SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A-2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 8, 1999
IMAGINON, INC.
(Exact name of registrant as specified in its charter)
Delaware 000-25114 84-1217733
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1313 Laurel Street, Suite 1
San Carlos, CA 94070
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 596-9300
<PAGE>
This Current Report on Form 8-K/A amends and supplements the Current Report on
Form 8-K/A filed by Imaginon, Inc. (the "Company" or "Imaginon") on May 25, 1999
(the "Initial Form 8-K") to include audited 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.
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 March 23, 1999.
Attached hereto as Exhibit 99.1 are the audited financial
statements for the fiscal year ended December 31, 1998 of
Network Specialists, Inc.
(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
disclosure contained in the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on March
23, 1999. Attached hereto as Exhibit 99.2 are the unaudited
pro forma condensed combined statements of operations for the
fiscal year ended December 31, 1998 and the three months ended
March 31, 1999, reflecting the acquisition of Network
Specialists, Inc. and including the notes to the unaudited pro
forma statements of operations.
(c) Exhibits
<PAGE>
Exhibit
No. Description
------- -----------
2.1(1) Merger Agreement and Plan of Reorganization dated as of
February 9, 1999.
2.2(1) First Amendment to Merger Agreement and Plan of Reorganization
dated as of March 8, 1999.
2.3(1) Side Agreement to Merger Agreement dated March 8, 1999.
99.1 Audited Financial Statements of Network Specialists, Inc.for
the fiscal year ended December 31, 1998.
99.2 Unaudited pro forma condensed combined statements of
operations for the fiscal year ended December 31, 1998, and
the three months ended March 31, 1999, reflecting the
acquisition of Network Specialists, Inc. and including the
notes to the unaudited condensed combined statements of
operations.
- ------------------------
(1) Previously filed with the Form 8-K filed by the Company on March 23, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned hereunto duly authorized.
IMAGINON, INC.
Dated: June 25, 1999 By: /s/ David M. Schwartz
----------------------------------------
David M. Schwartz
President
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
------- -----------
2.1(1) Merger Agreement and Plan of Reorganization dated as of
February 9, 1999.
2.2(1) First Amendment to Merger Agreement and Plan of Reorganization
dated as of March 8, 1999.
2.3(1) Side Agreement to Merger Agreement dated March 8, 1999.
99.1 Audited Financial Statements of Network Specialists, Inc. for
the fiscal year ended December 31, 1998.
99.2 Unaudited pro forma condensed combined statements of
operations for the fiscal year ended December 31, 1998, and
the three months ended March 31, 1999, reflecting the
acquisition of Network Specialists, Inc. and including the
notes to the unaudited condensed combined statements of
operations.
- ------------------------
(1) Previously filed with the Form 8-K filed by the Company on March 23, 1999.
INDEPENDENT AUDITORS' REPORT
Board of Directors
Network Specialists, Inc.
We have audited the accompanying balance sheet of Network Specialists, Inc. as
of December 31, 1998, and the related statements of operations, shareholders'
equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable bases for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Network Specialists, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
June 16, 1999
<PAGE>
Network Specialists, Inc.
Balance Sheet
DECEMBER 31,
1998
ASSETS
Current assets:
Cash ...................................................... $ 7,990
Accounts receivable, net .................................. 21,757
Advance to shareholders ................................... 3,903
Other current assets ...................................... 2,227
-----------
Total current assets .................................. 35,877
Fixed assets, net ............................................. 90,918
-----------
Total assets .......................................... $ 126,795
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Related party borrowings .................................. $ 8,896
Accounts payable .......................................... 42,804
Accrued liabilities ....................................... 18,124
Taxes payable ............................................. 12,898
-----------
Total current liabilities ............................. 82,722
-----------
Shareholders' equity:
Common Stock: $0.01 par value; 1,000,000
shares authorized; 1,000,000 shares
issued and outstanding at December 31, 1998 ............. 10,000
Retained earnings ......................................... 34,073
-----------
Total shareholders' equity ............................ 44,073
-----------
Total liabilities and shareholders' equity ......... $ 126,795
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Network Specialists, Inc.
Statement of Operations
YEAR ENDED
DECEMBER 31
1998
Product Sales ................................................. $ 413,482
Cost of sales ................................................. 168,260
-----------
Gross profit .................................................. 245,222
-----------
OPERATING EXPENSES:
Sales and marketing ....................................... 9,041
Research and development .................................. 26,062
General and administrative ................................ 145,936
-----------
Total operating expenses .............................. 181,039
-----------
Income from operations ........................................ 64,183
-----------
Interest expense .............................................. (541)
Other income, net ............................................. 50
-----------
Total other expense ................................... (491)
Income before taxes ........................................... 63,692
Income tax .................................................... 12,898
-----------
Net income .................................................... $ 50,794
===========
The accompanying notes are an integral part of these financial statement
<PAGE>
Network Specialists, Inc.
Statement of Shareholders' Equity
(Accumulated
Deficit) Total
Common Stock Retained Shareholders'
Shares Amount Earnings Equity
--------- --------- --------- ---------
Balances, January 1, 1998 1,000,000 10,000 (16,721) (6,721)
Net Income -- -- 50,794 50,794
--------- --------- --------- ---------
Balances, December 31, 1998 1,000,000 $ 10,000 $ 34,073 $ 44,073
========= ========= ========= =========
The accompanying notes are an integral part of these financial statement
<PAGE>
Network Specialists, Inc.
Statement of Cash Flow
YEAR ENDED
DECEMBER 31
1998
Cash flows from operating activities:
Net income ................................................ $ 50,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .......................................... 25,814
Changes in current assets and liabilities:
Accounts receivable ................................ (23,930)
Accounts payable ................................... (6,350)
Accrued liabilities ................................ 5,746
Taxes payable ...................................... 12,898
-----------
Net cash provided by operating activities ........ 64,972
-----------
Cash flows from investing activities:
Purchase of property and equipment ........................ (26,545)
-----------
Net cash used in investing activities ............ (26,545)
-----------
Cash flows from financing activities:
Repayment of related party borrowings, net................. (33,911)
-----------
Net cash used in financing activities ............ (33,911)
-----------
Net increase in cash .......................................... 4,516
Cash at beginning of year ..................................... 3,474
-----------
Cash at end of year ........................................... $ 7,990
===========
Supplemental disclosures:
Interest paid ............................................. $ 433
===========
Taxes paid ................................................ $ 2,775
===========
The accompanying notes are an integral part of these financial statements
<PAGE>
1. THE COMPANY
Network Specialists, Inc. (the "Company"), was incorporated in the
state of Nevada on December 2, 1993, and commenced operations in 1994. The
Company primarily provides high speed Internet connection services to commercial
and private users in the San Francisco Bay area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's revenues are principally derived from monthly Internet
connection service revenues. Standard rates currently range from approximately
$19.95 per month for private users to $35 per month for commercial users,
additional fees are charged for more customized service arrangements. To date,
service commitments are on a month-to-month basis. Revenues are recognized
ratably over the period in which the services are used, provided the
corresponding receivable is deemed collectable. Customers are billed a service
charge of 1.5% per month for any outstanding balance in excess of 30 days. At
December 31, 1998, the allowance for doubtful accounts is $0.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable. The
Company's accounts receivable are derived from revenue earned from customers
located in the U.S. The Company performs ongoing credit evaluations of its
customers' financial condition and does not require collateral. The Company
maintains an allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable. No one customer accounted for more than
10% of the revenues during 1998.
FIXED ASSETS
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally 3
to 5 years, or the lease term of the respective assets.
<PAGE>
RESEARCH AND DEVELOPMENT EXPENDITURES
Costs related to research, design and development of services are
charged to research and development expense as incurred. Service development
costs are capitalized beginning when a service's technological feasibility has
been established and ending when a service is available for general release to
customers. To date, completing a working model of the Company's services and
general release have substantially coincided. As a result, the Company has not
capitalized any service development costs since such costs have not been
significant.
ADVERTISING
Costs related to advertising and promotion of products is charged to
sales and marketing expense as incurred. Advertising and promotion costs were
$9,041 for the year ended December 31, 1998.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts expected to
be realized.
3. BALANCE SHEET COMPONENTS
DECEMBER 31
1998
FIXED ASSETS:
Computer equipment ........................................ $ 118,287
Computer software ......................................... 2,731
Furniture and fixtures .................................... 19,502
-----------
140,520
Less: Accumulated depreciation ........................... (49,602)
-----------
$ 90,918
===========
ACCRUED LIABILITIES:
Payroll and related expenses .............................. $ 17,961
Other ..................................................... 163
-----------
$ 18,124
===========
4. RELATED PARTY TRANSACTIONS
At December 31, 1998, the Company owed $8,896 to a related party. The
loan is non-interest bearing and is due on demand. This loan was paid in full
subsequent to year end.
At December 31, 1998, the Company had an advance to one of its
shareholders. The advance is non-interest bearing and is due on demand.
<PAGE>
5. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED
DECEMBER 31
1998
CURRENT:
U.S. federal .............................................. $ 9,014
State and local ........................................... 3,884
-----------
12,898
-----------
DEFERRED
U.S. federal .............................................. $ 12,587
State ..................................................... 2,425
Valuation allowance ....................................... (15,012)
-----------
-
-----------
Taxes on earnings ............................................. $ 12,898
===========
Deferred tax assets and liabilities consist of the following:
DECEMBER 31
1998
DEFERRED TAX ASSETS:
Accrual to cash adjustments ............................... $ 16,111
State taxes ............................................... 1,320
Valuation allowance ....................................... (17,431)
-----------
$ -
===========
DEFERRED TAX LIABILITIES:
Accelerated depreciation .................................. $ 5,112
Valuation allowance ....................................... (5,112)
-----------
$ -
===========
<PAGE>
The effective tax rate on earnings from operations differs from the U.S. federal
statutory tax rate as a result of the following:
1998
Federal statutory income tax rate ............................. 34.0 %
State and local taxes, net of federal tax benefit ............. 4.4 %
Permanent difference .......................................... 1.3 %
Change in valuation allowance ................................. (23.0)%
Other ......................................................... 3.1 %
-----------
Effective tax rate ............................................ 19.8 %
-----------
The Company has established a valuation allowance against its deferred
tax assets due to the uncertainty surrounding the realization of such assets.
Management evaluates on a periodic basis the recoverability of the deferred tax
assets and the level of the valuation allowance. At such time as it is
determined that it is more likely than not that the deferred tax asset is
realizable the valuation allowances will be reduced.
6. SUBSEQUENT EVENTS
On January 31, 1999, the Board of Directors approved the issuance of
975,000 shares of common stock to the Company's two existing shareholders. The
Board also revised the par value of the Company's common stock to $0.01 per
share. As there was no consideration exchanged for these shares, this issuance
has been treated as a stock split and the 1998 financial statements have been
restated accordingly.
On March 8, 1999, the Company was acquired by Imaginon, Inc. for
$1,631,920. The purchase price was paid through $230,000 in cash and stock OF
IMAGINON INC. valued at approximately $1,401,920 on the transaction closing
date.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial information for the twelve months
ended December 31, 1998 give effect to the acquisition as if it had occurred
effective at the beginning of each respective period.
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
JANUARY 1, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
NETWORK
IMAGINON, SPECIALISTS,
INC. INC. ADJUSTMENTS CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Product sales ....................... $ 880 $ 413,482 $ -- $ 414,362
Cost of sales ....................... 29 168,260 -- 168,289
------------ ------------ ------------ ------------
Gross profit ........................ 851 245,222 -- 246,073
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing ............. 440,967 9,041 -- 450,008
Research and development ........ 906,256 26,062 -- 932,318
General and administrative ...... 309,813 145,936 534,650 * 990,399
------------ ------------ ------------ ------------
Total operating expenses .... 1,657,036 181,039 534,650 2,372,725
------------ ------------ ------------ ------------
Income from operations .............. (1,656,185) 64,183 (534,650) (2,126,652)
------------ ------------ ------------ ------------
Interest income, net ................ (77,769) (541) -- (78,310)
Other income (expenses), net ........ (6,248) 50 -- (6,198)
------------ ------------ ------------ ------------
Total other income (expenses) (84,017) (491) -- (84,508)
Income (loss) before taxes .......... (1,740,202) 63,692 (534,650) (2,211,160)
Income tax provision ................ -- (12,898) -- --
------------ ------------ ------------ ------------
Net loss ............................ $ (1,740,202) $ 50,794 $ (534,650) $ (2,211,160)
============ ============ ============ ============
</TABLE>
* Adjustments: $1,603,950 of Goodwill amortized over a three-year period.
Loss per share, basic.......................................... ($0.11)
Shares used in per share calculation, basic.................... 20,645,758
Loss per share, diluted ....................................... ($0.11)
Shares used in diluted loss per share calculation ............. 20,645,758
<PAGE>
The following unaudited pro forma financial information for the three months
ended March 31, 1999 give effect to the acquisition as if it had occurred
effective at the beginning of each respective period.
IMAGINON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
JAN 1, 1999 TO MAR 31, 1999
<TABLE>
<CAPTION>
NETWORK
IMAGINON, SPECIALISTS,
INC. INC. PRO FORMA
1/1/99-3/31/99 1/1/99-3/8/99 ADJUSTMENTS CONSOLIDATED
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Product sales ....................... $ 13,701 $ 66,046 $ -- $ 79,747
Cost of sales ....................... 11,232 13,224 -- 24,456
------------ ------------ ------------ ------------
Gross profit ........................ 2,469 52,822 -- 55,291
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ............. 819,688 -- -- 819,688
Research and development ........ 302,888 16,554 -- 319,442
General and administrative ...... 537,451 47,348 99,973 * 684,772
------------ ------------ ------------ ------------
Total operating expenses ... 1,660,027 63,902 99,973 1,823,902
------------ ------------ ------------ ------------
Loss from operations ................ (1,657,558) (11,080) (99,973) (1,768,611)
------------ ------------ ------------ ------------
Interest expense (income)............ 54,462 (2,559) -- 51,903
Other income, net ................... 9,280 -- -- 9,280
------------ ------------ ------------ ------------
Total other expenses (income) 63,742 (2,559) -- 61,183
Net loss ............................ (1,721,300) (8,521) (99,973) (1,829,794)
Amortization of discount on
preferred stock ................... 833,333 -- -- 833,333
------------ ------------ ------------ ------------
Net loss applicable to common
stockholders ...................... $ (2,554,633) $ (8,521) $ (99,973) $ (2,663,127)
============ ============ ============ ============
</TABLE>
* Adjusts: $1,603,950 of Goodwill amortized over a three-year period
(from Jan 1, 1999 to Mar 8, 1999)
Loss per share, basic.......................................... ($0.05)
Shares used in per share calculation, basic.................... 32,784,244
Loss per share, diluted ....................................... ($0.05)
Shares used in diluted loss per share calculation ............. 32,784,244
<PAGE>
These 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.
