U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number: 1-13360
ENTERACTIVE, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 West 40th Street, Suite 2100, New York, NY 10018
(Address of Principal Executive Offices)
(212) 221-6559
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Number Outstanding
Title of Class as of October 11, 1995
-------------- ----------------------
Common Stock, $.01 Par Value 7,679,441
Transitional Small Business Disclosure Format: Yes No /X/
<PAGE>
TABLE OF CONTENTS
Page
PART I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at August 31,1996 3
and May 31, 1996
Consolidated Statements of Operations for the three 4
month periods ended August 31, 1996 and August 31, 1995
Consolidated Statements of Cash Flow for the three 5
months ended August 31, 1996 and August 31, 1995
Notes to Financial Statements 6-9
Item 2 - Management's Discussion and Analysis of 10-14
Financial Condition and Results of Operations
PART ll - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Change in Securities 15
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Enteractive, Inc.
August 31 May 31
-------------------------------------------------------------
1996 1996
-------------------------------------------------------------
<S> <C> <C>
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 3,046,500 $ 6,005,400
Accounts receivable 492,100 147,400
Income taxes receivable 16,400 16,400
Inventories 552,800 439,500
Prepaid expenses and other 45,300 10,200
-------------------------------------------------------------
Total current assets 4,153,100 6,618,900
Capitalized Software 963,600 1,070,600
Property and equipment, net 204,200 231,300
Other 24,200 24,200
-------------------------------------------------------------
$ 5,345,100 $ 7,945,000
=============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,001,800 $ 1,404,300
Accrued expenses 253,400 895,300
Current maturities of long-term debt 443,700 498,900
-------------------------------------------------------------
Total current liabilities 1,698,900 2,798,500
Long-term debt, excluding current maturities 112,600 167,800
-------------------------------------------------------------
Total liabilities 1,811,500 2,966,300
Commitments and contingencies
Stockholders' Equity
Preferred Stock $.01 par value,
2,000,000 shares authorized and none issued - -
Common Stock $.01 par value, 30,000,000 shares
authorized; 7,679,441 and 7,656,435 shares
issued and outstanding for August 31, 1996
and May 31 1996, respectively 76,800 76,600
Additional paid-in capital 19,813,300 19,620,900
Accumulated deficit (16,356,500) (14,718,800)
-------------------------------------------------------------
Total stockholders' equity 3,533,600 4,978,700
$ 5,345,100 $ 7,945,000
=============================================================
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Enteractive, Inc.
For the Three Months Ended August 31
---------------------------------------------------------
1996 1995
---------------------------------------------------------
(unaudited)
<S> <C> <C>
Net product sales $ 324,600 $ 25,500
Product development revenue 40,700 48,500
Royalty revenue 177,700 2,200
---------------------------------------------------------
Total revenues 543,000 76,200
Cost of product sales 129,000 8,300
Amortization of capitalized software 107,100 -
Cost of development revenue 27,600 38,200
Research and development expenses 820,800 748,100
Marketing and selling expenses 696,500 440,700
General and administrative expenses 439,300 335,000
---------------------------------------------------------
Total costs and expenses 2,220,300 1,570,300
Operating loss (1,677,300) (1,494,100)
---------------------------------------------------------
Other income (expense):
Interest expense (17,400) (600)
Interest income 57,000 33,700
Other - 9,300
---------------------------------------------------------
Loss before income taxes (1,637,700) (1,451,700)
Income tax benefit - -
---------------------------------------------------------
Net loss $ (1,637,700) $ (1,451,700)
=========================================================
Loss per common and
common equivalent share $ (0.21) $ (0.30)
=========================================================
Weighted average shares of common
stock and common stock equivalents 7,678,989 4,775,489
See notes to financial statements.
</TABLE>
<PAGE>
ENTERACTIVE, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended August 31
------------------------------------------------------------
1996 1995
------------------------------------------------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,637,700) $ (1,451,700)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 148,600 46,900
Stock option consulting expense 118,800 -
Changes in assets and liabilities:
Accounts receivable (344,700) (116,800)
Inventories (113,300) (74,300)
Prepaid expenses and other (35,100) 13,200
Other assets - (2,300)
Accounts payable (402,500) 2,400
Accrued expenses (641,900) (44,500)
------------------------------------------------------------
Net cash used in operating activities (2,907,800) (1,627,100)
------------------------------------------------------------
Cash flows from investing activities
Proceeds from sale of investments - 155,000
Purchases of property and equipment (14,500) (8,500)
------------------------------------------------------------
Net cash provided by investing activities (14,500) 146,500
------------------------------------------------------------
Cash flows from financing activities
Exercise of stock options 73,800 -
Principal payments under long-term debt (110,400) (15,200)
Principal payments under capital lease obligations - (1,100)
------------------------------------------------------------
Net cash used in financing activities (36,600) (16,300)
Net decrease in cash and equivalents (2,958,900) (1,496,900)
Cash and equivalents
Beginning of period 6,005,400 2,932,400
------------------------------------------------------------
End of period $ 3,046,500 $ 1,435,500
============================================================
</TABLE>
See notes to financial statements.
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and in the opinion of
management contain all adjustments necessary, (consisting of only
normal recurring entries) to present fairly the Company's financial
position as of August 31, 1996 and the results of its operations and
its cash flows for the three months ended August 31, 1996 and 1995.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The interim financial
statements should be read in conjunction with the Company's financial
statements and related notes in the May 31, 1996 Annual Report on Form
10-KSB. The results for the three month period ended August 31, 1996
are not necessarily indicative of the results to be obtained for the
full year.
2. BUSINESS
Enteractive, Inc. (the "Company") designs, publishes and markets
interactive multimedia titles to the home and school markets.
On February 29, 1996, the Company acquired Lyriq International
Corporation ("Lyriq"), a developer and publisher of interactive
multimedia software, whereby Lyriq was merged into a wholly-owned
subsidiary of the Company. The merger was accounted for under the
purchase method of accounting and, accordingly, the net assets and
operations of Lyriq are included in the Company's consolidated
financial statements commencing February 29, 1996.
<PAGE>
The purchase price was determined as follows:
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<CAPTION>
<S> <C>
725,212 shares of Enteractive common stock at fair value
($4.00 per share) $2,900,800
Excess of fair value of liabilities assumed over assets
acquired of Lyriq 625,400
Acquisition costs 52,100
-------------------------
Total $3,578,300
=========================
</TABLE>
In connection with the acquisition, the Company recorded a $2,293,500
expense for purchased research and development and $1,284,800 of
capitalized software which is being amortized on a straight-line basis
over three years. The charge for purchased research and development
equaled the estimated current fair value of the future related cash
flows to be derived from specifically identified technologies
(discounted at a risk-adjusted rate of 30%) for which technological
feasibility had not yet been established pursuant to SFAS No. 86
(consistent with management's definition of internally developed
software). In addition, such technologies have no alternative future
use.
The following unaudited pro forma consolidated results of operations
reflects the results of the Company's operations for the quarter ended
August 31, 1995 as if the merger with Lyriq had occurred at the
beginning of the period and reflect the historical results of
operations of the purchased business adjusted for increased
amortization expense and increased common shares outstanding from the
acquisition.
Quarter ended
August 31, 1995
---------------
Total revenues $ 248,374
Net loss $ 1,782,800
Net loss per share $ (.32)
The pro forma information does not necessarily indicate what would have
occurred had the acquisition been consummated at the beginning of the
respective periods, or of the results that may occur in the future.
<PAGE>
3. OFFERING OF COMMON STOCK - MAY 1996
In May, 1996, the Company sold 2,415,000 shares of the Company's common
stock to the public at a price of $3.375 per share. Proceeds were
approximately $6,791,600, net of related expenses of approximately
$1,359,000. In connection with this sale the Company sold to the
underwriter, for an aggregate of $100, the right to purchase 210,000
shares of common stock at a price of $3.71 per share through May 21,
2001. In connection with this right the underwriter also received
certain "piggyback" and demand registration rights.
4. REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment, provided no
significant vendor obligations remain and collection of the resulting
receivable is deemed probable. Revenue under fixed price product
development contracts is recognized using the percentage of completion
method based on progress to date, which is measured by comparing costs
to date to total estimated costs. Royalty revenue is recognized when
earned.
The Company's agreements with certain product distributors and
retailers permit them to exchange or return products for which the
Company provides an allowance reflected as a reduction of accounts
receivable in the accompanying balance sheets.
5. COST OF PRODUCT SALES
Cost of product sales consist of manufacturing, packaging, and customer
support costs.
6. SOFTWARE DEVELOPMENT COSTS
Capitalization of costs associated with internally developed software
begins upon the determination by the Company of a product's
technological feasibility, as evidenced by a working model. Capitalized
software development costs are amortized
<PAGE>
over related sales on a per-unit basis based on estimated total sales,
with a minimum amortization based on a straight-line method over three
years. Capitalized software at August 31, 1996 resulted from the Lyriq
acquisition and is net of accumulated amortization of $321,300.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No 121 ("SFAS No 121") that
establishes accounting standards for the impairment of long lived
assets, certain intangibles and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. In conformity with SFAS No. 121, it is
the Company's policy to evaluate and recognize an impairment of
capitalized software and other long lived assets if it is probable that
the recorded amounts are in excess of anticipated undiscounted future
cash flows.
7. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Among the more significant
estimates included in these financial statements are the estimated
allowance for doubtful accounts receivable, reserves for returns and
exchanges and charges for purchased research and development. Actual
results could differ from those estimates.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The discussion and analysis below should be read in conjunction with the
Financial Statements of Enteractive and the Notes to Financial Statements
included elsewhere in this Form 10-QSB.
OVERVIEW
Enteractive was formed in December 1993 to develop, publish and market
interactive multimedia software products, and consummated the merger with Sonic
Images Productions, Inc. ("Sonic"), an established multimedia software
developer, in May 1994. Prior to the merger, Enteractive had no operations and
had only expenses related to administrative costs associated with formation,
raising equity and debt financing and certain other merger activities and Sonic
was engaged in the development of multimedia software products.
Prior to fiscal 1996, the Company derived the majority of its revenues from
grants or contracts to develop specific titles. In the fiscal year ended May 31,
1995, the Company undertook a transition from such externally-funded development
projects to developing, either by itself or with a co-publisher, its own titles
and, accordingly, will derive its future revenues principally from product sales
and royalties.
As is typical in the interactive multimedia software industry, the Company
depends on the introduction of new titles or sequels to existing titles to
replace declining revenues from older titles. In order to generate revenues in
the future, the Company believes it will be necessary to develop, or obtain
rights to, new titles that are developed for the appropriate platforms, are
introduced in a timely manner and are able to achieve market acceptance for a
significant period of time. As a result , the Company will continue to incur
additional costs in connection with developing and marketing its own titles. For
the quarters ended August 31, 1996 and August 31, 1995 approximately 68.3% and
75.7% of the Company's costs and expenses were incurred in connection with the
development and/or marketing of specific titles. The Company's costs vary
significantly based on the number of titles being developed for and marketed by
the Company. Accordingly, adjustments in the level of expenditures can be
readily implemented.
REORGANIZATION
On July 15, 1996 the Company announced a restructuring, comprised of a 45%
reduction of its Washington DC based development staff, and changes in senior
management. In connection with the downsizing, John Ramo, President and Chief
Operating Officer and Jolie Barbiere a Vice President
<PAGE>
have resigned their positions as officers and members of the Company's Board of
Directors.
The Company believes that the restructuring will result in lower fixed costs and
increased product development flexibility while maintaining high quality
standards. The management changes and the reduction in fixed costs were based
upon the Company's decision to focus on recreation and entertainment products.
It is the Company's intention to continue to market the Picture Perfect golf
series, Richie Sambora: Interactive Guitar, Sacred Mirror of Kofun, an
interactive adventure game, and to expand its presence on the Internet and the
on-line services.
QUARTERLY RESULTS
The Company's quarterly operating results have in the past and are likely in the
future to vary significantly depending on factors such as the timing of new
hardware and software title introductions, the degree of market acceptance of
such titles and the introduction of titles competitive with those of the
Company. In addition, the home recreation and entertainment software business is
highly seasonal. Typically, revenues are highest during the last calendar
quarter (which includes the holiday buying season), decline in the first
calendar quarter and are lowest in the second and third calendar quarters. This
seasonal pattern is due primarily to the increased demand for home recreation
and entertainment software titles during the year-end holiday buying season. The
Company expects its future revenues and operating results will reflect these
seasonal factors.
MERGER
On February 29, 1996, the Company completed the acquisition of Lyriq, whereby
Lyriq was merged into a wholly-owned subsidiary of the Company. The Lyriq
acquisition was accounted for under the purchase method of accounting with the
Company as the acquiring entity. See footnote 2 to the accompanying consolidated
financial statements.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED AUGUST 31, 1996 VS. AUGUST 31, 1995
The Company recognized revenue of $324,600 in the quarter ended August 31, 1996,
an increase of $299,100 over the figure for the quarter ended August 31, 1995,
due to sales of its published titles through independent distributors, net of
estimated returns and exchanges. The first quarter of fiscal 1996 net product
sales of $25,500 represent initial sales of titles published by the Company The
increases in both accounts receivable and inventory are related to the Company's
expanded publishing operations.
Royalty revenue for the quarter ended August 31, 1996 was $177,700 compared to
$2,200 for the quarter ended August 31, 1995. The increase is primarily due to
greater royalties from international licenses.
<PAGE>
Cost of product sales was $129,000 for the quarter ended August 31, 1996
compared to $8,300 for the quarter ended August 31, 1996. This increase was due
to higher sales volumes.
Research and development expenses for the quarter ended August 31, 1996 was
$820,800 compared to $748,100 for the quarter ended August 31, 1995.
Marketing and selling expenses were $696,500 and $440,700, for the quarters
ended August 31, 1996 and August 31, 1995, respectively. The increase relates to
the greater number of titles being marketed.
General and administrative expenses increased by $104,300 or 31%, to $439,300
for the quarter ended August 31, 1996, from $335,000 for the quarter ended
August 31, 1995. This increase results from non-cash consulting expenses added
to implement the strategy previously discussed.
Interest expense increased to $17,400 from $600 for the quarters ended August
31, 1996 and August 31, 1995, respectively. This increase is due to the interest
on the loans for repurchased shares of Company Common Stock.
Interest income increased to $57,000 for the quarter ended August 31, 1996, from
$33,700 for the quarter ended August 31, 1995, due to interest earned on the
higher cash balances resulting from the proceeds of the Company's public
offering, which was consummated in May 1996.
No income tax provisions are necessary as the Company is in a net tax loss
carryforward position.
The Company does not believe it will generate taxable income during the period
ending May 31, 1997. Beyond such time, using the standards set forth in
Financial Accounting Standard No. 109, management cannot currently determine
whether the Company will generate taxable income during the period that the
Company's net operating loss carry forward may be applied towards the Company's
taxable income. Accordingly, the Company has established a valuation allowance
against its deferred tax asset.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Enteractive was formed in December 1993 and raised $1,531,100 from the sale of
600,000 shares of Common Stock in a January 1994 private placement. Subsequent
to January 1994 , the Company's principal sources of capital have been as
follows:
(i) In May 1994 the Company raised $2 million from the sale of notes
and warrants. Such notes were repaid with the proceeds of the Company's
initial public offering. In October 1994, the Company sold 2,300,000
units in the initial public offering, each unit consisting of one share
of Common Stock and a warrant to purchase one share of Common Stock.
The net proceeds from the initial public offering were $7,579,900 .
(ii) In a bridge financing consummated in January 1996, the Company
received approximately $2,460,000 in net proceeds from the sale of
convertible notes and warrants. Simultaneously with the closing on May
21, 1996 of the pubic offering described below convertible notes with
an aggregate principal of $2,250,000 were converted into 740,734
shares, while $450,000 of convertible notes were repaid.
(iii) On May 21, 1996, the Company consummated a public offering by
issuing 2,415,000 shares of Common Stock to the public. The net
proceeds from this offering were $6,791,600.
In May 1996 the Company consumated an agreement with certain of its officers
pursuant to which the Company repurchased 1,000,000 shares of Common Stock at
$1.00 per share. To date $443,700 of the purchase price has been paid. The
balance is currently scheduled to be paid as follows: $338,500 May 1997 and
$167,800 - May 1998. The accompanying August 31, 1996 balance sheet reflects
agreements among the Company, GKN Securities, and certain of the individuals
participating in the May 1996 agreement, which could result in the following
accelerated payment schedule: $331,200 - January 1997, $112,500 - May 1997,
$72,400 - November 1997 and $40,200 - May 1998.
At August 31, 1996, the Company had cash and equivalents of $3,046,500. The
decrease of $2,958,900 in cash and equivalents from May 31, 1996 is primarily a
result of the increased expenditures associated with marketing and selling
internally developed titles, as well as additional costs associated with the
reorganization.
Capital expenditures were $14,500 for the first quarter of fiscal 1997 as
compared to $8,500 for fiscal 1996. The Company expects capital expenditures in
the fiscal year ending May 31, 1997 to be consistent with the
<PAGE>
average of both fiscal 1996 and 1995 and may increase depending on product
development needs and changes in technology.
The Company believes that its existing cash and equivalents, investments and
anticipated revenues will be sufficient to meet its liquidity and cash
requirements for the remainder of the fiscal year. However, these funds may not
be sufficient to meet the Company's longer term cash requirements for
operations. Since the Company's costs vary significantly based on the number of
titles being developed and marketed by the Company, adjustments in the level of
expenditures can be readily implemented. Based on management's assessment of the
future marketability of its titles, the Company may significantly alter the
level of expenses both within the next 12 months and thereafter. If necessary,
the Company may return to performing product development for third party
companies in order to maintain its infrastructure while continuing with several
of its own titles.
FORWARD LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to develop its products, as well as
general market conditions, competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included in this Form 10-QSB will prove to be accurate. In light of significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
INFLATION
The past and expected future impact of inflation on the financial statements is
not significant.
<PAGE>
Part II - 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.
<PAGE>
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.
ENTERACTIVE, INC.
(Registrant)
Date October 15, 1996 /s/ Kenneth Gruber
------------------
Kenneth Gruber
Chief Financial Officer and
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE QUARTER ENDED AUGUST 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 3,046,500
<SECURITIES> 0
<RECEIVABLES> 508,500
<ALLOWANCES> 137,924
<INVENTORY> 552,800
<CURRENT-ASSETS> 4,153,100
<PP&E> 204,200
<DEPRECIATION> 148,600
<TOTAL-ASSETS> 5,345,100
<CURRENT-LIABILITIES> 1,698,900
<BONDS> 0
0
0
<COMMON> 76,800
<OTHER-SE> 3,456,800
<TOTAL-LIABILITY-AND-EQUITY> 5,345,100
<SALES> 324,600
<TOTAL-REVENUES> 543,000
<CGS> 129,000
<TOTAL-COSTS> 2,220,300
<OTHER-EXPENSES> 17,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,400
<INCOME-PRETAX> (1,637,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,637,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,637,700)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
