A back-door Net IPO rolls
ImaginOn, in a 'shell' game after venture capitalists say no, lands day-trade volume
January 29, 1999: 11:48 a.m. ET
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NEW YORK (CNNfn) - David Schwartz knows it takes more than the reticence of venture capitalists or investment banks to hold back a successful market launch of an Internet-related company.
In just three weeks of trading under its own ticker symbol, Schwartz's eight-person company, ImaginOn Inc. (IMON) has exploded onto the Nasdaq most-active list.
But the 50-year-old former Atari engineer, hitting many a brick wall in his effort to stir up capital, didn't opt for the traditional route to an initial public offering -- because he couldn't line up any deep-pocketed backers to escort the company into the market.
Instead, ImaginOn chief executive Schwartz and longtime friend Henry Fong, the company chairman and former financial expert with the Air Force, devised a roundabout but legal way to what Schwartz called a "backdoor" initial public offering for his company.
Banking on high hopes for Internet-related companies, ImaginOn, owner of a technology used in Web searches, took over the shell of a defunct, but publicly-traded sporting goods company Fong used to head.
In the three weeks since that company, California Pro Sports Inc., has come under the ImaginOn name on Wall Street, the stock has come to life.
An average of 15.2 million of its shares have traded per day since Jan. 15 -- and its float is only about 12 million shares.
The shares have risen 475 percent since opening under the new IMON symbol Jan. 4, replacing California Pro's CALP ticker. The stock traded Friday at 8-1/16.
Not surprisingly, the run on ImaginOn shares has been fueled by two staples of the Internet frenzy: the speculative hype that inhabits online chat rooms and select press release-churning that often drums up the interest of day traders.
On Tuesday, in a combination of both, Schwartz -- who insists it's not in his interest to see the stock explode higher -- quickly put out a statement debunking a chat room buzz that the company was near a deal with Internet bellwether America Online (AOL).
That day the stock traded 24.7 million shares.
The explosive interest from investors suggests that the already earth-shaking Internet sector is again rewriting the Wall Street rule book. But analysts say it's not likely to set rolling a brand new bandwagon.
"There simply aren't hundreds of derelict companies out there," said Richard Smith, a managing director at NationsBanc Montgomery Securities and an IPO expert. "It could happen on an isolated basis, but the mechanics don't exist for this to happen every 15 minutes."
An odd route to Internet stock gains
But behind what has become the company's run-in with Net stock hoopla is a patent case of mud-in-your-eye for some of Wall Street's finest.
Schwartz shopped his company to at least a dozen venture capital firms and two investment banks -- to no avail.
None valued ImaginOn at more than $6 million, which Schwartz called "unacceptable." An outside appraiser told him six months ago the company could fetch $10 million, he said.
Schwartz said the lack of interest from potential investors was partly his own doing.
"[The technology] is very esoteric," he said, during a phone interview from headquarters of the eight-person company in San Carlos, Calif. "That's what got us bounced out of all those VCs - we just didn't explain it very well."
Unable to get a bite, Schwartz turned to a complicated tactic called a "reverse merger," by which he would take over the remnants of a bankrupt company, pay its debt and nab its publicly-traded status.
He pitched to its shareholders an idea: give ImaginOn rights to the publicly-traded status, and receive a 40 percent stake in ImaginOn in return.
They bit.
On Oct. 2, 1997, California Pro agreed to merge with ImaginOn, and on Jan. 30, 1998, the company signed an agreement and plan of merger, according to SEC filings.
The deal finally closed last month with an overwhelming shareholder vote in favor of the merger. ImaginOn reined $6 million through an issuance of convertible shares soon thereafter.
A new web search engine?
ImaginOn's staple product is WebZinger, based on a proprietary technology that offers a kind of souped-up search engine that assembles search results in a presentable, PowerPoint-like display format.
The upcoming release of WebZinger 6.0 - whose predecessor versions were offered as shareware - was announced on Jan. 12, which caused investors to prick up their ears.
On Jan. 15, roughly 23 million shares traded.
The software, which will retail through five electronic commerce sites for $44.95, was scheduled to be available for purchase Friday.
The company's SEC filings indicate the company has other products, including an Internet travelogue and an e-commerce tool, based on its proprietary technology, known as TDPP - short for "Transformation Database Processing and Playback."
Not the only player in shell game
ImaginOn didn't invent the reverse merger.
Last July, the online party goods vendor iParty, which trades under the symbol IPTY on the OTC Bulletin Board, launched a reverse merger into WSI Acquisitions, Inc., a publicly-held holding company.
James Preissler, an Internet stock analyst at PaineWebber, said there are reasons to keep an eye on such companies especially when they had trouble launching an IPO.
"There's a lot of froth in this sector," he said. "Some of the more creative people out there are trying to take advantage of it. They want some of the activity in the sector and to get it through faster means."
-- by staff writer Jamey Keaten
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