<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 March 31, 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: 44,663,400 common shares, par value
$.01 per share, outstanding at May 10, 2000.
Transitional Small Business Disclosure Format (Check One) YES NO X
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Page 1 of 20 total pages on this document.
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IMAGINON, INC. AND SUBSIDIARIES
INDEX
Page
------
PART I FINANCIAL INFORMATION
Item 1. Financial statements:
Independent accountants' report 1
Consolidated balance sheet - March 31, 2000 2
Consolidated statements of operations - three months ended
March 31, 2000 and 1999 3
Consolidated statement of shareholder's equity - three months
ended March 31, 2000 4
Consolidated statements of cash flows - three months ended
March 31, 2000 and 1999 5-6
Notes to consolidated financial statements 7-10
Item 2. Management's discussion and analysis 11-17
PART II. OTHER INFORMATION
Item 1. Legal proceedings 17
Item 2. Changes in securities and use of proceeds 17
Item 3. Defaults upon senior securities 18
Item 4. Submission of matters to a vote of security holders 18
Item 5. Other Information 18
Item 6. Exhibits and reports on Form 8-K 18-19
Signatures 20
<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 March 31, 2000, and the related condensed
consolidated statements of operations, shareholders' equity, and cash flows for
the three-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
May 11, 2000
1
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IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(UNAUDITED)
ASSETS
------
Current assets:
Cash $ 3,616,045
Accounts receivable, less allowance for
doubtful accounts of $10,600 50,001
Inventories 26,425
Prepaid expenses and other 153,959
------------
Total current assets 3,846,430
------------
Furniture and equipment, net of
accumulated depreciation of $203,754 187,760
Intangible and other assets, net of
accumulated amortization of $820,799 1,873,586
------------
2,061,346
------------
$ 5,907,776
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 474,970
Accrued expenses 564,958
------------
Total liabilities (all current) 1,039,928
------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value;
authorized 5,000,000 shares; none issued and
outstanding
Common stock, $0.01 par value; authorized
50,000,000 shares; 44,629,850 shares issued
and outstanding 446,298
Warrants and options 1,704,479
Capital in excess of par 14,875,114
Accumulated deficit (12,158,043)
------------
Total shareholders' equity 4,867,848
------------
$ 5,907,776
============
See notes to condensed consolidated financial statements.
2
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IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
------------ ------------
Revenues $ 76,912 $ 13,701
Cost of revenues 51,313 11,232
------------ ------------
Gross profit 25,599 2,469
------------ ------------
Operating expenses:
Research and development 272,821 302,888
Sales and marketing 919,476 819,688
General and administrative 921,977 537,451
------------ ------------
2,114,274 1,660,027
------------ ------------
Loss from operations (2,088,675) (1,657,558)
------------ ------------
Other income (expenses):
Interest expense (81,500)
Interest income 59,334 5,615
Other income 12,142
------------ ------------
59,334 (63,743)
------------ ------------
Net loss (2,029,341) (1,721,301)
Series F preferred stock dividend (36,667)
Series F redemption premium (200,000)
Amortization of discount on preferred stock (833,333)
------------ ------------
Net loss applicable to common shareholders $ (2,266,008) $ (2,554,634)
============ ============
Basic and diluted Loss per common share $ (.05) $ (.08)
============ ============
Weighted average number of common shares
outstanding 44,543,439 32,593,577
============ ============
See notes to condensed consolidated financial statements.
3
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IMAGINON, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Series F convertible
preferred stock Common Stock Capital Total
------------------ ---------------------- Warrants in excess shareholders'
Shares Amount Shares Amount and options of par Deficit equity
------ ---------- ---------- ---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1999 2,000 $1,865,000 44,124,178 $ 441,241 $1,641,579 $14,485,996 $(10,128,702) $8,305,114
Issuance of common stock
and warrants, net of
issuance costs of $50,000 374,672 3,747 271,700 674,553 950,000
Redemption of Series F
preferred stock (including
dividends of $194,000 and
redemption premium of
$200,000) (2,000) (1,865,000) (529,000) (2,394,000)
Exercise of stock options 120,000 1,200 (208,800) 208,800 1,200
Issuance of common stock
to employees 11,000 110 34,765 34,875
Net loss (2,029,341) (2,029,341)
------ ---------- ---------- ---------- ----------- ----------- ------------ -----------
Balances, March 31, 2000 -- $ -- 44,629,850 $ 446,298 $ 1,704,479 $14,875,114 $(12,158,043) $ 4,867,848
====== ========== ========== ========== =========== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
4
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IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $ (2,029,341) $ (1,721,301)
------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 264,761 40,000
Provision for bad debts 10,600
Expense incurred upon issuance
of common stock 34,875 612,032
Changes in operating assets and liabilities
net of of effects of business acquisition:
Increase in accounts receivable (1,230) (30,265)
Increase in inventories (4,921) (7,070)
Increase in prepaid expenses and other (104,327) (70,198)
(Decrease) increase in accounts payable (126,713) 46,318
Increase in accrued expenses 119,261 218,574
------------ ------------
Total adjustments 192,306 809,391
------------ ------------
Net cash used in operating activities (1,837,035) (911,910)
------------ ------------
Cash flows from investing activities:
Cash paid on business acquisition, net of
cash acquired (212,548)
Capital expenditures (63,814) (17,617)
------------ ------------
Net cash used in investing activities (63,814) (230,165)
------------ ------------
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 3,099,550
Proceeds from issuance of common stock and
warrants, net 2,951,200 590,750
------------ ------------
Net cash provided by financing activities 557,200 3,690,300
------------ ------------
Net (decrease) increase in cash (1,343,649) 2,548,225
Cash, beginning 4,959,694 10,874
------------ ------------
Cash, ending $ 3,616,045 $ 2,559,099
============ ============
(Continued)
5
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IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
2000 1999
------------ ------------
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 $ 108,000
Intangible assets 1,604,000
Liabilities assumed (100,000)
Fair value of assets exchanged (1,399,000)
------------
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
============
See notes to condensed consolidated financial statements.
6
<PAGE>
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
1. Basis of presentation:
The condensed consolidated financial statements for the three month periods
ended March 31, 2000 and March 31, 1999 have been prepared by Imaginon,
Inc. (the "Company"). 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 March 31, 2000, and for the
three month periods ended March 31, 2000 and March 31, 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. It is the Company's
opinion that, when the interim financial statements are read in conjunction
with the December 31, 1999 Annual Report on Form 10-KSB, the Company's
disclosures are adequate to make the information presented not misleading.
The results of operations for the three months ended March 31, 2000 and
1999, 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, INOW, since
March 8, 1999, and ImaginOn Digital Productions, Inc., since July 1, 1999
(Note 2). Intercompany transactions have been eliminated in consolidation.
7
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IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 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 $213,000 cash (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 $125,000
cash, 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.
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
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IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 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 annual cash flows on an undiscounted basis, with the related
annual amortization expenses. Based on its review, management does not
believe that any impairment has occurred as of March 31, 2000.
3. 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.
4. 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.
9
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IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
4. Shareholders' equity (continued):
Common stock (continued):
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 $271,000 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 three months ended March 31, 2000, the Company also issued
11,000 shares of the Company's common stock to employees, valued at
$34,875, 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.
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.
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 March 31, 1999, $833,333 had been amortized
to preferred stock for the period beginning from the date of issuance.
10
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IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
4. Shareholders' equity (continued):
Series F convertible preferred stock:
In May 1999, the Company issued 4,000 shares of 12% Series F convertible
preferred stock (the "Series F 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.
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>
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
On January 20, 1999 ImaginOn, Inc., formerly known as California Pro Sports,
Inc. (the "Company" or "ImaginOn"), through ImaginOn Acquisition Corp., a wholly
owned subsidiary of ImaginOn, completed a merger with ImaginOn.com of San
Carlos, California. Subsequent to the merger, ImaginOn has no sporting goods
business and has not retained any personnel or directors from those operations.
ImaginOn is a publicly held company with common stock currently trading on the
NASDAQ SmallCap Market under the symbol "IMON". ImaginOn has three operating
units.
ImaginOn 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'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 March 31, 2000, ImaginOn employs 29 full time employees, plus 6
consultants compared to 15 full time employees and 3 consultants ended March 31,
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 do not 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.
12
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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 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, 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.
The goal of the ImOn.comTV product is to make the Internet easier and more
productive for businesses, educational institutions and individuals. ImOn.comTV
integrates the WebZinger research engine, WorldCities 2000 Series of interactive
travel planners, sellONstream video e-commerce solutions and the never-released
interactive movie and PC videogame, American Hero. Additionally, licensees of
ImOn.comTV receive the Company's software authoring tool, ImaginAuthor enables
authoring of interactive TV content such as interactive movies like WorldCities
2000, and e-commerce video presentations, like sellONstream. Corporate training
departments and educational content developers can use the Company's
ImaginAuthor authoring tool for creating learning on demand applications.
ImOn.comTV's features will be useful in interactive education/training and
interactive advertising markets.
ImOn.comTV's instant Internet television delivers up to 200 video data streams
in standard package prices from $31,000 to $49,000 (or with optional servers
included in the packages with prices ranging from $35,000 to $84,000) and was
introduced at the world's largest television broadcast convention for the
National Association of Broadcasters in Las Vegas, Nevada on April 10-13, 2000.
With the ImOn.comTV product, it is now possible for anyone to start an Internet
television station overnight. The anticipated widespread deployment of
ImOn.comTV will change the entire notion of what "broadcast" is in the high
bandwidth Internet era. While there are many companies that can stream video
and audio, ImOn.comTV's instant Internet television "station in a box" is unique
in four important ways. First, ImaginOn's technology links video directly to
Web pages. Second, ImaginOn provides viewer-directed video branching, whereby a
consumer watching a video can interactively make a decision, and based on that
decision, the video will seamlessly change scenes. If the consumer makes a
different decision, another video option will be played. Third, ImaginOn's
proprietary search engine, WebZinger, is always running behind the video,
providing automatic video-content-sensitive searches on the subject featured on
the television screen. Finally, ImaginOn's ImaginAuthor tools enable fast
conversion of video footage to the ImOn.comTV format.
ImOn.comTV's instant Internet television packages are available for fast
delivery, depending on the package selected and the amount of customization
required by the licensee. The product can be shipped within six weeks from the
date of purchase. ImOn.comTV's station packages can put any traditional
broadcaster, e-business or content owner into the Internet television business,
almost immediately. Companies that have libraries of video content will be able
to launch specialized Internet television stations using their own video,
processed by the ImaginAuthor authoring tool, the key tool that enables video
branching, content-sensitive search capabilities, and e-commerce linkage for
existing video footage.
ImOn.comTV, WebZinger, ImaginAuthor and sellONstream are trademarks of ImaginOn
and are protected under U.S. patents.
COMPETITION
In the Internet Service Provider industry segment, ImaginOn competes with
numerous companies, large and small, that offer similar services. ImaginOn's
competitive advantage in this area is derived from its
13
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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 segment, 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.
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. ImaginOn will license tool sets to businesses for building
e-commerce, data mining, interactive entertainment and training applications.
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.
Three Months Ended
March 31,
--------------------------
2000 1999
---------- ----------
Net revenues $ 76,912 $ 13,701
Cost of revenues 51,313 11,232
Gross profit 25,599 2,469
Research and development 272,821 302,888
Sales and marketing 919,476 819,688
General administrative 921,977 537,451
Net Loss (2,029,341) (1,721,301)
Net Loss applicable to common shareholders (2,266,008) (2,554,634)
NET REVENUES
Consolidated net revenues increased to $76,912 for the three months ended March
31, 2000 compared to $13,701 for the three months ended March 31, 1999. Of this
increase in first quarter 2000, $63,897 was contributed by the INOW subsidiary,
which is an Internet service provider, $10,726 was from IDP for customer
website maintenances, renewals, and related services, and $2,289 was primarily
from ImaginOn's
14
<PAGE>
CD software products, WebZinger and WorldCities 2000.
COST OF REVENUES
Consolidated cost of revenues was $51,313 ended March 31, 2000 compared to
$11,232 ended March 31, 1999. The majority of these costs were incurred by
the INOW and IDP subsidiaries. The increase in costs is from bandwidth usage,
online communications, hardware servers, website maintenance and services, host
computer and network equipment costs, and providing customer technical support
and certain installations, and materials, packaging, and labor in producing
ImaginOn's CD products.
GROSS PROFIT
Consolidated gross profit increased to $25,599 for the three months ended March
31, 2000 compared to $2,469 for the three months March 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures for the three months ended March 31, 2000,
decreased to $272,821, compared to $302,888 for the three months ended March 31,
1999. The main distinction from the first quarter of 1999 was that in 1999
ImaginOn expensed $157,344 for a one-time stock grant bonus to new engineers and
video production employees. Of the remaining $145,544 during the first quarter
1999, 79% was comprised of regular employee payroll for engineers and video
production employees, 17% for WorldCities 2000 product development, and 4% for
purchase of computer equipment and office supplies. During the first quarter
2000, nearly 81% was from payroll (which includes employer taxes and expenses of
stock grants) for engineers and video production employees, 8% was from the
development of the Imon.comTV product, 8% was for computer equipment, computer
supplies, rent, utilities, communications, and 3% was for research and
development of the voice over recording for the WebZinger product.
SALES AND MARKETING EXPENSES
For the three months ended March 31, 2000, sales and marketing expenses
increased to $919,476 compared to $819,688 for the three months ended March 31,
1999. During the first quarter 2000, nearly 70% was attributable to the
marketing, advertising, sales promotions & materials, trade shows &
presentations, and public relations of ImaginOn's products, $413,434 was
expensed mainly for the ImOn.comTV product, 15% was for employee payroll (which
includes employer taxes), consultants, and new hire of sales representatives,
15% was for general office supplies, rent, utilities, communications and
computer equipment, and the remaining amount was for travel and
accommodations.
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended March 31, 2000, expenses increased to $921,977
compared to the three months ended March 31, 1999 of $537,451. Out of this total
in the first quarter 2000, nearly 33% was for professional legal and accounting
audit fees incurred for SEC filings, corporate reporting, costs for lawsuit
proceedings, and preparation of the 10KSB audit, 24% was for employee payroll
(which includes employer taxes), 24% represented goodwill amortization related
to the two acquisitions for INOW and IDP last year, 16% was for rent, utilities,
communications, computer equipment and supplies, general office supplies,
furniture, deprecations, bad debts, public relations and business wires, and
travel and accommodations, and 3% was for general liability and directors and
officers insurance.
OTHER INCOME (EXPENSE)
For the three months ended March 31, 2000, interest expense decrease to $0,
compared to the three months ended March 31, 1999 of $81,500 because of the
elimination of monthly bridge loans incurred for Cal Pro and ImaginOn.com before
the merger.
15
<PAGE>
Interest income of $59,095 was earned in the first quarter 2000 from money
market and CD deposits primarily from the private placements, as compared to no
interest earned in first quarter 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, ImaginOn's cash and working capital had increased to
$3,616,045 and $2,806,502 respectively, as compared to $2,559,099 and
$1,970,631, respectively on March 31, 1999. This increase in cash and working
capital was primarily related to private placement offerings. In late December
and early January 2000, a $6 million private placement was completed through
Ladenburg Thalmann & Co., Inc., an investment banker. In December 1999,
ImaginOn sold 1,873,360 shares of restricted common stock for $2.67 per share,
resulting in net proceeds to the Company of $4,700,000. The Company also issued
warrants to acquire up to 749,344 additional shares of common stock at an
exercise price of $3.34 per share. In January 2000, the Company sold 374,672
shares of restricted common stock for $2.67 per share, resulting in $950,000 in
net proceeds. The Company issued warrants to acquire up to 149,869 additional
shares of common stock at an exercise price of $3.34 per share. The warrants
from both of these private placements expire on March 30, 2002.
On February 25, 2000, ImaginOn redeemed the remaining outstanding shares of its
Series F convertible preferred stock, plus accrued dividends, for $2,394,000.
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. After completing this
transaction, the Company's capitalization is comprised solely of common stock
and warrants.
ImaginOn expects to continue using it's 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 activities,
and cash available from the capital markets will be sufficient to fund its
operations for the next twelve months.
16
<PAGE>
PART II - OTHER INFORMATION
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,
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. Plaintiff has recently proffered a settlement less than ninety days
after filing suit, which ImaginOn has under advisement.
Item 2. Changes in Securities and Use of Proceeds
Changes in Securities
On December 31, 1999, ImaginOn received $3 million of a $6 million private
placement of its restricted common stock through its investment banker,
Ladenburg Thalmann & Co. Inc. The remaining $3 million of the private placement
was received after year end. The net proceeds of $5,600,000 from the placement
offering will be used primarily to fund the marketing of ImaginOn's ImOn.com TV
product. In the offering, ImaginOn sold 2,248,032 shares of common stock for
$2.67 per share and issued warrants to acquire up to 889,213 shares of common
stock at an exercise price of $3.34 per share. The warrants will expire on
March 30, 2002.
In December 2000, 2,200 shares of Series F Convertible Preferred Stock were
converted into 858,851 shares of common stock in accordance with its terms. On
February 25, 2000, ImaginOn redeemed the remaining outstanding 2,000 shares of
Series F Convertible Preferred Stock for $2,394,000 in accordance with its
terms. The Series F Convertible Preferred Stock was redeemed for $1,197 per
share, which includes $97 per share of accrued interest through the redemption
date.
Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
17
<PAGE>
None.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other information
Not applicable.
Item 6. Exhibits and 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 Certificate of Designations for Series F 12% Convertible Preferred
Stock (Incorporated by reference to Exhibit 3(I) .2 the Registrant's
Registration Statement on Form SB-2, Registration No. 33-88729 as
filed with the Securities and Exchange Commission on October 8, 1999
(the "1999 Registration Statement").)
3(i).3 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).4 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).)
4.2 Preferred Stock Purchase Agreement dated May 4, 1999 by and among Gage
LLC and the Registrant. (Incorporated by reference to Exhibit 4.2 to
the 1999 Registration Statement).
4.3 Registration Rights Agreement dated May 4, 1999 by and among Gage LLC
and the Registrant. (Incorporated by reference to Exhibit 4.3 to the
1999 Registration Statement).
4.4 Common Stock Purchase Warrant dated May 4, 1999 by and among Gage LLC
and the Registrant. (Incorporated by reference to Exhibit 4.4 to the
1999 Registration Statement).
18
<PAGE>
4.5 Form of Purchase Agreement dated December, 2000 by and among the
Registrant and investors in $6 million private placement.
(Incorporated by reference to Exhibit 10.23(a) of Registrant's Form
10-KSB for the year ending December 31, 1999 filed with the Securities
and Exchange Commission on March 15, 2000 (the "December 31, 1999 10-
KSB")).
4.6 Form of Registration Rights Agreement dated December, 2000 by and
among the Registrant and investors in $6 million private placement.
(Incorporated by reference to Exhibit 10.23(b) of the December 31,
1999 10-KSB).
4.7 Form of Warrant dated December, 2000 by and among the Registrant and
investors in $6 million private placement. (Incorporated by reference
to Exhibit 10.23(c) of the December 31, 1999 10-KSB).
11.1 Computation of Net Income (Loss) Per Share
27.1 Financial Data Schedule
Reports on Form 8-K
(b) Reports on Form 8-K
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant 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
May 15, 2000.
IMAGINON, INC.
Dated: May 15, 2000 By: /s/ David M. Schwartz
---------------------------------------
David M. Schwartz, Chairman,
Chief Executive Officer and
President
Dated: May 15, 2000 By: /s/ James A. Newcomb
---------------------------------------
James A. Newcomb
Chief Financial Officer
20
<PAGE>
EXHIBIT 11.1
IMAGINON, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net loss $(2,029,341) $(1,721,301)
Amortization of discount on preferred stock (833,333)
Series F preferred stock dividend (36,667)
Series F preferred stock redemption premium (200,000)
----------- -----------
Net loss applicable to common shareholders $(2,266,008) $(2,554,634)
=========== ===========
Weighted average number of common shares outstanding 44,543,439 32,593,577
Common equivalent shares representing shares issuable upon exercise of
outstanding options and warrants and conversion of preferred stock -*- -*-
----------- -----------
Basic and diluted loss per common share $ (0.05) $ (0.08)
=========== ===========
</TABLE>
* No impact to weighted average number of shares as the inclusion of additional
shares assuming the exercise of outstanding options and warrants and conversion
of preferred stock would have been antidilutive.
Diluted and supplementary net loss per share are not presented as the amounts
are not dilutively or incrementally different from basic net loss per share
amounts.
<TABLE> <S> <C>
<PAGE>
<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 MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,616,045
<SECURITIES> 0
<RECEIVABLES> 50,001
<ALLOWANCES> 10,600
<INVENTORY> 26,425
<CURRENT-ASSETS> 3,846,430
<PP&E> 187,760
<DEPRECIATION> 203,754
<TOTAL-ASSETS> 5,907,776
<CURRENT-LIABILITIES> 1,039,938
<BONDS> 0
0
0
<COMMON> 446,298
<OTHER-SE> 4,421,550
<TOTAL-LIABILITY-AND-EQUITY> 5,907,776
<SALES> 76,912
<TOTAL-REVENUES> 76,912
<CGS> 51,313
<TOTAL-COSTS> 2,114,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,029,341)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,029,341)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,029,341)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
