U.S. Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS
SUBJECT TO THE 1934 ACT REPORTING REQUIREMENTS
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF EXCHANGE ACT
Commission file number 000-29750
INTERACTIVE MAGIC, INC.
(Exact name of small business issuer as specified in its charter)
North Carolina 56-2092059
(State of incorporation) (I.R.S. Employer Identification Number)
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
(Address of principal executive offices)
(919) 461-0722
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No | |
As of May 17, 1999 (the most recent practicable date), there were 10,682,871
shares of the issuer's Common Stock, $.10 par value per share, outstanding.
Transitional Small Business Disclosure Format (check one)
Yes |_| No |X|
<PAGE>
INTERACTIVE MAGIC, INC.
Form 10-QSB Quarterly Report
INDEX
PART I FINANCIAL INFORMATION
PAGE
----
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION 20
Item 1 Legal Proceedings 20
Item 2 Changes in Securities and Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 21
Item 4 Other Information 21
Item 5 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Interactive Magic, Inc.
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
(UNAUDITED) (AUDITED)
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,255 $ 3,025
Trade receivables, net of allowances of $1,521 and $2,871,
respectively 1,404 2,168
Inventories 834 892
Advance royalties, net 1,812 1,586
Software development costs, net 344 912
Prepaid expenses and other 123 112
---------------------------------
Total current assets 7,772 8,695
Property and equipment, net 1,173 1,273
Noncurrent assets:
Royalties receivable 706 726
Other 66 30
---------------------------------
Total noncurrent assets 772 756
---------------------------------
Total assets $ 9,717 $10,724
=================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
(UNAUDITED) (AUDITED)
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 1,380 $ 2,248
Royalties and commissions payable 488 768
Lines of credit 1,323 1,348
Current portion of capital lease obligations 52 56
Rent payable to related parties - 481
Accrued interest payable to related parties - 4,320
Notes payable to related parties - 12,490
------------------------------------
Total current liabilities 3,243 21,711
Noncurrent liabilities:
Accrued interest payable to related parties 145 117
Long-term debt 3,304 -
Capital lease obligations, less current portion 35 43
------------------------------------
Total noncurrent liabilities 3,484 160
Stockholders' equity (deficit):
Preferred Stock, $.10 par value; 25,000,000 shares authorized; none
issued and outstanding - -
Common stock, $.10 par value; 50,000,000 shares authorized; 10,675,183
and 10,375,867 shares issued and outstanding at March 31, 1999 and
December 31, 1998, respectively 1,068 1,038
Additional paid-in capital 50,101 31,523
Deferred compensation - (29)
Accumulated deficit (48,071) (43,585)
Accumulated other comprehensive loss (108) (94)
-----------------------------------
Total stockholders' equity (deficit) 2,990 (11,147)
====================================
Total liabilities and stockholders' equity (deficit) $ 9,717 $ 10,724
====================================
</TABLE>
<PAGE>
Interactive Magic, Inc.
Consolidated Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
----------------------------------
<S> <C> <C>
Net revenues:
CD-ROM product sales $ 561 $ 4,057
Online sales 484 386
Royalties and licenses 7 516
Advertising and other 112 6
----------------------------------
Total net revenues 1,164 4,965
Cost of revenues:
Cost of products and services 429 988
Royalties and amortized software costs 91 910
----------------------------------
Total cost of revenues 520 1,898
----------------------------------
Gross profit 644 3,067
Operating expenses:
Sales and marketing 1,475 1,704
Product development 2,020 1,327
General and administrative 1,244 590
----------------------------------
Total operating expenses 4,739 3,621
----------------------------------
Operating loss (4,095) (554)
Other (income) expense:
Interest expense - third parties 743 200
Interest expense - related parties 144 367
Other (38) -
----------------------------------
Total other (income) expense 849 567
----------------------------------
Loss before income taxes and extraordinary item (4,944) (1,121)
Income tax expense 35 128
----------------------------------
Loss before extraordinary item (4,979) (1,249)
Extraordinary gain on early extinguishment of debt 493 -
==================================
Net loss $ (4,486) $ (1,249)
==================================
Basic loss per share:
Loss before extraordinary item $ (0.47) $ (0.32)
Extraordinary item 0.05 -
----------------------------------
Net loss per share $ (0.42) $ (0.32)
==================================
Weighted average shares used in computing basic loss per share 10,555,467 3,954,558
==================================
</TABLE>
<PAGE>
Interactive Magic, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 82,634 $ 8 - $ - - -
Exercise of stock options - - - - - -
Deferred compensation related to grant of stock
options - - - - - -
Issuance of common stock - - - - - -
Exercise of warrants - - - - - -
Issuance of preferred stock - - 778,746 78 - -
Conversion of notes payable into common stock - - - - - -
Recapitalization contemporaneous with the
initial public offering (NOTE 9) (82,634) (8) (778,746) (78) 7,318,699 732
Issuance of common stock - - - - 2,990,000 299
Exercise of warrants - - - - 18,330 2
Exercise of stock options - - - - 48,838 5
Issuance of warrants - - - - - -
Amortization of deferred compensation - - - - - -
Comprehensive loss
Net loss - - - - - -
Other comprehensive loss - - - - - -
Total comprehensive loss
--------------------------------------------------------------------------
Balance at December 31, 1998 - - - - 10,375,867 1,038
Exercise of stock options - - - - 104,316 10
Issuance of warrants - - - - - -
Issuance of convertible debentures (NOTE 7) - - - - - -
Issuance of common stock for services - - - - 45,000 5
Issuance of common stock in settlement of note
payable to related party - - - - 150,000 15
Cancellation of notes payable and other
obligations to stockholder - - - - - -
Amortization of deferred compensation - - - - - -
Comprehensive loss
Net loss - - - - - -
Other comprehensive loss - - - - - -
Total comprehensive loss
Balance at March 31, 1999 (UNAUDITED) - $ - - $ - 10,675,183 $ 1,068
==========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER
COMMON STOCK COMMON STOCK PAID-IN COMPREHENSIVE DEFERRED ACCUMULATED
CAPITAL LOSS COMPENSATION DEFICIT TOTAL
------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3,670,696 $ 367 7,875 $ 1 $5,000 $(59) $ - $(29,402) $(24,085)
268,750 27 102,500 10 381 - - - 418
- - - - 48 - (48) - -
- - 48,604 5 (5) - - - -
516,769 52 - - (52) - - - -
- - - - 3,091 - - - 3,169
- - 442,478 44 1,956 - - - 2,000
(4,456,215) (446) (601,457) (60) 460 - - - 600
- - - - 20,176 - - - 20,475
- - - - (2) - - - -
- - - - 76 - - - 81
- - - - 394 - - - 394
- - - - - - 19 - 19
- - - - - - - (14,183) (14,183)
- - - - - (35) - - (35)
-------------
(14,218)
----------------------------------------------------------------------------------------------------------------------------
- - - - 31,523 (94) (29) (43,585) (11,147)
- - - - 207 - - - 217
- - - - 466 - - - 466
- - - - 591 - - - 591
- - - - 228 - - - 233
- - - - 763 - - - 778
- - - - 16,323 - - - 16,323
- - - - - - 29 - 29
- - - - - - - (4,486) (4,486)
- - - - - (14) - - (14)
-------------
(4,500)
----------------------------------------------------------------------------------------------------------------------------
- $ - - $ - $50,101 $(108) $ - $(48,071) $2,990
============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Interactive Magic, Inc.
Consolidated Statements of Cash Flows
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
-----------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,486) $ (1,249)
Adjustments to reconcile net loss to net cash used in operating
activities:
Extraordinary gain on early extinguishment of debt (497) -
Issuance of warrants 76 -
Depreciation and amortization 166 116
Amortization of capitalized software development costs 212 250
Issuance of stock for services 233 -
Amortization of deferred compensation 29 12
Noncash interest expense 591 33
Write-off of capitalized software development costs 393 -
Changes in operating assets and liabilities:
Trade and royalties receivables 784 (1,704)
Inventories 58 (128)
Advance royalties (226) 367
Prepaid expenses and other (47) 23
Accounts payable and accrued expenses (656) 249
Royalties and commissions payable (280) 77
Accrued interest and rent payable to related parties 153 262
-----------------------------------------
Net cash used in operating activities (3,497) (1,692)
INVESTING ACTIVITIES
Purchase of property and equipment (66) (52)
Software development costs (37) (583)
-----------------------------------------
Net cash used in investing activities (103) (635)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 217 9
Proceeds from issuance of preferred stock - 3,169
Payments on long-term debt - (20)
Proceeds from issuance of convertible debentures 3,664 -
Proceeds from notes payable to related parties - 363
</TABLE>
<PAGE>
Interactive Magic, Inc.
Consolidated Statements of Cash Flows (continued)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
-----------------------------------------
<S> <C> <C>
Net borrowings from lines-of-credit (25) (1,426)
Payments on capital lease obligations (12) (18)
-----------------------------------------
Net cash provided by financing activities 3,844 2,077
Effect of currency exchange rate changes on cash and cash
equivalents (14) (20)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 230 (270)
Cash and cash equivalents at beginning of period 3,025 403
-----------------------------------------
Cash and cash equivalents at end of period $ 3,255 $ 133
=========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 26 $ 276
=========================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Cancellation of notes payable and other obligations to
stockholder $ 16,323 $ -
=========================================
Issuance of stock for settlement of outstanding notes payable and accrued
interest to related parties $ 778 $ -
=========================================
Issuance of warrants in connection with long-term debt $ 390 $ -
=========================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31,
1999 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Interactive Magic, Inc. (the "Company") develops, publishes, and distributes 3-D
interactive, simulation and strategy entertainment software to customers around
the world via (1) retail distribution through international and domestic
software outlets and (2) proprietary, pay-for-play online service on the
Internet. The Company also provides real-time 3-D entertainment for multi-user
online/Internet play, as well as creating interactive entertainment platforms on
the internet, such as online game channels, game hub and websites. The Company
has agreements with various software licensors to manufacture, market, sell and
distribute software in the United States. Through its wholly owned subsidiaries
located in the United Kingdom and Germany, and through its online services, the
Company also distributes its products internationally.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Interactive Magic, Inc. (the "Company"), a North Carolina corporation, and its
wholly owned subsidiaries, iMagicOnline Corporation, Interactive Magic Ltd. And
Interactive Magic GmbH. All significant intercompany accounts and transactions
have been eliminated.
While the financial information furnished is unaudited, the condensed
consolidated financial statements included in this report reflect all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the results of operations for
the interim periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for interim periods are not
necessarily indicative of the results for the entire year. The condensed
consolidated financial statements should be read in conjunction with the
Interactive Magic, Inc. consolidated financial statements and the notes thereto,
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
3. BUSINESS COMBINATION
On February 12, 1999 the Company acquired 100% of the outstanding capital stock
of MPG-Net, Inc. ("MPG-Net") pursuant to which MPG-Net was merged into the
Company ("the merger"). The Company exchanged 525,000 shares of its common stock
and options to purchase 30,000 shares of its common stock for all of the
outstanding common stock and options of MPG-Net and issued 150,000 shares of its
common stock valued at $778,000 in full settlement of certain debt obligations
of MPG-Net totaling $1,271,000. The Company has recognized the difference
between these amounts in 1999 as an extraordinary gain on the early
extinguishment of debt. The merger constituted a tax-free reorganization and was
accounted for under the pooling of interests method of accounting in accordance
with Accounting Principles Board Opinion No. 16. The accompanying consolidated
financial statements include the operations of the combined entities for the
quarters ended March 31, 1999 and 1998.
Immediately prior to the merger, notes payable with accrued interest and other
related obligations to MPG-Net's stockholder totaling $16,111,000 were forgiven
and were recorded as contributed capital to MPG-Net. MPG-Net's stockholder also
assumed it's obligation for unpaid professional fees totaling $212,000 and
received in exchange a $212,000 note from MPG-Net which was then forgiven. The
amount has been recorded as contributed capital to MPG-Net. Also in connection
with the merger, the Company issued 45,000 shares of its common stock for a
total consideration of $233,000 in settlement of certain merger related
services.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow (in thousands):
ONE MONTH THREE MONTHS
ENDED JANUARY 31 ENDED MARCH 31
1999 1998
(UNAUDITED)
---------------------------------------------
Net Revenues
Interactive Magic, Inc. $ 302 $ 4,913
MPG-Net, Inc. 24 52
---------------------------------------------
Combined $ 326 $ 4,965
=============================================
Net Loss
Interactive Magic, Inc. $ (1,664) $ (621)
MPG-Net, Inc. (242) (628)
---------------------------------------------
Combined $ (1,906) $ (1,249)
=============================================
The accompanying consolidated financial statements include the financial results
of the combined entities for all periods presented.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
4. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts in demand deposit accounts and
investments with an original maturity date of three months or less when
purchased.
INVENTORIES
Inventories consist of pre-packaged CD-ROM software packages and related
materials and are stated at the lower of cost or market. Costs are determined
using the first-in, first-out ("FIFO") cost flow assumption.
Inventories consist of the following (IN THOUSANDS):
MARCH 31 DECEMBER 31
1999 1998
---------------------------------
Finished goods $ 856 $ 1,065
Components 329 117
---------------------------------
1,185 1,182
Inventory valuation reserve (351) (290)
=================================
$ 834 $ 892
=================================
ADVANCE ROYALTIES
Advance royalties represent prepayments made to independent software developers
under development agreements. Advance royalties are expensed as part of
royalties and amortized software costs at the contractual royalty rate based on
actual net product sales. Management continuously evaluates the future
realization of advance royalties, and charges to cost of revenues any amount
that management deems unlikely to be amortized at the contractual royalty rate
through product sales. At March 31, 1999 and December 31, 1998, the reserve for
advance royalties was $1,724,000 and $1,654,000, respectively.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
4. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation for equipment, furniture
and fixtures and purchased software is computed using the straight-line method
over the estimated useful lives of the assets, ranging from five to seven years.
Leasehold improvements are amortized on a straight-line basis over the term of
the estimated useful life of the asset or the remaining lease term, whichever is
less. Depreciation expense, including amortization of equipment leased under
capital leases, was $166,000 and $112,000 for the three months ended March 31,
1999 and 1998, respectively.
Property and equipment consists of the following (IN THOUSANDS):
MARCH 31 DECEMBER 31
1999 1998
-----------------------------
Equipment $ 2,413 $ 2,376
Furniture and fixtures 411 382
Software 537 537
Leasehold improvements 77 77
-----------------------------
3,438 3,372
Less accumulated depreciation and amortization (2,265) (2,099)
-----------------------------
$ 1,173 $ 1,273
=============================
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
4. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Costs incurred in the development of software for sale to customers are
capitalized after a product's technological feasibility has been established.
Capitalization of such costs is discontinued when a product is available for
general release to customers. Capitalized software development costs are
capitalized at the lower of cost or net realizable value and amortized using the
greater of the revenue curve method or the straight-line method over the
estimated economic life of the related product. Amortization begins when a
product is ready for general release to customers.
Information related to net capitalized software development costs is as follows
(IN THOUSANDS):
MARCH 31, 1999 DECEMBER 31, 1998
--------------------------------------
Balance at beginning of period $ 912 $ 425
Capitalized 37 1,450
Written off (393) -
Amortized (212) (963)
--------------------------------------
Balance at end of period $ 344 $ 912
======================================
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables, accounts
payable and other liabilities approximates fair value at March 31, 1999 and
December 31, 1998.
REVENUE RECOGNITION
In October 1997, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 97-2 Software Revenue Recognition as amended in
March 1998 by SOP 98-4 and October 1998 by SOP 98-9. These SOPs provide guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The Company adopted SOP 97-2 for software transactions
entered into beginning January 1, 1998. Based on the current requirements of the
SOPs, application of these statements did not have a material impact on the
Company's revenue recognition policies.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
4. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
However, AcSEC is currently reviewing further modifications to the SOP with the
objective of providing more definitive, detailed implementation guidelines. This
guidance could lead to unanticipated changes in the Company's operations and
revenue recognition practices
Revenue from CD-ROM product sales is recognized at the time of product shipment.
Revenue from online sales is recognized at the time the game is played and is
based upon actual usage by the customer on an hourly basis. Revenue from
royalties and licenses is recognized when earned under the terms of the relevant
agreements with original equipment manufacturers ("OEMs"), international
distributors and other third parties. With respect to license agreements that
provide customers the right to multiple copies in exchange for guaranteed
amounts, net revenue is recognized upon delivery of the product master or the
first copy; provided collectibility is probable. Per copy royalties on sales
that exceed the guarantee are recognized as earned. The Company accepts product
returns and provides price protection on certain unsold merchandise. Revenue is
recorded net of an allowance for estimated future returns, markdowns, price
protection and warranty costs. Such reserves are based upon management's
evaluation of historical experience, current industry trends and estimated
costs.
Revenue from certain software development contracts with fixed price components
is recognized on the percentage of completion basis in accordance with the
American Institute of Certified Public Accountants' SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts." In
accordance with SOP 81-1, the Company recognizes percentage of completion
revenue based upon the ratio of accumulated incurred costs to the total
estimated costs to complete each contract.
The accounts receivable allowance consists primarily of reserves for product
returns, markdowns, price protection and warranty costs. The allowance also
includes a reserve for doubtful accounts, which management records based on
historical experience and current evaluation of potential collectibility issues.
The Company does not require collateral for unpaid balances. Credit losses have
historically been within management's expectations.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
4. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
PRODUCT DEVELOPMENT
Product development expenses (excluding capitalized software development costs)
are charged to operations in the period incurred and consist primarily of
payroll and payroll related costs.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense was
approximately $560,000 and $603,000 for the three months ended March 31, 1999
and 1998, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates include provisions for doubtful accounts, sales returns
and allowances, warranty provisions, and estimates regarding the recoverability
of prepaid royalty advances and inventory. Actual results could differ from
those estimates.
FOREIGN CURRENCY TRANSLATION
The Company follows the principles of the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," using the local currency of its operating subsidiaries as
the functional currency. Accordingly, all assets and liabilities outside the
United States are translated into U.S. dollars at the rate of exchange in effect
at the balance sheet date. Income and expense items are translated at the
weighted average exchange rate prevailing during the period. Adjustments
resulting from translation of financial statements are reflected as a component
of accumulated other comprehensive loss.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, the liability method is used
in accounting for income taxes and deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
4. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
BASIC NET LOSS PER SHARE
Basic net loss per share has been calculated in accordance with SFAS No. 128,
"Earnings Per Share". SFAS No. 128 requires companies to compute earnings per
share under two different methods (basic and diluted). Basic net loss per share
is calculated by dividing net loss by the weighted average shares of common
stock outstanding during the period. All shares used in computing basic net loss
per share reflect the retroactive effect of the Company's July 1998 one-for-two
reverse stock split.
Had the Company been in a net income position, diluted earnings per share would
have been presented and would have included potential common shares related to
outstanding options and warrants. The diluted earnings per share computation is
not included, as all potential common shares are antidilutive. The Company
evaluated the requirements of the Securities and Exchange Commission Staff
Accounting Bulletin No. 98 ("SAB 98"), and concluded that there are no nominal
issuances of common stock or potential common stock which would be required to
be shown as outstanding for all periods as outlined in SAB 98.
5. LINES OF CREDIT
The Company maintains a revolving line of credit arrangement with a bank for up
to $2,750,000. The principal balance outstanding at any point in time is payable
on demand with interest payable monthly at the current prime rate (7.75% at
December 31, 1998). The weighted-average interest rate on the line of credit was
7.75% and 8.50% for the three months ended March 31, 1999 and 1998,
respectively. The balance outstanding as of March 31, 1999 and December 31, 1998
was $1,316,000. Advances on the line of credit are collateralized by a personal
guarantee of the Company's majority stockholder. In consideration for this
guarantee, the Company will pay the stockholder an amount equal to 6% of the
outstanding balance on the line of credit (which has been recorded as interest
expense). At March 31, 1999 and December 31, 1998, the Company owed the
stockholder $145,000 and $117,000 relating to this guarantee, respectively.
These amounts are due no earlier than January 1, 2000.
The Company also entered into a line of credit agreement with its bank to borrow
up to $150,000. The Company's net property and equipment collateralize the line
of credit. The principal balance outstanding at any point in time is payable on
demand with interest payable monthly at the current prime rate. The
weighted-average interest rate on the line of credit was 7.75% and 8.50% for the
three months ended March 31, 1999 and 1998, respectively. The balance
outstanding at March 31, 1999 and December 31, 1998 was $7,000 and $32,000,
respectively.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
6. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following at December 31, 1998
(IN THOUSANDS):
Note payable to stockholder, unsecured, interest at 8% per annum $ 11,290
Note payable to related party, unsecured, interest at 8% per annum 1,200
-----------
$ 12,490
===========
The Company incurred interest expense related to these notes totaling $124,000
and $239,000 during the three months ended ended March 31, 1999 and 1998,
respectively. Accrued interest due on these notes was $0 and $4,320,000 at March
31, 1999 and December 31, 1998, respectively. In connection with the merger with
MPG-Net, MPG-Net's notes payable to related parties and the related accrued
interest were satisfied as described in Note 3.
7. LONG-TERM DEBT
On January 25, 1999, the Company issued a convertible debenture ("the
debenture") for net proceeds to the Company of approximately $3.7 million. The
debenture accrues interest at an annual interest rate of 6% and is due with
principal on January 25, 2002. The holder of the convertible debenture may
convert all or any portion of the debenture into the Company's common stock
where the number of shares to be issued will be determined by dividing the
principal plus interest due by the conversion price. The conversion price will
be equal to the lesser of a conversion price ranging from 77% to 93% of the
market price of the Company's common stock (as defined in the securities
purchase agreement) or a conversion price ranging from 104% to 120% of a fixed
conversion price (as defined in the securities purchase agreement). On the date
of conversion, if the Company's common stock trades at a price higher than the
fixed conversion price, the Company is obligated to issue to the holder of the
debenture warrants to purchase the Company's stock at a one-for-two ratio of
common stock issued as a result of the debenture conversion at an exercise price
equal to the debenture conversion price. The beneficial conversion feature
resulted in a portion of the proceeds of the convertible debenture being
allocated to the conversion feature, which significantly increased the reported
interest expense associated with this debenture. For the three months ended
March 31, 1999, the Company recorded interest expense of $635,000 related to
this debenture of which $591,000 is attributable to the beneficial conversion
feature of the debenture. The Company issued 200,000 warrants to the broker of
the convertible debenture valued at $390,000. These warrants were recorded as
additional paid-in capital and the resulting debt discount will be amortized to
interest expense over the term of the debenture. These warrants have a weighted
average exercise price of $4.85 and were exercisable upon issuance.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
8. LEASES
The Company rents its facilities and certain office equipment under
noncancelable operating leases, which expire at various times through 2001, as
well as certain computer and office equipment leases with third parties through
2003. The monthly rent under certain facility leases is periodically adjusted
based on changes in the Consumer Price Index.
Property and equipment includes the following amounts for capital leases (IN
THOUSANDS):
MARCH 31 1999 DECEMBER 31 1998
----------------------------------------
Leased equipment $ 247 $ 247
Leased furniture and fixtures 53 53
----------------------------------------
300 300
Less: accumulated amortization (174) (159)
----------------------------------------
$ 126 $ 141
========================================
Total rent expense incurred was approximately $103,000 and $153,000 for the
three months ended March 31, 1999 and 1998, respectively.
9. STOCKHOLDERS' EQUITY (DEFICIT)
RECAPITALIZATION
The Company was recapitalized through the exchange of securities, which was
effective as of the closing date of the Company's initial public offering in
July 1998, as follows:
Class A Common Stock: Exchanged for an aggregate of 4,456,215 shares of
common stock.
Class B Common Stock: Exchanged for an aggregate of 601,457 shares of
common stock.
Series A Convertible Preferred Stock: Converted into an aggregate of 82,634
shares of common stock.
Series B Convertible Preferred Stock: Converted into an aggregate of
2,045,649 shares of common stock.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Series C Redeemable Convertible Preferred Stock: Converted into an
aggregate of 132,744 shares of common stock.
Upon consummation of the initial public offering, the Company has authorized
capital of 50,000,000 shares of $.10 par value common stock and 25,000,000
shares of $.10 par value preferred stock.
10. STOCK OPTIONS, STOCK PLANS AND WARRANTS
EMPLOYEE STOCK OPTIONS AND STOCK PLANS
Effective January 2, 1995, the Company adopted two employee incentive stock
option plans (the "1995 Plans"). One plan provided for the granting of options
to purchase Class A Common Stock which was voting stock, and one plan provided
for the granting of options to purchase Class B Common Stock which was
non-voting. The 1995 Plans are intended as incentives to induce key employees of
the Company to remain in the employ of the Company or of any subsidiary of the
Company, and to encourage such employees to own stock in the Company. This
purpose is carried out by granting options to purchase shares of Common Stock.
The Company may grant incentive stock options ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended to eligible
participants under the 1995 Plans. The exercise price of an ISO may not be less
than 100% of the fair market value of the underlying shares at the time the ISO
is granted.
<PAGE>
The 1995 Plans are administered by the Board of Directors. The Board has the
authority to administer the 1995 Plans and determine, among other things, the
interpretation of any provisions of the 1995 Plans, the eligible employees who
are to be granted stock options, the number of shares which may be issued and
the option exercise price.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
10. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)
The Company's incentive stock options vest over time with 20% vesting during the
second year after the date of grant with an additional 5% vesting each calendar
quarter thereafter. Incentive stock options generally may only be exercised if
the participant has been employed by the Company continuously for at least one
year as of the last day of the first twelve-month period following the. date of
option grant. The option is only exercisable if the participant is employed by
the Company and for limited periods of time after the participant's termination
of employment. If the participant ceases to be employed on account of
termination by the Company for cause or resignation (other than retirement as
defined in the option agreement), the right to exercise any unexercised portion
of the option terminates. If the participant is terminated by the company
without cause, the participant shall be entitled to purchase, within three
months, option shares equal to an additional 25% of the participant's option
shares that were not exercisable as of the termination date. The option becomes
immediately and fully exercisable in the event of a change in control as defined
in the option agreement
Performance options vest upon the earlier of the Company's achievement of
certain performance standards or seven years from the date of grant. The number
and exercise price of the options are fixed at the date of grant. Options are
exercisable only in the event the participant is employed by the Company and for
limited periods of time after the participant's termination of employment. If
the participant ceases to be an employee on account of resignation) (other than
retirement as defined in the option agreement) or termination for cause, the
right to exercise any unexercised portion of the option shall terminate. The
option becomes immediately and fully exercisable as of a change in control as
defined in the agreement.
In January 1998, the Company entered into an employment and option grant
agreement with a key employee. In accordance with the terms of the agreement,
the Company granted an option to the employee to purchase 30,000 shares of the
Company's outstanding common stock at an exercise price of $.01 per share. The
option agreement provided for 20% vesting immediately and the remaining 80%
vesting over four years with accelerated vesting upon a change in control of the
Company. The Company recorded deferred compensation of $47,500 at the date of
the option grant representing the difference between the grant price and the
estimated fair value of the Company's common stock. This amount is being
amortized over the vesting period of the option and totaled $19,000 during the
year ended December 31, 1998. In connection with the acquisition of MPG-Net in
February 1999, the option became fully vested, the option was exercised in full
and the remaining unamortized deferred compensation was fully expensed.
During May 1998, the Company's 1998 Stock Plan (the "Plan") was adopted by the
Board of Directors and approved by the shareholders of the Company. The Company
anticipates that no future grants will be made under the Company's 1995
incentive stock plans after the effective date
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
10. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)
of the 1998 Plan. A total of 800,000 shares of Common Stock have been reserved
for issuance under the Plan. The Plan provides for grants to employees of
incentive stock options. In addition, the Plan provides for grants of
nonqualified stock options and stock purchase rights to employees, directors and
consultants of the Company. The Plan is administered by the Board of Directors
or by a Committee appointed by the Board. The administrator determines the terms
of options and stock purchase rights granted, including the exercise price and
the number of shares subject to option or stock purchase right. The exercise
price of incentive stock options granted under the Plan must be at least equal
to the fair market value of the Company's Common Stock on the date of the grant.
The maximum term of options granted under the plan is 10 years.
During May 1998, the Company's 1998 Employee Stock Purchase Plan (the "Purchase
Plan") was adopted by the Company's Board of Directors and approved by the
Company's shareholders. The Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code of 1986, as amended. The Company has reserved
500,000 shares of Common Stock for issuance under the Purchase Plan. Under the
Purchase Plan, an eligible employee may purchase shares of Common Stock from the
Company through payroll deductions of up to 10% of his or her base compensation,
not to exceed $25,000 per year, at a price per share equal to 85% of the fair
market vale of a share of the Company's Common Stock on the last day of the
offering period. The maximum number of shares that an employee may purchase in
any offering period is 2,500 shares. Any employee who is customarily employed
for at least 20 hours per week, and more than five months per calendar year and
who is employed on or before the commencement date of an offering period is
eligible to participate in the Purchase Plan.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
10. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)
The following table summarizes the activity under the Company's Stock Option
Plans:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE EXERCISE OPTIONS
OUTSTANDING PRICE PER SHARE EXERCISABLE
-------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1997 1,993,048 $2.14 1,007,328
Options granted 769,434 4.61 -
Options exercised (420,088) 1.19 -
Options canceled (330,426) 4.70 -
------------------------------------------------------------------------
Balances at December 31, 1998 2,011,968 2.68 833,373
Options granted 623,330 4.25 -
Options exercised (104,316) 2.08 -
Options canceled (35,954) 5.90 -
-------------------------------------------------------------------------
Balances at March 31, 1999 2,495,028 $3.05 948,092
=========================================================================
The following summarizes information about the Company's stock options
outstanding at March 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$0.010 - $1.000 970,937 3.96 $1.00 588,171 $1.00
$2.000 - $4.125 565,736 6.33 $3.56 121,476 $2.69
$4.250 - $4.500 652,150 5.47 $4.29 25,000 $4.25
$6.000 306,205 5.77 $6.00 213,445 $6.00
----------------------------------------------------------------------------------
2,495,028 5.10 $3.05 948,092 $2.40
==================================================================================
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123. The fair
value for each option was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted average assumptions:
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
10. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
---------------------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 5% 5%
Expected volatility 66% 66%
Expected life (in years from vesting) 2.5 3.4
For purpose of pro forma disclosures, the estimated fair values of the stock
options are amortized to expense over the vesting period. The grant date
Black-Scholes weighted-average value of options was $2.11 for 1998.
The following table shows pro forma net loss and net loss per share as if the
fair value accounting method prescribed by SFAS No. 123 had been used to account
for stock based compensation (IN THOUSANDS, EXCEPT PER SHARE DATA):
- --------------------------------------------------------------------------------
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
1999 1998
Net loss as reported $(4,486) $ (1,249)
Pro forma compensation expense (284) (86)
Pro forma net loss $(4,770) $ (1,335)
Net loss per share:
Historical $(0.42) $ (.32)
Pro forma (for SFAS 123 disclosure purposes) $(0.45) $ (.34)
================================================================================
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
10. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)
STOCK WARRANTS
Warrants issued in connection with notes payable and convertible debt were
recorded at their estimated fair value and credited to additional paid in
capital. The resulting debt discount is amortized to interest expense over the
term of the related debt. Warrants issued to members of the Board of Directors,
consultants and financial advisors are recorded at their estimated fair value
and the related general and administrative expense is charged when the warrants
are issued. The estimated fair value of warrants issued to the placement agent
in connection with the issuance of preferred stock in February 1998 was recorded
as a stock issuance cost.
The following summarizes the activity of warrants:
WARRANTS
OUTSTANDING
-----------------------
Balance at December 31, 1997 750,054
Issued 514,993
Exercised (535,875)
-----------------------
Balance at December 31, 1998 729,172
Issued 260,000
Exercised -
-----------------------
Balance at March 31, 1999 989,172
=======================
All of the Company's outstanding warrants at December 31, 1998 were exercisable
at prices ranging from $1.00 to $8.00 per share.
<PAGE>
Interactive Magic, Inc.
Notes to Consolidated Financial Statements (continued)
10. STOCK OPTIONS, STOCK PLANS AND WARRANTS (CONTINUED)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
The Company has reserved authorized shares of Common Stock for future issuance
as follows:
March 31, 1999
-----------------------
Outstanding stock options 2,525,028
Possible future issuance under stock option plan 1,359,509
Stock purchase warrants 989,172
-----------------------
4,873,709
=======================
11. ANTICIPATED SALE OF CD-ROM OPERATIONS
On March 18, 1999, the Company announced plans to seek a buyer for the retail
CD-ROM portion of its business and its plan to focus efforts exclusively on the
development of its Internet products and online services. Management is
currently in the process of identifying potential acquirers for the CD-ROM
operations; however, no definitive agreements have been executed.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements in this form 10-Q that are not descriptions of historical facts
are forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those set forth herein and in the Company's other
SEC filings, and including., in particular, the availability of sufficient
capital to finance the Company's business plan on terms satisfactory to the
Company, risks relating to uncertainties relating to dependence on strategic
partners and third party relationships, dependence on online distribution and
competition.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues decreased by 77% to $ 1.2 million for the three months ended March
31, 1999 from $5.0 million for the three months ended March 31, 1998.
The following is a reconciliation of net revenue for the first quarter of 1998
to the same period for 1999:
$ Thousand
----------
Net revenue, first three months 1998 $ 4,965
Lower CD-ROM revenue (4,534)
Increased Online revenue 98
Increased advertising revenue Online 106
Lower royalty & licensing revenue (509)
Lower returns, allowances & discounts 1,038
-----
Net revenue, first three months 1999 $ 1,164
------
The decrease in CD-ROM revenue reflects our intention to exit this line of
business. As a comparison, the following table lists the CD-ROM titles released
during the first quarter of 1999 and 1998:
<PAGE>
--------------------------------------------------------------
1999 1998
--------------------------------------------------------------
--------------------------------------------------------------
North v. South Battles of Caesar
--------------------------------------------------------------
IF-22
--------------------------------------------------------------
IPanzer
--------------------------------------------------------------
Liberation Day
--------------------------------------------------------------
Semper Fi
--------------------------------------------------------------
COST OF REVENUES.
Cost of revenues consist of costs of products sold (including cost of Internet
access) and royalties and amortization of software development costs. Cost of
revenues in the first quarter of 1999 decreased by 73% to $ .5 million from $1.9
million in the same period of 1998. This decrease was due almost entirely to the
lower level of CD-ROM revenue. Gross margins for the first three months of 1999
and 1998 were 55% and 62% respectively.
<PAGE>
OPERATING EXPENSES
Operating expenses increased $1.1 million or 31% from the first quarter of 1998
to the same period in 1999. The following is a summary of major variances:
$ Thousand
----------
Operating expenses, first three months 1998 $ 3,621
Decrease in sales & marketing expense (229)
Increase in product development expense 693
Increase in general & administrative expense 654
---------
Operating expenses, first three months 1999 $ 4,739
-------
SALES AND MARKETING. Sales and marketing expenses for the first three months of
1999 decreased 13% from the same period in 1998. The decrease was attributable
to the lower number of titles released in 1999.
PRODUCT DEVELOPMENT. Product development expense increased $ 700 thousand in the
first quarter of 1999 versus 1998, or 52%. Nearly all of this increase was due
to our write-offs of capitalized development costs associated with a revaluation
of estimated revenues to be derived from products to be released in 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $ 650
thousand higher in the first quarter of 1999 than the same period last year. The
increase was due to the higher costs associated with being a public-traded
corporation and the effect of the MPG-Net acquisition on professional fees in
the quarter.
OTHER EXPENSE
Other (income) / expense increased $300 thousand in the first three months of
1999 compared to 1998. The increase was due to higher interest expense
particularly relating to the $ 4,000,000 convertible debenture financing
<PAGE>
INCOME TAX (EXPENSE) BENEFIT
The Company recorded $35,000 income tax expense for the first quarter 1999
compared $128,000 for the same period in 1998.
EXTRAORDINARY GAIN
The Company recorded an extraordinary gain of $493 thousand in the first quarter
of 1999. This gain resulted from the extinguishment of debt associated with the
MPG-Net acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have been and will continue to be
significant, and, to date, its cash requirements have exceeded its cash flow
from operations. The Company historically has satisfied cash requirements
through borrowings, the private sale of equity securities, and its initial
public offering.
Net cash used in operations of $3.5 million during the three months ended March
31, 1999 is due primarily to the Company's operating loss. Offsetting the cash
used from operations in the quarter was the $3.7 million proceeds from the
issuance of the convertible debentures.
The Company maintains a revolving line of credit arrangement with a bank for up
to $2.8 million. The principal balance outstanding at any point in time is
payable on demand with interest payable monthly at the bank's current prime rate
(7.75% as of March 31, 1999). The balance outstanding under this line as of
March 31, 1999 was $ 1.3 million. Advances on the line of credit are
collateralized by a personal guarantee of the Company's majority shareholder.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing or refinancing as may be required, and ultimately to
attain profitability. The Company is actively pursuing potential acquirers for
the purchase of the retail CD-ROM portion of its business. Management expects
the anticipated disposition of its CD-ROM operations will substantially reduce
or eliminate its operating losses and expects to be able to attract additional
capital, if needed, for its online operations. However, there can be no
assurance that management's plans will be executed as anticipated.
<PAGE>
YEAR 2000 ISSUE
The Company's products are of a nature that they are not date dependent or
subject to failure because of Year 2000 issues. The Company however, has
assigned full-time information technology professionals to the task of
identifying and resolving Year 2000 problems that may affect the Company's
business, and has adopted a Year 2000 compliance plan. Under the Company's Year
2000 compliance plan, the Company has and will continue to inventory and collect
documentation on all of its computers, computer related equipment, and equipment
with embedded processors. In addition, the Company will contact critical vendors
and suppliers to obtain assurances of their ability to ensure smooth delivery of
products and services after December 1999. Additionally, the Company will
prioritize and implement any necessary repairs or replacements to equipment in
order to achieve Year 2000 compliance, which it expects to complete by the end
of 1999. The Company will also implement a testing program, scheduled for
completion by the end of 1999. The Company has not prepared estimates of costs
for correction of Year 2000 problems. Based on information available at this
time, including the Year 2000 compliance status of equipment that has been
examined as well as the anticipated replacement schedule for equipment, the
Company does not believe that the cost of remedial actions will have a material
adverse effect on the Company's results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of corrections as the Year
2000 compliance plan is performed. Failure to implement such changes could have
an adverse effect on future results of operations. In addition, unexpected costs
of correcting equipment that has not yet been fully evaluated could have an
adverse effect on future results of operations.
EURO CONVERSION
On January 1, 1999, the European Community began denominating significant
financial transactions in a new monetary unit, the Euro. The Euro is intended to
replace the traditional currencies of the individual EU member countries. The
Company's operations in Europe are continuing to operate in the traditional
currencies and are not converting internal financial systems to the Euro as a
functional currency. The Company is evaluating when to convert its local
currency in Europe to the Euro with as little disruption to customer and vendors
as possible. The Company does not intend to make such a conversion in 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) From January 1, 1999 through March 31, 1999 the Company issued 260,000
warrants and granted 623,330 options.
(d) The Company's Registration Statement of Form SB-2 (Registration No.
333-53755) covering certain shares of its common stock was declared
effective on July 21, 1998. A total of 2,990,000 shares of the
Company's common stock, par value $0.10 per share, were registered
(including an over-allotment option for the sale of 390,000 shares).
The Company consummated an initial public offering of 2,600,000 shares
of common stock at a price to the public of $8.00 per share on July 27,
1998. The lead underwriters in the offering were BlueStone Capital
Partners, L.P. and Royce Investment Group, Inc.. During August 1998,
the underwriters exercised their right to purchase an additional
390,000 shares at the initial public offering price. The aggregate
offering price of the amount registered and sold was $23,920,000. The
total proceeds received by the Company, net of underwriting discounts
and estimated expenses of the offering, were approximately $21,885,000.
The total underwriting discount was $1,674,000. Expenses paid to or for
the underwriters were approximately $361,000. Other expenses in
connection with the offering were approximately $1,409,000 (of which
$400,000
<PAGE>
was paid to an affiliate of one of the Company's directors). From the
effective date through March 31,1999 the net offering proceeds were
used as follows: $8,870,000 for repayment of indebtedness (of which
$483,000 was paid to officers of the Company), and the remaining
proceeds received by the Company were used to fund operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Effective March 15, 1999 Douglas Kubel resigned as Vice President to pursue
other interests.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27.01 Financial Data Schedule
Reports on Form 8-K
During the three months ended March 31, 1999 the Company filed Form 8-K's in
conjunction with the following transactions:
o Issuance of a $ 4,000,000 convertible note debenture, filed January 29, 1999
o Acquisition of MPG-Net, Inc., filed February 22, 1999
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERACTIVE MAGIC, INC.
May 20, 1999 By: /s/ J.W. Stealey
--------------------
J.W. Stealey
Chairman of the Board of Directors
and Chief Executive Officer
May 20, 1999 By: /s/ Michael W. Oliver
-------------------------
Michael W. Oliver
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Balance Sheet of Interactive Magic, Inc. as of March 31, 1999 and
the related Statements of Operations for the three month period ended March 31,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,255
<SECURITIES> 0
<RECEIVABLES> 2,925
<ALLOWANCES> 1,521
<INVENTORY> 834
<CURRENT-ASSETS> 7,772
<PP&E> 3,438
<DEPRECIATION> 2,265
<TOTAL-ASSETS> 9,717
<CURRENT-LIABILITIES> 3,243
<BONDS> 3,304
0
0
<COMMON> 1,068
<OTHER-SE> 1,922
<TOTAL-LIABILITY-AND-EQUITY> 9,717
<SALES> 561
<TOTAL-REVENUES> 1,164
<CGS> 520
<TOTAL-COSTS> 5,259
<OTHER-EXPENSES> 38
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 887
<INCOME-PRETAX> 4,944
<INCOME-TAX> 35
<INCOME-CONTINUING> (4,979)
<DISCONTINUED> 0
<EXTRAORDINARY> 493
<CHANGES> 0
<NET-INCOME> (4,486)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
