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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 0-25114
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ImaginOn, Inc.
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(Name of small business issuer in its charter)
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<S> <C>
Delaware 84-1217733
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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1313 Laurel Street
San Carlos, California 94070
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(Address of principal executive office) (zip code)
Issuer's telephone number (650) 596-9300
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
(1) Yes X No
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(2) Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of the issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year $339,790.
As of February 29, 2000, 44,409,684 shares of Common Stock were outstanding
and the aggregate market value of the shares (based upon the average of the bid
and asked price of the shares on the over-the-counter market) of ImaginOn, Inc.
held by nonaffiliates was approximately $134,606,000.
Transitional Small Business disclosure format (check one):
Yes No X
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IMAGINON, INC.
AND SUBSIDIARIES
FORM 10-KSB
This report may contain certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, which
represent our expectations or beliefs, including but not limited to, statements
concerning our operations, economic performance, financial condition, growth and
acquisition strategies, investments, and future operational plans. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intent," "could," "estimate," "might," or "continue" or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond our control,
and actual results may differ materially depending on a variety of important
factors, including uncertainty related to acquisitions, governmental regulation,
managing and maintaining growth, volatility of stock price and any other factors
discussed in this and our other filings with the Securities and Exchange
Commission.
PART I
Item 1. Description of Business
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Note: Readers of this report should note that our business materially
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changed after December 31, 1998. Except as otherwise described in this report,
the information in this report is given through December 31, 1999. We ceased
our prior operations, merged with another company on January 20, 1999 and now
are engaged in another line of business.
(a) Business Development.
ImaginOn, Inc., a Delaware corporation, is 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. 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".
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Our History
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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
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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 in-line skate business from
California Pro USA Corp. Playmaker Co., LTD ("Playmaker"), the in-line skate
manufacturer and majority owner of the seller, granted to us, an exclusive,
perpetual, non-royalty bearing license to the California Pro names and
trademarks and entered into a five-year manufacturing agreement to supply
substantially all of our in-line skate products. In another acquisition
completed on August 1, 1994, 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.
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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.
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.
(b) Business of Issuer.
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.
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Corporate Positioning
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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 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 is expected to be a $40 billion business 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 our
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 2 million
users today, it is widely believed that more than 20 million broadband
connections will be deployed by 2002. Initially, virtually all Internet TV
users 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
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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
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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.
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
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.com TV 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. By the year 2000, this business may exceed $1 billion, not
counting ads within digital television.
Today's banner ads are weakly interactive; limited to hyperlinking to the
ad 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
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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-
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end market. Over the longer haul, as more businesses license ImOn.comTV, the ISP
percentage of revenues is expected to decline.
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
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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.
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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 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
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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.
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Our core technology, Transformational Database Processing and Playback, has
three components: database analysis; network synthesis; and 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.
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.
-8-
<PAGE>
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.
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
-9-
<PAGE>
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 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.
-10-
<PAGE>
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:
. Cost of a successful market entry
. Critical approval and customer acceptance
. Proof of commercial viability of the tool set
-11-
<PAGE>
All of the above barriers can be overcome with sufficient corporate
infrastructure, funding, time and effort. 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.
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.
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 televison
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.
-12-
<PAGE>
Our earnings growth is dependent upon acceptance of our products.
Our earnings growth depends primarily upon market acceptance of our
software products. Our products may not be able to be successfully marketed or
achieve customer acceptance.
Our success depends on the introduction of new products and product
enhancements.
Our success in the software development business is heavily dependent upon
the timely introduction of successful new products or enhancements of existing
products to replace declining revenues from products at the latter stage of a
product cycle. Consumer preferences for software products are difficult to
predict, and few consumer software products achieve sustained market acceptance.
If revenue from new products or enhancements does not replace declining revenues
from existing products, we may experience:
. lower operating revenues
. lower net revenues
. lower cash flows
. less liquidity
Production delays could inhibit our success.
The process of developing our software products is extremely complex. A
significant delay in the introduction of one or more new products or
enhancements could have a material adverse effect on the ultimate success of
such products and we may experience:
. lower operating revenues
. lower net revenues
. lower cash flows
. less liquidity
We operate in a developing market with increasing participants.
The market for Internet products and computer software is rapidly evolving
and is characterized by an increasing number of market entrants who have
introduced or developed products and services. Although we believe that the
diverse segments of the Internet market will provide opportunities for more than
one supplier of products and services similar to those we possesses, it is
possible that a single supplier may dominate one or more market segments.
Additionally, there may be insufficient market acceptance of our products
because the market for Internet products and computer software changes rapidly.
We 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.
-13-
<PAGE>
We are dependent on contracts with other companies for promotion of our products
and reputation.
We have entered into agreements and informal relationships with other
software and computer companies under which the companies will use our products.
We believe these arrangements are important to the promotion of our products and
the public recognition of the "ImaginOn" name. These arrangements typically are
not exclusive, and may be terminable upon little or no notice. Termination or
alteration of these agreements could have any of the following effects on us:
. limit or eliminate the market for our products
. limit or eliminate public recognition of the "ImaginOn" name
. reduce revenues
. lower cash flows
. impair liquidity
We regard our patented technology as proprietary.
Our success and ability to compete is dependent on our proprietary
technology. We regard our technology as proprietary and we rely primarily on
U.S. patent, trademark, copyright, trade secret laws, third-party non-disclosure
agreements and other methods to protect our proprietary rights. The steps taken
by us to protect our proprietary rights may not be adequate and third parties
may infringe or misappropriate our copyrights, trademarks, and similar
proprietary rights. Additionally, effective trademark, patent, copyright and
trade secret protection may not be available in every country in which our
products and media properties will be distributed or made available through the
Internet.
We could be affected by Year 2000.
We are aware of the issues associated with the programming code and
embedded technology in existing systems for the Year 2000. The "Year 2000
Issue" arises from the potential for computers to fail or operate incorrectly
because the programs incorrectly interpret the two digit date fields "00" as
1900 or some other year, rather than the Year 2000. The Year 2000 issue creates
risk for us from unforeseen problems in our own computer systems and from third
parties, including customers, vendors, banks etc. Failures of our and/or third
parties' computer systems could result in an interruption in, or a failure of,
certain normal business activities or operations. Such failures could
materially and adversely affect our results of operations, liquidity, and
financial condition, though the impact is unknown at this time.
To minimize this risk, in the first quarter 1999, our board of directors
and management went through a series of Year 2000 questionnaires and assessments
that would impact our entire operation. These questionnaires and assessments
revealed no significant issues with our Internet service provider, technology
infrastructure, facilities or products. Certain vendors/partners/third parties
themselves have significant Year 2000 programs, the successes of which are also
important to us. We established a contingency plan for each critical partner,
the activation of which is dependent on the failure of the vendor/partner/third
party to achieve key milestones in their programs. The total cost of Year 2000
activities is not material to our operations, liquidity or capital resources.
Costs were managed within each department unit. The total estimated costs did
not exceed $20,000. Cost excludes expenditures for replacement systems.
We recognize that failing to resolve Year 2000 issues could increase costs
and limit our ability to conduct business operations as well as limit customers
utilization of the Internet services which we provide.
Some commentators have stated that a significant amount of litigation will
arise out of Year 2000 compliance issues, and we are aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether or to what extent we may be
affected.
While we have not experienced any difficulties arising from Year 2000
issues, we cannot be certain that we may not experience such difficulties in the
future.
-14-
<PAGE>
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.
-15-
<PAGE>
Item 2. Description of Property
-----------------------
<TABLE>
<CAPTION>
(a) Facilities
Lease (L) Annual
Location Use Sq. Ft. Own (O) Rent
- -------- --- ------ --------- ------
<S> <C> <C> <C> <C>
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
- --------------
</TABLE>
* 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.
(b) and (c)
Not applicable
Item 3. Legal Proceedings
-----------------
We were named as a co-defendant in a lawsuit filed by Cord Investment
Company and Frances Peppy. The action was filed March 12, 1999 in the District
Court, City and County of Denver, Colorado alleging violations of state
securities laws and other common law torts stemming from a private placement of
securities. 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 against this law suit and
believe that the matter will be resolved in our favor.
On January 20, 2000, we were served a summon and complaint filed 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 versus trademark
granted by the federal government under state), 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 prevailing common law trademark for
the word "Imon," and seeks injunctive monetary relief. Both parties have
applications before the U.S. Patent and Trademark Office. We intend to
vigorously defend ourselves in this action and believe it will be resolved in
our favor. In addition, we very likely will file a counterclaim under the
recently enacted federal "Trademark Cyberpiracy Prevention" Act.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
-16-
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
(a) Market Information.
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 publically traded warrants were
redeemed and are no longer traded. The following table sets forth the range of
high and low bid prices of our common stock and warrants as quoted by NASDAQ.
These market quotations reflect inter-dealer prices without retail mark-up,
mark-down or commissions and may not represent actual transactions.
Common Stock Warrants
Bid Prices Bid Prices
---------- ----------
1999 High Low High Low
---- ---- --- ---- ---
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
* Warrants were redeemed June 7, 1999 and no longer trade.
(b) Holders.
As of February 29, 2000, there were approximately 345 record holders of
our common stock.
(c) Dividends.
We have not declared or paid dividends on our Common Stock, nor do we
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain any future earnings to fund operations and for the continued
development of our business. Further, our prior loan agreements provided that
without the prior written consent of the lender, we could not declare or pay any
dividend on any class of stock until satisfaction of all liabilities under the
loan agreements.
(d) Recent Sales of Unregistered Securities.
On January 15 1999, we issued 1,500 shares of Series D preferred stock
whereby we received net proceeds of $1.5 million. We relied on the exemptions
from registration provided by Section 4(2) of the Securities Act.
On April 6, 1999, we issued 1,500 of Series E preferred stock whereby we
received net proceeds of approximately $1.5 million. We relied on exemptions
from registration provided by Section 4(2) of the Securities Act.
-17-
<PAGE>
In addition, we announced that the exercise period of our 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, we issued 4,000 shares of Series F Convertible Preferred
Stock to redeem the Series D & E Preferred Stock. We received approximately
$3,650,000 million net proceeds. We 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 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 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 our 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.
Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Overview
During 1999, we achieved revenues of $339,790 compared to $880 in 1998.
These revenues were attributed from our marketing and sale of WebZinger,
WorldCities 2000, SellONstream, ImOn.con TV, and our licensing of our
technology. In addition, revenues were generated from the acquisition of INOW
and IDP customers 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 the year end of
1998, when our indebtedness was nearly $1.8 million. The 1999 financing efforts
increased our current assets of 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.
We continue to serve the broadband Internet access industry in all of its
form, reaching a clearer mission, better product defined line, better market
focus, and a more complete management team in place compared to December 31,
1998.
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.
-18-
<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>
Year ended December 31, 1999 compared to year ended December 31, 1998.
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 and 18% to video production crew and
staff. Nearly 21% is attributable 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. In the total for the
year ended December 31, 1998, nearly 43% was for payroll expenses of engineers
and 2% for video production crew. The remaining 55% was for the development and
production of the World Cities 2000 projects.
-19-
<PAGE>
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% 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. Another 33% was due to employee payroll and outside consultants. There
was 23% for rent, utilities and travel. Approximately 8% was for general office
supplies, communications, corporate insurances, 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.
There was 32% for employee payroll expenses. 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, the 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 primary 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 prior to year
end, 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
-20-
<PAGE>
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.
Item 7. Financial Statements
--------------------
Our audited financial statements, described as follows, are included in
this report following the signature page of this report.
ImaginOn, Inc. and Subsidiaries Consolidated Financial Statements
- ------------------------------------------------------------------
<TABLE>
<S> <C>
Independent auditors' report............................ F-1
Consolidated financial statements:
Balance sheet at December 31, 1999..................... F-2
Statements of operations - for the years
ended December 31, 1999 and 1998....................... F-3
Statement of shareholders' equity -
for the years ended
December 31, 1999 and 1998............................. F-4 - F-6
Statements of cash flows - for the years
ended December 31, 1999 and 1998....................... F-7 - F-8
Notes to consolidated financial statements............. F-9 - F-26
</TABLE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None
-21-
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------
Compliance With Section 16(a) of the Exchange Act
-------------------------------------------------
The information required by this Item with respect to the identity and
business experience of our directors is set forth in our Definitive Proxy
Statement for the 2000 Annual Meeting of Shareholders, under the captions
"Proposal 1 Election of Directors - Information Concerning the Nominees for
Election as Directors", "Proposal 1 Election of Directors - Executive Officers",
"Proposal 1 Election of Directors -Compliance with Section 16(a) of the Exchange
Act", which information is hereby incorporated herein by reference.
Item 10. Executive Compensation
----------------------
The information required by this Item is set forth in our Definitive Proxy
Statement for the 2000 Annual Meeting of Shareholders, under the captions
"Proposal 1 Election of Directors - Summary Compensation Table", "Proposal 1
Election of Directors - Option/SAR Grants in Last Fiscal Year", and "Proposal 1
Election of Directors -Aggregated Option/SAR Exercises in Last Fiscal Year and
FY-End 1999 Option/SAR Values" which information is hereby incorporated herein
by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information required by this Item is set forth in our Definitive Proxy
Statement for the 2000 Annual Meeting of Shareholders, under the caption
"Proposal 1 Election of Directors - Principal Stockholders" which information is
hereby incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
The information required by this Item is set forth in our Definitive Proxy
Statement for the 2000 Annual Meeting of Shareholders, under the caption
"Proposal 1 Election of Directors - Certain Relationships and Related
Transactions" which information is hereby incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
Exhibits being filed herewith are listed below.
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
3(i).1 Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration Statement
on Form SB-2, Registration No. 33-85108 as filed with the Securities
and Exchange Commission "SEC" on October 13, 1994 (the "1994
Registration Statement").)
3(i).2 Certificate of Designations for Series B 4% Convertible Preferred
Stock. (Incorporated by reference to Exhibit 3.(I).1 of the
Registrant's June 30, 1998 10-QSB.)
3(i).3 Certificate of Designations for Series C 4% Convertible Preferred
Stock. (Incorporated by reference to Exhibit 3.4 of the registrant's
registration statement on Form S-3/A, registration No. 333-62713 as
filed with the Securities and Exchange Commission on December 21,
1998.)
</TABLE>
-22-
<PAGE>
<TABLE>
<C> <S>
3(i).4 Certificate of Designations For Series D 4% Convertible Preferred
Stock. (Incorporated by reference to Exhibit 3(i).4 of the
Registrant's registration statement on Form S-3/A, Registration No.
333-71989 as filed with the Securities and Exchange Commission on
March 17, 1999 (the "1999 Form S-3/A").)
3(i).5 Certificate of Designations for the Series E 4% Convertible
Preferred Stock. (Incorporated by reference to annual report for
fiscal year ended December 31, 1998 on Form 10-KSB as filed with the
Securities and Exchange Commission on April 1, 1999.)
3(i).6 Amendment to Certificate of Incorporation of the Registrant dated
July 22, 1998. (Incorporated by reference to Exhibit 3(i).5 of the
1999 Form S-3/A.)
3(i).7 Amendment to Certificate of Incorporation of the Registrant dated
December 17, 1998. (Incorporated by reference to Exhibit 3(i).6 of
the 1999 Form S-3/A.)
3(ii) Bylaws as currently in effect. (Incorporated by reference to
Exhibit 3.2 to the 1994 Registration Statement.)
4.1 Specimen of Common Stock certificate. (Incorporated by reference to
Exhibit 4.1 to Amendment No. 4 to the 1994 Registration Statement,
filed with the SEC on December 22, 1994 ("1994 Amendment #4).)
10.1 Patent License Agreement, dated April 1, 1993 and Assignment
thereof. (Incorporated by reference to Exhibit 10.8(b) to the 1994
Registration Statement.)
10.2 1994 Stock Option Plan. (Incorporated by reference to Exhibit
10.14 to the 1994 Registration Statement.)
10.3 License Agreement, dated July 28, 1994, between Front 500
Corporation and CP. (Incorporated by reference to Exhibit 10.16 to
the 1994 Registration Statement.)
10.4 Exclusive Distributorship Agreement, dated March 1994, with
Maneuverline Co. Ltd. (Incorporated by reference to Exhibit 10.20 to
the 1994 Registration Statement.)
10.5 Exclusive Distributorship Agreement, dated March 1, 1991, with
Airtool Ltd. (Incorporated by reference to Exhibit 10.21 to the 1994
Registration Statement.)
10.6 Exclusive Distributorship Agreement, dated June 15, 1994, with Wolf
Strobel Sportswear GMBH. (Incorporated by reference to Exhibit 10.22
to the 1994 Registration Statement.)
10.7 License Agreement, dated May 10, 1995, granted by California Pro,
Inc. to Big5 Co., Ltd. (Incorporated by reference to Exhibit 10.23
in Registration Statement 33-98898.)
10.8 Form of Warrant related to the Registrant's issuance of warrants to
purchase up to 200,000 shares of Common Stock. (Incorporated by
reference to Exhibit 10.29(a) to the 1994 Registration Statement.)
10.9 Form of Warrant related to the issuance of warrants to purchase up
to 21,000 shares of Common Stock. (Incorporated by reference to
Exhibit 10.29(c) to 1994 Amendment #1.)
</TABLE>
-23-
<PAGE>
<TABLE>
<C> <S>
10.10 Form of Indemnity Agreements for the Registrant's directors and
officers. (Incorporated by reference to Exhibit 10.31 to the 1994
Registration Statement.)
10.11 Patent License Agreement, with Out of Line Sports, Inc. dated as of
September 30, 1994. (Incorporated by reference to Exhibit 10.33 to
the 1994 Registration Statement.)
10.12 Trademark License Agreement, dated as of September 30, 1994.
(Incorporated by reference to Exhibit 10.34 to the 1994 Registration
Statement.)
10.13 Agreement, dated October 31, 1994, between California Pro Sports,
Inc. and Playmaker related to royalty payments. (Incorporated by
reference to Exhibit 10.35 to Amendment No. 2 to the Registration
Statement, filed with the SEC on November 16, 1994 ("1994 Amendment
#2").)
10.14 Form of Warrant related to the Registrant's issuance of warrants to
purchase up to 300,000 shares of Common Stock. (Incorporated by
reference to Exhibit 10.37 in Registration Statement 33-98898.)
10.15 Form of Warrant related to the Registrant's issuance of warrants to
purchase up to 150,000 shares of Common Stock with Registration
Rights Agreement. (Incorporated by reference to Exhibit 10.39 in
Registration Statement 33-98898.)
10.16 Consulting and Non-Competition Agreement among Warren Amendola, Sr.,
USA and the Registrant, with related Guaranty. (Incorporated by
reference to Exhibit 10.1(c) to the 1996 Form 8-K.)
10.17(a) Asset Purchase Agreement, dated September 10, 1997 by and among Les
Equipements Sportifs Davtec Inc., USA Skate Co., Inc., USA Skate
Corporation, the Registrant, Rawlings Canada Inc. and Rawlings
Sporting Goods Company, Inc. (Incorporated by reference to Exhibit
10.1(a) to Registrant's Form 8-K, filed September 29, 1997,
reporting an event on September 12, 1997, Commission File No. 0-
25114 (the "1997 Form 8-K").)
10.17(b) Exhibit A - Escrow Agreement, dated September 12, 1997 by and among
Les Equipements Sportifs Davtec Inc., USA Skate Co., Inc., Rawlings
Canada Inc., Rawlings Sporting Goods Company, Inc. and the Bank of
New York. (Incorporated by reference to Exhibit 10.1(b) to
Registrant's 1997 Form 8-K.)
10.17(c) Exhibit C - Guaranty, dated September 12, 1997 for Rawlings Canada
Inc. and Rawlings Sporting Goods Company, Inc. (Incorporated by
reference to Exhibit 10.1(c) to Registrant's 1997 Form 8-K.)
10.18 Agreement and Plan of Merger, dated January 30, 1998 by and among
the Registrant, ImaginOn, Inc. and ImaginOn Acquisition Corp.
(Incorporated by reference to Exhibit 3 of Registrant's proxy
statement on Schedule 14A, filed with the Securities and Exchange
Commission on November 13, 1998.)
10.19(a) Merger Agreement and Plan of Reorganization, dated February 9, 1999
by and among Network Specialists, Inc., INOW and the Registrant.
(Incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K,
filed March 23, 1999, reporting an event on March 9, 1999,
Commission File No. 0-25114 (the "March 1999 Form 8-K").)
</TABLE>
-24-
<PAGE>
10.19(b) First Amendment to Merger Agreement and Plan of Reorganization dated
as of March 8, 1999. (Incorporated by reference to Exhibit 2.2 to
the March 1999 Form 8-K.)
10.19(c) Side Agreement to Merger Agreement and Plan of Reorganization dated
March 8, 1999. (Incorporated by reference to Exhibit 2.3 to the
March 1999 Form 8-K.)
10.20 Certificate of Designation of 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"))
10.21(a) 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).
10.21(b) 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).
10.21(c) 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).
10.22 1997 Stock Option Plan. (Incorporated by reference to Exhibit
10.1 to the 1999 Registration Statement).
10.23(a) Form of Purchase Agreement dated December, 2000 by and among the
Registrant and investors in $6 million private placement. FILED
HEREWITH.
10.23(b) Form of Registration Rights Agreement dated December, 2000 by and
among the Registrant and investors in $6 million private placement.
FILED HEREWITH.
10.23(c) Form of Warrant dated December, 2000 by and among the Registrant
and investors in $6 million private placement. FILED HEREWITH.
10.24 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).
11.1 Statement Re: Computation of Per Share Earnings. FILED HEREWITH.
21.1 List of Subsidiaries.(Incorporated by reference to Exhibit 21.1
to the 1999 Registration Statement).
27.1 Financial Data Schedule. FILED HEREWITH.
-25-
<PAGE>
(b) Reports on Form 8-K.
During the last quarter for the fiscal year ended December 31, 1999 through
February 29, 2000, we filed the following Current Reports on Form 8-K:
Date Item Numbers
---- ------------
September 14, 1999 2, 7
October 26, 1999 5
October 27, 1999 5
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on our behalf
by the undersigned thereunto duly authorized.
IMAGINON, INC.
Date: March 14, 2000 /s/ David M. Schwartz
-------------------------------
David M. Schwartz, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on our behalf and in the
capacities and on the dates indicated.
Date: March 14, 2000 /s/ David M. Schwartz
-------------------------------
David M. Schwartz, Chairman,
Chief Executive Officer,
President and Director
Date: March 14, 2000 /s/ James A. Newcomb
-------------------------------
James A. Newcomb, Chief Financial
Officer, Chief Accounting Officer
and Director
Date: March 14, 2000 /s/ Mary E. Finn
-------------------------------
Mary E. Finn, Director
Date: March 14, 2000 /s/ Dennis Allison
-------------------------------
Dennis Allison, Director
Date: March 14, 2000 /s/ Jim Polizotto
-------------------------------
Jim Polizotto, Director
-27-
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1999 AND 1998
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent auditors' report F-1
Consolidated financial statements:
Balance sheet 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-26
</TABLE>
-28-
<PAGE>
INDEPENDENT AUDITORS' REPORT
-----------------------------
Board of Directors
ImaginOn, Inc.
We have audited the accompanying consolidated balance sheet of ImaginOn, Inc.
and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the two-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 the results of their operations and
their cash flows for each of the years in the two-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 SHEET
DECEMBER 31, 1999
ASSETS
------
<TABLE>
<S>
Current assets:
<C>
Cash $ 4,959,694
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
------------
Total current assets 7,090,201
------------
Furniture and equipment, net (Note 2) 159,734
Intangible and other assets, net (Note 2) 2,094,341
------------
2,254,075
------------
$ 9,344,276
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 601,683
Accrued expenses 37,479
------------
Total liabilities (all current) 1,039,162
------------
Commitments and contingencies (Notes 3, 6 and 8)
Shareholders' equity (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
Warrants and options 1,641,579
Capital in excess of par 14,485,996
Accumulated deficit (10,128,702)
------------
Total shareholders' equity 8,305,114
------------
$ 9,344,276
============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues $ 339,790 $ 880
Cost of revenues 198,001 29
----------- -----------
Gross profit 141,789 851
----------- -----------
Operating expenses:
Research and development 1,117,265 906,256
Sales and marketing 2,829,535 440,967
General and administrative 3,256,220 309,813
Consulting fees, related parties (Note 6) 135,000
----------- -----------
Total operating expenses 7,338,020 1,657,036
----------- -----------
Loss from operations (7,196,231) (1,656,185)
----------- -----------
Other income (expense):
Interest expense, related parties (Note 4) (905) (78,079)
Interest income 122,191 310
Other 27,863 (6,248)
----------- -----------
149,149 (84,017)
----------- -----------
Net loss (7,047,082) (1,740,202)
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)
=========== ===========
Basic and diluted loss per common share $ (.22) (.08)
=========== ===========
Weighted average number of common
shares outstanding $39,006,214 $20,483,093
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Series D, E and F
convertible
preferred stock Common stock
------------------ -----------------
Capital Total
Warrants in excess shareholders'
Shares Amount Shares Amount and options of par Deficit equity
------- -------- -------- --------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 19,450,673 $ 194,508 $ 72,158 $ 530,445 $(1,341,418) $(544,307)
Issuance of common shares
and warrants for cash,
net of issuance cost of
$348,438 1,138,200 11,382 383,753 165,180 489,915
Issuance of common shares to
employees in payment of an earned
bonus 135,500 1,355 61,145 62,500
Issuance of common shares in
payment of accounts payable 23,742 237 10,714 10,951
Repurchase of common shares (542,000) (5,420) (119,580) (125,000)
Issuance of warrants to purchase
common shares in connection
with a bridge financing 82,398 12,398
Issuance of options to a
consultant 1,987 1,987
Net loss (1,740,202) (1,740,802)
------- -------- ---------- ------- ------- ------- ----------- -----------
Balances, December 31, 1998 20,206,1^5 202,062 397,909 649,891 (3,081,620) (1,831,758)
Issuance of shares in
connection with
acquisition of ImaginOn.com,
Inc. 3,000 $1,570,000 16,000,602 160,006 394,200 2,574,915 4,699,121
Exercise of 4,075,065
warrants at exercise
prices between $.055 and
$2.10 per share 4,075,065 40,751 (757,177) 4,562,527 3,846,101
Issuance of common shares
to employees in payment
of an earned bonus 183,330 1,833 843,789 845,622
</TABLE>
(Continued)
F-4
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Series D, E and F
convertible
preferred stock Common stock
------------------ -----------------
Capital Total
Warrants in excess shareholders'
Shares Amount Shares Amount and options of par Deficit equity
------- -------- -------- --------- -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares of common
stock in connection with
acquisition of Network
Specialists, Inc. 260,000 2,600 1,399,320 1,401,920
Issuance of shares of common
stock in cashless conversion of
119,060 warrants to purchase
common stock 88,540 885 (885)
Exercise of stock options 152,950 1,529 6,679 8,208
Amortization of Series D, E and F
preferred stock beneficial
conversion feature 1,255,319 (1,255,319)
Issuance of shares of common
stock in exchange for 490 shares
of Series E preferred stock (490) (419,768) 165,410 1,654 418,114
Issuance of shares of common
stock in connection with
acquisition of Imagine Digital
Productions I, Inc. 305,000 3,050 664,290 667,340
Issuance of shares of Series F
preferred stock 4,000 3,474,681 175,319 3,650,000
Redemption of Series D and E
preferred stock (2,510) (2,150,232) (891,872) (3,042,104)
Redemption of 74,823 warrants at
$.05 each (15,773) 12,031 (3,742)
Repurchase and retirement of
shares of previously issued
common stock (45,045) (450) (49,550) (50,000)
Proceeds received from Section
16c transaction 168,988 168,988
</TABLE>
(Continued)
F-5
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Series D, E and F
convertible
preferred stock Common stock
------------------ -----------------
Capital Total
Warrants in excess shareholders'
Shares Amount Shares Amount and options of par Deficit equity
------- -------- -------- --------- -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock options to
employees and others in 272,500 272,500
payment of an earned bonus
and for services
Conversion of Series F
preferred stock to shares
of common stock (2,000) (1,865,000) 858,851 8,588 1,856,412
Issuance of common stock and
warrants, net of issuance
cost of $280,000 1,873,360 18,733 1,349,920 3,351,347 4,720,000
Net loss (7,047,082) (7,047,082)
------- ----------- ---------- -------- ---------- ----------- ------------ ----------
Balances, December 31, 1999 2,000 $ 1,865,000 44,124,178 $441,241 $1,641,579 $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 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,047,082) $(1,740,202)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 682,304 17,526
Provision for losses on accounts receivable 25,300
Warrants issued for interest expense 12,398
Stock-based compensation expense 1,118,122 75,438
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)
Decrease in loans to officers 10,045
Increase in other assets (4,400)
(Decrease) increase in accounts payable (185,055) 18,411
Increase in accrued expenses 244,526 116,729
----------- -----------
Total adjustments 1,768,283 237,023
----------- -----------
Net cash used in operating activities (5,278,799) (1,503,179)
Cash flows from investing activities:
Cash paid for business acquisitions, net of
cash acquired (337,485)
Capital expenditures (111,897) (16,100)
----------- -----------
Net cash used in investing activities (449,382) (16,100)
----------- -----------
Cash flows from financing activities:
Bank overdraft (1,587)
Proceeds from notes payable and
advances (Note 4) 3,160,420 1,185,254
Payments on notes payable (60,870) (143,429)
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
----------- -----------
Net cash provided by financing activities 10,677,001 1,530,153
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <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
=========== ========
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
========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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.
On January 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.
F-9
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
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.
Furniture, equipment and depreciation:
Furniture and equipment are stated at cost and consist of the following at
December 31, 1999:
<TABLE>
<S> <C>
Furniture and fixtures $ 45,421
Equipment 282,286
--------
327,707
Less accumulated depreciation 167,973
--------
$159,734
========
</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.
F-10
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
2. Significant accounting policies (continued):
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:
<TABLE>
<S> <C>
Goodwill $2,610,000
Trademark and license costs 100,000
Deposits and other 11,882
----------
2,721,882
Less accumulated amortization 627,541
----------
$2,094,341
==========
</TABLE>
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.
F-11
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
2. Significant accounting policies (continued):
Intangible and other assets (continued):
Management assesses the carrying value of intangible and other long-lived
assets for impairment when circumstances warrant such a review,
primarily by comparing current and projected sales, operating income
and annual cash flows on an undiscounted basis, with the related
annual amortization expenses. 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.
F-12
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
2. Significant accounting policies (continued):
Research and development expense:
Costs related to research, design, and development of products are charged to
operations as incurred.
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 and $79,000 in 1999 and 1998, 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 and 1998. At December 31, 1999 and 1998, 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 and 7,540,433, 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.
F-13
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
2. Significant accounting policies (continued):
Stock-based compensation (continued):
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 and 1998, the Company had
no items of comprehensive income.
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 financial statements have been
reclassified to conform to the 1999 presentation.
F-14
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
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> <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>
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.
F-15
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
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-16
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
6. Commitments and contingencies (continued):
Leases (continued):
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
2000 $114,000
2001 91,000
2002 95,000
2003 99,000
2004 37,000
Thereafter 102,000
--------
$538,000
========
</TABLE>
Total rent expense for 1999 and 1998 was approximately $79,000 and $32,700,
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 or
1998.
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.
F-17
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
6. Commitments and contingencies (continued):
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.
The following is a summary of the Company's deferred tax assets and
liabilities at December 31, 1999:
<TABLE>
<S>
Deferred tax assets: <C>
Net operating loss carryforward $7,839,000
Intangible assets 186,000
Tax credits and other 77,000
----------
8,102,000
Valuation allowance for deferred tax assets (8,102,000)
-----------------
$ -
=================
</TABLE>
The net increase in the valuation allowance during 1999 was approximately
$6,768,000.
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.
F-18
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
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.
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.
F-19
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. Shareholders' equity (continued):
Issuance of common stock prior to the January 20, 1999 merger (continued):
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.
Issuance of common stock subsequent to the January 20, 1999 merger:
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.
F-20
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. Shareholders' equity (continued):
Issuance of common stock subsequent to the January 20, 1999 merger
(continued):
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.
Series D/E convertible preferred stock (continued):
The conversion feature was "in the money" at the date of issue (a "beneficial
conversion feature"). The Company allocated $1,000,000 of the proceeds,
equal to the intrinsic value of the beneficial conversion feature, to
capital in excess of par. During 1999, the entire amount of the beneficial
conversion feature was amortized to preferred stock.
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.
F-21
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. Shareholders' equity (continued):
Series F convertible preferred stock (continued):
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.
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.
F-22
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. Shareholders' equity (continued):
Stock options (continued):
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, 1998 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-23
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
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
---- ----
<S> <C> <C> <C> <C>
Net loss applicable to common
shareholders, as reported $ (8,642,269) $ (1,740,202)
Net loss applicable to common
shareholders, pro forma $ (9,325,000) $ (1,747,000)
Net loss per common share, as reported $ (.22) $ (.08)
Net loss per common share, pro forma $ (.24) $ (.08)
</TABLE>
The fair value of each option granted during 1999 and 1998 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 and 1998:
F-24
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. Shareholders' equity (continued):
Stock options (continued):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 78% -
Risk-free interest rate 6% 5.86% - 5.98%
Expected life of options 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.
F-25
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
9. Operating segments (continued):
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>
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-26
<PAGE>
EXHIBIT 10.23(a)
PURCHASE AGREEMENT
------------------
THIS PURCHASE AGREEMENT ("Agreement") is made as of the ________ day
of December 1999 by and between ImaginOn, Inc., a corporation organized under
the laws of Delaware, USA with headquarters located at 1313 Laurel Street, Suite
No. 1, San Carlos, CA 94070, USA (the "Company"), and the Investors set forth on
the signature page affixed hereto (each an "Investor" and collectively the
"Investors").
Recitals
A. The Company and the Investors are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("Regulation D"), as promulgated by the U.S.
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act");
B. Each Investor wishes to purchase, and the Company wishes to sell
and issue to each Investor, upon the terms and conditions stated in this
Agreement, certain of the Company's shares of Common Stock, par value $0.01 per
share (the "Common Stock") and warrants to acquire shares of Common Stock in the
form attached hereto as Exhibit A (the "Warrants"); and
---------
C. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit B (the "Registration Rights Agreement"),
---------
pursuant to which the Company has agreed to provide certain registration rights
under the 1933 Act, and the rules and regulations promulgated thereunder, and
applicable state securities laws;
In consideration of the mutual promises made herein and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. In addition to those terms defined above and elsewhere in
-----------
this Agreement, for the purposes of this Agreement, the following terms shall
have the meanings here set forth:
1.1 "Affiliate" means, with respect to any Person, any other Person
---------
which directly or indirectly controls, is controlled by, or is under common
control with, such Person.
1.2 "Agreements" means this Agreement, the Registration Rights
----------
Agreement, and the Warrants.
1
<PAGE>
1.3 "Closing" means the consummation of the transactions contemplated
-------
by this Agreement, and "Closing Date" means the date of such Closing.
------------
1.4 "Control" means the possession , direct or indirect, of the power
-------
to direct or cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract or otherwise.
1.5 "Market Price" means the average of the lowest ten (10) closing
------------
bid prices of the Common Stock over the immediately preceding forty (40) trading
days before the date hereof as reported by Nasdaq Small Cap Market ("the Nasdaq
Stock Market").
1.6 "Material Adverse Effect" means a material adverse effect on the
-----------------------
(i) condition (financial or otherwise), business, assets, or results of
operations of the Company and its subsidiaries, taken as a whole; (ii) ability
of the Company to perform any of its material obligations under the Agreements;
or (iii) rights and remedies of the Investor under the Agreements.
1.7 "Person" means an individual, corporation, partnership, trust,
------
business trust, association, joint stock company, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization, governmental
authority or any other form of entity not specifically listed herein.
1.8 "SEC Filings" has the meaning set forth in Section 4.6.
-----------
1.9 "Securities" means the Shares, the Warrants and the Warrant
----------
Shares (defined below).
1.10 "Shares" means the shares of Common Stock being purchased by the
------
Investors hereunder.
1.11 "Warrant Shares" means the shares of Common Stock issuable upon
--------------
exercise of or otherwise pursuant to the Warrants.
1.12 "1933 Act" means the Securities Act of 1933, as amended, and the
--------
rules and regulations promulgated thereunder.
1.13 "1934 Act" means the Securities Exchange Act of 1934, as
--------
amended, and the rules and regulations promulgated thereunder.
2. Purchase and Sale of the Shares and Warrants. Subject to the terms and
--------------------------------------------
conditions of this Agreement, each of the Investors hereby severally, and not
jointly, agrees to purchase and the Company hereby agrees to sell and issue to
the Investors, the number of Shares and Warrants to purchase the number of
shares of Common Stock set forth on such Investor's signature page attached
hereto. The number of Shares to be purchased by the Investors shall be
determined by dividing the Investor's aggregate purchase price (as the aggregate
purchase price is set forth on Investor's signature page attached hereto), by an
amount equal to the Market Price of the Common Stock on the date hereof (the
"Purchase Price"). The number of shares of Common
2
<PAGE>
Stock purchasable by each Investor pursuant to the Warrants shall be equal to
40% of the number of Shares purchased by each Investor, with an initial exercise
price equal to 125% of the Market Price on the date hereof.
3. Closing. On the date of this Agreement, the Purchase Price shall be
-------
determined. The Company shall promptly deliver to Investors' counsel, on the
date hereof, in trust, (i) the Warrants and a certificate registered in such
name or names as each Investor may designate, representing all of the Shares,
and (ii) payment in full of the fees and expenses referred to in Section 11.5(b)
and (c) below, with instructions that such certificates, Warrants and dollar
amounts are to be held for release to each Investor only upon payment of the
aggregate Purchase Price to the Company. Upon receipt by counsel to the
Investors of the certificates, the Warrants and dollar amounts, the Investors
shall promptly cause a wire transfer in same day funds to be sent to the account
of the Company as instructed in writing by the Company, in amounts representing
the Investor's aggregate Purchase Price. On the date the Company receives such
funds, the certificates evidencing the Shares and the Warrants shall be released
to the Investors and the dollar amounts shall be released to the payees as
contemplated by Section 11.5(b) (and such date shall be deemed the "Closing
Date").
4. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Investors that:
4.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of Delaware and has all requisite power and authority to carry on its
business and own its properties as now conducted and owned. The Company is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property makes such qualification or licensing necessary
unless the failure to so qualify or be licensed would not have a Material
Adverse Effect. Schedule 4.1 lists all subsidiaries of the Company. Except
------------
when the context otherwise requires, representations and warranties in this
Section 4 by the Company shall be deemed to include representations and
warranties as to its subsidiaries as well.
4.2 Authorization. The Company has full power and authority and has
-------------
taken all requisite action on the part of the Company, its officers, directors
and stockholders necessary for (i) the authorization, execution and delivery of
the Agreements, (ii) the performance of all obligations of the Company hereunder
or thereunder, and (iii) the authorization, issuance (or reservation for
issuance) and delivery of the Securities. The Agreements constitute the legal,
valid and binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability,
relating to or affecting creditors' rights generally.
4.3 Capitalization. Set forth on Schedule 4.3 hereto is (a) the
-------------- ------------
authorized capital stock of the Company on the date hereof; (b) the number of
shares of capital stock issued and outstanding; (c) the number of shares of
capital stock issuable pursuant to the Company's stock plans; and (d) the number
of shares of capital stock issuable and reserved for issuance pursuant to
3
<PAGE>
securities (other than the Shares and the Warrants) exercisable for, or
convertible into or exchangeable for any shares of capital stock. All of the
issued and outstanding shares of the Company's capital stock have been duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights. Except as set forth on Schedule 4.3, no Person is entitled
------------
to preemptive or similar statutory or contractual rights with respect to any
securities of the Company, including the Shares, the Warrants and the Warrant
Shares. Except as set forth on Schedule 4.3, there are no outstanding warrants,
------------
options, convertible securities or other rights, agreements or arrangements of
any character under which the Company is or may be obligated to issue any equity
securities of any kind, or to transfer any equity securities of any kind; and
except as contemplated by this Agreement or as set forth on Schedule 4.3, the
------------
Company does not have any present plan or intention to issue any equity
securities of any kind, or to transfer any equity securities of any kind owned
by it. Except as set forth on Schedule 4.3, the Company does not know of any
------------
voting agreements, buy-sell agreements, option or right of first purchase
agreements or other agreements of any kind among any of the securityholders of
the Company relating to the securities held by them. Except as set forth on
Schedule 4.3, the Company has not granted any Person the right to require the
- ------------
Company to register any securities of the Company under the 1933 Act, whether on
a demand basis or in connection with the registration of securities of the
Company for its own account or for the account of any other Person.
4.4 Valid Issuance. The Company has reserved a sufficient number of
--------------
shares of Common Stock for issuance pursuant to this Agreement and upon exercise
of the Warrants. The Company will take such steps as may be necessary to
reserve sufficient shares for issuance pursuant to Section 7 below when such
issuance is determinable. The Shares and Warrants are duly authorized, and such
Securities, along with the Warrant Shares when issued in accordance herewith and
with the terms of the Warrants, will be duly authorized, validly issued, fully
paid, non-assessable and free and clear of all encumbrances and restrictions,
except for restrictions on transfer imposed by applicable securities laws.
4.5 Consents. The execution, delivery and performance by the Company
--------
of the Agreements and the offer, issuance and sale of the Securities require no
consent of, action by or in respect of, or filing with, any Person, governmental
body, agency, or official other than (i) filings that have been made pursuant to
applicable state securities laws and the requirements of the Nasdaq Stock Market
and (ii) post-sale filings pursuant to applicable state and federal securities
laws and the requirements of the Nasdaq Stock Market which the Company
undertakes to file within the applicable time periods.
4.6 Delivery of SEC Filings; Business. The Company has provided the
---------------------------------
Investors with copies of the Company's most recent Annual Report on Form 10K for
the fiscal year ended December 31, 1998, and all other reports filed by the
Company pursuant to the 1934 Act since the filing of the Annual Report on Form
10K (collectively, the "SEC Filings"). The Company is engaged only in the
business described in the SEC Filings and the SEC Filings contain a complete and
accurate description of the business of the Company. The Company has not
provided to the Investors (i) any information required to be filed under the
1934 Act that has not been so filed or (ii) any non-public information.
4.7 Use of Proceeds. The proceeds of the sale of the Securities
---------------
hereunder shall be
4
<PAGE>
used by the Company for working capital and general corporate purposes.
4.8 No Material Adverse Change. Except as set forth in Schedule 4.8,
-------------------------- ------------
since the filing of the Company's most recent Annual Report on Form 10K or as
otherwise identified and described in subsequent reports filed by the Company
pursuant to the 1934 Act, there has not been:
(i) any change in the consolidated assets, liabilities,
financial condition or operating results of the Company from that reflected in
the financial statements included in the Company's most recent Report on Form
10Q, except changes in the ordinary course of business which have not had, in
the aggregate, a Material Adverse Effect;
(ii) any declaration or payment of any dividend, or any
authorization or payment of any distribution, on any of the capital stock of the
Company, or any redemption or repurchase of any securities of the Company;
(iii) any material damage, destruction or loss, whether or
not covered by insurance to any assets or properties of the Company or any of
its subsidiaries;
(iv) any waiver by the Company of a valuable right or of a
material debt owed to it;
(v) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and which is not material to the assets, properties,
financial condition, operating results or business of the Company taken as a
whole (as such business is presently conducted and as it is proposed to be
conducted);
(vi) any material change or amendment to a material
contract or arrangement by which the Company or any of its assets or properties
is bound or subject;
(vii) any labor difficulties or labor union organizing
activities with respect to employees of the Company;
(viii) any transaction entered into by the Company other than
in the ordinary course of business; or
(ix) any other event or condition of any character that
might have a Material Adverse Effect.
4.9 SEC Filings; Material Contracts.
-------------------------------
(a) As of its filing date, each report filed by the
Company with the SEC pursuant to the 1934 Act, complied as to form in all
material respects with the requirements of the 1934 Act and did not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
5
<PAGE>
(b) Each registration statement and any amendment thereto
filed by the Company pursuant to the 1933 Act and the rules and regulations
thereunder, as of the date such statement or amendment became effective,
complied as to form in all material respects with the 1933 Act and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; and
each prospectus filed pursuant to Rule 424(b) under the 1933 Act, as of its
issue date and as of the closing of any sale of securities pursuant thereto did
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
(c) Except as set forth on Schedule 4.3 hereto, there are no
------------
agreements or instruments currently in force and effect that constitute a
warrant, option, convertible security or other right, agreement or arrangement
of any character under which the Company is or may be obligated to issue any
material amounts of any equity security of any kind, or to transfer any material
amounts of any equity security of any kind.
4.10 Form S-3 Eligibility. Although the Company is not currently
--------------------
eligible to register the resale of its Common Stock on a registration statement
on Form S-3 under the 1933 Act, the Company will be eligible to register said
resales on Form S-3 under the 1933 Act on and after, June 28, 2000, assuming
compliance by the Company with its reporting requirements under the 1934 Act.
4.11 No Conflict, Breach, Violation or Default. (a) The execution,
-----------------------------------------
delivery and performance of the Agreements by the Company and the issuance and
sale of the Securities will not conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a default under (i) the
Company's Certificate of Incorporation ("Articles") or Bylaws, each as in effect
on the date hereof, or (ii) except where it would not have a Material Adverse
Effect, (a) any statute, rule, regulation or order of any governmental agency or
body or any court, domestic or foreign, having jurisdiction over the Company or
any of its properties, or (b) any agreement or instrument to which the Company
is a party or by which the Company is bound or to which any of the properties of
the Company are subject.
(a) Except as set forth on Schedule 4.11 hereto, or where it
-------------
would not have a Material Adverse Effect, the Company (i) is not in violation of
any statute, rule or regulation applicable to the Company or its assets, (ii) is
not in violation of any judgment, order or decree applicable to the Company or
its assets; and (iii) is not in breach or violation of any agreement, note or
instrument to which it or its assets are a party or are bound. The Company has
not received notice from any Person of any claim or investigation that, if
adversely determined, would render the preceding sentence untrue or incomplete.
4.12 Tax Matters. The Company has correctly and timely prepared and
-----------
filed or timely obtained extensions for, all tax returns required to have been
filed by it with all appropriate governmental agencies and timely paid all taxes
owed by it. The charges, accruals and reserves on the books of the Company in
respect of taxes for all fiscal periods are adequate in all material respects,
and there are no material unpaid assessments of the Company nor, to the
6
<PAGE>
knowledge of the Company, any basis for the assessment of any additional taxes,
penalties or interest for any fiscal period or audits by any federal, state or
local taxing authority except such as which are not material. All material
taxes and other assessments and levies that the Company is required to withhold
or to collect for payment have been duly withheld and collected and paid to the
proper governmental entity or third party. There are no tax liens or claims
pending or threatened against the Company or any of its assets or property.
There are no outstanding tax sharing agreements or other such arrangements
between the Company and any other corporation or entity.
4.13 Title to Properties. Except as disclosed in the SEC Filings,
-------------------
the Company has good and marketable title to all real properties and all other
properties and assets owned by it, in each case free from liens, encumbrances
and defects that would materially affect the value thereof or materially
interfere with the use made or currently planned to be made thereof by them; and
except, as disclosed in the SEC Filings, the Company holds any leased real or
personal property under valid and enforceable leases with no exceptions that
would materially interfere with the use made or currently planned to be made
thereof by them.
4.14 Certificates, Authorities and Permits. The Company possesses
-------------------------------------
adequate certificates, authorizations or permits issued by appropriate
governmental agencies or bodies necessary to conduct its business as presently
operated and has not received any written notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit that, if
determined adversely to the Company, would individually or in the aggregate have
a Material Adverse Effect.
4.15 No Labor Disputes. No labor dispute with the employees of the
-----------------
Company or any subsidiary exists or, to the knowledge of the Company, is
imminent.
4.16 Intellectual Property. Except as set forth on Schedule 4.16,
--------------------- -------------
the Company owns or possesses adequate trademarks and trade names and have all
other rights to inventions, know-how, patents, copyrights, trademarks, trade
names, confidential information and other intellectual property (collectively,
"Intellectual Property Rights"), free and clear of all liens, security
interests, charges, encumbrances, equities and other adverse claims, necessary
to conduct the business now operated by it, or presently employed by it, and
presently contemplated to be operated by it, and has not received any notice of
infringement of or conflict with asserted rights of others with respect to any
Intellectual Property Rights. Schedule 4.16 sets forth a list by serial number
-------------
and title of the patents and/or patent applications owned or possessed by the
Company. No proprietary technology of any Person was used in the design or
development by the Company of (or otherwise with respect to) any of the
Intellectual Property Rights, which technology was not properly acquired or
licensed by the Company from such Person.
4.17 Environmental Matters. The Company is not in violation of any
---------------------
statute, rule, regulation, decision or order of any governmental agency or body
or any court, U.S. or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or restoration of
the environment or human exposure to hazardous or toxic substances
(collectively, "Environmental Laws"), does not own or operate any real property
contaminated with any substance that is subject to any Environmental Laws, is
not liable for any off-site
7
<PAGE>
disposal or contamination pursuant to any Environmental Laws, and is not subject
to any claim relating to any Environmental Laws, which violation, contamination,
liability or claim would individually or in the aggregate have a Material
Adverse Effect; and the Company is not aware of any pending investigation that
might lead to such a claim.
4.18 Litigation. Except as disclosed in the SEC Filings, there are
----------
no pending actions, suits or proceedings against or affecting the Company, or
any of its properties that, if determined adversely to the Company, would
individually or in the aggregate have a Material Adverse Effect or would
materially and adversely affect the ability of the Company to perform its
obligations under the Agreements, or which are otherwise material in the context
of the sale of the Securities; and to the Company's knowledge, no such actions,
suits or proceedings are threatened or contemplated.
4.19 Financial Statements. The financial statements included in each
--------------------
SEC Filing present fairly and accurately the consolidated financial position of
the Company as of the dates shown and its results of operations and cash flows
for the periods shown, and such financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis. Except as set forth on Schedule 4.19 or in the financial statements of
-------------
the Company included in the SEC Filings filed prior to the date hereof, the
Company has no liabilities, contingent or otherwise, except those which
individually or in the aggregate are not material to the financial condition or
operating results of the Company.
4.20 Insurance Coverage. The Company maintains in full force and
------------------
effect insurance coverage that is customary for comparably situated companies
for the business being conducted, and properties owned or leased, by the
Company, and the Company reasonably believes such insurance coverage to be
adequate against all liabilities, claims and risks against which it is customary
for comparably situated companies to insure.
4.21 Compliance with Nasdaq Continued Listing Requirements. The
-----------------------------------------------------
Company is in compliance with all applicable Nasdaq continued listing
requirements for the Nasdaq Stock Market. There are no proceedings pending or,
to the Company's knowledge, threatened against the Company relating to the
continued listing of the Company's Common Stock on the Nasdaq Stock Market and
the Company has not received any notice of, nor to the knowledge of the Company
is there any basis for, the delisting of the Common Stock from the Nasdaq Stock
Market.
4.22 Acknowledgement of Dilution. The number of shares of Common
----------------------------
Stock issuable pursuant to this Agreement may increase significantly. The
Company's executive officers and directors have studied and fully understand the
nature of the transactions being contemplated hereunder and recognize that they
have a potential dilutive effect.
4.23 Brokers and Finders. The Investors shall have no liability or
-------------------
responsibility for the payment of any commission or finder's fee to any third
party in connection with or resulting from this agreement or the transactions
--
contemplated by this Agreement by virtue of any agreement made by the Company to
a third party, and except a fee payable to Ladenburg Thalman & Co. of five
percent (5%) of the aggregate purchase price, the Company shall have no
8
<PAGE>
such liability or responsibility for any such commission or finder's fee.
4.24 No Directed Selling Efforts or General Solicitation. Neither
---------------------------------------------------
the Company nor, to its knowledge, any Person acting on its behalf has conducted
any general solicitation or general advertising (as those terms are used in
Regulation D) in connection with the offer or sale of any of the Securities.
4.25 No Integrated Offering. Neither the Company nor any of its
----------------------
Affiliates, nor any Person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would adversely affect reliance by
the Company on Section 4(2) for the exemption from registration for the
transactions contemplated hereby or would require registration of the Securities
under the 1933 Act; or would require the integration of this offering with any
other offering of securities for purposes of determining the need to obtain
shareholder approval of the transactions contemplated hereby under the rules of
the Nasdaq Stock Market.
4.26 Disclosures. No representation or warranty made under any
-----------
Section hereof and no information furnished by the Company pursuant hereto, or
in any other document, certificate or statement furnished by the Company to the
Investors or any authorized representative of the Investors, pursuant to the
Agreements or in connection therewith, contains any untrue statement of a
material fact or omits to state a material fact necessary to make the respective
statements contained herein or therein, in light of the circumstances under
which the statements were made, not misleading.
5. Representations and Warranties of the Investor. Each of the Investors
----------------------------------------------
hereby severally, and not jointly, represents and warrants to the Company that:
5.1 Organization and Existence. The Investor is a validly existing
--------------------------
company and has all requisite corporate or limited liability company power and
authority to invest in the Securities pursuant to this Agreement.
5.2 Authorization. The execution, delivery and performance by the
-------------
Investor of the Agreements have been duly authorized and the Agreements will
each constitute the valid and legally binding obligation of the Investor,
enforceable against the Investor in accordance with their terms.
5.3 Purchase Entirely for Own Account. The Securities to be received
---------------------------------
by the Investor hereunder will be acquired for the Investor's own account, not
as nominee or agent, and not with a view to the resale or distribution of any
part thereof in violation of securities laws, and the Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same in violation of securities laws. The Investor is not a registered
broker dealer or an entity engaged in the business of being a broker or dealer.
5.4 Investment Experience. The Investor acknowledges that it can
---------------------
bear the economic risk and complete loss of its investment in the Securities and
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of
9
<PAGE>
the investment contemplated hereby.
5.5 Disclosure of Information. The Investor has had an opportunity
-------------------------
to receive documents related to the Company and to ask questions of and receive
answers from the Company regarding the Company, its business and the terms and
conditions of the offering of the Securities. Neither such inquiries nor any
other due diligence investigation conducted by the Investor shall modify, amend
or affect the Investor's right to rely on the Company's representations and
warranties contained in this Agreement or made pursuant to this Agreement.
5.6 Restricted Securities. The Investor understands that the
---------------------
Securities are characterized as "restricted securities" under the U.S. federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the 1933 Act only in certain limited circumstances.
5.7 Legends. It is understood that, until registration for resale
-------
pursuant to the Registration Rights Agreement or until sales under Rule 144 are
permitted, certificates evidencing the Securities will bear one or all of the
following legends or legends substantially similar thereto:
"These securities have not been registered under the Securities Act of
1933, as amended (the "Act"), and may not be offered, sold, pledged,
hypothecated, assigned or transferred except (i) pursuant to a registration
statement under the Act which has become effective and is current with respect
to these securities, or (ii) pursuant to a specific exemption from registration
under the Act but only upon a holder hereof first having obtained the written
opinion of counsel to the Corporation, or other counsel reasonably acceptable to
the Corporation, that the proposed disposition is consistent with all applicable
provisions of the Act."
Upon registration for resale pursuant to the Registration Rights
Agreement (and provided the registration statement covering such resales is
current and effective) or when sale of the Shares or Warrant Shares under Rule
144(k) are permitted, the Company shall promptly cause certificates evidencing
the Shares or Warrant Shares, as applicable, previously issued hereunder (or to
be issued hereunder) to be replaced with certificates which do not bear such
restrictive legends.
5.8 Accredited Investor. The Investor is an accredited investor as
-------------------
defined in Rule 501(a) of Regulation D, as amended, under the 1933 Act.
5.9 No General Solicitation. The Investor did not learn of the
-----------------------
investment in the Securities as a result of any public advertising or general
solicitation.
6. Registration Rights Agreement. The parties acknowledge and agree that
-----------------------------
part of the inducement for the Investors to enter into this Agreement is the
Company's execution and delivery of the Registration Rights Agreement. The
parties acknowledge and agree that simultaneously with the execution hereof, the
Registration Rights Agreement is being duly executed and delivered by the
parties thereto.
10
<PAGE>
7. Covenants and Agreements of the Company.
---------------------------------------
7.1 Subsequent Sale at Lower Price.
------------------------------
(a) Required Adjustments. Subject to the exclusions
--------------------
contained in Section 7.1(f) below, if during the period ending on the later of
(i) twenty-four (24) months following the Closing Date or (ii) twenty-one (21)
months following the effective date of the Registration Statement contemplated
by the Registration Rights Agreement (the "MFN Period"), the Company sells any
shares of its Common Stock at a per share selling price ("Per Share Selling
Price") lower than the Purchase Price per share set forth in Section 2 hereof,
the Purchase Price per share of the Shares originally sold to the Investors
hereunder shall be adjusted downward to equal such lower Per Share Selling Price
and each Investor shall be entitled to receive the additional shares as provided
by Section 7.1(c); provided, however, if the Investor then owns less than 70% of
the Shares originally acquired by it hereunder, such Investor shall be entitled
to additional shares only with respect to the number of Shares originally
acquired and then owned by the Investor as provided in Section 7.1(c). For so
long as any Investor owns 70% or more of the Shares originally acquired by such
Investor hereunder, the Investor shall be entitled to the full benefit of the
Purchase Price adjustment required by this Section 7.1. The Company shall give
to the Investors written notice of any such sale within 24 hours of the closing
of any such sale and shall within such 24 hour period issue a press release
announcing such sale.
(b) Definitions.
-----------
(i) For the purposes of this Section 7.1, the
term "Per Share Selling Price" as used in this Section 7.1 shall include the
amount actually paid by third parties for each share of Common Stock; in the
event a fee is paid by the Company in connection with the transaction, any such
fee shall be deducted from the selling price pro rata to all shares sold in the
transaction to arrive at the Per Share Selling Price. A sale of shares of Common
Stock shall include the sale or issuance of rights, options, warrants or
convertible securities ("derivative securities") under which the Company is or
may become obligated to issue shares of Common Stock, and in such circumstances
the sale of Common Stock shall be deemed to have occurred at the time of the
issuance of the derivative securities and the Per Share Selling Price of the
Common Stock covered thereby shall also include the exercise or conversion price
thereof (in addition to the consideration received by the Company upon such sale
or issuance less the fee amount as provided above). In case of any such security
issued within the MFN Period in a "Variable Rate Transaction" or an "MFN
Transaction" (each as defined below), the Per Share Selling Price shall be
deemed to be the lowest conversion or exercise price at which such securities
are converted or exercised or might have been converted or exercised in the case
of a Variable Rate Transaction, or the lowest adjustment price in the case of an
MFN Transaction. If shares are issued for a consideration other than cash, the
per share selling price shall be the fair value of such consideration as
determined in good faith by the Board of Directors of the Company.
(ii) The term "Variable Rate Transaction" shall
mean a transaction in which the Company issues or sells (a) any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common
11
<PAGE>
Stock either (x) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
Common Stock at any time after the initial issuance of such debt or equity
securities, or (y) with a fixed conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock (but excluding customary anti-dilution provisions for forward
or reverse stock splits, stock dividends, reclassifications, recapitalization,
mergers or consolidations or similar adjustments affecting the Company's Common
Stock), or (b) any securities of the Company pursuant to an "equity line"
structure which provides for the sale, from time to time, of securities of the
Company which are registered for resale pursuant to the 1933 Act.
(iii) The term "MFN Transaction" shall mean a transaction in
which the Company issues or sells any securities in a capital raising
transaction or series of related transactions (the "New Offering") which grants
to an investor (the "New Investor") the right to receive additional shares based
upon future transactions of the Company on terms more favorable than those
granted to the New Investor in the New Offering.
(iv) The term "MFN Period" shall have the meaning set forth
in Section 7.1(a), above.
(c) Adjustment Mechanism. If an adjustment of the Purchase
--------------------
Price is required pursuant to Section 7.1(a), the Company shall deliver to the
Investor (at a U.S. delivery address provided in advance to the Company) within
eight calendar days of the closing of the transaction giving rise to the
adjustment or by such other date as may be required by Section 7.1(d) ("Delivery
Date") the Investor's share of such number of additional shares of Common Stock
equal to (i) the aggregate Purchase Price paid by the Investor divided by the
adjusted Per Share Purchase Price as required under Section 7.1(a), minus (ii)
the total number of shares of Common Stock previously delivered to the Investor
hereunder; provided however, that the Company shall delay effecting such
----------------
adjustment, in whole or in part, to the extent required by Section 7.1(d). If
the Company fails to deliver the additional shares by the applicable Delivery
Date, the Company shall be liable to the Investor for a delay payment equal to
2% of the Purchase Price per month payable in Common Stock or cash, at the
Investor's election. If at the time of any adjustment the proviso of the first
sentence of Section 7.1(a) is applicable, then the number of additional shares
otherwise determined as deliverable under this Section 7.1(c) shall be adjusted
so that it is equal to such number, multiplied by a fraction, the numerator of
which is the number of Shares acquired on the Closing Date and still owned at
the time of the adjustment and the denominator is the total number of Shares
acquired on the Closing Date.
(d) Limitation on Number of Shares.
------------------------------
(i) If by way of any adjustment required by
this Section 7.1, an Investor would receive a number of shares of Common Stock
such that the total number of such shares beneficially owned (within the meaning
of Section 13(d) of the 1934 Act) by the Investor as of the date of such
adjustment would be greater than 9.90% but less than 13.0% of the total
outstanding Common Stock of the Company, then the Company shall not effect the
adjustment
12
<PAGE>
required by this Section to the extent necessary to avoid causing the aforesaid
limitation to be exceeded until 120 days following the date such adjustment
would have otherwise been made.
(ii) If by way of any adjustment required by this
Section 7.1, an Investor would receive a number of shares of Common Stock such
that the total number of such shares held by the Investor as of the date of such
adjustment would equal or exceed 13.0% of the total outstanding Common Stock of
the Company, then the Company shall not effect the adjustment required by this
Section to the extent necessary to avoid causing the aforesaid limitation to be
exceeded until 180 days following the date such adjustment would have otherwise
been made.
(iii) In no event shall the Company issue to an
Investor additional shares pursuant to an adjustment required by this Section
7.1 such that the total number of shares issued to the Investor (when added to
the Warrant Shares) would exceed 19.9% of the Company's issued and outstanding
shares of Common Stock on the date hereof. Instead, the Company shall redeem
such excess shares at 120% of the Per Share Purchase Price, as adjusted. Only
shares acquired pursuant to this Agreement will be included in determining
whether the limitations would be exceeded for purposes of this Section
7.1(d)(iii).
(iv) The time periods in paragraphs (i) (120 days)
and (ii) (180 days) above shall be extended one (1) day for each day, prior to
the time that sales under Rule 144(k) would be permitted, that sales under the
Registration Statement contemplated by the Registration Rights Agreement may not
be made.
(e) Capital Adjustments. In case of any stock split or reverse stock
-------------------
split, stock dividend, reclassification of the common stock, recapitalization,
merger or consolidation, or like capital adjustment affecting the Common Stock
of the Company, the provisions of Section 7.1 shall be applied in a fair,
equitable and reasonable manner so as to give effect, as nearly as may be, to
the purposes hereof.
(f) Exclusions. Section 7.1(a) shall not apply to (i) sales of shares
----------
of Common Stock by the Company upon conversion or exercise of any convertible
securities, options or warrants outstanding prior to the date hereof; or (ii)
sales of shares of Common Stock by the Company pursuant to the provisions of any
shareholder-approved option or similar plan heretofore adopted by the Company.
7.2 Limitation on Transactions.
--------------------------
(a) Until the date of effectiveness of the registration statement
contemplated by the Registration Rights Agreement, without the prior written
consent of the Investors (which consent may be withheld in the Investors'
discretion), the Company shall not (i) issue or sell or agree to issue or sell
any securities for cash in a non-public MFN Transaction; or (ii) issue or sell,
or agree to issue or sell, any securities for cash in a non-public Variable Rate
Transaction.
(b) During the period after effectiveness of the registration
statement
13
<PAGE>
contemplated by the Registration Rights Agreement and until the expiration of
the MFN Period, without the prior written consent of the Investors (which
consent may be withheld in the Investors' discretion), the Company shall not (i)
issue or sell or agree to issue or sell any securities for cash in a non-public
MFN Transaction; or (ii) issue or sell, or agree to issue or sell, any
securities for cash in a non-public Variable Rate Transactions.
(c) The Company shall not issue any securities in any
transaction that would be integrated with the Securities issued pursuant to this
Agreement.
7.3 Right of Investors to Participate in Future Transactions. The
--------------------------------------------------------
Company agrees that during the MFN Period the Investors will have a right to
participate in future non-public capital raising transactions as set forth in
this Section 7.3. The Company shall give advance written notice to the
Investors prior to any offer or sale of any of its equity securities or any
securities convertible into or exchangeable or exercisable for such securities
in a non-public capital raising transaction. Prior to the closing of any such
transaction, the Investors shall have the right to participate in up to 50% of
such new offering (or in the case of a Variable Rate Transaction, up to 75% of
such new offering) and purchase such securities for the same consideration and
on the same terms and conditions as contemplated for such third-party sale. To
exercise this right, an Investor must give written notice to the Company of the
Investor's election to participate and such notice must be given within ten (10)
days following receipt of the notice from the Company. If the Company gives
notice to the Investors of an expected transaction pursuant to this Section 7.3
but cannot consummate such transaction, the Company will give the Investors
prompt written notice of the cancellation of such transaction. If, subsequent
to the Company giving notice to the Investors hereunder, the terms and
conditions of the proposed third-party sale are changed in any way, the Company
shall be required to provide a new notice to the Investors hereunder and the
Investors shall have the right to participate in the offering on such changed
terms and conditions as provided hereunder.
7.4 Opinion of Counsel. On or prior to the Closing Date, the Company
------------------
will deliver to the Investors the opinions of independent legal counsel to the
Company, in form and substance reasonably acceptable to the Investors,
addressing those legal matters set forth in Schedule 7.4 hereto.
------------
7.5 Reservation of Common Stock Pursuant to Section 7.1 and Exercise
----------------------------------------------------------------
of Warrants. The Company hereby agrees, at all times with respect to shares
- -----------
issuable upon exercise of the Warrants, and at all appropriate times with
respect to shares issuable pursuant to Section 7.1, to reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of providing for the additional issuance(s) of Common Stock pursuant
to Section 7.1 and exercise of the Warrants, such number of shares of Common
Stock as shall from time to time equal the number of shares sufficient to permit
the issuance, if any, required pursuant to Section 7.1 plus the number of shares
of Common Stock as shall be necessary to permit the exercise of the Warrants in
accordance with the terms of the Warrants.
7.6 Reports. Within one week of filing the following reports with
-------
the SEC, or in the absence of such filing within the time periods specified
below, the Company shall send a copy of the following reports to each Investor
by regular mail:
14
<PAGE>
(a) Quarterly Reports. As soon as available the Company's quarter-
-----------------
annual report on Form 10-Q or, in the absence of such report, consolidated
balance sheets of the Company and its subsidiaries as at the end of such period
and the related consolidated statements of operations, stockholders' equity and
cash flows for such period and for the portion of the Company's fiscal year
ended on the last day of such quarter, prepared in accordance with the rules and
regulations promulgated by the SEC.
(b) Annual Reports. As soon as available after the end of each fiscal
--------------
year of the Company, the Company's Form 10K or, in the absence of a Form 10K,
consolidated balance sheets of the Company and its subsidiaries as at the end of
such year and the related consolidated statements of earnings, stockholders'
equity and cash flows for such year, all in reasonable detail and accompanied by
the report on such consolidated financial statements of an independent certified
public accountant selected by the Company.
(c) Securities Filings. As promptly as practicable and in any event
------------------
within one week after the same are issued or filed, copies of (i) all notices,
proxy statements, financial statements, reports and documents as the Company or
any subsidiary shall send or make available generally to its stockholders or to
financial analysts, and (ii) all periodic and special reports, documents and
registration statements which the Company or any subsidiary furnishes or files,
or any officer or director of the Company or any of its subsidiaries (in such
person's capacity as such) furnishes or files with the SEC.
(d) Other Information. Such other information relating to the Company
-----------------
or its subsidiaries as from time to time may reasonably be requested by the
Investors provided the Company produces such information in its ordinary course
of business, and further provided that the Company, solely in its own
discretion, determines that such information is not confidential in nature and
disclosure to the Investors would not be harmful to the Company.
(e) Rule 144. The Company agrees to make publicly available on a
--------
timely basis the information necessary to enable Rule 144 to be available for
resale.
7.7 Press Releases. Any press release or other publicity concerning this
--------------
Agreement or the transactions contemplated by this Agreement shall be submitted
to the Investors for comment at least two (2) business days prior to issuance,
unless the release is required to be issued within a shorter period of time by
law or pursuant to the rules of a national securities exchange or the Nasdaq
Stock Market. The Company shall issue a press release concerning the fact and
material terms of this Agreement within one business day of the Closing.
7.8 No Conflicting Agreements. The Company will not, and will not permit
-------------------------
its subsidiaries to, take any action, enter into any agreement or make any
commitment that would conflict or interfere in any material respect with the
obligations to the Investors under the Agreements.
7.9 Insurance. For so long as any Investor beneficially owns any of the
---------
Securities, the Company shall, and shall cause each subsidiary to, have in full
force and effect (a) insurance reasonably believed to be adequate on all assets
and activities of a type customarily insured,
15
<PAGE>
covering property damage and loss of income by fire or other casualty, and (b)
insurance reasonably believed to be adequate protection against all liabilities,
claims and risks against which it is customary for companies similarly situated
as the Company and the subsidiaries to insure.
7.10 Compliance with Laws. For so long as any Investor beneficially
--------------------
owns any of the Securities, the Company will use reasonable efforts, and will
cause each of its subsidiaries to use reasonable efforts, to comply with all
applicable laws, rules, regulations, orders and decrees of all governmental
authorities, except to the extent non-compliance (in one instance or in the
aggregate) would not have a Material Adverse Effect.
7.11 Listing of Underlying Shares and Related Matters. The Company
------------------------------------------------
hereby agrees, promptly following the Closing of the transactions contemplated
by this Agreement, to take such action to cause the Shares, the Warrant Shares
and the shares of Common Stock issuable under Section 7.1(a) hereof to be listed
on the Nasdaq Stock Market as promptly as possible but no later than the
effective date of the registration contemplated by the Registration Rights
Agreement. The Company further agrees that if the Company applies to have its
Common Stock or other securities traded on any other principal stock exchange or
market, it will include in such application the Common Stock underlying the
Warrants, and will take such other action as is necessary to cause such Common
Stock to be so listed. The Company will take all action necessary to continue
the listing and trading of its Common Stock on the Nasdaq Stock Market and will
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of such exchange, as applicable, to ensure
the continued eligibility for trading of the Shares and the Warrant Shares
thereon.
7.12 Corporate Existence. So long as the Investors beneficially owns
-------------------
any of the Shares or Warrants, the Company shall maintain its corporate
existence, except in the event of a merger, consolidation or sale of all or
substantially all of the Company's assets, as long as the surviving or successor
entity in such transaction (a) assumes the Company's obligations hereunder and
under the agreements and instruments entered into in connection herewith,
regardless of whether or not the Company would have had a sufficient number of
shares of Common Stock authorized and available for issuance in order to fulfill
its obligations hereunder and effect the exercise in full of all Warrants
outstanding as of the date of such transaction; (b) has no legal, contractual or
other restrictions on its ability to perform the obligations of the Company
hereunder and under the agreements and instruments entered into in connection
herewith; and (c) (i) is a publicly traded corporation whose common stock and
the shares of capital stock issuable upon exercise of the Warrants are (or would
be upon issuance thereof) listed for trading on the Nasdaq Stock Market, New
York Stock Exchange or American Stock Exchange, or (ii) if not such a publicly
traded corporation, then the buyer agrees that it will, at the election of an
Investor, purchase such Investor's Shares (and Warrant Shares) then held at a
price equal to 120% of the Per Share Purchase Price of such Shares.
8. Limitation on Investors' Transactions. During the MFN Period, the
-------------------------------------
Investors agree not to, directly or indirectly, participate in or effect any
derivative transactions with respect to any security of the Company that is
listed on a national securities exchange or the Nasdaq Stock Market.
16
<PAGE>
9. Survival. All representations, warranties, covenants and agreements
--------
contained in this Agreement shall be deemed to be representations, warranties,
covenants and agreements as of the date hereof and shall survive the execution
and delivery of this Agreement.
10. Arbitration.
-----------
10.1 Scope. Resolution of any and all disputes arising from or in
-----
connection with the Agreements, whether based on contract, tort, common law,
equity, statute, regulation, order or otherwise ("Disputes"), shall be
exclusively governed by and settled in accordance with the provisions of this
Section 10; provided, that the foregoing shall not preclude equitable or other
judicial relief to enforce the provisions hereof or to preserve the status quo
pending resolution of Disputes hereunder.
10.2 Binding Arbitration. The parties hereby agree to submit all
-------------------
Disputes to arbitration for final and binding resolution. Either party may
initiate such arbitration by delivery of a demand therefor (the "Arbitration
Demand") to the other party. The arbitration shall be conducted in New York,
New York by a sole arbitrator selected by agreement of the parties not later
than 10 business days after delivery of the Arbitration Demand, or, failing such
agreement, appointed pursuant to the Commercial Arbitration Rules of the
American Arbitration Association, as amended from time to time (the "AAA
Rules"). If the arbitrator becomes unable to serve, his successor(s) shall be
similarly selected or appointed.
10.3 Procedure. The arbitration shall be conducted pursuant to the
---------
Federal Arbitration Act and such procedures as the parties may agree or, in the
absence of or failing such agreement, pursuant to the AAA Rules.
Notwithstanding the foregoing, (a) each party shall have the right to conduct
limited discovery of information relevant to the Dispute; (b) each party shall
provide to the other, reasonably in advance of any hearing, copies of all
documents that a party intends to present in such hearing; (c) all hearings
shall be conducted on an expedited schedule; and (d) all proceedings shall be
confidential, except that either party may at its expense make a stenographic
record thereof.
10.4 Timing. The arbitrator shall use best efforts to complete all
------
hearings not later than 90 days after his or her selection or appointment, and
shall use best efforts to make a final award not later than 30 days thereafter.
The arbitrator shall apportion all costs and expenses of the arbitration,
including the arbitrator's fees and expenses, and fees and expenses of experts
("Arbitration Costs") between the prevailing and non-prevailing party as the
arbitrator shall deem fair and reasonable. In circumstances where a Dispute has
been asserted or defended against on grounds that the arbitrator deems
manifestly unreasonable, the arbitrator may assess all Arbitration Costs against
the non-prevailing party and may include in the award the prevailing party's
attorney's fees and expenses in connection with any and all proceedings under
this Section 10. Notwithstanding the foregoing, in no event may the arbitrator
award multiple or punitive damages.
11. Miscellaneous.
-------------
11.1 Successors and Assigns. This Agreement may not be assigned by
----------------------
a party
17
<PAGE>
hereto without the prior written consent of the other party hereto, except that
without the prior written consent of the Company, but after notice duly given,
an Investor may assign its rights hereunder in whole or in part to any purchaser
of Securities from the Investor, provided that, unless the Shares or Warrant
Shares are sold pursuant to the registration statement contemplated by the
Registration Rights Agreement, the purchaser of the Securities shall make all
representations and warranties of the Investor contained in Section 5 hereof, in
writing to the Company prior to the purchase of the Securities. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective permitted successors and assigns of the parties. Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
11.2 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.3 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
11.4 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given only upon delivery to each party to be notified by (i)
personal delivery, (ii) telex or telecopier, upon receipt of the electronically
generated confirmation of delivery, or (iii) a recognized overnight air courier,
addressed to the party to be notified at the address as follows, or at such
other address as such party may designate by at least ten days' advance written
notice to the other party:
If to the Company:
ImaginOn, Inc.
1313 Laurel Street, Suite No. 1
San Carlos, CA 94070
USA
Telephone: (650) 596 9300
Telefax: (650) 596 9350
Attention: Chief Executive Officer
with a copy to:
Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
1400 Glenarm Place, Suite 300
Denver, CO 80202
Attn: Gerald Raskin, Esq. and John W. Kellogg, Esq.
Telephone: (303) 571-1400
18
<PAGE>
Facsimile: (303) 595-3159
If to the Investors, to the addresses set forth on the
signature pages hereto, and with a copy to:
__________________________
__________________________
__________________________
__________________________
Telephone: _______________
Facsimile: _______________
11.5 Fees and Expenses.
-----------------
(a) Except as set forth below, the parties hereto shall pay
their own costs and expenses in connection herewith.
(b) Tail Wind Inc. shall receive an expense allowance to cover
due diligence expenses and legal expenses, in an amount equal to 0.8% of the
aggregate Purchase Price. Such expense allowance shall be paid by the Company at
the Closing.
11.6 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investors.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any Securities purchased under this Agreement at the
time outstanding, each future holder of all such securities, and the Company.
11.7 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
11.8 Entire Agreement. This Agreement, including the Exhibits and
----------------
Schedules hereto, and the Registration Rights Agreement constitute the entire
agreement among the parties hereof with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter hereof and
thereof.
11.9 Further Assurances. The parties shall execute and deliver all
------------------
such further instruments and documents and take all such other actions as may
reasonably be required to carry out the transactions contemplated hereby and to
evidence the fulfillment of the agreements herein contained.
11.10 Applicable Law. This Agreement shall be governed by, and
--------------
construed in accordance with, the laws of the State of New York without regard
to principles of conflicts of laws.
19
<PAGE>
11.11 Remedies.
--------
(a) The Investors shall be entitled to specific performance of
the Company's obligations under the Agreements.
(b) The Company shall be entitled to specific performance of
each Investor's obligations under the Agreements.
(c) Each party shall indemnify the other and hold it harmless
from any loss, cost, expense or fees (including attorneys' fees and expenses)
arising out of any breach of any representation, warranty, covenant or agreement
in any of the Agreements, or arising out of the enforcement of this Section
11.11
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
The Company:
IMAGINON, INC.
By:_________________________
Name: David M. Schwartz
Title: Chief Executive Officer
21
<PAGE>
The Investor:
By:_________________________
Name:
Title:
By:_________________________
Name:
Title:
Aggregate Purchase Price:
Number of Shares of Common Stock:
Number of Warrants:
Effective per share Purchase Price of Shares: $2.669
Exercise price of Warrants: $3.34 (125% premium to Market Price)
Address for Notice:
Corporate Centre
with a copy to:
Telephone:
Facsimile:
22
<PAGE>
EXHIBIT 10.23(b)
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (the "Agreement") is made and
entered as of this nineteenth day of December, 1999 by and between ImaginOn,
Inc., a corporation organized under the laws of Delaware, USA (the "Company"),
and the "Investors" named in that certin Purchase Agreement of even date
herewith by and between the Company and the Investors (the "Purchase
Agreement").
The parties hereby agree as follows:
1. Certain Definitions
-------------------
As used in this Agreement, the following terms shall have the
following meanings:
"Additional Registrable Securities" shall mean the shares of
---------------------------------
Common Stock, if any, issued to the Investors pursuant to Section 7.1 of the
Purchase Agreement.
"Common Stock" shall mean the Company's shares of Common Stock,
------------
par value $0.01 per share.
=====
"Investors" shall mean the purchasers identified int he Purchase
---------
Agreement and any affiliate of any Investor who is a subsequent holder of any
Common Stock, Warrant or Registrable Securities.
"Prospectus" shall mean the prospectus included in any
----------
Registration Statement, as amended or supplemented by any prospectus supplement,
with respect to the terms of the offering of any portion of the Registrable
Securities and Additional Registrable Securities covered by such Registration
Statement and by all other amendments and supplements to the prospectus,
including post-effective amendments and all material incorporated by reference
in such prospectus.
"Register," "registered" and "registration" refer to a
-------- ---------- ------------
registration made by preparing and filing a registration statement or similar
document in compliance with the 1933 Act (as defined below), and the declaration
or ordering of effectiveness of such registration statement or document.
"Registrable Securities" shall mean the shares of Common Stock
----------------------
issued and issuable to the Investors pursuant to the Purchase Agreement (other
than additional shares of Common Stock issuable pursuant to Section 7.1 of the
Purchase Agreement) and issuable upon the exercise of the Warrants, and any
securities issued with respect to, or in exchange for, such securities.
1
<PAGE>
"Registration Statement" shall mean any registration statement of
----------------------
the Company filed under the 1933 Act that covers the resale of any of the
Registrable Securities or Additional Registrable Securities pursuant to the
provisions of this Agreement, amendments and supplements to such Registration
Statement, including post-effective amendments, all exhibits and all material
incorporated by reference in such Registration Statement.
"SEC" means the U.S. Securities and Exchange Commission.
---
"1933 Act" means the Securities Act of 1933, as amended, and the
--------
rules and regulations promulgated thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as amended,
--------
and the rules and regulations promulgated thereunder.
"Warrants" mean the warrants to purchase shares of Common Stock
--------
issued to the Investors pursuant to the Purchase Agreement.
Other capitalized terms used herein but not defined herein shall
have the meaning provided therefor in the Purchase Agreement.
2. Registration.
------------
(a) Registration Statement. Promptly following the closing of
----------------------
the transactions contemplated by the Purchase Agreement (the "Closing Date")
(but no later than 45 days after the Closing Date), the Company shall prepare
and file with the SEC one Registration Statement on Form S-1 covering the resale
of the Registrable Securities. Such Registration Statement shall cover, to the
extent allowable under the 1933 Act and the Rules promulgated thereunder
(including Rule 416), such indeterminate number of additional shares of Common
Stock resulting from stock splits, stock dividends or similar transactions with
respect to the Registrable Securities. No securities shall be included in the
Registration Statement without the consent of the Investors other than the
Registrable Securities. The Registration Statement (and each amendment or
supplement thereto, and each request for acceleration of effectiveness thereof)
shall be provided in accordance with Section 3(c) to (and subject to the
approval of) the Investors and their counsel prior to its filing or other
submission which approval shall not be unreasonably withheld or delayed.
(b) Expenses. The Company will pay all expenses associated with
--------
the registration and in addition shall pay the reasonable fees of counsel to the
Investors relating thereto in an amount not to exceed $5,000, excluding
discounts, commissions, fees of underwriters, selling brokers, dealer managers
or similar securities industry professionals.
(c) Effectiveness.
-------------
(i) The Company shall use its best efforts to have the
Registration Statement declared effective as soon as practicable. If (A) the
Registration Statement is not declared effective by the SEC within 90 days
following the Closing Date (or 120 days following the Closing Date in the case
of a registration statement which is subject to a full
2
<PAGE>
SEC review) (the "Registration Date"), or (B) after the Registration Statement
has been declared effective by the SEC, sales cannot be made pursuant to the
Registration Statement for any reason but except as excused pursuant to
subparagraph (ii) below, then the Company will make payments to each Investor,
as damages and not as a penalty, for any 30 day period or portion thereof
following the Registration Date during which any of the events described in (A)
or (B) above occurs and is continuing (the "Blackout Period") in an amount equal
to 2% of the aggregate Purchase Price paid by such Investor to the Company on
the Closing Date. The amounts payable as damages pursuant to this paragraph
shall be payable in lawful money of the United States and shall be paid on
demand from time to time following the commencement of the Blackout Period until
the termination of the Blackout Period. The same remedy shall be available in
the case of any suspension from trading or delisting from the Nasdaq Stock
Market. The remedies set forth in this section are not intended to be exclusive,
and shall be in addition to any other remedies available at law or equity.
Amounts payable as damages hereunder shall cease when such Investor no longer
holds Warrants or Registrable Securities, or Additional Registrable Securities,
as applicable.
(ii) The Company may terminate or suspend effectiveness of
any registration contemplated by this Section one time for a period of not more
than twenty (20) days if the Company shall deliver to the Investors a
certificate signed by the President of the Company stating that, in the good
faith judgment of the Board of Directors of the Company, it would (A) be
seriously detrimental to the business of the Company for such registration to be
effected or remain effective at such time, (B) interfere with any proposed or
pending material corporate transaction involving the Company or any of its
subsidiaries, or (C) result in any premature disclosure thereof. In such a case,
the Company shall not disclose to the Investors any facts or circumstances
constituting material non-public information, without the prior written consent
of Investors. The duration of the MFN Period provided for in the Purchase
Agreement will be extended by the number of days of any termination or
suspension of the effectiveness of any registration contemplated by this
Section.
(d) Underwritten Offering. If any offering pursuant to a Registration
---------------------
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Investors shall have the right to select an investment banker and manager to
administer the offering, which investment banker or manager shall be reasonably
satisfactory to the Company.
(e) Promptly following the issuance of any Additional Registrable
Securities, the Company shall file a Registration Statement, which may serve as
a post-effective amendment to any other registrations statement, and use its
best efforts to have such Registration Statement covering the Additional
Registrable Securities declared effective as soon as possible. All time
periods, provisions and remedies covering the registration of Registrable
Securities shall apply, mutatis mutandis, to the registration of the Additional
Registrable Securities.
(f) Upon becoming eligible to file registration statements on Form S-
3 for secondary offerings, the Company shall file with the Commission such
amendments to the Registration Statement and the prospectus used in connection
therewith as may be necessary to convert the Registration Statement from a
registration statement on Form S-1 to a registration statement on Form S-3.
3
<PAGE>
3. Company Obligations. The Company will use its best efforts to
-------------------
effect the registration of the Registrable Securities and Additional Registrable
Securities in accordance with the terms hereof, and pursuant thereto the Company
will, as expeditiously as possible:
(a) use its best efforts to cause such Registration Statement to
become effective and to remain continuously effective for a period that will
terminate upon the earlier of the date on which all Registrable Securities or
Additional Registrable Securities, as the case may be, covered by such
Registration Statement, as amended from time to time, have been sold or until
such time as they become eligible for distribution pursuant to Rule 144(k), or
any successor provision thereof, under the 1933 Act (the "Registration Period");
(b) prepare and file with the SEC such amendments and post-
effective amendments to the Registration Statement and the Prospectus as may be
necessary to keep the Registration Statement effective for the period specified
in Section 3(a) and to comply with the provisions of the 1933 Act and the 1934
Act with respect to the distribution of all Registrable Securities and
Additional Registrable Securities; provided that, at a time reasonably prior to
the filing of a Registration Statement or Prospectus, or any amendments or
supplements thereto, the Company will furnish to the Investors copies of all
documents proposed to be filed, which documents will be subject to the comments
of the Investors;
(c) permit a single firm of counsel designated by the Investors
to review the Registration Statement and all amendments and supplements thereto
no fewer than ten (10) days prior to their filing with the SEC, and not file any
document in a form to which such counsel reasonably objects;
(d) furnish to the Investors and their legal counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and Prospectus and each amendment
or supplement thereto, and each letter written by or on behalf of the Company to
the SEC or the staff of the SEC, and each item of correspondence from the SEC or
the staff of the SEC, in each case relating to such Registration Statement
(other than any portion of any thereof which contains information for which the
Company has sought confidential treatment), and (ii) such number of copies of a
Prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as each Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities and
Additional Registrable Securities owned by such Investor;
(e) if the Investors select underwriters for the offering, the
Company shall enter into and perform its reasonable obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering;
(f) at the request of the Investors, the Company shall furnish,
on the date that Registrable Securities or Additional Registrable Securities, as
applicable, are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) an opinion, dated as of such date, from counsel
representing the Company for purposes of such Registration
4
<PAGE>
Statement, in form, scope and substance as is customarily given in an
underwritten public offering, addressed to the underwriter and the Investors and
(ii) a letter, dated such date, from the Company's independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters and the Investors;
(g) make reasonable effort to prevent the issuance of any stop
order or other suspension of effectiveness and, if such order is issued, obtain
the withdrawal of any such order at the earliest possible moment;
(h) furnish to each Investor at least five copies of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules by courier pursuant to the notice
requirements of Section 11.4 of the Purchase Agreement;
(i) prior to any public offering of Registrable Securities or
Additional Registrable Securities, use its best efforts to register or qualify
or cooperate with the Investors and their counsel in connection with the
registration or qualification of such Registrable Securities or Additional
Registrable Securities, as applicable, for offer and sale under the securities
or blue sky laws of all U.S. jurisdictions and do any and all other reasonable
acts or things necessary or advisable to enable the distribution in such
jurisdictions of the Registrable Securities or Additional Registrable Securities
covered by the Registration Statement, provided the Company shall not be
required to provide a general consent to the service of process in any
jurisdiction in which its business or operations does not otherwise require such
consent;
(j) cause all Registrable Securities or Additional Registrable
Securities covered by the Registration Statement to be listed on each securities
exchange, interdealer quotation system or other market on which similar
securities issued by the Company are then listed;
(k) immediately notify the Investors, at any time when a
Prospectus relating to the Registrable Securities or Additional Registrable
Securities is required to be delivered under the Securities Act, upon discovery
that, or upon the happening of any event as a result of which, the Prospectus
included in such Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing, and at the request of any such holder,
promptly prepare and furnish to such holder a reasonable number of copies of a
supplement to or an amendment of such Prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such Registrable Securities or
Additional Registrable Securities, as applicable, such Prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing; and
(l) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC under the 1933 Act and the 1934 Act, take such
other actions as may be
5
<PAGE>
reasonably necessary to facilitate the registration of the Registrable
Securities and Additional Registrable Securities hereunder.
4. Obligations of the Investors.
----------------------------
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities or Additional Registrable Securities, if applicable,
that each Investor shall furnish in writing to the Company such information
regarding itself, the Registrable Securities or Additional Registrable
Securities, as applicable, held by it and the intended method of disposition of
the Registrable Securities or Additional Registrable Securities, as applicable,
held by it as shall be reasonably required to effect the registration of such
Registrable Securities or Additional Registrable Securities, as applicable, and
shall execute such documents in connection with such registration as the Company
may reasonably request. At least ten (10) business days prior to the first
anticipated filing date of the Registration Statement, the Company shall notify
each Investor of the information the Company requires from such Investor if such
Investor elects to have any of the Registrable Securities or Additional
Registrable Securities included in the Registration Statement.
(b) Each Investor, by its acceptance of the Registrable
Securities and Additional Registrable Securities, if any, agrees to cooperate
with the Company as reasonably requested by the Company in connection with the
preparation and filing of the Registration Statement hereunder, unless such
Investor has notified the Company in writing of its election to exclude all of
its Registrable Securities or Additional Registrable Securities, as applicable,
from the Registration Statement.
(c) If the Investors determine to engage the services of an
underwriter, the Investors agrees to enter into and perform its obligations
under an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering and take such other actions as are
reasonably required in order to expedite or facilitate the dispositions of the
Registrable Securities or Additional Registrable Securities, as applicable.
(d) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event rendering the Registration Statement
no longer effective, such Investor will immediately discontinue disposition of
Registrable Securities or Additional Registrable Securities pursuant to the
Registration Statement covering such Registrable Securities or Additional
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus filed with the SEC and declared effective
and, if so directed by the Company, such Investor shall deliver to the Company
(at the expense of the Company) or destroy (and deliver to the Company a
certificate of destruction) all copies in the Investor's possession of the
Prospectus covering the Registrable Securities or Additional Registrable
Securities, as applicable, current at the time of receipt of such notice.
(e) No Investor may participate in any underwritten registration
hereunder unless it (i) agrees to sell the Registrable Securities or Additional
Registrable Securities, as
6
<PAGE>
applicable, on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to the terms of this Agreement.
5. Indemnification.
---------------
(a) Indemnification by Company. The Company agrees to indemnify
--------------------------
and hold harmless, to the fullest extent permitted by law the Investors, each of
their officers, directors, partners and employees and each person who controls
the Investors (within the meaning of the 1933 Act) against all losses, claims,
damages, liabilities, costs (including, without limitation, reasonable
attorney's fees) and expenses imposed on such person caused by (i) any untrue or
alleged untrue statement of a material fact contained in any Registration
Statement, Prospectus or any preliminary prospectus or any amendment or
supplement thereto or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as the same are based upon any
information furnished in writing to the Company by such Investors, expressly for
use therein, or (ii) any violation by the Company of any federal, state or
common law, rule or regulation applicable to the Company in connection with any
Registration Statement, Prospectus or any preliminary prospectus, or any
amendment or supplement thereto, and shall reimburse in accordance with
subparagraph (c) below, each of the foregoing persons for any legal and any
other expenses reasonably incurred in connection with investigating or defending
any such claims. The foregoing is subject to the condition that, insofar as the
foregoing indemnities relate to any untrue statement, alleged untrue statement,
omission or alleged omission made in any preliminary prospectus or Prospectus
that is eliminated or remedied in any Prospectus or amendment or supplement
thereto, the above indemnity obligations of the Company shall not inure to the
benefit of any indemnified party if a copy of such corrected Prospectus or
amendment or supplement thereto had been made available to such indemnified
party and was not sent or given by such indemnified party at or prior to the
time such action was required of such indemnified party by the 1933 Act and if
delivery of such Prospectus or amendment or supplement thereto would have
eliminated (or been a sufficient defense to) any liability of such indemnified
party with respect to such statement or omission. Indemnity under this Section
5(a) shall remain in full force and effect regardless of any investigation made
by or on behalf of any indemnified party and shall survive the permitted
transfer of the Registrable Securities and Additional Registrable Securities.
(b) Indemnification by Holder of Registrable Securities. In
---------------------------------------------------
connection with any registration pursuant to the terms of this Agreement, each
Investor will furnish to the Company in writing such information as the Company
reasonably requests concerning the holders of Registrable Securities and
Additional Registrable Securities or the proposed manner of distribution for use
in connection with any Registration Statement or Prospectus and agrees,
severally but not jointly, to indemnify and hold harmless, to the fullest extent
permitted by law, the Company, its directors, officers, employees, stockholders
and each person who controls the Company (within the meaning of the 1933 Act)
against any losses, claims, damages, liabilities
7
<PAGE>
and expense (including reasonable attorney's fees) resulting from any untrue
statement of a material fact or any omission of a material fact required to be
stated in the Registration Statement or Prospectus or preliminary prospectus or
amendment or supplement thereto or necessary to make the statements therein not
misleading, to the extent, but only to the extent that such untrue statement or
omission is contained in any information furnished in writing by the holder of
Registrable Securities or Additional Registrable Securities to the Company
specifically for inclusion in such Registration Statement or Prospectus or
amendment or supplement thereto. In no event shall the liability of a holder of
Registrable Securities or Additional Registrable Securities be greater in amount
than the dollar amount of the proceeds received by such holder upon the sale of
the Registrable Securities or Additional Registrable Securities included in the
Registration Statement giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. Any person entitled
--------------------------------------
to indemnification hereunder shall (i) give prompt notice to the indemnifying
party of any claim with respect to which it seeks indemnification and (ii)
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party; provided that any person
--------
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of such claim, but the fees and
expenses of such counsel shall be at the expense of such person unless (a) the
indemnifying party has agreed to pay such fees or expenses, or (b) the
indemnifying party shall have failed to assume the defense of such claim and
employ counsel reasonably satisfactory to such person or (c) in the reasonable
judgment of any such person, based upon written advice of its counsel, a
conflict of interest exists between such person and the indemnifying party with
respect to such claims (in which case, if the person notifies the indemnifying
party in writing that such person elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such claim on behalf of such person); and
provided, further, that the failure of any indemnified party to give notice as
- -------- -------
provided herein shall not relieve the indemnifying party of its obligations
hereunder, except to the extent that such failure to give notice shall
materially adversely affect the indemnifying party in the defense of any such
claim or litigation. It is understood that the indemnifying party shall not, in
connection with any proceeding in the same jurisdiction, be liable for fees or
expenses of more than one separate firm of attorneys at any time for all such
indemnified parties. No indemnifying party will, except with the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect to such claim or litigation.
(d) Contribution. If for any reason the indemnification
------------
provided for in the preceding paragraphs (a) and (b) is unavailable to an
indemnified party or insufficient to hold it harmless, other than as expressly
specified therein, then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such loss, claim, damage
or liability in such proportion as is appropriate to reflect the relative fault
of the indemnified party
8
<PAGE>
and the indemnifying party, as well as any other relevant equitable
considerations. No person guilty of fraudulent misrepresentation within the
meaning of Section 11(f) of the 1933 Act shall be entitled to contribution from
any person not guilty of such fraudulent misrepresentation. In no event shall
the contribution obligation of a holder of Registrable Securities or Additional
Registrable Securities be greater in amount than the dollar amount of the
proceeds received by it upon the sale of the Registrable Securities or
Additional Registrable Securities giving rise to such contribution obligation.
6. Miscellaneous.
-------------
(a) Amendments and Waivers. This Agreement may be amended only
----------------------
by a writing signed by the parties hereto. The Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company shall have obtained the written consent to such
amendment, action or omission to act, of each Investor.
(b) Notices. All notices and other communications provided for
-------
or permitted hereunder shall be made as set forth in Section 11.4 of the
Purchase Agreement.
(c) Assignments and Transfers by Investors. This Agreement and
--------------------------------------
all the rights and obligations of the Investors hereunder may not be assigned or
transferred to any transferee or assignee except as set forth herein. The
Investors may make such assignment or transfer to any transferee or assignee of
any Common Stock, Warrant or Registrable Securities, or Additional Registrable
Securities, provided, that (i) such transfer is made expressly subject to this
--------
Agreement and the transferee agrees in writing to be bound by the terms and
conditions hereof, and (ii) the Company is provided with written notice of such
assignment.
(d) Assignments and Transfers by the Company. This Agreement may
----------------------------------------
not be assigned by the Company without the prior written consent of each
Investor, except that without the prior written consent of the Investors, but
after notice duly given, the Company shall assign its rights and delegate its
duties hereunder to any successor-in-interest corporation, and such
successor-in-interest shall assume such rights and duties, in the event of a
merger or consolidation of the Company with or into another corporation or the
sale of all or substantially all of the Company's assets.
(e) Benefits of the Agreement. The terms and conditions of this
-------------------------
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
(f) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9
<PAGE>
(g) Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
(h) Severability. If one or more provisions of this Agreement
------------
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms to the fullest extent permitted by law.
(i) Further Assurances. The parties shall execute and deliver
------------------
all such further instruments and documents and take all such other actions as
may reasonably be required to carry out the transactions contemplated hereby and
to evidence the fulfillment of the agreements herein contained.
(j) Entire Agreement. This Agreement is intended by the parties
----------------
as a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
(k) Applicable Law. This Agreement shall be governed by, and
--------------
construed in accordance with, the laws of the State of New York without regard
to principles of conflicts of law.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first written above.
The Company: IMAGINON, INC.
By:_________________________
Name:
Title:
The Investors: [___________________________]
By:_________________________
Name:
Title:
By:_________________________
Name:
Title:
11
<PAGE>
EXHIBIT 10.23C
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT COVERING THIS WARRANT UNDER SAID ACT OR AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT.
VOID AFTER 5:00 P.M. EASTERN TIME ON MARCH 30, 2002 ("EXPIRATION DATE").
IMAGINON, INC.
WARRANT TO PURCHASE _______ SHARES OF
COMMON STOCK, PAR VALUE $0.01 PER SHARE
This is to certify that, for VALUE RECEIVED, ("Warrantholder"), is entitled
to purchase, subject to the provisions of this Warrant, from ImaginOn, Inc., a
corporation organized under the laws of Delaware, USA ("Company"), at any time
not later than 5:00 P.M., Eastern time, on the Expiration Date, at an exercise
price per share equal to $3.34 (the exercise price in effect from time to time
hereafter being herein called the "Warrant Price") ________ shares ("Warrant
Shares") of Common Stock, par value $0.01per share ("Common Stock"). The number
of Warrant Shares purchasable upon exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time as described herein.
This Warrant has been issued pursuant to the terms of the Purchase
Agreement dated on or about the date hereof between the Company and the
Warrantholder. Capitalized terms used herein and not defined shall have the
meaning specified in the Purchase Agreement.
Section 1. Registration. The Company shall maintain books for the
------------
transfer and registration of the Warrant. Upon the initial issuance of the
Warrant, the Company shall issue and register the Warrant in the name of the
Warrantholder.
Section 2. Transfers. As provided herein, the Warrant may be
---------
transferred only pursuant to a registration statement filed under the Securities
Act of 1933, as amended ("1933 Act") or an exemption from registration
thereunder. Subject to such restrictions, the Company shall transfer from time
to time, the Warrant, upon the books to be maintained by the Company for that
purpose, upon surrender thereof for transfer properly endorsed or accompanied
by appropriate instructions for transfer upon any such transfer, and a new
Warrant shall be issued to the transferee and the surrendered Warrant shall be
canceled by the Company.
Section 3. Exercise of Warrant. Subject to the provisions hereof,
-------------------
the
1
<PAGE>
Warrantholder may exercise the Warrant in whole or in part at any time upon
surrender of the Warrant, together with delivery of the duly executed Warrant
exercise form attached hereto (the "Exercise Agreement"), to the Company during
normal business hours on any business day at the Company's principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the holder hereof), and upon (i) payment to the Company in cash, by
certified or official bank check or by wire transfer for the account of the
Company of the Warrant Price for the Warrant Shares specified in the Exercise
Agreement or (ii) delivery to the Company of a written notice of an election to
effect a "Cashless Exercise" (as defined below) for the Warrant Shares specified
in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to
be issued to the holder hereof or such holder's designee, as the record owner of
such shares, as of the close of business on the date on which this Warrant shall
have been surrendered (or evidence of loss, theft or destruction thereof), the
completed Exercise Agreement shall have been delivered, and payment shall have
been made for such shares as set forth above. Certificates for the Warrant
Shares so purchased, representing the aggregate number of shares specified in
the Exercise Agreement, shall be delivered to the holder hereof within a
reasonable time, not exceeding two (2) business days, after this Warrant shall
have been so exercised. The certificates so delivered shall be in such
denominations as may be requested by the holder hereof and shall be registered
in the name of such holder or such other name as shall be designated by such
holder. If this Warrant shall have been exercised only in part, then, unless
this Warrant has expired, the Company shall, at its expense, at the time of
delivery of such certificates, deliver to the holder a new Warrant representing
the number of shares with respect to which this Warrant shall not then have been
exercised.
To effect a Cashless Exercise, the holder shall submit to the Company
with the Exercise Agreement, written notice of the holder's intention to do so,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof. In the event of a
Cashless Exercise, in lieu of paying the Warrant Price in cash, the holder shall
surrender this Warrant for that number of shares of Common Stock determined by
multiplying the number of Warrant Shares to which it would otherwise be entitled
by a fraction, the numerator of which shall be the difference between the then
current Market Price per share of the Common Stock and the Warrant Price, and
the denominator of which shall be the then current Market Price per share of the
Common Stock. For this purpose, the "Market Price" of the Common Stock shall be
the average of the closing bid prices of the Common Stock as reported by the
Nasdaq Small Cap Market for the thirty (30) trading days immediately preceding
the exercise date.
Section 4. Compliance with the Securities Act of 1933. Neither this
------------------------------------------
Warrant nor the Common Stock issued upon exercise hereof nor any other security
issued or issuable upon exercise of this Warrant may be offered or sold except
as provided in this agreement and in conformity with the 1933 Act and then only
against receipt of an agreement of such person to whom such offer of sale is
made to comply with the provisions of this Section 4 with respect to any resale
or other disposition of such security. The Company may cause the legend set
forth on the first page of this Warrant to be set forth on each Warrant or
similar legend on any security issued or issuable upon exercise of this Warrant
until the Warrant Shares have been registered for resale under the Registration
Rights Agreement or until Rule 144(k) is available, unless counsel
2
<PAGE>
for the Company is of the opinion as to any such security that such legend is
unnecessary.
Section 5. Payment of Taxes. The Company will pay any documentary
----------------
stamp taxes attributable to the initial issuance of Warrant Shares issuable upon
the exercise of the Warrant; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any transfer
involved in the issue or delivery of any certificates for Warrant Shares in a
name other than that of the registered holder of the Warrant in respect of which
such shares are issued, and in such case, the Company shall not be required to
issue or deliver any certificate for Warrant Shares or any Warrant until the
person requesting the same has paid to the Company the amount of such tax or has
established to the Company's satisfaction that such tax has been paid. The
holder shall be responsible for income taxes due under federal or state law, if
any such tax is due.
Section 6. Mutilated or Missing Warrants. In case the Warrant shall
-----------------------------
be mutilated, lost, stolen, or destroyed, the Company shall issue in exchange
and substitution of and upon cancellation of the mutilated Warrant, or in lieu
of and substitution for the Warrant lost, stolen or destroyed, a new Warrant of
like tenor and for the purchase of a like number of Warrant Shares, but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction of the Warrant, and with respect to a lost, stolen or
destroyed Warrant, reasonable indemnity or bond, if requested by the Company.
Section 7. Reservation of Common Stock. The Company hereby
---------------------------
represents and warrants that there have been reserved, and the Company shall at
all applicable times keep reserved, out of the authorized and unissued Common
Stock, a number of shares sufficient to provide for the exercise of the rights
of purchase represented by the Warrant, and the transfer agent for the Common
Stock ("Transfer Agent"), and every subsequent transfer agent for the Common
Stock or other shares of the Company's capital stock issuable upon the exercise
of any of the right of purchase aforesaid, shall be irrevocably authorized and
directed at all times to reserve such number of authorized and unissued shares
of Common Stock as shall be requisite for such purpose. The Company agrees that
all Warrant Shares issued upon exercise of the Warrant shall be, at the time of
delivery of the certificates for such Warrant Shares, duly authorized, validly
issued, fully paid and non-assessable shares of Common Stock of the Company.
The Company will keep a conformed copy of this Warrant on file with the Transfer
Agent and with every subsequent transfer agent for the Common Stock or other
shares of the Company's capital stock issuable upon the exercise of the rights
of purchase represented by the Warrant. The Company will supply from time to
time the Transfer Agent with duly executed stock certificates required to honor
the outstanding Warrant.
Section 8. Warrant Price. The Warrant Price, subject to adjustment
-------------
as provided in Section 9 hereof, shall, if payment is made in cash or by
certified check, be payable in lawful money of the United States of America.
Section 9. Adjustments. Subject and pursuant to the provisions of
-----------
this Section 9, the Warrant Price and number of Warrant Shares subject to this
Warrant shall be subject to adjustment from time to time as set forth
hereinafter.
3
<PAGE>
(a) If the Company shall at any time or from time to time while the
Warrant is outstanding, pay a dividend or make a distribution on its Common
Stock in shares of Common Stock, subdivide its outstanding shares of Common
Stock into a greater number of shares or combine its outstanding shares into a
smaller number of shares or issue by reclassification of its outstanding shares
of Common Stock any shares of its capital stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then the number of Warrant Shares
purchasable upon exercise of the Warrant and the Warrant Price in effect
immediately prior to the date upon which such change shall become effective,
shall be adjusted by the Company so that the Warrantholder thereafter exercising
the Warrant shall be entitled to receive the number of shares of Common Stock or
other capital stock which the Warrantholder would have received if the Warrant
had been exercised immediately prior to such event. Such adjustment shall be
made successively whenever any event listed above shall occur.
(b) If any capital reorganization, reclassification of the capital
stock of the Company, consolidation or merger of the Company with another
corporation, or sale, transfer or other disposition of all or substantially all
of the Company's properties to another corporation shall be effected, then, as a
condition of such reorganization, reclassification, consolidation, merger, sale,
transfer or other disposition, lawful and adequate provision shall be made
whereby each Warrantholder shall thereafter have the right to purchase and
receive upon the basis and upon the terms and conditions herein specified and in
lieu of the Warrant Shares immediately theretofore issuable upon exercise of the
Warrant, such shares of stock, securities or properties as may be issuable or
payable with respect to or in exchange for a number of outstanding Warrant
Shares equal to the number of Warrant Shares immediately theretofore issuable
upon exercise of the Warrant, had such reorganization, reclassification,
consolidation, merger, sale, transfer or other disposition not taken place, and
in any such case appropriate provision shall be made with respect to the rights
and interests of each Warrantholder to the end that the provisions hereof
(including, without limitations, provision for adjustment of the Warrant Price)
shall thereafter be applicable, as nearly equivalent as may be practicable in
relation to any shares of stock, securities or properties thereafter deliverable
upon the exercise thereof. The Company shall not effect any such consolidation,
merger, sale, transfer or other disposition unless prior to or simultaneously
with the consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation or merger, or the corporation
purchasing or otherwise acquiring such assets or other appropriate corporation
or entity shall assume, by written instrument executed and delivered to the
Company, the obligation to deliver to the holder of the Warrant such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to purchase and the other obligations under this
Warrant. The provisions of this paragraph (b) shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers, sales,
transfers or other dispositions.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of Common Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness or assets (other than cash
dividends or cash distributions payable out of consolidated earnings or earned
surplus or dividends or distributions referred to in Section 9(a)),
4
<PAGE>
or subscription rights or warrants, the Warrant Price to be in effect after such
record date shall be determined by multiplying the Warrant Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the total number of shares of Common Stock outstanding multiplied by
the Market Price per share of Common Stock (as determined pursuant to Section
3), less the fair market value (as determined by the Company's Board of
Directors in good faith) of said assets or evidences of indebtedness so
distributed, or of such subscription rights or warrants, and the denominator of
which shall be the total number of shares of Common Stock outstanding multiplied
by such current Market Price per share of Common Stock. Such adjustment shall
be made successively whenever such a record date is fixed.
(d) If the Company shall at any time or from time to time after the
date of issuance hereof issue or sell in a financing transaction (which shall
not include any sales or issuances of Common Stock after the date hereof
pursuant to contractual obligations in effect on the date hereof), (A) any
shares of Common Stock for a consideration per share less than the Warrant Price
(as defined above) on the date of such issuance or (B) any securities
convertible into shares of Common Stock ("Convertible Securities") for which the
conversion or exercise price (which, for the purposes of this Section 9(d),
shall be the total obtained by dividing (x) the total amount received by the
Company as consideration for the issuance of such Convertible Securities plus
any amount payable to the Company on conversion or exercise thereof, by (y) the
number of shares of Common Stock issuable upon the conversion or exercise
thereof) is less than the Warrant Price (as defined above) on the date of such
issuance, then the Warrant Price shall be reduced to a price equal to 125% of
such per share consideration, or conversion or exercise price. Such adjustments
shall be made successively whenever such sales are made.
(e) An adjustment shall become effective immediately after the record
date in the case of each dividend or distribution and immediately after the
effective date of each other event which requires an adjustment.
(f) If, as a result of an adjustment made pursuant to Section 9, the
holder of the Warrant shall become entitled to receive any shares of capital
stock of the Company other than shares of Common Stock, the number of such other
shares so receivable upon exercise of the Warrant shall be subject thereafter to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Warrant Shares contained in
this Warrant.
Section 10. Fractional Interest. The Company shall not be required
-------------------
to issue fractions of Warrant Shares upon the exercise of the Warrant. If any
fraction of a Warrant Share would, except for the provisions of this Section, be
issuable upon the exercise of the Warrant (or specified portions thereof), the
Company shall round such calculation to the nearest whole number and disregard
the fraction.
Section 11. Benefits. Nothing in this Warrant shall be construed to
--------
give any person, firm or corporation (other than the Company and the
Warrantholder) any legal or equitable right, remedy or claim, it being agreed
that this Warrant shall be for the sole and exclusive benefit of the Company and
the Warrantholder.
5
<PAGE>
Section 12. Notices to Warrantholder. Upon the happening of any
------------------------
event requiring an adjustment of the Warrant Price, the Company shall forthwith
give written notice thereof to the Warrantholder at the address appearing in the
records of the Company and in the manner provided by Section 14 hereof, stating
the adjusted Warrant Price and the adjusted number of Warrant Shares resulting
from such event and setting forth in reasonable detail the method of calculation
and the facts upon which such calculation is based. The certificate of the
Company's independent certified public accountants shall be conclusive evidence
of the correctness of any computation made, absent manifest error. Failure to
give such notice to the Warrantholder or any defect therein shall not affect the
legality or validity of the subject adjustment.
Section 13. Identity of Transfer Agent. The Transfer Agent for the
--------------------------
Common Stock is Corporate Stock Transfer. Forthwith upon the appointment of any
subsequent transfer agent for the Common Stock or other shares of the Company's
capital stock issuable upon the exercise of the rights of purchase represented
by the Warrant, the Company will fax to the Warrantholder a statement setting
forth the name and address of such transfer agent.
Section 14. Notices. Any notice pursuant hereto to be given or made
-------
by the Warrantholder to or on the Company shall be sufficiently given or made
personally or if sent by an internationally recognized courier by next day or
two day delivery service, addressed as follows:
ImaginOn, Inc.
1313 Laurel Street, Suite No. 1
San Carlos, CA 94070
USA
Telephone: (650) 596 9300
Telefax: (650) 596 9350
Attention: Chief Executive Officer
or such other address as the Company may specify in writing by notice to the
Warrantholder complying as to delivery with the terms of this Section 14.
Any notice pursuant hereto to be given or made by the Company to the
Warrantholder shall be sufficiently given or made if personally delivered or if
sent by an internationally recognized courier service by next day or two-day
service, to the address set forth on the books of the Company or, as to each of
the Company and the Warrantholder, at such other address as shall be designated
by such party by written notice to the other party complying as to delivery with
the terms of this Section 14.
All such notices, requests, demands, directions and other
communications shall, when sent by courier, be effective two (2) days after
delivery to such courier as provided and addressed as aforesaid.
Section 15. Registration Rights. The initial holder of this Warrant
-------------------
is entitled to
6
<PAGE>
the benefit of certain registration rights in respect of the Warrant Shares as
provided in the Registration Rights Agreement.
Section 16. Successors. All the covenants and provisions hereof by
----------
or for the benefit of the Investor shall bind and inure to the benefit of its
respective successors and assigns hereunder.
Section 17. Governing Law. This Warrant shall be deemed to be a
-------------
contract made under the laws of the State of New York, and for all purposes
shall be construed in accordance with the laws of said State.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant to be duly
executed, as of the day and year first above written.
IMAGINON, INC.
By:________________________________
Name: David M. Schwartz
Title Chief Executive Officer
Attest:
______________________________
James A. Newcomb
Chief Financial Officer
8
<PAGE>
IMAGINON, INC.
WARRANT EXERCISE FORM
ImaginOn, Inc.
1313 Laurel Street, Suite No. 1
San Carlos, CA 94070
USA
Attention: Chief Executive Officer
This undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant ("Warrant") for, and to purchase
thereunder by (CHECK AS APPLICABLE) [_] payment by cash, wire or certified
check; [_] conversion of the within Warrant by surrender of the Warrant,
_______________ shares of Common Stock* ("Warrant Shares") provided for therein,
and requests that certificates for the Warrant Shares be issued as follows:
________________________________
Name
________________________________
Address
________________________________
________________________________
and, if the number of Warrant Shares shall not be all the Warrant Shares
purchasable upon exercise of the Warrant, that a new Warrant for the balance of
the Warrant Shares be issued.
* NOTE: If conversion of the Warrant is made by surrender of the Warrant and
the number of shares indicated exceeds the maximum number of shares to
which a holder is entitled, the Company will issue such maximum number
of shares purchasable upon exercise of the Warrant be registered in
the name of the undersigned Warrantholder or the undersigned's
Assignee as below indicated and delivered to the address stated below.
Dated:___________________, ____
Signature:__________________________________
__________________________________
Name (please print)
__________________________________
Address
__________________________________
<PAGE>
SCHEDULE 4.1--SUBSIDIARIES
ImaginOn Inc., a Delaware corporation, operates through three subsidiaries:
1. ImaginOn.com- a California corporations in good standing
2. iNow, a California corporation in good standing, acquired in February, 1999
3. ImaginOn Digital Productions (IDP), a Colorado corporation in good standing,
also acquired in 1999.
<PAGE>
- --------------------------------------------------------------------------------
IMAGINON, INC. - Schedule 4.3
(a) Authorized capital stock of the Company:
Common stock 50,000,000 shares
Preferred stock 5,000,000 shares
(b) Number of shares of capital stock issued and
outstanding
Common stock: 41,205,887 shares
Preferred stock, Series F 4000 shares
Note: Information provided above excerpted from the September 30, 1999,
Form 10-QSB.
(c) 2.5 million shares to be issued under employee equity incentive plan
over 10 years.
(d) IMAGINON
Common stock issuable upon conversion of
series F Preferred Stock 2,836,905
Common stock issuable upon exercise of
group F warrant 122,553
Shares issuable under options outstanding
under 1994 stock option plan 0
Shares issuable under options outstanding
under 1997 stock option plan 847,302
Shares issuable under warrants to
purchase common stock 519,845
Shares issuable under options
issued in 1998 1,100,000
---------
5,426,605
Note: Information above excerpted from S-1/A filing and other SEC filings
<PAGE>
SCHEDULE 4.8-NO MATERIAL ADVERSE CHANGE
NONE.
<PAGE>
SCHEDULE 4.11- NO MATERIAL BREACH,VIOLATION, OR DEFAULT
NONE.
<PAGE>
- --------------------------------------------------------------------------------
4.16 Intellectual Property
---------------------
Trademarks
The Company has one registered trademark and eighteen pending trademark
applications and will aggressively file new applications as appropriate. The
following table sets out the Company's trademarks.
<TABLE>
<CAPTION>
Mark Registration/Application No.
---- -----------------------------
<S> <C>
IMAGINON U.S. Reg. No. 2,255,045
WEBZINGER (Stylized) App. Ser. No. 75/746,739
STOP SEARCHING, START ZINGING App. Ser. No. 75/742,124
YOUR PERSONAL RESEARCH ENGINE App. Ser. No. 75/742,195
WEBZINGER MASCOT DESIGN App. Ser. No. 75/746,740
WORLD CITIES 2000 and Design App. Ser. No. 75/746,737
WEBZINGER (Stylized) App. Ser. No. 75/750,694
THE WORLD'S FIRST RESEARCH ENGINE App. Ser. No. 75/750,693
IMAGINON Filed: November 10, 1999.
Awaiting serial number.
IMAGINON and Design Filed: November 10, 1999.
Awaiting serial number.
IMON.COM' Filed: November 23, 1999.
Awaiting serial number.
IMON.COM and Design Filed: November 23, 1999.
Awaiting serial number.
LIVE AT A HIGHER BANDWIDTH Filed: December 15, 1999.
Awaiting serial number.
</TABLE>
- ------------------------------
/1/ On October 4, 1999, the Company received a letter from ImOn, Inc., the owner
of the IMON.NET domain name, demanding that the Company cease its use of the
IMON and IMON.COM names and marks. The Company responded to this demand,
asserted the basis for the Company's rights in the IMON and IMON.COM names and
marks, and believes that this matter has been resolved.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
WORLDCITIES 2000 Filed: November 10, 1999.
Awaiting serial number.
IMAGINAUTHOR Filed: December 15, 1999.
Awaiting serial number.
IMAGINAUTHOR and Design Filed: December 15, 1999.
Awaiting serial number.
IMON.COM TV Filed: December 15, 1999.
Awaiting serial number.
IMON.COM Filed: December 15, 1999.
Awaiting serial number.
IMON.COM and Design Filed: December 15, 1999.
Awaiting serial number.
</TABLE>
Patents
The Company's technology is covered by two U.S. patents. U.S. Patent No.
5,905,988, owned by the Company, covers the Company's proprietary method and
apparatus for database transformation and adaptive playback. The Company's
technology is also covered by a patent licensed from Atari. U.S. Patent No.
5,607,356, licensed by the Company from Atari, covers an interactive game film.
The Company also owns U.S. Patent No. 5,969,559, which covers a method and
apparatus that uses the power grid for clock distribution in semiconductor
integrated circuits.
There can be no assurance that these patents will provide a competitive
advantage or will afford protection against competitors with similar technology,
or that such patents will not be challenged successfully or circumvented by
competitors.
Copyrights
The Company will pursue an aggressive proprietary strategy. To that end,
the Company is in the process of filing multiple copyright applications covering
its source code and other copyrightable proprietary information.
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE 4.19-FINANCIAL STATEMENTS
NONE.
<PAGE>
EXHIBIT 11.1
IMAGINON, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net loss $(7,047,082) $(1,740,202)
Amortization of discount on preferred stock (1,255,319)
Series F preferred stock dividend (297,868)
Series E preferred stock dividend (42,000)
----------- -----------
Net loss applicable to common shareholders $(8,642,269) $(1,740,202)
=========== ===========
Weighted average number of common shares outstanding 39,006,214 20,483,093
Common equivalent shares representing shares issuable upon exercise of
outstanding options and warrants and conversion of preferred stock -*- -*-
----------- -----------
Basic and diluted loss per common share $ (0.22) $ (0.08)
=========== ===========
</TABLE>
* No impact to weighted average number of shares as the inclusion of additional
shares assuming the exercise of outstanding options and warrants and conversion
of preferred stock would have been antidilutive.
Diluted and supplementary net loss per share are not presented as the
amounts are not dilutively or incrementally different from basic net loss per
share amounts.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S ANNUAL REPORT ON FORM 10KSB
FOR THE YEAR ENDED DECEMBER 31, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,959,694
<SECURITIES> 0
<RECEIVABLES> 2,059,371
<ALLOWANCES> 19,400
<INVENTORY> 21,504
<CURRENT-ASSETS> 7,090,201
<PP&E> 327,707
<DEPRECIATION> (167,973)
<TOTAL-ASSETS> 9,344,276
<CURRENT-LIABILITIES> 1,039,162
<BONDS> 0
0
1,865,000
<COMMON> 441,241
<OTHER-SE> 5,998,873
<TOTAL-LIABILITY-AND-EQUITY> 9,344,276
<SALES> 339,790
<TOTAL-REVENUES> 339,790
<CGS> 198,001
<TOTAL-COSTS> 7,338,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 905
<INCOME-PRETAX> (7,047,082)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,047,082)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,047,082)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
</TABLE>
