U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSBA
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 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 August 31, 1997
-------------- ---------------------
Common Stock, $.01 Par Value 7,679,441
Transitional Small Business Disclosure Format: Yes / / No /X/
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
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Item 1 Financial Statements
Consolidated Balance Sheets at August 31, 1997 and May 31, 1997 3
Consolidated Statements of Operations for the three months and
six months ended August 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the six months ended
August 31, 1997 and 1996 5
Notes to Financial Statements 6
SIGNATURES 9
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31 May 31
1997 1997
---------- --------
ASSETS (unaudited)
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 3,063,400 $ 4,952,900
Accounts receivable 213,400 224,400
Assets held for sale 62,700 100,000
Prepaid expenses and other 143,600 93,800
------------ ------------
Total current assets 3,483,100 5,371,100
Affiliation Rights, net 578,100 593,800
Property and equipment, net 351,800 154,900
Other 54,000 61,500
------------ ------------
$ 4,467,000 $ 6,181,300
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 311,300 $ 287,900
Accrued expenses 570,200 623,900
Deferred revenue 19,600 69,500
Current maturities of long-term debt 40,200 40,200
------------ ------------
Total current liabilities 941,300 1,021,500
Commitments and contingencies
Stockholders' Equity
Preferred Stock $.01 par value, 2,000,000 shares 100 100
authorized and 6,720 shares issued and outstanding
Common Stock $.01 par value, 50,000,000 shares
authorized; 7,679,441 issued and 76,800 76,800
outstanding
Additional paid-in capital 28,038,400 28,038,400
Accumulated deficit (24,589,600) (22,955,500)
------------ ------------
Total stockholders' equity 3,525,700 5,159,800
See notes to consolidated financial statements $ 4,467,000 $ 6,181,300
------------ ------------
</TABLE>
3
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ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
August 31 August 31
1997 1996
------------ ----------
(unaudited)
<S> <C> <C>
Internet services revenues $ 142,400 $ --
Net product sales -- 324,600
Product development revenue -- 40,700
Software licensing and royalty revenue 34,500 177,700
----------- -----------
Total revenues 176,900 543,000
Cost of internet services revenues 99,500 --
Cost of product sales -- 236,100
Cost of development revenue -- 27,600
Research and development expenses 399,500 820,800
Marketing and selling expenses 799,000 696,500
General and administrative expenses 566,600 439,300
----------- -----------
Total costs and expenses 1,864,600 2,220,300
Operating loss (1,687,700) (1,677,300)
----------- -----------
Other income (expense):
Interest expense -- (17,400)
Interest income 53,600 57,000
----------- -----------
Net loss $(1,634,100) $(1,637,700)
----------- -----------
Preferred stock preferences (1997 restated - Note 5) (1,952,100) --
Net loss to common shareholders (1997 restated - Note 5) $(3,586,200) $(1,637,700)
----------- -----------
Loss per common and common equivalent share (1997 restated - Note 5)
$ (0.47) $ (0.21)
----------- -----------
Weighted average shares of common
stock and common stock equivalents 7,679,441 7,678,989
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Three Months
Ended August 31 Ended August 31
1997 1996
--------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Net Loss $(1,634,100) $(1,637,700)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 46,600 148,600
Stock option consulting expense -- 118,800
Changes in assets and liabilities
Accounts Receivable 11,000 (344,700)
Assets held for sale 37,300 --
Inventories -- (113,300)
Prepaid expenses and other (49,800) (35,100)
Other assets 7,500
Accounts payable 23,400 (402,500)
Accrued expenses (53,700) (641,900)
Deferred revenue (49,900) --
----------- -----------
Net cash used in operating activities (1,661,700) (2,907,800)
----------- -----------
Cash flows from investing activities
Purchases of property and equipment (227,800) (14,500)
-----------
----------- -----------
Net cash used in investing activities (227,800) (14,500)
----------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options -- 73,800
Principal payments under long-term debt -- (110,400)
----------- -----------
Net cash provided by financing activities -- (36,600)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,889,500) (2,958,900)
Cash and cash equivalents
Beginning of year 4,952,900 6,005,400
----------- -----------
----------- -----------
End of period $ 3,063,400 $ 3,046,500
----------- -----------
</TABLE>
See notes to consolidated financial statements
5
<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 August 31, 1997, and the results of its operations and its cash
flows for the three months ended August 31, 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, 1997 Annual Report on Form 10-KSB. The
results for the three month period ended August 31, 1997 are not
necessarily indicative of the results to be obtained for the full year.
2. Business
Headquartered in New York, New York, Enteractive, Inc. (the "Company")
offers products and services to customers for the design, development,
operation and maintenance of customer Intranets or sites on the
Internet and World Wide Web and publishes multimedia titles to the
home. As described below, the Company recently entered into an
agreement, which provides that the Company will sell its domestic
distribution rights, inventory and certain accounts receivable from its
interactive multimedia publishing business to a third party. The
Company's address is 110 West 40th Street, Suite 2100, New York, New
York 10018 and its telephone number is (212) 221-6559. Its World Wide
Web site address is http://www.crstone.com.
Throughout the first half of fiscal 1997 the Company was primarily
engaged in the development, publishing and marketing of multimedia
interactive software with an emphasis on the CD-ROM platform. As a
result of a rigorous review of the CD-ROM market, the Company's
performance and the related risks of continuing to develop and market
interactive multimedia titles, the Company concluded that it could
capitalize on what the Company believes to be a vibrant market and upon
its expertise in development by redirecting its business to provide
network and web-related solutions, products and services to businesses
and other entities.
The Company plans to, directly or in cooperation with third parties,
design, develop, install, maintain and host customer Intranets or sites
on the Internet and World Wide Web. According to an August 1996 report
by Forrester Research the number of Web sites is projected to grow from
43,000 at the end of 1996 to 657,000 at the end of 2000. In addition,
businesses are demanding more complex Web sites, as these sites become
increasingly important first points of contact with current and
prospective customers. Accordingly, the Company believes that a
company's web site is becoming a mission-critical component of the
enterprise. Companies are also increasingly deploying Intranets to
manage their internal corporate communications because they enable
employees and business associates to receive corporate information and
training efficiently, communicate through e-mail, use the internal
network's client applications and access proprietary information and
legacy databases.
On December 4, 1996, the Company entered into an agreement (the
"Enteractive Affiliates Agreement") with USWeb Corporation ("USWeb")
pursuant to which the Company became an affiliate of USWeb and a member
of USWeb's network of independent affiliates (the "USWeb Network").
Under the Affiliates Agreement, the Company paid $625,000 for the right
to operate USWeb affiliate offices in certain localities for 10 years
as provided below. USWeb is a relatively new venture, which has raised
approximately $34 million to date. Principal investors include Softbank
Corporation, which owns Comdex and Ziff-Davis Publishing, 21st Century
Communications Partners L.P., Wheatly Partners L.P. and Reuters. USWeb
is seeking to capitalize on the service opportunities presented by the
increasing use of the Internet and Intranets as commercial tools. The
Company has formed a subsidiary, Enteractive Network Solutions Inc.,
doing business as USWeb Cornerstone, which is intended to provide a
full range of Internet and Intranet-based business solutions, including
Website design, hosting and management, design and implementation of
6
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ENTERACTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
database and e-commerce solutions, educational programs and Web-related
strategic consulting and marketing. The Company is obligated to pay
USWeb monthly royalty and service and marketing and advertising fees
equal in the aggregate to 7% of Adjusted Gross Revenues from this
business, as defined in the agreement, but not less than certain
contractual fee levels.
The Company has been granted exclusive rights to develop new USWeb
Affiliate offices in Long Island (Nassau-Suffolk County), Philadelphia,
Baltimore, Stamford, CT, and Bergen County and Newark, NJ. The Company
has established a USWeb Affiliate office in New York City and in each
of the above territories. The exclusive rights granted to the Company
are subject to certain minimum performance standards set forth in the
Affiliates Agreement. If the Company is unable to meet these minimum
performance standards, its exclusive rights may be terminated.
On August 15, 1997 the Company consummated an agreement with
Enteractive Distribution Company, LLC ("EDC"), an unrelated company.
Under the terms of the agreement EDC acquired the inventory and certain
accounts receivable existing August 15, 1997 resulting from the
Company's interactive multimedia publishing business. In addition the
Company has assigned its domestic distribution contracts with its
domestic distributors to EDC and granted EDC an exclusive license to
market the Company's interactive multimedia titles in North America for
a minimum of two years. The sales price includes the greater of
$100,000 or 50% of EDC's proceeds from the sale of the inventory in the
9 months following the closing and 50% of the accounts receivable
balances collected by EDC within 24 months of closing. The Company will
also receive royalties on sales of its products subsequent to
liquidation of existing inventory of 15% for three years and 10%
thereafter. EDC will also pay the Company a 5% royalty from the sales
of any third party products it sells through August, 2002. The Company
is evaluating the most appropriate manner to continue licensing its
multimedia titles outside the United States. The Company does not
believe that it will incur any future significant costs associated with
the domestic or international distribution of its multimedia titles.
As a result of the Company's agreement with EDC, the Company wrote down
the majority of its interactive multimedia related business assets in
the fourth quarter of fiscal 1997 to the related anticipated minimum
proceeds of $100,000. These assets are classified as "assets held for
sale" in the financial statements and in the Company's May 31, 1997
balance sheet in the Form 10-KSB.
3. Affiliate 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
indicated in note 2. The fee is being amortized over the 10 year life
of the agreement with USWeb. Affiliate rights at August 31, 1997 were
net of accumulated amortization of $46,900.
4. 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. Actual results could differ
from those estimates.
5. 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 of $531,000. The Preferred Stock
7
<PAGE>
ENTERACTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 on
a pro rata basis of the Preferred Stock at any time upon 30 days prior
written notice, at a redemption price equal to 110% of the stated
value. 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.
In a 1997 announcement, the staff of the Securities and Exchange
Commission ("SEC") indicated that when preferred stock is convertible
at a discount from the then current common stock market price, the
discount amount reflects at that time an incremental yield, e.g. a
"beneficial conversion feature", which should be recognized as a return
to the preferred shareholders. Based on the market price of the
Company's common stock and the fair value of the warrants on the date
of issuance the Class A Preferred Stock had a non cash beneficial
conversion feature of $13,390,000. The beneficial conversion feature is
recognized solely in the calculation of loss per common share over a 17
month period, beginning with the issuance of the Preferred stock to
April 30, 1998, the first date that conversion can occur. As a result,
the loss per common share has been restated to reflect an increase of
($0.26) for the three months ended August 31, 1997.
6. Warrant Exchange
On September 16, 1997, the Company announced that it is offering to
exchange (the "Exchange Offer") twenty of its publicly-traded Common
Stock Purchase Warrants (the "Warrants") expiring October 20, 1997 for
one share of newly-issued Common Stock, $.01 par value. As of the date
of this Form 10-QSB, there are 5,121,468 Warrants outstanding. Thus, if
all the Warrants are exchanged, approximately 256,000 shares of Common
Stock will be issued. Each Warrant currently entitles the registered
holder to purchase through October 20, 1997 one share of the Company's
Common Stock at an exercise price of $4.00 per share. The Exchange
Offer will expire at 5:00 P.M., New York City Time on October 14, 1997,
unless extended. The purpose of the Exchange Offer is to (i) reduce the
overhang to the market for the Company's Common Stock and (ii) offer
Warrant holders the opportunity to participate in any long term
appreciation of the Company's securities, since absent the Exchange
Offer, it is likely that the Warrants will expire unexercised on
October 20, 1997.
8
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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 30, 1998 /s/ Kenneth Gruber
------------------------------
Kenneth Gruber
Chief Financial Officer and
Principal Accounting Officer
