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, 2001
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: 66,816,479 common shares, par value
$.01 per share, outstanding at May 3, 2001.
Transitional Small Business Disclosure Format (Check One) YES ________ NO X
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Page 1 of 26 total pages on this document.
IMAGINON, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial statements:
Independent accountants' report 3
Condensed consolidated balance sheet - March 31, 2001 4
Condensed consolidated statements of operations - three
months ended March 31, 2001 and 2000 5
Condensed consolidated statement of shareholders' deficit
- three months ended March 31, 2001 6
Condensed consolidated statements of cash flows - three
months ended March 31, 2001 and 2000 7
Notes to Condensed consolidated financial statements 8-14
Item 2. Management's discussion and analysis 15-21
PART II. OTHER INFORMATION
Item 1. Legal proceedings 22
Item 2. Changes in securities and use of proceeds 22
Item 3. Defaults upon senior securities 23
Item 4. Submission of matters to a vote of security holders 23
Item 5. Other Information 24
Item 6. Exhibits and reports on Form 8-K 24-25
Signatures 26
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, 2001, the related condensed
consolidated statements of operations and cash flows for the three-month
periods ended March 31, 2001 and 2000, and the condensed consolidated statement
of shareholders' deficit for the three months ended March 31, 2001. These
condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our reviews 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 reviews, 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, 2001
3
IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2001
(UNAUDITED)
ASSETS
Current assets:
Cash $ 13,209
Accounts receivable, less allowance for
doubtful accounts of $ 24,700 89,886
Inventories 27,282
Prepaid expenses and other 22,469
------------
Total current assets 152,846
------------
Other receivable 19,922
Furniture and equipment, net of
accumulated depreciation of $332,281 246,331
Deposits and other assets 50,439
------------
316,692
------------
$ 469,538
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 519,015
Accrued expenses 72,245
Deposits 10,500
Note payable 100,000
------------
Total liabilities (all current) 701,760
------------
Commitments and contingencies
Mandatory redeemable Series G, 8% convertible
preferred stock; 13.5 shares issued and outstanding;
liquidation preference $1,405,980 1,405,980
Common stock issued upon conversion of series G preferred
stock, 10,266,110 shares subject to redemption 977,860
------------
2,383,840
------------
Shareholders' deficit:
Preferred stock, $0.01 par value; authorized
5,000,000 shares; 13.5 shares issued and outstanding
Common stock, $0.01 par value; authorized
100,000,000 shares; 62,700,727 shares issued
and outstanding 627,007
Warrants and options 1,720,479
Capital in excess of par 14,577,342
Accumulated deficit (19,540,890)
------------
Total shareholders' deficit (2,616,062)
------------
$ 469,538
============
See notes to condensed consolidated financial statements.
4
IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
Revenues $ 109,132 $ 76,912
Cost of revenues 90,680 51,313
----------- -----------
Gross profit 18,452 25,599
----------- -----------
Operating expenses:
Research and development 293,325 272,821
Sales and marketing 140,307 919,476
General and administrative 574,414 921,977
Impairment of intangible assets 498,266
----------- -----------
1,506,312 2,114,274
----------- -----------
Loss from operations (1,486,613) (2,088,675)
----------- -----------
Other income (expense):
Interest income 1,617 59,334
Interest expense (370)
----------- -----------
1,247 59,334
----------- -----------
Net loss (1,486,613) (2,029,341)
Series F preferred stock dividend (36,667)
Series F redemption premium (200,000)
Amortization of discount on preferred stock (37,500)
Series G preferred stock dividend (37,522)
----------- -----------
Net loss applicable to common shareholders $(1,561,635) $(2,266,008)
=========== ===========
Basic and diluted loss per common share $ (.03) $ (.05)
=========== ===========
Weighted average number of common shares
Outstanding 56,415,860 44,543,439
=========== ===========
See notes to condensed consolidated financial statements.
5
IMAGINON, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
Common Stock Capital Total
--------------------- Warrants in excess shareholders'
Shares Amount and options of par Deficit deficit
---------- --------- ----------- ----------- ------------- --------------
Balances
January 1, 2001 52,434,617 $524,346 $1,720,479 $14,680,003 $(18,054,277) $(1,129,449)
Conversion of Series G
preferred stock to
common stock 10,266,110 102,661 (102,661)
Net loss (1,486,613) (1,486,613)
---------- --------- ----------- ----------- ------------- --------------
Balances, March 31, 2001 62,700,727 $627,007 $1,720,479 $14,577,342 $(19,540,890) $(2,616,062)
========== ========= =========== =========== ============ ===========
See notes to condensed consolidated financial statements.
6
IMAGINON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $(1,486,613) $(2,029,341)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 172,620 264,761
Provision for losses on accounts receivable 10,600
Impairment of intangible assets 498,266
Expense incurred upon issuance
of common stock 34,875
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 15,267 (1,230)
Decrease (increase) in inventories 49 (4,921)
Decrease (increase) in prepaid expenses and other 1,379 (104,327)
Increase (decrease) in accounts payable 80,256 (126,713)
Increase (decrease) in accrued expenses (14,822) 119,261
----------- -----------
Total adjustments 753,015 192,306
----------- -----------
Net cash used in operating activities (733,598) (1,837,035)
----------- -----------
Cash flows from investing activities:
Capital expenditures (63,814)
----------- -----------
Net cash used in investing activities (63,814)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable 100,000
Dividends on Series F preferred stock (194,000)
Redemption of Series F preferred stock (2,200,000)
Proceeds from issuance of Series G preferred
stock 150,000
Proceeds from issuance of common stock and
warrants, net 2,951,200
----------- -----------
Net cash provided by financing activities 250,000 557,200
----------- -----------
Net decrease in cash (483,598) (1,343,649)
Cash, beginning 496,807 4,959,694
----------- -----------
Cash, ending $ 13,209 $ 3,616,045
=========== ===========
See notes to condensed consolidated financial statements.
7
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
1. Basis of presentation:
The condensed consolidated financial statements for the three-month periods
ended March 31, 2001 and March 31, 2000 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, 2001, and for the
three-month periods ended March 31, 2001 and 2000, have been made. Those
adjustments consist only of normal and recurring adjustments except for
those described below.
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, 2000 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, 2001 and
2000, are not necessarily indicative of the operating results to be
expected for the full year.
The accompanying condensed consolidated financial statements include the
accounts of ImaginOn, Inc., and its wholly-owned subsidiaries, Imaginon
Network Specialists, Inc. ("INOW"), ImaginOn Digital Productions, Inc.
("IDP"), and Wireless Web Data, Inc ("WDDI"). Intercompany transactions
have been eliminated in consolidation.
Going concern and management's plans
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal
course of business. The Company reported a net loss of $1,486,613 for the
three months ended March 31, 2001, the Company has an accumulated deficit
of $19,540,890 as of March 31, 2001, and the Company is subject to certain
contingencies at March 31, 2001. The Company has not recognized any
substantial revenues from its broadband Internet television systems and
expects to incur continued cash outflows, which are expected to result in a
working capital deficiency within the next year. As a result, the Company
may experience difficulty and uncertainty in meeting its liquidity needs
during the next fiscal year.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The condensed consolidated financial
statements do not include any adjustments relating to the recoverability
and classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
8
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
1. Basis of presentation (continued):
To address its current cash flow concerns, the Company is in discussions
with potential investors attempting to raise funds to support current and
future operations. This includes attempting to raise additional working
capital through the sale of additional capital stock and/or through the
issuance of debt (Notes 3, 5 and 7). The Company has also implemented plans
to restructure the Company (Note 7). Currently, the Company does not have a
revolving loan agreement with any financial institution, nor can the
Company provide any assurance that it will be able to enter into any such
agreement in the future, or be able to raise funds through a further
issuance of debt or equity in the Company. The Company continues to
develop, market and license its products, which may provide additional
funds to address the Company's capital requirements.
2. Intangible assets:
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. The Company recognizes impairment losses on
intangible assets when undiscounted cash flows estimated to be generated
from the intangible assets are less than the amount of unamortized assets.
In April 2001, the Company made a decision to abandon further efforts in
developing and marketing INOW products and services and in May 2001, the
Company entered into an agreement to sell its INOW subsidiary (Note 7).
Based on the terms of the sale, the Company concluded that an impairment
charge of $498,266 was necessary to write off the carrying amount of
goodwill related to the Company's acquisition of INOW.
3. Note payable:
On March 15, 2001, the Company borrowed $100,000 under a note payable to an
individual (Note 7). Interest on the note is charged at 9%, with principal
and interest payable upon demand by the lender.
4. Commitments and contingencies:
Leases:
The Company leases office space under various non-cancelable operating lease
agreements expiring at various dates through 2007. Certain lease agreements
provide for annual incremental rent increases of 5%.
Litigation:
The Company has been named as a co-defendant in a lawsuit in which the
plaintiff is seeking damages in excess of $500,000, and in subsequent
filings, the plaintiff has indicated that damages in excess of $2 million
may be claimed. Management believes that the claims contained in this
action are without merit and is defending against the claims vigorously.
The Company is involved in other 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
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
5. Redeemable Series G preferred stock and common stock issued upon conversion
of Series G preferred stock
At December 31, 2000, the Company had 22 shares of Series G preferred stock
issued and outstanding. During the quarter ended March 31, 2001, the
Company issued an additional 1.5 shares of Series G preferred stock for
$150,000. The Series G preferred stock has a par value of $0.01 per share,
a stated value of $100,000 per share, and a liquidation preference equal to
the stated value plus unpaid dividends. The Series G preferred stock is
convertible into shares of the Company's common stock at the lower of $0.60
per share, or 80% of the market price of the Company's common stock on the
conversion date, subject to a minimum conversion price limit of $0.10 per
share. The Series G preferred stock is convertible, at any time, for five
years from the issue date. Shares of Series G preferred stock that have not
been converted within five years of the original issue date are to be
redeemed by the Company at a price equal to the stated value of the shares
plus accumulated unpaid dividends. Dividends are cumulative at 8% per year
and are payable semiannually. Dividends not paid when due are subject to an
18% late fee, payable in cash. Cumulative dividends through March 31, 2001,
are $55,980.
The conversion feature was "in the money" at the date of issue (a
"beneficial conversion feature"). The Company allocated $37,500 of the
proceeds, equal to the intrinsic value of the beneficial conversion
feature, to capital in excess of par in the first quarter, and allocated
the entire portion to the Series G Preferred Stock.
The Series G preferred stock has voting rights consistent with the voting
rights of the common shareholders. Each share of Series G preferred stock
is entitled to 166,666 votes. The Series G preferred stock contains a
provision that if the Company issues or sells shares of common stock at a
price per share lower than the Series G preferred stock conversion price
during the period that any of the Series G preferred stock is outstanding,
the Series G preferred stock conversion price shall be adjusted downward to
equal that price, subject to terms and conditions as defined in the
agreement.
The Series G preferred stock is also subject to a mandatory redemption
provision upon the triggering of certain events, as defined, the majority
of which were satisfied in connection with a registration of common shares
underlying the Series G preferred stock in February 2001. In addition, in
connection with the private placement of the Series G preferred stock, the
Company paid $75,000 in 2000 to an entity which was not registered as a
broker-dealer; however, it may have been required to be registered as a
broker-dealer in connection with the Series G preferred stock transaction.
If the entity acted as a broker-dealer in connection with the private
placement, it would have been required to be registered with the Securities
Exchange Act (the "Act") unless it was exempt from the broker-dealer
registration requirements under the Act.
If the entity was not properly exempt from the broker-dealer registration
requirements, various parties could potentially assert claims, including
perhaps the following: the investors could assert claims for rescission of
their investment in the Company; and the Company, or its shareholders,
could have a claim against the entity for rescission of the $75,000
payment. In response to a possible rescission by the investors, the Company
believes it has defenses and other legal rights, and would intend to
vigorously defend such an action.
As a result of this contingency and other redemption features of the Series
G preferred stock, the Company has not included the Series G preferred
stock or the 10,266,110 shares of common stock issued in February 2001 upon
the conversion of 10 shares of Series G preferred stock in shareholders'
equity (deficit).
10
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
6. Business segment information:
As and during the periods ended March 31, 2001 and March 31, 2000, segment
results were as follows:
Three months ended March 31,
-----------------------------
2001 2000
Computer Software Products:
ImaginOn.com:
Revenues $ 98 $ 2,289
Segment loss (1,362,752) (1,945,624)
Total assets 348,457 5,655,834
IDP:
Revenues 1,429 10,726
Segment loss (13,978) (21,854)
Total assets 26,569 34,430
Internet service:
WWDI:
Revenues 80 -
Segment loss (48,157) -
Total assets 2,289 -
INOW:
Revenues 107,526 63,897
Segment loss (61,726) (59,813)
Total assets 105,274 104,012
Corporate:
Segment income (loss) - (2,050)
Total assets 19,922 113,500
Net loss all segments
and corporate (1,486,613) (2,029,341)
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.
11
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINTUED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
7. Subsequent events:
WDDI transactions:
In April 2001, the Company entered into a letter of intent with Gallagher
Research Corporation, a publicly-held Nevada corporation ("GRC") to
exchange shares between the Company and GRC. Pursuant to the terms of the
proposed agreement, the Company is to sell GRC all of the outstanding
shares of WWDI common stock it owns, and in exchange, GRC is to issue an
aggregate of 20,000,000 shares of GRC common stock to the Company and
certain of its officers and directors. Immediately following this
transaction, GRC is to have 24,768,000 shares of issued and outstanding
common stock, and the Company is to hold 19,080,000 shares, or 77%, of the
issued and outstanding shares of GRC common stock.
In April 2001, WDDI also entered into a letter of intent with Gulfstream
Financial Partners, LLC ("Gulfstream") to proceed with a series of proposed
investment transactions. Pursuant to the terms of this letter of intent,
Gulfstream, or Gulfstream and other investors, will invest cash in WDDI in
two phases, which are subject to the successful completion of certain
events by the Company.
The first phase is to consist of an initial investment of up to $500,000 in
exchange for rights to purchase up to 20% of the common stock of WDDI.
Through April 2001, a total of $260,000 has been received from investors by
the Company, on behalf of WDDI. The Company received proceeds of $100,000
in March 2001, for which it entered into a 9% promissory note, due on
demand. In exchange for proceeds of $30,000 (received by the Company in
April 2001), WDDI entered into a 15% promissory note, due on demand, no
later than May 13, 2001. Additional advances of $130,000, received in April
2001 by the Company on behalf of WDDI, are not evidenced by promissory
notes.
Under the proposed second phase, upon the successful completion of a merger
of the Company and GRC, terms of an additional financing are to be
negotiated. In consideration for arranging the proposed financing
agreement, Gulfstream is to be issued three-year warrants to purchase
common stock of WDDI at $.10 per share, equal to 9.9% of WDDI on a fully
diluted basis, subject to registration rights.
Series G preferred stock and common stock issuance:
In April 2001, the Company issued .6 shares of Series G preferred stock
and 1,666,666 shares of common stock to an investor in exchange for
$60,000. In addition, 2.5 shares of Series G preferred stock were converted
into 2,580,550 shares of common stock.
Sale of INOW subsidiary:
In May 2001, the Company entered into an agreement to sell all of its issued
and outstanding shares of INOW for $25,000.
12
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINTUED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
The following pro forma condensed consolidated balance sheet gives effect to
the sale of INOW as if it occurred on March 31, 2001. The pro forma adjustments
reflect the receipt of $25,000 and the sale of assets, net of certain
liabilities:
Pro forma Pro forma
ASSETS: Historical adjustments balances
---------------- --------------- ----------------
Current assets:
Cash $ 13,209 $ 25,000 $ 38,209
Accounts receivable 89,886 (21,041) 68,845
Inventories 27,282 - 27,282
Prepaid expenses and other 22,469 - 22,469
---------------- --------------- ----------------
Total current assets 152,846 3,959 156,805
---------------- --------------- ----------------
Other receivable 19,922 - 19,922
Furniture and equipment, net 246,331 (33,816) 212,515
Deposits and other assets 50,439 - 50,439
---------------- --------------- ----------------
316,692 (33,816) 282,876
---------------- --------------- ----------------
$ 469,538 $ (29,857) $ 439,681
================ =============== ================
LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 519,015 $ (14,535) $ 504,480
Accrued expenses 72,245 (10,008) 62,237
Deposits 10,500 - 10,500
Note payable 100,000 - 100,000
---------------- --------------- ----------------
Total liabilities (all current) 701,760 (24,543) 677,217
---------------- --------------- ----------------
Redeemable preferred stock 1,405,980 - 1,405,980
Redeemable common stock 977,860 - 977,860
---------------- --------------- ----------------
2,383,840 2,383,840
Total shareholders' deficit (2,616,062) (5,314) (2,621,376)
---------------- --------------- ----------------
$ 469,538 $ (29,857) $ 439,681
================ =============== ================
13
IMAGINON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINTUED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
The following pro forma codensed consolidated statements of operations for the
three-months ended March 31, 2001 and the year ended December 31, 2000, give
effect to the sale of INOW as if it occurred on January 1, 2001 and January 1,
2000, respectively. The pro forma adjustments are recorded to exclude the
operations of INOW from the consolidated statements of operations of the Company
for the periods presented:
Three months ended March 31, 2001:
Pro forma Pro forma
Historical adjustments balances
-------------- ------------- --------------
Revenues $ 109,132 $(107,526) $ 1,606
Cost of revenues 90,680 (90,360) 320
-------------- ------------- --------------
Gross profit 18,452 (17,166) 1,286
-------------- ------------- --------------
Operating expenses:
Research and development 293,325 (8,250) 285,075
Selling expense 140,307 (25,912) 114,395
General and administrative expense 574,414 (44,731) 529,683
Impairment charge 498,266 498,266
-------------- ------------- --------------
1,506,312 (78,893) 1,427,419
-------------- ------------- --------------
Operating income (loss) (1,487,860) 61,727 (1,426,133)
Other income, net 1,247 - 1,247
-------------- ------------- --------------
Net loss (1,486,613) 61,727 (1,424,886)
Amortization of discount and dividend on
preferred stock (75,022) - (75,022)
-------------- ------------- --------------
Net loss applicable to common stock $(1,561,635) $ 61,727 $(1,499,908)
============== ============= ==============
Loss per share $ (0.03) $ (0.03)
============== ==============
Weighted average number of
shares outstanding 56,415,860 56,415,860
============== ==============
Year ended December 31, 2000:
Pro forma Pro forma
Historical adjustments balances
-------------- ------------- ---------------
Revenues $ 605,373 $(404,759) $ 200,614
Cost of revenues 350,718 (293,834) 56,884
-------------- ------------- ---------------
Gross profit 254,655 (110,925) 143,730
-------------- ------------- ---------------
Operating expenses:
Research and development 1,401,542 (12,916) 1,388,626
Selling expense 2,816,260 (13,494) 2,802,766
General and administrative expense 3,563,652 (313,989) 3,249,663
Impairment - charge 564,920 - 564,920
-------------- ------------- ---------------
8,346,374 (340,399) 8,005,975
-------------- ------------- ---------------
Operating income (loss) (8,091,719) 229,474 (7,862,245)
Other income, net 166,144 - 166,144
-------------- ------------- ---------------
Net loss (7,925,575) 229,474 (7,696,101)
Amortization of discount and dividend on
preferred stock (820,507) - (820,507)
-------------- ------------- ---------------
Net loss applicable to common stock $(8,746,082) $ 229,474 $(8,516,608)
============== ============= ===============
Loss per share $ (0.19) $ (0.19)
============== ===============
Weighted average number of
shares outstanding 46,022,320 46,022,320
============== ===============
14
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
The independent auditors' report on the Company's consolidated financial
statements as of December 31, 2000, and for each of the years in the two-year
period ended December 31, 2000 includes a "going concern" paragraph that
describes substantial doubt about the Company's ability to continue as a going
concern.
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. Imaginon is a publicly held company with common stock
currently trading on the Over the Counter Bulletin Board under the symbol
"IMON". Imaginon has four operating units.
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 two U. S. Patents issued to the founders of Imaginon, which
they have assigned to the Company. As of March 31, 2001, Imaginon has 13 full
time employees plus 9 consultants, compared to 29 full time employees and 6
consultants at March 31, 2000.
Beginning January 2000, Imaginon focused upon its information technology and
developing and marketing broadband Internet television systems to businesses and
institutions. Imaginon's Internet television system, ImOn.comTV, a software
system and 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 that can be customized for each
licensee.
During the third quarter 2000, in order to initiate a presence of Imaginon's
ImOn.comTV interactive Internet television to multiple markets, the Company
began new installations of this product to a
15
broad range of clients. While some clients were charged at the full list price
of the ImOn.comTV stations, others were charged at less than full-list price.
Some of these sales were made for strategic key marketing positions rather than
for income. The Company's clientele is made up of magazine publishers, colleges,
communication companies and sports franchises. ImOn.comTV offers a complete
turnkey product that turns any existing Website into an interactive TV station
on the broadband Internet. Imaginon implemented a seven-channel sales and
marketing strategy targeting broadcast, education, e-commerce, publishing,
corporate training, telemedicine, and adult entertainment.
In the third quarter 2000, Imaginon aggressively marketed and presented its
Interactive Internet Television, ImOn.comTV, also referred to as a "television
station in a box" at conferences such as Syllabus 2000, one of the education
industry's largest gathering of teachers, administrators, and consultants in San
Jose, California. The Company also attended the European Market Debut at IBC
2000, Europe's single largest broadcasters' conference in Amsterdam, and
introduced ImOn.comTV to a pan-European audience and began building a network
of distributors in the major markets. Imaginon, Inc. served as a Silver
Sponsor of the year 2000 Intel Developer Forums where Imaginon demonstrated the
corporate training, educational and e-commerce applications of ImOn.comTV.
In July 2000, Imaginon, Inc. formed a new wholly-owned subsidiary, Wireless Web
Data, Inc. (WWDI). WWDI plans to purchase assets, a patent license and know-how
from Imaginon, Inc. 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 storage
and forward capability of this system will allow users to initiate an Internet
or Intranet data request from their desktop PC and see or hear the results at a
later time on their phone or other portable device.
Imaginon's technology will be utilized by WWDI to develop software for wireless
Web data servers to allow cellular phone and portable computing device users to
request any type of data, including text, audio and video, and receive it
properly formatted for their individual device. Data such as stock quotes,
weather information, maps, MP3 audio files and video clips will be available to
portable handheld device users by using the WWDI system.
In April 2001, the Company entered into a letter of intent with Gallagher
Research Corporation, a publicly-held Nevada corporation ("GRC") to
exchange shares between the Company and GRC. Pursuant to the terms of the
proposed agreement, the Company is to sell GRC all of the outstanding
shares of WWDI common stock it owns, and in exchange, GRC is to issue an
aggregate of 20,000,000 shares of GRC common stock to the Company and
certain of its officers and directors. Immediately following this
transaction, GRC is to have 24,768,000 shares of issued and outstanding
common stock, and the Company is to hold 19,080,000 shares, or 77%, of the
issued and outstanding shares of GRC common stock.
In April 2001, WDDI also entered into a letter of intent with Gulfstream
Financial Partners, LLC ("Gulfstream") to proceed with a series of proposed
investment transactions. Pursuant to the terms of this letter of intent,
Gulfstream, or Gulfstream and other investors, will invest cash in WDDI in
two phases, which are subject to the successful completion of certain
events by the Company.
The first phase is to consist of an initial investment of up to $500,000 in
exchange for rights to purchase up to 20% of the common stock of WDDI.
Through April 2001, a total of $260,000 has been received from investors by
the Company, on behalf of WDDI. The Company received proceeds of $100,000
in March 2001, for which it entered into a 9% promissory note, due on
demand. In exchange for proceeds of $30,000 (received by the Company in
April 2001), WDDI entered into a 15% promissory note, due on demand, no
later than May 13, 2001. Additional advances of $130,000, received in April
2001 by the Company on behalf of WDDI, are not evidenced by promissory
notes.
Under the proposed second phase, upon the successful completion of a merger
of WDDI and GRC, terms of an additional financing are to be negotiated. In
consideration for arranging the proposed financing agreement, Gulfstream is
to be issued three-year warrants to purchase common stock of WDDI at $.10
per share, equal to 9.9% of WDDI on a fully diluted basis, subject to
registration rights.
16
In January 2001, Imaginon management and directors evaluated the assets and
direction of the Company, seeking to optimize the use of resources. The goal of
the Company remains unchanged: to create a profitable business based on
Imaginon's proprietary software technology. However, the strategy for reaching
this goal is substantially changed.
Imaginon management and directors' analysis of the results of the year 2000
marketing and sales efforts concluded that the ImOn.comTV product offering
itself was too complex, too expensive, too difficult to deploy, and outside the
mainstream market for Internet and intranet software products. Consequently, a
new strategy was devised to achieve entry into the mainstream of Internet and
intranet software. Imaginon's year 2001 strategy includes simplifying the
product offering, integrating closely with Microsoft's software systems, and
unbundling Imaginon's core technology from hardware, media content and Internet
hosting services.
The revamped, simplified version of ImOn.comTV is now "ImaginVideo for Windows
2000 Server." As the name implies, this product is a software application for
Microsoft's server operating system. As such, bundling of Imaginon software
with hardware is unnecessary, so Imaginon is not selling software and hardware
as turnkey systems. The close integration of Imaginon software with
Microsoft's systems has earned Imaginon "Microsoft Gold Certified Partner"
status, as well as "Certified for Windows 2000 Server" approval. With these
certifications, Imaginon qualifies for a wide range of co-marketing
opportunities with Microsoft.
ImaginVideo for Windows 2000 Server is accompanied by ImaginAuthor for Windows
2000, an intuitive authoring tool for interactive streaming video. This tool
makes it easy for any corporate training department or educator to create
content for ImaginVideo, without relying on Imaginon content production and
support. As a result, Imaginon no longer needs a video production and editing
department.
Since most Windows 2000 servers are hosted by their owners, or large service
companies, Imaginon no longer needs to offer hosting or Internet service
provisioning to sell its ImaginVideo software. The INOW subsidiary of Imaginon
was sold in May 2001, which will result in a reduction of operating losses for
Imaginon.
Going forward, Imaginon will market ImaginVideo for Windows 2000 Server, and
seek to license its technology to other companies. The first substantial
technology license sale is anticipated to be to Wireless Web Data, Inc., a
subsidiary of Imaginon that is in the process of being sold to Gallagher
Research Corporation.
ImaginVideo, WebZinger, ImaginAuthor and sellONstream are trademarks of ImaginOn
and are protected under U.S. patents.
17
COMPETITION
In the Internet Service 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 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
ImaginVideo, 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 license agreements for its technology and sales of its software.
New products created with Imaginon technology 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,
2001 2000
------------ ---------------
Net revenues $ 109,132 $ 76,912
Cost of revenues 90,680 51,313
Gross profit 18,452 25,599
Research and development 293,325 272,821
Sales and marketing 140,307 919,476
General administrative 574,414 921,977
Net Loss (1,486,613) (2,029,341)
Net Loss applicable to common shareholders (1,561,635) (2,266,008)
18
NET REVENUES
Consolidated net revenues increased to $109,132 for the three months ended March
31, 2001 compared to $76,912 for the three months ended March 31, 2000. Of this
increase in first quarter 2001, $107,526 was contributed by the INOW
subsidiary, through ISP revenues and sales of wireless networking products,
$1,429 was from IDP for customer website maintenance, renewals, and related
services, and the remainder was from Imaginon's CD software products, WebZinger
and WorldCities 2000.
COST OF REVENUES
Consolidated cost of revenues was $90,680 ended March 31, 2001 compared to
$51,313 ended March 31, 2000. The majority of these costs were incurred by the
INOW subsidiary. The increase in costs is from bandwidth usage, online
communications, hardware servers, website maintenance and services, host
computer and network equipment costs, providing customer technical support and
wireless networking products.
GROSS PROFIT
Consolidated gross profit decreased to $18,452 for the three months ended March
31, 2001 compared to $25,599 for the three months March 31, 2000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures for the three months ended March 31, 2001,
increased to $293,325, compared to $272,821 for the three months ended March 31,
2000. During the first quarter 2001, 57% was comprised of regular employee
payroll for engineers and video production employees, 30% for the development of
the ImaginVideo/ImaginAuthor and Vizario products, and 13% for purchases of
computer equipment, office supplies, rent, utilities and communications
services. 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 for the development of the ImaginVideo product, 8%
was for computer equipment, computer supplies, rent, utilities, communications,
and 3% was for the voice over recording for the WebZinger product.
SALES AND MARKETING EXPENSES
For the three months ended March 31, 2001, sales and marketing expenses
decreased to $140,307 compared to $919,476 for the three months ended March 31,
2000. Sales and marketing efforts were significantly reduced in the first
quarter of 2001, as management evaluated the direction of the Company and where
to focus its resources. During the first quarter 2001, nearly 34% was
attributable to the marketing, advertising, sales promotions & materials, trade
shows & presentations, and public relations of Imaginon's products, 53% was for
employee payroll (which includes employer taxes) and consultants, and the
remaining 15% was for general office supplies, rent, utilities, communications
and computer equipment, travel and accommodations.
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended March 31, 2001, expenses decreased to $574,414
compared to $921,977 in the three months ended March 31, 2000. Out of this total
in the first quarter 2001, nearly 22% was for professional legal and accounting
audit fees incurred for SEC filings, corporate reporting, costs for lawsuit
proceedings, and preparation of the 10KSB filing, 34% was for employee payroll
(which includes employer taxes), 25% represented goodwill amortization related
to the 1999 acquisition of INOW, and 19% was for rent, utilities,
communications, computer equipment and supplies, general office supplies,
furniture, depreciation, bad debts,
19
public relations and business wires, travel and accommodations, and for general
liability and directors' and officers' insurance.
OTHER OPERATING EXPENSES
During the three months ended March 31, 2001, there was an impairment charge of
$498,266 recorded on the intangible assets related to the INOW acquisition. The
impairment charge was recorded in conjunction with a decision by management to
abandon further efforts in developing and marketing INOW products and services
and the subsequent sale of the INOW subsidiary in May 2001.
OTHER INCOME (EXPENSE)
Net interest income of $1,617 was earned in the first quarter 2001, as compared
to $59,095 of net interest earned in first quarter 2000 from money market and CD
deposits primarily from the private placement.
LIQUIDITY AND CAPITAL RESOURCES
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.
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. In connection with this transaction, the Company incurred issuance
costs of $50,000.
In September 2000, the Company signed a non-binding letter of intent with third-
party investors for a multi-stage, $12 million equity financing, in which the
Company agreed to issue up to $3 million of Series G, 8% cumulative convertible
preferred stock (the "Series G Preferred Stock") and up to $9 million of the
Company's common stock.
The Series G Preferred Stock has a par value of $0.01 per share, a stated value
of $100,000 per share, and is convertible into shares of the Company's common
stock at the lower of $0.60 per share, or 80% of the market price of the
Company's common stock on the conversion date, subject to a minimum conversion
price limit of $0.10 per share (Note 12). The Series G Preferred Stock is
convertible, at any time, for five years from the issue date. Shares of Series
G Preferred Stock that have not been converted within five years of the original
issue date are to be redeemed by the Company at a price equal to the stated
value of the shares plus accumulated unpaid dividends. Dividends are cumulative
at 8% per year and are payable semiannually.
The Series G Preferred Stock is subject to a mandatory redemption provision upon
the triggering of certain events, as defined, including failure to register
shares of common stock underlying the Series G Preferred Stock within 120 days
of the issue date. The Series G Preferred Stock also has a liquidation
preference equal to stated value of the Series G Preferred Stock.
In October 2000, the Company issued 15 shares of Series G Preferred Stock for
$1.2 million cash (net of $100,000 of offering costs and in satisfaction of a
$200,000 payable to the investor). The Company also issued 7 shares of Series G
Preferred Stock valued at $700,000 to another investor in exchange for $233,000
cash and in satisfaction of a $467,000 payable (Note 10).
20
In February 2001, the Company issued 1.5 shares of Series G Preferred Stock for
$150,000 cash. Also in February 2001, Series G Preferred Stockholders converted
10 shares of Series G Preferred stock into 10,266,110 common shares of the
Company. Because of the redemption features of the Series G Preferred Stock, the
Company has not included the Series G Preferred shares in shareholders' equity
(deficit).
In March 2001, the Company borrowed $100,000 from an individual, at an interest
rate of 9%, with principal and interest payable upon demand by the lender at any
time.
At March 31, 2001, Imaginon's cash and working capital had decreased to $13,209
and a deficit of $548,914 respectively, as compared to $3,616,045 and
$2,806,502, respectively on March 31, 2000. This decrease in cash and working
capital was primarily related to the use of cash in meeting the operating
expenditures for the three primary categories of General and Administrative,
Sales and Marketing, and Research and Development.
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 activities,
and cash available from the capital markets will be sufficient to fund its
operations for the next twelve months.
21
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in Securities and Use of Proceeds
Changes in Securities
On February 21, 2001 the Company issued 822,048 shares of its common stock
to Resonance Limited upon conversion of .8 shares of the Company's Series G
Preferred Stock at the conversion price of $0.10 per share. The Company placed
appropriate restrictive legends and stop transfer instructions with its transfer
agent regarding the restricted nature of the common stock. The Series G
Preferred Stock was originally issued on October 19, 2000. Under the terms of
the Series G Preferred Stock, conversion does not require the payment of any
consideration. The Company relied upon the exemption provided under Section
3(a)(9) of the Securities Act for the issuance of the common stock upon
conversion, based upon the following factors: (i) the conversion; (ii) the
conversion right is only available to holders of the Series G Preferred Stock;
(iii) no additional consideration was paid to the Company by the holders of the
Series G Preferred Stock to complete the conversion, nor were the terms of the
Series G Preferred Stock modified to provide for the conversion; and (iv) no
commission or other remuneration was paid in connection with the conversion.
On February 21, 2001 the Company issued 4,315,730 shares of its common
stock to Bess Holdings Limited upon conversion of 4.2 shares of the Company's
Series G Preferred Stock at the conversion price of $0.10 per share. The
Company placed appropriate restrictive legends and stop transfer instructions
with its transfer agent regarding the restricted nature of the common stock.
The Series G Preferred Stock was originally issued on October 19, 2000. Under
the terms of the Series G Preferred Stock, conversion does not require the
payment of any consideration. The Company relied upon the exemption provided
under Section 3(a)(9) of the Securities Act of the issuance of the common stock
upon conversion, based upon the following factors: (i) the Company was the
issuer of the Series G Preferred Stock and the common stock issued upon
conversion; (ii) the conversion right is only available to holders of the Series
G Preferred Stock; (iii) no additional consideration was paid to the Company by
the holders of the Series G Preferred Stock to complete the conversion; and (iv)
no commission or other remuneration was paid in connection with the conversion.
On February 26, 2001 the Company issued 3,588,669 shares of its common
stock to Gage, LLC upon conversion of 3.5 shares of the Company's Series G
Preferred Sock at the conversion price of $0.10 per share. The Company placed
appropriate restrictive legends and stop transfer instructions with its transfer
agent regarding the restricted nature of the common stock. The Series G
Preferred Stock was originally issued on October 30, 2000. Under the terms of
the Series G Preferred Stock, conversion does not require the payment of any
consideration. The Company relied upon the exemption provided under Section
3(a)(9) of the Securities Act for the issuance of the common stock upon
conversion, based upon the following factors: (i) the Company was the issuer of
the Series G Preferred Stock and the common stock issued upon conversion; (ii)
the conversion right is only available to holders of the Series G Preferred
Stock; (iii) no additional consideration was paid to the Company by the holders
of the Series G Preferred Stock to complete the conversion, nor were the terms
of the Series G Preferred Stock modified to provide for the conversion; and (iv)
no commission or other remuneration was paid in connection with the conversion.
On March 2, 2001 the Company issued 1,539,663 shares of its common stock to
Gage, LLC upon conversion of 1.5 of shares of the Company's Series G Preferred
Stock at the conversion price of $0.10 per share. The Company placed
appropriate restrictive legends and
22
stop transfer instructions with its transfer agent regarding the restricted
nature of the common stock. The Series G Preferred Stock was issued on October
30, 2000. Under the terms of the Series G Preferred Stock, conversion does not
require the payment of any consideration. The Company relied upon the exemption
provided under Section 3(a)(9) of the Securities Act for the issuance of the
common stock upon conversion, based upon the following factors: (i) the Company
was the issuer of the Series G Preferred Stock and the common stock issued upon
conversion; (ii) the conversion right is only available to holders of the Series
G Preferred Stock; (iii) no additional consideration was paid to the Company by
the holders of the Series G Preferred Stock to complete the conversion, nor were
the terms of the Series G Preferred Stock modified to provide for the
conversion; and (iv) no commission or other remuneration was paid in connection
with the conversion.
On April 25, 2001, the Company issued 1 share of Series G Preferred Stock
to Resonance Limited pursuant to a purchase agreement effective February 20,
2001 for $100,000 in cash. The Company relied upon the exemptions from
registration provided by Sections 4(6) and 4(2) of the Securities Act and Rule
506 promulgated thereunder based upon (i) representations provided by Resonance
Limited in the purchase agreement that it is an accredited investor; (ii) that
no general solicitation of the securities was made by the Company; (iii) the
Series G Preferred Stock was a "restricted security" as that term is defined
under Rule 144 promulgated under the Securities Act, and that a restrictive
legend was placed on the certificate; (vi) written representations by Resonance
Limited to the Company that it would comply with the manner of sale provisions
described in the purchase agreement and registration rights agreement covering
its resale of the securities; and (vii) prior to completion of the transaction,
Resonance Limited was provided with all information regarding the Company as
required under Rule 502 of Regulation D and was given the opportunity to ask
questions of and receive additional information from the Company regarding its
financial condition and operations. The Company did not pay any fees or
commissions to third parties with respect to this transaction.
On April 25, 2001, the Company issued .5 shares of Series G Preferred Stock
to Gage LLC pursuant to a purchase agreement effective February 22, 2001 for
$50,000 in cash. The Company relied upon the exemptions from registration
provided by Sections 4(6) and 4(2) of the Securities Act and Rule 506
promulgated thereunder based upon (i) representations provided by Gage LLC in
the purchase agreement that it is an accredited investor; (ii) that no general
solicitation of the securities was made by the Company; (iii) the Series G
Preferred Stock was a "restricted security" as that term is defined under Rule
144 promulgated under the Securities Act, and that a restrictive legend was
placed on the certificate; (iv) written representations by Gage LLC to the
Company that it would comply with the manner of sale provisions described in the
purchase agreement and registration rights agreement covering its resale of the
securities; and (vii) prior to completion of the transaction, Gage LLC was
provided with all information regarding the Company as required under Rule 502
of Regulation D and was given the opportunity to ask questions of and receive
additional information from the Company regarding its financial condition and
operations. The Company did not pay any fees or commissions to third parties
with respect to this transaction.
Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
23
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 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(i).4 Certificate of Designations, Preferences and Rights of Series G 8%
Convertible Preferred Stock dated August 3, 2000. (Incorporated by
reference to Exhibit 4.2 of the Registrant's September 30, 2000 10-
QSB).
3(i).5 Amended certificate of Designations, Preferences and Rights of Series
G 8% Convertible Preferred Stock dated August 16, 2000. (Incorporated
by reference to Exhibit 4.3 of the Registrant's September 30, 2000 10-
QSB).
3(i).6 Amended Certificate of Designations, Preferences and Rights of Series
G 8% Convertible Preferred Stock dated October 16, 2000 (Incorporated
by reference to Exhibit 4.4 of the Registrant's September 30, 2000 10-
QSB).
3(i).7 Amended Certificate of Designations, Preferences and Rights of Series
G 8% Convertible Preferred Stock dated October 16, 2000. (Incorporated
by reference to Exhibit 4.4 of the Registrant's September 30, 2000 10-
QSB).
3(ii) 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).)
10.1 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 of
the Registrant's Registration Statement on Form S-1, Registration
#333-88729, as filed with the SEC on October 8, 1999).
10.2(a) Form of Purchase Agreement dated December, 1999 by and among the
Registrant and investors in $6 million private placement.
(Incorporated by reference to Exhibit 10.23(a) of Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1999 filed with
the SEC on March 15, 2000 (the "December 31, 1999 10-KSB")).
10.2(b) Form of Registration Rights Agreement dated December, 1999 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).
24
10.2(c) Form of Warrant dated December, 1999 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).
10.3 1999 Equity Incentive Plan. (Incorporated by reference to Exhibit A to
the Registrant's Definitive Proxy Statement for the 2000 annual meeting
on Schedule 14A as filed with the Securities and Exchange Commission).
10.4 Form of Purchase Agreement date October 2000 by and among the
Registrant and the Series G Preferred investors. (Incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 2000).
10.5 Form of Registration Rights Agreement dated October, 2000 by and among
the Registrant and the Series G Preferred investors. (Incorporated by
reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 2000).
11.1 Computation of Net Income (Loss) Per Share
Reports on Form 8-K
(b) Report on Form 8-K filed February 28, 2001 for Item 5. Other Events and
Item 7. Exhibits Index
25
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
May 18, 2001.
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 May 18, 2001
- --------------------- And Director
David M. Schwartz
______________________ Chief Financial Officer May 18, 2001
/s/ James A. Newcomb and Director
James A. Newcomb
26