<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: COMMISSION FILE NUMBER
MARCH 31, 1997 0-23672
SMART GAMES INTERACTIVE, INC.
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1692323
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(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
2075 CASE PARKWAY SOUTH
(216) 963-0660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $.0002 PAR VALUE
COMMON STOCK PURCHASE WARRANTS
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE: 12,648,244 SHARES OF COMMON STOCK,
$.0002 PAR VALUE, AT MAY 15, 1997.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 12 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
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
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TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES NO X
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SMART GAMES INTERACTIVE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
INDEX
Page
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<S> <C> <C>
Part 1. Financial Information
Item 1. Financial Statements
Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 3
Statements of Operations for the three months ended March 31, 1997
and 1996 (unaudited) 4
Statements of Cash Flows for the three months ended March 31, 1997
and 1996 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 7
Part 2. Other Information 8
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 9
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
SMART GAMES INTERACTIVE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
March 31, 1997 December 31,1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $173,458 $482,340
Accounts receivable, less allowances of $20,000 and $44,000 respectively 12,780 28,980
Prepaid expenses and other current assets 176,909 171,886
Inventories:
Raw Materials 296,822 301,389
Work-in-process 177,194 166,180
Finished Goods 83,461 91,374
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Total inventories 557,477 558,843
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TOTAL CURRENT ASSETS 920,624 1,242,049
Property and equipment, net 143,605 165,061
Other noncurrent assets
Trade Credits, net of valuation reserves of $798,000 42,000 42,000
Other assets, net 87,727 84,085
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29,727 126,085
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TOTAL ASSETS $1,193,956 $1,533,195
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations $4,577 $5,841
Accounts payable 290,404 591,235
Accrued compensation and related liabilities 4,536 4,328
Other accrued expenses 172,038 207,700
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TOTAL CURRENT LIABILITIES 471,555 809,104
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 28,797 28,797
SHAREHOLDERS' EQUITY
Preferred stock, at par value ($0.0002),
5,000,000 shares authorized, 0 shares
issued and outstanding -- --
Common stock, at par value ($0.0002),
50,000,000 shares authorized; 12,648,244
issued and outstanding at March 31, 1997 and at December 31, 1996 2,530 2,530
Paid in capital 6,262,943 6,262,943
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Accumulated deficit (5,571,869) (5,570,179)
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693,604 695,294
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,193,956 $1,533,195
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
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SMART GAMES INTERACTIVE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
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<S> <C> <C>
Net Sales $33,019 $111,484
Cost of goods sold 43,404 120,288
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Gross Margin (10,385) (8,804)
Selling, general and administrative expenses 198,786 167,825
Research and Development Costs 35,058 34,372
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Loss from operations (244,229) (211,001)
Other income (expense), primarily interest 1,535 (900)
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Loss before extraordinary items (242,694) (211,901)
Extraordinary item 241,004 --
------- --
Net loss $(1,690) $(211,901)
======= =========
Net loss per common share before extraordinary items $(0.03) $(0.06)
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Net loss per common share $0.00 $(0.06)
===== ======
Shares used in calculation of net loss
per common share 8,534,532 3,760,440
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
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SMART GAMES INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before extraordinary item (242,694) (211,901)
Extraordinary item 241,004 --
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Net loss (1,690) (211,901)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization 22,659 21,273
Accounts receivable allowances (23,840) (113,533)
Cash provided (used) by the change in:
Accounts receivable 40,040 245,225
Inventories 1,366 53,782
Prepaid expenses and other assets (9,869) 9,688
Accounts payable (300,830) (121,752)
Accrued expenses (35,454) (6,932)
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NET CASH USED BY OPERATING ACTIVITIES (307,618) (124,150)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment -- (15,522)
CASH FLOWS FROM FINANCING ACTIVITIES
Expenditures for offering -- (16,085)
Repayment of capital lease obligation (1,264) --
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NET CASH USED BY FINANCING ACTIVITIES (1,264) (16,085)
--------- ---------
NET DECREASE IN CASH (308,882) (155,757)
CASH AND CASH EQUIVALENTS, beginning of period 482,340 166,944
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $173,458 $11,187
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
SMART GAMES INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The statements are unaudited but,
in the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the financial statements
and footnotes thereto for the year ended December 31, 1996 included in the
registrant's Annual Report on Form 10-KSB filed on March 31, 1997.
NOTE 2. NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted average number of
shares of common stock and common equivalent shares outstanding.
NOTE 3. CONSIGNED INVENTORY, WARRANTY AND RIGHT OF RETURN POLICIES
Inventory consigned to customers is included in the Company's finished goods
valuation. Revenue from these consignments is recognized when the consignee
sells the product to individual consumers. All products carry a minimum ninety
day manufacturer's warranty. The warranty period begins on the date of purchase
by the individual consumer. Consumers, who purchase product from the Company,
have a right to return the product for either merchandise, credit or refund
(within thirty days of purchase) provided the product is free of damage or abuse
not consistent with the normal use of the product.
NOTE 4. EXTRAORDINARY ITEMS
During the first quarter of 1997, the Company continued a program, which began
during the fourth quarter of 1996, whereby it negotiated settlements of
outstanding trade payable indebtedness owed by the Company. The Company paid
cash of approximately $98,000 in order to settle indebtedness of approximately
$355,000. The Company reduced accounts payable and other accrued expenses on its
balance sheet by approximately $355,000 and recorded an extraordinary after tax
gain of approximately $241,000, net of expenses of approximately $16,000.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
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Three Months Ended March 31, 1997 Compared to the Three Months Ended
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March 31, 1996
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Net sales for the three months ended March 31, 1997 were $33,000 as compared to
net sales of $111,000 for the same period in 1996. This decrease in net sales is
attributable to the Company's inability, due to lack of capital resources, to
satisfactorily market its products. International sales, including Canada, for
the three month period ended March 31, 1997 were $7,000 as compared to $15,000
over the same period in 1996. Product return accruals for the three months ended
March 31, 1997 were $3,000 compared to $0 during the same period in 1996.
Gross margin percentage for the three months ended March 31, 1997 was -31% as
compared to -8% for the same period in 1996. This decrease in gross margin
percentage was due to the decrease in unit sales volumes, as explained above.
Total operating expenses for the three months ended March 31, 1997 were
$234,000, consisting of selling, general and administrative costs of $199,000
and research and development costs of $35,000 compared to total operating
expenses of $202,000 for the same period in 1996 consisting of selling, general
and administrative costs of $168,000, and research and development costs of
$34,000.
For the three months ended March 31, 1997 other income was $2,000 compared to
other expense of $1,000 during the same period in 1996.
Financial Condition and Liquidity
- ---------------------------------
Cash flow used by operations was $307,618 for the three month period ended March
31, 1997 compared to cash flow used by operations of $124,150 for the three
month period ended March 31, 1996.
Management estimates that its minimum cash requirements for 1997 are
approximately $1,000,000. These minimum cash requirements are as follows:
$160,000 for working capital, $710,000 for sales, marketing and administrative
expenses, and $130,000 for research and development costs. Management believes
that cash flow generated from operations during 1997 will not be sufficient to
meet minimum cash requirements. To address the Company's ongoing serious cash
flow problems and to meet its minimum cash requirements, the Company must obtain
at least $500,000 through private placements of equity securities to meet its
minimum cash requirements and to supplement cash on hand at March 31, 1997 of
$173,458. The Company would use the approximately $375,000 in additional net
proceeds to finalize the development of its skateboard/snowboard product. This
product would be developed for the personal computer and new video game
platforms on the market, with revenues generated from this product beginning in
1998.
There can be no assurance that the Company will be able to generate or raise
sufficient funds to meet minimum liquidity needs in 1997.
7
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PART 2. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
None
8
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized:
SMART GAMES INTERACTIVE, INC.
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Date: May 15, 1997 /s/ John D. Lipps
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John D. Lipps, Chairman of the Board, President, Chief
Executive Officer
/s/ Nicholas J. Chuma
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Nicholas J. Chuma, Executive Vice President,
Treasurer Chief Financial Officer and Secretary
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 173,458
<SECURITIES> 0
<RECEIVABLES> 12,780
<ALLOWANCES> 0
<INVENTORY> 557,477
<CURRENT-ASSETS> 920,624
<PP&E> 143,605
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,193,956
<CURRENT-LIABILITIES> 471,555
<BONDS> 28,797
<COMMON> 2,530
0
0
<OTHER-SE> 693,604
<TOTAL-LIABILITY-AND-EQUITY> 1,193,956
<SALES> 33,019
<TOTAL-REVENUES> 33,019
<CGS> 43,404
<TOTAL-COSTS> 233,844
<OTHER-EXPENSES> 1,535
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (242,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 241,004
<CHANGES> 0
<NET-INCOME> (1,690)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
