PROSPECTUS
IMAGINON, INC.
(formerly CALIFORNIA PRO SPORTS, INC.)
4,608,262 Shares of Common Stock
($.01 par value)
The estimated 4,608,262 shares (the "Shares") of Common Stock, par
value $.01 per share (the "Common Stock") of Imaginon, Inc. (formerly California
Pro Sports, Inc.), a Delaware corporation (the "Company") are being registered
by the Company for resale by the selling stockholders (the "Selling
Stockholders") and include an estimated 1,615,385 shares issuable upon
conversion of $1,050,000 in principal amount of Series B 4% Convertible
Preferred Stock (the "Series B Preferred"), 1,584,615 Shares issuable upon
conversion of $1,030,000 in principal amount of Series C 4% Convertible
Preferred Stock (the "Series C Stock"), 1,208,262 Shares of Common Stock already
outstanding and 200,000 shares issuable upon exercise of Options. The number of
shares of Common Stock estimated to be issuable upon conversion of each of the
1,050 shares of Series B Preferred and 1,030 Shares of Series C Preferred, and
the consequent number of shares of Common Stock available for resale under this
Prospectus, is based upon a conversion ratio which is $1,000 divided by 65% of
the closing bid price of the Common Stock on NASDAQ averaged over the five
trading days immediately prior to the date of conversion. The closing bid price
of the Common Stock was $1.00 per share on September 1, 1998, the date
immediately prior to the original filing of the Registration Statement of which
this Prospectus is a part, and as of that date the total number of shares
issuable pursuant to the conversion terms of the Preferred Stock was 3,200,000
shares. The average closing bid price over the five trading days immediately
prior to the date of the prospectus was $1.30 per share, or a conversion price
of $.845 per share, which would result, if all Preferred Shares were converted,
in the issuance of 2,461,538 shares, or 17.7% of the total outstanding. The
holders of Preferred Stock do not have the right to convert to the extent that
such conversion would cause the holder to "beneficially' hold more than 5% of
the outstanding shares of Common Stock, as such terms defined in Rule 13d-3 of
the Securities Exchange Act of 1934.
The Company will not receive any proceeds from the sale of Common Stock
by the Selling Stockholders. See "Selling Stockholders." The expenses of the
offering, estimated at $30,000, will be paid by the Company.
The Common Stock currently trades on the NASDAQ Small Cap Market under
the symbol "IMON." On November 27, 1998, the last sale price of the Common Stock
as reported on NASDAQ Small Cap Market was $1.50 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PURCHASE OF THESE SECURITIES INVOLVES RISKS.
See "Risk Factors" on page 4.
The date of this Prospectus is December 23, 1998, as
supplemented
January 6, 1999
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No person has been authorized in connection with this offering to give
any information or to make any representation other than as contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
securities covered by this Prospectus in any state or other jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such state
or jurisdiction. Neither the delivery of this Prospectus nor any sales made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date hereof.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, as well as proxy
statements and other information filed by the Company with the Commission, can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
its Regional Offices located at 7 World Trade Center, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission, Washington, D.C. 20549, during
regular business hours. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
issuers such as the Company that file electronically with the Commission at
http://www.sec.gov.
This Prospectus incorporates by reference the Company's Annual Report
on Form 10-KSB/A for the year ended December 31, 1997, its Quarterly Reports on
Form 10-QSB/A for the quarterly periods ended March 31, 1998 and June 30, 1998,
and Form 10-QSB for the quarter ended September 30, 1998, and its Current
Reports on Form 8-K dated February 25, 1998, March 25, 1998 and June 25, 1998,
its preliminary proxy statement filed on September 19, 1998, as amended on
October 23, 1998, the description of securities included in the Company's
Registration Statement on Form 8-A, File No. 0-25114, and all other documents
subsequently filed by the Company pursuant to Section 13(a), 13(c) or 14 of the
Exchange Act prior to the termination of the offering made hereby. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in its entirety by such
reference. The Company will provide, without charge upon oral or written request
of any person, a copy of any information incorporated by reference herein. Such
request should be directed to the Company at 1221-B South Batesville Road, Suite
B, Greer, South Carolina 29650, telephone (864) 848-5160.
INDEMNIFICATION
Pursuant to the Company's Certificate of Incorporation, as amended, the
Company may indemnify each of its directors and officers with respect to all
liability and loss suffered and reasonable expense incurred by such person in
any action, suit or proceeding in which such person was or is made or threatened
to be made a party or is otherwise involved by reason of the fact that such
person is or was a director of the Company. In addition, the Company may pay the
reasonable expenses of indemnified directors and officers incurred in defending
such proceedings if the indemnified party agrees to repay all amounts advanced
should it be ultimately determined that such person is not entitled to
indemnification.
In addition, as permitted by the Delaware General Corporation Law, the
Company's Certificate of Incorporation provides that the Company's directors
will not be held personally liable to the Company or its stockholders for
monetary damages for a breach of fiduciary duty as a director except to the
extent such exemption from liability or limitation thereof is not permitted
under the Delaware General Corporation Law. This provision does not eliminate
the duty of care, and injunctive or other forms of non-monetary equitable relief
will remain available under Delaware law. In addition, each director continues
to be liable for monetary damages for (i) misappropriation of any corporate
opportunity in violation of the director's duties, (ii) acts or omissions in bad
faith
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or involving intentional dishonesty, (iii) knowing violations of law, and (iv)
any transaction from which a director derives an improper personal benefit. The
provision does not affect a director's responsibilities under any other law,
such as the federal securities laws of state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the information
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety.
The Company
In 1997, due to continuing operating losses, management decided to
restructure and deleverage the Company. In connection with these plans, the
Company:
(a) Ceased distribution of products covered under the
California Pro and Kemper licenses, thereby 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. In the second quarter of 1997, the Company began
liquidating remaining in-line skate, snowboard and accessories
inventories.
(b) Completed the sale of substantially all of the operating
assets of USA Skate Corporation ("USA Skate") and Davtec. The proceeds
of the sale of the Company's hockey business 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 Corporation ("Skate Corp.").
(c) Entered into two sub-license agreements regarding the use
of the Kemper name. The Company will rely on the expertise of their
sub-licenses to develop, import or manufacture, and market and
distribute within their licensed product categories and territories.
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-transferable 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 is the
greater 7.5% of the cost to UMC or $30,000 per annum. UMC has an option
to renew for one or two additional years. During the first contract
year (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., a California corporation ("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 equipment, clothing
and accessories (the "Products"). Jaysport has the option to renew the
agreement for additional two year periods thereafter. The agreement
includes a royalty payment of 3% net sales on all Products with a
minimum royalty of $25,000 per annum. Each of the Kemper sub-licensees
offer a full line of products at various price points within their
respective product categories. The Company is seeking sub-licensees for
the California Pro brand, not only for in-line skates but for other
sporting goods categories such as snowboards and water skis.
(d) Commenced a search for a merger candidate. As a result of
its search, on October 2, 1997, the Company signed a letter of intent
to merge with ImaginOn, Inc. ("ImaginOn"), a privately held company,
and on January 30, 1998, the company signed an agreement and plan of
merger with ImaginOn,
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whereby there would be an exchange of 100% of the outstanding shares of
ImaginOn for an amount equal to 60% of the outstanding post merger
common stock of California Pro.
ImaginOn, formed in March 1996, designs, manufactures and sells: (i)
consumer software products for the CD/DVD-ROM market; and (ii) a navigational
tool for sophisticated Internet users. ImaginOn's proprietary technology, called
"Transformation Database Processing and Playback" ("TDPP"), enables the creation
of new business and consumer products that provide user-friendly and
entertaining access to multimedia databases. TDPP is comprised of twelve
software tools, which enable seamless real time access to video, audio,
graphics, text html and three-dimensional objects from multiple remote or local
databases. The transaction, which is expected to be completed by the fall of
1998, is contingent upon certain customary conditions including, but not limited
to, approval by the boards of directors of both companies, a vote by the
Company's stockholders (to approve the merger and increase the authorized shares
the Company may issue), and the completion of a fairness opinion by an
independent valuation company.
ImaginOn has developed and manufactured a general purpose software
application, named "WebZinger" for internet browsers. WebZinger(TM) mediates Web
searches for both naive and sophisticated users, increasing efficiency and
saving time. ImaginOn's core technology, TDPP, has enabled the creation of a new
class of business and consumer products; a hybrid of local and remote database
content with seamless real-time access to video, audio, graphics and text.
ImaginOn has designed eleven software tools based on TDPP. The first software
title "World Cities 2000 San Francisco," an interactive travelogue, is complete.
The Company's principal executive offices are located at 1221-B South
Batesville Road, Suite B, Greer, South Carolina 29650. Its telephone number is
(864) 848-5160.
The Offering
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Securities Offered: An estimated 4,608,262 shares of Common Stock, $.01 par value per share,
including an estimated 1,615,385 shares issuable upon conversion of 1,050 shares
of Series B 4% Preferred Stock, 1,584,615 shares issuable upon conversion of
1,030 Shares of Series C 4% Preferred Stock (collectively, the "Preferred Stock").
1,208,262 Shares already outstanding and 200,000 Shares issuable upon exercise
of options and warrants. All of the shares of Common Stock offered hereby are
offered by the Selling Stockholders for resale. See "Selling Stockholders". The
conversion price per share of Preferred Stock is equal to 65% of the average
closing price of the Common Stock on the five trading days prior to conversion
(or an estimated $.65 per share.)
NASDAQ Small Cap symbol IMON
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Risk Factors
Investment in the Shares offered hereby involves a high degree of risk,
including the limited operating history of the Company and competition.
Investors should carefully consider the various risk factors before investing in
the Shares. This Prospectus contains forward looking statements which may
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors." See "Risk Factors."
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RISK FACTORS
The shares of Common Stock offered hereby are highly speculative and
involve a high degree of risk. The following risk factors should be considered
carefully in addition to the other information in this Prospectus before
purchasing the shares of Common Stock offered hereby. The discussion in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein.
Limited Operations. The Company and ImaginOn have limited business operations.
The Company is currently receiving income from sub-licenses it has entered into
regarding the use of the Kemper name and trademark for which it has a license.
The Company also licenses the California Pro name and trademark and is pursuing
entering into sub-licenses. The Company has received no commitment from any
party for such sub-license and there can be no assurance that a sub-license will
be entered into.
ImaginOn, organized in March, 1996, is engaged in the business of
designing, selling and manufacturing: (i) consumer software products for the
rapidly growing "infotainment" and "edutainment" CD/DVD-ROM markets; and (ii)
Internet software. Since inception, ImaginOn has been engaged primarily in
product development activities. Through June 30, 1998 ImaginOn has had no
significant revenues and had a loss from operation of $946,512 and $930,754 for
the year ended December 31, 1997 and six months ended June 30, 1998,
respectively.
No Inventories. The Company has liquidated its remaining inventory and,
therefore, it does not maintain, nor does it intend to accumulate, an inventory
of in-line skate, snowboard or hockey products.
Working Capital Shortages and Operating Losses. Recently, the Company has
generated significant operating losses and has failed to generate positive cash
flow. As a result, the Company has, and continue to experience, shortages of
working capital to fund day to day operations. ImaginOn also has generated
significant operating losses and has failed to generate positive cash flow.
The shortages of working capital and insufficient cash flow have, from time
to time, prevented the Company from making prompt payment of current
obligations. As a result, the Company is subject to numerous claims for
collection of past due amounts and are past due on certain of its debt
obligations.
Limited Capitalization. The Company and ImaginOn have only limited financing
available to it and is dependent on significant additional financing being
available to continue as a going concern.
On March 13, 1998, the Company began a private placement for the sale of
1,842,000 shares of Skate Corp. common stock it owns, which includes an option
to acquire 2,763,000 shares of the Company's common stock in exchange for the
Skate Corp. shares. In April and May 1998, the Company received $255,000 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 503,262
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. From June 30, 1998 through August 1998 the Company
sold 1,050 Shares of Series B and 1,030 Shares of Series C Convertible Preferred
Stock at a price of $1,000 per Share, for gross proceeds of $2,080,000.
In addition to selling the Preferred Stock, the Company may also seek
additional equity or debt financing to further fund day to day operations. There
can be no assurance that such financing will be available when needed, or that,
if available, it will be on satisfactory terms.
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Merger with ImaginOn; Change of Business. The Company has signed a
definitive Agreement and Plan of Merger with ImaginOn, Inc. ("ImaginOn"). The
closing of this transaction is subject to certain contingencies, including
shareholder approval. If the transaction is consummated, the Company's line of
business will change to include computer software manufacturing, production and
other related activities. Although the Company's management believes the
transaction will close upon satisfaction of certain contingencies, there can be
no such assurance.
Antitakeover Provisions in the Company's Corporate Documents. The Company's
Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock, $.01 par value per share (the "Preferred Stock"), of the
Company, including the 10,000 shares of Series B 4% Preferred Stock including
1,050 Shares issued to date, and the 1,030 shares of Series C 4% Preferred which
have been issued to date and to determine the price, rights, preferences,
privileges and restrictions thereof, including voting rights, without any
further vote or action by the Company's stockholders. The voting and other
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The Company's Board may similarly issue additional shares of
Common Stock without any further vote or action by stockholders. Such an
issuance could occur in the context of another public or private offering of
shares of Common stock or Preferred Stock or in a situation where the Common or
Preferred Stock is used to acquire the assets or stock of another company. The
issuance of Common or Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no current plans to issue any additional shares of
Common or Preferred Stock other than as described herein. See "Description of
Securities."
Dilutive Effect of Conversion; Redemption. The holders of Series B and
Series C Preferred Stock in the aggregate, currently have the right to convert
such shares into 3,200,000 Shares of Common Stock, based on a current Market
Price of $1.00 per share. In the event of a decline in such Market Price, the
number of shares issuable upon conversion of the Preferred Stock could increase
until such time as the total number of common shares issued for each class
equalled 19.9% of the then outstanding shares of Common Stock for each class, at
which time the Company would be obligated to redeem the remaining outstanding
and unconverted shares at a price of $1.250 per Share. The Company has no
sources of capital to effect such redemption at this time.
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET; LACK OF LIQUIDITY OF LOW
PRICED STOCKS
If the Company fails to maintain the qualification for its Common Stock to
trade on the Nasdaq SmallCap Market, its securities would be delisted from the
Nasdaq SmallCap Market. Factors giving rise to such delisting could include, but
not limited to, a reduction of the Company's assets to below $1,000,000,
stockholders' equity being reduced to below $2,000,000, a minimum bid price
being less than $1.00 per share, a reduction to one active market maker or a
reduction in the value of the Company's publicly held securities to less than
$250,000. In such event, trading, if any, in Cal Pro Common Stock would
thereafter be conducted in the over-the-counter markets in the so-called "pink
sheets" or the National Association of Securities Dealer's "Electronic Bulletin
Board." Consequently, the liquidity of the Cal Pro's Common Stock would like be
impaired, not only in the number of shares which could be bought and sold, but
also through delays in the timing of the transactions, reduction in security
analysts' and the news media's coverage if any, of the Company, and lower prices
for the Company's securities than might otherwise prevail. If the Company's
common stock were to be delisted from the Nasdaq SmallCap Market, it would
become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as
amended, (the "Penny Stock Rules"), which imposes additional sales practice
requirements on broker-dealers which sell such common stock to persons other
than established customers and certain institutional investors. For transactions
covered by this rule, a broker-dealer must make a special suitability
determination for the purchasers and have received the purchaser's written
consent to the transaction prior to sale. Consequently, the Penny Stock Rules
may adversely affect the ability of broker-dealers to sell the Company's common
stock and may adversely affect the ability of ImaginOn's shareholders to sell
any of the share of Cal Pro Common Stock in the secondary market.
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SELECTED FINANCIAL AND OPERATING DATA
The following selected financial and operating data should be read in
conjunction with the Company's financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-KSB/A (the
"Annual Report"), incorporated by reference herein. The statement of operations
data for the years ended December 31, 1997 and 1996 and the balance sheet data
as of December 31, 1997 incorporated by reference herein, are derived from
financial statements of the Company that have been audited by Gelfond Hochstadt
Pangburn & Co., independent certified public accountants. The statement of
operations data for the nine months ended September 30, 1998 and 1997 and the
balance sheet data as of September 30, 1998 and the pro forma balance sheet data
as of September 30, 1998 are derived from unaudited financial statements of the
Company included in the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1998 ("September 10-QSB"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report and in the September 10-QSB.
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Nine Months ended Year ended
September 30, December 31,
1998 1997 1997 1996
Statement of Operation data:
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Net Sales $ -- $ 8,849,356 $ 9,087,767 $ 16,952,904
Gross Profit -- 2,417,371 1,642,423 2,891,870
Loss from operations (1,392,153) (2,694,966) (4,075,182) (4,690,853)
Loss Before Extraordinary item (1,858,376) (3,519,070) (5,192,920) (5,575,882)
Extraordinary Item 383,705 383,705
Comprehensive Loss $ (1,858,376) $ (3,153,199) $ (4,809,215) $ (5,575,882)
Loss Per Share:
Before Extraordinary Item $ (.22) $ (.66) $ (.94) $ (1.37)
Extraordinary item .07 .07
Loss per common share $ (.22) $ (.59) $ (.87) $ (1.37)
Weighted Average
shares outstanding 8,527,479 5,293,473 5,544,833 4,078,864
September 5, 1998 December 31,
Proforma(1) Historical 1997
Balance Sheet data:
Current Assets $ 2,509,165 $ 3,262,552 $ 1,377,907
Total Assets 3,143,182 3,984,172 2,268,627
Working Capital (deficiency) 2,176,349 1,646,195 (400,625)
Shareholders' Equity 2,810,366 2,337,160 104,946
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MARKET PRICE OF COMMON STOCK
The Company's Common Stock and Warrants have been traded over-the-counter
since January 18, 1995 and are currently quoted on the Nasdaq SmallCap Market
under the symbols IMON and IMONW, respectively. Until January 4, 1999 the Common
Stock and Warrants were quoted under the symbols CALP and CALPW, respectively.
The following table sets forth the range of high and low bid prices 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.
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Common Stock Warrants
Bid Prices Bid Prices
1998 High Low High Low
- ---- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter (1/1/98-3/31/98)................................ $ 1.63 $ 1.13 $ .75 $ .44
Second Quarter (4/1/98-6/30/98)............................... $ 1.94 $ 1.19 $ .88 $ .50
Third Quarter (7/1/98-9/30/98)............................... $ 1.53 $ .75 $ .72 $ .25
1997
First Quarter (1/1/97-3/31/97)................................ $ 1.53 $ .81 $ .40 $ .25
Second Quarter (4/1/97-6/30/97)............................... $ 2.00 $ .93 $ .68 $ .21875
Third Quarter (7/1/97-9/30/97)................................ $ 2.37 $ 1.37 $ .75 $ .4375
Fourth Quarter (10/1/97-12/31/97)............................. $ 3.06 $ 1.06 $ 1.15 $ .6875
1996
First Quarter (1/1/96-3/31/96)................................ $ 4.62 $ 2.56 $ 1.92 $ .65625
Second Quarter (4/1/96-6/30/96)............................... $ 4.00 $ 2.25 $ 1.00 $ .50
Third Quarter (7/1/96-9/30/96)................................ $ 3.06 $ 1.87 $ .90 $ .375
Fourth Quarter (10/1/96-12/31/96)............................. $ 2.31 $ 1.25 $ .56 $ .21875
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NASDAQ NOTIFICATION OF DELISTING. The NASDAQ Stock Market, Inc. ("NASDAQ")
issued new standards for continued listing of SmallCap Market participants which
became effective February 23, 1998. The Company is a SmallCap Market participant
and must meet these new requirements. On the effective date, the Company did not
meet one of the new requirements of having net tangible assets that exceed $2
million. Under the new standards, NASDAQ has established a review process for
companies temporarily out of compliance. The Company filed its written request
for a temporary exemption to the new standards on March 27, 1998. Along with the
written request, the Company filed a Form 8-K which, on a pro-forma basis, shows
compliance with the new continued listing requirements. NASDAQ granted a
conditional exceptions to the listing requirements on July 10, 1998, provided
the Company completed by August 14, 1998 certain placements (including the
placement of Preferred Stock). The Company filed a Form 10-QSB with NASDAQ on
August 14, 1998, and the Company subsequently received on August 20, 1998 notice
from NASDAQ that the Company has evidenced compliance with all requirements
necessary for continued listing on the NASDAQ SmallCap Market.
The number of record holders of the Company's Common Stock as of October
31, 1998 was approximately ___. Based on information from the brokerage
community, the Company believes that its Common Stock and Warrants each are held
beneficially by more than 300 persons.
The Company has not declared or paid dividends on its Common Stock, nor
does it anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain any future earnings to fund operations and
for the continued development of its business. No dividends may be paid on
Common Stock unless all accrued and unpaid dividends have been paid on the
Preferred Stock.
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PLAN OF DISTRIBUTION
The shares of Common Stock of the Company offered by the Selling
Stockholders (the "Shares") will be offered at market prices, as reflected on
NASDAQ. The aggregate number of shares offered for resale upon conversion of the
Preferred Stock will be based on the conversion rate in effect at the time of
conversion. It is anticipated that Selling Stockholders will sell their shares
of Common Stock on NASDAQ in which case registered broker-dealers will be
allowed the commissions which are usual and customary in open market
transactions. No specific brokers or dealers have been identified, and no person
has agreed to sell or take down any shares. The expenses of the offering,
estimated at $30,000, will be paid entirely by the Company. Selling Stockholders
may also sell their shares of Common Stock in off-the-market transactions at
market price in which case no commissions would be paid. The Selling
Stockholders and broker dealers who act in connection with the sale of the
Shares may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, and any sales commissions or resales of the Common Stock as a
principal by such broker dealers may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933.
SELLING STOCKHOLDERS
The number of shares of Common Stock estimated to be issuable upon
conversion of each of the 1,050 shares of Series B Preferred and 1,030 Shares of
Series C Preferred, and the consequent number of shares of Common Stock
available for resale under this Prospectus, is based upon a conversion ratio
which is $1,000 divided by 65% of the closing bid price of the Common Stock on
NASDAQ averaged over the five trading days immediately prior to the date of
conversion. The number of shares in the table below is based upon a rate of
$.65, or approximately 1538.46 shares of Common Stock per share of Series B and
C Preferred. The Selling Stockholders do not own any Common Stock except as
registered hereby and will own no shares after the completion of the offering.
The relationship, if any, between the Company and any Selling Stockholder is set
forth below.
<TABLE>
<CAPTION>
Percent of
Common Stock
Number of Number of Before
Name Preferred Shares Class Common Shares Offering(1)
<S> <C> <C> <C>
The Augustine Fund(2) 200 B 307,692 2.6%
Congregation Beth Mordecai(3) 200 B 307,692 2.6%
Dale N. Stein 25 B 38,462 *
C. Jessie Reggio 75 B 115,385 *
Zaken Limited(4) 200 B 307,692 2.6%
Matthew Holstein 50 B 76,923 *
Russell G. Kraus 25 B 38,462 *
The Four Corporation
Defined Benefit Pension Trust(5) 25 B 38,462 *
Tabacalara, Ltd.(6) 100 B 153,846 1.3%
Keith Mazer(10) 50 B 76,923 *
Bertek Realty(7) 100 B 153,846 1.3%
The Shaar Fund, Ltd.(8) 1,030 C 1,584,615 12.1%
c/o Schaar Advisory Services, Ltd.
62 King George Street, Apartment 4F
Jerusalem, Israel
World Capital Funding, L.L.C.(9) 325,000 2.8%
Wayne Mills IRA 250,000 2.1%
Jeffrey Werbalowsky 62,500 *
John Skeleton 62,500 *
Richard Lockwood 62,500 *
Craig Avery 62,500 *
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<PAGE>
John Black 69,076 *
John Burford 98,678 *
Jim Burford, M.D.(10) 98,678 *
David Saltiel 9,868 *
William Pallack 49,340 *
Richard Cammeron 49,340 *
Joseph Maenza 128,282 1.1
Gary Tice 80,000 *
Totals 2,080 - 4,608,262 38.1%
</TABLE>
*less than 1%
(1) The holders of Preferred Stock do not have the right to convert to the
extent that such conversion would cause the holder to "beneficially"
hold more than 5% of the outstanding shares of Common Stock, as such
term is defined in Rule 13d-3 of the Securities Exchange Act of 1934.
(2) Thomas Duszynski controls the voting of the shares of The Augustine
Fund.
(3) Sholom Taversky controls the voting of the shares of Congregation Beth
Mordechei.
(4) Bernard Muller controls the voting of the shares of Zaken Limited.
(5) Jonathan Holstein controls the voting of the shares of The Four
Corporation Defined Benefit Pension Trust.
(6) Messod Maxo controls the voting of the shares of Tabacalera.
(7) Lazar Leybovich controls the voting of the shares of Bertek Realty.
(8) Samuel Levinson controls the voting of the shares of The Shaar Fund.
(9) Keith Mazer is the principal officer, director and member of World
Capital Funding, LLC. Includes as to World Capital Funding 125,000
Shares of Common Stock and 200,000 shares issuable upon exercise of
warrants. World Capital Funding, LLC received a consulting fee of
$249,600 in connection with advising the Company with respect to the
Placement of Preferred Stock and other capitalization strategies.
(10) Jim Burford, MD is the brother of John Burford.
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<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The Company's Articles of Incorporation authorizes the issuance of
20,000,000 shares of Common Stock, $.01 par value per share, of which 11,479,727
shares were outstanding as of July 31, 1998. Holders of shares of Common Stock
are entitled to one vote for each share on all matters to be voted on by the
shareholders. Holders of Common Stock have no cumulative voting rights. Holders
of shares of Common Stock are entitled to share ratably in dividends, if any, as
may be declared, from time to time by the Board of Directors in its discretion,
from funds legally available therefore. In the event of a liquidation,
dissolution or winding up of the Company, the holders of shares of Common Stock
are entitled to share pro rata all assets remaining after payment in full of all
liabilities. Holders of Common Stock have no preemptive rights to purchase the
Company's Common Stock. There are no conversion rights or redemption or sinking
fund provisions with respect to the Common Stock. All of the outstanding shares
of Common Stock are validly issued, fully paid and non-assessable.
The transfer agent for the Common Stock is Corporate Stock Transfer, Inc.,
370 17th Street, Suite 2350, Denver, Colorado, 80202.
Preferred Stock
The Company's Certificate of Incorporation authorize the issuance of
5,000,000 shares of preferred stock, $.01 par value, of which as of July 31,
1998 1,050 shares of Series B Preferred and 1,030 shares of Series C Preferred,
are outstanding. The Preferred Stock is convertible into shares of common stock
at the option of the holders, and is mandatorily convertible three years after
issuance. See "Selling Stockholders". The annual dividend rate for the Series B
and Series C Preferred is $40.00 per share, when, as and if declared by the
Company's Board of Directors. If not declared, dividends will accumulate and be
payable in the future. Full dividends must be paid or set aside on the Series B
and Series C Preferred Stock before dividends may be paid or set aside on the
Company's Common Stock. A liquidation shall be deemed to occur in the event of
any voluntary liquidation, the sale of substantially all the assets of the
Company or certain changes of control and similar transactions. The holders of
Series B and Series C Preferred have a liquidation preference of $1,300 per
share over the Common Stock. In the event the holders of Series A Preferred
Stock or Series B Preferred Stock, in the aggregate, have converted into Shares
of Common Stock in excess of 19.99% of the outstanding Shares of Common Stock
(measured separately for each series) then the Company is required to redeem the
remaining shares of such class at a price of $1,250 per Share, together with
unpaid dividends. The Company does not expect to declare or pay such dividends
in the foreseeable future. The Company may issue additional preferred stock in
the future. The Company's Board of Directors has authority, without action by
the shareholders, to issue all or any portion of the authorized but unissued
preferred stock in one or more series and to determine the voting rights,
preferences as to dividends and liquidation, conversion rights, and other rights
of such series.
The Company considers it desirable to have preferred stock available to
provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or private placements, the provisions for preferred stock in the
Company's Certificate of Incorporation would avoid the possible delay and
expense of a shareholder's meeting, except as may be required by law or
regulatory authorities. Issuance of the preferred stock could result, however,
in a series of securities outstanding that will have certain preferences with
respect to dividends and liquidation over the Common Stock which would result in
dilution of the income per share and net book value of the Common Stock.
Issuance of additional Common Stock pursuant to any conversion right which may
be attached to the terms of any series of preferred stock may also result in
dilution of the net income per share and the net book value of the Common Stock.
The specific terms of any series of preferred stock will depend primarily on
market conditions, terms of a proposed acquisition or financing, and other
factors existing at the time of issuance. Therefore, it is not possible at this
time to determine in what respect a particular series of
11
<PAGE>
preferred stock will be superior to the Company's Common Stock or any other
series of preferred stock which the Company may issue. The Board of Directors
may issue additional preferred stock in future financings.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of Delaware law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. While such provisions are intended to enable the Board of Directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which could be in the best interest of certain stockholders. There is no
assurance that such provisions will not have an adverse effect on the market
value of the Company's stock in the future.
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by Hand & Hand, a law corporation, Dana Point, California.
EXPERTS
The financial statements of the Company as of December 31, 1997 and for the
years ended December 31, 1997 and 1996, incorporated by reference in this
Prospectus from the Annual Report on Form 10-KSB/A, have been incorporated
herein in reliance on the report of Gelfond Hochstadt Pangburn & Co.,
independent certified public accountants, given on the authority of said firm as
experts in accounting and auditing.
No dealer, salesman or other person is authorized to give any information
or to make any representations not contained in this Prospectus in connection
with the offer made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell or a solicitation
to an offer to buy the securities offered hereby to any person in any state or
other jurisdiction in which such offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the information contained herein
is correct as of any time subsequent to the date hereof.
12
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Additional Information.................................................................................... 2
Prospectus Summary........................................................................................ 3
Risk Factors.............................................................................................. 6
Market Price of Common Stock.............................................................................. 8
Selling Stockholders...................................................................................... 10
Description of Securities................................................................................. 10
Legal Matters............................................................................................. 11
Experts................................................................................................... 11
</TABLE>
6,008,262 SHARES
13
<PAGE>
