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 June 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: 40,873,887 common shares, par value
$.01 per share, outstanding at August 12, 1999.
Transitional Small Business Disclosure Format (Check One) YES [ ] NO [X]
Page 1 of 30 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
JUNE 30, 1999
(UNAUDITED)
ASSETS
------
Current assets:
Cash ....................................................... $ 5,174,218
Accounts receivable, less allowance for
doubtful accounts of $6,000 ............................... 107,720
Inventory .................................................. 25,938
Prepaid expenses and other ................................. 105,957
-----------
Total current assets ................................. 5,413,833
-----------
Furniture and equipment, net of accumulated
depreciation of $103,821 ....................................... 131,117
-----------
Other assets, net of accumulated
amortization of $187,837:
Goodwill ................................................... 1,436,945
Trademark and license costs ................................ 79,168
Other ...................................................... 141,557
-----------
1,657,670
-----------
$ 7,202,620
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable ........................................... $ 242,563
Accrued expenses ........................................... 664,779
-----------
Total liabilities (all current) ...................... 907,342
-----------
Shareholders' equity (Note 5):
Preferred stock, Series D/E/F, $0.01 par value;
authorized 5,000,000 shares, issued 4,000 ................ 3,556,951
Common stock, $0.01 par value; authorized
50,000,000 shares; issued 40,873,887 ..................... 408,740
Warrants ................................................... 84,736
Capital in excess of par ................................... 8,547,540
Deficit accumulated during the development stage ........... (6,302,689)
-----------
Total shareholders' equity ........................... 6,295,278
-----------
$ 7,202,620
===========
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 JUNE 30, 1999 AND 1998
Three months ended
June 30,
1999 1998
------------ -------------
Revenues .................................... $ 77,361 $ (19)
Cost of revenues ............................ 49,473
------------ ------------
Gross profit ................................ 27,888 (19)
------------ ------------
Operating expenses:
Research and development ............. 308,787 354,788
Selling expense ...................... 536,776 81,000
General and administrative expense ... 750,994 34,932
------------ ------------
1,596,557 470,720
------------ ------------
Loss from operations ........................ (1,568,669) (470,739)
------------ ------------
Other expenses (income):
Interest expense ..................... 13,322
Interest income ...................... (664)
Other income ......................... (68,237)
------------ ------------
(68,901) 13,322
------------ ------------
Net loss .................................... (1,499,768) (484,061)
Amortization of discount on preferred stock . (248,937)
------------ ------------
Net loss applicable to common shareholders .. $ (1,748,705) $ (484,061)
============ ============
Loss per share .............................. $ (.05) $ (.02)
============ ============
Weighted average number of shares outstanding 36,700,257 20,748,115
============ ============
See notes to consolidated financial statements.
4
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
Six months ended March 29, 1996
June 30, (date of incep-
---------------------------- tion) to June
1999 1998 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues .................................... $ 91,062 $ 26 $ 96,607
Cost of revenues ............................ 60,705 61,769
------------ ------------ ------------
Gross profit ................................ 30,357 26 34,838
------------ ------------ ------------
Operating expenses:
Research and development ............. 611,675 531,483 2,414,965
Selling expense ...................... 1,356,464 267,199 2,006,399
General and administrative expense ... 1,288,445 112,383 1,760,693
------------ ------------ ------------
3,256,584 911,065 6,182,057
------------ ------------ ------------
Loss from operations ........................ (3,226,227) (911,039) (6,147,219)
------------ ------------ ------------
Other expenses (income):
Interest expense ..................... 66,500 19,715 236,190
Interest income ...................... (6,279) (6,589)
Other income ......................... (65,379) (74,131)
------------ ------------ ------------
(5,158) 19,715 155,470
------------ ------------ ------------
Net loss .................................... (3,221,069) (930,754) (6,302,689)
Amortization of discount on preferred stock . (1,082,270) (1,082,270)
------------ ------------ ------------
Net loss applicable to common shareholders .. $ (4,303,339) $ (930,754) $ (7,384,959)
============ ============ ============
Loss per share .............................. $ (.12) $ (.05) $ (.39)
============ ============ ============
Weighted average number of shares outstanding 36,053,963 20,585,369 18,780,386
============ ============ ============
</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 JUNE 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 90,033
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 JUNE 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 JUNE 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
connection 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 2) ......................... 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 88,540 shares of
common stock in exchange for
cashless conversions of 119,060
warrants to purchase common
stock ............................ 88,540 885
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)
Issuance of 4,000 shares of
Series F preferred stock ......... 4,000 3,474,681
Amortization of Series F preferred
stock ............................ 82,270
</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 JUNE 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
connection 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)
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
Issuance of 4,000 shares of
Series F preferred stock ......... 175,319 3,650,000
Amortization of Series F preferred
stock ............................ (82,270)
</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 JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series D, E and F
convertible
Common stock preferred stock
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Redemption of Series D and E
preferred stock .................. (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 six months ended
June 30, 1999
------------ ------------ ------------ ------------
Balances, June 30, 1999 .......... 40,873,887 $ 408,740 4,000 $ 3,556,951
============ ============ ============ ============
</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 JUNE 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>
Redemption of Series D and E
preferred stock .................. (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 six months ended
June 30, 1999 .................... (3,221,069) (3,221,069)
------------ ------------ ------------ ------------
Balances, June 30, 1999 .......... $ 84,736 $ 8,547,540 $ (6,302,689) $ 6,295,278
============ ============ ============ ============
</TABLE>
11
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
( A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
Six months ended March 29, 1996
June 30, (date of incep-
---------------------------- tion) to June
1999 1998 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (3,221,069) $ (930,754) $ (6,302,689)
------------ ------------ ------------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization .......................... 172,544 10,259 197,879
Bad debt expense ....................................... 6,000 6,000
Interest expense for issuance of notes payable ......... 77,942
Expense incurred upon issuance of common stock ......... 677,821 62,500 760,342
Changes in operating assets and liabilities, net
of effects of business acquisition
Accounts receivable .................................. (107,480) (107,480)
Inventories .......................................... (25,938) (25,938)
Prepaid expenses and other ........................... (84,322) (143) (101,880)
Accounts payable and accrued expenses ................ 448,360 97,307 829,592
------------ ------------ ------------
Total adjustments ...................................... 1,086,985 169,923 1,636,457
------------ ------------ ------------
Net cash used in operating activities ......................... (2,134,084) (760,831) (4,666,232)
------------ ------------ ------------
Cash flows from investing activities:
Cash paid on business acquisition, net of
cash acquired .......................................... (212,548) (212,548)
Deferred merger costs .................................... (125,000) (125,000)
Capital expenditures ..................................... (33,817) (6,336) (70,963)
------------ ------------ ------------
Net cash used in investing activities ......................... (371,365) (6,336) (408,511)
------------ ------------ ------------
Cash flows from financing activities:
Bank overdraft ........................................... (1,587)
Proceeds from notes payable and advances ................. 3,099,550 466,480 4,627,304
Payments on notes payable ................................ (184,980) (153,429)
Redemption of preferred stock and warrants ............... (3,095,846) (3,095,846)
Proceeds from issuance of common stock,
warrants, and other, net ............................... 7,665,089 489,530 8,870,932
------------ ------------ ------------
Net cash provided by financing activities ..................... 7,668,793 769,443 10,248,961
------------ ------------ ------------
</TABLE>
(Continued)
12
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 AND
CUMULATIVE PERIOD FROM MARCH 29, 1996 (DATE OF
INCEPTION) TO JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
period from
Six months ended March 29, 1996
June 30, (date of incep-
---------------------------- tion) to June
1999 1998 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net increase in cash .......................................... 5,163,344 2,276 5,174,218
Cash, beginning ............................................... 10,874
------------ ------------ ------------
Cash, ending .................................................. $ 5,174,218 $ 2,276 $ 5,174,218
============ ============ ============
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
============ ============ ============
Issuance of warrants to purchase common stock ............ $ $ 313,353 $ 397,909
============ ============ ============
Exercise of common stock warrants in exchange
for note payable ........................................ $ $ $ 8,556
============ ============ ============
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 ................. $ 4,699,121 $ $ 4,699,121
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 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 six months
ended June 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 subsidiaries, ImaginOn Acquisition Corp., IMON,
and Network Specialists, Inc. (Note 3). 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.
14
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
3. Business acquisition:
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. The acquisition was accounted for as a purchase,
and the results of operations of INOW are included in the Company's
consolidated statement of operations from the date of acquisition. The
total purchase price was allocated to the assets and liabilities acquired
based on their estimated fair values, including goodwill of approximately
$1,600,000 which is being amortized by the use of the straight-line
method over three years.
The following unaudited pro forma financial information for the six months
ended June 31, 1999 and 1998 give effect to the acquisition as if it had
occurred effective at the beginning of each respective period.
Period ended June 30,
-------------------------
1999 1998
----------- -----------
Revenue $ 157,108 $ 210,026
Net loss $(3,329,563) $(1,618,768)
Net loss applicable to common shareholders $(4,411,833) $(1,618,768)
Loss per share $ (.12) $ (.08)
Shares used in per share calculation 36,148,770 20,845,369
The unaudited pro forma financial information above does not purport to
represent the results which would actually have been obtained if the
acquisition had been in effect during the period covered or any future
results which may in fact be realized.
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.
15
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
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 D/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.
Issuance of common stock subsequent to the January 20, 1999 merger:
In the period ended June 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 June 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.
16
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
5. Shareholders' equity (continued):
Issuance of common stock subsequent to the January 20, 1999 merger
(continued):
In March 1999, the Company also issued 260,000 shares to the former
shareholders of Network Specialists, Inc. in connection with the
acquisition of Network Specialists, Inc.
In March and April 1999, the Company also 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 also 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.
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.
17
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
5. Shareholders' equity (continued):
Series D/E preferred stock (continued):
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 June 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.
Series F convertible preferred stock:
In May 1999 the Company issued 4,000 shares of 12% Series F ("Series F")
convertible preferred stock 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 underlying 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 June 30, 1999, $82,270 has been
amortized to preferred stock for the period beginning from the date of
issuance.
18
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
6. Subsequent event:
Effective July 1, 1999, the Company, through ImaginOn Digital Productions,
Inc., ("IDP") a newly formed, wholly-owned subsidiary of the Company,
completed a merger with Imagine Digital Productions I, Inc. ("Imagine"),
a Colorado corporation, which will be account for as a purchase. Imagine
is a multimedia production studio and publishing company located in
Aspen, Colorado. Imagine's primary business is the development of
proprietary CD-ROM products and Internet multimedia Web sites on a
contract basis for resort area advertisers.
In the merger, holders of Imagine's common stock received $325,000 and
400,000 shares of the Company's common stock. Holder's of Imagine's
common stock may receive up to 105,000 additional shares, the issuance of
which is dependent upon Imagine meeting certain financial performance
objectives. The merger consideration was determined as a result of arms'
length negotiation between the Company and Imagine. Through June 30,
1999, the Company incurred approximately $125,000 of deferred merger
costs, recorded as other assets.
19
<PAGE>
ITEM TWO
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
represent ImaginOn, Inc.'s 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. 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, volatility of stock price and any other factors discussed in this and
other ImaginOn Inc. filings with the Securities and Exchange Commission.
OVERVIEW AND RECENT DEVELOPMENTS
On January 20, 1999 ImaginOn, Inc., formerly known as California Pro Sports,
Inc. through ImaginOn Acquisition Corp., a wholly owned subsidiary of ImaginOn,
Inc., completed a merger with ImaginOn.com of San Carlos, California. Subsequent
to the merger, ImaginOn, Inc. has no sporting goods business and has not
retained any personnel or directors from those operations. ImaginOn, Inc. is a
publicly held company under the NASDAQ symbol IMON. As of the filing date of
this report, August 15, 1999, ImaginOn, Inc. has three operating units.
ImaginOn.com. was formed in March 1996, and designs, manufactures and sells: (I)
consumer software products for the CD/DVD-ROM market and (ii) a research tool
for Internet users. ImaginOn's proprietary technology, called "Transformational
Database Processing and Playback" ("TDPP"), enables the creation of new business
and consumer products that provide user-friendly and entertaining access to
multimedia databases. ImaginOn, Inc.'s founders were granted a U.S. patent on
May 18, 1999 for their "TDPP" technology which they have assigned to the
Company. The Company has brought its first three product lines, WebZinger,
WorldCities 2000, and sellONstream, to market. These products are trademarks and
are protected under two U. S. Patents issued to the founders of ImaginOn, Inc.,
which they have assigned to the company. Marketing and advertising began its
ramp up in the second quarter, with the first WebZinger ad for schools placed
during March in the Educational Technology Institute (ETI) Spring 1999 Exploria
catalog. The first ad for WorldCities 2000 was placed during May 1999 in Sunset
Magazine. And the first sellONstream ad was placed on July 12, 1999 in AdWeek,
Marketing Week and MediaWeek Magazines (in the Marketing With Video, DVD &
CD-ROM Sourcebook). As recently as last November, ImaginOn, Inc. employed only
five full time staff, and has now grown to a team of 46 people: engineers,
managers, software developers, administrators, consultants, and contractors.
This includes staff recently hired from INOW, the Internet service provider --
and effective on July 1, 1999, staff hired from another acquisition -- Imagine
Digital Productions, Inc. (IDP) in Aspen, Colorado, a privately held designer,
producer, and publisher of interactive CD-ROMs and Internet Web Sites.
20
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
On March 8, 1999, Network Specialists, Inc. ("Network") was merged with and into
INOW, a subsidiary of ImaginOn, Inc. INOW is an Internet Service Provider that
offers PPP, both dial up dedicated; ISDN Dial-up; ISDN for LAN; Frame Relay;
Full and Fractional Leased T1. Additional services include World Wide Web server
co-locations and space rental, secure transaction servers, World Wide Web page
authoring, domain name service, networking hardware sales, and consulting
services such as needs/cost analysis. INOW currently covers all of the Bay Area
with plans to serve select metropolitan cities within the United States. INOW's
prime target markets are the thousands of home offices and small and
medium-sized businesses in Northern California. INOW offers DSL, or Digital
Subscriber Line, that describes a group of technologies that deliver high-speed
connections over existing telephone copper wiring. The two-wire copper phone
line from a telephone company's central office (CO) to a customer's premise is
often referred to as "the last mile". This "last mile" of copper wiring has long
been the bottleneck to providing fast data services to homes and businesses. DSL
utilizes a new line-coding scheme that allows very high-speed, affordable
connections over this last mile for the first time. DSL connections are "always
on" or "always connected". This means that users don't need to dial up each time
they want a connection to the network. Another benefit of having a "dedicated
connection" is the fact that busy signals and dropped connections will never
again be an issue with the Internet service. With INOW's SDSL (Symmetric DSL)
Service, a corporate LAN will have bandwidth of up to 1.530 Mbps to the Internet
for both uploads and downloads. This is not the case with ADSL (Asymmetric DSL),
which is limited to 384 kbps for uploads. At the click of an icon, INOW DSL
Service gives a dedicated connection to destination without having to wait for
the call to be set up or get annoying busy signals. The main difference between
ADSL vs. SDSL is that Asymmetric DSL upload and download speeds are different.
You can download much faster than you can upload. While Symmetric DSL offers the
same speed in both directions.
As of July 1, 1999, ImaginOn, Inc. acquired Imagine Digital Productions, Inc.
("IDP"). IDP was founded in 1997 and is a multimedia production studio and
publishing company. Its prime business is the development of proprietary CD-ROM
products and Internet multimedia Web sites on a contract basis for resort area
advertisers. IDP distinguishes itself from competitors in the field by focusing
on high quality user interface design. This includes the use of the latest
Internet technologies, including virtual panoramas, streaming multimedia, and
real-time databases. IDP's acquisition was completed as a tax-free merger, in
which ImaginOn paid IDP $325,000 in cash and up to 400,000 shares of
unregistered common stock, depending upon IDP's performance during the first 12
months following the merger. The completion of this merger significantly
extended the reach of ImaginOn's core technology. IDP's software can be joined
with ImaginOn's patented Transformational Database Processing & Playback
technology, extending the business into advertiser supported destination resort
guides, enhancing the WorldCities 2000 series of real-time interactive travel
planners. It will also enable ImaginOn to feature resort destination sites
through expanded Internet services. IDP's Destination Aspen CD-ROM has been
renamed Resorts 2000: Aspen.
WorldCities 2000 New York was released on May 31, 1999. The filming of the
ImaginOn's third and fourth interactive titles, "WorldCities 2000 Paris" and
"WorldCities 2000 London" has been completed and will expect to be launched in
Fall 1999.
During this second quarter, ImaginOn, Inc. announced the redemption of publicly
traded warrants. Out of the 1,870,000 public warrants outstanding, there were
1,784,900 of its publicly traded common stock purchase warrants that were
exercised at $1.50 per warrant after ImaginOn served warrant holders with a
notice of redemption. As a result of these exercises, ImaginOn received proceeds
of approximately $2,677,300. The shares of common stock underlying the warrants
were included on a registration statementfiled by
21
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
ImaginOn and declared effective by the Securities and Exchange Commission. At
the close of the redemption period, ImaginOn automatically redeemed for $0.05
each, all remaining outstanding public warrants. All warrants not exercised by
the warrant holders from and after May 27, 1999 are of no further force and
effect, and represent only an interest to receive the automatic redemption
price. The monies derived from the exercised warrants will be used to help fund
the beginning of ImaginOn's first national consumer advertising program for the
WebZinger product line. The advertising launch begins in late August. In
addition, the monies will be used to support funding of advertising and product
marketing for the WorldCities 2000 product line and sellONstream.
As of June 9, 1999, Advanstar Communications agreed to license ImaginOn's
sellONstream technology to create an interactive CD-ROM that features video
clips and/or four color still advertisements that are directly linked to each
advertiser's web site. The CD, which will include ImaginOn's built-in browser,
is intended to be inserted into issues of Advanstar's Landscape Management
magazine. Advanstar Communications is a worldwide business information company
that publishes 110 business magazines and directories and produces 107
exhibitions and conferences throughout the world. They provide direct marketing,
database, and reference products and services, specializing in the retail,
hospitality, fashion, healthcare, pharmaceutical, science, information
technology, communications, manufacturing and processing markets in the United
States and abroad. Other sellONstream video e-commerce technology licensees with
ImaginOn, Inc. are Trashy Lingerie, Inc. and Times Mirror Publishing.
ImaginOn is offering sellONstream video e-commerce solutions to businesses for
increasing sales on the Internet. The sellONstream CDS combine broadcast quality
video presentations of products and fully integrated web site linkage within a
branded window. Any time viewers want to buy what they see in the video, or get
more product information, a mouse click brings up the appropriate web page. The
"Trashy Lingerie CD" is one example, enabling viewers to purchase any outfit
shown just by clicking the mouse once to go shopping online.
Another sellONstream technology licensee is Times Mirror Publishing. The
agreement with GOLF MAGAZINE and Senior Golfer magazine marks the first time
ImaginOn's sellONstream e-commerce technology will be used in the publishing
field. ImaginOn will work with GOLF MAGAZINE and Senior Golfer Magazine to
create specially themed CD-ROMs that contain television quality video footage of
leading golf destinations, golf resorts and golf schools, with each video linked
to each advertiser's Web site. As planned, users will simply insert the CD-ROM
into their personal computer, sit back and watch the show and, at any time in
the course of the playback, click on to a Web site. Once they do so, they will
be connected directly to the advertiser's site, where they can obtain more
information, plan a golf vacation or meeting, or enroll in a golf school. The
exclusive GOLF MAGAZINE and Senior Golf magazine branded CD-ROMs, which will be
promoted inside the pages of each magazine with special ads, will be made
available free to readers who pay only shipping and handling.
22
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
ImaginOn's technology is useful across a wide spectrum of business and consumer
markets, including electronic commerce, in-service training, research, and
education, as well as digital interactive TV and home entertainment. All of
ImaginOn's software and services are now being integrated into a unique, high-
bandwidth, high value added Internet portal on WWW.IMON.COM, designed for
business, institutional, and individual power users. IMON.com will be launched
on October 26, 1999 at the ISPCON Conference in San Jose, California. It will
showcase the high bandwidth capabilities of ImaginOn's proprietary technology in
a wide variety of user applications, including advanced on-line research,
interactive movies and gameplay, interactive travel planning, and video
e-commerce. This high bandwidth, high value added Internet portal will be
enabled by ImaginOn's patented Transformational Database Processing & Playback
technology. The goal of the new portal is to make the Internet easier and more
productive for small businesses, educational institutions, and individuals. This
new portal will become an integral part of incorporating ImaginOn's WebZinger
Research Engine, WorldCities 2000 Series of interactive travel planners,
sellONstream video e- commerce solutions and Resorts 2000 virtual destinations.
ImaginOn anticipates that revenues will be generated by ISP services, license
agreements, memberships, advertising and commissions stemming from video
e-commerce sales. Memberships in the IMON portal community will be made
available free of charge to businesses, schools, and individuals who connect to
the Internet through ImaginOn's wholly-owned subsidiary, INOW Internet services.
A feature that is likely to drive portal memberships in the short-run is the
debut of the on-line version of the WebZinger Research Engine, which will
feature support for Real Audio and Video, MP3 and quicker, more efficient audio
and video retrieval.
ImaginOn's core technology, "Transformational Database Processing and Playback"
(TDPP), has been granted two U.S. Patents. The embodiment of TDPP is a set of
twelve software tools. The tools are Search Driver, Network Analyzer, Network,
Walker, Filter, Formatter, Network Builder, Network Complier, Live Linker, Smart
Buffer, Presenter, Browser, and User Profiler. Each tool can be used as a
stand-alone application when needed, plus each tool is designed to communicate
and inter-operate with every other tool in the set. In the hands of webmasters
and programmers, these tools are used to create new applications and content.
New products created with ImaginOn tools are characterized by seamless real-time
access to video, audio, graphics, text, HTML and 3D objects from multiple remote
or local databases. With its intellectual property secured by patents, ImaginOn
will license its tool set to businesses for building e-commerce, data mining,
interactive entertainment and training applications. This technology is
currently incorporated in its three major desktop-based product lines: the
WebZinger Research Engine family, WorldCities 2000 Series of CD/Web interactive
travel planners, and sellONstream e-commerce solutions. ImaginOn's technology
will be running on the server side of the Internet through INOW Internet
services.
COMPETITION
In the Internet Service Provider industry segment, ImaginOn competes with
numerous companies, large and small, that offer services. ImaginOn's competitive
advantage in this area is derived from its relationship to IMON.com. In the
Internet portal industry segment, IMON.com will compete with many larger, more
well known portals. IMON.com's advantages will be based on its unique
proprietary technology that implements interactive video and media-intensive
data mining.
In the high bandwidth interactive streaming video authoring and playback
software business, ImaginOn has no direct competitor, yet. Several companies
offer components that can be used to implement portions of a networked system,
but no other company offers a complete turnkey solution like ImaginOn's. Among
the competitors that provide parts that can be used to build a similar, lower
performance system are RealNetworks, Oracle and Macromedia.
23
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Oracle is a relational database management systems company whose products work
well within any single operating system, operating on data collected by some
other system or process. Oracle's SQL database query system allows diverse data
display systems to access formatted data. Oracle's position is that of
"middleware"; processing data from one place and making it available to
someplace else. This arrangement suffices for conventional transactional and
customer information systems. However, when the data is of many types, spanning
multiple operating systems in diverse locations, timely response is not
guaranteed. Furthermore, when the requested data content is not in the system at
all, Oracle must request another system to search, locate and fetch the data.
On the display side, the fundamental design of Oracle's software dictates that
the playback of data content be handled by a separate process that usually runs
in a separate computer or playback device. This provides generality at the
expense of performance. For media-rich sets of data such as digital video, audio
and Web pages, the separation of processing systems from display systems results
in delays and difficulty in providing real-time playback. The intermittent stop
and start look of streaming video is partially caused by these delays.
RealNetworks Realvideo and Microsoft's Mediaplayer are the main streaming-only
video players in the market today. Neither systems' authoring tools or playback
mechanism allows for real-time branching, or integrated Web browser data. To get
from one video clip to the next, these systems stop. To show Web information,
they require a separate browser window. ImaginOn's authoring and playback
systems remove both of these limitations, enabling true TV image quality and
videogame-like branching, with live Web pages inside the player.
ImaginOn's software tightly couples data acquisition, processing and display
into a single solution, which can be distributed among processors in a network
or be entirely located in a single PC. This architecture is the best guarantee
that data will always be presented in real time. For applications such as
broadband Internet, interactive TV, and hybrid CDS or DVDs, this is ImaginOn's
main competitive advantage.
Macromedia is another company that provides tools that can solve part of
real-time multimedia network delivery problem. Their "Director" software can
manage mixed data format objects within the context of creating a multimedia
application. Macromedia dominates the market for multimedia authoring. Director,
however, is not a general-purpose system, does not support real-time playback,
and is based on a proprietary non-standard programming language called "Lingo".
ImaginOn's competitive advantage with respect to Macromedia in Macromedia's own
market is ImaginOn software's customizability based on a programming-free
assemblage of software tools, and its real-time playback capability. The steep
and lengthy learning curve associated with Director's Lingo programming language
is a major barrier to its widespread use for corporate training products.
Within the Internet "search engine" marketplace, there are at least two dozen
products aimed at Web users for the purpose of searching the Internet. All of
these search engines are primarily list generators; leaving the actual data
evaluation and retrieval to the user. The few search engines that do offer media
retrieval do not provide much control or formatting of the output. Positioned as
a "Research Engine", WebZinger actually does the heavy lifting of finding and
retrieving rich media assets from the Web.
24
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
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 Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net Revenues $ 77,361 $ (19) $ 91,062 $ 26
Gross Profit 27,888 (19) 30,357 26
Research and Development 308,787 354,788 611,675 531,483
Sales and Marketing 536,776 81,000 1,356,464 267,199
General Administrative 750,994 34,932 1,288,445 112,383
Net Loss (1,499,768) (484,061) (3,221,069) (930,754)
"Consolidated" three and six months ended June 30, 1999 compared to June 30,
1998.
NET REVENUES
Consolidated net revenues for the three and six months ended June 30, 1999 were
increased by $77,380 and $91,036 respectively. Approximately 93% of this revenue
was from INOW, the Internet service provider. For the three and six months ended
June 30, 1998, the Company was still in the developmental stage and thus
revenues were nearly nil.
GROSS PROFIT
Gross profit for the three and six months ended June 30, 1999 and 1998 were
increased from $0 in 1998 to $27,888 in 1999 and from $26 to $30,357,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and Development for the three months ended June 30, 1999 decreased by
$46,001 compared to June 30, 1998. Nearly 71% of the costs in the three months
ended in June 30, 1998 were for the development of WorldCities 2000 San
Francisco and New York. Nearly 50% of the costs in the three months ended in
June 30, 1999 were for WorldCities 2000 Paris and London. An additional 36% of
the costs for the World 2000 Paris and London projects were paid in the first
quarter of 1999. For the six months ended June 30, 1999, costs increased by
$80,192 compared to the six months ended June 30, 1998. This increase mainly
pertains to new personnel in the software and video production departments.
25
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
SALES AND MARKETING EXPENSES
For the three months ended June 30, 1999, expenses increased by $455,766
compared to the three months ended June 30, 1998. Nearly 52% of this increase is
attributed to advertising and marketing of WorldCities 2000, WebZinger, and
sellONstream products. Another 35% of this increase is from employee payroll and
outside sales and consulting fees. The remaining 4% is for general travel and
office related expenses. In addition, INOW sales consulting and marketing
comprised 9% of this $455,766 increase. For the six months ended June 30, 1999,
expenses increased by $1,089,265 compared to the six months ended June 30, 1998.
This increase is due to expenses pertaining to the same areas as mentioned above
in the 2nd quarter 1999. Other increases for the cumulative six months were
$454,688 that was a one time expense related to a stock signing bonus given to a
newly hired employee, as well as an increase of $155,625 for additional staff of
ImaginOn, $45,000 for additional consulting, an increase of $11,953 for public
relations due to becoming a public company and an increase by 11,223 due to five
trade shows and conferences attended.
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended June 30, 1999, expenses increased by $716,062
compared to the three months ended June 30, 1998. Nearly 8% of this increase is
from INOW. About 56 % of this increase is from legal and accounting and audit
services mainly pertaining to acquisitions. About 19% of this increase is from
additional personnel hired. The remaining 17% is due to the Company's growth
that included general expenses such as office supplies, furniture, computer
equipment, insurance, travel, communications and rent. For the six months ended
June 30, 1999, expenses increased by $1,176,062 compared to the six months ended
June 30, 1998. This is due to primarily to the same areas mentioned above for
the cumulative six months.
OTHER EXPENSES (INCOME)
For the three months ended June 30, 1999, ImaginOn, Inc. had other income of
$68,901 compared to other expenses of 13,322 for the three months ended June 30,
1998. The charge was attributable to reduction of interest expense of $13,332 as
the Company no longer had the notes payable that existed in the three month
period ended June 30, 1998. Additionally, the Company recognized interest income
from cash on hand of $28,018 and royalty and other income of $25,874.
For the six months ended June 30, 1999, ImaginOn, Inc. had other income of
$5,158 compared to other expenses of $19,715 for the six months ended June 30,
1998. In the 1999 period, ImaginOn, Inc. had $66,500 of interest expense related
to the Company's convertible preferred stock, which was offset by $42,960 of
interest income and $28,698 of royalty and other income.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1999 ImaginOn, Inc. had working capital of approximately $4,500,000
compared to approximately $800,000 at December 31, 1998. The increase in working
capital is attributed to the exercise of public and privately held warrants
which raised approximately $3,879,000 at exercise prices from $.05 to $2.10, and
the sale of 4,000 shares of Series F, 12% convertible preferred stock at $1,000
per share for net proceeds of approximately $3,650,000. Approximately $3,042,000
of the proceeds were utilized to redeem the remaining 2,510 shares of Series D &
E Preferred Stock as well as support the Company's operating expenses.
26
<PAGE>
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
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, ImaginOn's board of directors
and management have gone through a series of Year 2000 questionnaires and
assessments that would impact the full operation of the company. These
questionnaires and assessments 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. 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.
27
<PAGE>
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:
From April 8, 1999, through June 24, 1999 the Registrant issued 21,200
shares of its common stock to four employees. The Registrant relied on
the exemptions from registration provided by Sections 4(2) and/or 4(6).
From April 12, 1999 through June 19, 1999 the Registrant issued
2,543,915 shares of its common stock for the exercise of warrants and
options at exercise prices between $.05 and $2.10.
On April 19, 1999 the Registrant issued 165,410 shares of its common
stock in exchange for 490 shares of its Series E preferred stock. The
Company relied on the exemptions from registration provided by Sections
4(2) and or 4(6).
On April 23, 1999 the Registrant issued 11,855 shares of its common
stock in exchange for the cashless exercise of 18,440 warrants. The
Registrant relied on the exemptions from registration provided by
Sections 4(2) and/or 4(6).
28
<PAGE>
Item 6 Exhibits and Reports on Form 8-K
During the three month period covered by this report the Registrant
filed the following current reports on Form 8-K:
Item numbers
------------
Form 8-K/A April 5, 1999 2,7
Form 8-K/A May 25, 1999
Form 8-K/A June 28, 1999
Form 8-K July 8, 1999
29
<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: August 13, 1999 By: /s/ David M. Schwartz
-----------------------------------
David M. Schwartz
President, Chief Executive Officer,
Chief Financial Officer
Dated: August 13, 1999 By: /s/ Thompson Chan
-----------------------------------
Thompson Chan
Chief Accounting Officer
30
<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 June 30, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,174,218
<SECURITIES> 0
<RECEIVABLES> 107,720
<ALLOWANCES> (6,000)
<INVENTORY> 25,938
<CURRENT-ASSETS> 5,413,833
<PP&E> 131,117
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,202,620
<CURRENT-LIABILITIES> 907,342
<BONDS> 0
0
3,556,951
<COMMON> 408,740
<OTHER-SE> 2,329,587
<TOTAL-LIABILITY-AND-EQUITY> 7,202,620
<SALES> 91,062
<TOTAL-REVENUES> 91,062
<CGS> 60,705
<TOTAL-COSTS> 3,256,584
<OTHER-EXPENSES> (5,158)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,500
<INCOME-PRETAX> (3,221,069)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,221,069)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,221,069)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
