U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number 0-25114
ImaginOn, Inc.
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(Name of small business issuer in its charter)
Delaware 84-1217733
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1313 Laurel Street, Suite 1
San Carlos, California 94070
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(Address of principal executive office) (zip code)
Issuer's telephone number (650) 596-9300
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Warrants to Purchase Common Stock
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(Title of Class)
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
reports), and (2) has been subject to such filing requirements for the past 90
days. (1) Yes |X| No | | (2) Yes |X| No | |
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of the issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.| |
State the issuer's revenues for its most recent fiscal year.
As of March 26, 1999, 37,602,752 shares of Common Stock were outstanding and
aggregate market value of the shares (based upon the average of the bid and
asked price of the shares on the over-the-counter market) of ImaginOn, Inc. held
by nonaffiliates was approximately $143,622,424.
Documents Incorporated by Reference - None
Transitional Small Business disclosure format (check one):Yes | | No |X|
<PAGE>
IMAGINON, INC.
AND SUBSIDIARIES
FORM 10-KSB
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 FUTURE
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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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NOTE: READERS OF THIS REPORT SHOULD NOTE THAT THE BUSINESS OF THE
REGISTRANT MATERIALLY CHANGED AFTER DECEMBER 31, 1998. EXCEPT AS OTHERWISE
DESCRIBED IN THIS REPORT, THE INFORMATION IN THIS REPORT IS GIVEN THROUGH
DECEMBER 31, 1998. BECAUSE THE COMPANY HAS CEASED ITS PRIOR OPERATIONS, MERGED
WITH ANOTHER COMPANY ON JANUARY 20, 1999 AND NOW IS ENGAGED IN ANOTHER LINE OF
BUSINESS, THE INFORMATION IN THIS REPORT IS MAINLY HISTORICAL AND IS NOT
REFLECTIVE OF THE COMPANY'S CURRENT OPERATIONS OR FINANCIAL POSITION. THE
COMPANY FILED A PROXY STATEMENT IN NOVEMBER 1998 THAT INCLUDES FINANCIAL
STATEMENTS OF IMON, UNAUDITED PRO FORMA FINANCIAL INFORMATION REFLECTING THE
MERGER, AND OTHER INFORMATION ABOUT IMON AND THE MERGER. THE COMPANY ALSO WILL
BE FILING A CURRENT REPORT ON FORM 8- K/A WHICH WILL CONTAIN UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. SEE THE LAST PARAGRAPH OF ITEM 1(A)
FOR A DESCRIPTION OF THE COMPANY'S CURRENT BUSINESS.
(a) BUSINESS DEVELOPMENT.
California Pro Sports, Inc., (now known as ImaginOn, Inc. and
hereinafter referred to as the "Company" or "Registrant"), is a Delaware
corporation, which, in 1993, acquired the California Pro(TM) in-line skate
business from California Pro USA Corp. Playmaker Co., LTD ("Playmaker"), the
Taiwanese in-line skate manufacturer and majority owner of the seller, granted
the Company an exclusive, perpetual, non-royalty bearing license to the
California Pro(TM) names and trademarks and entered into a five-year
manufacturing agreement to supply substantially all of the Company's in-line
skate products. This acquisition was a taxable transaction and was accounted for
<PAGE>
as a purchase. Due to the significant continuing ownership participation of
Playmaker in the Company, the assets acquired were recorded at historical cost.
Cash paid and notes given by the Company for the agreements not to compete,
management buy-out and consulting fees, and the guaranty fees, were recorded as
intangible assets.
In another acquisition completed on August 1, 1994, the Company
purchased certain assets, including an exclusive, perpetual world-wide license
to the Kemper(R) name and trademark, subject to a royalty. The Company acquired
its license directly from the registered owner of the Kemper(R) name and
trademark, Front 500 Corporation ("Front 500").
In 1995, the Company formed USA Skate Corporation, a Delaware
corporation, ("Skate Corp."). Skate Corp. was a majority owned (approximately
62%) subsidiary of the Company and its financial statements are consolidated
with those of the Company in this report. Effective as of April 30, 1996, Skate
Corp. acquired 100% of USA Skate Co., Inc. ("USA Skate"), a New York
corporation, in a stock purchase transaction. USA Skate owned, directly or
indirectly, all of the capital stock of Les Equipements Sportifs Davtec, Inc.
("Davtec"), a Canadian corporation. The acquisition was accounted for as a
purchase. Consideration for the purchase was $10.5 million, consisting of $3.65
million of cash (including approximately $98,000 of cash acquired), a $1.05
million 8% installment note payable due through November 1998, 250,000 shares of
Skate Corp. common stock valued at $300,000, and assumption of approximately
$5.5 million of debt.
The cash portion of purchase price for USA Skate was paid with funds
raised by Skate Corp., including the private placement of 884,667 shares of
common stock of Skate Corp. for approximately $1.06 million; the issuance of
approximately $1.08 million of 9% promissory notes payable to certain
officers/stockholders due June 30, 1997; and the issuance of approximately $2.5
million of 9% promissory notes due January 1997 (the "Skate Notes"). As
permitted under their terms, the due date of the Skate Notes was extended to May
5, 1998 and the annual interest rate increased to 12% during the extension
period. The Skate notes are convertible under certain circumstances.
The debt assumption portion of this acquisition was financed in part by
a bank loan to USA Skate by LaSalle National Bank, the proceeds of which were
used to repay the outstanding indebtedness under the credit facility in place
for USA Skate prior to completion of the acquisition. The LaSalle loan agreement
allowed for advances based on percentages of qualifying accounts receivable,
qualifying inventories and outstanding letters of credit, with a maximum limit
of $5 million. The loan agreement required payment of various financing fees and
contained certain financial covenants and restrictions regarding payment of
dividends, officers' compensation and consulting fees, as well as restrictions
on USA Skate's loans and investments. The loan was collateralized by
substantially all of USA Skate's assets and was guaranteed by Skate Corp. and
certain of its affiliates and stockholders. At December 31, 1996, Skate Corp.
was in technical default under this lending arrangement primarily due to the
Company's wholly-owned subsidiary being in default under its loan with LaSalle.
At year-end 1996, California Pro, Inc. was under-collateralized by approximately
$800,000 and was not in compliance with certain of its financial covenants.
Although, LaSalle could have accelerated both loans and required immediate full
repayment, LaSalle did not accelerate either loan nor did it require full
repayment.
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<PAGE>
At the time of the acquisition, Skate Corp. made a capital contribution
of $500,000 to Davtec, and the former controlling shareholder of USA Skate paid
Davtec $165,000 in return for a $125,000, 8% promissory note due December 31,
1996 and payment of a $40,000 outstanding receivable. The proceeds of $665,000
were used to reduce Davtec's indebtedness to its Canadian bank lender. In
connection with the payments, and subject to certain other terms and conditions,
the Canadian bank agreed to extend the existing line of credit with Davtec
through July 31, 1997. In March 1997, the Company repaid $50,000 under the note
to the former controlling shareholder of USA Skate and entered into a
modification agreement extending the due date of the remaining $75,000 to
October 1, 1997. In February 1997, the Company received notice that it was in
violation of a loan covenant and in March 1997, the bank filed a notice of
intention to enforce security and to demand payment of the loan.
At the time of the USA Skate acquisition, the Company, Skate Corp. and
USA Skate also entered into certain other agreements with the former controlling
shareholder of USA Skate. USA Skate entered into a one-year employment agreement
with the former controlling shareholder of USA Skate, which provides for annual
compensation of $90,000. The former controlling shareholder of USA Skate entered
into a five-year consulting agreement with the Company, Skate Corp. and USA
Skate and a ten-year noncompete agreement in consideration for receipt of
400,000 shares of the Company's common stock valued at $900,000. USA Skate also
entered into a worldwide, exclusive license agreement for use of certain
trademarks owned by the former controlling shareholder of USA Skate in exchange
for minimum royalty payments of $3 million due on or before December 2001.
Finder's fees, bank origination, legal, accounting and other costs of the
acquisition were approximately $1.53 million, including guarantee fees to two
officers/stockholders of $600,000 related to the officers'/stockholders'
providing personal guarantees of certain of the debt assumed and issued in the
transaction.
In 1996 and 1997, due to continuing operating losses, management
decided to restructure and reduce its debt Accordingly, in September 1997, the
Company completed the sale of substantially all of the assets of Skate Corp.'s
direct and indirect operating subsidiaries, USA Skate and Davtec, to Rawlings
Sporting Goods Company, Inc. and Rawlings Canada, Inc. Consideration to Skate
Corp. consisted of $14.5 million cash, including $1.0 million retained in escrow
for purchase price adjustments and proven claims by the purchasers, and
assumption of trade payables and accrued liabilities related to the assets
purchased.
An additional component of the restructuring plan included management's
decision to cease operating its California Pro and Kemper licenses, eliminate
most of the operating and overhead expenses associated with its sporting goods
business and begin to concentrate on sub-licensing its trademark rights.
Accordingly, in the second quarter of 1997, the Company began liquidating
remaining inventories and commenced a search for sub-licensees and a merger
candidate.
As a result of its search, on October 2, 1997, the Company signed a
letter of intent to merge with ImaginOn, Inc. ("ImaginOn") of San Carlos,
California, a privately held company. Thereafter, the Company signed an
agreement and plan of merger as of January 30, 1998 under which there would be
an exchange of 100% of the outstanding shares of ImaginOn for approximately 60%
of the outstanding post merger common stock of the Company.
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<PAGE>
On January 4, 1999, in anticipation of the pending completion of the
transaction, California Pro Sports, Inc. changed its name to ImaginOn, Inc. and
the company previously known as ImaginOn, Inc. changed its name to ImaginOn.com
("IMON").
The transaction was completed on January 20, 1999 by the Company
issuing 21,248,665 shares of its common stock in exchange for the 7,456,131
outstanding shares of IMON.
IMON is engaged in the business of designing, selling and
manufacturing: (i) consumer software products for the rapidly growing
"infotainment" and "edutainment" compact disc and digital video disc-Rom
markets; and (ii) Internet software. IMON's core proprietary technology,
transformational database processing and playback, is used in a set of 12
software tools developed and used by IMON. New products created with IMON tools
are characterized by seamless real-time access to video, audio, graphics, text,
html and three dimensional objects from multiple remote or local databases. IMON
is packaging its tool set as a content management system. IMON is producing a
series of interactive travelogues for distribution on CD and DVD. ImaginOn's
first general-purpose software application, "WebZinger(TM)," is an automated
productivity tool that searches the Web, then formats its results into a graphic
PowerPoint(TM)-like slideshow.
(b) BUSINESS OF ISSUER.
The Company licenses California Pro(R) in-line skates, and related
protective gear and accessories from Playmaker. Kemper(R) snowboards and related
snowboard accessories are licensed from Front 500. VIC(R), VICTORIAVILLE(TM) and
McMartin(TM) ice and street/roller hockey skates, sticks and related protective
gear and accessories were licensed until September 1997 from the former
controlling shareholder of USA Skate. Davtec, USA Skate's wholly-owned Canadian
subsidiary, manufactured hockey sticks, pants and gloves for USA Skate and was
the Canadian distributor for all of the hockey related VICTORIAVILLE(TM) and
VIC(R) product lines.
The Company in-line skate products were sold in the United States,
Canada, the Caribbean and U.S. military bases world wide. Its snowboards and
related accessories were sold primarily in the United States and European
countries. Through September 1997, the Company sold its hockey- related products
through independent sales representatives and independent distributors in the
United States, Canada and various other countries.
As part of management's restructuring plan [see Item 1(a)--Business
Development], in 1998 the Company entered into two sub-license agreements
regarding the use of the Kemper name.
The Company will rely on the expertise of its sub-licensees to develop,
import or manufacture, and market and distribute within their licensed product
categories and territories.
One of the Kemper sub-licensees, a major west coast sporting goods
retailer, designs, imports and sells directly to consumers a line of snowboard
apparel. The other Kemper sub-licensee is one of the leading manufacturers and
marketers of snowboards and related products such as bindings, boots and other
accessories.
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<PAGE>
Each of the Kemper sub-licensees offer a full line of products at
various price points within their respective product categories.
PRODUCTS
Through September 1997, the Company had five major hockey product
categories consisting of hockey stick, hockey protective gear, figure and ice
hockey skates, hockey bags and related accessories, and street/roller hockey
skates and protective gear. These products were marketed under the
VICTORIAVILLE(TM), VIC(R) and McMartin(R) brands. Davtec, the Canadian
subsidiary of the Company's hockey division, manufactured hockey sticks, pants
and gloves for the Company and was the Canadian distributor for all of the
hockey related VIC(R) and VICTORIAVILLE(TM) product lines. Approximately 70% of
Skate Corp.'s products were manufactured by the Canadian subsidiary.
PRODUCT DESIGN AND DEVELOPMENT
Design and development of the Company's hockey products sold through
September 1997 was undertaken by internal research and development personnel in
conjunction with outside design firms and vendors, where appropriate.
SALES AND MARKETING
The Company marketed its ice hockey products primarily in retail
sporting goods chains and specialty shops. Distribution was accomplished
primarily through networks of independent sales representative groups and
distributors who sold directly to buyers and retail accounts. These sales
representative groups and distributors were paid on a standard, commission-only
basis.
The Company's marketing strategy emphasized the price/value
relationship of its branded products.
USA Skate advertised and promoted its hockey products through multiple
methods customary within the industry, including participation in all major
trade exhibits, special promotions, advertising in trade and consumer
publications, point of purchase materials and endorsements by National Hockey
League players.
SUPPLIERS AND MANUFACTURING
IN-LINE SKATE PRODUCTS. The Company had an exclusive manufacturing
agreement with Playmaker which expired in 1998, under which Playmaker supplied
most of the Company's in-line skates and in-line skate accessory products. Prior
to the decision to suspend marketing of in-line skates and related accessories,
Playmaker manufactured, assembled and packaged its in-line skate products at its
facilities in Taiwan and China for set prices, in U.S. dollars, negotiated
annually. In 1996, the Company began sourcing certain in-line skate models from
an alternative Pacific Rim supplier.
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<PAGE>
HOCKEY PRODUCTS. Prior to selling certain assets in September 1997, the
Company had three Canadian manufacturing facilities. Products representing
approximately 70% of USA Skate's sales were manufactured by Davtec. The other
products marketed were sourced from a variety of suppliers throughout the world.
LICENSES, PATENTS AND TRADEMARKS
The Company derives its proprietary protection primarily from licenses
with others who own patents and trademarks. The Company owns no patents and has
applied for or owns a limited number of trademarks.
IN-LINE SKATE PRODUCTS. The Company entered into a perpetual license
agreement with Playmaker under which the Company has the exclusive, royalty-free
right to use the California Pro(R) and Rolling Thunder(TM) names and trademarks
on in-line skates, accessories and any other products in the United States,
Canada, certain areas of the Caribbean and U.S. military exchanges worldwide.
The Company has also entered into an agreement with Playmaker under which
Playmaker will pay the Company a five percent royalty on all sales of any
product made by Playmaker to any new customer of Playmaker generated by the
Company. No royalties have been agreed to or paid to date under this agreement.
The Company and Playmaker each have non-exclusive royalty bearing
patent license agreements with Rollerblade, Inc. related to one feature on
several the Company, Inc.'s in-line skate models. These agreements require
payment to Rollerblade, Inc. of a percentage of the net sales price to retail
merchants. Playmaker reimburses the Company for 90% of the royalties paid by the
Company to Rollerblade under these agreements.
The Company, after continuing to analyze the competitive position of
the California Pro brand in the marketplace, has decided to seek potential
sub-licensing candidates. Management feels there is value in the brand, not only
for in-line skates but in other sporting goods categories such as skateboards
and waterskis.
SNOWBOARD PRODUCTS. In August 1994, the Company, Inc. entered into an
agreement with Front 500 Corporation, for an exclusive, perpetual, worldwide
license to use the name "Kemper Snowboards Inc." and the Kemper(R) design and
all derivations thereof in the manufacture, import, export, design, marketing,
promotion and distribution of Kemper(R) snowboards and related equipment,
clothing and accessories. In return for these license rights, the Company paid a
royalty of net sales for products sold under this license.
In February 1998, the Company reached a two-year agreement with an
international manufacturer and marketer of snowboards and related products. The
agreement, in effect, assigns all the license rights the Company had from Front
500 to the sub-licensee. The Company has no further obligations to Front 500 and
is entitled to the greater of a royalty-based payment on net sales by the
sub-licensee, or an annual minimum guaranteed payment.
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<PAGE>
In 1997, the Company entered into a three year non-exclusive
sub-license agreement with a major west coast sporting goods chain retailer. The
agreement allows for the sub-licensee to manufacture, or cause to be
manufactured, snowboard apparel (jackets, pants, fleece garments, socks, etc.)
bearing the name and/or logo of Kemper, and to sell such products in retail
stores. The agreement requires the retailer to pay to the Company the greater of
a percentage of their cost to manufacture the apparel or an annual minimum
guaranteed payment.
HOCKEY PRODUCTS. The Company, through September 1997, owned the
exclusive worldwide trademark rights to the VICTORIAVILLE(TM) and VIC(R)
trademarks under a royalty bearing license. Included with the sale of certain
assets of the Company's hockey business were these trademarks. Accordingly, the
Company paid $2,678,000 of the proceeds from Rawlings the former controlling
shareholder of USA Skate for, primarily, the purchase price of these trademarks.
COMPETITION
IN-LINE SKATE BUSINESS. The in-line skate business is a highly
competitive industry. The Company believes that there has been lower consumer
demand for in-line skates as well as retailers not quickly selling through their
existing inventory which, in turn, will diminish the value of the Company's
trademarks. The primary competitors are Rollerblade, Inc., Ultra Wheels (First
Team Sports, Inc.), Bauer and Variflex. Management believes that these
competitors collectively have a market share of over 50%.
The primary competitive factors in the in-line skate business are
product features, quality, price, service and name recognition. Although
Rollerblade is still the most recognized name in the in-line skate industry,
consumers are now comparing features and price more closely.
SNOWBOARD BUSINESS. The Company's sub-licensees compete with Burton
Snowboards, with a world market share estimated at approximately 50%. Other
competitors include Sims Snowboards and Ride Snowboard Company. Additionally,
many of the ski manufacturers have also entered the market. Management believes
that these companies have greater financial and other resources than ImaginOn,
Inc.'s sub-licensees.
HOCKEY BUSINESS. While the Company was engaged in the ice and
street/roller hockey businesses competition was intense with the markets
dominated by a relatively small number of large companies, most of whom had
greater financial and other resources than the Company. The primary competitors
were Bauer, CCM, Sherwood and Karhu Corp., which, the Company believes, had
collectively a market share of over 50%.
CUSTOMERS
For the year ended December 31, 1998, no customers accounted for 10% or
more of the Company's sales.
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<PAGE>
EMPLOYEES
As of December 31, 1998, the Company had two full-time employees and
one consultant. The Company believes its relations with its employees and
consultant are good. The Company's employees are not subject to collective
bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTY
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(a) FACILITIES
Lease (L) Annual
Location Use Sq. Ft. Own (O) Rent
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Greer, SC Corporate Offices 3,900 L $36,000 *
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* Leased on a month-to-month basis.
(b) AND (c)
Not applicable
ITEM 3. LEGAL PROCEEDINGS
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The Company was named as a defendant in a lawsuit styled Timothy Wayne
Wooten and Tammy Marie Wooten v. Amy Marie Abott and California Pro Sports, Inc.
The action was filed on October 21, 1998 in the District Court of Midland,
Texas, 238th Judicial District alleging a product defect that resulted in a
wrongful death. Plaintiffs seek damages in an amount not less than $10,000,000.
The Company referred the petition to its insurer, which thereafter provided a
defense. The Company intends to vigorously defend itself and strongly believes
the matter will be resolved in its favor.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On December 10, 1998, the Registrant held a Special Meeting of
Stockholders. The stockholders elected the following three persons to serve
until the next meeting of stockholders and the votes were cast as follows:
For Against
--- -------
David M. Schwartz 9,309,224 97,094
Leonard W. Kain 9,289,017 117,301
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<PAGE>
Mary E. Finn 9,239,017 167,301
Additionally, the following proposals were presented and voted upon at
the meeting and the votes were cast as follows:
To amend Paragraph Fourth of the Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock from
20,000,000 shares to 50,000,000 shares. The votes were cast as follows:
For Against Abstain
--- ------- -------
9,014,652 339,066 52,600
At the discretion of the board of directors, to amend Paragraph Fourth
of the Certificate of Incorporation to cause a one-for-three reverse stock split
of the Company's common stock. The votes were cast as follows:
For Against Abstain
--- ------- -------
8,762,190 582,378 61,750
To ratify the merger of a wholly-owned subsidiary of the Company with
and into ImaginOn, Inc., a privately-held California corporation. The votes were
cast as follows:
For Against Abstain
--- ------- -------
6,340,105 80,444 1,500
To amend Paragraph First of the Certificate of Incorporation to cause a
change in the name of the Company from California Pro Sports, Inc. to ImaginOn,
Inc. The votes were cast as follows:
For Against Abstain
--- ------- -------
9,318,499 83,169 4,650
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
(a) MARKET INFORMATION.
The Company's common stock and warrants have been traded
over-the-counter since January 18, 1995 and were quoted on the Nasdaq SmallCap
Market under the symbols CALP and CALPW, respectively through January 3, 1999.
On December 18, 1998, California Pro Sports, Inc. changed its name to ImaginOn,
Inc. and on January 4, 1999, began to trade under the symbols IMON and IMONW for
the common stock and warrants. The following table sets forth the range of high
and low bid prices as quoted by Nasdaq. These market quotations reflect
inter-dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions.
COMMON STOCK WARRANTS
BID PRICES BID PRICES
1998 HIGH LOW HIGH LOW
---- ---- --- ---- ---
First Quarter (1/1/98-3/31/98) $1.625 $1.125 $.8125 $.4375
Second Quarter (4/1/98-6/30/98) $1.9375 $1.1875 $.875 $.50
Third Quarter (7/1/98-9/30/98) $1.50 $.75 $.6875 $.4375
Fourth Quarter (10/1/98-12/31/98) $2.625 $.50 $1.375 $.25
1997
----
First Quarter (1/1/97-3/31/97) $1.53125 $.8125 $.40625 $.25
Second Quarter (4/1/97-6/30/97) $2.00 $.9375 $.6875 $.21875
Third Quarter (7/1/97-9/30/97) $2.375 $1.375 $.75 $.4375
Fourth Quarter (10/1/97-12/31/97) $3.0625 $1.0625 $1.15623 $.6875
(b) HOLDERS.
The number of record holders of the Company's common stock as of March
26, 1999 was approximately 307.
(c) DIVIDENDS.
The Company has not declared or paid dividends on its Common Stock, nor
does it anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain any future earnings to fund operations and
for the continued development of its business.
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<PAGE>
Further, the Company's prior loan agreements provided that without the prior
written consent of the lender, the Company could not declare or pay any dividend
on any class of stock until satisfaction of all liabilities under the loan
agreements.
(d) RECENT SALES OF UNREGISTERED SECURITIES.
On October 1, 1998, the Company issued 20,000 shares of its Common
Stock to two directors of the Company for services rendered.
On October 5, 1998, the Company issued 43,191 shares of its Common
Stock in exchange for the extensions of the maturity date to November 5, 1998 on
notes of Skate Corp. The amount owed was calculated at 5% of the outstanding
principal balance and payment was made based on $.70 per share. The Company
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On November 5, 1998, the Company issued 56,477 shares of its Common
Stock in exchange for the extensions of the maturity date to December 5, 1998 on
notes of Skate Corp. The amount owed was calculated as 5% of the outstanding
principal balance and payment was made based on $.71 per share. The Company
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On November 23, 1998, the Company issued 525,073 shares of its Common
Stock in exchange for the conversion of 245 shares of Series B Convertible
Preferred Stock.
On November 27, 1998, the Company issued 122,675 shares of its Common
Stock in exchange for the conversion of 95 shares of Series B Convertible
Preferred Stock.
On December 2, 1998, the Company issued 100,000 shares of its Common
Stock to a consultant upon the exercise of a previously granted option.
On December 5, 1998, the Company issued 21,922 shares of its Common
Stock in exchange for the extensions of the maturity date to January 5, 1999 on
notes of Skate Corp. The amount owed was calculated at 5% of the outstanding
principal balance and payment was made based on $1.73 per share. The Company
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
From December 24 through December 31, 1998, the Company issued 131,686
shares of its common stock in exchange for the conversion of 110 shares of
Series C Convertible Preferred Stock.
On December 31, 1998, the Company issued 232,256 shares of its Common
Stock in exchange for assumption of certain liabilities of the Company totaling
$239,326, the Company relied on the exemptions from registration provided by
Section 4(2) and/or 4(6) of the Securities Act.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
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 FUTURE
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
During 1997, the Company had limited revenues in its in-line skate and
snowboard businesses, and in September 1997, sold substantially all of the
assets of its ice and street/roller hockey business ("Hockey"). In 1998, the
Company had no operating revenues, but did realize income from sub-licensing
agreements. The following discussion pertains to the business operations for
in-line skates and snowboards and ice and street/roller hockey products through
September 1, 1997 (the asset disposition date of USA Skate.)
The Company imported and distributed products in three participant
sports categories. In- line skates and related accessory products were marketed
under the brand names California Pro(R) and Rolling Thunder(TM); since August 1,
1994, snowboards and snowboard accessory products were marketed under the
Kemper(R) brand; and from May 1996 to September 1, 1997, ice and street/roller
hockey skates, sticks, related gear and accessories, as well as figure skates
were marketed under the VICTORIAVILLE(TM), VIC(R), Hespeler(TM) and McMartin(R)
brands. The Company purchased most of its in-line skate and snowboard products
from manufacturers in Taiwan, mainland China, Austria and Canada. Some of the
Company's accessory products were purchased from domestic suppliers.
Approximately 70% of all hockey products sold were manufactured by Davtec and
skates and related gear were purchased from foreign suppliers.
The Company sold its in-line skate products principally to major retail
sporting goods chains in North America and to U.S. military exchanges worldwide,
through independent sales representative groups, under an exclusive royalty free
perpetual license. Snowboard products were sold to regional sporting goods
chains and specialty shops through independent sales agencies in the U.S. and
Canada and directly by the Company to its foreign distributors. Hockey products
were sold in North America through a network of independent sales representative
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groups to major retail sporting goods chains as well as smaller, specialized
independent sporting goods shops. Internationally, hockey products were sold to
and distributed by independent distributors located primarily in Germany,
Switzerland, Italy, Austria, Czech Republic, Sweden, France, Finland and Brazil.
MANAGEMENT'S PLAN OF RESTRUCTURE
As a result of continuing operating losses, the Board of Directors,
early in 1997, decided to restructure and deleverage the Company. Accordingly,
in September 1997, the Company and Skate Corp. sold assets of the ice hockey
related business (including the trademark rights to VIC(R), VICTORIAVILLE(TM)
and McMartin(TM)) to Rawlings for $14.5 million and certain debt assumption. The
proceeds of the sale were substantially utilized to pay secured revolving lines
of credit, purchase the remainder of the trademarks from the previous owner, and
partially reduce notes payable of Skate Corp. to unaffiliated noteholders.
As a result of the sale to Rawlings, and other restructuring and
deleveraging activities, including the assumption and assignment of certain
notes and trade payables to third parties in exchange for common and/or
preferred stock of the Company, the Company has reduced its liabilities from
approximately $18,988,000 as of January 1, 1997 to approximately $1,500,000 as
of December 31, 1998.
The Company has completed private placements generating aggregate net
proceeds of $2,267,000. In addition, $579,410 has been received from the
exercise of stock options for the purchase of 534,200 shares of the Company's
common stock. In conjunction with dramatically reducing overhead, a plan to
restore operating profitability to the remaining sporting goods businesses is in
place through licensing programs. Additionally, the Company is seeking to
diversify its business through a merger with ImaginOn, Inc. Each part of the
Company's plan is discussed in detail below.
On March 13, 1998, the Company began a private placement for the sale
of the 1,842,000 shares of Skate Corp. common stock it owns, which includes an
option to acquire 2,763,000 shares of the Company's common stock in exchange for
the Skate Corp. shares. The Company intended to sell 14 units at $100,000 each
for total aggregate proceeds of $1,400,000. Each unit consists of 131,571 shares
of Skate Corp. with an option to acquire 197,357 shares of the Company's common
stock in exchange for the Skate Corp. shares. The Company received $255,000 cash
from purchasers acquiring 335,507 shares of Skate Corp. Each of the investors
exercised their options to exchange those shares for 167,754 shares of the
Company's Series A preferred stock which automatically converted to 503,261
shares of the Company's common stock on July 13, 1998 upon stockholder approval
of an increase in the authorized shares of common stock from 10,000,000 to
20,000,000. Subsequent to the receipt of the $255,000, this offering was closed
to further investors, and two officers/stockholders of the Company have agreed
to purchase the shares of Skate Corp. from the Company for $90,000. This
transaction was completed and the Company received the $90,000 in January 1999.
The Company's business and financial consultant has introduced to the
Company accredited investors who have purchased a combination of 2,080 shares of
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the Company's Series B and C Preferred Stock and restricted common stock for net
proceeds of approximately $1,600,000. The Series B and C Preferred Stock will be
convertible at the option of the holder at any time after 90 days from the
closing date into a number of shares of common stock equal to $1,000 divided by
the lower of 65% of the average market price of the common stock for five days
immediately prior to the conversion date, or the market price at the first day
of closing. These private placements were completed in August 1998. In December
1998, holders of Series B and C Convertible Preferred Stock converted 450 shares
into 742,644 shares of common stock of the Company.
As part of the restructuring plan, the Company has eliminated most of
the overhead expenses associated with its sporting goods business and has begun
to concentrate on sub-licensing its trademark rights to the Kemper and
California Pro trade names.
In August 1997, the Company began negotiating with ImaginOn.com,
formerly ImaginOn, ("IMON") of San Carlos, California, a privately held company,
to acquire, in an exchange of stock, all of the outstanding capital stock of
IMON. IMON, formed in March 1996, designs, manufactures and sells: (i) consumer
software products for the CD/DVD-ROM market and (ii) a navigational tool for
sophisticated Internet users. ImaginOn's proprietary technology, called
"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.
The Company signed an Agreement and Plan of Merger as of January 30,
1998 whereby there would be an exchange of 100% of the outstanding shares of
IMON for an amount equal to 60% of the outstanding post-merger common stock of
the Company, subject to certain adjustments.
On November 12, 1998, the Company announced a special meeting of its
stockholders, to be held December 10, 1998, at which time the stockholders voted
upon, and approved, among other things, a proposal to ratify the plan of merger.
On January 20, 1999, the Company through ImaginOn Acquisition Corp., a
newly formed wholly-owned subsidiary, completed the merger with IMON.
IMON is engaged in the business of designing, selling and
manufacturing: (i) consumer software products for the rapidly growing
"infotainment" and "edutainment" compact disc and digital video disc-Rom
markets; and (ii) Internet software. IMON's core proprietary technology,
transformational database processing and playback, is used in a set of 12
software tools developed and used by IMON. New products created with IMON tools
are characterized by seamless real-time access to video, audio, graphics, text,
html and three dimensional objects from multiple remote or local databases. IMON
is packaging its tool set as a content management system. IMON is producing a
series of interactive travelogues for distribution on CD and DVD. ImaginOn's
first general-purpose software application, "WebZinger(TM)," is an automated
productivity tool that searches the Web, then formats its results into a graphic
PowerPoint(TM)-like slideshow.
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<PAGE>
Management believes it has begun the successful implementation of a
plan that will provide the Company with the liquidity necessary to continue as a
going concern.
The Company has entered into two sub-license agreements regarding the
use of the Kemper name. Effective May 1, 1997, the Company entered into an
agreement through April 30, 2000 with United Merchandising Corp., a California
corporation ("UMC"). The Company granted UMC a non-exclusive, non-transferrable
license to manufacture and/or purchase and sell various snowboarding apparel
bearing the name and/or logo of "Kemper", in its retail stores in the United
States. The royalty rate is 7.5% of the cost to UMC with a minimum of $30,000
per annum. UMC has an option to renew for one or two additional years. During
the first contract year (May 1, 1997 through April 30, 1998) the Company
received royalties of approximately $34,300.
Effective in February 1998 the Company entered into a two year
exclusive Licensing Agreement with Jaysport International, Inc., a California
corporation ("Jaysport"). Subject to the prior sub-license granted to UMC, the
Company sub-licensed to Jaysport the exclusive worldwide right to use the Kemper
name and trademark on snowboards, related equipment, clothing and accessories
(the "Products"). Jaysport has the option to renew the agreement for additional
two year periods thereafter. The agreement includes a royalty payment of 3% of
net sales on all products with a minimum royalty of $25,000 per annum.
After considerable consolidation in the snowboard industry in 1997, the
Company believes the snowboard market is rebounding. Kemper, one of the original
snowboard brands, should prosper in this new environment. The combined minimum
annual royalty of these licenses is $55,000, and based upon discussions with the
sub-licensors and review of their sales plans, management projects that the
actual combined royalty income from these two licenses will exceed the minimum.
On January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. This standard establishes requirements for disclosure of
comprehensive income which includes certain items previously not included in the
statements of operations, including minimum pension liability adjustments and
foreign currency translation adjustments, among others. During the year ended
December 31, 1998, the Company had no items of comprehensive income. The
financial statements for the year ended December 31, 1997 have been reclassified
to disclose items of comprehensive income. There are no significant tax effects
related to these items.
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information,
and in February 1998, the FASB issued SFAS No. 132, Employer's Disclosure about
Pensions and Other Post Retirement Benefits. Both of these statements require
disclosure only and therefore will not impact the Company's financial
statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for fiscal years
beginning after June 15, 1999. Currently, the Company does not have any
derivative financial instruments and does not participate in hedging activities.
Therefore, management believes that SFAS No. 133 will not have an impact on its
financial statements.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Company's sales by major product
category for the periods indicated:
YEAR ENDED DECEMBER 31,
1998 1997
----------------- ------------------
(dollars in thousands)
$ % $ %
--- --- --- ---
In-line skates, snowboards (2)
and related accessories $1,311 14%
Ice and street/roller hockey (1) 7,777 86%
------ ----
$9,088 100%
(1) Sale of hockey products began May 1, 1996 and ceased on September 12, 1997.
(2) The Company generated no sales in 1998.
The following table sets forth for the periods indicated the
percentages which selected items in the Consolidated Statements of Operations
bear to net sales:
Year ended
December 31,
1998 1997
Net Sales (1) 100.0
Cost of Goods Sold 81.9
Gross Profit 18.1
General & Administrative Expenses 51.1
Depreciation and Amortization 6.9
Consulting & Management Fees, related parties 2.3
Charges 2.6
Income (Loss) from Operations (44.8)
Interest and Other Expenses 22.1
Income Tax Expense (Benefit) (1.8)
Minority Interest (8.0)
Extraordinary item (4.2)
-----
Net Income (Loss) (52.9)
===== ======
(1) The Company generated no sales in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales for the year ended December 31, 1997 were
$9,087,676; comprised of $7,777,000 for the 1997 period of hockey related
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<PAGE>
products (January 1 through August 31) and sales for the Company's in-line skate
and snowboard products $1,311,000 in the 1997 period. In 1997 the Company sold
substantially all of the assets of Skate Corp.'s direct and indirect operating
subsidiaries and also ceased operating its California Pro and Kemper licenses,
and began to seek sub- licenses for these brands.
GROSS PROFIT. Gross profit was $2,042,423 for the year ended December
31, 1997. As a percent of sales, gross profit was 22.5% in 1997.
GENERAL ADMINISTRATIVE AND SELLING EXPENSES. General and administrative
expenses decreased to $2,060,000 for the year ended December 31, 1998, compared
to $5,270,153 for the year ended December 31, 1997. This represents a decrease
of $3,210,152. The primary reason for the decrease is attributable to the
Company selling substantially all of the assets of the operating subsidiaries of
Skate Corp. in September 1997. Included in the 1997 expenses was approximately
$989,000 of selling expenses and $1,561,000 of general and administrative
expenses. Additionally, sales and marketing expenses related to in-line skates
and snowboards decreased by approximately $279,000 in 1998 compared to 1997 due
to the Company no longer directly marketing those product lines, relying instead
on its sub-licensees to market the brands.
CONSULTING FEES, RELATED PARTY. Consulting fees, related party
decreased to $180,000 for the year ended December 31, 1998 from $210,000 for the
year ended December 31, 1997. The Company pays an officer/stockholder $10,000
per month for services primarily related to long-term strategic planning,
financing and acquisitions and paid an additional $30,000 from USA Skate during
1998. Another officer/stockholder also received $30,000 from USA Skate during
1998. In 1997 $5,000 was paid per month from USA Skate each to two
officers/directors prior to the time of the Company selling substantially all of
the operating assets of USA Skate's operating subsidiaries.
IMPAIRMENT CHARGES. For the year ended December 31, 1998, the Company
had impairment charges of $489,825. These charges related to management's
re-evaluation of certain trademarks and licenses ($327,273, other intangibles
($81,825) and goodwill ($80,723). In 1997 the Company had impairment charges of
$239,452 related to its write-off of goodwill, resulting from the sale of the
Company's hockey assets.
LOSS FROM OPERATIONS. In the year ended December 31, 1998 the Company
had a loss from operations of $2,729,826 compared to $4,075,182 for the year
ended December 31, 1997. The decrease in the loss of $1,345,356 was a result of
lower operating expenses of $2,987,779 in 1998 compared to 1997, partially
offset by the gross profit of $1,642,423 that was recognized in 1997.
OTHER INCOME/EXPENSES. In 1998, the Company recognized $103,643 of
royalty and other income compared to $62,312 in the 1997 period. Other expenses
for the year ended December 31, 1998 were $709,509 compared to $2,011,339 for
the year ended December 31, 1997. The decrease of $1,301,830 was primarily
attributable to the 1997 loss on the sale of USA Skate assets (see Note 4 to the
consolidated financial statements) of $751,522 and interest expense related to
the operations of USA Skate. Additionally, interest expense on USA Skate notes
was approximately $265,000 in 1997, compared to $105,000 in 1998.
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<PAGE>
INCOME TAX BENEFIT. For the year ended December 31, 1997, the Company
had an income tax benefit of $166,404.
LIQUIDITY AND CAPITAL RESOURCES. Through September 1, 1997, the Company
funded its operations principally through a $5.5 million revolving credit
facility with a bank, and, to a lesser degree, loans from private investors and
trade credit. Concurrent with the sale of the USA Skate assets, the revolving
line of credit facility was repaid in full and other indebtedness of the Company
was significantly reduced.
On September 12, 1997, the Company sold substantially all of the assets
of its hockey business for $14,500,000 inclusive of $1,000,000 retained in
escrow for purchase price adjustments and proven claims by the purchasers, and
assumption of trade payables and accrued liabilities of approximately $1,600,000
related to the asset purchased. The proceeds were utilized as follows:
Secured revolving lines of credit $ 7,984,000
Convertible noteholders 549,000
Secured debt 519,000
Other notes 100,000
Stockholder notes 505,000
Payment to previous USA Skate
owners 2,678,000
Interest payments 85,000
Cash to escrow account 1,000,000
Cash in bank 680,000
-----------
$14,500,000
In February 1998, Rawlings and the Company agreed to a purchase price
reduction of $395,108 due to a final valuation by Rawlings of the fair value of
the net assets purchased.
During 1998, the Company issued 167,754 shares of Series A preferred
stock in a private placement in which the Company received $166,653. On July 15,
1998 the Company issued 525,262 shares of its common stock in exchange for the
167,754 Series A preferred stock shares. Also in 1998 the Company issued 2,080
shares of Series B and C convertible preferred stock (further described in note
7 to the consolidated financial statements) for $1,660,026 net of offering
costs.
Finally, during 1998 the Company received $440,000 for the sale of
580,000 shares of restricted common stock.
At December 31, 1998, the Company had working capital of
approximately $807,733 compared to a deficit of $384,312 at December 31, 1997.
The increase in working capital is primarily related to the Company realizing
net proceeds of approximately $2,267,000 from various private placements as
described above, and the Company converting approximately $684,000 of debt to
equity.
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On October 2, 1997, the Company signed a letter of intent to merge with
IMON. Subsequently, the Company signed an agreement and plan of merger as of
January 30, 1998 whereby there will be an exchange of 100% of the outstanding
shares of IMON for an amount equal to 60% of the outstanding post merger common
stock of the Company. IMON is a developmental stage company engaged in the
business of designing, manufacturing and selling consumer software products for
the rapidly growing "edutainment" CD/DVD ROM market as well as an internet
utility and an authoring tool. ImaginOn's proprietary technology, TDPP, enables
the creation of new business and consumer products that provide user-friendly
and entertaining access to multimedia and mixed-format databases distributed
across local disk storage and networks.
In January 1999, the Company completed the sale of 3,000 shares of
Series D and E preferred stock whereby the Company received net proceeds of
$2,550,000.
In addition, the Company announced that the exercise period of its
publicly traded common stock purchase warrants exercisable at $1.50 per share
has been extended from December 31, 1998 through June 30, 1999.
For payments to foreign suppliers, the Company has utilized trade
acceptances, which generally are payable upon receipt of documentation by the
Company's bank, but no later than time of delivery, utilizing available cash
under the Company's revolving line of credit. For 1997 the Company negotiated
with its suppliers to be paid 50% upon shipment and 50% on 90 day terms.
SEASONALITY. The Company's in-line skate and hockey related sales were
strongest in the second and third quarters of each calendar year. Snowboard
product sales were strongest during the third and fourth quarters of each
calendar year. However, industry trade shows and other sales, marketing and
administrative costs typically precede the strong selling season and, therefore,
the Company anticipates that it may incur a significant loss in the first
quarter of each year, including 1997.
FOREIGN EXCHANGE. Through September 1997, the Company's products were
principally purchased from suppliers located in Taiwan, mainland China, Korea,
Austria and Canada. The Company purchased its in-line skate products for set
prices negotiated annually in U.S. dollars at exchange rates reset annually. The
Company purchased its snowboards in Deutsche Marks. The Company sold its
snowboard and hockey products both domestically and internationally. As a
result, extreme exchange rate fluctuations could have had a significant effect
on its sales, costs of goods sold and the Company's gross margins. Further, if
exchange rates had fluctuated dramatically, it may have become uneconomical for
the relationship between the Company and its suppliers to continue. The Company
does not engage in hedging transactions.
EFFECT OF INFLATION. Management believes that inflation has not had a
significant impact on its business.
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ITEM 7. FINANCIAL STATEMENTS
--------------------
The Company's audited financial statements, described as follows, are
included in this report following the signature page of this report.
ImaginOn, Inc. and Subsidiaries Consolidated Financial Statements
Independent auditors' report...........................................F-1
Consolidated financial statements:
Balance sheet at December 31, 1998..................................F-2
Statements of operations and comprehensive loss - for the years
ended December 31, 1998 and 1997....................................F-3
Statement of shareholders' equity
for the years ended
December 31, 1998 and 1997 .........................................F-4
Statements of cash flows - for the years
ended December 31, 1998 and 1997...................................F-12
Notes to consolidated financial statements.........................F-14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
None
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------------------
(a) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS.
The officers and directors of the Company are listed below. The
directors of the Company are elected to hold office until the next annual
meeting of stockholders and until their respective successors have been elected
and qualified. Officers of the Company are elected by the Board of Directors and
hold office until their successors are elected and qualified.
The chart below identifies persons who, at any time during the fiscal
year, served as officers and/or directors of the Company.
Name Age Positions
- ---- --- ---------
David M. Schwartz 50 Chairman, Chief Executive Officer, President
and Director, effective January 20, 1999
Leonard W. Kain 37 Executive Vice President, Chief Financial
Officer/Treasurer, Secretary and Director,
effective January 20, 1999
Mary E. Finn 40 Director, effective January 20, 1999
Dennis Allison 58 Director, effective March 4, 1999
Jim Polizotto 62 Director, effective March 4, 1999
Henry Fong 62 Chairman of the Board of Directors and Chief
Executive Officer, resigned January 20, 1999
Barry S. Hollander 41 Acting President, Treasurer and Chief Financial
Officer, resigned January 27, 1999
Brian C. Simpson 64 Director, resigned January 20, 1999
Hung-Chang Yang 52 Director, resigned January 20, 1999
DAVID M. SCHWARTZ has been Chairman, Chief Executive Officer, President
and Director of the Company since January 20, 1999. Mr. Schwartz has been
principally employed as an officer and director of ImaginOn, Inc., a
privately-held California corporation, and wholly-owned subsidiary of the
Company since its formation in 1996. From 1992 until 1996, Mr. Schwartz served
as Vice President of New Media Systems and Technology at Atari Corporation,
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where he invented GameFilm technology for video game applications, and served as
a principal designer of the Atari Jaguar(TM) CD peripheral. From 1990 to 1992,
Mr. Schwartz was a senior member of the technical staff at Tandy Electronics
Research Labs in San Jose, California, where he headed the software team
developing the first erasable CD ROM. In 1983 Mr. Schwartz started and led
CompuSonics Corporation which went public in 1984. CompuSonics ceased operations
in 1989. In 1985, CompuSonics introduced the CompuSonics DSP1000, the first
consumer audio recorder for floppy or optical disks. The CompuSonics Video PC
Movie-Maker, introduced in 1986, inaugurated real-time digital video recording
and editing on desktop PCS. Mr. Schwartz earned a Bachelor of Arts in
Architecture from Carnegie-Mellon University, after completing a
multidisciplinary program in Architecture, Engineering and Computer Science in
1972.
LEONARD W. KAIN has been Executive Vice President, Chief Financial
Officer/Treasurer, Secretary and a Director of the Company since January 20,
1999. Mr. Kain was principally employed as an officer and director of ImaginOn,
Inc., a privately-held California corporation, and wholly-owned subsidiary of
the Company since its formation in 1996. From 1991 until July 1996, Mr. Kain
served as the real-time systems manager at Compression Labs, Inc., where he
supervised all aspects of multimedia and video communications, including
networking, communications framing, audio-video compression, real-time system
design and user interface design. From 1988 until 1991, Mr. Kain was software
manager at Telebit Corporation where he managed development of domestic and
international high speed modems and network products. From 1986 until 1988, Mr.
Kain served with Mr. Schwartz as director of software development at CompuSonics
Corporation. Mr. Kain earned a Bachelor's Degree in Engineering from Stevens
Institute of Technology in New Jersey in 1983, and a Masters Degree in
Electrical Engineering from Stanford University in 1985. In 1998, Mr. Kain
earned a Masters of Business Administration from the University of Phoenix.
MARY E. FINN has been a Director of the Company since January 20, 1999.
She has more than 15 years' experience in various media fields, utilizing her
skills in writing, editing, broadcasting, teaching and management. From 1994 to
1997, Ms. Finn served as publicity director for the local chapter of FEMALE, a
national mother's support group. From 1988 to 1991, Ms. Finn served as a talk
show producer and engineer at KNBR in San Francisco, California. From 1982 to
1986, Ms. Finn taught radio production at Phillips Academy in Andover,
Massachusetts. Ms. Finn earned a Bachelor of Arts degree in Communication from
the University of Michigan in 1981, and a Master's degree in Media Management
from Emerson College in Boston in 1987.
DENNIS ALLISON, a Director of the Company, is a Stanford University
Computer Systems Laboratory Lecturer. Mr. Allison is also an independent
consultant and an editorial advisor on computer science and electrical
engineering to Addison-Wesley-Longham. A former Series Advisor on the
Prentice-Hall Series on Innovative Technology, Mr. Allison also served on the
editorial board of Microprocessor Report. He was also the co-founder of HaL
Computer Systems and of the People's Computer Company, a non-profit organization
that played a pivotal role in the development of the personal computer. He is
also a past IEEE CS Governing Board Member and a past member of the editorial
boards of IEEE Computer and IEEE Software.
JIM POLIZOTTO, a Director of the Company, Mr. Polizotto has served an
Engineering Director of VTEL Corporation, Sunnyvale, California, since 1994,
where he is responsible for the company's Sunnyvale Validation organization. He
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also has corporate responsibility to ensure interoperability with other vendors'
systems. VTEL Corporation is a world leader in Digital Visual Communications.
Prior to 1994, Polizotto helped to create a multimedia development laboratory
for IBM in Silicon Valley and was responsible for the development of many IBM
multimedia breakthroughs, including the 1993 launch of IBM's Internet-based
multimedia video streaming server. Mr. Polizotto also serves on the board of the
International Multimedia Teleconferencing Consortium, Inc., a non-profit
corporation comprised of more than 150 companies from around the world.
HENRY FONG was the Chief Executive Officer and a director of the
Company from its inception in January 1993 through January 20, 1999. During his
tenure, Mr. Fong served as a member of the executive committee of the Company's
Board of Directors. From 1987 to June 1997, Mr. Fong was chairman of the board
and chief executive officer of RDM Sports Group, Inc. (f/k/a Roadmaster
Industries, Inc. ("RDM")), a New York Stock Exchange listed company, and was its
president and treasurer from 1987 to 1996. In August 1997, RDM filed for Chapter
11 bankruptcy. Since 1983, Mr. Fong also has served as the President and a
director and is a significant stockholder of Equitex, Inc., a publicly-held
business development company. In March 1994, Mr. Fong was one of twelve CEOs
selected as Silver Award winners in Financial World magazine's Corporate
American "Dream Team."
BARRY S. HOLLANDER was the Treasurer and Chief Financial Officer of the
Company since March 1993 and Acting President since September 1997. Mr.
Hollander resigned as an officer of the Company on January 27, 1999. From May
1991 through July 1996, Mr. Hollander served as Vice President of Operations and
Chief Financial Officer of MacGregor Sports and Fitness, Inc. (subsequently
renamed IntraNet Solutions, Inc.), a publicly-held company. From August 1986 to
1989, Mr. Hollander held various positions with MacGregor Sporting Goods, Inc.,
including Accounting Manager and Chief Financial Officer of the Athletic
Products Division.
BRIAN C. SIMPSON was a director of the Company from November 1994
through January 20, 1999. During his tenure with the Company, Mr. Simpson serves
as a member of the executive, compensation and audit committees of the Company's
Board of Directors. Since 1992, his principal occupation has been that of an
international management consultant, providing management support and strategic
planning services for various companies, Dunlop-Slazenger and BTR Industries.
From 1989 to 1992, Mr. Simpson served as Strategic Planning Director on a
worldwide basis for Dunlop- Slazenger International Limited. Prior to 1989, Mr.
Simpson served as president of Dunlop- Slazenger Corporation USA and as regional
director, North America for Dunlop-Slazenger Corporation International Limited,
UK. Mr. Simpson has extensive experience in sales, licensing, distribution and
manufacturing, both nationally and internationally, in the sporting goods
business.
HUNG-CHANG (HERO) YANG was elected as a director of the Company in
November 1994. Mr. Yang resigned as a director of the Company on January 20,
1999. In addition, Mr. Yang serves as a member of the compensation and audit
committees of the Company's Board of Directors. Since 1984, Mr. Yang's principal
occupation has been that of president of Precision Golf Associates, Ltd., a
Taiwanese company which engages in the manufacture and sale of golf equipment.
From time-to-time, Mr. Yang has served as an unpaid consultant to the Company in
areas such as quality control of products and components.
-23-
<PAGE>
(b) SIGNIFICANT EMPLOYEES.
None.
(c) FAMILY RELATIONSHIPS.
Mr. Schwartz and Ms. Finn are husband and wife.
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
None.
(e) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the officers and directors of the Company and persons
who own more than ten percent of a registered class of the Company's securities
(collectively, "reporting persons"), to file reports of ownership and changes in
ownership on Forms 3, 4, and 5 with the Securities and Exchange Commission
("SEC"). Reporting Persons are required by SEC regulation to furnish the Company
with copies of all Forms 3, 4, and 5 filed.
Based solely upon a review of the copies of such forms it has received
and representations from the Reporting Persons, the Company believes all
reporting persons have complied with the applicable filing requirements.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
SUMMARY COMPENSATION TABLE.
The following table sets forth information regarding compensation paid
to (i) the Company's Chief Executive Officer and (ii) each of its other
executive officers whose total annual compensation exceeded $100,000 for the
years ended December 31, 1996, 1997 and 1998. No executive officer received
awards or payments of any long-term compensation from the Company during the
period covered.
-24-
<PAGE>
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Compensation
------------------------------------ ------------ ------------
($$) ($$)
Securities
Underlying
Name and Position Year Salary Bonus Other Options
- ----------------- ---- ------ ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Henry Fong, 1998 150,000(1) -0- -0- -0-
Chief Executive Officer 1997 165,000(1) -0- -0- -0- -0-
and Chairman of the Board 1996 160,000(1) -0- -0- -0- $300,000(2)
Resigned January 20, 1999
Michael S. Casazza, 1998 -0- -0- -0- -0- -0-
President, Chief 1997 157,500 413,000(3) -0- -0-
Operating Officer & Director 1996 190,000 -0- -0- -0- $300,000(2)
Resigned September 1997
Barry S. Hollander, 1998 155,000 76,313(4) -0- -0- -0-
Acting President, Treasurer and 1997 117,738 -0- -0- -0- -0-
Chief Financial Officer 1996 125,000 -0- -0- -0- -0-
Resigned January 27, 1999
</TABLE>
- ----------
(1) Mr. Fong was not an employee of the Company and received fees of
$10,000 per month for consulting services rendered to the Company and
received an additional $30,000 USA Skate fee primarily related to
long-term strategic planning, financing and acquisitions.
(2) Represents guaranty fees accrued in connection with the USA Skate
acquisition. These fees were paid at December 31, 1996 in shares of
common stock based on a price of $1.375 per share, the December 31,
1996 market price.
(3) Represents a bonus of 236,000 shares of common stock of the Company
for, among other things, the forgiveness of the remaining amount of
$149,000 of the $400,000 promissory note, making other loans to the
Company and/or its subsidiaries in order for the Company to meet
immediately due obligations, and his efforts in negotiating and
moving the USA Skate asset sale forward to completion.
(4) In January 1998, the Company issued 18,500 shares of Series A
preferred stock to Mr. Hollander. The shares were valued based upon
the trading price of the Company's common stock, adjusted for the one
for three conversion feature of the preferred stock, and accordingly,
the Company recognized an expense of $76,313.
-25-
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR.
During 1997, 85,000 incentive stock options were granted at an exercise
price of $1.00 to Mr. Hollander under the Company's 1994 Stock Option Plan. Mr.
Hollander exercised these options in January 1998 in order to provide working
capital to the Company. In January 1998 Mr. Hollander was granted 49,500
incentive stock options at an exercise price of $1.00. In May 1998 Mr. Hollander
exercised 49,500 options in order to provide working capital to the Company
AGGREGATED OPTION/SAR EXERCISES AND YEAR-END 1998 OPTION/SAR VALUES.
The following table sets forth information concerning the value of
unexercised options held by each of the named executive officers at December 31,
1998. No stock appreciation rights are outstanding and 211,700 options were
exercised by Messrs. Hollander (134,500) and Fong (77,200).
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money options
at December 31, 1998 (#) at December 31, 1998 (#)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Henry Fong 221,400/725,200 $83,025/0
Barry S. Hollander 0/254,800 $0/0
COMPENSATION OF DIRECTORS. During 1997, Messrs. Lin, Simpson and Yang,
the outside directors of the Company, received an annual retainer of $10,000
paid quarterly, and $1,000 for each Board of Directors meeting attended in
person. In addition, they were reimbursed for expenses incurred to attend
meetings of the Board of Directors or otherwise in connection with their
services as directors of the Company. Directors also were eligible to receive
grants of stock options under the Company's 1994 Stock Option Plan. During 1997,
10,000 incentive stock options were granted to each of the then outside
directors of the Company at an exercise price of $1.00. In 1998, Messrs. Simpson
and Yang each received 10,000 shares of common stock in connection with their
services as directors. Additionally, Mr. Yang exercised 15,000 previously
granted options. In 1998,10,000 incentive stock options were granted to Messrs.
Yang and Simpson each at an exercise price of $1.42.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Set forth below is certain information as of March 26, 1999, with
respect to ownership of the Company's common and preferred stock held of record
or beneficially by (i) the Company's executive officers named in the summary
compensation table, (ii) each director of the Company, (iii) each person who
owns beneficially more than five percent of the Company's outstanding Common and
Preferred Stock; and (iv) all directors and executive officers as a group:
-26-
<PAGE>
Percentage
Number of Owned of
Name and Address Common Common
of Beneficial Owner Shares Owned Shares
- ------------------- ------------ ----------
Henry Fong 926,800(1) 2.4%
2401 PGA Blvd., Suite 280F
Palm Beach Gardens, FL 33410
Gulfstream 1998 Irrevocable Trust 2,238,813 6.0%
3155 Miro Drive North
Palm Beach Gardens, FL 33410
David Schwartz 5,431,742 14.4%
(Officer and Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070
Leonard Kain 2,710,000 7.2%
(Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070
Mary E. Finn -0-(2) -0-
(Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070
Dennis Allison -0- -0-
(Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070
Jim Polizotto -0- -0-
(Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070
Wayne W. Mills 2,987,241(3) 7.9%
R.J. Steichen & Co.
5500 Wayzata Blvd
Suite 290
Golden Valley, MN 55402
Michael Casazza 120,613 .3%
906 Thornblade Blvd.
Greer, SC 24650
-27-
<PAGE>
Percentage
Number of Owned of
Name and Address Common Common
of Beneficial Owner Shares Owned Shares
- ------------------- ------------ ----------
Barry S. Hollander 254,800(4) .7%
1221-B S. Batesville Road
Greer, SC 29650
All Directors and executive 8,141,742 21.7%
officers as a group (5 persons)
- ----------
(1) Includes warrants currently not exercisable to acquire 725,200 shares
of common stock.
(2) Does not include 5,431,742 shares owned by her spouse, David M.
Schwartz, as to which she disclaims beneficial ownership. (3)
(3) Includes Warrants currently exercisable to acquire 271,000 shares of
Common Stock
(4) Includes Warrants currently not exercisable to acquire 254,800 shares
of Common Stock.
CHANGES IN CONTROL. None.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
In April 1994, the Company issued warrants to Henry Fong, a founder of
the Company to purchase up to 148,600 shares of Common Stock and issued warrants
to Michael S. Casazza, a founder of the Company, to purchase up to 51,400 shares
of Common Stock, exercisable at $4.50 per share through April 14, 1997 (the
"April Warrants"). In August 1995, the Company issued warrants to Messrs. Fong
and Casazza each to purchase up to 150,000 shares of Common Stock, exercisable
at $3.56 per share through August 1, 1998 (the "August Warrants"). The exercise
price of these warrants represented 100% of the closing bid price of the Common
Stock as reported by Nasdaq on the date of grant. The warrants issued to Messrs.
Fong and Casazza in April 1994 and August 1995 were issued as additional
compensation for their valuable services rendered to the Company. In April 1996,
as compensation for their extra efforts in causing the USA Skate acquisition to
close, the Company lowered the exercise price of all of the warrants held by
Messrs. Fong and Casazza to $2.38 per share, the closing bid price of the Common
Stock on the date the warrants were repriced. Additionally, the exercise date
for the April Warrants was extended to April 14, 2002 and the exercise date for
the August Warrants was extended to August 1, 2003. On January 8, 1998, the
Company lowered the exercise of all the warrants held by Messrs. Fong and
Casazza to $1.00 per share. In January 1999, Mr. Casazza sold his 201,400
warrants.
At December 31, 1995, the Company owed Mr. Fong $90,000 of accrued but
unpaid fees. During the second quarter of 1996, the Company transferred 75,000
shares of USA Skate common stock to Mr. Fong in satisfaction of this debt, based
on a price of $1.20 per share of USA Skate common stock.
-28-
<PAGE>
Messrs. Fong and Casazza personally guaranteed the Company's in-line
skate/snowboard related bank line of credit up to $5.5 million and its hockey
related bank line of credit up to $5 million. In addition, Messrs. Fong and
Casazza each guaranteed, jointly and severally with other guarantors, an
additional $5.25 million of indebtedness of the Company incurred in connection
with the USA Skate acquisition, and Messrs. Fong and Casazza have guaranteed,
jointly and severally with another guarantor, approximately CDN $650,000 owed by
the Canadian subsidiary to a Canadian bank. The Company has accrued fees of
$300,000 each for Messrs. Fong and Casazza as compensation for their extensive
personal guaranties. As of December 31, 1996 Messrs. Fong and Casazza agreed to
accept payment of these fees in common stock of the Company based on the
December 31, 1996 market price of $1.375 per share.
In March 1996, the Chief Operating Officer loaned the Company $170,000.
During the second quarter of 1996, the Company transferred 141,667 shares of USA
Skate common stock to Mr. Casazza in satisfaction of this debt, based on a price
of $1.20 per share of USA Skate common stock. In May 1997, the 141,667 shares of
USA Skate common stock were returned to the Company in exchange for 170,000
shares of common stock of the Company.
In May 1996, Mr. Fong loaned $680,000, and Mr. Casazza loaned $400,000
to the Company's majority owned subsidiary, which funds were used to pay a
portion of the purchase price for the USA Skate acquisition. In return for these
loans, the subsidiary issued promissory notes for the principal amount of each
loan with interest at nine percent payable quarterly, due July 1, 1997. In
addition, the subsidiary granted warrants to Mr. Fong to purchase 566,667 shares
of USA Skate common stock and to Mr. Casazza to purchase 333,333 shares of USA
Skate common stock, all exercisable through April 30, 1998 at $1.20 per share of
USA Skate common stock.
In December 1996, Mr. Fong agreed to convert $60,000 owed to him by the
Company for consulting services for the period July 1 through December 31, 1996
into shares of the Company, at the December 31, 1996 market price of $1.375 per
share.
In March 1997, Mr. Fong agreed to convert $30,000 owed to him by the
Company for consulting services for the period January 1, 1997 through March 31,
1997, and $10,000 for a note payable into shares of the Company, at the March
31, 1997 market price of $1.00 per share.
In September 1997, Mr. Fong agreed to convert $181,000 owed to him by
the Company, for a note payable of the Company, assumed by Mr. Fong, at the
September 30, 1997 market price of $2.00 per share. In December 1997, Mr. Fong
agreed to convert the common shares issued September 30, 1997 to Series A
Preferred Shares of the Company. Upon stockholder approval of a recapitalization
measure in July 1998, Mr. Fong received 90,500 shares of the Company's Common
Stock in exchange for the Series A Preferred Stock.
In September 1997, the Company awarded Mr. Casazza a bonus of 236,000
shares of common stock (at a value of $1.75 per share) of the Company for, among
other things, the forgiveness of the remaining amount of $149,000 of the
$400,000 promissory note, making other loans to the Company and/or its
subsidiaries in order for the Company to meet immediately due obligations, and
his efforts in negotiating and moving the USA Skate asset sale forward to
completion, as well as for his past services to the Company. Additionally, Mr.
Casazza resigned from all positions effective with the completion of the sale of
USA Skate, however he agreed to assist, as requested and act as a consultant to
the Company.
-29-
<PAGE>
In January 1998, so as to infuse the Company with short-term working
capital, Mr. Hollander agreed to exercise 85,000 options to purchase shares of
Common Stock granted pursuant to an Incentive Stock Option Agreement dated April
23, 1997. In exchange for this exercise, the Company awarded Mr. Hollander
29,500 non-statutory stock options and 18,500 shares of Series A Preferred
Stock. On July 15, 1998, the Series A Preferred Shares were converted to 55,500
shares of Common Stock.
In January 1998, the Company authorized the issuance of 50,000 shares
of Common Stock to Mr. Casazza in exchange for consulting services for the
period September 12, 1997 through January 12, 1998, at the January 5, 1998
market price of $1.375.
In May 1998, at the request of the Company, Barry Hollander exercised
49,500 options so as to infuse the Company with short-term working capital.
In June of 1998, at the request of the Company, Henry Fong exercised a
total of 77,200 options so as to infuse the Company with short-term working
capital.
Transactions between the Company and its officers, directors, employees
and affiliates were on terms no less favorable to the Company than would have
been available from unaffiliated parties. Any such transactions were subject to
the approval of a majority of the disinterested members of the Board of
Directors.
-30-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS.
Exhibits being filed herewith are listed below.
Number Description
- ------ -----------
3(i).1 Certificate of Incorporation of the Registrant. (INCORPORATED BY
REFERENCE TO EXHIBIT 3.1 TO THE REGISTRANT'S REGISTRATION
STATEMENT ON FORM SB-2, REGISTRATION NO. 33-85108 AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION "SEC" ON OCTOBER 13, 1994
(THE "1994 REGISTRATION STATEMENT").)
3(i).2 Certificate of Designations for Series B 4% Convertible Preferred
Stock. (INCORPORATED BY REFERENCE TO EXHIBIT 3.(I).1 OF THE
REGISTRANT'S JUNE 30, 1998 10-QSB.)
3(i).3 Certificate of Designations for Series C 4% Convertible Preferred
Stock. (INCORPORATED BY REFERENCE TO EXHIBIT 3.4 OF THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-3/A, REGISTRATION
NO. 333-62713 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON DECEMBER 21, 1998.)
3(i).4 Certificate of Designations For Series D 4% Convertible Preferred
Stock. (INCORPORATED BY REFERENCE TO EXHIBIT 3(I).4 OF THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-3/A, REGISTRATION
NO. 333-71989 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON MARCH 17, 1999 (THE "1999 FORM S- 3/A").)
3(i).5 Certificate of Designations for the Series E 4% Convertible
Preferred Stock. FILED HEREWITH.
3(i).6 Amendment to Certificate of Incorporation of the Registrant dated
July 22, 1998. (INCORPORATED BY REFERENCE TO EXHIBIT 3(I).5 OF
THE 1999 FORM S-3/A.)
3(i).7 Amendment to Certificate of Incorporation of the Registrant dated
December 17, 1998. (INCORPORATED BY REFERENCE TO EXHIBIT 3(I).6
OF THE 1999 FORM S-3/A.)
3(ii) Bylaws as currently in effect. (INCORPORATED BY REFERENCE TO
EXHIBIT 3.2 TO THE 1994 REGISTRATION STATEMENT.)
4.1 Specimen of Common Stock certificate. (INCORPORATED BY REFERENCE
TO EXHIBIT 4.1 TO AMENDMENT NO. 4 TO THE 1994 REGISTRATION
STATEMENT, FILED WITH THE SEC ON DECEMBER 22, 1994 (" 1994
AMENDMENT #4).)
-31-
<PAGE>
10.1 Manufacturing Agreement, dated April 1, 1993, between the
Registrant and Playmaker. (INCORPORATED BY REFERENCE TO EXHIBIT
10.2 TO THE 1994 REGISTRATION STATEMENT.)
10.2 Exclusive License Agreement, dated April 1, 1993, between the
Registrant and Playmaker. (INCORPORATED BY REFERENCE TO EXHIBIT
10.4 TO THE 1994 REGISTRATION STATEMENT.)
10.3 Patent License Agreement, dated April 1, 1993 and Assignment
thereof. (INCORPORATED BY REFERENCE TO EXHIBIT 10.8(B) TO THE
1994 REGISTRATION STATEMENT.)
10.4 1994 Stock Option Plan. (INCORPORATED BY REFERENCE TO EXHIBIT
10.14 TO THE 1994 REGISTRATION STATEMENT.)
10.5 License Agreement, dated July 28, 1994, between Front 500
Corporation and CP. (INCORPORATED BY REFERENCE TO EXHIBIT 10.16
TO THE 1994 REGISTRATION STATEMENT.)
10.6 Exclusive Distributorship Agreement, dated March 1994, with
Maneuverline Co. Ltd. (INCORPORATED BY REFERENCE TO EXHIBIT 10.20
TO THE 1994 REGISTRATION STATEMENT.)
10.7 Exclusive Distributorship Agreement, dated March 1, 1991, with
Airtool Ltd. (INCORPORATED BY REFERENCE TO EXHIBIT 10.21 TO THE
1994 REGISTRATION STATEMENT.)
10.8 Exclusive Distributorship Agreement, dated June 15, 1994, with
Wolf Strobel Sportswear GMBH. (INCORPORATED BY REFERENCE TO
EXHIBIT 10.22 TO THE 1994 REGISTRATION STATEMENT.)
10.9 License Agreement, dated May 10, 1995, granted by California Pro,
Inc. to Big5 Co., Ltd. (INCORPORATED BY REFERENCE TO EXHIBIT
10.23 IN REGISTRATION STATEMENT 33-98898.)
10.10 Form of Warrant related to the Registrant's issuance of warrants
to purchase up to 200,000 shares of Common Stock. (INCORPORATED
BY REFERENCE TO EXHIBIT 10.29(A) TO THE 1994 REGISTRATION
STATEMENT.)
10.11 Form of Warrant related to the issuance of warrants to purchase
up to 21,000 shares of Common Stock. (INCORPORATED BY REFERENCE
TO EXHIBIT 10.29(C) TO 1994 AMENDMENT #1.)
10.12 Form of Indemnity Agreements for the Registrant's directors and
officers. (INCORPORATED BY REFERENCE TO EXHIBIT 10.31 TO THE 1994
REGISTRATION STATEMENT.)
-32-
<PAGE>
10.13 Lease Agreement, dated February 16, 1993, for office space, as
amended by letter agreement dated February 16, 1994.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.32 TO THE 1994
REGISTRATION STATEMENT.)
10.14 Patent License Agreement, with Out of Line Sports, Inc. dated as
of September 30, 1994. (INCORPORATED BY REFERENCE TO EXHIBIT
10.33 TO THE 1994 REGISTRATION STATEMENT.)
10.15 Trademark License Agreement, dated as of September 30, 1994.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.34 TO THE 1994
REGISTRATION STATEMENT.)
10.16 Agreement, dated October 31, 1994, between California Pro Sports,
Inc. and Playmaker related to royalty payments. (INCORPORATED BY
REFERENCE TO EXHIBIT 10.35 TO AMENDMENT NO. 2 TO THE REGISTRATION
STATEMENT, FILED WITH THE SEC ON NOVEMBER 16, 1994 ("1994
AMENDMENT #2").)
10.17 Form of Warrant related to the Registrant's issuance of warrants
to purchase up to 300,000 shares of Common Stock. (INCORPORATED
BY REFERENCE TO EXHIBIT 10.37 IN REGISTRATION STATEMENT
33-98898.)
10.18 Form of Warrant related to the Registrant's issuance of warrants
to purchase up to 150,000 shares of Common Stock with
Registration Rights Agreement. (INCORPORATED BY REFERENCE TO
EXHIBIT 10.39 IN REGISTRATION STATEMENT 33- 98898.)
10.19 Consulting and Non-Competition Agreement among Warren Amendola,
Sr., USA and the Registrant, with related Guaranty. (INCORPORATED
BY REFERENCE TO EXHIBIT 10.1(C) TO THE 1996 FORM 8-K.)
10.20(a) Asset Purchase Agreement, dated September 10, 1997 by and among
Les Equipements Sportifs Davtec Inc., USA Skate Co., Inc., USA
Skate Corporation, the Registrant, Rawlings Canada Inc. and
Rawlings Sporting Goods Company, Inc. (INCORPORATED BY REFERENCE
TO EXHIBIT 10.1(A) TO REGISTRANT'S FORM 8-K, FILED SEPTEMBER 29,
1997, REPORTING AN EVENT ON SEPTEMBER 12, 1997, COMMISSION FILE
NO. 0-25114 (THE "1997 FORM 8-K").)
10.20(b) Exhibit A - Escrow Agreement, dated September 12, 1997 by and
among Les Equipements Sportifs Davtec Inc., USA Skate Co., Inc.,
Rawlings Canada Inc., Rawlings Sporting Goods Company, Inc. and
the Bank of New York. (INCORPORATED BY REFERENCE TO EXHIBIT
10.1(B) TO REGISTRANT'S 1997 FORM 8-K.)
10.20(c) Exhibit C - Guaranty, dated September 12, 1997 for Rawlings
Canada Inc. and Rawlings Sporting Goods Company, Inc.
(INCORPORATED BY REFERENCE TO EXHIBIT 10.1(C) TO REGISTRANT'S
1997 FORM 8-K.)
-33-
<PAGE>
10.21 Agreement and Plan of Merger, dated January 30, 1998 by and among
the Registrant, ImaginOn, Inc. and ImaginOn Acquisition Corp.
(INCORPORATED BY REFERENCE TO EXHIBIT 3 OF REGISTRANT'S PROXY
STATEMENT ON SCHEDULE 14A, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON NOVEMBER 13, 1998.)
10.22(a) Merger Agreement and Plan of Reorganization, dated February 9,
1999 by and among Network Specialists, Inc., INOW and the
Registrant. (INCORPORATED BY REFERENCE TO EXHIBIT 2.1 TO
REGISTRANT'S FORM 8-K, FILED MARCH 23, 1999, REPORTING AN EVENT
ON MARCH 9, 1999, COMMISSION FILE NO. 0-25114 (THE "MARCH 1999
FORM 8-K").)
10.22(b) First Amendment to Merger Agreement and Plan of Reorganization
dated as of March 8, 1999. (INCORPORATED BY REFERENCE TO EXHIBIT
2.2 TO THE MARCH 1999 FORM 8-K.)
10.22(c) Side Agreement to Merger Agreement and Plan of Reorganization
dated March 8, 1999. (INCORPORATED BY REFERENCE TO EXHIBIT 2.3 TO
THE MARCH 1999 FORM 8- K.)
11.1 Statement Re: Computation of Per Share Earnings. FILED HEREWITH.
21.1 List of Subsidiaries. FILED HEREWITH.
27.1 Financial Data Schedule. FILED HEREWITH.
(b) REPORTS ON FORM 8-K.
During the last quarter for the fiscal year ended December 31, 1998 and
through March 31, 1999, the Company filed the following Current Reports on Form
8-K:
Date Item Numbers
- ---- ------------
February 3, 1999 2,7
March 23, 1999 2,7
-34-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
IMAGINON, INC.
Date: March 31, 1999 /s/ David M. Schwartz
-------------- -----------------------------------------
David M. Schwartz, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Date: March 31, 1999 /s/ David M. Schwartz
-------------- -----------------------------------------
David M. Schwartz, Chief Executive Officer,
Chief Accounting Officer, President and Director
Date: March 31, 1999 /s/ Leonard W. Kain
-------------- -----------------------------------------
Leonard W. Kain, Secretary and Director
Date: March 31, 1999 /s/ Mary E. Finn
-------------- -----------------------------------------
Mary E. Finn, Director
Date: March 31, 1999 /s/ Dennis Allison
-------------- -----------------------------------------
Dennis Allison, Director
Date: March 31, 1999 /s/ Jim Polizotto
-------------- -----------------------------------------
Jim Polizotto, Director
-35-
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998 AND 1997
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent auditors' report F-1
Consolidated financial statements:
Balance sheet F-2
Statements of operations and comprehensive loss F-3
Statements of shareholders' equity F-4 - F-11
Statements of cash flows F-12 - F-13
Notes to financial statements F-14 - F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
ImaginOn, Inc.
We have audited the accompanying consolidated balance sheet of ImaginOn, Inc.
and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ImaginOn, Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
March 22, 1999
F-1
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Assets
------
Unaudited
Pro forma Historical
------------ ------------
(Note 7)
<S> <C> <C>
Current assets:
Cash ................................................................ $ 2,714,103 $ 74,103
Notes receivable:
Related party (Note 10) ........................................... 1,477,217 1,477,217
Other ............................................................. 104,226 104,226
Prepaid expenses and other .......................................... 25,000 25,000
Assets of subsidiary held for sale (Note 4) ......................... 624,284
------------ ------------
Total current assets ............................................ 4,320,546 2,304,830
------------ ------------
Furniture and equipment, net of
accumulated depreciation of $469,379 .................................... 2,674 2,674
------------ ------------
Other assets:
Deferred merger costs ............................................... 167,777 167,777
Trademark license costs, net of
accumulated amortization of $16,666 .............................. 83,334 83,334
------------ ------------
251,111 251,111
------------ ------------
$ 4,574,331 $ 2,558,615
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses ............................... $ 278,333 $ 233,532
Liabilities of subsidiary held for sale (Note 4) .................... 1,263,565
------------ ------------
Total liabilities (all current) ................................. 278,333 1,497,097
------------ ------------
Minority interest ......................................................... 56,320
------------ ------------
Commitments and contingencies (Notes 4, 5, and 10)
Shareholders' equity (Note 7):
Preferred stock, $0.01 par value; authorized
5,000,000 shares:
Series B/C, issued and outstanding 1,630 shares ................... 1,300,902 1,300,902
Series D/E, issued and outstanding 3,000 shares ................... 935,000
Common stock, $0.01 par value; authorized
50,000,000 shares; issued 13,434,731 shares ...................... 134,347 134,347
Warrants ............................................................ 394,200 394,200
Capital in excess of par ............................................ 15,583,849 13,968,849
Accumulated deficit ................................................. (14,052,300) (14,052,300)
Treasury stock held by subsidiary, at cost,
1,204,950 shares of common stock ................................. (740,800)
------------ ------------
Total shareholders' equity ...................................... 4,295,998 1,005,198
------------ ------------
$ 4,574,331 $ 2,558,615
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales ................................................................. $ $ 9,087,767
Cost of sales ............................................................. 7,445,344
------------ ------------
Gross profit ...................................................... 1,642,423
------------ ------------
Operating expenses:
General, administrative and selling expenses ........................ 2,060,001 5,270,153
Consulting fees, related party (Note 5) ............................. 180,000 210,000
Impairment charges .................................................. 489,825 237,452
------------ ------------
Total operating expenses .................................................. 2,729,826 5,717,605
------------ ------------
Loss from operations ...................................................... (2,729,826) (4,075,182)
------------ ------------
Other expenses (income):
Interest income, related party (Note 10) ............................ (43,948)
Interest expense:
Related parties ................................................... 297,338
Other ............................................................. 141,040 669,140
Foreign currency gains .............................................. (59,791)
Royalty and other income ............................................ (103,643) (62,312)
Loss on marketable securities (Note 3) .............................. 62,392
Gain on sale of investment in subsidiary (Note 4) ................... (87,593)
Finance fees (Notes 4 and 7) ........................................ 591,060 440,643
Loss on sale of USA Skate assets (Note 4) ........................... 125,000 751,522
------------ ------------
709,509 2,011,339
------------ ------------
Loss before income taxes and minority interest ............................ (3,439,335) (6,086,521)
Income tax benefit (Note 6) ............................................... (166,404)
------------ ------------
Loss before minority interest ............................................. (3,439,335) (5,920,117)
Minority interest ......................................................... 58,252 (727,197)
------------ ------------
Loss before extraordinary item ............................................ (3,497,587) (5,192,920)
Extraordinary item (Note 8) ............................................... 383,705
------------ ------------
Net loss .................................................................. (3,497,587) (4,809,215)
Other comprehensive income:
Foreign currency translation adjustments ............................ 7,774
Comprehensive loss ........................................................ $ (3,497,587) $ (4,801,441)
============ ============
Net loss .................................................................. $ (3,497,587) $ (4,809,215)
Amortization of discount on preferred stock ............................... (1,120,000)
------------ ------------
Net loss applicable to common shareholders ................................ $ (4,617,587) $ (4,809,215)
============ ============
Basic and diluted loss pershare:
Before extraordinary item ........................................... $ (0.48) $ (0.94)
Extraordinary item .................................................. 0.07
------------ ------------
Basic and diluted loss per common share ................................... $ (0.48) $ (0.87)
============ ============
Weighted average number of shares outstanding ............................. 9,549,353 5,544,833
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series A Series B and C
Common Stock Preferred Stock Preferred Stock
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances,
January 1, 1997 4,699,511 $ 46,995
Issuance of 371,493
shares of common stock
in exchange for 480,417
shares of the Company's
subsidiary stock (Note 4) 371,493 3,715
Issuance of 75,000
shares of common stock
in satisfaction of 300,000
options to purchase
common stock (Note 5) 75,000 750
Issuance of 75,000
shares of common stock
for consulting and finan-
cial services (Note 5) 75,000 750
Issuance of 865,225
shares of common stock
in satisfaction of
$1,171,656 of liabilities
(Note 7) 865,225 8,652
Issuance of 235,701
shares of common stock
for extending maturity date
on certain notes (Note 4) 235,701 2,357
Issuance of 52,500
shares of common stock
upon the exercise of
options (Note 7) 52,500 525
Issuance of 349,214
Class A Series Preferred
Stock (Note 7) 349,214 $ 3,492
Issuance of stock
to subsidiary in satisfac-
tion of $893,640 liabilities
(Note 7) 360,000 3,600 750,471 7,505
Net loss for 1997
Foreign currency
translation adjustment
----------- ---------- ----------- ----------- ----------- -----------
Balances,
December 31, 1997 6,734,430 $ 67,344 1,099,685 $ 10,997
</TABLE>
F-4 (Continued)
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Capital Foreign currency
in excess translation Treasury
Warrants of par Deficit adjustment stock Total
----------- ------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances,
January 1, 1997 $ 394,200 $ 6,386,332 $ (5,745,498) $ (7,774) $ 1,074,255
Issuance of 371,493
shares of common stock
in exchange for 480,417
shares of the Company's
subsidiary stock (Note 4) 407,677 411,392
Issuance of 75,000
shares of common stock
in satisfaction of 300,000
options to purchase
common stock (Note 5) 69,563 70,313
Issuance of 75,000
shares of common stock
for consulting and finan-
cial services (Note 5) 74,250 75,000
Issuance of 865,225
shares of common stock
in satisfaction of
$1,171,656 of liabilities
(Note 7) 1,163,004 1,171,656
Issuance of 235,701
shares of common stock
for extending maturity date
on certain notes (Note 4) 438,284 440,641
Issuance of 52,500
shares of common stock
upon the exercise of
options (Note 7) 94,475 95,000
Issuance of 349,214
Class A Series Preferred
Stock (Note 7) 1,564,638 1,568,130
Issuance of stock
to subsidiary in satisfac-
tion of $893,640 liabilities
(Note 7) 882,535 $ (893,640)
Net loss for 1997 (4,809,215) (4,809,215)
Foreign currency
translation adjustment 7,774 7,774
----------- ------------ ------------- ----------- ------------ ------------
Balances,
December 31, 1997 $ 394,200 $ 11,080,758 $ (10,554,713) $ (893,640) $ 104,946
</TABLE>
F-5 (Continued)
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series A Series B and C
Common Stock Preferred Stock Preferred Stock
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 437,593
shares of common stock
in consideration for
extending the date on
certain notes (Note 4) 437,593 4,376
Issuance of 50,000
shares of common stock
for consulting services
(Note 5) 50,000 500
Issuance of 534,200
shares of common stock
upon exercise of options
and warrants (Note 7) 534,200 5,342
Issuance of 18,500
shares of Series A
preferred stock (Note 7) 18,500 185
Issuance of 167,754
shares of Series A
preferred stock in
private placement
(Note 7) 167,754 1,678
Issuance of 41,667
shares of Series A
preferred stock in
satisfaction of $150,000
of liabilities (Note 7) 41,667 417
Issuance of 3,982,818
shares of common stock in
exchange for 1,327,606
shares of Series A
preferred stock (Note 7) 3,982,818 39,828 (1,327,606) (13,277)
Issuance of 245,520
shares of common stock
owned by Skate Corp. in
satisfaction of $245,520
of liabilities (Note 7)
Issuance of 316,256
shares of common stock
in satisfaction of
$288,826 of liabilities
(Note 7) 316,256 3,163
</TABLE>
F-6 (Continued)
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Capital Foreign currency
in excess translation Treasury
Warrants of par Deficit adjustment stock Total
----------- ------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 437,593
shares of common stock
in consideration for
extending the date on
certain notes (Note 4) 538,426 542,802
Issuance of 50,000
shares of common stock
for consulting services
(Note 5) 68,250 68,750
Issuance of 534,200
shares of common stock
upon exercise of options
and warrants (Note 7) 574,068 579,410
Issuance of 18,500
shares of Series A
preferred stock (Note 7) 76,128 76,313
Issuance of 167,754
shares of Series A
preferred stock in
private placement
(Note 7) 164,975 166,653
Issuance of 41,667
shares of Series A
preferred stock in
satisfaction of $150,000
of liabilities (Note 7) 149,583 150,000
Issuance of 3,982,818
shares of common stock in
exchange for 1,327,606
shares of Series A
preferred stock (Note 7) (26,551)
Issuance of 245,520
shares of common stock
owned by Skate Corp. in
satisfaction of $245,520
of liabilities (Note 7) 161,503 84,017 245,520
Issuance of 316,256
shares of common stock
in satisfaction of
$288,826 of liabilities
(Note 7) 285,663 288,826
</TABLE>
F-7 (Continued)
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series A Series B and C
Common Stock Preferred Stock Preferred Stock
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 2,080
shares of Series B and
C preferred stock in
connection with
private placement,
net of costs
(Note 7) 2,080 $ 540,026
Issuance of 1,327,000
shares of common stock
owned by Skate Corp. in
exchange for 884,667
shares of Skate Corp.
(Note 7)
Issuance of 80,000
shares of common stock
in a private placement
(Note 7) 80,000 800
Issuance of 500,000
shares of common stock
for $400,000 (Note 7) 500,000 5,000
Issuance of 36,790
shares of common stock
for penalty on Series B
and C preferred stock
(Note 7) 36,790 368
Issuance of 742,644
shares of common stock
in exchange for 450
shares of Series B
and C preferred stock
(Note 7) 742,644 7,426 (450) (359,124)
Issuance of 20,000
shares to outside
members of the Board of
Directors 20,000 200
Sale of 84,212 shares of
treasury owned by
subsidiary (Note 7)
Amortization of Class B
and C Series preferred
stock 1,120,000
</TABLE>
F-8 (Continued)
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Capital Foreign currency
in excess translation Treasury
Warrants of par Deficit adjustment stock Total
----------- ------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 2,080
shares of Series B and
C preferred stock in
connection with private
placement, net of costs
(Note 7) 1,120,000 1,660,026
Issuance of 1,327,000
shares of common stock
owned by Skate Corp. in
exchange for 884,667
shares of Skate Corp.
(Note 7) (107,797) 454,099 346,302
Issuance of 80,000
shares of common stock
in a private placement
(Note 7) 39,200 40,000
Issuance of 500,000
shares of common stock
for $400,000 (Note 7) 395,000 400,000
Issuance of 36,790
shares of common stock
for penalty on Series B
and C preferred stock
(Note 7) 47,890 48,258
Issuance of 742,644
shares of common stock
in exchange for 450
shares of Series B and
C preferred stock
(Note 7) 351,698
Issuance of 20,000
shares to outside
members of the Board of
Directors 19,800 20,000
Sale of 84,212 shares of
treasury owned by
subsidiary (note 7) 150,255 28,724 178,979
Amortization of Class B
and C Series preferred
stock (1,120,000)
</TABLE>
F-9 (Continued)
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series A Series B and C
Common Stock Preferred Stock Preferred Stock
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Receipt of subsidiary
of 250,000 shares of
common stock from
third party in settlement
of an amount due to
subsidiary from third
party (Note 4)
Net loss for the year
ended December
31, 1998
----------- ----------- ----------- ----------- ----------- -----------
13,434,731 $ 134,347 1,630 $ 1,300,902
=========== =========== =========== =========== =========== ===========
</TABLE>
F-10 (Continued)
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Capital Foreign currency
in excess translation Treasury
Warrants of par Deficit adjustment stock Total
----------- ------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Receipt of subsidiary
of 250,000 shares of
common stock from
third party in settlement
of an amount due to
subsidiary from third
party (Note 4) (414,000) (414,000)
Net loss for the year
ended December
31, 1998 (3,497,587) (3,497,587)
----------- ------------ ------------- ----------- ------------ ------------
$ 394,200 $ 13,968,849 $ (14,052,300) $ (740,800) $ 1,005,198
=========== ============ ============= =========== ============ ============
</TABLE>
F-11
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................................... $ (3,497,587) $ (4,809,215)
------------ ------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary gain ........................................... (383,705)
Net unrealized holding loss .................................. 62,392
Gain on sale of investment in subsidiary ..................... (87,593)
Loss on sale of USA Skate assets ............................. 125,000 751,522
Expense incurred upon issuance of common stock
and options ................................................ 756,122 724,223
Depreciation and amortization ................................ 230,821 628,601
Amortization of license fee payable and other ................ 88,867
Provision for losses on accounts receivable .................. 272,086 250,836
Foreign currency gains ....................................... (59,791)
Minority interest ............................................ 58,252 (727,197)
Restructuring and impairment charges ......................... 489,825 237,452
Decrease (increase) in assets:
Accounts receivable .......................................... (135,947)
Income taxes receivable ...................................... 221,624
Due from related parties ..................................... (1,345,947) (310,369)
Inventories .................................................. 1,806,578
Prepaid expenses and other ................................... (82,898) 436,111
Assets of subsidiary held for sale ........................... (2-5.843)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ........................ 853,585 (394,606)
Payables to officers/shareholders and other
related parties ............................................ (36,804)
Liabilities of subsidiary held for sale ...................... (450,574) (1,340,648)
------------ ------------
Total adjustments ......................................... 700,429 1,731,546
------------ ------------
Net cash used in operating activities ................................ (2,797,158) (3,077,669)
------------ ------------
Cash flows from investing activities:
Payment from sale of USA Skate Co., Inc. ....................... 14,500,000
Capital expenditures ........................................... (95,141)
Proceeds from sale of marketable securities .................... 166,260
Deferred merger costs .......................................... (167,777)
------------ ------------
Net cash (used in) provided by investing activities .................. (167,777) 14,571,119
------------ ------------
</TABLE>
F-12 (Continued)
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable and long-term debt ................. 174,545
Repayments of notes payable, license fees
and long-term debt ........................................... (11,713,124)
Proceeds from sale of treasury stock ........................... 178,980
Net proceeds from issuance of
common stock and warrants ..................................... 2,846,089
------------ ------------
Net cash provided by (used in) financing activities .................. 3,025,069 (11,538,579)
------------ ------------
Net increase (decrease) in cash ...................................... 60,134 (45,129)
Cash, beginning ...................................................... 13,969 59,098
------------ ------------
Cash, ending ......................................................... $ 74,103 $ 13,969
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ......................................... $ 152,000 $ 826,000
============ ============
Supplemental disclosure of noncash investing and financing activities:
Disposition of USA Skate Co., Inc.
Cost of assets disposed of.................................... $(16,937,947)
Liabilities disposed of ...................................... 1,899,533
Loss on disposition .......................................... 538,414
------------
Total cash received, net of cash acquired ...................... $(14,500,000)
============
Issuance of 371,493 shares of common stock in
exchange for 480,417 shares of Company's
subsidiary stock ............................................. $ 411,392
============
Issuance of 316,256 and 865,225 shares of common stock
in 1998 and 1997, respectively, in satisfaction of amounts
due .......................................................... $ 288,826 $ 1,171,656
============ ============
Issuance of 1,327,000 shares of common stock owned
by subsidiary in exchange for 884,667 shares of Skate
Corp ......................................................... $ 346,302
============
Issuance of 41,667 preferred shares in satisfaction of
amounts due .................................................. $ 150,000
============
Receipt by subsidiary of 250,000 shares of common
stock from third party in settlement of an amount due
to subsidiary from third party ............................... $ 414,000
============
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. Basis of presentation, business and plan of restructuring:
Basis of presentation:
The accompanying consolidated financial statements include the accounts of
Imaginon, Inc. (formerly known as California Pro Sports, Inc.) (the
"Company") and its subsidiaries, California Pro, Inc. ("CP"), USA Skate
Corporation ("Skate Corp.") and Imaginon Acquisition Corp. Skate Corp.
was formed in 1995 to acquire USA Skate Co., Inc. ("USA Skate") and its
subsidiary, Les Equipments Sportifs Davtec, Inc., a Canadian corporation
("Davtec"). On December 31, 1998, the Company owned 100% of the
outstanding CP and Imaginon Acquisition Corp. capital stock and 89.8% of
the outstanding Skate Corp. capital stock. Minority interest represents
Skate Corp.'s minority shareholders' 10.2% ownership interest in Skate
Corp. Intercompany transactions have been eliminated in consolidation.
Business and plan of restructuring:
In 1997, due to continuing operating losses, management decided to
restructure and deleverage the Company. In connection with these plans,
the Company:
a. Ceased operating the California Pro and Kemper licenses, eliminated
most of the operating and overhead expenses associated with its
sporting goods business and began to concentrate on sub-licensing the
Company's trademark rights.
b. Sold substantially all of its Skate Corp. sporting goods related
assets in September 1997 (Note 4).
c. Completed various private equity placements throughout 1998 and into
1999 (Note 7).
d. Completed the merger of the Company and IMON in January 1999 (Note
10).
e. Completed the sale of Skate Corp. in January 1999 (Note 4).
Prior to the second quarter of 1997, the Company sold in-line skates and
accessories, under the brand names California Pro(R) and Rolling
Thunder(TM), to retail sporting goods stores principally in North
America, and sold snowboards and accessories under the Kemper(R) brand
name to retail sporting goods stores in North America and
F-14
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. Basis of presentation, business and plan of restructuring (continued):
Business and plan of restructuring (continued):
distributors in Europe and Japan. In connection with its restructuring
and deleverage plans, in the second quarter of 1997, the Company began
liquidating remaining in-line skate, snowboard and accessories
inventories. Prior to September 1997, the Company also manufactured,
imported and marketed VICTORIAVILLE(TM), VIC(R), and McMartin(TM) ice and
street/roller hockey skates, sticks and related protective gear and
accessories for sale to retail sporting goods stores in the United States
and Canada and independent distributors primarily located in Europe. In
September 1997, Skate Corp. sold substantially all of the operating
assets of USA Skate and Davtec. During 1998, the Company operated
exclusively as a licensor of trade names and trademarks. The Company
currently receives income from sub-licenses it has entered into regarding
the use of the Kemper brand name. The Company has no other sporting goods
related business.
2. Significant accounting policies:
Use of accounting estimates in financial statement preparation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
F-15
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
2. Significant accounting policies (continued):
Furniture, equipment, and depreciation:
Furniture and equipment are stated at cost. Depreciation is provided by use
of accelerated and straight-line methods over the estimated useful lives
(5 to 10 years) of the related assets.
Intangible assets:
Intangible assets at December 31, 1998 consist of trademark licence costs
related to Kemper perpetual license agreements. Trademark license costs
are amortized on the straight-line method over 12 years.
Management assesses the carrying value of intangible and other long-lived
assets for impairment when circumstances warrant such a review, primarily
by comparing current and projected sales, operating income and annual
cash flows on an undiscounted basis, with the related annual amortization
expenses. The Company has not been successful in concluding any
arrangements with regard to sub-licensing of the California Pro brand and
currently is not in any discussions with third parties. Therefore, in
1998, the Company wrote-off the remaining balance of $409,102 related to
the California Pro trademark. In 1998, the Company also wrote-off the
remaining balance of $80,723 related to goodwill that arose on the 1996
acquisition of USA Skate. In 1997 goodwill related to USA Skate with a
carrying value of $428,573 was written down to $191,121 (Note 4). The
resulting expenses of $489,825 for 1998 and $237,452 for 1997 were
included in restructuring and impairment charges.
Deferred merger costs:
Costs incurred through December 31, 1998 related to the merger of the
Company and IMON (Note 10) have been deferred. The merger was completed
in January 1999 and at that time the Company charged the costs, as well
as additional amounts incurred in January 1999, directly to equity.
F-16
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
2. Significant accounting policies (continued):
Revenue recognition:
The Company's revenue recognition policy is to record sales as product is
shipped and recognize royalty and other income when sub-licenses report
royalties and the Company receives payment.
Foreign currency transactions:
In 1997, CP primarily purchased and sold its in-line skate products in US
dollars. CP primarily purchased its snowboard products in German Deutsche
Marks ("DM") and sold to its customers in either DM or US dollars. USA
Skate primarily purchased and sold its products in US dollars, and Davtec
primarily purchased its goods in Canadian dollars and sold to customers
in both US and Canadian dollars. Gains and losses on foreign currency
transactions are included in determining consolidated net loss.
Convertible preferred stock:
During 1998, the Company issued Series B and C convertible preferred stock
for which the conversion feature was "in the money" at the date of issue
(a "beneficial conversion feature"). The Company allocated a portion of
the proceeds equal to the intrinsic value of the beneficial conversion
feature to capital in excess of par. This amount has been amortized to
preferred stock from the date of issuance through the date the securities
are first convertible.
Net loss per share:
Basic loss per share is computed by dividing loss applicable to common
shareholders by the weighted-average number of common shares outstanding
for the year. In arriving at loss applicable to common shareholders,
amortization of the beneficial conversion feature related to the Series B
and C preferred stock has been deducted from net loss. Diluted loss per
share reflects the potential dilution that could occur if dilutive
securities and other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company, unless the effect is to
reduce a loss or increase earnings per share. The Company had no
potential common stock instruments which would result in diluted loss per
share in 1998 and 1997.
F-17
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
2. Significant accounting policies (continued):
Fair value of financial instruments:
The carrying value of the Skate Corp. convertible promissory notes payable,
included in liabilities of subsidiary held for sale on the consolidated
balance sheet (Note 4), is not practicable to estimate because management
believes that due to the financial condition of the Company, similar
instruments with similar terms could not be obtained elsewhere. The fair
values of the Company's receivables from related parties are not
practicable to estimate, due to the related party nature of the
underlying transactions and indefinite payment terms. The carrying
amounts of the Company's other financial instruments approximates their
fair values because of the short maturities of these instruments.
Subsidiary equity transactions:
The Company recognizes in its consolidated financial statements, gains and
losses resulting from the sales of previously unissued stock by its
subsidiaries, which have the effect of reducing the parent's percentage
equity holding. There were no gains or losses in 1998 or 1997.
Stock-based compensation:
Statement of Financial Accounting Standard ("SFAS") No. 123, ACCOUNTING FOR
STOCK- BASED COMPENSATION, defines a fair-value-based method of
accounting for stock-based employee compensation plans and transactions
in which an entity issues its equity instruments to acquire goods or
services from non-employees, and encourages but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB NO. 25") and related interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the
stock.
F-18
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
2. Significant accounting policies (continued):
Recently issued accounting standards:
On January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. This standard establishes requirements for
disclosure of comprehensive income which includes certain items
previously not included in the statements of operations, including
minimum pension liability adjustments and foreign currency translation
adjustments, among others. During the year ended December 31, 1998, the
Company had no items of comprehensive income. The financial statements
for the year ended December 31, 1997 have been reclassified to disclose
items of comprehensive income. There are no significant tax effects
related to these items.
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
and in February 1998, the FASB issued SFAS No. 132, Employer's Disclosure
about Pensions and Other Post Retirement Benefits. Both of these
statements require disclosure only and therefore will not impact the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for
fiscal years beginning after June 15, 1999. Currently, the Company does
not have any derivative financial instruments and does not participate in
hedging activities. Therefore, management believes that SFAS No. 133 will
not have an impact on its financial statements.
Reclassifications:
Certain amounts reported in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
3. Marketable securities:
In 1996, the Company received marketable securities from an affiliate in
payment of an amount owed to the Company by a related party, which the
Company classified as trading securities under SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. In 1997, the
Company sold these securities and recognized a loss of $62,392. This
amount is included in loss on marketable securities in the consolidated
statements of operations and comprehensive loss.
F-19
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
4. Skate Corp. transactions:
Gain on sale of investment in subsidiary:
In March 1997, the Company satisfied payables in the amount of $106,500 by
exchanging 88,750 shares of Skate Corp. common stock held by the Company
in satisfaction of the liability. The carrying value of the Skate Corp.
shares was $61,237 and the estimated fair value of those shares was
$106,500. The Company also sold 83,000 shares of Skate Corp. common stock
held by the Company to a third party. The carrying value of the Skate
Corp. shares was $57,270 and the sales price was $99,600. These
transactions resulted in total gains of $87,593.
Purchase of subsidiary common stock:
In May and September 1997, the Company acquired 230,417 shares of Skate
Corp. common stock from two shareholders (one of which was an officer) in
exchange for 238,160 shares of common stock of the Company. In 1997, the
Company also issued 133,333 shares of common stock to acquire 250,000
shares of Skate Corp. common stock, that otherwise the Company would have
been obligated to redeem. The Company accounted for these transactions
under the purchase method of accounting based upon the market value of
the common stock issued by the Company.
Sale of USA Skate assets:
On September 12, 1997, the Company sold substantially all of the operating
assets of USA Skate for $14,500,000, with $1,000,000 to be held in escrow
for potential purchase price adjustments and other claims. The proceeds
of the sale were used to repay the Company's outstanding lines of credit
and other liabilities. Subsequent to September 1997, purchase price and
other adjustments have reduced the principle amount of the escrow account
by approximately $423,000 and approximately $180,000 of the escrow
account was disbursed and used to partially repay a trade liability. The
Company recognized a loss in 1997 of approximately $752,000 on the sale
of the USA Skate assets, and due to the post closing adjustments an
additional loss of $125,000 in 1998.
F-20
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
4. Skate Corp. transactions:
Sale of USA Skate assets:
The remaining account balances of Skate Corp. have been classified as
assets and liabilities held for sale in the accompanying consolidated
balance sheet and consist of the following:
Assets held for sale:
Cash $ 39,782
Cash held in escrow 397,002
Accounts receivable, related parties 187,500
-----------------
$ 624,284
=================
Liabilities held for sale:
Accounts payable and accrued expenses $ 545,451
Convertible promissory notes payable 718,114
-----------------
$ 1,263,565
=================
The accounts receivable, related parties are non-interest bearing and are
due January 1999 through 2000. The convertible promissory notes were
originally due in January 1997 with interest at 9%. In January 1997, the
due date of the notes was extended to July 1997 and the interest rate was
adjusted to 12%. Beginning July 1997, substantially all of the note
holders agreed to extend the notes for 30 day intervals in exchange for
the Company issuing the note holders common stock of the Company at each
extension date. During, 1997, the Company had issued 235,701 shares of
common stock and recognized financing fees of approximately $440,641.
During 1998, the Company issued 437,593 shares of common stock, and
recognized financing fees of $542,802 for the note extensions. The notes
were paid in full in January 1999.
In December 1998 Skate Corp. negotiated and received 250,000 shares of
common stock of the Company in settlement of accounts receivable of
$580,000. The market price on the day of settlement was $1.656 and
accordingly Skate Corp. realized a loss of $166,000 which is included in
the consolidated operating expenses in the financial statements. The
250,000 shares of common stock are included in treasury stock.
F-21
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
4. Skate Corp. transactions (continued):
Subsequent sale of the Company's investment in Skate Corp.:
In April 1998, the Company received commitments from a group of accredited
investors to purchase for $1,400,000 the shares of common stock of Skate
Corp. owned by the Company along with an option to acquire shares of the
Company in exchange for the purchased shares of Skate Corp. The options
allowed the investors to exchange each common share of Skate Corp. for
1.5 shares of the Company's common stock. In April and May 1998, the
Company received gross proceeds of $255,000 (net proceeds of $166,653)
from investors acquiring 335,507 shares of Skate Corp. Each of the
investors exercised their options to exchange those shares for 167,754
shares of the Company's Series A preferred stock, which automatically
converted to 503,261 shares of the Company's common stock on July 15,
1998 upon the shareholders approving an increase in the authorized common
shares of the Company from 10,000,000 to 20,000,000. Subsequent to the
receipt of the $255,000, this offering was closed to further investors.
The offering was closed to further investors as the Company was able to
obtain similar financing on terms more beneficial to the Company through
the sale of preferred stock as discussed in Note 7. Upon the closing of
the offering, two officers/shareholders of the Company agreed to purchase
the shares of Skate Corp. from the Company for $90,000 with no conversion
rights. The purchase price was based on the net book value of the
Company's investment in Skate Corp. at the time of the agreement. The
sale of Skate Corp. was completed, and the Company received the $90,000,
in January 1999.
5. Commitments and contingencies:
Office lease:
The Company is currently leasing office space in South Carolina on a
month-to-month basis for $3,000 per month plus certain real estate and
property taxes. Total rent expense for 1998 and 1997 was approximately
$41,000 and $227,000, respectively, and includes rent expense and lease
termination fees in 1997 on the Company's prior operating warehouses and
office space.
F-22
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
5. Commitments and contingencies (continued):
In-line skate license agreements:
The Company has various license agreements with Playmaker, Co. Ltd.
("Playmaker") under which the Company has the exclusive, royalty-free
right to use the California Pro and Rolling Thunder names and trademarks
on in-line skates, accessories and other products in the United States,
Canada, certain areas of the Caribbean and U.S. military exchanges
worldwide. The Company has also entered into an agreement with Playmaker
whereby Playmaker will pay the Company a 5% royalty on all sales of any
product made by Playmaker to any new customer of Playmaker generated by
the Company. No royalties have been agreed to or paid to date under this
agreement. The agreements are subject to cancellation if the Company does
not meet certain sales and/or purchase requirements.
The Company has a patent license agreement related to one feature on
several of the Company's in-line skate models. Under the license
agreements, the Company pays royalty fees based on its sales of the
related items. Playmaker reimburses the Company for a portion of the
royalties paid. The royalties were not significant in 1998 or 1997.
Kemper license agreements:
The Company has a license agreement for the exclusive, perpetual use of the
Kemper name on snowboards and accessories. The Company pays a royalty
based on net sales of products sold under this license.
In 1997, the Company entered into a three-year exclusive sub-license
agreement with a third party which allows the third party to manufacture
and sell certain Kemper products. The agreement provides for the Company
to receive license fees based on manufacturing costs, or an annual
minimum guaranteed payment.
In February 1998, the Company entered into a two-year agreement with a
third party snowboard manufacturer and marketer. The agreement, in
effect, assigns all of the Company's license rights to the Kemper name
(except for the sub-license described above) to the third party in
exchange for the greater of a royalty fee based on sales, or an annual
minimum guaranteed payment.
F-23
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
5. Commitments and contingencies (continued):
Employment and consulting agreements:
On a month to month basis, the Company accrues expense to an officer/
shareholder consulting fees of $10,000 per month. Skate Corp. paid
consulting fees to two Company officers/shareholders that totaled $60,000
and $90,000 in 1998 and 1997, respectively.
Prior to 1997, the Company had issued warrants to purchase 300,000 shares
of common stock to an unrelated financial advisory consultant. In 1997,
in lieu of the warrants to purchase 300,000 shares of common stock, the
Company issued the party 75,000 shares of common stock.
In 1997, the Company entered into a financial advisory and consulting
agreement with an unrelated third party. Under this agreement, the
Company issued 75,000 shares of common stock and 33,333 shares of Series
A preferred stock to the consultant (included in total Series A preferred
stock issuances on the consolidated statement of shareholders' equity).
In 1998, the Company began working with another financial consultant who
was a former director and officer of the Company. Under the agreement,
the Company issued 50,000 shares of common stock to the consultant. The
Company recorded consulting expense for the shares issued based on the
market value of the common stock.
Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the
financial statements of the Company.
6. Income taxes:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
F-24
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
6. Income taxes (continued):
The provision benefit for income taxes for the years ended December 31,
1998 and 1997 consists of the following:
1998 1997
----------------- -----------------
Current:
Federal $ $
State and local
Foreign (166,404)
----------------- -----------------
(166,404)
================= =================
Deferred:
Federal (1,089,000) (1,345,000)
State and local (108,000) (219,000)
Foreign (120,000)
----------------- -----------------
(1,197,000) (1,684,000)
----------------- -----------------
Change in valuation allowance
for deferred tax assets 1,197,000 1,684,000
----------------- -----------------
Income tax benefit $ $ (166,404)
================= =================
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1998 and 1997
is as follows:
1998 1997
------------ ------------
Statutory income tax benefit (34%) (34%)
Deferred income tax valuation allowance 35% 28%
Other (1%) 3%
------------ ------------
(3%)
============ ============
F-25
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
6. Income taxes (continued):
The following is a summary of the Company's deferred tax assets and
liabilities at December 31, 1998:
Deferred tax assets:
Net operating loss carryforward $ 4,012,000
Intangible assets 492,000
Accounts receivable 94,000
-----------------
Inventories 4,598,000
Valuation allowance for deferred tax assets (4,598,000)
-----------------
$ 0
=================
Net operating loss carryforwards of approximately $10,700,000 are available
to offset future taxable income, if any, through 2018. The net operating
loss carryforwards may be subject to certain restrictions due to the sale
of Skate Corp. assets, the IMON merger and other transactions. A
valuation allowance has been provided to reduce the deferred tax assets,
as realization of the assets is not assured.
7. Shareholders' equity:
Series A preferred stock:
In 1997, the Company issued 349,214 shares of Series A preferred stock
(including 30,167 to an officer/shareholder) in satisfaction of
$1,568,130 of liabilities (including $181,000 due to the
officer/shareholder). In 1997, the Company also issued 750,471 shares of
Series A preferred stock and 360,000 shares of common stock to its
subsidiary in satisfaction of intercompany liabilities, which resulted in
an increase in treasury stock of $893,640. The shares were valued based
upon the trading price of the Company's common stock, adjusted for the
one for three conversion feature of the preferred stock.
F-26
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
7. Shareholders' equity (continued):
Series A preferred stock (continued):
During 1998, the Company issued 18,500 shares of Series A preferred stock
to an officer of the Company. The shares were valued based upon the
trading price of the Company's common stock, adjusted for the one for
three conversion feature of the preferred stock, and accordingly, the
Company recognized an expense of approximately $76,313. During 1998, the
Company also issued 167,754 shares of Series A preferred stock in a
private placement, in which the Company received $166,653, and the
Company issued 41,667 shares of Series A preferred stock in satisfaction
of $150,000 of liabilities.
Each share of outstanding Series A Convertible Preferred Stock
automatically converted to three shares of common stock in July 1998 upon
shareholder approval of a recapitalization measure that increased the
authorized number of common shares of the Company, from 10,000,000 to
20,000,000. Upon conversion of the Series A Preferred Stock into common
stock, there were no Series A Preferred shares outstanding and
accordingly all rights for Series A stockholders have been terminated.
Series B/C preferred stock:
During 1998, the Company issued 2,080 shares of Series B and C convertible
preferred stock ("Series B/C") for $1,660,026 (net of offering costs) at
a price of $1,000 per share. The Series B/C stock is convertible at the
option of the holder at any time after 90 days from the closing date,
into a number of shares of common stock equal to $1,000 divided by the
lower of 65% of the average market price of the common stock for the five
trading days immediately prior to the conversion date, or the market
price on the day of first closing. During the fourth quarter of 1998, the
Company issued 36,790 shares of common stock to the Series B/C
shareholders as a penalty for not completing a registration statement
within an agreed upon time period. The Company recorded financing fee
expense of $48,258 based on the market value of the common shares issued.
The registration statement was filed in the fourth quarter of 1998 and
the holders of Series B and C convertible preferred stock converted 450
shares into 742,644 shares of common stock of the Company. At December
31, 1998, 1,630 shares of Series B/C remain outstanding.
F-27
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
7. Shareholders' equity (continued):
Series D/E preferred stock:
In January 1999, the Company with the assistance of its financial
consultant completed private placements whereby the Company received net
proceeds of $2,550,000 from accredited investors introduced to the
Company by the consultant, for the purchase of 1,500 shares each of
Series D and E Convertible Preferred Stock, par value $.01 ("Series D/E")
at a price of $1,000 per share. The Series D/E stock is convertible at
the option of the holder at any time after 90 days from the closing date
into a number of shares of common stock equal to the lower of $1,000
divided by 75% of the average closing bid price of the common stock for
the five trading days immediately prior to the conversion date, or 120%
of the market price on the day of closing. In connection with the
placement of the Series D/E, the Company issued warrants to purchase
300,000 shares of common stock to financial advisors that assisted with
placements. One-half of the warrants are exercisable at $7.28063 per
share (the market price of the common stock at the date of issuance). All
warrants expire in January 2004.
Unaudited pro forma balance sheet:
The accompanying consolidated balance sheet includes an unaudited pro forma
consolidated balance sheet as of December 31, 1998, that gives effect to
the following transactions as if these transactions had been consummated
on December 31, 1998:
a. The receipt of $2,550,000 cash from investors who purchased 3,000
shares of Series D/E preferred stock from the Company as described
above. The portion of the proceeds equal to the intrinsic value of
the beneficial conversion feature ($1,615,000) has been allocated to
capital in excess of par.
b. The receipt of $90,000 cash from two officers/shareholders of the
Company to purchase all of the Company's shares of Skate Corp. common
stock as described in Note 4, "Subsequent sale of the Company's
investment in Skate Corp." Thus the unaudited pro forma balance sheet
reflects the receipt of $90,000 of cash in exchange for the assets
and liabilities held for sale, the elimination of the historical
Skate Corp. minority interest, the decrease in treasury stock that
had been recorded in the historical consolidation, and the
F-28
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
7. Shareholders' equity (continued):
Unaudited pro forma balance sheet (continued):
recognition of $44,801 of intercompany accounts payable due to Skate
Corp. that had been eliminated in the historical consolidation. The
pro forma adjustment does not result in any gain or loss to the
Company.
The unaudited pro forma consolidated balance sheet should be read in
conjunction with the historical financial statements of the Company. The
unaudited pro forma consolidated balance sheet does not purport to be
indicative of the financial position of the Company had the transactions
occurred on December 31, 1998.
Issuances of common stock:
During the year ended December 31, 1998, the Company issued 437,593 shares
of its common stock at prices from $.70 to $1.72 per share in exchange
for the extensions of the maturity date on notes of Skate Corp. The
Company recognized finance fee expense of $542,902 related to these
services. Additionally, the Company issued 50,000 shares of its common
stock at $1.375 per share (the market value of the stock on the effective
date of issuance) to a consultant who was a former director and officer
of the Company. The Company recognized $68,750 of consulting expenses
related to this issuance. During the year ended December 31, 1998,
534,200 options and/or warrants were exercised at $1.00 to $1.15 per
share, by officers (211,700), consultant (300,000), director (15,000) and
an employee (7,500).
In July 1998, the Company sold 80,000 shares of restricted common stock in
a private placement to a third party for $40,000.
During the year ended December 31, 1998, the Company received proceeds of
$400,000 cash from investors who acquired 500,000 shares of restricted
common stock from the Company.
In 1998, the Company issued 316,256 shares of common stock in satisfaction
of $288,826 of liabilities. In 1997, the Company issued 865,225 shares of
common stock (including 299,633 to officers/shareholders) in satisfaction
of $1,171,656 of liabilities (including $493,995 due to the
officers/shareholders). The shares were valued at the trading price of
the Company's common stock.
F-29
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
7. Shareholders' equity (continued):
Issuance of stock to Skate Corp.:
During the year ended December 31, 1998, the Company issued 245,520
treasury shares owned by Skate Corp. with a carrying value of $84,017 in
satisfaction of $245,520 of Skate Corp. liabilities held for sale. As a
result of this transaction, the treasury stock balance has been reduced
by $84,017.
During December 1998, Skate Corp. sold 84,212 treasury shares with a
carrying value of $28,724 for cash of $178,979. As a result of this sale
the carrying value of treasury stock has been reduced by $28,724 and
capital in excess of par was increased by $150,255.
The Company also issued 1,327,000 treasury shares owned by Skate Corp. with
a carrying value of $454,099 in exchange for 884,667 shares of Skate
Corp. As a result of this transaction, the treasury stock balance has
been reduced by $454,099.
Stock options:
The Company has a stock option plan (the "1994 Stock Option Plan") which
provides for the issuance to employees, officers, directors, and
consultants of the Company options to purchase up to 200,000 shares of
common stock. Options may be granted as incentive stock options or as
non-statutory options. Only employees are eligible to receive incentive
options. For options that are granted, the exercise period may not exceed
ten years. The exercise price for incentive options may not be less than
100% of the fair market value of the Company's common stock on the date
of grant, except for options issued to persons controlling more than 10%
of the Company's common stock, for which the option price may not be less
than 110% of the fair market value of the Company's common stock on the
date of grant. The exercise price for non-statutory options may not be
less than 80% of the fair market value of the Company's common stock on
the date of grant.
F-30
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
7. Shareholders' equity (continued):
Stock options (continued):
In 1997, the Company granted options to purchase 150,000 shares of common
stock to non-employees for services provided to the Company. General and
administrative expense was charged $42,500.
A summary of the status of the Company's stock options and weighted average
exercise prices is as follows:
1994 Plan Other Total
----------------------------------------------------------
Shares Price Shares Price Shares Price
----------------------------------------------------------
Outstanding,
January 1, 1997 20,000 $2.50 20,000 $2.50
Granted 130,000 $1.00 150,000 $0.83 280,000 $0.95
Exercised (22,500) $1.00 (30,000) $1.00 (52,500) $1.00
------- ----- --------- ----- --------- -----
Outstanding,
December 31, 1997 127,500 $1.24 120,000 $0.89 247,500 $1.07
Canceled (20,000) $2.50 (100,000) $0.88 (120,000) $1.15
Granted 49,500 $1.00 1,100,000 $2.22 1,149,500 $2.17
Exercised (157,000) $1.00 (157,000) $1.00
------- ----- --------- ----- --------- -----
Outstanding,
December 31, 1998 0 1,120,000 $2.20 1,120,000 $2.20
======= ===== ========= ===== ========= =====
The 1994 Plan options expire from 1999 through 2003. The other options
expire from 2000 through 2002.
F-31
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
7. Shareholders' equity (continued):
Stock options (continued):
Had compensation cost for the 1994 options granted in 1997 and 1998 been
determined based on the fair value at the grant dates consistent with the
provisions of SFAS No. 123, the Company's net loss and loss per share
would not have been materially different from that reported.
Warrants:
The Company has outstanding warrants to purchase 1,990,000 shares of common
stock at $1.00 per share that expire in June 1999 (the "Warrants"). The
Company also has outstanding warrants to purchase 120,000 Warrants at
$0.30 per Warrant that expire in June 1999.
In 1997, the exercise price of warrants to purchase 500,000 shares of the
Company's common stock that had been granted to two officers/shareholders
of the Company were reduced from $2.38 per share to $1.00 per share
(which approximated fair value). These warrants expire from 2002 through
2003.
The Company also has outstanding warrants to purchase 58,331 shares of
common stock at $4.81 per share that expire in 2000.
8. Extraordinary item:
The Company recognized an extraordinary gain of $383,705 in 1997 (of which
$149,000 related to debt due to officer/shareholder) from the
extinguishment of debt for amounts less than the carrying value of the
liabilities.
F-32
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
9. Foreign operations and export sales:
Information about the Company's operations in the United States and Canada
for the year ended December 31, 1997 are as follows:
United Combined
States Canada Eliminations total
----------- ---------- ------------ -----------
Sales to unaffiliated
customers $ 5,494,000 $3,594,000 $ 9,088,000
Intercompany sales 740,000 $(740,000)
----------- ---------- --------- -----------
Net sales $ 5,494,000 $4,334,000 $(740,000) $ 9,088,000
=========== ========== ========= ===========
Loss from operations $(3,650,000) $ (418,000) $ (7,000) $(4,075,000)
=========== ========== ========= ===========
During the year ended December 31, 1997 sales by geographic regions were as
follows:
Europe and other $ 1,395,330
Canada 3,185,923
Japan 101,595
-----------------
Total exports 4,682,848
USA sales 4,404,919
-----------------
Total sales $ 9,087,767
=================
10. Merger agreement:
On January 20, 1999, the Company, through ImaginOn Acquisition Corp., a
newly formed, wholly owned subsidiary of the Company, completed a merger
with ImaginOn.com, Inc. of San Carlos, California ("IMON"), a privately
held company. IMON, formed in March 1996, designs, manufactures and sells
consumer software products for Internet users. At closing, IMON's
shareholders received approximately 60% of the post merger issued and
outstanding common stock of the Company (21,248,665 shares) in exchange
for their IMON common stock.
F-33
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
10. Merger agreement (continued)
The Company filed a proxy statement relating to the transaction in November
1998 that includes financial statements of IMON, unaudited pro forma
financial information reflecting the merger, and other information about
IMON and the merger. The merger transaction was approved in December 1998
by the boards of directors of both companies and was also approved by the
Company's shareholders. The merger transaction was consummated on January
20, 1999. During 1998, the Company advanced ImaginOn $1,433,269 at 9%
interest. This amount, plus interest receivable of $43,948, is classified
as notes receivable, related party on the consolidated balance sheet.
On March 8, 1999, the Company acquired Network Specialists, Inc., an
internet service provider for $230,000 cash and approximately 260,000
shares of the Company's common stock.
F-34
CERTIFICATE OF DESIGNATIONS
OF
IMAGINON, INC.
--------------------
Designation of Preferences, Limitations and Relative Rights
of the
Series E 4% Convertible Preferred Stock
Pursuant to Section 151
of the
Delaware General Corporation Law
--------------------
ImaginOn, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Company"), DOES HEREBY CERTIFY that the following
resolution was duly adopted by the Board of Directors of the Company on January
15, 1999.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the
"Board") in accordance with the provisions of its Certificate of
Incorporation, the Board of Directors hereby authorizes a series of the
Corporation's previously authorized Preferred Stock, par value $0.01
per share (the "Preferred Stock"), and hereby states the designation
and number of shares, and fixes the relative rights, preferences,
privileges, powers and restrictions as set forth in Attachment A
attached hereto.
IN WITNESS WHEREOF, the undersigned hereby acknowledges under penalty
of perjury that the execution of this instrument is the Company's act and deed.
IMAGINON, INC.
March 31, 1999 /S/ LEONARD W. KAIN
-------------------------------------
Leonard W. Kain, Secretary
<PAGE>
ATTACHMENT A
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINITIONS. The terms defined in this Article whenever
used in this Certificate of Designations have the following respective meanings;
(a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in Section
6.1(c).
(b) "AFFILIATE" has the meaning ascribed to such term in Rule 12b-2
under the Securities Exchange Act of 1934, as amended.
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(c) "BUSINESS DAY" means a day other than Saturday, Sunday or any day
on which banks located in the State of New York are authorized or obligated to
close.
(d) "CAPITAL SHARES" means the Common Shares and any other shares of
any other class or series of common stock, whether now or hereafter authorized
and however designated, which have the right to participate in the distribution
of earnings and assets (upon dissolution, liquidation or winding-up) of the
Corporation.
(e) "CLOSING DATE" means January 15, 1999.
(f) "COMMON SHARES" or "COMMON STOCK" means shares of common stock,
$.01 par value, of the Corporation.
(g) "COMMON STOCK ISSUED AT CONVERSION" when used with reference to the
securities issuable upon conversion of the Series E Preferred Stock, means all
Common Shares now or hereafter Outstanding and securities of any other class or
series into which the Series E Preferred Stock hereafter shall have been changed
or substituted, whether now or hereafter created and however designated.
(h) "CONVERSION DATE" means any day on which all or any portion of
shares of the Series E Preferred Stock is converted in accordance with the
provisions hereof.
(i) "CONVERSION NOTICE" has the meaning set forth in Section 6.2.
(j) "CONVERSION PRICE" means on any date of determination the
applicable price for the conversion of shares of Series E Preferred Stock into
Common Shares on such day as set forth in Section 6.1.
(k) "CONVERSION RATIO" on any date means of determination the
applicable percentage of the Market Price for conversion of shares of Series E
Preferred Stock into Common Shares on such day as set forth in Section 6.1.
(l) "CORPORATION", means Imaginon, Inc., a Delaware corporation, and
any successor or resulting corporation by way of merger, consolidation, sale or
exchange of all or substantially all of the Corporation's assets, or otherwise.
(m) "CURRENT MARKET PRICE" on any date of determination means the
closing price of a Common Share on such day as reported on the Nasdaq - Small
Cap Market ("NASDAQ").
(n) "DEFAULT DIVIDEND RATE" shall be equal to the Preferred Stock
Dividend Rate plus an additional 4% per annum.
(o) "HOLDER" means the persons to whom the Series E Preferred Stock is
issued, any successor thereto, or any Person to whom the Series E Preferred
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Stock is subsequently transferred in accordance with the provisions hereof.
(p) "MARKET DISRUPTION EVENT" means any event that results in a
material suspension or limitation of trading of Common Shares on the NASDAQ.
(q) "MARKET PRICE" per Common Share means the average of the closing
prices of the Common Shares as reported on the NASDAQ for the five Trading Days
in any valuation Period.
(r) "MAXIMUM RATE" has the meaning set forth in Section 7.3(b).
(s) "OUTSTANDING" when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), means, on any date of determination, all issued
and outstanding Shares, and includes all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; PROVIDED, HOWEVER, that any such Shares directly or indirectly owned or
held by or for the account of the Corporation or any Subsidiary or the
Corporation shall not be deemed "Outstanding" for purposes hereof.
(t) "PERSON" means an individual, a corporation, a partnership, an
association, a limited liability company, a unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(u) "REGISTRATION RIGHTS AGREEMENT" means that certain Registration
Rights Agreement dated of date even herewith between the Corporation and Holder.
(v) "SEC" means the United States Securities and Exchange Commission.
(w) "SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as in effect at the time.
(x) "SECURITIES PURCHASE AGREEMENT" means that certain Securities
Purchase Agreement dated a date even herewith between the Corporation and
Holder.
(y) "SERIES E PREFERRED STOCK" means the Series E 4% Convertible
Preferred Stock of the Corporation or such other convertible Preferred Stock
exchanged therefor as provided in Section 2.1.
(aa) "STATED VALUE" has the meaning set forth in Article 2.
(bb) "SUBSIDIARY" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
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(cc) "TRADING DAY" means any day on which purchases and sales of
securities authorized for quotation on the NASDAQ are reported thereon and on
which no Market Disruption Event has occurred.
(dd) "VALUATION EVENT" has the meaning set forth in Section 6.1.
(ee) VALUATION PERIOD" means the five Trading Day period immediately
preceding the Conversion Date.
All references to "cash" or "$" herein means currency of the United
States of America.
ARTICLE 2
DESIGNATION AND AMOUNT
SECTION 2.1
The designation of this series, which consists of 2,000 shares of
Preferred Stock, is Series E 4% Convertible Preferred Stock (the "Series E
Preferred Stock") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "Stated Value").
ARTICLE 3
RANK
SECTION 3.1
The Series E Preferred Stock shall rank (i) prior to the Common
Stock; (ii) prior to any class of series of capital stock of the Corporation
hereafter created other than "Pari Passu Securities" (collectively, with the
Common Stock, "Junior Securities"); and (iii) pari passu with any class or
series of capital stock of the Corporation hereafter created specifically
ranking on parity with the Series E Preferred Stock ("Pari Passu Securities").
ARTICLE 4
DIVIDENDS
SECTION 4.1
(a)(i) The Holder shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available for the
payment of dividends, dividends (subject to Sections 4(a)(ii) hereof) at the
rate of 4% per annum (computed on the basis of a 360-day year) (the "Dividend
Rate") on the Liquidation Value (as defined below) of each share of Series E
Preferred Stock on and as of the most recent Dividend Payment Due Date (as
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<PAGE>
defined below) with respect to each Dividend Period (as defined below).
Dividends on the Series E Preferred Stock shall be cumulative from the date of
issue, whether or not declared for any reason, including if such declaration is
prohibited under any outstanding indebtedness or borrowings of the Corporation
or any of its Subsidiaries, or any other contractual provision binding on the
Corporation or any of its Subsidiaries, and whether or not there shall be funds
legally available for the payment thereof.
(ii) Each dividend shall be payable in equal quarterly amounts on
each March 31, June 30, September 30 and December 31 of each year (each, a
"Dividend Payment Due Date"), commencing September 30, 1998, to the holders of
record of shares of the Series E Preferred Stock, as they appear on the stock
records of the Corporation at the close of business on any record date, not more
than 60 days or less than 10 days preceding the payment dates thereof, as shall
be fixed by the Board of Directors. For the purposes hereof, "Dividend Period"
means the quarterly period preceding Dividend Payment Date and ending on and
including the immediately subsequent Dividend Payment Date. Accrued and unpaid
dividends for any past Dividend Period may be declared and paid at any time,
without reference to any Dividend Payment Due Date, to holders of record on such
date, not more than 15 days preceding the payment date thereof, as may be fixed
by the Board of Directors.
(iii) At the option of the Corporation, the dividend shall be
paid in cash or through the issuance of duly and validly authorized and issued,
fully paid and non-assessable, freely tradeable shares of Common Stock valued at
the Market Price. The Common Stock to be issued in lieu of cash payments shall
be registered for resale in the Registration Statement to be filed by the
Corporation to register the Common Stock issuable upon conversion of the shares
of Series E Preferred Stock and exercise of the Warrants as set forth in the
Registration Rights Agreement. Notwithstanding the foregoing, until such
Registration Statement has been declared effective under the Securities Act by
the SEC, payment of dividends on the Series E Preferred Stock shall be in cash.
(b) The Holder shall not be entitled to any dividends in excess
of the cumulative dividends, as herein provided, on the Series E Preferred
Stock. Except as provided in this Article 4, no interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment or
payments on the Series E Preferred Stock that may be in arrears.
(c) So long as any shares of the Series E Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on Pari Passu Securities for
any period unless full cumulative dividends required to be paid in cash have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Series E Preferred
Stock for all Dividend Periods terminating on or prior to the date of payment of
the dividend on such class or series of Pari Passu Securities. When dividends
are not paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, all dividends declared upon shares of the Series E Preferred Stock
and all dividends declared upon any other class or series of Pari Passu
Securities shall be declared ratably in proportion to the respective amounts of
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<PAGE>
dividends accumulated and unpaid on the Series E Preferred Stock and accumulated
and unpaid on such Pari Passu Securities.
(d) So long as any shares of the Series E Preferred stock are
outstanding, no dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a stock option
plan) of the Corporation or any subsidiary, (all such dividends, distributions,
redemptions or purchases being hereinafter referred to as a "Junior Securities
Distribution") for any consideration (or any moneys be paid to or made available
for a sinking fund for the redemption of any shares of any such stock) by the
Corporation, directly or indirectly, unless in each case (i) the full cumulative
dividends required to be paid in cash on all outstanding shares of the Series E
Preferred Stock and any other Pari Passu Securities shall have been paid or set
apart for payment for all past Dividend Periods with respect to the Series E
Preferred Stock and all past dividend periods with respect to such Pari Passu
Securities, and (ii) sufficient funds shall have been paid or set apart for the
payment of the dividend for the current Dividend Period with respect to the
Series E Preferred Stock and the current dividend period with respect to such
Pari Passu Securities.
ARTICLE 5
LIQUIDATION PREFERENCE
SECTION 5.1
(a) If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up (each such event being
considered a "Liquidation Event"), no distribution shall be made to the holders
of any shares of capital stock of the Corporation upon liquidation, dissolution
or winding up unless prior thereto, the holders of shares of Series E Preferred
Stock, subject to Article 5, shall have received the liquidation Preference (as
defined in Article 5(c)) with respect to each share. If upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
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<PAGE>
holders of the Series E Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series E Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation preference payable on each such share bears to
the aggregate liquidation Preference payable on all such shares.
(b) At the option of each Holder, the sale, conveyance of
disposition of all or substantially all of the assets of the Corporation, the
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
not the survivor shall either: (i) be deemed to be a liquidation, dissolution or
winding up of the Corporation pursuant to which the Corporation shall be
required to distribute, upon consummation of and as a condition to, such
transaction an amount equal to 120% of the Liquidation Preference with respect
to each outstanding sharer of Series E Preferred Stock in accordance with and
subject to the terms of this Article 5 or (ii) be treated pursuant to Article
5(c) (iii) hereof; provided, that all holders of Series E Preferred Stock shall
be deemed to elect the option set forth in cause (i) hereof if at least a
majority in interest of such holders elect such option. "Person" shall mean any
individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.
(c) For purposes hereof, the "Liquidation Preference" with
respect to a share of the Series E Preferred Stock shall mean an amount equal to
the sum of (i) the Stated Value thereof, plus (ii) an amount equal to thirty
percent (30%) of such Stated Value, plus (iii) the aggregate of all accrued and
unpaid dividends on such share of Series E Preferred Stock until the most recent
Dividend Payment Date; PROVIDED that, in the event of an actual liquidation,
dissolution or winding up of the Corporation, the amount referred to in clause
(iii) above shall be calculated by including accrued and unpaid dividends to the
actual date of such liquidation, dissolution or winding up, rather than the
Dividend Payment Due Date referred to above.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 CONVERSION; CONVERSION PRICE. At the option of the Holder,
the shares of Preferred Stock may be converted, either in whole or in part, into
Common Shares (calculated as to each such conversion to the nearest 1/100th of a
share), at any time, and from time to time following the date of issuance of the
Series E Preferred Stock (the "Issue Date") at a conversion Price equal to the
lower of (a) 75% of the Market Price or (b) 120% of the closing market price on
the day of Closing, as adjusted for any stock splits or reclassifications;
provided, however, that the Holder shall not have the right to convert any
portion of the Series E Preferred Stock to the extent that the issuance to the
Holder of Common Shares upon such conversion would result in the Holder being
deemed the "beneficial owner" of 5% or more of the then outstanding Common
Shares within meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended. At the Corporation's option, the amount of accrued and unpaid dividends
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<PAGE>
as of the conversion Date shall not be subject to conversion but instead may be
paid in cash as of the Conversion Date; if the Corporation elects to convert the
amount of accrued and unpaid dividends at the Conversion Date into Common Stock,
the Common Stock issued to the Holder shall be valued at the Conversion Price.
Notwithstanding the previous sentence, in no event shall the Holder have the
right to convert that portion of the Series E Preferred Stock to the extent that
the issuance of Common Shares upon the conversion of such Series E Preferred
Stock, when combined with shares of Common Stock received upon other conversions
of Series E Preferred Stock by such Holder and any other holders of Series E
Preferred Stock, would exceed 19.99% of the Common Stock outstanding on the
Closing Date. Within ten (10) Business Days after the receipt of the Conversion
Notice which upon conversion would, when combined with shares of Common Stock
received upon other conversions of Series E Preferred Stock by such Holder and
any other holders of Series E Preferred Stock and Warrants, exceed 19.99% of the
Common Stock outstanding on the Closing Date, the Corporation shall redeem all
remaining outstanding shares of Series E Preferred Stock at on hundred twenty
percent (120%) of the Stated Value thereof, together with all accrued and unpaid
dividends thereon, in cash, to the date of redemption.
The number of shares of Common Stock due upon conversion of
Series E Preferred Stock shall be (i) the number of shares of Series E Preferred
Stock to be converted, multiplied by (ii) the State Value and dividend by (iii)
the applicable Conversion Price.
Within two (2) Business Days of the occurrence of a Valuation
Event, the Corporation shall send notice (the "Valuation Event Notice") of such
occurrence to the Holder. Notwithstanding anything to the contrary contained
herein, if a Valuation Event occurs during any Valuation Period, a new Valuation
Period shall begin on the Trading Day immediately following the occurrence of
such Valuation Event and end on the Conversion Date; PROVIDED that, if a
Valuation Event occurs on the fifth day of any Valuation Period, then the
Conversion Price shall be the Current Market Price of the Common Shares on such
day; and PROVIDED, FURTHER, that the Holder may, in its discretion, postpone
such Conversion Date to a Trading Day which is no more than five (5) Trading
Days after the occurrence of the latest Valuation Event by delivering a
notification to the Corporation with two (2) Business Days of the receipt of the
Valuation Period to be other than the five (5) Trading Days immediately Prior to
the Conversion Date, the Holder shall give written notice of such fact to the
Corporation in the related Conversion Notice at the time of conversion.
For purposes of this Section 6.1, a "Valuation Event" shall mean an event in
which the Corporation at any time during a Valuation Period takes any of the
following actions:
(a) subdivides or combines its Capital Shares;
(b) makes any distribution of its Capital Shares;
(c) issues any additional Capital Shares (the "Additional Capital
Shares"), otherwise than as provided in the foregoing Sections 6.1(a) and 6.1(b)
above, at a price per shareless, or for other consideration lower, than the
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Current Market Price in effect immediately prior to such issuances, or without
consideration, except for issuances under employee benefit plans consistent with
those presently in effect and issuances under presently outstanding warrants,
options or convertible securities;
(d) issues any warrants, options or other rights to subscribe for
or purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for Capital Shares and the consideration per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to the
terms of such convertible, exchangeable or exercisable securities shall be less
than the Current Market Price in effect immediately prior to such issuance;
(f) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend in liquidation
or by way of return of capital or other than as a dividend payable out of
earnings or surplus legally available for the payment of dividends under
applicable law or any distribution to such holders made in respect of the sale
of all or substantially all of the Corporation's assets (other than under the
circumstances provided for in the foregoing Sections 6.1(a) through 6.1(e)); or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Sections 6.1(a)
through 6.1(f) hereof, inclusive, which in the opinion of the Corporation's
Board of Directors, determined in good faith, would have a material adverse
effect upon the rights of the Holder at the time of a conversion of the
Preferred Stock.
SECTION 6.2 EXERCISE OF CONVERSION PRIVILEGE. (a) Conversion of the
Series E Preferred Stock may be exercised, in whole or in part, by the Holder by
telecopying an executed and completed notice of conversion in the form annexed
hereto as Annex I (the "Conversion Notice") to the Corporation. Each date on
which a Conversion Notice is telecopied to and received by the Corporation in
accordance with the provisions of this Section 6.2 shall constitute a Conversion
Date. The Corporation shall convert the Preferred Stock and issue the Common
Stock Issued at Conversion effective as of the Conversion Date. The Conversion
Notice also shall state the name or names (with addresses) of the persons who
are to become the holders of the Common Stock Issued at Conversion in connection
with such conversion. The Holder shall deliver the shares of Series E Preferred
Stock to the Corporation by express courier within 30 days following the date on
which the telecopied Conversion Notice has been transmitted to the Corporation.
Upon surrender for conversion, the Preferred Stock shall be accompanied by a
proper assignment hereof to the Corporation or be endorsed in blank. As promptly
as practicable after the receipt of the Conversion Notice as aforesaid, but in
any event not more than five Business Days after the Corporation's receipt of
such Conversion Notice, the Corporation shall (i) issue the Common Stock issued
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at Conversion in accordance with the provisions of this Article 6, and (ii)
cause to be mailed for delivery by overnight courier to the Holder (X) a
certificate or certificate(s) representing the number of Common Shares to which
the Holder is entitled by virtue of such conversion, (Y) cash, as provided in
Section 6.3, in respect of any fraction of a Share issuable upon such conversion
and (Z) cash in the amount of accrued and unpaid dividends as of the Conversion
Date. Such conversion shall be deemed to have been effected at the time at which
the Conversion Notice indicates so long as the Preferred Stock shall have been
surrendered as aforesaid at such time, and at such time the rights of the Holder
of the Preferred Stock, as such, shall cease and the Person and Persons in whose
name or names the Common Stock Issued at Conversion shall be issuable shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby. The Conversion Notice shall constitute a contract between
the Holder and the Corporation, whereby the Holder shall be deemed to subscribe
for the number of Common Shares which it will be entitled to receive upon such
conversion and, in payment and satisfaction of such subscription (and for any
cash adjustment to which it is entitled pursuant to Section 6.4), to surrender
the Preferred Stock and to release the Corporation from all liability thereon.
No cash payment aggregating less than $1.50 shall be required to be given unless
specifically requested by the Holder.
(b) If, at any time (i) the Corporation challenges, disputes or
denies the right of the Holder hereof to effect the conversion of the Preferred
Stock into Common Shares or otherwise dishonors or rejects any Conversion Notice
delivered in accordance with this Section 6.2 or (ii) any third party who is not
and has never been an Affiliate of the Holder commences any lawsuit or
proceeding or otherwise asserts any claim before any court or public or
governmental authority which seeks to challenge, deny enjoin, limit, modify,
delay or dispute the right of the Holder hereof to effect the conversion of the
Preferred Stock into Common Shares, then the Holder shall have the right, by
written notice to the Corporation, to require the Corporation to promptly redeem
the Series E Preferred Stock for cash at a redemption price equal to one hundred
thirty-five percent (135%) of the Stated Value thereof together with all accrued
and unpaid dividends thereon (the "Mandatory Purchase Amount"). Under any of the
circumstances set forth above, the Corporation shall be responsible for the
payment of all costs and expenses of the Holder, including reasonable legal fees
and expenses, as and when incurred in disputing any such action or pursuing its
rights hereunder (in addition to any other rights of the Holder).
SECTION 6.3 FRACTIONAL SHARES. No fractional Common Shares or scrip
representing fractional Common Shares shall be issued upon conversion of the
Series E Preferred Stock. Instead of any fractional Common Shares which
otherwise would be issuable upon conversion of the Series E Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.50 shall be required
to be given unless specifically requested by the Holder.
SECTION 6.4 RECLASSIFICATION, CONSOLIDATION, MERGER OR MANDATORY SHARE
EXCHANGE. At any time while the Series E Preferred Stock remains outstanding and
any shares thereof has not been converted, in case of any reclassification or
change of Outstanding Common Shares issuable upon conversion of the Series E
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Preferred Stock (other than a change in par value, or from par value to no par
value per share, of from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon conversion of
the Series E Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another corporation
(other than a merger or mandatory share exchange with another corporation in
which the Corporation is a continuing corporation and which does not result in
any reclassification or change, other than a change in par value, or from par
value to not par value per share, or from no par value per share to par value,
or as a result of a subdivision of combination of Outstanding Common Shares upon
conversion of the Series E Preferred Stock), or in the case of any sale or
transfer to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, the Corporation, as the case may be,
shall, without payment of any additional consideration therefor, execute a new
Series E Preferred Stock providing that the Holder shall have the right to
convert such new Series E Preferred Stock (upon terms and conditions not less
favorable to the Holder than those in effect pursuant to the Series E Preferred
Stock) and to receive upon such exercise, in lieu of each Common Share
theretofore issuable upon conversion of the Series E Preferred Stock, the kind
and amount of shares of stock, other securities, money or property receivable
upon such reclassification, change, consolidation, merger, mandatory share
exchange, sale or transfer by the holder of one Common Share issuable upon
conversion of the Series E Preferred Stock had the Series E Preferred Stock been
converted immediately prior to such reclassification, change, consolidation,
merger, mandatory share exchange or sale or transfer. The provisions of this
Section 6.4 shall similarly apply to successive reclassifications, changes,
consolidations, mergers, mandatory share exchanges and sales and transfers.
SECTION 6.5 ADJUSTMENTS TO CONVERSION RATIO. For so long as any shares
of the Series E Preferred Stock are outstanding, if the Corporation (i) issues
and sells pursuant to an exemption from registration under the Securities Act
(A) Common Shares at a purchase price on the date of issuance thereof that is
lower than the Conversion Price, (B) warrants or options with an exercise price
representing a percentage of the Current Market Price with an exercise price on
the date of issuance of the warrants or options that is lower than the agreed
upon exercise price for the Holder, except for employee stock option agreements
or stock incentive agreements of the Corporation, or (C) convertible,
exchangeable or exercisable securities with a right to exchange at lower than
the Current Market Price on the date of issuance or conversion, as applicable,
of such convertible, exchangeable or exercisable securities, except for stock
option agreements or stock incentive agreements; and (ii) grants the right to
the purchaser(s) thereof to demand that the Corporation register under the
Securities Act such Common Shares issued or the Common Shares for which such
warrants or options may be exercised or such convertible, exchangeable or
exercisable securities may be converted, exercised or exchanged, then the
Conversion Ratio shall be reduced to equal the lowest of any such lower rates.
SECTION 6.6 OPTIONAL REDEMPTION UNDER CERTAIN CIRCUMSTANCES. At anytime
after the date of issuance of the Series E Preferred Stock until July 15, 1999,
the Corporation, upon notice delivered to the Holder as provided in Section 6.7,
may redeem the Series E Preferred Stock (but only with respect to such shares as
to which the Holder has not theretofore furnished a Conversion Notice in
11
<PAGE>
compliance with Section 6.2), at one hundred twenty percent (120%) of the Stated
Value thereof (the "Optional Redemption Price"), together with all accrued and
unpaid dividends thereon to the date of redemption (the "Redemption Date");
PROVIDED, HOWEVER, that the Corporation may only redeem the Series E Preferred
Stock under this Section 6.6 if the Current Market Price is less than the
Current Market Price on the Closing Date. Except as set forth in this Section
6.6, the Corporation shall not have the right to prepay or redeem the Series E
Preferred Stock.
SECTION 6.7 NOTICE OF REDEMPTION. Notice of redemption pursuant to
Section 6.6 shall be provided by the Corporation to the Holder in writing (by
registered mail or overnight courier at the Holder's last address appearing in
the Corporation's security registry) not less than ten (10) nor more than
fifteen (15) days prior to the Redemption Date, which notice shall specify the
Redemption Date and refer to Section 6.6 (including, a statement of the Market
Price per Common Share) and this Section 6.7.
SECTION 6.8 SURRENDER OF PREFERRED STOCK. Upon any redemption of the
Series E Preferred Stock pursuant to Sections 6.6 or 6.7, the Holder shall
either deliver the Series E Preferred Stock by hand to the Corporation at its
principal executive offices or surrender the same to the Corporation at such
address by express courier. Payment of the Optional Redemption Price specified
in Section 6.6 shall be made by the Corporation to the Holder against receipt of
the Series E Preferred Stock (as provided in this Section 6.8) by wire transfer
of immediately available funds to such account(s) as the Holder shall specify to
the Corporation. If payment of such redemption price is not made in full by the
Mandatory Redemption Date or the Redemption Date, as the case may be, the Holder
shall again have the right to convert the Series E Preferred Stock as provided
in Article 6 hereof.
SECTION 6.9 MANDATORY CONVERSION. On the third anniversary of the date
of this Agreement (the "Mandatory Conversion Date"), the Corporation shall
convert all Series E Preferred Stock outstanding at the Conversion Price.
Notwithstanding the previous sentence, in no event shall the Corporation convert
that portion of the Series E Preferred Stock to the extent that the issuance of
Common Shares upon the conversion of such Series E Preferred Stock, when
combined with shares of Common Stock by such Holder and any other holders of
Series E Preferred Stock and Warrants, would exceed 19.99% of the Common Stock
outstanding on the Closing Date. Within ten (10) Business Days after the
Mandatory Conversion Date, the Corporation shall redeem all remaining
outstanding Series E Preferred Stock at one hundred and thirty-five percent
(135%) of the Stated Value thereof, together with all accrued and unpaid
dividends thereon, in cash, to the date of redemption.
ARTICLE 7
VOTING RIGHTS
The holders of the Series E Preferred Stock have no voting power,
except as otherwise provided by the General Corporation Law of the State of
Delaware ("DGCL"), in this Article 7, and in Article 8 below.
Notwithstanding the above, the Corporation shall provide each
holder of Series E Preferred Stock with prior notification of any meeting of the
12
<PAGE>
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least thirty (30) days prior to the consummation of the transaction
or event, whichever is earlier), of the date on which any such action is to be
taken for the purpose of such dividend, distribution, right or other event to
the extent known at such time.
To the extent that under the DGCL the vote of the holders of the
Series E Preferred Stock, voting separately as a class or series as applicable,
is required to authorize a given action of the Corporation, the affirmative vote
or consent of the holders of at least a majority of the shares of the Series E
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series E Preferred Stock
(except as otherwise may be required under the DGCL) shall constitute the
approval of such action by the class. To the extent that under the DGCL holders
of the Series E Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series E Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series E Preferred Stock shall be entitled to
notice of all shareholder meetings or written consents (and copies of proxy
materials and other information sent to shareholders) with respect to which they
would be entitled tonight, which notice would be provided pursuant to the
Corporation's bylaws and the DGCL.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series E Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the DGCL) of the holders of at least a majority
of the then outstanding shares of Series E Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the Series E Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series E Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation ("Senior Securities")
or alter or change the rights, preferences or privileges of any Senior
Securities so as to affect adversely the Series E Preferred Stock;
(c) increase the authorized number of shares of Series E
Preferred Stock; or
13
<PAGE>
(d) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series E Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
In the event holders of at least a majority of the then
outstanding shares of Series E Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series E
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series E
Preferred Stock, then the Corporation will deliver notice of such approved
change to the holders of Series E Preferred Stock that did not agree to such
alteration or change (the "Dissenting Holders") and Dissenting Holders shall
have the right for a period of thirty (30) days to convert pursuant to the terms
of this Certificate of Designation as they exist prior to such alteration or
change or continue to hold their shares of Series E Preferred Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 LOSS, THEFT, DESTRUCTION OF PREFERRED STOCK. Upon receipt
of evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of shares of Series E Preferred Stock and, in the case of any such
loss, theft or destruction, upon receipt of indemnity or security reasonably
satisfactory to the Corporation, or, in the case of any such mutilation, upon
surrender and cancellation of the Series E Preferred Stock, the Corporation
shall make, issue and deliver, in lieu of such lost, stolen, destroyed or
mutilated shares of Series E Preferred Stock, new shares of Series E Preferred
Stock, new shares of Series E Preferred Stock of like tenor. The Series E
Preferred Stock shall be held and owned upon the express condition that the
provisions of this Section 10.1 are exclusive with respect to the replacement of
mutilated, destroyed, lost or stolen shares of Series E Preferred Stock and
shall preclude any and all other rights and remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the
replacement of negotiable instruments or other securities without the surrender
thereof.
SECTION 9.2 WHO DEEMED ABSOLUTE OWNER. The Corporation may deem the
Person in whose name the Series E Preferred Stock shall be registered upon the
registry books of the p at its principal office a register in which the
Corporation shall provide for the registration of the Series E Preferred Stock.
Upon any transfer of the Series E Preferred Stock in accordance with the
provisions hereof, the Corporation shall register such transfer on the Series E
Preferred Stock register.
The Corporation may deem the person in whose name the Series E
Preferred Stock shall be registered upon the registry books of the Corporation
to be, and may treat it as, the absolute owner of the Series E Preferred Stock
for the purpose of receiving payment of dividends on the Series E Preferred
Stock and for all other purposes, and the Corporation shall not be affected by
any notice to the contrary. All such payments and such conversions shall be
valid and effective to satisfy and discharge the liability upon the Series E
Preferred Stock to the extent of the sum or sums so paid or the conversion or
conversions so made.
14
<PAGE>
SECTION 9.5 WITHHOLDING. To the extent required by applicable law, the
Corporation may withhold amounts for or on account of any taxes imposed or
levied by or on behalf of any taxing authority in the United States having
jurisdiction over the Corporation from any payments made pursuant to the Series
E Preferred Stock.
SECTION 9.6 HEADINGS. The headings of the Articles and Section s of
this Certificate of Designations are inserted for convenience only and do not
constitute a part of this Certificate of Designations.
15
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations, Preferences and Rights to be signed by its duly authorized officer
on this 15th day of January, 1999.
IMAGINON, INC.
By: /S/ DAVID M. SCHWARTZ
------------------------------
David M. Schwartz
President
16
<PAGE>
[FORM OF CONVERSION NOTICE]
TO:
_______________________________________
_______________________________________
The undersigned owner of this Series E 4% Convertible Preferred Stock (the
"Series E Preferred Stock") issued by Imaginon, Inc. (the "Corporation") hereby
irrevocably exercises its option to convert ________ shares of the Series E
Preferred Stock into shares of the common stock, $.01 par value, of the
Corporation ("Common Stock"), in accordance with the terms of the Certificate of
Designations. The undersigned hereby instructs the Corporation to convert the
number of shares of the Series E Preferred Stock specified above into Shares of
Common Stock Issued at Conversion in accordance with the provisions of Article 6
of the Certificate of Designations. The undersigned directs that the Common
Stock issuable and certificates therefor deliverable upon conversion, the Series
E Preferred Stock recertificated, if any, not being surrendered for conversion
hereby, together with any check in payment for fractional Common Stock, be
issued in the name of and delivered to the undersigned unless a different name
has been indicated below. All capitalized terms used and not defined herein have
the respective meanings assigned to them in the Certificate of Designations.
Dated:____________________________
__________________________________
Signature
Fill in for registration of Series E Preferred Stock:
Please print name and address
(including zip code number):
________________________________________________________________________________
________________________________________________________________________________
17
EXHIBIT 11.1
CALIFORNIA PRO SPORTS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
Year ended December 31,
-----------------------
1998 1997
------ ------
Net loss ..................................... $ (3,497,587) $ (4,809,215)
Amortization of discount on preferred stock .. (1,120,000)
------------ ------------
Net loss applicable to common shareholders ... $ (4,617,587) $ (4,809,215)
============ ============
Weighted average number
of common shares outstanding 9,549,353 5,544,833
Common equivalent shares
representing shares
issuable upon exercise of
outstanding options and warrants -*- -*-
------------ ------------
9,549,353 5,544,833
============ ============
Basic and diluted loss pershare:
Before extraordinary item .............. $ (0.48) $ (0.94)
Extraordinary item ..................... 0.07
------------ ------------
Basic and diluted loss per common share ...... $ (0.48) $ (0.87)
============ ============
* No impact to weighted average number of shares as the inclusion of additional
shares assuming the exercise of outstanding options and warrants would have been
antidilutive.
Fully diluted and supplementary net income (loss) per share are not
presented as the amounts are not dilutively or incrementally different from
primary net income (loss) per share amounts.
EXHIBIT 21.1
List of Subsidiaries
ImaginOn.com, a California corporation
INOW, Inc., a California corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 74,103
<SECURITIES> 0
<RECEIVABLES> 1,581,443
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,304,830
<PP&E> 2,674
<DEPRECIATION> (469,379)
<TOTAL-ASSETS> 2,558,615
<CURRENT-LIABILITIES> 1,497,097
<BONDS> 0
0
1,300,902
<COMMON> 134,347
<OTHER-SE> 430,051
<TOTAL-LIABILITY-AND-EQUITY> 2,558,615
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,729,826
<OTHER-EXPENSES> 709,509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,040
<INCOME-PRETAX> (3,439,335)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,497,587)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,497,587)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
