As filed with the Securities and Exchange Commission on September 28, 2005
Commission File No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
IMEDIA INTERNATIONAL, INC.
_____________________________________________
(Name of small business issuer in its charter)
Delaware 9995 56-2428786
_____________________________ ____________________________ ___________________
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
David G. MacEachern
Chief Executive Officer
1721 21st Street
Santa Monica, California 90404
(310) 453-4499
_________________________________________________________________
(Address and telephone number of principal executive offices)
(Name, address, including zip code, and telephone number, including
area code, of agent for service of process)
Copies to:
Mark Y. Abdou, Esq.
Richardson & Patel LLP
10900 Wilshire Boulevard, Suite 500
Los Angeles, California 90024
Telephone (310) 208-1182
Approximate date of proposed sale to public: From time to time after the
effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Calculation of Registration Fee
Proposed
Maximum
Offering Proposed Maximum Amount of
Title of Each Class of Amount to be Price Aggregate Registration
Securities to be Registered Registered Per Share Offering Price Fee
- ---------------------------- -------------- ----------- ----------------- ------------
<s> <c> <c> <c> <c>
Common shares 5,184,334 $0.55 $ 2,851,383.70 $ 335.61(1)
- --------------------------------------------------------------------------------------
Common shares
underlying Warrants 4,002,404 $0.55 $ 2,201,322.20 $ 259.10(2)
- --------------------------------------------------------------------------------------
Common Shares underlying
Series A and Series B
Preferred Stock 22,978,750(3) $0.55 $12,638,312.50 $1,487.53(2)
- --------------------------------------------------------------------------------------
Common shares underlying
Warrants issued in
connection with Series A
Preferred Stock 7,600,000 $0.55 $4,180,000.00 $ 491.99(2)
- --------------------------------------------------------------------------------------
Common shares underlying
Warrants issued in
connection with Series B
Preferred Stock 14,760,000 $0.60 $8,856,000.00 $1,042.35(4)
- --------------------------------------------------------------------------------------
Total 54,525,488 $3,616.57
- --------------------------------------------------------------------------------------
(1) Calculated in accordance with Rule 457(c) under the Securities Act on the basis
of the average of the high and low prices of the common stock on September 23,
2005, as quoted on the OTC Bulletin Board.
(2) Calculated in accordance with Rule 457(g) under the Securities Act on the basis
of the average of the high and low prices of the common stock on September 23,
2005, as quoted on the OTC Bulletin Board.
(3) Includes shares of our common stock that we estimate in good faith are issuable
to holders of Series A 6% Convertible Preferred Stock and Series B Convertible
Preferred Stock.
(4) Calculated in accordance with Rule 457(g) under the Securities Act based on the
exercise price of the Warrants of $0.60 per share of common stock.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine
[LOGO]
54,525,488 Shares of Common Stock
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This prospectus relates to the sale of up 54,525,488 shares of our common
stock by the selling security holders, consisting of:
. 22,978,750 common shares issuable pursuant to the conversion of
currently issued and outstanding Series A 6% Convertible Preferred
Stock and Series B 6% Convertible Preferred Stock;
. 7,600,000 common shares issuable pursuant to the exercise of
currently issued and outstanding common share purchase warrants held
by holders of our Series A 6% Convertible Preferred Stock;
. 14,760,000 common shares issuable pursuant to the exercise of
currently issued and outstanding common share purchase warrants held
by holders of our Series B 6% Convertible Preferred Stock; and
. 5,184,334 currently issued and outstanding common shares.
. 4,002,404 common shares issuable pursuant to the exercise of
currently issued and outstanding common share purchase warrants held
by our security holders, other than the security holders of Series A
6% Convertible Preferred Stock or Series B 6% Convertible Preferred
Stock.
This offering is not being underwritten. The prices at which the selling
security holders may sell the shares will be determined by the prevailing
market price for the shares or in negotiated transactions. We will not receive
proceeds from the sale of our shares by the selling security holders.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"IMNL." On September 23, 2005, the last reported sale price for our common
stock as reported on the OTC Bulletin Board was $0.55 per share.
Pursuant to registration rights granted to the holders of our Series A 6%
Convertible Preferred Stock and Series B 6% Convertible Preferred Stock, we
are obligated to register the shares of common stock issuable upon conversion
of the Series A 6% Convertible Preferred Stock and Series B 6% Convertible
Preferred Stock and the shares issuable upon exercise of warrants held by such
holders.
You should rely only on the information contained in this prospectus to
make your investment decision. We have not authorized anyone to provide you
with different information. The selling security holders are not offering
these securities in any state where the offer is not permitted.
Any broker-dealer executing sell orders on behalf of a selling security
holder may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933. Commissions received by any broker-dealer may be
deemed to be underwriting commissions under the Securities Act of 1933.
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on PAGE 4 for a discussion of these risks.
Neither the United States Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the common shares offered
for sale under this prospectus or the merits of that offering, or has
determined that this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
______
The date of this prospectus is [-----------], 2005
TABLE OF CONTENTS
Page
SUMMARY INFORMATION.......................................................1
RISK FACTORS..............................................................4
Risks Relating to our Business.........................................4
Risks Relating to an Investment in Our Securities.....................11
USE OF PROCEEDS..........................................................15
SELLING SECURITY HOLDERS.................................................16
PLAN OF DISTRIBUTION.....................................................22
DESCRIPTION OF BUSINESS..................................................24
DESCRIPTION OF PROPERTY..................................................28
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................29
LEGAL PROCEEDINGS........................................................35
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.............35
EXECUTIVE COMPENSATION...................................................37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........40
DESCRIPTION OF SECURITIES................................................41
INTEREST OF NAMED EXPERTS AND COUNSEL....................................43
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES..........................................................43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................45
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................45
REPORTS TO SECURITY HOLDERS..............................................46
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.....................................................47
FINANCIAL STATEMENTS.....................................................48
EXHIBITS...............................................................II-9
SIGNATURES.............................................................II-11
SUMMARY INFORMATION
This summary highlights important information about our company and business.
Because it is a summary, it may not contain all of the information that is
important to you. To understand this offering fully, you should read this
entire prospectus and the financial statements and related notes included in
this prospectus carefully, including the "Risk Factors" section. Unless the
context requires otherwise, "we," "us," "our", " and the "company" and similar
terms refer to iMedia International, Inc., and our subsidiaries collectively,
while the term "iMedia" refers to iMedia International, Inc., in its corporate
capacity.
The Company
iMedia International Inc. is a digital convergence media company and
interactive multi-media content creator. We are strategically positioned and
poised to exploit the paradigm-shift created by the new digital world. This
shift is now affecting all media, communications, marketing and commerce
globally. Businesses, governments and organizations are demanding immediate
accountability and definitive results for each marketing and communications
dollar spent.
The Internet, print, broadcast and wireless communications independently reach
an audience, but by themselves cannot fulfill these demands. Over the past
five years, iMedia has created, developed and implemented "Digital iMedia
Solutions" that successfully fulfill these demands. Our solutions converge
print, multi-media, broadcast and the Internet together, that deliver an
engaging, interactive multi-media presentation to any targeted audience and
instantly determine the results.
Because of its limitations, most traditional media is limited to creating
brand, product or organization awareness. There is usually very little 'call
to action' for the consumer, and the effect is that advertisers only enjoy a
fractional return on investment for each advertising dollar. Our digital
solutions not only allow for impressive branding opportunities, but more
importantly inform the consumer and then lead the consumer to make a purchase
or transaction immediately. Because our digital media is interactive, we can
measure the consumer's interest and response throughout the entire process,
and report this response to the advertiser or sponsor all in real-time.
Our proprietary brands, technologies and business models provide us the
opportunity to deliver rich, engaging interactive digital media to any
targeted audience, and to participate in the unlimited retail transactional
opportunities that result from each consumer's response. We have effectively
converged digital multi-media, interactive advertising and retail sales with
efficient and economical distribution devices that have mass appeal.
We have multiple revenue models, each with multiple revenue streams. We
incorporate both business-to-business and business-to-consumer models.
Revenues are generated from advertising, production, replication,
distribution, transactions, data collection, data sales, subscriptions,
product merchandising and from ancillary follow-up marketing services. Our
overall business model has tremendous scalability and continuity. Each
division co-brands and supports the products, services brands and sponsors
offered/featured by the Company's other divisions. Revenue models are modular
and transition easily from vertical market to vertical market, and work in any
country in the world. It is the scalability of our underlying business models
along with the a multitude of vertical markets that provide for growth
opportunities as our digital solutions become adopted as the backbone of the
new-media, online retailing and advertising industries.
iMedia International, Inc., is a Delaware corporation. Our principal executive
offices are located at 1721 21st Street, Santa Monica, California 90404. Our
telephone number is (310) 453-4499.
The Offering
This prospectus relates to the sale of up 54,525,488 shares of our common
stock by the selling security holders, consisting of:
. 22,978,750 common shares issuable pursuant to the conversion of
currently issued and outstanding Series A 6% Convertible Preferred
Stock and Series B 6% Convertible Preferred Stock;
. 7,600,000 common shares issuable pursuant to the exercise of currently
issued and outstanding common share purchase warrants held by holders
of our Series A 6% Convertible Preferred Stock;
1
. 14,760,000 common shares issuable pursuant to the exercise of
currently issued and outstanding common share purchase warrants held
by holders of our Series B 6% Convertible Preferred Stock; and
. 5,184,334 currently issued and outstanding common shares.
. 4,002,404 common shares issuable pursuant to the exercise of currently
issued and outstanding common share purchase warrants held by our
security holders, other than the security holders of Series A 6%
Convertible Preferred Stock or Series B 6% Convertible Preferred
Stock.
On August 22, 2005, we sold $4,920,000 in shares of Series B 6% Convertible
Preferred Stock (the "Series B Preferred Stock") and warrants to purchase up
to 14,760,000 shares of common stock. The warrants are exercisable for five
years at $0.60 per share. Each share of Series B Preferred Stock may be
converted into shares of common stock at a price of $0.40 per share. In
addition, holders of outstanding Series B Preferred Stock will have a right to
participate in any of our future debt or equity financings.
On May 23, 2005, we sold $3,040,000 in shares of Series A 6% Convertible
Preferred Stock (the "Series A Preferred Stock"), warrants to purchase up to
7,600,000 shares of common stock and a warrant (the "Short Term Warrant") to
purchase (i) up to $1,200,000 in Series A Preferred Stock and (ii) a warrant
to purchase common stock. The warrants are exercisable for five years at $0.60
per share. Each share of Series A Preferred Stock may be converted into shares
of common stock at a price of $0.40 per share. In addition, holders of
outstanding Series A Preferred Stock will have a right to participate in any
of our future debt or equity financings.
We agreed to file a registration statement with the Commission in order to
register the resale of the shares issuable upon conversion of the Series A
Preferred Stock, the Series B Preferred Stock and the shares issuable upon
exercise of the warrants issued to such holders. We are not registering any
shares of common stock issuable upon conversion of any Preferred Stock or
exercise of any Long Term Warrant which are issued upon any exercise of the
Short Term Warrant.
As of September 1, 2005, we had 71,532,563 shares of common stock outstanding.
The number of shares registered under this prospectus would represent
approximately 46% of the total common stock outstanding, assuming conversion
of the Series A Preferred Stock, the Series B Preferred Stock and upon
issuance of the common stock being registered hereunder that is issuable upon
exercise of our warrants. The number of shares ultimately offered for sale by
the selling security holders is dependent on whether and to what extent such
holders convert their shares of Series A Preferred Stock, the Series B
Preferred Stock or exercise their warrants.
The common shares offered under this prospectus may be sold by the selling
security holders on the public market, in negotiated transactions with a
broker-dealer or market maker as principal or agent, or in privately
negotiated transactions not involving a broker or dealer. Information
regarding the selling security holders, the common shares they are offering to
sell under this prospectus, and the times and manner in which they may offer
and sell those shares is provided in the sections of this prospectus captioned
"Selling Security Holders" and "Plan of Distribution."
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Such forward-looking
statements include statements regarding, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends in
our industry, (d) our future financing plans, and (e) our anticipated needs
for working capital. Forward-looking statements, which involve assumptions and
describe our future plans, strategies, and expectations, are generally
identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend," or "project" or the negative of
these words or other variations on these words or comparable terminology. This
information may involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievements to be
materially different from the future results, performance, or achievements
expressed or implied by any forward-looking statements. These statements may
be found under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," as well as in this prospectus
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including,
without limitation, the risks outlined under "Risk Factors" and matters
described in this prospectus generally. This prospectus may contain market
data related to our business, which may have been included in articles
published by independent industry sources. Although we believe these sources
are reliable, we have not independently verified this market data. This market
data includes projections that are based on a number of assumptions. If any
one or more of these assumptions turns out to be incorrect, actual results may
differ materially from the projections based on these assumptions. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. In
addition to the information expressly required to be included in this filing,
we will provide such further material information, if any, as may be necessary
to make the required statements, in light of the circumstances under which
they are made, not misleading.
Each forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this prospectus as well as other pubic reports
which may be filed with the United States Securities and Exchange Commission
(the "SEC"). You should not place undue reliance on any forward-looking
statement as a prediction of actual results or developments. We are not
obligated to update or revise any forward-looking statement contained in this
prospectus to reflect new events or circumstances, unless and to the extent
required by applicable law.
3
RISK FACTORS
An investment in our common shares involves a high degree of risk and is
subject to many uncertainties. These risks and uncertainties may adversely
affect our business, operating results and financial condition. Our most
significant risks and uncertainties are described below; however, they are not
the only risks we face. If any of the following risks actually occur, our
business, financial condition, or results or operations could be materially
adversely affected, the trading of our common stock could decline, and you may
lose all or part of your investment therein. You should acquire shares of our
common stock only if you can afford to lose your entire investment. In order
to attain an appreciation for these risks and uncertainties, you should read
this prospectus in its entirety and consider all of the information and
advisements contained in this prospectus, including the following risk factors
and uncertainties.
Risks Relating to our Business
We have a limited operating history with significant losses and expect
losses to continue for the foreseeable future. Should we continue to
incur losses for a significant amount of time, the value of your
investment in the common shares could be adversely affected and you could
even lose your entire investment.
We have yet to establish any history of profitable operations. On an accrual
basis, we have incurred annual net operating losses of $(4,914,516) during the
year ended December 31, 2004 and $(6,969,365) for the six months ended June
30, 2005. As a result, at June 30, 2005, we had an accumulated deficit of
$(15,521,181). Our revenues have not been sufficient to sustain our
operations. Also, our net losses may increase from: the development of new
products; the acquisition of licenses and rights to other business, products
and services; research and development activities; marketing activities; and
the general and administrative expenses associated with the above activities.
These efforts may prove to be more expensive than we currently anticipate,
which could further increase our net losses. We cannot predict when, or if, we
will become profitable in the future. Furthermore, as digital media and
digital publishing are continually developing technologies, the level of
profitability, or lack thereof, cannot be accurately predicted. Even if we
achieve profitability, we may not be able to sustain it.
Our independent auditors have added an explanatory paragraph regarding
our ability to continue as a going concern. If we cannot successfully
continue as a going concern, you may lose your entire investment in our
common shares.
We have a history of operating losses that are likely to continue in the
future. Our independent auditors have added an explanatory paragraph to their
audit opinion issued in connection with the consolidated financial statements
for the year ended December 31, 2004, to the effect that our significant
losses from operations and our dependence on equity and debt financing raise
substantial doubt about our ability to continue as a going concern. We may not
be successful in addressing these issues. If we cannot successfully continue
as a going concern, our shareholders may lose their entire investment in our
common shares. Our ability to obtain additional funding will determine our
ability to continue as a going concern. Our financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
We may require additional financing to sustain our operations, and
without it we may not be able to continue operations. Our inability to
raise additional working capital at all or to raise it in a timely manner
would negatively impact our ability to fund our operations, to generate
revenues, and to otherwise execute our business plan, leading to the
reduction or suspension of our operations and ultimately our going out of
business. Should this occur, the value of your investment in the common
shares could be adversely affected, and you could even lose your entire
investment.
We received $3,040,000 in connection with our private placement of our Series
A 6% Convertible Preferred Stock and $4,920,000 in connection with our private
placement of our Series B 6% Convertible Preferred Stock. Although we received
an aggregate of $7,960,000, we still may not have enough funding to continue
our operations. We have required substantial financing to fund our growth and
operations since our inception. Our long-term financial success depends on our
ability to generate sufficient revenue and cash flow to offset operating
expenses. To the extent we do not generate sufficient revenues and cash flow
to offset expenses we will require further financing to fund our ongoing
operations. We cannot assure you that any additional financing will be
available or if available, that it will be on favorable terms. The terms of
any financing that we enter into will vary depending on many factors
including, among other things, our then current financial condition, the
market price of our common stock, and other characteristics and terms of our
capital structure including outstanding options and warrants. We may seek to
raise additional capital through private offerings of equity securities or
debt financings. Our issuance of additional equity securities could cause
dilution to holders of our common stock and may adversely affect the market
price of our common stock. The incurrence of additional debt could increase
our interest expense and other debt service obligations and could result in
the imposition of covenants that restrict our operational and financial
flexibility. If we are unable to obtain additional financing, our business
prospects, operating results and financial condition may be materially and
adversely affected to such an extent that we are forced to restructure, sell
some of our assets or curtail our operations, any of which would have a
detrimental effect on the value of our common stock.
4
At June 30, 2005, we had positive working capital of $631,821, however, we had
an operating cash flow deficit of $(2,902,652) for the six months ended June
30, 2005, and an operating cash flow deficit of $(2,807,831) for the year
ended December 31, 2004. We currently have sufficient financial resources to
fund our operations and those of our subsidiaries. However, we may need
additional funds to continue these operations, and such additional funds may
not be available when required.
We have a limited operating history and our results of operations may
highly fluctuate from quarter to quarter as we continue to grow,
therefore you cannot use these results to predict how we may perform in
the future.
As a result of our limited operating history, we do not have historical
financial data for a significant number of periods in which to base our
planned operating expenses. Our expense levels are based in part on our
projections as to future revenues that are expected to increase. It is
anticipated that as we mature, our sales and operating results may fluctuate
from quarter to quarter and from year to year due to a combination of factors,
including, among others:
. market acceptance of, and variability in demand for, our digital media
services;
. increased competition from existing competitors and other companies
entering our markets;
. our ability to compete against significantly larger and better funded
competitors;
. the number, timing, pricing and significance of new products and
product introductions and enhancements by us and our competitors;
. our ability to develop, introduce and market new and enhanced versions
of our products on a timely basis;
. litigation with respect to liability, trademark or copyright claims,
and the availability of any insurance on such claims;
. ability of our customers and ourselves to procure necessary
intellectual property rights for digital media content;
. willingness of our customers to enter into longer-term volume or
recurring revenue digital media services agreements and purchase
orders in light of the economic and legal uncertainties related to
their business models;
. our ability to enter into or renew strategic relationships and
agreements with media organizations, including movie studios,
newspapers and publishers;
. expenses incurred in connection with our plans to fund greater levels
of sales and marketing activities and operations and develop new
distribution channels and services in connection with the expansion of
our operations;
. changes in the level of operating expenses;
. technical difficulties, security concerns or system downtime affecting
the Internet generally or the operation of our discs or websites
linked to from our discs; and
. general domestic and international legal, economic, political and
market conditions.
Any unfavorable changes in these or other factors could have a material
adverse effect on our business, financial condition and results of operation.
The likelihood of the Company's business success must be considered in light
of the expenses, difficulties and delays frequently encountered in operating a
new business and new management. Accordingly, the Company's prospects must be
considered speculative considering the risks, expenses, and difficulties
frequently encountered in establishing a new business and considering other
uncertainties in our industry. You must consider our prospects in light of the
risks, expenses and difficulties we face as an early stage company with a
limited operating history.
We will face intense competition from competitors that have greater
financial, technical and marketing resources. These competitive forces
may impact our projected growth and ability to generate revenues and
profits, which would have a negative impact on our business and the value
of your investment.
Our business is highly competitive. We likely will face competition from
media, advertising and production companies offering similar or competing
digital media solutions, many of which can be expected to have longer
operating histories, greater name recognition, larger installed customer bases
and significantly more financial resources, research and development
facilities and manufacturing and marketing experience than us. Competitors may
have already developed, or be in the process of developing technologies that
are, or may be, the basis for competitive products to the Company's current or
planned lines of products. Some of these products may have an entirely
different approach or means of accomplishing the same end results as products
currently developed, or contemplated for development, by the Company. As a
result, competitive products may render our products or proposed products or
services obsolete.
We will also compete with large media conglomerates and publishers of
traditional print publications such as magazines and newspapers. These
competitors may have better access to content, advertisers and distribution,
or these may be available to them at a lower cost than those available to us,
thereby enabling them to provide similar services at lower costs than we may
be willing to provide. In addition, these competitors may be better positioned
than we are to market their products and services to clients because of their
ability to offer additional services and products, and more favorable rates
and terms. These factors could adversely affect our ability to maintain or
grow our portfolio.
5
In order to remain competitive we must enhance our existing digital media
services, develop and introduce new products and services, anticipate and
meet specific customer requirements and respond to technological change.
Any failure to do so in a timely manner may cause us to experience a
decrease in demand for our products or our products could become obsolete
which may cause our results of operations to suffer.
The market for digital media services is characterized by rapid technological
change, frequent new service offerings, new device introductions and changes
in customer requirements, some of which are unique or on a
customer-by-customer basis. The Company's ability to respond quickly to
consumer needs or advances in digital publishing technologies, without
compromising product quality, will be crucial to our success. Our future
success will depend to a substantial degree on our ability to offer services
that incorporate leading technology, address the increasingly sophisticated,
varied or individual needs of our current and prospective customers and
respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis. You should be aware that:
. Our technology, services or products may become obsolete upon the
introduction of alternative technologies;
. We may not have sufficient resources to develop or acquire new
technologies or the ability to introduce new services capable of
competing with future technologies or service offerings;
. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent the development, introduction
or marketing of new services and enhancements; and
. The price of our services is likely to decline as rapidly as the cost
of any competitive alternatives.
The Company's competitive position may be adversely affected by competitive
product development or the acceptance and/or integration by the public or
sponsors of new or other forms of digital media, formats or devices not
anticipated or supported by the Company. In addition, our inability to
effectively manage the transition from older services to newer services could
cause disruptions to customer orders and harm our business and prospects.
We will not be competitive unless we continually introduce new services or
enhancements to existing services that meet evolving industry standards and
customer needs. In the future, we may not be able to address effectively the
compatibility and interoperability issues that arise as a result of
technological changes and evolving industry standards. The technical
innovations required for us to remain competitive are inherently complex,
require long development schedules and are dependent in some cases on sole
source suppliers. We will be required to continue to invest in research and
development in order to attempt to maintain and enhance our existing
technologies and services, but we may not have the funds available to do so.
Even if we have sufficient funds, these investments may not serve the needs of
customers or be compatible with changing technological requirements or
standards. Most development expenses must be incurred before the technical
feasibility or commercial viability of new or enhanced services and
applications can be ascertained. Revenue from future services or enhancements
to services may not be sufficient to recover the associated development costs.
We plan to grow rapidly, which will place strains on our management team
and other Company resource to both implement more sophisticated
managerial, operational and financial systems, procedures and controls
and to train and manage the personnel necessary to implement those
functions. Our inability to manage our growth could impede our ability to
generate revenues and profits and to otherwise implement our business
plan and growth strategies, which would have a negative impact on our
business and the value of your investment.
We will need to devote substantial resources to expanding our sales and
marketing, especially focusing on the creation and marketing of our
proprietary brands, and our marketing, sales, administrative, operational,
financial and other systems and resources to implement our longer-term
business plan and growth strategies. In addition, we may incur substantial
expenses identifying and investigating strategic partners.
This expansion and these expanded relationships will require us to
significantly improve and replace our existing managerial, operational and
financial systems, procedures and controls, to improve the coordination
between our various corporate functions, and to manage, train, motivate and
maintain a growing employee base. Our performance and profitability will
depend on the ability of our officers and key employees to: manage our
business and our subsidiaries as a cohesive enterprise; manage expansion
through the timely implementation and maintenance of appropriate
administrative, operational, financial and management information systems,
controls and procedures; add internal capacity, facilities and third-party
sourcing arrangements as and when needed; maintain service quality controls;
and attract, train, retain, motivate and manage effectively our employees. The
time and costs to effectuate these steps may place a significant strain on our
management personnel, systems and resources, particularly given the limited
amount of financial resources and skilled employees that may be available at
the time. We may not be able to integrate and manage successfully new systems,
controls and procedures for our business, or even if we successfully integrate
our systems, controls, procedures, facilities and personnel, such improvements
may not be adequate to support our projected future operations. We may never
recoup expenditures incurred during this expansion. Any failure to implement
and maintain such changes could have a material adverse effect on our
business, financial condition and results of operations.
6
We may undertake acquisitions to expand our business that may pose risks
to our business and dilute the ownership of our existing stockholders.
As part of our growth we will continue to evaluate opportunities to acquire
other businesses that would complement our current offerings, expand the
breadth of markets we can service or enhance our services and products.
Acquisitions that we may potentially make in the future entail a number of
risks that could materially and adversely affect our business, operating and
financial results, including:
. problems integrating the acquired operations, technologies or products
with our existing business and products;
. diversion of management's time and attention from our core business;
. need for financial resources above our planned investment levels;
. difficulties in retaining business relationships with suppliers and
customers of the acquired company;
. risks associated with entering markets in which we lack prior
experience;
. potential loss of key employees of the acquired company; and
. potential requirements to amortize intangible assets.
Future acquisitions also could cause us to incur debt or contingent
liabilities and/or impairment related to goodwill and other intangibles and
the incurrence of large, immediate write-offs or cause us to issue equity
securities that would reduce the ownership percentages of existing
stockholders. Moreover, we may never realize the anticipated benefits of any
acquisition.
We are dependent for our success on a few key executive officers and
outside consultants. Our inability to retain those officers would impede
our business plan and growth strategies, which would have a negative
impact on our business and the value of your investment.
Our success depends to a critical extent on the continued efforts of services
of David G. MacEachern, our Chairman and Chief Executive Officer, Scott Kapp,
our President and Director, Franklin H. Unruh, our Chief Financial Officer and
Director, Kelly Konzelman, our Executive Vice President and Kevin Plate, our
Executive Vice President of Sales and Business Development. Were we to lose
one or more of these key executive officers, we would be forced to expend
significant time and money in the pursuit of a replacement, which would result
in both a delay in the implementation of our business plan and the diversion
of limited working capital. We can give you no assurance that we can find
satisfactory replacements for these key executive officers at all, or on terms
that are not unduly expensive or burdensome to our company. We do not
currently carry a key-man life insurance policy on any of our employees, which
would assist us in recouping our costs in the event of the loss of those
officers.
If our consultants or collaborative partners do not perform, we may be
unable to develop and bring to market new products as anticipated, which
may have a material adverse effect on our operations and financial
conditions.
We may in the future enter into consulting collaborative arrangements with
third parties to develop products. These arrangements may not produce
successful products. If we fail to establish these arrangements, the number of
products from which we could receive future revenues will be limited. Our
dependence on consulting or collaborative arrangements with third parties
subjects us to a number of risks. These arrangements may not be on terms
favorable to us. We cannot absolutely control the amount and timing of
resources our consultants or collaborative partners may devote to our
products, and these third parties may choose to pursue alternative products.
These third parties also may not perform their obligations as expected.
Business combinations, significant changes in their business strategy, or
their access to financial resources may adversely affect a consultant's or
partner's willingness or ability to complete its obligations under the
arrangement. Moreover, we could become involved in disputes with our
consultants or partners, which could lead to delays or termination of the
arrangements and time-consuming and expensive litigation or arbitration. In
addition, the Company's consultants may be affiliated or employed by others
and some may have consulting or other advisory arrangements with other
entities that may conflict or compete with their obligations to the Company.
The Company addresses such potential conflicts by requiring that its
consultants, collaborators and sponsored researchers execute confidentiality
agreements upon commencement of relationships with the Company, by closely
monitoring the work of such persons and by requiring material transfer and
intellectual property assignment agreements wherever possible and appropriate.
Our inability to hire qualified personnel could impede our ability to
generate revenues and profits and to otherwise implement our business
plan and growth strategies, which would have a negative impact on our
business and could adversely affect the value of your investment.
We currently have an extremely small management and executive team comprised
of five employees. Although we believe that our management team will be able
to handle most of our additional management, administrative, research and
development, sales and marketing, and manufacturing requirements in the short
term, as we ramp up our sales and operations, we will nevertheless be required
over the longer-term to hire highly skilled managerial, sales and marketing
and administrative personnel to fully implement our business plan and growth
strategies. We cannot assure you that we will be able to engage the services
of such qualified personnel at competitive prices or at all, particularly
given the risks of employment attributable to our limited financial resources
and lack of an established track record.
7
We may have difficulty in attracting and retaining management and outside
independent members to our board of directors as a result of their
concerns relating to their increased personal exposure to lawsuits and
shareholder claims by virtue of holding these positions in a publicly
held company
The directors and management of publicly traded corporations are increasingly
concerned with the extent of their personal exposure to lawsuits and
shareholder claims, as well as governmental and creditor claims which may be
made against them, particularly in view of recent changes in securities laws
imposing additional duties, obligations and liabilities on management and
directors. Due to these concerns, directors and management are also becoming
increasingly concerned with the availability of directors and officers'
liability insurance to pay on a timely basis the costs incurred in defending
shareholder claims. We do not currently carry directors and officers liability
insurance. If we are unable to obtain directors and officers liability
insurance at affordable rates or at all, it may become increasingly more
difficult to attract and retain qualified outside directors to serve on our
board of directors. The fees of directors are also rising in response to their
increased duties, obligations and liabilities as well as increased exposure to
such risks. As a company with a limited operating history and limited
resources, we will have a more difficult time attracting and retaining
management and outside independent directors than a more established company
due to these enhanced duties, obligations and liabilities. In addition, in the
event that we do not obtain director and officer liability insurance by
February 20, 2006, the quarterly dividends due to the holders of our Series B
Preferred Stock will increase from 6% to 9% per annum, until such time that we
obtain director and officer liability insurance.
We rely on strategic relationships to promote our services and for access
to licensed technology; if we fail to maintain or enhance existing
relationships or obtain new relationships, our ability to serve our
customers and develop new services could be harmed.
The Company is seeking to build alliances with leading national sponsors,
media and publishing companies, distributors, financial organizations,
automotive manufacturers and technology companies, and plans to continue its
strategy of developing key alliances in order to expand its reach into the
national and international marketplace. However, there can be no assurance
that the Company will be successful in obtaining ongoing strategic alliances
or that the Company will be able to find further suitable business
relationships as it develops strategies and new products. Any failure to
continue or expand such relationships could have a material adverse effect on
the Company's business, results of operations or financial condition.
Major risks associated with strategic alliances and partnerships are (1) the
lack of control the Company may have over these operations, and (2) the
possibility that in the future, the Company's strategic alliances will not
develop or market products in competition with the Company, and/or discontinue
their alliances with the Company or form alliances with the Company's
competitors.
Digital media distribution services in general are new and rapidly
evolving and may not prove to be viable business models.
Our digital media distribution services are a relatively new business model
for delivering digital media coupled with traditional print publications. It
is too early to predict whether consumers will accept our products and
services in significant numbers and accordingly whether our clients will use
our digital media solutions to reach their audience or consumers. If digital
media distribution services do not prove to be popular with consumers, or if
these services cannot sustain any such popularity, our business and prospects
may be materially and adversely affected.
We are dependent on our ability to develop strategic relationships with
media, entertainment and Internet organizations. There is no guarantee
that the motion picture studios will continue to provide the Company with
content and movie trailers at no cost.
The success of our operations is dependent in part on our ability to enter
into and maintain strategic relationships and agreements with media,
entertainment and Internet organizations. There can be no assurance that we
will be able to develop and maintain these strategic relationships and, if we
are unable to do so, our financial conditions and results of operations could
be adversely impacted. Presently, the Company is being provided copyrighted
theatrical movie trailers and other copyrighted public dissemination's such as
press releases, behind-the-scenes footage, video clips, celebrity interviews
and other promotional media directly from film studios and other sources at no
cost. This same promotional media is also made available to other companies,
broadcasters and production facilities for their use and incorporation into
various other broadcast mediums and products. Traditionally, this media has
been provided free of charge in the form of industry "Press Kits" and made
available for re-broadcast or re-distribution by third parties without license
or fees. The Company will continue to rely upon the availability of this free
media and content as the key component for the Hollywood Previews(TM)
Entertainment Magazine. Although it is not anticipated, should in the future
this content become unavailable, or should at any time studios begin charging
a license or other royalties for the use or re-broadcast of its copyrighted
materials, the Company's ability to continue producing the Hollywood
Previews(TM) Entertainment Magazine could be jeopardized, and the production
and distribution of this core Company product could prove non-viable. This
would have an immediate and materially adverse effect upon the Company's
revenue projections, and subsequently affect Company viability. In addition,
our intellectual property library is dependent on our ability to identify and
license current media content.
8
We may not be able to protect our intellectual property, and we may be
found to infringe on proprietary rights of others, which could harm our
business. Should our intellectual property rights not adequately protect
our products or technologies; others could compete against us more
directly, which would hurt our sales and profitability.
Our performance and ability to compete are dependent to a significant degree
on our internally developed and licensed content and technology. We rely on a
combination of copyright, trademark and trade secret laws, confidentiality and
nondisclosure agreements with our employees and with third parties and
contractual provisions to establish and maintain our proprietary rights. We do
not have any patents protecting our proprietary technology. There can be no
assurance that the steps taken by us to protect our proprietary rights will be
adequate, or that third parties will not infringe upon or misappropriate our
copyrights, trademarks, service marks and similar proprietary rights. In
addition, effective copyright and trademark protection may be unenforceable or
limited in certain foreign countries. In the future, litigation may be
necessary to enforce and protect our trademarks, service marks, trade secrets,
copyrights and other intellectual property rights. Any such litigation would
be costly and could divert management's attention from other more productive
activities. Adverse determinations in such litigation could result in the loss
of certain of our proprietary rights, subject us to significant liabilities,
require us to seek licenses from third parties, or prevent us from selling our
services.
We own trademark registrations in the United States for many of the trademarks
that we use. There can be no assurance that we will be able to secure adequate
protection for these names or other trademarks in the United States or in
foreign countries. If we obtain registration of those trademarks, we may not
be able to prevent our competitors from using different trademarks that
contain similar words. Many countries have a "first-to-file" trademark
registration system; and thus we may be prevented from registering our marks
in certain countries if third parties have previously filed applications to
register or have registered the same or similar marks. It is possible that our
competitors or others will adopt product or service names similar to ours,
thereby impeding our ability to build brand identity and possibly leading to
customer confusion.
Our inability to protect our trademarks adequately could impair our ability to
maintain and expand such brands and thus impair our ability to generate
revenue from these brands.
We may become subject to liability for infringement of third-party
intellectual property rights.
There can be no assurance that third parties will not bring copyright or
trademark infringement claims against us, or claim that our use of certain
technology violates a patent. Even if these claims are not meritorious, they
could be costly and could divert management's attention from other more
productive activities. If it is determined that we have infringed upon or
misappropriated a third party's proprietary rights, there can be no assurance
that any necessary licenses or rights could be obtained on terms satisfactory
to us, if at all. The inability to obtain any required license on satisfactory
terms could force us to incur expenses to change the way we operate our
businesses. If our competitors prepare and file applications that claim
trademarks owned or registered by us, we may oppose these applications and
have to participate in administrative proceedings to determine priority of
right in the trademark, which could result in substantial costs to us, even if
the eventual outcome is favorable to us. An adverse outcome could require us
to license disputed rights from third parties or to cease using such
trademarks.
In addition, inasmuch as we use or license a portion of our content from third
parties, our exposure to copyright infringement or right of privacy or
publicity actions may increase; because we must rely upon such third parties
for information as to the origin and ownership of such licensed content. We
generally obtain representations as to the origins, ownership and right to use
such licensed content and generally obtain indemnification to cover any breach
of any such representations; however, there can be no assurance that such
representations will be accurate or that such indemnification will provide
adequate compensation for any breach of such representation. There can be no
assurance that the outcome of any litigation between such licensors and a
third party or between us and a third party will not lead to royalty
obligations for which we are not indemnified or for which such indemnification
is insufficient, or that we will be able to obtain any additional license on
commercially reasonable terms if at all.
We may be liable for the content we make available on the Internet.
There is risk that we could become subject to various types of legal claims
relating to the content we make available on our discs or the downloading and
distribution of such content, including claims such as defamation, invasion of
privacy and copyright infringement. Although we carry liability insurance that
covers some types of claims to a limited extent, we do not carry special media
insurance. Therefore, our insurance may not cover some or all potential claims
of this type, and/or may not be adequate to cover all costs incurred in
defense of potential claims or to indemnify us for all liability that may be
imposed. Any costs or imposition of liability that is not covered by insurance
or in excess of insurance coverage could have a material adverse effect on our
business, results of operations and financial condition.
9
Our operations could be negatively impacted by systems interruptions,
which may have an material adverse effect on our reputation and business.
The hardware, software and discs used in our operations could be damaged by
fire, floods, earthquakes, power loss, telecommunications failures, break-ins,
electronic break-ins, computer viruses or other similar disruptive problems.
These system problems could affect our business. Insurance may not adequately
compensate us for any losses that may occur due to any failures or
interruptions in systems. General Internet traffic interruptions or delays
could also harm our business. Additionally, online service providers have
experienced significant outages in the past, and could experience outages,
delays and other difficulties due to system failures unrelated to our systems.
To the extent our services are disrupted, we may be required to delay delivery
of our discs, which may have a material adverse effect on our reputation and
business.
Our international business exposes us to a number of risks, which may
have an adverse effect on our business.
Some of our projected future sales may be derived from international
operations. Although we do not currently anticipate having material
international operations, if we expand our international operations, we will
be exposed to risks associated with international operations, including risks
associated with re-valuation of the local currencies of countries where we
sell our products or conduct business, which may result in our products
becoming more expensive in local currency terms, thus reducing demand or in
increased costs to us. Our operations and financial results also may be
affected by other international factors, including:
. Foreign government regulation;
. Political or economic instability in our target markets;
. Trade restrictions;
. Changes in tax laws and tariffs;
. Inadequate protection of intellectual property rights in some
countries; and
. Managing foreign distributors, manufacturers and staffing Managing
foreign branch offices.
If these risks actually materialize, our sales to international customers may
decrease.
Government regulations of the Internet could adversely impact the
business of our clients, which could have a material adverse effect on
our ability to market and sell our products.
The application of existing laws and regulations to our business and our
clients' business relating to issues such as user privacy, pricing, taxation,
content, sweepstakes, copyrights, trademarks, advertising, and the
characteristics and quality of our products and services can be unclear. Our
clients and us may be subject to new laws and regulations related to our
business. Although we endeavor to comply with all applicable laws and
regulations and believe that we are in compliance, because of the uncertainty
of existing laws and the possibility that new laws may be adopted, there is a
risk that we will not be in full compliance.
Several federal laws could have an impact on our business. The Digital
Millennium Copyright Act establishes binding rules that clarify and strengthen
protection for copyrighted works in digital form, including works used via the
Internet and other computer networks. The Child Online Protection Act is
intended to restrict the distribution of certain materials deemed harmful to
children. The Children's Online Privacy Protection Act of 1998 protects the
privacy of children using the Internet, by requiring, among other things, (1)
that in certain specific instances the operator of a website must obtain
parental consent before collecting, using or disclosing personal information
from children under the age of 13, (2) the operator of a website to make
certain disclosures and notices on the website or online service regarding the
collection, use or disclosure of such personal information, and (3) the
operator of a website or online service to establish and maintain reasonable
procedures to protect the confidentiality, security and integrity of personal
information collected from children under the age of 13. Our efforts to comply
with these and other laws subject our business to additional costs, and
failure to comply could expose the business our clients and us to liability,
which may have an adverse effect on our out business.
New rules, including those contained in and issued under the
Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or
attract qualified officers and directors, which could adversely affect
the management of our business and our ability to obtain or retain
listing of our Common Stock.
The enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance
of a series of new rules and regulations and the strengthening of existing
rules and regulations by the SEC. These developments have increased our legal
compliance and financial reporting costs. We may be unable to attract and
retain qualified officers, directors and members of board committees required
to provide for our effective management as a result of the recent and
currently proposed changes in the rules and regulations which govern publicly
held companies, including, but not limited to, certifications from executive
officers and requirements for financial experts on the board of directors. The
perceived increased personal risk associated with these recent changes may
deter qualified individuals from accepting these roles. We are presently
evaluating and monitoring regulatory developments and cannot estimate the
timing or magnitude of additional costs we may incur as a result.
10
Further, certain of these recent and proposed changes heighten the
requirements for board or committee membership, particularly with respect to
an individual's independence from the corporation and level of experience in
finance and accounting matters. We may have difficulty attracting and
retaining directors with the requisite qualifications. If we are unable to
attract and retain qualified officers and directors, the management of our
business could be adversely affected.
Our internal controls over financial reporting may not be effective, and
our independent auditors may not be able to certify as to their
effectiveness, which could have a significant and adverse effect on our
business.
We are evaluating our internal controls over financial reporting to allow
management to report on, and our independent auditors to attest to, our
internal controls over financial reporting, as will be required by Section 404
of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC,
which we collectively refer to as Section 404. We are currently performing the
system and process evaluation and testing required in an effort to comply with
the management assessment and auditor certification requirements of Section
404, which will initially apply to us as of December 31, 2006. In the course
of our ongoing Section 404 evaluations, we may identify conditions that may
result in significant deficiencies or material weaknesses in the future.
Risks Relating to an Investment in Our Securities
Our Executive Officers and Directors own or control a large portion of
our outstanding common shares, which may limit the ability of yourself or
other shareholders, whether acting singly or together, to propose or
direct the management or overall direction of our Company. Additionally,
this concentration of ownership could discourage or prevent a potential
takeover of our Company that might otherwise result in you receiving a
premium over the market price for your common shares.
Currently, our Executive Officers and Directors beneficially own or control
approximately 43% of our outstanding common shares. As a result, they will
have the ability to control substantially all matters submitted to our
shareholders for approval and to control our management and affairs, including
extraordinary transactions such as mergers and other changes of corporate
control, and going private transactions.
The application of the "penny stock" rules could adversely affect the
market price of our common shares and increase your transaction costs to
sell those shares.
As long as the trading price of our common shares is below $5 per share, the
open-market trading of our common shares will be subject to the "penny stock"
rules. The "penny stock" rules impose additional sales practice requirements
on broker-dealers who sell securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchase of securities and have
received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the Securities and Exchange Commission relating to the
penny stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative and
current quotations for the securities. Finally, monthly statements must be
sent disclosing recent price information on the limited market in penny
stocks. These additional burdens imposed on broker-dealers may restrict the
ability or decrease the willingness of broker-dealers to sell the common
shares, and may result in decreased liquidity for our common shares and
increased transaction costs for sales and purchases of our common shares as
compared to other securities.
Our common shares are thinly traded, so you may be unable to sell at or
near ask prices or at all if you need to sell your shares to raise money
or otherwise desire to liquidate your shares.
Our common shares have historically been sporadically or "thinly-traded" on
the OTC Bulletin Board, meaning that the number of persons interested in
purchasing our common shares at or near ask prices at any given time may be
relatively small or non-existent. This situation is attributable to a number
of factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others
in the investment community that generate or influence sales volume, and that
even if we came to the attention of such persons, they tend to be risk-averse
and would be reluctant to follow an unproven company such as ours or purchase
or recommend the purchase of our shares until such time as we became more
seasoned and viable. As a consequence, there may be periods of several days or
more when trading activity in our shares is minimal or non-existent, as
compared to a seasoned issuer which has a large and steady volume of trading
activity that will generally support continuous sales without an adverse
effect on share price. We cannot give you any assurance that a broader or more
active public trading market for our common shares will develop or be
sustained, or that current trading levels will be sustained.
11
The conversion or exercise of Series A Preferred Stock, Series B
Preferred Stock and warrants into our common stock could cause our
common stock price to decline due to the additional shares available in
the market, particularly in light of the relatively thin trading volume
of our common stock.
The market price of our common stock could decline and the voting power and
value of your investment would be subject to continual dilution if the holders
of our Series A Preferred Stock, Series B Preferred Stock and warrants convert
their holdings into common stock and resell those shares into the market. As
of September 1, 2005, we had and aggregate of approximately 19.9 million
shares of common stock issuable upon conversion of our outstanding Series A
Preferred Stock and Series B Preferred Stock and approximately 33,500,000
common shares issuable upon exercise of various outstanding warrants. If all
outstanding Series A and Series B Preferred shares were converted, and all
outstanding warrants for common shares were exercised, approximately 128
million shares of common stock would be held by our security holders,
including approximately 39,800,000 shares of common stock held by holders of
Series A and Series B Preferred Stock.
No holder of our Series A Preferred Stock or Series B Preferred Stock may
convert any portion of their holdings to the extent that after giving effect
to such conversion, such holder (together with such holder's affiliates),
would beneficially own in excess of 4.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to such conversion.
However, such holder may waive the 4.99% limitation upon 61 days prior notice
to the Company. In addition, this 4.99% limitation does not prevent any holder
from converting the Series A Preferred Stock or Series B Preferred Stock into
shares of our common stock and then reselling those shares at times when
neither they nor their affiliates beneficially own shares in excess of the
4.99% limitation. Therefore, by periodically selling our common shares into
the market, such holder together with its affiliates could in the aggregate
sell more than 4.99% of our outstanding common shares. Consequently, the 4.99%
limitation will not necessarily prevent substantial dilution of the voting
power and value of your investment.
All shares in this offering will be freely tradable once sold pursuant to the
terms outlined in the Plan of Distribution in this prospectus. Each selling
security holder may sell none, some or all of the common shares registered
under this prospectus at any time. Depending upon market liquidity at the
time, a sale of shares under this offering at any given time could cause the
trading price of our common stock to decline. The sale of a substantial number
of shares of our common stock under this offering, or anticipation of such
sales, could make it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price that we might otherwise wish
to effect sales. In addition, sales of large amount of these shares in the
public market could substantially depress the prevailing market prices for our
shares. If that were to happen, the value of your investment could decline
substantially.
The market price for our common shares is particularly volatile given our
status as a relatively unknown Company with a small and thinly traded
public float, limited operating history and lack of profits which could
lead to wide fluctuations in our share price. The price at which you
purchase our common shares may not be indicative of the price that will
prevail in the trading market. You may be unable to sell your common
shares at or above your purchase price, which may result in substantial
losses to you.
The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share
price will continue to be more volatile than a seasoned issuer for the
indefinite future. The volatility in our share price is attributable to a
number of factors. First, as noted above, our common shares are sporadically
and thinly traded. As a consequence of this lack of liquidity, the trading of
relatively small quantities of shares by our shareholders may
disproportionately influence the price of those shares in either direction.
The price for our shares could, for example, decline precipitously in the
event that a large number of our common shares are sold on the market without
commensurate demand, as compared to a seasoned issuer which could better
absorb those sales without adverse impact on its share price. Secondly, we are
a speculative or "risky" investment due to our limited operating history and
lack of profits to date, and uncertainty of future market acceptance for our
products. As a consequence of this enhanced risk, more risk-adverse investors
may, under the fear of losing all or most of their investment in the event of
negative news or lack of progress, be more inclined to sell their shares on
the market more quickly and at greater discounts than would be the case with
the stock of a seasoned issuer. Many of these factors are beyond our control
and may decrease the market price of our common shares, regardless of our
operating performance. We cannot make any predictions or projections as to
what the prevailing market price for our common shares will be at any time,
including as to whether our common shares will sustain their current market
prices, or as to what effect that the sale of shares or the availability of
common shares for sale at any time will have on the prevailing market price.
Shareholders should be aware that, according to SEC Release No. 34-29093, the
market for penny stocks has suffered in recent years from patterns of fraud
and abuse. Such patterns include (1) control of the market for the security by
one or a few broker-dealers that are often related to the promoter or issuer;
(2) manipulation of prices through prearranged matching of purchases and sales
and false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups
by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated
to a desired level, along with the resulting inevitable collapse of those
prices and with consequent investor losses. Our management is aware of the
abuses that have occurred historically in the penny stock market. Although we
do not expect to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, management will strive within
the confines of practical limitations to prevent the described patterns from
being established with respect to our securities. The occurrence of these
patterns or practices could increase the volatility of our share price.
12
Volatility in our common share price may subject us to securities
litigation, thereby diverting our resources that may have a material
adverse effect on our results of operations.
As discussed in the preceding risk factor, the market for our common shares is
characterized by significant price volatility when compared to seasoned
issuers, and we expect that our share price will continue to be more volatile
than a seasoned issuer for the indefinite future. In the past, plaintiffs have
often initiated securities class action litigation against a company following
periods of volatility in the market price of its securities. We may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and liabilities and could divert management's attention
and resources.
The trading price of our common stock may decrease due to factors beyond
our control.
The stock market from time to time has experienced extreme price and volume
fluctuations, which have particularly affected the market prices for emerging
growth companies and which often have been unrelated to the operating
performance of the companies. These broad market fluctuations may adversely
affect the market price of our common stock. If our shareholders sell
substantial amounts of their common stock in the public market, the price of
our common stock could fall. These sales also might make it more difficult for
us to sell equity or equity related securities in the future at a price we
deem appropriate.
To date, we have not paid any cash dividends on our common stock and no
cash dividends on our common stock will be paid in the foreseeable
future. We are required to pay quarterly dividends to our outstanding
shares of Series A Preferred Stock and Series B Preferred Stock.
We do not anticipate paying cash dividends on our common shares in the
foreseeable future. We may not have enough funds to legally pay dividends.
Even if funds are legally available to pay dividends, we may nevertheless
decide in our sole discretion not to pay dividends. In addition, we cannot pay
any dividends on our common stock if any dividends due on our outstanding
Series A Preferred Stock or Series B Preferred Stock are unpaid. Holders of
Series A Preferred Stock are entitled to receive cumulative dividends of 6%
per annum, based on the stated value of $1,000 per share. Holders of Series B
Preferred Stock are entitled to receive cumulative dividends of based on the
stated value of $1,000 per share of Preferred Stock at the rate of 6% per
annum until August 22, 2009, 9% per annum from August 22, 2009 until August
22, 2010 and 14% thereafter until the Preferred Stock is no longer
outstanding. Dividends on our Series A and Series B Preferred Stock are be
payable quarterly on March 1, June 1, September 1 and December 1, which
further limits our ability to pay dividends on our common shares. In addition,
if the Company does not have in effect a policy of directors and officers
liability insurance by February 20, 2006, or if the Corporation shall not have
appointed a new Chief Financial Officer prior to November 18, 2005, then
dividends on the Series B Preferred Stock shall accrue and be payable at a
rate of 9% per annum in lieu of 6% per annum during the occurrence and during
the continuance of either of the foregoing events.
Our issuance of additional preferred shares, or options or warrants to
purchase those shares, could negatively impact the value of your
investment in our common shares as the result of preferential voting
rights or veto powers, dividend rights, disproportionate rights to
appoint directors to our board, conversion rights, redemption rights and
liquidation provisions granted to the preferred shareholders, including
the grant of rights that could discourage or prevent the distribution of
dividends to you, or prevent the sale of our assets or a potential
takeover of our company that might otherwise result in you receiving a
distribution or a premium over the market price for your common shares.
The conversion of our outstanding preferred shares could result in the
substantial dilution of your investment in terms of your percentage
ownership in the company as well as the book value of your common shares.
The sale of a large amount of common shares received upon the conversion
of out outstanding preferred shares, could substantially depress the
prevailing market prices for our common stock.
We are entitled under our certificate of incorporation to issue up to
500,000,000 common shares and 20,000,000 "blank check" preferred shares. As of
June 30, 2005, after taking into consideration our outstanding common and
preferred shares, we will be entitled to issue up to 408,567,437 additional
common shares and 19,992,040 additional preferred shares. Our board may
generally issue those common and preferred shares, or options or warrants to
purchase those shares, without further approval by our shareholders based upon
such factors as our board of directors may deem relevant at that time. Any
preferred shares we may issues shall have such rights, preferences, privileges
In the event of the conversion of our preferred shares and subsequent sale of
our common shares, you could suffer substantial dilution of your investment in
terms of your percentage ownership in the company as well as the book value of
your common shares. Potential dilutive effects of future sales of our common
shares by our stockholders, pursuant to this prospectus could have an adverse
effect on the prices of our securities.
13
The elimination of monetary liability against our directors, officers and
employees under our certificate of incorporation and the existence of
indemnification rights to our directors, officers and employees may
result in substantial expenditures by our company and may discourage
lawsuits against our directors, officers and employees.
Our certificate of incorporation contains provisions, which eliminate the
liability of and indemnify our directors for monetary damages to our company
and shareholders to the maximum extent permitted under Delaware corporate law.
We may also have contractual indemnification obligations under our agreements
with our directors, officers and employees. The foregoing indemnification
obligations could result in our company incurring substantial expenditures to
cover the cost of settlement or damage awards against directors, officers and
employees, which we may be unable to recoup. These provisions and resultant
costs may also discourage our company from bringing a lawsuit against
directors, officers and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our
shareholders against our directors, officers and employees even though such
actions, if successful, might otherwise benefit our company and shareholders.
14
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by selling security holders. We will receive no
proceeds from the sale of shares of common stock in this offering, except upon
exercise of the warrants other than by a cashless exercise. In that case, we
would receive up to approximately $21,725,000. We will bear all expenses
incident to the registration of the shares of our common stock under Federal
and state securities laws other than expenses incident to the delivery of the
shares to be sold by the selling security holders. Any transfer taxes payable
on these shares and any commissions and discounts payable to underwriters,
agents, brokers or dealers will be paid by the selling security holder.
On May 23, 2005, we received $3,040,000 in connection with the sale of our
Series A 6% Convertible Preferred Stock. We have used those proceeds, net our
offering expense of $259,000 as follows: first, $1,130,000 to repay
indebtedness; second, $1,651,000 for SG&A expenses and for working capital.
On August 22, 2005, we received $4,920,000 in connection with the sale of our
Series B 6% Convertible Preferred Stock. We used or plan to use these
proceeds, net of our offering expenses of approximately $539,000, as follows:
first, up to $250,000 for marketing and advertising; second, up to $1,200,000,
to increase our employee base; third, up to $250,000, for investor relations
and public relations; and the balance for working capital and general
corporate purposes, including but not limited to financing current and future
projects.
The proceeds from exercise of the warrants held by the selling security
holders, other than by a cashless exercise, will be used for working capital
and general corporate purposes.
15
SELLING SECURITY HOLDERS
The following table presents information regarding the selling security
holder. Unless otherwise stated below, to our knowledge no selling security
holder nor any affiliate of such shareholder has held any position or office
with, been employed by or otherwise has had any material relationship with us
or our affiliates during the three years prior to the date of this prospectus.
None of the selling security holders are members of the National Association
of Securities Dealers, Inc. The selling security holders may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933. The number
and percentage of shares beneficially owned before and after the sales is
determined in accordance with Rule 13d-3 and 13d-5 of the Exchange Act, and
the information is not necessarily indicative of beneficial ownership for any
other purpose. We believe that each individual or entity named has sole
investment and voting power with respect to the securities indicated as
beneficially owned by them, subject to community property laws, where
applicable, except where otherwise noted. The total number of common shares
sold under this prospectus may be adjusted to reflect adjustments due to stock
dividends, stock distributions, splits, combinations or recapitalizations.
For purposes of calculating the percentage of shares owned after the offering,
we assumed the sale of all common shares offered under this prospectus.
However, the selling security holders are under no obligation to sell all or
any portion of the common shares offered for sale under this prospectus.
Accordingly, no estimate can be given as to the amount or percentage of our
common shares that will ultimately be held by the selling security holders
upon termination of sales pursuant to this prospectus. The percentage of
outstanding shares is based on 71,532,563 shares of common stock outstanding
as of September 1, 2005.
Percentage of
Shares Outstanding
Beneficially Shares
Owned Shares to be Beneficially
Before Sold in the Owned after
Selling Security Holder Offering Offering Offering
- ----------------------------------- ------------- -------------- -------------
Abdou, Mark 10,000(1) 10,000 *
Adams, Carol 30,000 30,000 *
Allen, John 46,022(2) 216,872 *
Anasazi Partners III Offshore, Ltd. 412,500(3) 440,625 *
Anasazi Partners III, LLC 412,500(4) 440,625 *
AS Capital Partner LLC 252,340(5) 271,090 *
Atlanticcity.com, Inc 550,000(6) 587,500 *
ACS Holdings, LLC 285,450(7) 285,450 *
Augustine Fund, LP 50,000(8) 50,000 *
Axiom Capital Management 741,250(9) 741,250 *
Baker, Christopher P. 412,500(10) 440,625 *
Barron, Bruce N. and Jacqueline A. 275,000(11) 293,750 *
Bauman, Gabor 93,570(12) 93,570 *
Bear Sterns Security Corp FBO
Barry W. Zelin 252,340(13) 271,090 *
Brda, John 43,750(14) 43,750 *
Bromberg, David 45,000(15) 45,000 *
Calicchia, Vince 21,375(16) 21,375 *
CAMOFI Master LDC 4,125,000(17) 4,406,250 *
Canfield, Michel D. 137,500(18) 146,875 *
Castle Creek Technology
Partners, LLC 504,680(19) 542,180 *
CEO Cast, Inc. 75,000(20) 75,000 *
Chernick, Murray 550,000(21) 587,500 *
Cordillera Fund, L.P. 1,100,000(22) 1,175,000 *
16
Crestview Capital Master, LLC 5,046,804(23) 5,421,804 *
Darrell J. Dettling 1992
Revocable Trust 75,702(24) 81,327 *
Davidowitz, Rosalind 2,200,000(25) 2,350,000 *
DCI Master LDC 275,000(26) 293,750 *
Draper, Mike 43,750(27) 43,750 *
Enable Growth Partners LP 1,816,849(28) 1,951,849 *
Enable Opportunity Partners LP 201,872(29) 216,872 *
Forfeited 962 Trust 126,170(30) 135,545 *
Fryermuth, Reed 35,000(31) 35,000 *
Gilmore, David & Arlene 220,000(32) 235,000 *
Greenfield, Randy and Randi 825,000(33) 881,250 *
Harman Stoller Capital
Partners II LTD 110,550(34) 118,088 *
Headblom, Per 510(35) 510 *
Hirsh, Nicholas 47,050(36) 47,050 *
Hoffer, Carol 632,500(37) 675,625 *
Irvine Capital International, Ltd. 426,250(38) 455,313 *
Irvine Capital Partner, L.P. 797,500(39) 851,875 *
Irvine Capital Partners III, L.P. 151,250(40) 161,563 *
Jaqueten, Jean Sebastian 5,765(41) 5,765 *
Jordon, David 4,018,722(42) 4,168,722 *
JP Turner and Company 100,000(43) 100,000 *
KBK Ventures, Inc. 1,300,000(44) 1,300,000 *
K-Com Communications, Inc. 350,000(45) 350,000 *
Kove, Vivienne 75,000 75,000 *
Kramer, Sheila G. 412,500(46) 440,625 *
Luskin, Bernard J. and Toni 137,500(47) 146,875 *
Manolovici, G.E. and Nancy 275,000(48) 293,750 *
McCullagh, Michael P. 25,000 25,000 *
Michael L. Gruber MD Defined
Benefit Pension Plan 110,000(49) 117,500 *
MicroCapital Fund, LP 666,623(50) 666,623 *
MicroCapital Fund, LTD 999,933(51) 999,933 *
Mid South Capital, Inc. 15,500(52) 15,500 *
Midsummer Investment, Ltd 8,250,000(53) 8,812,500 *
Miltenberg, Andrew 275,000(54) 293,750 *
Muth, Dudley 3,000 3,000 *
Nite Capital LP 504,680(55) 542,180 *
Paradigm Equities Fund II LTD 322,300(56) 344,275 *
Petschek, Jay 275,000(57) 293,750 *
Pettman, Barrie 225,000 225,000 *
Polinsky, Douglas 110,000(58) 117,500 *
Pollan, Steven 350,000(59) 350,000 *
17
Professional Traders Fund, LLC 550,000(60) 587,500 *
RHP Master Fund Ltd. 1,250,000(61) 1,437,500 *
Richardson & Patel LLP 152,500(62) 152,500 *
Rodriguez, Ricardo 140,468(63) 54,218 *
ROI Group Associates 127,500(64) 127,500 *
Salzwedal Financial
Communications, Inc. 500,000(65) 500,000 *
Sanders 1998 Children's Trust 504,680(66) 542,180 *
Sanders Morris Harris 60,000(67) 60,000 *
Sanders Opportunity Fund Inst. LP 774,483(68) 832,031 *
Sanders Opportunity Fund LP 234,878(69) 252,331 *
Sanders, Don 757,021(70) 813,271 *
Sanders, Katherine U. 504,680(71) 542,180 *
Sanson, Mark 5,255(72) 5,255 *
Schaffer, Gerald W. and Elaine 110,000(73) 117,500 *
Schaffer, William D. and Patricia E. 110,000(74) 117,500 *
Schaffer, William J. 55,000(75) 58,750 *
Shemano, Gary 35,253(76) 35,253 *
Solomon Grey Financial Services 144,248(77) 144,248 *
SPGP 240,000(78) 120,000 *
Stanley S. Raphael Trust 550,000(79) 587,500 *
The Harman Stoller Capital
Partners Master Fund Ltd. 529,650(80) 565,763 *
vFinance Investments, Inc. 23,875(81) 23,875 *
Vincent Manngard and Eric
Manngard Partnership 550,000(82) 587,500 *
Vozick, David 275,000(83) 293,750 *
Weir, Donald and Julie 252,340(84) 271,090 *
Weiskopf, Silver & Co., L.P. 275,000(85) 293,750 *
Wilder, Sammy 275,000(86) 293,750 *
Zelin, Barry 250,000(87) 250,000 *
------------
Total 54,525,488 *
(1) Includes 10,000 shares of common stock issuable upon exercise of a
warrant.
(2) Includes 100,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 100,000 shares of
common stock issuable upon exercise of a warrant.
(3) Includes 187,500 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 225,000 shares of
common stock issuable upon exercise of a warrant. Christopher P. Baker is
the Manager of Anasazi Partners III Offshore, Ltd. The address of Anasazi
Partners III Offshore, Ltd. is 99 High Street, 7th Floor, Boston, MA
02110.
(4) Includes 187,500 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 225,000 shares of
common stock issuable upon exercise of a warrant. Christopher P. Baker is
the Manager of Anasazi Partners III, LLC. The address of Anasazi Partners
III, LLC. is 99 High Street, 7th Floor, Boston, MA 02110.
(5) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 125,000 shares of
common stock issuable upon exercise of a warrant. AS Capital Partner, LLC
is a limited liability corporation and Michael Coughlin has voting and
investment power over the shares being offered under this prospectus. The
address of AS Capital Partner, LLC is 2 Rector Street, 3rd Floor New
York, NY 10006.
(6) Includes 250,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 300,000 shares of
common stock issuable upon exercise of a warrant. David Kaleky has voting
and investment power over the shares being offered under this prospectus.
The address of Atlanticcity.com, Inc. is 6503 N. Military Trail, #2801,
Boca Raton, FL 33496.
(7) Consists of 285,450 shares of common stock issuable upon exercise of a
warrant. Steven Pollan has voting and investment power over the shares
being offered under this prospectus. The address of Atlas Capital
Services, Inc. is 405 Lexington Avenue, 47th Floor, New York, NY 10174.
(8) Consists of 50,000 shares of common stock issuable upon exercise of a
warrant. John Porter has voting and investment power over the shares
being offered under this prospectus. The address of Augustine Fund, LP is
141 W. Jackson Boulevard, #2182, Chicago, IL 60604.
(9) Consists of 741,250 shares of common stock issuable upon exercise of a
warrant.
(10) Includes 187,500 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 225,000 shares of
common stock issuable upon exercise of a warrant.
18
(11) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 150,000 shares of
common stock issuable upon exercise of a warrant.
(12) Consists of 93,570 shares of common stock issuable upon exercise of a
warrant.
(13) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 125,000 shares of
common stock issuable upon exercise of a warrant. Barry Zelin has voting
and investment power over the shares being offered under this prospectus.
The address of Bear Sterns Security Corp. is 300 East 56th Street, New
York, NY 10022.
(14) Consists of 43,750 shares of common stock issuable upon exercise of a
warrant.
(15) Consists of 45,000 shares of common stock issuable upon exercise of a
warrant.
(16) Consists of 21,375 shares of common stock issuable upon exercise of a
warrant.
(17) Includes 1,875,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 2,250,000 shares of
common stock issuable upon exercise of a warrant. Jeffrey Haas has voting
and investment power over the shares being offered under this prospectus.
The address of CAMOFI Master LDC is 830 Third Avenue, New York, NY 10022.
(18) Includes 62,500 shares of common stock issuable upon conversion of shares
of Series B 6% Convertible Preferred Stock and 75,000 shares of common
stock issuable upon exercise of a warrant.
(19) Includes 250,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 250,000 shares of
common stock issuable upon exercise of a warrant. Stephen Friend has
voting and investment power over the shares being offered under this
prospectus. The address of Castle Creek Technology Partners, LLC is 111
West Jackson Blvd., Suite 2020 Chicago, IL 60604.
(20) Michael Wachs is the controlling person of CEO Cast, Inc and has voting
and investment power over the shares being offered under this prospectus.
The address of CEO Cast, Inc is 55 John Street, 11th Floor, New York, NY
10038.
(21) Includes 250,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 300,000 shares of
common stock issuable upon exercise of a warrant.
(22) Includes 500,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 600,000 shares of
common stock issuable upon exercise of a warrant. James P. Andrew has
voting and investment power over the shares being offered under this
prospectus. The address of Cordillera Fund, L.P. is 8201 Preston Road,
Suite 400, Dallas, TX 75225.
(23) Includes 2,500,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 2,500,000 shares of
common stock issuable upon exercise of a warrant. Stewart Flink, Robert
Hoyt and Daniel Warsh have voting and investment power over the shares
being offered under this prospectus. The address of Crestview Capital
Master, LLC is 95 Revere Drive, Suite A Northbrook, IL 60062.
(24) Includes 37,500 shares of common stock issuable upon conversion of shares
of Series A 6% Convertible Preferred Stock and 37,500 shares of common
stock issuable upon exercise of a warrant. Darrell Dettling has voting
and investment power over the shares being offered under this prospectus.
(25) Includes 1,000,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 1,200,000 shares of
common stock issuable upon exercise of a warrant.
(26) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 150,000 shares of
common stock issuable upon exercise of a warrant. Michael Crow has voting
and investment power over the shares being offered under this prospectus.
The address of DCI Master LDC is 830 Third Avenue, 14th Floor, New York,
NY 10019.
(27) Consists of 43,750 shares of common stock issuable upon exercise of a
warrant.
(28) Includes 900,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 900,000 shares of
common stock issuable upon exercise of a warrant. Mitch Levine has voting
and investment power over the shares being offered under this prospectus.
The address of Enable Growth Partners, LP is 95 Revere Drive, Suite A
Northbrook, IL 60062.
(29) Includes 100,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 100,000 shares of
common stock issuable upon exercise of a warrant. Mitch Levine has voting
and investment power over the shares being offered under this prospectus.
The address of Enable Opportunity Partners, LP is 95 Revere Drive, Suite
A Northbrook, IL 60062.
(30) Includes 62,500 shares of common stock issuable upon conversion of shares
of Series A 6% Convertible Preferred Stock and 62,5000 shares of common
stock issuable upon exercise of a warrant.
(31) Consists of 15,000 shares of common stock issuable upon exercise of a
warrant.
(32) Includes 100,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 450,000 shares of
common stock issuable upon exercise of a warrant.
(33) Includes 375,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 225,000 shares of
common stock issuable upon exercise of a warrant.
(34) Includes 50,250 shares of common stock issuable upon conversion of shares
of Series B 6% Convertible Preferred Stock and 60,300 shares of common
stock issuable upon exercise of a warrant. Matthew Harman has voting and
investment power over the shares being offered under this prospectus. The
address of Harman Stoller Capital Partners II LTD is 650 Fifth Avenue,
5th Floor, New York, NY 10019.
(35) Consists of 510 shares of common stock issuable upon exercise of a
warrant.
(36) Consists of 47,050 shares of common stock issuable upon exercise of a
warrant.
(37) Includes 287,500 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 345,000 shares of
common stock issuable upon exercise of a warrant.
(38) Includes 193,750 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 232,500 shares of
common stock issuable upon exercise of a warrant. David Bunzel has voting
and investment power over the shares being offered under this prospectus.
The address of Irvine Capital International, Ltd. is Manhattanville Road,
Suite 105, Purchase NY 10577.
(39) Includes 362,500 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 435,000 shares of
common stock issuable upon exercise of a warrant. David Bunzel has voting
and investment power over the shares being offered under this prospectus.
The address of Irvine Capital Partners, L.P. is Manhattanville Road,
Suite 105, Purchase NY 10577.
(40) Includes 68,750 shares of common stock issuable upon conversion of shares
of Series B 6% Convertible Preferred Stock and 82,500 shares of common
stock issuable upon exercise of a warrant. David Bunzel has voting and
investment power over the shares being offered under this prospectus. The
address of Irvine Capital Partners III, L.P. is Manhattanville Road,
Suite 105, Purchase NY 10577.
(41) Consists of 5,765 shares of common stock issuable upon exercise of a
warrant.
(42) Includes 1,000,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 3,000,000 shares of
common stock issuable upon exercise of a warrant.
(43) Includes 100,000 shares of common stock issuable upon exercise of a
warrant. Patrick Carmichael has voting and investment power over the
shares being offered under this prospectus. The address of JP Turner and
Company is 3340 Peachtree Road, Suite 2300, Atlanta GA 30326.
(44) David Bromberg has voting and investment power over the shares being
offered under this prospectus. The address of KBK Ventures, Inc is 25227
Grogan's Mill Road #125, The Woodlands, TX 77380.
(45) Howard Abrams is the controlling person K-Com Communications, Inc and has
voting and investment power over the shares being offered under this
prospectus. The address of K-Com Communications, Inc is 3945 Wasatch
Boulevard, #282, Holladay UT 84124.
(46) Includes 187,500 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 225,000 shares of
common stock issuable upon exercise of a warrant.
(47) Includes 62,500 shares of common stock issuable upon conversion of shares
of Series B 6% Convertible Preferred Stock and 75,000 shares of common
stock issuable upon exercise of a warrant.
(48) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 150,000 shares of
common stock issuable upon exercise of a warrant.
19
(49) Includes 50,000 shares of common stock issuable upon conversion of shares
of Series B 6% Convertible Preferred Stock and 60,000 shares of common
stock issuable upon exercise of a warrant. Michael L. Gruber is Trustee
and has voting and investment power over the shares being offered under
this prospectus.
(50) Includes 666,623 shares of common stock issuable upon exercise of a
warrant. Ian Ellis has voting and investment power over the shares being
offered under this prospectus. The address of MicroCapital Fund LP is 201
Post Street, #1001, San Francisco, CA 94108.
(51) Includes 999,933 shares of common stock issuable upon exercise of a
warrant. Ian Ellis has voting and investment power over the shares being
offered under this prospectus. The address of MicroCapital Fund LTD is
201 Post Street, #1001, San Francisco, CA 94108.
(52) Timothy Moody has voting and investment power over the shares being
offered under this prospectus. The address of Mid South Capital Inc is
3500 Parkway Lane #415, Norcross, GA 30092.
(53) Includes 3,750,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 4,500,000 shares of
common stock issuable upon exercise of a warrant. Midsummer Capital, LLC
is the investment manager to Midsummer Investment Ltd. By virtue of such
relationship, Midsummer Capital, LLC may be deemed to have dispositive
power over the shares owned by Midsummer Investment Ltd. Midsummer
Capital, LLC disclaims beneficial ownership of such shares. Mr. Michel
Amsalem and Mr. Scott Kaufman have delegated authority from the members
of Midsummer Capital, LLC with respect to the shares of common stock
owned by Midsummer Investment Ltd. Messrs. Amsalem and Kaufman may be
deemed to share dispositive power over the shares of our common stock
owned by Midsummer Investment Ltd. Messrs. Amsalem and Kaufman disclaim
beneficial ownership of such shares of our common stock and neither
person has any legal right to maintain such delegated authority.
(54) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 150,000 shares of
common stock issuable upon exercise of a warrant.
(55) Includes 250,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 250,000 shares of
common stock issuable upon exercise of a warrant.
(56) Includes 146,500 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 175,800 shares of
common stock issuable upon exercise of a warrant. HS Management LLC is
the controlling entity of Paradigm Equities Fund II LTD and has voting
and investment power over the shares being offered under this prospectus.
The address of Midsummer Investment, Ltd. is 650 Fifth Avenue, 5th Floor,
New York, NY 10019.
(57) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 150,000 shares of
common stock issuable upon exercise of a warrant.
(58) Includes 50,000 shares of common stock issuable upon conversion of shares
of Series B 6% Convertible Preferred Stock and 60,000 shares of common
stock issuable upon exercise of a warrant.
(59) Consists of 350,000 shares of common stock issuable upon exercise of a
warrant.
(60) Includes 250,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 300,000 shares of
common stock issuable upon exercise of a warrant. Marc K. Swickie has
voting and investment power over the shares being offered under this
prospectus. The address of Professional Traders Fund, LLC is 1400 Old
Country Road, Suite 206, Westbury, NY 11590.
(61) Includes 625,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 625,000 shares of
common stock issuable upon exercise of a warrant. RHP Master Fund, Ltd.
is a party to an investment management agreement with Rock Hill
Investment Management, L.P. a limited partnership of which the general
partner is RHP General Partner, LLC. Pursuant to such agreement, Rock
Hill Investment Management directs the voting and disposition of shares
owned by RHP Master Fund. Messrs. Wayne Bloch and Peter Lockhart own all
of the interests in RHP General Partner. The aforementioned entities and
individuals disclaim beneficial ownership of the common stock owned by
the RHP Master Fund.
(62) Includes 90,000 shares of common stock issuable upon exercise of a
warrant. Erick Richardson and Nimish Patel are the controlling persons of
Richardson & Patel LLP, legal counsel to the Company, and have voting and
investment power over the shares being offered under this prospectus. The
address of Richardson & Patel LLP is 10900 Wilshire Boulevard, Suite 500,
Los Angeles, California 90024.
(63) Includes 25,000 shares of common stock issuable upon conversion of shares
of Series A 6% Convertible Preferred Stock and 25,000 shares of common
stock issuable upon exercise of a warrant.
(64) Robert Giordano has voting and investment power over the shares being
offered under this prospectus. The address of ROI Group Associates, Inc.
is 39 Broadway, Suite 2410, New York, NY 10006.
(65) Jeff Salzwedal has voting and investment power over the shares being
offered under this prospectus. The address of Salzwedal Financial
Communications, Inc is 1800 SW Blankenship Road, Suite 275, West Linn,
OR, 97068.
(66) Includes 250,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 250,000 shares of
common stock issuable upon exercise of a warrant. Don Weir has voting and
investment power over the shares being offered under this prospectus.
(67) Consists of 60,000 shares of common stock issuable upon exercise of a
warrant. Don Wier and Don Sanders have voting and investment power over
the shares being offered under this prospectus. The address of Sanders
Morris Harris is 600 Travis Street # 3100 Chase Tower, Houston, TX 77002.
(68) Includes 383,650 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 383,650 shares of
common stock issuable upon exercise of a warrant. Don Wier and Don
Sanders have voting and investment power over the shares being offered
under this prospectus. The address of Sanders Opportunity Fund Inst., LP
is 600 Travis Street # 3100 Chase Tower, Houston, TX 77002.
(69) Includes 116,350 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 116,350 shares of
common stock issuable upon exercise of a warrant. Don Wier and Don
Sanders have voting and investment power over the shares being offered
under this prospectus. The address of Sanders Opportunity Fund, LP is 600
Travis Street # 3100 Chase Tower, Houston, TX 77002.
(70) Includes 375,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 375,000 shares of
common stock issuable upon exercise of a warrant.
(71) Includes 250,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 250,000 shares of
common stock issuable upon exercise of a warrant.
(72) Consists of 5,255 shares of common stock issuable upon exercise of a
warrant.
(73) Includes 50,000 shares of common stock issuable upon conversion of shares
of Series B 6% Convertible Preferred Stock and 60,000 shares of common
stock issuable upon exercise of a warrant.
(74) Includes 50,000 shares of common stock issuable upon conversion of shares
of Series B 6% Convertible Preferred Stock and 60,000 shares of common
stock issuable upon exercise of a warrant.
(75) Includes 25,000 shares of common stock issuable upon conversion of shares
of Series B 6% Convertible Preferred Stock and 30,000 shares of common
stock issuable upon exercise of a warrant.
(76) Consists of 15,000 shares of common stock issuable upon exercise of a
warrant.
(77) Consists of 144,248 shares of common stock issuable upon exercise of a
warrant. Kyle Rowe has voting and investment power over the shares being
offered under this prospectus. The address of Solomon Grey Financial
Services is 5430 LBJ Freeway, Suite 1626, Dallas, TX 75240.
(78) Includes 120,000 shares of common stock issuable upon exercise of a
warrant. Guy Bertin has voting and investment power over the shares being
offered under this prospectus. The address of SPGP is 17 Avenue Matignon,
Paris, 75008, France.
(79) Includes 250,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 300,000 shares of
common stock issuable upon exercise of a warrant. Stanley S. Raphael is
Trustee and has voting and investment power over the shares being offered
under this prospectus. The address of Stanley S. Raphael Trust is 4221
Bocaire Blvd., Boca Raton, FL 33487.
(80) Includes 240,750 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 288,900 shares of
common stock issuable upon exercise of a warrant. HS Management LLC is
the controlling entity of The Harman Stoller Capital Partners Master Fund
LTD and has voting and investment power over the shares being offered
under this prospectus. The address of The Harman Stoller Capital Partners
Master Fund LTD is 650 Fifth Avenue, 5th Floor, New York, NY 10019.
20
(81) Consists of 23,875 shares of common stock issuable upon exercise of a
warrant. Robert Wein has voting and investment power over the shares
being offered under this prospectus. The address of vFinance Investments
Inc. is 3010 Military Trail, Suite 300, Boca Raton, FL 33431.
(82) Includes 250,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 300,000 shares of
common stock issuable upon exercise of a warrant. Eric and Vincent
Manngard have voting and investment power over the shares being offered
under this prospectus. The address of Vincent Manngard and Eric Manngard
Partnership is 196 East Main Street, Huntington, NY 11743.
(83) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 150,000 shares of
common stock issuable upon exercise of a warrant.
(84) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series A 6% Convertible Preferred Stock and 125,000 shares of
common stock issuable upon exercise of a warrant.
(85) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 150,000 shares of
common stock issuable upon exercise of a warrant. William Silver has
voting and investment power over the shares being offered under this
prospectus. The address of Weiskopf, Silver & Co., L.P. is 230 Park
Avenue, Suite 1550, New York, NY 10169.
(86) Includes 125,000 shares of common stock issuable upon conversion of
shares of Series B 6% Convertible Preferred Stock and 150,000 shares of
common stock issuable upon exercise of a warrant.
(87) Consists of 250,000 shares of common stock issuable upon exercise of a
warrant.
21
PLAN OF DISTRIBUTION
Each Selling Security Holder and any of their pledges, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on the OTC Bulletin Board or any other stock exchange, market
or trading facility on which the shares are traded or quoted or in private
transactions. These sales may be at fixed or negotiated prices. A Selling
Security Holder may use any one or more of the following methods when selling
shares:
. ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
. block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
. purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
. an exchange distribution in accordance with the rules of the
applicable exchange;
. privately negotiated transactions;
. settlement of short sales entered into after the effective date of the
registration statement of which this prospectus is a part;
. broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
. a combination of any such methods of sale;
. through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
. any other method permitted pursuant to applicable law.
A Selling Security Holder may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available,
rather than under this prospectus.
Broker-dealers engaged by a Selling Security Holder may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from a Selling Security Holder (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser)
in amounts to be negotiated, but, except as set forth in a supplement to this
Prospectus, in the case of an agency transaction not in excess of a customary
brokerage commission in compliance with NASDR Rule 2440; and in the case of a
principal transaction a markup or markdown in compliance with NASDR IM-2440.
In connection with the sale of the Common Stock or interests therein, a
Selling Security Holder may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn engage in
short sales of the Common Stock in the course of hedging the positions they
assume. A Selling Security Holder may also sell shares of the Common Stock
short and deliver these securities to close out their short positions, or loan
or pledge the Common Stock to broker-dealers that in turn may sell these
securities. A Selling Security Holder may also enter into option or other
transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities which require the delivery to
such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The Selling Security Holder and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Stockholder
has informed the Company that it does not have any written or oral agreement
or understanding, directly or indirectly, with any person to distribute the
Common Stock. In no event shall any broker-dealer receive fees, commissions
and markups which, in the aggregate, would exceed eight percent (8%). The
following Selling Security Holders are NASD registered brokers or
broker-dealers, or affiliates of NASD Broker Dealers: Baxter Capital Advisors,
Barry Zelin, Vince Calicchia, Reed Fryermuth, David Jordon, JP Turner and
Company, Mid South Capital, Inc., John Rich, Don Sanders, Gary Shemano,
Solomon Grey Financial Services, vFinance Investments, Inc. and Donald Weir.
The foregoing Selling Security Holders received the securities being
registered in this prospectus in the ordinary course of business, and at the
time of their receipt, had no agreements or understandings, directly or
indirectly, with any person to distribute the securities being registered in
this prospectus.
The Company is required to pay certain fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the Selling Security Holder against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act.
Because Selling Security Holder may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by
this prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
Each Selling Stockholder has advised us that they have not entered into any
written or oral agreements, understandings or arrangements with any
underwriter or broker-dealer regarding the sale of the resale shares. There is
no underwriter or coordinating broker acting in connection with the proposed
sale of the resale shares by the Selling Security Holders.
22
We agreed to keep this prospectus effective until the earlier of (i) the date
on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii)
all of the shares have been sold pursuant to the prospectus or Rule 144 under
the Securities Act or any other rule of similar effect. The resale shares will
be sold only through registered or licensed brokers or dealers if required
under applicable state securities laws. In addition, in certain states, the
resale shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to the Common Stock for a period of
two business days prior to the commencement of the distribution. In addition,
the Selling Stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including Regulation M,
which may limit the timing of purchases and sales of shares of the Common
Stock by the Selling Stockholders or any other person. We will make copies of
this prospectus available to the Selling Stockholders and have informed them
of the need to deliver a copy of this prospectus to each purchaser at or prior
to the time of the sale.
23
DESCRIPTION OF BUSINESS
iMedia International Inc. is a digital convergence media company and
interactive multi-media content creator. We are strategically positioned and
poised to exploit the paradigm-shift created by the new digital world. This
shift is now affecting all media, communications, marketing and commerce
globally. Businesses, governments and organizations are demanding immediate
accountability and definitive results for each marketing and communications
dollar spent.
The Internet, print, broadcast and wireless communications independently reach
an audience, but by themselves cannot fulfill these demands.
Over the past five years, iMedia has created, developed and implemented
"Digital iMedia Solutions" that successfully fulfill these demands. Our
solutions seamlessly converge print, multi-media, broadcast and the Internet
together, that deliver an engaging, interactive multi-media presentation to
any targeted audience and instantly determine the results.
Because of its limitations, most traditional media is limited to creating
brand, product or organization awareness. There is usually very little 'call
to action' for the consumer, and the effect is that advertisers only enjoy a
fractional return on investment for each advertising dollar. Our digital
solutions not only allow for impressive branding opportunities, but more
importantly inform the consumer and then lead the consumer to make a purchase
or transaction immediately. Because our digital media is interactive, we can
measure the consumer's interest and response throughout the entire process,
and report this response to the advertiser or sponsor all in real-time.
Our proprietary brands, technologies and business models provide us the
opportunity to deliver rich, engaging interactive digital media to any
targeted audience, and to participate in the unlimited retail transactional
opportunities that result from each consumer's response. We have effectively
converged digital multi-media, interactive advertising and retail sales with
efficient and economical distribution devices that have mass appeal.
Physically Deliverable Multi-Media
We believe that two fundamental keys to generating high consumer response in
any marketing program are: the ability to target market and the ability to
capture consumer's attention in a meaningful way.
iMedia accomplishes both using various proven models. We partner with
traditional print media for distribution of our multi-media productions. These
include magazines and newspapers which have well established targeted
audiences. We also exploit catalogs and direct mail as other distribution
sources. Because we know in advance both the demographic and psychographic
makeup of these audiences, we can produce an optical disc (CD-ROM or DVD-ROM)
that is designed specifically for, and that can be physically delivered to
that targeted audience. Each disc contains engaging content along with
advertising and sponsor's messages. The content varies depending upon the
advertiser's goals, but might contain movie, entertainment, sports or travel
or other content specifically chosen to appeal to the targeted audience.
Because our productions are targeted, there is a high probability that our
discs will be viewed. Our internal research statistics show that on an average
60% of the discs we distribute are viewed for an average of 10-12 minutes
each. Because our productions are highly interactive, we succeed in engaging
the consumer in the experience. While the consumer is engaged, we can at the
same time deliver to them specific advertising messages and a present a
'call-to-action' to respond.
This sets us apart from most traditional media. There is always a call to
action on our productions. We encourage the consumer to "buy now!" and provide
them with the ability to instantly respond and make a purchase or transaction.
Every optical disc links seamlessly and instantly with the Internet allowing
us or our sponsors to direct an interested, pre-qualified consumer instantly
to a pre-determined webpage where they can buy the product or service offered.
Our disc productions are distributed as digital enhancements to magazines,
newspapers, catalogs and direct mail pieces. We can then deliver effective
multi-media presentations to any targeted audience without the 30-second
limitations imposed by television. The consumer is always directed to
click-through for more information or to make a purchase. Our technology
instantly launches their Internet browser allowing for an immediate purchase
or response.
Measurability, Reportability and Accountability
A key feature and proprietary aspect of our technology is our ability to
measure and record the navigation of a consumer while they are viewing our
productions. Without using cookies or spyware, or violating the privacy of any
user, we know when a consumer puts our disc in, how long they watched it, what
content they saw, what advertisements they saw, even how long they may have
watched a video or commercial before moving on. We track and compile this
data, and can sort it by time of day, zip code, city, or state. We know
immediately what is the most popular content or advertisements, and conversely
which the content or advertisement the consumer liked least. We can then
report the effectiveness of a campaign instantly and in real-time to our
advertisers, clients and sponsors using our web-based reporting system.
24
Convergence Media Follows Up Consumer Interest
Because our discs are interactive, we can provide our clients and sponsors
with follow-up sales programs that traditional media cannot provide. These
additional digital solutions include instant messaging from call center
operators, live chat capability, viral marketing opportunities and telephone
voice casting. Our media does more than just deliver messages. We deliver
prepared, informed consumers to sellers of products and services, and allow
advertisers to follow up on interest using state-of-the art digital
technology. While some of these services are offered as stand-alone components
by traditional marketing companies, our ability to include a complete turn-key
digital solution package that includes all of these features is unique in the
marketing and media industry.
The Market
According to the 2002 Report by the International Recording Media Association
in 2002, U.S. companies spent over $208 billion in direct-to-consumer
advertising alone. This does not include the billions of dollars spent for
traditional print, outdoor and broadcast marketing. There are over one hundred
different vertical markets that are potential users of our convergent media.
Our Business Models
We have multiple revenue models, each with multiple revenue streams. We
incorporate both business-to-business and business-to-consumer models.
Revenues are generated from advertising, production, replication,
distribution, transactions, data collection, data sales, subscriptions,
product merchandising and from ancillary follow-up marketing services.
Our overall business model has tremendous scalability and continuity. Each
division co-brands and supports the products, services brands and sponsors
offered/featured by the Company's other divisions. Revenue models are modular
and transition easily from vertical market to vertical market, and work in any
country in the world. It is the scalability of our underlying business models
along with the infinite number of vertical markets that provide for growth
opportunities as our digital solutions become adopted as the backbone of the
new-media, online retailing and advertising industries.
Business-To-Business Sales
Approximately 98% of the Company's current revenues are currently generated in
business-to-business (B2B) sales. We anticipate that while our B2B business
will continue to grow exponentially, it could eventually become eclipsed by
our business-to-consumer operations.
B2B projects and productions usually consist of custom interactive media
programs developed and produced specifically for promoting a particular event,
television show, product or service. The Company reduces its risk on these
projects because all costs and gross margins are known in advance and rarely
change after contracting.
Our B2B models continue to expand. We intend to continue developing new models
that will generate additional revenue or raise gross profits without
increasing the net cost of our services to our B2B clients. We do this by
offering other follow-up programs that are sold as part of our digital
solutions programs. These programs produce revenues from transactions,
merchandising, and our follow-up marketing programs. These solutions include
instant messaging, call center support, and advanced e-mail and voice cast
technologies. In addition, we continue to collect data on each program, its
users and the resulting transactions. This data can then be analyzed and sold
to various third parties.
Our B2B business allows us to develop relationships with the worlds largest
corporations, provides a stable and projectable source of revenues and income,
and offers unlimited potential for growth.
Our Proprietary Brands
The business and revenue models surrounding our various proprietary products
and brands has the ability to quickly eclipse the B2B digital solutions
business we currently offer to our various clients and customers. Most
importantly, our proprietary brands allow us to control pricing, thereby
providing the Company with much higher gross profit margins, as we face no
competitive pricing issues.
Currently, our proprietary brand consists of Hollywood Previews(TM) iMagazine.
We are currently developing Stock Previews(TM) iMagazine, iBuy Direct(TM)
Catalog and Travel Previews(TM) iMagazine.
Each of these products serve unique and specific audiences, and complement the
Company's penetration into the following four targeted vertical markets:
Entertainment, Finance, Travel and Direct Response marketing. The Company is
currently developing other proprietary titles that will allow for expansion
into the Sports, Automobile, Health, Lifestyle, Fashion, Wireless Applications
and Education markets.
25
Because we own both our brand and control the content, we are not limited to
the distribution of this content only on optical disc. We have begun to
utilize various forms of existing digital distribution so as to maximize our
revenue, reach and exposure. While we currently distribute our content and
productions on optical disc and via the Internet, we intend to begin offering
distribution of streaming media on new G3 wireless cell phones. We also intend
on beginning production of a 30-minute weekly television show featuring
Hollywood Previews(TM) content.
Newspaper Syndication
Beginning with Hollywood Previews, the Company's flagship publication, we
offer publishers of traditional newspapers and magazines the ability to
purchase or to partner with the Company custom branding Hollywood Previews(TM)
iMagazine as an interactive, multi-media enhancement for their publications.
We offer each newspaper up to half of the ad positions on each disc, and offer
to brand their newspaper on our cover. The revenue model is similar to that a
network television show where local, regional and national advertisers all
participate.
Using newspaper syndication, it is the Company's goal to reach a targeted
distribution of 10 million Hollywood Previews iMagazines on a monthly basis by
year-end 2007. Commensurate with the distribution of Hollywood Previews, the
Company intends expanding its newspaper syndication model to include its other
brands: Travel Previews, Stock Previews, Health Previews and Auto Previews. We
can now offer newspapers and their readers the ability to have a regular,
weekly multi-media supplement as part of their newspaper experience.
Corporate Structure
iMedia International, Inc. is a holding company structured to operate using
various operating divisions and subsidiaries. Currently, the Company's main
operating unit is iMedia International LLC, a California limited liability
company. This wholly owned subsidiary contains four operating divisions. The
Company also does business under another wholly owned subsidiary Hollywood
Previews, Inc., a California Corporation. We will continue to use this
subsidiary to incorporate the strategic growth initiatives of Hollywood
Previews iMagazine.
The Company's six current divisions include:
. Business-to-Business Division
. Entertainment Division
. Automotive Division
. Direct Response Marketing Division
. Travel and Leisure Division
. Finance Division
As the Company expands operations, it will continue to form new business
divisions to develop various other targeted vertical markets such as:
. Sports Division
. Fashion Division
. Life Sciences Division
. Political Campaigns Division
. Print Publishing Division
. Wireless Applications
Because the fundamental and underlying business model is modular and
scaleable, it is the Company's goal to begin international expansion of its
operations beginning in 2006. We intent to initially target the following
English speaking markets by creating subsidiary operations in:
. The United Kingdom
. Australia
. Canada
Subsequently, and subject to capital availability, we also intend to form
additional subsidiaries to service and expand operations into the following
international markets:
26
. Japan
. Western Europe
. China
. South America
. India
Revenue Streams
The Company has developed multiple revenue models and multiple revenue streams
within each model. Some revenue streams are more easily projectable as they
are based upon certain established parameters and assumptions. These
projectable revenue streams include revenues from:
. Pre-production and production
. Manufacturing and replication
. Distribution
. Digital Media Consulting
. Continuity advertising programs
. Subscription revenues
. Syndication revenues
. Placement revenues (advertorials) and others
Other revenue streams are variable and in some cases dependant upon consumer
response. These types of revenue streams include:
. Transactional revenues
. Transaction fees
. Sponsorships
. Local and regional advertising
. Participation Programs
. Revenue Share Programs
. Data collection and sales and others
Internet Solutions and Destination Websites
The Company has developed it first destination website at
www.hollywoodpreviews.tv. The website exploits the variety of content
currently available and produced for the Hollywood Previews(TM) iMagazine, its
wireless distribution and its planned television programming. Using a
traditional Internet model, the Company generates revenues from banner and
click-though advertising and from the sale of movie tickets, DVD's and video
games using our proprietary shopping cart solution.
Hollywood Previews is the first of the Company's future destination websites.
We intend to create new destination sites for each of the vertical markets
and/or proprietary brands currently under development. Again, the model is
simple: our discs brand our wireless, which brand our broadcast TV, which
brand our Internet sites which brand our newspaper syndications. Advertisers
and sponsors are provided with a great diversity of exposure and distribution
opportunities and at the same time, we establish and build our national
brands.
Transactional Revenues
The Company has proven that our interactive digital discs are highly effective
in driving consumer transactions. To exploit this opportunity, we endeavor to
incorporate some form of digital transactional media on each program we
create, whether this is for a custom B2B client or for our proprietary brands.
As part of each program, we desire to participate in a portion of the revenues
derived from each transaction we generate. This may be as little as a $0.50
fee for processing a transactions through our shopping cart solution, or as
much as 50% of the retail sale for some of our direct-to-consumer marketing
products.
Data Collection and Data Sales
The interactive capability of the Company's media allows for opportunities for
data collection. Our data collection model is still in its infancy, but will
continue to be developed on an ongoing basis. With the potential for millions
of discs being distributed on a annual basis, and the ability of the Company
to generate profiles for various demographic audiences that are based on hard
data, the ability for iMedia to launch into the data, survey, polling and lead
generation business is tremendous, and offers one more major profit and
revenue center for the Company and its operations.
27
DESCRIPTION OF PROPERTY
Our principal management offices are located at 1721 21st Street, Santa
Monica, California. The property is leased on a month-to-month basis and
consists of 3,000 square feet of mixed-use office, production and warehouse
space. Annual rent expense is approximately $39,000.
Office equipment consist of computers, servers, audio and video editing
equipment, CD duplication equipment and other miscellaneous equipment that in
management's opinion are in overall good operating condition and adequate to
meet our immediate needs. We foresee the need to acquire additional or larger
facilities in order to attain and service our projected growth. In addition,
we will need to continually upgrade or acquire additional audio-video
equipment computer software and hardware and other devices. We are dependant
upon using state-of-the-art technology to produce and distribute our products.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This "Management's Discussion and Analysis and Plan of Operation" contains
"forward-looking statements" that include information relating to future
events, future financial performance, strategies, expectations, competitive
environment, regulation and availability of resources. These forward-looking
statements include, without limitation, statements regarding: proposed new
services; our expectations concerning litigation, regulatory developments or
other matters; statements concerning projections, predictions, expectations,
estimates or forecasts for our business, financial and operating results and
future economic performance; statements of management's goals and objectives;
and other similar expressions concerning matters that are not historical
facts. Words such as "may," "will," "should," "could," "would," "predicts,"
"potential," "continue," "expects," "anticipates," "future," "intends,"
"plans," "believes" and "estimates," and similar expressions, as well as
statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of
the times at, or by which, that performance or those results will be achieved.
Forward-looking statements are based on information available at the time they
are made and/or management's good faith belief as of that time with respect to
future events, and are subject to risks and uncertainties that could cause
actual performance or results to differ materially from those expressed in or
suggested by the forward-looking statements.
Forward-looking statements speak only as of the date they are made. You should
not put undue reliance on any forward-looking statements. We assume no
obligation to update forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting forward-looking
information, except to the extent required by applicable securities laws. If
we do update one or more forward-looking statements, no inference should be
drawn that we will make additional updates with respect to those or other
forward-looking statements.
Overview
Pursuant to an Agreement and Plan of Merger dated as of August 18, 2003 (the
"Merger Agreement"), a wholly owned subsidiary of the Company's corporate
predecessor, Irvine Pacific Corporation ("IPC") merged with and into Hollywood
Previews, Inc. ("HPI"), on August 29, 2003, resulting in HPI becoming a wholly
owned subsidiary of IPC (the "Acquisition").
As consideration for the Acquisition, the shareholders of HPI were issued
55,179,581 shares of IPC common stock which, immediately following the
Acquisition, represented 96.18% of the issued and outstanding common stock of
IPC (after giving effect to the conversion of all of IPC's outstanding notes
immediately prior to the Acquisition). Although HPI became a wholly owned
subsidiary following the Acquisition, because the transaction resulted in a
change of control, the transaction was recorded as a "reverse merger" whereby
HPI is considered to be the accounting acquirer of the Company. Immediately
prior to the Acquisition IPC had only nominal assets and liabilities and no
current business operations.
Effective November 25, 2003, IPC completed a statutory merger effected for the
purpose of changing its state of incorporation from Colorado to Delaware by
merging into a newly formed Delaware corporation, iMedia International, Inc.
(the "Company"). This change in IPC's state of incorporation and corporate
name was approved by the shareholders of a majority of IPC's outstanding
shares of common stock at a special meeting of shareholders on November 21,
2003.
As a result of the reincorporation merger, each outstanding share of IPC's
common stock was automatically converted into one share of Company common
stock. Each stock certificate representing issued and outstanding shares of
IPC's common stock continues to represent the same number of shares of common
stock of the Company. The Company continues to operate the business of IPC,
and the reincorporation did not result in any change in IPC's former business,
assets or liabilities, did not cause the Company's headquarters to be moved,
or result in any relocation of management or other employees.
At the time of the Acquisition, HPI held an exclusive license from
iPublishing, Inc. ("iPublishing"), an affiliate of the Company, to use
iPublishing's intellectual property (the "License"). iPublishing's three
shareholders, David MacEachern, Scott Kapp and Franklin Unruh (each of whom
own approximately 33% of the outstanding securities of iPublishing), are each
officers and directors of the Company. Pursuant to the License, iPublishing
receives annual royalties of 5% of Gross Margin generated by discs produced by
the Company using iPublishing technology. Because the License is exclusive,
iPublishing may not license or assign any of its intellectual property to any
other party and may not compete with the Company. It is the Company's
intention to permanently acquire all of iPublishing's intellectual property at
some point in the future when operations and revenue have stabilized. In
connection with the exclusive license, HPI purchased all of iPublishing's
property and equipment, which iPublishing had previously purchased from one of
its shareholders and officers. The purchase transaction has been accounted for
at the carry-over basis of the assets at which they were obtained by the
shareholder/officer of iPublishing. HPI has since transferred the exclusive
license to its parent, the Company. The intellectual property covered by the
License consists of various proprietary procedures, codes, technologies,
copyrights, trademarks and brands, along with the proprietary suite of
mastering software used to create our CD-ROM and DVD-ROM products.
29
As a result of the Acquisition, we became a publisher of interactive, digital,
and multimedia publications on CD-ROM. The Company markets and produces a
variety of special edition digital publications and custom promotional discs
for various corporate clients. We also distribute Hollywood Previews(TM)
Entertainment iMagazine(TM), an interactive digital magazine (also called an
iMagazine) on CD-ROM that features movie previews, video games, and television
previews, plus interviews with stars, behind the scenes videos, music
soundtracks and music videos, Hollywood fashion and style, and other
entertainment news. Hollywood Previews(TM) Entertainment iMagazine(TM) is used
primarily to showcase the Company's proprietary digital publishing system
capabilities. The Company's publications are distributed in a variety of
methods including insertions in major metropolitan newspapers, insertions in
major magazines and periodicals, hand-outs using targeted street teams, at
movie theater box offices, in back-end fulfillment and packaging, or via
direct mail to consumers.
The majority of our revenues to date have been generated from the sale of
custom publications and special edition discs. We continue to pursue the
procurement of paid advertising sponsorships, licensing, content placements,
and e-commerce fees from Hollywood Previews(TM) Entertainment iMagazine(TM).
We also intend to begin sales efforts of our proprietary data and usage report
technology that has the ability to monitor the navigation and use of Hollywood
Previews(TM) Entertainment iMagazine(TM), and our other custom disc products
by their audiences.
The Company is a holding company doing business through various operating
subsidiaries. We formed iMedia US, LLC, a California limited liability company
as a wholly owned subsidiary on December 24, 2003, to serve as our primary
operating unit for developing custom publications and special edition discs.
Strategic Distribution Partners
We are continuing to forge relationships with major publishers of newspapers
and magazines for strategic distribution for our customer discs and Hollywood
Previews (TM) Entertainment iMagazine (TM). We are working closely with these
publishers to develop a series of interactive, digital enhancements that will
serve as digital supplements to their publications.
In conjunction with a major metropolitan newspaper, we intend to underwrite
the costs for several unique new publications so as to guarantee publication
and distribution over the next nine months. By undertaking to subsidize any
revenue we ensure continuity of our publishing calendar with the newspaper and
our potential sponsors.
For each strategic distribution publishing partner, we plan to implement a
revenue sharing program that will allow us to participate in the combined
sponsorship revenues.
Custom Discs
A major portion of our efforts and resources are spent on the development of
special edition and custom interactive publications for a variety of
industries and corporate clientele.
We foresee that the custom disc market will constitute a major part of our
future revenues. We have identified and have developed new products
specifically targeted to these new markets, industries and sectors. We intend
to use a portion of our capital on an ongoing basis to develop these targeted
markets.
We will continue to open up new segments of industry and commerce and new
lines of distribution. Topics and sectors include entertainment, sports,
travel, information, medical, wireless, automotive and direct marketing.
RESULTS OF OPERATIONS
Revenues are generated from the sale of paid advertising sponsorships,
licensing, content placements, and e-commerce fees, plus the sale to
advertisers and content providers of the Company's proprietary usage report
that monitors the use of publications by their audiences.
The consolidated financial statements of iMedia International Inc., as of
December 31, 2003, December 31, 2004 and June 30, 2005 include the accounts of
the Company and its wholly owned subsidiaries HPI, iMedia US LLC, and iMedia
Nevada, LLC.
On a combined basis, the Company has incurred operating losses since inception
due to the expenses involved with production, fundraising and for general and
administrative expenses. Significant expenditures at the corporate level
continue. These outlays include production and distribution costs, fundraising
costs, marketing costs, growth initiatives, legal, accounting and other
professional fees.
30
Results of Operations for the years ended December 31, 2003 compared to
December 31, 2004 and for the six months ended June 30, 2005 compared to the
six months ended June 30, 2004:
SALES
Net sales increased $1,771,814 or 341% from $518,720 for the year ended
December 31, 2003 to $2,290,534 for the year ended December 31, 2004. The
Company shifted its sales emphasis to the production of special edition and
custom discs while it is in the process of raising the capital to launch its
proprietary products such as Hollywood Previews(TM) Entertainment Magazine.
Net sales increased $1,222,176 or 132% for the six months ended June 30, 2005
to $2,147,351 from $925,175 for the six months ended June 30, 2004.
The increase in sales for the six months June 30, 2005 versus the same time
period in June 30, 2004 is primarily due to an increase in our customer base
as a result of implementing our marketing plan. Our customer base increased
from 3 customers in the first half of 2004 to 14 customers in fiscal 2005. Our
sales consisted of custom productions to augment our various customers
marketing and advertising programs. As of June 30, 2005 we have sales backlog
of approximately $1.0 million which we expect to recognize in the third
quarter of 2005. During the first half of 2004 and 2005 our customer base
consisted primarily of companies in the entertainment business. This includes
television networks, casinos, and entertainment ensembles. We expect to
continue attracting customers in the entertainment area but we have begun to
target other significant potential customers, including the wireless and
automotive industries. We anticipate generating revenues from these additional
industries sometime in 2005.
The Company does not believe that in the near future its earnings from sales
to customers will be overly concentrated to any one or to only a few
customers. The Company's business plan calls for sales to a wide variety of
customers and with a wide variety of interests. Similarly, the Company's
purchases will not be over concentrated with any one or only a few vendors.
Cost of sales and gross profit
Cost of sales increased $2,197,490 or 596% from $368,156 for the year ended
December 31, 2003 to $2,565,646 for the year ended December 31, 2004, compared
with in the prior year. The increase in cost of sales is attributable to the
overall increase in sales. The increase in gross profit margin from 29% for
the year ended December 31, 2003 to -12% for the year ended December 31, 2004
is the result of customer acquisition and pilot programs.
Cost of sales increased $944,123 or 122% for the six months ended June 30,
2005 to $1,715,232 from $771,109 for the six months ended June 30, 2004. Gross
profit as a percentage of sales for the six months ended June 30, 2005 versus
the six months ended June 30, 2004 is 20% and 16.6%, respectively.
The increase in cost of goods sold in absolute dollars for the six months
ended June 30, 2005 versus the same time period in 2004 is due to increased
sales. During 2005, it is anticipated that sales and cost of sales shall
constitute a variety of design, manufacturing, replication and advertising,
and that the cost of sales will average 20% to 40% of gross revenues. We may
also be required to vary the profitability of each project so as to establish
market share. During the six months ended June 30, 2005 we incurred costs
related to a promotion with Amazon.com. This promotion consisted of providing
Hollywood Preview discs to Amazon for inclusion with their shipped products.
This promotion had no corresponding revenue associated with it. The impact on
our margins was negative however we anticipate that our success with this
project will promote our suite of products and proprietary ideas into the
future with Amazon. The Company does foresee the need to continue its policy
of cost variation or promotion in order to achieve significant market
penetration and brand recognition.
OPERATING EXPENSES
Operating expenses increased $1,147,170 or 45% from $2,551,494 for the year
ended December 31, 2003 to $3,698,664 for the year ended December 31, 2004.
The increase in expense is mainly attributable to higher marketing and sales
costs.
Operating expenses increased $2,046,297 or 106% for the six months ended June
30, 2005 to $3,973,626 from $1,927,329 for the six months ended June 30, 2004.
The increase in operating expenses for the six months ended June 30, 2005
versus the same time period in 2004 is due primarily to continued development
of our products, growth initiatives, expenses associated with expanded sales
efforts, as well as substantial legal and accounting costs associated with
maintaining our fully-reporting status. We have dramatically increased our
sales and marketing efforts resulting in additional operating expenses. For
the six months ended June 30, 2005, $1,864,992 or 47%, respectively of
operating expenses were associated with compensation and services paid through
the issuance of warrants as opposed to cash. For the six months ended June 30,
2004 approximately $13,000 or.6%, of operating expenses were associated with
compensation and services paid through the issuance of warrants as opposed to
cash. As our business increases, it is anticipated that operating expenses
will increase in absolute dollars, but should decrease as a percentage of
sales.
31
Operating Expenses - related parties
Operating expenses - related parties increased $49,000 or 20% for the six
months ended June 30, 2005 to $292,500 from $243,500 for the six months ended
June 30, 2004.
In lieu of hiring individuals to perform certain management functions, we have
contracted with a company owned by our officers for its management services.
Other Expense
Interest Expense
Interest expense on a combined basis increased $912,250 from $26,090 for the
year ended December 31, 2003, to $938,340 for the year ended December 31,
2004. The increase in interest expense is attributable to $1,250,000 in
additional short term financing during 2004. In addition, the company issued
warrants computed at $851,418 for the additional financing. These warrants
were recorded as additional interest expense.
Interest expense increased $547,526 or 576% for the six months ended June 30,
2005 to $642,571 from $95,044 for the six months ended June 30, 2004. Interest
expense for the six months ended June 30, 2005 consisted primarily of the
following:
. September 2004 Bridge Financing of $403,415, which includes $340,478
of interest related to warrants issued in connection with this final
debt extension;
. The amortization of the Company's Series A-6% Convertible Preferred
Stock ("The Preferred Stock") debt discount of $92,899 and accrued
preferred stock dividends of $15,428 recorded as interest (See
"Liquidity and Capital Resources Below"); and
. Interest on payable to related parties of $94,900 for common stock
issued in lieu of interest expense.
Interest expense for the six months ended June 30, 2004 consisted primarily of
the amortization of the beneficial conversion feature of a different note
payable.
During the second quarter of 2005, we paid off the September 2004 bridge loan.
We do not anticipate any material interest expense through 2005 except for the
amortization of the debt discount on the Preferred Stock.
Loss on sale of investments
The loss on sale of investments for the six months ended June 30, 2005 of
$149,913 reflects the sale of 625,000 shares, of the Company's available for
sale investment in Langley Park. For the six months ended June 30, 2004 the
Company did not have any investment transactions.
Impairment loss on investment in available for sale securities
During the six months ended June 30, 2005 we determined that the value of our
investment in available for sale securities ("Langley Shares") has been
permanently impaired. In accordance with SFAS 115 we have recorded the
permanent impairment of this investment. The loss of $1,570,750 for the six
months ended June 30, 2005 represents the impairment loss on this investment
from the inception of the acquisition of the Langley Shares.
Value of warrants issued
In February 2005, we issued a total of 5,969,234 out-of-the-money warrants to
purchase additional shares of common stock to approximately 40 investors to
our prior private placements. We issued these warrants due to the illiquidity
experienced by these investors while it was experiencing delays in obtaining
its OTC-BB listing. 2,984,617 warrants are exercisable at the price of $1.00
per share, and 2,984,617 of these warrants are exercisable at the price of
$1.25 per share. Each warrant issued was for a one-year term and will expire
on February 2, 2006. At the date the warrants were issued, the market price of
our common stock was $.80 per share. The value of the warrants was calculated
at $439,819 using the Black-Scholes method and is recorded as "value of
warrants issued" in "other income (expense) "in the statement of operations
for the six months ended June 30, 2005.
In March 2005, we offered holders of certain one-year warrants the opportunity
to exercise these warrants at a discounted price of $.40 per share, which was
at a discount to the warrant exercise price. At the time of the offer, the
market price of our common stock was approximately $.50 per share, and there
was little trading volume. For the six months ended June 30, 2005 certain
warrant holders took advantage of this opportunity and exercised warrants for
2,874,119 shares of common stock for total proceeds to us of $1,134,962. As a
condition to the agreement, for each warrant exercised, we issued a
replacement warrant as of June 30, 2005. In all,
32
we issued to these holders of one year warrants 1,437,060 replacement warrants
with an exercise price of $1.25 to these holders and 1,437,059 replacement
warrants with an exercise price of $1.00. These replacement warrants will
expire on June 30, 2006. The total value of the 1,437,059 warrants with a
strike price of $1 per share is $181,056, calculated using the Black-Scholes
method using the following assumptions of 124% volatility, $.46 share price,
risk free interest rate of 3.50% and zero dividend yields. The total value of
the 1,437,060 warrants with a strike price of $1.25 is $148,049, using the
Black-Scholes method using the following assumptions of 124% volatility, $.46
share price, risk free interest rate of 3.50% and zero dividend yields. Total
value of all warrants issued for this transaction is $329,105. There were no
commissions paid in conjunction with these warrants.
We did not have this expense for the six months ended June 30, 2004.
Provision for Income Taxes
For the year ended December 31, 2004, 2003 and the six months ended June 30,
2005 and 2004 the provision for income taxes represents the minimum state
taxes due.
Other Comprehensive Loss
The Comprehensive loss for the year ended December 31, 2004 of $1,130,451
represents the write down of the unrealized loss in the investment in Langley
Park Investments Plc. Mutual Fund shares. This unrealized loss was caused by
the value of the Langley Park shares as quoted on the London Stock Exchange at
December 31, 2004 (Sterling 0.14 pence), declining from the cost recorded at
September 30, 2004 (Sterling 0.31 pence), the date of purchase.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the year ended December 31, 2004 was
$2,807,831, resulting primarily from a net loss of $4,914,516, compared to
$2,609,871 for the year ended December 31, 2003.
Net cash used in operating activities for the six months ended June 30, 2005
was $2,902,652. The net cash used in operations is a result of a net loss of
approximately $6,969,000 offset by approximately $3,224,000 of non cash stock
and warrant compensation and interest charges and approximately $1,720,000 of
unrealized and realized losses on the investment in Langley Shares. In
addition, we used approximately $2,009,000 for working capital purposes. Non
cash compensation charges resulted from warrants issued for consulting
services, bonuses and interest. The unrealized loss on the investment in
Langley Shares is the result of us making the determination that the shares
were permanently impaired as determined in SFAS 115. Net cash used in
operating activities for the six months ended June 30, 2004 of $1,987,215 is
primarily attributable to the net loss for the six months ended June 30, 2004
of approximately $2,114,000 offset by warrants issued for services of
approximately $267,000 and approximately $100,000 for working capital
purposes.
Net cash used in investing activities for the year ended December 31, 2004 was
$195,700, compared with $398,482 in 2003. This reflected an increase in due
from affiliates of $135,206 and the purchase of equipment for $60,494.
Net cash provided by investing activities for the six months ended June 30,
2005 was $179,341. Net cash provided by investing activities for the six
months ended June 30, 2005 is primarily attributable to the sale of securities
held for investments (i.e., the Langley Shares) for approximately $209,000
offset by the purchase of equipment for $16,000 and payments from affiliates
of approximately $13,600. For the six months ended June 30, 2004 net cash used
in investing activities of $97,844 was a result of the purchase of equipment
for approximately $41,000 and the reduction in the amount from Affiliates and
associated companies payable of approximately $56,000.
Net cash provided by financing activities for the year ended December 31, 2004
totaled $2,549,312. We received net proceeds from the private sale of common
stock totaling $1,433,210, net of offering costs of $189,790. We also received
$1,380,00 net proceeds from notes payable.
Net cash provided by financing activities for the six months ended June 30,
2005 totaled $2,800,960. We received net proceeds from the issuance of common
and preferred stock, net of costs, of approximately $3,930,000. These proceeds
were offset by the payment of notes and notes payable to related parties with
the preferred stock offering proceeds of approximately $1,130,000. Net cash
provided by financing activities for the six months ended June 30, 2004
totaled $1,550,347. We received net proceeds from the issuance of common stock
totaling approximately $1,313,000 and proceeds from a note payable of
$250,000. These proceeds were offset primarily by payments on notes payable to
a related party of approximately $14,000.
We have generated losses since inception and have an accumulated deficit as of
June 30, 2005 of $15,521,181. For the year ended December 31, 2004 the
independent registered public accounting firm, in their opinion, has expressed
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
33
We believe that over the next 12 months we will experience a steady growth in
revenues and a steady growth towards profitability. To address the issue of
liquidity and create an adequate capital pool we have taken on the following
actions:
. During the three months ended June 30, 2005 warrant holders
exercised their right to purchase 1,774,600 shares of common stock at
$.40 per share for total proceeds of $703,172;
. Completed a private placement of Preferred Stock-Series A for
$3,040,000; and
. Completed a private placement of Preferred Stock-Series B for
$4,920,000.
On May 23, 2005, the Company entered into a Purchase Agreement with 19
investors (the "Purchasers") pursuant to which the Company agreed to sell, and
the Purchasers agreed to purchase, for an aggregate price of $3,040,000, 3,040
shares of Series A 6% Convertible Preferred Stock (The "Series A Preferred
Stock") , warrants (the "Long Term Warrants") to purchase up to 7,600,000
shares of common stock and, solely to Crestview Capital Master Fund, LLC
("Crestview"), a warrant to purchase up to 6,000,000 shares of common stock
("The Short Term Warrants"). The Long Term Warrants are exercisable for five
years at $0.60 per share. Each share of Preferred Stock may be converted into
shares of common stock at a price of $0.40 per share. The Short Term Warrant
entitles the Crestview to purchase up to $1,200,000 in Preferred Stock and a
number of Long Term Warrants equal to 100% of the shares of Common Stock
issuable upon conversion of such Preferred Stock and is otherwise based on the
same terms and conditions as the Long Term Warrants, except that the Short
Term Warrants are only exercisable until the earlier of (i) one year from the
date that the initial Registration Statement filed by the Company pursuant to
the Registration Rights Agreement between the Company and the Purchasers is
first declared effective by the Commission or (ii) two years after the date of
the Purchase Agreement. The Preferred Stock has a mandatory redeemable feature
at the end of two years from its issuance date.
On August 22, 2005, the Company entered into a Purchase Agreement with several
accredited investors (the "Purchasers") pursuant to which the Company agreed
to sell, and the Purchasers agreed to purchase, $4,920,000, 4,920 shares of
Series B 6% Convertible Preferred Stock (the "Series B Preferred Stock") and
warrants (the "Series B Warrants") to purchase up to 14,760,000 shares of
common stock. The Warrants are exercisable for five years at $0.60 per share.
A portion of the proceeds will be used to pay the fees incurred in connection
with the transactions described herein, including commissions paid to the
Company's placement agents, and legal fees for the preparation offering
documents and filing of the registration statement. The remaining net proceeds
will be used for marketing, general and administrative expenses and working
capital purposes, including but not limited to consulting, payroll, and sales
costs.
We agreed to file a registration statement with the Commission in order to
register the resale of the shares issuable upon conversion of the Series A and
B Preferred Stock and the shares issuable upon exercise of the Warrants.
Also in May 2005, the Company paid certain offering commissions to eight
investment banking firms and individuals in connection with the issuance of
the Preferred Stock and accompanying warrants, through the issuance of
warrants to purchase up to 2,617,950 shares of the Company's common stock. The
warrants were issued at strike prices ranging from $1.00 per share to $.40 per
share and terms ranging from 5 years to 1 year.
During the six months ended June 30, 2005 the Company issued 2,874,119 shares
of its common stock upon exercise of certain one-year warrants for total
proceeds of $1,134,962.
We believe that the liquidity events noted above will give the Company
adequate capital to fund its operations for the next 12 months. However, there
can be no assurance that this capital can be adequate the result of which
would be a material adverse effect on the Company's operations.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements.
34
LEGAL PROCEEDINGS
We are not a party to any pending material legal proceedings and are not aware
of any threatened or contemplated proceeding by any governmental authority
against our company.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Identity
The following table identifies our current executive officers and directors
and their respective offices held:
Name Age Position Held Since
--------- ---- ----------- ----------
David G. MacEachern 49 Chairman and Chief Executive Officer 2003
Scott Kapp 44 President and Director 2003
Franklin H. Unruh 65 Chief Financial Officer and Director 2003
Kelly Konzelman 42 Executive Vice President 2003
Kevin Plate 48 Executive Vice President of Sales 2003
and Business Development
Business Experience
David G. MacEachern, has served as iMedia's Chairman and Chief Executive
officer since August 28, 2003. Mr. MacEachern has been in the entertainment
and advertising business for over 28 years. As an entrepreneur, he has
extensive executive level experience as a founder and CEO of several
successful businesses. His experience includes developing, and managing
companies in as diverse fields as marketing, advertising, graphic arts,
cosmetics and business development.
In 1984, Mr. MacEachern co-founded the David-Scott Advertising; a Los Angeles
based ad agency providing advertising and promotion for local, regional and
national accounts. While continuing to run David-Scott Advertising, Mr.
MacEachern co-founded and was Chief Executive Officer of Professional Make-up,
a cosmetic manufacture with over $30 million in domestic and international
sales. Mr. MacEachern was instrumental in acquiring distribution rights for
Wal-Mart, K-Mart and Target stores. At Professional Make-Up, his primary
responsibilities were developing marketing strategies, new product development
and product promotion.
In 1998 Mr. MacEachern co-founded the Modern Company LLC, a digital
multi-media production house specializing in the application of digital
imaging to the consumer products market. The Modern Company's core
competencies include developing interactive websites, graphic arts and CD-ROM
design.
Scott Kapp, has served as iMedia's President and Director since August 28,
2003. Mr. Kapp is also co-founder and President of David-Scott Advertising,
Mr. Kapp was responsible for negotiating and securing many of the agency's top
clients. His advertising campaign for Ogee hair products won a Starch Award.
Mr. Kapp also co-founded Professional Make-up. In addition to his role as
President, Mr. Kapp was responsible for the development of ancillary products,
new markets and business development. While at Professional Make-Up, Mr. Kapp
built-out and managed a sales force of 250 independent sales reps and secured
10 major distributors worldwide.
In 1998 Mr. Kapp along with Mr. MacEachern co-founded the Modern Company LLC,
a digital multi-media production company. Mr. Kapp holds a bachelor's degree
from the University of Southern California.
Franklin H. Unruh, has served as iMedia's Chief Financial Officer and Director
since August 28, 2003. Mr. Unruh has over 37 years of significant experience
in both accounting and financial consulting. His financial experience
comprises an array of conglomerate corporations ranging from entertainment,
film and music production to food processing and automobile distribution in 4
countries, South Africa, United Kingdom, Israel and the USA.
From 1980 to1986 Mr. Unruh served as Director of Participation at 20th Century
Fox Films. His duties included managing profit participations on such award
nominated films as the Star Wars Trilogy and other 20th Century Fox motion
pictures and television programming.
Warner Communications Inc. appointed Mr. Unruh as an International Internal
Auditor and later promoting Mr. Unruh to Controller of Warner Bros. Music
Publishing, the second largest music publishing company in the world.
35
In 1978, A&M Music Publishing recruited Mr. Unruh to serve as Controller of
A&M Music Publishing and later promoted him to Managing Director of ALMO
Publications, A&M Publishing's printed music division.
Mr. Unruh acts as a financial consultant specializing in participations,
residuals and international tax advantage investments for motion picture
clients such as Cinergi, Hemdale Distributing and Streamline Pictures. He also
oversees music production and artist management for his company Hanging Rock
Studios.
Kelly Konzelman has served as iMedia's Executive Vice President since August
28, 2003. Mr. Konzelman has extensive experience in corporate development. For
the last six years, his business efforts have focused primarily on corporate
finance, security sales, investment banking and private equity placements. Mr.
Konzelman's company Investment Advisory Group, has consulted with numerous
developing and start-up ventures providing management expertise, implementing
corporate development programs and authoring business plans and private
offering memorandums. These companies were in industries as diverse as medical
devices, cosmetic surgery, media, entertainment, technology, reclamation and
real estate.
As an investment-banking consultant, Mr. Konzelman was responsible for the
successful acquisition of capital for a number of developing companies, both
public and private. As a partner in 360 Securities, and OSJ of Intrepid
Securities, he successfully engineered a syndicate of over 120 independent
broker dealers to offer client's private securities placements nationwide.
Mr. Konzelman brings over 22 years of general and executive-level business
experience to the Company. He is currently overseeing the Company operations,
where he is responsible for business affairs, Corporate finance, investor
relations and strategic acquisitions.
Kevin Plate has served as iMedia's Executive Vice President of Sales and
Business Development since August 28, 2003. Mr. Plate has extensive experience
in advertising and sponsorship sales. Mr. Plate' has held a variety of
increasingly responsible sales and marketing positions over the past 20 years.
Mr. Plate' served as the Western Regional Director for The Golf Channel, whose
high-profile ownership group includes Comcast, Cable, Fox and Times Mirror
Corporation. Through his development of creative sales and marketing packages
for national advertisers, Mr. Plate' was responsible for delivering over $35
million revenue to the first cable network dedicated exclusively to a single
sport.
Mr. Plate' executive management also contributed to the success of Advantage
International, the world's second largest sports marketing and management
company, where he used his expertise in strategic planning, new business
development and sales for clients including MasterCard International, Sara
Lee, Tuner Broadcasting and Keebler.
For five years Mr. Plate' served in various marketing positions at RJR
Nabisco, a Fortune 500 foods and tobacco producer. Mr. Plate's duties included
leveraging the company's many sports sponsorships and developing national and
market-specific advertising and promotional campaigns for both the food and
tobacco business units.
Mr. Plate responsibilities include implementing the Company's sales and
business development plan, and the development of new client-specific products
and special projects. Mr. Plate holds a bachelor's degree from the University
of South Carolina.
Family Relationships
There are no family relationships between any two or more of our directors or
executive officers. There is no arrangement or understanding between any of
our directors or executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or officer, and
there is no arrangement, plan or understanding as to whether non-management
shareholders will exercise their voting rights to continue to elect the
current board of directors. There are also no arrangements, agreements or
understandings to our knowledge between non-management shareholders that may
directly or indirectly participate in or influence the management of our
affairs.
Involvement in Certain Legal Proceedings
Except as stated herein, to the best of our knowledge, during the past five
years, none of the following occurred with respect to a present or former
director or executive officer of the Company: (1) any bankruptcy petition
filed by or against any business of which such person was a general partner or
executive officer either at the time of the bankruptcy or within two years
prior to that time; (2) any conviction in a criminal proceeding or being
subject to a pending criminal proceeding (excluding traffic violations and
other minor offenses); (3) being subject to any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of any competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities; and (4) being found by a court of competent jurisdiction
(in a civil action), the Securities and Exchange Commission or the commodities
futures trading commission to have violated a Federal or state securities or
commodities law, and the judgment has not been reversed, suspended or vacated.
On September 19, 2005, Mr. Konzelman, our
36
Executive Vice President, became aware that a Desist and Refrain Order was
issued by the California Department of Corporations. The California
Corporations Commissioner is of the opinion that Pacific Fund, LLC and Mr.
Konzelman issued limited liability company membership interests, which were
subject to qualification under the California Securities Law of 1968 without
being qualified. The Order provides that Mr. Konzelman is to desist and
refrain from the offer or sale of securities unless and until qualification
has been made under the law or unless exempt. Mr. Konzelman maintains that the
Order is based on material misrepresentations of fact. Notwithstanding, Mr.
Konzelman intends to comply with the substance of the Order, as it merely
demands compliance with the law.
Board Committees and Independence
All of the directors serve until the next annual meeting of common
shareholders and until their successors are elected and qualified by our
common shareholders, or until their earlier death, retirement, resignation or
removal. Our Bylaws set the authorized number of directors at not less than
three, with the actual number fixed by our board of directors. Our Bylaws
authorized the Board of Directors to designate from among its members one or
more committees and alternate members thereof, as they deem desirable, each
consisting of one or more members, with such powers and authority (to the
extent permitted by law and these Bylaws) as may be provided in such
resolution.
Our board of directors has not established any committees to date. None of our
current directors are deemed "independent" directors as that term is used by
the national stock exchanges or have the requisite public company accounting
background or experience to be considered an "audit committee financial
expert" as that term is defined by the under Regulation S-B promulgated under
the Securities Act of 1933, as amended. The entire Board of Directors will
perform the function of the Audit Committee until we appoint directors to
serve on the Audit Committee. Our business model is not complex and our
accounting issues are straightforward. Responsibility for our operations is
centralized within management, which is currently comprised of five people. We
recognize that having a person who possesses all of the attributes of an audit
committee financial expert would be a valuable addition to our Board of
Directors, however, currently we are not able to adequately compensate such a
person, therefore may find it difficult to attract such a candidate.
Management wishes to expand the Board of Directors. In expanding our Board of
Directors, we will seek individuals who would be able to guide our operations
based on their business experience, both past and present, or their education,
and whenever possible, persons who will also qualify as independent directors.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation paid over the past three fiscal
years with respect to our "named executive officers" as that term is defined
by the under the Securities and Exchange Act of 1934.
37
Annual Compensation Long Term Compensation
--------------------------------- ----------------------------------------
Awards Payouts
---------------------- ----------------
Securities All
Restricted Underlying Other
Other Annual Stock Options LTIP Compen-
Name and Principal Position Year Salary Bonus Compensation Award(s) SARs(#) Payouts sation
- ----------------------------- ----- -------- ----- ------------ ---------- ---------- --------- --------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
David G. MacEachern 2004 $201,000 - - - - - -
Chief Executive Officer 2003 $170,500 - - - - - -
2002 $108,634 - - - - - -
Scott Kapp 2004 $180,000 - - - - - -
President 2003 $139,250 - - - - - -
2002 - - - - - - -
Franklin H. Unruh, 2004 $180,000 - - - - - -
Chief Financial Officer 2003 $122,750 - - - - - -
2002 - - - - - - -
Kelly Konzelman, 2004 $178,000 - - - - - -
Executive Vice-President 2003 $148,350 - - - - - -
2002 - - - - - - -
Kevin Plate,
Executive Vice-President-Sales 2004 $180,000 - - - - - -
and Business Development 2003 $144,375 - - - - - -
2002 - - - - - - -
Options and Stock Appreciation Rights Grant Table
There were no grants of stock options to the Named Executive Officers during
the fiscal year ended December 31, 2004.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
We did not have any outstanding stock options or stock appreciation rights at
end the fiscal year ended December 31, 2004.
Long-Term Incentive Plan Awards Table
We do not have any Long-Term Incentive Plans.
Compensation of Directors
We currently have three directors. We do not currently provide our directors
with cash compensation, although we do reimburse their expenses. There are no
other arrangements pursuant to which any director was compensated during the
Company's last completed fiscal year for any service provided as director.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company entered into employment agreements with Mr. MacEachern, Mr. Kapp
and Mr. Unruh on August 1, 2003. Each officer is compensated $18,000 annually
in addition to compensation received through I-Publishing, Inc. as described
below. The agreements may be terminated by the Company or employee upon
14-days written notice.
The Company entered into a consulting and independent contractor agreement
with I-Publishing, Inc. on July 15, 2003. Effective April 2005, the agreement
specified monthly payments totaling $50,000, for the combined executive
management services of the Company's Chief Executive Officer, President and
Chief Financial Officer. The Company may terminate the agreement upon 30-days
written notice.
38
The Company entered into consulting and independent contractor agreements on
July 15, 2003 with Mr. Konzelman's company, Investment Advisory Group, Inc.,
and with Mr. Plate's company, Media Solutions Network, LLC. Each agreement
specifies monthly payments of $13,500 each for management services for a total
of $27,000 per month. The Company may terminate the agreements upon 30-days
written notice.
39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the common stock as of December 3, 2004, by (i) each person who
is known by the Company to own beneficially more than 5% of the any classes of
outstanding Stock, (ii) each director of the Company, (iii) each of the Chief
Executive Officers and the four (4) most highly compensated executive officers
who earned in excess of $100,000 for all services in all capacities
(collectively, the "Named Executive Officers") and (iv) all directors and
executive officers of the Company as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 and 13d-5 of the Exchange Act, and the information
is not necessarily indicative of beneficial ownership for any other purpose.
We believe that each individual or entity named has sole investment and voting
power with respect to the securities indicated as beneficially owned by them,
subject to community property laws, where applicable, except where otherwise
noted. Unless otherwise stated, the address of each person is c/o iMedia
International, Inc., 1721 21st Street, Santa Monica, California 90404. The
percentage of outstanding shares is based on 71,347,027 shares of common stock
outstanding as of June 30, 2005.
Number of Shares Percent
Name of Beneficial Owner of Common Stock of Class
- ----------------------------------------- ------------------------- ----------
Officers and Directors
----------------------
David G. MacEachern,
Chief Executive Officer, Director 11,727,510 16%
Scott Kapp,
President, Director 10,884,000 15%
Franklin H. Unruh
Chief Financial Officer, Director 5,432,500 8%
Kevin Plate
Executive Vice-President-Sales and
Business Development 2,173,000 3%
Kelly Konzelman (1)
Executive Vice-President 315,085 <1%
All Officers and Directors as a group
(5 persons) 30,488,635 43%
5% Stockholders
---------------
Waletta Far East Ltd.(2) 5,432,500 8%
----------
TOTAL 35,921,135 50%
______________________
(1) 43,460 shares are held by Investment Advisory Group, Inc, of which Kelly
Konzelman is the sole controlling person and beneficial owner with
voting and investment power over these common shares. The address of
Investment Advisory Group is 27400 Pacific Coast Highway #2, Malibu, CA
90265.
(2) Carol Levinsky is the sole controlling person of Waletta Far East Ltd,
and has voting and investment power over these common shares. The
address of Waletta Far East Ltd. is: c/o Geremant SA, 24 Ave de Champal
#1206, Geneve 12, Switzerland.
Changes in Control
We are not aware of any arrangements that may result in a change in control of
the Company.
40
DESCRIPTION OF SECURITIES
General
The company is authorized to issue two classes of stock, designated as common
stock and preferred stock. The company is authorized to issue is 520,000,000
shares of capital stock, consisting of 500,000,000 shares of common stock, par
value $0.001 per share, and 20,000,000 shares of "blank check" preferred
stock, par value $0.001 per share, having such rights, preferences, privileges
and restrictions as may be designated from time-to-time by our board. Our
board of directors has since designated 7,200 shares of preferred stock as
Series A 6% Convertible Preferred Stock, with the rights, preferences,
privileges and restrictions summarized below.
Common Stock
The holders of common stock are entitled to one vote per share for the
election of directors and on all other matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
securities, the holders of common stock are entitled to receive, when and if
declared by the board of directors, out of funds legally available for such
purpose, any dividends on a pro rata basis. In the event of our liquidation,
dissolution or winding up, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock issuable upon exercise of
warrants or conversion of preferred stock that are being registered in this
prospectus will, when the warrants or preferred stock are properly exercised
or converted, be fully paid and non-assessable.
Preferred Stock
The following is a brief description is a summary of the principal terms,
rights and obligations of 7,200 shares of our preferred stock designated as
Series A 6% Convertible Preferred Stock (the "Series A Preferred Stock") and
6,000 shares of our preferred stock designated as Series B 6% Convertible
Preferred Stock (the "Series B Preferred Stock"). The following summary does
not purport to be complete and is qualified in its entirety by reference to
the Certificate of Designations relating thereto.
Series A Preferred Stock
Dividends. Holders of the Series A Preferred Stock shall be entitled to
receive cumulative dividends of 6% per annum, based on the stated value of
$1,000 per share of Series A Preferred Stock, payable quarterly on March 1,
June 1, September 1 and December 1, with the first payment due on June 1,
2005.
Voting Rights. Except as otherwise required by law, a holder of shares of
Series A Preferred Stock does not have the right to vote on matters that come
before the Registrant's stockholders. However, the Registrant may not
authorize or create any class of stock ranking senior to, or otherwise pari
passu with, the Series A Preferred Stock with respect to dividends, redemption
or distribution of assets upon a liquidation.
Liquidation Preference. In the event of a dissolution or winding up of the
Registrant, each holder of the Series A Preferred Stock is entitled to a
liquidation preference of $1,000 per share of Series A Preferred Stock held
plus any declared but unpaid dividends on such share, prior to any payment to
the holders of Registrant's common stock or any other stock of Registrant
ranking junior to the Series A Preferred Stock with regard to any distribution
of assets upon liquidation, dissolution or winding up of the Registrant.
Conversion. Shares of Series A Preferred Stock may, at the option of the
holder, be converted at any time or from time to time into shares of common
stock at the initial conversion price of $0.40 per share, subject to
adjustment; provided, that a holder of Series A Preferred Stock may at any
given time convert only up to that number of shares of Series A Preferred
Stock so that, upon conversion, the aggregate beneficial ownership of common
stock of such holder and all persons affiliated with such holder is does not
exceed 4.99% of the then outstanding common stock. The number of shares into
which one share of Series A Stock shall be convertible shall be determined by
dividing $1,000 by the then existing conversion price.
The conversion price may be reduced if the Registrant sells common stock or
other securities convertible into or exercisable for common stock at a per
share price, exercise price or conversion price lower than the conversion
price then in effect (other than in connection with an acquisition of the
securities, assets or business of another company, joint ventures and employee
stock options).
41
Forced Conversion. If the shares underlying the Series A Preferred Stock are
registered and the Registrant's stock price trades above $1.25 for a period of
thirty consecutive days with average daily volume for 20 consecutive days of
100,000 shares per day the Registrant may force the holders of Series A
Preferred Stock to convert into Common Stock.
Redemption. The Registrant is to redeem all of the then outstanding shares of
Series A Preferred Stock on May 23, 2007.
Series B Preferred Stock
Dividends. Holders of the Preferred Stock shall be entitled to receive
cumulative dividends based on the stated value of $1,000 per share of
Preferred Stock at the rate of 6% per annum until the fourth anniversary of
the Original Issue Date, 9% per annum from the fourth anniversary of the
Original Issue Date until the fifth anniversary of the Original Issue Date and
14% from the fifth anniversary of the Original Issue Date until the Preferred
Stock is no longer outstanding. Dividends will be payable quarterly on March
1, June 1, September 1 and December 1, with the first payment due on December
1. In addition, if the Company does not have in effect a policy of directors
and officers liability insurance by February 20, 2006, or if the Corporation
shall not have appointed a new Chief Financial Officer prior to November 18,
2005, then dividends shall accrue and be payable at a rate of 9% per annum in
lieu of 6% per annum during the occurrence and during the continuance of
either of the foregoing events.
Voting Rights. Except as otherwise required by law, a holder of shares of
Preferred Stock does not have the right to vote on matters that come before
the Registrant's stockholders. However, the Registrant may not authorize or
create any class of stock ranking senior to, or otherwise pari passu with, the
Preferred Stock with respect to dividends, redemption or distribution of
assets upon a liquidation.
Liquidation Preference. In the event of a dissolution or winding up of the
Registrant, each holder of the Preferred Stock is entitled to a liquidation
preference of $1,000 per share of Preferred Stock held plus any declared but
unpaid dividends on such share, after distribution or payment to the holders
of the Registrant's Series A 6% Convertible Preferred Stock and prior to any
payment to the holders of Registrant's common stock or any other stock of
Registrant ranking junior to the Preferred Stock with regard to any
distribution of assets upon liquidation, dissolution or winding up of the
Registrant.
Conversion. Shares of Preferred Stock may, at the option of the holder, be
converted at any time or from time to time into shares of common stock at the
initial conversion price of $0.40 per share, subject to adjustment; provided,
that a holder of Preferred Stock may at any given time convert only up to that
number of shares of Preferred Stock so that, upon conversion, the aggregate
beneficial ownership of the common stock of such holder and all persons
affiliated with such holder is does not exceed 4.99% of the then outstanding
common stock. The number of shares into which one share of Series B Stock
shall be convertible shall be determined by dividing $1,000 by the then
existing conversion price.
The conversion price may be reduced if the Registrant sells common stock or
other securities convertible into or exercisable for common stock at a per
share price, exercise price or conversion price lower than the conversion
price then in effect (other than in connection with an acquisition of the
securities, assets or business of another company, joint ventures and employee
stock options).
Forced Conversion. If the shares underlying the Preferred Stock are registered
and the Registrant's stock price trades above $1.25 for a period of thirty
consecutive days with average daily volume for 20 consecutive days of 100,000
shares per day the Registrant may force the holders of Preferred Stock to
convert into Common Stock.
Amendment of our Bylaws
Our bylaws may be adopted, amended or repealed by the affirmative vote of a
majority of our outstanding shares. Subject to applicable law, our bylaws also
may be adopted, amended or repealed by our board of directors.
Delaware Laws
Business Combinations with Substantial Stockholders. Our Certificate of
Incorporation provides that we are not subject to Section 203 of the Delaware
General Corporation Law, which applies to business combinations with
interested stockholders. Section 203 of the Delaware General Corporation Law
precludes a shareholder who owns 15% or more of our shares from entering into
a "business combination" involving our company for a period of three years,
unless (1) our board of directors approves the combination before the
shareholder acquires the 15% interest; (2) the interested shareholder acquires
at least 85% of our shares as part of the transaction in which he acquired the
initial 15%, excluding shares owned by our officers who are also directors and
voting stock held by employee benefit plans; or (3) the combination is
approved by a majority vote of our board of directors and two-thirds vote of
our other shareholders at a duly called shareholders' meeting. A "business
combination" is defined as (1) a merger or consolidation requiring shareholder
approval, (2) the sale, lease, pledge, or other disposition of our assets,
including by dissolution, having at least 50% of the entire asset value of our
company, or (3) a proposed tender or exchange offer of 50% or more of our
voting stock.
42
INTEREST OF NAMED EXPERTS AND COUNSEL
Our financial statements for the year ended December 31, 2004 and 2003,
contained in this prospectus were audited by Singer Lewak Greenbaum &
Goldstein LLP. Singer Lewak Greenbaum & Goldstein LLP does not own any
interest in us. Effective April 1, 2005, Singer Lewak Greenbaum & Goldstein
LLP resigned as the Company's principal independent accountant.
On May 10, 2005, we engaged Weinberg & Company, P.A. as our new independent
certified public accountants. Weinberg & Company, P.A. does not own any
interest in us.
Richardson & Patel LLP passed upon the validity of the issuance of the common
shares to be sold by some of the selling security holders under this
prospectus. As of September 1, 2005, Richardson & Patel LLP, and its assigns,
owns 62,500 shares of common stock and a warrant to purchase up to 100,000
common shares, all of which are being registered for sale under this
prospectus.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our bylaws and certificate of incorporation entitle our directors or executive
officers to indemnification to the fullest extent permitted under Section 145
of the Delaware General Corporation Law, as may be amended. Our bylaws and
certificate of incorporation also provide that our directors shall not be
liable to the company or our stockholders for monetary damages for breach of
duty, except (a) for any breach of duty of loyalty to the company or our
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 174 of
the Delaware General Corporation Law, or (d) for any transaction from which a
director derived an improper personal benefit.
The Delaware General Corporation Law allows a company to indemnify our
officers, directors, employees, and agents from any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, except under certain circumstances.
Indemnification may only occur if a determination has been made that the
officer, director, employee, or agent acted in good faith and in a manner,
which such person believed to be in the best interests of the Registrant. A
determination may be made by the stockholders; by a majority of the directors
who were not parties to the action, suit, or proceeding confirmed by opinion
of independent legal counsel; or by opinion of independent legal counsel in
the event a quorum of directors who were not a party to such action, suit, or
proceeding does not exist.
Section 145 of the Delaware General Corporation Law, provides further for
permissive indemnification of officers and directors, and insurance, as
follows:
A corporation shall have power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action,
suit or proceeding if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe the person's conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendre or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in
a manner which the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
A corporation shall have power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that the person is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by the
person in connection with the defense or settlement of such action or suit if
the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except
that no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnify for such expenses which the Court of Chancery or such other court
shall deem proper.
To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to in subsections (a) and (b) of this section, or in
defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys fees) actually and
reasonably incurred by such person in connection therewith.
43
Any indemnification under subsections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made,
with respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors,
even though less than a quorum, or (3) if there are no such directors, or if
such directors so directs, by independent legal counsel in a written opinion,
or (4) by the stockholders.
Expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to be indemnified by the
corporation as authorized in this section. Such expenses (including attorneys'
fees) incurred by former directors and officers or other employees and agents
may be so paid upon such terms and conditions, if any, as the corporation
deems appropriate.
The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.
A corporation shall have power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against such liability under
this section.
For purposes of this section, reference to "the corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as such person would have with respect to such constituent
corporation if its separate existence had continued.
For purposes of this section, references to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to any employee benefit plan; and references
to "serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties
on, or involves services by, such director, officer, employee, or agent with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner such person reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the
best interests of the corporation" as referred to in this section.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
The Court of Chancery is hereby vested with exclusive jurisdiction to hear and
determine all actions for advancement of expenses or indemnification brought
under this section or under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
Provided the terms and conditions of these provisions under Delaware law are
met, officers, directors, employees, and agents of the Registrant may be
indemnified against any cost, loss, or expense arising our of any liability
under the Securities Act. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
License Agreement and Physical Properties from iPublishing, Inc. The Company
has an exclusive license(s) for certain intellectual properties from an
affiliate, iPublishing, Inc., a related corporation that is controlled by, and
whose beneficial owners are also the principal shareholders and directors of
the Company. The license term is for a period of 99 years beginning April 4,
2003.Under the terms of the License Agreement, the royalty payable to
iPublishing is a flat 5% of the Company's gross profits (net sales minus only
the cost of goods sold). The license agreement has a provision for adjustment
so as to limit any windfall potential to the Licensor, and inures to the
benefit of the Company. The Company believes that the terms of the license
agreement were no less favorable to the Company than could have been obtained
in an arm's-length transaction.
Executive Compensation is paid directly to Entities Owned or Controlled by the
Officers or Principal Shareholders. Compensation (salary) may be paid to the
Company's primary and executive management either as an individual, or as
independent contractors. This includes the executives of the Company who are
also the primary owners and directors of I-Publishing, Inc. The majority of
all executive compensation is paid directly to I-Publishing for distribution
as directed by the executive. To comply with generally accepted accounting
principles and to accurately disclose the total amount of executive
compensation, all monies paid to the executive both as an individual
(employee) or to a related entity (consultant or independent contractor) are
classified and listed on the Company's financial statements as "operating
expense - related parties".
Consulting Agreements. The Company entered into consulting and independent
contractor agreements on July 15, 2003 with companies owned by its officers
and shareholders, Investment Advisory Group, Inc. and Media Solutions Network,
LLC, which are owned by Kelly Konzelman and Kevin Plate, respectively. Each
agreement specifies monthly payments of $13,500 for management services for a
total of $27,000 per month. The Company may terminate the agreements upon
30-days written notice. Total management fees paid for the six months ended
June 30, 2005 is $162,000.
Related Party Notes. On July 20, 2004, the Company closed three short-term
loans totaling $130,000. These loans were made to the Company by Vivian Kove,
Carol Adams and Amber Kapp and each was evidenced by a promissory note (each,
a "Related Party Note"). Each Related Party Note had identical terms and
conditions, although the note amounts varied. The notes had a term of 90 days
and bore interest at 8% per annum. In addition, a total of 130,000 two-year
warrants, convertible to common stock at the price of $0.50 per share were
issued to the lenders as an incentive to make the loans. On December 31, 2004
the Related Party Notes were amended and the loans were extended until to
April 30, 2005. In exchange for waiving the interest payments on the original
notes, the 130,000 two year warrants were cancelled and the Company authorized
the issuance of 130,000 common shares in January 2005. At December 31, 2004
the committed stock was valued at $94,900.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common shares are currently quoted on the OTC Bulletin Board under the
symbol "IMNL." Prior to November 24, 2004, our common shares were quoted on
the Pink Sheets with very little activity and few isolated transactions. The
following table sets forth the quarterly high and low bid prices for our
common shares on the OTC Bulletin Board for the periods indicated. The prices
set forth below represent inter-dealer quotations, without retail markup,
markdown or commission and may not be reflective of actual transactions. Prior
to our reverse merger on August 29, 2003, our stock had been inactive with
only a few isolated transactions at approximately $0.01 per share.
45
Bid Price
---------------------------------
Period High Low
------------------------------------------------------------------------
Fiscal Year 2005:
June 30, 2005 $1.26 $0.42
March 31, 2005 $1.55 $0.40
Fiscal Year 2004:
December 31, 2004 $2.00 $1.01
September 30, 2004 $2.25 $1.50
June 30, 2004 $2.25 $1.75
March 31, 2004 $2.50 $1.15
Fiscal Year 2003:
December 31, 2003 $3.25 $1.15
August 29 - September 30, 2003 $2.00 $0.10
Holders
We have approximately 678 record holders of our common stock as of September
1, 2005, according to a shareholders' list provided by our transfer agent as
of that date and our records relating to issuable shares, not including an
indeterminate number of stockholders who may hold their shares in street name.
Dividend Policy
We do not anticipate that we will pay any dividends with respect to our common
stock in the foreseeable future. Our current business plan is to retain any
future earnings to finance the expansion development of our business. Any
future determination to pay cash dividends will be at the discretion of our
board of directors, and will be dependent upon our financial condition,
results of operations, capital requirements and other factors as our board may
deem relevant at that time.
We cannot pay any dividends on our common stock if any dividends due on our
outstanding Series A Preferred Stock or Series B Preferred Stock are unpaid.
Holders of Series A Preferred Stock are entitled to receive cumulative
dividends of 6% per annum, based on the stated value of $1,000 per share.
Holders of Series B Preferred Stock are entitled to receive cumulative
dividends of based on the stated value of $1,000 per share of Preferred Stock
at the rate of 6% per annum until the fourth anniversary of the Original Issue
Date, 9% per annum from the fourth anniversary of the Original Issue Date
until the fifth anniversary of the Original Issue Date and 14% from the fifth
anniversary of the Original Issue Date until the Preferred Stock is no longer
outstanding. Dividends on our Series A and Series B Preferred Stock are be
payable quarterly on March 1, June 1, September 1 and December 1.
Securities Authorized for Issuance Under Equity Compensation Plans
We did not have any equity compensation plans at the end of our last fiscal
year.
Stand-Alone Grants
We do not have any outstanding stock options or stock appreciation rights. In
the future, our board of directors may grant additional common share purchase
options or warrants to selected directors, officers, employees, consultants
and advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any formal stock plans. The terms of these grants
may be individually negotiated.
REPORTS TO SECURITY HOLDERS
We file annual and quarterly reports with the U.S. Securities and Exchange
Commission (SEC). In addition, we file additional reports for matters such as
material developments or changes. Our executive officers, directors and
beneficial owners of 10% or more of our common shares also file reports
relative to the acquisition or disposition of our common shares or
acquisition, disposition or exercise of our common shares purchase options or
warrants. These filings are a matter of public record and any person may read
and copy any materials we file with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements,
and other information regarding issuers, including us, that file
electronically with the SEC. We are not required to deliver an annual report
with this prospectus, nor will we do so. However, you may obtain a copy of our
annual report and its exhibits, or any of our other public filings, by
contacting the Company or from the SEC as mentioned above.
46
This prospectus constitutes a part of a registration statement on Form SB-2
filed by us with the Commission under the Securities Act of 1933. As permitted
by the rules and regulations of the Commission, this prospectus omits certain
information that is contained in the registration statement. We refer you to
the registration statement and related exhibits for further information with
respect to us and the securities offered. Statements contained in the
prospectus concerning the content of any documents filed as an exhibit to the
registration statement (or otherwise filed with the Commission) are not
necessarily complete. In each instance you may refer to the copy of the filed
document. Each statement is qualified in its entirety by such reference.
No person is authorized to give you any information or make any representation
other than those contained or incorporated by reference in this prospectus.
Any such information or representation must not be relied upon as having been
authorized. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there
has been no change in our affairs since the date of the prospectus.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Our financial statements for the year ended December 31, 2004 and 2003,
contained in this prospectus have been audited by Singer Lewak Greenbaum &
Goldstein LLP, registered independent certified public accountants, to the
extent set forth in their report, and are set forth in this prospectus in
reliance upon such report given upon their authority as experts in auditing
and accounting. Singer Lewak Greenbaum & Goldstein LLP does not own any
interest in us. Effective April 1, 2005, Singer Lewak Greenbaum & Goldstein
LLP ("SLGG") resigned as the Company's principal independent accountant. The
Company received notice of SLGG's resignation on April 7, 2005.
SLGG's reports on the Company's financial statements for the fiscal years
ended December 31, 2003 and December 31, 2004, did not contain an adverse
opinion or disclaimer of opinion and were not qualified or modified as to
audit scope or accounting principles. However, SLGG's reports on the
consolidated financial statements of the Company included explanatory language
regarding substantial doubt about the Company's ability to continue as a going
concern.
During our fiscal years ended December 31, 2003, and December 31, 2004, and
through April 1, 2005, there were no disagreements between us and SLGG on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements if not resolved to SLGG's
satisfaction would have caused SLGG to make reference to the subject matter of
the disagreements in connection with its reports; and there were no reportable
events described under Item 304(a)(1)(iv) of Regulation S-B.
On May 10, 2005, we engaged Weinberg & Company, P.A. ("Weinberg") as our new
independent certified public accountants. The engagement of Weinberg was
approved by the Board of Directors of the Company.
During the two most recent fiscal years and the interim period preceding the
engagement of Weinberg, the Company has not consulted with Weinberg regarding
either: (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements; or (ii) any matter
that was either the subject of a disagreement or event identified in paragraph
(a)(1)(iv) of Item 304 of Regulation S-B.
47
FINANCIAL STATEMENTS
Index to Financial Statements
Description Page No.
Report of Independent Registered Public Accounting Firm..................F-1
Consolidated Balance Sheets at December 31, 2004.........................F-2
Consolidated Statements of Operations and Comprehensive
Loss for the period ended December 31, 2004 and 2003.....................F-3
Consolidated Statements of Shareholders' Deficit for the period
ended December 31, 2004 and 2003.........................................F-4
Consolidated Statements of Cash Flows for the period
ended December 31, 2004 and 2003.........................................F-6
Notes to Consolidated Financial Statements........................F-7 - F-18
Condensed Consolidated Balance Sheets as of June 30, 2005
(unaudited) and December 31, 2004.......................................F-19
Condensed Consolidated Statements of Operations and for
the three and six months ended June 30, 2005 (unaudited)
and 2004 (unaudited)....................................................F-20
Condensed Consolidated Statements of Shareholders' Equity
(Deficit) and other comprehensive income (loss) for the
six months ended June 30, 2005 (unaudited)..............................F-21
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2005 (unaudited) and 2004 (unaudited).........F-22
Notes to condensed consolidated financial statements as
of June 30, 2005 (unaudited)....................................F-23 - F-32
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of iMedia International, Inc.
We have audited the accompanying consolidated balance sheet of iMedia
International, Inc. and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, comprehensive loss, shareholders'
deficit and cash flows for each of the two years in the period ended December
31, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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
audit provides 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 iMedia
International, Inc. and subsidiaries as of December 31, 2004, and the results
of their operations and their cash flows for each of the two years in the
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, during the year ended
December 31, 2004, the Company incurred significant losses from operations and
was highly dependent on equity and debt financing. These factors, among
others, as discussed in Note 2 to the financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, California
February 25, 2005
F-1
49
CONSOLIDATED FINANCIAL STATEMENTS
iMEDIA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 358,969
Accounts receivable 46,444
Prepaid expense 555
-----------
Total current assets 405,968
-----------
PROPERTY AND EQUIPMENT, NET 78,211
Investment in available for sale securities 1,066,461
-----------
Total assets $ 1,550,640
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 757,633
Due to affiliate 13,602
Notes payable 1,080,022
-----------
Total current liabilities 1,851,257
-----------
SHAREHOLDERS' DEFICIT
Preferred stock, $0.001 par value, authorized
20,000,000 shares; none outstanding -
Common stock, $0.001 par value, authorized
500,000,000 shares; 65,567,913 issued and
Outstanding 65,568
Subscription receivable (530,000)
Common stock committed, 710,000 shares 674,900
Deferred compensation (149,246)
Capital in excess of par value 9,320,428
Accumulated deficit (8,551,816)
Accumulated other comprehensive loss (1,130,451)
------------
Total shareholders' deficit (300,617)
------------
Total liabilities and shareholders' equity $ 1,550,640
============
The accompanying notes are an integral part of these financial statements.
F-2
50
iMEDIA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Years ended December 31, 2004 and 2003
2004 2003
------------ ------------
Net sales $ 2,290,534 $ 156,000
Cost of sales 2,565,646 177,969
------------ ------------
Gross loss (275,112) (21,969)
Operating expenses 3,698,664 2,754,636
Reserve for collection of
receivable due from affiliate - 859,173
------------ ------------
Loss from operations (3,973,776) (3,635,778)
Interest expense 938,340 722
------------ ------------
Loss before provision for income taxes (4,912,116) (3,636,500)
Provision for income taxes 2,400 800
------------ ------------
Net Loss (4,914,516) (3,637,300)
------------ ------------
Other comprehensive loss, net of tax
Unrealized holding loss on securities (1,130,451) -
------------ ------------
Comprehensive loss $(6,044,967) $(3,637,300)
============ ============
NET LOSS PER COMMON SHARE FROM OPERATIONS
Basic and diluted $ (0.08) $ (0.07)
============ ============
NET COMPREHENSIVE LOSS PER COMMON SHARE $ (0.10) $ (0.07)
============ ============
WEIGHTED AVERAGE COMMON OUTSTANDING SHARES
Basic and diluted 61,655,666 53,845,708
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
51
iMedia International, Inc.
Statement of Shareholders' Deficit
Accumulated
Deferred Capital in Other
Common Stock Subscription Committed Compen- excess of Comprehen. Accumulated
Shares Amount Receivable Shares Amount sation par value Losses Deficit Total
------------ -------- ------------ ------ --------- --------- ---------- ---------- ----------- ------------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance,
December 31,
2002 - $ - $ - - $ 65,000 $ - $ - $ - $ - $ 65,000
Issuance of
common stock
to Founders 44,661,421 44,661 - - - - (44,661) - - -
Issuance of
committed
shares 5,432,500 5,433 - - (65,000) - 59,567 - - -
Issuance of
common stock
for cash 4,654,990 4,655 - - - - 4,344,262 - - 4,348,917
Issuance of
common stock
for offering
costs 2,000,000 2,000 - - - - - - - 2,000
Issuance of
common stock
for debt
conversion 217,300 217 - - - - 149,783 - - 150,000
Issuance of
common stock
to pre-reverse
merger share-
holders and
noteholders 2,217,046 2,217 - - - - (2,217) - - -
Subscription
receivable - - (680,000) - 680,000 - - - - -
Stock options
issued for
consulting
services - - - - - - 45,734 - - 45,734
Common stock
committed for
consulting
services - - - - 11,520 - - - - 11,520
Offering costs
paid in cash - - - - - - (365,238) - - (365,238)
Offering
costs paid
by issuance
of warrants - - - - - - (20,177) - - (20,177)
Offering costs
paid through
issuance of
common stock - - - - - - (2,000) - - (2,000)
Warrants
issued as
offering
costs - - - - - - 20,177 - - 20,177
Net loss - - - - - - - - (3,637,300) (3,637,300)
------------ -------- ------------ ------ --------- --------- ---------- ---------- ----------- -----------
Balance,
12/31/03 59,183,257 $ 59,183 $ (680,000) - $691,520 $ - $4,185,230 $ - $(3,637,300) $ 618,633
============ ======== ============ ====== ========= ========= ========== ========== =========== ==========
F-4
52
iMedia International, Inc.
Statement of Shareholders' Deficit
Accumulated
Deferred Capital in Other
Common Stock Subscription Committed Compen- excess of Comprehen. Accumulated
Shares Amount Receivable Shares Amount sation par value Losses Deficit Total
----------- -------- ------------ ------- --------- --------- ---------- ---------- ------------ ------------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance,
December 31,
2003 59,183,257 $ 59,183 $ (680,000) 578,667 $691,520 $ - $4,185,230 $ - $(3,637,300) $ 618,633
Issuance
of common
stock for
cash 1,661,993 1,662 - - - - 1,251,338 - - 1,253,000
Issuance of
common stock
for consulting
services 202,325 214 - - - - 151,005 - - 151,207
Issuance of
committed
shares 320,333 320 370,000 (320,333)(381,520) - 381,200 - - 370,000
Subscription
cancellations - - 30,000 (25,000) (30,000) - - - - -
Common stock
committed for
consulting
services - - - 50,000 50,000 - - - - 50,000
Offering
costs paid
in cash - - - - - - (202,064) - - (202,064)
Offering
costs paid
by issuance
of warrants - - - - - - 12,274 - - 12,274
Issuance
of warrants
for debt
conversion - - - - - - 914,355 - - 914,355
Warrants
issued for
services - - - - - - 434,378 - - 434,378
Common stock
committed
for interest
payable - - - 130,000 94,900 - - - - 94,900
Subscription
receivable - - (250,000) 296,666 250,000 - - - - -
Issuance of
common stock
for shares in
Langley Park
Investment.
Common stock
for Langley 4,000,000 4,000 - - - - 2,308,539 - - 2,312,539
Offering
costs paid
with
Langley
Park's
Shares - - - - - - (261,627) - - (261,627)
Issuance
of common
stock for
offering
costs 200,000 200 - - - - 145,800 - - 145,800
Deferred
compensation - - - - - (149,246) - - - (149,246)
Unrealized
Holding
Loss on
Securities - - - - - - - (1,130,451) - (1,130,451)
Net loss - - - - - - - - (4,914,516) (4,914,516)
----------- -------- ------------ ------- --------- --------- ---------- ----------- ----------- -----------
Balance,
12/31/04 65,567,908 $ 65,568 $ (530,000) 710,000 $674,900 $(149,246) $9,320,428$(1,130,451)$(8,551,816) $ (300,618)
=========== ======== ============ ======= ========= ======== ========== =========== =========== ===========
F-5
53
iMEDIA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004 and 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,914,516) $(3,637,300)
Adjustments to reconcile net loss to net
cash used in operating activities
Interest on fixed conversion feature and
Amortization of debt discount 851,420 -
Depreciation 48,111 26,284
Reserve for collection of receivable
due from affiliate - 859,173
Non-cash stock compensation charge 151,207 57,254
Non-cash warrants compensation charge 434,378 -
(Increase) in accounts receivable (46,444) -
Decrease in committed stock 144,900 -
Increase in deferred compensation (149,246) -
Decrease in prepaid expenses 2,842 (3,397)
Decrease in inventory 71,055 (71,056)
Increase in accounts payable
and accrued expenses 598,462 159,171
------------ ------------
Net cash used in operating activities (2,807,831) (2,609,871)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (60,495) (78,117)
Due from affiliates, net (135,206) (320,365)
------------ ------------
Net cash used in investing activities (195,701) (398,482)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (251,035) -
Payments on notes payable - related parties (14,254) (175,000)
Proceeds from notes payable - related parties 1,391 12,863
Proceeds from notes payable 1,380,000 -
Proceeds from collections of subscriptions 370,000 -
Offering costs paid on common stock (189,790) (365,238)
Proceeds from issuance of common stock 1,253,000 4,348,917
------------ ------------
Net cash provided by financing activities 2,549,312 3,821,542
------------ ------------
Net Change in Cash (454,220) 813,189
Cash, beginning of Period 813,189 -
------------ ------------
Cash, end of Period $ 358,969 $ 813,189
============ ============
Supplemental disclosures of cash flow information
Interest paid $ 55,000 $ 722
Income taxes paid $ 2,400 $ 800
Supplemental schedule of disclosure of non-cash financing activities
During the year ended December 31, 2004, the Company exchanged 4,000,000
shares of common stock, valued at $2,312,539 for 4,185,022 shares of the
Langley Park Investments Plc Mutual Fund based in London, England.
During the year ended December 31, 2003, the Company:
.. converted $150,000 of notes payable into 217,300 shares of common stock,
of which $50,000 was for interest due under the note.
.. purchased equipment valued at $71,196 from a shareholder/officer in
exchange for a note payable.
The accompanying notes are an integral part of these financial statements.
F-6
54
iMEDIA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. ORGANIZATION
General
Pursuant to an Agreement and Plan of Merger dated as of August 18, 2003 (the
"Merger Agreement"), a wholly-owned subsidiary of the Company's corporate
predecessor, Irvine Pacific Corporation ("IPC") merged with and into Hollywood
Previews, Inc. ("HPI"), on August 29, 2003, resulting in HPI becoming a
wholly-owned subsidiary of IPC (the "Acquisition").
As consideration for the Acquisition, the shareholders of HPI were issued
55,179,581 shares of IPC common stock which, immediately following the
Acquisition, represented 96.18% of the issued and outstanding common stock of
IPC (after giving effect to the conversion of all of IPC's outstanding notes
immediately prior to the Acquisition). Although HPI became a wholly-owned
subsidiary following the Acquisition, because the transaction resulted in a
change of control, the transaction was recorded as a "reverse merger" whereby
HPI is considered to be the accounting acquirer of the Company. Immediately
prior to the Acquisition IPC had only nominal assets and liabilities and no
current business operations.
Effective November 25, 2003, IPC completed a statutory merger effected for the
purpose of changing its state of incorporation from Colorado to Delaware by
merging into a newly formed Delaware corporation, iMedia International, Inc.
(the "Company"). This change in IPC's state of incorporation and corporate
name was approved by the holders of a majority of IPC's outstanding shares of
common stock at a special meeting of shareholders on November 21, 2003.
As a result of the reincorporation merger, each outstanding share of IPC's
common stock was automatically converted into one share of Company common
stock. Each stock certificate representing issued and outstanding shares of
IPC's common stock continues to represent the same number of shares of common
stock of the Company. The Company continues to operate the business of IPC,
and the reincorporation did not result in any change in IPC's former business,
assets or liabilities, did not cause the Company's headquarters to be moved,
or result in any relocation of management or other employees.
At the time of the Acquisition HPI held an exclusive license from iPublishing,
Inc. ("iPublishing"), an affiliate of the Company, to use iPublishing's
intellectual property (the "License"). iPublishing's three shareholders, David
MacEachern, Scott Kapp and Franklin Unruh (each of whom own approximately 33%
of the outstanding securities of iPublishing), are each officers and directors
of the Company. Pursuant to the License, iPublishing receives annual
royalties of 5% of Gross Margin generated by disks produced by the Company
using iPublishing technology. Because the License is exclusive, iPublishing
may not license or assign any of its intellectual property to any other party
and may not compete with the Company. It is the Company's intention to
permanently acquire all of iPublishing's intellectual property at some point
in the future when operations and revenue have stabilized. In connection with
the exclusive license, HPI purchased all of iPublishing's property and
equipment, which iPublishing had previously purchased from one of its
shareholders and officers. The purchase transaction has been accounted for at
the carry-over basis of the assets at which they were obtained by the
shareholder/officer of iPublishing. HPI has since transferred the exclusive
license to its parent, the Company. The intellectual property covered by the
License consists of various proprietary procedures, codes, technologies,
copyrights, trademarks and brands, along with the proprietary suite of
mastering software used to create our CD-ROM and DVD-ROM products.
F-7
55
As a result of the Acquisition, the Company became a publisher of interactive,
digital, and multimedia publications on CD-ROM. The Company markets and
produces a variety of special edition digital publications and custom
promotional discs for various corporate clients. We also distribute Hollywood
Previews(TM) Entertainment iMagazine(TM), an interactive digital magazine
(also called an iMagazine) on CD-ROM that features movie previews, video
games, and television previews, plus interviews with stars, behind the scenes
videos, music soundtracks and music videos, Hollywood fashion and style, and
other entertainment news. Hollywood Previews(TM) Entertainment iMagazine(TM)
is used primarily to showcase the Company's proprietary digital publishing
system capabilities. The Company's publications are distributed in a variety
of methods including insertions in major metropolitan newspapers, insertions
in major magazines and periodicals, hand-outs using targeted street teams, at
movie theater box offices, in back-end fulfillment and packaging, or via
direct mail to consumers.
The majority of our revenues to date have been generated from the sale of
custom publications and special edition discs. We continue to pursue the
procurement of paid advertising sponsorships, licensing, content placements,
and e-commerce fees from Hollywood Previews(TM) Entertainment iMagazine(TM).
We also intend to begin sales efforts of our proprietary data and Usage Report
that monitors the navigation and use of Hollywood Previews(TM) Entertainment
iMagazine(TM) by its audience.
The Company is a holding company doing business through various operating
subsidiaries. We formed iMedia US, LLC, a California limited liability
company on December 24, 2003 to serve as our primary operating unit.
Combined Pro-Forma Financial Statements
During, HPI was a member of an affiliated group (the "affiliated group"),
which included I-Publishing, MOD Studios, Inc. ("MOD Studios"), and The Modern
Company, LLC ("The Modern Company"). If the consolidated financial statements
were presented on a combined basis with the affiliated group, the pro forma
impact on the consolidated financial condition and results of operations of
the Company as of the year ended December 31, 2003 and would be as follows:
Affiliated Combining Combined
As Reported Group Entries Basis
------------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited)
Balance sheet
Current assets $ 1,024,306 $ 108,609 $ (136,664) $ 996,251
Property and equipment 51,833 - - 51,833
Other assets - 1,000 - 1,000
Due from affiliate 285,472 (285,472) -
------------- ------------ ------------ ------------
Total assets $ 1,076,139 $ 395,081 $ (422,136) $ 1,049,084
============= ============ ============ ============
Current liabilities 457,506 350,376 (422,136) 385,746
Shareholders' and
members' equity 618,633 44,705 - 663,338
------------- ------------ ------------ ------------
Total liabilities and
shareholders' and
members' equity $ 1,076,139 $ 395,081 $ (422,136) $ 1,049,084
============= ============ ============ ============
F-8
56
Affiliated Combining Combined
As Reported Group Entries Basis
------------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited)
Results of operations
Net sales $ 156,000 $ 905,270 $ (542,550) $ 518,720
Expenses 3,791,778 (329,578) 542,550 2,919,650
------------- ------------ ------------ ------------
(Loss) income from (3,635,778) 1,234,848 - (2,400,930)
operations
Other expense 722 125,368 - 126,090
------------- ------------ ------------ ------------
(Loss) income before
provision for
income taxes (3,636,500) 1,109,480 - (2,527,020)
Provision for income
taxes 800 1,600 - 2,400
------------- ------------ ------------ ------------
Net (loss) income $ (3,637,300) $ 1,107,880 $ - $(2,529,420)
============= ============ ============ ============
2. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company experienced net
losses from operations of $4,914,516, other comprehensive losses of $1,130,451
and has a accumulated deficit of $8,551,816. These factors raise substantial
doubt about its ability to continue as a going concern.
Additional financing will be required in order for the Company to continue in
existence. Management believes it will be able to obtain such financing from
new investors through sales of equity through a private placement memorandum.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of iMedia International, Inc. as of
December 31, 2004, include the accounts of the Company and its wholly-owned
subsidiaries Hollywood Previews, Inc., iMedia US, LLC. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Dissolution of Subsidiaries
The Company's majority owned subsidiaries Las Vegas Previews, LLC and
iPolitix, LLC had no operations for the year ended December 31, 2004, and
these entities have been dissolved.
Revenue Recognition
Revenue is generated mainly through the sale and licensing of interactive,
digital, multi-media publishing and is recognized in full when the product,
usually a CD-ROM, is shipped to the customer or distributed to the public,
provided that the other conditions of sale as established by the Securities
and Exchange Commission's Staff Accounting Bulleting ("SAB") No. 104, are
satisfied; Persuasive evidence of an arrangement exists; Delivery has occurred
or services have been rendered; The seller's price to the buyer is fixed or
determinable; and Collectibility is reasonably assured.
F-9
57
Accounts Receivable
The Company sells its products throughout the United States. The Company
evaluates its accounts receivable on a regular basis for collectibility and
provides for an allowance for potential credit losses as deemed necessary.
Earnings (Loss) per Common Share
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share", which established standards for computing and
presenting earnings per share (EPS). The statement simplifies the standards
for computing EPS, replaces the presentation of primary EPS with a
presentation of basic EPS and requires a dual presentation of basic and
diluted EPS on the face of the income statement. Basic EPS are based upon the
weighted average number of common shares outstanding during the period.
Diluted EPS are based upon the weighted average number of common shares if all
dilutive potential common shares had been outstanding.
The following potential common shares have been excluded from the computation
of diluted net loss per share for all periods presented because the effect
would have been anti-dilutive:
December 31,
2004 2003
--------- ---------
Warrants and options issued in
conjunction with
- offering costs 244,250
- services rendered 1,373,566 404,004
- convertible notes payable 1,411,111
----------- -----------
Total $ 3,028,927 $ 404,004
=========== ===========
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of three to five years. Maintenance and minor replacements are
charged to expense as incurred. Gains and losses on disposals are included in
the results of operations.
Cash
The Company places its cash in banks in excess of amounts insured by federal
agencies. The Company does not believe that as a result of this concentration
it is subject to any unusual financial risk beyond the normal risk associated
with commercial banking relationships. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash.
Impairment of Long-Lived Assets
The Company reviews its assets for impairment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Estimated losses are included in the statements of operations as
a component of cost of sales.
F-10
58
Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable, and
accounts payable and accrued expenses. The book values of all financial
instruments are representative of their fair values.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts
at each year-end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Estimates
The preparation of financial statements 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations and Uncertainties
Major Customers and Suppliers
We continue to expand and diversify our customer and marketing base so as to
reduce the risk associated with sales concentration on any one or group of
clients or markets. It is anticipated that over the succeeding quarters, our
customer base will become more broadly diversified as we begin marketing
efforts directed at sports, travel and the life science industries.
During the year ended December 31, 2004, four major customers accounted for
100% of total net sales whereas for the year ended December 31,2004 two
customers constituted 63% and 24% respectively of total net sales. For the
year ended December 31, 2004, one major vendor accounted for 36% of purchases.
We continue to be dependent upon third party suppliers for the manufacturing
of our goods and products. Presently we outsource our disc manufacturing and
printing to a variety of vendors in strategic geographic areas. Printing and
disc manufacturing is a commodity industry, and should it be necessary, these
suppliers can be easily replaced without detrimentally affecting to the
Company.
The Company does not believe that in the near future its earnings from sales
to customers will be over concentrated to any one or to only a few customers.
The Company's business plan calls for sales to a wide variety of customers and
in a wide variety of interests. Similarly, the Company's purchases will not
be over concentrated to any one or only a few vendors.
The Company had $46,444 in receivables outstanding from customers at December
31. These have subsequently been paid.
F-11
59
Lines of Credit
In March 2004, we cancelled a line of credit with a financial institution in
the amount of $30,000. The Company presently has no additional open lines of
credit.
Marketable Securities:
The Company accounts for investments under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investment securities are
classified into one of three categories: held-to-maturity, available-for-sale,
or trading. Securities are considered held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity. These
securities are recorded as either short-term investments or long-term
marketable securities on the balance sheet depending upon their original
contractual maturity dates. Held-to-maturity securities are stated at
amortized cost, including adjustments for amortization of premiums and
accretion of discounts. Securities are considered trading when bought
principally for the purpose of selling in the near term. Trading securities
are recorded as short-term investments and are carried at market value.
Unrealized holding gains and losses on trading securities are included in
operating income. Securities not classified as held-to-maturity or as trading
are considered available-for-sale. Available-for-sale securities are recorded
as either short-term investments or long-term marketable securities and are
carried at market value with unrealized gains and losses included in other
comprehensive income in stockholders' equity.
Comprehensive Income (Loss):
SFAS No. 130, "Reporting Comprehensive Income," established new rules for
the reporting and display of comprehensive income and its components.
SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities, foreign currency translation adjustments
and minimum pension liability adjustments to be reported as a separate
component (comprehensive income/loss) of stockholders' equity.
4. INVESTMENT IN AVAILABLE FOR SALE SECURITIES
On September 30, 2004, we closed on a Stock Purchase Agreement with Langley
Park Investments LLP, a London-based institutional investment trust. Langley
Park purchased 4,000,000 of the Company's common shares at the price of $1.90
per share. In lieu of cash, Langley issued to the Company 4,185,022 of its
common shares at British Pound Sterling 1.00 per share (British Pound Sterling
1.00 = US $1.81 on August 5, 2004). These shares become free-trading on the
London Stock Exchange (LSE) on October 8, 2004 and opened at British Pound
Sterling 0.31 per share. On September 30, 2004, we booked the corresponding
value of these shares as an asset on our financial statements in the amount of
$2,312,539. The asset value was calculated by multiplying the number of the
Langley Shares by the first opening trade as reported on the LSE, multiplied
by the U.S. dollar to British Pound Sterling exchange rate on September 30,
2004 (4,185,022 X British Pound Sterling 0.31 X $1.7825 = $2,312,539).
We paid a non-cash commission to an investment banker consisting of 209,251
Langley Park shares valued at $115,627 (209,251 x British Pound Sterling 0.31
X $1.7825), and an additional 200,000 shares of our common stock booked at
FMV, and valued at $146,000 (200,000 X $0.73) for this transaction. The net
fair market asset value of the Langley Park investment as of December 31, 2004
is $1,066,461.
We intend to use the Langley shares either to collateralize and drawn-down on
a bank line of credit, to take out the MicroCapital Fund(s) loans, and/or
begin progressive liquidation of the shares through the LSE in the secondary
market.
F-12
60
The Langley Park shares are registered as a Unit Investment Trust on the LSE.
The trading symbol for the shares is LSE:LPI. The shares are quoted in
British Pound Sterling. The investment trust consists of a portfolio of
common stock of 23 U.S. publicly-traded microcap companies. Langley Park must
hold, and cannot sell, short or hedge against its portfolio for a period of
two years. One-half of the free-trading Langley Park shares paid to iMedia
and the 22 other portfolio companies is being held in an escrow account as
downside protection for the trust in the case that any of the portfolio
companies should lose market value. At the end of the two-year restriction
period, the escrowed shares will be returned to the Company if the trading
price of iMedia shares at that time exceeds $1.90, otherwise a portion or all
of the escrowed shares will be returned to the trust to adjust for a market
loss. If, at the end of the two-year period, the trading price of iMedia
shares falls below $0.95, all the escrowed Langley shares will be lost. If,
however, the trading price of iMedia shares is more than $0.95 but less than
$1.90, only a proportionate amount of the escrowed shares will be lost.
The Comprehensive loss of $1,130,451 represents the write down of the
unrealized loss in the investment in Langley Park Investments Plc. Mutual Fund
shares. This unrealized loss was caused by the value of the Langley Park
shares as quoted on the London Stock Exchange at December 31, 2004 (Sterling
0.14 pence), declining from the cost recorded at September 30, 2004 (Sterling
0.31pence), the date of purchase.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004, consisted of the following:
Office Equipment, at cost $ 255,352
Less accumulated depreciation (177,142)
------------
Property and equipment, net $ 78,210
============
For the year ended December 31, 2004 and 2003, depreciation expense was
$48,111 and $26,284 respectively.
6. COMMITMENTS AND CONTINGENCIES
Office Lease: The Company leases its office facilities on a month-to-month
basis for $3,395. Rent expense amounted to $39,145 for the year ended December
31, 2004.
Employment and consulting agreements
The Company entered into employment agreements with Mr. MacEachern, Mr. Kapp
and Mr. Unruh on August 1, 2003. Each officer is compensated $18,000 annually
in addition to compensation received through I-Publishing, Inc as described
below. The agreements may be terminated by the Company or employee upon
14-days written notice.
The Company entered into a consulting and independent contractor agreement
with I-Publishing, Inc. on July 15, 2003. The agreement specifies monthly
payments totaling $40,500 for the combined executive management services of
the Company's Chief Executive Officer, President and Chief Financial Officer.
In October 2004, this amount was increased to $47,500 per month. The Company
may terminate the agreement upon 30-days written notice.
F-13
61
The Company entered into consulting and independent contractor agreements on
July 15, 2003 with Mr. Konzelman's company, Investment Advisory Group, Inc.,
and with Mr. Plate's company, Media Solutions Network, LLC. Each agreement
specifies monthly payments of $13,500 for management services. The Company may
terminate the agreements upon 30-days written notice.
7. CONVERTIBLE NOTES PAYABLE
On April 22, 2004 the Company closed a short-term convertible note payable to
Augustine Fund, LLP. The amount borrowed was $250,000 payable in 90 days.
The Note bore interest of 8%, compounded monthly. As an incentive to make the
loan, Augustine Fund was issued a 3-year warrant to purchase up to 50,000
shares at $1.00 per share and a second one-year warrant to purchase up to
250,000 additional common shares at the same price. Pursuant to the terms of
the Note, the Company had the right to repay the note at any time subject to a
10-day option to convert the Note into 250,000 shares of our Common Stock. We
also had the right to extend the note for one additional 90-day period.
In accordance with generally accepted accounting principles, the difference
between the conversion price and the Company's stock price on the date of
issuance of the Note to Augustine was considered to be interest expense. It
was recognized in the statement of operations during the period from the date
of issuance of the note to the time at which the note matured. During the year
ended December 31, 2004, the Company recorded $54,026 as a debt discount and
recognized $54,026 in interest expense related to the accretion of the debt
discount.
The Company allocates the proceeds received from debt or convertible debt with
detachable warrants using the relative fair value of the individual elements
at the time of issuance. The amount allocated to the warrants as a debt
discount was calculated at $54,026 and was recognized as interest expense over
the period until the notes matured. During the year ended December 31, 2004,
the Company recognized $54,026 in interest expense related to the accretion of
the debt discount.
In July, 2004, the Company exercised its option to repay the Note and
Augustine elected not to convert. The principal amount of the Note, plus
$5,000 in interest was paid by the Company on July 20, 2004 and no penalty
warrants were issued. The remaining interest related to the difference between
he Company's stock price and the conversion price and the warrants was
recognized on that date.
On September 1, 2004 the Company closed on two short-term convertible notes
payable to MicroCapital Fund, LP and MicroCapital Fund LTD (separately and
collectively "Lenders"). The Company borrowed the aggregate amount of
$1,000,000 payable to Lenders in 120 days. The Note bears simple interest of
15%. As an incentive to make the loan, Lenders were issued 5-year warrants to
purchase up to the aggregate of 1,111,000 shares of common stock at $0.90 per
share. Pursuant to the terms of the Notes, the Company has the right to repay
the note at maturity, or Lenders may exercise an option to convert any portion
of the notes into common shares at the price of $0.60 per share up to a
maximum of 1,666,666 common shares. The Company has the right to force a
conversion at the price of $0.20 per share, or 5,000,000 shares subject to the
Company meeting certain required disclosure conditions.
In accordance with generally accepted accounting principles, the difference
between the conversion price and the Company's stock price on the date of
issuance of the Note to Lenders are considered to be interest expense. It will
be recognized in the statement of operations during the period from the date
of issuance of the note to the time at which the note matures. During the
year ended December 31, 2004, the Company recorded $464,140 as a debt discount
and recognized $464,140 in interest expense related to the accretion of the
debt discount.
F-14
62
The Company allocates the proceeds received from debt or convertible debt with
detachable warrants using the relative fair value of the individual elements
at the time of issuance. The amount allocated to the warrants as a debt
discount was calculated at $247,473 and will be recognized as interest expense
over the period until the notes mature or are converted. During the year
ended December 31, 2004, the Company recognized $247,473 in interest expense
related to the accretion of the debt discount.
On December 30, 2004 MicroCap agreed to extend the loan until April 30th, 2005
under similar terms, except that, under the terms of the amendment, the price
that Lenders may exercise an option to convert any portion of the notes into
common shares is $0.60 per share up to a maximum of 1,666,666 common shares
and the Company's right to force conversion at price is lowered to $0.16 per
share, or 6,250,000 shares. Due to the amendment, the additional amount
allocated to the warrants as debt discount is $62,937 and will be recognized
as interest expense until the notes mature or are converted.
The Company expects to repay the notes upon maturity, unless the Lenders
exercise their option to convert into common shares. The Company does not
expect to exercise its option to force a conversion to common stock under the
terms of the amendment
8. PAYABLES TO RELATED PARTIES
On July 20, 2004, the Company closed three short-term loans totaling $130,000.
These loans were made to the Company by parties related to the Company and/or
its officers or directors. The Company issued a promissory note to each
lender. Each note had identical terms and conditions, although the note
amounts varied. The notes had a term of 90 days and bore interest at 8% per
annum. In addition, a total of 130,000 two-year warrants, convertible to
common stock at the price of $0.50 per share were issued to the lenders as an
incentive to make the loans. On December 31st, 2004 the agreements were
amended and the loans were extended until April 30th, 2005. In exchange for
waiving the interest payments on the original notes, the 130,000 two year
warrants were cancelled and the Company authorized the issuance of 130,000
common shares in January 2005. At December 31, 2005 the committed stock is
valued at $94,900. Deferred interest was calculated at $94,900, of which
$31,633 was recognized in the period ending December 31, 2004.
9. SHAREHOLDERS' DEFICIT
Common Stock Subscriptions
As at December 31, 2004, the Company had subscriptions for 530,000 shares of
common stock from investors through a private placement and recorded
subscriptions receivable of $530,000.
During the year ended December 31st, 2004 the Company received subscriptions
of $1,253,000 for the purchase of 1,253,000 shares of common stock from
accredited investors.
In addition, $370,000 was received from the prior year's subscriptions
receivable.
Common Stock issued to Subscribers of a Previous Private Placement
We issued an additional 408,993 shares to investors who participated in a
previous private placement dated September 2, 2003. The shares were issued to
compensate for the difference between the amount paid by these prior
subscribers and the amounts paid by subscribers of a subsequent private
placement dated March 18, 2004, who purchased shares at a price-per-share
lower than that of the previous offering.
F-15
63
Common Stock issued for Services
During the year ended December 31, 2004, we issued a total of 202,325
restricted shares for services rendered.
Issued securities include:
.. 3,000 shares issued to a consultant for services rendered during 2004
valued at $3,000.
.. 10,000 restricted shares issued to another consultant for services
rendered during the three month period ended March 31, 2004, valued at
$10,000.
.. 114,325 shares issued to consultants for services rendered and expensed
during 2003 and 2004, valued at $83,457.
.. 45,000 restricted shares issued to another consultant for services
rendered valued at $32,850.
.. 30,000 restricted shares issued to another consultant for services
rendered valued at $21,900.
During the year ended December 31, 2004, the Company issued the following
shares of common stock:
.. 320,333 committed shares of common stock.
.. 200,000 shares as offering costs valued at $146,000.
.. 202,325 shares in exchange for services valued at $151,207
.. 4,000,000 shares for investment in Langley Park shares. (See note 4)
10. WARRANTS AND OPTIONS
During the year ended December 31, 2004, the Company issued 3,028,927 warrants
or options to purchase common stock. All warrants and options were issued with
Black Scholes assumptions of 50% volatility, $0.73 share price, risk free
interest rates ranging from 2.87% to 3.7%, and exercise prices ranging from
$0.10 to $1.75. The warrants and options were issued as follows:
.. issued warrants or options to purchase 244,250 shares of the Company's
common stock to third parties for offering costs. The Company issued these
options at exercise price of $1.00 per share, with terms expiring in two to
four years. The options had a calculated value of $45,539.
.. issued warrants or options to purchase 1,373,566 shares of the Company's
common stock to third parties for services. The Company issued these options
at exercise prices of between $0.10 - $1.75 per share, with terms expiring in
two to five years. The options had a calculated value of $428,524, $342,545
of which was recognized in the current period.
.. issued warrants to purchase 1,111,111 shares of the Company's common stock
to Micro-Capital at exercise prices between $0.90 per share, with terms
expiring in five years. The warrants had a calculated value of $711,613 which
was recognized in the current period.
.. issued warrants to purchase 300,000 shares of the Company's common stock to
the Augustine Fund at an exercise price of $1.00 per share, with a term
expiring in one to five years. The warrants had a calculated value of
$108,052 which was recognized in the current period.
F-16
64
11. INCOME TAXES
The provision for income taxes differs from the amount that would result from
applying the federal statutory rate for the years ended December 31, 2004 and
2003 as follows:
2004 2003
----------- ----------
Statutory regular federal income benefit rate (34.0%) (34.0)%
State income taxes, net of federal benefit (8.8) (5.8)
Change in valuation allowance 42.6 39.6
Other 0.2 0.2
----------- ----------
Total - % - %
=========== ==========
The components of the deferred income tax assets (liabilities) at December 31,
2003 were as follows:
Net operating loss carry-forwards $ 2,668,226
Reserve for loan receivable 343,669
State taxes 252,528
Other 267,051
-------------
3,531,474
Valuation allowance (3,531,474)
-------------
Total $ -
=============
The valuation allowance increased by approximately $2,090,874 during the year
ended December 31, 2004. As of December 31, 2004, the Company had federal net
operating loss carryforwards for federal and state income tax purposes of
approximately $6,990,190. The net operating loss carryforwards begin expiring
in 2024. The utilization of net operating loss carryforwards may be limited
due to the ownership change provisions of Internal Revenue Code Section 382
and similar state provisions.
12. RELATED PARTY TRANSACTIONS
Licensing Agreement
I-Publishing licensed to the Company the exclusive rights to use its
intellectual property. The Company is obliged to pay I-Publishing a royalty of
5% of the gross margin, defined as gross revenues less cost of goods,
associated with revenue earned that uses or relies upon the Licensor's
intellectual property in any form. During the period ended December 31, 2004
the Company paid royalties of $19,657 to iPublishing. Licensor may not sell,
provide or otherwise assign a similar license to any other company, nor become
a competitor for as long a period of time as the Company remains in operation.
There are no minimum performance stipulations in the License Agreement. The
license term is for 99 years beginning April, 2003.
Executive Compensation paid to Affiliate
In lieu of salaries to the three executive officers for the year ended
December 31, 2004, the Company paid I-Publishing management fees of $507,000
and recorded these payments as management compensation expense.
F-17
65
13. SUBSEQUENT EVENTS
During the period subsequent to December 31, 2004, we issued a total of
5,615,510 out-of-the-money warrants to purchase additional shares of common
stock to approximately 40 investors to the Company s prior private placements.
The warrants were issued voluntarily as a concession for the delays and
illiquidity experienced by these investors during the delay that the Company
experienced in obtaining its OTC-BB listing. 2,807,775 warrants are
exercisable at the price of $1.00 per share, and 2,807,775 of these warrants
are exercisable at the price of $1.25 per share. Each warrant issued was for a
one-year term and will expire on February 2, 2006. At the date the warrants
were issued, the market price of the Company's common stock was $0.80 per
share. The value of the warrants was calculated at $439,819, and recorded in
the first quarter of 2005.
During the period subsequent to December 31, 2004, 2,260,162 warrants
convertible to common stock were exercised by various warrant holders in
exchange for $893,199.
F-18
66
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2005 2004
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 436,618 $ 358,969
Accounts receivable 884,237 46,444
Work in process 129,051 -
Prepaid expense 800 555
------------- -------------
Total current assets 1,450,706 405,968
Property and equipment, net 70,233 78,211
Investment in available for sale securities 266,988 1,066,461
------------- -------------
Total assets $ 1,787,927 $ 1,550,640
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 695,625 $ 757,633
Deferred revenue 123,260 -
Due to affiliate - 13,602
Notes payable - 1,080,022
------------- -------------
Total current liabilities 818,885 1,851,257
------------- -------------
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK,
net of discount of $2,947,111 (plus accrued
unpaid dividends and interest of $15,428) 108,317 -
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible Preferred stock subject to
mandatory redemption convertible into
7,600,000 shares of common stock, $0.001
par value, 6% dividend, authorized 7,200
shares; 3,040 shares issued and outstanding
as of June 30, 2005, none outstanding
as of December 31, 2004 - -
Common stock-500,000,000 shares authorized,
$.001 par value 71,347,027 issued and
outstanding as of June 30, 2005; 65,567,908
issued and outstanding as of December 31,
2004 71,347 65,568
Subscription receivable - (530,000)
Common stock committed
710,000 shares as of December 31, 2004 - 674,900
Deferred compensation (865,666) (149,246)
Capital in excess of par value 17,176,225 9,320,428
Accumulated deficit (15,521,181) (8,551,816)
Accumulated other comprehensive loss - (1,130,451)
------------- -------------
Total stockholders' equity (deficit) 860,725 (300,617)
------------- -------------
Total liabilities and stockholders'
equity (deficit) $ 1,787,927 $ 1,550,640
============= =============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
F-19
66
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2005 and 2004 (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
------------- ------------ ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<s> <c> <c> <c> <c>
Net sales $ 1,700,886 $ 899,675 $ 2,147,351 $ 925,175
Cost of sales 1,447,278 766,409 1,715,232 771,109
------------- ------------ ------------- -------------
Gross profit 253,608 133,266 432,119 154,066
------------- ------------ ------------- -------------
Costs and expenses:
Operating expenses 1,953,951 1,158,317 3,973,626 1,927,329
Operating expenses
- related parties 150,000 121,500 292,500 243,000
------------- ------------ ------------- -------------
Total expenses 2,103,951 1,279,817 4,266,126 2,170,329
------------- ------------ ------------- -------------
Loss before other expenses
and taxes (1,850,343) (1,146,551) (3,834,007) (2,016,263)
------------- ------------ ------------- -------------
Other expense:
Interest expense 510,025 95,044 642,571 95,044
Loss on sale of investments 6,436 - 149,913 -
Impairment loss on investment
in available-for-sale
securities 57,720 - 1,570,750 -
Value of warrants 329,105 - 768,924 -
------------- ------------ ------------- -------------
Total other expense 903,286 95,044 3,132,158 95,044
------------- ------------ ------------- -------------
Loss before provision
for income taxes (2,753,629) (1,241,595) (6,966,165) (2,111,307)
Provision for income taxes 2,400 - 3,200 2,400
------------- ------------ ------------- -------------
Net loss $ (2,756,029) $(1,241,595) $ (6,969,365) $ (2,113,707)
============= ============ ============= =============
NET LOSS PER COMMON SHARE
BASIC AND DILUTED
Basic and diluted $ (0.04) $ (0.02) $ (0.10) $ (0.04)
============= ============ ============= =============
WEIGHTED AVERAGE COMMON
OUTSTANDING SHARES
Basic and diluted 70,960,230 60,488,428 69,004,890 59,953,397
============= ============ ============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-20
67
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT) AND OTHER COMPREHENSIVE INCOME (LOSS)
For the six months ended June 30, 2005 (unaudited)
Accumulated
Committed Deferred Capital in Other
Common Stock Subscription Shares Compen- excess of Comprehensive Accumulated
Shares Amount Receivable Shares Amount sation par value Losses Deficit Total
---------- -------- ----------- ------- ---------- ------------- ----------- ------------ ------------- ------------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance
December
31, 2004 65,567,908 $ 65,568 $ (530,000) 710,000 $ 674,900 $ (149,246) $ 9,320,428 $(1,130,451) $ (8,551,816) $ (300,617)
Cancellation
of
subscription
receivable - - 530,000 (580,000) (580,000) - 50,000 - - -
Issuance
of common
stock upon
exercise of
warrants 2,874,119 2,874 - - - - 1,132,087 - - 1,134,961
Issuance
of common
stock for
cash 30,000 30 - - - - 14,970 - - 15,000
Issuance
of common
stock for
services 2,745,000 2,745 - - - (929,200) 1,924,005 - - 997,550
Issuance
of common
stock for
interest
payable to
related
parties 130,000 130 - (130,000) (94,900) - 94,770 - - -
Issuance
of warrants
for services - - - - - (665,979) 665,979 - - -
Amortization
of deferred
compensation - - - - - 878,759 - - - 878,759
Unrealized
loss on
investment - - - - - - - (382,579) - (382,579)
Permanent
impairment
on investment
in available
for sale
securities - - - - - - - 1,513,030 - 1,513,030
Issuance of
additional
warrants to
investors - - - - - - 439,819 - - 439,819
Issuance of
warrants with
preferred
stock offering - - - - - - 2,781,000 - - 2,781,000
Issuance of
replacement
warrants - - - - - - 329,105 - - 329,105
Issuance
of warrants
for legal
services - - - - - - 83,584 - - 83,584
Issuance
of warrants
for debt
extension - - - - - - 340,478 - - 340,478
Net Loss - - - - - - - - (6,969,365) (6,969,365)
---------- -------- ----------- ------- ---------- ------------- ----------- ------------ ------------- ------------
Balance
June 30,
2005 71,347,027 $ 71,347 $ - $ - $ - $ (865,666) $17,176,225 $ - $(15,521,181) $ 860,725
========== ======== =========== ======= ========== ============= =========== ============ ============= ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-21
68
IMEDIA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2005 and 2004 (unaudited)
June 30, June 30,
2005 2004
------------- -------------
(unaudited) (unaudited)
Cash Flows From Operating Activities:
Net loss $ (6,969,365) $ (2,113,707)
Adjustments to reconcile net loss to net cash
used in operating activities:
Interest on fixed conversion feature - 90,044
Depreciation and amortization 24,296 20,739
Options and warrants issued for services - 267,770
Loss on sales of investments 149,913 -
Impairment loss on investment in
available for sale securities 1,570,750 -
Non-cash stock and warrants 2,633,916 13,000
Non-cash warrant interest charge 340,478 -
Preferred stock dividend - interest accrual 15,428 -
Amortization of common stock for interest on
notes to related parties 94,900 -
Amortization of debt discount for preferred stock 92,889 -
Amortization of note discount 62,937 -
Increase in accounts and advances receivable (837,790) (444,585)
Increase in work in process (129,051) -
Increase in deferred compensation - (47,317)
Decrease in prepaid expenses (245) 3,397
Decrease in leases payable (2,138) -
Decrease in inventory - 71,055
Increase (decrease) in accounts payable and
accrued expenses (72,830) 102,389
Increase in committed stock - 50,000
Increase in deferred revenue 123,260 -
------------- -------------
Net cash flows used in operating activities (2,902,652) (1,987,215)
------------- -------------
Cash Flows From Investing Activities:
Purchase of equipment (16,318) (41,393)
Due from affiliates and associated companies, net (13,602) (56,451)
Proceeds from sale of investment in
available for sale securities 209,261 -
------------- -------------
Net cash flows provided by (used in)
investing activities 179,341 (97,844)
------------- -------------
Cash Flows From Financing Activities:
Payments on notes payable - related parties (130,000) (14,254)
Payments on notes payable (1,000,000) 1,391
Proceeds from notes payable - 250,000
Proceeds for collection of common stock
subscription receivable - 370,000
Proceeds from issuance of common stock 1,149,960 1,058,000
Net proceeds from issuance of preferred stock 2,781,000 -
Offering costs paid on issuance of stock - (114,790)
------------- -------------
Net cash flows provided by financing activities 2,800,960 1,550,347
------------- -------------
Net increase (decrease) in cash 77,649 (534,712)
Cash, at beginning of period 358,969 813,189
------------- -------------
Cash, at end of period $ 436,618 $ 278,477
============= =============
Supplemental Disclosures of Cash Flow Information
Income taxes paid $ 3,200 $ 2,400
============= =============
Interest paid $ 67,571 $ -
============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-22
69
IMEDIA INTERNATIONAL INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
1. ORGANIZATION
General
Pursuant to an Agreement and Plan of Merger dated as of August 18, 2003 (the
"Merger Agreement"), a wholly-owned subsidiary of the Company's corporate
predecessor, Irvine Pacific Corporation ("IPC") merged with and into Hollywood
Previews, Inc. ("HPI"), on August 29, 2003, resulting in HPI becoming a
wholly-owned subsidiary of IPC (the "Acquisition").
As consideration for the Acquisition, the shareholders of HPI were issued
55,179,581 shares of IPC common stock which, immediately following the
Acquisition, represented 96.18% of the issued and outstanding common stock of
IPC (after giving effect to the conversion of all of IPC's outstanding notes
immediately prior to the Acquisition). Although HPI became a wholly-owned
subsidiary following the Acquisition, because the transaction resulted in a
change of control, the transaction was recorded as a "reverse merger" whereby
HPI is considered to be the accounting acquirer of the Company. Immediately
prior to the Acquisition IPC had only nominal assets and liabilities and no
current business operations.
Effective November 25, 2003, IPC completed a statutory merger effected for the
purpose of changing its state of incorporation from Colorado to Delaware by
merging into a newly formed Delaware corporation, iMedia International, Inc.
(the "Company"). This change in IPC's state of incorporation and corporate
name was approved by the holders of a majority of IPC's outstanding shares of
common stock at a special meeting of shareholders on November 21, 2003.
As a result of the reincorporation merger, each outstanding share of IPC's
common stock was automatically converted into one share of Company common
stock. Each stock certificate representing issued and outstanding shares of
IPC's common stock continues to represent the same number of shares of common
stock of the Company. The Company continues to operate the business of IPC,
and the reincorporation did not result in any change in IPC's former business,
assets or liabilities, did not cause the Company's headquarters to be moved,
or result in any relocation of management or other employees.
At the time of the Acquisition HPI held an exclusive license from iPublishing,
Inc. ("iPublishing"), an affiliate of the Company, to use iPublishing's
intellectual property (the "License"). iPublishing's three shareholders, David
MacEachern, Scott Kapp and Franklin Unruh (each of whom own approximately 33%
of the outstanding securities of iPublishing), are each officers and directors
of the Company. Pursuant to the License, iPublishing receives annual royalties
of 5% of Gross Margin generated by disks produced by the Company using
iPublishing technology. Because the License is exclusive, iPublishing may not
license or assign any of its intellectual property to any other party and may
not compete with the Company. It is the Company's intention to permanently
acquire all of iPublishing's intellectual property at some point in the future
when operations and revenue have stabilized. In connection with the exclusive
license, HPI purchased all of iPublishing's property and equipment, which
iPublishing had previously purchased from one of its shareholders and
officers. The purchase transaction has been accounted for at the carry-over
basis of the assets at which they were obtained by the shareholder/officer of
iPublishing. HPI has since transferred the exclusive license to its parent,
the Company. The intellectual property covered by the License consists of
various proprietary procedures, codes, technologies, copyrights, trademarks
and brands, along with the proprietary suite of mastering software used to
create our CD-ROM and DVD-ROM products.
As a result of the Acquisition, the Company became a publisher of interactive,
digital, and multimedia publications on CD-ROM. The Company markets and
produces a variety of special edition digital publications and custom
promotional discs for various corporate clients. The Company also distributes
Hollywood Previews(TM) Entertainment iMagazine(TM), an interactive digital
magazine (also called an iMagazine) on CD-ROM that features movie previews,
video games, and television previews, plus interviews with stars, behind the
scenes videos, music soundtracks and music videos, Hollywood fashion and
style, and other entertainment news. Hollywood Previews(TM) Entertainment
iMagazine(TM) is used primarily to showcase the Company's proprietary digital
publishing system capabilities. The Company's publications are distributed in
a variety of methods including insertions in major metropolitan newspapers,
insertions in major magazines and periodicals, hand-outs using targeted street
teams, at movie theater box offices, in back-end fulfillment and packaging, or
via direct mail to consumers.
The majority of the Company's revenues to date have been generated from the
sale of custom publications and special edition discs. The Company continues
to pursue the procurement of paid advertising sponsorships, licensing, content
placements, and e-commerce fees from Hollywood Previews(TM) Entertainment
iMagazine(TM) and intends to begin sales efforts of its proprietary data and
usage report technology that monitors the navigation and use of Hollywood
Previews(TM) Entertainment iMagazine(TM) by its audience.
The Company is a holding company doing business through various operating
subsidiaries. iMedia US, LLC, a California limited liability company was
formed on December 24, 2003 to serve as the Company's primary operating unit
for developing custom publications and special edition discs.
F-23
70
2. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company experienced net
losses from operations for the six months ended June 30, 2005 of $6,969,365,
negative cash flows from operations of $2,902,652 and has an accumulated
deficit of $15,521,181 as of June 30, 2005. These factors raise substantial
doubt about its ability to continue as a going concern.
Additional financing will be required in order for the Company to continue in
existence. During the three months ended June 30, 2005 the Company entered
into a purchase agreement with several accredited investors pursuant to which
the Company agreed to sell 3,040 of its shares of Series A-6% Mandatory
Redeemable Convertible Preferred Stock along with warrants to purchase its
common stock (see Note 12). The Company intends to seek additional financing
through the issuance of additional debt or equity securities.
The financial statements do not include any adjustments relating to the
recoverability and classification of assets or liabilities that might be
necessary should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The consolidated financial information as of June 30, 2005 and for the three
and six months ended June 30, 2005 is unaudited and reflects all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position, operating
results, and cash flows for such periods. The consolidated results of
operations for the three and six months ended June 30, 2005 are not
necessarily indicative of the results that may be expected for any future
period. These financial statements and accompanying footnotes should be read
in conjunction with the Company's financial statements in the Company's Form
10-KSB for the year ended December 31, 2004.
The Company's results of operations for the three and six months ended June
30, 2005 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending December 31, 2005.
Basis of Presentation
The consolidated financial statements of iMedia International, Inc. as of June
30, 2005, include the accounts of the Company and its wholly-owned
subsidiaries Hollywood Previews, Inc., IMedia US, LLC and IMedia Nevada, LLC.
All significant inter-company accounts and transactions have been eliminated
in consolidation.
Revenue Recognition
The Company's major source of revenue is from the creation and duplication of
interactive multi-media CD's from content provided by customers. Revenue is
allocated to the creation of the CD, and to the duplication of such CD's,
based upon the contract terms and relative fair value of such services to the
total contractual revenue. Revenue from the creation of the multi-media
interactive CD is recognized when completed and upon client acceptance.
Revenue from duplication is recognized as the units are shipped.
Accounts Receivable
The Company sells its products throughout North America. The Company evaluates
its accounts receivable on a regular basis for collectibility and provides for
an allowance for potential credit losses as deemed necessary. As of June 30,
2005 (unaudited) and December 31, 2004 no valuation allowance has been
recorded against the accounts receivable.
Work in Progress
The Company capitalizes direct material and labor into work in process on
projects that have yet to be completed. Total work in process as of June 30,
2005 is $129,051. There was no work in progress as of December 31, 2004.
Earnings (Loss) per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
requires presentation of basic earnings per share and diluted earnings per
share. Basic earnings (loss) per share is computed by dividing earnings (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share gives effect
to all dilutive potential common shares outstanding during the period. These
potentially dilutive securities were not included in the calculation of loss
per share for the three and six months ended June 30, 2005 and 2004 because
the Company incurred a loss during
F-24
71
such periods and thus their effect would have been anti-dilutive. Accordingly,
basic and diluted loss per share is the same for the three and six months
ended June 30, 2005 and 2004. For the three and six months ended June 30,
2005, potentially dilutive securities totaled 25,544,935 and 33,061,605,
respectively. For the three and six months ended June 30, 2004, potentially
dilutive securities totaled 405,016 and 759,341, respectively.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of three to five years. Maintenance and minor replacements are
charged to expense as incurred. Gains and losses on disposals are included in
the results of operations.
Property and equipment at June 30, 2005 (unaudited) and December 31, 2004
consisted of the following:
2005 2004
------------- ------------
Equipment $ 271,669 $ 255,352
Less: Accumulated Depreciation (201,436) (177,141)
------------- ------------
$ 70,233 $ 78,211
============= =============
Cash
The Company places its cash in banks in excess of amounts insured by federal
agencies. The Company does not believe that as a result of this concentration
it is subject to any unusual financial risk beyond the normal risk associated
with commercial banking relationships. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash. As of June 30, 2005 total cash in excess of federally
insured amounts by the Company is $209,522.
Impairment of Long-Lived Assets
The Company reviews its assets for impairment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Estimated losses are included in the statements of operations as
a component of cost of sales.
Deferred Revenue
The Company records receivables for projects that have yet to complete the
earnings process when they become billable under the customers contract or
purchase order. As of June 30, 2005 the Company has recorded deferred revenue
of $123,260.
Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable accounts
payable and accrued expenses. The book values of all financial instruments are
representative of their fair values.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts
at each year-end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Estimates
The preparation of financial statements 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-25
72
Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share Based Payment" ("SFAS 123R"), a revision
to SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R
supercedes Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and amends SFAS No. 95, "Statement of Cash Flows". SFAS
123R requires that the Company measure the cost of employee services received
in exchange for equity awards based on the grant date fair value of the
awards. The cost will be recognized as compensation expense over the vesting
period of the awards. The Company is a small business issuer, and therefore is
required to adopt SFAS 123R as of the first interim or annual reporting period
of the first fiscal year that begins on or after December 15, 2005. Under this
method, the Company will begin recognizing compensation cost for equity-based
compensation for all new or modified grants after the date of adoption. In
addition, the Company will recognize the unvested portion of the grant date
fair value of awards issued prior to adoption based on the fair values
previously calculated for disclosure purposes over the remaining vesting
period of the outstanding options and warrants. The Company is currently
evaluating the potential effect that the adoption of SFAS 123R will have on
the Company's financial statement presentation and disclosures.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment to APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends
Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary
Transactions", to require that exchanges of nonmonetary assets be measured and
accounted for at fair value, rather than at carryover basis, of the assets
exchanged. Nonmonetary exchanges that lack commercial substance are exempt
from this requirement. SFAS 153 is effective for nonmonetary exchanges entered
into in fiscal periods beginning after June 15, 2005. The Company does not
routinely enter into nonmonetary exchanges. Accordingly, the Company does not
expect that the adoption of SFAS 153 will have a significant effect on the
Company's financial statement presentation or disclosures.
Marketable Securities
The Company accounts for investments under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investment securities are
classified into one of three categories: held-to-maturity, available-for-sale,
or trading. Securities are considered held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity. These
securities are recorded as either short-term investments or long-term
marketable securities on the balance sheet depending upon their original
contractual maturity dates. Held-to-maturity securities are stated at
amortized cost, including adjustments for amortization of premiums and
accretion of discounts. Securities are considered trading when bought
principally for the purpose of selling in the near term. Trading securities
are recorded as short-term investments and are carried at market value.
Unrealized holding gains and losses on trading securities are included in
operating income. Securities not classified as held-to-maturity or as trading
are considered available-for-sale. Available-for-sale securities are recorded
as either short-term investments or long-term marketable securities and are
carried at market value with unrealized gains and losses included in other
comprehensive income in stockholders' equity.
Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," established rules for the
reporting and display of comprehensive income and its components. SFAS No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities, foreign currency translation adjustments and minimum pension
liability adjustments to be reported as a separate component (comprehensive
income/loss) of stockholders' equity.
4. MAJOR CUSTOMERS AND SUPPLIERS
During the three and six months ended June 30, 2005, three and four major
customers accounted for 70% and 76% of total net sales, respectively, whereas
for the three and six months ended June 30, 2004, two major customers
accounted for 95% and 92% of total net sales, respectively. During the three
and six months ended June 30, 2005, one vendor accounted for 90% and 92% of
total purchases, respectively. Whereas for the three and six months ended
June 30, 2004, five vendors accounted for 98% and 99% of total purchases,
respectively.
We are dependent upon third party suppliers for the manufacturing of our goods
and products. Presently we outsource our disc manufacturing and printing to a
variety of vendors in strategic geographic areas. Printing and disc
manufacturing is a commodity industry, and should it be necessary, these
suppliers can be easily replaced without detrimentally affecting the Company.
F-26
73
5. INVESTMENT IN AVAILABLE FOR SALE SECURITIES
On September 30, 2004, the Company closed on a Stock Purchase Agreement with
Langley Park Investments LLP, a London-based institutional investment trust.
Langley Park purchased 4,000,000 of the Company's common shares at the price
of $1.90 per share. In lieu of cash, Langley issued to the Company 4,185,022
of its common shares at British Pound Sterling 1.00 per share (British Pound
Sterling 1.00 = US $1.81 on August 5, 2004). These shares became free-trading
on the London Stock Exchange (LSE) on October 8, 2004 and opened at British
Pound Sterling 0.31 per share. On September 30, 2004, the Company recorded the
corresponding value of these shares as an asset on its financial statements in
the amount of $2,312,539. The asset value was calculated by multiplying the
number of the Langley Shares by the first opening trade as reported on the
LSE, multiplied by the U.S. dollar to British Pound Sterling exchange rate on
September 30, 2004 (4,185,022 X British Pound Sterling 0.31 X $1.7825 =
$2,312,539).
The Langley Park shares are registered as a Unit Investment Trust on the LSE.
The trading symbol for the shares is LSE:LPI. The shares are quoted in British
Pound Sterling. The investment trust consists of a portfolio of common stock
of 23 U.S. publicly-traded microcap companies. Langley Park must hold, and
cannot sell, short or hedge against its portfolio for a period of two years.
One-half of the free-trading Langley Park shares paid to iMedia and the 22
other portfolio companies is being held in an escrow account as downside
protection for the trust in the case that any of the portfolio companies
should lose market value. At the end of the two-year restriction period, the
escrowed shares will be returned to the Company if the trading price of iMedia
shares at that time exceeds $1.90, otherwise a portion or all of the escrowed
shares will be returned to the trust to adjust for a market loss. If, at the
end of the two-year period, the trading price of iMedia shares falls below
$0.95, all the escrowed Langley shares will be lost. If, however, the trading
price of iMedia shares is more than $0.95 but less than $1.90, only a
proportionate amount of the escrowed shares will be lost. During the three
months ended March 31, 2005, the Company's share price was below $.95. The
Company determined that its entire investment in the escrow shares became
permanently impaired In accordance with SFAS No. 115, the write down of these
shares was reflected as a permanent impairment and the previously reflected
unrealized loss of $1,513,030 included in accumulated other comprehensive
loss. was recorded in the statement of operations for the three months ended
March 31, 2005. During the three months ended June 30, 2005, the Company
reflected a further impairment loss of $57,720 on the non escrowed shares.
During the three and six months ended June 30, 2005, the Company sold 25,000
and 650,000 shares of its non-escrow shares, respectively for gross proceeds
totaling $7,379 and $209,261, respectively. In connection with the sale of
these shares the Company recorded a loss for the three and six months ended
June 30, 2005 of $6,346 and $149,913, respectively, in the statement of
operations in other expense.
The net fair market asset value of the Langley Park investment as of June 30,
2005 is $266,988. On July 27, 2005 the Company sold the remaining 1,233,260
shares of this investment for $257,407.
6. COMMITMENTS AND CONTINGENCIES
Office Lease
The Company leases its office facilities on a month-to-month basis. Rent
expense amounted to $10,185 and $24,370, respectively, for the three and six
months ended June 30, 2005 and $9,750 and $19,500, respectively for the three
and six months ended June 30, 2004.
Employment and Consulting Agreements
The Company entered into employment agreements with Mr. MacEachern, Mr. Kapp
and Mr. Unruh on August 1, 2003. Each officer is compensated $18,000 annually
in addition to compensation received through iPublishing, Inc as described
below. The agreements may be terminated by the Company or employee upon 14
days written notice.
The Company entered into a consulting and independent contractor agreement
with iPublishing, Inc. on July 15, 2003. The agreement specifies monthly
payments totaling $40,500 for the combined executive management services of
the Company's Chief Executive Officer, President and Chief Financial Officer.
In October 2004, this amount was increased to $47,500 per month and in April
2005 increased to $50,000 per month. The Company may terminate the agreement
upon 30-days written notice. Total compensation paid for the three and six
months ended June 30, 2005 and 2004 is $142,500 and $292,500, respectively,
and $121,500 and $243,000, respectively.
The Company entered into consulting and independent contractor agreements on
July 15, 2003 with companies owned by its shareholders, Investment Advisory
Group, Inc. and Media Solutions Network, LLC. Each agreement specifies monthly
payments of $13,500 each for management services for a total of $27,000 per
month. The Company may terminate the agreements upon 30-days written notice.
Total management fees paid for the three and six months ended June 30, 2005
and 2004 is $81,000 and $162,000, respectively, and $81,000 and $134,000,
respectively.
F-27
74
7. CONVERTIBLE NOTES PAYABLE
On September 1, 2004 the Company closed on two short-term convertible notes
payable to MicroCapital Fund, LP and MicroCapital Fund LTD (separately and
collectively "Lenders"). The Company borrowed the aggregate amount of
$1,000,000 payable to Lenders in 120 days. The notes bore simple interest of
15%. As an incentive to make the loan, Lenders were issued 5-year warrants to
purchase up to the aggregate of 1,111,000 shares of common stock at $0.90 per
share. Pursuant to the terms of the Notes, the Company has the right to repay
the notes at maturity, or Lenders may exercise an option to convert any
portion of the notes into common shares at the price of $0.60 per share up to
a maximum of 1,666,666 common shares. The Company has the right to force a
conversion at the price of $0.20 per share, or 5,000,000 shares subject to the
Company meeting certain required disclosure conditions.
In accordance with generally accepted accounting principles, the difference
between the conversion price and the Company's stock price on the date of
issuance of the notes to Lenders are considered to be interest expense. Such
difference was recognized in the statement of operations during the period
from the date of issuance of the note to the time at which the note matures.
During the year ended December 31, 2004, the Company recorded $464,140 as a
debt discount and recognized the entire $464,140 as interest expense related
to the accretion of the debt discount.
The Company allocates the proceeds received from debt or convertible debt with
detachable warrants using the relative fair value of the individual elements
at the time of issuance. The amount allocated to the warrants as a debt
discount was calculated at $247,473 and was recognized as interest expense
over the period until the notes mature or are converted. During the year ended
December 31, 2004, the Company recognized the entire $247,473 as interest
expense related to the accretion of the debt discount.
On December 30, 2004 Lenders agreed to extend the loan to April 30, 2005 under
similar terms, except that, under the terms of the amendment, the price that
Lenders may exercise an option to convert any portion of the notes into common
shares is $0.60 per share up to a maximum of 1,666,666 common shares and the
Company's right to force conversion at price is lowered to $0.16 per share, or
6,250,000 shares. Due to the amendment, the additional amount allocated to the
warrants as debt discount is $62,937 of which $15,734 is recognized as
interest expense for the three months ended June 30, 2005 and $62,937 for the
six months ended June 30, 2005.
In the second quarter of 2005, the Company was granted an additional repayment
extension. The Company issued the Lender 555,556 additional warrant in
connection with this extension. These warrants were valued at $340,478 and
are reflected as interest expense for the three and six months ended June 30,
2005.
During the three months ended June 30, 2005 the notes were repaid in their
entirety.
8. PAYABLES TO RELATED PARTIES
On July 20, 2004, the Company closed three short-term loans totaling $130,000.
These loans were made to the Company by parties related to the Company and/or
its officers or directors and each was evidenced by a promissory note (each, a
"Related Party Note"). Each Related Party Note had identical terms and
conditions, although the note amounts varied. The notes had a term of 90 days
and bore interest at 8% per annum. In addition, a total of 130,000 two-year
warrants, convertible to common stock at the price of $0.50 per share were
issued to the lenders as an incentive to make the loans (see Note 12). On
December 31, 2004 the Related Party Notes were amended and the loans were
extended until to April 30, 2005. In exchange for waiving the interest
payments on the original notes, the 130,000 two year warrants were cancelled
and the Company authorized the issuance of 130,000 common shares in January
2005 (see Note 10). At December 31, 2004 the committed stock was valued at
$94,900. On December 31, 2004, the $130,000 of Related Party Notes was
included in notes payable as "Payable to related parties."
Deferred interest on the Related Party Notes for the six months ended June 30,
2005 was calculated at $94,900, of which $15,817 was recognized during the
three months ended June 30, 2005 and $94,900 for the six months ended June 30,
2005.
On May 26, 2005 the Company paid $130,000 to satisfy its "Payable to related
parties".
9. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On May 23, 2005, the Company's Board of Directors authorized the issuance of
7,200 shares of Series A-6% Preferred Stock ("the Preferred Stock"). On the
same date, the Company entered into a Purchase Agreement with several
accredited investors (the "Purchasers") pursuant to which the Company agreed
to sell, and the Purchasers agreed to purchase, 3,040 shares of Preferred
Stock (the "Preferred Stock for an aggregate of $3,040,000. The Preferred
Stock has a mandatory redeemable feature at the end of two years from its
issuance date. In accordance with SFAS 150 "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", as of June
30, 2005, the Preferred Stock is therefore classified as a long term liability
on the balance sheet. Net proceeds received by the Company after closing
costs of $259,000, was $2,781,000. The $259,000 of closing costs has been
reflected as debt discount.
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The Preferred Stock contains certain conversion features and 16,217,950
warrants at varying terms and exercise prices were issued in conjunction with
the Preferred Stock pursuant to the Purchaser's respective purchase
agreements. Based upon the existence of these features, the Company determined
that a debt discount was required to be recorded as of the date of issuance to
account for the value of the warrants and the value of the beneficial
conversion feature. The total value of the warrants associated with this
Preferred Stock offering was valued at $9,979,966 based upon the Black Scholes
pricing model using assumptions discussed in Note 12 and the beneficial
conversion feature was valued at $3,415,730. As the value of the warrants and
the beneficial conversion feature exceeded the total offering proceeds, the
amount allocated to the warrants and the beneficial conversion feature was
limited to the amount of the notes. Therefore the Company recorded a debt
discount of $2,781,000 relating to the issuance of the warrants.
The debt discount has been recorded as a valuation allowance against the
Preferred Stock and is being amortized to interest expense over the redemption
feature of 24 months. For the three and six months ended June 30, 2005
amortization of the debt discount recorded to interest expense is $92,889. The
Company accrued the dividend for the preferred stock through June 30, 2005 of
$15,200 and is recorded as interest expense.
The following is a brief descriptive summary of the principal terms, rights
and obligations of the Company's Series A-6% Convertible Preferred Stock ("The
Preferred Stock"):
Dividends. Holders of the Preferred Stock shall be entitled to receive
cumulative dividends of 6% per annum, based on the stated value of $1,000 per
share of Preferred Stock, payable quarterly on March 1, June 1, September 1
and December 1, with the first payment due on June 1, 2005.
Voting Rights. Except as otherwise required by law, a holder of shares
Preferred Stock does not have the right to vote on matters that come before
the Company's stockholders. However, the Company may not authorize or create
any class of stock ranking senior to, or otherwise pari passu with, Preferred
Stock with respect to dividends, redemption or distribution of assets upon a
liquidation.
Liquidation Preference. In the event of a dissolution or winding up of the
Company, each holder of the Preferred Stock is entitled to a liquidation
preference of $1,000 per share of Preferred Stock held plus any declared but
unpaid dividends on such share, prior to any payment to the holders of
Registrant's common stock or any other stock of Company ranking junior to the
Preferred Stock with regard to any distribution of assets upon liquidation,
dissolution or winding up of the Company.
Conversion. Shares of Preferred Stock may, at the option of the holder, be
converted at any time or from time to time into shares of common stock at the
initial conversion price of $0.40 per share, subject to adjustment; provided,
that a holder of Preferred Stock may at any given time convert only up to that
number of shares of Preferred Stock so that, upon conversion, the aggregate
beneficial ownership of common stock of such holder and all persons affiliated
with such holder is does not exceed 4.99% of the then outstanding common
stock. The number of shares into which one share of Stock shall be convertible
shall be determined by dividing $1,000 by the then existing conversion price.
The conversion price may be reduced if the Company sells common stock or other
securities convertible into or exercisable for common stock at a per share
price, exercise price or conversion price lower than the conversion price then
in effect (other than in connection with an acquisition of the securities,
assets or business of another company, joint ventures and employee stock
options).
Redemption. The Registrant is to redeem all of the then outstanding shares of
Preferred Stock on May 23, 2007. If the shares underlying the Preferred Stock
are registered and the Company 's stock price trades above $1.25 for a period
of thirty consecutive days with average daily volume for 20 consecutive days
of 100,000 shares per day the Company may force the holders of Preferred Stock
to convert into Common Stock.
10. COMMON STOCK TRANSACTIONS
Common Stock Issued
A total of 130,000 shares of common stock were issued to related parties in
connection with the cancellation of $94,900 of accrued interest on the Related
Party Notes recorded as "Payables to Related Parties" (See Note 8).
An individual investor purchased 30,000 shares of common stock during the six
months ended June 30, 2005 for $15,000. See Note 11 for common stock issued
for cash of $1,134,961 from the exercise of 2,874,119 warrants.
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See Note 11 for common stock issued for cash of $1,134,961 from the exercise
of 2,874,119 warrants.
Common Stock Subscriptions
During the six months ended June 30, 2005 the Company canceled a stock
subscription receivable of $580,000 for 580,000 shares.
Warrants exercised for Common Stock converted to Common Stock
In March 2005, the Company offered holders of certain one-year warrants to
purchase common stock the opportunity to exercise such warrants at discounted
price of $.40 per share. At the time of the offer the market price of the
Company's common stock was approximately $.50 per share, and there was little
trading volume. During the three months and six months ended June 30, 2005
certain warrant holders took advantage of this opportunity and exercised
warrants for 1,774,600 and 2,874,119 shares of common stock, respectively.
Total proceeds from these warrant conversions for the three and six months
ended June 30, 2005 were $703,172 and $1,134,961, respectively.
Common Stock issued for Services
During the six months ended June 30, 2005 the Company issued a total of
2,745,000 restricted shares for services as follows:
2,510,000 restricted shares were issued to various consultants for
services to be provided over various periods, such services were valued
at $1,633,000 of which $569,525 and $1,273,325 is recognized as
consulting expense for the three and six months ended June 30, 2005,
respectively, and $359,675 is recorded as deferred compensation on the
balance sheet.
235,000 restricted shares were issued to staff as incentive bonuses,
valued at $293,750 and is recorded as compensation expense during the six
months ended June 30, 2005.
11. WARRANTS
Compensation Warrants
During the six months ended June 30, 2005 the Company issued a total of
950,000 warrants to purchase common stock as consideration for services
provided, as follows:
In January, 2005, the Company issued five year warrants to purchase
350,000 shares of its common stock to a consultant for advisory services
for a two year term at an exercise price of $.40 per share. The common
stock price at issue was $1.10. Total value of these warrants is
$312,364. The warrant value was calculated using the Black-Scholes
method using the following assumptions of 78% volatility, $1.10 share
price, risk free interest rate of 3.68% and zero dividend yields. As of
June 30, 2005, $240,781 of deferred compensation associated with these
warrants is on the balance sheet of the Company. For the three and six
months ended June 30, 2005 the Company amortized deferred compensation of
$39,046 and $71,584, respectively to compensation expense.
In March, 2005, the Company issued three year warrants to purchase
500,000 shares of its common stock to a consultant for marketing services
for a one year term at an exercise price of $1.00 effective March 29,
2005. The common stock price at issue was $1.03. Total value of these
warrants is $353,614. The warrant value was calculated using the
Black-Scholes method using the following assumptions of 111% volatility,
$1.03 share price, risk free interest rate of 3.76% and zero dividend
yields. As of June 30, 2005, $265,211 of deferred compensation
associated with these warrants is on the balance sheet of the Company.
For the three months and six months ended June 30, 2005 Company amortized
deferred compensation of $88,404 to compensation expense.
In April 2005, the Company issued warrants to purchase 100,000 shares of
common stock for legal services in the second quarter of 2005. Total
value of this warrant is $83,584 and is recorded in operating expense as
compensation on the statement of operations for the three and six months
ended June 30, 2005. The warrant has a strike price of $.40 per share
and a term of three years. The warrant value was calculated using the
Black-Scholes method using the following assumptions of 117% volatility,
$.1.01 share price, risk free interest rate of 3.65% and zero dividend
yield.
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Prior Investors Warrants
In February 2005, the Company issued a total of 5,969,234 out-of-the-money
warrants to purchase additional shares of common stock to approximately 40
investors to the Company's prior private placements. The Company issued these
warrants due to the illiquidity experienced by these investors while it was
experiencing delays in obtaining its OTC-BB listing. 2,984,617 warrants are
exercisable at the price of $1.00 per share, and 2,984,617 of these warrants
are exercisable at the price of $1.25 per share. Each warrant issued was for
a one-year term and will expire on February 2, 2006. At the date the warrants
were issued, the market price of the Company's common stock was $.80 per
share. The value of the warrants was calculated at $439,819 using the Black -
Scholes method and is recorded as an expense in the statement of operations
for the six months ended June 30, 2005.
Replacement Warrants
In March 2005, the Company offered holders of certain one-year warrants the
opportunity to exercise these warrants at a discounted price of $.40 per
share, which was at a discount to the warrant exercise price. At the time of
the offer, the market price of the Company's common stock was approximately
$.50 per share, and there was little trading volume. For the six months ended
June 30, 2005 certain warrant holders took advantage of this opportunity and
exercised warrants for 2,874,119 shares of common stock for total proceeds to
the Company of $1,134,962. As a condition to the agreement, for each warrant
exercised, the Company issued a replacement warrant as of June 30, 2005. In
all, the Company issued to these holders of one year warrants 1,437,060
replacement warrants with an exercise price of $1.25 to these holders and
1,437,059 replacement warrants with an exercise price of $1.00. These
replacement warrants will expire on June 30, 2006. The total value of the
1,437,059 warrants with a strike price of $1 per share is $181,056, calculated
using the Black-Scholes method using the following assumptions of 124%
volatility, $.46 share price, risk free interest rate of 3.50% and zero
dividend yields. The total value of the 1,437,060 warrants with a strike
price of $1.25 is $148,049, using the Black-Scholes method using the following
assumptions of 124% volatility, $.46 share price, risk free interest rate of
3.50% and zero dividend yields. Total value of all warrants issued for this
transaction is $329,105. There were no commissions paid in conjunction with
these warrants.
Sales of Preferred Stock and Accompanying Warrants
In connection with the Company's sale of Redeemable/Convertible Preferred
Stock the Company issued the following warrants to Purchasers of the Preferred
Stock:
. Warrants to purchase up to 7,600,000 shares at a strike price of
$.60 per share with a term of 5 years expiring on May 23, 2010.
Total value of these warrants is $5,866,967. The warrant value was
calculated using the Black-Scholes method using the following
assumptions of 120% volatility, $.89 share price, risk free interest
rate of 3.83% and zero dividend yields.
. Warrants to purchase up to 6,000,000 shares ("Green Shoe Warrants").
The Green Shoe Warrants have a two year term and expire on May 23,
2007. Of the 6,000,000 warrants, 3,000,000 warrants are at a strike
price of $.40. Total value of these 3,000,000 warrants is
$1,989,665. The warrant value was calculated using the Black-Scholes
method using the following assumptions of 114% volatility, $.89
share price, risk free interest rate of 3.65% and zero dividend
yields. The remaining 3,000,000 have a strike price of $.60 per
share. Total value of these remaining warrants is $1,846,058. The
warrant value was calculated using the Black-Scholes method using
the following assumptions of 120% volatility, $.89 share price, risk
free interest rate of 3.65% and zero dividend yields.
In addition, the Company paid certain offering commissions to a total of eight
investment banking firms and individuals in connection with the issuance of
the Preferred Stock through the issuance of warrants to purchase up to
2,717,950 shares of its common stock. The warrants were issued at strike
prices ranging from $1.00 per share to $.40 per share and terms ranging from 5
years to 1 year. The value of these warrants is $440,835. The warrant value
was calculated using the Black-Scholes method using the following assumptions
of 125% volatility, $.47 share price, risk free interest rate ranging from of
3.50% to 3.65% and a zero dividend yield. The warrant values were offset
against the value of the preferred stock and are being accreted to the
redemption value over the term of the mandatory redemption period on the
interest method.
12. RELATED PARTY TRANSACTIONS
The Company entered into consulting and independent contractor agreements on
July 15, 2003 with companies owned by its shareholders, Investment Advisory
Group, Inc. and Media Solutions Network, LLC. Each agreement specifies monthly
payments of $13,500 for management services for a total of $27,000 per month.
The Company may terminate the agreements upon 30-days written notice. Total
management fees paid for the three and six months ended June 30, 2005 and 2004
is $81,000 and $162,000, and $81,000 and $134,000, respectively.
See Note 8 "Payables to Related Parties".
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Licensing Agreement
iPublishing licensed to the Company the exclusive rights to use its
intellectual property. The Company is obliged to pay iPublishing a royalty of
5% of the gross margin, defined as gross revenues less cost of goods,
associated with revenue earned that uses or relies upon the Licensor's
intellectual property in any form. For the three and six months ended June 30,
2005 the Company paid royalties of $12,864 and $22,090, respectively to
iPublishing. For the three and six months ended June 30, 2004 the Company
paid $9,000 and $9,900, respectively. Licensor may not sell, provide or
otherwise assign a similar license to any other company, nor become a
competitor for as long a period of time as the Company remains in operation.
There are no minimum performance stipulations in the License Agreement. The
license term is for 99 years beginning April, 2003.
Executive Compensation paid to Affiliate
For the three and six months ended June 30, 2005 the Company, in lieu of
salary to three executive officers, paid an affiliated Company iPublishing,
$150,000 and $292,500, respectively. These payments are recorded as
management compensation expense in the accompanying statement of operations
for the three and six months ended June 30, 2005. For the three and six
months ended June 30, 2004 the Company, in lieu of salaries to three executive
officers paid $121,500 and $243,000.
13. LITIGATION
The Company may from time to time become involved in various legal cases
arising in the ordinary course of business. Based upon current information,
management, after consultation with legal counsel, believes the ultimate
disposition thereof will have no material effect upon either the Company's
results of operations or its financial condition.
In July 2005, the Company received an arbitration demand arising from a
contractual dispute raised by a former financial advisor of the Company. The
amount in dispute is approximately $60,000, plus legal fees, which the former
advisor believes is owed to it pursuant to services conducted on behalf of the
Company under its engagement agreement. The Company believes that the advisor
is not entitled to any further amounts under the agreement and intends to
vigorously defend the claim. In the event the Company is ultimately found
responsible for the disputed amounts, management believes that any payment
thereof would not have a material effect upon either the Company's results of
operations or its financial condition.
14. SALES BACKLOG
In addition to the reported sales from the Company for the three months and
six months ended June 30, 2005 of $1,700,886 and $2,147,351, respectively, the
Company has executed sales contracts of approximately $1.0 million. The
Company anticipates recognizing the revenue on its executed sales contracts in
third quarter of 2005.
15. SUBSEQUENT EVENTS
On August 22, 2005, we sold $4,920,000 in shares of Series B 6% Convertible
Preferred Stock (the "Series B Preferred Stock") and warrants to purchase up
to 14,760,000 shares of common stock. The warrants are exercisable for five
years at $0.60 per share. Each share of Series B Preferred Stock may be
converted into shares of common stock at a price of $0.40 per share. In
addition, holders of outstanding Series B Preferred Stock will have a right to
participate in any of our future debt or equity financings.
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Prospectus
[LOGO]
54,525,488 Shares of Common Stock
No person is authorized to give any information or to make any representation
other than those contained in this prospectus, and if made such information or
representation must not be relied upon as having been given or authorized.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities offered by this
prospectus or an offer to sell or a solicitation of an offer to buy the
securities in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
The delivery of this prospectus shall not, under any circumstances, create any
implication that there have been no changes in the affairs of the company
since the date of this prospectus. However, in the event of a material change,
this prospectus will be amended or supplemented accordingly.
[-----------], 2005
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PART II
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws and certificate of incorporation entitle our directors or executive
officers to indemnification to the fullest extent permitted under Section 145
of the Delaware General Corporation Law, as may be amended. Our bylaws and
certificate of incorporation also provide that our directors shall not be
liable to the company or our stockholders for monetary damages for breach of
duty, except (a) for any breach of duty of loyalty to the company or our
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 174 of
the Delaware General Corporation Law, or (d) for any transaction from which a
director derived an improper personal benefit.
The Delaware General Corporation Law allows a company to indemnify our
officers, directors, employees, and agents from any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, except under certain circumstances.
Indemnification may only occur if a determination has been made that the
officer, director, employee, or agent acted in good faith and in a manner,
which such person believed to be in the best interests of the Registrant. A
determination may be made by the stockholders; by a majority of the directors
who were not parties to the action, suit, or proceeding confirmed by opinion
of independent legal counsel; or by opinion of independent legal counsel in
the event a quorum of directors who were not a party to such action, suit, or
proceeding does not exist. See "Disclosure of Commission Position of
Indemnification for Securities Act Liabilities" for a description of Section
145 of the Delaware General Corporation Law.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, which we
expect to incur with respect to the offering and sale or distribution of
common shares under this registration statement. We have agreed to pay all of
these expenses.
SEC registration fee $ 3,616.57
Financial printer fees to EDGARize and print
registration statement *$ 10,000
Transfer Agent Fees, including Printing and
Engraving Stock Certificates *$ 1,000
Legal fees and expenses *$ 25,000
Accounting fees and expenses *$ 20,000
Miscellaneous *$ 5,000
---------------------------------------------------------------------
Total *$ 64,616.57
=====================================================================
* estimated
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RECENT SALES OF UNREGISTERED SECURITIES
We have sold or issued the following securities not registered under the
Securities Act by reason of the exemption afforded under Section 4(2) of the
Securities Act of 1933, during the three year period ending on the date of
filing of this registration statement. Except as stated below, no underwriting
discounts or commissions were payable with respect to any of the following
transactions. The offer and sale of the following securities was exempt from
the registration requirements of the Securities Act under Rule 506 insofar as
(1) except as stated below, each of the investors was accredited within the
meaning of Rule 501(a); (2) the transfer of the securities were restricted by
the company in accordance with Rule 502(d); (3) there were no more than 35
non-accredited investors in any transaction within the meaning of Rule 506(b),
after taking into consideration all prior investors under Section 4(2) of the
Securities Act within the twelve months preceding the transaction; and (4)
none of the offers and sales were effected through any general solicitation or
general advertising within the meaning of Rule 502(c).
On September 23, 2005, we issued to Richardson & Patel LLP in consideration
for legal services rendered, 62,500 shares of common stock at a per share
price of $0.60.
On September 1, 2005, we issued to Crestview Capital Master LLC 46,803 common
shares in consideration for $16,381 in accrued Series A Preferred Dividends
and penalty interest.
On September 1, 2005, we issued to David Jordon, 18,721 common shares in
consideration for $6,552 in accrued Series A Preferred Dividends and penalty
interest.
On September 1, 2005, we issued to Barry Zelin, 2,340 common shares in
consideration for $819 in accrued Series A Preferred Dividends and penalty
interest.
On September 1, 2005, we issued to Enable Growth Partners LP, 16,849 common
shares in consideration for $5,897 in accrued Series A Preferred Dividends and
penalty interest.
On September 1, 2005, we issued to Enable Opportunity Partners LP, 1,872
common shares in consideration for $655 in accrued Series A Preferred
Dividends and penalty interest.
On September 1, 2005, we issued to Sanders Opportunity Fund Institutional LP,
7,182 common shares in consideration for $2,514 in accrued Series A Preferred
Dividends and penalty interest.
On September 1, 2005, we issued to Don Sanders, 7,020 common shares in
consideration for $2,457 in accrued Series A Preferred Dividends and penalty
interest.
On September 1, 2005, we issued to Sanders 1998 Children's Trust, 4,680 common
shares in consideration for $1,638 in accrued Series A Preferred Dividends and
penalty interest.
On September 1, 2005, we issued to Katherine Sanders, 4,680 common shares in
consideration for $1,638 in accrued Series A Preferred Dividends and penalty
interest.
On September 1, 2005, we issued to Donald Weir and Julie Weir, 2,340 common
shares in consideration for $819 in accrued Series A Preferred Dividends and
penalty interest.
On September 1, 2005, we issued to Sanders Opportunity Fund LP, 2,178 common
shares in consideration for $762 in accrued Series A Preferred Dividends and
penalty interest.
On September 1, 2005, we issued to Castle Creek Technology Partners LLC, 4,680
common shares in consideration for $1,638 in accrued Series A Preferred
Dividends and penalty interest.
On September 1, 2005, we issued to Nite Capital LP, 4,680 common shares in
consideration for $1,638 in accrued Series A Preferred Dividends and penalty
interest.
On September 1, 2005, we issued to AS Capital Partners LLC, 2,340 common
shares in consideration for $819 in accrued Series A Preferred Dividends and
penalty interest.
On September 1, 2005, we issued to John Allen, 1,872 common shares in
consideration for $655 in accrued Series A Preferred Dividends and penalty
interest.
On September 1, 2005, we issued to Darrell Dettling, 702 common shares in
consideration for $245 in accrued Series A Preferred Dividends and penalty
interest.
On September 1, 2005, we issued to the Forfeited 962 Trust, 1,170 common
shares in consideration for $410 in accrued Series A Preferred Dividends and
penalty interest.
On September 1, 2005, we issued to Ricardo Rodriguez, 468 common shares in
consideration for $163 in accrued Series A Preferred Dividends and penalty
interest.
On September 1, 2005, we issued to RHP Master Fund LTD, 11,701 common shares
in consideration for $4,095 in accrued Series A Preferred Dividends and
penalty interest, which shall be cancelled and returned to treasury in lieu of
a cash payment for the Series A Preferred Dividend.
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On August 25, 2005 we issued to The Shemano Group, and its assigns, 43,252
common shares to settle a dispute over outstanding investment banking
over-ride commissions.
On August 24, 2005 we issued to Nicholas Hirsch, a principal of Atlas Capital
Services Inc., 4-year warrants to purchase up to 35,000 common shares at the
exercise price of $0.40 per share as placement agent commissions on the
Company's Series B Preferred offering. The Registrant valued the warrant at
$11,929 using the Black-Schloles method.
On August 24, 2005 we issued to Steven Pollan, a principal of Atlas Capital
Services Inc., 4-year warrants to purchase up to 250,000 common shares at the
exercise price of $0.40 per share as placement agent commissions on the
Company's Series B Preferred offering. The Registrant valued the warrant at
$85,210 using the Black-Schloles method.
On August 24, 2005 we issued to ASC Holdings LLC, a designee of Atlas Capital
Services Inc., 4-year warrants to purchase up to 190,000 common shares at the
exercise price of $0.40 per share for placement agent commissions on the
Company's Series B Preferred offering. The Registrant valued the warrant at
$64,760 using the Black-Schloles method.
On August 24, 2005 we issued to Axiom Capital Management, 4-year warrants to
purchase up to 741,250 common shares at the exercise price of $0.40 per share
for placement agent commissions on the Company's Series B Preferred offering.
The Registrant valued the warrant at $252,649 using the Black-Schloles method.
On August 22, 2005, in consideration for $4,920,000, the Registrant issued to
4,920 shares of Series B 6% Convertible Preferred Stock convertible into
4,920,000 shares of common stock and warrants to purchase up to 14,760,000
shares of common stock to several accredited investors.
On August 19, 2005 we issued to Richardson & Patel LLP a three-year warrant to
purchase up to 100,000 shares of common stock at the exercise price of $0.40
per share. The warrants were issued as consideration for legal services
rendered.
On August 15, 2005 we issued to Brda and Company LLC a four-year warrant to
purchase up to 43,750 shares of common stock at the exercise price of $0.40
per share. The warrants were issued as consideration for consulting services
rendered, and the Registrant valued the warrant at $20,681 using the
Black-Scholes method.
On August 15, 2005 we issued to KBK Ventures, Inc. a four-year warrant to
purchase up to 43,750 shares of common stock at the exercise price of $0.40
per share. The warrants were issued as consideration for consulting services
rendered, and the Registrant valued the warrant at $20,681 using the
Black-Scholes method.
On August 15, 2005 we issued to DermaPlus, Inc. a four-year warrant to
purchase up to 45,000 shares of common stock at the exercise price of $0.40
per share. The warrants were issued as consideration for consulting services
rendered, and the Registrant valued the warrant at $21,272 using the
Black-Scholes method.
On June 2, 2005, the Registrant issued to Barry Zelin, a warrant to purchase
up to 250,000 shares of common stock at an exercise price of $1.00 for a
period of up to 1-year, in consideration for the provision of Offering
Commissions. The Registrant valued the warrant at $32,500.00, using the
Black-Scholes method.
On June 2, 2005, the Registrant issued to David Jordon, a warrant to purchase
up to 2,000,000 shares of common stock at an exercise price of $1.00 for a
period of up to 1-year, in consideration for the provision of Offering
Commissions. The Registrant valued the warrant at $260,000.00, using the
Black-Scholes method.
On June 2, 2005, the Registrant issued to Atlas Capital, a warrant to purchase
up to 95,450 shares of common stock at an exercise price of $0.40 for a period
of up to 4-years, in consideration for the provision of Offering Commissions.
The Registrant valued the warrant at $36,773.00, using the Black-Scholes
method.
On June 2, 2005, the Registrant issued to Steven Pollan, a warrant to purchase
up to 100,000 shares of common stock at an exercise price of $0.40 for a
period of up to 4-years, in consideration for the provision of Offering
Commissions. The Registrant valued the warrant at $38,526.00, using the
Black-Scholes method.
On June 2, 2005, the Registrant issued to Nicholas Hirsch, a warrant to
purchase up to 12,500 shares of common stock at an exercise price of $0.40 for
a period of up to 4-years, in consideration for the provision of Offering
Commissions. The Registrant valued the warrant at $4,816.00, using the
Black-Scholes method.
On June 2, 2005, the Registrant issued to JP Turner & Co., a warrant to
purchase up to 100,000 shares of common stock at an exercise price of $0.40
for a period of up to 5-years, in consideration for the provision of Offering
Commissions. The Registrant valued the warrant at $40,613.00, using the
Black-Scholes method.
On June 2, 2005, the Registrant issued to Sanders, Morris Harris LP, a warrant
to purchase up to 60,000 shares of common stock at an exercise price of $0.40
for a period of up to 4-years, in consideration for the provision of Offering
Commissions. The Registrant valued the warrant at $20,266.00, using the
Black-Scholes method.
On May 23, 2005, in consideration for $3,040,000, the Registrant issued to
3,040,000 shares of Series A 6% Convertible Preferred Stock convertible into
3,040,000 shares of common stock and warrants to purchase up to 7,600,000
shares of common stock to several accredited investors, and a warrant to
Crestview Capital Master Fund, LLC to purchase up to $1,200,000 in Series A 6%
Convertible Preferred Stock and a warrant based on the same terms and
conditions as the warrants to the purchasers of the Series A 6% Convertible
Preferred Stock.
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On March 31, 2005, the Registrant issued 5,000 shares of common stock to DS
Consulting, in consideration for the provision of Sales and Marketing. The
Registrant valued the common stock at $5,000.00.
On March 31, 2005, the Registrant issued 25,000 shares of common stock to
Virtus Media Sales, in consideration for the provision of Sales and Marketing.
The Registrant valued the common stock at $18,750.00.
On March 31, 2005, the Registrant issued 75,000 shares of common stock to CEO
Cast, Inc., in consideration for the provision of Investor Relations. The
Registrant valued the common stock at $75,000.00.
On March 23, 2005, the Registrant issued 500,000 shares of common stock to
Salzwedel Financial Communications, in consideration for the provision of
Investment Relations. The Registrant valued the common stock at $545,000.00.
On March 9, 2005 we sold the aggregate of 30,000 shares at $0.50 per share to
one accredited investor. The placement was sold as a unit of two common shares
and warrants to purchase two common shares at $0.75 and $1.00 respectively.
The Company received a gross total of $15,000. There were no commissions paid
in conjunction with this offering.
In March 2005, we offered holders of certain one-year warrants the opportunity
to exercise these warrants at $0.40 per share, which was at a discount to the
warrant face exercise price. At the time of the offer, the market price of the
Company's common stock was approximately $0.50 per share, and there was little
trading volume. 20 warrant holders took advantage of this opportunity and
exercised warrants for 2,874,119 common shares. In exchange the Company
received net proceeds of $1,134,962. As a condition to the agreement, for each
warrant exercised, the Company issued a replacement warrant having the same
term, expiration and strike price of those of the original warrant. In all,
the Company issued 1,437,059 warrants with an exercise price of $1.00 and
1,437,059 warrants with an exercise price of $1.25 to these holders. These
replacement warrants will expire on February 2, 2006. There were no
commissions paid in conjunction with these warrants.
On February 28, 2005, the Registrant issued 1,300,000 shares of common stock
to KBK Ventures, in consideration for the provision of Investment Relations.
The Registrant valued the common stock at $520,000.00
On February 22, 2005, the Registrant issued 350,000 shares of common stock to
K-Com Communications, in consideration for the provision of Investment
Banking. The Registrant valued the common stock at $150,500.
On February 2, 2005 we issued a total of 5,969,234 out-of-the-money warrants
to purchase additional shares of common stock to approximately 40 investors to
the Company's prior private placements. We issued these warrants to compensate
for the illiquidity experienced by these investors while the Company was
delayed in obtaining its OTC-BB listing. 2,984,617 warrants are exercisable at
the price of $1.00 per share, and 2,984,617 of these warrants are exercisable
at the price of $1.25 per share. Each warrant issued was for a one-year term
and will expire on February 2, 2006. The value of the warrants was calculated
at $439,819.
On January 4, 2005, the Registrant issued 32,500 shares of common stock to
Andrew Walkinshaw, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $40,625.00.
On January 4, 2005, the Registrant issued 32,500 shares of common stock to
Brian Hunkins, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $40,625.00.
On January 4, 2005, the Registrant issued 25,000 shares of common stock to
Jeff Thomas, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $31,250.00.
On January 4, 2005, the Registrant issued 25,000 shares of common stock to
Alex Ranarivelo, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $31,250.00.
On January 4, 2005, the Registrant issued 15,000 shares of common stock to
David Reynolds, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $18,750.00.
On January 4, 2005, the Registrant issued 15,000 shares of common stock to
Kenneth Bennett, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $18,750.00.
On January 4, 2005, the Registrant issued 15,000 shares of common stock to
Damon O'Stein, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $18,750.00.
On January 4, 2005, the Registrant issued 15,000 shares of common stock to
Francis Magana, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $18,750.00.
On January 4, 2005, the Registrant issued 15,000 shares of common stock to
James Leger, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $18,750.00.
On January 4, 2005, the Registrant issued 15,000 shares of common stock to
Nida Borja, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $18,750.00.
On January 4, 2005, the Registrant issued 10,000 shares of common stock to
Star Michael, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $12,500.00.
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On January 4, 2005, the Registrant issued 10,000 shares of common stock to
Matteo Indelicato, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $12,500.00.
On January 4, 2005, the Registrant issued 10,000 shares of common stock to
Edward Hwang, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $12,500.00.
On January 4, 2005, the Registrant issued 62,000 shares of common stock to
Baxter Capital Advisors, Inc., in consideration for the provision of
Investment Banking. The Registrant valued the common stock at $77,500.00.
On January 4, 2005, the Registrant issued 15,500 shares of common stock to Mid
South Capital, Inc., in consideration for the provision of Investment Banking.
The Registrant valued the common stock at $19,375.00.
On January 4, 2005, the Registrant issued 127,500 shares of common stock to
ROI Group Associates, in consideration for the provision of Investor
Relations. The Registrant valued the common stock at $159,375.00.
On January 4, 2005, the Registrant issued 23,875 shares of common stock to
vFinance Investments, Inc., in consideration for the provision of Investment
Banking. The Registrant valued the common stock at $29,843.75.
On January 4, 2005, the Registrant issued 21,375 shares of common stock to
Vince Calicchia, in consideration for the provision of Investment Banking. The
Registrant valued the common stock at $26,718.75.
On January 4, 2005, the Registrant issued 4,750 shares of common stock to John
Rich, in consideration for the provision of Investment Banking. The Registrant
valued the common stock at $5.937.50.
On January 5, 2005 we issued an aggregate of 130,0000 shares of our common
stock to three individual accredited investors in consideration for the
extension of the maturity date of notes held by the three investors and
cancellation of warrants issued to thte investors on July 29, 2004, to
purchase up to 130,000 shares of common stock at an exercise price of $0.50
for a period of up to 2-years. The Registrant valued the warrants at $42,016,
using the Black-Scholes method.
On December 31, 2004, the Registrant issued 30,000 shares of common stock to
Bernie Luskin, in consideration for the provision of Advisory Board. The
Registrant valued the common stock at $21,900.00.
On December 9, 2004, the Registrant issued to Ross Goodman, a warrant to
purchase up to 228,375 shares of common stock at an exercise price of $1.00
for a period of up to 3-years, in consideration for the provision of Advisory
Board Services. The Registrant valued the warrant at $85,979.00, using the
Black-Scholes method.
On December 9, 2004, the Registrant issued to Michael Mack, a warrant to
purchase up to 228,375 shares of common stock at an exercise price of $1.00
for a period of up to 3-years, in consideration for the provision of Advisory
Board Services. The Registrant valued the warrant at $1,763.00, using the
Black-Scholes method.
On September 30, 2004, the Registrant issued 200,000 shares of common stock to
Intercapital Group, LLC, in consideration for the provision of Investment
Banking. The Registrant valued the common stock at $146,000.
On September 30, 2004, we closed on a Stock Purchase Agreement with Langley
Park Investments LLP, a London-based institutional investment trust. Langley
Park purchased 4,000,000 of the Company's common shares at the price of $1.90
per share.
On September 24, 2004, the Registrant issued 15,000 shares of common stock to
Nida Borja, in consideration for the provision of Employee Bonus. The
Registrant valued the common stock at $10,950.00.
On September 24, 2004, the Registrant issued 20,000 shares of common stock to
James Leger, in consideration for the provision of Accounting. The Registrant
valued the common stock at $14,600.00.
On September 24, 2004, the Registrant issued 25,000 shares of common stock to
Steven Levey, in consideration for the provision of Sales and Marketing. The
Registrant valued the common stock at $18,250.00.
On September 24, 2004, the Registrant issued 45,000 shares of common stock to
Bryan Altman, in consideration for the provision of Programming Services. The
Registrant valued the common stock at $32,850.00.
On September 1, 2004, the Registrant issued to Reed Fryermuth, a warrant to
purchase up to 15,000 shares of common stock at an exercise price of $0.90 for
a period of up to 5-years, in consideration for the provision of Offering
Commissions. The Registrant valued the warrant at $4,440.00, using the
Black-Scholes method.
On September 1, 2004, the Registrant issued to Gary Shemano, a warrant to
purchase up to 15,000 shares of common stock at an exercise price of $0.90 for
a period of up to 5-years, in consideration for the provision of Offering
Commissions. The Registrant valued the warrant at $4,440.00, using the
Black-Scholes method.
On September 1, 2004 the Company closed on two short-term convertible notes
payable to MicroCapital Fund, LP and MicroCapital Fund LTD (separately and
collectively "Lenders") accredited investors. The Company borrowed the
aggregate amount of $1,000,000 payable to Lenders in 120 days. The Note bore
simple interest of 15%. As an incentive to make the loan, Lenders were issued
5-year warrants to purchase up to the aggregate of 1,111,000 shares of common
stock at $0.90 per share. On December 28, the notes were extended for an
additional four months. On April 28, the loan was again extended for an
additional 30 days. As a concession to the Lenders for these extensions, the
Company issued an aggregate of 555,556 additional 5-year warrants at $0.40 per
share, and reduced the exercise price for the existing 1,111,000 warrants from
$0.90 to $0.40. The notes have subsequently been fully repaid.
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Between August 8, 2004 and September 23, 2004 we sold the aggregate of 170,000
shares at $1.00 per share, to four accredited investors. The placement was
sold as a unit of two common shares and warrants to purchase two common shares
at $1.00. The Company received a gross total of $170,000, and paid $14,300 in
commissions and fees.
On August 3, 2004, the Registrant issued 54,325 shares of common stock to Rick
Riccobono, in consideration for the provision of Advisory Board. The
Registrant valued the common stock at $39,657.25.
On July 20, 2004, we closed on three short-term loans totaling $130,000. These
loans were made to the Company by parties related to the Company and/or its
officers or directors. The Company issued a promissory note to each lender.
Each note had identical terms and conditions, although the note amounts
varied. The notes had a term of 90-days and bore interest at 8% annually. In
addition, a total of 130,000 two-year warrants, convertible to common stock at
the price of $0.50 per share were issued to the lenders as an incentive to
make the loans. The loans were extended at the same terms, for an additional
90-days, however, as a concession to the lenders, the warrants were voided and
a total of 130,000 shares of common stock was issued in their place. The Notes
have subsequently been fully paid.
On June 30, 2004, the Registrant issued to Franciscs Magana, a warrant to
purchase up to 10,866 shares of common stock at an exercise price of $1.00 for
a period of up to 2-years, in consideration for the provision of Services. The
Registrant valued the warrant at $1,533.00, using the Black-Scholes method.
On June 30, 2004, the Registrant issued to Soloman Grey Financial Services, a
warrant to purchase up to 44,150 shares of common stock at an exercise price
of $1.00 for a period of up to 3-years, in consideration for the provision of
Offering Costs. The Registrant valued the warrant at $12,274.00, using the
Black-Scholes method.
On May 25, 2004, the Registrant issued to Gabe Bauman, a warrant to purchase
up to 90,000 shares of common stock at an exercise price of $1.00 for a period
of up to 4-years, in consideration for the provision of Investor Relations.
The Registrant valued the warrant at $17,946.00, using the Black-Scholes
method.
On May 25, 2004, the Registrant issued to Gabe Bauman, a warrant to purchase
up to 3,570 shares of common stock at an exercise price of $1.00 for a period
of up to 4-years, in consideration for the provision of Investor Relations.
The Registrant valued the warrant at $827.00, using the Black-Scholes method.
On May 25, 2004, the Registrant issued to Per Headblom, a warrant to purchase
up to 510 shares of common stock at an exercise price of $1.00 for a period of
up to 4-years, in consideration for the provision of Investor Relations. The
Registrant valued the warrant at $118.00, using the Black-Scholes method.
On May 25, 2004, the Registrant issued to Jean Jacquentin, a warrant to
purchase up to 5,000 shares of common stock at an exercise price of $1.00 for
a period of up to 4-years, in consideration for the provision of Investor
Relations. The Registrant valued the warrant at $997.00, using the
Black-Scholes method.
On May 25, 2004, the Registrant issued to Mark Sansom, a warrant to purchase
up to 5,000 shares of common stock at an exercise price of $1.00 for a period
of up to 4-years, in consideration for the provision of Investor Relations.
The Registrant valued the warrant at $997.00, using the Black-Scholes method.
On May 25, 2004, the Registrant issued to Mark Sansom, a warrant to purchase
up to 255 shares of common stock at an exercise price of $1.00 for a period of
up to 4-years, in consideration for the provision of Investor Relations. The
Registrant valued the warrant at $59.00, using the Black-Scholes method.
On May 25, 2004, the Registrant issued to Bombay Investments, a warrant to
purchase up to 41,671 shares of common stock at an exercise price of $.10 for
a period of up to 2-years, in consideration for the provision of Investor
Relations. The Registrant valued the warrant at $37,652.00, using the
Black-Scholes method.
On May 20, 2004, the Registrant issued to Augustine Fund LP, a warrant to
purchase up to 50,000 shares of common stock at an exercise price of $1.00 for
a period of up to 3-years, in consideration for the provision of Loan
Fees/Interest. The Registrant valued the warrant at $18,008.67, using the
Black-Scholes method.
On May 20, 2004, the Registrant issued to Augustine Fund LP, a warrant to
purchase up to 250,000 shares of common stock at an exercise price of $1.00
for a period of up to 1-year, in consideration for the provision of Loan
Fees/Interest. The Registrant valued the warrant at $90,043.33, using the
Black-Scholes method.
On May 8, 2004, the Registrant issued to Mark Livingston, a warrant to
purchase up to 25,000 shares of common stock at an exercise price of $1.00 for
a period of up to 2-years, in consideration for the provision of Sales and
Marketing. The Registrant valued the warrant at $7,478.00, using the
Black-Scholes method.
On May 4, 2004, the Registrant issued to Bombay Investments, a warrant to
purchase up to 41,670 shares of common stock at an exercise price of $.10 for
a period of up to 2-years, in consideration for the provision of Investor
Relations. The Registrant valued the warrant at $37,651.00, using the
Black-Scholes method.
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On May 11, 2004 we issued a total of 408,993 bonus shares to the 40 accredited
investors who purchased shares through private placements between September
16, 2003 and December 15, 2003. The shares were issued to compensate
subscribers who had purchased shares at $1.20 per share, when the Company
later offered subscriptions at a lower price per share and valuation that that
of its previous offering.
On April 22, 2004 we closed on a short-term convertible note payable to
Augustine Fund, LLP. As an incentive to make the loan, Augustine Fund was
issued a 3-year warrant to purchase up to 50,000 shares at $1.00 per share and
a second one-year warrant to purchase up to 250,000 additional common shares
at the same price which has since expired. The loan has been repaid without
penalty or conversion of the Note.
On April 3, 2004, the Registrant issued to Bombay Investments, a warrant to
purchase up to 41,669 shares of common stock at an exercise price of $0.10 for
a period of up to 2-years, in consideration for the provision of Investor
Relations. The Registrant valued the warrant at $37,649.00, using the
Black-Scholes method.
Between March 23, 2004 and April 23, 2004 we sold 1,058,000 shares at $1.00
per share to 26 accredited investors. The Company received a gross total of
$1,058,000, and paid $114,790 in commissions and fees.
On March 31, 2004, the Registrant issued 10,000 shares of common stock to Shai
Stern, in consideration for the provision of Investor Relations. The
Registrant valued the common stock at $10,000.00.
On March 3, 2004, the Registrant issued to Bombay Investments, a warrant to
purchase up to 41,668 shares of common stock at an exercise price of $.10 for
a period of up to 2-years, in consideration for the provision of Investor
Relations. The Registrant valued the warrant at $37,649.00, using the
Black-Scholes method.
On February 1, 2004, the Registrant issued to Bombay Investments, a warrant to
purchase up to 41,667 shares of common stock at an exercise price of $0.10 for
a period of up to 2-years, in consideration for the provision of Investor
Relations. The Registrant valued the warrant at $37,648.00, using the
Black-Scholes method.
On January 31, 2004, the Registrant issued 3,000 shares of common stock to
Maier and Company, Inc., in consideration for the provision of Investor
Relations. The Registrant valued the common stock at $3,000.00.
On January 1, 2004, the Registrant issued to Vince Calicchia, a warrant to
purchase up to 21,375 shares of common stock at an exercise price of $1.75 for
a period of up to 3-years, in consideration for the provision of Investment
Banking. The Registrant valued the warrant at $4,057.00, using the
Black-Scholes method.
On January 1, 2004, the Registrant issued to Jonathan Rich, a warrant to
purchase up to 4,750 shares of common stock at an exercise price of $1.75 for
a period of up to 3-years, in consideration for the provision of Investment
Banking. The Registrant valued the warrant at $902.00, using the Black-Scholes
method.
On January 1, 2004, the Registrant issued to vFinance Investments, Inc., a
warrant to purchase up to 23,875 shares of common stock at an exercise price
of $1.75 for a period of up to 3-years, in consideration for the provision of
Investment Banking. The Registrant valued the warrant at $4,531.00, using the
Black-Scholes method.
On December 31, 2003, the Registrant issued 12,000 shares of common stock to
Maier and Company, Inc., in consideration for the provision of Investor
Relations. The Registrant valued the common stock at $11,520.00.
On December 31, 2003, the Registrant issued to Soloman Grey Financial
Services, a warrant to purchase up to 5,800 shares of common stock at an
exercise price of $1.00 for a period of up to 3-years, in consideration for
the provision of Offering Commissions. The Registrant valued the warrant at
$928.00, using the Black-Scholes method.
On December 31, 2003, the Registrant issued to Soloman Grey Financial
Services, a warrant to purchase up to 11,0009 shares of common stock at an
exercise price of $1.00 for a period of up to 3-years, in consideration for
the provision of Offering Commissions. The Registrant valued the warrant at
$4,623.789, using the Black-Scholes method.
On November 13, 2003, the Registrant issued to Brian Hunkins, a warrant to
purchase up to 3,906 shares of common stock at an exercise price of $3.15 for
a period of up to 2-years, in consideration for the provision of Employee
Bonus. The Registrant valued the warrant at $234.36, using the Black-Scholes
method.
On November 5, 2003, the Registrant issued to Riccobono & Associates, Inc., a
warrant to purchase up to 250,000 shares of common stock at an exercise price
of $1.00 for a period of up to 3-years, in consideration for the provision of
Sales and Marketing. The Registrant valued the warrant at $34,350.00, using
the Black-Scholes method.
On November 4, 2003, the Registrant issued to Jason Gandhi, a warrant to
purchase up to 54,325 shares of common stock at an exercise price of $1.00 for
a period of up to 2-years, in consideration for the provision of Programming
Services. The Registrant valued the warrant at $16,015.00, using the
Black-Scholes method.
On October 1, 2003, the Registrant issued to Emil Rensing, a warrant to
purchase up to 50,000 shares of common stock at an exercise price of $1.00 for
a period of up to 2-years, in consideration for the provision of Sales and
Marketing. The Registrant valued the warrant at $8,000.00, using the
Black-Scholes method.
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On September 30, 2003, the Registrant issued to Soloman Grey Financial
Services, a warrant to purchase up to 40,000 shares of common stock at an
exercise price of $1.00 for a period of up to 3-years, in consideration for
the provision of Offering Commissions. The Registrant valued the warrant at
$14,320.00, using the Black-Scholes method.
On September 30, 2003, the Registrant issued to Soloman Grey Financial
Services, a warrant to purchase up to 43,289 shares of common stock at an
exercise price of $1.00 for a period of up to 3-years, in consideration for
the provision of Offering Commissions. The Registrant valued the warrant at
$15,497.00, using the Black-Scholes method.
Between September 16, 2003 and December 15, 2003 we sold 2,690,795 shares at
$1.20 per share to 40 accredited investors. The Company received a gross total
of $3,228,954, and paid $309,472 in commissions and fees.
On September 4, 2003, the Registrant issued to Riccobono & Associates, Inc., a
warrant to purchase up to 21,625 shares of common stock at an exercise price
of $1.00 for a period of up to 2-years, in consideration for the provision of
Sales and Marketing. The Registrant valued the warrant at $2,971.00, using the
Black-Scholes method.
Between May 1, 2003 and August 20, 2003 we sold 1,340,000 shares (1,455,910 on
a post Acquisition basis) at $1.00 per share to 25 accredited investors. The
Company received a gross total of $1,340,000, and paid $15,909 in commissions
and fees.
Between February 27, 2003 and April 28, 2003 we sold 833,333 shares (905,416
on a post Acquisition basis) at $0.75 per share to five accredited investors.
The Company received a gross total of $625,000, and paid $10,607 in
commissions and fees.
On January 30, 2003, we sold 425,000 shares (461,763 on a post Acquisition
basis) at $0.53 per share to one accredited investor. The Company received a
gross total of $225,000, and paid $29,250 in commissions and fees.
On October 1, 2002, the Registrant issued to North American Marketing Inc., a
convertible note for $8,000 due on December 31, 2003, or convertible into
400,000 shares of common stock.
II-8
88
EXHIBITS
No. Description
- ---- ----------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated August 18, 2003. (2)
3.1 Articles of Incorporation. (1)
3.2 By-laws. (1)
3.1 Certificate of Designation of Series A 6% Convertible Preferred Stock.(6)
3.2 Certificate of Designation of Series B 6% Convertible Preferred Stock.(7)
5.1 Opinion on Legality.
10.1 Employment Agreement dated February 27, 2004, between Hollywood
Previews, Inc., as the Company, and David G. MacEachern, as the
Employee. (3)
10.2 Employment Agreement dated February 27, 2004, between Hollywood Previews,
Inc., as the Company, and Scott Kapp, as the Employee. (3)
10.3 Employment Agreement dated February 27, 2004, between Hollywood Previews,
Inc., as the Company, and Frank H. Unruh, as the Employee. (3)
10.4 Employment Agreement dated February 27, 2004, between Hollywood Previews,
Inc., as the Company, and Kelly Konzelman, as the Employee. (3)
10.5 Employment Agreement dated February 27, 2004, between Hollywood Previews,
Inc., as the Company, and Kevin Plate, as the Employee. (3)
10.6 Consulting Agreement dated July 3, 2003, between Hollywood Previews,
Inc., as the Company, and I-Publishing, Inc., as Consultant. (3)
10.7 Consulting Agreement dated July 3, 2003, between Hollywood Previews,
Inc., as the Company, and Media Solutions Network LLC, as Consultant. (3)
10.8 Consulting Agreement dated July 3, 2003, between Hollywood Previews,
Inc., as the Company, and Investment Advisory Group, Inc., as Consultant.
(3)
10.9 License Agreement and Use of Intellectual Properties Agreement between
I-Publishing and Hollywood Previews, Inc. as the Company dated April 5,
2003. (3)
10.10 Assignment and Alteration of License Agreement and Use of Intellectual
Properties Dated December 12, 2003 between iMedia International, Inc.
as the Company, and Hollywood Previews, Inc. and I-Publishing, Inc. (3)
10.11 Stock Purchase Agreement Dated July 14, 2004 between the Company and
Langley Park Investments, PLC. (4)
10.12 Form of Securities Purchase Agreement dated September 1, 2004, with
MicroCapital Funds. (5)
10.13 Term Loan Agreement Dated April 22, 2004 between the Company and
Augustine Fund, L.P. (4)
10.14 Form of Purchase Agreement, dated as of May 23, 2005, between iMedia
International, Inc., and the Purchaser of Series A 6% Convertible
Preferred Stock. (6)
10.15 Registration Rights Agreement dated as of May 23, 2005, between iMedia
International, Inc., and the Purchasers of Series A 6% Convertible
Preferred Stock. (6)
10.16 Form of Long-Tern Warrant issued to the Purchasers of Series A 6%
Convertible Preferred Stock. (6)
10.17 Form of Short Term Warrant issued to Crestview Capital Master Fund, LLC.
(6)
10.18 Form of Purchase Agreement, dated as of August 22, 2005, between iMedia
International, Inc., and the Purchaser of Series B 6% Convertible
Preferred Stock. (7)
10.19 Registration Rights Agreement, dated as of August 22, 2005, between
iMedia International, Inc., and the Purchasers of Series B 6%
Convertible Preferred Stock. (7)
10.20 Form of Warrant issued to holders of Series B 6% Convertible Preferred
Stock. (7)
14.1 Code of Ethics for Principle Executive Officers and Chief Financial
Officer. (3)
21.1 Subsidiaries of the Company. (3)
23.1 Consent of Independent Auditor.
23.2 Consent of Legal Counsel (included in Exhibit 5.1 hereto).
(1) Previously filed as an exhibit to our Registration Statement on Form
Form 10-SB filed with the Commission on January 27,2003, and
incorporated herein by this reference.
(2) Previously filed as an exhibit to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 15, 2003, and
incorporated herein by this reference.
(3) Previously filed as an exhibit to our Annual Report for the fiscal year
ended December 31, 2003 filed with the Commission on March 23, 2004, and
incorporated herein by this reference.
(4) Previously filed as an exhibit to our Quarterly Report for the period
ended June 30, 2004 filed with the Commission on August 23, 2004, and
incorporated herein by this reference.
(5) Previously filed as an exhibit to our Quarterly Report for the period
ended September 30, 2004 filed with the Commission on November 18, 2004,
and incorporated herein by this reference.
(6) Previously filed as an exhibit to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 23, 2005, and
incorporated herein by this reference.
(7) Previously filed as an exhibit to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 23, 2005, and
incorporated herein by this reference.
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89
UNDERTAKINGS
We hereby undertake to:
1. File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
i. Include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and Notwithstanding the forgoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation From the low or high end of the
estimated maximum offering range may be reflected in the form of
prospects filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in the volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
iii. Include any additional or changed material information on the plan
of distribution.
2. For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
5. In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
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90
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Santa Monica, State of California on September 26, 2005.
iMedia International, Inc.
By: /S/ DAVID G. MACEACHERN
__________________________________
David G. MacEachern
Chief Executive Officer (Principal
Executive Officer)
By: /S/ FRANKLIN H. UNRUH
__________________________________
Franklin H. Unruh
Chief Financial Officer (Principal
Financial Officer)
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated:
Name Position Date
---- --------- --------
By: /S/ DAVID G. MACEACHERN Director September 26, 2005
______________________________
David G. MacEachern
By: /S/ FRANKLIN H. UNRUH Director September 26, 2005
______________________________
Franklin H. Unruh
By: /S/ SCOTT KAPP Director September 26, 2005
_______________________________
Scott Kapp
II-11