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 February 28, 1997
/ / 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 April 14, 1997
-------------- --------------------
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 February 28, 1997 3
and May 31, 1996
Consolidated Statements of Operations for the nine 4
month and three month periods ended February 28,
1997 and February 29, 1996, respectively
Consolidated Statements of Cash Flow for the nine 5
months ended February 28, 1997 and February 29,
1996
Notes to Financial Statements 6-9
Item 2 - Management's Discussion and Analysis of 10-14
Financial Condition and Results of Operations
PART II - 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 16
SIGNATURES 17
<PAGE>
ENTERACTIVE INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28 May 31
--------------------------------------------------
1997 1996
--------------------------------------------------
ASSETS (unaudited)
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 6,516,700 $ 6,005,400
Accounts receivable 224,800 147,400
Income taxes receivable - 16,400
Inventories 518,100 439,500
Prepaid expenses and other 10,400 10,200
--------------------------------------------------
Total current assets 7,270,000 6,618,900
Capitalized Software 749,500 1,070,600
Affiliation Rights 609,400 -
Property and equipment, net 166,000 231,300
Other 24,200 24,200
--------------------------------------------------
$ 8,819,100 $ 7,945,000
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 896,000 $ 1,404,300
Accrued expenses 55,200 895,300
Current maturities of long-term debt 40,200 498,900
--------------------------------------------------
Total current liabilities 991,400 2,798,500
Long-term debt, excluding current maturities 40,200 167,800
--------------------------------------------------
Total liabilities 1,031,600 2,966,300
Commitments and contingencies
Stockholders' Equity
Preferred Stock $.01 par value,
2,000,000 shares authorized; 6,720 and 0 -
shares issued and outstanding for February 28, 1997
and May 31, 1996, respectively 100
Common Stock $.01 par value, 30,000,000 shares
authorized; 7,679,441 and 7,656,435 shares issued
and outstanding for February 28, 1997 and May 31, 1996,
respectively 76,800 76,600
Additional paid-in capital 27,919,500 19,620,900
Accumulated deficit (20,208,900) (14,718,800)
--------------------------------------------------
Total stockholders' equity 7,787,500 4,978,700
$ 8,819,100 $ 7,945,000
--------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE>
ENTERACTIVE INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------------------------------------------------------
February 28, 1997 February 29, 1996 February 28, 1997 February 29, 1996
------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net product sales $ 115,200 $ 95,200 $ 881,300 $ 324,800
Product development revenue - 57,200 40,700 257,700
Royalty revenue 152,600 900 527,900 103,300
------------------------------------- --------------------------------
Total revenues 267,800 153,300 1,449,900 685,800
Cost of product sales 113,600 22,300 462,500 77,600
Amortization of capitalized software 107,000 - 321,200 -
Cost of development revenue - 37,300 37,000 225,500
Research and development expenses 542,000 844,200 1,982,200 2,301,500
Marketing and selling expenses 835,500 344,300 2,641,300 1,354,700
Internet services expense 516,700 - 516,700 -
General and administrative expenses 210,600 587,300 1,118,100 1,246,900
Acquired in-process research and development - 1,915,100 - 1,915,100
------------------------------------- -------------------------------
Total costs and expenses 2,325,400 3,750,500 7,079,000 7,121,300
Operating loss (2,057,600) (3,597,200) (5,629,100) (6,435,500)
------------------------------------- -------------------------------
Other income (expense):
Interest expense (10,900) (57,500) (33,100) (58,200)
Interest income 81,800 19,800 165,200 110,000
Other - (4,000) 6,900 4,900
------------------------------------- -------------------------------
Loss before income taxes (1,986,700) (3,638,900) (5,490,100) (6,378,800)
Income tax benefit - - - -
------------------------------------- --------------------------------
Net loss $(1,986,700) $(3,638,900) $(5,490,100) $(6,378,800)
------------------------------------- --------------------------------
Loss per common and
common equivalent share $ (0.26) (0.76) $ (0.71) $ (1.34)
------------------------------------- --------------------------------
Weighted average shares of common
stock and common stock equivalents 7,679,441 4,775,489 7,679,295 4,775,489
</TABLE>
See notes to financial statements.
<PAGE>
ENTERACTIVE, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------------------------
February 28, 1997 February 29, 1996
-------------------------------------------------------
(unaudited)
Cash flows from operating activities
<S> <C> <C>
Net loss $(5,490,100) $ (6,378,800)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 462,100 287,400
Acquired in-process research and development 1,915,100
Gain on disposal of assets - (9,000)
Stock option consulting expense 356,300 -
Changes in assets and liabilities:
Accounts receivable (77,400) (101,000)
Notes receivable - -
Income Taxes Receivable 16,400 13,700
Inventories (78,600) (140,200)
Prepaid expenses and other (200) 30,400
Other assets - (2,800)
Accounts payable (508,300) 271,400
Accrued expenses (840,100) (194,000)
------------------------------------------------------
Net cash used in operating activities (6,159,900) (4,307,800)
------------------------------------------------------
Cash flows from investing activities
Proceeds from sale of investments - 1,085,700
Notes receivable (285,800)
Cash acquired from Lyriq acquisition 11,300
Purchase of franchise rights (625,000)
Purchases of property and equipment (60,100) (35,700)
------------------------------------------------------
Net cash (used in) provided by investing activities (685,100) 775,500
------------------------------------------------------
Cash flows from financing activities
Exercise of stock options 73,500 -
Repayment of short-term borrowings (15,200)
Net proceeds from issuance of convertible preferred stock 7,869,100 2,460,000
Principal payments under long-term debt (586,300) -
Principal payments under capital lease obligations - (2,900)
------------------------------------------------------
Net cash used in financing activities 7,356,300 2,441,900
Net increase (decrease) in cash and equivalents 511,300 (1,090,400)
Cash and equivalents
Beginning of period 6,005,400 2,932,400
------------------------------------------------------
End of period $ 6,516,700 $ 1,842,000
------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
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 (consisting of only
normal recurring entries) necessary to present fairly the Company's
financial position as of February 28, 1997, and the results of its
operations and its cash flows for the nine months ended February 28,
1997 and 1996. 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 nine month period
ended February 28, 1997 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 for the entertainment and recreation
markets. On December 4, 1996 the Company signed multiple market
affiliate agreements with USWeb Corporation and paid $625,000 for
the right to operate USWeb affiliate offices in New York, Long
Island, Philadelphia, Baltimore, Stamford, CT and Bergen County and
Newark, NJ., for a ten year period. The Company has formed a
subsidiary, which is named USWeb Cornerstone, which is intended to
provide a full range of Internet and Intranet -based business
solutions; including Web site design, hosting and management, design
and implementation of database and e-commerce solutions, educational
programs and Web-related strategic consulting and marketing.
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.
The purchase price was determined as follows:
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
----------
$3,578,300
==========
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
1
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months
ending February 29, 1996 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.
Nine months ended
February 29, 1996
-----------------
Total revenues $ 1,548,200
Net loss $ (5,086,400)
Net loss per share $ (.92)
The pro forma information does not necessarily indicate what would
have occurred had the acquisition been consummated at the beginning
of the period, or of the results that may occur in the future.
3. Public Offerings of Common Stock
On October 20, 1994, 2,300,000 units of interest in the Company were
sold in an initial public offering(IPO). Each unit, which was sold
for $4.00, consisted of one share of the Company's common stock and
one common stock purchase warrant, which entitles the warrant holder
to purchase one share of the Company's common stock for $4.00
through October 20, 1997. Proceeds of approximately $7,600,000, net
of related expenses of approximately $1.6 million, were received in
exchange for the units issued. In connection with this sale of
units, the Company sold to the underwriter, for an aggregate of $50,
the right to purchase 200,000 units with identical terms to those
sold in the initial public offering, except that the exercise price
of the warrants is $5.20. Such units are exercisable at $6.60 per
unit through October 20, 1999, and have certain "piggy back" and
demand registration rights.
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 offering 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.
2
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. 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 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 February 28, 1997 resulted from the
Lyriq acquisition and is net of accumulated amortization of
$535,500.
5. Affiliation Rights
Fees for affiliation rights were paid to USWeb for the right to join
the USWeb network and operate as an affiliate in the territories
noted in Note 2. The fee is being amortized over the 10 year life of
the agreement with USWeb. Fees for affiliation rights at February
28, 1997 were net of accumulated amortization of $15,600.
6. 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.
7. Private Placement
On December 12, 1996 the Company completed a private placement of 84
units each consisting of 80 shares of Class A Convertible Preferred
Stock ("Preferred Stock") and 50,000 Common Stock Purchase Warrants
to purchase in the aggregate 4,200,000 shares of Common Stock at an
exercise price of $4.00 per share. Proceeds were approximately
$7,869,100, net of related expenses. The Preferred Stock has a
stated value of $1,250 per share and each share is convertible at
any time after April 30, 1998 into such whole number of shares of
Common Stock equal to the aggregate stated value of the Preferred
Stock to be converted divided by the lesser of (i) $2.00 or (ii) 50%
of the average closing sale price for the Common Stock for the last
ten trading days in the fiscal quarter of the Company prior to such
conversion. The Company must use the proceeds, if any, derived from
the exercise of the Company's currently outstanding public Common
Stock Warrants, which expire in October 1997, or 50% of the proceeds
from any other equity financing to redeem the Preferred Stock at
110% of stated value. The Company also has the option to redeem all,
or any portion of, on a pro-rata basis, the Preferred Stock at any
time upon 30 days prior written notice, at a redemption price equal
to 110% of the stated value.
3
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Conversion Rate of the Convertible Preferred Stock (when
calculated on the basis of dividing the Stated Value by $2.00 only)
will be subject to adjustment to protect against dilution in the
event of stock dividends, stock splits, combinations, subdivision
and reclassifications.
8. Early extinguishment of debt
As a result of agreements among the Company, certain former
employees and GKN Securities Corp., in January, 1997 the Company
repaid $475,800 of it's long-term debt plus related accrued
interest.
9. Subsequent Events
On April 3, 1997 the Company's shareholders approved (1) an
amendment to the Certificate of Incorporation increasing the
authorized number of shares of common stock to 50,000,000 from
30,000,000 and (2) an amendment to the Company's 1994 Incentive and
Stock Option Plan increasing the number of shares of Common Stock
authorized for issuance upon exercise of the options granted
pursuant to the plan to 2,500,000 from 1,500,000.
4
<PAGE>
Item 2. 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 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, planned to derive its revenues
principally from product sales and royalties. The Company is currently
evaluating the extent to which, it will continue to incur additional costs in
connection with developing and marketing its own titles.
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 Note 2 to the accompanying consolidated
financial statements.
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, resigned as officers and
members of the Company's Board of Directors.
Affiliation with USWeb
On December 4, 1996 the Company signed an agreement with USWeb Corporation under
which the Company has established a subsidiary to operate USWeb Cornerstone
affiliate offices in New York and subject to regulatory approval, the exclusive
rights to develop new USWeb Cornerstone affiliate offices in Long Island,
Philadelphia, Baltimore, Stamford, CT and Bergen County and Newark, NJ. The
subsidiary, which is named USWeb Cornerstone, is intended to provide a full
range of Internet and Intranet-based business solutions; including Web site
design, hosting and management, design and implementation of database and
e-commerce solutions, educational programs and Web-related strategic consulting
and marketing.
Quarterly results
The Company's quarterly operating results from its sales of entertainment and
recreational software 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
software revenues and operating results reflect these seasonal factors.
<PAGE>
For the quarters ended February 28, 1997 and February 29, 1996 approximately
65.3% and 59.2% 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.
The Company expects that the operating results from its USWeb Cornerstone
related operations will reflect the costs of establishing offices, hiring
personnel and marketing its services. Cost will exceed related revenues during
the start up phase of this business. However, management believes that since a
significant component of the business cost will be personnel related it can
quickly adjust staffing levels to correspond to anticipated demand.
Results of operations for the nine and three months ended February 28, 1997 vs.
February 29, 1996.
The Company recognized product sales, net of estimated returns of $881,300 and
$115,200, in the nine and three months ended February 28, 1997, respectively, an
increase of $556,500 and $20,000 over the nine and three month period ended
February 29, 1996. This significant increase is due to increased volumes. The
increases in both accounts receivable and inventory are related to the Company's
software publishing operations.
Royalty revenue was $527,900 and $152,600 in the nine and three months ended
February 28, 1997, respectively, an increase of $424,600 and $151,700 over the
nine and three month period ended February 29, 1996, respectively. The increase
is primarily due to greater royalties from international licenses.
Cost of product sales was $462,500 and $113,600 in the nine and three months
ended February 28, 1997, respectively, an increase of $384,900 and $91,300 over
the nine and three month period ended February 29, 1996, respectively. The
increase in cost of product sales in absolute dollars is due to increases in
sales volume. The increase in the percentage of cost of product sales to net
product sales in the current year reflects the increase in allowances for
returns and other sales credits which is recorded as a reduction in net product
sales.
Amortization of capitalized software was $321,200 and $107,000 in the nine and
three months ended February 28, 1997, respectively. This amortization is a
result of the capitalized software acquired in connection with the Lyriq
acquisition.
Research and development expenses were $1,982,200 and $542,000 in the nine and
three months ended February 28, 1997, respectively, a decrease of $319,300 and
$302,200 over the nine and three month period ended February 29, 1996,
respectively. This decrease reflects lower spending on development of fewer new
titles.
Marketing and selling expenses were $2,641,300 and $835,500 in the nine and
three months ended February 28, 1997, respectively, an increase of $1,286,600
and $491,200 over the nine and three month period ended February 29, 1996,
respectively. This increase reflects a greater number of titles being marketed
and the Company's shift to entertainment and recreational products which require
higher levels of marketing support to generate sales. The quarterly increase
also reflects trade and consumer cooperative advertising allowances to secure
shelf space for product.
Internet Services Expenses were $516,700 in the nine and three months ended
February 28, 1997. These expenses represent start-up costs, including staffing
and payroll related, as well as costs associated with opening new offices for
the USWeb Cornerstone subsidiary.
General and administrative expenses were $1,118,100 and $210,600 in the nine and
three months ended February 28, 1997, respectively, a decrease of $128,800 and
$376,700 over the nine and three month period ended February 29, 1996,
respectively.
<PAGE>
Interest expense was $33,100 and $10,900 in the nine and three months ended
February 28, 1997, respectively, a decrease of $25,100 and $46,600 over the nine
and three month period ended February 29, 1996, respectively. This decrease is
due to the repayment of the majority of the loans for repurchased shares of the
Company Common Stock.
Interest income was $165,200 and $81,800 in the nine and three months ended
February 28, 1997, respectively, an increase of $55,200 and $62,000 over the
nine and three month period ended February 29, 1996, respectively. This increase
reflects higher cash balances resulting from the proceeds from the private
placement of preferred stock completed on December 12, 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
Since 1995, the Company's principal sources of capital have been as follows:
(i) 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 of Common Stock, while
$450,000 of convertible notes were repaid.
(ii) 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.
(iii) On December 12, 1996 the Company completed a private placement
of 84 units each consisting of 80 shares of Class A
Convertible Preferred Stock ("Preferred Stock") and 50,000
Common Stock Purchase Warrants to purchase in the aggregate
4,200,000 shares of Common Stock at an exercise price of $4.00
per share. Proceeds were approximately $7,869,100, net of
related expenses. The Preferred Stock has a stated value of
$1,250 per share and each share is convertible at any time
after April 30, 1998 into such whole number of shares of
Common Stock equal to the aggregate stated value of the
Preferred Stock to be converted divided by the lesser of (i)
$2.00 or (ii) 50% of the average closing sale price for the
Common Stock for the last ten trading days in the fiscal
quarter of the Company prior to such conversion. The Company
must use the proceeds, if any, derived from the exercise of
the Company's currently outstanding public Common Stock
Warrants, which expire in October 1997, or 50% of the proceeds
from any other equity financing, to redeem the Preferred Stock
at 110% of the stated value. The Company also has the option
to redeem the Preferred Stock at any time upon 30 days prior
written notice, at a redemption price equal to 110% of the
stated value.
In May 1996 the Company consummated 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. As a result of agreements among the Company, certain former
employees and GKN Securities Corp. in January, 1997 the Company repaid $475,800
of it's long-term debt plus related accrued interest. At February 28, 1997
$919,600 of the purchase price had been paid. Interest will accrue on the unpaid
balances at the prime rate and is payable quarterly.
At February 28, 1997, the Company had cash and equivalents of $6,516,700. The
increase of $511,300 in cash and equivalents from May 31, 1996 reflects the
receipt of approximately $7,869,100 in net proceeds from a private placement
consummated in December 1996, partially offset by the funding of operating
activities, as described above, and a $625,000 payment for affiliate rights The
increase in both accounts receivable and inventory are related to the Company's
software publishing operation.
Capital expenditures were $60,100 and $26,400 in the nine and three months ended
February 28, 1997, respectively, an increase of $28,000 and $22,000 from the
nine and three month period ended February 29, 1996, respectively. The Company
expects capital expenditures in the fiscal year ending May 31, 1997 to be higher
than the average of both fiscal 1996 and 1995 principally as a result of the
cost of acquiring the equipment required for the US Web Cornerstone offices and
development center.
The Company believes that its existing cash and equivalents, and anticipated
revenues will be sufficient to meet its liquidity and cash requirements for at
least the next 15 months. However, these funds may not be sufficient to meet the
Company's longer term cash requirements for operations. Based on management's
assessment of the future
<PAGE>
marketability of its titles and demand for Web related services, the Company may
significantly alter the level of expenses both within the next 15 months and
thereafter.
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, the success of
its USWeb Cornerstone subsidiary 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
On December 12, 1996, the Company completed a private placement to
accredited investors of 84 units each consisting of 80 shares of Class
A Convertible Preferred Stock ("Preferred Stock") and 50,000 Common
Stock Purchase Warrants to purchase in the aggregate 4,200,000 shares
of Common Stock at an exercise price of $4.00 per share. Proceeds were
approximately $7,864,100, net of related expenses.
GKN Securities Corp. acted as the placement agent in the private
placement and received a placement agent fee of $432,000 and a
non-accountable expense allowance equal to $83,000. The private
placement was completed in reliance on the private offering exemptions
contained in Sections 3 (b) and/or 4 (2) of the Securities Act of
1933, as amended, and in reliance on similar exemptions under certain
appplicable state laws. For information relating to the redemption and
conversion of the Preferred Stock see "Note 9 to Notes to Condensed
Consolidated Financial Statements."
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security-
Holders
None
Item 5. Other Information
None.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) None
(b) The Company filed one form 8-K under Item 5. --- Other Events
during the quarter ended February 28, 1997.
<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 April 21, 1997 /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
CONDENSED FINANCIAL STATEMENTS FOR THE QUARTER ENDED FEBRUARY 28, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> NOV-30-1997
<PERIOD-END> FEB-28-1997
<CASH> 6,516,700
<SECURITIES> 0
<RECEIVABLES> 224,800
<ALLOWANCES> 338,800
<INVENTORY> 518,100
<CURRENT-ASSETS> 7,270,000
<PP&E> 166,000
<DEPRECIATION> 41,863
<TOTAL-ASSETS> 8,819,100
<CURRENT-LIABILITIES> 991,400
<BONDS> 0
0
100
<COMMON> 76,800
<OTHER-SE> 7,710,600
<TOTAL-LIABILITY-AND-EQUITY> 8,819,100
<SALES> 115,200
<TOTAL-REVENUES> 267,800
<CGS> 113,600
<TOTAL-COSTS> 2,325,400
<OTHER-EXPENSES> 10,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,900
<INCOME-PRETAX> (1,986,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,986,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,986,700)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
