<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 2000
REGISTRATION NO. 333-________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________________
IMAGINON, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7372 84-1217733
(State or other jurisdiction of (Primary Standard (IRS Employer
incorporation or organization) Industrial Code) Identification No.)
1313 Laurel Street
San Carlos, California 94070
(650) 596-9300
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
David M. Schwartz
President, Chairman and Chief Executive Officer
1313 Laurel Street
San Carlos, California 94070
(650) 596-9300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all correspondence to:
John W. Kellogg, Esq.
RaLea A. Sluga, Esq.
Friedlob Sanderson Paulson & Tourtillott, LLC
1400 Glenarm Place, Suite 300
Denver, Colorado 80202
(303) 571-1400
_________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement as determined by
market conditions.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check this following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offer. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Calculation Of Registration Fee
- ----------------------------------------------------------------------------------------------------------
Title of each class of securities to Amount to be Proposed Proposed Amount of
be registered Registered(1) Maximum Maximum Registration
Offering Price Aggregate Fee
Per Share Offering Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 2,248,032 $1.25(3) $2,810,040 $ 742
- ----------------------------------------------------------------------------------------------------------
Common Stock issuable upon 1,879,213 (2) $5,340,972 $1,411
exercise of warrants
- ----------------------------------------------------------------------------------------------------------
TOTAL 4,127,245 $8,151,012 $2,153
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to Rule 457(c), the average of the bid and ask price of ImaginOn,
Inc. common stock as quoted on the NASDAQ SmallCap Market on April 17, 2000
was $1.25.
(2) Three of the selling securityholders have a combined total of 899,213
warrants with an exercise price of $3.34. There are an additional two
selling securityholders that have warrants with varied exercise prices:
180,000 warrants with an exercise price of $1.42, 200,000 warrants with an
exercise price of $1.70, 100,000 warrants with an exercise price of $1.98,
100,000 warrants with an exercise price of $2.27, 100,000 warrants with an
exercise price of $2.55, 100,000 warrants with an exercise price of $2.83,
100,000 warrants with an exercise price of $3.54 and 100,000 warrants with
an exercise price of $4.25.
(3) Pursuant to Rule 457(g), the proposed maximum offering price per share of
common stock is $1.25.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
PRELIMINARY PROSPECTUS DATED APRIL 19, 2000
PROSPECTUS
[LOGO OF IMAGINON APPEARS HERE]
4,127,245 shares of common stock
This prospectus relates to the proposed resale from time to time of up to
4,127,245 shares of our common stock by the selling securityholders. We will
not receive any of the proceeds from the sale of these securities.
The selling securityholders listed on page 38 are offering:
. 2,248,032 shares of common stock
. 1,879,213 shares of common stock issuable upon exercise of the
warrants
The selling securityholders may sell all or any portion of their shares of
common stock in one or more transactions on the NASDAQ SmallCap Market or in
private, negotiated transactions. The selling securityholders will pay all
selling expenses, including any brokerage commissions. ImaginOn will pay the
registration fee.
Our common stock trades on the NASDAQ SmallCap Market under the symbol
"IMON." On April 17, 2000, the last reported sale price of our common stock was
$1.25 per share.
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read this entire prospectus
and any amendments or supplements carefully before you make your investment
decision.
See "Risk Factors" starting on page 7 to read about material risks you
should consider before you purchase shares of our common stock.
______________________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
______________________________
Prospectus dated April 19, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
Where You Can Find Additional Information............................... -iii-
Forward-looking Statements.............................................. -iii-
Summary................................................................. -1-
Risk Factors............................................................ -7-
Use of Proceeds......................................................... -10-
Dividend Policy......................................................... -10-
Selected Financial Data................................................. -11-
Managements Discussion And Analysis
of Financial Condition And Results of Operations..................... -12-
ImaginOn, Inc........................................................... -18-
Management.............................................................. -30-
Certain Relationships and Related Transactions.......................... -36-
Principal Stockholders.................................................. -36-
Price Range of Our Common Stock......................................... -37-
Selling Securityholder.................................................. -38-
Plan of Distribution.................................................... -39-
Description of Securities............................................... -40-
Legal Matters........................................................... -43-
Experts................................................................. -43-
Index to Financial Statements........................................... F-1
</TABLE>
ii
<PAGE>
Where You Can Find Additional Information
We have filed with the SEC a registration statement on Form S-1 to register
the shares of common stock offered hereby. This prospectus is a part of that
registration statement. As allowed by the SEC rules, this prospectus does not
contain all the information you can find in the registration statement or the
exhibits to that registration statement. For further information with respect
to us and the common stock offered hereby, reference is made to the registration
statement and the exhibits to that registration statement. Statements in this
prospectus concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to that exhibit. Each statement in
this prospectus relating to a contract or document filed as an exhibit to the
registration statement is qualified by the filed exhibits. You can obtain a
copy of the registration statement and the exhibits through the SEC, at the
SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549,
Seven World Trade Center, 13/th/ Floor, New York, New York, 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, or the
SEC's website at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for
-------------------
further information on the public reference rooms and their copy charges.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors. We will also file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You can also request copies of these documents, for a copying
fee, by writing the SEC.
Our common stock is traded as "SmallCap Market Securities" on the Nasdaq
SmallCap Market. Material filed by us can be inspected at the offices of the
National Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
You may request free copies of any filing by writing or telephoning us at
our principal offices, which are located at the following address:
1313 Laurel Street
San Carlos, CA 94070
(650) 596-9300
Attn: Secretary
Forward-looking Statements
Certain statements under the captions "Summary," "Risk Factors," "Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "ImaginOn, Inc." and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations, prospects
and intentions, markets in which we participate and other statements contained
in this prospectus that are not historical facts. When used in this prospectus,
the words "expect," "project," "anticipate," "believe," "estimate," "intend,"
"plan," "seek" and similar expressions are generally intended to identify
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these forward-
looking statements, including changes in our plans, objectives, expectations,
prospects and intentions and other factors discussed under "Risk Factors" and
elsewhere in this prospectus. We cannot guarantee any future levels of
activity, performance or achievements. We will update these forward-looking
statements, to the extent required by law, to reflect material changes in the
information previously disclosed.
iii
<PAGE>
Summary
The information below is only a summary of more detailed information
included in other sections of this prospectus. The other information is
important, so please read this entire prospectus carefully.
ImaginOn, Inc.
Our Business
- ------------
We are an information technology company focused on developing and
marketing broadband Internet television systems to businesses and institutions.
Our Internet television system, ImOn.comTV, is a licensed turnkey package that
enables any website to present interactive television within a standard browser
window on any suitably connected computer. The ImOn.comTV interactive virtual
console offers its users video on demand, video that branches under user
command, automated Web searching, and many additional features, customized for
each licensee.
David Schwartz and Leonard Kain started ImaginOn in 1996 to develop better
ways for businesses and consumers to take advantage of the Internet and personal
computers.
Our patented core software technology, Transformational Database Processing
and Playback, has three components:
. database analysis
. network synthesis
. real-time adaptive playback
Transformational Database Processing and Playback has a set of 14 software
tools used to create new applications and content characterized by seamless
real-time access to video, audio, graphics, text HTML and 3D objects from
multiple remote or local databases.
For end users or viewers of ImOn.comTV, the product features three unique
components developed by ImaginOn:
. WebZinger(R) Online is a data mining Research Engine that searches the
-------------------
Web, which is short for the World Wide Web, downloads each website's
highlights, then formats the results into an illustrated report, complete
with audio and video.
. n-Branching movies, including WorldCities 2000(TM) is a series of
----------------------------------------------
interactive travel planners for distribution on broadband Internet, CD and
DVD. Travelers will use WorldCities to interactively tour a city, on film,
from the driver's seat. Each tour contains up to 120 minutes of TV quality
video in-depth topical information and links to over 1,000 websites.
. sellONstream(TM) is an e-commerce solution used by advertisers who want
------------
to sell products via the Web and at the same time use full-bandwidth video
content to motivate buyers with highly entertaining product-related pitches
and one-click access to e-commerce websites.
On October 26, 1999, to demonstrate our Internet TV system, we created the
ImOn.com Internet portal that uses the high bandwidth capabilities of our
patented technology in a wide variety of user applications, including:
. advanced on-line research,
. interactive travel planning,
. video e-commerce, and
-1-
<PAGE>
. interactive movies and gameplay.
The goal of our ImOn.comTV product is to make the Internet easier and more
productive for small businesses, educational institutions and individuals.
ImOn.comTV integrates our WebZinger research engine, WorldCities 2000 Series of
interactive travel planners, sellONstream video e-commerce solutions and our
never-released interactive movie and PC videogame, American Hero. Additionally,
licensees of ImOn.comTV get our software authoring tool, ImaginAuthor, which
enables authoring of interactive TV content such as interactive movies like
World Cities 2000, and e-commerce video presentations, like sellONstream.
Corporate training departments and educational content developers can use our
ImaginAuthor authoring tool for creating learning on demand applications.
ImOn.comTV's features will be useful in interactive education/training and
interactive advertising markets.
Market Segment
- ---------------
To attract licensees by demonstrating the quality and capability of
ImOn.comTV, we operate a high-bandwidth Internet portal, ImOn.com. This
Internet TV station is built out of our software components, plays original
video content produced by us using our authoring tool, and features our own
search engine. The fact that virtually all aspects of this system are owned by
us reassures potential customers that we can deliver and support ImOn.comTV in
all respects, from authoring content to streaming Internet broadcasting. This
industry segment is made up of a relatively small number of brand-name portals.
Additional markets where ImOn.comTV's features will be useful include
interactive education/training and interactive advertising. The market for
computer-based educational and training systems is already a $6 billion industry
serviced by thousands of small vendors.
ImOn.comTV addresses the e-commerce software market with its sellONstream
component. E-commerce is a new and rapidly growing segment of the Internet,
defined as transactions made online. For the calendar year 1998, e-commerce
sales were about $4 billion. Of this, $2.3 billion was during the holiday
season alone, up from $1.1 billion in the same period during 1997. E-commerce is
estimated to have exceeded $40 billion in 1999.
The market for ImOn.comTV is all businesses and institutions that are heavy
Internet users for their own internal purposes or service the general public
over the Internet. Since the market for ImOn.comTV is so large and diffuse, we
will focus our efforts on those businesses that have the most to gain by
licensing the product as soon as they become aware of it.
We are developing a "lite" downloadable version of our ImaginAuthor
authoring tool. Unlike the full-featured pro version of ImaginAuthor, the
downloaded version will be suitable for use by anyone who can use a word
processor. Corporate training departments and educational content developers
can then create original training and education content that can be "broadcast"
on the Internet in text and video, all interactive as desired.
Industry and Competition
- ------------------------
In the Internet television systems industry segment, we have no direct
competition. In the high bandwidth interactive streaming video authoring and
playback software business, we have no direct competitor, yet. Among the
competitors that provide software components that can be used to build a
similar, lower performance, less capable system, are Microsoft, Broadcast.com,
RealNetworks, Oracle and Macromedia.
Within the Internet search engine marketplace, there are at least two dozen
products aimed at Web users for the purpose of searching the Internet. All of
these search engines are primarily list generators; leaving the actual data
evaluation and retrieval to the user. The few search engines that do offer data
retrieval, do not provide much control or formatting of the output. Positioned
as a research engine, WebZinger actually does the substantial work of finding,
retrieving and formatting rich media assets from the Web.
-2-
<PAGE>
Strategy
- --------
Numerous companies, large and small, offer some portion of the services or
capabilities of ImOn.comTV, but there are no other single vendor integrated
solutions. Our competitive advantage in this field is derived from our unique
proprietary technology that integrates interactive video playback with media-
intensive data mining. We anticipate that revenues will be generated by ISP
services, license agreements, memberships, advertising and commissions stemming
from video e-commerce sales.
New products created with our tools are characterized by seamless real-time
access to video, audio, graphics, text, HTML and 3D objects from multiple remote
or local databases. We will license our tool set to businesses for building e-
commerce, data mining, interactive entertainment and training applications.
About Us
- --------
Below is a schematic drawing of the structure of our company and its
subsidiaries.
---------------------
ImaginOn, Inc.
"ImaginOn"
(Formerly California
Pro Sports, Inc.)
---------------------
----------------- ----------------- --------------
INow, Inc. ImaginOn Digital ImaginOn.com
Our Productions, Inc. Our
Inetrnet service Our technology
division advertising development
supported content division
"INOW" production
division "ImaginOn.com"
"IDP"
----------------- ----------------- --------------
-3-
<PAGE>
Risk Factors
- ------------
In connection with an investment in ImaginOn you should consider the
following risk factors which are more fully discussed beginning on Page 7:
. You may experience dilution.
. We have little relevant operating history to evaluate our performance or
prospects.
. We will require additional financial resources to fund our new product
development and growth. The failure to acquire additional funding could
impede new product development and growth and ultimately affect our
performance and prospects.
. Our earnings growth depends primarily upon market acceptance of our
software products.
. Our products may not be able to be successfully marketed or achieve
customer acceptance.
. Our success is heavily dependent upon unpredictable consumer approval of
our products.
. Slow development of new or replacement software or products offered could
cause us to experience:
. lower operating revenues
. lower net revenues
. lower cash flows
. less liquidity
. The market for Internet products and computer software evolves rapidly
and is characterized by numerous industry participants with technology that
may dominate the market for Internet products and computer software.
. We are dependent upon our founder and executive officer David Schwartz.
The loss of his services could have a material adverse effect on our
business and prospects. We do not hold "key-person" life insurance on Mr.
Schwartz.
. We entered into agreements and informal relationships with other software
and computer companies that if terminated or altered could have any of the
following effects:
. limit or eliminate the market for our products
. limit or eliminate public recognition of the "ImaginOn" name
. reduce revenues
. lower cash flows
. impair liquidity
. Effective trademark, patent, copyright and trade secret protection may
not be available in every country in which our products and media
properties will be distributed or made available through the Internet.
. We could be held liable for some of the services we provide or may be
held liable for Year 2000 problems.
-4-
<PAGE>
The Offering
Shares offered The selling securityholders are offering up to 4,127,245
shares of our common stock.
Public price The shares may be sold to the public at the prevailing
market price at the time of sale. See "Plan of
Distribution".
Use of proceeds The net proceeds for the sale of the shares will be paid to
the selling securityholders. We will not receive any of the
proceeds from this offering, except for the warrants
exercised. See "Use of Proceeds".
Trading symbol Our common stock currently trades on the NASDAQ SmallCap
Market under the symbol "IMON".
-5-
<PAGE>
Summary Financial Data
The following table summarizes certain financial information about our
business. Because of our recent change in business, the historic information
reflected below may not be a good basis for evaluating our current and future
performance. For a more detailed explanation of this data, see "Management
discussion and analysis of financial condition and results of operations" and
our financial statements located elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31, Period from March
------------------------ 29, 1996 (date of
inception) to
1999(1) 1998 1997 December 31, 1996
---------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales $ 339,790 $ 880 $ 4,665
Gross Profit 141,789 851 3,630
Loss from operations (7,196,231) (1,656,185) (870,234) $ (394,573)
Net loss (7,047,082) (1,740,202) (946,512) (394,906)
Net loss applicable to common shareholders ($8,642,269) ($1,740,202) ($946,512) ($394,906)
============= ============ =========== ==============
Loss per common share ($.22) ($.08) ($.06) ($.04)
============= ============ =========== ==============
Weighted average common shares outstanding 39,006,214 20,483,093 15,534,969 9,033,332
============= ============ =========== ==============
<CAPTION>
December 31,
------------
1999 1998
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets $ 7,090,201 $ 24,032
Total assets 9,344,276 40,243
Working capital (deficit) 6,051,039 (1,847,969)
Shareholders' equity (deficit) 8,305,114 (1,831,758)
</TABLE>
(1) On January 20, 1999, we completed a merger with ImaginOn, Inc. The
transaction was recorded as an acquisition of ImaginOn, Inc. by ImaginOn.com,
Inc. and a recapitalization of ImaginOn.com, Inc.
-6-
<PAGE>
Risk Factors
You should carefully consider the risk factors listed below and the other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock and warrants involves a high degree of risk. Any
or all of the risks listed below could have a material adverse effect on our
business, operating results or financial condition, which could cause the market
price of our stock to decline, in which event you could lose your investment in
our common stock. You should also keep these risk factors in mind when you read
forward-looking statements. We have identified all of the material risks which
we believe may affect our business and the principal ways in which we anticipate
that they may affect our business or financial condition.
Risks Relating to Our Business
- ------------------------------
We have little relevant operating history to evaluate performance or prospects.
Prior to the fourth quarter of 1999, we considered ourselves to be a
development stage company, and engaged primarily in research and development
activities, raising capital, acquiring businesses and recruiting personnel. In
the fourth quarter of 1999, we began selling our broadband Internet television
software systems, which we developed in conjunction with technologies and
resources obtained in part through our business. We also completed a $6,000,000
private placement of our common stock and warrants. While as a result of these
events, beginning in the fourth quarter of 1999, we no longer consider ourselves
to be a development stage company, we have little relevant operating history
upon which we can evaluate our performance and prospects. We face all the risks
common to companies in their early stage of development, including:
. undercapitalization;
. cash shortages;
. high capital expenditures;
. unproven business model;
. difficulties in managing rapid growth; and
. lack of sufficient customers, revenue and cash flow.
Although our personnel have experience in developing and commercializing
new products based on innovative technologies, unanticipated expenses, problems
or technical difficulties could occur which would result in material delays in
product commercialization. Our efforts may not result in successful product
commercialization.
We will need additional capital to fund operations.
We will require additional financial resources to fund our new product
development and growth. Although we are actively exploring options for funding,
we have received no commitment from any person or source for that financing, and
adequate financing may not be available on reasonable terms. Our failure to
acquire additional funding when required could impede new product development
and growth and, ultimately, our performance and prospects.
Our earnings growth is dependent upon acceptance of our products.
Our earnings growth depends primarily upon market acceptance of our
software products. Our products may not be able to be successfully marketed or
achieve customer acceptance.
Our success depends on the introduction of new products and product
enhancements.
Our success in the software development business is heavily dependent upon
the timely introduction of successful new products or enhancements of existing
products to replace declining revenues from products at the latter stage of a
product cycle. Consumer preferences for software products are difficult to
predict, and few
-7-
<PAGE>
consumer software products achieve sustained market acceptance. If revenue from
new products or enhancements does not replace declining revenues from existing
products, we may experience:
. lower operating revenues
. lower net revenues
. lower cash flows
. less liquidity
Production delays could inhibit our success.
The process of developing our software products is extremely complex. A
significant delay in the introduction of one or more new products or
enhancements could have a material adverse effect on the ultimate success of
such products and we may experience:
. lower operating revenues
. lower net revenues
. lower cash flows
. less liquidity
We operate in a developing market with increasing participants.
The market for Internet products and computer software is rapidly evolving
and is characterized by an increasing number of market entrants who have
introduced or developed products and services. Although we believe that the
diverse segments of the Internet market will provide opportunities for more than
one supplier of products and services similar to those we possess, it is
possible that a single supplier may dominate one or more market segments.
Additionally, there may be insufficient market acceptance of our products
because the market for Internet products and computer software changes rapidly.
We are heavily dependent on our management.
Our success depends upon the personal efforts of our President and Chief
Executive Officer, David M. Schwartz. The loss of the services of Mr. Schwartz
could have a material adverse effect on our business and prospects. We do not
have "key-person" life insurance on Mr. Schwartz.
Our success is linked to our ability to hire and maintain personnel.
Our success depends on our ability to hire and retain additional qualified
management, marketing, technical, financial and other personnel. Competition
for qualified personnel is intense and we may not be able to hire or retain
qualified personnel.
The exercise of the warrants will cause dilution to holders of our common stock.
The exercise of the warrants to purchase 1,879,213 shares of common stock
issued to the warrant holders will result in dilution to the interests of other
holders of common stock.
We are dependent on contracts with other companies for promotion of our products
and reputation.
We have entered into agreements and informal relationships with other
software and computer companies under which the companies will use our products.
We believe these arrangements are important to the promotion of our products and
the public recognition of the "ImaginOn" name. These arrangements typically are
not exclusive, and may be terminable upon little or no notice. Termination or
alteration of these agreements could have any of the following effects on us:
-8-
<PAGE>
. limit or eliminate the market for our products
. limit or eliminate public recognition of the "ImaginOn" name
. reduce revenues
. lower cash flows
. impair liquidity
We regard our patented technology as proprietary.
Our success and ability to compete is dependent on our proprietary
technology. We regard our technology as proprietary and we rely primarily on
U.S. patent, trademark, copyright, trade secret laws, third-party non-disclosure
agreements and other methods to protect our proprietary rights. The steps taken
by us to protect our proprietary rights may not be adequate and third parties
may infringe or misappropriate our copyrights, trademarks, and similar
proprietary rights. Additionally, effective trademark, patent, copyright and
trade secret protection may not be available in every country in which our
products and media properties will be distributed or made available through the
Internet.
Risks Related to the Internet and the Internet Industry
- -------------------------------------------------------
We face significant competition from other providers of Internet products and
computer software.
The markets that we intend to enter for our Internet products and computer
software are characterized by intense competition and an increasing number of
new market entrants who have developed or are developing potentially competitive
products. Further, the cost barriers to these markets are relatively low, which
means our competitors range from small companies with limited resources to
large, more established companies. Some competitors, regardless of size, have
substantially greater financial, technical, marketing, distribution, personnel
and other resources. For example, current and future competitors with greater
financial resources than us may be able to carry larger inventories, undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
make higher offers or guarantees to software developers and co-development
partners than us. It is possible that we may not have the resources to
withstand these and other competitive forces.
We may become subject to government regulation.
We are not currently subject to direct regulation by any government agency
in the United States, other than general business regulations applicable to
conduct businesses generally. Currently there are few laws or regulations
regarding access to or commerce on the Internet. Due to the increasing
popularity and use of the Internet, laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. These laws or
regulations, if adopted, could also limit the growth of the Internet, which
could, in turn, decrease the demand for our proposed products and services and
increase our cost of doing business. Inasmuch as the applicability to the
Internet of the existing laws governing issues such as property ownership, libel
and personal privacy is uncertain, any new legislation or regulation or the
application of existing laws and regulations to the Internet could have an
adverse effect on our business and prospects.
We could be held liable for some of our services.
Because materials may be downloaded by the online or Internet services
operated or facilitated by us and may be subsequently distributed to others,
there is a potential that claims will be made against us for defamation,
negligence, copyright or trademark infringement, personal injury or other
theories based on the nature and content of these materials. These types of
claims have been brought, and sometimes successfully pressed, against online
service providers. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. Any impositions of liability or legal
defense expenses are not covered by insurance or in excess of insurance coverage
could effect our revenues, cash-flow and/or liquidity.
-9-
<PAGE>
Use of Proceeds
We will not receive any proceeds from the sale of the shares of common
stock being sold by the selling securityholders. We will receive approximately
$3,003,372 from the exercise of the warrants held by TailWind Fund, Ltd. ,
Resonance Ltd. and Southshore Capital Fund Limited to purchase 899,213 shares of
our common stock. However, we do not expect to receive these proceeds until the
exercise price of the warrants is below the market price of the our common
stock. We will receive approximately $2,342,200 from the exercise of the
warrants held by Henry Fong and Barry Hollander. All proceeds from the exercise
of warrants will be used for working capital.
Dividend Policy
Holders of our common stock are entitled to receive such dividends as may
be declared by our board of directors. We have not paid any dividends on our
common stock and we do not anticipate that we will pay dividends in the
foreseeable future. Any payments of future dividends will be at the discretion
of our board of directors after taking into account various factors, such as our
financial condition, operating results, current and anticipated cash needs and
plans for expansion and restrictions in our credit documents or other
agreements. We currently intend to retain any future earnings to fund
operations and continue development of our business.
-10-
<PAGE>
Selected Financial Data
The selected financial data set forth below for the periods ended December
31, 1999, 1998 and 1997 have been derived from our consolidated financial
statements included elsewhere in this prospectus. The consolidated balance sheet
data as of December 31, 1999 and 1998, and statements of operations data for
each of the periods ended December 31, 1999, 1998 and 1997 have been derived
from our consolidated financial statements which have been audited by Gelfond
Hochstadt Pangburn, P.C. The balance sheet data and statement of operations
data as of and for the period ended December 31, 1996, has been derived from
unaudited financial statements. Because of our recent change in business, the
historic information reflected below may not be a good basis for evaluating our
current and future performance. You should read this information together with
the financial statements and related notes included in this prospectus and the
information under the heading "Management's discussion and analysis of financial
condition and results of operation" in this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31, Period from March 29,
------------------------
1996 (date of inception)
1999(1) 1998 1997 to December 31, 1996
------------ ------------ ----------- --------------------
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales $ 339,790 $ 880 $ 4,665 --
Gross Profit $ 141,789 $ 851 $ 3,630 --
Loss from operations ($7,196,231) ($1,656,185) ($870,234) (394,573)
Net Loss ($7,047,082) ($1,740,202) ($946,512) ($394,906)
Net loss applicable to ($8,642,269) ($1,740,202) ($946,512) ($394,906)
common shareholders ============ ============ =========== =========
Loss per common share ($.22) ($.08) ($.06) ($.04)
============ ============ =========== =========
Weighted average common 39,006,214 20,483,093 15,534,969 9,033,332
shares outstanding ============ ============ =========== =========
<CAPTION>
Years Ended December 31,
-----------------------
1999 1998 1997 1996
---- ---- ------- ------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $ 7,090,201 $ 24,032 $ 14,079 -
Total assets $ 9,344,276 $ 40,243 $ 27,316 -
Working capital (deficiency) $ 6,051,039 $ (1,847,965) ($557,544) (391,573)
Shareholders' equity $ 8,305,114 $ (1,831,758) ($544,307) (371,573)
(deficit)
</TABLE>
(1) On January 20, 1999, the company completed a merger with ImaginOn, Inc. The
transaction was recorded as an acquisition of ImaginOn, Inc. by ImaginOn.com,
Inc. and a recapitalization of ImaginOn.com, Inc.
-11-
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview
- --------
You should note that our business materially changed after December 31,
1998. We are no longer a participant in the in-line skate business, hockey
business or snowboard business. We are an information technology company. Except
as otherwise described in this prospectus, the financial information in this
prospectus is given through December 31, 1999.
Recent Developments
- -------------------
On December 31, 1999, we completed $3 million of a $6 million private
placement of our restricted common stock through our investment banker,
Ladenburg Thalmann & Co., Inc. The remaining $3 million of the private placement
was received after year end. The net proceeds of $5.6 million from the placement
offering will be used primarily to fund the marketing of our ImOn.comTV product.
In the offering, we sold 2,248,032 shares of common stock for $2.67 per share
and issued warrants to acquire up to 899,213 shares of common stock at an
exercise price of $3.34 per share. The warrants will expire on March 30, 2002.
On January 13, 2000, the holder of the Series F Convertible Preferred Stock
converted 2,000 shares of Series F Convertible Preferred Stock into 858,851
shares of common stock in accordance with its terms.
On February 25, 2000, we redeemed the remaining outstanding 2,000 shares of
Series F Convertible Preferred Stock for $2,394,000 in accordance with its
terms. The Series F Convertible Preferred Stock was redeemed for $1,197 per
share, which includes $97 per share of accrued interest through the redemption
date.
Change in Business
- ------------------
Effective December 31, 1998, we, operating under the name of California Pro
Sports, Inc., materially changed our business operations from the in-line skate,
snowboard and hockey business to information technology. The information in this
section is mainly historical and does not reflect our current operating
business.
Until December 31, 1998, under previous management, we operated under the
name of California Pro Sports, Inc., and imported and distributed products in
three participant sports categories:
. in-line skates
. hockey
. snowboards
In-line skates and related accessory products were marketed under the brand
names California Pro(R) and Rolling Thunder(TM) since August 1, 1994, snowboards
and snowboard accessory products were marketed under the Kemper(R) brand; and
ice and street/roller hockey skates, sticks, related gear and accessories, as
well as figure skates were marketed under the VICTORIAVILLE(TM), VIC(R),
Hespeler(TM) and McMartin(R) brands. We purchased most of our in-line skate and
snowboard products from manufacturers in Taiwan, mainland China, Austria and
Canada. Some of our accessory products were purchased from domestic suppliers.
Approximately 70% of all hockey products sold were manufactured by Davtec, our
subsidiary, and skates and related gear were purchased from foreign suppliers.
We sold our 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 us to our foreign distributors. Hockey products
-12-
<PAGE>
were sold in North America through a network of independent sales representative
groups to major retail sporting goods chains as well as smaller, specialized
independent sporting goods shops. Internationally, hockey products were sold to
and distributed by independent distributors located in Germany, Switzerland,
Italy, Austria, Czech Republic, Sweden, France, Finland and Brazil. In 1996 and
1997, due to continuing operating losses, management decided to restructure and
reduce its debt. Accordingly, in September 1997, we completed the sale of
substantially all of our hockey business assets of Skate Corp.'s direct and
indirect operating subsidiaries, USA Skate and Davtec, to Rawlings Sporting
Goods Company, Inc. and Rawlings Canada, Inc. for $14.5 million cash, including
$1 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, we began liquidating remaining
inventories and commenced a search for sub-licensees and a merger candidate. In
1998, we had no operating revenues, but did realize income from sub-licensing
agreements.
The Merger Transaction
- ----------------------
October 2, 1997 we signed a Letter of Intent with ImaginOn.com to merge a
wholly owned subsidiary corporation with ImaginOn.com, whereby there would be an
exchange of 100% of the outstanding ImaginOn.com common stock for an amount
equal to 60% of our outstanding post merger common stock, subject to certain
adjustments.
At a special meeting of our stockholders, held December 10, 1998, the
stockholders approved the proposed merger and also approved changing our name
from California Pro Sports, Inc. to ImaginOn, Inc. On January 20, 1999, ImaginOn
through ImaginOn Acquisition Corp., completed the merger with ImaginOn.com. The
shareholders of ImaginOn.com became stockholders of ImaginOn, Inc. and were
issued 20,206,115 shares of ImaginOn common stock.
Year ended December 31, 1999 compared to year ended December 31, 1998
- ---------------------------------------------------------------------
Overview. During 1999, we achieved revenues of $339,790 compared to $880
in 1998. These revenues are attributed to our marketing and sale of WebZinger,
WorldCities 2000, sellONstream, ImOn.comTV, and our licensing of our technology.
In addition, revenues were generated from the acquisition of customers of INOW
and IDP for Internet and Website host services. Our net loss for the year ended
December 31, 1999, was $8,642,269, which included amortization for the discount
and dividends on our convertible preferred stock, compared to the year ended
December 31, 1998 net loss of $1,740,202. The loss per share of common stock was
$0.22 in year ended December 31, 1999 compared to $0.08 in year ended December
31, 1998. Operating results for 1998 reflect only the operation of ImaginOn.com
as a private company prior to the merger with California Pro Sports.
At year end 1999, ImaginOn is debt-free, as compared to year end 1998, when
our indebtedness was nearly $1.8 million. The 1999 financing efforts increased
our current assets to nearly $7.1 million compared to $24,000 one year ago,
reflecting our fiscal 1999 investment in the sale, marketing and R&D programs
required to transition us from the development stage to the operating stage.
Results of Operations. The following discussion and analysis of our
financial condition and results of operation should be read in conjunction with
the condensed consolidated financial statements and notes.
-13-
<PAGE>
The following table sets forth certain operating data for us for the
periods as indicated below.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Net Revenues $ 339,790 $ 880
Gross Profit 141,789 851
Research and Development 1,117,265 906,256
Sales and Marketing 2,829,535 440,967
General and administrative 3,256,220 309,813
Net Loss (8,642,269) (1,740,202)
</TABLE>
Net revenues were $339,790 and $880 for the years ended December 31, 1999
and 1998, respectively. The increase was due primarily to the acquisition of
INOW's Internet service provider customers that brought in $239,470. There was
$74,345 in revenue from ImaginOn.com's products and licensing. The remaining
$25,975 was from the acquisition of IDP customers. For the year ended December
31, 1998, revenue was limited due to us being in the development stage.
Marketing and advertising began to increase in the second quarter, with the
first WebZinger ad for schools placed during March in the Educational Technology
Institute (ETI) Spring 1999 Exploria catalog. The first ad for WorldCities 2000
was placed during May 1999 in Sunset Magazine. The first sellONsteam ad was
placed on July 12, 1999 in AdWeek, Marketing Week and MediaWeek Magazines (in
the Marketing with Video, DVD and CD-ROM Sourcebook). The ImOn.com portal was
launched on October 26, 1999 at the ISPCON Conference in San Jose, CA. This is
viewer driven seamless branching TV that simultaneously integrates with the Web
research data in the same virtual console. This paved the way of the arrival of
ImOn.com Internet TV - a video channel with sound and integrated Web
functionality that is delivered over the Internet and viewed in much the same
way as traditional broadcast television. Shortly after the ISPCON show, we
generated $24,000 from our first ImOn.com TV customer. In addition, $25,000 was
received toward the end of the year from the new Hong Kong distributor for
licensing of our technology.
Gross Profit. Gross profit increased to $141,789 for the year ended
December 31, 1999, compared to $851 in the year ended December 31, 1998.
Research and Development Expenses. Research and development expenses
increased to $1,117,265 for the year ended December 31, 1999, compared to
$906,256 for the year ended December 31, 1998, a 23% increase. Out of the total
for year ended December 31, 1999, nearly 59% was payroll expenses to engineers,
18% to video production crew and staff and nearly 21% to the development,
production and completion of the World Cities 2000 projects for San Francisco,
New York, Paris and London. The remaining 2% was for the ImOn.com Internet TV
project. For the year ended December 31, 1998, nearly 43% was for payroll
expenses of engineers, 2% for video production crew and the remaining 55% was
for the development and production of the World Cities 2000 projects.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$2,829,535 for the year ended December 31, 1999, compared to $440,967 for the
year ended December 31, 1998, a 542% increase. Out of the total for the year
ended December 31, 1999, approximately 44% was for the advertising and marketing
of WebZinger, WorldCities 2000, sellOnstream and ImOn.comTV. Nearly half of this
44% expense is attributable to the WebZinger nationwide marketing campaign in
the fall. About 37% was for employee payroll, a one time expense of a stock
signing bonus given to a newly hired employee during the first quarter, and
outside consultants. The remaining 19% was attributable to trade shows,
conferences, public relations, travel, marketing supplies such as printing and
reproduction, computer related equipment, promotion materials and
communications. In total for the year ended December 31, 1998, nearly 65% was
for employee payroll and outside consultants. Approximately, 21%
-14-
<PAGE>
was for advertising, trade shows, public relations and sales and marketing
materials. The remaining 14% was for travel, communications, and computer
related equipment. From this total sales and marketing expense in 1999, there
was $137,139 and $44,778 from INOW and IDP acquisitions, respectively.
General and Administrative Expenses. General and administrative expenses
increased to $3,256,220 for the year ended December 31, 1999, compared to
$309,813 for the year ended December 31, 1998, a 951% increase. Out of the total
for the year ended December 31, 1999, nearly 34% was attributable to
professional services for legal and auditing fees, 33% was for employee payroll
and outside consultants, 23% was for rent, utilities and travel and
approximately 8% was for general office supplies, communications, corporate
insurance, computer equipment and furniture. Due to the two acquisitions, about
2% was for the amortization of intangible assets related to goodwill. In the
year ended December 31, 1998, nearly 64% was attributable to professional
services of legal and auditing fees, 32% for employee payroll expenses and the
remaining 4% was for rent, utilities, travel, communications, general office
supplies, computer equipment and furniture. From the total general and
administrative expense in 1999, there was $370,473 and $293,638 from the INOW
and IDP acquisitions, respectively.
Interest Expense, Net. In the year ended December 31, 1999, total net
interest income increased to $122,191 compared to $310 for the year ended
December 31, 1998. This increase was primarily due to interest earned from money
market and CD bank accounts. Interest expense decreased to $905 for the year
ended December 31, 1999, compared to $78,079 for the year ended December 31,
1998. The reason is primarily due to the elimination of monthly bridge loans
incurred for the California Pro Sports, Inc. and ImaginOn.com merger. Other
income increased to $27,863 primarily from California Pro Sports, Inc. royalties
for the year ended December 31, 1999 compared to an expense of $6,248 for the
year ended December 31, 1998.
Liquidity and Capital Resources. On December 31, 1999, cash and working
capital increased to $4,959,694 and $6,051,039, respectively, compared to
$10,874 and ($1,847,969), respectively, on December 31, 1998. The increase in
cash and working capital is attributable during the second quarter to the
exercise of options for net proceeds of $9,462.12 and the sale of 4,000 shares
of Series F 12% convertible preferred stock at $1,000 per share for net proceeds
of approximately $3,650,000. Approximately $3,042,000 of the proceeds were
utilized to redeem the remaining 2,510 shares of Series D and E preferred stock
as well as support our operating expenses. In addition, during the fourth
quarter, we received $3 million of the $6 million private placement through
Ladenburg Thalmann & Co., Inc. The remaining $3 million of the private placement
was received after year end. Under the terms of the $6 million offering, we sold
2,248,032 shares of common stock for $2.67 per share, resulting in net proceeds
to us of $5,600,000. We also issued to investors warrants to acquire up to
899,213 shares of common stock at an exercise price of $3.34 per share. The
warrants expire on March 30, 2002. The number of shares issued in the offering
and the exercise price of the warrants will be adjusted for future issuances of
our securities at prices less than the sale price of the common stock or
exercise of the warrants. We have agreed to register the shares of common stock,
including the shares received upon exercise of the warrants on or before March
30, 2000.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
- ---------------------------------------------------------------------
Results of Operations. The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with
the consolidated financial statements and notes.
-15-
<PAGE>
The following table sets forth certain operating data for us for the
periods as indicated below.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Net Revenues $ 880 $ 4,665
Gross Profit 851 3,630
Research and Development 906,256 547,531
Sales and Marketing 440,967 208,588
General and administrative 309,813 117,745
Net Loss (1,740,202) (946,512)
</TABLE>
Net Revenues. Net revenues were $880 and $4,665 for the years ended
December 31, 1998 and 1997 respectively. For these years, we were in the
development stage and were not a public company. Therefore, revenues for sales
of ImaginOn's software products were insignificant.
Gross Profit. Gross profit decreased to $851 for the year ended December
31, 1998 compared to $3,630 in the year ended December 31, 1997. This was due to
a one time sale of $4,350 for ImaginOn's software to a local company in 1997.
Research and Development Expenses. Research and development expenses
increased to $906,256 for the year ended December 31, 1998 compared to
$547,531for the year ended December 31, 1997. Out of the total for the year
ended December 31, 1998, approximately 45% was increased payroll expenses to
engineers, video production crew and staff, 33% was attributable to the
development and production of the World Cities 2000 projects for San Francisco,
New York, Paris and London, 13% was for technology licenses and rights, 6% was
for general office, supplies, rent, travel and accommodations and the remaining
3% was for computer equipment, supplies and office furniture. In the total for
the year ended December 31, 1997, nearly 64% was payroll expenses to engineers
and consultants, 18% was for the development and production of the first World
Cities 2000 project for San Francisco, 8% was for general office supplies, rent,
travel and accommodations, 5% was for purchasing of computer equipment,
supplies, and office furniture, 3% for technology rights and 2% for professional
legal fees for patents and trademarks.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$440,967 for the year ended December 31, 1998, compared to $208,588 for the year
ended December 31, 1997. Out of the total for the year ended December 31, 1998,
approximately 65% was for payroll and consultants, an increase due to the hiring
of additional employees and consultants, 21% was for advertising, promotional
materials, packaging designs, public relations, trade shows and presentations,
an increase due to the promotion of ImaginOn products, 11% was for general
office supplies, rent, communications, computer equipment and the remaining 3%
was for travel and accommodations due to relocation to a larger facility. In
the total for the year ended December 31, 1997, approximately, 55% was for
advertising, trade shows, public relations, general office supplies, rent and
sales and marketing materials, 39% was for employee payroll and consultants and
the remaining 6% was for travel, communications and computer related equipment.
General and Administrative Expenses. General and administrative expenses
increased to $309,813 for the year ended December 31, 1998, compared to $117,745
for the year ended December 31, 1997. Out of the total for the year ended
December 31, 1998, nearly 64% was attributable to professional services of legal
and auditing fees for the preparation of the reverse merger and the company
going public, 32% was due to increased employee payroll
-16-
<PAGE>
and the remaining 4% was for growth of general office supplies, communications,
corporate insurance, rent, utilities, travel and accommodations. In the year
ended December 31, 1997, nearly 41% was for payroll expenses, 29% was
attributable to professional services of accounting and auditing fees, 18% was
for rent, utilities, travel, communications, general office supplies, computer
equipment and furniture, and the remaining 12% was for travel and
accommodations.
Liquidity and Capital Resources. On December 31, 1998, cash was $10,874
and working capital was ($1,847,969), compared to no cash and ($557,544) for
working capital on December 31, 1997. In January 1998, ImaginOn.com issued
873,180 shares of common stock at $1.25 per share for net proceeds of $489,915.
On January 30, 1998, ImaginOn.com signed a merger agreement with California Pro
Sports, Inc., a publicly traded marketer and distributor of sporting goods
related products. Under the merger transaction, there was an exchange of 100% of
the outstanding shares of ImaginOn, Inc. for an amount equal to 60% of the
outstanding post-merger common stock. The merger transaction was contingent upon
certain customary conditions including, but not limited to the approval of the
transaction by the board of directors of both companies and the stockholders of
California Pro Sports, Inc.
In connection with the first round of financing in 1997, ImaginOn.com
issued warrants to purchase 611,539 shares of common stock for $0.15-$1.25 per
share.
In connection with the second round of financing in 1998, ImaginOn.com
issued warrants to purchase 1,112,265 shares of common stock for $1.25 per
share.
ImaginOn.com determined, by using appropriate valuation models, that the
fair value of the warrants was $72,158 in 1997 for the first round of financing
and $325,751 in 1998 for the second round of financing. Accordingly, these
amounts have been offset against the proceeds from the issuance of common stock
in the relevant year.
In connection with the 1998 bridge financing, ImaginOn.com issued warrants
to purchase 41,580 shares of common stock for $1.25 per share. In regards to
the 1998 bridge financing, ImaginOn.com determined the fair value of the
warrants to be $12,398 at the date of grant. Accordingly, we recorded $12,398
of interest expense associated with these warrants.
Recently Adopted Accounting Standards
- -------------------------------------
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement is effective for fiscal years
beginning after June 15, 2000. We currently do not use any derivative financial
instruments to hedge our exposure to adverse fluctuations in interest rates,
foreign exchange rates, fluctuations in commodity prices or other market risks,
nor do we invest in speculative financial instruments. Therefore, SFAS No. 133
will not have an impact on the financial statements.
-17-
<PAGE>
ImaginOn, Inc.
You should note that our business materially changed after December 31,
1998. We no longer are a participant in the in-line skate, hockey or snowboard
business. We are now an information technology company. Except as otherwise
described in this prospectus, the information in this prospectus is given
through December 31, 1999.
Our Mission
- -----------
Our objective is to deliver Internet television to everyone who wants to
communicate, entertain, inform, educate or market in a new way, in a new era.
About Us
- --------
We are an information technology company focused on developing and
marketing broadband Internet television systems to businesses and institutions.
Our Internet television system, ImOn.comTV(TM), is a licensed turnkey package
that enables any website to present interactive television within a standard
browser window on any suitably connected computer. Web sites are places on the
Internet. Every web page has a location where it resides which is called its
site and every site has an address usually beginning with "http://." The
ImOn.comTV interactive "virtual console" offers its users video on demand, video
that branches under user command, automated Web searching, and many additional
features, customized for each licensee.
David Schwartz and Leonard Kain started ImaginOn in 1996 to develop better
ways for businesses and consumers to take advantage of the Internet and personal
computers. Originally, the Internet was called ARPANET after the Advanced
Research Projects Agency of the U.S. Department of Defense. This electronic
network, which is a multi-dimensional set of items and the connections between
them, connects the network host computers together so that a user may go from
one Web Page to another efficiently. This electronic connection network began
as a government experiment in 1969 with four computers connected together over
phone lines. By 1972, universities also had access to what was by then called
the Internet. On January 20, 1999, ImaginOn became a public company by
completing a merger with California Pro Sports, Inc., "CALP", in which their
shareholders retained 40% ownership of the merged entity and no representation
on our Board of Directors. All business operations of CALP were discontinued
prior to the merger and the name was changed to ImaginOn, Inc. ImaginOn
currently trades on the Nasdaq SmallCap Market under the symbol "IMON".
The software technology invented by our founders is the subject of two U.S.
patents. The primary functions of our applications are authoring media
intensive data and interactive playback of media intensive data. On the
authoring side, we enable automated data collection and organization, manually
guided collection and organization, or a combination of automated and manual
operations. Our authoring software is used to create Internet TV content. On
the playback side, we enable access and manipulation of interactive high
bandwidth streaming video. A stream is digital data that is transmitted or
delivered as a continuous flow of information within a channel. The stream may
or may not have a fixed duration. Examples of streams are digitized audio and
digitized video. To view or hear something in real-time means to see or hear it
immediately and without any slowdowns. Real-time audio on the Internet, for
example, means the user does not have to wait an entire audio file to download,
but can, almost immediately, start listening to the audio as it is coming to
them. Our media playback features interactivity that goes beyond simple click-
throughs. Real-time seamless branching of video streams, and simultaneous real-
time seamless integration of Web research data within Internet TV, are
fundamentally new features created by us.
Corporate Positioning
- ---------------------
Personal computers with high performance video processing technology, CD or
DVD ROM disc drives and Internet World Wide Web access are now the standard
configuration in the marketplace. The World Wide Web
-18-
<PAGE>
is a full-color, multimedia database of information through web pages connected
together through links, which transport a user from one Internet site to another
with just a click of the mouse and are distinguished by a different color than
the rest of the text on the screen for text links and a frame for graphic links.
A CD-ROM or what is also called a Compact Disc has Read Only Memory. A CD-ROM is
any compact disc which contains computer data. These discs can store large
amounts of data. If there is a large amount of data on a CD-ROM, then it is
usually impractical to copy the data to the hard disk, in this case, you must
insert the disc whenever you want to use the data. The ROM simply means that you
cannot save information onto these discs. CD-ROM may also refer to the drive
used to read these discs. DVDs are digital video discs or digital versatile
discs. DVD ROM is similar to a large capacity CD ROM. DVD movies are DVD discs
containing digitized Hollywood movies. DVD Ram, Random Access Memory, is
recordable DVD media, like CDR, CD Recordable, and CDRW, CD Read/Write discs.
Dataquest projects that the installed base of such machines will be over 100
million by the end of year 2000. The Software Publishers Association reports
that over 60% of American homes now have a computer. By many estimates, the
total number of "subscribers" to the Web exceeds 50 million in the USA alone.
One in five online users say that they have made a purchase online at least
once. E-commerce business is estimated to have exceeded $40 billion in 1999, and
over $1 trillion by 2003. Virtually every Fortune 1000 company has established
Internet and intranet electronic information and commerce systems. These new
systems connect corporate staff to each other, suppliers to purchasers, and
customers to vendors.
Todays ongoing PC-Internet revolution is just the beginning , comprising
one half of the future of electronic data processing, interaction and
entertainment. The second half will be high definition television (HDTV) and
its peripheral equipment, such as Digital Video Disc (DVD) players, DVD
recorders, set-top cable or satellite boxes and camcorders. This new generation
of TV is designed to be interactive, digital, and compellingly high quality.
The overlap of functionality has already started. In the opinion of ImaginOn's
management, the eventual convergence of the Web, PCs and TV is inevitable.
We foresee a future with tens of thousands of TV channels, mostly on the
broadband Internet. While broadband Internet access serves less than 4 million
users today, it is widely believed that more than 20 million broadband
connections will be deployed by 2002. Initially, virtually all Internet TV will
be watching, and interacting, on their PCs. Eventually, HDTV sets with broadband
Internet connections may become dominant. Our ImOn.comTV system delivers
Internet TV on PCs with broadband connections today, and will perform equally
well or better on HDTV, when it becomes more widely available.
Our software takes advantage of the PC-Internet infrastructure in both the
business to business and consumer marketplaces. In the business marketplace,
our ImOn.comTV provides significant competitive advantages and increased
internal efficiencies to business users. For consumers, ImOn.comTV delivers
faster, higher quality experiences for information, education and entertainment.
For the emerging digital broadcast industry, ImOn.comTV is a comprehensive
solution for creating interactive TV content, video server data management, ad
insertion, user feedback and interactive advertising.
Our Marketplace
- ---------------
The market for ImOn.comTV is all business and institutions that are heavy
Internet users for their own internal purposes or service the general public
over the Internet. Examples of potential client businesses that service the
public include entertainment companies, news companies, cable TV stations, and
Internet portal operators. Examples of potential client businesses that use the
Internet in conjunction with their intranets for internal purposes are large
electronics companies, banking companies, national real estate companies, and
automotive manufacturers and their suppliers. Institutional examples are
universities, national health care organizations, and governmental agencies.
Since the market for ImOn.comTV is so large and diffuse, we will focus our
efforts on those businesses that have the most to gain by licensing the product
as soon as they become aware of it. Judging by the companies that have
expressed interest in purchasing ImOn.comTV systems to date, the early adopters
will be Internet companies that are video-media centric.
-19-
<PAGE>
To attract licensees by demonstrating the quality and capability of
ImOn.comTV, we operate a high-bandwidth Internet portal, ImOn.comTV. This
Internet TV station is built out of our software components, plays original
video content produced by us using our authoring tool, and features our own
search engine. Furthermore, ImOn.comTV is hosted on our own servers at our own
Internet Service Provider, in San Jose CA. The fact that virtually all aspects
of this system are owned by us reassures potential customers that we can deliver
and support ImOn.comTV in all respects, from authoring content to streaming
Internet broadcasting.
ImOn.comTV addresses the e-commerce software market with its
sellONstream(TM) component. E-commerce is a new and rapidly growing segment of
the Internet, defined as transactions made online. For the calendar year 1998,
e-commerce sales were about $4 billion. Of this, $2.3 billion was during the
holiday season alone, up from $1.1 billion in the same period during 1997. E-
commerce is estimated to have exceeded $40 billion in 1999. The top items
purchased online are software, books, computers, travel, music, food/gifts and
clothing. The software used by the businesses to accomplish e-commerce include
website hosting applications, credit transaction applications, website creation
and editing applications, and database management applications.
Additional markets where ImOn.comTV's features will be useful include
Interactive Education/Training and Interactive Advertising. The market for
computer-based educational and training systems is already a $6 billion industry
serviced by thousands of small vendors. Interactive advertising is just
beginning to be an industry, based on Internet banner ads. In the near future,
as digital HDTV is deployed, interactive advertising will enter the TV
mainstream.
We are developing a "lite" downloadable version of our ImaginAuthor(TM)
authoring tool. Unlike the full-featured pro version of ImaginAuthor included
with every ImOn.comTV product, the downloaded version will be suitable for use
by anyone who can use a word processor. Corporate training departments and
educational content developers can then create Learning on Demand applications.
Learning on Demand, a term popularized by Stanford Research Institute, is a
feature of training systems that have very rapid response and delivery
capabilities. When any desired content is delivered at the time it is requested,
or shortly thereafter, for immediate consumption, learning on demand is enabled.
The learning may be about concepts, products, business results or any topic at
all. The data itself may be in the form of digital video, text, audio, Web
pages, spreadsheets or any mix of those forms.
As digital broadcast television emerges, and the Internet gains bandwidth,
methods of advertising are adapting; taking advantage of these new environments
to sell smarter and harder. The first new form of advertising to arrive in this
space is the banner ad. On some websites today, these small graphical displays
consume up to 20% of the display area on computer screens. Most banners are
composed of a stationary graphic image or message, like a small ad on a magazine
page. Some banners are animated, like simple TV cartoons, to improve their eye
appeal. It is estimated that the annual business of banner ads was over $700
million in 1999. In the year 2000, this business may exceed $1 billion, not
counting ads within digital television.
Today's banner ads are weakly interactive; limited to hyperlinking to the
ad sponsors website. When the ad is clicked, the user is transported by their
browser to a new website. This abrupt change of venue is cited by many Web users
as the primary reason they do not like banner ads. A more sensible, effective,
and user-friendly approach is needed. ImOn.comTV's video ads respond to user
clicks with context-based sensitivity, making the transition from the video
presentation to a sales website and then back to the video presentation more
acceptable.
Business Model
- ----------------
In the short run, we will generate revenues in two ways: selling Internet
connectivity via iNow(TM), and selling ImOn.comTV licenses. The two revenue
sources are synergistic, in the sense that iNow will use ImOn.comTV to attract
ISP clients, and ImOn.comTV can point potential clients to iNow. Both parts of
the business are aimed at the same high-end market. Over the longer haul, as
more businesses license ImOn.comTV, the ISP percentage of revenues is expected
to decline.
-20-
<PAGE>
iNows's target client is a business or institution that wants a single-
source package deal, including Internet connectivity at high bandwidth, the
hardware to do it, a website, e-commerce support and technical support. As a
high end, high performance supplier, we believe iNow's gross margin is
substantially higher than that of a commodity ISP, like Earthlink.
IMON.comTV Features
- -------------------
To demonstrate our Internet TV system, we created the ImOn.comTV Internet
portal. This portal has guest demo pages where any visitor with a connection
speed of 384 kbps or higher can preview the key features of the portal in a
three minute interactive video presentation. This presentation is based entirely
on our technology, clearly illustrating its benefits. Guests experience our
unique real-time seamless branching video with integral Web data, plus a
WebZinger research report on the same topic in the same window. The following
are brief summaries of the content of our Internet portal.
WebZinger(TM) Online
WebZinger is a data mining Research Engine that searches the Web, downloads
each website's highlights, then formats the results into an illustrated report,
complete with audio and video. WebZinger acts as a personal research assistant,
substantially increasing the efficiency of Web searches for both naive and
sophisticated users. WebZinger is fully integrated into ImOn.comTV's virtual
console.
A unique feature of ImOn.comTV is that Web searches are automatically
performed based on the topic of the current video window whenever the user
clicks the "Go" button on the console. For example, while touring New York City
in video, the State of Liberty is shown. If the user clicks the Go button at
that point, WebZinger starts a search on "Statue of Liberty", without having to
type anything. Of course, WebZinger does have a search term entry window, so
users can type into it at any time, as with a standard search engine. When
WebZinger has results ready, usually within a few minutes, a formatted report is
presented on-screen.
WorldCities 2000(TM)
WorldCities 2000 is a series of interactive travel planners for
distribution on broadband Internet, CD and DVD. Travelers will use WorldCities
in interactively tour a city, on film, from the driver's seat, deciding which
way to turn and what to see. Integrated Web access provides in-depth topical
information about whatever is in front of the driver. By the end of April,
2000, the first volume will be complete, containing San Francisco, New York,
London and Paris. Each city tour contains over 120 minutes of TV-quality video
and links to over 1000 Websites.
WorldCities 2000 travel planners are virtual tourism that is useful to both
business and consumer travelers. On any PC or advanced digital cable TV, the
user can navigate real cities as if they, themselves, were driving the car
through the city. The camera's viewpoint is the driver's seat, looking through
the windshield. At key intersections, the user can turn the car left or right,
without stopping. An on-screen button labeled "Go Online" instantly connects the
user to the Web page most relevant to the view ahead. For example, in
WorldCities 2000 San Francisco, when the user sees Pier 39's Underwater World,
the Go Online button causes the browser to open a window and display Underwater
World's website, live. Since the website is updated frequently by Underwater
World, the information about show times and pricing it always current.
sellONstream(TM)
The same underlying software engine that powers WorldCities 2000 also
powers sellONstream, our video e-commerce solution. Advertisers who want to
sell products via the Web, and at the same time use full-bandwidth video content
to motivate buyers will distribute sellONstream CD ROMs as stuff-ins to
catalogs, magazines and newspapers. Viewers will insert the CD into their PC
and get a highly entertaining product-related pitch with one-click access to e-
commerce websites. High bandwidth Internet users can access sellONstream
presentations directly
-21-
<PAGE>
from ImOn.comTV, or any ImOn.comTV enabled website, using the CDs only to
validate special offers and product discounts.
The unique selling proposition of sellONstream is that it is the only way
to deliver TV-quality interactive video fully integrated with the Internet to
users with 28.8 or 56 kbps modem connections. Even low bandwidth users do not
see any discontinuity between the video playback and Web pages. The single-
focus branded window approach guarantees businesses that their message is the
sole message the viewer will see when their presentation is on screen.
Initially, we will produce the sellONstream presentations for clients,
converting their existing videotape. Eventually, clients will use our
ImaginAuthor tools and produce the CDs or website-sourced interactive streaming
video themselves.
American Hero
The never-released interactive movie and PC videogame, American Hero, was
developed by our founders while at Atari Corp before that company's demise, and
our startup. At ImOn.com, Internet TV users can play this interactive movie
today. In addition to being a novelty item for the ImOn.comTV demo site,
American Hero will also serves as an example of how interactive film can be
released on the Web. The goal is to attract film producers, who will license
our tools to create their own interactive movies.
ImaginAuthor(TM)
Our authoring tool for creating interactive video with integral Web data,
ImaginAuthor, is a large CAD system-like environment that enables the creation
of large, complex software products like WorldCities 2000, sellONstream and
American Hero, without programming. All licensees of ImOn.comTV receive a copy
of ImaginAuthor for their own use in creating interactive content. To increase
awareness of our technology, and to generate free content for ImOn.comTV, a no-
cost, limited, but fully functional version of ImaginAuthor, including the
ImaginOn Player, will be downloadable from ImOn.comTV sometime in 2000. Content
created with ImaginAuthor can then be played back on any suitable PC, burned
onto CD ROM or interactively streamed from ImOn.comTV stations.
Our Technology
- --------------
Our core technology, Transformational Database Processing and Playback, has
been granted two U.S. patents. The embodiment of Transformational Database
Processing and Playback is a set of 14 software tools. In the hands of
webmasters and programmers, these tools are used to create new applications and
content. New products created with our tools are characterized by seamless real-
time access to video, audio, graphics, text, HTML and 3D objects from multiple
remote or local databases. HTML is Hypertext Mark-Up Language and is not really
a programming language, but a way to format text by placing marks around the
text. For example, HTML allows a user to make word bold or underline it. It is
the foundation for most web pages. Java applets are mini-software programs
written in the Java language that run inside a Web browser window. A Web browser
is a tool program that allows a user to look around the web. Objects are self-
contained items of information that have predefined attributes and behaviors.
Objects are used by computer programs to store data and represent data. Examples
of objects are digital images, a text page, a display window. With our
intellectual property secured by patents, we will license our tool set to
businesses for building e-commerce, data mining, interactive entertainment and
training applications.
-22-
<PAGE>
Our core technology, Transformational Database Processing and Playback, has
three components:
. database analysis
. network synthesis
. real-time adaptive playback
The source database for our analysis can be any data file or set of data
files which may contain multiple classes of data, such as text, video or audio.
In the case of WebZinger, the source database is the entire World Wide Web,
where allowable data classes are images, movies, audio, text, HTML and Java
applets. In the case of WorldCities 2000, the source database contains text,
Uniform Resource Locators which are the address of an Internet site, video, and
audio files. During database analysis, filters based on selection criteria are
used to screen out irrelevant data and accept desirable data. The organization
of the data with respect to its position in the database is preserved.
Our network synthesis is the process of creating a "playable" network
consisting of data items and decision points. The synthetic network is
hierarchical and tree-like in that it has a trunk, branches and leaves. Decision
nodes, which are the points within a network where an item resides, or a
connection is made to an item in the network, connect the branches to the trunk
and the leaves to the branches. The distance from the trunk at which a data item
is placed out on a branch is usually determined by its quality of match to the
database analysis criteria. The network synthesis process can be entirely
automatic or manually guided.
Our real-time playback is the part of Transformational Database Processing
and Playback technology that most users see. The desired data items selected
during database analysis and organized within a synthetic network are played in
real time, sequentially and seamlessly. When the synthetic network contains
solely digitized film clips, the resulting playback forms an interactive movie.
If the network is populated with still images, such as Web pages, playback forms
an interactive slide show. Our network filled with text pages is a hypertext
electronic book, magazine or newspaper. Hypertext is text on a web page that
links the user to another web page. The hypertext, or links will usually be a
different color than the other text on the page and is usually underlined. Our
synthetic networks can be layered one on top of the other, with live cross-
references. For example, in our WorldCities 2000 interactive travel planners, a
network made of video clips references the Web, providing a whole new way of
navigating data space visually.
The current implementation of ImOn.comTV utilizes Apple Quicktime for its
video streaming. In addition, we have updated our basic playback engine to
allow for use over the Internet. There are two basic ImOn.comTV software
components used to create an ImOn.comTV station. The first is a streaming video
interface that is net savvy and recognizes Quicktime formats. The second is a
group of java servlets, designed to make Mac, Windows and other future target
systems behave the same way on all ImaginOn technology-based Internet TV
stations.
Our Software Tools
- ------------------
We have developed the following basic tools that can be combined in many
different ways to create software application programs. Each tool can be used
as a standalone application when needed, plus, each tool is designed to
communicate and interoperate with every other tool in the set. ImOn.comTV,
WebZinger, sellONstream, American Hero and WorldCities 2000 were each built
using different combinations of the basic tools:
Search Driver contains a set of parameters and interfaces to commercially
available search engines and database query engines. Input to Search Driver is
plain English text. Search Driver's output is specific to every engine it
supports.
Network Analyzer takes a text description of a complex network, such as the
netlist of a drawing tree or a schematic diagram and determines the system
requirements for real-time playback of the data elements or objects.
-23-
<PAGE>
Network Walker traverses a data network such as a LAN or the Internet and
compiles a map that can be utilized by our other tools. Network Walker is
guided by user-controlled parameters.
Filter filters data sets or data objects to determine the degree of match
to a set of user-defined parameters. The filtering process is based on the
digital signal processing (DSP) model in which filters can be cascaded, tapped
and fed back on each other in many configurations.
Formatter normalizes data objects so that they can be displayed or played
in real time. This process can be lossy, which is a digital process that loses
information, or lossless, which is a digital process that preserves information,
depending on user requirements.
Network Builder constructs a synthetic network of data elements or objects
that can be traversed in real time.
Network Compiler takes the netlist created by Network Builder and data
objects processed by Formatter and generates an output file that Presenter can
use. A compiler is a software program that processes a structured set of data
and creates another data set. If the data is a computer program written in a
human-readable language, the output will usually be a set of instructions that
can be executed by a computer to perform the tasks the programmer intended.
Live Linker manages a list of active Web addresses and the pointers to
specific data objects in the playback stream, enabling the Browser tool to
include live Web pages side by side with "canned" data objects, such as video
recordings. Live Linker is used to create the hybrid of CD data plus Web pages.
Smart Buffer reads the compiled network of links and objects, then fetches
data ahead of time, from disk or network, so Presenter never has to stop or
pause during playback. A buffer is a storage area for a finite amount of data in
a computer system or digital transmission system.
Presenter displays, or plays back, data objects to the user in real time.
Presenter allows the user to make real-time choices among data objects as they
are played back.
Browser allows users to visit websites and hyperlink to other websites. A
hyperlink is a data object, such as text or an image, that has a dual purpose.
The first purpose is to convey information in the form of text or a picture.
The second purpose is to connect the user to another data object, that may be
somewhere else entirely separate from the text or image presented. For example,
on an Internet Web page, the word "Poodle" within a text about dogs might serve
to connect the user to another web page specifically about poodles, when the
user clicks their mouse button while their cursor is on the word "Poodle."
Browser is similar in functionality to Microsoft Internet Explorer and Netscape
Navigator, minus features like email and editing. Browser is based on the Java
Ice Browser, which we have licensed.
User Profiler monitors the playback of data objects and decisions made by
the user with respect to those objects. The user profile derived from this
history can be used to automate playback as well as adapt playback to the user's
preferences.
Streaming Video Interface, a low level video format interface, allows our
technology to be used with many types of video formats of different programming
interface models. It allows for the same code base to support CD formats,
Internet formats and in the future, cable and set-top formats without
significant modification.
Communications Servlet, a set of servlets running on a server, allows our
products to support interfaces with various web browsers on selected platforms
without specific modifications to each component. This allows for easy plug-in
to different platforms and browsers.
-24-
<PAGE>
Our Competition
- ---------------
In the Internet television systems industry segment, we have no direct
competition. Numerous companies, large and small, offer some portion of the
services or capabilities of ImOn.comTV, but there are no other single vendor
integrated solutions. Our competitive advantage in this field is derived from
our unique proprietary technology that integrates interactive video playback
with media-intensive data mining.
In the high bandwidth interactive streaming video authoring and playback
software business, we have no direct competitor, yet. Several companies offer
components that can be used to implement portions of a networked system, but no
other company offers a complete turnkey solution like ours. Among the
competitors that provide software components that can be used to build a
similar, lower performance, less capable system, are Microsoft, Broadcast.com,
RealNetworks, Oracle and Macromedia.
Oracle is a relational database management systems company whose products
work well within any single operating system, operating on data collected by
some other system or process. Oracle's SQL database query system allows diverse
data display systems to access formatted data. Oracle's position is that of
"middleware"; processing data from one place and making it available to
someplace else. This arrangement suffices for conventional transactional and
customer information systems. However, when the data is of many types, spanning
multiple operating systems in diverse locations, timely response is not
guaranteed. Furthermore, when the requested data content is not in the system at
all, Oracle must request another system to search, locate and fetch the data.
On the display side, the fundamental design of Oracle's software dictates
that the playback of data content be handled by a separate process that usually
runs in a separate computer or playback device. This provides generality at the
expense of performance. For media-rich sets of data such as digital video, audio
and Web pages, the separation of processing systems from display systems results
in delays and difficulty in providing real-time playback. The intermittent stop
and start look of streaming video is partially caused by these delays.
RealNetworks Realvideo and Microsoft's Mediaplayer are the main streaming-
only video players in the market today. Neither systems' authoring tools or
playback mechanism allows for real-time branching or integrated Web browser
data. To get from one video clip to the next, these systems stop. To show Web
information, they require a separate browser window. Our authoring and playback
systems remove both of these limitations, enabling true TV image quality and
videogame-like branching, with live Web pages inside the player.
Our software tightly couples data acquisition, processing and display into
a single solution, which can be distributed among processors in a network or be
entirely located in a single PC. This architecture is the best guarantee that
data will always be presented in real time. For applications such as broadband
Internet, interactive TV, and hybrid CDs or DVDs, this is our main competitive
advantage.
Macromedia is another company that provides tools that can solve part of
real-time multimedia network delivery problem. Their "Director" software can
manage mixed data format objects within the context of creating a multimedia
application. Macromedia dominates the market for multimedia authoring.
However, Director is not a general-purpose system, nor does it support real-time
playback. To Director's further disadvantage, its content authoring system is
based on a proprietary non-standard programming language called "Lingo".
Our competitive advantage with respect to Macromedia in Macromedia's own
market is our software's customizability based on a programming-free assemblage
of software tools, and its real-time playback capability. The steep and lengthy
learning curve associated with Director's Lingo programming language is a major
barrier to its widespread use for corporate training products. Director's
sluggish almost-real-time playback is one of the reasons multimedia in general
has earned such a poor reputation in the entertainment products marketplace.
Within the Internet search engine marketplace, there are at least two dozen
products aimed at Web users for the purpose of searching the Internet. All of
these search engines are primarily list generators; leaving the actual
-25-
<PAGE>
data evaluation and retrieval to the user. The few search engines that do offer
media retrieval, do not provide much control or formatting of the output.
Positioned as a research engine, WebZinger actually does the heaving lifting of
finding, retrieving and formatting rich media assets from the Web.
Strategic Corporate Relationships
- ---------------------------------
Our management realizes that partnering and associating with larger
companies are critical to our success. So far, four large companies, Intel, Sun,
Apple and Sony are working with us. Their participation in our marketing
activities has been limited in part by our perceived financial instability
during our startup phase, and the high maintenance requirements in terms of our
staff time. As we become more stable, and marketing activities increase, it is
anticipated that these relationships will become more productive.
Intel
In March, 1997, our demonstration of the world's first and only broadcast-
quality interactive movie caught the attention of Intel Corporation engineers
and marketing staff. Intel and us agreed to Intel use of our demo software in
return for loans of Intel computers and some reimbursement of expenses. Intel
first used our demo in the keynote address opening COMDEX 97 in Japan and has
since used our demonstrations at the launch of the Pentium II, PC Expo, COMDEX
Canada and many other events. We have adopted Intel's concepts of knowledge
management and visual computing.
Sun Microsystems
In July, 1997, we demonstrated an early version of our Web research
software to Sun software engineers and marketing staff. They liked what they
saw and assisted us in achieving 100% Pure Java certification. ImaginOn has been
an invited Java and E-commerce Partner participant in five trade shows with Sun.
Apple Computer
In mid-1998, ImaginOn, Inc. and Apple agreed to cooperate in optimizing
WebZinger for K-12 school use, on Apple hardware. Upon successful completion of
that development work, Apple introduced us to Apple's educational market
national distributors, who began evaluating WebZinger School Edition.
Subsequently, 1n 1999, these distributors included WebZinger SE in their
marketing programs.
Sony Computer Entertainment Inc. (SCEI)
After years of periodic contacts and presentations to software development
personnel at SCEI in nearby Foster City CA, Sony developer relations staff
visited us in the Summer of 1999 to be briefed on our authoring tools for
branching digital video. After a series of follow up meetings at SCEI, we were
invited to submit ImaginAuthor for approval as "middleware" for the
PlayStation2(R) (PS2) computer entertainment system. SCEI approved ImaginAuthor
for this use, and consequently we became a Sony licensee for Playstation2
development.
Our management believes that some Playstation2 developers will adopt
ImaginAuthor for creating interactive movie titles, both with and without
Internet access. Since most PS2 developers are in Japan, we reached a
distribution agreement with AiCube of Tokyo, Japan, to localize ImaginAuthor and
support Japanese users.
Overcoming Barriers to Success
- ------------------------------
Since our inception, we have developed a base of intellectual property
(IP), software tools to implement our technology, and software applications that
demonstrate the value of our IP. Both the software tools and the applications
have the potential to become revenue generating lines of business. The main
barriers to achieving business success are:
-26-
<PAGE>
. Cost of a successful market entry
. Critical approval and customer acceptance
. Proof of commercial viability of the tool set
Success depends on planning and accomplishing highly targeted
activities that will have a cumulative, synergistic effect. A shotgun approach
that spends a little bit here and there promoting each of our tools and
application in parallel is doomed to failure. By focusing all of our marketing
and sales efforts on the ImOn.comTV product, we will maximize the effect of
promotions and advertising.
Critical approval and customer acceptance will never totally overlap.
Nor is customer acceptance dependent entirely on critical approval. Nonetheless,
they are closely linked. The few initial reviews of our Beta versions and demos
of our products have been good. American Hero was selected as a finalist in New
Media magazines annual software competition. An early version of WebZinger was
favorably reviewed in PC Magazine. WorldCities 2000 was favorable reviewed in
New Media magazine. With the emphasis now on ImOn.comTV, we will be targeting
business and Internet media with PR and advertising.
Our History
- -----------
The genesis of our technology was at Atari Corporation in June, 1994.
David Schwartz, a senior staff engineer and head of the Jaguar CD project,
conceived of a new type of interactive entertainment product, named "GameFilm",
merging videogame and film formats. Between July, 1994 and June, 1996, Schwartz'
team of software engineers and a film production company successfully developed
the first Jaguar CD ROM GameFilm title, "American Hero", a Windows 95 runtime
engine, as well as a prototype suite of software authoring tools. Len Kain
served as a part time consultant to Atari for the GameFilm project.
Atari went out of business as a result of a reverse merger with JTS
Corp. in July, 1996. In the context of this change in business, Mr. Schwartz (a
vice president of Atari since October, 1994) negotiated to leave with an Asset
Purchase and Licensing Agreement for the GameFilm technology. The Agreement
transferred the new technology from Atari to us for a cash price of $258,000.
Mr. Schwartz incorporated FilmMagic in May, 1996, changing its name to
ImaginOn in October, 1996, when Len Kain formally joined the company. During
1996, we concentrated on developing our intellectual property position. During
1997, we hired our core staff, set up our offices and developed our tool set. In
1998, we developed software applications based on our technology and began field
testing our software. Since becoming a publicly owned company in 1999, we have
concentrated on building a sales/marketing organization, growing the business by
acquisitions, and consolidating our software and services as the ImOn.comTV
product, which was introduced on October 26, 1999 at the ISPCON trade show and
conference.
Prior Business
- --------------
Prior to January 20, 1999, under previous management, we operated under
the name California Pro Sports, Inc., and we imported and distributed products
in three participant sport categories:
. in-line skates
. hockey equipment, and
. snowboard equipment
In 1993, we acquired the California Pro(TM) in-line skate business from
California Pro USA Corp. Playmaker Co., LTD ("Playmaker"), the in-line skate
manufacturer and majority owner of the seller, granted to us, an exclusive,
perpetual, non-royalty bearing license to the California Pro(TM) names and
trademarks and entered into a five-year manufacturing agreement to supply
substantially all of our in-line skate products. In another acquisition
-27-
<PAGE>
completed on August 1, 1994, we purchased certain assets, including an
exclusive, perpetual world-wide license to the Kemper(R) name and trademark,
subject to a royalty. We acquired our license directly from the registered owner
of the Kemper(R) name and trademark, Front 500 Corporation ("Front 500"). In
1995, we formed USA Skate Corporation, a Delaware corporation, ("Skate Corp.").
Skate Corp. was our majority owned (approximately 62%) subsidiary and its
financial statements are consolidated with ours in this prospectus. Effective as
of April 30, 1996, Skate Corp. acquired 100% of USA Skate Co., Inc. ("USA
Skate"), a New York corporation, in a stock purchase transaction. USA Skate
owned, directly or indirectly, all of the capital stock of Les Equipments
Sportifs Davtec, Inc. ("Davtec"), a Canadian corporation.
Our in-line skate products were sold in the United States, Canada, the
Caribbean and U.S. military bases world wide. Our snowboards and related
accessories were sold primarily in the United States and European countries.
Through September 1997, we sold our hockey-related products through independent
sales representatives and independent distributors in the United States, Canada
and various other countries.
We had continual operating losses and in 1996 and 1997, when our
management decided to restructure the company and reduce our debt. The
components of the restructuring plan included management's decision to
. cease operating its California Pro and Kemper licenses,
. begin to concentrate on sub-licensing its trademark rights
. eliminate most of the operating and overhead expenses, and
. look for a merger candidate in a new line of business.
Management's Plan of Restructure
As a result of continuing operating losses, our Board of Directors,
early in 1997, decided to restructure and de-leverage the company. Accordingly,
in September 1997, we and Skate Corp. sold assets of the ice hockey related
business (including the trademark rights to VIC(R), VICTORIAVILLE(TM) and
McMartin(TM)) to Rawlings for $14.5 million plus the assumption of $1million of
debt. The proceeds of the sale were substantially utilized to pay secured
revolving lines of credit, purchase the remainder of the trademarks from the
previous owner, and partially reduce notes payable of Skate Corp. to
unaffiliated note holders.
As a result of the sale to Rawlings, and other restructuring and
deleveraging activities, including the assumption and assignment of certain
notes and trade payables to third parties in exchange for our common and/or
preferred stock, we reduced our liabilities from approximately $18,988,000 at
January 1, 1997 to approximately $1,500,000 at December 31, 1998.
As part of the restructuring plan, we eliminated most of the overhead
expenses associated with our sporting goods business and entered into two sub
license agreements regarding the use of the Kemper name. Effective May 1, 1997,
we entered into an agreement through April 30, 2000 with United Merchandising
Corp., a California corporation. We granted United Merchandising Corp. a
non-exclusive, non-transferrable license to manufacture and/or purchase and sell
various snowboarding apparel bearing the name and/or logo of "Kemper", in its
retail stores in the United States. The royalty rate was 7.5% of the cost to
United Merchandising Corp. with a minimum of $30,000 per annum. United
Merchandising Corp. has an option to renew for one or two additional years. From
May 1, 1997 through April 30, 1998 we received royalties of approximately
$34,300.
Effective in February 1998 we entered into a two year exclusive
Licensing Agreement with Jaysport International, Inc. Subject to the prior
sub-license granted to United Merchandising Corp., we sub-licensed to Jaysport
International, Inc. the exclusive worldwide right to use the Kemper name and
trademark on snowboards, related equipment, clothing and accessories. Jaysport
International, Inc. had the option to renew the agreement for additional two
year periods thereafter. The agreement included a royalty payment of 3% of net
sales on all products with a minimum royalty of $25,000 per annum.
-28-
<PAGE>
Accordingly, in the second quarter of 1997, we 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, we signed a letter of
intent to merge with ImaginOn. Thereafter, we signed an agreement and plan of
merger as of January 30, 1998 under which there was an exchange of 100% of the
outstanding shares of ImaginOn for approximately 60% of the outstanding post
merger common stock of the company. The transaction was completed on January 20,
1999.
Financial Information About Segments
- ------------------------------------
Please see Footnote 9 to Notes To Consolidated Financial Statements.
Research and Development
- ------------------------
For the year ended December 31, 1999, we spent $1,117,265 in research
and development expenses for World Cities 2000 projects for San Francisco, New
York, Paris and London and on the ImOn.com Internet TV Project. For the year
ended December 31, 1998, we spent $906,256 in research and development expenses
for the World Cities 2000 projects. For the year ended December 31, 1997, we
spent $547,531 in research and development expenses for the first World Cities
2000 project.
Description of Property
- -----------------------
Lease (L) Annual
Location Use Sq. Ft. Own (O) Rent
- -------- --- ------- ------- ----
1313 Laurel Street Corporate Offices approx. 5,000 L* $54,485
San Carlos, CA 64070
1000 Ames Avenue Internet Services approx. 1,000 L** $11,248
Milpitas, CA 95035
408AABC, Suite 204
Aspen, CO 81611 Internet Services approx. 1,000 L*** $13,500
- --------------
* Lease terms vary on different suites in the frame structured building
ranging from 1 year to 7 year terms.
** Leased on a month-to-month basis.
*** This lease was terminated in 1999.
Legal Proceedings
- -----------------
We were named as a co-defendant in a lawsuit filed by Cord Investment
Company and Frances Peppy on March 12, 1999 in the District Court, City and
County of Denver, Colorado. The suit alleges violations of state securities laws
and other common law torts stemming from a private placement of securities. On
November 3, 1999, an order staying all proceedings for one year was entered by
the court, to allow completion of a settlement agreement not involving ImaginOn,
Inc.
We were also named as a co-defendant in a lawsuit filed June 3, 1999 by
Bertrand T. Ungar in the U.S District Court for the District of Colorado
alleging among other things, conversion, civil theft and breach of fiduciary
duties stemming from the transfer of pledged securities. Plaintiff seeks damages
in the excess of $600,000. We are vigorously defending ourselves against this
law suit and believe it will be resolved in our favor. The issues relating to
ImaginOn, Inc. have been significantly narrowed since the bankruptcy trustee
involved with the pledgee of the securities paid a bond for a replacement stock
certificate. On March 22, 2000, the Settlement Judge Magistrate ordered all
parties to meet for a settlement conference, but plaintiff did not appear and
the Judge sanctioned plaintiff by awarding all defendants' costs for attending
the attempted conference. Document discovery has begun and another settlement
conference is scheduled for June 13, 2000.
On January 20, 2000, we were served a complaint by a corporation named
ImOn Inc. in the U.S. District Court for the Southern District of New York,
alleging violation of common law trademark (as opposed to trademark granted by
the federal government under statute), and two other claims under the New York
General Business Law alleging "Deceptive Acts" and "Unfair Competition and
Trademark Infringement." Our intellectual property law firm had previously
discussed this firm's claim with one of the three attorneys who have represented
the plaintiff, ImOn, Inc., which was incorporated last summer. Plaintiff claims
to own the "Imon.net" Internet domain and a common law trademark for the word
"Imon" as it relates to Internet commerce. ImaginOn, Inc., Imon, Inc. and at
least one other company have filed trademark applications with the Federal
Office of Patents and Trademarks. We are vigorously defending ourselves in this
action and believe it will be resolved in our favor. On January 31, 2000,
plaintiff filed a motion for a preliminary injunction and the court issued a
Show Cause Order for a March 2, 2000 hearing to determine if an injunction
should be issued prohibiting us from using the term"ImOn" in commerce. After a
two day hearing, the Judge denied the motion for a preliminary injunction ,
holding that the plaintiff failed on every element requisite for the injunction,
including likelihood of prevailing at trial. In addition, due to errors in the
plaintiff's federal trademark application, it was excluded from evidence for the
purposes of the motion. We have filed a counterclaim under the newly enacted
Federal Trademark Cyberpiracy Prevention Act, which provides for award of
attorneys' fees and liquidated damages of up to $100,000. Plaintiff has recently
proffered a settlement less than ninety days afer filing suit, which we have
under advisement.
Personnel
- ---------
Our founders are David M. Schwartz, President, and Leonard W. Kain,
formerly our Vice President, Engineering. Mr. Kain now serves as a consultant to
us. The total staff size is 33 persons, plus 13 consultants and contractors. The
Executive Committee is composed of our President, our Chief Financial Officer,
Vice President of Business Development, and Vice President of Marketing.
-29-
<PAGE>
Management
Directors and Executive Officers
- --------------------------------
Our officers and directors are listed below. Our directors are elected
to hold office until the next annual meeting of stockholders and until their
respective successors have been elected and qualified. Officers are elected by
the Board of Directors and hold office until their successors are elected.
The chart below identifies persons who currently serve as officers
and/or directors.
<TABLE>
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
David M. Schwartz 51 Chairman, Chief Executive Officer, President and Director
James A. Newcomb 53 Chief Financial Officer, Treasurer and Director
Sue Ann von Kaeppler 52 Vice President of Business Development
Abe Matar 29 Vice President of Marketing
Mary E. Finn 40 Director
Dennis Allison 57 Director
Jim Polizotto 63 Director
</TABLE>
David M. Schwartz has been Chairman, Chief Executive Officer, President
and Director of ImaginOn since January 20, 1999. Mr. Schwartz has been
principally employed as an officer and director of ImaginOn.com Inc., our
wholly-owned subsidiary, since its formation in 1996. From 1992 until 1996, Mr.
Schwartz was Vice President of New Media Systems and Technology Atari
Corporation, where he invented GameFilm technology for videogame 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 writable and 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 computers. Mr. Schwartz earned a
Bachelor of Arts in Architecture from Carnegie-Mellon University, after
completing a multidisciplinary program in Architecture, Engineering and Computer
Science. He also participated in post-graduate studies at Carnegie-Mellon in the
school of Industrial Administration.
James A. Newcomb has been Chief Financial Officer of ImaginOn since
November 19, 1999 and Treasurer and a director since March 7, 2000 when he was
appointed to fill a vacancy. He came to us from Displaytech, Inc., in Longmont,
Colorado, a privately held company that manufactures high resolution micro
displays for, among other devices, digital still cameras, camcorder viewfinders,
and projection displays for computer monitors and televisions. As Chief
Financial Officer, Mr. Newcomb played a key role in implementing the financial
aspects of Displaytech's key alliances, both domestically and internationally.
Before this, he was with the NASDAQ listed Fischer Imaging Corporation, in
Denver, Colorado, where he served from 1995 through 1998 as Vice President and
Chief Financial Officer. A member in good standing of the Financial Executives
Institute, Mr. Newcomb was awarded a Masters of Business Administration degree
in Finance by the Amos Tuck School at Dartmouth College, Hanover, New Hampshire,
in 1970. He received a BA degree in Economics from Beloit College, Beloit,
Wisconsin, in 1968.
Sue Ann von Kaeppler has been Vice President of Business Development of
ImaginOn since October 22, 1999. Prior to joining our company, Ms. von Kaeppler
served from 1979-1998 in a number of strategic positions at AT&T, Pacific
Bell/Telesis, and Southwestern Bell Corporation, including Program Director of
Emerging Markets, Director of Channel Management, and a wide variety of
management positions including reengineering, product development, and sales and
marketing. Recently, as a business consultant, Ms. von Kaeppler counted among
her clients Digital Interiors, Inc., Sage Systems, Inc., and HealthCentral.com.
For all three early-stage, high technology and Internet start-up companies, she
developed integrated sales, marketing and business development programs.
-30-
<PAGE>
Abe Matar has been Vice President of Marketing of ImaginOn since March
8, 1999. Born in Jerusalem, Mr. Matar came to the US to go to school in 1987.
After completing his Masters degree in Electrical Engineering from San Jose
State University, he began his career working for Silicon Valley companies such
as Apple, EO, an AT&T subsidiary, and Compression Labs. During that period, he
developed experience and knowledge in managing and running engineering projects
in the communications field. As a founding member of iNOW Internet Services, Mr.
Matar has been involved in the day-to-day operation and management of the
business, and is overseeing its expansion.
Mary E. Finn has been a Director of ImaginOn since January 20, 1999.
She has more than 15 years experience in various media fields, utilizing her
skills in writing, editing, broadcasting, teaching and management. From 1994 to
1997, Ms. Finn served as publicity director for the local chapter of FEMALE, a
national mother's support group. From 1988 to 1991, Ms. Finn served as a talk
show producer and engineer at KNBR in San Francisco, California. From 1982 to
1986, Ms. Finn taught radio production at Phillips Academy in Andover,
Massachusetts. Ms. Finn earned a Bachelor of Arts degree in Communication from
the University of Michigan in 1981, and a Master's degree in Media Management
from Emerson College in Boston in 1987. Ms. Finn is married to David Schwartz,
ImaginOn's Chairman, Chief Executive Officer and a Director.
Dennis Allison, has been a Director of ImaginOn since March 4, 1999. He
is a Stanford University Computer Systems Laboratory Lecturer. Mr. Allison is
also an independent consultant and an editorial advisor on computer science and
electrical engineering to Addison-Wesley-Longham. A former Series Advisor on the
Prentice-Hall Series on Innovative Technology, Mr. Allison also served on the
editorial board of Microprocessor Report. He was also the co-founder of HaL
Computer Systems and of the People's Computer ImaginOn, a non- profit
organization that played a pivotal role in the development of the personal
computer. He is also a past IEEE CS Governing Board Member and a past member of
the editorial boards of IEEE Computer and IEEE Software.
Jim Polizotto has been a Director of ImaginOn since March 4, 1999. Mr.
Polizotto has served an Engineering Director of VTEL Corporation, Sunnyvale,
California, since 1994, where he is responsible for the Sunnyvale Validation
organization. He also has corporate responsibility to ensure interoperability
with other vendors' systems. VTEL Corporation is a world leader in Digital
Visual Communications. Prior to 1994, Polizotto helped to create a multimedia
development laboratory for IBM in Silicon Valley and was responsible for the
development of many IBM multimedia breakthroughs, including the 1993 launch of
IBM's Internet-based multimedia video streaming server. Mr. Polizotto also
serves on the board of the International Multimedia Teleconferencing Consortium,
Inc., a non-profit corporation comprised of more than 150 companies from around
the world.
Compensation of the Board of Directors
- --------------------------------------
Our outside directors receive stock options equivalent to $10,000 per
year of service. All directors are reimbursed their expenses incurred in
attending Board of Directors meetings.
In 1998, former directors Messrs. Simpson and Yang each received 10,000
shares of common stock in connection with their services as directors.
Additionally, Mr. Yang exercised 15,000 previously granted options. In 1998,
10,000 incentive stock options were granted to Messrs. Yang and Simpson each at
an exercise price of $1.42.
On August 31, 1999, the compensation committee approved a $50,000 bonus
to each David Schwartz and Leonard Kain, a former officer and Director, for
recognition of their services to us and to reflect current compensation of
executives at other information technology companies.
On January 7, 2000, we issued outside directors Messrs. Polizotto and
Allison 15, 873 stock options each at a discount price of 15% below the market
price of that day, representing their compensation for service in 1999.
-31-
<PAGE>
Audit Committee
- ---------------
We have an audit committee that:
. monitors our financial reporting and our internal and external
audits;
. reviews and approves material accounting policy changes;
. monitors internal accounting controls;
. recommends the engagement of independent auditors;
. reviews transactions between us and our officers or Directors; and
. performs other duties when requested by the Board of Directors.
Directors Allison, Polizotto and Finn are members of the audit
committee.
Compensation Committee
- ----------------------
We also have a compensation committee that reviews and approves the
compensation and benefits paid to our executive officers, and administers our
employee stock option plan. Messrs. Allison and Polizotto are members of the
compensation committee.
1994 Stock Option Plan
- ----------------------
Our stockholders adopted the 1994 stock option plan which provides for
the issuance of options to purchase up to 200,000 shares of common stock to
employees, officers, directors of, and consultants to ImaginOn, then operating
as California Pro Sports, Inc. The purposes of the 1994 stock option plan are to
encourage stock ownership by our employees, consultants and directors so that
they may acquire or increase their proprietary interest in us, to reward
employees, directors and consultants for past services to us and to encourage
such persons to become employed by or remain in the employ of or otherwise
continue their association. All options under the 1994 stock option plan have
been granted.
1997 Stock Option Plan
- ----------------------
The stockholders of ImaginOn.com, a California corporation, adopted the
1997 stock option plan which provides for the reservation of up to 2,710,000
shares of our common stock. The purpose of the 1997 stock option plan is to
provide additional incentive to our employees and consultants. Unless sooner
terminated, the 1997 stock option plan will expire in 2007.
1999 Equity Incentive Plan
- --------------------------
The board of directors of ImaginOn, Inc. , a Delaware corporation after
merger with California Pro Sports, Inc., recently approved the 1999 Equity
Incentive Plan. On April 7, 2000, our shareholders approved the 1999 Equity
Incentive Plan.
The following table provides summary information about our stock option
plans as of February 29, 2000:
<TABLE>
<CAPTION>
Shares authorized Options outstanding Options exercisable
----------------- ------------------- -------------------
<S> <C> <C> <C>
1994 Plan 200,000 -0- -0-
1997 Plan 2,710,000 677,500 167,800
1999 Plan 2,500,000 1,349,446 167,975
--------- --------- -------
Total 2,910,000 847,302 335,775
========= ======= =======
</TABLE>
-32-
<PAGE>
Our stock option plans are administered by our compensation committee.
They determine additional conditions of the options granted, including the
exercise price and the number of shares to grant.
Options may be granted as incentive stock options intended to qualify
for special treatment under the Internal Revenue Code of 1986, as amended, or as
non-statutory stock options which are not intended to so qualify. Only our
employees or employees of our subsidiaries are eligible to receive incentive
options. The period during which options may be exercised may not exceed ten
years. The exercise price for incentive options may not be less than 100% of the
fair market value of the common stock on the date of grant; except that the
exercise price for incentive options granted to persons owning more than 10% of
the total combined voting power of the common stock may not be less than 110% of
the fair market value of the common stock on the date of grant and may not be
exercisable for more than five years. The exercise price for non-statutory
options may not be less than 80% of the fair market value of the common stock on
the date of grant.
The option plans contain provisions for proportionate adjustment of the
number of shares issuable upon the exercise of outstanding options and the
exercise price per share in the event of stock dividends, recapitalization
resulting in stock splits or combinations or exchanges of shares.
In the event of our dissolution or liquidation, a corporate separation
or division or the merger or consolidation of us, the Board may adopt
resolutions which provide that all outstanding options under the option plans
may be exercised on such terms as it may have been exercised immediately prior
to, or will expire by a fixed date on or prior to, the date of such dissolution,
liquidation, corporate separation, division, merger or consolidation. The option
plans also provide for the acceleration of the vesting of all outstanding
options in the event of any merger or consolidation in which we are not the
surviving corporation, or any sale or transfer by us of all or substantially all
its assets or any tender offer or exchange offer for or the acquisition,
directly or indirectly, by any person or group or all or a majority of the our
then outstanding voting securities.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors and persons who own more than ten percent of
a registered class of our securities, collectively, "reporting persons", to file
reports of ownership and changes in ownership on Forms 3, 4, and 5 with the
Securities and Exchange Commission, "SEC".
Based solely upon a review of the copies of such forms we have received
and representations from the Reporting Persons, we believe that not all
reporting persons have complied with the applicable filing requirements. Within
the last seven months, Jim Newcomb had one late report on Form 3 with one
transaction listed. Within the last year, Abe Matar had one late report on Form
3 with two transactions listed and one late report on Form 4 with one
transaction listed. Within the last seven months, Sue Ann von Kaeppler had one
late report on Form 3 with one transaction listed and one late report on Form 4
with one transaction listed.
-33-
<PAGE>
Executive Compensation
- ----------------------
Summary Compensation Table
The following table sets forth information regarding compensation paid
to (i) our Chief Executive Officer and (ii) each of our other executive officers
whose total annual compensation exceeded $100,000 for the years ended December
31, 1997, 1998 and 1999. Some of the executives listed below resigned and are no
longer our employees.
<TABLE>
<CAPTION>
Long Term All Other
Annual Compensation ($$) Compensation Compensation
------------------------------------------------- ------------ ------------
($$)
Securities
Underlying
Name and Position Year Salary Bonus Other Options
- ----------------- ---- ------ ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Henry Fong,, 1999 -0- -0- $67,500(4) -0- -0-
President, CEO and
Chairman of the Board 1998 150,000(1) -0- -0- -0- -0-
Resigned January 20,
1999 1997 165,000(1) -0- -0- -0- -0-
Michael S. Casazza, 1999 -0- -0- -0- -0- -0-
President, Chief
Operating Officer and 1998 -0- -0- -0- -0- -0-
Director
Resigned September,
1997 1997 157,500 413,000(2) -0- -0- -0-
Barry S. Hollander, 1999 -0- -0- $67,500(4) -0- -0-
Treasurer and Chief
Financial Officer 1998 155,000 76,313(3) -0- -0- -0-
Resigned January 27,
1999 1997 117,738 -0- -0- -0- -0-
David Schwartz, 1999 $120,000 $50,000 -0- -0- -0-
Chairman, Chief
Executive Officer, 1998 -0- -0- -0- -0- -0-
President and Director 1997 -0- -0- -0- -0- -0-
Leonard Kain, 1999 $120,000 $50,000 -0- -0- -0-
Executive Vice
President, Secretary and 1998 -0- -0- -0- -0- -0-
Director
Resigned March 7, 2000 1997 -0- -0- -0- -0- -0-
Abe Mater, 1999 $87,500 $595,000(5) -0- 225,000 -0-
Vice President of 1998 -0- -0- -0- -0- -0-
Marketing 1997 -0- -0- -0- -0- -0-
</TABLE>
- ----------
-34-
<PAGE>
(1) Mr. Fong was not our employee and received fees of $10,000 per month for
consulting services rendered to us and received an additional $30,000 USA
Skate fee primarily related to long-term strategic planning, financing and
acquisitions in connection with our prior business.
(2) Represents a bonus of 236,000 shares of our common stock for, among other
things, the forgiveness of the remaining amount of $149,000 of the $400,000
promissory note, making other loans to us and/or our subsidiaries in order
for us to meet immediately due obligations, and his efforts in negotiating
and moving the USA Skate asset sale forward to completion.
(3) In January 1998, we issued 18,500 shares of Series A preferred stock to Mr.
Hollander. The shares were valued based upon the trading price of our
common stock, adjusted for the one for three conversion feature of the
preferred stock, and accordingly, we an expense of $76,313.
(4) Messrs. Fong and Hollander received fees for consulting services performed
in 1999.
(5) The bonus is calculated from two stock grants of restricted stock to Mr.
Matar during 1999. On February 2, 1999 Mr. Matar received a stock grant of
75,000 shares at a then fair market value of $6.06 per share and on
November 11, 1999, Mr. Matar received another stock grant of 50,000 shares
at a then fair market value of $2.81 per share.
Option/SAR Grants in Last Fiscal Year.
<TABLE>
<CAPTION>
Number of Securities Percent of Total Options Exercise of
Underlying Options Granted to Employees in Base Price Expiration
----------
Name Granted Fiscal Year ($/sh) Date
- ---- ------- ----------- ----
<S> <C> <C> <C> <C>
Abe Matar 225,000 43.5% $6.06/per 2/9/09
share
</TABLE>
Aggregated Option/SAR Exercises and Year-End 1999 Option/SAR Values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Value Of
Number Of Securities Unexercised
Underlying Unexercised In-The-Money
Options/SARs Options/SARs
Shares Value At December 31, 1999 At December 31, 1999
Acquired On Realized (#) Exercisable/ ($) Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Henry Fong 785,900 3,084,449 221,400/725,200 83,025/0
======= =========
- --------------------------------------------------------------------------------------------------------------------------
Abe Matar -0- -0- 0/225,000 0/0
=== ===
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
-35-
<PAGE>
Certain Relationships and Related Transactions
On January 8, 1998, we lowered the exercise of all the warrants held by
Messrs. Fong and Casazza to $1.00 per share. In January 1999, Mr. Casazza sold
his 201,400 warrants.
In January 1998, so as to infuse us 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, we 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, we 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 our request, Barry Hollander exercised 49,500 options
so as to infuse us with short-term working capital.
In June of 1998, at our request, Henry Fong exercised a total of 77,200
options so as to infuse us with short-term working capital.
Transactions between us and our officers, directors, employees and
affiliates were on terms no less favorable to us 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.
Principal Stockholders
Set forth below is certain information as of March 27, 2000, with
respect to ownership of our common and preferred stock held of record or
beneficially by (i) our executive officers named in the summary compensation
table, (ii) our directors, (iii) each person who owns beneficially more than
five percent of our outstanding common and preferred stock; and (iv) all
directors and executive officers as a group:
<TABLE>
<CAPTION>
Number of Common Percentage Owned of
Name and Address of Beneficial Owner Shares Owned Common Shares (2)
------------------------------------ ------------ -------------
<S> <C> <C>
David Schwartz 5,431,743 11.74%
Officer and Director
1313 Laurel Street
San Carlos, CA 94070
Henry Fong 2,131,815 4.61%
3155 Miro Drive North
Palm Beach Gardens, FL 33410
Leonard Kain 2,680,000 5.79%
1313 Laurel Street
San Carlos, CA 94070
Mary E. Finn -0-(1) -0-
Director
1313 Laurel Street
San Carlos, CA 94070
</TABLE>
-36-
<PAGE>
Dennis Allison -0- -0-
Director
1313 Laurel Street
San Carlos, CA 94070
Jim Polizotto -0- -0-
Director
1313 Laurel Street
San Carlos, CA 94070
Abe Matar 255,000 .55%
Vice President of Marketing
1313 Laurel Street
San Carlos, CA 94070
Sue Ann von Kaeppler 5,000 0.01%
Vice President of Business Development
1313 Laurel Street
San Carlos, CA 94070
James A. Newcomb -0- -0-
Chief Financial Officer and Director
1313 Laurel Street
San Carlos, CA 94070
Wayne W. Mills 2,511,568 5.43%
c/o R. J. Steichen & Co.
5500 Wayzata Blvd., Suite 290
Golden Valley, MN 55402
All Directors and executive officers as a 5,431,743 11.74%
group (5 persons)
_____________________
(1) Does not include 5,431,743 shares owned by her spouse, David M. Schwartz,
as to which she disclaims beneficial ownership.
(2) The percentage is based on 46,288,897 shares of common stock outstanding
after 1,879,213 shares of common stock have been issued and pursuant to
exercise of the warrants.
Price Range of Our Common Stock
Our securities have been traded over-the-counter since January 18, 1995 and
were quoted on the NASDAQ SmallCap Market under the symbols CALP and CALPW,
respectively through January 3, 1999. On December 18, 1998, we changed our name
from California Pro Sports, Inc. to ImaginOn, Inc. On January 4, 1999, the
common stock and publicly traded warrants began to trade under the symbols IMON
and IMONW, respectively. On June 7, 1999 our publicly traded warrants were
redeemed and are no longer traded. The following table sets forth the range of
high and low bid prices of our common stock and warrants as quoted by NASDAQ.
These market quotations reflect inter-dealer prices without retail mark-up,
mark-down or commissions and may not represent actual transactions.
-37-
<PAGE>
<TABLE>
<CAPTION>
Common Stock Warrants
Bid Prices Bid Prices
---------- ----------
2000 High Low High Low
---- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter (1/1/00-3/31/00) $4.9375 $ 2.50 * *
Second Quarter (4/1/00-4/17/00) $ 2.75 $1.0938 * *
1999
----
First Quarter (1/1/99-3/31/99) $ 15.25 $1.1875 $12.375 $.71875
Second Quarter(4/1/99-6/30/99) $5.8125 $1.9375 $ 3.75 $.90625
Third Quarter (7/01/99-9/30/99) $3.7183 $1.5625 * *
Fourth Quarter (10/1/99-12/31/99) $6.3438 $2.3125 * *
1998
----
First Quarter (1/1/98-3/31/98) $ 1.625 $ 1.125 $ .8125 $ .4375
Second Quarter (4/1/98-6/30/98) $1.9375 $1.1875 $ .875 $ .50
Third Quarter (7/1/98-9/30/98) $ 1.50 $ .75 $ .6875 $ .4375
Fourth Quarter (10/1/98-12/31/98) $ 2.625 $ .50 $ 1.375 $ .25
</TABLE>
As of February 29, 2000, there were approximately 345 record holders of
ImaginOn common stock.
* Warrants were redeemed June 7, 1999 and no longer trade.
Selling Securityholders
The following table lists the securities to be registered and offered for
sale by the selling securityholders including the total number of shares to be
registered by this registration statement. The term "selling securityholders"
include donees, pledgees, transferees and other successors in interest selling
shares received from the selling securityholders after the date of this
prospectus.
Because the selling securityholders may offer all or part of the shares of
common stock owned by them or received upon exercise of the warrants and because
this offering is not being underwritten on a firm commitment basis, no estimate
can be given as to the number of shares of common stock that the selling
securityholders are going to sell. The shares of common stock offered by this
prospectus may be offered from time to time by the selling securityholders.
The three of the selling securityholders acquired their shares of common
stock and warrants in a $6 million private placement through our investment
banker, Ladenburg Thalmann & Co., Inc. On December 30, 1999 we completed the
sale of 1,124,016 shares of common stock to the Tail Wind Fund, Ltd. and a
warrant to purchase 449,606 shares of common stock to the Tail Wind Fund, Ltd.
In addition, on December 30, 1999, we completed the sale of 749,344 shares of
common stock to Resonance Ltd. and a warrant to purchase 299,738 shares of
common stock to Resonance Ltd. The proceeds from these transactions of
approximately $4,750,000 were utilized to fund the marketing of our ImOn.com TV
product. On January 16, 2000, we completed the sale of 374,672 shares of common
stock to Southshore Capital Fund Limited and a warrant to purchase 149,869
shares of common stock to Southshore Capital Fund Limited. The proceeds from
this transaction of approximately $950,000 were utilized to fund the marketing
of our ImOn.comTV. In connection with the private placement, Ladenburg Thalmann
& Co., Inc. received $255,000, Meridian Capital received $15,000 and Allied
Capital International received $60,000 as placement agents. All remaining
proceeds were used to fund operating expenses. For a more detailed description
of this previous transaction see "Description of securities."
So as to infuse us with short-term working capital, two selling
securityholders, Henry Fong, and Barry Hollander, have agreed to exercise a
total of 980,000 warrants to purchase shares of common stock. In exchange for
-38-
<PAGE>
this exercise, we have agreed to register the common stock underlying the
warrants to be exercised. In 1998, Henry Fong received his warrants to purchase
725,000 shares of our common stock granted pursuant to __________. Mr. Fong was
President, CEO and Chairman of our Board until he resigned on January 20, 1999.
Also in 1998, Barry Hollander received his warrants to purchase 254,800 shares
of our common stock granted pursuant to _______________. Mr. Hollander was
Treasurer and Chief Financial Officer until he resigned on January 27, 1999. The
warrants owned by Messrs. Fong and Hollander have varied exercise prices:
180,000 warrants with an exercise price of $1.42, 200,000 warrants with an
exercise price of $1.70, 100,000 warrants with an exercise price of $1.98,
100,000 warrants with an exercise price of $2.27, 100,000 warrants with an
exercise price of $2.55, 100,000 warrants with an exercise price of $2.83,
100,000 warrants with an exercise price of $3.54 and 100,000 warrants with an
exercise price of $4.25. These warrants expire in 2003.
Shares of Common Stock and Shares Underlying Warrants Offered by the Selling
- ----------------------------------------------------------------------------
Securityholders
- ---------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Percent of
Shares of common Amount of outstanding
Shares of Shares of stock exercisable Total common common
common common stock underlying shares of stock owned stock owned
stock owned to be warrants to be common stock by by
Selling owned offered for offered for to be offered for securityholder securityholder
securityholder prior to securityholder's securityholder's securityholder's after the after the
name offering account account account offering (1) offering (1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tail Wind Fund,
Ltd. 1,124,016 1,124,016 449,606 1,573,622 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Resonance Ltd. 749,344 749,344 299,738 1,049,082 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Southshore Capital 374,672 374,672 149,869 524,541 0 0
Fund Limited
- ------------------------------------------------------------------------------------------------------------------------------------
Fong, Henry 2,131,815 0 725,200 725,200 2,131,815 4.60%
- ------------------------------------------------------------------------------------------------------------------------------------
Hollander, Barry 490,102 0 254,800 254,800 490,102 1.06%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes all shares offered are sold.
Plan of Distribution
We are registering the shares offered by the selling securityholders and no
underwriters are participating in this offering.
We will pay all costs and expenses in connection with the preparation of
this prospectus and the registration of the shares. Brokerage commissions and
similar selling expenses, if any, attributable to the sale of shares will be
borne by the selling securityholders. The selling securityholders may sell their
shares from time to time in one or more types of transactions, which may include
block transactions, on the Nasdaq SmallCap Market. The types of transactions
include:
. negotiated transactions;
. put or call option transactions;
. short sales; or
. a combination of the above transaction at market prices at the time of
sale or at negotiated prices.
These transactions may or may not involve brokers or dealers. The selling
securityholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-
-39-
<PAGE>
dealers regarding the sale of the shares, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of shares by the
selling securityholders.
Pursuant to the Purchase Agreements dated December 30, 1999, Tail Wind
Fund, Ltd., Resonance Ltd. and Southshore Capital Fund Limited may not own more
than 19.9% of our issued and outstanding shares of common stock. We must redeem
their excess shares at $3.2028, which is 120% of the per share purchase price of
$2.669, as adjusted.
We have agreed to indemnify the selling securityholders and the officers,
directors and each person who controls the selling securityholders against all
losses, claims, damages, liabilities and expenses caused by:
. any untrue or alleged untrue statement of material fact contained in the
registration statement, this prospectus or any amendment or supplement
to these documents; or
. any omission or alleged omission to state a material fact in the
registration statement, this prospectus or any amendment or supplement
to these documents that is required to be stated or necessary to ensure
that the documents are not misleading.
The selling securityholders will not be indemnified if the claims relating
to or arising from untrue statements or omissions if:
. the statements or omissions are based on written information provided by
the selling securityholders for use in the preparation of the
registration statement, this prospectus or any amendments or supplements
to these documents; or
. the selling securityholders fail to deliver a copy of this prospectus to
a buyer.
The selling securityholders and any broker-dealers that act in connection
with the sale of securities might be deemed to be underwriters within the
meaning of Section 2(a)(11) of the Securities Act, and any commissions received
by those broker-dealers and any profit on the resale of the securities sold by
them while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act.
Because the selling securityholders may be deemed to be underwriters within
the meaning of Section 2(a)(11) of the Securities Act, the selling
securityholders will be subject to the prospectus delivery requirements of the
Securities Act. We have informed the selling securityholders that the anti-
manipulative provisions of Regulation M promulgated under the Exchange Act may
apply to their sales in the market.
The selling securityholders also may resell all or a portion of the shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of that Rule.
Description of Securities
Common Stock
- ------------
We are authorized to issue up to 100,000,000 shares of common stock, $.01
par value per share. As of February 29, 2000, 44,409,684 shares were
outstanding. All outstanding shares of common stock are fully paid and non-
assessable, and all shares of common stock offered in the offering, when issued,
will be fully paid and non-assessable. The holders of ImaginOn common stock:
. have equal ratable dividends from funds legally available, when and
if declared by our Board of Directors;
. are entitled to share ratably in all our assets available for
distribution to holders of common stock upon liquidation, dissolution
or winding up of the affairs of ImaginOn;
-40-
<PAGE>
. do not have preemptive, subscription or conversion rights and there
are no redemption or sinking fund provisions applicable thereto; and
. are entitled to one vote per share on all matters on which
stockholders may vote at all meetings of stockholders.
The holders of our common stock do not have cumulative voting rights, which
means that the holders of a majority of the outstanding shares represented at
any stockholder meeting at which a quorum is present, voting for the election of
directors, can elect all of the directors to be elected, if they so choose and,
in such event the holders of the remaining shares will not be able to elect any
of the directors.
The number of shares of our common stock is subject to adjustment in each
of the following cases:
. stock dividend
. declaration of dividends payable in cash while offering a right to
purchase more common stock at the dividend price
. stock split
. combination of outstanding shares of common stock
. issue or reclassify common stock
. consolidation, merger, sale or lease of substantially all of our
assets
. capital reorganization or reclassification of common stock
Preferred Stock
- ---------------
We are authorized to issue up to 5,000,000 shares of preferred stock with
such designations, rights and preferences as may be determined from time to time
by the Board of Directors. Accordingly the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidations, conversion, voting or other rights that adversely affect the
voting powers or other rights of ImaginOn's Common Stockholders. Currently there
are no shares of preferred stock issued or outstanding.
Warrants
- --------
The Warrants
Prior to this offering, we redeemed all of our outstanding public warrants.
As part of the Purchase Agreements dated December 30, 1999, Tail Wind Fund,
Ltd., Resonance Ltd. and Southshore Capital Fund Limited also negotiated for
warrants that expire on March 30, 2002 to purchase an aggregate of 899,213
shares of common stock. The exercise price of the warrants is $3.34, 125%
of the market price.
The warrants' exercise price is subject to adjustment in certain events
including but not limited to the following:
. subdivision of our outstanding stock or declare a dividend or make
any distribution to shareholders payable in common stock;
. issuance or sale in a financing transaction of: 1) any shares of common
stock for a consideration per share less than the warrant exercise price
on the date of issuance; or 2) any convertible securities into shares of
common stock for which the conversion or exercise price is less than the
warrant exercise price on the date of issuance; or
. the merger, consolidation, reorganization or sale of substantially all
our assets.
-41-
<PAGE>
Pursuant to the Purchase Agreements dated December 30, 1999, Tail Wind
Fund, Ltd., Resonance Ltd. and Southshore Capital Fund Limited may not own more
than 19.9% of our issued and outstanding shares of common stock. We must redeem
their excess shares at $3.2028, which is 120% of the per share purchase price of
$2.669, as adjusted.
In 1998, we issued warrants to purchase 725,000 shares of our common stock
to Henry Fong and warrants to purchase 254,800 shares of our common stock to
Barry Hollander. The warrants owned by Messrs. Fong and Hollander have varied
exercise prices: 180,000 warrants with an exercise price of $1.42, 200,000
warrants with an exercise price of $1.70, 100,000 warrants with an exercise
price of $1.98, 100,000 warrants with an exercise price of $2.27, 100,000
warrants with an exercise price of $2.55, 100,000 warrants with an exercise
price of $2.83, 100,000 warrants with an exercise price of $3.54 and 100,000
warrants with an exercise price of $4.25. These warrants expire in 2003.
Group F Warrant
As part of the Series F Convertible Preferred Stock purchase agreement
dated May 4, 1999 the purchaser of the Series F Convertible Preferred Stock also
negotiated for a warrant that expires on May 3, 2003 to purchase 122,553 shares
of common stock. The group F warrant exercise price is $2.8125, but is subject
to adjustment in certain events including but not limited to the following:
. amendment to our Certificate of Incorporation changing the designation
of common stock or the rights, privileges, restrictions or conditions in
respect of the common stock or division of common stock;
. subdivision to our outstanding stock or declare a dividend or make any
distribution to shareholders payable in common stock;
. issue more than 100,000 share of common stock or options to purchase
common stock or securities convertible into common stock with an
exercise price less than the group F warrant exercise price either
through a public or private placement but not including options granted
pursuant to our Stock Option Plan or shares issued in an acquisition, or
shares issuable pursuant to our convertible debentures; or
. merger, consolidation, reorganization or sale of substantially all our
assets.
The number of common shares underlying the group F warrant is fixed prior
to adjustment at 122,553 shares of common stock.
Anti-dilution Rights
- --------------------
Until the later of December 30, 2001 or 21 months following the effective
date of this registration statement, the selling securityholders have anti-
dilution rights. If we sell any shares of common stock at a lower price than
the purchase price for the selling securityholders of $2.669, then we must
adjust the purchase price for the selling securityholders downward and issue
each selling securityholder the difference in additional shares of common stock.
However, if the selling shareholder owns less than 70% of his shares of common
stock acquired in the Purchase Agreement dated December 30, 1999, then he is
entitled to additional shares only with respect to the number of shares of
common stock originally acquired and then owned by the selling securityholder.
Pursuant to the Purchase Agreement dated December 30, 1999, we must obtain
the consent of the selling securityholders before:
. we issue or sell or agree to issue or sell any securities for cash in a
non-public capital raising transaction or series of transactions which
grant to the selling securityholders the right to receive additional
shares based upon future transactions on terms more favorable than those
granted to the selling securityholders in the new transaction; or
-42-
<PAGE>
. we issue or sell or agree to issue or sell for cash in a non public
transaction: 1) any debt or equity securities that are convertible into
additional shares of common stock either at a price that varies with
quotations of our common stock or at a fixed price that may be reset at
some future date; or 2) any equity line securities which provide for the
sale of our securities which are registered for resale pursuant to the
1933 Act.
Participation Rights in Future Transactions
- -------------------------------------------
Until the later of December 30, 2001 or 21 months following the effective
date of this registration statement, the selling securityholders have the right
to participate in future non-public capital raising transactions.
Indemnification Provided in Connection with the Offering by the Selling
- -----------------------------------------------------------------------
Securityholder
- --------------
The selling securityholders agreed to indemnify and hold harmless ImaginOn,
its directors, officers, agents and employees, each person who controls
ImaginOn, and the directors, officers, agents or employees of such controlling
persons, to the fullest extent permitted by applicable law, from and against all
losses arising solely out of or based solely upon any untrue statement of a
material fact contained in this registration statement, any prospectus, or any
form of prospectus, or solely out of or based solely upon any omission of a
material fact required to be stated in herein not misleading to the extent, but
only to the extent, that such untrue statement or omission is contained in any
information so furnished in writing by the selling securityholders to ImaginOn
specifically for inclusion in this registration statement or such prospectus or
to the extent that such information related to the selling securityholders or
the selling securityholders' proposed method of distribution of the securities
and was reviewed and expressly approved in writing by the selling security
holders expressly for use in this registration statement, such prospectus or
form of prospectus.
Indemnification Provided in Connection with the Offering by Imaginon
- --------------------------------------------------------------------
ImaginOn agreed to indemnify and hold harmless the selling securityholders,
its directors, officers, agents, employees, each person who controls the selling
securityholders, and the directors, officers, agents or employees of such
controlling persons, to the fullest extent permitted by applicable law, from and
against all losses arising solely out of or based solely upon any untrue
statement of a material fact contained in this registration statement, or any
related prospectus or similar document, or arise out of or are based upon the
omission or alleged omission to state a material fact required to be stated or
necessary to make such statements not misleading; however, ImaginOn will not be
liable in any such case to the extent such loss, claim damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in this registration statement or
prospectus or similar document in reliance upon, and in conformity with, written
information furnished to ImaginOn by the selling securityholders, specifically
for the use in the preparation of such document or to the extent that such
information related to the selling securityholders' method of distribution of
the securities and was reviewed expressly by the selling securityholders.
Legal Matters
Friedlob Sanderson Paulson & Tourtillott, LLC, Denver, Colorado, as our
counsel, has issued an opinion as to the validity of the common stock and
purchase warrants.
Experts
Our financial statements included in this registration statement
have been audited by Gelfond Hochstadt Pangburn, P.C., independent certified
public accountants, for the periods and to the extent set forth in their
report appearing in this registration statement. Such financial statements
have been so included in reliance upon the report of such firm given upon their
authority as experts in auditing and accounting.
-43-
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent auditors' report F-1
Consolidated financial statements:
Balance sheets F-2
Statements of operations F-3
Statements of shareholders' equity F-4 - F-6
Statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
ImaginOn, Inc.
We have audited the accompanying consolidated balance sheets of ImaginOn, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
January 31, 2000, except for the second paragraph of Note 10, as to which the
date is February 25, 2000
F-1
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
------
1999 1998
------------------ -----------------
<S> <C> <C>
Current assets:
Cash $ 4,959,694 $ 10,874
Receivable from sale of common stock (Note 8) 2,000,000
Accounts receivable, less allowance for
doubtful accounts of $19,400 (Note 5) 59,371
Inventories 21,504
Prepaid expenses and other 49,632 13,158
------------------ -----------------
Total current assets 7,090,201 24,032
------------------ -----------------
Furniture and equipment, net (Note 2) 159,734 11,811
Intangible and other assets, net (Note 2) 2,094,341 4,400
------------------ -----------------
2,254,075 16,211
------------------ -----------------
$ 9,344,276 $ 40,243
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable $ 601,683 $ 188,279
Accrued expenses 437,479 192,953
Notes payable, related parties (Note 4) 1,490,769
------------------ -----------------
Total liabilities (all current) 1,039,162 1,872,001
------------------ -----------------
Commitments and contingencies (Notes 3, 6 and 8)
Shareholders' equity (deficit) (Notes 8 and 10):
Preferred stock, $0.01 par value; 5,000,000 shares
authorized: Series F convertible preferred stock;
2,000 shares issued and outstanding 1,865,000
Common stock, $0.01 par value; 50,000,000 shares
authorized; 44,124,178 shares issued and
outstanding 441,241 851,953
Warrants and options 1,641,579 397,909
Capital in excess of par 14,485,996
Accumulated deficit (10,128,702) (3,081,620)
------------------ -----------------
Total shareholders' equity (deficit) 8,305,114 (1,831,758)
------------------ -----------------
$ 9,344,276 $ 40,243
================== =================
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues $ 339,790 $ 880 $ 4,665
Cost of revenues 198,001 29 1,035
---------------- ----------------- ----------------
Gross profit 141,789 851 3,630
---------------- ----------------- ----------------
Operating expenses:
Research and development 1,117,265 906,256 547,531
Sales and marketing 2,829,535 440,967 208,588
General and administrative 3,256,220 309,813 117,745
Consulting fees, related parties (Note 6) 135,000
---------------- ----------------- ----------------
Total operating expenses 7,338,020 1,657,036 873,864
---------------- ----------------- ----------------
Loss from operations (7,196,231) (1,656,185) (870,234)
---------------- ----------------- ----------------
Other income (expense):
Interest expense, related parties (Note 4) (905) (78,079) (76,278)
Interest income 122,191 310
Other 27,863 (6,248)
---------------- ----------------- ----------------
149,149 (84,017) (76,278)
---------------- ----------------- ----------------
Net loss (7,047,082) (1,740,202) (946,512)
Amortization of discount on preferred
stock (Note 8) (1,255,319)
Series F preferred stock dividend (Note 8) (297,868)
Series E preferred stock dividend (Note 8) (42,000)
---------------- ----------------- ----------------
Net loss applicable to common shareholders $ (8,642,269) $ (1,740,202) $ (946,512)
================ ================= ================
Basic and diluted loss per common share $ (.22) $ (.08) $ (.06)
================ ================= ================
Weighted average number of common
shares outstanding 39,006,214 20,483,093 15,534,969
================ ================= ================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Series D, E and F
convertible
preferred stock Common Stock
---------------------------- -------------------------------
Warrants
Shares Amount Shares Amount and options
--------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997 9,033,332 $ 90,333
Issuance of common stock 9,593,398 95,934
Issuance of common stock, net of issuance
costs of $19,686 479,670 4,797
Issuance of common stock to employees in
payment of an earned bonus 67,750 678
Exercise of warrants 121,950 1,220
Exercise of common stock warrants in
exchange for notes payable 154,573 1,546
Issuance of warrants to purchase shares of
common stock, net $ 72,158
Net loss
------------- ------------- ------------ --------------
Balances, December 31, 1997 19,450,673 194,508 72,158
Issuance of common shares and warrants for
cash, net of issuance cost of $348,438 1,138,200 11,382 313,353
Issuance of common shares to employees in
payment of an earned bonus 135,500 1,355
Issuance of common shares in payment of
accounts payable 23,742 237
Repurchase of common shares (542,000) (5,420)
<CAPTION>
Capital Total
in excess shareholders'
of par Deficit equity
------------- --------------- -----------------
<S> <C> <C> <C>
Balances, January 1, 1997 $ (87,000) $ (394,906) $ (391,573)
Issuance of common stock 435,066 531,000
Issuance of common stock, net of issuance
costs of $19,686 166,767 171,564
Issuance of common stock to employees in
payment of an earned bonus 3,072 3,750
Exercise of warrants 5,530 6,750
Exercise of common stock warrants in
exchange for notes payable 7,010 8,556
Issuance of warrants to purchase shares of
common stock, net 72,158
Net loss (946,512) (946,512)
------------- -------------- -----------------
Balances, December 31, 1997 530,445 (1,341,418) (544,307)
Issuance of common shares and warrants for
cash, net of issuance cost of $348,438 165,180 489,915
Issuance of common shares to employees in
payment of an earned bonus 61,145 62,500
Issuance of common shares in payment of
accounts payable 10,714 10,951
Repurchase of common shares (119,580) (125,000)
</TABLE>
(Continued)
F-4
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Series D, E and F
convertible
preferred stock Common stock
---------------------------- ------------------------------
Warrants
Shares Amount Shares Amount and options
---------- ------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Issuance of warrants to purchase common shares
in connection with a bridge financing 12,398
Issuance of options to a consultant
Net loss
---------- ------------- ------------- ------------ ---------------
Balances, December 31, 1998 20,206,115 202,062 397,909
Issuance of shares in connection with
acquisition of ImaginOn.com, Inc. 3,000 $1,570,000 16,000,602 160,006 394,200
Exercise of 4,075,065 warrants at exercise prices
between $.055 and $2.10 per share 4,075,065 40,751 (757,177)
Issuance of common shares to employees in
payment of an earned bonus 183,330 1,833
Issuance of shares of common stock in
connection with acquisition of Network
Specialists, Inc. 260,000 2,600
Issuance of shares of common stock in cashless
conversion of 119,060 warrants to purchase
common stock 88,540 885
Exercise of stock options 152,950 1,529
Amortization of Series D, E and F preferred
stock beneficial conversion feature 1,255,319
<CAPTION>
Capital Total
in excess shareholders'
of par Deficit equity
------------- ---------------- ----------------
<S> <C> <C> <C>
Issuance of warrants to purchase common shares
in connection with a bridge financing 12,398
Issuance of options to a consultant 1,987 1,987
Net loss (1,740,202) (1,740,202)
------------- ---------------- ----------------
Balances, December 31, 1998 649,891 (3,081,620) (1,831,758)
Issuance of shares in connection with
acquisition of ImaginOn.com, Inc. 2,574,915 4,699,121
Exercise of 4,075,065 warrants at exercise prices
between $.055 and $2.10 per share 4,562,527 3,846,101
Issuance of common shares to employees in
payment of an earned bonus 843,789 845,622
Issuance of shares of common stock in
connection with acquisition of Network
Specialists, Inc. 1,399,320 1,401,920
Issuance of shares of common stock in cashless
conversion of 119,060 warrants to purchase
common stock (885)
Exercise of stock options 6,679 8,208
Amortization of Series D, E and F preferred
stock beneficial conversion feature (1,255,319)
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Series D, E and F
convertible
preferred stock Common stock
---------------------------- ------------------------------
Warrants
Shares Amount Shares Amount and options
---------- ------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Issuance of shares of common stock in exchange
for 490 shares of Series E preferred stock (490) (419,768) 165,410 1,654
Issuance of shares of common stock in
connection with acquisition of Imagine Digital
Productions I, Inc. 305,000 3,050
Issuance of shares of Series F preferred stock 4,000 3,474,681
Redemption of Series D and E preferred stock (2,510) (2,150,232)
Redemption of 74,823 warrants at $.05 each (15,773)
Repurchase and retirement of shares of
previously issued common stock 45,045 450
Proceeds received from Section 16c transaction
Issuance of stock options to employees and
others in payment of an earned bonus and for
services 272,500
Conversion of Series F preferred stock to shares
of common stock (2,000) (1,865,000) 858,851 8,588
Issuance of common stock and warrants, net of
issuance cost of $280,000 1,873,360 18,733 1,349,920
Net loss
---------- ------------- ------------- ------------ ---------------
Balances, December 31, 1999 2,000 $1,865,000 44,124,178 $ 441,241 $ 1,641,579
========== ============= ============= ============ ===============
<CAPTION>
Capital Total
in excess shareholders'
of par Deficit equity
-------------- ---------------- -----------------
<S> <C> <C> <C>
Issuance of shares of common stock in exchange
for 490 shares of Series E preferred stock 418,114
Issuance of shares of common stock in
connection with acquisition of Imagine Digit
Productions I, Inc. 664,290 667,340
Issuance of shares of Series F preferred stock 175,319 3,650,000
Redemption of Series D and E preferred stock 891,872 (3,042,104)
Redemption of 74,823 warrants at $.05 each 12,031 (3,742)
Repurchase and retirement of shares of
previously issued common stock 49,550 (50,000)
Proceeds received from Section 16c transaction 168,988 168,988
Issuance of stock options to employees and
others in payment of an earned bonus and for 272,500
services
Conversion of Series F preferred stock to share
of common stock 1,856,412
Issuance of common stock and warrants, net of
issuance cost of $280,000 3,351,347 4,720,000
Net loss (7,047,082) (7,047,082)
-------------- ---------------- -----------------
Balances, December 31, 1999 $14,485,996 $(10,128,702) $ 8,305,114
============== ================ =================
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- -------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,047,082 $ (1,740,202) $ (946,512)
----------------- -------------- ---------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 682,304 17,526 7,809
Provision for losses on accounts receivable 25,300
Warrants issued for interest expense 12,398 65,544
Stock-based compensation expense 1,118,122 75,438 3,750
Changes in operating assets and liabilities,
net of effects of business acquisitions:
Increase in accounts receivable (76,081)
Increase in inventories (12,836)
Increase in prepaid expenses and other (27,997) (9,124) (4,034)
Decrease (increase) in loans to officers 10,045 (10,045)
Increase in other assets (4,400)
(Decrease) increase in accounts payable (185,055) 18,411 151,999
Increase (decrease) in accrued expenses 244,526 116,729 (284,209)
----------------- -------------- ---------------
Total adjustments 1,768,283 237,023 (69,186)
----------------- -------------- ---------------
Net cash used in operating activities (5,278,799) (1,503,179) (1,015,698)
----------------- -------------- ---------------
Cash flows from investing activities:
Cash paid for business acquisitions,
net of cash acquired (337,485)
Capital expenditures (111,897) (16,100) (21,046)
----------------- -------------- ---------------
Net cash used in investing activities (449,382) (16,100) (21,046)
----------------- -------------- ---------------
Cash flows from financing activities:
Bank overdraft (1,587) (1,684)
Proceeds from notes payable and
advances (Note 4) 3,160,420 1,185,254 332,500
Payments on notes payable (60,870) (143,429) (10,000)
Redemption of preferred stock and warrants (3,095,846)
Proceeds from issuance of common and
preferred stock, the exercise of options
and warrants, and other 10,673,297 489,915 715,928
----------------- -------------- ---------------
Net cash provided by financing activities 10,677,001 1,530,153 1,036,744
----------------- -------------- ---------------
</TABLE>
(Continued)
F-7
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- -------------- ---------------
<S> <C> <C> <C>
Net increase in cash 4,948,820 10,874 -
Cash, beginning 10,874 - -
------------------ ------------- ---------------
Cash, ending $ 4,959,694 $ 10,874 -
================= ============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 5,388 $ 17,141 1,210
================= ============== ===============
Cash paid for taxes $ - $ 3,593 -
================= ============== ===============
Supplemental disclosure of non-cash investing and
financing activities:
Purchase of Network Specialists, Inc., net of
cash acquired:
Fair value of assets acquired $ 115,000
Intangible assets 1,600,000
Liabilities assumed (100,000)
Fair value of common stock issued (1,402,000)
-----------------
Cash paid, net of cash acquired $ 213,000
=================
Purchase of Imagine Digital Productions I, Inc.,
net of cash acquired:
Fair value of assets acquired $ 27,000
Intangible assets 1,010,000
Liabilities assumed (245,000)
Fair value of common stock issued (667,000)
-----------------
Cash paid $ 125,000
=================
Receivable from sale of common stock $ 2,000,000
=================
Conversion of warrants to common stock $ 885
=================
Accrual of common stock issuance costs $ 280,000
=================
Common stock issued in connection with the
Company's merger with ImaginOn.com, Inc. $ 4,669,121
=================
Issuance of warrants to purchase common stock $ 325,751 $ 72,158
============== ===============
Exercise of common stock warrants in exchange
for note payable $ 8,556
===============
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. Organization and basis of presentation:
ImaginOn, Inc. and subsidiaries (the "Company") develops, manufactures, and
markets consumer software and Internet-related products, including broadband
Internet television systems. The Company also provides Internet connection
services to commercial and private users in the San Francisco Bay area.
OnJanuary 20, 1999, the Company, formerly known as California Pro Sports,
Inc., completed a merger with ImaginOn.com, Inc. ("ImaginOn.com") of San Carlos,
California, a privately held company formed in March 1996. At closing,
ImaginOn.com's shareholders received approximately 60% of the outstanding post-
merger common stock of the Company (20,206,115 shares) in exchange for their
ImaginOn.com common stock. The transaction has been recorded as an acquisition
of ImaginOn, Inc. by ImaginOn.com, and a recapitalization of ImaginOn.com.
The accompanying consolidated financial statements include the accounts of
ImaginOn, Inc., previously ImaginOn.com, and its wholly-owned subsidiaries,
ImaginOn Network Specialists, Inc. and ImaginOn Digital Productions, Inc. (Note
3). Intercompany transactions have been eliminated in consolidation.
Prior to the fourth quarter of 1999, the Company considered itself to be a
development stage Company, and was engaged primarily in research and development
activities, raising capital, acquiring businesses, and recruiting personnel. In
the fourth quarter of 1999, the Company began selling its broadband Internet
television software system, which it developed in conjunction with technologies
and resources obtained in part through its business acquisitions. The Company
also completed a $5,000,000 private placement of its common stock and warrants
(Note 8). As a result of these events, beginning in the fourth quarter of 1999,
the Company no longer considers itself to be a development stage company.
Since inception, the Company has incurred significant operating losses. The
ability of the Company to successfully carry out its business plan is primarily
dependent upon its ability to generate significant revenues and cash flows
through the future sales of its products. The Company believes that as a result
of the 1999 events described above, and through the continuation of its plans
and strategies, the Company will be able to generate sufficient cash flows to
enable it to fund operations during the year ending December 31, 2000.
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, and it is
reasonably possible that significant changes could occur in the near term.
Inventories:
Inventories consist primarily of internally-produced computer software
products and are valued at the lower of cost (first-in, first-out) or market
value. Inventory costs include product materials.
F-9
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Furniture, equipment and depreciation:
Furniture and equipment are stated at cost and consist of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Furniture and fixtures $ 45,421
Equipment 282,286 $ 37,146
--------------- ---------------
327,707 37,146
Less accumulated depreciation 167,973 (25,335)
--------------- ---------------
$ 159,734 $ 11,811
=============== ===============
</TABLE>
Depreciation is provided by use of accelerated and straight-line methods
over the estimated useful lives (1 to 7 years) of the related assets.
Software development costs:
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Under SFAS
No. 86, software development costs may be capitalized once the technological
feasibility of the project is established and until a point at which the
products are generally available for sale. The amount of software development
costs that may be capitalized is subject to limitations based on the net
realizable value of the potential product. To date, the period between achieving
technological feasibility of the Company's products and the general availability
of the products has been short. Software development costs qualifying for
capitalization have, consequently, been immaterial. Accordingly, the Company has
not capitalized any software development costs and has instead charged all such
costs to research and development expense.
Intangible and other assets:
Intangible and other assets consist of the following at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Goodwill $ 2,610,000
Trademark and license costs 100,000
Deposits and other 11,882 $ 4,400
--------------- ---------------
2,721,882 4,400
Less accumulated amortization 627,541 -
--------------- ---------------
$ 2,094,341 $ 4,400
=============== ===============
</TABLE>
F-10
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Intangible and other assets (continued):
Goodwill represents the cost of the Company's investments in subsidiaries
in excess of the net tangible assets acquired, and is amortized on the straight-
line method over three years. Trademark and license costs are related to
perpetual license agreements for a sporting goods product, and are amortized on
the straight-line method over 12 years; royalty income was approximately $25,000
in 1999, and is included in other income in the consolidated statement of
operations.
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. Based on
its review, management does not believe that any impairment has occurred as of
December 31, 1999.
Revenue recognition:
The Company currently derives its revenues from software sales, software
license fees, Internet and customer service contracts, and other support
services. Revenues from the sale of software and software licenses are generally
recorded at the time of delivery to the customer and when no significant
obligations remain related to implementation. Internet service revenue is
recognized monthly, as Internet access is provided to customers on a monthly
basis. Revenue from post-sales customer support contracts are recognized ratably
over the term of the agreement, typically one year. Customer advances and billed
amounts due from customers in excess of revenue recognized are recorded as
deferred revenue.
In 1999, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position ("SOP") 97-2, Software Revenue Recognition,
which requires companies to defer revenue and profit recognition unless four
required criteria of a sale are met. In addition, SOP 97-2 requires that revenue
recognized from software arrangements be allocated to each element of the
arrangement based on the relative fair values of the elements such as products,
upgrades, enhancements, post-contract customer support, installation, or
training. The adoption of SOP 97-2 did not have a material effect on the
Company's financial position or results of operations.
Fair value of financial instruments:
The carrying amounts of the Company's cash, receivables, accounts payable
and accrued expenses approximate fair values due to the short maturities of
these instruments.
Research and development expense:
Costs related to research, design, and development of products are charged
to operations as incurred.
F-11
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Advertising:
Costs related to advertising and promotion of products are charged to sales
and marketing expense as incurred. Advertising and promotion costs were
approximately $778,000, $79,000 and $115,000 in 1999, 1998 and 1997,
respectively.
Net loss per share:
Basic loss per share is computed by dividing net loss applicable to common
shareholders by the weighted-average number of common shares outstanding for the
year. In arriving at net loss applicable to common shareholders, amortization of
the beneficial conversion features related to the preferred stock and dividends
on the preferred stock (Note 8) increased this amount. 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 1999, 1998 and 1997. At December 31,
1999, 1998 and 1997, the total number of common shares issuable under the
exercise of outstanding options and warrants and upon the conversion of
convertible preferred stock was 3,984,731, 7,540,433 and 1,721,844 respectively.
Stock-based compensation:
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.
Comprehensive income:
SFAS No. 130, Reporting Comprehensive Income, 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 years ended December 31, 1999, 1998 and 1997 the Company had no items of
comprehensive income.
F-12
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. Currently, the Company does not have any derivative financial instruments
and does not participate in hedging activities. Therefore, management believes
that SFAS No. 133 will not have an impact on its financial position or results
of operations.
Reclassifications:
Certain amounts reported in the 1998 and 1997 financial statements have
been reclassified to conform to the 1999 presentation.
3. Business acquisitions:
On March 8, 1999, the Company acquired Network Specialists, Inc., a San
Francisco, California Internet service provider company, through its subsidiary
ImaginOn Network Specialists, Inc. ("INOW"), for $213,000 cash (net of cash
acquired) and 260,000 shares of the Company's common stock valued at
approximately $1,402,000.
Effective July 1, 1999, the Company acquired Imagine Digital Productions I,
Inc. ("IDP"), a multi-media production studio and publishing company, through
its subsidiary ImaginOn Digital Productions, Inc., for $125,000 cash, a $200,000
payable (paid in October 1999), and 305,000 shares of the Company's common stock
valued at approximately $667,000. The Company agreed to issue as contingent
consideration, up to 105,000 shares of the Company's common stock on June 30,
2000, subject to IDP's satisfaction of certain performance criteria, as defined.
Each acquisition was accounted for as a purchase, and the results of
operations of INOW and IDP are included in the Company's consolidated statement
of operations from the date of each acquisition. The total purchase price of
each acquisition was allocated to the assets and liabilities acquired based on
their estimated fair values, including total goodwill of approximately
$2,610,000.
The following unaudited pro forma financial information for the years ended
December 31, 1999 and 1998, gives effect to the acquisitions as if they had
occurred at the beginning of each respective period:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenue $ 465,000 $ 542,000
Net loss $ (7,113,000) $ (1,842,000)
Net loss applicable to common
shareholders $ (8,708,000) $ (1,842,000)
Basic and diluted loss per common share $ (.22) $ (.09)
Shares used in per share calculation 39,205,309 21,048,093
</TABLE>
F-13
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. Business acquisitions (continued):
The unaudited pro forma financial information above does not purport to
represent the results which would actually have been obtained if the
acquisitions had been in effect during the periods covered, or any future
results which may in fact be realized.
4. Notes payable:
Prior to the Company's January 20, 1999 merger with ImaginOn.com,
ImaginOn.com partly funded its operations through the issuance of 10%, 90-day
notes payable to related parties. At December 31, 1998, notes payable totaling
$60,870 were due to the President of ImaginOn.com and to a former
officer/shareholder of the Company. These notes were paid in 1999. In addition,
prior to the January 1999 merger, ImaginOn, Inc. advanced ImaginOn.com cash. At
December 31, 1998, these advances totaled approximately $1,430,000, and
additional advances of approximately $3,160,000 were made through the date of
the merger. Interest at 9% was charged on these advances, and accrued interest
totaled approximately $44,000 at December 31, 1998. The advances and related
accrued interest between the Company and ImaginOn.com eliminated in
consolidation subsequent to January 20, 1999.
5. Sale of the Company's investment in USA Skate Corporation:
In 1998, two former officers/shareholders of the Company agreed to purchase
all of the shares of USA Skate Corporation (an inactive subsidiary of California
Pro Sports, Inc. at January 20, 1999) that were owned by the Company for
$90,000. The purchase price was based on the net book value of the Company's
investment in Skate Corp. at the time of the agreement. The sale of Skate Corp.
was completed and the Company received the $90,000 in January 1999. The
transaction did not result in any gain or loss to the Company. At December 31,
1999, the Company has an non-related receivable of $19,900 from USA Skate
Corporation which is unsecured and due on demand.
6. Commitments and contingencies:
Leases:
The Company leases office space under non-cancelable operating lease
agreements expiring at various dates through 2007. Certain lease agreements
provide for annual incremental rent increases of 5%.
F-14
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. Commitments and contingencies (continued):
Leases (continued):
Future minimum lease payments under operating leases are as follows:
Year ending
December 31,
------------
2000 $ 114,000
2001 91,000
2002 95,000
2003 99,000
2004 37,000
Thereafter 102,000
----------
$ 538,000
==========
Total rent expense for 1999, 1998 and 1997 was approximately $79,000, $32,700
and $7,800, respectively.
License agreement:
In 1996, the Company entered into a non-exclusive, royalty-bearing,
perpetual worldwide license agreement with a company to use and distribute
certain licensed technology. The Company is to pay royalties equal to 3% of
gross revenue, as defined, for products distributed which utilize this
technology. No royalties were incurred under this agreement in 1999, 1998 and
1997.
Consulting fees, related parties:
During 1999, the Company incurred $135,000 of consulting fees to two former
officers/shareholders of the Company. These consulting services were terminated
in October 1999.
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 adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company.
7. 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-15
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. Income taxes (continued):
The following is a summary of the Company's deferred tax assets and
liabilities at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $7,839,000 $ 978,000
Intangible assets 186,000
Tax credits and other 77,000 356,000
---------- -----------
8,102,000 1,334,000
Valuation allowance for deferred tax assets (8,102,000) (1,334,000)
---------- -----------
$ - $ -
========== ===========
</TABLE>
Net operating loss carryforwards of approximately $20,100,000 are available
to offset future taxable income, if any, through 2019. The net operating loss
carryforwards may be subject to certain limitations due to the merger with
ImaginOn.com, the IDP and INOW acquisitions, and other transactions. A valuation
allowance has been provided to reduce the deferred tax assets, as realization of
the assets is not assured.
8. Shareholders' equity:
Issuance of common stock prior to the January 20, 1999 merger:
At December 31, 1998, ImaginOn, Inc. had 13,434,731 shares of common stock
outstanding and 1,630 shares of Series B and C ("Series B/C") convertible
preferred stock outstanding. In January 1999, prior to the merger, the preferred
shares were converted into 1,879,626 shares of common stock. In January 1999, an
additional 39,845 shares of common stock were issued to the Series B/C
shareholders as a penalty for not completing a registration statement within an
agreed upon time period. The Company recorded an expense of $81,500 based upon
the market value of the shares issued.
In January 1999, the Company issued 125,000 shares of common stock to a
third-party consultant who performed services in connection with the Series B/C
and Series D and E preferred stock issuances. In addition, the Company issued
521,400 shares of common stock in connection with the exercise of options at
$1.00 per share.
As a result of these transactions, ImaginOn, Inc. had 16,000,602 shares of
common stock outstanding at the date of the merger with ImaginOn.com.
Issuance of common stock subsequent to the January 20, 1999 merger:
During 1999 the Company issued 4,075,065 shares of common stock upon the
exercise of 4,075,065 options at exercise prices from $.055 to $2.10 per share.
The total net proceeds the Company received was $3,846,101. In addition, the
Company issued 183,330 shares of common stock as bonuses granted to employees,
and recognized $845,622 of expense, which was calculated based upon the market
value of the common stock issued at the date of the grant.
F-16
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. Shareholders' equity (continued):
Issuance of common stock subsequent to the January 20, 1999 merger
(continued):
In connection with the acquisitions of INOW and IDP, in March 1999, the
Company issued 260,000 shares of common stock valued at $1,401,920 to the former
shareholders of Network Specialists, Inc., and in July 1999, the Company issued
305,000 shares of common stock valued at $667,340 to the former shareholders of
Imagine Digital Production I, Inc. The values of the shares issued were based on
the market value of the common stock at the respective dates of issuance.
During 1999, the Company issued 88,540 shares of common stock upon a
cashless exercise of 119,060 warrants. During 1999, the Company also repurchased
and retired 45,045 shares of previously issued common stock for $50,000 and
issued 152,950 shares of common stock upon the exercise of stock options.
On December 30, 1999, the Company issued 1,873,360 shares of common stock
and warrants to purchase an additional 749,344 shares of common stock for
$5,000,000. The Company received $3,000,000 on December 30, 1999, and received
the remaining $2,000,000 on January 3, 2000. In connection with this
transaction, the Company incurred $280,000 of issuance costs which were paid in
January 2000 and which have been recorded as a liability at December 31, 1999.
The warrants are exercisable immediately, provide for the purchase of 749,344
shares of common stock at an exercise price of $3.34 per share, and expire in
March 2002.
In connection with the December 30, 1999, issue of common stock and
warrants, the Company entered into a registration rights agreement, which
provides that the Company will use its best efforts to register the common stock
issued and common stock underlying the warrants within a specified time period.
If a registration of these shares is not completed within the specified time
period, the Company may be subject to contingent payments of 2% of the purchase
price of the stock and warrants, per month, as defined.
Series D/E preferred stock:
In January 1999, prior to the merger, the Company completed private
placements whereby the Company received net proceeds of $2,570,000 for the
purchase of 1,500 shares each of Series D and E convertible preferred stock (the
"Series D/E Stock") at a price of $1,000 per share. The Series D/E Stock was
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 Stock, the Company
issued warrants to purchase 300,000 shares of common stock to financial advisors
that assisted with the placements. The warrants are exercisable at $7.28 per
share (120% of the market price, as defined in the agreement, of the common
stock at the date of issuance). These warrants expire in January 2004.
The conversion feature was "in the money" at the date of issue (a
"beneficial conversion feature"). The Company allocated $1,000,000 of the
proceeds, equal to the intrinsic value of the beneficial conversion feature, to
capital in excess of par. During 1999, the entire amount of the beneficial
conversion feature was amortized to preferred stock.
F-17
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. Shareholders' equity (continued):
Issuance of common stock subsequent to the January 20, 1999 merger
(continued):
Series D/E preferred stock (continued):
During 1999, 490 shares of Series E preferred stock were converted into
165,410 shares of common stock. The remaining shares of Series D/E Stock were
redeemed in 1999 at 120% of face value plus unpaid dividends of $42,000 for a
total redemption of approximately $3,042,000.
Series F convertible preferred stock:
In May 1999, the Company issued 4,000 shares of 12%, Series F convertible
preferred stock (the "Series F Stock") for $3,650,000 (net of offering costs) at
a price of $1,000 per share. The Series F Stock is convertible at the option of
the holder at any time after 180 days from the closing date into a number of
shares of common stock equal to the lower of 125% of the five-day average
closing bid price of the Company's common stock immediately preceding the
closing date, or 94% of the low five-day average closing bid price of the
Company's common stock for the 22 consecutive trading days prior to the trading
day on which the notice of conversion is sent by the preferred shareholders.
The Series F Stock is subject to a registration rights agreement which
provides that the Company will use its best efforts to register the common stock
issued and common stock underlying the warrants within a specified time period.
If a registration of these shares is not completed within the specified time
period, the Company may be subject to contingent payments of 2% of the purchase
price of the stock, per month, as defined.
In connection with the Series F Stock placement, warrants to purchase
122,553 shares of common stock were issued with an exercise price of the
warrants equal to the lesser of 110% of the closing bid price of the common
stock on the closing date, or 100% of the closing bid price of the common stock
on the date the convertible preferred shares are redeemed, or 100% of the
closing bid price of the common stock on the first trading day after the Company
has filed a registration statement covering the shares of common stock to be
issued upon conversion of the Series F Stock and exercise of the warrants.
In December 1999, 2000 shares of the Series F Stock were converted into
858,851 shares of common stock. Dividends on the Series F Stock through December
31, 1999, were approximately $298,000.
The conversion feature was "in the money" at the date of issue (a
"beneficial conversion feature"). The Company allocated $255,319 of the
proceeds, equal to the intrinsic value of the beneficial conversion feature to
capital in excess of par. During 1999, the entire amount of the beneficial
conversion feature was amortized to preferred stock.
F-18
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. Shareholders' equity (continued):
Stock options:
The Company has two stock option plans, the 1994 Stock Option Plan (the
"1994 Plan") and the 1997 Stock Option Plan (the "1997 Plan"), both of which
provide for the issuance to employees, officers, directors, and consultants of
the Company options to purchase up to 2,910,000 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.
Under the 1994 Plan, 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.
Under the 1997 Plan, the exercise price for incentive options may not be
less than 85% of the fair market value of the Company's common stock on the date
of grant in the case of nonstatutory stock options, and at fair market value in
the case on incentive stock options. Options become exercisable as determined by
the Board of Directors, but in no case at a rate less than 20% per year over
five years from the date of grant.
A summary of the status of the Company's stock options and weighted average
exercise prices is as follows:
<TABLE>
<CAPTION>
1997 Plan 1994 Plan Other Total
---------- --------- --------- --------
Weighted Weighted Weighted Weighted
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares Price
---------- --------- --------- -------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997 20,000 $ 2.50 20,000 $ 2.50
Granted 677,500 $0.15 130,000 1.00 150,000 $0.83 957,500
Exercised (22,500) 1.00 (30,000) 1.00 (52,500) 1.00
--------- ----- -------- ----- --------- -------- ---------- --------
December 31, 1997 677,500 0.15 127,500 1.24 120,000 0.89 925,000 .40
Canceled (20,000) 2.50 (100,000) 0.88 (120,000) 1.15
Granted 342,243 1.25 49,500 1.00 1,100,000 2.22 1,491,743 1.96
Exercised (157,000) $1.00 (157,000) 1.00
--------- ----- -------- ----- --------- -------- ---------- --------
December 31, 1998 1,019,743 0.52 1,120,000 2.20 2,139,743 1.40
Canceled (217,443) 3.52 (217,443) 3.52
Granted 875,646 3.64 875,646 3.64
Exercised (152,950) 0.05 (152,950) 0.05
--------- ----- -------- ----- --------- -------- ---------- --------
December 31, 1999 1,524,996 $2.13 1,120,000 $ 2.20 2,644,996 $ 2.16
========= ===== ======== ===== ========= ======== ========== ========
</TABLE>
F-19
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. Shareholders' equity (continued):
Stock options (continued):
The number of options exercisable at December 31, 1999 and 1998 are
1,494,100 and 1,188,289, respectively. The 1997 Plan and other options expire
from 2000 through 2009.
<TABLE>
<CAPTION>
Weighted
average Weighted Weighted
contractual average average
Range of Number period in exercise Number exercise
exercise prices outstanding years price exercisable price
- ------------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.01 120,000 9.5 $ .01 120,000 $ .01
$.055 - $ .46 731,750 8.5 $ .23 254,100 $ .19
$.75 - $1.00 120,000 1.5 $ .79 120,000 $ .79
$2.22 - 2.37 1,070,000 1.5 $2.36 1,000,000 $2.37
$2.84 - $4.00 282,246 9.5 $3.77
$5.75 - $6.19 321,000 9.5 $5.84
--------- ----- --------- -----
$.01 - $5.72 2,644,996 $2.16 1,494,100 $1.68
========= ===== ========= =====
</TABLE>
Had compensation cost for the Company's stock-based compensation plans 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 net loss per common share
would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Net loss applicable to common
shareholders, as reported $ (8,642,269) $ (1,740,202) $ (946,512)
Net loss applicable to common
shareholders, pro forma $ (9,325,000) $ (1,747,000) $ (947,700)
Net loss per common share, as
reported $ (.22) $ (.08) $ (.06)
Net loss per common share, pro
forma $ (.24) $ (.08) $ (.06)
</TABLE>
The fair value of each option granted during 1999, 1998 and 1997 was
estimated on the date of grant using the Black-Scholes option-pricing model or
using the minimum value pricing method. The following assumptions were utilized
in 1999, 1998 and 1997:
F-20
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. Shareholders' equity (continued):
Stock options (continued):
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ------------- --------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 78% - -
Risk-free interest rate 6% 5.86% - 5.98% 5.79%
Expected life of options 5 years 5 years 5 years
</TABLE>
Subsequent to December 31, 1999, the Company granted additional options to
employees to purchase approximately 329,000 shares of the Company's common stock
at exercise prices which were based on the market value of the Company's common
stock at the date of grant.
Warrants:
The Company has outstanding warrants entitling the holder to purchase
58,331 shares of the Company's common stock at $4.81 per share which expire in
2000.
9. Operating segments:
In 1999, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes reporting and disclosure
standards for an enterprise's operating segments. Operating segments are defined
as components of an enterprise for which separate financial information is
available and regularly reviewed by the Company's senior management.
Beginning in 1999, in connection with the Company's acquisitions of INOW
and IDP, the Company has three reportable segments: ImaginOn, Inc. and IDP,
which both develop, produce and market computer software products, and INOW, an
Internet service provider. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies. The
Company evaluates performance based on operating earnings of the respective
business units.
As of and during the year ended December 31, 1999, the segment results were
as follows:
<TABLE>
<CAPTION>
Internet
Computer software products service
--------------------------- -----------
ImaginOn, Inc. IDP INOW Corporate Total
--------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 74,345 $ 25,975 $ 239,470 $ 339,790
Segment loss (5,607,094) (340,040) (404,207) $ (695,741) (7,047,082)
Total assets 7,086,594 20,867 114,755 2,122,060 9,344,276
Capital expenditures 104,465 1,626 5,806 111,897
Depreciation and
amortization 47,977 5,714 28,237 600,376 682,304
</TABLE>
F-21
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. Subsequent events:
In January 2000, the Company issued 374,672 shares of common stock, and
warrants to purchase an additional 149,869 shares of common stock for
$1,000,000. In connection with this transaction, the Company incurred issuance
costs of $50,000.
In February 2000, the Company, at its option, redeemed the remaining 2,000
shares of Series F Stock for $2,394,000.
F-22
<PAGE>
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
is accurate as of the date on the front cover of this prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.
Until ______, 2000, all dealers effecting transactions in the common
stock, whether or not participating in this distribution, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
4,127,245 Shares Common Stock
------------------------------------
PROSPECTUS
------------------------------------
[LOGO]
April 19, 2000
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered. All expenses are
estimated except the registration and NASD filing fees.
Registration and filing fee $ 3,000
Printing 1,000
Accounting fees and expenses 5,000
Legal fees and expenses 10,000
Blue sky fees and expenses 500
Transfer Agent 1,000
Other 500
-------
Total $21,000
=======
ITEM 14 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION PROVIDED UNDER IMAGINON'S CERTIFICATE OF INCORPORATION
Section 145 of the Delaware General Corporation Law and Article Ninth
of the Registrant's Certificate of Incorporation provides for, under certain
circumstances, the indemnification of the Registrant's officers, directors,
employees and agents against liabilities which they may incur in such
capacities. A summarization of the circumstances in which such indemnifications
provided for is contained herein, but that description is qualified in its
entirety by reference to Article Ninth of the Registrant's Certificate of
Incorporation and the relevant Section of the Delaware General Corporation Law.
In general, the statute provides that any director, officer, employee
or agent of a corporation may be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement, actually and
reasonably incurred in a proceeding (including any civil, criminal,
administrative or investigative proceeding) to which the individual was a party
by reason of such status. Such indemnity may be provided if the indemnified
person's actions resulting in the liabilities: (i) were taken in good faith;
(ii) were reasonably believed to have been in or not opposed to the Registrant's
best interest; and (iii) with respect to any criminal action, such person had no
reasonable cause to believe the actions were unlawful. Unless ordered by a
court, indemnification generally may be awarded only after a determination of
independent members of the Board of Directors or committee thereof, by
independent legal counsel or by vote of the stockholders that the applicable
standard of conduct was met by the individual to be indemnified.
The statutory provisions further provide that to the extent a director,
officer, employee or agent is wholly successful on the merits or otherwise in
defense of any proceeding to which he was a party, he is entitled to receive
indemnification against expenses, including attorneys' fees, actually and
reasonably incurred in connection with the proceeding.
Indemnification in connection with a proceeding by or in the right of
ImaginOn in which the director, officer, employee or agent is successful is
permitted only with respect to expenses, including attorneys' fees actually and
reasonably incurred in connection with the defense. In such actions, the person
to be indemnified must have acted in good faith, in a manner believed to have
been in ImaginOn's best interest and must not have been adjudged liable to
ImaginOn unless and only to the extent that the Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expense which the Court of Chancery or such other court shall deem proper.
Indemnification is otherwise prohibited in connection with a proceeding brought
on behalf of the Registrant in which a director is adjudged liable to the
Registrant, or in
II-1
<PAGE>
connection with any proceeding charging improper personal benefit to the
director in which the director is adjudged liable for receipt of an improper
personal benefit.
Delaware law authorizes the Registrant to reimburse or pay reasonable
expenses incurred by a director, officer, employee or agent in connection with a
proceeding in advance of a final disposition of the matter. Such advances of
expenses are permitted if the person furnishes to the Registrant a written
agreement to repay such advances if it is determined that he is not entitled to
be indemnified by ImaginOn.
The statutory section cited above further specifies that any provisions
for indemnification of or advances for expenses does not exclude other rights
under the Registrant's Certificate of Incorporation, Bylaws, resolutions of its
stockholders or disinterested directors, or otherwise. These indemnification
provisions continue for a person who has ceased to be a director, officer,
employee or agent of ImaginOn and inure to the benefit of the heirs, executors
and administrators of such persons.
The statutory provision cited above also grants the power to the
Registrant to purchase and maintain insurance policies which protect any
director, officer, employee or agent against any liability asserted against or
incurred by him in such capacity arising out of his status as such. Such
policies may provide for indemnification whether or not ImaginOn would otherwise
have the power to provide for it. No such policies providing protection against
liabilities imposed under the securities laws have been obtained by the
Registrant.
Article VIII of the Registrant's Bylaws provides that the Registrant
shall indemnify its directors, officers, employees and agents to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Registrant has entered into agreements with its directors indemnifying them to
the fullest extent permitted by the Delaware General Corporation Law.
ITEM 15 - RECENT SALES OF UNREGISTERED SECURITIES
On April 13, 1997, the Registrant issued warrants to purchase up to
150,000 shares of its common stock as payment for consulting services. Of these
warrants, 50,000 are exercisable at $1.00 per share and 100,000 are exercisable
at $.87 per share. The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6) of the Securities Act of 1933 (the
"Securities Act") related to the issuance of these warrants.
On April 13, 1997, the Registrant granted stock options to purchase up
to 45,000 shares of its common stock as compensation to its non-employee
directors. These options are exercisable at $1.00 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these options.
On April 13, 1997, the Registrant issued 776 shares of its common stock
as payment for a debt owed in the amount of $995. Payment was made based on
$1.25 per share, representing the closing price of the common stock on April 11,
1997 as reported on the Nasdaq SmallCap Market. The Registrant relied on the
exemption from registration provided by Section 4(6) of the Securities Act
related to the issuance of these shares.
On April 23, 1997, the Registrant issued 75,000 shares of common stock,
valued at $1.00 per share, to a consultant for services rendered prior to April
1, 1997. The Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act because the recipient of these
shares was a sophisticated and/or accredited investor.
On April 23, 1997, the Registrant granted options to purchase 100,000
shares of common stock under its 1994 Stock Option Plan as additional
compensation to one officer and four other employees of the Registrant. The
exercise price for these options is $1.00 per share, representing the closing
price of the common stock as reported by the Nasdaq SmallCap Market on the date
of grant. The Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act related to the grant of these
stock options.
On May 6, 1997, the Registrant issued 75,000 shares of common stock in
exchange for outstanding options to purchase 300,000 shares of common stock
initially issued to a consultant for services. The services were valued at
II-2
<PAGE>
$75,000, or $1.00 per share. The Registrant relied on the exemption from
registration provided by Section 4(6) and 4(2) of the Securities Act because the
recipients of these shares were sophisticated and/or accredited investors.
On May 31, 1997, the Registrant issued 214,416 shares of its common
stock, valued at $1.00 per share representing the average of the closing bid and
asked prices of the Registrant's common stock as quoted by Nasdaq for the ten
consecutive trading days immediately preceding the date of the agreement of the
parties to the transactions. Of these shares 170,000 were issued in exchange for
141,667 shares of common stock of USA Skate Corporation (the Registrant's
majority owned subsidiary). In March 1996, one of the Registrant's officers made
a loan of $170,000 to the Registrant and, in June 1996, the Registrant
transferred 141,667 shares of USA Skate Corporation owned by the Registrant to
this officer in repayment thereof based on a valuation of $1.20 per USA Skate
common share. In the May 1997 transaction, the officer returned the 141,667
shares of USA Skate Corporation to the Registrant in exchange for 170,000 shares
of common stock of the Registrant. The other 44,416 shares of common stock of
the Registrant were issued to one holder to repay a debt owed by the Registrant
for services performed and acknowledged. The Registrant relied on the exemption
from registration provided by Section 4(6) of the Securities Act because the
recipients of the 342,645 shares were accredited investors.
On June 30, 1997, the Registrant issued 271,264 shares of common stock
to an entity in exchange for assumption of certain trade payables of the
Registrant totaling $450,000. The Registrant relied on the exemptions from
registration provided by Sections 4(2) and/or 4(6) of the Securities Act because
the recipient of these shares was an accredited investor.
On August 1, 1997, the Registrant issued 138,923 shares of its common
stock in exchange for the extension of the maturity date to September 15, 1997
on notes of USA (the Registrant's majority owned subsidiary). The amount owed
was based upon 10% of the outstanding principal and payment was made based on
$1.8125 per share of common stock, representing the average closing bid price
for the 10 days immediately preceding the date of issuance. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
In August 1997, 30,000 warrants were exercised, purchasing 30,000
shares of common stock.
On September 11, 1997, the Registrant issued 258,857 shares of its
common stock as payment for fees and forgiveness of debt to two
officers/shareholders of the Registrant. Payment was made based on $1.75 per
share. The Registrant relied on the exemption from registration provided by
Section 4(6) of the Securities Act related to the issuance of these shares.
On September 12, 1997, the Registrant issued 68,160 shares of its
common stock to a third party, valued at $1.5625 per share representing the
closing price on the date the agreement was reached. These shares were issued in
exchange for 88,750 shares of common stock of USA. The Registrant transferred
the 88,750 shares of USA owned by the Registrant in payment of rent and other
related expenses based on a valuation of $1.20 per USA common share. The
individual returned the 88,750 shares of USA in exchange for 68,160 shares of
common stock of the Registrant.
On September 15, 1997, the Registrant issued 36,490 shares of its
common stock in exchange for the extensions of the maturity date to October 15,
1997 on notes of USA. The amount owed was based upon 5% of the outstanding
principal balance, and payment was based on $1.725 per share.
On September 30, 1997, the Registrant issued 114,979 shares of common
stock to an entity in exchange for assumption of certain trade payables of the
Registrant totaling $214,463. The Registrant relied on the exemptions from
registration provided by Section 4(2) and/or 4(6) of the Securities Act because
the recipient of these shares was an accredited investor.
On September 30, 1997, the Registrant issued 100,000 shares of common
stock to a consultant for services rendered during the three month period ended
September 30, 1997. Payment was made based on $1.92 per share, representing the
average close price of the common stock at the end of each calendar month during
the quarter ended
II-3
<PAGE>
September 30, 1997. The Registrant relied on the exemption from registration
provided by Section 4(b) of the Securities Act related to the issuance of these
shares.
On September 30, 1997, the Registrant issued 90,500 shares of its
common stock to an officer/shareholder in exchange for assumption of certain
note payables of the Registrant assumed by the officer/shareholder. The
Registrant relied on the exemption from registration provided by Section 4(b) of
the Securities Act related to the issuance of these shares.
On January 5, 1998, the Registrant issued 37,467 shares of its common
stock in exchange for the extensions of the maturity date to February 5, 1998 on
notes of Skate Corp. The amount was owed based upon 5% of the outstanding
principal balance, and payment was based on $1.43 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On January 12, 1998, the Registrant issued 50,000 shares of its common
stock to a consultant for services rendered. Payment was made based on $1.375
per share representing the market price of the common stock. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On January 16, 1998, the Registrant issued 85,000 shares to an officer
of the Registrant upon the exercise of a previously granted option under the
Registrant's 1994 Stock Option Plan. The Registrant relied on the exemption from
registration provided by Section 4(6) of the Securities Act related to the
issuance of these shares.
On January 8, 1998, the Registrant issued 18,500 Series A Convertible
Preferred Stock to an officer of the Registrant for among other things, his
agreement to exercise 85,000 options so as to infuse the Registrant with
short-term working capital. The Registrant relied on the exemption from
registration provided by Section 4(6) of the Securities Act related to the
issuance of these shares.
On February 5, 1998, the Registrant issued 35,125 shares of its common
stock in exchange for the extensions of the maturity date to March 5, 1998 on
notes of Skate Corp. The amount was owed based upon 5% of the outstanding
principal balance and payment was made based on $1.52 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On March 5, 1998, the Registrant issued 39,222 shares of its common
stock in exchange for the extensions of the maturity date to April 5, 1998 on
notes of Skate Corp. The amount owed was based upon 5% of the outstanding
principal balance and payment was made based on $1.35 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On March 26, 1998, the Registrant issued 15,000 shares to a director of
the Registrant upon the exercise of a previously granted option under the
Registrant's 1994 Stock Option Plan.
On March 31, 1998, the Registrant issued 7,500 shares of its common
stock to an employee of the Registrant upon the exercise of a previously granted
option under the Registrant's 1994 Stock Option Plan.
On June 30, 1998, the Registrant issued 3,000 shares of Series B 4%
Convertible Preferred Stock. The Registrant relied on the exemption from
registration provided by Section 4(2) of the Securities Act related to the
issuance of these securities.
On August 3, 1998, the Registrant issued 1,030 shares of Series C 4%
Convertible Preferred Stock. The Registrant relied on the exemption from
registration provided by Section 4(2) of the Securities Act related to the
issuance of these shares.
On October 1, 1998, the Registrant issued 20,000 shares of its common
stock to two directors of the Registrant for services rendered.
II-4
<PAGE>
On October 5, 1998, the Registrant issued 43,191 shares of its common
stock in exchange for the extensions of the maturity date to November 5, 1998 on
notes of Skate Corp. The amount owed was calculated at 5% of the outstanding
principal balance and payment was made based on $.70 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On November 5, 1998, the Registrant issued 56,477 shares of its common
stock in exchange for the extensions of the maturity date to December 5, 1998 on
notes of Skate Corp. The amount owed was calculated as 5% of the outstanding
principal balance and payment was made based on $.71 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
On November 23, 1998, the Registrant issued 525,073 shares of its
common stock in exchange for the conversion of 245 shares of Series B
Convertible Preferred Stock.
On November 27, 1998, the Registrant issued 122,675 shares of its
common stock in exchange for the conversion of 95 shares of Series B Convertible
Preferred Stock.
On December 2, 1998, the Registrant issued 100,000 shares of its common
stock to a consultant upon the exercise of a previously granted option.
On December 5, 1998, the Registrant issued 21,922 shares of its common
stock in exchange for the extensions of the maturity date to January 5, 1999 on
notes of Skate Corp. The amount owed was calculated at 5% of the outstanding
principal balance and payment was made based on $1.73 per share. The Registrant
relied on the exemption from registration provided by Section 4(6) of the
Securities Act related to the issuance of these shares.
From December 24 through December 31, 1998, the Registrant issued
131,686 shares of its common stock stock in exchange for the conversion of 110
shares of Series C Convertible Preferred Stock.
On December 31, 1998, the Registrant issued 232,256 shares of its
common stock in exchange for assumption of certain liabilities of the Registrant
totaling $239,326, the Registrant relied on the exemptions from registration
provided by Section 4(2) and/or 4(6) of the Securities Act.
On January 15 1999, the Registrant issued 1,500 shares of Series D
preferred stock whereby the Registrant received net proceeds of $1.5 million.
The Registrant relied on the exemptions from registration provided by Section
4(2) of the Securities Act.
On April 6, 1999, the Registrant issued 1,500 of Series E preferred
stock whereby the Registrant received net proceeds of approximately $1.5
million. The Registrant relied on exemptions from registration provided by
Section 4(2) of the Securities Act.
In addition, the Registrant announced that the exercise period of its
publicly traded common stock purchase warrants exercisable at $1.50 per share
has been extended from December 31, 1998 through June 30, 1999.
On May 4, 1999 the Registrant issued 4,000 shares of Series F
Convertible Preferred Stock to redeem the Series D & E Preferred Stock. The
Registrant received approximately $4 million net proceeds. The Registrant relied
on the exemptions from registration provided by Section 4(2)of the Securities
Act.
On December 31, 1999, we received $3 million of a $6 million private
placement of our restricted common stock through our investment banker,
Ladenburg Thalmann & Co., Inc. The remaining $3 million of the private placement
was received after year end. The net proceeds of $5,600,000 from the placement
offering will be used primarily to fund the marketing of our ImOn.comTV product.
In the offering, we sold 2,248,032 shares of common stock for $2.67 per share
and issued warrants to acquire up to 889,213 shares of common stock at an
exercise price of $3.34 per share. The warrants will expire on March 30, 2002.
On January 13, 2000, the selling securityholder converted 2,000 shares
of Series F Convertible Preferred Stock into 858,851 shares of common stock in
accordance with its terms. On February 25, 2000, we redeemed the
II-5
<PAGE>
remaining outstanding 2,000 shares of Series F Convertible Preferred Stock for
$2,394,000 in accordance with its terms. The Series F Convertible Preferred
Stock was redeemed for $1,197 per share, which includes $97 per share of accrued
interest through the redemption date.
ITEM 16 - EXHIBITS
The following is a complete list of exhibits filed as part of
this registration statement:
No. Description
3(i).1 Certificate of Incorporation of the Registrant. (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 F 12% Convertible Preferred
Stock (Incorporated by reference to Exhibit 3(i).2 the Registrant's
Registration Statement on Form SB-2, Registration No. 33-88729 as
filed with the Securities and Exchange Commission on October 8,
1999 (the "1999 Registration Statement").)
3(i).3 Amendment to Certificate of Incorporation of the Registrant dated
July 22, 1998. (Incorporated by reference to Exhibit 3(i).5 of the
Registrant's registration statement on Form S-3A, Registration No.
333-71989 as filed with the Securities and Exchange Commission on
March 17, 1999 (the "1999 Form S-3/A.").)
3(i).4 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).1 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).)
4.2 Preferred Stock Purchase Agreement dated May 4, 1999 by and among
Gage LLC and the Registrant. (Incorporated by reference to Exhibit
4.2 to the 1999 Registration Statement).
4.3 Registration Rights Agreement dated May 4, 1999 by and among Gage
LLC and the Registrant. (Incorporated by reference to Exhibit 4.3
to the 1999 Registration Statement).
4.4 Common Stock Purchase Warrant dated May 4, 1999 by and among Gage
LLC and the Registrant. (Incorporated by reference to Exhibit 4.4
to the 1999 Registration Statement).
4.5 Form of Purchase Agreement dated December, 2000 by and among the
Registrant and investors in $6 million private placement.
(Incorporated by reference to Exhibit 10.23(a) of Registrant's Form
10-KSB for the year ending December 31, 1999 filed with the
Securities and Exchange Commission on March 15, 2000 (the "December
31, 1999 10-KSB")).
4.6 Form of Registration Rights Agreement dated December, 2000 by and
among the Registrant and investors in $6 million private placement.
(Incorporated by reference to Exhibit 10.23(b) of the December 31,
1999 10-KSB).
4.7 Form of Warrant dated December, 2000 by and among the Registrant
and investors in $6 million private placement. (Incorporated by
reference to Exhibit 10.23(c) of the December 31, 1999 10-KSB).
5.1 Opinion of Friedlob Sanderson Paulson & Tourtillott, LLC
10.1 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10.1
to the 1999 Registration Statement).
10.2 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.)
II-6
<PAGE>
10.3 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").)
10.4 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.)
10.5 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.).
10.6 Agreement and Plan of Merger and Reorganization effective as of June
23, 1999.(Incorporated by reference to Exhibit 2.1 to Registrant's
Form 8-K, filed July 8, 1999, reporting an event on July 8, 1999,
Commission File No. 0-25114).
10.7 1999 Equity Incentive Plan. (Incorporated by reference to Exhibit A
to the Registrant's Definitive Proxy Statement for the 2000 annual
meeting on Schedule 14A as filed with the Securities and Exchange
Commission).
21.1 List of Subsidiaries. (Incorporated by reference to Exhibit 21.1 to
the 1999 Registration Statement).
23.1 Consent of Independent Certified Public Accountants
23.2 Consent of Friedlob Sanderson Paulson & Tourtillott, LLC (See Exhibit
5.1)
27.1 Financial Data Schedule. (Incorporated by reference to Exhibit 27.1
of the December 31, 1999 10-KSB).
ITEM 17 - UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (f the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant and has duly caused this amended registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Carlos, State of California, on April 18, 2000.
IMAGINON, INC.
By: /s/ David M. Schwartz
---------------------
David M. Schwartz,
Chairman, Chief Executive Officer
and President
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints David M. Schwartz, his attorney-in-fact, for him
in any and all capacities, to sign any amendments to this registration
statement, and any related registration statement filed pursuant to Rule 462(b),
and to file the sale, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ David M. Schwartz Chief Executive Officer April 18, 2000
________________________________
David M. Schwartz and Director
/s/ James A. Newcomb Chief Financial Officer and April 18, 2000
________________________________
James A. Newcomb Director
/s/ Dennis Allison Director April 18, 2000
________________________________
Dennis Allison
/s/ Jim Polizotto Director April 18, 2000
________________________________
Jim Polizotto
/s/ Mary E. Finn Director April 18, 2000
________________________________
Mary E. Finn
</TABLE>
<PAGE>
April 18, 2000
ImaginOn, Inc.
1313 Laurel Street, Suite 1
San Carlos, CA 94070
Re: Registration Statement on Form S-1 - Opinion of Counsel
Gentlemen:
We are counsel for ImaginOn, Inc., a Delaware corporation ("ImaginOn"). In
that capacity we have examined the Certificate of Incorporation, as amended, the
Bylaws and minutes of ImaginOn and such other corporate records, documents,
certificates and other instruments as, in our judgment, we deemed relevant for
the purposes of this opinion. We have also, as such counsel, examined the
Registration Statement on Form S-1, Securities and Exchange Commission File No.
333-_______, (the "Registration Statement"), covering the issuance of ImaginOn's
shares of common stock, $.01 par value (the "Common Stock"), and the issuance of
Common Stock upon the exercise of ImaginOn's warrants (the "Warrants") and the
subsequent resale of the Common Stock by the Selling Securityholders.
Based upon the foregoing, we are of the opinion that (i) the shares of
Common Stock to be issued upon exercise of the Warrants, when paid for in
accordance with the terms of the Warrants, will be legally issued, fully paid
and non-assessable and (ii) the Common Stock to be sold by the Selling
Securityholders constitutes legally issued, fully paid and non-assessable shares
of Common Stock.
We know that we are referred to under the caption "Legal Matters" included
in the Prospectus forming a part of the Registration Statement. We hereby
consent to such use of our name in the Registration Statement and to the filing
of this opinion as Exhibit 5.1 thereto. In giving this consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the Rules
and Regulations of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
/s/ Friedlob Sanderson Paulson & Tourtillott, LLC
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-1 of our report
dated January 31, 2000, except for the second paragraph of Note 10, as to which
the date is February 25, 2000, relating to the consolidated financial statements
of ImaginOn, Inc. and subsidiaries, and to the reference to our Firm under the
caption "Experts" in the Prospectus.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
April 18, 2000
