<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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, San Carlos, CA 94070
-----------------------------------------
(Address of principal executive offices) (Zip Code)
(650) 596-9300
--------------
(Registrants 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 44,682,650 common shares, par value
$.01 per share, outstanding at August 8, 2000.
Transitional Small Business Disclosure Format (Check One) YES NO X
----- -----
Page 1 of 22 total pages on this document.
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial statements:
Independent accountants' report 1
Condensed consolidated balance sheet - June 30, 2000 2
Condensed consolidated statements of operations -
three and six months ended June 30, 2000 and 1999 3
Condensed consolidated statement of shareholders' equity -
six months ended June 30, 2000 4
Condensed consolidated statements of cash flows -
six months ended June 30, 2000 and 1999 5-6
Notes to condensed consolidated financial statements 7-12
Item 2. Management's discussion and analysis 13-18
PART II. OTHER INFORMATION
Item 1. Legal proceedings 19
Item 2. Changes in securities and use of proceeds 19
Item 3. Defaults upon senior securities 19
Item 4. Submission of matters to a vote of security holders 20
Item 5. Other Information 20
Item 6. Exhibits and reports on Form 8-K 20-21
Signatures 22
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
Board of Directors
ImaginOn, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
ImaginOn, Inc. and subsidiaries as of June 30, 2000, the related condensed
consolidated statements of operations for the three-month and six-month periods
then ended, and the condensed consolidated statements of shareholders' equity
and cash flows for the six-month period then ended. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
August 9, 2000
1
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
ASSETS
------
Current assets:
Cash, including $300,000 held as collateral on note payable $ 2,160,477
Accounts receivable, less allowance for
doubtful accounts of $19,400 86,139
Inventories 31,997
Prepaid expenses and other 185,006
----------------
Total current assets 2,463,619
----------------
Furniture and equipment, net of accumulated
depreciation of $251,740 190,373
Intangible and other assets, net of accumulated
amortization of $1,038,255 1,664,955
----------------
1,855,328
----------------
$ 4,318,947
================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 604,923
Accrued expenses 776,523
Note payable 300,000
----------------
Total liabilities (all current) 1,681,446
----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; authorized
5,000,000 shares; no shares issued and outstanding
Common stock, $0.01 par value; authorized
100,000,000 shares; 44,667,100 shares issued
and outstanding 446,671
Warrants and options 1,704,479
Capital in excess of par 14,916,206
Accumulated deficit (14,429,855)
----------------
Total shareholders' equity 2,637,501
----------------
$ 4,318,947
================
See notes to condensed consolidated financial statements.
2
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 139,633 $ 77,361 $ 216,545 $ 91,062
Cost of revenues 53,267 49,473 104,580 60,705
----------- ----------- ----------- -----------
Gross profit 86,366 27,888 111,965 30,357
----------- ----------- ----------- -----------
Operating expenses:
Research and development 305,170 308,787 577,991 611,675
Sales and marketing 917,044 536,776 1,836,520 1,356,464
General and administrative 1,183,586 750,994 2,105,563 1,288,445
----------- ----------- ----------- -----------
2,405,800 1,596,557 4,520,074 3,256,584
----------- ----------- ----------- -----------
Loss from operations (2,319,434) (1,568,669) (4,408,109) (3,226,227)
----------- ----------- ----------- -----------
Other income (expenses):
Interest expense (1,488) (1,488) (81,500)
Interest income 48,311 664 107,644 6,279
Other income 800 68,237 800 80,379
----------- ----------- ----------- -----------
47,622 68,901 106,956 5,158
----------- ----------- ----------- -----------
Net loss (2,271,812) (1,499,768) (4,301,153) (3,221,069)
Series F preferred stock
dividend (36,667)
Series F redemption premium (200,000)
Amortization of discount
on preferred stock (248,937) (1,082,270)
----------- ----------- ----------- -----------
Net loss applicable to
common shareholders $(2,271,812) $(1,748,705) $(4,537,820) $(4,303,339)
=========== =========== =========== ===========
Basic and diluted loss per
common share $ (.05) $ (.05) $ (.10) $ (.12)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 44,653,018 36,700,257 44,598,888 36,053,963
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
IMAGINON, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Series F convertible
Preferred stock Common stock
----------------------------- ----------------------------
Warrants
Shares Amount Shares Amount and options
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 2000 2,000 $ 1,865,000 44,124,178 $ 441,241 $ 1,641,579
Issuance of common stock and
warrants, net of issuance
costs of $50,000 374,672 3,747 271,700
Redemption of Series F
preferred stock (including cumulative
dividends of $194,000 and
redemption premium of
$200,000) (2,000) (1,865,000)
Exercise of stock options 133,550 1,336 (208,800)
Issuance of common stock to 34,700 347
employees
Net loss
---------- ----------- ---------- ----------- -----------
Balances, June 30, 2000 - $ - 44,667,100 $ 446,671 $ 1,704,479
---------- ----------- ---------- ----------- -----------
<CAPTION>
Capital Total
in excess Accumulated shareholder's
of par deficit equity
----------- ------------ -------------
<S> <C> <C> <C>
Balances, January 1, 2000 $14,485,996 $(10,128,702) $ 8,305,114
Issuance of common stock and
warrants, net of issuance
costs of $50,000 674,553 950,000
Redemption of Series F
preferred stock (including cumulative
dividends of $194,000 and
redemption premium of
$200,000) (529,000) (2,394,000)
Exercise of stock options 214,915 7,451
Issuance of common stock to
employees 69,742 70,089
Net loss (4,301,153) (4,301,153)
----------- ------------ -----------
Balances, June 30, 2000 $14,916,206 $(14,429,855) $ 2,637,501
----------- ------------ -----------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,301,153) $(3,221,069)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 513,153 172,544
Provision for bad debts 19,400 6,000
Expense incurred upon issuance
of common stock 70,089 677,821
Changes in operating assets and liabilities
net of effects of business acquisition:
Increase in accounts receivable (46,168) (107,480)
Increase in inventories (10,493) (25,938)
Increase in prepaid expenses and other (135,374) (84,322)
Increase in accounts payable 3,240 168,248
Increase in accrued expenses 339,044 280,112
----------- -----------
Total adjustments 752,891 1,086,985
----------- -----------
Net cash used in operating activities (3,548,262) (2,134,084)
----------- -----------
Cash flows from investing activities:
Cash paid on business acquisition, net of
cash acquired (212,548)
Deferred merger costs (125,000)
Capital expenditures (114,406) (33,817)
----------- -----------
Net cash used in investing activities (114,406) (371,365)
----------- -----------
Cash flows from financing activities:
Dividends on Series F preferred stock (194,000)
Redemption of Series F preferred stock (2,200,000)
Proceeds from notes payable and advances 300,000 3,099,550
Redemption of preferred stock and warrants (3,095,846)
Proceeds from collection of receivable from
sale of common stock 2,000,000
Proceeds from issuance of common stock and
warrants, net 957,451 7,665,089
----------- -----------
Net cash provided by financing activities 863,451 7,668,793
----------- -----------
</TABLE>
(Continued)
5
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net (decrease) increase in cash (2,799,217) 5,163,344
Cash, beginning 4,959,694 10,874
----------- -----------
Cash, ending $ 2,160,477 $ 5,174,218
=========== ===========
Supplemental disclosure of
cash flow information:
Cash paid for interest $ - $ -
=========== ===========
Cash paid for taxes $ - $ -
=========== ===========
Supplemental disclosure of non-cash investing and
financing activities:
Purchase of INOW, net of cash acquired:
Fair value of assets acquired $ 115,000
Intangible assets 1,600,000
Liabilities assumed (100,000)
Fair value of assets exchanged (1,402,000)
-----------
Cash paid, net of cash acquired $ 213,000
===========
Conversion of warrants for shares of
common stock $ 767
===========
Common stock issued in connection with the merger
between the Company and ImaginOn.com, Inc. $ 4,699,121
===========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
1. Basis of presentation:
The condensed consolidated financial statements of ImaginOn, Inc. (the
"Company") for the six month periods ended June 30, 2000 and June 30,
1999 have been prepared by the Company without audit by the Company's
independent auditors. In the opinion of the Company's management, all
adjustments necessary to present fairly the financial position, results
of operations, and cash flows of the Company as of June 30, 2000, and for
the three and six month periods ended June 30, 2000 and 1999, have been
made. Those adjustments consist only of normal and recurring adjustments.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
condensed consolidated financial statements should be read in conjunction
with a reading of the financial statements and notes thereto included in
the Company's December 31, 1999 Annual Report on Form 10-KSB, filed with
the Securities and Exchange Commission. The results of operations for the
three and six month periods ended June 30, 2000, are not necessarily
indicative of the operating results to be expected for the full year.
On January 20, 1999, the Company, formerly known as California Pro Sports,
Inc., completed a merger with Imaginon.com, Inc. ("ImaginOn.com") of San
Carlos, California, a privately held company formed in March 1996. At
closing, ImaginOn.com's shareholders received approximately 60% of the
outstanding post-merger common stock of the Company (20,206,115 shares)
in exchange for their ImaginOn.com common stock. The transaction was
recorded as an acquisition of ImaginOn, Inc. by ImaginOn.com and a
recapitalization of ImaginOn.com.
The accompanying condensed consolidated financial statements include the
accounts of ImaginOn, Inc. and its wholly-owned subsidiaries, including
INOW, since March 8, 1999, and ImaginOn Digital Productions, Inc., since
July 1, 1999 (Note 2). Intercompany transactions have been eliminated in
consolidation. In July 2000, the Company formed a new wholly-owned
subsidiary, Wireless Web Data, Inc., to develop software for wireless Web
data servers that will allow cellular phone and portable computer device
users to interface with the Internet.
7
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
1. Basis of presentation (continued):
Prior to the fourth quarter of 1999, the Company considered itself to be a
development stage company, and was engaged primarily in research and
development activities, raising capital, acquiring businesses, and
recruiting personnel. In the fourth quarter of 1999, the Company began
selling its broadband Internet television software system, which it
developed in conjunction with technologies and resources obtained in part
through its business acquisitions. The Company also completed a
$6,000,000 private placement of its common stock and warrants. As a
result of these events, beginning in the fourth quarter of 1999, the
Company no longer considers itself to be a development stage company.
2. Business acquisitions and intangible assets:
On March 8, 1999, the Company acquired Network Specialists, Inc., a San
Francisco, California Internet service provider company, through its
subsidiary INOW, for cash of $213,000 (net of cash acquired) and 260,000
shares of the Company's common stock valued at approximately $1,402,000.
Effective July 1, 1999, the Company acquired Imagine Digital Productions I,
Inc. ("IDP"), a multi-media production studio and publishing company,
through its subsidiary ImaginOn Digital Productions, Inc., for cash of
$125,000, a $200,000 payable (paid in October 1999), and 305,000 shares
of the Company's common stock valued at approximately $667,000. 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's
satisfaction of certain performance criteria, as defined. These criteria
were not satisfied as of June 30, 2000, and therefore no contingent
consideration was issued.
Each acquisition was accounted for as a purchase, and the results of
operations of INOW and IDP are included in the Company's consolidated
statements of operations from the date of each acquisition. The total
purchase price of each acquisition was allocated to the assets and
liabilities acquired based on their estimated fair values, including
total goodwill of approximately $2,610,000.
8
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
2. Business acquisitions and intangible assets (continued):
Management assesses the carrying value of intangible and other long-lived
assets, including goodwill, for impairment when circumstances warrant
such a review, primarily by comparing current and projected sales,
operating income and cash flows on an undiscounted basis, with the
related amortization expense. Based on its review, management does not
believe that any impairment has occurred as of June 30, 2000.
3. Note payable:
On June 19, 2000, the Company borrowed $300,000 in exchange for a short-
term note payable to a bank. The note bears interest at 10.65% and is
collateralized by a certificate of deposit. Principal and accrued
interest are due in August 2000.
4. Commitments and contingencies:
Leases:
The Company leases office space under various non-cancelable operating
lease agreements. In April 2000, the Company entered into an agreement to
lease additional office space. Additional future minimum lease payments
under this new lease agreement will be between $30,000 and $61,000 per
year, through 2007.
Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact
either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
9
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
5. Shareholders' equity:
Common stock:
On December 30, 1999, the Company issued 1,873,360 shares of common stock
and warrants to purchase an additional 749,344 shares of common stock for
a total of $5,000,000. The Company received $3,000,000 on December 30,
1999, and received the remaining $2,000,000 on January 3, 2000. In
connection with this transaction, the Company incurred $280,000 of
issuance costs which were paid in January 2000, and which were accrued as
a liability at December 31, 1999.
In January 2000, the Company issued 374,672 shares of common stock and
warrants to purchase an additional 149,869 shares of common stock for a
total of $1,000,000, of which $271,700 was allocated to warrants. The
warrants are exercisable through March 2002 at $3.34 per share. In
connection with this transaction, the Company incurred issuance costs of
$50,000.
During the six months ended June 30, 2000, the Company also issued 34,700
shares of the Company's common stock to employees, valued at $70,089,
based upon the quoted market price of the Company's common stock at the
date of issue. This amount has been recorded as expense in the
accompanying statement of operations.
During the three months ended June 30, 2000, the Company's shareholders
approved an increase in the number of common shares authorized from
50,000,000 to 100,000,000 shares.
Series D/E preferred stock:
In January 1999, prior to the merger, the Company completed private
placements whereby the Company received net proceeds of $2,570,000, for
the sale of 1,500 shares each of Series D and E convertible preferred
stock (the "Series D/E Stock") at a price of $1,000 per share. The Series
D/E Stock was 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.
10
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
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
had been amortized to preferred stock for the period beginning from the
date of issuance.
Series F convertible preferred stock:
In May 1999, the Company issued 4,000 shares of 12% Series F convertible
preferred stock (the "Series F Stock") for $3,750,000 (net of offering
costs) at a price of $1,000 per share. The Series F Stock was 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 was sent by the preferred shareholders. The conversion feature
was "in the money" at the date of issue (a "beneficial conversion
feature"), and as a result, 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 had been
amortized to preferred stock for the period beginning from the date of
issuance.
In December 1999, 2000 shares of the Series F Stock were converted into
858,851 shares of the Company's common stock. In February 2000, the
Company, at its option, redeemed the remaining 2,000 shares of Series F
Stock for $2,394,000, which included dividends of $194,000 ($157,333
accumulated as of December 31, 1999) and a redemption preference of
$200,000.
11
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
Business segment information:
As of and during the periods ended June 30, 2000 and June 30, 1999, segment
results were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ImaginOn.com:
Revenues $ 77,165 $ 2,954 $ 79,454 16,655
Segment loss (2,204,153) (1,485,034) (4,149,777) $(3,040,746)
Total assets 4,076,089 6,894,364 4,076,089 6,894,364
IDP:
Revenues 1,993 - 12,719 -
Segment loss (15,953) - (37,807) -
Total assets 36,506 - 36,506 -
INOW:
Revenues 60,475 74,407 124,372 151,144
Segment loss (49,151) (46,444) (111,519) (59,963)
Total assets 92,852 180,866 92,852 180,866
Corporate:
Segment income (loss) (2,555) 31,710 (4,605) (120,360)
Total assets 113,500 127,400 113,500 127,400
Net loss all segments
and corporate (2,271,812) (1,499,768) (4,301,153) (3,221,069)
</TABLE>
There are no differences in the basis of segmentation or in the basis of
measurement of segment loss from the Company's last annual report.
12
<PAGE>
PART 1 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
This report may contain certain "Forward-Looking Statements" as such term is
defined in the private securities litigation reform act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, which
represents ImaginOn, Inc. expectations or beliefs, including but not limited to,
statements concerning ImaginOn, Inc. operations, economic performance, financial
condition, growth and acquisition strategies, investments, and operational
plans. For this purpose, any statements contained from here on that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may", "will",
"expect", "believe", "anticipate", "intent", "could", "estimate", "might" or
"continue" or the negative or other variations or comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, certain of which are beyond
ImaginOn, Inc.'s control, and actual results may differ materially depending on
a variety of important factors, including uncertainty related to acquisitions,
governmental regulation, managing and maintaining growth, 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
ImaginOn, Inc. (the "Company" or "ImaginOn") is a publicly held company with
common stock currently trading on the NASDAQ SmallCap Market under the symbol
"IMON". ImaginOn operates in three segments: ImaginOn, Inc. and IPP, which both
develop, produce and market computer software products, and INOW, an Internet
service provider.
ImaginOn 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's founders were granted a U.S. patent on May 18, 1999 for its "TDPP"
technology. The Company has brought its first three products, WebZinger,
WorldCities 2000 and sellONstream, to market. These products are trademarked and
are protected under U. S. Patent and U.S. Patent Pending issued to the founders
of ImaginOn, which they have assigned to the Company. As of June 30, 2000,
ImaginOn employed 30 employees, plus 6 consultants compared to a total of 46
employees and consultants on June 30, 1999.
On March 8, 1999, Network Specialists, Inc. ("Network") was merged with and into
INOW, a California corporation and subsidiary of ImaginOn ("INOW"). INOW is an
Internet Service Provider ("ISP") that offers PPP (both dial up and dedicated)
ISDN Dial-up, ISDN for LAN, Frame Relay, and 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,
consulting services such as needs/cost analysis and hardware and software sales.
INOW currently covers all of the Bay Area with plans to serve select
metropolitan cities within the United States. INOW's prime target market are the
thousands of small commercial offices, 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 delivers high-speed connections over
existing telephone copper wiring. The two wire copper phone line from a
telephone company's central office 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 are
not an issue with the Internet service. With INOW's
13
<PAGE>
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. The main
difference between ADSL and SDSL is that Asymmetric DSL upload and download
speeds are different. With ADSL you can download much faster than you can
upload, while SDSL offers the same speed in both directions.
Beginning January 2000, ImaginOn focused its information technology on
developing and marketing broadband Internet television systems to businesses and
institutions. ImaginOn's Internet television system, ImOn.comTV(TM), is a
licensed turnkey package that enables any Website to present interactive
television within a standard browser window on any suitably connected computer.
The ImOn.comTV interactive virtual console offers its users video on demand,
video that branches under user command, automated Web searching, and many
additional features, customized for each licensee.
During the second quarter 2000, ImaginOn's ImOn.comTV Interactive Internet "TV
station in a box", began a preview of its interactive Internet system that
powered the launch of the American Arts Network, the first dedicated arts
Internet television site and the first entity to establish a comprehensive
Internet based method for funding the arts. The official launch of the new
broadband American Arts Network Internet TV channel is scheduled for this coming
September.
Another launch during the second quarter 2000 was "The GOLF MAGAZINE INTERACTIVE
Travel Guide" which offers the guide on a high bandwidth interactive Internet
television station powered by ImOn.comTV. In addition, ImOn.comTV powered a new
Internet television site called ApproachTV.Com, which allows users to view
original content movies, newscasts, live sports and pay per view events that
cannot be seen anywhere else. The scalability of the ImOn.comTV system allows
ApproachTV.Com to increase the number of streams they provide as their site
grows.
In May 2000, ImaginOn, Inc. entered into a streaming media agreement with Intel
Corporation. ImaginOn, Inc. will use Intel(R) Internet Media Services to provide
its ImOn.comTV Internet Television Network customers with reliable worldwide
distribution of interactive digital video streams. Intel Internet Media
Services will supply high quality, reliable service for ImaginOn's broadband
Internet television viewers. Intel Internet Media Services is part of Intel's
New Business Group, which was formed to grow new internet-related services and
products in support of Intel's mission to be the building block supplier to the
worldwide Internet economy.
In June 2000, ImaginOn, Inc. was at the Tools & Middleware Expo 2000 in Japan
demonstrating ImaginAuthor(TM) an authoring tool to developers producing content
for the new Sony PlayStation(R) 2 computer entertainment system. ImaginAuthor
is expected to provide the content development community with the unique ability
to incorporate viewer-directed video branching into gameplay sequences.
Further, ImaginOn is now creating its own PlayStation 2 computer entertainment
system content in hybrid DVD/broadband Internet products. ImaginOn's goal is to
deliver at least five ImaginOn titles in the year 2001. These titles will both
stand alone on their merits and serve as a showcase for the unique capabilities
of ImaginOn's core technology. These products will also take advantage of
ImOn.comTV interactive TV stations on the Web to create open-ended infotainment
and entertainment experiences.
Also in June 2000, ImaginOn, Inc. launched ImOn.comTV in the United Kingdom and
all of Europe.
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In July 2000, ImaginOn, Inc. formed a new wholly-owned subsidiary called
"Wireless Web Data, Inc." (WWDI). WWDI was formed to develop and commercialize a
new application of ImaginOn technology targeted at wireless Web data
acquisition, formatting and delivery. The server and client software to be
developed by WWDI will enable new services, such as instant Web searches on any
digital cell phone. The first new development by WWDI will be the Wireless Data
Engine. The store and forward capability of this system will allow users to
initiate an internet or intranet data request from their desktop PC, and then
see or hear the results at a later time on their phone or other portable device.
Data requests may be for any type of information, from stock reports to movie
times, and audio or video files.
WWDI is currently negotiating terms of a proposed private placement of equity,
in which proceeds are planned to deploy a Beta version of the WWDI Wireless Data
Server.
ImOn.comTV, WebZinger, ImaginAuthor and sellONstream are trademarks of ImaginOn
and are protected under U.S. patents.
COMPETITION
In the Internet Service Provider industry, ImaginOn competes with numerous
companies, large and small, that offer similar services. ImaginOn's competitive
advantage in this area is derived from its relationship to IMON.com. In the
Internet portal industry segment, IMON.com competes with many larger, better-
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 does not yet have a direct competitor. 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.
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 offer media
retrieval provide little control or formatting of the output. Positioned as a
"Research Engine", WebZinger actually retrieves rich media assets from the Web.
In the Internet television systems industry, there is currently no direct
competition. In the high bandwidth interactive streaming video authoring and
playback software business, there are no direct competitors as of this time.
Numerous companies offer some portion of the services or capabilities of
ImOn.comTV, but there are no other single vendor integrated solutions.
ImaginOn's competitive advantage in this field is derived from the company's
unique proprietary technology that integrates interactive video playback with
media-intensive data mining. ImaginOn anticipates that revenues will be
generated by ISP services, license agreements, memberships, advertising and
commissions stemming from video e-commerce sales.
In the Wireless Web Data, Inc. area, there are at least two dozen search engines
freely accessible to anyone with a computer and Web browser. WWDI is
fundamentally different from all of them because it is built from unique
patented software technology developed by ImaginOn. Nonetheless, the competition
dominates the marketplace today. In the rapidly evolving wireless Web arena at
least six potential competitors have announced that they will soon have products
available. Given the size of the potential marketplace, there may be many
entrants by the end of the year 2000.
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<PAGE>
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 consolidated operating results of the
Company for the periods as indicated below.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 139,633 $ 77,361 $ 216,545 $ 91,062
Cost of revenues 53,267 49,473 104,580 60,705
Gross profit 86,366 27,888 111,965 30,357
Research and development 305,170 308,787 577,991 611,675
Sales and marketing 917,044 536,776 1,836,520 1,356,464
General administrative 1,183,586 750,994 2,105,563 1,288,445
Net loss (2,271,812) (1,499,768) (4,301,153) (3,221,069)
Net loss applicable to
common shareholders (2,271,812) (1,748,705) (4,537,820) (4,303,339)
</TABLE>
NET REVENUES
Consolidated net revenues were $139,633 and $216,545 for the three-month and
six-month periods ended June 30, 2000, respectively, which represent increases
of 81% and 138% when compared with the corresponding periods in 1999. The
increase in second quarter 2000 revenue was primarily due to sales of ImaginOn's
ImOn.comTV product and software technology licenses. WebZinger, WorldCities
2000, and GOLF MAGAZINE CD software products also contributed to this increase.
As a percentage of second quarter revenue, 55% was from Imon.com, 43% was
contributed by INOW, and the remaining 2% was from IDP for customer website
maintenance, renewals, and related services. For the three months ended June
30, 2000, Imon.com subsidiary revenues increased nearly 97%, while INOW
subsidiary revenues decreased nearly 23%, compared to the three months ended in
June 30, 1999.
COST OF REVENUES
Cost of revenues was $53,267, or 38% of net revenues for the three months ended
June 30, 2000 compared to $49,473, or 64% of net revenues for the three months
ended June 30, 1999. For the six months ended June 30, 2000, cost of revenues
was $104,580, or 48% of net revenues compared to $60,705, or 67% of net revenues
for the corresponding period of 1999. The decrease in cost of revenues as a
percentage of total revenues in the three and six months ended June 30, 2000
compared to the same periods ended June 30, 1999, was primarily attributable to
the ImOn.ComTV Internet TV packages and ImaginOn's software technology license.
These costs of revenues consist of the expenses associated with the production
and usage of Imon.comTV and the Company's other online media properties. These
costs include fees for bandwidth, co-location, Internet connection charges and
hardware servers and computer related equipment. Costs also include Website
maintenance and services, host computer and network equipment costs, and
providing customer technical support and certain installation, materials,
packaging, and labor in producing ImaginOn products.
16
<PAGE>
GROSS PROFIT
Consolidated gross profit for the three and six months ended June 30, 2000 and
1999 increased to $86,366 in 2000 compared to $27,888 in 1999 and an increase of
$111,965 in 2000 compared to $30,357 in 1999, respectively. These increases
were primarily attributable to the sales of ImOn.comTV instant interactive
Internet TV packages.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended June 30, 2000
decreased slightly to $305,107, compared to $308,787 for the three months ended
June 30, 1999. During this year's second quarter, nearly 71% of research and
development expenses were due to payroll for engineers, outside consultants, and
video production staff, 16% was for other related ImOn.comTV project expenses,
and the remaining 13% was for office rent, utilities, communications, computer
equipment and supplies. For the six months ended June 30, 2000, expenses
increased to $611,675 compared to $531,483 for the six months ended June 30,
1999. This increase compared to last year was primarily due to additional
employee staffing and compensation increases.
SALES AND MARKETING EXPENSES
For the three months ended June 30, 2000, sales and marketing expenses increased
to $917,044 compared to $536,776 for the three months ended June 30, 1999.
During this year's second quarter, nearly 74% was attributable to the marketing,
advertising, sales promotions and materials, trade shows and presentations, and
public relations of ImaginOn's ImOn.comTV product, 16% was for employee payroll
(which included employer taxes), and consultants, the remaining 10% was for
general office supplies, rent, utilities, communications and computer equipment,
travel and accommodations. For the six months ended June 30, 2000, expenses
increased to $1,836,520 compared to $1,288,445 for the six months ended June 30,
1999. This increase compared to last year was primarily attributable to hiring
additional sales and sales-support staff, as well as sales and marketing
activities in connection with the ImOn.comTV product.
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended June 30, 2000, general and administrative expenses
increased to $1,183,586 compared to the three months ended June 30, 1999 of
$750,994. Out of this total, during this year's second quarter, nearly 39% was
for professional legal and independent accounting and audit services as well as
corporate filings and reporting such as the printing of materials for the annual
proxy and stockholder annual reports, costs for legal proceedings, 26% was for
employee payroll (which included employer taxes), 19% represented goodwill
amortization related to the two acquisitions for INOW and IDP during last year.
The remaining 16% was for rent, utilities, communications, computer equipment
and supplies, general office supplies, furniture, depreciation, bad debts,
public relations and business wires, and travel and accommodations, and for
general liability and directors and officers insurance. For the six months
ended June 30, 2000, expenses increased to $1,888,107 compared to $1,288,445 for
the six months ended June 30, 1999. This increase was primarily attributable to
the acquisition of INOW and IDP's goodwill amortization and increased payroll
due to more employees as well as expanded growth of the Company from the prior
year.
OTHER INCOME (EXPENSE)
For the three months ended June 30, 2000, interest expense increased to $1,488
for bank interest charges, compared to zero in the three months ended June 30,
1999. Other income for the three months ended June 30, 2000 decreased to
$49,111 compared to $68,901 for the three months ended in June 30, 1999. This
decrease is primarily due to less funds in the CD and money market bank accounts
during this year's second quarter. For the six months ended June 30, 2000
interest expense decreased to $1,488 compared to $66,500 for the six months end
June 30, 1999. This was primarily due to the elimination of monthly bridge
17
<PAGE>
loans incurred for Cal Pro and ImaginOn.com before the merger. For the six
months ended June 30, 2000, interest income increased to $108,445 compared to
$71,658 for the six months ended in June 30, 1999. This increase was due to
availability of funds for interest earned from money market and CD deposits
primarily from the private placements received early this year.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2000, ImaginOn's cash and working capital decreased to approximately
$2.9 million from $4.6 million on June 30, 1999. This was primarily due to the
redemption of the remaining outstanding shares of its Series F convertible
preferred stock, plus accrued dividends, for $2,394,000 during the first
quarter, 2000. The preferred stock and accrued dividends were convertible into
approximately 684,000 shares of ImaginOn common stock, which would have
represented 1.5 percent of the shares outstanding on that date.
Cash decreased due to the use of cash on hand in meeting the capital
expenditures for the three primary categories of General and Administrative,
Sales and Marketing, and Research and Development.
In June 2000, the Company borrowed $300,000 from a bank, collateralized by a
certificate of deposit, in order to avoid early withdrawal penalties prior to
the CD's maturity date. After the maturity date on August 10, 2000, the loan is
planned to be paid with proceeds from the CD.
ImaginOn expects to continue using its working capital to finance ongoing
operations and to fund marketing programs of its products and services. The
Company anticipates that cash on hand, cash provided by operating and financing
activities, and cash available from the capital markets will be sufficient to
fund its operations for the next twelve months.
18
<PAGE>
Part II Other Information
Part II - Item 1 Legal Proceedings
On January 20, 2000, ImaginOn was served a complaint by a corporation named ImOn
Inc. in the U.S. District Court for the Southern District of New York alleging
violation of common law trademark (as opposed to trademark granted by the
federal government under statute), and two other claims under the New York
General Business Law alleging "Deceptive Acts" and "Unfair Competition and
Trademark Infringement." ImaginOn's intellectual property law firm had
previously discussed this firm's claim with one of the three attorneys who have
represented the plaintiff, ImOn, Inc., which was incorporated last summer.
Plaintiff claims to own the "Imon.net" Internet domain and a common law
trademark for the word "Imon" as it related to Internet commerce. ImaginOn,
Inc., Imon, Inc. and at least one other company have filed trademark
applications with the Federal Office of Patents and Trademarks. ImaginOn is
vigorously defending itself in this action and believes it will be resolved in
its favor. On January 31, 2000, plaintiff filed a motion for a preliminary
injunction and the court issued a Show Cause Order for a March 2, 2000 hearing
to determine if an injunction should be issued prohibiting us from using the
term "ImOn" in commerce. After a two day hearing, the Judge denied the motion
for a preliminary injunction, holding that the plaintiff failed on every element
requisite for the injunction, including likelihood of prevailing at trial. In
addition, due to errors in the plaintiff's federal trademark application, it was
excluded from evidence for the purposes of the motion. ImaginOn filed a
counterclaim under the newly enacted Federal "Trademark Cyberpiracy Prevention"
Act, which provides for award of attorneys' fees and liquidated damages of up to
$100,000. The parties agreed to a 60 day standstill for settlement discussions.
On July 28, 2000, ImaginOn was informed by plaintiff that it would cease all
operations and become dormant as of July 31, 2000. ImaginOn is considering
options as to whether to pursue its counterclaim against the plaintiff's backers
for its legal costs.
Part II - Item 2 Changes in Securities and Use of Proceeds
Changes in Securities
None.
Use of Proceeds
Not applicable.
Part II - Item 3 Defaults Upon Senior Securities
None.
Part II - Item 4 Submission of Matters to a Vote of Security Holders
On April 7, 2000 at 10:00 a.m., Pacific Daylight Time, ImaginOn held its annual
meeting of stockholders.
The following directors were elected to served as directors of ImaginOn until
the next annual meeting of stockholders and until their respective successors
are elected and qualified:
Votes For Votes Against Abstentions
David M. Schwartz 31,745,421 3,483 129,580
James A. Newcomb 31,745,421 3,483 129,580
Mary E. Finn 31,745,421 3,483 129,580
Dennis Allison 31,745,421 3,483 129,580
Jim Polizotto 31,745,421 3,483 129,580
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<PAGE>
The ImaginOn 1999 Equity Incentive Plan was adopted and approved with the
following results:
Votes For Votes Against Abstentions
31,100,052 666,380 111,872
An amendment to Article Forth of ImaginOn's Amended Certificate of Incorporation
to increase ImaginOn's authorized common stock, $.01 par value per share, from
50,000,000 shares to 100,000,000 shares was approved with the following results:
Votes For Votes Against Abstentions
31,157,373 639,688 81,243
Part II - Item 5 Other Information
Not applicable.
Part II - Item 6 Exhibits & Reports on Form 8-K
Exhibits
3(i).1 Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-85108 as filed with
the Securities and Exchange Commission "SEC" on October 13, 1994
(the "1994 Registration Statement").)
3(i).2 Amendment to Certificate of Incorporation of the Registrant dated
July 22, 1998. (Incorporated by reference to Exhibit 3(i).5 of the
Registrant's registration statement on Form S-3A, Registration No.
333-71989 as filed with the Securities and Exchange Commission on
March 17, 1999 (the "1999 Form S-3/A.").)
3(i).3 Amendment to Certificate of Incorporation of the Registrant dated
December 17, 1998. (Incorporated by reference to Exhibit 3(i).6 of
the 1999 Form S-3/A.)
3(ii).1 Bylaws as currently in effect. (Incorporated by reference to
Exhibit 3.2 to the 1994 Registration Statement.)
4.1 Specimen of Common Stock certificate. (Incorporated by reference
to Exhibit 4.1 to Amendment No. 4 to the 1994 Registration
Statement, filed with the SEC on December 22, 1994 (" 1994
Amendment #4).)
11.1 Computation of Net Income (Loss) Per Share
27 Financial Data Schedule
Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
and has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Carlos, State of California, on
August 14, 2000.
IMAGINON, INC.
By:/s/ David M. Schwartz
----------------------
David M. Schwartz,
Chairman, Chief Executive Officer
and President
SIGNATURES TITLE DATE
---------- ----- ----
/s/ David M. Schwartz Chief Executive Officer August 14, 2000
--------------------- And Director
David M. Schwartz
/s/ James A. Newcomb Chief Financial Officer August 14, 2000
--------------------- and Director
James A. Newcomb
21
