SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
September 14, 1999 (July 1, 1999)
IMAGINON, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1217733
- -------- ----------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
000-25114
---------
(Commission FileNo.)
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)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
As described in the Registrant's Current Report on Form 8-K filed on July 8,
1999 (the "Initial 8-K") effective July 1, 1999, the Registrant completed a
merger pursuant to which Imagine Digital Productions 1, Inc., a Colorado
corporation, merged with and into a wholly-owned subsidiary of the Registrant,
ImaginOn Digital Productions, Inc. The Initial 8-K erroneously reported the
effective date of the transaction as June 23, 1999.
This Current Report on Form 8-K/A amends and supplements the Initial 8-K to
include financial statements and pro forma financial information permitted
pursuant to Item 7 of Form 8-K to be excluded from the Initial Form 8-K and
required to be filed by amendment to the Initial Form 8-K not later that 60 days
after the date the initial Form 8-K was required to be filed.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of the Business Acquired
Pursuant to paragraph (a)(4) of Item 7 of Form 8-K, the
attached financial statements were omitted from the
disclosure contained in the Company's Current report on Form
8-K filed with the Securities and Exchange Commission on
July 8, 1999. Attached hereto as are the audited financial
statements of Imagine Digital Productions 1, Inc. as of
December 31, 1998, and for the year ended December 31, 1998,
and the period from September 19, 1997 (date of inception)
through December 31, 1997, as well as the unaudited
financial statements as of June 30, 1999, and the six-month
periods ended June 30, 1999, and June 30, 1998.
(b) Pro Forma Financial Information
Pursuant to paragraph (b)(2) of Item 7 of Form 8-K, the
following pro forma financial information was omitted from
the disclosures contained in the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission
on July 8, 1999. Attached hereto are the unaudited pro forma
condensed consolidated balance sheet as of June 30, 1999,
and the statements of operations for the year ended December
31, 1998, and the six months ended June 30, 1999, reflecting
the acquisition of Imagine Digital Productions 1, Inc., and
including the notes to the unaudited pro forma financial
statements.
2
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997, AND THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997, AND THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
CONTENTS
Independent auditors' report 1
Financial statements:
Balance sheets 2
Statements of operations 3
Statements of equity (deficit) 4
Statements of cash flows 5
Notes to financial statements 6-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Imagine Digital Productions 1, Inc.
We have audited the balance sheet of Imagine Digital Productions 1, Inc. as of
December 31, 1998, and the related statements of operations, equity (deficit)
and cash flows for the year ended December 31, 1998, and the period from
September 19, 1997 (inception) through December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Imagine Digital Productions 1,
Inc. as of December 31, 1998, and the results of its operations and its cash
flows for the year ended December 31, 1998 and the period from September 19,
1997 (inception) through December 31, 1997, in conformity with generally
accepted accounting principles.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
September 2, 1999
1
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
ASSETS
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
Current assets:
Cash ............................................ $ 7,049 $ 63
Accounts receivable ............................. 7,439 2,350
Related party receivables (Note 3) .............. 4,200
Inventories ..................................... 2,500 8,668
-------- --------
Total current assets ........................ 21,188 11,081
-------- --------
Property and equipment, net (Note 4) ................. 17,754 15,097
Other assets ......................................... 1,616 730
-------- --------
$ 40,558 $ 26,908
======== ========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................ $ 672
Advances payable to ImaginOn, Inc. and others
(Note 8) ....................................... $ 44,500
-------- --------
Total liabilities (all current) ............. 672 44,500
-------- --------
Commitments (Notes 5 and 8)
Equity (deficit) (Note 7):
Shareholders' deficit:
Preferred stock; 1,000 shares authorized;
719.63 shares issued and outstanding
(liquidation preference of $359,815) ...... 12,432
Common stock; 10,000 shares authorized;
660.37 shares issued and outstanding ...... 28
Accumulated deficit ......................... (30,052)
Members' equity ................................. 39,886
-------- --------
Total equity (deficit) .................... 39,886 (17,592)
-------- --------
$ 40,558 $ 26,908
======== ========
See notes to financial statements.
2
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
September 19,
1997 (inception) Year ended Six months ended
through December December 31, June 30,
31,1997 1998 1998 1999
---------------- ------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue ....................... $ 53,040 $ 127,762 $ 88,677 $ 59,152
Cost of revenue ............... 30,617 117,877 65,521 48,661
----------- ----------- ----------- -----------
Gross profit .................. 22,423 9,885 23,156 10,491
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing .... 35,121 93,429 50,676 31,471
General and administrative 24,814 72,058 39,389 36,498
----------- ----------- ----------- -----------
(59,935) (165,487) (90,065) (67,969)
----------- ----------- ----------- -----------
Loss from operations .......... (37,512) (155,602) (66,909) (57,478)
Other income .................. 3,000
----------- ----------- ----------- -----------
Net loss ...................... $ (37,512) $ (152,602) $ (66,909) $ (57,478)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
STATEMENTS OF EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997, AND THE SIX MONTHS
ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Shareholders' equity
---------------------------------------------- Members'
Preferred stock Common stock equity/
--------------------- ---------------------- accumulated
Shares Amount Shares Amount deficit Total
--------- --------- ---------- --------- --------- ---------
(Note 7)
<S> <C> <C> <C> <C> <C>
Capital contribution
at inception .............................. $ 95,000 $ 95,000
Net loss ................................... (37,512) (37,512)
--------- --------- ---------- --------- --------- ---------
Balances, December 31, 1997 ................ 57,488 57,488
Capital contribution ....................... 135,000 135,000
Net loss ................................... (152,602) (152,602)
--------- --------- ---------- --------- --------- ---------
Balances, December 31, 1998 ................ 39,886 39,886
Net loss for four months ended
April 30, 1999 (unaudited) ................ (27,426) (27,426)
--------- --------- ---------- --------- --------- ---------
Balances, April 30, 1999 (unaudited) ....... 12,460 12,460
Issuance of common and
preferred stock upon incorporation
of the Company (Note 7) .................. 719.63 $ 12,432 660.37 $ 28 (12,460)
Net loss for two months ended
June 30, 1999 (unaudited) ................ (30,052) (30,052)
--------- --------- ---------- --------- --------- ---------
Balances, June 30,
1999 (unaudited) .......................... 719.63 $ 12,432 660.37 $ 28 $ (30,052) $ (17,592)
========= ========= ========== ========= ========= =========
</TABLE>
See notes to financial statements
4
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
September 19,
1997
(inception), Six months ended
through Year ended June 30,
December December 31, ----------------------
31, 1997 1998 1998 1999
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................... $ (37,512) $(152,602) $ (66,909) $ (57,478)
--------- --------- --------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ................................ 886 5,314 2,657 2,657
Changes in assets and liabilities:
(Increase) decrease in receivables ........ (37,700) 26,061 5,500 9,289
Increase in inventories ................... (2,500) (6,168)
(Increase) decrease in other assets ....... (2,970) 1,355 150 886
Increase (decrease) in accounts payable ... 1,536 (866) (1,485) (672)
--------- --------- --------- ---------
Total adjustments ......................... (38,248) 29,364 6,822 5,992
--------- --------- --------- ---------
Net cash used in operating activities ... (75,760) (123,238) (60,087) (51,486)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment ......... (23,953)
--------- --------- --------- ---------
Net cash used in investing activities ... (23,953)
--------- --------- --------- ---------
Cash flows from financing activities:
Bank overdraft .............................. 4,713 (4,713) (4,713)
Advances from ImaginOn, Inc. and others ..... 44,500
Capital contributions ....................... 95,000 135,000 65,000
--------- --------- --------- ---------
Net cash provided by financing activities 99,713 130,287 60,287 44,500
--------- --------- --------- ---------
Net increase (decrease) in cash .................. 7,049 200 (6,986)
Cash, beginning .................................. 7,049
--------- --------- --------- ---------
Cash, ending ..................................... $ $ 7,049 $ 200 $ 63
========= ========= ========= =========
</TABLE>
See notes to financial statements.
5
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997 AND THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
1. Organization and nature of business:
Imagine Digital Productions 1, Inc., (the "Company") was originally formed
as a Colorado Limited Liability Company on September 19, 1997, and began
operations on October 1, 1997. On April 30, 1999, the Company revoked its
limited liability company status and incorporated as a Colorado
Corporation (Note 6). The Company is located in Aspen, Colorado, and
operates a multimedia production studio which designs, produces and
distributes information, in an interactive digital form, through media
such as CD-ROM computer disks and the World Wide Web. The Company markets
these multimedia products to customers in specific markets and geographic
areas along with custom website and other online services which the
Company provides to its customers.
2. Significant accounting policies:
Unaudited financial statements:
The balance sheet as of June 30, 1999, the statements of operations and
cash flows for the six months ended June 30, 1999 and 1998, and the
statement of equity (deficit) for the six months ended June 30, 1999,
have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include normal recurring adjustments)
necessary to present fairly the financial position, results of operations
and cash flows for all such periods have been made. The results of
operations for the six months ended June 30, 1999 are not necessarily
indicative of the operating results for the full year.
Use of estimates in the preparation of financial statements:
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 reporting periods. Management makes these estimates using the
best information available at the time the estimates are made; however,
actual results could differ materially from these estimates.
6
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997, AND THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
2. Significant accounting policies (continued):
Inventories:
Inventories, which consist of CD-ROM computer disks, are valued at the
lower of cost or market and are accounted for on the first-in, first-out
(FIFO) basis.
Property and equipment:
Property and equipment is recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
assets, which range from three to seven years.
The Company assesses the carrying values of its long-lived assets for
impairment when circumstances indicate such amounts may not be
recoverable from future operations. Generally, assets to be held and used
in operations are considered impaired if the sum of expected undiscounted
future cash flows is less than the assets' carrying amount. If an
impairment is indicated, the loss is measured based on the amount by
which the assets' carrying amounts exceed their fair value. Based on its
review, the Company's management does not believe that any impairment has
occurred as of December 31, 1998 (or June 30, 1999, unaudited).
Revenue recognition:
The Company recognizes revenue upon the completion and acceptance by the
customer of each website and Internet-related development project.
Revenues from other consulting and implementation services are recognized
when the servcies are performed, and revenues from CD-ROM computer disk
sales are recognized when the products are shipped.
Risk considerations:
The Company is subject to risks and uncertainties common to growing
technology- based companies, including rapid technological change, growth
and commercial acceptance of the Internet, dependence on principal
products and third party technology, new product development, new product
introductions and other activities of competitors, dependence on key
personnel, and limited operating history.
7
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997, AND THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
2. Significant accounting policies (continued):
Risk considerations (continued):
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due
to processing errors potentially arising from calculations using the Year
2000 date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of
the operational systems. The Company has established processes for
evaluating and managing the risks and costs associated with this problem.
Management believes the total cost of compliance, and its effect on the
Company's future results of operations will be insignificant.
Fair value of financial instruments:
Management believes that the carrying amounts of the Company's financial
instruments approximates their fair values primarily because of the
short-term maturity of these instruments. Estimates are not necessarily
indicative of the amounts which could be realized or would be paid in a
current market exchange. The effect of using different market assumptions
and/or estimation methodologies may be material to the estimated fair
value amounts.
Recently issued accounting pronouncements:
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement is
effective for fiscal years beginning after June 15, 2000. Currently, the
Company does not have any derivative financial instruments and does not
participate in hedging activities, therefore management believes SFAS No.
133 will not impact the Company's financial position or results of
operations.
8
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997, AND THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
2. Significant accounting policies (continued):
Recently issued accounting pronouncements:
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130
establishes requirements for disclosure of comprehensive income and its
components, which include, among other items, unrealized gains or losses
from marketable securities and foreign currency translation adjustments
that previously were only reported as a component of shareholders'
equity. The Company does not have any components of comprehensive income
through December 31, 1998, and through the period ended June 30, 1999
(unaudited).
3. Related party receivables:
Related party receivables represent unsecured, non-interest bearing
advances made to the Company's member/shareholders.
4. Property and equipment:
Property and equipment consist of the following at December 31, 1998 and
June 30, 1999:
December 31, June 30
1998 1999
--------- ---------
(Unaudited)
Computer equipment $ 11,405 $ 11,405
Furniture and fixtures 12,549 12,549
--------- ---------
23,954 23,954
Less accumulated depreciation 6,200 8,857
--------- ---------
$ 17,754 $ 15,097
========= =========
9
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997, AND THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
5. Leases:
The Company leases office space and computer equipment under operating
leases that expire through 2002. Rental expense for all operating leases
was $10,307 for the period ended December 31, 1997, and $22,306 for the
year ended December 31, 1998 ($10,996 and $11,358 for the six months
ended June 30, 1998 and 1999, respectively, unaudited). Future minimum
lease payments are as follows:
Year ending
December 31, Amount
------------ ---------
1999 $ 25,182
2000 18,870
2001 18,689
2002 10,509
---------
Total minimum
lease payments $ 73,250
=========
6. Income taxes:
Through April 30, 1999, the Company maintained Limited Liability Company
status for federal income tax purposes. As a limited liability company,
the Company's members reported their respective share of net income or
loss on their respective income tax returns, and the Company did not
record a provision for Federal or State income taxes.
Effective April 30, 1999, the Company revoked its limited liability Company
status and became a C Corporation. As a C corporation, income taxes will
be provided for the tax effects of transactions reported in the financial
statements subsequent to April 30,1999, and a deferred income tax
liability or asset will be recognized for temporary differences between
the Company's financial statements and tax returns. Deferred tax assets
and liabilities are measured using enacted tax rates which are expected
to be in effect when these differences reverse.
10
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997, AND THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
6. Income taxes (continued):
The Company has no provision for income tax for the six months ended June
30, 1999 (unaudited), because the Company incurred a net operating loss.
Based on statutory rates, the Company's expected tax benefit arising from
the net loss would be approximately $5,000 (unaudited) for the six
months ended June 30, 1999. However, the estimated tax benefit has been
reduced by a valuation allowance for financial reporting purposes due to
the uncertainty regarding the realization of this deferred tax asset.
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if
appropriate. Realization of the future tax benefits related to the
deferred tax assets is dependent on many factors, including the Company's
ability to generate taxable income within the net operating loss
carryforward period. The realization of the net operating loss may also
be limited by the change in the Company's ownership (Note 8). Management
has considered these factors in reaching its conclusion as to the
valuation allowance for financial reporting purposes.
7. Equity:
Effective April 30, 1999, upon the incorporation of the Company, 660.37
shares of common stock and 719.63 shares of preferred stock were issued
to the previous three members of the Company. The members' previous
capital balances were reclassified accordingly in the accompanying
financial statements at the limited liability company's historical cost
basis.
The preferred shareholders are entitled to voting rights, and the preferred
shares contain a liquidation preference equal to $500 per share.
11
<PAGE>
IMAGINE DIGITAL PRODUCTIONS 1, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998, AND THE
PERIOD FROM SEPTEMBER 19, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1997, AND THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
8. Subsequent events:
Effective July 1, 1999, the shareholders of the Company sold 100% of their
ownership interests to ImaginOn, Inc. ("ImaginOn"), through ImaginOn's
wholly-owned subsidiary ImaginOn Digital Productions, Inc. The purchase
price consisted of cash of $125,000, a $200,000 payable (due in October
1999), and 305,000 shares of ImaginOn common stock valued at
approximately $667,000. In addition, ImaginOn agreed to issue as
contingent consideration, up to 105,000 shares of ImaginOn common stock
on June 30, 2000, subject to the satisfaction of certain performance
criteria.
During the six months ended June 30, 1999, ImaginOn advanced the Company
$25,000, and other parties advanced 19,500 (unaudited) for operations.
The advances are unsecured, non-interest bearing and due on demand.
12
<PAGE>
IMAGINON INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999, AND
YEAR ENDED DECEMBER 31, 1998
On July 1, 1999, ImaginOn, Inc. (the "Registrant", or the "Company") through
ImaginOn Digital Productions, Inc., a newly formed wholly owned subsidiary,
acquired all the outstanding common and preferred shares of stock of Imagine
Digital Productions 1, Inc. ("IDP") in a transaction accounted for as a
purchase. The accompanying unaudited condensed pro forma consolidated balance
sheet gives effect to the acquisition as if the purchase had been consummated on
June 30, 1999. The accompanying unaudited condensed pro forma consolidated
statements of operations for the six months ended June 30, 1999, and the year
ended December 31, 1998, give effect to the acquisition as if the purchase had
been consummated on January 1, 1999, and January 1, 1998, respectively.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements of IDP (included herein) as
well as those of the Company. The unaudited pro forma consolidated financial
statements do not purport to be indicative of the financial position or results
of operations that actually would have occurred had the acquisition occurred
before July 1, 1999, or to project the Company's financial position or results
of operations to any future period.
1
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
Historical
--------------------------
Imagine
ImaginOn, Digital
Inc. and Productions, Pro forma Pro forma
subsidiaries 1, Inc. adjustments consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash .................................... $ 5,174,218 $ 63 $ (125,000) (A) $ 5,049,281
Accounts receivable ..................... 107,720 2,350 (44,500) (B) 65,570
Inventories ............................. 25,938 8,668 34,606
Prepaid expenses and other .............. 105,957 105,957
----------- ----------- ----------- -----------
Total current assets .................... 5,413,833 11,081 (169,500) 5,255,414
Furniture and equipment, net .................. 131,117 15,097 146,214
Other assets .................................. 141,557 730 142,287
Intangible assets ............................. 1,516,113 1,009,932 (A) 2,526,045
----------- ----------- ----------- -----------
$ 7,202,620 $ 26,908 $ 840,432 $ 8,069,960
=========== =========== =========== ===========
Liabilities and shareholders' equity (deficit):
Current liabilities:
Accounts payable ........................ 242,563 44,500 (44,500) (B) 242,563
Accrued expense ......................... 664,779 664,779
Payable to previous IDP shareholders .... 200,000 (A) 200,000
----------- ----------- ----------- -----------
Total current liabilities ............... 907,342 44,500 155,500 1,107,342
Shareholders' equity (deficit) ................ 6,295,278 (17,592) 684,932 (A) 6,962,618
----------- ----------- ----------- -----------
$ 7,202,620 $ 26,908 $ 840,432 $ 8,069,960
=========== =========== =========== ===========
</TABLE>
2
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Historical
--------------------------
Imagine
ImaginOn, Digital
Inc. and Productions, Pro forma Pro forma
subsidiaries 1, Inc. adjustments consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues .................................. $ 91,062 $ 59,152 $ 150,214
Cost of revenues .......................... 60,705 48,661 109,366
----------- ----------- ----------- -----------
Gross profit ........................ 30,357 10,491 40,848
Operating expenses:
Research and development ............ 611,675 611,675
Selling expense ..................... 1,356,464 31,471 1,387,935
General and administrative expense .. 1,288,445 36,498 $ 168,320 (C) 1,493,263
----------- ----------- ----------- -----------
3,256,584 67,969 168,320 3,492,873
----------- ----------- ----------- -----------
Operating income loss ..................... (3,226,227) (57,478) (168,320) (3,452,025)
----------- ----------- ----------- -----------
Other income (expenses):
Interest income ..................... 6,279 6,279
Interest expense .................... (66,500) (66,500)
Other ............................... 65,379 65,379
----------- ----------- ----------- -----------
5,158 5,158
----------- ----------- ----------- -----------
Net loss .................................. (3,221,069) (57,478) (168,320) (3,446,867)
Amortization of discount on preferred stock (1,082,270) (1,082,270)
----------- ----------- ----------- -----------
Net loss applicable to common shareholders $(4,303,339) $ (57,478) $ (168,320) $(4,529,137)
=========== =========== =========== ===========
Basic and diluted loss per common
share ............................... $ (0.12) $ (0.12)
=========== ============
Weighted average number of
shares outstanding ...................... 36,053,963 305,000 (D) 36,358,963
=========== =========== ===========
</TABLE>
3
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Historical
--------------------------
Imagine
ImaginOn, Digital
Inc. and Productions, Pro forma Pro forma
subsidiaries 1, Inc. adjustments consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ................................. $ 880 $ 127,762 $ 128,642
Cost of revenues ......................... 29 117,877 117,906
----------- ----------- ----------- -----------
Gross profit ....................... 851 9,885 10,736
----------- ----------- ----------- ------------
Operating expenses:
Research and development ........... 906,256 906,256
Selling expense .................... 440,967 93,429 534,396
General and administrative expense . 309,813 72,058 $ 336,645 (C) 718,516
----------- ----------- ----------- -----------
1,657,036 165,487 336,645 2,159,168
----------- ----------- ----------- -----------
Operating loss ........................... (1,656,185) (155,602) (336,645) (2,148,432)
----------- ----------- ----------- -----------
Other income (expenses):
Interest income
Interest expense ................... (77,769) (77,769)
Other .............................. (6,248) 3,000 (3,248)
----------- ----------- ----------- -----------
(84,017) 3,000 (81,017)
----------- ----------- ----------- -----------
Net loss applicable to common shareholders $(1,740,202) $ (152,602) $ (336,645) $(2,229,449)
=========== =========== =========== ===========
Basic and diluted loss per share ......... $ (0.09) $ (0.11)
=========== ===========
Weighted average number of
shares outstanding ..................... 20,206,115 305,000 (D) 20,511,115
=========== =========== ===========
</TABLE>
4
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
PRO FORMA CONSOLIDATED BALANCE SHEET
AND STATEMENTS OF OPERATIONS
AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999, AND FOR THE YEAR ENDED DECEMBER 31, 1998
The purchase method of accounting conforms the accounting policies followed by
the consolidated entities. There were no significant accounting policy
differences or other items which required adjustment in the unaudited pro forma
consolidated financial statements.
On July 1, 1999, ImaginOn, Inc. (the "Registrant", or the "Company") through
ImaginOn Digital Productions, Inc., a newly formed wholly owned subsidiary,
acquired all the outstanding common and preferred shares of Imagine Digital
Productions 1, Inc. ("IDP") in a transaction accounted for as a purchase.
Consideration for the purchase consisted of $125,000 cash, a $200,000 payable
(due in October 1999), and 305,000 shares of the Company's common stock valued
at $667,340. 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.
The pro forma adjustments consist of the following:
Entry (A):
To reflect the July 1, 1999, acquisition of all the outstanding common and
preferred stock of IDP in exchange for consideration valued at $992,340, which
consists of $125,000 cash, a $200,000 payable to the previous IDP shareholders,
and 305,000 shares of the Company's common stock, valued at $667,340. The
consideration of $992,340, plus the elimination of the IDP deficit of $17,592,
results in goodwill of $1,009,932.
Entry (B)
To eliminate intercompany receivables and advances payable.
Entry (C)
To record amortization expense related to the goodwill recognized in the
acquisition transaction. The goodwill is to be amortized on the straight-line
method over three years.
Entry (D)
To record the pro forma weighted average number of common shares outstanding.
5
<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.
Dated: September 14, 1999 By: /s/ David M. Schwartz
-----------------------------------
David M. Schwartz
President, Chief Executive Officer,
Chief Financial Officer
