U.S. Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 0-29750
IENTERTAINMENT NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
North Carolina 56-2092059
(State of incorporation) (I.R.S. Employer Identification Number)
215 Southport Drive, Suite 1000
Morrisville, North Carolina 27560
(Address of principal executive office)
(919) 461-0722
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes | X | No | |
As of November 7, 2000, (the most recent practicable date), there were
15,786,405 shares of the issuer's Common Stock, $.10 par value per share,
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes |_| No | X |
<PAGE>
IENTERTAINMENT NETWORK, Inc.
Form 10-QSB Quarterly Report
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II OTHER INFORMATION 16
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IENTERTAINMENT NETWORK, Inc.
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
(UNAUDITED)
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 894 $ 3,092
Trade receivables, net of allowances of $ 0 and $ 241, respectively 1,547 421
Software development costs, net 512 92
Prepaid expenses and other 226 138
-------------- ---------------
Total current assets 3,179 3,743
Property and equipment, net 876 714
Noncurrent assets:
Royalties receivable - 80
Goodwill, net 2,128 3,329
Other - 10
-------------- ---------------
Total noncurrent assets 3,004 3,419
-------------- ---------------
Total assets $ 6,183 $ 7,876
============== ===============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,116 $ 2,258
Royalties and commissions payable 26 120
Current portion of capital lease obligations 37 55
-------------- ---------------
Total current liabilities 1,179 2,433
Capital lease obligations, less current portion 43 29
Series D Redeemable Convertible Preferred Stock, $.10 par value; liquidation
and stated value of $1,000 per share, plus accumulated accretion; 4,911
shares authorized, issued and outstanding at December 31, 1999 (Note 4) - 4,951
Stockholders' equity:
Series D Convertible Preferred Stock $.10 par value; liquidation and stated
value of $1,000 per share, plus accumulated accretion, 4,911
shares authorized, issued and outstanding at September 30, 2000 (Note 4) 5,173 -
Common stock, $.10 par value; 50,000,000 shares authorized; 15,786,405 and
14,722,203 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 1,579 1,472
Additional paid-in capital 38,092 36,672
Accumulated deficit (39,812) (37,565)
Accumulated other comprehensive loss (71) (116)
-------------- ---------------
Total stockholders' equity 4,961 463
-------------- ---------------
Total liabilities, redeemable preferred stock and stockholders' equity $ 6,183 $ 7,876
============== ===============
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
IENTERTAINMENT NETWORK, Inc.
Consolidated Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2000 1999 2000 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
NET REVENUES:
CD-ROM PRODUCT SALES $ 60 $ 373 $ 70 $ 934
PAY FOR PLAY 346 464 1,162 1,429
ROYALTIES AND LICENSES 4 12 120 19
ADVERTISING AND CONTRACT REVENUE 1,493 407 4,111 756
-------------- ------------- ------------- --------------
TOTAL NET REVENUES 1,903 1,256 5,463 3,138
COST OF REVENUES:
COST OF PRODUCTS AND SERVICES 43 238 91 2,588
ROYALTIES AND AMORTIZED SOFTWARE COSTS 44 - 368 311
-------------- ------------- ------------- --------------
TOTAL COST OF REVENUES 87 238 459 2,899
-------------- ------------- ------------- --------------
GROSS PROFIT (LOSS) 1,816 1,018 5,004 239
OPERATING EXPENSES:
SALES AND MARKETING 1,494 660 3,404 3,494
PRODUCT DEVELOPMENT 363 1,000 1,308 4,193
GENERAL AND ADMINISTRATIVE 398 521 1,430 2,643
DEBT CONCESSIONS (265) - (265) -
GOODWILL AMORTIZATION 400 376 1,201 932
-------------- ------------- ------------- --------------
TOTAL OPERATING EXPENSES 2,390 2,557 7,078 11,262
-------------- ------------- ------------- --------------
OPERATING LOSS (574) (1,539) (2,074) (11,023)
OTHER (INCOME) EXPENSE:
INTEREST EXPENSE-THIRD PARTIES (8) 1,198 (3) 3,771
INTEREST EXPENSE-RELATED PARTIES - 21 - 59
OTHER (3) 16 (61) (906)
-------------- ------------- ------------- --------------
TOTAL OTHER (INCOME) EXPENSE (11) 1,235 (64) 2,924
-------------- ------------- ------------- --------------
LOSS BEFORE INCOME TAXES (563) (2,774) (2,010) (13,947)
INCOME TAX EXPENSE 1 10 16 52
-------------- ------------- ------------- --------------
NET LOSS (564) (2,784) (2,026) (13,999)
ACCRETION OF SERIES D PREFERRED STOCK (74) - (221) -
-------------- ------------- ------------- --------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (638) $ (2,784) $ (2,247) $ (13,999)
============== ============= ============= ==============
BASIC AND DILUTED LOSS PER SHARE:
NET LOSS PER SHARE $ (0.04) $ (0.25) $ (0.15) $ (1.31)
============== ============= ============= ==============
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND
DILUTED LOSS PER SHARE 15,747,188 11,013,733 15,256,235 10,674,069
============== ============= ============= ==============
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
IENTERTAINMENT NETWORK, Inc.
Consolidated Statements of Cash Flows
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
2000 1999
------------- -------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (2,026) $ (13,999)
Adjustments to reconcile net loss to net cash used in operating
activities:
Issuance of warrants - 172
Depreciation and amortization 1,440 1,116
Gain on the sale of advance royalties - (855)
Issuance of common stock for services 132 -
Non-cash compensation expense 79 -
Amortization of capitalized software development costs - 329
Noncash interest expense - 2,775
Write-off of capitalized software development costs - 611
Changes in operating assets and liabilities:
Trade and royalties receivable (1,046) 2,402
Inventories - 831
Prepaid expenses and other (29) (84)
Accounts payable and accrued expenses (657) 251
Royalties and commissions payable (94) (529)
Accrued interest payable to related parties - 66
------------- -------------
Net cash used in operating activities (2,201) (6,914)
INVESTING ACTIVITIES
Acquisition of MPG-Net - (15)
Proceeds from the sale of advance royalties - 2,315
Purchase of property and equipment (354) (31)
Increase in notes receivable - (200)
Software development costs (420) (37)
------------- -------------
Net cash (used in)/ provided by investing activities (774) 2,032
FINANCING ACTIVITIES
Proceeds from issuance of common and preferred stock 836 245
Stock registration costs (53) -
Net borrowings on lines-of-credit - (325)
Payments on capital lease obligations (51) (30)
Proceeds from issuance of convertible debentures - 3,660
------------- -------------
Net cash provided by financing activities 732 3,550
Effect of currency exchange rate changes on cash and cash equivalents 45 (41)
------------- -------------
Net (decrease) increase in cash and cash equivalents (2,198) (1,373)
Cash and cash equivalents at beginning of period 3,092 2,943
------------- -------------
Cash and cash equivalents at end of period $ 894 $ 1,570
============= =============
</TABLE>
5
<PAGE>
IENTERTAINMENT NETWORK, Inc.
Consolidated Statements of Cash Flows
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
2000 1999
------------- -------------
NONCASH INVESTING AND FINANCING ACTIVITIES
<S> <C> <C>
Issuance of common stock in connection with development agreement $ 49 $ -
Fixed assets acquired under capital lease 47 -
Issuance of common stock in settlement of contractual liabilities 300 -
Issuance of common stock in connection with employee severance 136 -
Issuance of common stock in connection with acquisition of MPG-Net - 3,858
Issuance of common stock in connection with acquisition of Virtual Business
Designs, Inc - 288
Conversion note payable into common and prefered stock - 831
Contingently issuable warrants provided to holder of convertible debenture - 1,067
Issuance of warrants to broker in connection with convertible debentures - 390
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
IENTERTAINMENT NETWORK, Inc.
Notes to Consolidated Financial Statements
(INFORMATION AS OF September 30, 2000 AND FOR THE THREE AND NINE MONTHS ENDED
September 30, 2000 AND 1999 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
iEntertainment Network, Inc. (f/k/a Interactive Magic, Inc.) (or the "Company")
is a developer and publisher of Internet games and an operator of online game
services. The Company develops and publishes proprietary online multi-player
games and has built an Internet distribution infrastructure which offers online
gamers a variety of free, subscription and pay-per-play games and services,
including simulation, parlor, strategy, role playing and action games. Effective
December 30, 1999, the Company changed its name from Interactive Magic, Inc. to
iEntertainment Network, Inc.
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
iEntertainment Network, Inc., a North Carolina corporation, and its wholly owned
subsidiaries, iMagicOnline Corporation, iEntertainment Network Ltd. and
iEntertainment Network GmbH. All significant intercompany accounts and
transactions have been eliminated.
While the financial information furnished is unaudited, the condensed
consolidated financial statements included in this report reflect all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the results of operations for
the interim periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for interim periods are not
necessarily indicative of the results for the entire year. The condensed
consolidated financial statements should be read in conjunction with the
iEntertainment Network, Inc. consolidated financial statements and the notes
thereto, included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999.
7
<PAGE>
IENTERTAINMENT NETWORK, Inc.
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from pay for play online sales is recognized at the time the game is
played and is based upon actual usage by the customer on an hourly basis. The
Company records advertising revenues in the period the advertising impressions
are delivered to customers. The Company records advertising revenues net of
related administrative fees as reported by its outside advertising vendor. The
Company recorded barter revenue and expense under the criteria established by
EITF 99-17 "Accounting for Advertising Barter Transactions" of $154,000 and
$220,000 for the three and nine months ended September 30, 2000, respectively,
and $0 for the three and nine months ended September 30, 1999. Barter expense is
treated as a Sales & Marketing expense. The Company's advertising contracts do
not guarantee a minimum number of impressions to be delivered.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. SAB No. 101 provides guidance on
a variety of revenue recognition issues, including gross versus net income
statement presentation. The Company's 1999 quarterly reporting on Form 10-QSB
reported advertising revenues gross with related fees reported as selling and
marketing expenses. Based on the criteria of SAB No. 101, the Company has
retroactively reclassified its 1999 quarterly reporting to present its
advertising revenues net of these sales and marketing expenses. The total amount
reclassified for the three and nine months ended September 30, 1999 was $252,000
and $509,000, respectively.
Revenue from CD-ROM product sales was recognized at the time of product
shipment. Revenue from royalties and licenses is recognized when earned under
the terms of the relevant agreements with original equipment manufacturers
("OEMs"), international distributors and other third parties. With respect to
license agreements that provide customers the right to multiple copies in
exchange for guaranteed amounts, net revenue is recognized upon delivery of the
product master or the first copy provided collectibility is probable. Per copy
royalties on sales that exceed the guarantee are recognized as earned. The
Company accepted product returns and provides price protection on certain unsold
merchandise. Revenue from CD-ROM product sales was recorded net of an allowance
for estimated future returns, markdowns, price protection and warranty costs.
Such reserves were based upon management's evaluation of historical experience,
current industry trends and estimated costs.
8
<PAGE>
IENTERTAINMENT NETWORK, Inc.
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
In October 1997, the Accounting Standards Executive Committee "(AcSEC)" issued
Statement of Position "(SOP)" 97-2, "Software Revenue Recognition" as amended in
March 1998 by SOP 98-4 and October 1998 by SOP 98-9. These SOPs provide guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The Company adopted SOP 97-2 for software transactions
entered into beginning January 1, 1998. Based on the current requirements of the
SOPs, application of these statements did not have a material impact on the
Company's revenue recognition policies. However, AcSEC is currently reviewing
further modifications to the SOP with the objective of providing more
definitive, detailed implementation guidelines. This guidance could lead to
unanticipated changes in the Company's operations and revenue recognition
practices.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133, as
amended, is required to be adopted in years beginning after June 15, 2000.
Because of the Company's minimal use of derivatives, management does not
anticipate the adoption of the new statement will have a significant affect on
earnings or the financial position of the Company.
COMPREHENSIVE LOSS
The following chart details the Company's comprehensive loss for the periods
presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 2000 1999
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Loss $ (564) $ (2,784) $(2,026) $(13,999)
Other comprehensive income - foreign
currency translation adjustment 6 (84) 44 (41)
------------------------------------------------------------
Comprehensive loss $ (558) $ (2,868) $(1,982) $ (14,040)
============================================================
</TABLE>
9
<PAGE>
IENTERTAINMENT NETWORK, Inc.
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Costs incurred in the development of software for sale to customers are
capitalized after a product's technological feasibility has been established.
Capitalization of such costs is discontinued when a product is available for
general release to customers. Capitalized software development costs are
capitalized at the lower of cost or net realizable value and amortized using the
greater of the revenue curve method or the straight-line method over the
estimated economic life of the related product. Amortization begins when a
product is ready for general release to customers.
Information related to net capitalized software development costs is as follows
(IN THOUSANDS):
SEPTEMBER 30 DECEMBER 31
2000 1999
------------------ ----------------
Balance at beginning of period $ 92 $ 912
420 128
Capitalized
Amortized - (948)
------------------ ----------------
Balance at end of period $512 $ 92
================== ================
2. DISPOSITION OF ASSETS
In connection with the disposition of its CD-ROM assets, the Company decided to
terminate certain CD-ROM distribution agreements and began negotiations to
mutually release each partner from any obligation under the terms of these
agreements. In the second quarter of 1999, the Company estimated a liability of
$850,000 for potential settlements upon termination of these agreements. The
balance of this liability at September 30, 2000 and December 31, 1999 was
$195,000 and $692,000 respectively and is reflected as accounts payable and
accrued expenses in the consolidated balance sheets.
3. BUSINESS COMBINATION
On February 12, 1999, the Company completed the acquisition of MPG-Net, Inc.
("MPG-Net") by exchanging 600,000 shares of its common stock valued at
approximately $3.1 million for all of the outstanding common stock of MPG-Net
and issuing 150,000 shares of its common stock valued at approximately $800,000
in full settlement of certain debt obligations of MPG-Net. MPG-Net was primarily
in the business of developing, publishing and distributing interactive, real
time 3-D entertainment for multi-user online/Internet play, as well as creating
entertainment platforms on the Internet such as online game channels, game hubs
and websites. The acquisition was accounted for as a purchase in accordance with
10
<PAGE>
IENTERTAINMENT NETWORK, Inc.
Notes to Consolidated Financial Statements (continued)
3. BUSINESS COMBINATION (CONTINUED)
Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations" and,
accordingly, the operating results of MPG-Net have been included in the
Company's consolidated financial statements from the date of acquisition. The
excess of the aggregate purchase price over the fair market value of the net
assets acquired of approximately $4.3 million is being amortized on a
straight-line basis over 3 years.
4. STOCKHOLDERS' EQUITY AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 2000, the Company issued 600,000 shares of its common stock for cash
totaling $600,000.
As of December 31, 1999, the Company had 4,911 shares of Series D redeemable
convertible preferred stock outstanding. These shares were redeemable at the
option of the holder until a registration statement registering the underlying
common stock necessary to effect a conversion of the Series D preferred stock,
became effective. A registration statement was filed and became effective in
March 2000 which removed the redemption feature that was outside the control of
the Company. Accordingly, the Company classified the Series D preferred stock as
permanent equity during the first quarter of 2000.
The Series D preferred stockholders are entitled to a 6% annual return on the
stated value of the preferred stock, upon liquidation, conversion, and
redemption within control of the Company. Accordingly, the Company has recorded
this return as accretion to the stated value of the preferred stock and a charge
to accumulated deficit. For the three and nine months ended September 30, 2000,
the recorded accretion was $74,000 and $221,000. Accumulated accretion at
September 30, 2000, and December 31, 1999 was $262,000 and $40,000,
respectively.
5. STOCK OPTIONS, STOCK PLANS AND WARRANTS
The following table summarizes the activity under the Company's Stock Option
Plans for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE
OUTSTANDING PER SHARE
-------------------------------------------------------
<S> <C> <C>
Balances at December 31, 1999 3,755,794 $ 1.95
Options granted 746,181 1.97
Options exercised (386,782) 1.49
Options canceled (364,475) 3.18
-------------------------------------------------------
Balances at September 30, 2000 3,750,718 $1.89
=======================================================
</TABLE>
At September 30, 2000, the Company had 2,312,428 options exercisable at exercise
prices ranging from $1.00 - $6.00 per share.
The Company had 1,185,903 and 1,210,903warrants outstanding at September 30,
2000 and December 31, 1999, respectively, all of which were exercisable at
prices ranging from $1.00 to $9.60 per share.
11
<PAGE>
IENTERTAINMENT NETWORK, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED
TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
OVERVIEW
During 1999, the Company implemented its revised business strategy focusing
future efforts solely on the Internet. As part of its plan, on June 30, 1999,
the Company received $2,500,000 from Ubi Soft Entertainment S.A. for the sale of
the rights the Company had for the development of certain CD-ROM games. The sale
of the development rights marked the Company's exit from the CD-ROM business.
The Company retained the online rights for these games. During the fourth
quarter of 1999, management of the Company began the process of closing its
European operations which historically had supported its CD-ROM business. The
three and nine month financial statement comparisons are therefore heavily
impacted by the disposition of the CD-ROM business.
NET REVENUES
Net revenues increased by 51% to $1.9 million for the three months ended
September 30, 2000 from $1.3 million for the three months ended September 30,
1999. Net revenues increased by 74% to $5.5 million for the nine months ended
September 30, 2000 from $3.1 million for the nine months ended September 30,
1999.
The following table summarizes the changes in the components of revenue from
1999 to 2000:
<TABLE>
<CAPTION>
Three Months Nine months
ended September ended September
30 30
($000) ($000)
<S> <C> <C>
Revenue for the period in 1999 $ 1,256 $ 3,138
Increase/(Decrease) in CD-ROM revenue (313) (864)
Increase/(Decrease) in Pay for Play (118) (267)
Revenue
Increase/(Decrease) in Royalty & Licensing (8) 101
Increase/(Decrease) in Advertising and
Contract Revenue 1,086 3,355
------------------- ------------------
Revenue for the period in 2000 $ 1,903 $ 5,463
=================== ==================
</TABLE>
The Company expects that, under its Internet only strategy, future revenues will
be derived primarily from advertising supported games and its pay for play
premium games.
COST OF REVENUES
Cost of revenues consists of costs of products sold (including cost of Internet
access) and royalties and amortization of software development costs. Cost of
revenues in the three and nine month periods ending September 30, 2000 decreased
to $0.1 million and $0.5 million from $0.2 million and $2.9 million in the same
periods of 1999. The decreases were due primarily to the Company's exit from the
CD-ROM business.
12
<PAGE>
IENTERTAINMENT NETWORK, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Operating expenses decreased by 7% to $2.4 million for the three months ended
September 30, 2000 from $2.6 million for the three months ended September 30,
1999. Operating expenses decreased by 37% to $7.1 million for the nine months
ended September 30, 2000 from $11.3 million for the nine months ended September
30, 1999.
The following table summarizes the changes in the components of operating
expenses from 1999 to 2000:
<TABLE>
<CAPTION>
Three Months Nine months
ended September ended September
30 30
($000) ($000)
<S> <C> <C>
Operating Expenses for the period in 1999 $ 2,557 $ 11,262
Increase/(Decrease) in Sales and Marketing 834 (90)
Increase/(Decrease) in Product Development (637) (2,885)
Increase/(Decrease) in General and Administrative (123) (1,213)
Increase/(Decrease) in Debt Concessions (265) (265)
Increase/(Decrease) in Goodwill Amortization 24 269
------------------ -------------------
Operating Expenses for the period in 2000 $ 2,390 $ 7,078
================== ===================
</TABLE>
SALES AND MARKETING
Sales and marketing expenses increased during the third quarter from the prior
year's comparable period due primarily to increased costs associated with
customer incentives, increased partner promotion expenses and expenses related
to barter advertising. The three month period ending September 30, 1999
represented the first quarter of the Companys' internet only strategy. Sales and
marketing expenses decreased slightly in the nine month period ending September
30, 2000 from the prior year's comparable periods due primarily to the Company's
exit from the CD-ROM business. The elimination of CD-ROM product advertising
expense and the reduction in personnel costs, offset increased customer
incentive and partner promotion expenses relating to our online business.
PRODUCT DEVELOPMENT
Product development expenses, especially staffing expenses, decreased in the
three and nine month periods ending September 30, 2000 from the prior year's
comparable periods primarily due to the exit from the CD-ROM business. The
decreased expenses in the third quarter also included $0.1 million of
capitalized software development costs. The first nine months of 1999 included
one-time charges for the write-off of costs associated with the exit from the
CD-ROM business including unamortized development costs of $0.6 million and
advance royalties on unreleased product of $0.5 million.
13
<PAGE>
IENTERTAINMENT NETWORK, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased in the three and nine month
periods ending September 30, 2000 from the prior year's comparable periods
primarily due to the consolidation of our worldwide operations to North
Carolina. The Company recognized significant reductions in facilities, employee
and professional expenses. The nine month period ending September 30, 1999 also
included a charge of $0.3 million from our European operations associated with
the exit from the CD-ROM business
DEBT CONCESSIONS
Debt Concession as presented in the three and nine month periods ending
September 30, 2000 represent settlement of outstanding liabilities at less than
their carrying values in the underlying financial records.
GOODWILL AMORTIZATION
Goodwill from the MPG-Net acquisition, acquired in mid first quarter 1999, is
being amortized to expense over 36 months. Goodwill from the Gamers Net
acquisition, acquired in third quarter 1999, is being amortized to expense over
24 months.
OTHER (INCOME) EXPENSE
The change in other (income) expense in the three and nine month periods ending
September 30, 2000 from the prior year's comparable periods is due primarily to:
1) the inclusion in the first quarter of 1999 of the interest expense relating
to the recognition of the beneficial conversion feature of the $4,000,000
convertible debenture, and related warrants, which were issued in the first
quarter of 1999; as well as the interest expense on these debentures and 2) the
inclusion in the second quarter of 1999 of a $0.9 million gain related to the
exit from the CD-ROM business. The interest expense referred to in item 1
accounts for the difference in the quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash and cash equivalents of $.9
million. The following is a condensed table of cash and cash equivalents on hand
and major cash flow items:
($000)
--------
Cash and cash equivalents on hand, December 31, 1999 $ 3,092
Net loss (2,026)
Add: non-cash charges and expenses 1,651
Changes in working capital (1,826)
--------
Net Cash Used in Operations (2,201)
Net investing and financing activities (42)
Effect of exchange rates on cash and cash equivalents 45
--------
Net change in cash and cash equivalents (2,198)
--------
Cash and cash equivalents on hand, September 30, 2000 $ 894
========
14
<PAGE>
IENTERTAINMENT NETWORK, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On June 30, 2000, the Company sold 600,000 shares of common stock to Vertical
Financial Holdings in a private placement for $600,000. Vertical Financial
Holdings purchased these securities for investment purposes.
The Company used $4.7 million less net cash in operating activities during the
first nine months of 2000 compared with the same period in 1999. This decrease
was primarily due to exiting the CD-ROM business and increasing the focus on a
pure Internet strategy during 2000, resulting in reduced cash operating
requirements.
The Company's success is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain additional financing
or refinancing as may be required, and ultimately to attain profitability.
Management expects the disposition of its CD-ROM operations has and will
continue to reduce its operating losses and expects to be able to attract
additional capital, if needed, for its online operations. However, there can be
no assurance that management's plans will be executed as anticipated.
As of the balance sheet date the Company believes that it may not have
sufficient cash resources to fund it's operations through the next twelve
months. The Company has received inquiries as to a potential merger and has
retained Concordia Capital Technology Group to advise it on strategic
alternatives. There is no assurance that the Company will be able to close on
any financing transaction. The Company does not have any current arrangements or
commitments for any future financing. The Company may not be able to obtain
sufficient additional financing to satisfy its cash requirements. The Company
may be required to obtain financing on terms that are not favorable to it and
its shareholders.
The Company has been informed by its independent auditors that, depending on its
success in obtaining additional financing to meet future cash requirements
referred to above prior to the completion of their audit of the Company's
consolidated financial statements for the year ending December 31, 2000, their
auditor's report on those financial statements may be modified in that these
matters may raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
If the Company is unable to obtain additional financing when needed, it may be
required to delay or scale back product development and marketing programs in
order to meet its short-term cash requirements, which could have a material
adverse effect on its business, financial condition and results of operations.
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IENTERTAINMENT NETWORK, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's forecast for the period of time through which its financial
resources will be adequate to support its operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary.
The factors described in the preceding paragraphs will impact the Company's
future capital requirements and the adequacy of its available funds.
EURO CONVERSION
On January 1, 1999, the European Community began denominating significant
financial transactions in a new monetary unit, the Euro. The Euro is intended to
replace the traditional currencies of the individual EU member countries. During
the fourth quarter of 1999, the Company decided to close its European operations
and therefore is not converting internal financial systems to the Euro as a
functional currency during this closure period.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From January 1, 2000 through September 30, 2000, the Company (1) issued warrants
to purchase 52,500 shares of common stock to members of the Board of Directors
in recompense for services at exercise prices ranging from market value to 79%
of the market value on the date of issuance; (2) issued warrants to purchase
25,000 shares of common stock to a contractor for services priced at market
value on the date of issuance; (3) granted options to purchase 513,500 shares of
common stock to 38 employees priced at market value on the date of grant; (4)
issued 180,181 shares of common stock to contractors for services priced at the
average market price over a range of days specified under contract; (5) issued
77,420 shares of common stock, priced at market value on the date of contract
execution, to a vendor in satisfaction of outstanding liabilities; (6) issued
600,000 shares of common stock on June 30, 2000 for cash of $600,000 at 89% of
the market value on the date of issuance to Vertical Financial Holdings. The
Company used the proceeds of the sale for general working capital requirements.
Items (1) through (6) were exempt from registration under Section 5 of the
Securities Act of 1933, as amended, by reason of Section 4(2) of the Act and
Regulation D of the Securities and Exchange Commission.
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IENTERTAINMENT NETWORK, Inc.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Risk Factors
In connection with the "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document are advised that this
document contains both statements of historical facts and forward-looking
statements. Our forward-looking statements include statements related to capital
needs and ability to raise capital. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions are
intended to identify forward-looking statements. Our forward-looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those indicated by the forward-looking statements.
Our forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs, and certain assumptions
made by management. These statements are not guarantees of future performance
and actual actions or results may differ materially. These statements are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. We undertake no obligation to update publicly any forward-looking
statements as a result of new information, future events or otherwise, unless
required by law.
You should carefully consider the risks described in the Company's 10-KSB,
together with all of the other information included in this Form 10-QSB, before
making an investment decision. The risks and uncertainties described are not the
only ones we face. If any of the these risks actually occur, it is likely that
our business, financial condition or operating results would be harmed. In such
case, the trading price of our common stock could decline, and you could lose
all or part of your investment.
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IENTERTAINMENT NETWORK, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.01 Financial Data Schedule
(B) REPORTS ON FORM 8-K
Since the filing of the Company's 2000 Second Quarter, Form 10-QSB, the Company
filed current reports on Form 8-K in conjunction with the following event:
On August 24, 2000, the Company issued a press release to announce that it had
received inquiries as to a potential merger and that it had retained Concordia
Capital Technology Group to advise it on strategic alternatives.
IENTERTAINMENT NETWORK, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IENTERTAINMENT NETWORK, INC.
By: /s/ Michael C. Pearce
----------------------
Michael C. Pearce
Chief Executive Officer
By: /s/ Robert L. Hart
----------------------
Robert L. Hart
Chief Financial Officer
18
