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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
September 30, 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
Twinsburg, Oh. 44087
(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 FEBRUARY 9, 1999.
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 No X
---
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 SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part 1. Financial Information
Item 1. Financial Statements
Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 3
Statements of Operations for the three and nine month periods ended September 30, 1997
and 1996 (unaudited) 4
Statements of Cash Flows for the nine month period ended September 30, 1997
and 1996 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 8
Part 2. Other Information 10
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 11
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
SMART GAMES INTERACTIVE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, 1997 December 31, 1996
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<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 652 $ 482,340
Accounts receivable, less allowances of $32,284
and $20,000, respectively -- 28,980
Prepaid expenses and other current assets 12,393 171,886
Inventories:
Raw Materials -- 301,389
Work-in-process -- 166,180
Finished Goods 52,280 91,374
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Total inventories 52,280 558,843
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Total current assets 65,325 1,242,049
Property and equipment, net 10,519 165,061
Other noncurrent assets
Trade Credits, net of valuation reserves of $870,200
and $798,000, respectively 45,800 42,000
Other assets, net 0 84,085
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45,800 126,085
TOTAL ASSETS $ 121,644 $ 1,533,195
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Note Payable $ 14,000 $ --
Current portion of capital lease obligations -- 5,841
Accounts payable 431,702 591,235
Accrued compensation and related liabilities 17,689 4,328
Other accrued expenses 150,240 207,700
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Total current liabilities 613,631 809,104
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION -- 28,797
SHAREHOLDERS' EQUITY
Preferred stock, at par value ($.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 shares issued and outstanding at
September 30, 1997 and at December 31, 1996 2,530 2,530
Paid in capital 6,262,943 6,262,943
Accumulated deficit (6,757,460) (5,570,179)
Total shareholders' equity (491,987) 695,294
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 121,644 $ 1,533,195
================== ==================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
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SMART GAMES INTERACTIVE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net Sales $ 47,457 $ 30,139 $ 138,448 $ 593,145
Cost of goods sold 44,945 24,435 151,699 449,830
============ ============ ============ ============
Gross Margin 2,512 5,704 (13,251) 143,315
Selling, general and administrative costs 87,256 193,545 533,026 475,258
Research and Development Costs -- 32,495 54,610 95,899
Non-recurring charges 440,000 -- 826,744
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Income (Loss) from operations (524,744) (220,336) (1,427,631) (427,832)
Other expense -- 9,675 653 16,509
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Loss before extraordinary items $ (524,744) $ (230,011) $ (1,428,284) $ (444,341)
Extraordinary item -- -- 241,004 --
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Net loss $ (524,744) $ (230,011) $ (1,187,280) $ (444,341)
============ ============ ============ ============
Net loss per share before extraordinary items (0.04) (0.04) (0.11) (0.09)
------------ ------------ ------------ ------------
Net loss per common share (0.04) (0.04) (0.09) (0.09)
------------ ------------ ------------ ------------
Shares used in calculation of net
loss per common share 12,648,244 5,523,433 12,648,244 5,165,476
------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
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SMART GAMES INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
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<S> <C> <C>
Cash flows from operating activities
Loss before extraordinary item $(1,428,284) $ (444,341)
Extraordinary item 241,004 --
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Net loss (1,187,280) (444,341)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 46,194 64,513
(Gain) Loss on sale of property and equipment 23,014 (56)
Accounts receivable allowances (36,124) (197,435)
Non-recurring charges 826,744 (24,506)
Sale of inventory for trade credits, net of allowances (3,800) --
Cash provided (used) by the change in:
Accounts receivable 65,104 423,701
Inventories (180,181) 136,430
Prepaid expenses and other assets 182,529 (99,510)
Accounts payable (159,533) (49,918)
Accrued expenses (44,099) (67,059)
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NET CASH USED BY OPERATING ACTIVITIES (467,332) (258,181)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (503) (4,950)
Proceeds from sale of property and equipment 6,700 350
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,197 (4,600)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of notes payable 14,000 456,396
Repayment of notes payable -- (306,396)
Repayment of capital lease obligation (5,841) --
Expenditures for offering -- (51,017)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 11,472 98,983
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Net decrease in cash (481,688) (163,798)
Cash and cash equivalents at beginning of period 482,340 166,944
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Cash and cash equivalents at end of period $ 652 $ 3,146
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
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SMART GAMES INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and nine month periods ended SEPTEMBER 30, 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 25,1997.
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.
NOTE 5. INVENTORY; NON-RECURRING CHARGES
During the third quarter of 1997 the Company recognized an unusual,
non-recurring charge of $300,000 related to reducing all inventories to net
realizable value. This charge was necessary due to the termination of the
president and chief executive officer, John D. Lipps, whereby, pursuant to an
agreement between the Company and Mr. Lipps, patents assigned by Mr. Lipps to
the Company reverted back to him upon certain events. Since the Company can no
longer sell its products, it is unlikely that it will operate as an ongoing
concern with its present business.
During the second quarter of 1997 and during the fourth quarters of 1996 and
1995, the Company recognized unusual, non-recurring charges of $386,744,
$697,303, and $402,644, respectively, related to reducing inventories to net
realizable value. Such value is based on managements' estimate of sales of its
16-bit technology products and its baseball products in general for the ensuing
years.
6
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NOTE 6. ASSETS; NON-RECURRING CHARGES
During the third quarter of 1997 the Company recognized an unusual,
non-recurring charge of $140,000 related to reducing certain assets and patents
to net realizable value. This charge was necessary due to the termination of the
president and chief executive officer, John D. Lipps, whereby, pursuant to an
agreement between the Company and Mr. Lipps, patents assigned by Mr. Lipps to
the Company reverted back to him upon certain events. Since the Company has
ceased operations, it will not operate as a going concern with its former
business.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
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Three Months Ended September 30, 1997 Compared to the Three Months Ended
- ------------------------------------------------------------------------
September 30, 1996
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The Company has ceased operations, terminated all employees and is not likely to
restart operations with its former business.
Net sales for the three months ended September 30, 1996 were $47,000 as compared
to net sales of $30,000 for the same period in 1996. International sales,
including Canada, for the three month period ended September 30, 1997 were
$2,000 as compared to $10,000 over the same period in 1996. Product return
accruals for the three months ended September 30, 1997 were $ 0 compared to
$34,000 during the same period in 1996.
Gross margin percentage for the three months ended September 30, 1997 was 5% as
compared to 19% for the same period in 1996.
Total operating expenses for the three months ended September 30, 1997 were
$527,000, consisting of selling, general and administrative costs of $247,000,
research and development costs of $0 and a non-recurring charge of $440,000 for
inventory and asset write-downs, as compared to total operating expenses of
$226,000 for the same period in 1996 consisting of selling, general and
administrative costs of $194,000, and research and development costs of $32,000.
For the three months ended September 30, 1997 other expense was $0 compared to
$10,000 during the same period in 1996.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September
- --------------------------------------------------------------------------------
30, 1996
- --------
The Company has ceased operations, terminated all employees and is not likely to
restart operations with its former business.
Net sales for the nine months ended September 30, 1996 were $138,000 as compared
to net sales of $593,000 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 nine month period ended September 30, 1997 were $2,000 as compared to
$49,000 over the same period in 1996. Product return accruals for the nine
months ended September 30, 1997 were $0 compared to $48,000 during the same
period in 1996.
Gross margin percentage for the nine months ended September 30, 1997 was -9%
compared to a 24% gross margin during 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 nine months ended September 30, 1997 were
$1,414,000, consisting of selling, general and administrative costs of $533,000,
research and development costs of $54,000 and a non-recurring charge of $827,000
for inventory and asset write-downs, as compared to total operating expenses of
$571,000 for the same period in 1996 consisting of selling, general and
administrative costs of $475,000 and research and development costs of $96,000.
Other expense for the nine months ended September 30, 1997 was $1,000 as
compared to $17,000 in the same period of 1996.
8
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Financial Condition and Liquidity
- ---------------------------------
Cash flow used by operations was $467,332 for the nine month period ended
September 30, 1997 compared to cash flow used by operations of $258,181 for the
nine month period ended September 30, 1996.
During the third quarter of 1997, the Company terminated all employees,
including the president and chief executive officer, Mr. John D. Lipps. Due to
this termination, all patents assigned by Mr. Lipps to the Company reverted back
to Mr. Lipps. Since the Company has ceased operations it will not operate as a
going concern with its former business. As a consequence, the Company has
written incurred unusual, non-recurring charges related to reducing the value of
inventories and certain assets to net realizable value.
During the third quarter of 1997, the Companys' largest creditor received a
judgment lien against all the Companys' assets, excluding certain intangible
assets.
The Company will not be able to generate or raise sufficient funds to meet
minimum liquidity needs in 1997 and repay any liabilities of the Company.
The Company has less than 300 holders of record of its Common Stock.
Accordingly, the Company intends to file a Form 15 with the Securities and
Exchange Commission which will immediately terminate the Company's obligation to
file reports under the SEC Act of 1934. As a result of the filing of Form 15,
the Company anticipates that this quarterly report will be its last filing under
the SEC Act of 1934.
9
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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.
Date: February 8, 1999 /S/ Nicholas J. Chuma
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Nicholas J. Chuma, Director
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