. The holders of
the Series F Preferred Stock are entitled to receive dividends out of legally
available funds, subject to declaration by the Board of Directors. Such
dividends are cumulative and shall be paid prior to and in preference to any
dividend on the common stock at an annual rate of 12% of the $1,000 stated
value. Such dividends begin to accrue from the date if issuance and are payable
upon redemption or conversion. Dividends are payable, at the holders option in
cash or unrestricted common stock. The Series F Preferred Stock shall rank
prior to the common stock.
Conversion of Preferred Stock into common stock can only occur by
submitting a Notice of Conversion. After October 31, 1999 (180 days after date
of issue date) the holders of Series F Preferred Stock may convert any whole
number of the Series F Preferred Stock into common stock provided that:
. redemption notice has not been provided by us; or
. holders of Series F Preferred do not currently or as a result of such
conversion, own more that 4.9% of the then outstanding shares of
common stock
-49-
<PAGE>
The number of our shares of common stock upon conversion of the Series F
Preferred Stock is determined by dividing 1,000 by the conversion price. The
conversion price will be the lowest of:
. 125% of the average closing bid price of ImaginOn common stock on the
5 consecutive trading days ending on the trading day immediately
preceding the issuance date; or
. 94% of the average of the 5 lowest closing bid price of ImaginOn
common stock during 22 trading days immediately preceding the
conversion date.
However, the number of shares of our common stock is subject to adjustment
in each of the following cases:
. stock dividend
. declaration of dividends payable in cash while offering a right to
purchase more common stock at the dividend price
. stock split
. combination of outstanding shares of common stock
. issue or reclassify common stock
. consolidation, merger, sale or lease of substantially all of our
assets
. capital reorganization or reclassification of common stock
Redemption of Preferred Stock by us may occur at any time provided that
there is one of the following:
. available full cash amount of the redemption price; or
. available credit facility to pay the cash redemption price; or
. a combination or readily available cash and credit facility to pay the
redemption price.
The redemption price is subject to adjustment of the conversion price in
the event of a stock split, stock dividend or combination of shares or similar
event. The redemption price is determined by one of the following formulas:
. 105% of the aggregate stated value of the Series F Preferred Stock
plus all accrued and unpaid dividends if such redemption occurs before
October 31, 1999 (180 days after the issue date; or
. 110% of the aggregate stated value of the redeemed shares plus all
accrued and unpaid interest if redeemed after October 31, 1999 (180
days after the issue date).
As long as Series F Preferred Stock is outstanding, we are required to
reserve and keep available out of our authorized but unissued common stock no
less that 200% of the number of shares of common stock convertible from the
Series F Preferred Stock. A two-thirds vote of the Series F Preferred
Stockholders is required to amend our Certificate of Incorporation if such
amendment does any of the following:
. create senior preferred stock
. reduce payment to Holders of Series F Preferred Stock due to voluntary
or involuntary liquidation or winding up
. cancel or modify conversion rights
Additionally, we cannot establish a par value of any shares of stock
receivable on conversion of Series F Preferred Stock or consolidate, merger or
permit such unless such acquirer assumes in writing all the obligations of the
Series F Preferred Stock.
-50-
<PAGE>
Warrants and Options
The Warrants. Prior to this offering, we redeemed all of our outstanding
public warrants. As part of the Series F 12% Convertible Preferred Stock
Purchase Agreement dated May 4, 1999 (the "Series F Agreement") the purchaser of
the Series F Preferred Stock also negotiated for a warrant that expires on or
prior to May 3, 2003 to purchase 122,553 shares of common stock (the "Group F
Warrant"). The exercise price ("Group F Warrant Exercise Price") of the common
stock will be the lower of the following:
. 110% of the bid price on a trading day immediately preceding the date
of the warrant; or
. 100% of the bid price on the day all shares of Series F Preferred
Stock are redeemed in full by us; or
. 100% of the bid price on the first trading day immediately following
the day demand and proper notice for registration of the common stock
is received by us.
The Group F Warrant Exercise Price is subject to adjustment in certain
events including but not limited to the following:
. amendment to our Certificate of Incorporation changing the designation
of common stock or the rights, privileges, restrictions or conditions
in respect of the common stock or division of common stock;
. subdivision to our outstanding stock or declare a dividend or make any
distribution to shareholders payable in common stock;
. issue more than 100,000 share of common stock or options to purchase
common stock or securities convertible into common stock with an
exercise price less than the Group F Warrant Exercise Price either
through a public or private placement but not including options
granted pursuant to our Stock Option Plan or shares issued in an
acquisition, or shares issuable pursuant to our convertible
debentures;
. merger, consolidation, reorganization or sale of substantially all our
assets.
Registration Rights
Pursuant to the Series F Agreement, the holder of the Series F Preferred
Stock was granted demand registration rights for the number of shares of common
stock convertible from the Series F Preferred Stock and the Group F Warrant.
Under to the registration rights agreement, we are obligated to register 150%
shares of common stock which may be redeemed upon conversion of the Series F
Preferred Stock and the 122,553 shares of common stock exercisable under the
Group F Warrant. We are fulfilling our obligations under the registration
rights agreement with this registration statement and prospectus.
Indemnification Provided in Connection with the Offering by the Selling
Securityholder
The selling securityholder has agreed to indemnify ImaginOn, its
directors, its officers and each person who controls ImaginOn against any
liabilities and expenses arising out of or based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in this
registration statement and prospectus in reliance upon written information
furnished by the selling securityholder to ImaginOn for use in either of these
documents.
-51-
<PAGE>
Plan of Distribution
We are registering the shares offered by the selling securityholder and no
underwriters are participating in this offering.
We will pay all costs and expenses in connection with the preparation of
this prospectus and the registration of the shares. Brokerage commissions and
similar selling expenses, if any, attributable to the sale of shares will be
borne by the selling securityholder. Selling securityholder may sell their
shares from time to time in one or more types of transactions, which may include
block transactions, on the Nasdaq SmallCap Market. The types of transactions
include:
. negotiated transactions
. put or call option transactions;
. short sales; or
. a combination of the above transaction at market prices at the
time of sale or at negotiated prices.
These transactions may or may not involve brokers or dealers. The selling
securityholder have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of the shares, nor is there an underwriter or coordinating broker
acting in connection with the proposed sale of shares by the selling
securityholder. Pursuant to the Certificate of Designation of the Series F 12%
Convertible Preferred Stock, the securityholder cannot own more than 4.99% of
the issued and outstanding common stock at any one time. This requirement does
not interfere with the securityholder's right to convert the Series F Preferred
Stock over time which in the aggregate would be greater than 4.99% provided that
the securityholder does not own more than 4.99% of the common stock at anyone
time. ImaginOn is registering 2,959,458 shares of common stock with this
registration statement, but the securityholder, can only can convert Series F
Preferred Stock up to 2,013,823 shares of common stock including 122,553 warrant
shares.
We have agreed to indemnify the selling securityholder and the officers,
directors and each person who controls the selling securityholder against all
losses, claims, damages, liabilities and expenses caused by:
. any untrue or alleged untrue statement of material fact contained
in the registration statement, this prospectus or any amendment
or supplement to these documents; or
. any omission or alleged omission to state a material fact in the
registration statement, this prospectus or any amendment or
supplement to these documents that is required to be stated or
necessary to ensure that the documents are not misleading.
The selling securityholder will not be indemnified if the claims relating
to or arising from untrue statements or omissions if:
. the statements or omissions are based on written information
provided by the selling securityholder for use in the preparation
of the registration statement, this prospectus or any amendments
or supplements to these documents; or
. the selling securityholder fails to deliver a copy of this
prospectus to a buyer.
The selling securityholder and any broker-dealers that act in connection
with the sale of securities might be deemed to be underwriters within the
meaning of Section 2(a)(11) of the Securities Act, and any commissions received
by those broker-dealers and any profit on the resale of the securities sold by
them while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act.
Because the selling securityholder may be deemed to be an underwriter
within the meaning of Section 2(a)(11) of the Securities Act, the selling
securityholder will be subject to the prospectus delivery requirements of
-52-
<PAGE>
the Securities Act. We have informed the selling securityholder that the anti-
manipulative provisions of Regulation M promulgated under the Exchange Act may
apply to its sales in the market.
The selling securityholder also may resell all or a portion of the Shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided it meets the criteria and conform to the requirements of that Rule.
Legal Matters
The legality of the securities being offered will be passed on for us by
Friedlob Sanderson Raskin Paulson & Tourtillott, LLC, Denver, Colorado.
Experts
The audited consolidated financial statements of ImaginOn, Inc. and
subsidiaries included in this Registration Statement have been audited by
Gelfond Hochstadt Pangburn & Co., independent certified public accountants, for
the periods and to the extent set forth in their report appearing in the
Registration Statement. Such financial statements have been so included in
reliance upon the report of such firm given upon their authority as experts in
auditing and accounting.
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to you free of charge at the SEC's website at http://www.sec.gov.
Our common stock is traded as "SmallCap Market Securities" on the Nasdaq
National Market. Material filed by us can be inspected at the offices of te
National Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
. Our Annual Report on Form 10-KSB for the year ended December 31,
1998
. Our Quarterly Report on Form 10-QSB for the quarter ended March
31, 1999
. Our Quarterly Report on Form 10-QSB for the quarter ended June
30, 1999
. Our Current Reports on Form 8-K filed March 23, 1999 and July 8,
1999
You may request free copies of these filings by writing or telephoning us
at our principal offices, which are located at the following address:
1313 Laurel Street, Suite 1
San Carlos, CA 94070
(650) 596-9300
Attn: Secretary
-53-
<PAGE>
Glossary
The following glossary may be helpful in understanding the business and
risk factors associated with ImaginOn, Inc. and its wholly-owned subsidiary
ImaginOn.com:
"BROWSER" - Short for Web Browser; it's the tool (program) that allows a
user to surf the web.
"BUFFER" - A storage area for a finite amount of data in a computer system
or digital transmission system.
"CD-ROM" - Compact Disc - Read Only Memory. A CD-ROM is any compact disc
which contains computer data. These discs can store large amounts of data. If
there is a large amount of data on a CD-ROM, then it is usually impractical to
copy the data to the hard disk, in this case, you must insert the disc whenever
you want to use the data. The ROM simply means that you cannot save information
onto these discs. CD-Rom may also refer to the drive used to read these discs.
"COMPILER" - A software program that processes a structured set of data
and creates another data set. If the data is a computer program written in a
human-readable language, the output will usually be a set of instructions that
can be executed by a computer to perform the tasks the programmer intended.
"DVD"- Digital video disc or digital versatile disc. DVD Rom is similar
to a large capacity CD Rom. DVD movies are DVD discs containing digitalized
Hollywood movies. DVD Ram (Random Access Memory) is recordable DVD media, like
CDR (CD Recordable) and CDRW (CD Read/Write discs.)
"E-MAIL" - E-mail stands for electronic mail. Most networks support some
form of e-mail. E-mail allows a user to send text (such as a letter) to another
person on another computer.
"ELECTRONIC-MAIL" - This tool is usually provided by an Internet service
provider. It allows a user to send and receive mail (messages) over the
Internet.
"HTML" - Hypertext Mark-Up Language. HTML is not really a programming
language, but a way to format text by placing marks around the text. For
example, HTML allows a user to make a word bold or underline it. HTML is the
foundation for most web pages.
"HYPERLINK" - A data object, such as text or an image, that has a dual
purpose. The first purpose is to convey information in the form of text or a
picture. The second purpose is to connect the user to another data object, that
may be somewhere else entirely separate from the text or image presented. For
example, on an Internet Web page, the word "Poodle" within a text about dogs
might serve to connect the user to another web page specifically about poodles,
when the user clicks their mouse button while their cursor is on the word
"Poodle."
"HYPERTEXT" - Text on a web page that links the user to another web page.
The hypertext, or links will usually be different color than the other text on
the page and is usually underlined.
"I/O" - Input/Output. The place where data enters or leaves a computer
system or digital transmission system.
"INTERNET" - Originally called ARPANET after the Advanced Research
Projects Agency of the U.S. Department of Defense. This electronic network
connects the hosts together so that a user may go from one Web Page to another
efficiently. The electronic connection began as a government experiment in 1969
with four computers connected together over phone lines. By 1972, universities
also had access to what was by then called the Internet.
-54-
<PAGE>
"JAVA APPLET" -mini-software programs written in the Java language, that
run inside a Web browser window.
"KEYWORD" - A word a user might use to search for a web site.
"LATENCY" - The time it takes for a computer or transmission system to
respond to the user's input.
"LINK" - A link will transport a user from one Internet site to another
with just a click of the mouse. Links can be text or graphic and are
recognizable once the user knows what to look for. Text links usually will be
underlined and often a different color than the rest of the text on the screen.
A graphic link usually has a frame around it.
"LOSSLESS" - A digital process that preserves information. For example,
the process that digitizes financial data for transmission over computer
networks is lossless, so the numbers do not change between sender and receiver.
"LOSSY" - A digital process that loses information. For example, the
process that digitizes voice for long distance telephone calls is lossy, so the
quality of the audio is less than perfect.
"NET" - Short for Internet.
"NETWORK" - A multi-dimensional set of items and the connections between
them.
"NODE" - The point within a network where an item resides, or a connection
is made to an item in the network.
"OBJECT" - A self-contained item of information that has predefined
attributes and behaviors. Objects are used by computer programs to store data
and represent data. Examples of objects are digital images, a text page, a
display window.
"ONLINE" - Having accesses to the Internet.
"REAL-TIME" - To view or hear something in real-time means to see or hear
it immediately and without any slowdowns. Real-time audio on the Internet, for
example, means the user does not have to wait an entire audio file to download,
but can (almost) immediately start listening to the audio as it is coming to
them.
"SITE" - A place on the Internet. Every web page has a location where it
resides which is called its site. Every site has an address usually beginning
with "http://."
"STREAM" - Digital data that is transmitted or delivered as a continuous
flow of information within a channel. The stream may or may not have a fixed
duration. Examples of streams are digitized audio and digitized video.
"SURFING" - The process of "looking around" the Internet.
"URL" - Uniform Resource Locator. The address of an Internet site.
"WWW" - An acronym for the World Wide Web.
"WEB" - Short for the World Wide Web.
"WEB BROWSER" - The tool (program) that allows one to surf the World Wide
Web.
-55-
<PAGE>
"WEB PAGE" - Every time a user is on the Internet, they are looking at a
web page.
"WORLD WIDE WEB" - A full-color, multimedia database of information on the
Internet. Like the name implies the World Wide Web is a universal mass of web
pages connected together through links. Theoretically, if a user clicks on every
link on every web page you would eventually visit every corner of the world
without ever leaving their computer chair.
-56-
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent auditors' report F-2
Consolidated financial statements:
Balance sheets F-3
Statements of operations and comprehensive loss F-4
Statements of shareholders' equity F-5 - F-8
Statements of cash flows F-9 - F-10
Notes to financial statements F-11 - F-34
Unaudited June 30, 1999 Financial Statements: F-35
Balance sheet F-36
Statement of operations and comprehensive losses F-37
Statement of shareholders' equity F-38 - F-40
Statement of cash flows F-41 - F-42
Notes of financial statements F-43 - F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
ImaginOn, Inc.
We have audited the accompanying consolidated balance sheets of ImaginOn, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ImaginOn, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
March 22, 1999
F-2
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets
------
Unaudited December 31, December 31,
Pro forma 1998 1997
------------ ------------ ------------
(Note 7)
<S> <C> <C> <C>
Current assets:
Cash $ 2,714,103 $ 74,103 $ 13,969
Notes and accounts receivable, less allowance
for doubtful accounts of $216,000 in 1997:
Trade 10,000
Related parties (Note 10) 1,477,217 1,477,217 131,270
Other 104,226 104,226 90,000
Prepaid expenses and other 25,000 25,000 28,141
Assets of subsidiary held for sale (Note 4) 624,284 1,104,527
------------ ------------ ------------
Total current assets 4,320,546 2,304,830 1,377,907
------------ ------------ ------------
Furniture and equipment, net of accumulated
depreciation ($469,379,1998; $319,866,1997) 2,674 2,674 153,387
------------ ------------ ------------
Other assets, net of accumulated amortization
($16,666, 1998; $66,137, 1997):
Deferred merger costs 167,777 167,777
Goodwill 191,121
Trademark license costs and other 83,334 83,334 546,212
------------ ------------ ------------
251,111 251,111 737,333
------------ ------------ ------------
$ 4,574,331 $ 2,558,615 $ 2,268,627
============ ============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 278,333 $ 233,532 $ 64,393
Liabilities of subsidiary held for sale (Note 4) 1,263,565 1,714,139
------------ ------------ ------------
Total liabilities (all current) 278,333 1,497,097 1,778,532
------------ ------------ ------------
Minority interest 56,320 385,149
------------ ------------ ------------
Commitments and contingencies (Notes 4, 5, and 10)
Shareholders' equity (Note 7):
Preferred stock, $0.01 par value; authorized
5,000,000 shares:
Series A, issued and outstanding
1,099,685 shares 10,997
Series B/C, issued and
outstanding 1,630 shares 1,300,902 1,300,902
Series D/E, issued and
outstanding 3,000 shares 935,000
Common stock, $0.01 par value; authorized
50,000,000 shares; issued 13,434,731 shares 134,347 134,347 67,344
Warrants 394,200 394,200 394,200
Capital in excess of par 15,583,849 13,968,849 11,080,758
Accumulated deficit (14,052,300) (14,052,300) (10,554,713)
Treasury stock held by subsidiary, at cost,
1,204,950 shares of common stock, 1998;
360,000 shares of common stock and
750,471 shares of preferred stock, 1997 (740,800) (893,640)
------------ ------------ ------------
Total shareholders' equity 4,295,998 1,005,198 104,946
------------ ------------ ------------
$ 4,574,331 $ 2,558,615 $ 2,268,627
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- ----------------
<S> <C> <C> <C>
Net sales $ $ 9,087,767 $ 16,952,904
--------------- -------------- ----------------
Cost of sales:
Substantially from a related party (Note 1) 3,148,423
Others 7,445,344 9,852,861
Inventory markdowns and adjustments 1,059,750
--------------- -------------- ----------------
7,445,344 14,061,034
--------------- -------------- ----------------
Gross profit 1,642,423 2,891,870
--------------- -------------- ----------------
Operating expenses:
General, administrative and selling expenses 2,060,001 5,270,153 6,153,723
Consulting fees, related party (Note 5) 180,000 210,000 200,000
Restructuring and Impairment
charges (Note 11) 489,825 237,452 1,229,000
--------------- -------------- ----------------
Total operating expenses 2,729,826 5,717,605 7,582,723
--------------- -------------- ----------------
Loss from operations (2,729,826) (4,075,182) (4,690,853)
--------------- -------------- ----------------
Other expenses (income):
Interest income, related party (Note 10) (43,948)
Interest expense:
Related parties 297,338 305,947
Other 141,040 669,140 1,083,274
Foreign currency gains (59,791) 44,012
Royalty and other income (103,643) (62,312) (51,376)
Loss on marketable securities (Note 3) 62,392 144,457
Gain on sale of investment in subsidiary (Note 4) (87,593) (111,366)
Gain from issuance of common stock by
subsidiary (Note 4) (479,100)
Finance fees (Notes 4 and 7) 591,060 440,643
Loss on sale of USA Skate assets (Note 4) 125,000 751,522
--------------- -------------- ----------------
709,509 2,011,339 935,848
--------------- -------------- ----------------
Loss before income taxes and minority interest (3,439,335) (6,086,521) (5,626,701)
Income tax benefit (Note 6) (166,404) (244,500)
--------------- -------------- ----------------
Loss before minority interest (3,439,335) (5,920,117) (5,382,201)
Minority interest 58,252 (727,197) 193,681
--------------- -------------- ----------------
Loss before extraordinary item (3,497,587) (5,192,920) (5,575,882)
Extraordinary item (Note 8) 383,705
--------------- -------------- ----------------
Net loss (3,497,587) (4,809,215) (5,575,882)
Other comprehensive income (loss):
Foreign currency translation adjustments 7,774 (7,774)
--------------- -------------- ----------------
Comprehensive loss $ (3,497,587) $ (4,801,441) $ (5,583,656)
=============== ============== ================
Net loss $ (3,497,587) $ (4,809,215) $ (5,575,882)
Amortization of discount on preferred stock (1,120,000)
--------------- -------------- ----------------
Net loss applicable to common shareholders $ (4,617,587) $ (4,809,215) $ (5,575,882)
=============== ============== ================
Basic and diluted loss per share:
Before extraordinary item $ (0.48) $ (0.94) $ (1.37)
Extraordinary item 0.07
--------------- -------------- ----------------
Basic and diluted loss per common share $ (0.48) $ (0.87) $ (1.37)
=============== ============== ================
Weighted average number of shares outstanding 9,549,353 5,544,833 4,078,864
=============== ============== ================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Series A Series B and C
Common Stock Preferred Stock Preferred Stock
-------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amounts Warrants
---------- -------- ---------- -------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 3,783,511 $ 37,835 $394,200
Issuance of 400,000 shares
of common stock (Note 7) 400,000 4,000
Issuance of 36,000 shares
of common stock in
settlement of an account
payable (Note 7) 36,000 360
Issuance of 480,000 shares
of common stock in
settlement of payables to
officers/shareholders
(Note 7) 480,000 4,800
Net loss for 1996
Cumulative foreign
currency translation
adjustment
---------- -------- ---------- -------- --------- --------- -----------
Balances, December 31, 1996 4,699,511 $ 46,995 $394,200
Issuance of 371,493 shares
of common stock in
exchange for 480,417
shares of the Company's
subsidiary stock (Note 4) 371,493 3,715
Issuance of 75,000 shares
of common stock in
satisfaction of 300,000
options to purchase
common stock (Note 5) 75,000 750
Issuance of 75,000 shares
of common stock for
consulting and financial
services (Note 5) 75,000 750
Issuance of 865,225 shares
of common stock in
satisfaction of
$1,171,656 of liabilities
(Note 7) 865,225 8,652
Issuance of 235,701 shares
of common stock for
extending maturity date
on certain notes (Note 4) 235,701 2,357
<CAPTION>
Foreign
currency
Capital in translation Treasury
excess of par Deficit adjustment stock Total
----------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 $ 4,727,492 $ (169,616) $ 4,989,911
Issuance of 400,000 shares
of common stock (Note 7) 896,000 909,000
Issuance of 36,000 shares
of common stock in
settlement of an account
payable (Note 7) 107,640 103,000
Issuance of 480,000 shares
of common stock in
settlement of payables to
officers/shareholders
(Note 7) 655,200 660,000
Net loss for 1996 (5,575,882) (5,575,882)
Cumulative foreign
currency translation
adjustment $ (7,774) (7,774)
----------------- ------------- ------------- ----------- -----------
Balances, December 31, 1996 $ 6,386,332 $ (5,745,498) $ (7,774) $ 1,074,255
Issuance of 371,493 shares
of common stock in
exchange for 480,417
shares of the Company's
subsidiary stock (Note 4) 407,677 411,392
Issuance of 75,000 shares
of common stock in
satisfaction of 300,000
options to purchase
common stock (Note 5) 69,563 70,313
Issuance of 75,000 shares
of common stock for
consulting and financial
services (Note 5) 74,250 75,000
Issuance of 865,225 shares
of common stock in
satisfaction of
$1,171,656 of liabilities
(Note 7) 1,163,004 1,171,656
Issuance of 235,701 shares
of common stock for
extending maturity date
on certain notes (Note 4) 438,284 440,641
</TABLE>
(Continued)
F-5
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Series A Series B and C
Common Stock Preferred Stock Preferred Stock
------------------ ---------------------- -------------------
Capital in
Shares Amount Shares Amount Shares Amounts Warrants excess of par
--------- -------- ------- ----------- ------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 52,500 shares
of common stock upon the
exercise of options (Note 7) 52,500 525 94,475
Issuance of 349,214 Class
A Series Preferred Stock
(Note 7) 349,214 $ 3,492 1,554,638
Issuance of stock to
subsidiary in satisfaction
of $893,640 liabilities
(Note 7) 360,000 3,600 750,471 7,505 882,535
Net loss for 1997
Foreign currency
translation adjustment
--------- ------ -------- -------- --------- ---------- -------- -----------
Balances, December 31, 1997
6,734,430 $67,344 1,099,685 $ 10,997 $394,200 $11,080,758
Issuance of 437,593 shares
of common stock in
consideration for
extending the date on
certain notes (Note 5) 437,593 4,376 538,426
Issuance of 50,000 shares
of common stock for
consulting services (Note 5) 50,000 500 68,250
Issuance of 534,200 shares
of common stock upon
exercise of options (Note 5) 534,200 5,342 574,068
Issuance of 18,500 shares
of Series A preferred
stock (Note 5) 18,500 185 76,128
Issuance of 167,754 shares
of Series A preferred
stock in a private
placement (Note 4) 167,754 1,678 164,975
Issuance of 41,667 shares
of Series A preferred
stock in satisfaction of
$150,000 of liabilities 41,667 417 149,583
Issuance of 3,982,818
shares of common stock in
exchange for 1,327,606
shares of Series A
preferred stock (Note 5) 3,982,818 39,828 (1,327,606) (13,277) (26,551)
<CAPTION>
Foreign
currency
transition
adjustment
Treasury
Deficit stock Total
----------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Issuance of 52,500 shares
of common stock upon the
exercise of options (Note 7) 95,030
Issuance of 349,214 Class
A Series Preferred Stock
(Note 7) 1,568,130
Issuance of stock to
subsidiary in satisfaction
of $893,640 liabilities
(Note 7) $ (893,640)
Net loss for 1997 (4,809,215) (4,809,215)
Foreign currency
translation adjustment 7,774 7,774
------------- ----------- ---------- ---------
Balances, December 31, 1997 $(10,554,713) $ (893,640) $101,946
Issuance of 437,593 shares
of common stock in
consideration for
extending the date on
certain notes (Note 5) 542,832
Issuance of 50,000 shares
of common stock for
consulting services (Note 5) 68,750
Issuance of 534,200 shares
of common stock upon
exercise of options (Note 5) 579,410
Issuance of 18,500 shares
of Series A preferred
stock (Note 5) 76,313
Issuance of 167,754 shares
of Series A preferred
stock in a private
placement (Note 4) 166,653
Issuance of 41,667 shares
of Series A preferred
stock in satisfaction of
$150,000 of liabilities 150,000
Issuance of 3,982,818
shares of common stock in
exchange for 1,327,606
shares of Series A
preferred stock (Note 5)
</TABLE>
(Continued)
F-6
<PAGE>
<TABLE>
<CAPTION>
Series A Series B and C
Common Stock Preferred Stock Preferred Stock
------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amounts Warrants
-------- -------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 245,520 shares of
common stock owned by Skate
Corp. in satisfaction of
$245,520 of liabilities
Issuance of 316,256 shares of
common stock in satisfaction of
$288,826 of liabilities 316,256 3,163
Issuance of 2,080 shares of
Series B and C preferred stock
in connection with private
placement, net of costs (Note 4) 2,080 $ 540,026
Issuance of 1,327,000 shares of
common stock owned by Skate
Corp. In exchange for 884,667
shares of Skate Corp (Note 5)
Issuance of 80,000 shares of
common stock in a private
placement 80,000 800
Issuance of 500,000 shares of
common stock for $400,000
(Note 7) 500,000 5,000
Issuance of 36,790 shares of
common stock for penalty on
Series B/C preferred stock
(Note 7) 36,790 368
Issuance of 742,644 shares of
common stock in exchange for
450 shares of Series B & C
preferred stock (Note 7) 742,644 7,426 (450) (359,124)
Issuance of 20,000 shares to
outside members of the Board
of Directors 20,000 200
Sale of 84,212 shares of
treasury owned by
subsidiary
Amortization of Class B/C
Series preferred stock 1,120,000
<CAPTION>
Foreign
currency
Capital in translation Treasury
excess of par Deficit adjustment stock Total
---------------- -------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of 245,520 shares
of common stock owned by Skate
Corp. in satisfaction of
$245,520 of liabilities 161,503 80,017 245,520
Issuance of 316,256 shares of
common stock in satisfaction
of $288,826 of liabilities 285,663 288,826
Issuance of 2,080 shares of
Series B and C preferred stock
in connection with private
placement, net of costs (Note 4) 1,120,000 1,660,026
Issuance of 1,327,000 shares of
common stock owned by Skate
Corp. In exchange for 884,667
shares of Skate Corp (Note 5) (107,797) 454,099 346,302
Issuance of 80,000 shares of
common stock in a private
placement 39,200 40,000
Issuance of 500,000 shares of
common stock for $400,000
(Note 7) 395,000 400,000
Issuance of 36,790 shares of
common stock for penalty on
Series B/C preferred stock
(Note 7) 47,890 48,258
Issuance of 742,644 shares of
common stock in exchange for
450 shares of Series B & C
preferred stock (Note 7) 351,698
Issuance of 20,000 shares to
outside members of the Board
of Directors 19,800 20,000
Sale of 84,212 shares of
treasury owned by subsidiary 150,255 28,724 178,979
Amortization of Class B/C
Series preferred stock (1,120,000)
</TABLE>
(Continued)
F-7
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Series A Series B and C
Common Stock Preferred Stock Preferred Stock
---------------------- -------------------- --------------------
Capital in
Shares Amount Shares Amount Shares Amounts Warrants excess of par
---------- --------- --------- --------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Receipt by subsidiary of
250,000 shares of common
stock from third party in
settlement of an amount
due to subsidiary from
third party (Note 4)
Net loss for the year
ended December 31, 1998
---------- --------- --------- -------- -------- ---------- ---------- -------------
13,434,731 $ 134,347 1,630 $1,300,902 $394,200 $13,968,849
========== ========= ========= ======== ======== ========== ========== =============
<CAPTION>
Foreign
currency
translation
adjustment Treasury
Deficit stock Total
------------- ------------ ----------- ------------
<C> <C> <C> <C>
Receipt by subsidiary of
250,000 shares of common
stock from third party in
settlement of an amount
due to subsidiary from
third party (Note 4) (414,000) (414,000)
Net loss for the year
ended December 31, 1998 (3,497,587) (3,497,587)
------------- ------------ ----------- ------------
$(14,052,300) $(740,800) $ 1,005,198
============= ============ =========== ============
</TABLE>
F-8
<PAGE>
IMAGINON,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,497,587) $ (4,809,215) $ (5,575,882)
-------------- -------------- --------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary gain (383,705)
Inventory markdowns and adjustments 1,059,750
Net unrealized holding loss 62,392 144,457
Gain on sale of investment in subsidiary (87,593) (111,366)
Gain from issuance of common stock by
subsidiary (479,100)
Loss on sale of USA Skate assets 125,000 751,522
Expense incurred upon issuance of
common stock and options 756,122 724,223
Depreciation and amortization 230,821 628,601 681,717
Amortization of license fee payable
and other 88,867 214,688
Provision for losses on accounts receivable 272,086 250,836 228,000
Foreign currency gains (loss) (59,791) 44,012
Minority interest 58,252 (727,197) 193,681
Restructuring and impairment charges 489,825 237,452 1,229,000
Decrease (increase) in assets:
Accounts receivable (135,947) 2,432,580
Income taxes receivable 221,624 (221,624)
Due from related parties (1,345,947) (310,369) 22,866
Inventories 1,806,578 2,578,805
Prepaid expenses and other (82,898) 436,111 (236,638)
Assets of subsidiary held for sale (205,843)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 853,585 (394,606) (1,210,188)
Payables to officers/shareholders and other
related parties (36,804) 136,250
Income taxes payable (208,304)
Liabilities of subsidiary held for sale (450,574) (1,340,648)
-------------- -------------- --------------
Total adjustments 700,429 1,731,546 6,498,586
-------------- -------------- --------------
Net cash provided by (used in) operating activities (2,797,158 (3,077,669) 922,704
-------------- -------------- --------------
Cash flows from investing activities:
Payment from sale of USA Skate Co., Inc. 14,500,000
Payment or purchase of subsidiary, net
of cash acquired (3,551,760)
Payment for intangible assets (436,600)
Capital expenditures (95,141) (237,545)
Proceeds from sale of marketable securities 166,260
Acquisition, offering and financing costs (421,770)
Deferred merger costs (167,777)
-------------- -------------- --------------
Net cash provided by (used in) investing activities (167,777 14,571,119 (4,647,675)
-------------- -------------- -------------
</TABLE>
F-9
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 174,545 4,543,522
Repayments of notes payable, license fees
and long-term debt (11,713,124) (1,587,263)
Proceeds from sale of treasury stock 178,980
Net proceeds from issuance of
common stock and warrants 2,846,089 819,600
--------------- --------------- --------------
Net cash provided by (used in) financing activities 3,025,069 (11,538,579) 3,775,859
--------------- --------------- --------------
Net increase (decrease) in cash 60,134 (45,129) 50,888
Cash, beginning 13,969 59,098 8,210
--------------- --------------- --------------
Cash, ending $ 74,103 $ 13,969 $ 59,098
=============== =============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 152,000 $ 826,000 $ 1,041,900
=============== =============== ==============
Cash paid for income taxes $ 89,300
==============
Supplemental disclosure of noncash
investing and financing activities:
Purchase (disposition) of USA Skate Co., Inc.
net of cash acquired:
Fair value (cost) of assets acquired (disposed of) $ (16,937,947) $ 11,334,200
Intangible assets 2,777,774
Liabilities (assumed) disposed of 1,899,533 (9,210,214)
Fair value of assets exchanged (1,350,000)
Loss on disposition 538,414
--------------- --------------
Total cash paid (received), net of cash acquired $ (14,500,000) $ 3,551,760
=============== ==============
Issuance of 400,000 shares of common stock in
exchange for consulting and non-compete agreements $ 900,000
==============
Issuance of 480,000 shares of common stock in
settlement of payables to officers/shareholders $ 660,000
==============
Minimum royalties payable in exchange
for a license agreement $ 2,213,235
==============
Issuance of 371,493 shares of common stock in
exchange for 480,417 shares of Company's
Subsidiary stock $ 411,392
===============
Issuance of 316,256, 865,225, and 36,000 shares of
common stock in 1998 and 1997 and 1996, respectively,
in satisfaction of amounts due $ 288,826 $ 1,171,656 $ 108,000
=============== =============== ==============
Issuance of 1,327,000 shares of common
stock owned by subsidiary in exchange
for 884,667 shares of Skate Corp. $ 346,302
===============
Issuance of 41,667 preferred shares
in satisfaction of amounts due $ 150,000
===============
Receipt by subsidiary of 250,000
shares of common stock from third
party in settlement of an amount due
from subsidiary to third party $ 414,000
===============
</TABLE>
F-10
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1. Basis of presentation, business and plan of restructuring:
Basis of presentation:
The accompanying consolidated financial statements include the accounts of
Imaginon, Inc. (formerly known as California Pro Sports, Inc.) (the
"Company") and its subsidiaries, California Pro, Inc. ("CP"), USA Skate
Corporation ("Skate Corp.") and Imaginon Acquisition Corp. Skate Corp. was
formed in 1995 to acquire USA Skate Co., Inc. ("USA Skate") and its
subsidiary, Les Equipments Sportifs Davtec, Inc., a Canadian corporation
("Davtec").
Effective April 30, 1996, the Company, through Skate Corp.,completed the
acquisition of all of the outstanding capital stock of USA Skate. The
acquisition was accounted for as a purchase. Accordingly, the consolidated
statements of operations include the results of operations of USA Skate and
Davtec beginning May 1, 1996. In September 1997, Skate Corp. sold
substantially all of the operating assets of USA Skate and Davtec.
On December 31, 1998 and 1997, the Company owned 100% of the outstanding CP
capital stock, and the Company owned 89.8% and 62.3% of the outstanding
Skate Corp. capital stock, respectively. Minority interest represents Skate
Corp.'s minority shareholders' 10.2% and 37.7% ownership interest in Skate
Corp at December 31, 1998 and 1997, respectively. In addition, on December
31, 1998, the Company owned 100% of the ImaginOn Acquisition Corp. capital
stock. Intercompany transactions have been eliminated in consolidation.
F-11
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1. Basis of presentation, business and plan of restructuring (continued):
Business and plan of restructuring:
In 1997, due to continuing operating losses, management decided to
restructure and deleverage the Company. In connection with these plans, the
Company:
a. Ceased operating the California Pro and Kemper licenses, eliminated most
of the operating and overhead expenses associated with its sporting
goods business and began to concentrate on sub-licensing the Company's
trademark rights.
b. Sold substantially all of its Skate Corp. sporting goods related assets
in September 1997 (Note 4).
c. Completed various private equity placements throughout 1998 and into
1999 (Note 7).
d. Completed the merger of the Company and IMON in January 1999 (Note 10).
e. Completed the sale of Skate Corp. in January 1999 (Note 4).
Prior to the second quarter of 1997, the Company sold in-line skates and
accessories, under the brand names California Pro(R) and Rolling
Thunder(TM), to retail sporting goods stores principally in North America,
and sold snowboards and accessories under the Kemper(R) brand name to
retail sporting goods stores in North America and distributors in Europe
and Japan. In connection with its restructuring and deleverage plans, in
the second quarter of 1997, the Company began liquidating remaining in-line
skate, snowboard and accessories inventories. Prior to September 1997, the
Company also manufactured, imported and marketed VICTORIAVILLE(TM), VIC(R),
and McMartin(TM) ice and street/roller hockey skates, sticks and related
protective gear and accessories for sale to retail sporting goods stores in
the United States and Canada and independent distributors primarily located
in Europe. In September 1997, Skate Corp., sold substantially all of the
operating assets of USA Skate and Davtec. During 1998, the Company operated
exclusively as a licensor of trade names and trademarks. The Company
currently receives income from sub-licenses it has entered into regarding
the use of the Kemper brand name. The Company has no other sporting goods
related business.
F-12
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
2. Significant accounting policies:
Use of accounting estimates in financial statement preparation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statement and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Inventories:
Inventories are stated at the lower of cost (first-in first-out method) or
market. At December 31, 1997, there are no remaining inventories
Furniture, equipment, and depreciation:
Furniture and equipment are stated at cost. Depreciation is provided by use
of accelerated and straight-line methods over the estimated useful lives (5
to 10 years) of the related assets.
Intangible assets:
Intangible assets at December 31, 1998 and 1997 consist of trademark
licence costs related to Kemper and California Pro perpetual license
agreements. Goodwill at December 31, 1997, represents the cost of the
Company's investments in Skate Corp. and its subsidiaries in excess of the
net tangible assets acquired. Trademark license costs are amortized on the
straight-line method over 5 to 12 years. Goodwill is amortized on the
straight-line method over 15 to 25 years.
F-13
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
2. Significant accounting policies:
Intangible assets (continued):
Management assesses the carrying value of intangible and other long-lived
assets for impairment when circumstances warrant such a review, primarily
by comparing current and projected sales, operating income and annual cash
flows on an undiscounted basis, with the related annual amortization
expenses. The Company has not been successful in concluding any
arrangements with regard to sub-licensing of the California Pro brand and
currently is not in any discussions with third parties. Therefore, in 1998,
the Company wrote-off the remaining balance of $409,102 related to the
California Pro trademark. In 1998, the Company also wrote-off the remaining
balance of $80,723 related to goodwill that arose on the 1996 acquisition
of USA Skate.
In 1997, goodwill related to Skate Corp. with a carrying value of $428,573
was written down to $191,121 (Note 4). In 1996, intangible assets with a
carrying value of $9,192,506 were written down to $8,473,806 (Note 11).
The resulting expense of $489,825, $237,452, and $718,700 for 1998, 1997,
and 1996, respectively, were included in restructuring and impairment
charges.
Deferred merger costs:
Costs incurred through December 31, 1998 related to the merger of the
Company and IMON (Note 11) have been deferred. The merger was completed in
January 1999 and at that time the Company charged the costs, as well as
additional amounts incurred in January 1999, directly to equity.
Revenue recognition:
The Company's revenue recognition policy is to record sales as product is
shipped and recognize royalty and other income when sub-licenses report
royalties and the Company receives payment.
F-14
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
2. Significant accounting policies (continued):
Foreign currency transactions:
In 1997, CP primarily purchased and sold its in-line skate products in US
dollars. CP primarily purchased its snowboard products in German Deutsche
Marks ("DM") and sold to its customers in either DM or US dollars. USA
Skate primarily purchased and sold its products in US dollars, and Davtec
primarily purchased its goods in Canadian dollars and sold to customers in
both US and Canadian dollars. Gains and losses on foreign currency
transactions are included in determining consolidated net loss.
Convertible preferred stock:
During 1998, the Company issued Series B and C convertible preferred stock
for which the conversion feature was "in the money" at the date of issue (a
"beneficial conversion feature"). The Company allocated a portion of the
proceeds equal to the intrinsic value of beneficial conversion feature to
capital in excess of par. This amount has been amortized to preferred stock
from the date of issuance through the date the securities are first
convertible.
Net loss per share:
Basic loss per share is computed by dividing loss applicable to common
shareholders by the weighted-average number of common shares outstanding
for the year. In arriving at loss applicable to common shareholders,
amortization of the beneficial conversion feature related to the Series B
and C preferred stock has been deducted from net loss. Diluted loss per
share reflects the potential dilution that could occur if dilutive
securities and other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company, unless the effect is to
reduce a loss or increase earnings per share. The Company had no potential
common stock instruments which would result in diluted loss per share in
1998, 1997, and 1996.
F-15
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
2. Significant accounting policies (continued):
Fair value of financial instruments:
The carrying value of the Skate Corp. convertible promissory notes payable,
included in liabilities of subsidiary held for sale on the consolidated
balance sheet (Note 4), is not practicable to estimate because management
believes that due to the financial condition of the Company, similar
instruments with similar terms could not be obtained elsewhere. The fair
values of the Company's receivables to related parties are not practicable
to estimate, due to the related party nature of the underlying transactions
and indefinite payment terms. The carrying amounts of the Company's other
financial instruments approximates their fair values because of the short
maturities of these instruments.
Subsidiary equity transactions:
In 1996, the Company adopted an accounting policy to recognize in its
consolidated financial statements, gains and losses resulting from the
sales of previously unissued stock by its subsidiaries, which have the
effect of reducing the parent's percentage equity holding. There were no
gains or losses in 1998 or 1997. The Company recorded a gain of $479,100 in
1996 (Note 4).
Stock-based compensation:
Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock-Based Compensation, defines a fair-value-based method of accounting
for stock-based employee compensation plans and transactions in which an
entity issues its equity instruments to acquire goods or service from
non-employees, and encourages but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB No. 25") and related interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
F-16
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
2. Significant accounting policies (continued):
Recently issued accounting standards:
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This standard establishes requirements for disclosure
of comprehensive income which includes certain items previously not
included in the statements of operations, including minimum pension
liability adjustments and foreign currency translation adjustments, among
others. During the year ended December 31, 1998, the Company had no items
of comprehensive income. The financial statements for the year ended
December 31, 1997 have been reclassified to disclose items of comprehensive
income. There are no significant tax effects related to these items.
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
and in February 1998, the FASB issued SFAS No. 132, Employer's Disclosure
about Pensions and Other Post Retirement Benefits. Both of these statements
require disclosure only and therefore will not impact the Company's
financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for fiscal
years beginning after June 15, 1999. Currently, the Company does not have
any derivative financial instruments and does not participate in hedging
activities. Therefore, management believes that SFAS No. 133 will not have
an impact on its financial statements.
Reclassifications:
Certain amounts reported in the 1997 and 1996 financial statements have
been reclassified to conform to the 1998 presentation.
3. Marketable securities:
In 1996, the Company received marketable securities from an affiliate in
payment of an amount owed to the Company by a related party, which the
Company classified as trading securities under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. In 1997, the Company
sold these securities and recognized a loss of $62,392. This amount is
included in loss on marketable securities in the consolidated statements of
operation and comprehensive loss.
F-17
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4. Skate Corp. transactions:
Gain from issuance of common stock by subsidiary:
During 1996, Skate Corp. sold 884,667 shares of its common stock at $1.20
per share in a private placement for $1,061,600 and issued 250,000 shares
of common stock at $1.20 per share valued at $300,000 in connection with
the acquisition of USA Skate. Before these transactions, the Company owned
100% of Skate Corp. These transactions resulted in a gain from the issuance
of stock by the subsidiary of $479,100.
Gain on sale of investment in subsidiary:
In June 1996, the Company satisfied $260,000 of amounts payable to
officers/shareholders by transferring to the officers/shareholders 216,667
shares of Skate Corp. common stock from the Company's original investment
in 2,000,000 Skate Corp. shares. The recorded cost of the Skate Corp.
shares transferred was $148,634, and the fair value of those shares was
$260,000 (based on sales of the Skate Corp. shares to third parties),
resulting in a gain of $111,366.
In March 1997, the Company satisfied payables in the amount of $106,500 by
exchanging 88,750 shares of Skate Corp. common stock held by the Company in
satisfaction of the liability. The carrying value of the Skate Corp. shares
was $61,237 and the estimated fair value of those shares was $106,500. The
Company also sold 83,000 shares of Skate Corp. common stock held by the
Company to a third party. The carrying value of the Skate Corp. shares was
$57,270 and the sales price was $99,600. These transactions resulted in
total gains of $87,593.
Purchase of subsidiary common stock:
In May and September 1997, the Company acquired 230,417 shares of Skate
Corp. common stock from two shareholders (one of which was an officer) in
exchange for 238,160 shares of common stock of the Company. In 1997, the
Company also issued 133,333 shares of common stock to acquire 250,000
shares of Skate Corp. common stock, that otherwise the Company would have
been obligated to redeem. The Company accounted for these transactions
under the purchase method of accounting based upon the market value of the
common stock issued by the Company.
F-18
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4. Skate Corp. transactions (continued):
Sale of USA Skate assets:
On September 12, 1997, the Company sold substantially all of the operating
assets of USA Skate for $14,500,000, with $1,000,000 to be held in escrow
for potential purchase price adjustments and other claims. The proceeds of
the sale were used to repay the Company's outstanding lines of credit and
other liabilities. Subsequent to September, purchase price and other
adjustments have reduced the principle amount of the escrow account by
approximately $423,000 and approximately $180,000 of the escrow account was
disbursed and used to partially repay a trade liability. The Company
recognized a loss in 1997 of approximately $752,000 on the sale of the USA
Skate assets, and due to the post closing adjustments an additional loss of
$125,000 in 1998.
The remaining account balances of Skate Corp. have been classified as
assets and liabilities held for sale in the accompanying consolidated
balance sheets and consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Assets held for sale:
Cash $ 39,782
Cash held in escrow 397,002 $ 472,002
Accounts receivable:
Trade 47,525
Related parties 187,500 585,000
---------- ----------
$ 624,284 $1,104,527
========== ==========
Liabilities held for sale:
Accounts payable and accrued expenses $ 545,451 $ 589,239
Note payable, related party 50,000
Convertible promissory notes payable 718,114 1,074,900
---------- ----------
$1,263,565 $1,714,139
========== ==========
</TABLE>
F-19
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4. Skate Corp. transactions (continued):
Sale of USA Skate assets (continued):
The accounts receivable, related parties are non-interest bearing and are
due January 1999 through 2000. The convertible promissory notes were
originally due in January 1997 with interest at 9%. In January 1997, the
due date of the notes was extended to July 1997 and the interest rate was
adjusted to 12%. Beginning July 1997, substantially all of the note holders
agreed to extend the notes for 30 day intervals in exchange for the Company
issuing the note holders common stock of the Company at each extension
date. During, 1997, the Company had issued 235,701 shares of common stock
and recognized financing fees of approximately $440,641. During 1998, the
Company issued 437,593 shares of common stock, and recognized financing
fees of $542,802 for the note extensions. The notes were paid in full in
January 1999.
In December 1998, Skate Corp. negotiated and received 250,000 shares of
common stock of the Company in settlement of accounts receivable of
$580,000. The market price on the day of settlement was $1.656 and
accordingly Skate Corp. realized a loss of $166,000 which is included in
the consolidated operating expenses in the financial statements. The
250,000 shares are included in treasury stock.
Subsequent sale of the Company's investment in Skate Corp.:
In April 1998, the Company received commitments from a group of accredited
investors to purchase for $1,400,000 the shares of common stock of Skate
Corp. owned by the Company along with an option to acquire shares of the
Company in exchange for the purchased shares of Skate Corp. The options
allowed the investors to exchange each common share of Skate Corp. for 1.5
shares of the Company's common stock. In April and May 1998, the Company
received gross proceeds of $255,000 (net proceeds of $166,653) from
investors acquiring 335,507 shares of Skate Corp. Each of the investors
exercised their options to exchange those shares for 167,754 shares of the
Company's Series A preferred stock, which automatically converted to
503,261 shares of the Company's common stock on July 15, 1998 upon the
shareholders approving an increase in the authorized common shares of the
Company from 10,000,000 to 20,000,000.
F-20
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4. Skate Corp. transactions (continued):
Subsequent sale of the Company's investment in Skate Corp. (continued):
Subsequent to the receipt of the $255,000, this offering was closed to
further investors. The offering was closed to further investors as the
Company was able to obtain similar financing on terms more beneficial to
the Company through the sale of preferred stock as discussed in Note 7.
Upon the closing of the offering, two officers/shareholders of the Company
agreed to purchase the shares of Skate Corp. from the Company for $90,000
with no conversion rights. The purchase price was based on the net book
value of the Company's investment in Skate Corp. at the time of the
agreement. The sale of Skate Corp. was completed, and the Company received
the $90,000, in January 1999.
5. Commitments and contingencies:
Office lease:
The Company is currently leasing office space in South Carolina on a month-
to-month basis for $3,000 per month plus certain real estate and property
taxes. Total rent expense for 1998, 1997, and 1996 was approximately
$41,000, $227,000 and $277,000, respectively, and includes rent expense and
lease termination fees in 1997 on the Company's prior operating warehouses
and office space.
In-line skate license agreements:
The Company has various license agreements with Playmaker, Co. Ltd.
("Playmaker") under which the Company has the exclusive, royalty-free right
to use the California Pro and Rolling Thunder names and trademarks on in-
line skates, accessories and other products in the United States, Canada,
certain areas of the Caribbean and U.S. military exchanges worldwide. The
Company has also entered into an agreement with Playmaker whereby Playmaker
will pay the Company a 5% royalty on all sales of any product made by
Playmaker to any new customer of Playmaker generated by the Company. No
royalties have been agreed to or paid to date under this agreement. The
agreements are subject to cancellation if the Company does not meet certain
sales and/or purchase requirements.
F-21
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. Commitments and contingencies (continued):
In-line skate license agreements (continued):
The Company has a patent license agreement related to one feature on
several of the Company's in-line skate models. Under the license
agreements, the Company pays royalty fees based on its sales of the related
items. Playmaker reimburses the Company for a portion of the royalties
paid. The royalties were not significant in 1998, 1997, or 1996.
Kemper license agreements:
The Company has a license agreement for the exclusive, perpetual use of the
Kemper name on snowboards and accessories. The Company pays a royalty based
on net sales of products sold under this license.
In 1997, the Company entered into a three-year exclusive sub-license
agreement with a third party which allows the third party to manufacture
and sell certain Kemper products. The agreement provides for the Company to
receive license fees based on manufacturing costs, or an annual minimum
guaranteed payment.
In February 1998, the Company entered into a two-year agreement with a
third party snowboard manufacturer and marketer. The agreement, in effect,
assigns all of the Company's license rights to the Kemper name (except for
the sub-license described above) to the third party in exchange for the
greater of a royalty fee based on sales, or an annual minimum guaranteed
payment.
Employment and consulting agreements:
On a month to month basis, the Company accrues expense to an officer/
shareholder consulting fees of $10,000 per month. Skate Corp. paid
consulting fees to two Company officers/shareholders that totaled $60,000
in 1998, and $90,000 in 1997 and 1996, respectively.
Prior to 1997, the Company had issued warrants to purchase 300,000 shares
of common stock to an unrelated financial advisory consultant. In 1997, in
lieu of the warrants to purchase 300,000 shares of common stock, the
Company issued the party 75,000 shares of common stock.
F-22
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. Commitments and contingencies (continued):
Employment and consulting agreements (continued):
In 1997, the Company entered into a financial advisory and consulting
agreement with an unrelated third party. Under this agreement, the Company
issued 75,000 shares of common stock and 33,333 shares of Series A
preferred stock to the consultant (included in total Series A preferred
stock issuances on the consolidated statement of shareholders' equity). In
1998, the Company began working with another financial consultant who was a
former director and officer of the Company. Under the agreement, the
Company issued 50,000 shares of common stock to the consultant. The Company
recorded consulting expense for the shares issued based on the market value
of the common stock.
Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the
financial statements of the Company.
6. Income taxes:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
F-23
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. Income taxes (continued):
The provision (benefit) for income taxes for the years ended December 31,
1998, 1997, and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal $ (174,000)
State and local 41,900
Foreign $ (166,404) (29,300)
------------ ---------- -----------
(166,404) (161,400)
------------ ---------- -----------
Deferred:
Federal $ (1,089,000) (1,345,000) (1,393,000)
State and local (108,000) (219,000) (230,600)
Foreign (120,000) 46,000
------------ ---------- -----------
(1,197,000) (1,684,000) (1,577,600)
------------ ---------- -----------
Change in valuation allowance
for deferred tax assets 1,197,000 1,684,000 1,494,500
------------ ---------- -----------
Income tax benefit $ $ (166,404) $ (244,500)
============ =========== ===========
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1998, 1997, and
1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- --------
<S> <C> <C> <C>
Statutory income tax benefit (34%) (34%) (34%)
State and local income taxes 1%
Deferred income tax valuation
allowance 35% 28% 24%
Other (1%) 3% 5%
------- -------- ------
(3%) (4%)
======= ======== ======
</TABLE>
F-24
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. Income taxes (continued):
The following is a summary of the Company's deferred tax assets and
liabilities at December 31, 1998, and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 4,012,000 $ 2,919,000
Intangible assets 492,000 308,000
Accounts receivable 94,000 174,000
----------- -----------
Inventories 4,598,000 3,401,000
Valuation allowance for deferred
tax assets (4,598,000) (3,401,000)
----------- -----------
$ $
=========== ===========
</TABLE>
Net operating loss carryforwards of approximately $10,700,000 are available
to offset future taxable income, if any, through 2018. The net operating
loss carryforwards may be subject to certain restrictions due to the sale
of Skate Corp. assets, the IMON merger and other transactions. A valuation
allowance has been provided to reduce the deferred tax assets, as
realization of the assets is not assured.
7. Shareholders' equity:
Series A preferred stock:
In 1997, the Company issued 349,214 shares of Series A preferred stock
(including 30,167 to an officer/shareholder) in satisfaction of $1,568,130
of liabilities (including $181,000 due to the officer/shareholder). In
1997, the Company also issued 750,471 shares of Series A preferred stock
and 360,000 shares of common stock to its subsidiary in satisfaction of
intercompany liabilities, which resulted in an increase in treasury stock
of $893,640. The shares were valued based upon the trading price of the
Company's common stock, adjusted for the one for three conversion feature
of the preferred stock.
F-25
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
7. Shareholders' equity (continued):
Series A preferred stock (continued):
During 1998, the Company issued 18,500 shares of Series A preferred stock
to an officer of the Company. The shares were valued based upon the trading
price of the Company's common stock, adjusted for the one for three
conversion feature of the preferred stock, and accordingly, the Company
recognized an expense of approximately $76,313. During 1998, the Company
also issued 167,754 shares of Series A preferred stock in a private
placement, in which the Company received $166,653, and the Company issued
41,667 shares of Series A preferred stock in satisfaction of $150,000 of
liabilities.
Each share of outstanding Series A Convertible Preferred Stock
automatically converted to three shares of common stock in July 1998 upon
shareholder approval of a recapitalization measure that increased the
authorized number of common shares of the Company, from 10,000,000 to
20,000,000. Upon conversion of the Series A Preferred Stock into common
stock, there were no Series A Preferred shares outstanding and accordingly
all rights for Series A stockholders have been terminated.
Series B/C preferred stock:
During 1998, the Company issued 2,080 shares of Series B and C convertible
preferred stock ("Series B/C") for $1,660,026 (net of offering costs) at a
price of $1,000 per share. The Series B/C stock is convertible at the
option of the holder at any time after 90 days from the closing date, into
a number of shares of common stock equal to $1,000 divided by the lower of
65% of the average market price of the common stock for the five trading
days immediately prior to the conversion date, or the market price on the
day of first closing. During the fourth quarter of 1998, the Company issued
36,790 shares of common stock to the Series B/C shareholders as a penalty
for not completing a registration statement within an agreed upon time
period. The Company recorded financing fee expense of $48,258 based on the
market value of the common shares issued. The registration statement was
filed in the fourth quarter of 1998 and the holders of Series B and C
convertible preferred stock converted 450 shares into 742,644 shares of
common stock of the Company. At December 31, 1998, 1,630 shares of Series
B/C remain outstanding.
F-26
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
7. Shareholders' equity (continued):
Series D/E preferred stock:
In January 1999, the Company with the assistance of its financial
consultant completed private placements whereby the Company received net
proceeds of $2,550,000 from accredited investors introduced to the Company
by the consultant, for the purchase of 1,500 shares each of Series D and E
Convertible Preferred Stock, par value $.01 ("Series D/E") at a price of
$1,000 per share. The Series D/E stock is convertible at the option of the
holder at any time after 90 days from the closing date into a number of
shares of common stock equal to the lower of $1,000 divided by 75% of the
average closing bid price of the common stock for the five trading days
immediately prior to the conversion date, or 120% of the market price on
the day of closing. In connection with the placement of the Series D/E, the
Company issued warrants to purchase 300,000 shares of common stock to
financial advisors that assisted with placements. One-half of the warrants
are exercisable at $7.28063 per share (the market price of the common stock
at the date of issuance). All warrants expire in January 2004.
Unaudited pro forma balance sheet:
The accompanying consolidated balance sheet includes an unaudited pro forma
consolidated balance sheet as of December 31, 1998, that gives effect to
the following transactions as if these transactions had been consummated on
December 31, 1998:
a. The receipt of $2,550,000 cash from investors who purchased 3,000
shares of Series D/E preferred stock from the Company as described
above. The portion of the proceeds equal to the intrinsic value of the
beneficial conversion feature ($1,615,000) has been allocated to
capital in excess of par.
F-27
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
7. Shareholders' equity (continued):
Unaudited pro forma balance sheet (continued):
b. The receipt of $90,000 cash from two officers/shareholders of the
Company to purchase all of the Company's shares of Skate Corp. common
stock as described in Note 4, "Subsequent sale of the Company's
investment in Skate Corp." Thus the unaudited pro forma balance sheet
reflects the receipt of $90,000 of cash in exchange for the assets and
liabilities held for sale, the elimination of the historical Skate
Corp. minority interest, the decrease in treasury stock that had been
recognized in the historical consolidation, and the recognition of
$44,801 of intercompany accounts payable due to Skate Corp. that had
been eliminated in the historical consolidation. The pro forma
adjustment does not result in any gain or loss to the Company.
The unaudited pro forma consolidated balance sheet should be read in
conjunction with the historical financial statements of the Company. The
unaudited pro forma consolidated balance sheet does not purport to be
indicative of the financial position of the Company had the transactions
occurred on December 31, 1998.
Issuances of common stock:
During the year ended December 31, 1998, the Company issued 437,593 shares
of its common stock at prices from $.70 to $1.72 per share in exchange for
the extensions of the maturity date on notes of Skate Corp. The Company
recognized finance fee expense of $542,902 related to these services.
Additionally, the Company issued 50,000 shares of its common stock at
$1.375 per share (the market value of the stock on the effective date of
issuance) to a consultant who was a former director and officer of the
Company. The Company recognized $68,750 of consulting expenses related to
this issuance. During the year ended December 31, 1998, 534,200 options
and/or warrants were exercised at $1.00 to $1.15 per share, by officers
(211,700), consultant (300,000), director (15,000) and an employee (7,500).
In July 1998, the Company sold 80,000 shares of restricted common stock in
a private placement to a third party for $40,000. During the year ended
December 31, 1998, the Company received proceeds of $400,000 cash from
investors who acquired 500,000 shares of restricted common stock from the
Company.
F-28
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
7. Shareholders' equity (continued):
Issuances of common stock (continued):
In 1998, the Company issued 316,256 shares of common stock in satisfaction
of $288,826 of liabilities. In 1997, the Company issued 865,225 shares of
common stock (including 299,633 to officers/shareholders) in satisfaction
of $1,171,656 of liabilities (including $493,995 due to the
officers/shareholders). The shares were valued at the trading price of the
Company's common stock.
Issuance of stock to Skate Corp.:
In 1997, the Company issued 750,471 shares of preferred stock and 360,000
shares of common stock to Skate Corp. in satisfaction of intercompany
liabilities of $893,640. This transaction was accounted for as a treasury
stock transaction in the consolidated financial statements.
During the year ended December 31, 1998, the Company issued 245,520
treasury shares owned by Skate Corp. with a carrying value of $84,017 in
satisfaction of $245,520 of Skate Corp. liabilities held for sale. As a
result of this transaction, the treasure stock balance has been reduced by
$84,017.
During December 1998 Skate Corp. sold 84,212 treasury shares with a
carrying value of $28,724 for cash of $178,979. As a result of this sale
the carrying value of treasury stock has been reduced by $28,724 and
capital in excess of par was increased by $150,255.
The Company also issued 1,327,000 treasury shares owned by Skate Corp. with
a carrying value of $454,099 in exchange for 884,667 shares of Skate Corp.
As a result of this transaction, the treasury stock balance has been
reduced by $454,099.
F-29
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
7. Shareholders' equity (continued):
Issuances of common stock in 1996:
During 1996, the Company issued 400,000 shares of the Company's common
stock at an agreed value of $900,000, or $2.25 per share, as compensation
under a consulting and non-compete agreement; and 36,000 shares of common
stock at $3.00 per share (the trading price of the stock at the date the
Board of Directors authorized the issuance) in satisfaction of a $108,000
account payable. The Company also issued 480,000 shares of the Company's
common stock to officers/shareholders of the Company at $1.37 per share
(the trading price of the stock at the date the Board of Directors
authorized the issuance) in satisfaction of $660,000 of payables.
Stock options:
The Company has a stock option plan (the "1994 Stock Option Plan") which
provides for the issuance to employees, officers, directors, and
consultants of the Company options to purchase up to 200,000 shares of
common stock. Options may be granted as incentive stock options or as non-
statutory options. Only employees are eligible to receive incentive
options. For options that are granted, the exercise period may not exceed
ten years. The exercise price for incentive options may not be less than
100% of the fair market value of the Company's common stock on the date of
grant, except for options issued to persons controlling more than 10% of
the Company's common stock, for which the option price may not be less than
110% of the fair market value of the Company's common stock on the date of
grant. The exercise price for non-statutory options may not be less than
80% of the fair market value of the Company's common stock on the date of
grant.
In 1997, the Company granted options to purchase 150,000 shares of common
stock to non-employees for services provided to the Company. General and
administrative expense were charged $42,500.
F-30
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
7. Shareholders' equity (continued):
Stock options (continued):
A summary of the status of the Company's stock options and weighted average
exercise prices is as follows:
<TABLE>
<CAPTION>
1994 Plan Other Total
-------------------------------------------------------
Shares Price Shares Price Shares Price
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
January 1, 1996 36,500 $2.50 36,500 $2,50
Forfeited (16,500) $2.50 (16,500) $2.50
-------- ----- --------- ----- --------- -----
Outstanding,
December 31, 1996 20,000 $2.50 20,000 $2.50
Granted 130,000 $1.00 150,000 $0.83 280,000 $0.95
Exercised (22,500) $1.00 (30,000) $1.00 (52,500) $1.00
-------- ----- --------- ----- --------- -----
Outstanding,
December 31, 1997 127,500 $1.24 120,000 $0.89 247,500 $1.07
Canceled (20,000) $2.50 (100,000) $0.88 (120,000) $1.15
Granted 49,500 $1.00 1,100,000 $2.22 1,149,500 $2.17
Exercised (157,000) $1.00 (157,000) $1.00
-------- ----- --------- ----- --------- -----
Outstanding,
December 31, 1998 1,120,000 $2.20 1,120,000 $2.20
======== ===== ========= ===== ========= =====
</TABLE>
The 1994 Plan options expire from 1999 through 2003. The other options
expire from 2000 through 2002.
Had compensation cost for the 1994 options granted in 1997 been determined
based on the fair value at the grant dates consistent with the provisions
of SFAS No. 123, the Company's net loss and loss per share would not have
been materially different from that reported.
F-31
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
7. Shareholders' equity (continued):
Warrants:
The Company has outstanding warrants to purchase 1,990,000 shares of common
stock at $1.00 per share that expire in June 1999 (the "Warrants"). The
Company also has outstanding warrants to purchase 120,000 Warrants at $0.30
per Warrant that expire in June 1999.
In 1997, the exercise price of warrants to purchase 500,000 shares of the
Company's common stock that had been granted to two officers/shareholders
of the Company were reduced from $2.38 per share to $1.00 per share (which
approximated fair value). These warrants expire from 2002 through 2003.
The Company also has outstanding warrants to purchase 58,331 shares of
common stock at $4.81 per share that expire in 2000.
8. Extraordinary item:
The Company recognized an extraordinary gain of $383,705 in 1997 (of which
$149,000 related to debt due to officer/shareholder) from the
extinguishment of debt for amounts less than the carrying value of the
liabilities.
9. Foreign operations and export sales:
Information about the Company's operations in the United States and Canada
for the years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997:
United Combined
States Canada Eliminations total
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 5,494,000 $ 3,594,000 $ 9,088,000
Intercompany sales 740,000 $ (740,000)
----------- ----------- -----------
Net sales $ 5,494,000 $ 4,334,000 $ (740,000) $ 9,088,000
=========== =========== =========== ===========
Loss from operations $(3,650,000) $ (418,000) $ (7,000) $(4,075,000)
=========== =========== =========== ===========
Identifiable assets $ 2,269,000 $ 2,269,000
=========== ===========
</TABLE>
F-32
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
9. Foreign operations and export sales (continued):
<TABLE>
<CAPTION>
1996:
United Combined
States Canada Eliminations total
------ ------ ------------ -----
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 11,877,000 $ 5,076,000 $ 16,953,000
Intercompany sales 8410,000 $ (841,000)
------------ ------------ ------------ ------------
Net sales $ 11,877,000 $ 5,917,000 $ (841,000) $ 16,953,000
============ ============ ============ ============
Income (loss) from
operations $ (5,366,000) $ (590,000) $ 85,000 $ (4,691,000)
============ ============ ============ ============
</TABLE>
During the years ended December 31, 1997, and 1996, sales by geographic regions
were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Europe and other $ 1,395,330 $ 3,225,000
Canada 3,185,923 4,949,000
Japan 101,595 312,000
----------- -----------
Total exports 4,682,848 8,486,000
USA sales 4,404,919 8,467,000
----------- -----------
Total sales $ 9,087,767 $16,953,000
=========== ===========
</TABLE>
10. Merger agreement:
On January 20, 1999, the Company, through ImaginOn Acquisition Corp., a
newly formed, wholly owned subsidiary of the Company, completed a merger
with ImaginOn.com, Inc. of San Carlos, California ("IMON"), a privately
held company. IMON, formed in March 1996, designs, manufactures and sells
consumer software products for Internet users. At closing, IMON's
shareholders received approximately 60% of the post merger issued and
outstanding common stock of the Company (21,248,665 shares) in exchange for
their IMON common stock.
F-33
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
10. Merger agreement (continued):
The Company filed a proxy statement relating to the transaction in November
1998 that includes financial statements of IMON, unaudited pro forma
financial information reflecting the merger, and other information about
IMON and the merger. The merger transaction was approved December 1998 by
the boards of directors of both companies and was also approved by the
Company's shareholders. The merger transaction was consummated on January
20, 1999. During 1998, the Company advanced ImaginOn $1,433,269 at 9%
interest. This amount, plus interest receivable of $43,948, is classified
as notes receivable, related party on the consolidated balance sheet.
On March 8, 1999, the Company acquired Network Specialists, Inc., an
internet service provider for $230,000 cash and approximately 260,000
shares of the Company's common stock.
11. Restructuring and impairment charges:
The Company initiated its restructuring plan in 1996, which included the
implementation of product line changes and a cost reduction program
beginning in the fourth quarter of 1996. The Company recorded restructuring
an impairment charges with consists of the following:
<TABLE>
<CAPTION>
Non-cash asset Other
write downs charges Total
----------- ------- -----
<S> <C> <C> <C>
1996:
Equipment $ 411,700 $ 411,700
Trademarks 368,000 368,000
Organization costs and other
Intangibles 205,000 205,500
Consulting costs 145,500 145,500
Severance 22,100 22,100
Lease termination 76,500 76,500
----------- ---------- -----------
$ 1,130,400 $ 98,600 $ 1,229,000
=========== ========== ===========
1997:
Goodwill $ 237,452 $ 237,452
=========== ===========
1998:
Goodwill $ 489,825 $ 489,825
=========== ===========
</TABLE>
F-34
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
ASSETS
------
<TABLE>
<S> <C>
Current assets:
Cash $ 5,174,218
Accounts receivable, less allowance for
doubtful accounts of $6,000 107,720
Inventory 25,938
Prepaid expenses and other 105,957
------------
Total current assets 5,413,833
------------
Furniture and equipment, net of accumulated
depreciation of $103,821 131,117
------------
Other assets, net of accumulated
amortization of $187,837:
Goodwill 1,436,945
Trademark and license costs 79,168
Other 141,557
------------
1,657,670
------------
$ 7,202,620
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 242,563
Accrued expenses 664,779
------------
Total liabilities (all current) 907,342
------------
Shareholders' equity (Note 5):
Preferred stock, Series D/E/F, $0.01 par value;
authorized 5,000,000 shares, issued 4,000 3,556,951
Common stock, $0.01 par value; authorized
50,000,000 shares; issued 40,873,887 408,740
Warrants 84,736
Capital in excess of par 8,547,540
Deficit accumulated during the development stage (6,302,689)
------------
Total shareholders' equity 6,295,278
------------
$ 7,202,620
============
</TABLE>
F-35
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Three months ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Revenues $ 77,361 $ (19)
Cost of revenues 49,473
------------
Gross profit 27,888 (19)
------------ ------------
Operating expenses:
Research and development 308,787 354,788
Selling expense 536,776 81,000
General and administrative expense 750,994 34,932
------------ ------------
1,596,557 470,720
------------ ------------
Loss from operations (1,568,669) (470,739)
------------ ------------
Other expenses (income):
Interest expense 13,322
Interest income (664)
Other income (68,237)
------------
(68,901) 13,322
------------ ------------
Net loss (1,499,768) (484,061)
Amortization of discount on preferred stock (248,937)
------------
Net loss applicable to common shareholders $ (1,748,705) $ (484,061)
============ ============
Loss per share $ (.05) $ (.02)
============ ============
Weighted average number of shares outstanding 36,700,257 20,748,115
============ ============
</TABLE>
F-36
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
Six months ended March 29, 1996
June 30, (date of incep-
tion) to June
1999 1998 30, 1999
---- ---- --------
<S> <C> <C> <C>
Revenues $ 91,062 $ 26 $ 96,607
Cost of revenues 60,705 61,769
----------- -----------
Gross profit 30,357 26 34,838
----------- ----------- -----------
Operating expenses:
Research and development 611,675 531,483 2,414,965
Selling expense 1,356,464 267,199 2,006,399
General and administrative expense 1,288,445 112,383 1,760,693
----------- ----------- -----------
3,256,584 911,065 6,182,057
----------- ----------- -----------
Loss from operations (3,226,227) (911,039) (6,147,219)
----------- ----------- -----------
Other expenses (income):
Interest expense 66,500 19,715 236,190
Interest income (6,279) (6,589)
Other income (65,379) (74,131)
----------- -----------
(5,158) 19,715 155,470
----------- ----------- -----------
Net loss (3,221,069) (930,754) (6,302,689)
Amortization of discount on preferred stock (1,082,270) (1,082,270)
----------- -----------
Net loss applicable to common shareholders $(4,303,339) $ (930,754) $(7,384,959)
=========== =========== ===========
Loss per share $ (.12) $ (.05) $ (.39)
=========== =========== ===========
Weighted average number of shares outstanding 36,053,963 20,585,369 18,780,386
=========== =========== ===========
</TABLE>
F-37
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CUMULATIVE PERIOD FROM MARCH 29, 1996
(DATE OF INCEPTION) TO JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series D, E and F
convertible Deficit
Common stock preferred stock Accumulated
----------------------- -----------------------
Capital during the
in excess development
Shares Amount Shares Amount Warrants of par stage
---------- ---------- ---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for 9,033,332 90,333 (87,000)
services
Net loss (394,906)
---------- ---------- ---------- ---------- ------------ ---------- -----------
Balances, December 31, 1996 9,033,332 90,333 (87,000) (394,906)
Issuance of common stock for cash, 10,073,067 100,731 601,833
net of issuance costs of $49,686
Issuance of common stock to 67,750 678 3,072
employees in exchange for earned
bonuses at $0.15 per share
Exercise of common stock warrants 121,950 1,220 5,530
for cash
Exercise of common stock warrants 154,574 1,546 7,010
in exchange for note payable
Issuance of warrants to purchase 72,158
shares of common stock, net
Net loss (946,512)
---------- ---------- ---------- ---------- ------------ ---------- -----------
Balances, December 31, 1997 19,450,673 194,508 72,158 530,445 (1,341,418)
Issuance of common stock and 1,138,200 11,382 313,353 165,180
warrants for cash, net of
issuance cost of $348,438
Issuance of common stock to 135,500 1,355 61,145
employees in exchange for earned
bonus
Issuance of common stock in 23,742 237 10,714
exchange for accounts payable
<CAPTION>
Total
shareholders'
equity
-------------
<S> <C>
Issuance of common stock for 3,333
services
Net loss (394,906)
-------------
Balances, December 31, 1996 (391,573)
Issuance of common stock for cash, 702,564
net of issuance costs of $49,686
Issuance of common stock to 3,750
employees in exchange for earned
bonuses at $0.15 per share
Exercise of common stock warrants 6,750
for cash
Exercise of common stock warrants 8,556
in exchange for note payable
Issuance of warrants to purchase 72,158
shares of common stock, net
Net loss (946,512)
-------------
Balances, December 31, 1997 (544,307)
Issuance of common stock and 489,915
warrants for cash, net of
issuance cost of $348,438
Issuance of common stock to 62,500
employees in exchange for earned
bonus
Issuance of common stock in 10,951
exchange for accounts payable
</TABLE>
Continued
F-38
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
CUMULATIVE PERIOD FROM MARCH 29, 1996
(DATE OF INCEPTION) TO JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series D, E and F
convertible
Common stock preferred stock
----------------------- ----------------------
Capital
in excess
Shares Amount Shares Amount Warrants of par
---------- --------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Repurchase of common stock (542,000) (5,420) (119,580)
Issuance of warrants to purchase shares of 12,398
common stock in connection with the
issuance of a bridge financing
Issuance of options to a consultant 1,987
Net loss
----------- --------- ---------- ---------- ----------- ----------
Balances, December 31, 1998 20,206,115 202,062 397,909 649,891
Exercise of 4,075,065 warrants at exercise 4,075,065 40,751 (757,177) 4,562,527
prices between $.055 and $2.10
Shares issued in acquisition (Note 2) 16,000,602 160,006 3,000 1,570,000 394,200 2,574,915
Issuance of 123,200 shares to employees 123,200 1,232 65,577 611,012
Issuance of 260,000 shares of common stock 260,000 2,600 1,399,320
in connection with acquisition (Note 3)
Issuance of 88,540 shares of common stock 88,540 885 (885)
in exchange for cashless conversion of
119,060 warrants to purchase common stock
Amortization of Series D and E preferred 1,000,000 (1,000,000)
stock
<CAPTION>
Deficit
Accumulated
during the Total
development shareholders'
stage equity
-------------- ---------------
<S> <C> <C>
Repurchase of common stock (125,000)
Issuance of warrants to purchase shares of 12,398
common stock in connection with the
issuance of a bridge financing
Issuance of options to a consultant 1,987
Net loss (1,740,202) (1,740,202)
-------------- ---------------
Balances, December 31, 1998 (3,081,620) (1,831,758)
Exercise of 4,075,065 warrants at exercise 3,846,101
prices between $.055 and $2.10
Shares issued in acquisition (Note 2) 4,699,121
Issuance of 123,200 shares to employees 677,821
Issuance of 260,000 shares of common stock 1,401,920
in connection with acquisition (Note 3)
Issuance of 88,540 shares of common stock
in exchange for cashless conversion of
119,060 warrants to purchase common stock
Amortization of Series D and E preferred
stock
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
CUMULATIVE PERIOD FROM MARCH 29, 1996
(DATE OF INCEPTION) TO JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series D, E and F
Common stock convertible Deficit
preferred stock Accumulated
----------------- -------------------
Capital during the Total
in excess development Shareholders'
Shares Amount Shares Amount Warrants of par stage Equity
---------- -------- ------ ----------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 165,410 shares of common 165,410 1,654 (490) (419,768) 418,114
stock in exchange for 490 shares of
Series E preferred stock
Issuance of 4,000 shares of Series F 4,000 3,474,681 175,319 3,650,000
preferred stock
Amortization of Series F preferred 82,270 (82,270)
stock
Redemption of Series D and E (2,510) (2,150,232) (891,872) (3,042,104)
preferred stock
Redemption of 74,823 public warrants (15,773) 12,031 (3,742)
at $.05 each
Repurchase of 45,045 shares of (45,045) (450) (49,550) (50,000)
previously issued common stock
Proceeds received from Section 16c 168,988 168,988
Net loss for six months ended June 30, (3,221,069) (3,221,069)
1999
---------- -------- ------ ----------- -------- ---------- ------------ -------------
Balances, June 30, 1999 40,873,887 $408,740 4,000 $ 3,556,951 $ 84,736 $8,547,540 $(6,302,689) $ 6,295,278
========== ======== ====== =========== ======== ========== ============ =============
</TABLE>
F-40
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
March 29, 1996
Six months ended (date of incep-
June 30, tion) to June
--------
1999 1998 30, 1999
---- ---- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,221,069) $ (930,754) $ (6,302,689)
- ---------- - --------- - -----------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 172,544 10,259 197,879
Bad debt expense 6,000
Interest expense for issuance of notes payable 77,942
Expense incurred upon issuance of common stock 677,821 62,500 760,342
Changes in operating assets and liabilities, net
of effects of business acquisition
Accounts receivable (107,480) (107,480)
Inventories (25,938) (25,938)
Prepaid expenses and other (84,322) (143) (101,880)
Accounts payable and accrued expenses 448,360 97,307 829,592
---------- -------- -----------
Total adjustments 1,086,985 169,923 1,636,457
---------- -------- -----------
Net cash used in operating activities (2,134,084) (760,831) (4,666,232)
---------- -------- -----------
Cash flows from investing activities:
Cash paid on business acquisition, net of
cash acquired (212,548) (212,548)
Deferred merger costs (125,000) (125,000)
Capital expenditures (33,817) (6,336) (70,963)
---------- -------- -----------
Net cash used in investing activities (371,365) (6,336) (408,511)
---------- -------- -----------
Cash flows from financing activities:
Bank overdraft (1,587)
Proceeds from notes payable and advances 3,099,550 466,480 4,627,304
Payments on notes payable (184,980) (153,429)
Redemption of preferred stock and warrants (3,095,846) (3,095,846)
Proceeds from issuance of common stock,
warrants, and other, net 7,665,089 489,530 8,870,932
---------- -------- -----------
Net cash provided by financing activities 7,668,793 769,443 10,248,961
---------- -------- -----------
</TABLE>
F-41
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Period from
March 29, 1996
Six months ended (date of incep-
June 30, tion) to June
--------
1999 1998 30, 1999
---- ---- --------
<S> <C> <C> <C>
Net increase in cash 5,163,344 2,276 5,174,218
Cash, beginning 10,874
------------
Cash, ending $ 5,174,218 $ 2,276 $ 5,174,218
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ $ $ 18,351
============ ============ ============
Cash paid for taxes $ $ $ 3,593
============ ============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Purchase of Network Specialists, Inc. net of cash
acquired:
Fair value of assets acquired $ 115,000 $ 115,000
Intangible assets 1,600,000 1,600,000
Liabilities assumed (100,000) (100,000)
Fair value of assets exchanged (1,402,000) (1,402,000)
------------ ------------
Cash paid, net of cash acquired $ 213,000 $ 213,000
============ ============
Issuance of warrants to purchase common stock $ $ 313,353 $ 397,909
============ ============ ============
Exercise of common stock warrants in exchange
for note payable $ $ $ 8,556
============ ============ ============
Conversion of warrants for shares of common stock $ 885 $ $ 885
============ ============ ============
Issuance of common stock in exchange for
accounts payable $ $ 10,951 $ 10,951
============ ============ ============
Common stock issued in connection with the merger
between the Company and ImaginOn.com $ 4,699,121 $ $ 4,699,121
============ ============ ============
</TABLE>
F-42
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1. The interim financial statements:
The interim financial statements have been prepared by ImaginOn, Inc. (the
"Company", formerly known as California Pro Sports, Inc.), and in the
opinion of management, reflect all material adjustments which are
necessary to a fair statement of results for the interim periods
presented, including normal recurring adjustments. Certain information
and footnote disclosures made in the last annual report on Form 10-KSB
have been condensed or omitted for the interim statements. The financial
statements presented are those of the surviving entity from the merger
(see Note 2). It is the Company's opinion that, when the interim
statements are read in conjunction with the December 31, 1998 Annual
Report on Form 10-KSB and the Company's proxy statement dated December
10, 1998, the disclosures are adequate to make the information presented
not misleading. The results of operations for the three and six months
ended June 30, 1999 and 1998, are not necessarily indicative of the
operating results for the full year.
2. Organization and merger:
On January 20, 1999, the Company, through ImaginOn Acquisition Corp., a
wholly owned subsidiary of the Company, completed a merger with
ImaginOn.com, Inc. of San Carlos, California (formerly known as ImaginOn,
Inc., "IMON") a privately held company. IMON, formed in March 1996,
designs, manufactures and sells consumer software products for Internet
users. At closing, IMON's shareholders received approximately 60% of the
outstanding post-merger common stock of the Company (20,206,115 shares)
in exchange for their IMON common stock. The transaction has been
recorded as an acquisition of ImaginOn, Inc. by IMON and a
recapitalization of IMON.
The accompanying consolidated financial statements include the accounts of
ImaginOn, Inc., and its subsidiaries, ImaginOn Acquisition Corp., IMON,
and Network Specialists, Inc. (Note 3). The Company is in the development
stage and since inception has devoted substantially all of its efforts to
product research and development, raising capital and recruiting
personnel.
3. Business acquisition:
On March 8, 1999, the Company acquired Network Specialists, Inc. ("INOW"),
an internet service provider for $230,000 cash and 260,000 shares of the
Company's common stock. The acquisition was accounted for as a purchase,
and the results of operations of INOW are included in the Company's
consolidated statement of operations from the date of acquisition. The
total purchase price was allocated to the assets and liabilities acquired
based on their estimated fair values, including goodwill of approximately
$1,600,000 which is being amortized by the use of the straight-line
method over three years.
The following unaudited pro forma financial information for the six months
ended June 31, 1999 and 1998 give effect to the acquisition as if it had
occurred effective at the beginning of each respective period.
F-43
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Period ended June 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
Revenue $ 157,108 $ 210,026
Net loss $ (3,329,563) $ (1,618,768)
Net loss applicable to common shareholders $ (4,411,833) $ (1,618,768)
Loss per share $ (.12) $ (.08)
Shares used in per share calculation 36,148,770 20,845,369
</TABLE>
The unaudited pro forma financial information above does not purport to
represent the results which would actually have been obtained if the
acquisition had been in effect during the period covered or any future
results which may in fact be realized.
4. Sale of the Company's investment in USA Skate Corporation:
In 1998, two former officers/shareholders of the Company agreed to purchase
all of the shares of USA Skate Corporation (a subsidiary of the Company
through January 1999) that were owned by the Company for $90,000. The
purchase price was based on the net book value of the Company's
investment in Skate Corp. at the time of the agreement. The sale of Skate
Corp. was completed and the Company received the $90,000 in January 1999.
The transaction did not result in any gain or loss to the Company.
5. Shareholders' equity:
Issuance of common stock prior to the January 20, 1999 merger:
At December 31, 1998, ImaginOn, Inc. had 13,434,731 shares of common stock
outstanding and 1,630 shares of Series B and C ("Series B/C") convertible
preferred stock outstanding. In January 1999, prior to the merger, these
preferred shares were converted into 1,879,626 shares of common stock. In
January 1999, an additional 39,845 shares of common stock were issued to
the Series B/C shareholders as a penalty for not completing a
registration statement within an agreed upon time period. The Company
recorded an expense of $81,500 based upon the market value of the shares
issued.
In January 1999, the Company issued 125,000 shares of common stock to a
consultant to the Company for introducing accredited investors to the
Company who purchased $5,000,000 of Series B/C and D/E convertible
preferred stock.
The Company issued 521,400 shares of common stock in connection with the
exercise of 521,400 options, and the Company received $521,400 in
connection with the exercise at prices ranging from $.75 to $1.25 per
share.
As a result of these transactions, ImaginOn, Inc. had 16,000,602 shares of
common stock outstanding at the date of the merger with IMON.
Issuance of common stock subsequent to the January 20, 1999 merger:
F-44
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
In the period ended June 30, 1999 the Company issued 4,075,065 shares of
common stock upon the exercise of 4,075,065 options at exercise prices
from $.055 to $2.10 per share. The total net proceeds the Company
received was $3,846,101.
For the period ended June 30, 1999, the Company issued 123,200 shares of
common stock as bonuses given to new employees. In connection with these
issuances, the Company recognized $677,821 of expense.
F-45
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
5. Shareholders' equity (continued):
Issuance of common stock subsequent to the January 20, 1999 merger
(continued):
In March 1999, the Company also issued 260,000 shares to the former
shareholders of Network Specialists, Inc. in connection with the
acquisition of Network Specialists, Inc.
In March and April 1999, the Company also issued 88,540 shares of common
stock in exchange for the exercise of 119,060 warrants. The warrant
holders utilized a cashless exercise provision included in their
agreement. In April 1999, the Company also issued 165,410 shares of
common stock in exchange for 490 shares of its Series E convertible
preferred stock.
In June 1999, the Company repurchased 45,045 shares of previously issued
common stock for $50,000.
Series D/E preferred stock:
In January 1999 prior to the merger, the Company, with the assistance of
its financial consultant, completed private placements whereby the
Company received net proceeds of $2,570,000 from accredited investors
introduced to the Company by the consultant, for the purchase of 1,500
shares each of Series D and E convertible preferred stock par value $.01
("Series D/E") at a price of $1,000 per share. The Series D/E stock is
convertible at the option of the holder at any time after 90 days from
the closing date into a number of shares of common stock equal to the
lower of $1,000 divided by 75% of the average closing bid price of the
common stock for the five trading days immediately prior to the
conversion date, or 120% of the market price on the day of closing. In
connection with the placement of the Series D/E, the Company issued
warrants to purchase 300,000 shares of common stock to financial advisors
that assisted with placements. The warrants are exercisable at $7.28063
per share (120% of the market price as defined in the agreement, of the
common stock at the date of issuance). All warrants expire in January
2004.
F-46
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
5. Shareholders' equity (continued):
Series D/E preferred stock (continued):
The conversion feature was "in the money" at the date of issue (a
"beneficial conversion feature"). The Company allocated $1,000,000 of the
proceeds, equal to the intrinsic value of the beneficial conversion
feature to capital in excess of par. At June 30, 1999, the entire amount
has been amortized to preferred stock for the period beginning from the
date of issuance.
In April 1999, 490 shares of Series E preferred stock were converted into
165,410 shares of common stock. The remaining 250 shares of Series D/E
were redeemed in May 1999 at 120% of face value plus unpaid dividends for
a total redemption of approximately $3,042,000.
Series F convertible preferred stock:
In May 1999 the Company issued 4,000 shares of 12% Series F convertible
preferred stock for $3,650,000 (net of offering costs) at a price of
$1,000 per share. The Series F is convertible at the option of the holder
at any time after 180 days from the closing date into a number of shares
of common stock equal to the lower of 125% of the five day average
closing bid price of the Company's common stock immediately preceding the
closing date, or 94% of the low five-day average closing bid price of the
Company's common stock for the 22 consecutive trading days prior to the
trading day on which the notice of conversion is sent by the preferred
shareholders. Additionally 122,553 warrants were issued to purchase
common stock with an exercise price of the warrants equal to the lesser
of 110% of the closing bid price of the common stock on the closing date,
or 100% of the closing bid price of the common stock on the date the
convertible preferred shares are redeemed, or 100% of the closing bid
price of the common stock on the first trading day after the Company has
filed a registration statement covering the shares of common stock
underlying the warrants.
The conversion feature was "in the money" at the date of issue (a
"beneficial conversion feature"). The Company allocated $255,319 of the
proceeds, equal to the intrinsic value of the beneficial conversion
feature to capital in excess of par. At June 30, 1999, $82,270 has been
amortized to preferred stock for the period beginning from the date of
issuance.
6. Subsequent event:
Effective July 1, 1999, the Company, through ImaginOn Digital Productions,
Inc., ("IDP") a newly formed, wholly-owned subsidiary of the Company,
completed a merger with Imagine Digital Productions I, Inc. ("Imagine"),
a Colorado corporation, which will be accounted for as a purchase.
Imagine is a multimedia production studio and publishing company located
in Aspen, Colorado. Imagine's primary business is the development of
proprietary CD-ROM products and Internet multimedia Web sites on a
contract basis for resort area advertisers.
In the merger, holders of Imagine's common stock received $325,000 and
400,000 shares of the Company's common stock. Holder's of Imagine's
common stock may receive up to 105,000 additional shares, the issuance of
which is dependent upon Imagine meeting certain financial performance
objectives. The merger consideration was determined as a result of arms'
length negotiation between the Company and Imagine. Through June 30,
1999, the Company incurred approximately $125,000 of deferred merger
costs, recorded as other assets.
F-47
<PAGE>
IMAGINON, INC.
October___, 1999
____________________________________
PROSPECTUS
____________________________________
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus. Any information or representations not contained in this prospectus,
if given or made, must not be relied upon as having been authorized by the
company. This prospectus does not constitute an offer or solicitation in respect
to these securities in any jurisdiction in which an offer or solicitation would
be unlawful. The delivery of this prospectus shall not under any circumstances,
create any implication that there has been no change in the affairs of ImaginOn
or that the information contained in this prospectus is correct as of any time
subsequent to the date of this prospectus. However, in the event of a material
change, this prospectus will be amended or supplemented accordingly.
- --------------------------------------------------------------------------------
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered. All expenses are
estimated except the registration and NASD filing fees.
Registration and filing fee $ 1,945
Printing 1,000
Accounting fees and expenses 5,000
Legal fees and expenses 25,000
Blue sky fees and expenses 500
Transfer Agent 1,000
Other 555
-------
Total $35,000
=======
ITEM 14 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION PROVIDED UNDER IMAGINON'S CERTIFICATE OF INCORPORATION
Section 145 of the Delaware General Corporation Law and Article Ninth of
the Registrant's Certificate of Incorporation provides for, under certain
circumstances, the indemnification of the Registrant's officers, directors,
employees and agents against liabilities which they may incur in such
capacities. A summarization of the circumstances in which such indemnifications
provided for is contained herein, but that description is qualified in its
entirety by reference to Article Ninth of the Registrant's Certificate of
Incorporation and the relevant Section of the Delaware General Corporation Law.
In general, the statute provides that any director, officer, employee or
agent of a corporation may be indemnified against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, actually and reasonably
incurred in a proceeding (including any civil, criminal, administrative or
investigative proceeding) to which the individual was a party by reason of such
status. Such indemnity may be provided if the indemnified person's actions
resulting in the liabilities: (i) were taken in good faith; (ii) were reasonably
believed to have been in or not opposed to the Registrant's best interest; and
(iii) with respect to any criminal action, such person had no reasonable cause
to believe the actions were unlawful. Unless ordered by a court, indemnification
generally may be awarded only after a determination of independent members of
the Board of Directors or committee thereof, by independent legal counsel or by
vote of the stockholders that the applicable standard of conduct was met by the
individual to be indemnified.
The statutory provisions further provide that to the extent a director,
officer, employee or agent is wholly successful on the merits or otherwise in
defense of any proceeding to which he was a party, he is entitled to receive
indemnification against expenses, including attorneys' fees, actually and
reasonably incurred in connection with the proceeding.
Indemnification in connection with a proceeding by or in the right of
ImaginOn in which the director, officer, employee or agent is successful is
permitted only with respect to expenses, including attorneys' fees actually and
reasonably incurred in connection with the defense. In such actions, the person
to be indemnified must have acted in good faith, in a manner believed to have
been in ImaginOn's best interest and must not have been adjudged liable to
ImaginOn unless and only to the extent that the Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expense which the Court of Chancery or such other court shall deem proper.
Indemnification is otherwise prohibited in connection with a proceeding brought
on behalf of the Registrant in which a director is adjudged liable to the
Registrant, or in connection with any proceeding charging improper personal
benefit to the director in which the director is adjudged liable for receipt of
an improper personal benefit.
II-1
<PAGE>
Delaware law authorizes the Registrant to reimburse or pay reasonable
expenses incurred by a director, officer, employee or agent in connection with a
proceeding in advance of a final disposition of the matter. Such advances of
expenses are permitted if the person furnishes to the Registrant a written
agreement to repay such advances if it is determined that he is not entitled to
be indemnified by ImaginOn.
The statutory section cited above further specifies that any provisions for
indemnification of or advances for expenses does not exclude other rights under
the Registrant's Certificate of Incorporation, Bylaws, resolutions of its
stockholders or disinterested directors, or otherwise. These indemnification
provisions continue for a person who has ceased to be a director, officer,
employee or agent of ImaginOn and inure to the benefit of the heirs, executors
and administrators of such persons.
The statutory provision cited above also grants the power to the Registrant
to purchase and maintain insurance policies which protect any director, officer,
employee or agent against any liability asserted against or incurred by him in
such capacity arising out of his status as such. Such policies may provide for
indemnification whether or not ImaginOn would otherwise have the power to
provide for it. No such policies providing protection against liabilities
imposed under the securities laws have been obtained by the Registrant.
Article VIII of the Registrant's Bylaws provides that the Registrant shall
indemnify its directors, officers, employees and agents to the fullest extent
permitted by the Delaware General Corporation Law. In addition, the Registrant
has entered into agreements with its directors indemnifying them to the fullest
extent permitted by the Delaware General Corporation Law.
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES
On April 13, 1997, the Registrant issued warrants to purchase up to 150,000
shares of its common stock as payment for consulting services. Of these
warrants, 50,000 are exercisable at $1.00 per share and 100,000 are exercisable
at $.87 per share. The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities Act of 1933 (the
"Securities Act") related to the issuance of these warrants.
On April 13, 1997, the Registrant granted stock options to purchase up to
45,000 shares of its common stock as compensation to its non-employee directors.
These options are exercisable at $1.00 per share. The Registrant relied on the
exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these options.
On April 13, 1997, the Registrant issued 776 shares of its common stock as
payment for a debt owed in the amount of $995. Payment was made based on $1.25
per share, representing the closing price of the common stock on April 11, 1997
as reported on the Nasdaq SmallCap Market. The Registrant relied on the
exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On April 23, 1997, the Registrant issued 75,000 shares of common stock,
valued at $1.00 per share, to a consultant for services rendered prior to April
1, 1997. The Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act because the recipient of these
shares was a sophisticated and/or accredited investor.
On April 23, 1997, the Registrant granted options to purchase 100,000
shares of common stock under its 1994 Stock Option Plan as additional
compensation to one officer and four other employees of the Registrant. The
exercise price for these options is $1.00 per share, representing the closing
price of the common stock as reported by the Nasdaq SmallCap Market on the date
of grant. The Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act related to the grant of these
stock options.
On May 6, 1997, the Registrant issued 75,000 shares of common stock in
exchange for outstanding options to purchase 300,000 shares of common stock
initially issued to a consultant for services. The services were valued at
$75,000, or $1.00 per share. The Registrant relied on the exemption from
registration provided by Section 4(6) and 4(2) of the Securities Act because the
recipients of these shares were sophisticated and/or accredited investors.
On May 31, 1997, the Registrant issued 214,416 shares of its common stock,
valued at $1.00 per share representing the average of the closing bid and asked
prices of the Registrant's common stock as quoted by Nasdaq for the ten
consecutive trading days immediately preceding the date of the agreement of the
parties to the
II-2
<PAGE>
transactions. Of these shares 170,000 were issued in exchange for 141,667 shares
of common stock of USA Skate Corporation (the Registrant's majority owned
subsidiary). In March 1996, one of the Registrant's officers made a loan of
$170,000 to the Registrant and, in June 1996, the Registrant transferred 141,667
shares of USA Skate Corporation owned by the Registrant to this officer in
repayment thereof based on a valuation of $1.20 per USA Skate common share. In
the May 1997 transaction, the officer returned the 141,667 shares of USA Skate
Corporation to the Registrant in exchange for 170,000 shares of common stock of
the Registrant. The other 44,416 shares of common stock of the Registrant were
issued to one holder to repay a debt owed by the Registrant for services
performed and acknowledged. The Registrant relied on the exemption from
registration provided by Section 4(6) of the Securities Act because the
recipients of the 342,645 shares were accredited investors.
On June 30, 1997, the Registrant issued 271,264 shares of common stock to
an entity in exchange for assumption of certain trade payables of the Registrant
totaling $450,000. The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities Act because the
recipient of these shares was an accredited investor.
On August 1, 1997, the Registrant issued 138,923 shares of its common stock
in exchange for the extension of the maturity date to September 15, 1997 on
notes of USA (the Registrant's majority owned subsidiary). The amount owed was
based upon 10% of the outstanding principal and payment was made based on
$1.8125 per share of common stock, representing the average closing bid price
for the 10 days immediately preceding the date of issuance. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
In August 1997, 30,000 warrants were exercised, purchasing 30,000 shares of
common stock.
On September 11, 1997, the Registrant issued 258,857 shares of its common
stock as payment for fees and forgiveness of debt to two officers/shareholders
of the Registrant. Payment was made based on $1.75 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On September 12, 1997, the Registrant issued 68,160 shares of its common
stock to a third party, valued at $1.5625 per share representing the closing
price on the date the agreement was reached. These shares were issued in
exchange for 88,750 shares of common stock of USA. The Registrant transferred
the 88,750 shares of USA owned by the Registrant in payment of rent and other
related expenses based on a valuation of $1.20 per USA common share. The
individual returned the 88,750 shares of USA in exchange for 68,160 shares of
common stock of the Registrant.
On September 15, 1997, the Registrant issued 36,490 shares of its common
stock in exchange for the extensions of the maturity date to October 15, 1997 on
notes of USA. The amount owed was based upon 5% of the outstanding principal
balance, and payment was based on $1.725 per share.
On September 30, 1997, the Registrant issued 114,979 shares of common stock
to an entity in exchange for assumption of certain trade payables of the
Registrant totaling $214,463. The Registrant relied on the exemptions from
registration provided by Section 4(2) and/or 4(6) of the Securities Act because
the recipient of these shares was an accredited investor.
On September 30, 1997, the Registrant issued 100,000 shares of common stock
to a consultant for services rendered during the three month period ended
September 30, 1997. Payment was made based on $1.92 per share, representing the
average close price of the common stock at the end of each calendar month during
the quarter ended September 30, 1997. The Registrant relied on the exemption
from registration provided by Section 4(b) of the Securities Act related to the
issuance of these shares.
On September 30, 1997, the Registrant issued 90,500 shares of its common
stock to an officer/shareholder in exchange for assumption of certain note
payables of the Registrant assumed by the officer/shareholder. The Registrant
relied on the exemption from registration provided by Section 4(b) of the
Securities Act related to the issuance of these shares.
On January 5, 1998, the Registrant issued 37,467 shares of its common stock
in exchange for the extensions of the maturity date to February 5, 1998 on notes
of Skate Corp. The amount was owed based upon 5%
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<PAGE>
of the outstanding principal balance, and payment was based on $1.43 per share.
The Registrant relied on the exemption from registration provided by Section
4(6) of the Securities Act related to the issuance of these shares.
On January 12, 1998, the Registrant issued 50,000 shares of its common
stock to a consultant for services rendered. Payment was made based on $1.375
per share representing the market price of the common stock. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On January 16, 1998, the Registrant issued 85,000 shares to an officer of
the Registrant upon the exercise of a previously granted option under the
Registrant's 1994 Stock Option Plan. The Registrant relied on the exemption from
registration provided by Section 4(6) of the Securities Act related to the
issuance of these shares.
On January 8, 1998, the Registrant issued 18,500 Series A Convertible
Preferred Stock to an officer of the Registrant for among other things, his
agreement to exercise 85,000 options so as to infuse the Registrant with short-
term working capital. The Registrant relied on the exemption from registration
provided by Section 4(6) of the Securities Act related to the issuance of these
shares.
On February 5, 1998, the Registrant issued 35,125 shares of its common
stock in exchange for the extensions of the maturity date to March 5, 1998 on
notes of Skate Corp. The amount was owed based upon 5% of the outstanding
principal balance and payment was made based on $1.52 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On March 5, 1998, the Registrant issued 39,222 shares of its common stock
in exchange for the extensions of the maturity date to April 5, 1998 on notes of
Skate Corp. The amount owed was based upon 5% of the outstanding principal
balance and payment was made based on $1.35 per share. The Registrant relied on
the exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On March 26, 1998, the Registrant issued 15,000 shares to a director of the
Registrant upon the exercise of a previously granted option under the
Registrant's 1994 Stock Option Plan.
On March 31, 1998, the Registrant issued 7,500 shares of its common stock
to an employee of the Registrant upon the exercise of a previously granted
option under the Registrant's 1994 Stock Option Plan.
On June 30, 1998, the Registrant issued 3,000 shares of Series B 4%
Convertible Preferred Stock. The Registrant relied on the exemption from
registration provided by Section 4(2) of the Securities Act related to the
issuance of these securities.
On August 3, 1998, the Registrant issued 1,030 shares of Series C 4%
Convertible Preferred Stock. The Registrant relied on the exemption from
registration provided by Section 4(2) of the Securities Act related to the
issuance of these shares.
On October 1, 1998, the Registrant issued 20,000 shares of its common stock
to two directors of the Registrant for services rendered.
On October 5, 1998, the Registrant issued 43,191 shares of its common stock
in exchange for the extensions of the maturity date to November 5, 1998 on notes
of Skate Corp. The amount owed was calculated at 5% of the outstanding principal
balance and payment was made based on $.70 per share. The Registrant relied on
the exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On November 5, 1998, the Registrant issued 56,477 shares of its common
stock in exchange for the extensions of the maturity date to December 5, 1998 on
notes of Skate Corp. The amount owed was calculated as 5% of the outstanding
principal balance and payment was made based on $.71 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On November 23, 1998, the Registrant issued 525,073 shares of its common
stock in exchange for the conversion of 245 shares of Series B Convertible
Preferred Stock.
II-4
<PAGE>
On November 27, 1998, the Registrant issued 122,675 shares of its common
stock in exchange for the conversion of 95 shares of Series B Convertible
Preferred Stock.
On December 2, 1998, the Registrant issued 100,000 shares of its common
stock to a consultant upon the exercise of a previously granted option.
On December 5, 1998, the Registrant issued 21,922 shares of its common
stock in exchange for the extensions of the maturity date to January 5, 1999 on
notes of Skate Corp. The amount owed was calculated at 5% of the outstanding
principal balance and payment was made based on $1.73 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
From December 24 through December 31, 1998, the Registrant issued 131,686
shares of its common stock stock in exchange for the conversion of 110 shares of
Series C Convertible Preferred Stock.
On December 31, 1998, the Registrant issued 232,256 shares of its common
stock in exchange for assumption of certain liabilities of the Registrant
totaling $239,326, the Registrant relied on the exemptions from registration
provided by Section 4(2) and/or 4(6) of the Securities Act.
On January 15 1999, the Registrant issued 1,500 shares of Series D
preferred stock whereby the Registrant received net proceeds of $1.5 million.
The Registrant relied on the exemptions from registration provided by Section
4(2) of the Securities Act.
On April 6, 1999, the Registrant issued 1,500 of Series E preferred stock
whereby the Registrant received net proceeds of approximately $1.5 million. The
Registrant relied on exemptions from registration provided by Section 4(2) of
the Securities Act.
In addition, the Registrant announced that the exercise period of its
publicly traded common stock purchase warrants exercisable at $1.50 per share
has been extended from December 31, 1998 through June 30, 1999.
On May 4, 1999 the Registrant issued 4,000 shares of Series F Preferred
Stock to redeem the Series D & E Preferred Stock. The Registrant received
approximately $4 million net proceeds. The Registrant relied on the exemptions
from registration provided by Section 4(2)of the Securities Act.
II-5
<PAGE>
ITEM 16 EXHIBITS
The following is a complete list of exhibits filed as part of this
registration statement:
No. Description
3(i).1 Certificate of Incorporation of the Registrant. (PREVIOUSLY
FILED)
3(i).2 Certificate of Designations for Series F 12% Convertible
Preferred Stock.
3(i).3 Amendment to Certificate of Incorporation dated July 22, 1998.
(PREVIOUSLY FILED)
3(i).4 Amendment to Certificate of Incorporation dated December 17,
1998. (PREVIOUSLY FILED)
3(ii).1 Bylaws as currently in effect (PREVIOUSLY FILED)
4.1 Specimen of common stock certificate (PREVIOUSLY FILED)
4.2 Series F Preferred Stock Purchase Agreement dated May 4, 1999
4.3 Series F Preferred Stock Registration Rights Agreement dated May
4, 1999
4.4 Common stock Warrant Numbered F-1
5.1 Opinion of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC.
10.1 1997 Stock Option Plan
10.2 Agreement and Plan of Merger, dated January 30, 1998 (PREVIOUSLY
FILED AS EXHIBIT 3 OF IMAGINON'S PROXY STATEMENT FILED NOVEMBER
13, 1998.)
10.3 Merger Agreement and Plan of Reorganization, dated February 9,
1999 by and among Network Specialists, Inc., iNOW and ImaginOn,
Inc. (PREVIOUSLY FILED AS EXHIBIT 2.1 TO IMAGINON'S FORM 8-K,
FILED MARCH 1999)
10.4 First Amendment to Merger Agreement and Plan of Reorganization
dated as of March 8, 1999. (PREVIOUSLY FILED AS EXHIBIT 2.2 TO
THE MARCH 1999 FORM 8-K.)
10.5 Side Agreement to Merger Agreement and Plan of Reorganization
dated March 8, 1999. (PREVIOUSLY FILED AS EXHIBIT 2.3 TO THE
MARCH 1999 FORM 8- K.)
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Certified Public Accountants
23.2 Consent of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
(See Exhibit 5.1)
27.1 Financial Data Schedule
_________________
II-6
<PAGE>
ITEM 17 - UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(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 of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (f the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
and has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Carlos, State of
California, on October 8, 1999.
IMAGINON, INC.
By: /s/ David M. Schwartz
---------------------------------------
David M. Schwartz,
Chairman, Chief Executive Officer
and President
KNOWN ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints David M. Schwartz, his attorney-in-fact in any and all
capacities, to sign any amendments to this registration statement and any
related registration statement filed pursuant to 462(b) and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute may do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
Chief Executive Officer,
Chief Financial Officer, October 8 , 1999
/s/ David M. Schwartz ---
----------------------
David M. Schwartz Chief Accounting Officer and
Director
/s/ Leonard W. Kain Director October 8 , 1999
---------------------- ---
Leonard W. Kain
/s/ Dennis Allison Director October 8 , 1999
---------------------- ---
Dennis Allison
/s/ Jim Polizotto Director October 8 , 1999
---------------------- ---
Jim Polizotto
/s/ Mary E. Finn Director October 8 , 1999
---------------------- ---
Mary E. Finn
<PAGE>
Exhibit 3.(i)2
CERTIFICATE OF DESIGNATION
of
SERIES F 12% CONVERTIBLE PREFERRED STOCK
of
IMAGINON, INC.
(Pursuant to Section 151 of the Delaware Business Corporation Act)
The undersigned hereby certifies that the Board of Directors of
ImaginOn, Inc., a Delaware corporation (the "Company"), duly adopted the
following resolutions effective as of May 1, 1999:
RESOLVED, a series of preferred stock of the Company is created and
the relative rights, preferences, and limitations of the shares of such series
are as follows:
I. Designation and Amount. The shares of such series of Preferred Stock shall
----------------------
be designated as "Series F 12% Convertible Preferred Stock" (the "Series F
Preferred Stock") and the number of shares constituting the Series F Preferred
Stock shall be 4,000. The Series F Preferred Stock shall have a stated value
(the "Stated Value") of $1,000 per share.
II. Dividends.
---------
A. The holders of shares of Series F Preferred Stock shall be entitled to
receive dividends, out of any assets legally available therefor, subject to the
prior declaration or payment of any dividend and prior to, and in preference to,
any declaration or payment of any dividend on the Common Stock of this Company,
at a per share rate equal to twelve percent (12%) per annum of the amount of the
Stated Value of each share of Series F Preferred Stock, which is payable upon
conversion, or redemption (based upon a 360 calendar day year) as set forth
below. Dividends shall begin to accrue as of the Issuance Date (as defined
below). Any dividends payable pursuant to the provisions of this paragraph
shall, at the holder's option, be payable in cash, or, if available,
unrestricted shares of Common Stock of the Company within two Business Days (as
defined below) of when due, provided, that (i) the Common Stock is listed on the
--------
NASDAQ Small Cap Market, (ii) there has not been any suspension in the trading
of the Common Stock on the NASDAQ Small Cap Market during the thirty (30)
Trading Days immediately preceding such date, and the (iii) the Company has been
in compliance in all material respects with the terms and conditions contained
herein and any agreement entered into between the holder and the Company. The
number of shares
<PAGE>
of Common Stock to be issued by the Company in lieu of a cash payment for
dividends due as set forth herein shall be equal to the
2
<PAGE>
number of shares of Common Stock resulting from dividing the dollar amount of
dividends owed by the Conversion Price (as defined below) on such date as the
dividends are payable (if such date is not a Trading Day, then the next Trading
Day (as defined below) immediately thereafter).
B. Such dividends shall accrue on each share of Series F Preferred Stock
from the Issuance Date, and shall accrue from day to day whether or not earned
or declared. Such dividends shall be cumulative so that if such dividends in
respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, for all Series F Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series F
Preferred Stock, Common Stock or other security of the Company subordinate in
liquidation to the Series F Preferred Stock. Dividends on the Series F Preferred
Stock shall be non-participating and the holders of the Series F Preferred Stock
shall not be entitled to participate in any other dividends beyond the
cumulative dividends specified herein.
C. Dividends shall be reduced as follows: (a) by 1% if the Debtor files a
registration statement (the "Registration Statement") that includes shares of
common stock of the Company (the "Common Stock") in an equity financing of up to
$90,000,000 or such other equity financing if approved by the holders in
writing, within 30 calendar days after the Issuance Date; (b) by 1% if the
Registration Statement is declared effective on or prior to the sixtieth
calendar day after the Issuance Date; and (c) by 1% if the Company redeems all
of the outstanding shares of Series F Preferred Stock on or before the ninetieth
calendar after the Issuance Date.
III. Liquidation, Dissolution or Winding Up.
--------------------------------------
A. In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, and prior and in preference to any
distribution of any assets of the Company to the holders of any other security
of the Company, holders of each share of Series F Preferred Stock shall be
entitled to receive out of the assets available for distribution to shareholders
the Stated Value per share of Series F Preferred Stock plus twelve percent (12%)
per annum thereon from the Issuance Date (as defined below) to the day of such
liquidation, dissolution or winding up of the Company (the "Liquidation
Amount").
B. If the assets of the Company available for distribution to
shareholders shall be insufficient to pay the holders of shares of Series F
Preferred Stock the full Liquidation Amount to which they shall be entitled,
then any such distribution of assets of the Company shall be distributed ratably
to the holders of shares of Series F Preferred Stock.
C. After the payment of the Liquidation Amount shall have been made in
full to the holders of the Series F Preferred Stock or funds necessary for such
payment shall have been set aside by the Company in trust for the account of
holders of the Series F Preferred Stock so as to be available for such payments,
the holders of the Series F Preferred Stock shall be entitled to no further
participation in the distribution of the assets of the Company, and the
remaining assets of the Company legally available for distribution to
shareholders shall be distributed among the holders of Common Stock and any
other classes or series of Preferred Stock of the Company in accordance with
their respective terms.
3
<PAGE>
IV. Voting. Holders of Series F Preferred Stock shall have no voting rights
------
except as expressly required by law or as expressly provided herein.
V. Conversion of Series F Preferred Stock. The holders of Series F Preferred
--------------------------------------
Stock shall have the right, at such holder's option, to convert the Series F
Preferred Stock into shares of Common Stock, on the following terms and
conditions:
A. Subject to the provisions of Sections XI and XII hereof, at any time
or times, after the 181/st/ calendar day after the Issuance Date, any holder of
the Series F Preferred Stock shall be entitled to convert any whole number of
such holder's shares of Series F Preferred Stock into that number of fully paid
and nonassessable shares of Common Stock, which is determined (per share of
Series F Preferred Stock) by dividing (x) $1,000, by (y) the Conversion Price
(as defined below) (the "Conversion Rate").
B. For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A "Business Day" shall be any day other than a Saturday, Sunday,
national holiday or a day on which the New York Stock Exchange is closed.
The "Closing Bid Price" shall mean, for any security as of any date,
the last closing bid price for such security on the Nasdaq Stock Market as
reported by Bloomberg L.P. ("Bloomberg"), or, if the Nasdaq Stock Market is not
the principal trading market for such security, the last closing bid price of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price of such security in the over-the-counter
market on the NASD OTC Electronic Bulletin Board for such security as reported
by Bloomberg, or, the last closing trade price of such security as reported by
Bloomberg, or, if no last closing bid or trade price is reported for such
security by Bloomberg, the closing bid price shall be determined by reference to
the closing bid price as reported on the Principal Market. If the Closing Bid
Price cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on such date shall be
the fair market value as mutually agreed by the Company and the holders of two
thirds of the outstanding shares of Series F Preferred Stock.
The "Conversion Price" shall mean, as of any Conversion Date (as
defined below) the lesser of: (i) 125% of the average of the Closing Bid Prices
of the Common Stock during the five consecutive Trading Days ending on the
Trading Day immediately preceding the Issuance Date, or (ii) 94% of the "Market
Price" where the Market Price is defined as the average of the five lowest
Closing Bid Prices (which Trading Days need not be consecutive) of the Common
Stock during the 22 Trading Days immediately preceding the Conversion Date.
"Effective Date" shall mean the date on which the Securities and
Exchange Commission (the "SEC") first declares effective a Registration
Statement registering the resale of 200% of the number of shares of Common Stock
issuable upon conversion of all of the Series F
4
<PAGE>
Preferred Stock outstanding on the Trading Day immediately preceding the day
such Registration Statement is filed.
The "Issuance Date" shall mean, with respect to each share of Series F
Preferred Stock, the date of issuance of the applicable share of Series F
Preferred Stock.
A "Trading Day" shall mean a day on which the Principal Market is
open.
The "Principal Market" shall mean the Nasdaq National Market, the
Nasdaq Small Cap Stock Market, the American Stock Exchange, the NASD OTC
Electronic Bulletin Board operated by the National Association of Securities
Dealers, Inc., or the New York Stock Exchange, whichever is at the time the
principal trading exchange or market for the Common Stock.
C. The holder of Series F Preferred Stock may exercise its right to
convert the Series F Preferred Stock by telecopying an executed and completed
notice of conversion (the "Notice of Conversion") to the Company and delivering
the original Notice of Conversion and the original Series F Preferred Stock
certificate to the Company by express courier. Each Business Day on which a
Notice of Conversion is telecopied to and received by the Company in accordance
with the provisions hereof shall be deemed a "Conversion Date". The Company will
transmit the certificates representing shares of Common Stock issuable upon
conversion of the Series F Preferred Stock (together with the certificates
representing the shares of Series F Preferred Stock not so converted) to the
holder of the Series F Preferred Stock via express courier, by electronic
transfer (if applicable) or otherwise within three Business Days after the
Conversion Date if the Company has received the original Notice of Conversion
and share(s) of Series F Preferred Stock being so converted by such date, and if
it has not then within one Business Days after receipt of the original Notice of
Conversion and share(s) of Series F Preferred Stock being converted. In addition
to any other remedies which may be available to the holder of the Series F
Preferred Stock, in the event that the Company fails to effect delivery of such
shares of Common Stock within such three Business Day period, the holder of the
Series F Preferred Stock will be entitled to revoke the Notice of Conversion by
delivering a notice to such effect to the Company whereupon the Company and the
holder of the Series F Preferred Stock shall each be restored to their
respective positions immediately prior to delivery of the Notice of Conversion.
The Notice of Conversion and shares of Series F Preferred Stock representing
those shares of Series F Preferred Stock being converted shall be delivered as
follows:
ImaginOn, Inc.
1313 Laurel Street, Suite 1
San Carlos CA 94070
Attention: David M. Schwartz, President, CEO
Facsimile: (650) 596-9350
Telephone: (650) 596-9300
or to such other address as may be communicated by the Company to the
holder in writing.
5
<PAGE>
If the Common Stock issuable upon conversion of the Series F Preferred
Stock is not delivered within five Business Days of the Conversion Date, the
Company shall pay to the holder of the Series F Preferred Stock, in immediately
available funds, upon demand, as liquidated damages for such failure and not as
a penalty, for each $100,000 principal amount of Series F Preferred Stock sought
to be converted, $500 for each of the first ten days, and $1,000 per day
thereafter that the shares of Common Stock are not delivered, which liquidated
damages shall run from the sixth Business Day after the Conversion Date up until
the time that either the Conversion Notice is revoked or the Common Stock is
delivered, at which time such liquidated damages shall cease. Any and all
payments required pursuant to this paragraph shall be payable only in cash
immediately, and shall not relieve the Company of its obligation to issue shares
of Common Stock due upon conversion.
(D) The number of shares of Common Stock issuable upon the conversion of
the shares of Preferred Stock and the Conversion Price shall be subject to
adjustment as follows:
(i) In case the Company shall (A) pay a dividend on Common Stock in
Common Stock or securities convertible into, exchangeable for or otherwise
entitling a holder thereof to receive Common Stock, (B) declare a dividend
payable in cash on its Common Stock and at substantially the same time offer its
shareholder a right to purchase new Common Stock (or securities convertible
into, exchangeable for or otherwise entitling a holder thereof to receive Common
Stock) from proceeds of such dividend (all Common Stock so issued shall be
deemed to have been issued as a stock dividend), (C) subdivide its outstanding
shares of Common Stock into a greater number of shares of Common Stock, (D)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock, or (E) issue by reclassification of its Common Stock any shares
of Common Stock of the Company, the Conversion Price shall be adjusted so that
the holder shall be entitled to receive after the happening of any of the events
described above that number and kind of shares of Common Stock as the holders
would have received had such shares of Series F Preferred Stock been converted
immediately prior to the happening of such event or any record date with respect
thereto. Any adjustment made pursuant to this subdivision shall become effective
immediately after the close of business on the record date in the case of a
stock dividend and shall become effective immediately after the close of
business on the record date in the case of a stock split, subdivision,
combination or reclassification.
(ii) Any adjustment required to be made by this paragraph will not
have to be made if such adjustment would not require an increase or decrease in
one (1%) percent or more in the number of shares of Common Stock issuable upon
conversion of the Series F Preferred Stock.
(iii) Whenever the Conversion Price is adjusted, as herein provided,
such adjustment shall be effected (to the nearest cent) by multiplying such
Conversion Price immediately prior to such adjustment by a fraction of which the
numerator shall be the number of shares of Common Stock issuable upon the
exercise of each share of Series F Preferred Stock immediately prior to such
adjustment, and of which the denominator shall be the number of shares of Common
Stock issuable immediately thereafter.
6
<PAGE>
(E) In the case of any (i) consolidation or merger of the Company into any
entity (other than a consolidation or merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock of the Company), (ii) sale, transfer, lease or conveyance of all or
substantially all of the assets of the Company as an entirety or substantially
as an entirety, or (iii) reclassification, capital reorganization or change of
the Common Stock (other than solely a change in par value, or from par value to
no par value), in each case as a result of which shares of Common Stock shall be
converted into the right to receive stock, securities or other property
(including cash or any combination thereof), the holder of share(s) of Series F
Preferred Stock then outstanding shall have the right thereafter to convert such
share(s) only into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale, transfer, capital
reorganization or reclassification by a holder of the number of shares of Common
Stock of the Company into which such shares of Series F Preferred Stock would
have been converted immediately prior to such consolidation, merger, sale,
transfer, capital reorganization or reclassification, assuming such holder of
Common Stock of the Company (A) is not an entity with which the Company
consolidated or into which such sale or transfer was made, as the case may be
("constituent entity"), or an affiliate of the constituent entity, and (B)
failed to exercise his or her rights of election, if any, as to the kind or
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer (provided that if the kind or amount of
securities, cash or other property receivable upon such consolidation, merger,
sale or transfer is not the same for each share of Common Stock of the Company
held immediately prior to such consolidation, merger, sale or transfer by other
than a constituent entity or an affiliate thereof and in respect of which the
Company merged into the Company or to which such rights or election shall not
have been exercised ("non-electing share"), then for the purpose of this
paragraph the kind and amount of securities, cash or other property receivable
upon such consolidation, merger, sale or transfer by each non-electing share
shall be deemed to be the kind and amount so receivable per share by a majority
of the non-electing shares). If necessary, appropriate adjustment shall be made
in the application of the provision set forth herein with respect to the rights
and interest thereafter of the holder, to the end that the provisions set forth
herein shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of this Debenture. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, capital reorganizations and reclassifications. The Company shall not
effect any such consolidation, merger, sale or transfer unless prior to or
simultaneously with the consummation thereof the successor issuer or entity (if
other than the Company) resulting from such consolidation, merger, sale or
transfer shall assume, by written instrument, the obligation to deliver to the
holder such shares of Common Stock, securities or assets as, in accordance with
the provisions of this Certificate of Designation, such holder may be entitled
to receive under this Certificate of Designation.
(F) Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of any Series F Preferred Stock certificate(s), and
(in the case of loss, theft or destruction) of indemnity or security reasonably
satisfactory to the Company and the Company's transfer agent, and upon the
cancellation of the Series F Preferred Stock certificate(s), if mutilated, the
Company shall execute and deliver new certificates for Series F Preferred Stock
of like tenure and date. However, the Company shall not be obligated to reissue
such lost or stolen certificates for shares of Series F Preferred Stock if the
7
<PAGE>
holder contemporaneously requests the Company to convert such shares of Series F
Preferred Stock into Common Stock.
(G) The Company shall not issue any fraction of a share of Common Stock
upon any conversion. The Company shall round such fraction of a share of Common
Stock up to the nearest whole share.
(H) If some but not all of the shares of Series F Preferred Stock
represented by a certificate or certificates surrendered by a holder are
converted, the Company shall execute and deliver to or on the order of the
holder, at the expense of the Company, a new certificate representing the number
of shares of Series F Preferred Stock which were not converted.
(I) The Company shall pay any and all original issue and/or transfer taxes
which may be imposed upon it with respect to the issuance and delivery of Common
Stock upon conversion of the Series F Preferred Stock.
(J) Subject to the provisions of this Section, if the Company at any time
shall issue any shares of Common Stock prior to the conversion of the entire
Stated Value of the Series F Preferred Stock and dividends on such Series F
Preferred Stock, otherwise than: (i) pursuant to options, warrants, or other
obligations to issue shares outstanding on the date hereof as described in
writing to the holders prior to the Issuance Date or in SEC filings made by the
Company prior to the Issuance Date, or (ii) all shares reserved for issuance
pursuant to the Company's existing stock option, incentive, or other similar
plan, which plan and which grant is approved by the Board of Directors of the
Company ((i) and (ii) collectively referred to as the "Existing Obligations"),
for a consideration less than the Conversion Price set forth in the definition
of Conversion Price in above (as adjusted from the date hereof (the "Fixed
Conversion Price")), then, and thereafter successively upon each such issue, the
Conversion Price shall, from such date forward, equal the resulting quotient of
the following formula: (y) the number of shares of Common Stock outstanding
immediately prior to such issue shall be multiplied by the Fixed Conversion
Price in effect at the time of such issue and the product shall be added to the
aggregate consideration, if any received by the Company upon such issue of
additional shares of Common Stock; and (z) the sum so obtained shall be divided
by the number of shares of Common Stock outstanding immediately after such
issue. Except for the Existing Obligations and options that may be issued under
any employee incentive stock option and/or any qualified stock option plan
adopted by the Company, for purposes of this adjustment, the issuance of any
security of the Company carrying the right to convert such security into shares
of Common Stock or of any warrant, right, or option to purchase Common Stock
shall result in an adjustment to the Fixed Conversion Price upon the issuance of
shares of Common Stock upon exercise of such conversion or purchase rights.
(K) If a holder shall elect to convert any share or shares of Series F
Preferred Stock as provided herein, the Company cannot refuse conversion based
on any claim that such holder or anyone associated or affiliated with such
holder has been engaged in any violation of law, unless an injunction from a
court, restraining and/or enjoining conversion of all or part of said shares of
Series F Preferred Stock shall have been issued.
8
<PAGE>
VI. No Reissuance of Series F Preferred Stock. No share or shares of Series F
-----------------------------------------
Preferred Stock acquired by the Company by reason of purchase, conversion or
otherwise shall be reissued, and all such shares shall be canceled, retired and
eliminated from the shares which the Company shall be authorized to issue. The
Company may from time to time take such appropriate corporate action as may be
necessary to reduce the authorized number of shares of the Series F Preferred
Stock accordingly.
VII. Reservation of Shares. The Company shall, so long as any share or shares
---------------------
of the Series F Preferred Stock are outstanding reserve and keep available out
of its authorized and unissued Common Stock, solely for the purpose of effecting
the conversion of the Series F Preferred Stock, such number of shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
of the Series F Preferred Stock then outstanding; provided that the number of
shares of Common Stock so reserved shall at no time be less than 200% of the
number of shares of Common Stock for which the Series F Preferred Stock are at
any time convertible and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to maintain such number of shares
of Common Stock, the Company shall take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
VIII. Restrictions and Limitations.
----------------------------
A. Except as expressly provided herein or as required by law, so long as
any shares of Series F Preferred Stock remain outstanding, the Company shall
not, without the approval by vote or written consent by the holders of at least
two thirds of the then outstanding shares of Series F Preferred Stock, voting as
a separate class take any action that would adversely affect the rights,
preferences or privileges of the holders of Series F Preferred Stock.
B. Without limiting the generality of the preceding paragraph, the
Company shall not so long as any shares of Series F Preferred Stock remain
outstanding amend its Certificate of Incorporation without the approval by the
holders of all of the then outstanding shares of Series F Preferred Stock if
such amendment would:
1. create any other class or series of capital stock entitled to
seniority as to the payment of dividends in relation to the holders of Series F
Preferred Stock;
2. reduce the amount payable to the holders of Series F Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or winding up
of the Company, or change the relative seniority of the liquidation preferences
of the holders of Series F Preferred Stock to the rights upon liquidation of the
holders of other capital stock of the Company,
3. cancel or modify the conversion rights of the holders of Series F
Preferred Stock provided for in Section V herein; or
4. cancel or modify the rights of the holders of the Series F
Preferred Stock provided for in this Section.
9
<PAGE>
IX. No Dilution or Impairment. The Company shall not, by amendment of its
-------------------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Certificate of Designation set forth herein, but shall at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate in order to
protect the rights of the holders of the Series F Preferred Stock against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) shall not establish a par value of any shares of stock
receivable on the conversion of the Series F Preferred Stock above the amount
payable therefor on such conversion, (b) shall take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock on the conversion of all Series F
Preferred Stock from time to time outstanding, and (c) shall not consolidate
with or merge into any other person or entity, or permit any such person or
entity to consolidate with or merge into the Company (if the Company is not the
surviving person), unless such other person or entity shall expressly assume in
writing and will be bound by all of the terms of the Series F Preferred Stock
set forth herein.
X. Notices of Record Date. In the event of:
----------------------
A. any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
B. any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger of the Company,
or any transfer of all or substantially all of the assets of the Company to any
other corporation, or any other entity or person, or
C. any voluntary or involuntary dissolution, liquidation or winding up of
the Company, then and in each such event the Company shall mail or cause to be
mailed to each holder of Series F Preferred Stock a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or right,
(ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, merger, dissolution, liquidation or winding up is
expected to become effective and (iii) the time, if any, that is to be fixed, as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation
or winding up. Such notice shall be mailed at least ten Business Days prior to
the date specified in such notice on which such action is to be taken.
XI. Redemption.
----------
For so long as the Company has not received a Notice of Conversion for
such shares, the Company may, at its option, repay, in whole or in part, in
cash, the Series F Preferred Stock at the Redemption Price (as defined below) by
providing five Business Days prior written notice (the "Redemption Notice") to
the holder. The Company shall wire transfer the appropriate amount of
10
<PAGE>
funds into an escrow account to complete the redemption which shall be on the
fifth Business Day (the "Redemption Date") after the Redemption Notice was
served upon the holder.
The Redemption Notice shall set forth (i) the Redemption Date, (ii)
the "Redemption Price", which shall be equal to 105% of the aggregate Stated
Value of the shares of Series F Preferred Stock being redeemed, plus all accrued
and unpaid interest if the Redemption Notice is served on or prior to the
180/th/ calendar day after the Issuance Date and 110% of the aggregate Stated
Value of the shares of Series F Preferred Stock being redeemed, plus all accrued
and unpaid interest if the Redemption Notice is served after the 180/th/
calendar day after the Issuance Date, (iii) a statement that interest on the
shares of Preferred Stock being redeemed will cease to accrue on such Redemption
Date, and (iv) a statement of or reference to the conversion right set forth in
this Certificate of Designation (including that the right to give a notice of
conversion in respect of any shares to be redeemed shall terminate on the
Redemption Date). The Redemption Notice shall be irrevocable, and it shall be
mailed (or sent via express courier), postage prepaid, at least five Business
Days prior to the Redemption Date to the holder at its address as the same shall
appear on the books of the Company. If fewer than all of the shares of Series F
Preferred Stock owned by the holder are then to be redeemed, the notice shall
specify the amount thereof that is to be redeemed and, if practicable, the
numbers of the certificates representing such shares of Series F Preferred
Stock.
At any time up to the date immediately prior to the date the
Redemption Notice was served upon the holder, the holder shall have the right to
convert the shares of Series F Preferred Stock into Common Stock as more fully
provided hereof. Unless so converted, at the close of business on the Redemption
Date, subject to the satisfaction of each of the conditions described herein,
the number of shares of Series F Preferred Stock being redeemed shall be
automatically canceled and converted into a right to receive the Redemption
Price, and all rights of the holders of the Series F Preferred Stock, including
the right to conversion shall cease without further action. Immediately
following the Redemption Date, provided that the Company has satisfied each of
the conditions set forth herein, the holder shall surrender its original shares
of Series F Preferred Stock at the office of the Company, and the Company shall
issue to the holder a new certificate for the shares of Series F Preferred Stock
that remains outstanding, if any.
The Redemption Price shall be adjusted proportionally upon any
adjustment of the Conversion Price under the terms hereof in the event of any
stock dividend, stock split, combination of shares or similar event.
The Company shall not be entitled to send any Redemption Notice and
begin the redemption procedure hereunder unless it has:
(i) the full amount of the Redemption Price in cash, available
in a demand or other immediately available account in a bank or similar
financial institution;
(ii) immediately available credit facilities, in the full amount
of the Redemption Price with a bank or similar financial institution; or
11
<PAGE>
(iii) a combination of the items set forth in (a) and (b) above,
aggregating the full amount of the Redemption Price.
Upon delivery of the Redemption Notice, the Company and the holder
shall agree on reasonable arrangements for a closing of the redemption of the
Series F Preferred Stock.
If the Company does not wire transfer the appropriate amount of funds
into the escrow account on or before the Redemption Date, or shall otherwise
fail to comply with the redemption provisions set forth herein, then it shall
have waived its right to redeem the shares of Series F Preferred Stock at any
time, and the holder may utilize its conversion right granted hereunder.
Subject to the receipt by the holders of the Series F Preferred Stock
being redeemed of the wire transfer of the Redemption Price as described above,
each share of Series F Preferred Stock to be redeemed shall be automatically
canceled and converted into a right to receive the Redemption Price, and all
rights of the Series F Preferred Stock, including the right to conversion shall
cease without further action.
XII. 4.99% Limitation. The number of shares of Common Stock which may be
----------------
acquired by any holder pursuant to the terms herein shall not exceed the number
of such shares which, when aggregated with all other shares of Common Stock then
owned by such holder, would result in such holder owning more than 4.99% of the
then issued and outstanding Common Stock at any one time. The preceding shall
not interfere with any holder's right to convert any share or shares of Series F
Preferred Stock over time which in the aggregate totals more than 4.99% of the
then outstanding shares of Common Stock so long as such holder does not own more
than 4.99% of the then outstanding Common Stock at any given time.
XIII. Rank. The Series F Preferred Stock shall rank (i) prior to the Common
----
Stock; (ii) prior to any class or series of capital stock of the Company
hereafter created other than "Pari Passu Securities"; and (iii) pari passu with
any series or class of capital stock of the Company hereafter created
specifically ranking on parity with the Series F Preferred Stock.
12
<PAGE>
IN WITNESS WHEREOF, I have subscribed my name this 4th day of May,
1999.
ImaginOn, Inc.
By:__________________________________
David M. Schwartz, President and CEO
13
<PAGE>
Exhibit 4.2
________________________________________________________________________________
________________________________________________________________________________
PREFERRED STOCK PURCHASE AGREEMENT
among
ImaginOn, Inc.
and
Gage LLC
May 4, 1999
________________________________________________________________________________
________________________________________________________________________________
THE GOLDSTEIN LAW GROUP, P.C.
65 Broadway, 10/th/ Floor
New York, N.Y. 10006
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
----------------------------------
THIS PREFERRED STOCK PURCHASE AGREEMENT, dated as of May 4, 1999 (the
"Agreement"), among Gage LLC (hereinafter referred to as the "Investor"), and
ImaginOn, Inc., a corporation organized and existing under the laws of the State
of Delaware (NASDAQ Small Cap Market symbol "IMON", the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
and the Investor shall purchase (a) 4,000 shares of Preferred Stock (as defined
below), and (b) a Warrant to purchase 122,553 Warrant Shares; and
WHEREAS, such investment will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended, and the regulations promulgated
thereunder (the "Securities Act"), and/or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect
to any or all of the investments in Common Stock to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
---------
Certain Definitions
-------------------
Section 1.1 "Additional Shares" shall have that meaning set forth in Section
-----------------
2.4 below.
Section 1.2 "Bid Price" shall mean the closing bid price (as reported by
---------
Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.3 "Business Day" means any day except Saturday, Sunday and any
------------
day which shall be a Federal legal holiday or a day on which banking
institutions in the State of New York are authorized or required by law or other
government actions to close.
Section 1.4 "Capital Shares" shall mean the Common Stock and any shares of
--------------
any other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
Section 1.5 "Capital Shares Equivalents" shall mean any securities,
--------------------------
rights, or obligations that are convertible into or exchangeable for, or giving
any right to subscribe for, any Capital Shares of the Company or any warrants,
options or other rights to subscribe for or purchase Capital Shares or any such
convertible or exchangeable securities.
<PAGE>
Section 1.6 "Certificate of Designation" shall mean the Company's
--------------------------
Certificate of Designation setting forth all of the rights, privileges and
preferences of the Preferred Stock, as annexed hereto as Exhibit A and made a
part hereof.
Section 1.7 "Closing" shall mean the closing of the purchase and sale of
-------
the Preferred Stock and a Warrant pursuant to Article II below.
Section 1.8 "Closing Date" shall mean the date each of the conditions
------------
precedent to the Closing as set forth in Section 2.6 below, have been satisfied
or waived in writing.
Section 1.9 "Common Stock" shall mean the Company's common stock, $0.01
------------
par value per share.
Section 1.10 "Damages" shall mean any loss, claim, damage, liability,
-------
costs and expenses which shall include, but not be limited to, reasonable
attorney's fees, disbursements, costs and expenses of expert witnesses and
investigation.
Section 1.11 "Effective Date" shall mean the date on which the SEC first
--------------
declares effective a Registration Statement registering the resale of the
following: (i) 150% of the number of Underlying Shares assuming a Conversion
Date on the Closing Date, and (ii) 100% of the Warrant Shares issued to the
Investor as per terms of this Agreement.
Section 1.12 "Escrow Agent" shall mean the law firm of The Goldstein Law
------------
Group, P.C., pursuant to the terms of the Escrow Agreement attached as Exhibit
B.
Section 1.13 "Exchange Act" shall mean the Securities Exchange Act of
------------
1934, as amended, and the rules and regulations promulgated thereunder.
Section 1.14 "Legend" shall have the meaning set forth in Article VIII
------
below.
Section 1.15 "Material Adverse Effect" shall mean any effect on the
-----------------------
business, operations, properties, prospects, or financial condition of the
Company that is material and adverse to the Company and its subsidiaries and
affiliates, taken as a whole, and/or any condition, circumstance, or situation
that would prohibit or otherwise in any material respect interfere with the
ability of the Company to enter into and perform any of its obligations under
this Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Certificate of Designation, or Warrant in any material respect.
Section 1.16 "NASD" shall mean the National Association of Securities
----
Dealers, Inc.
Section 1.17 "Outstanding" when used with reference to shares of Common
-----------
Stock, preferred stock of the Company, or Capital Shares (collectively the
"Shares"), shall mean, at any date as of which the number of such Shares is to
be determined, all issued and outstanding Shares, and shall include all such
Shares issuable in respect of outstanding scrip or any
2
<PAGE>
certificates representing fractional interests in such Shares; provided,
--------
however, that Outstanding shall not mean any such Shares then directly or
- -------
indirectly owned or held by or for the account of the Company.
Section 1.18 "Person" shall mean an individual, a corporation, a
------
partnership, an association, a limited liability company, a trust or other
entity or organization, including a government or political subdivision or an
agency or instrumentality thereof.
Section 1.19 "Preferred Stock" shall mean the Company's Series C Preferred
---------------
Stock with the rights, privileges and preferences, as set forth in the
Certificate of Designation.
Section 1.20 "Prime Rate" shall mean the rate of interest per annum
----------
publicly announced from time to time by the principal New York City office of
the Chase Manhattan bank, or its successor, as its prime rate (which rate shall
change when and as such prime rate changes).
Section 1.21 "Principal Market" shall mean the Nasdaq National Market, the
----------------
Nasdaq Small Cap Market, the American Stock Exchange, or the New York Stock
Exchange, whichever is at the time the principal trading exchange or market for
the Common Stock.
Section 1.22 "Purchase Price" shall mean $4,000,000.
--------------
Section 1.23 "Registrable Securities" shall mean the Underlying Shares,
----------------------
Additional Shares, and Warrant Shares, (i) in respect of which the Registration
Statement (covering these securities) has not been declared effective by the
SEC, (ii) which have not been sold under circumstances under which all of the
applicable conditions of Rule 144 (or any similar provision then in force) under
the Securities Act ("Rule 144") are met, (iii) which have not been otherwise
transferred to holders who may trade such shares without restriction under the
Securities Act, or (iv) the sales of which, in the opinion of counsel to the
Company, are subject to any time, volume or manner of sale limitations pursuant
to Rule 144(k) (or any similar provision then in effect) under the Securities
Act.
Section 1.24 "Registration Rights Agreement" shall mean the agreement
-----------------------------
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investor on the
Subscription Date annexed hereto as Exhibit C.
Section 1.25 "Registration Statement" shall mean a registration statement
----------------------
on Form S-3 (or any other available form) for the registration of the resale by
the Investor of the Registrable Securities under the Securities Act.
Section 1.26 "Regulation D" shall have the meaning set forth in the
------------
recitals of this Agreement.
Section 1.27 "SEC" shall mean the Securities and Exchange Commission.
---
3
<PAGE>
Section 1.28 "Section 4(2)" shall have the meaning set forth in the
------------
recitals of this Agreement.
Section 1.29 "Securities" shall mean the Underlying Shares, the Additional
----------
Shares, and the Warrant Shares.
Section 1.30 "Securities Act" shall have the meaning set forth in the
--------------
recitals of this Agreement.
Section 1.31 "SEC Documents" shall mean the Company's latest Form 10-KSB
-------------
(and all amendments thereto) as of the time in question, all Form 10-QSBs and
Form 8-Ks filed thereafter, the Proxy Statement for its latest fiscal year as of
the time in question, and any currently effective registration statement, until
such time as the Company no longer has an obligation to maintain the
effectiveness of a Registration Statement as set forth in the Registration
Rights Agreement.
Section 1.32 "Subscription Date" shall mean the date on which this
-----------------
Agreement and all Exhibits and attachments hereto are executed and delivered by
the parties hereto.
Section 1.33 "Trading Day" shall mean any day during which the Principal
-----------
Market shall be open for business.
Section 1.34 "Underlying Shares" shall mean all shares of Common Stock or
-----------------
other securities issued or issuable pursuant to conversion of the Preferred
Stock.
Section 1.35 "Warrant" shall mean the Common Stock Purchase Warrant
-------
annexed hereto as Exhibit D.
Section 1.36 "Warrant Shares" shall mean all shares of Common Stock or
--------------
other securities issued or issuable pursuant to the exercise of the Warrant.
ARTICLE II
----------
Purchase and Sale of the Preferred Stock and Warrant
----------------------------------------------------
Section 2.1 Closing. On the Closing Date, the Company will sell and the
-------
Investor will buy, in reliance upon the representations, covenants, and
warranties contained in this Agreement and all Exhibits annexed hereto, and
subject to the terms and satisfaction of each of the conditions set forth in
Section 2.6 below, 4,000 shares of Preferred Stock (each share of Preferred
Stock has a Stated Value (as defined in the Certificate of Designation) of
$1,000), and a Warrant to purchase 122,553 shares of Common Stock, for the
Purchase Price.
4
<PAGE>
Section 2.2 Form of Payment. The Investor shall pay the Purchase Price
---------------
by delivering good funds in United States Dollars by wire transfer to the Escrow
Agent, against delivery of the original shares of Preferred Stock and Warrant.
The parties have entered into an Escrow Agreement annexed hereto as Exhibit B.
Section 2.3 Warrant. The Company will issue to the Investor on the
-------
Closing Date a Warrant, exercisable beginning on the Effective Date and then
exercisable any time over the four year period there following, to purchase
122,553 Warrant Shares. The Warrant shall be delivered by the Company to the
Escrow Agent, and delivered to the Investor pursuant to the terms of this
Agreement and the Escrow Agreement. All of the aforementioned Warrant Shares
shall be registered for resale pursuant to the Registration Rights Agreement.
Section 2.4 Additional Shares. If a "blackout period" occurs, which is
-----------------
defined as any period in which the effectiveness of the Registration Statement
is suspended for a reason other than a suspension of the Registration Statement
arising because the Company possesses material non-public information, and the
Bid Price on the Trading Day immediately preceding such "blackout period" (the
"Old Bid Price") is greater than the Bid Price on the first Trading Day
following such "blackout period" (the "New Bid Price"), the Company shall issue
to the Investor the number of additional shares of Common Stock equal to the
difference between (y) the product of (i) the number of Securities held by the
Investor during such "blackout period" that are or were not otherwise freely
tradable and (ii) the Old Bid Price, divided by the New Bid Price and (z) the
number of Securities held by the Investor during such "blackout period" that
were not otherwise freely tradable during such Blackout Period.
Section 2.5 Liquidated Damages. In addition to any other provisions for
------------------
liquidated damages in this Agreement or any Exhibit annexed hereto, if that the
Company does not deliver unlegended, freely tradable Common Stock in connection
with the sale of such Common Stock by the Investor as set forth in Article VIII
below within five Business Days of surrender by the Investor of the Common Stock
certificate in accordance with the terms and conditions set forth in Article
VIII below (such date of receipt is referred to as the "Receipt Date"), the
Company shall pay to the Investor, in immediately available funds, upon demand,
as liquidated damages for such failure and not as a penalty, for every day
thereafter for the first ten days, one percent of the product of (i) the number
of shares of Common Stock undelivered and (ii) the Bid Price on the Receipt
Date, and two percent of the product of (i) the number of shares of Common Stock
undelivered and (ii) the Bid Price on the Receipt Date, for every day thereafter
that the unlegended shares of Common Stock are not delivered, which liquidated
damages shall accrue from the sixth Business Day after the Receipt Date. The
parties hereto acknowledge and agree that the sums payable pursuant to the
Registration Rights Agreement and as set forth above, and the obligation to
issue Registrable Securities under Section 2.4 above, shall constitute
liquidated damages and not penalties. The parties further acknowledge that the
amount of loss or damages likely to be incurred in the event of a failure to
deliver unlegended, freely tradable shares of Common Stock cannot be precisely
estimated, and the parties are sophisticated business parties and have been
represented by sophisticated and able legal and financial counsel and negotiated
this Agreement at arm's length. Notwithstanding the above, if event that the
Company does not deliver unlegended Common Stock in connection with the sale
5
<PAGE>
of such Common Stock by the Investor as set forth in Article VIII below within
five Business Days of the Receipt Date, the Company shall also pay to the
Investor, in immediately available funds, interest (at the then current Prime
Rate), based upon the product of (i) the number of undelivered unlegended freely
tradable shares, and (ii) the Bid Price of the Common Stock on the Receipt Date,
undelivered for every day thereafter that the unlegended shares of Common Stock
are not delivered. Any and all payments required pursuant to this paragraph
shall be payable only in cash, and any payment hereunder shall not relieve the
Company of its delivery obligations under this Section or elsewhere in this
Agreement or any Exhibit annexed hereto.
Section 2.6 Conditions to Closing.
---------------------
(a) Conditions to Investor's Obligation to Purchase the Preferred
-------------------------------------------------------------
Stock and Warrant. The Company agrees to sell and the Investor agrees to
- -----------------
purchase 4,000 shares of Preferred Stock and a Warrant to purchase 122,553
Warrant Shares upon the satisfaction, or written waiver, of each of the
following conditions:
(i) Acceptance by the Investor of a satisfactory Purchase
Agreement and due execution by all parties of this Agreement and the
Exhibits annexed hereto;
(ii) Delivery to the Escrow Agent by the Company of 4,000
original shares of Preferred Stock, and the original Warrant being
purchased, as more fully set forth in the Escrow Agreement attached hereto
as Exhibit B;
(iii) All representations, covenants, and warranties of the
Company contained herein shall remain true and correct in all material
respects as of the Closing Date;
(iv) The Investor shall have received an opinion of counsel
substantially in the form of Exhibit E annexed hereto;
(v) The Company shall have obtained all permits and
qualifications required for the offer and sale of the Preferred Stock, and
Warrant, and the proposed issuance of the Securities or shall have the
availability of exemptions therefrom. At the Closing Date, the sale and
issuance of the Preferred Stock and Warrants, and the proposed issuance of
the Securities, shall be legally permitted by all laws and regulations to
which the Company and the Investor are subject;
(vi) The Investor shall have received the instruction letter
executed by the Company and the Company's transfer agent as set forth in
Exhibit F annexed to this Agreement;
(vii) The Company shall have performed, satisfied and
complied in all material respects with all covenants, agreements and
conditions required by this Agreement, the Certificate of Designation, the
Escrow Agreement, the Registration Rights Agreement
6
<PAGE>
and the Warrant, to be performed, satisfied or complied with by the Company
at or prior to the Closing Date;
(viii) No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction
that prohibits or directly and adversely affects any of the transactions
contemplated by this Agreement or the Exhibits annexed hereto, and no
proceeding shall have been commenced that may have the effect of
prohibiting or adversely affecting any of the transactions contemplated by
this Agreement or the Exhibits annexed hereto;
(ix) The trading of the Common Stock has not been suspended by
the SEC or the Principal Market, and the Common Stock has not been delisted
from the NASDAQ Small Cap Market. The issuance of shares of Common Stock
with respect to the conversion of the Preferred Stock, and/or exercise of
the Warrant shall not violate the shareholder approval requirements of the
NASDAQ Small Cap Market or the Principal Market where the Common Stock is
then listed. The Company shall not have been contacted by the NASD
concerning the delisting of the Common Stock on the NASDAQ Small Cap Market
and the Company currently meets all applicable listing requirements of the
Principal Market; and
(x) Payment of fees as set forth in Section 12.7 below.
(b) Conditions to the Company's Obligation to Sell. The Investor
----------------------------------------------
understands that the Company's obligation to sell the Preferred Stock and
Warrant is subject to the satisfaction (or written waiver) on the Closing Date,
of each of the following conditions:
(i) Delivery by Investor of a copy of this Agreement and each
Exhibit annexed hereto to which it is a party (substantially in the form
annexed hereto), in each case executed by the Investor;
(ii) Delivery to the Escrow Agent by the Investor of good
cleared funds as payment for the Purchase Price for the purchase of the
Preferred Stock and Warrant;
(iii) All representations and warranties of the Investor
contained herein shall remain true and correct in all material respects as
of the Closing Date; and
(iv) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock and Warrant, or shall have the availability of exemptions
therefrom. At the Closing Date, the sale and issuance of the Preferred
Stock, Warrants, and Securities shall be legally permitted by all laws and
regulations to which the Investor and the Company are subject.
7
<PAGE>
ARTICLE III
-----------
Representations and Warranties of the Investor
----------------------------------------------
The Investor represents and warrants to the Company that:
Section 3.1 Intent. Without limiting its ability to resell the
------
Securities pursuant to an effective registration statement or an exemption from
registration, the Investor is entering into this Agreement for its own account
and has no present arrangement (whether or not legally binding) at any time to
sell the Securities to or through any person or entity; provided, however, that
by making the representations herein, the Investor does not agree to hold the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with federal and state
securities laws applicable to such disposition. Without limiting its ability to
resell the Preferred Stock, Warrant, and Securities, the Investor represents
that the Preferred Stock and Warrant are purchased for the Investor's own
account, for investment purposes only and not for distribution or resale to
others. The Investor agrees that it will not sell the Preferred Stock, Warrant,
Underlying Shares, or Warrant Shares unless they are registered under the
Securities Act or unless an exemption from such registration is available.
Section 3.2 Accredited Investor/Investment Experience. The Investor is
-----------------------------------------
an accredited investor (as defined in Rule 501 of Regulation D), and has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in the Preferred Stock and Warrant. As of
the Closing Date, the Investor (i) has adequate means of providing for its
current need and possible personal contingencies, (ii) has no need for liquidity
in this investment, (iii) is able to bear the substantial economic risk of an
investment in the Preferred Stock and Warrant for an indefinite period, and (iv)
can afford the complete loss of his investment. The Investor recognizes the
highly speculative nature of this investment. The Investor acknowledges that it
has carefully read the SEC Documents, and the terms and conditions of the
Certificate of Designation and Warrant and fully understands the contents
thereof.
Section 3.3 Authority. This Agreement has been duly authorized and
---------
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application. The decision to invest and
the execution and delivery of this Agreement by the Investor, the performance by
the Investor of its obligations hereunder and the consummation by the Investor
of the transactions contemplated hereby have been duly authorized and requires
no other proceedings on the part of the Investor. This Agreement has been duly
executed and delivered by the Investor and, assuming the due execution and
delivery hereof and acceptance thereof by the Company, will constitute the
legal, valid and binding obligations of the Investor, enforceable against the
Investor in accordance with its terms.
8
<PAGE>
Section 3.4 Not an Affiliate. The Investor is neither an officer,
----------------
director nor "affiliate" (as that term is defined in Rule 405 of the Securities
Act) of the Company.
Section 3.5 Absence of Conflicts. The execution and delivery of this
--------------------
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated hereby and thereby, and
compliance with the requirements thereof, will not (a) violate the
organizational documents of the Investor; (b) violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investor, or, to
the Investor's knowledge; (c) violate any provision of any indenture, instrument
or agreement to which the Investor is a party or are subject, or by which any
Investor or any of its assets is bound; (d) conflict with or constitute a
material default thereunder; (e) result in the creation or imposition of any
lien pursuant to the terms of any such indenture, instrument or agreement, or
constitute a breach of any fiduciary duty owed by the Investor to any third
party; or (f) require the approval of any third-party (which has not been
obtained) pursuant to any material contract, agreement, instrument, relationship
or legal obligation to which the Investor is subject or to which any of their
assets, operations or management may be subject.
Section 3.6 Disclosure; Access to Information. The Investor has received
---------------------------------
all documents, records, books and other information pertaining to Investors'
investment in the Company that have been requested by the Investor. The Investor
has had the opportunity to ask questions of, and receive answers from, the
Company.
Section 3.7 Manner of Sale. At no time was the Investor presented with
--------------
or solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising in
connection with the offer and sale of the Preferred Stock and Warrant.
Section 3.8 Exemption from Registration. The Investor acknowledges and
---------------------------
understands that the shares of Preferred Stock and Warrant have not been
registered under the Securities Act by reason of an exemption under the
provisions of the Securities Act.
Section 3.9 No Legal, Tax or Investment Advice. The Investor understands
----------------------------------
that nothing in this Agreement or any other materials presented to the Investor
in connection with the purchase and sale of the Preferred Stock and Warrant
constitutes legal, tax or investment advice. The Investor has relied on, and has
consulted with, such legal, tax and investment advisors as it, in its sole
discretion, have deemed necessary or appropriate in connection with its purchase
of the Preferred Stock and Warrant.
9
<PAGE>
ARTICLE IV
----------
Representations and Warranties of the Company
---------------------------------------------
The Company represents and warrants that:
Section 4.1 Organization of the Company. The Company is a corporation
---------------------------
duly incorporated and existing in good standing under the laws of the State of
Delaware and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted except as described in the SEC
Documents. The Company is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary,
other than those (individually or in the aggregate) in which the failure so to
qualify would not reasonably be expected to have a Material Adverse Effect. The
Company is not in violation of any material terms of its Certificate of
Incorporation (as defined below) or Bylaws (as defined below).
Section 4.2 Authority. (i) The Company has the requisite corporate power
---------
and authority to enter into and perform its obligations under this Agreement,
and all Exhibits annexed hereto, and to issue the Preferred Stock, Warrant, and
the Securities, (ii) the execution, issuance and delivery of this Agreement, and
all Exhibits annexed hereto by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action and no further consent or authorization of the
Company, its shareholders, or its Board of Directors is necessary, and (iii)
this Agreement, and all Exhibits annexed hereto, have been duly executed and
delivered by the Company and constitute valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application.
Upon their issuance and delivery pursuant to this Agreement, the Preferred
Stock, Warrant, and the Securities will be validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances other than those
created hereunder or by the actions of the Investor; provided, however, that the
-------- -------
Preferred Stock, Warrant, and the Securities are subject to restrictions on
transfer under state and/or federal securities laws. The issuance and sale of
the securities hereunder will not give rise to any preemptive right or right of
first refusal or right of participation on behalf of any person other than the
Investor pursuant to the terms of this Agreement.
Section 4.3 Capitalization. As of March 26, 1999, the authorized capital
--------------
stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par
value, of which 37,602,752 shares are outstanding, and 5,000,000 shares of
preferred stock, of which 3,000 shares are outstanding. All of the outstanding
shares of the Company's capital stock have been duly and validly authorized and
issued and are fully paid and nonassessable. No shares of Common Stock or
preferred stock of the Company are entitled to preemptive or similar rights.
Except as disclosed in the SEC Documents, there are no outstanding options,
warrants, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or, except as a result of the purchase and sale
10
<PAGE>
of the Preferred Stock and Warrant, securities, rights or obligations
convertible into or exchangeable for, or giving any Person any right to
subscribe for or acquire, any shares of Common Stock, or contracts, commitments,
understandings, or arrangements by which the Company or any subsidiary is or may
become bound to issue additional shares of Common Stock or securities or rights
convertible or exchangeable into shares of Common Stock. Except as disclosed in
the SEC Documents, to the knowledge of the Company, no Person or group of
11
<PAGE>
Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated
under the Exchange Act) or has the right to acquire by agreement with or by
obligation binding upon the Company beneficial ownership of in excess of five
percent of the Common Stock.
Section 4.4 Common Stock. The Company has registered its Common Stock
------------
pursuant to Section 12(g) of the Exchange Act and is in full compliance with all
reporting requirements of the Exchange Act, and such Common Stock is currently
listed or quoted, and trades, on the NASDAQ Small Cap Market, and the Company is
in full compliance with the rules and regulations of the NASDAQ Small Cap
Market.
Section 4.5 SEC Documents. The Company has delivered or made available
-------------
to the Investor true and complete copies of the SEC Documents filed by the
Company with the SEC during the twelve (12) months immediately preceding the
date hereof. The Company has not provided to the Investor any information that,
according to applicable law, rule or regulation, should have been disclosed
publicly prior to the date hereof by the Company, but which has not been so
disclosed. The SEC Documents comply in all material respects with the
requirements of the Securities Act and/or the Exchange Act, as the case may be,
and the rules and regulations of the SEC promulgated thereunder and none of the
SEC Documents contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
Section 4.6 Valid Issuances. Neither the issuance of the Preferred
---------------
Stock, Warrant, or Securities, nor the Company's performance of its obligations
under this Agreement, and all Exhibits annexed hereto, will (i) result in the
creation or imposition by the Company of any liens, charges, claims or other
encumbrances upon the Warrant, Preferred Stock, or Securities, issued or
issuable hereunder, or any of the assets of the Company, or (ii) entitle the
holders of Outstanding Capital Shares to preemptive or other rights to subscribe
to or acquire any Capital Shares or other securities of the Company.
Section 4.7 No General Solicitation or Advertising in Regard to this
--------------------------------------------------------
Transaction. Neither the Company nor any of its affiliates, nor any distributor
- -----------
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising in connection with the offer and sale of the Preferred
Stock, Warrant, or Securities, or (ii) has made any offers or sales of any
security or
12
<PAGE>
solicited any offers to buy any security under any circumstances that would
require registration of the Preferred Stock, Warrant, or Securities under the
Securities Act, except as contemplated by this Agreement.
Section 4.8 Corporate Documents. The Company has furnished or made
-------------------
available to the Investor true and correct copies of the Company's Certificate
of incorporation, as amended and in effect on the date hereof (the "Certificate
of Incorporation"), and the Company's bylaws, as amended and in effect on the
date hereof (the "ByLaws").
Section 4.9 No Conflicts. The execution, delivery and performance of
------------
this Agreement (including all Exhibits annexed hereto) by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby,
including without limitation the issuance of the Preferred Stock, Warrant, and
Securities, do not and will not (i) result in a violation of the Company's
Certificate of Incorporation or ByLaws or (ii) conflict with, or constitute a
material default (or an event that with notice or lapse of time or both would
become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, patent, patent license,
indenture, instrument or any "lock-up" or similar provision of any underwriting
or similar agreement to which the Company is a party, or (iii) result in a
violation of any federal, state or local law, rule, regulation, order, judgment
or decree (including federal and state securities laws and regulations)
applicable to the Company or by which any property or asset of the Company is
bound or affected, nor is the Company otherwise in violation of, in conflict
with, or in default under, any of the foregoing except as would not reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect. The business of the Company is not being conducted in violation of any
law, ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate would not reasonably be
expected to have a Material Adverse Effect. Except for the filing of a Form D
within 15 days after the Closing Date (which the Company agrees it will file),
and such other form(s) required by "blue sky" laws, the Company is not required
under federal, state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or issue and sell the Preferred Stock, or
Warrant, in accordance with the terms hereof; provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investor
herein.
Section 4.10 No Material Adverse Change. Since January 1, 1999, no
--------------------------
Material Adverse Effect has occurred or exists with respect to the Company,
except as disclosed in the SEC Documents, or as publicly announced.
Section 4.11 No Undisclosed Liabilities. The Company has no liabilities
--------------------------
or obligations, known or unknown, absolute or otherwise, which are not disclosed
in the SEC Documents or otherwise publicly announced, or as incurred in the
ordinary course of the Company's businesses since January 1, 1999, or which,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect.
13
<PAGE>
Section 4.12 No Undisclosed Events or Circumstances. Since January 1,
--------------------------------------
1999, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company, but which
has not been so publicly announced or disclosed in the SEC Documents.
Section 4.13 Litigation and Other Proceedings. Except as may be set forth
--------------------------------
in the SEC Documents, there are no lawsuits or proceedings pending or to the
knowledge of the Company threatened, against the Company, nor has the Company
received any written or oral notice of any such action, suit, proceeding or
investigation, which would reasonably be expected to have a Material Adverse
Effect. Except as set forth in the SEC Documents, no judgment, order, writ,
injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which would
be reasonably expected to result in a Material Adverse Effect.
Section 4.14 Accuracy of Reports and Information. The Company is in
-----------------------------------
compliance, to the extent applicable, with all reporting obligations under
either Section 12(b), 12(g) or 15(d) of the Exchange Act. The Company has
complied in all material respects and to the extent applicable with all
reporting obligations, under either Section 13(a) or 15(d) of the Exchange Act
for a period of at least twelve (12) months immediately preceding the
Subscription Date.
Section 4.15 Acknowledgment of Dilution. The Company is aware and
--------------------------
acknowledges that issuance of Common Stock upon the conversion of the Preferred
Stock and/or exercise of the Warrant, may result in dilution of the outstanding
shares of Common Stock, which dilution may be substantial under certain market
conditions. The Company further acknowledges that its obligation to issue
Additional Shares in accordance with the terms herein, Underlying Shares in
accordance with the Certificate of Designation, and Warrant Shares in accordance
with the Warrant is unconditional and absolute regardless of the effect of any
such dilution.
Section 4.16 Employee Relations. The Company is not involved in any labor
------------------
dispute, nor, to the knowledge of the Company, is any such dispute threatened
which could reasonably be expected to have a Material Adverse Effect. None of
the Company's employees is a member of a union and the Company believes that its
relations with its employees are good.
Section 4.17 Insurance. The Company is insured by insurers of recognized
---------
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company is engaged. The Company has no notice to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires, or obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operation, of the Company.
14
<PAGE>
Section 4.18 Board Approval. The Board of Directors of the Company has
--------------
concluded, in its good faith business judgment, that the issuances of the
securities of the Company in connection with this Agreement are in the best
interests of the Company.
Section 4.19 Integration. The Company, any of its affiliates, or any
-----------
person acting on its or their behalf has not, shall not, and shall use its best
efforts to ensure that no affiliate shall, directly or indirectly, sell, offer
for sale or solicit offers to buy or otherwise negotiate in respect of any
security of the Company that would be integrated with the offer or sale of the
Preferred Stock, and Warrant in a manner that would require the registration
under the Securities Act of the issue, offer or sale of the Preferred Stock and
Warrant to the Investor. The shares of Preferred Stock and Warrant are being
offered and sold pursuant to the terms hereunder, are not being offered and sold
as part of a previously commenced private placement of securities.
Section 4.20 Patents and Trademarks. The Company has, or has rights to
----------------------
use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses, trade secrets and other
intellectual property rights which are necessary for use in connection with its
business or which the failure to so have would have a Material Adverse Effect
(collectively, the "Intellectual Property Rights"). To the best knowledge of
the Company, none of the Intellectual Property Rights infringe on any rights of
any other Person, and the Company either owns or has duly licensed or otherwise
acquired all necessary rights with respect to the Intellectual Property Rights.
The Company has not received any notice from any third party of any claim of
infringement by the Company of any of the Intellectual Property Rights, and has
no reason to believe there is any basis for any such claim. To the best
knowledge of the Company, there is no existing infringement by another Person on
any of the Intellectual Property Rights.
Section 4.21 Use of Proceeds. The net proceeds from this offering will be
---------------
used to redeem the Company's presently outstanding shares of Series D and Series
E Preferred Stock, and not for the payment of any judgment; provided, however,
if proceeds remain after all shares of Series D and Series E Preferred Stock
have been redeemed, the Company may use such proceeds for working capital.
Section 4.22 Subsidiaries. Except as disclosed in the SEC Documents, the
------------
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
Section 4.23 No Private Placements. Except as disclosed in the SEC
---------------------
Documents, the Company has not conducted a private placement of its Common Stock
or of any debt or equity instrument convertible into Common Stock within one
year prior to the Closing Date. Except for the transactions contemplated
hereby, there are no outstanding securities issued by the Company that are
entitled to registration rights under the Securities Act. Except as disclosed
in the SEC Documents, there are no outstanding securities issued by the Company
that are directly or indirectly convertible into, exercisable into, or
exchangeable for, shares of Common Stock, that have anti-dilution or similar
rights that would be affected by the issuance of the Preferred Stock, Warrant,
or Securities.
15
<PAGE>
Section 4.24 Permits; Compliance. The Company and each of its
-------------------
subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted (collectively, the "Company
Permits"), and there is no action pending or, to the knowledge of the Company,
threatened regarding the suspension or cancellation of any of the Company
Permits except for such Company Permits, the failure of which to possess, or the
cancellation, or suspension of which, would not, individually or in the
aggregate, have a Material Adverse Effect. To the Company's knowledge, neither
the Company nor any of its subsidiaries is in material conflict with, or in
material default or material violation of, any of the Company Permits. Since
January 1, 1999 neither the Company nor any of its subsidiaries has received any
notification with respect to possible material conflicts, material defaults or
material violations of applicable laws.
Section 4.25 Taxes. All federal, state, city and other tax returns,
-----
reports and declarations required to be filed by or on behalf of the Company
have been filed and such returns are complete and accurate and disclose all
taxes (whether based upon income, operations, purchases, sales, payroll,
licenses, compensation, business, capital, properties or assets or otherwise)
required to be paid in the periods covered thereby.
Section 4.26 No Bankruptcy. The Company is aware of no facts or claims
-------------
against it which would, and the Company has no present intention to, liquidate
the assets of the Company and/or seek bankruptcy protection either voluntarily
or involuntarily.
Section 4.27 Authority to Redeem. The Company is authorized to redeem the
-------------------
two series of preferred stock referred to in Section 4.21 above, pursuant to the
certificate of designations creating those two series of preferred stock which
are being redeemed in full with the proceeds from this transaction. The Company
has taken all appropriate measures to effectuate such redemption and will close
the redemption within twenty calendar days after the Closing Date.
ARTICLE V
---------
Covenants of the Investor
-------------------------
Section 5.1 4.99% Limitation. The number of shares of Common Stock which
----------------
may be acquired by the Investor pursuant to the terms of this Agreement shall
not exceed the number of such shares which, when aggregated with all other
shares of Common Stock then owned by the Investor (or one or more assigns of the
Investor), would result in the Investor owning more than 4.99% of the then
issued and outstanding Common Stock at any one time. The preceding sentence
shall not interfere with the Investor's right to convert any share or shares of
Preferred Stock and/or exercise the Warrant over time which in the aggregate
totals more than 4.99% of the then outstanding shares of Common Stock so long as
the Investor (or one or more assigns of the Investor) does not own more than
4.99% of the then outstanding Common Stock at any given time.
16
<PAGE>
ARTICLE VI
----------
Covenants of the Company
------------------------
Section 6.1 Registration Rights. The Company shall cause the Registration
-------------------
Rights Agreement to remain in full force and effect so long as any Registrable
Securities remain outstanding and the Company shall comply in all material
respects with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the
---------------------------
Company has authorized and reserved and the Company shall continue to reserve
and keep available at all times, free of preemptive rights, no less than 200% of
the shares of Common Stock underlying the Preferred Stock for the purpose of
enabling the Company to satisfy any obligation to issue the Securities; such
amount of shares of Common Stock to be reserved shall be calculated based upon
the Purchase Price therefor, Conversion Price and Exercise Price under the terms
of this Agreement, the Certificate of Designation, and Warrant. The number of
shares so reserved shall be increased or decreased to reflect potential
increases or decreases in the Common Stock that the Company may thereafter be so
obligated to issue by reason of adjustments to the Conversion Price and/or
Exercise Price as set forth in the Certificate of Designation and the Warrant.
Section 6.3 Listing of Common Stock. The Company shall (a) not later than
-----------------------
the tenth Business Day following the Closing Date prepare and file with the
Principal Market (as well as any other national securities exchange, market or
trading facility on which the Common Stock is then listed) an additional shares
listing application covering at least the sum of (i) two times the number of
Underlying Shares as would be issuable upon a conversion in full of (and as
payment of dividends in respect of) the Preferred Stock, assuming such
conversion occurred on the Closing Date, and (ii) the Warrant Shares issuable
upon exercise in full of the Warrant, (b) take all steps necessary to cause such
shares to be approved for listing on the Principal Market (as well as on any
other national securities exchange, market or trading facility on which the
Common Stock is then listed) as soon as possible thereafter, and (c) provide to
the Investor evidence of such listing, and the Company shall maintain the
listing of its Common Stock on such exchange or market for so long as the
Registrable Securities, Preferred Stock and/or Warrant is owned by the Investor.
In addition, if at any time the number of shares of Common Stock issuable on
conversion of all then outstanding shares of Preferred Stock, on account of
accrued and unpaid dividends thereon and upon exercise in full of the Warrant is
greater than the number of shares of Common Stock theretofore listed with the
Principal Market (and any such other national securities exchange, market or
trading facility), the Company shall promptly take such action (including the
actions described in the preceding sentence), if required pursuant to the rules
and regulations of the Principal Market, to file an additional shares listing
application with the Principal Market (and any such other national securities
exchange, market or trading facility) covering at least a number of shares equal
to the sum of (x) 200% of the number of Underlying Shares as would then be
issuable upon a conversion in full of the Preferred Stock, and (y) the number of
Warrant Shares as would be issuable upon exercise in full of the Warrant. The
Company warrants that it (i) has not received any notice, oral or written,
affecting its continued listing on the NASDAQ Small Cap Market, and (ii) is in
full compliance with the requirements for continued listing on the NASDAQ Small
Cap Market. The Company will take no
17
<PAGE>
action, which would impact its continued listing or the eligibility of the
Company for such listing. The Company will comply with the listing and trading
requirements of its Common Stock on the NASDAQ Small Cap Market (and of any then
Principal Market) and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the Principal Market.
If the Company receives notification from NASDAQ or any other controlling entity
stating that the Company is not in compliance with the listing qualifications of
such Principal Market, the Company will immediately thereafter give written
notice to the Investor and take all action necessary to bring the Company into
compliance with all applicable listing standards of the Principal Market.
Section 6.4 Exchange Act Registration. The Company will maintain the
-------------------------
registration of its Common Stock under Section 12 of the Exchange Act, will
comply in all respects with its reporting and filing obligations under the
Exchange Act, and will not take any action or file any document (whether or not
permitted by Exchange Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Act.
Section 6.5 Legends. The securities to be sold by the Company pursuant to
-------
this Agreement shall be free of restrictive legends, except as set forth in
Article VIII.
Section 6.6 Corporate Existence. The Company will take all steps
-------------------
necessary to preserve and continue the corporate existence of the Company.
Section 6.7 Notice of Certain Events Affecting Registration. The Company
-----------------------------------------------
will immediately notify the Investor upon the occurrence of any of the following
events in respect of a registration statement or related prospectus in respect
of an offering of Registrable Securities: (i) receipt of any request for
additional information by the SEC or any other federal or state governmental
authority during the period of effectiveness of the Registration Statement for
amendments or supplements to the Registration Statement or related prospectus;
(ii) the issuance by the SEC or any other federal or state governmental
authority of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose; (iii) receipt
of any notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction or the initiation or threatening of any proceeding for such
purpose; (iv) the happening of any event that makes any statement made in the
Registration Statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (v) the Company's reasonable
18
<PAGE>
determination that a post-effective amendment to the Registration Statement
would be appropriate. The Company will promptly make available to the Investor
any such supplement or amendment to the related prospectus.
Section 6.8 Consolidation; Merger. For so long as the Preferred Stock,
---------------------
Warrant, and/or Registrable Securities are owned by the Investor, the Company
shall not, at any time after the date hereof, effect any merger or consolidation
of the Company with or into, or a transfer of all or substantially all of the
assets of the Company to, another entity (a "Consolidation Event") unless the
resulting successor or acquiring entity (if not the Company) assumes by written
instrument the obligation to deliver to the Investor such shares of stock and/or
securities as the Investor is entitled to receive pursuant to this Agreement,
and all Exhibits annexed hereto.
Section 6.9 Issuance of Underlying Shares and Warrant Shares. The
------------------------------------------------
issuance of the Underlying Shares and the Warrant Shares pursuant to exercise of
the Warrant, and the conversion of the Preferred Stock, shall be made in
accordance with the provisions and requirements of Section 4(2) of the
Securities Act or Regulation D and any applicable state securities law.
Section 6.10 Legal Opinion. The Company's independent counsel shall
-------------
deliver to the Investor upon execution of this Agreement, an opinion in the form
of Exhibit E annexed hereto. The Company will obtain for the Investor, at the
Company's expense, any and all opinions of counsel which may be reasonably
required in order to convert the Preferred Stock and/or exercise the Warrant,
including, but not limited to, obtaining for the Investor an opinion of counsel,
subject only to receipt of a notice of conversion (the "Notice of Conversion")
in the form of Exhibit G, and/or subject only to a receipt of a notice of
exercise in the form annexed to the Warrant, directing the Company's transfer
agent to remove the legend from the certificate.
Section 6.11 Issuance Limitation. At no time will the Company be
-------------------
obligated to issue more than 20% of the number of shares of Common Stock
outstanding as of the Closing Date, unless the Company has obtained shareholder
approval. In lieu of such issuance(s) (and if the Company is otherwise unable
to issue shares of Common Stock to the Investor as they become due pursuant to
the terms of this Agreement) the Company shall pay to the Investor the cash
value of such shares within five Business Days of when such issuance is due
based upon the Bid Price of the Common Stock on the Trading Date of when due (or
such next Trading Day if such day is not a Trading Day).
Section 6.12 Right of First Refusal/Restrictions on Future Financing. The
-------------------------------------------------------
Company agrees that should it elect to enter into a private transaction for
convertible debt or equity financing (including any financing with a reset
provision, and excluding securities issued in connection with acquisition
transactions) at any time prior to six months after the Effective Date, the
Company will give the Investor written notice of the terms and conditions of
such offer (the "ROFR Notice") via facsimile. The Investor shall have a right
of first refusal to commit to provide the funds pursuant to the terms as
outlined in the ROFR Notice. The Investor shall have twenty (20) Business Days
to reply in writing after receipt of the ROFR Notice from the Company, and the
Company and the Investor must close such transaction within ten Business Days
after said twenty Business Day period. If such written reply is not received by
the Company within such twenty (20) Business Day period, the Company shall have
the right to conclude a transaction with another investor or investors
19
<PAGE>
provided the transaction is not materially different from that outlined to the
Investor as was provided in the ROFR Notice. If the Investor does exercise its
right of first refusal, such transaction must close within ten Business Days
after such twenty Business Day period. If the Investor does not exercise its
right of first refusal, the Company agrees that it will not, without the prior
written consent of the Investor, issue any Common Stock or any financial
instrument convertible into shares of Common Stock (or any financial instrument
with a reset or repricing provision) unless (a) the first use of proceeds from
such issuance would be to redeem the Preferred Stock, (b) the Investor has
converted all of the shares of Preferred Stock into Common Stock, or (c) the
Common Stock or the Common Stock underlying such financial instrument would not
be registered for resale until one year from the last date of issuance of
Underlying Shares.
Section 6.13 Conversion of Preferred Stock. The Company will permit the
-----------------------------
Investor to exercise its right to convert the Preferred Stock by telecopying an
executed and completed Notice of Conversion to the Company.
Section 6.14 Exercise of Warrants. The Company will permit the Investor
--------------------
to exercise its right to purchase shares of Common Stock upon exercise of the
Warrants as is set forth in the Warrants.
Section 6.15 Increase in Authorized Shares. At such time as the Company
-----------------------------
would be, if a Notice of Conversion or notice of exercise (as the case may be)
were to be delivered on such date, precluded from (a) converting in full all of
the shares of Preferred Stock that remain unconverted at such date (and paying
any accrued but unpaid dividends in respect thereof in shares of Common Stock),
or (b) honoring the exercise in full of the Warrant, due to the unavailability
of a sufficient number of shares of authorized but unissued or re-acquired
Common Stock, the Board of Directors of the Company shall promptly (and in any
case within 90 calendar days from such date) hold a shareholders meeting in
which the shareholders would vote for authorization to amend the Company's
Certificate of Incorporation to increase the number of shares of Common Stock
which the Company is authorized to issue to at least a number of shares equal to
the sum of (i) all shares of Common Stock then outstanding, (ii) the number of
shares of Common Stock issuable on account of all outstanding warrants, options
and convertible securities (other than the Preferred Stock and the Warrant) and
on account of all shares reserved under any stock option, stock purchase,
warrant or similar plan, (iii) 200% of the number of Underlying Shares as would
then be issuable upon a conversion in full of the then outstanding shares of
Preferred Stock and as payment of all future dividends thereon in shares of
Common Stock in accordance with the terms of this Agreement and the Certificate
of Designation, and (iv) such number of Warrant Shares as would then be issuable
upon the exercise in full of the Warrant. In connection therewith, the Board
of Directors shall (x) adopt proper resolutions authorizing such increase, (y)
recommend to its shareholders, and otherwise use its best efforts to promptly
and duly obtain shareholder approval to carry out such resolutions and (z)
within five Business Days of obtaining such shareholder authorization, file an
appropriate amendment to the Company's Certificate of Incorporation to evidence
such increase. The foregoing shall not relieve the Company from any claim for
damages that the Investor may have against the Company as a result of the
Company not having a sufficient number of authorized shares of Common Stock to
satisfy its obligations under this Agreement or any Exhibit annexed hereto.
20
<PAGE>
Section 6.16 Notice of Breaches. Each of the Company on the one hand, and
------------------
the Investor on the other, shall give prompt written notice to the other of any
breach by it of any representation, covenant, warranty or other agreement
contained in this Agreement or any Exhibit annexed hereto, as well as any events
or occurrences arising after the date hereof, which would reasonably be likely
to cause any representation, covenant, or warranty or other agreement of such
party, as the case may be, contained in this Agreement or any Exhibit annexed
hereto, to be incorrect or breached as of such Closing Date. However, no
disclosure by either party pursuant to this Section shall be deemed to cure any
breach of any representation, warranty or other agreement contained in this
Agreement or any Exhibit annexed hereto. Notwithstanding the generality of the
foregoing, the Company shall promptly notify the Investor of any notice or claim
(written or oral) that it receives from any lender of the Company to the effect
that the consummation of the transactions contemplated by this Agreement or any
Exhibit annexed hereto, violates or would violate any written agreement or
understanding between such lender and the Company, and the Company shall
promptly furnish by facsimile to the Investor a copy of any written statement in
support of or relating to such claim or notice.
Section 6.17 Transfer of Intellectual Property Rights. Except in the
----------------------------------------
ordinary course of the Company's business or in connection with the sale of all
or substantially all of the assets of the Company, the Company shall not
transfer, sell or otherwise dispose of, any Intellectual Property Rights, or
allow the Intellectual Property Rights to become subject to any Liens, or fail
to renew such Intellectual Property Rights (if renewable and would otherwise
expire); provided, however, the Company may license the Intellectual Property
Rights.
Section 6.18 Notices. The Company agrees to provide all holders of
-------
Preferred Stock and Warrant with copies of all notices and information,
including without limitation notices and proxy statements in connection with any
meetings, that are provided to the holders of shares of Common Stock,
contemporaneously with the delivery of such notices or information to such
Common Stock holders.
Section 6.19 Questions/Answers. The Company shall provide the Investor
-----------------
with the opportunity to ask additional questions of, and receive answers (all of
which information shall be limited to information in the public domain) from the
Company concerning the Company during the period which the Investor owns the
Preferred Stock and/or Warrant.
ARTICLE VII
-----------
Due Diligence Review; Non-Disclosure of Non-Public Information
--------------------------------------------------------------
Section 7.1 Due Diligence Review. The Company shall make available for
---------------------
inspection and review by the Investor, advisors to and representatives of the
Investor (who may or may not be affiliated with the Investor), and any
underwriter participating in any disposition of the Registrable Securities on
behalf of the Investor pursuant to the Registration Statement, any such
registration statement or amendment or supplement thereto or any blue sky, NASD
or other filing, all financial and other records, all SEC Documents and other
filings with the SEC, and all other corporate
21
<PAGE>
documents and properties of the Company as may be reasonably necessary for the
purpose of such review, and cause the Company's officers, directors and
employees to supply all such information reasonably requested by the Investor or
any such representative, advisor or underwriter in connection with such
Registration Statement (including, without limitation, in response to all
questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling the Investor and such
representatives, advisors and underwriters and its respective accountants and
attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
Section 7.2 Non-Disclosure of Non-Public Information.
----------------------------------------
(a) The Company shall not disclose non-public information to the
Investor, or advisors to or representatives of, the Investor unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investor, and their advisors and
representatives, with the opportunity to accept or refuse to accept such non-
public information for review. The Company may, as a condition to disclosing
any non-public information hereunder, require the Investor's advisors and
representatives to enter into a confidentiality agreement in form reasonably
satisfactory to the Company and the Investor.
(b) Nothing herein shall require the Company to disclose non-
public information to the Investor or its advisors or representatives, and the
Company represents that it does not disseminate non-public information to any
investors who purchase stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Investor and, if any,
underwriters, of any event or the existence of any circumstance (without any
obligation to disclose the specific event or circumstance) of which it becomes
aware, constituting non-public information (whether or not requested of the
Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in order
to make the statements, therein, in light of the circumstances in which they
were made, not misleading. Nothing contained in this Section shall be construed
to mean that such persons or entities other than the Investor (without the
written consent of the Investor prior to disclosure of such information) may not
obtain non-public information in the course of conducting due diligence in
accordance with the terms of this Agreement and nothing herein shall prevent any
such persons or entities from notifying the Company of its opinion that based on
such due diligence by such persons or entities, that the Registration Statement
contains an untrue statement of a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading.
22
<PAGE>
ARTICLE VIII
------------
Legends
-------
Section 8.1 Legends. The Investor agrees to the imprinting, so long as is
-------
required by this Section, of the following legend (or such substantially similar
legend as is acceptable to the Investor and its counsel, the parties agreeing
that any unacceptable legended securities shall be replaced promptly by and at
the Company's cost) on each of the Preferred Stock, Underlying Shares and
Warrant Shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR
APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO
AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THERE IS AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT.
The Investor further agrees to the imprinting, so long as required by this
Section of the following legend (or such substantially similar legend as is
acceptable to the Investor and its counsel, the parties agreeing that any
nonacceptable legended securities shall be replaced promptly by and at the
Company's cost) on each share of Preferred Stock:
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO
REQUESTS, THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL, OR OTHER SPECIAL RIGHTS OF THE SERIES F 12% CONVERTIBLE PREFERRED
STOCK AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS.
The Company agrees that it will provide the Investor, upon request, with a
certificate or certificates representing the Securities, free from such legend
at such time as such legend is no longer required hereunder. The Company may
not take any action or make any notation on its records or give instructions to
any transfer agent of the Company which enlarge the restrictions of transfer set
forth in this Section.
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit F hereto. Such instructions shall be irrevocable by the Company from
and after the date hereof or from and after the issuance thereof to any such
substitute or replacement transfer agent, as the case may be, except as
otherwise expressly provided in the Registration Rights Agreement. It is the
intent and purpose of such instructions, as provided therein, to require the
transfer agent for the Common Stock from time to time upon transfer of
Registrable Securities by the Investor to issue certificates evidencing such
Registrable Securities free of the Legend during the following periods and under
the following circumstances and except as provided below, without consultation
by the transfer agent with the Company or its counsel and without the
23
<PAGE>
need for any further advice or instruction or documentation to the transfer
agent by or from the Company or its counsel or the Investor:
(a) at any time after the Effective Date, upon surrender of one or
more certificates evidencing the Warrant, Preferred Stock, Underlying Shares or
Warrant Shares that bear the aforementioned Legend, to the extent accompanied by
a notice requesting the issuance of new certificates free of the aforementioned
legend to replace those surrendered; provided that (i) the Registration
Statement shall then be effective; (ii) the Investor confirms to the transfer
agent that it has sold, pledged or otherwise transferred or agreed to sell,
pledge or otherwise transfer such Common Stock in a bona fide transaction to a
third party that is not an affiliate of the Company; and (iii) the Investor
confirms to the transfer agent that the Investor has complied with the
prospectus delivery requirement; or
(b) at any time upon any surrender of one or more certificates
evidencing Registrable Securities, that bear the aforementioned legend, to the
extent accompanied by a notice requesting the issuance of new certificates free
of such legend to replace those surrendered and containing representations that
(i) the Investor is permitted to dispose of such Registrable Securities, without
limitation as to amount or manner of sale pursuant to Rule 144(k) under the
Securities Act (or any other similar exemption as may then be in effect), or
(ii) the Investor has sold, pledged or otherwise transferred or agreed to sell,
pledge or otherwise transfer such Registrable Securities, in a manner other than
pursuant to an effective registration statement, to a transferee who will upon
such transfer be entitled to freely tradable securities. The Company shall have
counsel provide any and all opinions necessary for the sale under Rule 144 (or
such other applicable exemption).
Any of the notices referred to above in this Section may be sent by
facsimile to the Company's transfer agent.
Section 8.2 No Other Legend or Stock Transfer Restrictions. No legend
----------------------------------------------
other than those specified in this Article (or pursuant to the Registration
Statement) have been or shall be placed on the share certificates representing
the Common Stock, and no instructions or "stop transfer orders," so called,
"stock transfer restrictions," or other restrictions have been or shall be given
to the Company's transfer agent with respect thereto other than as expressly set
forth in this Article.
Section 8.3 Investor's Compliance. Nothing in this Article shall affect
---------------------
in any way any of the Investor's obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
24
<PAGE>
ARTICLE IX
----------
Choice of Law
-------------
Section 9.1 Choice of Law; Venue; Jurisdiction. This Agreement will be
----------------------------------
construed and enforced in accordance with and governed exclusively by the laws
of the State of New York, except for matters arising under the Securities Act,
without reference to principles of conflicts of law. Each of the parties
consents to the exclusive jurisdiction of the U.S. District Court sitting in the
Southern District of the State of New York sitting in Manhattan in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
-----
non conveniens, to the bringing of any such proceeding in such jurisdictions.
- --- ----------
ARTICLE X
---------
Assignment; Entire Agreement, Amendment; Termination
----------------------------------------------------
Section 10.1 Assignment. The Investor's interest in this Agreement and
----------
its ownership of the Preferred Stock and Warrant may be assigned or transferred
at any time, in whole or in part, to any other person or entity (including any
affiliate of the Investor) who agrees to, and truthfully can, make the
representations and warranties contained in Article III, and who agrees to be
bound by the covenants of Article V. The provisions of this Agreement shall
inure to the benefit of, and be enforceable by, any transferee of any of the
Preferred Stock and/or Warrant purchased or acquired by the Investor hereunder
with respect to the Common Stock held by such person.
Section 10.2 Termination. This Agreement shall terminate upon the
-----------
earliest of (i) the date that all the Registrable Securities have been sold by
the Investor pursuant to the Registration Statement; or (ii) five years after
the Closing Date; provided, however, that the provisions of Articles III, IV, V,
VI, VII, VIII, IX, X, XI, and XII herein, and the registration rights provisions
for the Registrable Securities held by the Investor set forth in this Agreement,
and the Registration Rights Agreement, shall survive the termination of this
Agreement.
ARTICLE XI
----------
Notices
-------
Section 11.1 Notices. All notices, demands, requests, consents,
-------
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a Business Day during normal
25
<PAGE>
business hours where such notice is to be received), or the first Business Day
following such delivery (if delivered other than on a Business Day during normal
business hours where such notice is to be received), (b) on the second Business
Day following the date of mailing by reputable courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur, or (c) five calendar days after sent by regular mail. The
addresses for such communications shall be:
If to the Company:
ImaginOn, Inc.
1313 Laurel Street, Suite 1
San Carlos, CA 94070
Attention: David M. Schwartz, President and CEO
Facsimile: (650) 596-9350
Telephone: (650) 596-9300
with a copy to:
Friedlob Sanderson Raskin
Paulson & Tourtillott, LLC
1400 Glenarm Place, Third Floor
Denver, CO 80202
Attention: Gerald Raskin
Telephone: (303) 571-1400
Facsimile: (303) 595-3970
If to the Investor:
Gage LLC
c/o Citco Trustees Cayman Limited
Commercial Centre
PO Box 31106SMB
Grand Cayman, Cayman Islands
British West Indies
Attention: Sabrina Hew
Facsimile: 345 945-7566
Telephone: 345 949-3977
with a copy to:
The Goldstein Law Group, P.C.
65 Broadway, 10/th/ Floor
New York, NY 10006
Attention: Scott H. Goldstein, Esq.
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
26
<PAGE>
Facsimile:(212) 809-4228
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 11.1 by giving at least ten calendar days'
prior written notice of such changed address or facsimile number to the other
party hereto.
Section 11.2 Indemnification. The Company agrees to indemnify and hold
---------------
harmless the Investor and each officer, director of the Investor or person, if
any, who controls the Investor within the meaning of the Securities Act against
any losses, claims, damages or liabilities, joint or several (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees), to which the Investor may
become subject, under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon the breach by the Company of any term of this Agreement. This
indemnity agreement will be in addition to any liability, which the Company may
otherwise have.
The Investor agrees that they will indemnify and hold harmless the Company,
and each officer, director of the Company or person, if any, who controls the
Company within the meaning of the Securities Act, against any losses, claims,
damages or liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company or any such officer, director or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the breach by such Person of any term of
this Agreement. This indemnity agreement will be in addition to any liability,
which the Investor or any subsequent assignee may otherwise have.
Promptly after receipt by an indemnified party under this Section of notice
of the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under this Section,
notify the indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve the indemnifying party from
any liability which it may have to any indemnified party otherwise than as to
the particular item as to which indemnification is then being sought solely
pursuant to this Section. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, assume the defense thereof, subject to the provisions herein stated
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed
27
<PAGE>
the defense of the action with counsel reasonably satisfactory to the
indemnified party; provided that if the indemnified party is one of the
Investor, the fees and expenses of such counsel shall be at the expense of the
indemnifying party if (i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party, or (ii) the named parties to
any such action (including any impleaded parties) include both the Investor and
the indemnifying party and the Investor shall have been advised by such counsel
that there may be one or more legal defenses available to the indemnifying party
different from or in conflict with any legal defenses which may be available to
the Investor (in which case the indemnifying party shall not have the right to
assume the defense of such action on behalf of the Investor, it being
understood, however, that the indemnifying party shall, in connection with any
one such action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable only for the reasonable fees and expenses of one separate firm of
attorneys for the Investor, which firm shall be designated in writing by the
Investor). No settlement of any action against an indemnified party shall be
made without the prior written consent of the indemnified party, which consent
shall not be unreasonably withheld.
Each party hereby agrees that if another party to this Agreement obtains a
judgment against it in such a proceeding, the party which obtained such judgment
may enforce same by summary judgment in the courts of any country having
jurisdiction over the party against whom such judgment was obtained, and each
party hereby waives any defenses available to it under local law and agrees to
the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law. Each party waives
its right to a trial by jury. If the Investor, or any person claimed to be
affiliated or associated with the Investor, becomes involved in any capacity in
any action, proceeding or investigation brought by or against any such person,
including shareholders of the Company, in connection with or as a result of any
matter referred to in this Agreement or any exhibit annexed hereto, the Company
shall reimburse the Investor and/or those claimed to be affiliated or associated
with the Investor for its legal fees and expenses and other expenses (including
the cost of any investigation and preparation) incurred in connection therewith,
as those fees and expenses are incurred, provided, however, that if at the
conclusion of such action, proceeding or investigation it shall be finally
judicially determined by a court of competent jurisdiction that indemnity for
such fees and expenses is contrary to law, or that the Investor is not the
prevailing party then in that event, the Investor and/or any other person having
received such advances of fees and/or expenses shall reimburse the Company in
full for the sums advanced.
Section 11.3 Contribution. In order to provide for just and equitable
------------
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 11.2 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 11.2 hereof
provide for indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any indemnified party, then
28
<PAGE>
the Company and the Investor shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees), in either such case (after
contribution from others) on the basis of relative fault as well as any other
relevant equitable considerations. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in Section 11.2 shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contributions from any person who was
not guilty of such fraudulent misrepresentation.
ARTICLE XII
-----------
Miscellaneous
-------------
Section 12.1 Counterparts; Facsimile; Amendments. This Agreement may be
-----------------------------------
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by the Company on the one hand, and the Investor on the other hand.
Section 12.2 Entire Agreement. This Agreement, and the Exhibits annexed
----------------
hereto, which include, but are not limited to the Certificate of Designation,
the Warrant, the Escrow Agreement, and the Registration Rights Agreement, set
forth the entire agreement and understanding of the parties relating to the
subject matter hereof and supersedes all prior and contemporaneous agreements,
negotiations and understandings between the parties, both oral and written
relating to the subject matter hereof. The terms and conditions of all Exhibits
and Schedules to this Agreement are incorporated herein by this reference and
shall constitute part of this Agreement as is fully set forth herein.
Section 12.3 Survival; Severability. The representations, warranties,
----------------------
covenants and agreements of the parties hereto shall survive the Closing
hereunder. If any provision of this Agreement becomes or is declared by a court
of competent jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision; provided that
such severability shall be ineffective if it materially changes the economic
benefit of this Agreement to any party.
Section 12.4 Title and Subtitles. The titles and subtitles used in this
-------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
29
<PAGE>
Section 12.5 Reporting Entity for the Common Stock. The reporting entity
-------------------------------------
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement and all
Exhibits shall be Bloomberg, L.P. or any successor thereto. The written mutual
consent of the Investor and the Company shall be required to rely upon any other
reporting entity.
Section 12.6 Replacement of Certificates. Upon (i) receipt of evidence
---------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Preferred Stock, Warrant, or
Securities and (ii) in the case of any such loss, theft or destruction of such
certificate, upon delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company, and to the Company's transfer
agent, or (iii) in the case of any such mutilation, on surrender and
cancellation of such certificate, the Company at its expense will execute and
deliver, in lieu thereof, a new certificate of like tenor.
Section 12.7 Fees and Expenses. Each of the parties shall pay its own
-----------------
fees and expenses (including the fees of any attorneys, accountants, appraisers
or others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby, except that the Company shall pay on the
Closing Date, the sum of $30,000, in cash, out of escrow, to the Escrow Agent.
Section 12.8 Publicity. The Company and the Investor shall consult with
---------
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and no party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law, in which such case the disclosing party
shall provide the other parties with prior notice of such public statement.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of the Investor without the prior written consent of the Investor, except to the
extent required by law, in which case the Company shall provide the Investor
with prior written notice of such public disclosure.
EXHIBITS:
- --------
A: Certificate of Designation
B: Escrow Agreement
C: Registration Rights Agreement
D: Common Stock Purchase Warrant
E: Opinion of Counsel
F: Instruction Letter to Transfer Agent
G: Notice of Conversion
30
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Preferred Stock
Purchase Agreement to be executed by the undersigned, thereunto duly authorized,
as of the date first set forth above.
ImaginOn, Inc.
By: ____________________________
David M. Schwartz, President and CEO
Gage LLC
By:______________________
31
<PAGE>
Exhibit 4.3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of the 4th day of May,
1999, between Gage LLC ( referred to as the "Holder"), and ImaginOn, Inc., a
corporation incorporated under the laws of the State of Delaware (the
"Company").
WHEREAS, pursuant to the Preferred Stock Purchase Agreement dated as
of May 4, 1999 (the "Purchase Agreement"), the Holder will be purchasing shares
of Preferred Stock and Warrants (hereinafter collectively referred to as the
"Securities" of the Company) of the Company at the Purchase Price as set forth
in the Purchase Agreement; All capitalized terms not hereinafter defined shall
have that meaning assigned to them in the Purchase Agreement; and
WHEREAS, the Company desires to grant to the Holder the registration
rights set forth herein with respect to the Securities set forth in the Purchase
Agreement.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term "Registrable
----------------------
Security" shall mean the Additional Shares, Underlying Shares and Warrant
Shares: (i) in respect of which a registration statement (covering these
securities) has not been declared effective by the SEC, (ii) which have not been
sold under circumstances under which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (iii) which have not been otherwise transferred to holders who
may trade such shares without restriction under the Securities Act, or (iv) the
sales of which, in the opinion of counsel to the Company, are subject to any
time, volume or manner limitations pursuant to Rule 144(k) (or any similar
provision then in effect) under the Securities Act. The term "Registrable
Securities" means any and/or all of the securities falling within the foregoing
definition of a Registrable Security. In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of Registrable Security as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Section.
Section 2. Restrictions on Transfer. The Holder acknowledges and
------------------------
understands that prior to the registration of the Registrable Securities as
provided herein, the Registrable Securities are "restricted securities" as
defined in Rule 144 promulgated under the Securities Act. The Holder understands
that no disposition or transfer of the Registrable Securities or the Securities
may be made by the Holder in the absence of (i) an opinion of counsel to the
Company that such transfer may be made without registration under the Securities
Act and state law, or (ii) such registration.
Section 3. Registration Rights.
-------------------
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("SEC"), as soon as possible after the
Closing Date but not later than the 30/th/ calendar day after the Closing Date,
a primary shelf registration statement under the Securities Act (the "Shelf
Registration Statement"), at the sole expense of the Company (except as provided
in Section 3(c) hereof), in respect of the Registrable Securities, so as to
permit the resale of the Registrable Securities under the Securities Act. The
Company shall use its best efforts to cause the Shelf Registration Statement to
become effective on or before the 110/th/ calendar day after the Closing Date.
In the event the Shelf Registration Statement has not been filed by the 30/th/
calendar day after the Closing Date or has not been declared effective by the
SEC on or before the 110/th/ calendar day after the Closing Date, the Holder may
make a demand to the Company in writing (the "Demand Notice") via facsimile (the
Business Day in which the Company receives the Demand Notice in facsimile is
referred to as the "Demand Date") to require the Company to include the
Registrable
<PAGE>
Securities for resale via a registration statement on Form S-3 or any other
available form (the "Resale Registration Statement", and along with the Shelf
Registration Statement referred to as the "Registration Statement"). In such
case the Company shall be required to file with the SEC the Resale Registration
Statement on or before the 30/th/ calendar day after the Demand Date at the sole
expense of the Company (except as provided in Section 3(c) hereof), in respect
of the Registrable Securities, so as to permit the resale of the Registrable
Securities under the Securities Act. The Company will use its best efforts to
cause the Resale Registration Statement to become effective on or before the
90/th/ calendar day after the Demand Date. The number of shares of Common Stock
designated in the Registration Statement to be registered shall be (i) 150% of
the number of Underlying Shares that would be required if the Preferred Stock
was issued and converted on the Trading Day immediately preceding the filing of
the Registration Statement, plus (ii) 100% of the Warrant Shares.
In the event the number of shares of Common Stock included in the
Registration Statement shall be insufficient to cover the number of Registrable
Securities due to the Holder via conversion and/or exercise or otherwise under
the terms of the Purchase Agreement, the Company agrees that it shall file
either a new Registration Statement including such additional shares or amend
the then existing Registration Statement. The Company agrees that in such event
it will file with the SEC either an amendment to the then existing Registration
Statement or a new Registration Statement within 30 days of when required
hereunder, and use its best efforts to cause either the amendment or such
Registration Statement to become effective within 90 calendar days from when
required. If such amendment or new Registration Statement is not filed and/or
declared effective in a timely manner as set forth herein, the Company shall be
subject to liquidated damages as pursuant to the provisions of Section 3(e)
below.
(b) The Company will maintain the Registration Statement, or
post-effective amendment filed under this Section 3 hereof current under the
Securities Act until the earlier of (i) the date that all of the Registrable
Securities have been sold pursuant to the applicable Registration Statement,
(ii) the date the Company receives an opinion of counsel from the Holder that
the Registrable Securities may be sold under the provisions of Rule 144(k), or
other similar exemption (without volume limitation) or (iii) five years after
the Closing Date.
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Registration Statement under subparagraph 3(a) and in complying with applicable
securities and blue sky laws (including, without limitation, all attorneys' fees
of the Company) shall be borne by the Company. The Holder shall bear the cost,
pro rata, of underwriting discounts and commissions, if any, applicable to the
Registrable Securities being registered and the fees and expenses of their
counsel. The Company shall qualify any of the Registrable Securities for sale in
such states as the Holder reasonably designates and shall furnish
indemnification in the manner provided in Section 8 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers. The Company at its
expense will supply the Holder with copies of the Registration Statement and the
prospectus or offering circular included therein and other related documents in
such quantities as may be reasonably requested by the Holder.
(d) Unless otherwise agreed to in writing by the Holder, the Company
shall only be permitted to include the Registrable Securities in the
Registration Statement. The Company represents that as of the date hereof it is
not obligated to file a registration statement on behalf of any other Person
and/or entity not a party to this Agreement.
(e) In the event the Resale Registration Statement to be filed by the
Company pursuant to Section 3(a) above is not filed with the SEC on or before
the 30/th/ calendar day after the Demand Date and/or the Registration Statement
is not declared effective by the SEC on or before the 90/th/ calendar day after
the Demand Date, then the Company will pay the Holder (pro rated on a daily
basis), as liquidated damages for such failure and not as a penalty, two percent
(2%) of the Purchase Price (and in the case of the Warrants two percent (2%) of
the cash value on such date, where the "cash value" of each Warrant Share is
equal to the Bid Price of the Common Stock on such date less the Exercise Price
per share of Common Stock) of the then outstanding shares of Preferred Stock for
every 30 calendar day period until the Registration Statement has been filed
and/or declared effective. Such payment of the liquidated damages shall be made
to the Holder in cash, immediately upon demand, provided, however, that the
payment of such liquidated
2
<PAGE>
damages shall not relieve the Company from its obligations to register the
Registrable Securities pursuant to this Agreement. If the Company does not remit
the damages to the Holder as set forth above, the Company will pay the Holder's
reasonable costs of collection, including attorneys fees, in addition to the
liquidated damages. The registration of the Registrable Securities pursuant to
this provision shall not affect or limit the Holder's other rights or remedies
as set forth in this Agreement.
(f) The Company agrees that within five calendar days after being
notified by the SEC that the Registration Statement has been cleared to go
effective, the Company it will declare the Registration Statement effective. The
Company also agrees that it shall respond in writing to any questions and/or
comments from the SEC which relate to the Registration Statement within ten
calendar days of receipt of such question or comment.
Section 4. Cooperation with Company. The Holder will cooperate with the
------------------------
Company in all respects in connection with this Agreement, including timely
supplying (in writing if so reasonably requested) all information reasonably
requested by the Company and executing and returning all documents reasonably
requested in connection with the registration and resale of the Registrable
Securities.
Section 5. Registration Procedures. Whenever the Company is required by
-----------------------
any of the provisions of this Agreement to effect the registration of any of the
Registrable Securities under the Securities Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the SEC such amendments and supplements
to the Registration Statements and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the sale or other
disposition of all securities covered by such registration statement whenever
the Holder of such securities shall desire to sell or otherwise dispose of the
same (including prospectus supplements with respect to the sales of securities
from time to time in connection with a registration statement pursuant to Rule
415 promulgated under the Securities Act);
(b) furnish to the Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Securities Act, and such other documents, as the Holder may reasonably
request in order to facilitate the resale of the Registrable Securities owned by
the Holder;
(c) register and qualify the securities covered by the Registration
Statement under such other securities or blue sky laws of such jurisdictions as
the Holder shall reasonably request, and do any and all other acts and things
which may be necessary or advisable to enable the Holder to consummate the
public sale or other disposition in such jurisdiction of the securities owned by
the Holder, except that the Company shall not for any such purpose be required
to qualify to do business as a foreign corporation in any jurisdiction wherein
it is not so qualified or to file therein any general consent to service of
process;
(d) list such securities on the NASDAQ Small Cap Market or other
securities exchange, including, but not limited to, a national securities
exchange, on which any securities of the Company are then listed, if the listing
of such securities is then permitted under the rules of such market or exchange;
(e) enter into and perform its obligations under an underwriting
agreement, if the offering is an underwritten offering, in usual and customary
form, with the managing underwriter or underwriters of such underwritten
offering;
(f) notify the Holder of Registrable Securities covered by the
Registration Statement any time when a prospectus relating thereto covered by
the Registration Statement is required to be delivered under the Securities Act,
of the happening of any event of which it has knowledge as a result of which the
prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
3
<PAGE>
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
Section 6. Assignment. The rights granted the Holder under this
----------
Agreement may be assigned by giving the Company written assignment of such
transfer and such assignee agrees to be bound by the terms herein. This
Agreement is binding upon and inures to the benefit of the parties hereto and
their respective heirs, successors and permitted assigns.
Section 7. Termination of Registration Rights. The rights granted
----------------------------------
pursuant to this Agreement shall terminate as to the Holder (and permitted
transferee under Section 6 above) upon the occurrence of any of the following:
(a) all of the Holder's securities subject to this Agreement have
been registered;
(b) all of the Holder's securities subject to this Agreement may be
sold without such registration pursuant to Rule 144 (without volume limitation)
promulgated by the SEC pursuant to the Securities Act;
(c) all of such Holder's securities subject to this Agreement can
be sold pursuant to Rule 144(k) (without volume limitation) promulgated by the
SEC pursuant to the Securities Act; or
(d) five years from the issuance of the Registrable Securities.
Section 8. Indemnification.
---------------
(a) Indemnification by Holder. The Holder shall indemnify and hold
-------------------------
harmless the Company, its directors, officers, agents and employees, each Person
who controls the Company (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling Persons, to the fullest extent permitted by
applicable law, from and against all losses (as determined by a court of
competent jurisdiction in a final judgment not subject to appeal or review)
arising solely out of or based solely upon any untrue statement of a material
fact contained in the Registration Statement, any prospectus, or any form of
prospectus, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
the Holder to the Company specifically for inclusion in the Registration
Statement or such prospectus or to the extent that such information relates to
the Holder or the Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by the Holder
expressly for use in the Registration Statement, such prospectus or such form of
prospectus.
(b) Indemnification by Company. The Company shall indemnify and
--------------------------
hold harmless the Holder, its directors, officers, agents and employees, each
person who controls the Holder (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act), and the directors, officers,
agents or employees of such controlling persons, to the fullest extent permitted
by applicable law, from and against all losses arising solely out of or based
solely upon any untrue statement of a material fact contained in the
Registration Statement, or any related preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the Company will not be liable
-------- -------
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such Registration Statement, preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto in reliance upon, and in conformity with, written information
furnished to the Company by the Holder, specifically for use in the preparation
thereof or to the extent that such information relates to the Holder's method of
distribution of the Registrable Securities and was reviewed and expressly
reviewed by the Holder. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
4
<PAGE>
(c) Conduct of Indemnification Proceedings.
--------------------------------------
(i) If any Proceeding shall be brought or asserted against any
person and/or entity entitled to indemnity hereunder (an "Indemnified
Party"), such Indemnified Party promptly shall notify the Person from whom
indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and
the payment of all fees and expenses incurred in connection with defense
thereof; provided, that the failure of any Indemnified Party to give such
notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent
that it shall be finally determined by a court of competent jurisdiction
(which determination is not subject to appeal or further review) that such
failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.
(ii) An Indemnified Party shall have the right to employ
separate counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party or Parties unless: (A) the Indemnifying Party has
agreed in writing to pay such fees and expenses; or (B) the Indemnifying
Party shall have failed promptly to assume the defense of such Proceeding
and to employ counsel reasonably satisfactory to such Indemnified Party in
any such Proceeding; or (C) the named parties to any such Proceeding
(including any impleaded parties) include both such Indemnified Party and
the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that a conflict of interest is likely to exist if the same
counsel were to represent such Indemnified Party and the Indemnifying Party
(in which case, if such Indemnified Party notifies the Indemnifying Party
in writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to
assume the defense thereof and such counsel shall be at the expense of the
Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent,
which consent shall not be unreasonably withheld. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, effect
any settlement of any pending Proceeding in respect of which any
Indemnified Patty is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on
claims that are the subject matter of such Proceeding.
(iii) All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that
an Indemnified Party is not entitled to indemnification hereunder,
provided, that the Indemnified Party must reimburse all such fees and
expenses to the extent it is finally judicially determined that such
Indemnified Party is not entitled to indemnification hereunder).
Section 9. Contribution. If a claim for indemnification under Section 8
------------
is unavailable to an Indemnified Party because of a failure or refusal of a
governmental authority to enforce such indemnification in accordance with its
terms (by reason of public policy or otherwise), then each Indemnifying Party,
in lieu of indemnifying such Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such losses, in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions, statements or
omissions that resulted in such Losses as well as any other relevant equitable
considerations. The relative fault of such Indemnifying Party and Indemnified
Party shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of a
material fact or omission or alleged omission of a material fact, has been taken
or made by, or relates to information supplied by, such Indemnifying Party or
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable by a party as a result of any losses shall
be deemed to include, subject to the limitations set forth in Section 8, any
reasonable attorneys, or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
Section 8 was available
5
<PAGE>
to such party in accordance with its terms. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
Section 10. Notices. All notices, demands, requests, consents, approvals,
-------
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a Business Day during normal business hours where such notice is to
be received), or the first Business Day following such delivery (if delivered
other than on a Business Day during normal business hours where such notice is
to be received), (b) on the second Business Day following the date of mailing by
reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur, or (c) five
calendar days after sent by regular mail. The addresses for such communications
shall be:
If to the Company:
ImaginOn, Inc.
1313 Laurel Street, Suite 1
San Carlos, CA 94070
Attention: David M. Schwartz, President and CEO
Facsimile: (650) 596-9350
Telephone: (650) 596-9300
with a copy to:
Friedlob Sanderson Raskin
Paulson & Tourtillott, LLC
1400 Glenarm Place, Suite 300
Denver, CO 80202
Attention: Gerald Raskin, Esq.
Telephone: (303) 571-1400
Facsimile: (303) 595-3970
If to the Investor:
Gage LLC
c/o Citco Trustees Cayman Limited
Commercial Centre
PO Box 31106SMB
Grand Cayman, Cayman Islands
British West Indies
Attention: Sabrina Hew
Facsimile: 345 945-7566
Telephone: 345 949-3977
6
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with a copy to:
The Goldstein Law Group, P.C.
65 Broadway, 10/th/ Floor
New York, NY 10006
Attention: Scott H. Goldstein, Esq.
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
Either party hereto may from time to time change its address or facsimile
number for notices under this Section by giving at least ten calendar days'
prior written notice of such changed address or facsimile number to the other
party hereto.
Section 11. Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 12. Headings. The headings in this Agreement are for reference
--------
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
Section 13. Choice of Law; Venue; Jurisdiction. This Agreement will be
----------------------------------
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Securities Act, without
reference to principles of conflicts of law. Each of the parties consents to the
exclusive jurisdiction of the U.S. District Court sitting in the Southern
District of the State of New York sitting in Manhattan in connection with any
dispute arising under this Agreement and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum non
----- ---
conveniens, to the bringing of any such proceeding in such jurisdictions. Each
- ----------
party hereby agrees that if another party to this Agreement obtains a judgment
against it in such a proceeding, the party which obtained such judgment may
enforce same by summary judgment in the courts of any country having
jurisdiction over the party against whom such judgment was obtained, and each
party hereby waives any defenses available to it under local law and agrees to
the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law. Each party waives
its right to a trial by jury.
Section 14. Severability. If any provision of this Agreement shall for
------------
any reason be held invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provision hereof and this Agreement shall be
construed as if such invalid or unenforceable provision had never been contained
herein.
Section 15. Counterparts; Facsimile; Amendments. This Agreement may be
-----------------------------------
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by the Company on the one hand, and the Holder, on the other hand.
[Remainder of page intentionally left blank]
[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed, on the day and year first above written.
IMAGINON, INC.
By:____________________________
David M. Schwartz
President and CEO
GAGE LLC
By:______________________
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<PAGE>
Exhibit 4.4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR
APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER
THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THERE IS AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT.
COMMON STOCK PURCHASE WARRANT
No. F-1
To Purchase 122,553 Shares of Common Stock of
IMAGINON, INC.
THIS CERTIFIES that, for value received, Gage LLC (the "Investor",
including permitted assigns), is entitled, upon the terms and subject to the
conditions hereinafter set forth, at any time on or after the date hereof and on
or prior to May 3, 2003 (the "Termination Date") but not thereafter, to
subscribe for and purchase from ImaginOn, Inc., a Delaware corporation (the
"Company"), One Hundred Twenty Two Thousand Five Hundred Fifty Three (122,553)
shares of Common Stock (the "Warrant Shares"). The purchase price of one share
of Common Stock (the "Exercise Price") under this Warrant shall be equal to the
lower of (i) 110% of the Bid Price on the Trading Day immediately preceding the
date of this Warrant, (ii) 100% of the Bid Price on the day all of the shares of
Convertible Preferred Stock are redeemed in full by the Company (if such day is
not a Trading Day then the next subsequent Trading Day), or (iii) 100% of the
Bid Price on the first Trading Day immediately following the Demand Date (as
defined in the Registration rights Agreement entered into between the Company
and the Investor dated as of the date hereof). The Exercise Price and the number
of shares for which the Warrant is exercisable shall be subject to adjustment as
provided herein. This Warrant is being issued in connection with the Preferred
Stock Purchase Agreement dated as of May 4, 1999 (the "Agreement") entered into
between the Company, and the Investor. In the event of any conflict between the
terms of this Warrant and the Agreement, the Agreement shall control. Any
capitalized terms used herein but not otherwise defined shall have that meaning
assigned in the Agreement.
1. Title of Warrant. Prior to the expiration hereof and subject to
----------------
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon
1
<PAGE>
surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of
-----------------------
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Exercise of the purchase rights represented by
-------------------
this Warrant may be made at any time or times, in whole or in part, before the
close of business on the Termination Date, or such earlier date on which this
Warrant may terminate as provided in paragraph 11 below, by the surrender of
this Warrant and the Exercise Form annexed hereto duly executed, to the office
of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address of
such holder appearing on the books of the Company) and upon payment of the
Exercise Price, in cash, via wire transfer or via certified check, of the shares
of Common Stock thereby purchased; whereupon the holder of this Warrant shall be
entitled to receive a certificate for the number of shares of Common Stock so
purchased. Certificates for shares purchased hereunder shall be delivered to the
holder hereof within three Business Days after the date on which this Warrant
shall have been exercised as aforesaid. Payment of the Exercise Price of the
shares may be by certified check or cashier's check or by wire transfer (of same
day funds) to the Company in an amount equal to the Exercise Price multiplied by
the number of shares of Common Stock being purchased.
4. No Fractional Shares or Scrip. No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of issuing fractional shares, the Company shall round up to the
nearest whole share the number of Warrant Shares due upon exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for shares of
---------------------------
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
-------- -------
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
-------- -------
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. Closing of Books. The Company will at no time close its shareholder
----------------
books or records in any manner which interferes with the timely exercise of this
Warrant.
7. No Rights as Shareholder until Exercise. This Warrant does not
---------------------------------------
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise thereof. If, however, at the time of the
surrender of this Warrant the holder hereof shall be entitled
2
<PAGE>
to exercise this Warrant, the shares so purchased shall be and be deemed to be
issued to such holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been exercised.
8. Assignment and Transfer of Warrant. This Warrant may be assigned by
----------------------------------
the surrender of this Warrant and the Assignment Form annexed hereto duly
executed at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the registered holder hereof
at the address of such holder appearing on the books of the Company); provided,
--------
however, that this Warrant may not be resold or otherwise transferred except (i)
- -------
in a transaction registered under the Securities Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration and whereby, if
requested by the Company, an opinion of counsel reasonably satisfactory to the
Company is obtained by the holder of this Warrant to the effect that the
transaction is so exempt.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
-------------------------------------------------
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
or stock certificate, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and upon reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and cancellation
of such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of this Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
---------------------------------
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a legal
holiday.
11. Adjustments. The Exercise Price shall be adjusted as provided for
-----------
below in this Section (the Exercise Price, and the Exercise Price, as thereafter
then adjusted, shall be included in the definition of Exercise Price) and the
Exercise Price from time to time shall be further adjusted as provided for below
in this Section. Upon each adjustment of the Exercise Price, the holder shall
thereafter be entitled to receive upon exercise of this Warrant, at the Exercise
Price resulting from such adjustment, the number of shares of Common Stock
obtained by (a) multiplying the Exercise Price in effect immediately prior to
such adjustment by the number of shares of Common Stock purchasable hereunder
immediately prior to such adjustment and (b) dividing the product thereof by the
Exercise Price resulting from such adjustment. The Exercise Price shall be
adjusted as follows:
(i) In the case of any amendment to the Company's Certificate of
Incorporation to change the designation of the Common Stock or the rights,
privileges, restrictions or conditions in respect to the Common Stock or
division of the Common Stock, this Warrant shall be adjusted so as to provide
that upon exercise thereof, the holder shall receive, in lieu of each share of
Common Stock theretofore issuable upon such exercise, the kind and amount of
shares, other securities, money and property receivable upon such designation,
change or division by the holder issuable upon such exercise had the exercise
occurred immediately prior to such designation, change or division. This Warrant
shall be deemed thereafter to provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section. The provisions of this
3
<PAGE>
Subsection (i) shall apply in the same manner to successive reclassifications,
changes, consolidations and mergers.
(ii) If the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares of Common Stock, or
declare a dividend or make any other distribution upon the Common Stock payable
in shares of Common Stock, the Exercise Price in effect immediately prior to
such subdivision or dividend or other distribution shall be proportionately
reduced, and conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Exercise Price in
effect immediately prior to such combination shall be proportionately increased.
(iii) If the Company shall, through either a private placement or a
public offering (but other than pursuant to options granted under the Company's
stock option plans or shares or options issued in an acquisition or shares
issuable upon conversion of shares of the Company's convertible debentures or
shares issuable pursuant to the exercise of warrant or options outstanding on
the Closing Date and other than the issuance of up to an aggregate of 100,000
shares of Common Stock pursuant to transactions not described in this
parenthetical) issue shares of Common Stock, or options to purchase Common Stock
or rights to subscribe for Common Stock or securities convertible into or
exchangeable for Common Stock at a price (such price, if other than cash, as
determined by the Board of Directors) less than the Exercise Price (the "Lower
Price"), the Exercise Price shall be automatically reduced to the Lower Price.
Notwithstanding the foregoing, in no event shall the Exercise Price ever be
increased as a result of this Subsection (iii). There will be no adjustment in
the event that the Company pays a dividend in cash to its holders of Common
Stock; provided, however, the Company will give the holder written notice at
least thirty (30) days prior to the record date for the cash dividend, that the
Company intends to declare a cash dividend.
(iv) If any capital reorganization or reclassification of the capital
stock of the Company, or any consolidation or merger of the Company with or into
another corporation or other entity, or the sale of all or substantially all of
the Company's assets to another corporation or other entity shall be effected in
such a way that holders of shares of Common Stock shall be entitled to receive
stock, securities, other evidence of equity ownership or assets with respect to
or in exchange for shares of Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale (except as
otherwise provided below in this Section) lawful and adequate provisions shall
be made whereby the holder shall thereafter have the right to receive upon the
exercise hereof upon the basis and upon the terms and conditions specified
herein, such shares of stock, securities, other evidence of equity ownership or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of
Common Stock immediately theretofore purchasable and receivable upon the
exercise of this Warrant under this Section had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provisions shall be made with respect to the rights and
interests of the holder to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the Exercise Price and of the
number of shares of Common Stock receivable upon the exercise of this Warrant)
shall thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities, other evidence of equity ownership or assets thereafter
deliverable upon the exercise hereof including an immediate adjustment, by
reason of such
4
<PAGE>
consolidation or merger, of the Exercise Price to the value for the Common Stock
reflected, by the terms of such consolidation or merger if the value so
reflected is less than the Exercise Price in effect immediately prior to such
consolidation or merger. Subject to the terms of this Warrant, in the event of a
merger or consolidation of the Company with or into another corporation or other
entity as a result of which the number of shares of common stock of the
surviving corporation or other entity issuable to Investors of Common Stock, is
greater or lesser than the number of shares of Common Stock outstanding
immediately prior to such merger or consolidation, then the Exercise Price in
effect immediately prior to such merger or consolidation shall be adjusted in
the same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock. The Company shall not effect any such
consolidation, merger or sale, unless, prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume
by written instrument executed and mailed or delivered to the Investor, the
obligation to deliver to the Investor such shares of stock, securities, other
evidence of equity ownership or assets as, in accordance with the foregoing
provisions, the Investor may be entitled to receive or otherwise acquire. If a
purchase, tender or exchange offer is made to and accepted by the holders of
more than fifty (50%) percent of the outstanding shares of Common Stock, the
Company shall not effect any consolidation, merger or sale with the person
having made such offer or with any affiliate of such person, unless prior to the
consummation of such consolidation, merger or sale the Investor shall have been
given a reasonable opportunity to then elect to receive upon the exercise of
this Warrant the amount of stock, securities, other evidence of equity ownership
or assets then issuable with respect to the number of shares of Common Stock in
accordance with such offer.
(v) In case the Company shall, at any time prior to exercise of this
Warrant, consolidate or merge with any other corporation or other entity (where
the Company is not the surviving entity) or transfer all or substantially all of
its assets to any other corporation or other entity, then the Company shall, as
a condition precedent to such transaction, cause effective provision to be made
so that the Investor of this Warrant upon the exercise of this Warrant after the
effective date of such transaction shall be entitled to receive the kind and,
amount of shares, evidences of indebtedness and/or other securities or property
receivable on such transaction by the Investor of the number of shares of Common
Stock as to which this Warrant was exercisable immediately prior to such
transaction (without giving effect to any restriction upon such exercise); and,
in any such case, appropriate provision shall be made with respect to the rights
and interest of the Investor of this Warrant to the end that the provisions of
this Warrant shall thereafter be applicable (as nearly as may be practicable)
with respect to any shares, evidences of indebtedness or other securities or
assets thereafter deliverable upon exercise of this Warrant. Upon the occurrence
of any event described in this Subsection (v), the Investor of this Warrant
shall have the right to (i) exercise this Warrant immediately prior to such
event at an Exercise Price equal to lesser of (1) the then Exercise Price or (2)
the price per share of Common Stock paid in such event, or (ii) retain ownership
of this Warrant, in which event, appropriate provisions shall be made so that
the Warrant shall be exercisable at the Investor's option into shares of stock,
securities or other equity ownership of the surviving or acquiring entity,
(vi) Whenever the Exercise Price shall be adjusted pursuant to this
Section the Company shall issue a certificate signed by its President or Vice
President and by its Treasurer, or
5
<PAGE>
Secretary, setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
wag calculated (including a description of the basis on which the Board of
Directors of the Company made any determination hereunder), and the Exercise
Price after giving effect to such adjustment, and shall cause copies of such
certificates to be mailed (by first-class mail, postage prepaid) to the Investor
of this Warrant. The Company shall make such certificate and mail it to the
Investor immediately after each adjustment.
12. Notice of Adjustment. Whenever the number of Warrant Shares or number
--------------------
or kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted, as herein provided, the Company shall
promptly mail by registered or certified mail, return receipt requested, to the
holder of this Warrant notice of such adjustment or adjustments setting forth
the number of Warrant Shares (and other securities or property) purchasable upon
the exercise of this Warrant and the Exercise Price of such Warrant Shares after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth computation by which such adjustment was made. Such
notice, in absence of manifest error, shall be conclusive evidence of the
correctness of such adjustment.
13. Authorized Shares. The Company covenants that during the period the
-----------------
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of Common Stock
upon the exercise of any purchase rights under this Warrant. The Company further
covenants that its issuance of this Warrant shall constitute full authority to
its officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for shares of the Company's Common
Stock upon the exercise of the purchase rights under this Warrant. The Company
will take all such action as may be necessary to assure that such shares of
Common Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the domestic securities
exchange or market upon which the Common Stock may be listed.
14. 4.99% Limitation. The number of shares of Common Stock which may be
----------------
acquired by the Investor pursuant to the terms herein shall not exceed the
number of such shares which, when aggregated with all other shares of Common
Stock then owned by the Investor, would result in the Investor owning more than
4.99% of the then issued and outstanding Common Stock at any one time. The
preceding shall not interfere with the Investor's right to exercise this Warrant
over time which in the aggregate totals more than 4.99% of the then outstanding
shares of Common Stock so long as the Investor does not own more than 4.99% of
the then outstanding Common Stock at any given time.
15. Miscellaneous.
-------------
(a) Issue Date; Choice of Law; Venue; Jurisdiction. The provisions of
----------------------------------------------
this Warrant shall be construed and shall be given effect in all respects as if
it had been issued and delivered by the Company on the date hereof. This Warrant
shall be binding upon any successors or assigns of the Company. This Warrant
will be construed and enforced in accordance with and governed exclusively by
the laws of the State of New York, except for matters arising under the
Securities Act, without reference to principles of conflicts of law. The parties
consent to the exclusive jurisdiction of the U.S. District Court sitting in the
Southern District of the State of New
6
<PAGE>
York in connection with any dispute arising under this Warrant and hereby
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens, to the bringing of any such proceeding
----- --- ----------
in such jurisdictions. Each party hereby agrees that if the other party to this
Warrant obtains a judgment against it in such a proceeding, the party which
obtained such judgment may enforce same by summary judgment in the courts of any
country having jurisdiction over the party against whom such judgment was
obtained, and each party hereby waives any defenses available to it under local
law and agrees to the enforcement of such a judgment. Each party to this Warrant
irrevocably consents to the service of process in any such proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, to
such party at its address set forth herein. Nothing herein shall affect the
right of any party to serve process in any other manner permitted by law. Each
party waives its right to a trial by jury.
(b) Restrictions. The holder hereof acknowledges that the
------------
Warrant Shares acquired upon the exercise of this Warrant, if not registered (or
if no exemption from registration exists), will have restrictions upon resale
imposed by state and federal securities laws. Each certificate representing the
Warrant Shares issued to the Holder upon exercise (if not registered or if no
exemption from registration exists) will bear the following legend:
" THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") OR APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR
SUCH SECURITIES UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS OR PURSUANT TO AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT THERE IS AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT."
(c) Modification and Waiver. This Warrant and any provisions
-----------------------
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
-------
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
[Remainder of page intentionally left blank]
[Signature page follows]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.
Dated:
IMAGINON, INC.
By: ______________________________
David Schwartz
President and CEO
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NOTICE OF EXERCISE
------------------
To: IMAGINON, INC.
(1) The undersigned hereby elects to purchase ________ shares of Common Stock
of IMAGINON, INC. pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price in full, together with all applicable
transfer taxes, if any.
(2) Upon exercise pursuant to this Notice of Exercise, the undersigned will not
own 4.99% or more of the then issued and outstanding shares of Common Stock of
the Company.
(3) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
_______________________________
(Name)
_______________________________
(Address)
_______________________________
Dated:
______________________________
Signature
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ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: _______________,
Holder's Signature: ___________________________
Holder's Address: ___________________________
___________________________
Signature Guaranteed: ________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
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Exhibit 5.1
[FRIEDLOB SANDERSON RASKIN PAULSON & TOURTILLOTT, LLC LETTERHEAD]
October 6, 1999
ImaginOn, Inc.
1313 Laurel Street, Suite 1
San Carlos, CA 94070
Re: Registration Statement on Form S-1 Opinion of Counsel
Gentlemen:
We are counsel for ImaginOn, Inc., a Delaware corporation ("ImaginOn"). In
that capacity we have examined the Certificate of Incorporation, as amended, the
Bylaws and minutes of ImaginOn and such other corporate records, documents,
certificates and other instruments as, in our judgment, we deemed relevant for
the purposes of this opinion. We have also, as such counsel, examined the
Registration Statement on Form S-1, Securities and Exchange Commission File No.
333-_____, (the "Registration Statement"), covering the issuance of shares of
common ImaginOn's common stock, $.01 par value (the "Common Stock"), upon the
exercise of ImaginOn's Group F Warrant (the "Warrant") and upon the conversion
of the Series F 12% Convertible Preferred Stock (the "Preferred Stock") and the
subsequent resale of the Common Stock by the Selling Securityholder.
Based upon the foregoing, we are of the opinion that (i) the shares of
Common Stock to be issued upon exercise of the Warrant and sold by the Selling
Securityholder, when paid for in accordance with the terms of the Warrant, will
be legally issued, fully paid and non-assessable shares of Common Stock, and
(ii) the shares of Common Stock to be issued upon conversion of the Series F
Preferred Stock in accordance with its terms and sold by the Selling
Securityholder will be legally issued, fully paid and non-assessable shares of
Common Stock.
We know that we are referred to under the caption "Legal Matters" included
in the Prospectus forming a part of the Registration Statement. We hereby
consent to such use of our name in the Registration Statement and to the filing
of this opinion as Exhibit 5.1 thereto. In giving this consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the Rules
and Regulations of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
/s/ Friedlob
Sanderson Raskin
Paulson Tourtillott
<PAGE>
Exhibit 10.1
IMAGINON, INC.
1997 STOCK OPTION PLAN
1. Purpose. The purpose of this Stock Option Plan (the "PLAN") is to
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attract and retain the best available personnel, to provide additional incentive
to the EMPLOYEES and CONSULTANTS, as defined below, of IMAGINON, INC., a
California corporation (the "COMPANY"), and to promote the success of the
COMPANY's business.
2. Definitions. As used herein, the following definitions shall apply:
-----------
2.1 "BOARD" shall mean the COMMITTEE, as defined below, if one has
-----
been appointed, or the Board of Directors of the COMPANY, if no COMMITTEE has
been appointed.
2.2 "COMMITTEE" shall mean the COMMITTEE appointed by the BOARD in
---------
accordance with Section 4.2 of this PLAN, if one has been appointed.
2.3 "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" shall mean the
----------------------------------------------
absence of any interruption or termination of service as an EMPLOYEE or
CONSULTANT. CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT shall not be
considered interrupted in the case of sick leave, military leave or any other
leave of absence approved by the BOARD; provided, that such leave is for a
period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute.
2.4 "EMPLOYEE" shall mean any person, including officers and
--------
directors, employed by the COMPANY or any PARENT or SUBSIDIARY of the COMPANY,
as such terms are defined below. The payment of a director's fee by the COMPANY
shall not be sufficient to constitute "employment" by the COMPANY.
2.5 "CONSULTANT" shall mean any person who is engaged by the COMPANY
----------
or any PARENT or SUBSIDIARY to render consulting services to the COMPANY and is
compensated for such consulting services, or any director of the COMPANY whether
compensated for such services or not; provided, that if and in the event the
COMPANY registers any class of any equity security pursuant to Section 12 of the
Security Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the term
"CONSULTANT" shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the COMPANY.
2.6 "INCENTIVE STOCK OPTION" shall mean an OPTION, as defined below,
----------------------
intended to qualify as an incentive stock option within the meaning of Section
422A of the Internal Revenue Code of 1976, as amended (the "CODE").
2.7 "OPTION" shall mean a stock option granted pursuant to this PLAN.
------
1
<PAGE>
2.8 "OPTIONEE" shall mean an EMPLOYEE or CONSULTANT who receives an
--------
option pursuant to this PLAN.
2.9 "PARENT" shall mean a "parent corporation", whether now or
------
hereafter existing, as defined in Section 425(e) of the CODE.
2.10 "PLAN" shall mean this 1997 Stock Option Plan.
----
2.11 "SHARE" shall mean a share of STOCK, as adjusted in accordance
-----
with Section 13 of this PLAN.
2.12 "STOCK" shall mean the Common Stock of the COMPANY.
-----
2.13 "SUBSIDIARY" shall mean a "subsidiary corporation", whether now
----------
or hereafter existing, as defined in Section 425(f) of the CODE.
3. SHARES Subject to PLAN. Subject to the provisions of Section 13 of
----------------------
this PLAN, there shall be reserved for sale upon the exercise of OPTIONS to be
granted from time to time under this PLAN, an aggregate of 530,000 shares of
STOCK of the COMPANY, which SHARES may be authorized but unissued STOCK or
issued STOCK which shall have been reacquired by the COMPANY. If an OPTION
shall expire or terminate for any reason without having been exercised in full,
the unpurchased SHARES covered thereby shall (unless this PLAN shall have been
terminated) become available for future grant under this PLAN.
4. Administration of PLAN.
----------------------
4.1 Board of Directors. This PLAN shall be administered by the Board
------------------
of Directors of the COMPANY.
4.2 Creation of COMMITTEE. Subject to Section 4.3, the Board of
---------------------
Directors may appoint a COMMITTEE consisting of not less than two members of the
Board of Directors to administer this PLAN on behalf of the Board of Directors,
subject to such terms and conditions as the Board of Directors may prescribe.
Once appointed, the COMMITTEE shall continue to serve unless otherwise directed
by the Board of Directors. From time to time, the Board of Directors may
increase the size of the COMMITTEE and appoint additional members, remove
members (with or without cause), replace members, fill vacancies however caused,
or remove all members of the COMMITTEE and thereafter directly administer this
PLAN.
4.3 Issuances and Grants to BOARD Members and Officers.
--------------------------------------------------
a. Members of the BOARD who are eligible for OPTIONS or have
been granted OPTIONS may vote on any matters affecting the administration of
this PLAN or grant of OPTIONS pursuant to this PLAN, except that no such member
shall act upon the granting of an OPTION to him or herself, but any such member
may be counted in determining
2
<PAGE>
the existence of a quorum at any meeting of the BOARD during which action is
taken with respect to the granting of OPTIONS to him or her.
b. Notwithstanding the foregoing subparagraph (a), if the
COMPANY registers any class of any equity security pursuant to Section 12 of the
EXCHANGE ACT, from the effective date of such registration until six months
after the termination of such registration, any grant of OPTIONS to officers or
directors shall only be made by the Board of Directors; provided, however, that
if the majority of the Board of Directors is eligible to participate in this
PLAN or any other stock issuance, stock option, or any other stock plan of the
COMPANY or any of its affiliates, or has been eligible to participate in any
such plan at any time within the preceding year, any grants of OPTIONS to
directors or officers must be made by or only in accordance with a
recommendation of a COMMITTEE consisting of two or more persons who may, but
need not, be directors or employees of the COMPANY, appointed by the Board of
Directors and having full authority to act in the matter, none of whom is
eligible to participate in this PLAN or any other stock issuance, stock option,
or other stock plan of the COMPANY or any of its affiliates, or has been
eligible to participate at any time within the preceding year. Once appointed,
such COMMITTEE shall continue to serve with respect to the issuance of all STOCK
and granting of all OPTIONS under this PLAN unless otherwise directed by the
Board of Directors.
4.4 Powers of the BOARD. Subject to the provisions of this PLAN, the
-------------------
BOARD shall have complete and sole authority to: (i) determine whether to grant
INCENTIVE STOCK OPTIONS in accordance with Section 422A of the CODE to the
EMPLOYEES of the COMPANY or "non-statutory stock options" to the EMPLOYEES and
CONSULTANTS of the COMPANY; (ii) determine, subject to Section 8.2 of this PLAN,
the fair market value of the STOCK; (iii) fix the number of SHARES to be covered
by each of the OPTIONS; (iv) determine the time or times at which OPTIONS shall
be granted; (v) prescribe the terms and provisions of the respective agreements
governing each OPTION, which agreements need not be identical and, with the
consent of the holder thereof, the modification or amendment of each OPTION;
(vi) interpret this PLAN; (vii) prescribe, amend and rescind the rules and
regulations relating to this PLAN; and (viii) make all other determinations
deemed necessary or advisable for the administration of this PLAN.
4.5 Effect of all BOARD's Decisions. All decisions, determinations,
-------------------------------
and interpretations of the BOARD shall be final and binding on all OPTIONEES or
any other holders of STOCK or OPTIONS granted under this PLAN.
5. Eligibility.
-----------
5.1 EMPLOYEES and CONSULTANTS. Following the adoption of this PLAN
-------------------------
by the BOARD or approval of this PLAN by shareholders of the COMPANY in
accordance with Section 20 of this PLAN, whichever occurs first, OPTIONS may be
granted only to EMPLOYEES and CONSULTANTS of the COMPANY on terms as established
by the BOARD, provided that such terms are not inconsistent with this PLAN.
OPTIONS may be granted from time to time to any EMPLOYEE or CONSULTANT of the
COMPANY selected by
3
<PAGE>
the BOARD, whether or not such individual shall have previously received one or
more OPTIONS hereunder. INCENTIVE STOCK OPTIONS may be granted only to
EMPLOYEES.
5.2 Factors. In making any determination as to persons to whom
-------
OPTIONS shall be granted and as to the number of SHARES to be covered by such
OPTIONS, the BOARD shall take into account the duties of the respective
individuals, their present and potential contributions to the success of the
COMPANY, and such other factors as the BOARD shall deem relevant in connection
with accomplishing the purpose of this PLAN.
6. Not an Employment AGREEMENT. Neither this PLAN nor any document
---------------------------
signed by the OPTIONEE shall confer upon any OPTIONEE any right with respect to
continuation of employment or consulting relationship with the COMPANY, nor
shall it interfere in any way with his right or the COMPANY's right to terminate
his or her employment or consulting relationship at any time.
7. Limitation on INCENTIVE STOCK OPTIONS. The aggregate fair market
-------------------------------------
value (determined as of the time an OPTION is granted) of the SHARES with
respect to which the EMPLOYEE's INCENTIVE STOCK OPTIONS are exercisable for the
first time by the EMPLOYEE during any calendar year (under this PLAN or other
incentive stock option plans, if any, of the COMPANY and any PARENT or
SUBSIDIARY, shall not exceed the sum of One Hundred Thousand Dollars ($100,000).
To the extent that the aggregate fair market value of stock with respect to
which OPTIONS designated as INCENTIVE STOCK OPTIONS are exercisable by an
OPTIONEE for the first time during any calendar year exceeds One Hundred
Thousand Dollars ($100,000), the portion of such OPTIONS which exceeds such
amount shall be treated as NON-QUALIFIED STOCK OPTIONS. For purposes of this
Section 7, OPTIONS designated as INCENTIVE STOCK OPTIONS shall be taken into
account in the order in which they were granted, and the fair market value of
stock shall be determined as of the time the OPTION with respect to such stock
is granted. If the CODE is amended to provide for a different limitation from
that set forth in this Section 7, such different limitation shall be deemed
incorporated herein effective as of the date and with respect to such OPTIONS as
required or permitted by such amendment to the CODE. If an OPTION is treated as
an INCENTIVE STOCK OPTION in part and as a NON-QUALIFIED STOCK OPTION in part by
reason of the limitation set forth in this Section 7, the OPTIONEE may designate
which portion of such OPTION the OPTIONEE is exercising. In the absence of such
designation, the OPTIONEE shall be deemed to have exercised the INCENTIVE STOCK
OPTION portion of the OPTION first. Separate certificates representing each such
portion shall be issued upon the exercise of the OPTION.
8. Exercise Price and Consideration.
--------------------------------
8.1 Exercise Price. The per SHARE exercise price for the SHARES to
--------------
be issued shall be such price as is determined by the BOARD, but shall be
subject to the following:
a. The per SHARE exercise price shall be no less than 85% of
the fair market value per SHARE on the date of grant.
4
<PAGE>
b. In the case of an INCENTIVE STOCK OPTION the per SHARE
exercise price shall be no less than One Hundred Percent (100%) of the fair
market value per SHARE on the date of grant.
c. If the OPTIONEE, immediately prior to the grant, owns stock
representing more than Ten Percent (10%) of the voting power of all classes of
stock of the COMPANY or any PARENT or SUBSIDIARY (a "TEN PERCENT SHAREHOLDER"),
the per SHARE exercise price shall be no less than One Hundred Ten Percent
(110%) of the fair market value per SHARE on the date of grant.
d. In the case of an OPTION granted on or after the effective
date of registration of any class of equity security of the COMPANY pursuant to
Section 12 of the EXCHANGE ACT and prior to six months after the termination of
such registration, the per SHARE issue or exercise price shall be no less than
One Hundred Percent (100%) of the fair market value per share on the date of
grant. The fair market value shall be determined by the BOARD in its
discretion; provided, however, that if there is a public market for the STOCK,
the fair market value per SHARE shall be the mean of the bid and asked prices of
the STOCK for the date of grant, as reported in the Wall Street Journal, or, if
not so reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation System (NASDAQ).
8.2 Consideration. The consideration to be paid upon exercise of an
-------------
OPTION, including the method of payment, shall be determined by the BOARD and
may consist entirely of cash, check, promissory note, other SHARES of STOCK
having a fair market value on the date of surrender equal to the aggregate issue
or exercise price of the SHARES being purchased, or any combination of such
methods of payment, or such other consideration and method of payment for the
issuance of the SHARES to the extent permitted under Sections 408 and 409 of the
California General Corporation Law. In making this determination as to the type
of consideration to accept, the BOARD shall consider if acceptance of such
consideration may be reasonably expected to benefit the COMPANY (Section 315 of
the California General Corporation Law).
9. Terms of OPTIONS. The term of each OPTION shall be ten (10) years
----------------
from the date of its grant or such shorter term as may be provided in the STOCK
OPTION AGREEMENT. However, in the case of any OPTION granted to an OPTIONEE
who, at the time the OPTION is granted, is a TEN PERCENT SHAREHOLDER, the term
of the OPTION shall be five years from the date of grant thereof or such shorter
term as may be provided in the STOCK OPTION AGREEMENT. Notwithstanding the
foregoing, the OPTION term may be subject to earlier termination as provided in
Section 17 below.
10. Exercise of OPTIONS.
-------------------
10.1 Exercisability. Any OPTION granted hereunder shall be
--------------
exercisable at such times and under such conditions as determined by the BOARD;
provided, however, that each OPTION shall become exercisable at a rate no less
than twenty percent (20%) of the total
5
<PAGE>
number of SHARES subject to the OPTION per year. Even if otherwise exercisable,
an OPTION shall not be exercisable if such exercise would do any of the
following:
a. violate any federal or state law or regulation including,
without limitation, any rule under Part 207 of Title 12 of the Federal Code of
Regulations, often referred to as "Regulation G," as promulgated by the Federal
Reserve Board;
b. violate any of the requirements of any stock exchange upon
which the SHARES may then be listed; or
c. violate any statute, regulation, or other requirement under
which the OPTION or the SHARES were registered, qualified, or exempted from such
registration or qualification requirements.
10.2 Date of Exercise. The date of exercise of each OPTION shall be
----------------
deemed to be the date on which written notice of such exercise, executed by the
OPTIONEE, together with full payment of the purchase price for the SHARES being
purchased, are received by the COMPANY (the "DELIVERY DATE"). Each OPTION may
be exercised only in the manner set forth in the respective OPTION AGREEMENT and
consistent with this PLAN. Full payment may, as authorized by the BOARD,
consist of any consideration and method of payment allowable under Section 8.2
of this PLAN. On the DELIVERY DATE the OPTIONEE shall become a shareholder of
the COMPANY with the right to vote and receive dividends and exercise any other
right as a shareholder.
10.3 Effect of Exercise. Exercise of an OPTION shall result in the
------------------
decrease in the number of SHARES which thereafter may be available for sale
under the OPTION by the number of SHARES for which the OPTION is exercised.
10.4 Purchased for Investment. As a condition to the exercise of any
------------------------
OPTION, the COMPANY may require the person exercising such OPTION to represent
and warrant at the time of any such exercise that the SHARES are being purchased
only for investment and without any present intention to sell or distribute any
SHARES if, in the opinion of counsel for the COMPANY, such a representation is
required by any relevant provision of law.
10.5 Termination of Status as EMPLOYEE or CONSULTANT. If an EMPLOYEE
-----------------------------------------------
or a CONSULTANT ceases to serve as an EMPLOYEE or a CONSULTANT (as the case may
be), OPTIONEE may, but only within 30 days (or such other period of time not
exceeding three months as is determined by the BOARD at the time of the granting
of the OPTION) after the date OPTIONEE ceases to be an EMPLOYEE or a CONSULTANT
(as the case may be) of the COMPANY, exercise the OPTION to the extent that
OPTIONEE was entitled to exercise it at the date of such termination. To the
extent that OPTIONEE was not entitled to exercise the OPTION as of the date of
such termination or if OPTIONEE does not exercise the OPTION (which OPTIONEE was
entitled to exercise) within the time specified herein, the OPTION shall
terminate.
6
<PAGE>
10.6 Disability of an OPTIONEE. Notwithstanding the provisions of
-------------------------
Section 10.5 above, in the event an EMPLOYEE or a CONSULTANT is unable to
continue OPTIONEE's employment or consulting relationship (as the case may be)
with the COMPANY as a result of his or her disability, OPTIONEE may, but only
within six months (or such other period of time not exceeding twelve months as
is determined by the BOARD at the time of grant of the OPTION) from the date of
termination, exercise the OPTION to the extent that OPTIONEE was entitled to
exercise it at the date of such termination. To the extent that OPTIONEE was
not entitled to exercise the OPTION at the date of termination or if OPTIONEE
does not exercise the OPTION (which OPTIONEE was entitled to exercise) within
the time specified herein, the OPTION shall terminate.
10.7 Death of an OPTIONEE. Notwithstanding the provisions of Section
--------------------
10.5 above, in the event of the death of an OPTIONEE during or within 30 days
(or such other period of time not exceeding three months as is determined by the
BOARD at the time of grant of the OPTION) after the termination of OPTIONEE's
continuous status as an EMPLOYEE or CONSULTANT, the OPTION may be exercised at
any time within six months (or such other period of time not exceeding twelve
months as is determined by the BOARD at the time of the grant of the OPTION)
following the date of death, by the OPTIONEE's estate or by a person who
acquired the right to exercise the OPTION by bequest or inheritance, but only to
the extent OPTIONEE would have been entitled to exercise the OPTION as of the
date of death. To the extent that OPTIONEE was not entitled to exercise the
OPTION as of the date of death or if OPTIONEE does not exercise the OPTION
(which he was entitled to exercise) within the time specified herein, the OPTION
shall terminate.
11. Non-Transferability of OPTIONS. An OPTION shall not be sold, pledged,
------------------------------
assigned, hypothecated, or otherwise transferred other than by will or the laws
of descent and distribution, and during the lifetime of the OPTIONEE, only shall
be exercisable by the OPTIONEE.
12. Issuance of SHARES.
------------------
12.1 Compliance with Laws. No ISSUANCES shall be made under this PLAN
--------------------
if such ISSUANCE would do any of the following:
a. violate any federal or state law or regulation;
b. violate any of the requirements of any stock exchange upon
which the SHARES may then be listed; or
c. violate any statute, regulation, or other requirement under
which the OPTION or the SHARES were registered, qualified, or exempted from such
registration or qualification requirements.
12.2 Purchased for Investment. As a condition to the issuance of
------------------------
SHARES, the COMPANY may require the OPTIONEE to represent and warrant that the
SHARES are being
7
<PAGE>
purchased only for investment and without any present intention to sell or
distribute any SHARES.
13. Adjustments Upon Changes in Capitalization. Subject to any required
------------------------------------------
action by the shareholders of the COMPANY, the number of SHARES covered by each
outstanding OPTION, and the number of shares of all STOCK which have been
authorized for issuance under this PLAN but which have not been issued and as to
which no OPTIONS have yet been granted, or which have been returned to this PLAN
upon cancellation or expiration of an OPTION, as well as the price per share of
STOCK covered by each such outstanding OPTION, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of all STOCK
resulting from a stock split, reverse stock split, stock dividend, combination
or classification of the STOCK, or any other increase or decrease in the number
of issued shares of all STOCK effected without receipt of consideration by the
COMPANY; provided, however, that conversion of any convertible securities of the
COMPANY shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the BOARD, whose determination
in that respect shall be final, binding, and conclusive. Except as expressly
provided herein, no issuance by the COMPANY of shares of stock of any class or
securities convertible into shares or stock of any class shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of STOCK subject to an OPTION.
14. Dissolution or Reorganization. In the event of the proposed
-----------------------------
dissolution or liquidation of the COMPANY, all OPTIONS will terminate
immediately prior to the consummation of such proposed action. In the event of
a proposed sale of all or substantially all of the assets of the COMPANY, or the
merger of the COMPANY with or into another corporation, the OPTION in the
discretion of the BOARD and the successor corporation (a) shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or a subsidiary of such successor corporation, or (b) will terminated
immediately prior to the consumption of such proposed action.
15. Effective Date of this PLAN. This PLAN shall be effective as of the
---------------------------
date on which: (a) the shareholders of the COMPANY approve this PLAN as provided
in Section 20, or (b) the adoption of this PLAN by the BOARD, whichever is
earlier.
16. Date of Grant. Neither anything contained in this PLAN nor in any
-------------
resolution adopted or to be adopted by the BOARD or the shareholders of the
COMPANY nor any action taken by the BOARD shall constitute the issuance of STOCK
or the grant of an OPTION. The date of issuance of STOCK or grant of an OPTION
shall be deemed to be the date on which a written stock purchase or option
agreement shall have been duly executed by the COMPANY and the OPTIONEE.
17. Term. This PLAN shall terminate on the tenth anniversary of the
----
earlier of either the adoption of this PLAN by the BOARD or approval of this
PLAN by the shareholders of the COMPANY in accordance with Section 20 and no
ISSUANCE shall be made nor shall any OPTION be granted under this PLAN after
that date.
8
<PAGE>
18. Amendment and Termination of this PLAN.
--------------------------------------
18.1 Limitations on BOARD. The BOARD may amend or terminate this PLAN
--------------------
from time to time in such respects as the BOARD may deem it advisable provided
that, the following revisions or amendments shall require the approval of the
shareholders of the COMPANY in the manner described in Section 20:
a. An increase in the number of SHARES subject to this PLAN,
other than in connection with an adjustment under Section 13;
b. Any change in the designation of employees or consultants
eligible to be issued STOCK or granted an OPTION; or
c. If the COMPANY has a class of equity securities registered
under Section 12 of the EXCHANGE ACT at the time of such revision or amendment,
any material increase in the benefits accruing to participants under this PLAN.
18.2 Shareholder Approval. If any amendment requiring shareholder
--------------------
approval under Section 18.1 of this PLAN is made subsequent to the first
registration of any class of equity securities by the COMPANY under Section 12
of the EXCHANGE ACT, such shareholder approval shall be solicited as described
in Section 20(a) of this PLAN.
18.3 Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of this PLAN shall not affect any OPTIONS already granted and all
outstanding OPTIONS shall remain in full force and effect as if this PLAN had
not been amended or terminated, unless mutually agreed otherwise between the
OPTIONEE and the BOARD, which agreement must be in writing and signed by the
OPTIONEE and the COMPANY.
19. Reservation of SHARES. The COMPANY, during the term of this PLAN,
---------------------
shall at all times reserve and keep available such number of SHARES as shall be
sufficient to satisfy the requirements of this PLAN. The inability of the
COMPANY to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the COMPANY's counsel to be necessary to the lawful
issuance and sale of any SHARES, shall relieve the COMPANY of any liability in
respect to the failure to issue or sell SHARES as to which such requisite
authority shall have not been obtained.
20. Shareholder Approval. Continuance of this PLAN shall be subject to
--------------------
approval by the shareholders of the COMPANY within twelve months before or after
the date this PLAN is adopted by the Board of Directors. If such shareholder
approval is obtained at a duly held shareholders meeting, it may be obtained by
the affirmative vote of the holders of the majority of the outstanding shares of
the COMPANY present or represented and entitled to vote. If such shareholder
approval is obtained by written consent, it must be obtained by the written
consent of the majority of the outstanding shares of the COMPANY entitled to
vote thereon. If and in the
9
<PAGE>
event that the COMPANY registers any class of equity securities pursuant to
Section 12 of the EXCHANGE ACT, the approval of such shareholders of the company
shall be:
a. (i) solicited substantially in accordance with Section 14(a)
of the EXCHANGE ACT and the rules and regulations promulgated thereunder, or
(ii) solicited after the COMPANY has furnished in writing to the holders
entitled to vote substantially the same information concerning this PLAN as that
which would be required by the rules and regulations in effect under Section
14(a) of the EXCHANGE ACT at the time such information is furnished; and
b. obtained at or prior to the first annual meeting of the
shareholders held subsequent to the first registration of any class of equity
securities of the COMPANY under Section 12(a) of the EXCHANGE ACT.
21. Information of OPTIONEES. The COMPANY shall provide financial
------------------------
statements to each OPTIONEE at least annually during the period for which such
OPTIONEE is a shareholder or has one or more OPTIONS outstanding. The COMPANY
shall not be required to provide such information if the issuance of OPTIONS and
SHARES under this PLAN is limited to key employees whose duties in connection
with the COMPANY assure their access to equivalent information.
10
<PAGE>
Exhibit 21.1
List of ImaginOn Subsidiaries
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
ImaginOn.com California
ImaginOn Digital Productions, Inc. Delaware
iNow, Inc. California
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Registration Statement of our report dated
March 22, 1999, relating to the consolidated financial statements of ImaginOn,
Inc. and subsidiaries, and to the reference to our Firm under the caption
"Experts" in the Prospectus.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
October 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,174,218
<SECURITIES> 0
<RECEIVABLES> 107,720
<ALLOWANCES> (6,000)
<INVENTORY> 25,938
<CURRENT-ASSETS> 5,413,833
<PP&E> 131,117
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,202,620
<CURRENT-LIABILITIES> 907,342
<BONDS> 0
0
3,556,951
<COMMON> 408,740
<OTHER-SE> 2,329,587
<TOTAL-LIABILITY-AND-EQUITY> 7,202,620
<SALES> 91,062
<TOTAL-REVENUES> 91,062
<CGS> 60,705
<TOTAL-COSTS> 3,256,584
<OTHER-EXPENSES> (5,158)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,500
<INCOME-PRETAX> (3,221,069)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,221,069)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,221,069)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
