UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from_____to_____
Commission File Number 0-25114
IMAGINON, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1217733
- ---------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
1313 Laurel Street, Suite 1, San Carlos, CA 94070
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
(650) 596-9300
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such report(s)
and (2) has been subject to such filing requirements for the past 90 days.
YES[X] NO[ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 41,281,967 common shares, par value
$.01 per share, outstanding at November 12, 1999.
Transitional Small Business Disclosure Format YES[ ] NO[X]
Page 1 of 26 total pages on this document.
<PAGE>
IMAGINON, INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
2
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
ASSETS
Current assets:
Cash ...................................................... $ 3,365,483
Accounts receivable, less allowance for
doubtful accounts of $6,000 .............................. 129,847
Inventory ................................................. 43,851
Prepaid expenses and other ................................ 100,229
-----------
Total current assets ................................ 3,639,410
-----------
Furniture and equipment, net of accumulated
depreciation of $128,765 ...................................... 159,276
-----------
Other assets, net of accumulated
amortization of $394,093:
Goodwill .................................................. 2,227,957
Trademark and license costs ............................... 77,085
Other ..................................................... 12,471
-----------
2,317,513
-----------
$ 6,116,199
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 115,608
Accrued expenses .......................................... 469,499
Other payable ............................................. 200,000
-----------
Total liabilities (all current) ................. 785,107
-----------
Shareholders' equity (Note 5):
Preferred stock, $0.01 par value, authorized
5,000,000 shares Series F convertible preferred
stock, 4,000 shares issued and outstanding .............. 3,684,610
Common stock, $0.01 par value; authorized
50,000,000 shares; issued 41,205,887 .................... 412,060
Warrants .................................................. 84,736
Capital in excess of par .................................. 9,085,396
Deficit accumulated during the development stage .......... (7,935,710)
-----------
Total shareholders' equity .......................... 5,331,092
-----------
$ 6,116,199
===========
See notes to consolidated financial statements.
3
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Three months ended
September 30,
----------------------------
1999 1998
------------ ------------
Revenues .................................... $ 168,721 $ 148
Cost of revenues ............................ 37,834
------------ ------------
Gross profit ................................ 130,887 148
------------ ------------
Operating expenses:
Research and development ............. 206,906 179,809
Selling expense ...................... 719,999 39,538
General and administrative expense ... 884,562 122,103
------------ ------------
1,811,467 341,450
------------ ------------
Loss from operations ........................ (1,680,580) (341,302)
------------ ------------
Other expenses (income):
Interest expense ..................... 22,621
Interest income ...................... (48,755) (14)
Other ................................ 1,196
------------ ------------
(47,559) 22,607
------------ ------------
Net loss .................................... (1,633,021) (363,909)
Amortization of discount on preferred stock . (127,659)
------------ ------------
Net loss applicable to common shareholders .. $ (1,760,680) $ (363,909)
============ ============
Loss per share .............................. $ (.04) $ (.02)
============ ============
Weighted average number of shares outstanding 41,186,568 20,192,115
============ ============
See notes to consolidated financial statements.
4
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
Nine months ended March 29, 1996
September 30, (date of inception)
---------------------------- to September
1999 1998 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues .................................... $ 259,783 $ 223 $ 265,328
Cost of revenues ............................ 98,539 99,603
------------ ------------ ------------
Gross profit ................................ 161,244 223 165,725
------------ ------------ ------------
Operating expenses:
Research and development ............. 818,581 711,293 2,621,871
Selling expense ...................... 2,076,463 306,782 2,726,398
General and administrative expense ... 2,173,001 234,489 2,645,249
------------ ------------ ------------
5,068,045 1,252,564 7,993,518
------------ ------------ ------------
Loss from operations ........................ (4,906,801) (1,252,341) (7,827,793)
------------ ------------ ------------
Other expenses (income):
Interest expense ..................... 28,203 42,632 197,899
Interest income ...................... (16,737) (310) (17,047)
Other income ......................... (64,177) (72,935)
------------ ------------ ------------
(52,711) 42,322 107,917
------------ ------------ ------------
Net loss .................................... (4,854,090) (1,294,663) (7,935,710)
Amortization of discount on preferred stock . (1,209,929) (1,209,929)
------------ ------------ ------------
Net loss applicable to common shareholders .. $ (6,064,019) $ (1,294,663) $ (9,145,639)
============ ============ ============
Loss per share .............................. $ (.16) $ (.06) $ (.45)
============ ============ ============
Weighted average number of shares outstanding 37,786,268 20,581,152 20,391,632
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series D, E and F
convertible
Common stock preferred stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of common stock
for services 9,033,332 $ 90,333
Net loss
------------ ------------ ------------ ------------
Balances, December 31, 1996 9,033,332 90,333
Issuance of common stock for
cash, net of issuance costs of
$49,686 10,073,067 100,731
Issuance of common stock to
employees in exchange for earned
bonuses at $0.15 per share 67,750 678
Exercise of common stock
warrants for cash 121,950 1,220
Exercise of common stock warrants
in exchange for note payable 154,574 1,546
Issuance of warrants to purchase
shares of common stock, net
Net loss
------------ ------------ ------------ ------------
Balances, December 31, 1997 19,450,673 194,508
Issuance of common stock and
warrants for cash, net of
issuance cost of $348,438 1,138,200 11,382
Issuance of common stock to
employees in exchange for earned
bonus 135,500 1,355
Issuance of common stock in
exchange for accounts payable 23,742 237
Repurchase of common stock (542,000) (5,420)
</TABLE>
6
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
accumulated
Capital during the Total
In excess development shareholders'
Warrants of par stage equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of common stock
for services $ (87,000) $ 3,333
Net loss $ (394,906) (394,906)
------------ ------------ ------------ ------------
Balances, December 31, 1996 (87,000) (394,906) (391,573)
Issuance of common stock for cash,
net of issuance costs of $49,686 601,833 702,564
Issuance of common stock to
employees in exchange for earned
bonuses at $0.15 per share 3,072 3,750
Exercise of common stock
warrants for cash 5,530 6,750
Exercise of common stock warrants
in exchange for note payable 7,010 8,556
Issuance of warrants to purchase
shares of common stock, net $ 72,158 72,158
Net loss (946,512) (946,512)
------------ ------------ ------------ ------------
Balances, December 31, 1997 72,158 530,445 (1,341,418) (544,307)
Issuance of common stock and
warrants for cash, net of
issuance cost of $348,438 313,353 165,180 489,915
Issuance of common stock to
employees in exchange for earned
bonus 61,145 62,500
Issuance of common stock in
exchange for accounts payable 10,714 10,951
Repurchase of common stock (119,580) (125,000)
</TABLE>
7
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series D, E and F
convertible
Common stock preferred stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of warrants to purchase
shares of common stock in connec-
tion with the issuance of a
bridge financing
Issuance of options to a consultant
Net loss
------------ ------------ ------------ ------------
Balances, December 31, 1998 20,206,115 $ 202,062
Exercise of 4,075,065 warrants
exercise prices between $.055
and $2.10 4,075,065 40,751
Shares issued in acquisition
(Note 5) 16,000,602 160,006 3,000 $ 1,570,000
Issuance of 123,200 shares to
employees 123,200 1,232
Issuance of 260,000 shares of
common stock in connection with
acquisition (Note 3) 260,000 2,600
Issuance of 88,540shares of
common stock in exchange for
cashless conversions of 119,060
warrants to purchase common
stock 88,540 885
Exercise of stock options 27,000 270
Amortization of Series D and E
preferred stock 1,000,000
Issuance of 165,410 shares of
common stock in exchange for
490 shares of Series E
preferred stock 165,410 1,654 (490) (419,768)
</TABLE>
8
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
accumulated
Capital during the Total
In excess development shareholders'
Warrants of par stage equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of warrants to purchase
shares of common stock in connec-
tion with the issuance of a bridge
financing 12,398 12,398
Issuance of options to a consultant 1,987 1,987
Net loss (1,740,202) (1,740,202)
------------ ------------ ------------ ------------
Balances, December 31, 1998 397,909 649,891 (3,081,620) (1,831,758)
Exercise of 4,075,065 warrants at
exercise prices between $.055 and
$2.10 (757,177) 4,562,527 3,846,101
Shares issued in acquisition
(Note 2) 394,200 2,574,915 4,699,121
Issuance of 123,200 shares to
employees 65,577 611,012 677,821
Issuance of 260,000 shares of
common stock in connection with
acquisition (Note 3) 1,399,320 1,401,920
Issuance of 88,540 shares of
common stock in exchange for
cashless conversion of 119,060
warrants to purchase common
stock (885)
Exercise of stock options 1,225 1,495
Amortization of Series D and E
preferred stock (1,000,000)
Issuance of 165,410 shares of
common stock in exchange for
490 shares of Series E
preferred stock 418,114
</TABLE>
9
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series D, E and F
convertible
Common stock preferred stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of 305,000 shares of
common stock in connection
with acquisition of Imagine Digital
Productions I, Inc. 305,000 3,050
Issuance of 4,000 shares of
Series F preferred stock (Note 5) 4,000 3,474,681
Amortization of Series F preferred
stock (Note 5) 209,929
Redemption of Series D and E
preferred stock (Note 5) (2,510) (2,150,232)
Redemption of 74,823 public
warrants at $.05 each
Repurchase of 45,045 shares
of previously issued common
stock (45,045) (450)
Proceeds received from Section
16c
Net loss for nine months ended
September 30, 1999
------------ ------------ ------------ ------------
Balances, September 30, 1999 41,205,887 $ 412,060 4,000 $ 3,684,610
============ ============ ============ ============
</TABLE>
10
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE FROM MARCH 29, 1996
(DATE OF INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
accumulated
Capital during the Total
In excess development shareholders'
Warrants of par stage equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of 305,000 shares of
common stock in connection
with acquisition of Imagine Digital
Productions I, Inc. 664,290 667,340
Issuance of 4,000 shares of
Series F preferred stock (Note 5) 175,319 3,650,000
Amortization of Series F preferred
stock (Note 5) (209,929)
Redemption of Series D and E
preferred stock (Note 5) (891,872) (3,042,104)
Redemption of 74,823 public
warrants at $.05 each (15,773) 12,031 (3,742)
Repurchase of 45,045 shares
of previously issued common
stock (49,550) (50,000)
Proceeds received from Section
16c 168,988 168,988
Net loss for nine months ended
September 30, 1999 (4,854,090) (4,854,090)
------------ ------------ ------------ ------------
Balances, September 30, 1999 $ 84,736 $ 9,085,396 $ (7,935,710) $ 5,331,092
============ ============ ============ ============
</TABLE>
11
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
Nine months ended March 29, 1996
September 30, (date of inception)
---------------------------- to September
1999 1998 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................... $ (4,854,090) $ (1,294,663) $ (7,935,710)
------------ ------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ........ 418,491 14,977 443,826
Bad debt expense ..................... 6,000 6,000
Interest expense for issuance of notes
payable ............................ 77,942
Expense incurred upon issuance of common 677,821 62,500 760,342
Changes in operating assets and
liabilities, net of effects of
business acquisition
Accounts receivable ................ (127,257) (127,257)
Inventories ........................ (35,183) (35,183)
Prepaid expenses and other ......... (85,935) (5,772) (103,493)
Accounts payable and accrued expenses 81,625 92,937 462,857
------------ ------------ ------------
Total adjustments .................... 935,562 164,642 1,485,034
------------ ------------ ------------
Net cash used in operating activities ....... (3,918,528) (1,130,021) (6,450,676)
------------ ------------ ------------
Cash flows from investing activities:
Cash paid on business acquisitions, net of
cash acquired ........................ (337,485) (337,485)
Capital expenditures ................... (59,666) (7,740) (96,812)
------------ ------------ ------------
Net cash used in investing activities ....... (397,151) (7,740) (434,297)
------------ ------------ ------------
Cash flows from financing activities:
Bank overdraft ......................... (1,587)
Proceeds from notes payable and advances 3,099,550 801,636 4,627,304
Payments on notes payable .............. (143,429) (153,429)
Redemption of preferred stock and
warrants ............................. (3,095,846) (3,095,846)
Proceeds from issuance of common stock,
preferred stock, warrants, and
other, net ........................... 7,666,584 489,915 8,872,427
------------ ------------ ------------
Net cash provided by financing activities ... 7,670,288 1,146,535 10,250,456
------------ ------------ ------------
Net increase in cash ........................ 3,354,609 8,774 3,365,483
Cash, beginning ............................. 10,874
------------ ------------ ------------
Cash, ending ................................ $ 3,365,483 $ 8,774 $ 3,365,483
============ ============ ============
</TABLE>
(Continued)
12
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
Nine months ended March 29, 1996
September 30, (date of inception)
---------------------------- to September
1999 1998 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Cash paid for interest ................. $ -- $ -- $ 18,351
============ ============ ============
Cash paid for taxes .................... $ -- $ -- $ 3,593
============ ============ ============
Supplemental disclosure of non-cash
investing and financing activities:
Purchase of Network Specialists, Inc.,
net of cash acquired:
Fair value of assets acquired ........ $ 115,000 -- $ 115,000
Intangible assets .................... 1,600,000 -- 1,600,000
Liabilities assumed .................. (100,000) -- (100,000)
Fair value of assets exchanged ....... (1,402,000) -- (1,402,000)
------------ ------------ ------------
Cash paid, net of cash acquired ...... $ 213,000 -- $ 213,000
============ ============ ============
Purchase of Imagine Digital Productions
I, Inc., net of cash acquired:
Fair value of assets acquired ........ $ 27,000 -- $ 27,000
Intangible assets .................... 1,010,000 -- 1,010,000
Liabilities assumed .................. (45,000) -- (45,000)
Fair value of assets exchanged ....... (867,000) -- (867,000)
------------ ------------ ------------
$ 125,000 -- $ 125,000
============ ============ ============
Issuance of warrants to purchase
common stock .......................... $ -- $ 313,353 $ 397,909
============ ============ ============
Exercise of common stock warrants
in exchange for note payable .......... $ -- $ -- $ 8,556
============ ============ ============
</TABLE>
(Continued)
13
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
Nine months ended March 29, 1996
September 30, (date of inception)
---------------------------- to September
1999 1998 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Conversion of warrants for shares of
common stock .............................. $ 885 $ -- $ 885
============ ============ ============
Issuance of common stock in exchange for
accounts payable .......................... $ -- $ 10,951 $ 10,951
============ ============ ============
Common stock issued in connection with the
merger between the Company and ImaginOn.com $ 4,669,121 $ -- $ 4,669,121
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1. The interim financial statements:
The interim financial statements have been prepared by Imaginon, Inc. (the
"Company", formerly known as California Pro Sports, Inc.), and in the
opinion of management, reflect all material adjustments which are
necessary to a fair statement of results for the interim periods
presented, including normal recurring adjustments. Certain information
and footnote disclosures made in the last annual report on Form 10-KSB
have been condensed or omitted for the interim statements. The financial
statements presented are those of the surviving entity from the merger
(see Note 2). It is the Company's opinion that, when the interim
statements are read in conjunction with the December 31, 1998 Annual
Report on Form 10-KSB and the Company's proxy statement dated December
10, 1998, the disclosures are adequate to make the information presented
not misleading. The results of operations for the three and nine months
ended September 30, 1999 and 1998, are not necessarily indicative of the
operating results for the full year.
2. Organization and merger:
On January 20, 1999, the Company, through ImaginOn Acquisition Corp., a
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 (20,206,115 shares)
in exchange for their IMON common stock. The transaction has been
recorded as an acquisition of ImaginOn, Inc. by IMON and a
recapitalization of IMON.
The accompanying consolidated financial statements include the accounts of
ImaginOn, Inc., and its wholly owned subsidiaries, ImaginOn Acquisition
Corp., IMON, and Network Specialists, Inc. and Imagine Digital Production
I, Inc. (Note 3). Intercompany transactions have been eliminated in
consolidation. 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.
15
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
3. Business acquisitions:
On March 8, 1999, the Company acquired Network Specialists, Inc. ("INOW"),
an internet service provider for $230,000 cash and 260,000 shares of the
Company's common stock valued at approximately $1,402,000.
Effective July 1, 1999, the Company acquired Imagine Digital Productions I,
Inc. ("IDP"), a multi-media production studio and publishing company,
through its subsidiary ImaginOn Digital Productions, Inc., for $125,000
cash, a $200,000 payable (which was paid in October 1999), and 305,000
shares of the Company's common stock valued at approximately $667,000. In
addition, the Company agreed to issue as contingent consideration, up to
105,000 shares of the Company's common stock on June 30, 2000, subject to
IDP satisfying certain performance criteria, as defined in the purchase
agreement.
Each acquisition was accounted for as a purchase, and the results of
operations of INOW and IDP are included in the Company's consolidated
statement of operations from the date of each acquisition. The total
purchase price of each acquisition was allocated to the assets and
liabilities acquired based on their estimated fair values, including
total goodwill of approximately $2,610,000, which is being amortized by
the use of the straight-line method over three years.
The following unaudited pro forma financial information for the nine months
ended September 30, 1999 and 1998 give effect to the acquisitions as if
they had occurred effective at the beginning of each respective period:
Nine months
ended September 30,
-------------------------
1999 1998
----------- -----------
Revenue $ 385,000 $ 361,000
Net loss (4,920,000) (1,360,000)
Net loss applicable to common shareholders (6,130,000) (1,360,000)
Loss per share (.16) (.06)
Shares used in per share calculation 38,052,458 21,146,152
The unaudited pro forma financial information above does not purport to
represent the results which would actually have been obtained if the
acquisitions had been in effect during the period covered or any future
results which may in fact be realized.
16
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
4. Sale of the Company's investment in USA Skate Corporation:
In 1998, two former officers/shareholders of the Company agreed to purchase
all of the shares of USA Skate Corporation (a subsidiary of the Company
through January 1999) that were owned by the Company for $90,000. The
purchase price was based on the net book value of the Company's
investment in Skate Corp. at the time of the agreement. The sale of Skate
Corp. was completed and the Company received the $90,000 in January 1999.
The transaction did not result in any gain or loss to the Company.
5. Shareholders' equity:
Issuance of common stock prior to the January 20, 1999 merger:
At December 31, 1998, ImaginOn, Inc. had 13,434,731 shares of common stock
outstanding and 1,630 shares of Series B and C ("Series B/C") convertible
preferred stock outstanding. In January 1999, prior to the merger, these
preferred shares were converted into 1,879,626 shares of common stock. In
January 1999, an additional 39,845 shares of common stock were issued to
the Series B/C shareholders as a penalty for not completing a
registration statement within an agreed upon time period. The Company
recorded an expense of $81,500 based upon the market value of the shares
issued.
In January 1999, the Company issued 125,000 shares of common stock to a
consultant to the Company for introducing accredited investors to the
Company who purchased $5,000,000 of Series B/C and Series D and E
convertible preferred stock.
The Company issued 521,400 shares of common stock in connection with the
exercise of 521,400 options, and the Company received $521,400 in
connection with the exercise at prices ranging from $.75 to $1.25 per
share.
As a result of these transactions, ImaginOn, Inc. had 16,000,602 shares of
common stock outstanding at the date of the merger with IMON.
17
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
5. Shareholders' equity (continued):
Issuance of common stock subsequent to the January 20, 1999 merger:
In the period ended September 30, 1999 the Company issued 4,075,065 shares
of common stock upon the exercise of 4,075,065 options at exercise prices
from $.055 to $2.10 per share. The total net proceeds the Company
received was $3,846,101.
For the period ended September 30, 1999, the Company issued 123,200 shares
of common stock as bonuses given to new employees. In connection with
these issuances, the Company recognized $677,821 of expense.
In connection with the acquisitions of INOW and IDP, in March 1999, the
Company issued 260,000 shares to the former shareholders of Network
Specialists, Inc., and in July 1999, the Company issued 305,000 shares to
the former shareholders of Imagine Digital Production I, Inc.
In March and April 1999, the Company issued 88,540 shares of common stock
in exchange for the exercise of 119,060 warrants. The warrant holders
utilized a cashless exercise provision included in their agreement. In
April 1999, the Company issued 165,410 shares of common stock in exchange
for 490 shares of its Series E convertible preferred stock. In June 1999,
the Company repurchased 45,045 shares of previously issued common stock
for $50,000 and in August and September 1999, the Company issued 27,000
shares of common stock upon the exercise of stock options.
18
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
5. Shareholders' equity (continued):
Series D/E preferred stock:
In January 1999 prior to the merger, the Company, with the assistance of
its financial consultant, completed private placements whereby the
Company received net proceeds of $2,570,000 from accredited investors
introduced to the Company by the consultant, for the purchase of 1,500
shares each of Series D and E convertible preferred stock par value $.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 closing. In
connection with the placement of the Series D/E, the Company issued
warrants to purchase 300,000 shares of common stock to financial advisors
that assisted with placements. The warrants are exercisable at $7.28063
per share (120% of the market price as defined in the agreement, of the
common stock at the date of issuance). All warrants expire in January
2004.
The conversion feature was "in the money" at the date of issue (a
"beneficial conversion feature"). The Company allocated $1,000,000 of the
proceeds, equal to the intrinsic value of the beneficial conversion
feature to capital in excess of par. At September 30, 1999, the entire
amount has been amortized to preferred stock for the period beginning
from the date of issuance.
In April 1999, 490 shares of Series E preferred stock were converted into
165,410 shares of common stock. The remaining 250 shares of Series D/E
were redeemed in May 1999 at 120% of face value plus unpaid dividends for
a total redemption of approximately $3,042,000.
19
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
5. Shareholders' equity (continued):
Series F convertible preferred stock:
In May 1999, the Company issued 4,000 shares of 12% Series F convertible
preferred stock (the "Series F") for $3,650,000 (net of offering costs)
at a price of $1,000 per share. The Series F is convertible at the option
of the holder at any time after 180 days from the closing date into a
number of shares of common stock equal to the lower of 125% of the five
day average closing bid price of the Company's common stock immediately
preceding the closing date, or 94% of the low five-day average closing
bid price of the Company's common stock for the 22 consecutive trading
days prior to the trading day on which the notice of conversion is sent
by the preferred shareholders. Additionally 122,553 warrants were issued
to purchase common stock with an exercise price of the warrants equal to
the lesser of 110% of the closing bid price of the common stock on the
closing date, or 100% of the closing bid price of the common stock on the
date the convertible preferred shares are redeemed, or 100% of the
closing bid price of the common stock on the first trading day after the
Company has filed a registration statement covering the shares of common
stock to be issued upon conversion of the Series F and exercise of the
warrants.
The conversion feature was "in the money" at the date of issue (a
"beneficial conversion feature"). The Company allocated $255,319 of the
proceeds, equal to the intrinsic value of the beneficial conversion
feature to capital in excess of par. At September 30, 1999, 209,929 has
been amortized to preferred stock for the period beginning from the date
of issuance.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
This report may contain certain "Forward-Looking Statements" as such term is
defined in the private securities litigation reform act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, which
represents ImaginOn, Inc. expectations or beliefs, including but not limited to,
statements concerning ImaginOn Inc. operations, economic performance, financial
condition, growth and acquisition strategies, investments, and operational
plans. For this purpose, any statements contained from here on that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may", "will",
"expect", "believe", "anticipate", "intent", "could", "estimate", "might" or
"continue" or the negative or other variations or comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, certain of which are beyond
ImaginOn, Inc.'s control, and actual results may differ materially depending on
a variety of important factors, including uncertainty related to acquisitions,
governmental regulation, managing and maintaining growth, product acceptance,
competition, unavailability of financing, volatility of stock price and any
other factors discussed in this report.
RECENT DEVELOPMENTS
On September 9, 1999, the Company released the latest enhanced WebZinger 7.0
version. WebZinger 7.0 incorporates a number of new features, including an
enhanced consumer interface. This release of WebZinger 7.0 was supported by the
Company's first national consumer print, television and radio advertising
campaign, created by Holland Advertising. The campaign began on August 21 and
will end on November 15, 1999. This included 25 nationwide college and
university markets on top cable networks like Comedy Central, MTV, ESPN, ESPN2
and E!, as well at high profile campus movie events. The first television
advertisement started in San Francisco, with nine television spots running on
KBHK-TV's special "Star Trek- The Next Generation" marathon. These initial nine
spots generated over 25,000 hits to www.WebZinger.com. in that weekend alone.
After six weeks into ImaginOn's first national consumer advertising campaign,
there were more than 500,000 hits and the Web traffic continued to grow with
per-day free trial downloads. The campaign also included demo CD's and print ads
in the college-market focused consumer magazine "LINK" and banner ads on top
college sites.
At the 1999 ISPCON, ImaginOn unveiled its high-bandwidth Internet portal,
www.imon.com, showcasing Internet based interactive television based on ImaginOn
technology. ImaginOn's www.imon.com targets small businesses and Net enthusiasts
who are into high speed Internet access via cable modem or DSL.
The portal provides a variety of functions, including real-time on-line media
searches, interactive TV, music, videos, video games, interactive video travel
planners and video shopping catalogs. Also included are traditional features
like e-mail, calendar/date books, and customized news channels, among others.
Furthermore, many of the interactive TV programs and commercials within the
portal were built with ImaginOn's "ImaginAuthor(TM)" authoring system.
The ImOn.com portal will be marketed a number of different ways: as a
stand-alone monthly subscription of $9.95 to individuals already connected to
the Internet via DSL or cable modem, as a free component of a larger ISP package
offered by ImaginOn's wholly-owned subsidiary INOW Internet Services, as a
feature offered by ImaginOn-appointed regional ISP distributors and as a site
license package to corporations looking to expand their current intranet onto
the Web. ImOn.com portal software system can be licensed from ImaginOn by any
company that wants their own Internet TV station.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
On September 14, 1999, ImaginOn announced that it was one of 45 companies around
the world selected by Sony Computer Entertainment, Inc. to provide middleware to
developers creating content for the Internet- enabled Sony PlayStation(R)2
platform scheduled for launch in 2000. ImaginOn's Chief Executive Officer was
invited and presented the company's authoring software at Sony's PS2 developers
conference in Japan during the week of September 20th. ImaginOn was the only
company there whose authoring system supports seamless n-way branching of
digital film with integrated Internet access. As a result of this, ImaginOn
expects many developers creating content for the new PlayStation2 will license
ImaginAuthor.
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the condensed
consolidated financial statements and notes.
The following table sets forth certain operating data of the Company for the
periods as indicated below.
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net revenues $ 168,721 $ 148 $ 259,783 $ 223
Gross profit 130,887 148 161,244 223
Research and development 206,906 179,809 818,581 711,293
Sales and marketing 719,999 39,538 2,076,463 306,782
General administrative 884,556 122,103 2,173,001 234,489
Net loss (1,633,021) (363,909) (4,854,090) (1,294,663)
"Consolidated" three and nine months ended September 30, 1999 compared to
September 30, 1998 of "ImaginOn.Com", before merger with California Pro Sports,
Inc.
NET REVENUES
Consolidated net revenues for the three and nine months ended September 30, 1999
increased to $168,721 from $148 in 1998 and to $259,783 from $223 in 1998
respectively. Approximately 91% of this revenue were from INOW the Internet
service provider. For the three and nine months ended September 30, 1998, the
Company was still in the developmental stage and thus, revenues were very
minimal. During this third quarter 1999, ImaginOn began an advertising and
marketing campaign for WebZinger with increasing revenues of $7,235 and the two
acquisitions of INOW having $153,474 and IDP having $8,012 total revenues.
GROSS PROFIT
Gross profit for the three and nine months ended September 30, 1999 and 1998
increased to $130,887 from $148 in 1998 and to $161,244 from $223 in 1998,
respectively.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESEARCH AND DEVELOPMENT EXPENSES
Research and Development expense for the three months ended September 30, 1999
increased to $206,906 compared to that for September 30, 1999 of $179,809. This
increase was due to additional personnel in this department. There was $14,650
for additional purchase of computer and software equipment and supplies. These
items were all less than $1,000, and thus, not capitalized. A $12,096 payment
for costs associated with the Sony Computer Entertainment, Inc. licenses to use
for development tools in regards to the ImaginOnAuthor and Sony PlayStation2.
The remaining $6,902 was for general expenses such as travel, books, and
communications. For the nine months ended September 30, 1999 research and
development expenditures increased to $818,581 compared to that for the nine
months ended to September 30, 1998 of $711,293. This increase primarily resulted
from the continual growth of personnel in the software and video production
department, for improvements such as WebZinger, WorldCities 2000, video
production related to the new Imon.com portal and interactive Internet
technology, and SellOnstream.
SALES AND MARKETING EXPENSES
For the three months ended September 30, 1999, sales and marketing expenses
increased to $719,999 compared to the three months ended September 30, 1998 of
$39,538. This increase is due mainly from the nationwide advertisement and
marketing campaign of WebZinger at $473,918, and for marketing and advertisement
of $41,823 for Worldcities 2000 products. Another $48,000 was expended for the
Imon.com portal graphic design project, $17,397 and $6,779 for general marketing
and advertisement for INOW and IDP was spent respectively. Other expenses are
for employee payroll and outside sales and consulting fees of $83,935, $27,210
for travel and the remaining $20,937 are for sales and marketing supplies,
communication, and printing and reproduction, promotion and related expenses.
For the nine months ended September 30, 1999, sales and marketing expenses
increased to $2,076,463 compared with the nine months ended September 30, 1998
of $306,782, Due to the expansion and growth of the Company
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended September 30, 1999 these expenses increased to
$884,562 compared to the three months ended September 30, 1998 of $122,103. The
majority of this increase was from payroll of $450,553 which included $50,000
bonuses to two executive officers, and $204,173 for amortization expense for
intangible assets of INOW and Imagine Digital Productions, $109,429 for legal
and auditing expenses, and $27,494 for rent. The remaining $92,907 was for
general office expenses such as supplies, furniture, computer equipment,
depreciation, insurance and travel expenses. For the nine months ended September
30, 1999, these expenses increased to $2,173,001 compared to $234,489 nine
months ended September 30, 1998 of theses expenses. This increase was due to the
two acquisitions and growth of the Company.
INTEREST EXPENSE AND INCOME, NET
For the three months ended September 30, 1999 there was no interest expense
primarily due to the elimination of monthly bridge loans incurred for the Cal
Pro and ImaginOn.com merger, compared to the three months ended September 30,
1998 of $22,621. Net interest income of $48,755 was earned from bank deposits
such as money market and CD assets compared to $14 in September 30, 1998. For
the nine months ended September 30, 1999, interest expense decreased to $28,203
compared to $42,632 for the nine months ended September 30, 1998. This
difference was primarily due to the reversal then elimination of the monthly
bridge loans incurred from the Cal Pro merger. Interest income for the nine
months ended September 30, 1999 was $16,737 compared to $310 ended September 30,
1998. Other income for the nine months ended September 30, 1999 was $64,177
compared to none for the nine months ended September 30, 1998.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, ImaginOn had cash of $3,365,483 and a working capital
of $2,854,303 as compared to cash of $8,774 and working capital deficit of
$1,281,991 at September 30, 1998. ImaginOn used cash of $3,918,528 in the
operating activities for the nine months ended September 30, 1999. During the
nine months ended September 30, 1999 the principal uses of cash were to fund the
Company's working capital requirements as well as the purchase of two
acquisitions.
ImaginOn expect to incur further losses at least through the end of calendar
1999. However, ImaginOn is actively seeking additional funding during calendar
1999. In the absence of receiving additional funding, ImaginOn anticipate that
its existing capital resources and cash generated from operations, will be
adequate to meet the cash requirements for approximately the next ten months at
the anticipated level of operations. Failure to obtain funding would have a
material adverse effect on ImaginOn's business, financial condition and results
of operations. ImaginOn cannot assure that any additional financing will be
available on acceptable terms, or at all, when required by the Company.
YEAR 2000 COMPLIANCE
ImaginOn, Inc. is aware of the issues associated with the programming code and
embedded technology in existing systems as the year 2000 approaches. The "Year
2000 Issue" arises from the potential for computers to fail or operate
incorrectly because their programs incorrectly interpret the two digit date
fields "00" as 1900 or some other year, rather than the year 2000. The year 2000
issue creates risk for the company from unforeseen problems in its own computer
systems and from third parties, including customers, vendors, banks, production,
etc. Failures of ImaginOn's and/or third parties' computer systems could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity, and financial condition, though the impact is
unknown at this time.
To minimize this risk, in the first quarter 1999, the ImaginOn's board of
directors and management has gone through a series of year 2000 questionnaire
and assessments that would impact the full operation of the company. These
questionnaires and assessment revealed no significant issues with ImaginOn's ISP
(Internet Service Provider), technology infrastructure, facilities or products.
Certain vendors/partners/third parties themselves have significant year 2000
programs, the successes of which are also important to the company. ImaginOn,
Inc. is establishing a contingency plan for each critical partner, the
activation of which will be dependent on the failure of the vendor/partner/third
party to achieve key milestones in their programs. The total cost of Year 2000
activities is not expected to be material to the company's operations, liquidity
or capital resources. Costs are being managed within each department unit. The
total estimated costs are not expected to exceed $20,000. During the third
quarter ended September 30, 1999, there was approximately $5,000 incurred to
upgrade computer systems. Cost excludes expenditures for replacement systems.
While ImaginOn, Inc. believes that its efforts to address Y2K issues will be
successfully completed in a timely manner; the company recognizes that failing
to resolve Y2K issues could, in a reasonably likely worst case scenario,
increase costs and limit ImaginOn's ability to conduct business operations as
well as customers limited utilization of the Internet services which the company
provides.
The anticipated costs and timeliness of completion of Year 2000 modifications
are based on management's best estimates, which were derived using numerous
assumptions relating to future events, including, without limitation, the
continued availability of certain resources and third party modification plans.
However, these estimates and assumptions may turn out to be inaccurate.
Some commentators have stated that a significant amount of litigation will arise
out of Year 2000 compliance issues, and we are aware of a growing number of
lawsuits against other software vendors. Because of the unprecedented nature of
such litigation, it is uncertain whether or to what extent we may be affected.
24
<PAGE>
PART II
OTHER INFORMATION
Item 2 Changes in Securities and use of proceeds.
a. N/A
b. N/A
c. During the three month period covered by this report, the Registrant issued
the following securities:
Effective July 1, 1999, the Company issued 305,000 shares of its common
stock to the former shareholders of Imagine Digital Production I, Inc.
(IDP) in connection with the acquisition of IDP.
In August and September 1999, the Company issued 27,000 shares of common
stock upon the exercise of stock options.
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits:
Financial data schedule
b. Reports on Form 8-K:
On July 8, 1999, the Company filed a report on Form 8-K, reporting the
Company's acquisition of Imagine Digital Production I, Inc. ("IDP").
On September 14, 1999, the Company filed an 8-K/A, amending the 8-K filed
on July 8, 1999, to include financial statements of the business acquired
(IDP) and pro forma financial information.
25
<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.
IMAGINON, INC.
Dated: November 12, 1999 By: /s/ David M. Schwartz
----------------------------
David M. Schwartz
President, Chief Executive Officer,
Chief Financial Officer
Dated: November 12, 1999 By: /s/ Thompson Chan
----------------------------
Thompson Chan
Chief Accounting Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,365,483
<SECURITIES> 0
<RECEIVABLES> 129,847
<ALLOWANCES> 6,000
<INVENTORY> 43,851
<CURRENT-ASSETS> 3,639,410
<PP&E> 159,276
<DEPRECIATION> 214,618
<TOTAL-ASSETS> 6,116,199
<CURRENT-LIABILITIES> 785,107
<BONDS> 0
0
3,684,610
<COMMON> 412,060
<OTHER-SE> 84,736
<TOTAL-LIABILITY-AND-EQUITY> 6,116,199
<SALES> 259,783
<TOTAL-REVENUES> 259,783
<CGS> 98,539
<TOTAL-COSTS> 5,068,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,737
<INCOME-PRETAX> (4,906,801)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,906,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,854,090)
<EPS-BASIC> (.16)
<EPS-DILUTED> (.16)
</TABLE>
