Table of contents

Letter to Stockholders.... 1 Company Description. 2 Management of Operations... 3 Management Discussion.... 4 Market Research.. 5 Internet Sales... 7 Advertising Campaign.. 10 Trade Shows.... 11 ImagiNation Inc. in Vienna!...................................................... 13 Organization/Board of Directors............................................... 14
FINANCIAL DATA

Letter from the CFO................................................ 15 Income Statement.............................................................. 16 Cash Budget....................................................................... 17 Balance Sheet..................................................................... 18

Letter to Stockholders
Dear Stockholders, In the beginning of the 2011-2012 fiscal year, many of our employees had never participated in Virtual Enterprise. We were trying to understand what to do and how to do it. Time and time again, we raised a simple, though very puzzling question: What do customers want? The ImagiNation Inc. team and the Kadabra! brand were carefully constructed to worry about your problems so you dont have to. And that is exactly what we do through Kadabra!: we find ways to give you the chance to unlock your natural potential, to be more efficient and, overall, plain super! We strive to create the best versions of people and bring solutions through the idea and the feeling of having special powers. Essentially, we are selling super fun placebos that exercise the imagination of our customers. We are glad to announce that since our firm was incorporated, we have fulfilled multiple goals, allowing ourselves to stand tall and proud among other VE groups. Through our aggressive advertising campaign, we managed to create wide awareness of our firm, attracting partners and developing an ongoing, personal relationship with our customers. We promoted our image well to both domestic and international firms, welcoming visits from Brazilian and German firms to our own. In our first year active, we achieved $100,000 in sales of special powers, making profit and advancing substantially as a firm. We know; as an investor, you need more than scratching the surface. You want to see what lies beneath the magic of Kadabra!, you want to know who is behind it. This annual report will provide this to you along with that unique, imaginative, fun and inspirational flavor ImagiNation Inc. has created. You already know it we put the power in your hands!

Sincerely,

Yousif Yahya Chief Executive Officer

Company Description
ImagiNation Inc. was launched as a new Virtual Enterprise firm in September 2011, with 18 employees. It operates in the novelty industry from the High School for Arts, Imagination and Inquiry. Our firm aims to exercise the imagination of our customers through our Kadabra! brand products. ImagiNation Inc. filed with VE Law & Management and became incorporated as of November 5, 2011. We are located at 122 Amsterdam Ave, Room 376, New York, NY, 10023.

Mission Statement
At ImagiNation Inc., it is our mission to help our customers unlock their natural potential. We believe every human being is an individual and has something that makes them extraordinary. We strive to create products that inspire our customers to become the best versions of themselves.

Management of Operations
ImagiNation Inc. is broken down into five departments: Administration, Sales & Marketing, Accounting & Finance, Human Resources and Technology. The duties in each department contribute in achieving our firms goals, creating a strong, solid structure. To ensure that all sales and business activities are effective and efficient, our firm holds monthly status meetings with the head of each department. In these meetings, the goals and achievements for the month are analyzed, future objectives are discussed and strategies are developed. The team also estimates average sales goals for following months based on previous ones. That way, it is easier to understand where to place future advertisements and where to direct our customers. Departmental meetings are also held regularly to discuss specific objectives such as product development, pricing strategies, financial records monitoring, accounts receivables outreach, and website maintenance. The Administration department often discusses partnerships establishment through direct communication with other firms. Throughout the year, we explored domestic and international firms, creating relationships that resulted in profits for both parties. ImagiNation Inc.s Human Resources department was a key factor in our firms development this year. They were responsible for overseeing employee activities such as attendance, performance, and possible conflicts. In the beginning of the year, HR employees developed an Employee Manual to ensure the most efficient and moral performance from each and every member of our team, and created methods to motivate employees. At the end of every marking period, Human Resources distributes employee evaluations and discusses with employees regarding what they did well and what they should work on.

Management Discussion
All things considered, ImagiNation Inc. had a great first year of business. We exceeded our profit expectations and came to popularize our name within Virtual Enterprise, allowing upcoming employees to work with more ease and security. As this was our first year as a firm, our fiscal year was partially focused on deciding what to sell. When it was decided that we would operate in the novelty industry, we developed fun, unique products at a gross profit margin of nearly 90%. Our estimated break-even point was a little over $100,000, a result of our relatively low $85,000 fixed cost. Breaking even at that point, we expected profit of about $6,000. As it turned out, we achieved a total of $99,486 in sales and our operations expenses added up to $78,546, resulting in $7,919 of net income after taxes. Our success in our first year of business is largely a result of our aggressive advertising campaign and a survey conducted over the course of November, which promoted the Kadabra! brand, making it highly known among other firms. This survey was an extremely important factor in product development since it allowed us to better understand what our customers wanted. With base on their wants and our mission of making each individual the best they can be, the Kadabra! brand came to develop a series of trustworthy products that are not only fun, but also helpful. Another important factor in our success this year was the nearly perfect projections and attainable goals set in the beginning of the fiscal year. We had a very low error margin for our financials, resulting in successful management of operations.

Market Research
Throughout the month of November, we placed advertisements on the Virtual Enterprise International website to promote our market research survey. The objective of this survey was to understand what our potential customers wanted. The results indicated that 50% of those who responded to our survey wished to improve in time management (Fig. A).
Fig. A Fig. B

We had also speculated that our customers would like to achieve a certain level of success without having to go through as many obstacles. This was based on the idea that, in early adulthood, consumers want things made easier. As seen in the chart, the second most wanted aspect to improve is artistic ability. However, artistic talent was not a favorite when it came to desired special powers, as shown in Figure B. Based on the results of the survey, we understood that our market could be segmented into customers who seek efficiency and customers who prioritize fun products. Powers categorized as efficient include Kadabra!s Super Speed and Super Smarts, while our Special Voices Package, for example, is more inclined to fun purposes. Efficiency is substantially more popular with those who took our survey, and became our focus for product development and marketing strategies. When our website and order form were running, we added a section inquiring what else our customers would like us to offer. With this, we were able to continue developing imaginative products that matched our customers needs, securing a personal and close relationship with each person, and making sure that they were satisfied with our services.

Market Research (continued)

In the New York City Trade Show in March, our team thought it best to test brand awareness, determining whether or not our advertisements had been seen and noticed. During the trade show, ImagiNation Inc. employees took turns talking to customers, asking questions and completing the awareness survey while distributing Special Healing Power samples. When organizing the information gathered during the trade show, we found that 61% of interviewees had heard of Kadabra! before (45% of which had seen our advertisements), and no less than 90% of all participants (those who had and those who hadnt heard of us) were satisfied with our products and found that the prices are fair and good. Part of our market research consisted of discovering who our innovators are, based on the idea of Diffusion of Innovations, a theory which measures the rate at which new creations are spread within a culture. Innovators are the first 2% to adopt an idea. These people are generally attracted to one kind of product and will buy anything that comes out within that category. In our case, we were looking to find who were the people seeking innovation in the novelty industry. Once we were able to get a hold of these people, our product would be more easily spread to other types of customers. To find out who these people were, we gathered information regarding the states which bought more and the states where our new products sold best. New York and Tennessee were our top buyers. Once we found this information, however, it was difficult to apply it, especially since our advertisements could not be displayed for one specific location. Still, this research was useful in narrowing our target marketing, and this information can strengthen next years advertising campaigns.

Internet Sales
When the ImagiNation Inc. Business Plan was developed, we were confident that internet sales would be particularly important for our company. Although the New York City and Vienna Trade Shows were expected to bring more sales, internet sales are a steady source of revenue. Therefore, the majority of our advertisement campaign focused on directing web traffic to the Kadabra! website. Kadabra.us was launched in December. Prior to that, we placed a teaser advertisement fostering curiosity and directing potential customers to our market research survey. Throughout the year, we used Google Analytics to track the traffic to our website, determining the number of people, the place the visit came from and what pages were visited. The chart below depicts monthly access to Kadabra.us:

The month of December had the least visits (51) because the website was very new, and January was our leading month in terms of visits, with 229. This could be because we entered the Citywide Business Plan Competition on January 13, having popularized our company previously in the Local Competition. February and March proved the theory of steadiness in internet sales with a very similar visit rate. During these months, we had unique visitors from Spain, Indonesia and Brazil. April fell short of our expectations, probably because the fiscal year approached an end.

Internet Sales (continued)

It is important to point out that not all visits become sales. In December, for instance, 27 of the 51 visits were sales. The chart below illustrates the number of visits that were actual sales:

Here, the projected sales are compared to the actual monthly results: Projections vs. results for internet sales Projection Actual results Percent difference $1,000 $1,170 +1.7% $3,000 $4,383 +46.1% $5,000 $5,947 +18.94% $5,000 $4,868 -2.64% $5,000 $2,062.50 -58.75%

December January February March April

Comparing these results, the average sale value was found, and we were able to estimate the exact number of website visits we needed to achieve our sales goal for the month. In the January status meeting, for example, our team determined a total of 45 sales out of 280 visits (about 16%) throughout both December and January, earning $5,553. Dividing the total value of the sales by the number of sales, we found that the average sale price was approximately $123. To achieve our sales goal for February ($5,000), we aimed for about 256 visits and 40 sales (18% percent of 256) of average value.

Internet Sales (continued)

Gathering all this information each month, our team was able to decide where to place future advertisements, and where to direct customers. We also found that it could be interesting to see how many of our site visitors actually went to our order form and how many of these people did make a purchase. Since we began to track the access to order form, in March, it was visited 99 times, resulting in 40 purchases. This could indicate a number of things, one of them being problems with the order form. It could mean that customers wanted to purchase but werent able to. Theres also a chance that people changed their minds or that making a purchase wasnt the plan in the first place, and they were only roaming about. It is hard to determine what the issue (if there were any) was. With that in mind, we often made test sales through our order form and employees accessed the website from their own homes, checking its effectiveness and reporting any issues so that you wouldnt ever have to be troubled by it.

Screenshots of the Kadabra! website, Kadabra.us

Advertising Campaign
Since ImagiNation Inc. started, our Sales & Marketing team has directed most of its efforts towards the development of creative and efficient ways to promote Kadabra! products. We spent a substantial amount of money (over $35,000) on advertisements placed on various virtual magazines, other firms websites and the Virtual Enterprise International website, as well as sending faxes, promoting products by email, and making cold calls. The latter strategy was the least effective: many firms did not answer the phone, even during their work hours. Our advertisements included coupon codes valid for discounts. These served not only to attract customers, but also as a way to track the effectiveness of each of our ads. To a certain extent, this strategy failed many people saw the ads, but the majority disregarded the coupon codes. We developed theories as to why this happened. This observation could indicate that prices in Virtual Enterprise are inelastic, meaning that demand remains the same even as prices increase. This theory makes sense for Virtual Enterprise because participants have nothing to lose, using virtual money. If such is the case, customers probably find discounts unimportant. Perhaps, on the other hand, this could mean that the coupon code section of our order form wasnt very clear, which we should plan to address.

Banner ad placed in other firms websites throughout the year, promoting the Kadabra! website.

Kadabra! advertisement placed on the Virtual Enterprise International website in February 2012, to promote two new products.

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Trade Shows
On March 16, two ImagiNation Inc. employees went to Vienna, Austria, for the International Trade Show. Their goal was to represent and advertise the firm properly for both international firms and domestic ones in attendance. Despite of the work that it takes in preparation for the Trade Show, they had the opportunity to spend a week living with a host family, attend an international business college, and explore Viennas many attractions. Before their departure, all the departments in our firm came together and worked to develop an appropriately creative and unique booth, and a good marketing strategy, which included converting our prices from dollars to euros. We did an extensive research in psychology to determine how to set up our booth for the Trade Shows. Studies regarding colors indicate that different colors have different effects on the human mind, influencing a variety of feelings to arise when we notice them. The color red, for instance, should be used in small doses for retail businesses because it causes inclination to aggression and anger. The right amount of red should result in people feeling energetic, passionate, and excited. Yellow is often used in businesses for attracting customers because of its happy and playful quality, even though it may create anxiety. This color, we found, is ideal if businesses want customers to come in, purchase, and go out quickly. Green is stimulating to thirst, therefore appropriate for use in restaurants. Blue symbolizes honesty and trustworthiness. It has a calming effect on people and is generally useful in attracting customers, besides helping to entice customers, causing them to spend more time in the store. Based on this research, it was determined that our booth would consist primarily of the color blue, with the Kadabra! classic theme of comic books hanging from the sides to strengthen our brand image, and red cloth on our booths table. Besides the psychological influence of the chosen colors, we also kept in mind that superheroes often wear blue and red outfits, which, again, supports Kadabra!s brand image and our mission of helping customers feel super.

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Trade Shows (continued)

After creating a small prototype of our booth, our challenge was to improve our marketing strategy and develop an effective way to attract customers to our booth. In order to solve this problem, more research was done, this time on how to attract customers. Our ultimate strategy was based on a theory claiming that curiosity arises from the perception of a gap in understanding, and that this deprivation is akin to the feeling of hunger. When a person becomes aware of a gap in their knowledge, they feel that they must fulfill it.

The prototype and the real booth

Because of our aggressive advertising campaign, we realized that several people in Virtual Enterprise already knew us, even if not thoroughly. With that, we chose to prominently display our Super Smarts, a classic Kadabra! product, and a novelty favorite, Teleportation. This way, there was something that they knew and many had already bought. Next to it, a somewhat mysterious product which revealed a gap in their knowledge of Kadabra! and in their understanding of the world since when could we teleport? Finally, after analyzing more studies, we trained our employees to emphasize a few key words during their sales pitch. These include words such as you and can (individually or not), which incline customers towards increased confidence in themselves; easy, which provides them with the feeling of capability, and, most importantly, imagine. This word has been proved to instigate a persons imagination almost instantly. These are useful not only for their meanings, but also because they are truly related to Kadabra! and its mission. To ensure the most effective service to our customers, we had our employees take shifts in making sales, directing customers to our booth, and talking to them and distributing our survey. Throughout the trade show, not one customer remained unattended or left dissatisfied with our products and services. We also had three Apple iPads and one computer available for our customers purchases. This way, we were able to place orders faster and with instant email receipts, besides making it easier to track them. Our technological efforts made our team more efficient, just as our products make our customers more efficient.

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In Vienna!
This year, ImagiNation Inc. had the chance to send two employees to Vienna, Austria, for the international Trade Show. The chosen employees were our VP of Sales & Marketing and our VP of Human Resources. Their trip required a lot of preparation from them and the rest of the firm, as we hoped to convey a good image of the firm internationally. This, however, does not mean that their trip was a stressful one. It was quite the opposite! While in Vienna, our employees stayed with host families. Luckily for them, they were right in the 7th District, known for being a good place for shopping, and full of landmarks. Besides visiting an international business college for lectures and other activities, they had the chance to visit the Stephansdom (or St. Stephens Cathedral) and the Schnbrunn Palace, for example.

When our employees returned, they had tons of stories to tell about the food, the language, the people, and more. Not much later, they would welcome their hosts into their own homes for the New York City Trade Show, developing new friendships and knowing more about a different culture.

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Board of Directors
Nicholas Chapman Coordinator, ImagiNation, Inc. Stephen Noonan Principal, High School for Arts, Imagination and Inquiry Jaimee Fischer Assistant Principal, High School for Arts, Imagination and Inquiry Iris Blanc Director, Virtual Enterprises International John Jastremski Assistant Director, Virtual Enterprises International Eric Spinner Assistant Director, Virtual Enterprises International
To make sure that ImagiNation Inc.s pursuit of excellence and improvement is headed the right way, the members of our board of directors overlook our company and mission.

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Financial Data
Letter from the CFO
Dear Stockholders, As Chief Financial Officer of ImagiNation Inc. for the 2011-2012 fiscal year, I hereby take full responsibility for all financial data presented in this annual report. The Accounting department of ImagiNation Inc. kept all financial data organized and clear throughout this fiscal year. I, Irvin Barreto, take full responsibility for the validity of this information.

Sincerely,

Irvin Barreto
Irvin Barreto Chief Financial Officer

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Income Statement
ImagiNation Inc. Income Statement FY 2011-2012 PROJECTED Sales revenues Internet Sales NYC Trade Fair (On Account) NYC Trade Fair (Cash Sales) International Trade Fair (Credit) Sample Sale Total sales revenues Cost of goods sold Gross profit Gross Margin Operating expenses Salaries Payroll tax Rent Advetising/ Promotion Trade Fair Booth Insurance Accounting & Legal fees Utilities Interest Expense Pension or 401(k) Depreciation Other or miscellaneous Total operating expenses Income from operations Other gains and losses Net income before taxes Corporate income tax Net income after taxes 21,000 25,000 25,000 20,000 24,300 115,300 23,060 92,240 80% 32,400 2,479 6,975 30,000 1,000 333 333 2,375 1,507 0 4,000 3,650 85,053 7,187 0 7,187 1,078 6,109 ACTUAL 21,381 17,093 25,028 11,211 24,773 99,486 11,623 87,863 88% 24,684 1,888 6,975 35,050 0 333 333 2,375 1,507 0 4,355 1,044 78,546 9,317 0 9,317 1,398 7,919 % Difference 2% -32% 0% -44% 2% -14% -50% -5% 10% -24% -24% 0% 17% -100% 0% 0% 0% 0% 0% 9% -71% -8% 30% 30% 30% 30%

After conferencing in the beginning of the year, our team set out with the goal of achieving a total of $115,000 in sales, with $85,000 spent in operating expenses and an estimated total profit of about $6,000. We were able to achieve over $99,000 in sales. Additionally, our operating expenses were also lower, and we were able to have a 30% larger profit than expected, $7,919. This is in large part due to our low cost of goods sold. Expecting 80%, we found our gross profit margin to be 88% percent this year, which allowed our firm more financial freedom, as our products cost us very little.

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Cash Budget
ImagiNation Inc. Cash Budget FY 2011-2012 Description Cash balance at beginning of period: Receipts of cash: Sales Receipts of accounts receivable Loan proceeds Other Total receipts Beginning balance + cash receipts Payments: Cost of merchandise Salaries Accounts payable Rent Advertising/ promotion Payroll tax Insurance Accounting and legal fees Utilities Loan Principal Loan Interest Pension, 401(k) Sales tax Shipping Other or miscellaneous Corporate tax Total payments Cash balance at end of period: Net increase or decrease in cash Projected Budget 0 102,963 15,094 80,000 60,000 258,057 258,057 23,060 23,855 5,913 10,463 30,000 5,211 500 500 3,563 7,461 1,507 0 2,695 3,790 3,000 0 121,518 136,539 136,539 Actual Budget 0 75,483 13,871 80,000 90,000 259,354 259,354 10,993 19,572 0 12,207 25,050 3,313 500 500 4,157 7,461 1,507 0 863 373 33,707 0 120,203 139,151 139,151 % Difference

-27% -8% 0% 50% 1% 1% -52% -18% -100% 17% -17% -36% 0% 0% 17% 0% -68% -90% 1024% 0% -1% 2% 2%

Throughout the year, our cash budget projections proved to be very close to our actual results. We expected total receipts to be about $258,000, they were about $259,000. Similarly, we expected payments to add up to over $121,000 and they added up to little less than that, $120,203. At the end of the fiscal year, our projection for a $136,000 cash balance, resulted in over $139,000. This indicated a 2% error in our projections, proving that our research and expectations in the beginning of the year were highly realistic and attainable. The percentage difference remained low despite the 1024% error in the Other or miscellaneous section (this high difference is due to the purchase of our office equipment).

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Balance Sheet
Assets
Current Assets Cash Investments in stocks Accounts receivable Merchandise inventory Supplies Total Current Assets

ImagiNation Inc. Projected Balance Sheet FY 2011-2012 4/30/2012 Projected 136,541 0 9,516 0 600 146,657 12,664 1,689 15,000 2,000 5,000 667 28,308 174,965

4/30/2012 Actual 139,151 0 16,125 0 600 155,875 12,664 1,689 15,000 2,000 5,000 667 28,308 184,184

Fixed Assets Computers Less: accumulated depreciation Furniture and fixtures Less: accumulated depreciation Office equipment Less: accumulated depreciation Total Fixed Assets Total Assets

Liabilities and Shareholders' Equity

Current Liabilities Accounts payable Unearned revenue Shipping Payable Sales tax payable Salaries payable Payroll tax payable Corporate tax payable Total Current Liabilities Long Term Liabilities Loan payable Total Liabilities Shareholders' Equity Common stock, $10 par value, * # shares issued Additional paid-in-capital Retained earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 0 0 1,125 4,813 1,789 782 1,078 9,586 72,539 82,125 600 0 901 3,898 1,564 1,302 1,398 9,662 72,539 82,201

90,000 0 2,840 92,840 174,965

90,000 0 11,983 101,983 184,184

Similarly to the previous data, our balance sheet presents very close projections and results, with less than $100 in difference between our projected total liabilities and the results. The biggest difference, which shows in our total assets, is due to an unexpected value in accounts receivables, an effect of difficulty in tracking down trade show payments that resulted in a difference of almost $10,000 between projected and actual Total Assets.

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