UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-25114
IMAGINON, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1217733
- ---------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
1313 Laurel Street, Suite 1, San Carlos, CA 94070
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
(650) 596-9300
---------------------------------------------------
(Registrants telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such report(s)
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 38,694,081 common shares, par value
$.01 per share, outstanding at May 12, 1999.
Transitional Small Business Disclosure Format (Check One) YES [ ] NO [X]
Page 1 of ___ total pages on this document.
<PAGE>
IMAGINON, INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
2
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
ASSETS
------
Current assets:
Cash .................................................... $ 2,559,099
Accounts receivable, less allowance for
doubtful accounts of $3,000 ............................ 36,505
Inventory ............................................... 7,070
Prepaid expenses and other .............................. 91,833
-----------
Total current assets ..................... 2,694,507
-----------
Furniture and equipment, net of accumulated
depreciation of $515,361 ...................................... 124,220
-----------
Other assets, net of accumulated
amortization of $52,440:
Goodwill ................................................ 1,570,260
Trademark and license costs ............................. 81,251
Other ................................................... 4,400
-----------
1,655,911
-----------
$ 4,474,638
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses ................... $ 691,113
Other ................................................... 32,761
-----------
Total liabilities (all current) ................ 723,874
-----------
Shareholders' equity (Note 5):
Preferred stock, Series D/E, $0.01 par value;
authorized 5,000,000 shares, issued 3,000 ............. 2,403,333
Common stock, $0.01 par value; authorized
50,000,000 shares; issued 38,176,552 ................ 381,766
Warrants ................................................ 487,719
Capital in excess of par ................................ 5,280,867
Deficit accumulated during the development stage ........ (4,802,921)
-----------
Total shareholders' equity ............... 3,750,764
-----------
$ 4,474,638
===========
See notes to consolidated financial statements.
3
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Period from
Three months ended March 29, 1996
March 31, (date of incep-
---------------------------- tion) to March
1999 1998 31, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues .................................... $ 13,701 $ 45 $ 19,246
Cost of revenues ............................ 11,232 12,296
------------ ------------ ------------
Gross profit ................................ 2,469 45 6,950
Operating expenses:
Research and development ............. 302,888 176,695 2,106,178
Selling expense ...................... 819,688 186,199 1,469,623
General and administrative expense ... 537,451 77,451 1,009,699
------------ ------------ ------------
1,660,027 440,345 4,585,500
------------ ------------ ------------
Loss from operations ........................ (1,657,558) (440,300) (4,578,550)
------------ ------------ ------------
Other expenses (income):
Interest expense ..................... 81,500 6,393 236,190
Interest income ...................... (5,615) (5,925)
Other income ......................... (12,142) (5,894)
------------ ------------ ------------
63,743 6,393 224,371
------------ ------------ ------------
Net loss .................................... (1,721,301) (446,693) (4,802,921)
Amortization of discount on preferred stock . (833,333) (833,333)
------------ ------------ ------------
Net loss applicable to common shareholders $ (2,554,634) $ (446,693) $ (5,636,254)
============ ============ ============
Loss per share .............................. $ (.08) $ (.02) (.33)
============ ============ ============
Weighted average number of shares outstanding 32,593,577 20,420,816 17,064,014
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series D and E
convertible
Common stock preferred stock
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Issuance of common stock
for services ..................... 9,033,332 $ 90,333
Net loss
----------- ----------- ----------- -----------
Balances, December 31, 1996 ...... 9,033,332 90,333
Issuance of common stock for cash,
net of issuance costs of $49,686 . 10,073,067 100,731
Issuance of common stock to
employees in exchange for earned
bonuses .......................... 67,750 678
Exercise of common stock
warrants for cash ................ 121,950 1,220
Exercise of common stock warrants
in exchange for note payable ..... 154,573 1,546
Issuance of warrants to purchase
shares of common stock, net
Net loss
----------- ----------- ----------- -----------
Balances, December 31, 1997 ...... 19,450,673 194,508
Issuance of common stock and
warrants for cash in January 1998,
net of issuance cost of $348,438 . 1,138,200 11,382
Issuance of common stock to
employees in exchange for earned
bonuses .......................... 135,500 1,355
Issuance of common stock in
exchange for accounts payable .... 23,742 237
Repurchase of common stock ....... (542,000) (5,420)
</TABLE>
5
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
Accumulated
Capital during the Total
In excess development shareholders'
Warrants of par stage equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Issuance of common stock
for services ..................... $ (87,000) $ 3,333
Net loss ......................... $ (394,906) (394,906)
----------- ----------- ----------- -----------
Balances, December 31, 1996 ...... (87,000) (394,906) (391,573)
Issuance of common stock for cash,
net of issuance costs of $49,686 . 601,833 702,564
Issuance of common stock to
employees in exchange for earned
bonuses .......................... 3,072 3,750
Exercise of common stock
warrants for cash ................ 5,530 6,750
Exercise of common stock warrants
in exchange for note payable ..... 7,010 8,556
Issuance of warrants to purchase
shares of common stock, net....... $ 72,158 72,158
Net loss ......................... (946,512) (946,512)
----------- ----------- ----------- -----------
Balances, December 31, 1997 ...... 72,158 530,445 (1,341,418) (544,307)
Issuance of common stock and
warrants for cash net of
issuance cost of $348,438......... 313,353 165,180 489,915
Issuance of common stock to
employees in exchange for earned
bonuses .......................... 61,145 62,500
Issuance of common stock in
exchange for accounts payable .... 10,714 10,951
Repurchase of common stock ....... (119,580) (125,000)
</TABLE>
6
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series D and E
convertible
Common stock preferred stock
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Issuance of warrants to purchase
shares of common stock in connect-
ion with the issuance of a bridge
financing
Issuance of 6,289 options to a
consultant
Net loss
----------- ----------- ----------- -----------
Balances, December 31, 1998 ...... 20,206,115 $ 202,062
Exercise of 1,531,150 warrants at
exercise prices between $.065 and
$.46 (Note 5)..................... 1,531,150 15,311
Shares issued in
acquisition (Note 2).............. 16,000,602 160,006 3,000 $ 1,570,000
Issuance of 102,000 shares to
employees (Note 5)................ 102,000 1,020
Issuance of 260,000 shares of
common stock in connection with
acquisition (Note 3).............. 260,000 2,600
Issuance of 76,685 shares of
common stock in exchange for
cashless conversion of
100,620 warrants to purchase
common stock (Note 5)............. 76,685 767
Amortization of Series D and E
preferred stock (note 5).......... 833,333
Net loss
----------- ----------- ----------- -----------
Balances, March 31, 1999 ......... 38,176,552 $ 381,766 3,000 $ 2,403,333
=========== =========== =========== ===========
</TABLE>
7
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
Accumulated
Capital during the Total
In excess development shareholders'
Warrants of par stage equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Issuance of warrants to purchase
shares of common stock in connec-
tion with the issuance of a bridge
financing ........................ 12,398 12,398
Issuance of 6,289 options to a
consultant ....................... 1,987 1,987
Net loss ......................... (1,740,202) (1,740,202)
----------- ----------- ----------- -----------
Balances, December 31, 1998 ...... 397,909 649,891 (3,081,620) (1,831,758)
Exercise of 1,531,150 warrants at
exercise prices between $.065 and
$.46 (Note 5).................... (304,390) 879,829 590,750
Shares issued in
acquisition (Note 2) ............. 394,200 2,574,915 4,699,121
Issuance of 102,000 shares to
employees (Note 5)................ 611,012 612,032
Issuance of 260,000 shares of
common stock in connection with
acquisition (Note 3) ............. 1,399,320 1,401,920
Issuance of 76,685 shares of
common stock in exchange for
cashless conversion of 100,620
warrants to purchase common
stock (Note 5).................... (767)
Amortization of Series D and E
preferred stock (note 5).......... (833,333)
Net loss ......................... (1,721,301) (1,721,301)
----------- ----------- ----------- -----------
Balances, March 31, 1999 ......... $ 487,719 $ 5,280,867 $(4,802,921) $ 3,750,764
=========== =========== =========== ===========
</TABLE>
8
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
( A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Period from
Three months ended March 29, 1996
March 31, (date of incep-
---------------------------- tion) to March
1999 1998 31, 1999
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $(1,721,301) $ (446,693 $(4,802,921)
------------ ----------- -----------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization .......................... 40,000 3,720 65,335
Interest expense for issuance of notes payable ......... 12,398 77,942
Expense incurred upon issuance
of common stock ...................................... 612,032 73,451 694,553
Changes in operating assets and liabilities net of
of effects of business acquisition
Accounts receivable .................................. (30,265) (30,265)
Inventories .......................................... (7,070) (1,475) (7,070)
Prepaid expenses and other ........................... (70,198) 828 (87,756)
Accounts payable and accrued expenses ................ 264,892 (45,168) 646,124
------------ ----------- -----------
Total adjustments ...................................... 809,391 43,754 1,358,863
------------ ----------- -----------
Net cash used in operating activities ......................... (911,910) (402,939) (3,444,058)
------------ ----------- -----------
Cash flows from investing activities:
Cash paid on business acquisition, net of
cash acquired .......................................... (212,548) (212,548)
Capital expenditures ..................................... (17,617) (54,763)
------------ ----------- -----------
Net cash used in investing activities ......................... (230,165) (267,311)
------------ ----------- -----------
Cash flows from financing activities:
Bank overdraft ........................................... (1,587)
Proceeds from notes payable and advances ................. 3,099,550 4,627,304
Changes on notes payable ................................. (85,000) (153,429)
Proceeds from issuance of common stock and
warrants, net .......................................... 590,750 489,915 1,796,593
------------ ----------- -----------
Net cash provided by financing activities ..................... 3,690,300 403,328 6,270,468
------------ ----------- -----------
Net increase in cash .......................................... 2,548,225 389 2,559,099
Cash, beginning ............................................... 10,874
------------ ----------- -----------
Cash, ending .................................................. $ 2,559,099 $ 389 $ 2,559,099
============ =========== ===========
</TABLE>
(Continued)
See notes to consolidated financial statements
9
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Period from
Three months ended March 29, 1996
March 31, (date of incep-
---------------------------- tion) to March
1999 1998 31, 1999
------------ ----------- -----------
<S> <C> <C> <C>
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 .................................................. $ 767 $ $ 767
============ =========== ===========
Common stock issued in connection
with the merger between the Company and
ImaginOn.com ........................................... $ 4,699,121 $ $ 4,699,121
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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 months ended
March 31, 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.
11
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
3. Business acquisition:
On March 8, 1999, the Company acquired Network Specialists, Inc. ("INOW" or
"Network"), 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 three
months ended March 31, 1998 and 1999 give effect to the acquisition as if
it had occurred effective at the beginning of each respective period.
Period ended March 31,
-------------------------
1999 1998
----------- -----------
Revenue $ 79,747 $ 97,814
Net loss $(1,829,794) $(1,028,918)
Net loss applicable to common shareholders $(2,663,127) $(1,028,918)
Loss per share $ (0.08) $ (0.05)
Shares used in per share calculation 32,784,244 20,680,816
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.
12
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
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. 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:
In the quarter ended March 31, 1999 the Company issued 1,531,150 shares of
common stock upon the exercise of 1,531,150 options at prices from $.05
to $.46. The total proceeds the Company received was $590,750.
For the quarter ended March 31, 1999, the Company issued 102,000 shares of
common stock as bonuses given to new employees. In connection with these
issuances, the Company recognized $612,032 of expenses included in the
financial statements.
13
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
5. Shareholders' equity (continued):
Issuance of common stock subsequent to the January 20, 1999 merger
(continued):
The Company issued 260,000 shares to the former shareholders of Network
Specialists, Inc. in connection with the acquisition of Network
Specialists, Inc.
The Company issued 76,685 shares of common stock in exchange for the
exercise of 100,620 warrants. The warrant holders utilized a cashless
exercise provision included in their agreement.
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.
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 March 31, 1999, $833,333 has been
amortized to preferred stock for the period beginning from the date of
issuance.
14
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
5. Shareholders' equity (continued):
Series F convertible preferred stock:
In May 1999 the Company issued 4,000 shares of 12% Series F convertible
preferred stock for $3,730,000 (net of offering costs) at $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 Company notified the Series D and E convertible preferred shareholders
on May 6, 1999 that the Company will redeem all of the remaining shares
(2,510) of Series D and E convertible preferred stock on May 21, 1999.
The principal amount required to redeem the Series D/E preferred stock is
$3,012,000.
15
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
This report may contain certain "Forward-Looking Statements" as such term is
defined in the private securities litigation reform act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, which
represent the registrant's expectations or beliefs, including but not limited
to, statements concerning the registrant's operations, economic performance,
financial condition, growth and acquisition strategies, investments, and
operational plans. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"May" , "Will", "Expect", "Believe", "Anticipate", "Intent", "Could",
"Estimate", "Might" or "Continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
certain of which are beyond the registrant's control, and actual results may
differ materially depending on a variety of important factors, including
uncertainty related to acquisitions, governmental regulation, managing and
maintaining growth, volatility of stock price and any other factors discussed in
this and other Registrant filings with the Securities and Exchange Commission.
OVERVIEW
On January 20, 1999 ImaginOn, Inc. ("ImaginOn", the "Company", or the
"Registrant", formerly known as California Pro Sports, Inc.) through ImaginOn
Acquisition Corp., a wholly owned subsidiary of the Company, completed a merger
with ImaginOn.com, Inc. of San Carlos, California ("IMON" formerly known as
ImaginOn, Inc.). The Registrant is a public company. The merger was recorded as
an acquisition of ImaginOn, Inc. by IMON and a recapitalization of IMON.
ImaginOn, Inc. has two operating units, ImaginOn.com and INOW, Inc., both
California corporations. Accordingly, historical financial statements presented
are those of the Company
IMON was formed in March 1996, and designs, manufactures and sells: (I) consumer
software products for the CD/DVD-ROM market and (ii) a research tool for
internet users. ImaginOn's proprietary technology, called "Transformational
Database Processing and Playback" ("TDPP"), enables the creation of new business
and consumer products that provide user-friendly and entertaining access to
multimedia databases. IMON was granted a U.S. patent on May 18, 1999 for its
"TDPP" technology.
As part of the Company's continuing transition from developmental to commercial
operations, the Company on March 4, 1999 announced the appointment of two
outside members to its Board of Directors. Dennis Allison of Stanford University
Computer Systems Laboratory and VTEL Corporation Engineering Director Jim
Polizotto. The appointment of outside Board members comes at a time when the
Company has brought its first three products, WebZinger, WorldCities 2000 and
sellONstream to market. These products are trademarks of ImaginOn.com and are
also protected under a U.S. Patent and a U.S. Patent Pending. IMON, which as
recently as last November employed only five full time staff, has now grown to a
team of 28 people; engineers, managers, software developers, administrators,
consultants, and contractors, including staff recently hired from INOW, the
Internet service provider.
16
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
PRODUCTS
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(TM) San Francisco," an interactive travelogue, is complete. The
WebZinger(TM) family of Internet Research Assistant software was the first
product line created with ImaginOn tools. WebZinger is "The Research Engine"
that autonomously locates desired information on the Web, downloads it, formats
it and saves it. Images and text formatted by WebZinger play back
slideshow-style from the hard disk drive. Whenever more detailed information is
desired, one mouse click opens ImaginOn's built-in browser.
WebZinger is being marketed via electronic downloads from multiple Websites by
distributors who specialize in that channel. ImaginOn has 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 Beyond.com, NetSales, Software Buyline and Software
Unboxed. Additionally, co-marketing arrangements are under negotiation with
other leading software providers.
WorldCities 2000 San Francisco is a unique "hybrid" format title that combines
high-bandwidth television quality video with a built-in browser and instant
access to more than 1000 live San Francisco area Web sites. Three other cities
are currently in production, New York, Paris, and London. Unlike any travel
CD-ROM, WorldCities 2000 San Francisco literally puts you in the driver's seat
and then sends you off in a video trip though the streets of San Francisco.
Drive in real time; set your own direction as you travel and go online at any
time to more than 1000 live Web sites covering landmarks, entertainment,
restaurants, shopping, museums, and hotels. WorldCities 2000 San Francisco, and
the future city-based titles that will be added to the product line may forever
change the way travelers plan their business trips and vacations.
The Microsoft Windows based set of three CDs features over 140 minutes of
original footage of the city and is available now for immediate delivery for
$49.95. WorldCities Lite, a single CD for $14.95 is also available from the
ImaginOn e-commerce on-line store at www.imaginon.com.
ImaginOn is offering sellONstream(TM) video e-commerce solutions to business for
increasing sales on the Internet. The sellONstream CD's combine broadcast
quality video presentations of products and fully integrated website linkage
within a branded window. Anytime the viewer wants 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 purchasing any
lingerie outfit you see just by clicking your mouse once to go shopping online.
Another sellONstream video e-commerce technology licensee is Times Mirror
Publishing. The agreement with GOLF MAGAZINE and Senior Golfer magazine marks
the first time ImaginOn's sellONstream e- commerce technology will be used in
the publishing field. ImaginOn 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 a 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.
17
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
The following table sets forth certain operating data of the Company for the
period as indicated below.
Quarter ended
March 31, March 31,
1999 1998
----------- -----------
Net revenues $ 13,701 $ 45
Gross profit 2,469 45
Research and development 302,888 176,695
Sales and marketing 819,688 186,199
General administrative 537,451 77,451
Net loss (1,721,301) (446,693)
Quarters ended March 31, 1999 and March 31, 1998
NET REVENUES
Consolidated net revenues increased by $13,656 for the three months ended March
31, 1999 from $45 for the three months ended March 31, 1998. Of the increase,
$10,691 is related to including revenues from INOW, acquired on March 8, 1999.
The remainder of the increase was the beginning of actual sales of ImaginOn's
products of the World Cities 2000 and WebZinger. Prior sales of WebZinger
products were for research and development and did not reflect revenues.
GROSS PROFIT
Consolidated gross profit increased by $2,424 for the three months ended March
31, 1999 from $45 for the three months ended March 31, 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by $126,193 for the three months
ended March 31, 1999 from $176,695 for the three months ended March 31, 1998.
The increase was primarily attributable to a one time expense related to stock
signing bonuses of $157,344 to new personnel in the software and video
production departments.
18
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $819,688 for the three months ended March 31,
1999, compared to $186,199 for the three months ended March 31, 1998
representing an increase of $633,489. Of this increase, $454,688 was a one time
expense related to a stock signing bonus given to a newly hired employee. Other
increases were $155,625 for additional staff of ImaginOn, $45,000 for additional
consulting, an increase of $11,953 for public relations due to becoming a public
company and an increase by $11,223 due to five trade shows and conferences
attended versus one in first quarter 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the period ended March 31, 1999
increased to $537,451 from $77,451 for the three months ended March 31, 1998.
Increase is due to several professional outside services such as legal and
accounting. Legal costs for first quarter 1999 were approximately $208,000. This
included fees for acquisitions, filing services, reports, stock and equity
documents and other general corporate legal services. Accounting and financial
costs of nearly $31,000 for public accountants for auditing, reviews, and
consultations of all related mergers and acquisitions. Rent increased by $8,390
compared to the first quarter of 1998 due to expansion and growth. General
office supplies, equipment, furniture and insurance in total increased nearly
$17,752 for the three months ended March 31, 1999 compared to the three months
ended March 31, 1998.
INTEREST EXPENSE, NET
Interest expense increased to approximately $81,500 for the three months ended
March 31, 1999 compared to March 31, 1998. This increase was due to additional
interest incurred on the Company's Series B and C convertible preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $1,970,631 compared to
$807,733 at December 31, 1998. The increase is working capital primarily related
to the sale of 3,000 shares of Series D/E convertible preferred stock at $1,000
per share for net proceeds of approximately $2,570,000. Additionally,
approximately $590,000 was received from the exercise of warrants and options.
In May 1999, the Company issued 4,000 shares of Series F 12% convertible
preferred stock for net proceeds of approximately $3,730,000 approximately
$3,040,000 of the proceeds will be utilized to redeem the outstanding shares of
Series D/E convertible preferred stock.
19
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
ACQUISITION OR DISPOSITION OF ASSETS.
On March 8, 1999, Network Specialists, Inc. ("Network") was merged with and into
INOW, a subsidiary of the Company. In the merger, INOW succeeded to all of the
assets, liabilities, rights and obligations of Network, and 260,000 shares of
the Company's Common Stock was issued and $230,000 was paid for the outstanding
shares of Network Common Stock. The shares were not registered. The Company has
or will pay the cash portion of the merger consideration from its own funds. The
principal shareholders of Network were William Claren and Ibrahim Matar.
Network was an Internet service provider. The Company expects that such business
will be continued by INOW using the assets acquired in the merger. The assets
acquired principally consisted of working capital, computers and other
equipment, and intangibles, such as intellectual property and contract rights.
Founded in 1993, INOW Internet Services offers reliable, high speed and
fault-tolerant Internet connections. INOW, which now operates as a wholly-owned
subsidiary of ImaginOn, primarily operates in the San Francisco Bay Area, yet
through business alliances has the capacity to serve clients throughout the
U.S.A. INOW's offerings include server co-location, high-speed business Internet
connectivity, as well as nationwide secure e-commerce Web hosting. As of the end
of 1998, INOW had about 800 clients and annual revenues of approximately
$400,000, with income before taxes of approximately $63,000. INOW founder Abe
Matar has started in his new position as ImaginOn's Vice President of Network
Operations.
WorldCities 2000, sellONstream, and WebZinger are trademarks of ImaginOn.com and
are also protected under a U.S. Patent and a U.S. Patent pending.
20
<PAGE>
PART II
OTHER INFORMATION
Item 2 Changes in securities.
a. N/A
b. N/A
c. During the three month period covered by the report, the Registrant
issued the following securities:
From February 23, 1999 through March 11, 1999 the Registrant issued
76,685 shares of its common stock in exchange upon cashless exercise of
100,620 warrants. The Registrant relied on the exemptions from
registration provided by Sections 4(2) and/or 4(6).
On February 15, 1999 the Registrant issued 3,000 shares of its common
stock to an employee. The Registrant relied on the exemptions from
registration provided by Sections 4(2) and/or 4(6).
On March 1, 1999 the Registrant issued 75,000 shares of its common stock
to an employee. The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6).
On March 2, 1999 the Registrant issued 20,000 shares of its common stock
to an employee. The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6).
On March 8, 1999, the Registrant issued 260,000 shares of its common
stock in connection with the acquisition of Network Specialists, Inc.
On March 16, 1999 the Registrant issued 1,000 shares of its common stock
to an employee. The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6).
On March 31, 1999 the Registrant issued 3,000 shares of its common stock
to an employee. The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6).
Item 4 Submission of matters to a vote of security holders
NONE
Item 5 Other information
NONE
Item 6 Exhibits and reports on Form 8-K
(3)(I) Certificate of Designations for Series F 12%
Convertible Preferred Stock, filed herewith.
(10) 1999 Equity Incentive Plan
During the three month period covered by this report the
Registrant filed the following current reports on Form 8-K:
Date Item numbers
---------------- ------------
February 3, 1999 2,7
March 23, 1999 2,7
April 5, 1999 2,7
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IMAGINON, INC.
Dated: May 20, 1999 By: /s/ David M. Schwartz
-----------------------------------
David M. Schwartz
President, Chief Executive Officer,
Chief Financial Officer
Dated: May 20, 1999 By: /s/ Thompson Chan
----------------------------------
Thompson Chan
Chief Accounting Officer
22
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 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 number of
shares of Common Stock resulting from dividing the dollar amount of dividends
<PAGE>
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.
2
<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 181st 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 Preferred Stock outstanding on
the Trading Day immediately preceding the day such Registration Statement is
filed.
3
<PAGE>
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.
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
4
<PAGE>
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.
(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
5
<PAGE>
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
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.
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(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.
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.
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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.
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,
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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 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 180th 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
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and unpaid interest if the Redemption Notice is served after the 180th 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
(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
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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.
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IN WITNESS WHEREOF, I have subscribed my name this ___ day of
May, 1999.
ImaginOn, Inc.
By:/S/ DAVID M. SCHWARTZ
------------------------------------
David M. Schwartz, President and CEO
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IMAGINON, INC.
1999 EQUITY INCENTIVE PLAN
ADOPTED FEBRUARY 1, 1999
TERMINATION DATE: FEBRUARY 1, 2009
1. PURPOSES.
(a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive
Stock Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a
means by which eligible recipients of Stock Awards may be given an opportunity
to benefit from increases in value of the Common Stock through the granting of
the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Stock Awards, to secure
and retain the services of new members of this group and to provide incentives
for such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).
(e) "COMMON STOCK" means the common stock of the Company.
(f) "COMPANY" means ImaginOn, Inc., a Delaware corporation.
(g) "CONSULTANT" means any person, including an advisor, (i) engaged by
the Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (ii) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors who are not compensated by the Company for their services as Directors
or Directors who are merely paid a director's fee by the Company for their
services as Directors.
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(h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director will not
constitute an interruption of Continuous Service. The Board or the chief
executive officer of the Company, in that party's sole discretion, may determine
whether Continuous Service shall be considered interrupted in the case of any
leave of absence approved by that party, including sick leave, military leave or
any other personal leave.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means the inability of a person, in the opinion of a
qualified physician acceptable to the Company, to perform the major duties of
that person's position with the Company or an Affiliate of the Company because
of the sickness or injury of the person.
(l) "EMPLOYEE" means any person employed by the Company or an
Affiliate. Mere service as a Director or payment of a director's fee by the
Company or an Affiliate shall not be sufficient to constitute "employment" by
the Company or an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the last market trading day prior to the day
of determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
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(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(r) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(u) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.
(v) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury Regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(w) "PARTICIPANT" means a person to whom a Stock Award is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.
(x) "PLAN" means this ImaginOn, Inc. 1999 Equity Incentive Plan.
(y) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
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(z) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(aa) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.
(bb) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(cc) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c). Any interpretation of the Plan by the Board and any decision by
the Board under the Plan shall be final and binding on all persons.
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.
(ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section
12.
(iv) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) DELEGATION TO COMMITTEE.
(i) General. The Board may delegate administration of the Plan to
a Committee or Committees of one (1) or more members of the Board, and the term
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"Committee" shall apply to any person or persons to whom such authority has been
delegated. If administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board, including the power to delegate to a subcommittee any of
the administrative powers the Committee is authorized to exercise (and
references in this Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED.
At such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (1) delegate to a committee of one or
more members of the Board who are not Outside Directors the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or) (2)
delegate to a committee of one or more members of the Board who are not
Non-Employee Directors the authority to grant Stock Awards to eligible persons
who are not then subject to Section 16 of the Exchange Act.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate two million five
hundred thousand (2,500,000) shares of Common Stock.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall
for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, the shares of Common Stock not acquired under
such Stock Award shall revert to and again become available for issuance under
the Plan.
(c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan
may be unissued shares or reacquired shares, bought on the market or otherwise.
(d) SHARE RESERVE LIMITATION. To the extent required by Section
260.140.45 of Title 10 of the California Code of Regulations, the total number
of shares of Common Stock issuable upon exercise of all outstanding Options and
the total number of shares of Common Stock provided for under any stock bonus or
similar plan of the Company shall not exceed the applicable percentage as
calculated in accordance with the conditions and exclusions of Section
260.140.45 of Title 10 of the California Code of Regulations, based on the
shares of Common Stock of the Company that are outstanding at the time the
calculation is made.
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5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may
be granted only to Employees. Stock Awards other than Incentive Stock Options
may be granted to Employees, Directors and Consultants.
(b) TEN PERCENT STOCKHOLDERS.
(i) A Ten Percent Stockholder shall not be granted an Incentive
Stock Option unless the exercise price of such Option is at least one hundred
ten percent (110%) of the Fair Market Value of the Common Stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.
(ii) A Ten Percent Stockholder shall not be granted a Nonstatutory
Stock Option unless the exercise price of such Option is at least (i) one
hundred ten percent (110%) of the Fair Market Value of the Common Stock at the
date of grant or (ii) such lower percentage of the Fair Market Value of the
Common Stock at the date of grant as is permitted by Section 260.140.41 of Title
10 of the California Code of Regulations at the time of the grant of the Option.
(iii) A Ten Percent Stockholder shall not be granted a restricted
stock award unless the purchase price of the restricted stock is at least (i)
one hundred percent (100%) of the Fair Market Value of the Common Stock at the
date of grant or (ii) such lower percentage of the Fair Market Value of the
Common Stock at the date of grant as is permitted by Section 260.140.41 of Title
10 of the California Code of Regulations at the time of the grant of the
restricted stock award.
(c) SECTION 162(M) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in the shares of Common Stock, no Employee
shall be eligible to be granted Options covering more than one million
(1,000,000) shares of Common Stock during any calendar year.
(d) CONSULTANTS.
(i) A Consultant shall not be eligible for the grant of a Stock
Award if, at the time of grant, a Form S-8 Registration Statement under the
Securities Act ("Form S-8") is not available to register either the offer or the
sale of the Company's securities to such Consultant because of the nature of the
services that the Consultant is providing to the Company, or because the
Consultant is not a natural person, or as otherwise provided by the rules
governing the use of Form S-8, unless the Company determines both (i) that such
grant (A) shall be registered in another manner under the Securities Act (e.g.,
on a Form S-3 Registration Statement) or (B) does not require registration under
the Securities Act in order to comply with the requirements of the Securities
Act, if applicable, and (ii) that such grant complies with the securities laws
of all other relevant jurisdictions.
6
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(ii) As of April 7, 1999 Rule 701 and Form S-8 generally are
available to consultants and advisors only if (i) they are natural persons; (ii)
they provide bona fide services to the issuer, its parents, its majority-owned
subsidiaries or majority-owned subsidiaries of the issuer's parent; and (iii)
the services are not in connection with the offer or sale of securities in a
capital-raising transaction, and do not directly or indirectly promote or
maintain a market for the issuer's securities.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and, if certificates are issued, a separate certificate or certificates
will be issued for shares of Common Stock purchased on exercise of each type of
Option. The provisions of separate Options need not be identical, but each
Option shall include (through incorporation of provisions hereof by reference in
the Option or otherwise) the substance of each of the following provisions:
(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the Common Stock subject to the Option on the
date the Option is granted. Notwithstanding the foregoing, an Incentive Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Nonstatutory Stock Option shall be not less than eighty-five
percent (85%) of the Fair Market Value of the Common Stock subject to the Option
on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory
Stock Option may be granted with an exercise price lower than that set forth in
the preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(d) CONSIDERATION. The purchase price of Common Stock acquired pursuant
to an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the
Company of other Common Stock, (2) according to a deferred payment or other
similar arrangement with the Optionholder or (3) in any other form of legal
consideration that may be acceptable to the Board; provided, however, that at
any time that the Company is incorporated in Delaware, payment of the Common
7
<PAGE>
Stock's "par value," as defined in the Delaware General Corporation Law, shall
not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing, the Optionholder may,
by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option.
(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory
Stock Option shall not be transferable except by will or by the laws of descent
and distribution and, to the extent provided in the Option Agreement, to such
further extent as permitted by Section 260.140.41(d) of Title 10 of the
California Code of Regulations at the time of the grant of the Option, and shall
be exercisable during the lifetime of the Optionholder only by the Optionholder.
If the Nonstatutory Stock Option does not provide for transferability, then the
Nonstatutory Stock Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime of
the Optionholder only by the Optionholder. Notwithstanding the foregoing, the
Optionholder may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.
(g) VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.
(h) MINIMUM VESTING. Notwithstanding the foregoing subsection 6(g), to
the extent that the following restrictions on vesting are required by Section
260.140.41(f) of Title 10 of the California Code of Regulations at the time of
the grant of the Option, then:
(i) Options granted to an Employee who is not an Officer, Director
or Consultant shall provide for vesting of the total number of shares of Common
Stock at a rate of at least twenty percent (20%) per year over five (5) years
from the date the Option was granted, subject to reasonable conditions such as
continued employment; and
8
<PAGE>
(ii) Options granted to Officers, Directors or Consultants may be
made fully exercisable, subject to reasonable conditions such as continued
employment, at any time or during any period established by the Company.
(i) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Optionholder's
Continuous Service (or such longer or shorter period specified in the Option
Agreement, which period shall not be less than thirty (30) days for Options
unless such termination is for cause), or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified in
the Option Agreement, the Option shall terminate.
(j) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement
may also provide that if the exercise of the Option following the termination of
the Optionholder's Continuous Service (other than upon the Optionholder's death
or Disability) would be prohibited at any time solely because the issuance of
shares of Common Stock would violate the registration requirements under the
Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in subsection 6(a) or (ii) the
expiration of a period of three (3) months after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.
(k) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement, which period shall not be less than six (6) months) or
(ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, after termination, the Optionholder does not exercise his or her
Option within the time specified herein, the Option shall terminate.
(l) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's
Continuous Service terminates as a result of the Optionholder's death or (ii)
the Optionholder dies within the period (if any) specified in the Option
Agreement after the termination of the Optionholder's Continuous Service for a
reason other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but
only within the period ending on the earlier of (1) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement, which period shall not be less than six (6) months) or
(2) the expiration of the term of such Option as set forth in the Option
9
<PAGE>
Agreement. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate.
(m) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Any unvested shares of Common Stock so purchased may be subject to a
repurchase option in favor of the Company or to any other restriction the Board
determines to be appropriate.
(n) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option Agreement
a provision entitling the Optionholder to a further Option (a "Re-Load Option")
in the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares of Common Stock
equal to the number of shares of Common Stock surrendered as part or all of the
exercise price of such Option; (ii) have an expiration date which is the same as
the expiration date of the Option the exercise of which gave rise to such
Re-Load Option; and (iii) have an exercise price which is equal to one hundred
percent (100%) of the Fair Market Value of the Common Stock subject to the
Re-Load Option on the date of exercise of the original Option. Notwithstanding
the foregoing, a Re-Load Option shall be subject to the same exercise price and
term provisions heretofore described for Options under the Plan.
Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on the exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares of Common Stock under
subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options
under subsection 5(c) and shall be subject to such other terms and conditions as
the Board may determine which are not inconsistent with the express provisions
of the Plan regarding the terms of Options.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such
form and shall contain such terms and conditions as the Board shall deem
appropriate. The terms and conditions of stock bonus agreements may change from
time to time, and the terms and conditions of separate stock bonus agreements
need not be identical, but each stock bonus agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions:
10
<PAGE>
(i) CONSIDERATION. A stock bonus may be awarded in consideration
for past services actually rendered to the Company or an Affiliate for its
benefit.
(ii) VESTING. Shares of Common Stock awarded under the stock bonus
agreement may, but need not, be subject to a share repurchase option in favor of
the Company in accordance with a vesting schedule to be determined by the Board.
(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the
event a Participant's Continuous Service terminates, the Company may reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the stock bonus
agreement.
(iv) TRANSFERABILITY. Rights to acquire shares of Common Stock
under the stock bonus agreement shall not be transferable except by will or by
the laws of descent and distribution and shall be exercisable during the
lifetime of the Participant only by the Participant.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The terms and conditions of the restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(i) PURCHASE PRICE. Subject to the provisions of subsection 5(b)
regarding Ten Percent Stockholders, the purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. For restricted stock
awards, the purchase price shall not be less than eighty-five percent (85%) of
the Common Stock's Fair Market Value on the date such award is made or at the
time the purchase is consummated.
(ii) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either: (i) in
cash at the time of purchase; (ii) at the discretion of the Board, according to
a deferred payment or other similar arrangement with the Participant; or (iii)
in any other form of legal consideration that may be acceptable to the Board in
its discretion; provided, however, that at any time that the Company is
incorporated in Delaware, then payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by deferred
payment.
(iii) VESTING. Shares of Common Stock acquired under the
restricted stock purchase agreement may, but need not, be subject to a share
repurchase option in favor of the Company in accordance with a vesting schedule
to be determined by the Board.
(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event
a Participant's Continuous Service terminates, the Company may repurchase or
11
<PAGE>
otherwise reacquire any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination under the terms
of the restricted stock purchase agreement.
(v) TRANSFERABILITY. Rights to acquire shares of Common Stock under the
restricted stock purchase agreement shall not be transferable except by will or
by the laws of descent and distribution and shall be exercisable during the
lifetime of the Participant only by the Participant.
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain
from any such regulatory commission or agency the authority which counsel for
the Company deems necessary for the lawful issuance and sale of Common Stock
under the Plan, the Company shall be relieved from any liability for failure to
issue and sell Common Stock upon exercise of such Stock Awards unless and until
such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have
the power to accelerate the time at which a Stock Award may first be exercised
or the time during which a Stock Award or any part thereof will vest in
accordance with the Plan, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.
(b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares of
Common Stock subject to such Stock Award unless and until such Participant has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
12
<PAGE>
the capacity in effect at the time the Stock Award was granted or shall affect
the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.
(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
(e) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (iii) the issuance of the shares
of Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or (iv) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the Common Stock.
(f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the Participant as a result of the exercise
or acquisition of Common Stock under the Stock Award; or (iii) delivering to the
Company owned and unencumbered shares of Common Stock.
13
<PAGE>
(g) INFORMATION OBLIGATION. The Company shall deliver copies of any
publicly available material to any Participant who requests such material.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common
Stock subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person pursuant to subsection 5(c), and the outstanding Stock
Awards will be appropriately adjusted in the class(es) and number of securities
and price per share of Common Stock subject to such outstanding Stock Awards.
The Board shall make such adjustments, and its determination shall be final,
binding and conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a transaction "without receipt of consideration"
by the Company.)
(b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then all outstanding Stock Awards
shall terminate immediately prior to such event.
(c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION, REVERSE
MERGER OR SECURITIES ACQUISITION. In the event of (i) a sale, lease or other
disposition of all or substantially all of the assets of the Company, (ii) a
merger or consolidation in which the Company is not the surviving corporation,
(iii) a reverse merger in which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, or (iv) the acquisition by any person, entity or
group within the meaning of Section 13(d0 or 14(d) of the Exchange Act, or any
comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored on maintained by the Company or an Affiliate) of the beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act,
or comparable successor rule) of securities of the Company representing at least
fifty percent (50%) of the combined voting power entitled to vote in the
election of Directors, then any surviving corporation or acquiring corporation
shall assume any Stock Awards outstanding under the Plan or shall substitute
similar stock awards (including an award to acquire the same consideration paid
to the stockholders in the transaction described in this subsection 11(c)) for
those outstanding under the Plan. In the event any surviving corporation or
acquiring corporation refuses to assume such Stock Awards or to substitute
similar stock awards for those outstanding under the Plan, then with respect to
Stock Awards held by Participants whose Continuous Service has not terminated,
the vesting of such Stock Awards (and, if applicable, the time during which such
Stock Awards may be exercised) shall be accelerated in full, and the Stock
Awards shall terminate if not exercised (if applicable) at or prior to such
14
<PAGE>
event. With respect to any other Stock Awards outstanding under the Plan, such
Stock Awards shall terminate if not exercised (if applicable) prior to such
event.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time,
may amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in Common Stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for stockholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the
Board may amend the Plan in any respect the Board deems necessary or advisable
to provide eligible Employees with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted
before amendment of the Plan shall not be impaired by any amendment of the Plan
unless (i) the Company requests the consent of the Participant and (ii) the
Participant consents in writing.
(e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan
shall not impair rights and obligations under any Stock Award granted while the
Plan is in effect except with the written consent of the Participant.
15
<PAGE>
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no
Stock Award shall be exercised (or, in the case of a stock bonus, shall be
granted) unless and until the Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before or after the
date the Plan is adopted by the Board.
15. CHOICE OF LAW.
The law of the State of Delaware shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,559,099
<SECURITIES> 0
<RECEIVABLES> 36,505
<ALLOWANCES> (3,000)
<INVENTORY> 7,070
<CURRENT-ASSETS> 2,694,507
<PP&E> 124,220
<DEPRECIATION> (515,361)
<TOTAL-ASSETS> 4,474,638
<CURRENT-LIABILITIES> 723,874
<BONDS> 0
0
2,403,333
<COMMON> 381,766
<OTHER-SE> 965,665
<TOTAL-LIABILITY-AND-EQUITY> 4,474,638
<SALES> 13,701
<TOTAL-REVENUES> 13,701
<CGS> 11,232
<TOTAL-COSTS> 1,660,027
<OTHER-EXPENSES> 63,743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,500
<INCOME-PRETAX> (1,721,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,721,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,721,301)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
