SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or
15(d) of The Securities Act of 1934
Date of Report (Date of earliest event reported):
April 5, 1999 (January 20, 1999)
IMAGINON, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-25114 84-121773
- --------------------------------------------------------------------------------
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
1313 Laurel Street, Suite 1
San Carlos, California 94070
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (650) 596-9300
Not applicable
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On January 20, 1999, the Registrant, ImaginOn, Inc. (the "Company"),
completed a merger pursuant to which Imaginon.com ("Imaginon.com"), a California
corporation, became a wholly-owned subsidiary of the Company. In the merger,
holders of Imaginon.com's common stock received a total of 21,248,665 shares of
the Company's common stock. As a result of the merger, the Company has
34,683,396 shares of common stock outstanding. The merger consideration was
determined as a result of arms' length negotiation between the Company and
Imaginon.com, as more fully described in the Company's proxy statement dated
November 12, 1998.
Imaginon.com is a development stage company which engineers, produces and
sells business and consumer software for CD-ROM and network users.
The Company will continue the operations of Imaginon.com.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
1. Required financial statements of ImaginOn.com.
(b) Pro-forma financial information.
1. Unaudited pro forma condensed consolidated financial statements.
(c) Exhibits.
2.1 Agreement and Plan of Merger, effective as of January 30, 1998, among
Imaginon, Inc.(currently known as Imaginon.com),a California
corporation, and California Pro Sports, Inc. (currently known as
Imaginon, Inc.), a Delaware corporation, and Imaginon Acquisition
Corp., a California corporation. (FILED AS EXHIBIT 3 TO THE COMPANY'S
PROXY STATEMENT ON SCHEDULE 14A, DATED NOVEMBER 12, 1998, AND
INCORPORATED HEREIN BY REFERENCE.)
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
IMAGINON, INC.
Date: April 5, 1999 By /s/ David M. Schwartz
-----------------------------
David M. Schwartz, President and Chief
Executive Officer
-3-
<PAGE>
ImaginOn.com
Financial Statements
As of December 31, 1998 and 1997, and
for the years ended December 31, 1998 and 1997 and for the cumulative period
from March 29, 1996 (date of inception) to December 31, 1998
<PAGE>
Report of Independent Accountants
March 13, 1999
To the Board of Directors of
ImaginOn.com
In our opinion, the accompanying balance sheets and the related statements of
operations, shareholder's deficit and of cash flows present fairly, in all
material respects, the financial position of ImaginOn.com (a company in the
development stage) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1998 and 1997 and
for the cumulative period from March 29, 1996 (date of inception) to December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
<PAGE>
ImaginOn.com
(a Company in the development stage)
Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
ASSETS
Current assets:
<S> <C> <C>
Cash ................................................... $ 10,874 $ --
Prepaid expenses and other current assets .............. 13,158 4,034
Loans to officers ...................................... -- 10,045
----------- -----------
Total current assets ................................. 24,032 14,079
Property and equipment, net ................................. 11,811 13,237
Other long term assets ...................................... 4,400 --
----------- -----------
Total assets ......................................... $ 40,243 $ 27,316
=========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Bank overdraft ......................................... $ -- $ 1,587
Accounts payable ....................................... 188,279 169,868
Accrued liabilities .................................... 134,556 66,366
Notes payable to related parties ....................... 1,490,769 323,944
Interest payable ....................................... 58,397 9,858
----------- -----------
Total current liabilities ............................ 1,872,001 571,623
----------- -----------
Commitments and contingencies (Note 5)
Shareholder's deficit:
Preferred stock, no par value:
Authorized: 4,000,000 shares;
Issued and outstanding: none in 1998 and 1997 ...... -- --
Common stock, no par value:
Authorized: 10,000,000 shares
Issued and outstanding: 7,456,131 shares in 1998 and
7,177,370 shares in 1997 .......................... 851,953 724,953
Warrants to purchase common stock ...................... 397,909 72,158
Deficit accumulated during the development stage ....... (3,081,620) (1,341,418)
----------- -----------
Total shareholders' deficit .......................... (1,831,758) (544,307)
----------- -----------
Total liabilities and shareholders' deficit .......... $ 40,243 $ 27,316
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ImaginOn.com
(a Company in the development stage)
Statements of Operations
- --------------------------------------------------------------------------------
CUMULATIVE
PERIOD FROM
MARCH 29,
1996 (DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1998
Revenue ....................... $ 880 $ 4,665 $ 5,545
Cost of revenue ............... 29 1,035 1,064
----------- ----------- -----------
Gross profit ........... 851 3,630 4,481
----------- ----------- -----------
Operating expenses:
Research and development . 906,256 547,531 1,803,290
Sales and marketing ...... 440,967 208,588 649,935
General and administrative 309,813 117,745 472,248
----------- ----------- -----------
Total operating expenses 1,657,036 873,864 2,925,473
----------- ----------- -----------
Loss from operations .......... (1,656,185) (870,234) (2,920,992)
Other expense ................. (6,248) -- (6,248)
Interest expense .............. (78,079) (76,278) (154,690)
Interest income ............... 310 -- 310
----------- ----------- -----------
Net loss ...................... $(1,740,202) $ (946,512) $(3,081,620)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
ImaginOn.com
(a Company in the development stage)
Statements of Shareholder's Deficit
for the period from March 29, 1996 (date of inception) to December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEFICIT
WARRANTS ACCUMULATED
TO PURCHASE DURING THE TOTAL
COMMON STOCK COMMON DEVELOPMENT SHAREHOLDER'S
SHARES AMOUNT STOCK STAGE DEFICIT
<S> <C> <C> <C> <C> <C>
Issuance of common stock
for services renders at $0.001
per share in October 1996 ...... 3,333,333 $ 3,333 $ -- $ -- $ 3,333
Net loss ......................... (394,906) (394,906)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1996 ...... 3,333,333 3,333 -- (394,906) (391,573)
Issuance of common stock
for cash at $0.15 per share
in April and May 1997 .......... 3,539,999 531,000 -- -- 531,000
Issuance of common stock
for cash at $1.25 per share in
September, October, November
and December 1997, net of
issuance costs of $49,686 ...... 177,000 171,564 -- -- 171,564
Issuance of common stock to
employees in exchange for
earned bonuses in July 1997
at $0.15 per share ............. 25,000 3,750 -- -- 3,750
Exercise of common stock
warrants for cash in August 1997 45,000 6,750 -- -- 6,750
Exercise of common stock
warrants in exchange for note
payable in October 1997 ........ 57,038 8,556 -- -- 8,556
Issuance of warrants to
purchase 192,109 shares of
common stock in September,
October, November and
December 1997 .................. -- -- 72,158 -- 72,158
Net loss ......................... -- -- -- (946,512) (946,512)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1997 ...... 7,177,370 $ 724,953 $ 72,158 $ (1,341,418) $ (544,307)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ImaginOn.com
(a Company in the development stage)
Statements of Shareholder's Deficit
for the period from March 29, 1996 (date of inception) to December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEFICIT
WARRANTS ACCUMULATED
TO PURCHASE DURING THE TOTAL
COMMON STOCK COMMON DEVELOPMENT SHAREHOLDER'S
SHARES AMOUNT STOCK STAGE DEFICIT
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1997 .......... 7,177,370 $ 724,953 $ 72,158 $(1,341,418) $ (544,307)
Issuance of common stock and
warrants for cash at $1.25 per share
in January 1998, net of issuance
cost of $348,438 .................... 420,000 176,562 313,353 -- 489,915
Issuance of common stock to
employees in exchange for
earned bonus in March 1998
at $1.25 per share .................. 50,000 62,500 -- -- 62,500
Issuance of common stock in
exchange for legal services
in March 1999 at $1.25 per share .... 8,761 10,951 -- -- 10,951
Repurchase of common stock
in September 1998 at $0.625
per share ........................... (200,000) (125,000) -- -- (125,000)
Issuance of warrants in January
1998 in connection with a
bridge of financing ................ -- -- 12,398 -- 12,398
Issuance of 6,289 options to a
consultant in December 1998 ........ -- 1,987 -- -- 1,987
Net loss ............................. -- -- -- (1,740,202) (1,740,202)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1998 .......... 7,456,131 $ 851,953 $ 397,909 $ (3,081,620) $ (1,831,758)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ImaginOn.com
(a Company in the development stage)
Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
MARCH 29,
1996 (DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1998
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss .......................................... $(1,740,202) $ (946,512) $(3,081,620)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation .................................. 17,526 7,809 25,335
Interest expense for issuance of notes payable 12,398 65,544 77,942
Issuance of common stock, warrants
and options for services .................... 75,438 3,750 82,521
Change in operating assets and liabilities:
Prepaid expenses and other current assets ... (9,124) (4,034) (13,158)
Loans to officers ........................... 10,045 (10,045) --
Deposits .................................... (4,400) -- (4,400)
Accounts payable ............................ 18,411 151,999 188,279
Accrued liabilities ......................... 68,190 (293,734) 134,556
Interest payable ............................ 48,539 9,525 58,397
----------- ----------- -----------
Net cash used in operating activities ..... (1,503,179) (1,015,698) (2,532,148)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment ............. (16,100) (21,046) (37,146)
----------- ----------- -----------
Net cash used in investing activities ..... (16,100) (21,046) (37,146)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable ........... 1,185,254 332,500 1,527,754
Repayment of note payable ......................... (143,429) (10,000) (153,429)
Proceeds from issuance of common
stock and warrants, net ......................... 489,915 715,928 1,205,843
Bank overdraft .................................... (1,587) (1,684) --
----------- ----------- -----------
Net cash provided by financing activities 1,530,153 1,036,744 2,580,168
----------- ----------- -----------
Net increase in cash ................................... 10,874 -- 10,874
Cash, beginning of period .............................. -- -- --
----------- ----------- -----------
Cash, end of period .................................... $ 10,874 $ -- $ 10,874
=========== =========== ===========
Supplemental disclosure of non-cash
financing and investing activities:
Issuance of common stock for services rendered ... $ 64,487 $ 3,750 $ 71,570
Issuance of common stock for legal services ....... $ 10,951 $ -- $ 10,951
Issuance of warrants to purchase common stock ..... $ 325,751 $ 72,158 $ 397,909
Exercise of common stock warrants in exchange
for note payable ................................ $ -- $ 8,556 $ 8,556
Interest paid ..................................... $ 17,141 $ 1,210 $ 18,351
Taxes paid ........................................ $ 3,593 $ -- $ 3,593
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ImaginOn.com
(a company in the development stage)
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. FORMATION AND BUSINESS OF THE COMPANY
ImaginOn.com (formerly known as ImaginOn, Inc.) (the "Company") was
incorporated in the state of California on March 29, 1996. The Company is
engaged in the business of designing, selling, and manufacturing consumer
software products for the CD/DVD-ROM market and navigational tools for
Internet users. The Company is in the development stage and since inception
has devoted substantially all of its efforts to product research and
development, raising capital and recruiting personnel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate the continued
existence of the Company.
The Company's losses from operations raise substantial doubt about the
Company's ability to continue as a going concern for a reasonable period of
time. The Company is a development stage company and, as such, recovery of
the Company's assets is dependent upon future events, the outcome of which
is indeterminable. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company's continuation as a going concern is dependent upon its ability
to obtain additional financing, including equity capital, and its ability
to generate sufficient cash flow from operations. The Company intends to
seek additional funding through equity or debt financings.
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
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line basis over their estimated useful lives of one to three
years. Maintenance and repairs are charged to operations as incurred.
REVENUE RECOGNITION
Revenues from the sale of software products are recognized upon delivery of
the product if remaining vendor obligations are insignificant and
collection of the resulting receivable is probable.
The Company provides a limited amount of free telephone technical support
to customers. These activities are generally considered to be insignificant
post contract customer obligations.
1
<PAGE>
ImaginOn.com
(a company in the development stage)
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT EXPENDITURES
Costs related to research, design and development of products are charged
to research and development expense as incurred. Software development costs
are capitalized beginning when a product's technological feasibility has
been established and ending when a product is available for general release
to customers. To date, completing a working model of the Company's products
and general release have substantially coincided. As a result, the Company
has not capitalized any software development costs since such costs have
not been significant.
ADVERTISING
Costs related to advertising and promotion of products is charged to sales
and marketing expense as incurred. Advertising and promotion costs were
$79,084, $114,838 and $194,302 for the years ended December 31, 1998 and
1997 and for the cumulative period from March 29, 1996 (date of inception)
to December 31, 1998, respectively.
CONCENTRATION OF CREDIT RISK
For financial instruments consisting of prepaid expenses and other current
assets and accounts payable included in the Company's financial statements,
the carrying amounts are reasonable estimates of fair value.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be
realized.
3. BALANCE SHEET DETAIL
PROPERTY AND EQUIPMENT
Property and equipment comprise:
DECEMBER 31,
1998 1997
Computer hardware and software $ 37,146 $ 21,046
------------- -------------
37,146 21,046
Less: Accumulated depreciation (25,335) (7,809)
------------- -------------
$ 11,811 $ 13,237
============= =============
2
<PAGE>
ImaginOn.com
(a company in the development stage)
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets comprise:
DECEMBER 31,
1998 1997
Prepaid expenses $ 11,539 $ 4,034
Other receivables 1,619 -
------------- -------------
$ 13,158 $ 4,034
============= =============
ACCRUED LIABILITIES
Accrued liabilities comprise:
DECEMBER 31,
1998 1997
Accrued consulting and professional fees $ 94,462 $ 24,965
Accrued salary and related expenses 14,027 41,401
Production expenses 17,450 -
Other expenses 8,617 -
------------- -------------
$ 134,556 $ 66,366
============= =============
4. NOTES PAYABLE TO RELATED PARTIES
The Company has partly funded its operations since inception by issuance of
bridge notes payable to several related parties. Amounts borrowed under the
agreements bear interest at a rate of 10% per annum and have maturities of
90 days. The outstanding balance was $1,490,769 and $323,944 at December
31, 1998 and 1997, respectively. Interest payable related to the notes was
$58,397 and $9,858 at December 31, 1998 and 1997, respectively.
5. COMMITMENTS AND CONTINGENCIES
In August 1996, the Company entered into a non-exclusive, royalty-bearing,
perpetual worldwide license agreement with JTS, Inc. to use, reproduce,
prepare derivative works, distribute, publicly perform and publicly display
the GameFilm Technology and GameFilm Engine. The Company shall pay
royalties equal to 3% of the Gross Revenue received for each product
distributed by or on behalf of the Company which is based in large part on
the GameFilm Technology. Earned royalties are due within 30 days after the
end of each quarterly period. Royalties are payable until termination of
the agreement. No royalties were paid in 1998 or 1997.
3
<PAGE>
ImaginOn.com
(a company in the development stage)
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
The Company leases real property under a non-cancelable operating lease
agreement through 2003. The agreement provides for an annual incremental
rent increase of 5%. Rental expense related operating leases totaled
$32,725 and $7,835 for 1998 and 1997, respectively. The future minimum
lease payments under the operating lease as follows:
1999 $ 53,040
2000 55,687
2001 58,476
2002 61,406
2003 36,841
-------------
$ 265,450
=============
In November 1998 the Company entered an agreement with a consultant that
commits the Company to issue options for an equivalent of $10,000 a month.
The Company has accrued $20,000 as part of accrued liabilities to reflect
the costs related to this commitment since the options have not been
granted as of December 31, 1998.
6. SHAREHOLDER'S DEFICIT
PREFERRED STOCK
Under the Company's Articles of Incorporation, the Company's preferred
stock is issuable in series. The Company's Board of Directors is authorized
to determine the rights, preferences and terms of each series. At December
31, 1998, 4,000,000 shares of preferred stock were authorized and no
preferred stock was issued and outstanding.
COMMON STOCK
The Company is authorized to issue up to 10,000,000 shares of common stock,
no par value. All shares of common stock have equal voting rights and, when
validly issued and outstanding, have one vote per share in all matters to
be voted upon by shareholders. The shares of common stock have no
preemptive, subscription, conversion or redemption rights and may be issued
only as fully paid and non-assessable shares. Cumulative voting in the
election of directors is allowed, which means that the shareholder entitled
to vote at any election for Directors may cumulate his vote and give one
candidate a number of votes equal to the number of directors to be elected,
multiplied by the number of votes to which his shares are entitled, or to
distribute his votes on the same principle among as many candidates as he
may choose. On liquidation of the Company, each common shareholder is
entitled to receive a pro rate share of the Company's assets available for
distribution to common shareholders.
WARRANTS FOR COMMON STOCK
In connection with the first round of financing in 1997, the Company issued
warrants to purchase 294,147 shares of common stock for $0.15 - $1.25 per
share.
In connection with the second round of financing in 1998, the Company
issued warrants to purchase 535,000 shares of common stock for $1.25 per
share.
In connection with a bridge financing in 1998, the Company issued warrants
to purchase 20,000 shares of common stock for $1.25 per share.
4
<PAGE>
ImaginOn.com
(a company in the development stage)
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
All above described warrants are immediately exercisable and expire on the
earlier of between September 2000 and January 2001, the closing of an
acquisition of all, or substantially all, of the Company's assets, a merger
of the Company, or an initial public offering.
The Company has determined, using appropriate valuation models, that the
fair value of the warrants were $72,158 in 1997 for the first round of
financing and $325,751 in 1998 for the second round of financing.
Accordingly, these amounts have been offset against the proceeds of the
issuance of common stock in the relevant year.
In regard to the bridge financing in 1998, the Company determined the fair
value of the warrants to be $12,398 at the date of grant. Accordingly, the
Company recorded $12,398 of interest expense associated with these
warrants.
STOCK OPTION PLAN
During 1997, the Company adopted the 1997 Stock Option Plan (the "Plan")
and reserved a total of 1,000,000 shares of common stock for granting of
nonstatutory and incentive stock options to employees and consultants. The
Plan expires in 2007. Options to purchase the Company's common stock may be
granted at a price not less than 85% of fair market value in the case of
nonstatutory stock options, and at fair market value in the case of
incentive stock options. Fair market value is determined by the Board of
Directors. Options become exercisable as determined by the Board of
Directors but in no case at a rate less than 20% per annum over five years
from the date of grant. Options expire as determined by the Board of
Directors but not more than ten years after the date of grant.
Activity under the Plan is as follows:
1998 1997
SHARES PRICE SHARES PRICE
Options outstanding at January 1 250,000 $ 0.15 - $ -
Options granted 126,289 1.25-1.35 250,000 0.15
Options exercises - - - -
Options canceled - - - -
------- -------
Outstanding at December 31 376,289 0.52 250,000 0.15
======= =======
Options exercisable at December 31 68,289 0.26 - -
=======
5
<PAGE>
ImaginOn.com
(a company in the development stage)
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
OPTIONS EXERCISEABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
$0.15 250,000 8.54 $0.15 62,500 $0.15
1.25-1.35 126,289 9.45 1.26 6,289 1.35
--------- --------
376,289 68,789
========= ========
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under
a method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
1998 1997
Net loss:
As reported $ 1,720,202 $ 946,512
------------- -------------
Proforma $ 1,727,317 $ 947,700
============= =============
The Company calculated the fair value of each option grant on the date of
grant using the minimum value pricing method with the following
assumptions: dividend yield at 0%; weighted average expected option term of
5 years; risk free interest rate of 5.86% to 5.98% and 5.79% for the year
ended December 31, 1998, and 1997, respectively. The weighted average fair
value of options granted during 1998 and 1997 was $0.32 and $0.04,
respectively.
7. INCOME TAXES
The tax effects of temporary differences that gave rise to a significant
portion of the deferred tax assets are as follows:
DECEMBER 31,
1998 1997
Deferred tax assets
Net operating loss carryforwards $ 978,000 $ 328,000
Depreciation 6,000 5,000
Research and development tax credits 77,000 36,000
Accrual and other 273,000 174,000
------------- -------------
1,334,000 543,000
Less valuation allowance (1,334,000) (543,000)
------------- -------------
$ - $ -
============= =============
6
<PAGE>
ImaginOn.com
(a company in the development stage)
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
At December 31, 1998, the Company had net operating loss carryforwards
available to reduce future regular and alternative minimum taxable income
of approximately $2,455,000 for both federal and state income tax purposes.
The Company's net operating loss carryforwards expire at various dates in
the years 2004 through 2018, if not utilized. The Company had approximately
$43,000 in federal and $34,000 in state research tax credit carryforwards.
Research tax credit carryforwards will expire for federal purposes in the
years 2011 through 2018, for state tax purposes the credit may be carried
forward indefinitely.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. Any ownership changes, as defined, may restrict
utilization of carryforwards.
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluates on a periodic basis the recoverability of deferred tax
assets and the valuation allowance. At such time as it is determined that
it is more likely than not that deferred tax assets are realizable the
valuation allowance will be reduced.
8. SUBSEQUENT EVENTS
On January 20, 1999, the Company completed a merger pursuant to which it
became a wholly-owned subsidiary of ImaginOn, Inc. (formerly known as
California Pro Sports, Inc. a publicly listed company on the NASDAQ). In
the merger, holders of the Company's common stock received a total of
21,256,419 shares of the merging entity's common stock.
On March 8, 1999, the combined Company acquired Network Specialists, Inc.,
an internet service provider, for $1,000,000. The purchase price was paid
through $230,000 in cash and $770,000 in stock issuances.
On March 12, 1999, the combined Company signed a non-binding Letter of
Intent to acquire Imagine Digital Productions LLC, based in Aspen,
Colorado, a privately held designer, producer and publisher of interactive
CD-ROMs and Internet web sites.
7
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------
On January 20, 1999, ImaginOn, Inc. (formerly known as California Pro Sports,
Inc., the "Company") completed a merger with ImaginOn.com, Inc. of San Carlos,
California (formerly known as ImaginOn, Inc., "IMON"), a privately held company.
The Company is a publicly traded non-operating entity. At closing, IMON's
shareholders received approximately 60% of the post merger issued and
outstanding common stock of the Company (21,248,665 shares) par value $.01 per
share, in exchange for their IMON common stock. The Company plans to record this
transaction as an acquisition and recapitalization. The following unaudited
condensed consolidated balance sheet as of December 31, 1998, gives effect to
the transaction as if it had occurred on December 31, 1998. The following
unaudited pro forma condensed consolidated statement of operations for the year
ended December 31, 1998 gives effect to the transaction as if it had occurred
effective January 1, 1998.
These consolidated financial statements do not purport to present results which
would actually have been obtained if the transaction had been in effect during
the period covered or any future results which may in fact be realized. These
financial statements should be read in conjunction with the accompanying notes
and the separate historical financial statements and notes thereto of the
Company and ImaginOn.
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pre-merger Pro forma
The Company adjustments The Company IMON adjustments
(Historical) (Note 2) (As adjusted) (Historical) (Note 3) Pro forma
------------ ----------- ----------- ----------- ------------ -----------
Assets
------
Current Assets:
<S> <C> <C> <C> <C> <C> <C>
Cash $ 74,103 $ 2,550,000 (A) $ 2,435,770 $ 10,874 $ (50,000) (E) $ 2,396,644
90,000 (B)
(278,333) (C)
Notes receivable:
Intercompany 1,477,217 1,477,217 (1,477,217) (D)
Related parties 104,226 104,226 104,226
Prepaid expenses and other 25,000 25,000 13,158 38,158
Assets held for sale 624,284 (624,284) (B)
------------ ----------- ----------- ----------- ------------ -----------
Total current assets 2,304,830 1,737,383 4,042,213 24,032 (1,527,217) 2,539,028
Property and equipment, net 2,674 2,674 11,811 14,485
Deferred merger costs 167,777 167,777 (167,777) (E)
Trademark licenses costs, net 83,334 83,334 4,400 87,734
------------ ----------- ----------- ----------- ------------ -----------
Total assets $ 2,558,615 $ 1,737,383 $ 4,295,998 $ 40,243 $ (1,694,994) $ 2,641,247
============ =========== =========== =========== ============ ===========
Liabilities and shareholders'
equity (deficit)
- -----------------------------
Current liabilities:
Notes payable:
Related parties $ 57,500 $ 57,500
Intercompany 1,433,269 $ (1,433,269) (D)
Accounts payable and
accrued expenses:
Trade $ 233,532 $ 44,801 (B) 322,835 322,835
(278,333) (C)
Related party 14,449 14,449
Intercompany 43,948 (43,948) (D)
Liabilities held for sale 1,263,565 (1,263,565) (B)
------------ ----------- ----------- ----------- ------------ -----------
Total current liabilities 1,497,097 (1,497,097) 1,872,001 (1,477,217) 394,784
------------ ----------- ----------- ----------- ------------ -----------
Minority interest 56,320 (56,320) (B)
------------ ----------- ----------- ----------- ------------ -----------
Shareholders' equity:
Preferred stock 1,300,902 935,000 (A) $ 2,235,902 2,235,902
Common stock 134,347 134,347 851,953 (639,388) (F) 346,912
Warrants 394,200 394,200 397,909 792,109
Capital in excess of par 13,968,849 1,615,000 (A) 15,583,849 (217,777) (E) 1,953,161
(13,412,911) (F)
Accumulated deficit (14,052,300) (14,052,300) (3,081,620) 14,052,300 (F) (3,081,620)
Treasury stock (740,800) 740,800 (B)
------------ ----------- ----------- ----------- ------------ -----------
Total shareholders'
equity (deficit) 1,005,198 3,290,800 4,295,998 (1,831,758) (217,777) 2,246,463
------------ ----------- ----------- ----------- ------------ -----------
$ 2,558,615 $ 1,737,383 $ 4,295,998 $ 40,243 $ (1,694,994) $ 2,641,247
============ =========== =========== =========== ============ ===========
</TABLE>
See notes to unaudited pro forma condensed financial statements.
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro forma
The Company IMON adjustments
(Historical) (Historical) (Note 3) Pro forma
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 880 $ 880
Cost of Revenues 29 29
------------- ------------- ------------- -------------
Gross profit 851 851
------------- ------------- ------------- -------------
Operating expenses:
Research and development 906,256 906,256
Selling, general and administrative $ 2,549,826 750,780 $ (2,549,826) (G) 750,780
Consulting fees, related parties 180,000 (180,000) (H) 180,000
180,000 (G)
------------- ------------- ------------- -------------
Total operating expenses 2,729,826 1,657,036 (2,549,826) 1,837,036
------------- ------------- ------------- -------------
Loss from operations (2,729,826) (1,656,185) 2,549,826 (1,836,185)
------------- ------------- ------------- -------------
Other expense (income):
Interest income (43,948) (310) 43,948 (D) (310)
Interest expense and other 753,457 84,327 (43,948) (D) 40,379
(753,457) (G)
------------- ------------- ------------- -------------
709,509 84,017 (753,457) 40,069
------------- ------------- ------------- -------------
Loss before minority interest (3,439,335) (1,740,202) 3,303,283 (1,876,254)
------------- ------------- ------------- -------------
Minority interest 58,252 (58,252) (G)
------------- ------------- ------------- -------------
Net loss (3,497,587) (1,740,202) 3,361,535 (1,876,254)
Amortization of discount on preferred
stock (1,120,000) (1,120,000)
------------- ------------- ------------- -------------
Net loss applicable to common
shareholders $ (4,617,587) $ (1,740,202) $ 3,361,535 $ (2,996,254)
============= ============= ============= =============
Basic and diluted loss
per common share $ (0.48) $ (0.09)
============= =============
Weighted average number of
common shares outstanding 9,549,353 (I) 34,683,396
============= =============
</TABLE>
See notes to unaudited pro forma condensed financial statements.
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
1. Description of the transaction:
On January 20, 1999, the Company, through ImaginOn Acquisition Corp., a
newly formed, wholly owned subsidiary of the company, completed a merger
with ImaginOn.com, Inc. of San Carlos, California (formerly known as
ImaginOn, Inc., "IMON"), a privately held company. IMON, formed in March
1996, designs, manufactures and sells consumer software products for
Internet users. At closing, IMON's shareholders received approximately
60% of the outstanding post-merger common stock of the Company
(21,248,665 shares) in exchange for their IMON common stock.
The Company plans to record this transaction as an acquisition and
recapitalization. The unaudited condensed consolidated pro forma balance
sheet as of December 31, 1998 gives effect to the transaction as if it
had occurred December 31, 1998. The unaudited pro forma condensed
consolidated statements of operations for the year ended December 31,
1998 give effect to the transaction as if it had occurred effective
January 1, 1998.
2. Description of pre-merger adjustments, after which the Company will
essentially be a shell company:
(A) On January 15, 1999, the Company completed a private placement
whereby the Company received net proceeds of $2,550,000 for the
purchase of 1,500 shares each of Series D and E convertible
preferred stock, par value $0.01 ("Series D/E") at a price of
$1,000 per share. The Series D/E stock is convertible at the
option of the holder at any time after 90 days from the closing
date into a number of shares of common stock equal to the lower of
$1,000 divided by 75% of the average closing bid price of the
common stock for the five trading days immediately prior to the
conversion date, or 120% of the market price on the day of the
closing. Adjustment (A) records the receipt of $2,550,000 cash
from investors who purchased 3,000 shares of Series D/E preferred
stock from the Company as if it occurred on December 31, 1998. The
portion of the proceeds equal to the intrinsic value of the
beneficial conversion feature ($1,615,000) has been allocated to
capital in excess of par.
(B) In 1998, two officers/shareholders of the Company agreed to
purchase all of the shares of Skate Corp. (a subsidiary of the
Company) that are owned by the Company for $90,000. The purchase
price was based on the net book value of the Company's investment
in Skate Corp. at the time of the agreement. The sale of Skate
Corp. was completed and the Company received the $90,000 in
January 1999. Adjustment (B) records the receipt of $90,000 cash
in exchange for the assets and liabilities held for sale, the
elimination of the historical Skate Corp. minority interest, the
decrease in treasury stock that had been recognized in the
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
historical consolidation, and the recognition of $44,801 of
intercompany accounts payable due to Skate Corp. that had been
eliminated in the historical consolidation. The adjustment does
not result in any gain or loss to the Company.
(C) To record the payment of all remaining liabilities of Cal Pro.
3. Description of pro forma adjustments:
(D) To eliminate intercompany notes receivable and notes payable and
related interest income and interest expense.
(E) To record legal, accounting and other costs of the transactions.
The Company as of December 31, 1998 accrued $167,777 of deferred
acquisition costs and additional costs subsequent to December 31,
1998 were approximately $50,000.
(F) To record the transaction as a reverse acquisition. The purchase
price applied to the reverse acquisition has been based on the net
book values of the underlying assets of the Company which the
Company believes approximates the fair values of the assets. The
remaining trademark license costs carried forward by the Company
consist of the Kemper license and trademark costs. The Kemper
license and trademark costs will be amortized on the straight-line
method over the remaining estimated useful life of approximately
11 years.
(G) To reflect the reverse merger as if it had occurred on January 1,
1998. Since the Company was a non-operating entity at the date of
the transaction, none of the income or expenses of the Company
would have resulted during 1998 had the transaction occurred on
January 1, 1998. Accordingly, the adjustment reflects the removal
of these income and expense items.
(H) To record consulting fees of $15,000 per month under a consulting
agreement between the Company and two former officers of the
Company that will become effective on the date of the merger.
(I) Pro forma weighted average number of common shares outstanding
represents the total number of common shares that would have been
outstanding if the merger had been completed on December 31, 1998.
The outstanding options, warrants and convertible securities are
not considered in the pro forma calculations as they would
decrease pro forma loss per common share. Therefore, basic loss
per share is equivalent to diluted loss per share.
