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, 1998
/ / 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.)
25 West 45th Street, Suite 306, New York, NY 10036
(Address of Principal Executive Offices)
(212) 768-7100
(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 March 31, 1998
-------------- --------------------
Common Stock, $.01 Par Value 9,424,933
Transitional Small Business Disclosure Format: Yes / / No /X/
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Consolidated Balance Sheets at February 28, 1998 and May 31, 1997 3
Consolidated Statements of Operations for the nine months
and three month period ended February 28, 1998, and
February 28, 1997 respectively. 4,5
Consolidated Statements of Cash Flows for the nine months
ended February 28, 1998 and February 28, 1997. 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
,
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 12
Item 2. Change in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submissions of Matters to a Vote by Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28, 1998
ASSETS (unaudited) May 31, 1997
--------------------------------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 2,085,700 $ 4,952,900
Investments 115,100 --
Accounts receivable, net 280,100 224,400
Other Receivables 56,100 --
Assets held for sale -- 100,000
Prepaid expenses and other 185,400 93,800
------------ ------------
Total current assets 2,722,400 5,371,100
Affiliation rights, net 546,900 593,800
Property and equipment, net 550,500 154,900
Other 125,500 61,500
------------ ------------
$ 3,945,300 $ 6,181,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 440,000 $ 287,900
Accrued restructuring expenses 221,600 --
Accrued payroll and related expenses 83,700 79,500
Other accrued expenses 489,600 544,500
Deferred revenue -- 69,500
Current maturities of long-term debt 120,900 40,200
------------ ------------
Total current liabilities 1,355,800 1,021,500
Long-term debt 148,800 --
------------ ------------
1,504,600 1,021,500
Stockholders' Equity
Preferred Stock $.01 par value, 2,000,000 shares authorized:
Series A 6,720 shares issued and outstanding 100 100
Series B 2,000 and no shares issued and outstanding at
February 28, 1998 and May 31, 1997 100 --
Common Stock $.01 par value, 50,000,000 shares authorized;
9,423,933 and 7,679,441 shares issued and outstanding at
February 28,1998 and May 31,1997 94,200 76,800
Additional paid-in capital 30,246,000 28,038,400
Unrealized Gain on marketable equity securities 115,100
Accumulated deficit (28,014,800) (22,955,500)
------------ ------------
Total stockholders' equity 2,440,700 5,159,800
------------ ------------
Total Liabilities and Stockholders' equity $ 3,945,300 $ 6,181,300
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
February 28 February 28
1998 1997
-----------------------------------
<S> <C> <C>
Net product sales $ -- $ 115,200
Internet services revenues 426,200
Software licensing and royalty revenue 74,000 152,600
----------- -----------
Total revenues 500,200 267,800
Cost of product sales -- 113,600
Amortization of capitalized software -- 107,000
Cost of Internet services revenues 617,000 --
Cost of software licensing and royalty revenue 6,100 --
Research and development expenses -- 686,200
Marketing and selling expenses 610,100 913,600
General and administrative expenses 494,700 504,700
----------- -----------
Total costs and expenses 1,727,900 2,325,400
=========== ===========
Operating loss (1,227,700) (2,057,600)
----------- -----------
Other income (expense):
Interest expense (4,600) (10,900)
Other income/expense (900)
Interest income 11,300 81,800
----------- -----------
Net Loss $(1,221,900) $(1,986,700)
=========== ===========
Preferred stock preferences (1997 restated - Note 5) (3,596,900) (932,100)
----------- -----------
Net loss to common shareholders (1997 restated - Note 5) $(4,818,800) $(2,918,800)
----------- -----------
Basic and diluted loss per common share (1997 restated - Note 5)
$ (0.57) $ (0.38)
=========== ===========
Weighted average shares of common stock outstanding 8,380,656 7,679,441
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
February 28, February 28,
1998 1997
------------------------------------
<S> <C> <C>
Net product sales -- 881,300
Product development revenue -- 40,700
Internet services revenues 944,500 --
Software licensing and royalty revenue 206,400 527,900
----------------------------------
Total revenues 1,150,900 1,449,900
Cost of product sales -- 462,500
Amortization of capitalized software -- 321,200
Cost of development revenue -- 37,000
Cost of internet services revenues 1,919,400 --
Cost of software licensing and royalty revenue 28,300 --
Research and development expenses -- 2,126,400
Marketing and selling expenses 2,362,600 2,719,900
General and administrative expenses 1,553,500 1,412,115
Restructuring expenses 427,700
----------------------------------
Total costs and expenses 6,291,500 7,079,000
----------------------------------
Operating loss (5,140,600) (5,629,100)
----------------------------------
Other income (expense):
Interest expense (8,000) (33,100)
Other income (expense) (900) 6,900
Interest income 90,200 165,200
----------------------------------
Net loss (5,059,300) (5,490,100)
==================================
Preferred stock preferences (1997 restated - Note 5) (8,157,700) (932,100)
----------------------------------
Net loss to common shareholders (1997 restated - Note 5) $(13,217,000) $ (6,422,200)
----------------------------------
Basic and diluted loss per common share (1997 restated - Note 5) $ (1.66) $ (0.84)
==================================
Weighted average shares of common stock outstanding 7,965,846 7,679,295
==================================
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended February 28,
1998 1997
--------------------------------
Cash flows from Operating Activities
<S> <C> <C>
Net Loss $(5,059,300) $(5,490,100)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 134,000 462,100
Stock option consulting expense -- 356,300
Changes in assets and liabilities
Accounts receivable (55,700) (77,400)
Income taxes receivable -- 16,400
Assets held for sale 43,900 --
Inventories -- (78,600)
Prepaid expenses and other (91,600) (200)
Other assets (64,000) --
Accounts payable 152,100 (508,300)
Accrued expenses 171,000 (840,100)
Deferred revenue (69,500) --
--------------------------------
Net cash used in operating activities (4,839,100) (6,159,900)
Cash flows from investing activities
Purchase of franchise rights -- (625,000)
Purchases of property and equipment (482,700) (60,100)
--------------------------------
Net cash (used in) investing activities (482,700) (685,100)
Cash flows from financing activities
Proceeds from issuance of convertible preferred stock 2,000,000 7,869,100
Proceeds from exercise of stock options 225,100 73,500
Proceeds from sale and leaseback of equipment 250,100 --
Principal payments under long-term debt (20,600) (586,300)
--------------------------------
Net cash provided by financing activities 2,454,600 7,356,300
--------------------------------
Net increase (decrease) in cash and cash equivalents (2,867,200) 511,300
Cash and cash equivalents
Beginning of period 4,952,900 6,005,400
--------------------------------
End of period $ 2,085,700 $ 6,615,700
================================
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
ENTERACTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 financial position
of Enteractive, Inc, (the "Company") as of February 28, 1998 and the
results of its operations and its cash flows for the nine month, and
three month periods ended February 28,1998. 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 nine month
period ended February 28, 1998 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")
is a provider of business solutions based on internet technologies. In
August 1997, the Company sold its domestic distribution rights,
inventory and certain accounts receivable from its interactive
multimedia publishing business to a third party. The Company's address
is 25 West 45th Street, Suite 306, New York, New York 10036 and its
telephone number is (212) 768-7100. 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.
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 public company whose principal investors
include Intel, Softbank Corporation, which owns Comdex and Ziff-Davis
Publishing, 21st Century Communications Partners L.P. ( significant
stockholder of the Company), 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. The Company will focus on three
primary practice areas:
Business Applications Practice - Focuses on the automation of core
internal and external business processes through the use of internet
technology. Intranets and extranets deliver business applications
through secure internet technologies, and they can greatly increase
productivity and reduce overall costs while helping an organization
react quickly to changes in business and technology environments.
Media Asset Management Practice - Enables corporations to manage the
rapidly growing volumes of digital assets and to integrate them into
business processes. Automating the creative and approval workflow,
ensuring the consistency and integrity of a brand, repurposing or
reexpressing existing assets to support various functions (training and
marketing for example) provide opportunities to reduce cycle time and
costs. The use of Internet technologies tightly integrated with
database and storage technologies should enable clients to realize
enormous returns in this area.
Electronic Commerce Practice- Building electronic commerce solutions
requires a detailed understanding of the relative strengths and
weaknesses of the competing e-commerce product and service offerings,
internet marketing savvy, and the skills to address the underlying
financial, technology and security issues involved. There is a need to
provide a wide range of e-commerce solutions from catalog merchant
sites to large, sophisticated business - to - business systems
stretching across many value chains
The Company is obligated to pay USWeb monthly 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.
7
<PAGE>
By November 30, 1997 the Company, with the approval of USWeb, decided
that it could more cost effectively service the territories covered
under the franchise agreement with USWeb by closing its affiliate
offices in New Jersey, Long Island, NY Philadelphia, PA , Baltimore,
MA, and Stamford CT., and operate from offices located in New York
City. The statement of operations for the nine month period ended
February 28, 1998 reflects expenses totaling $427,700 to reflect the
Company's estimated losses from subleasing the closed offices and the
severance associated with eliminating positions deemed unnecessary by
management.
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. Affiliation rights at February 28,1998
were net of accumulated amortization of $78,125.
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 of Series A Preferred Stock and Common Stock Purchase
Warrants 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 ("December 1996 Warrants") to purchase in the aggregate
4,200,000 shares of common stock $0.01 par value (the "Common Stock")
at an exercise price of $4.00 per share. The Preferred Stock has a
stated value of $1,250 per share and each share was 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. 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
discounted 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 December 1996 Warrants
on the date of issuance, the 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. The impact on
loss per common share is $ 0.42 and $1.01 in the three and nine months
ended February 28, 1998. The loss per common share for the three and
nine month periods ending February 28, 1997 have been restated to
reflect an increase of $.12 as a result of the SEC announcement.
6. Warrant Exchanges
On September 16, 1997, the Company offered 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. On September 16, 1997, there were 5,121,468
Warrants outstanding. The purpose of the Exchange Offer was to reduce
the overhang to the market for the Company's Common Stock. On October
14, 1997 the company issued 248,864 shares of Common Stock in exchange
for 4,977,280 Warrants. The balance of the outstanding Warrants expired
unexercised.
On November 19, 1997 the Company offered to the holders of 4,200,000
December 1996 Warrants to issue one share of Common Stock for 2.8
December 1996 Warrants. The exchange offer as amended was conditioned
on at least 90% of holders of the December 1996 Warrants agreeing to
the exchange and expired on February 4, 1998. The December 1996
Warrants subject to the offer entitled the registered holder to
purchase through December 13, 2001 one share of Common Stock at an
exercise price of $4.00 per share. As a condition to closing the
amended exchange offer, the Company sought the consent of at least 90%
of all the holders of its Preferred Stock to (1) delay the date when
the Preferred Stock would first be converted into Common Stock from
April 30, 1998 until any time after June 30, 1999 and (2) modify the
redemption feature so that one-third, rather than 50%, of the net
proceeds from any public equity offering consummated by the Company
prior to January 1, 2000 would be used to redeem the outstanding
Preferred Stock and (3) if the closing price of the Company's common
Stock is at least $6.00 for 10 trading days in any 30 day period, the
Company will use its best efforts to complete an underwritten offering
of its Common Stock. All holders of Preferred Stock who approved the
delay in the conversion date will receive also a special monthly
dividend equal to 12% per annum of the stated value of the Preferred
Stock ($1,250 per share) for the period commencing April 30, 1998 and
ending the earlier of (1) June 30, 1999 or (2) the redemption date, if
8
<PAGE>
any of the Preferred Stock. Such payment may be made, at the Company's
option in either cash or additional shares of its Common Stock or a
combination thereof. Such payments will be made at the later of (1) the
time it redeems the Preferred Stock, or (2) July 10, 1999 (if the
Company does not redeem the Preferred Stock on or before June 30,
1999). On February 6, 1998 the company issued 1,397,323 shares of
Common Stock in exchange for 3,912,500 December 1996 Warrants which
were exchanged as part of the Exchange Offer. The holders of
approximately 93% of the Preferred Stock agreed to amend the terms of
the Preferred Stock.
7. Private Placement of Series B Preferred Stock
On February 20, 1998, the Company closed a $2,000,000 private
placement. The Company issued Series B par value $.01 Convertible
Preferred Stock (Series B Preferred Stock). The Series B Preferred
Stock has a stated per share value of $1,000, is entitled to vote on
all matters submitted to holders of the Common Stock, pays no dividends
and is not redeemable. The Series B, Preferred Stock is not convertible
until March 1, 1999 unless the Company has a private placement or
public offering of Common Stock where the gross proceeds to the Company
are in excess of $2,000,000 (the Financing). Upon the closing of a
Financing all of the Series B Preferred Stock shall automatically
convert into shares of the Company's Common Stock equal to the
aggregate stated value of the Series B Preferred Stock ($2,000,000)
divided by the greater of (a) 90% of the per share offering price of
the financing or (b) $1.00. Subsequent to March 1, 1999 the Series B
Preferred Stock is convertible into shares of Common Stock equal to the
aggregate stated value of preferred shares to be converted divided by
$1.00. The maximum number of common shares issuable upon conversion of
preferred stock is 2,000,000.
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
discounted 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 on the date of issuance the Series B Preferred
Stock had a non cash beneficial conversion feature of $2,250,000. The
beneficial conversion feature is recognized solely in the calculation
of loss per common share over the period, beginning with the issuance
of the Series B Preferred stock to March 1999 the first date that
mandatory conversion can occur. The impact on loss per common share is
$0.01 in the three and nine months ended February 28, 1998.
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
The Company was formed in December 1993 to develop, publish and market
interactive multimedia software products. On December 4, 1996 the
Company signed an agreement with USWeb Corporation under which the
Company has established a subsidiary to operate in New York and the
exclusive rights in Long Island, Philadelphia, Baltimore, Stamford, CT
and Bergen County and Newark, NJ. USWeb Cornerstone, the subsidiary,
provides 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, and
Web-related strategic consulting and marketing.
Quarterly results
Since signing the affiliate agreement with USWeb Corporation, the
Company has been building infrastructure to support anticipated sales.
The Company monitors and adjusts expense levels to support the revenue
stream. By May 31, 1997, the Company no longer utilized significant
resources for development or marketing of multimedia products and
consequently most comparisons to the previous years' periods are not
applicable.
By November 30, 1997 the Company, with the approval of USWeb, decided
that it could more cost effectively service the territories covered
under the franchise agreement with USWeb by closing its affiliate
offices in New Jersey, Long Island, NY Philadelphia, PA , Baltimore,
MA, and Stamford CT., and operate from offices located in New York
City. The statement of operations for the nine month period ended
February 28, 1998 reflects expenses totaling $427,700 for the Company's
estimated losses from subleasing the closed offices and the severance
associated with eliminating positions deemed unnecessary by management.
The Company expects its quarterly results to vary significantly in the
future. The number of customer contracts signed and fulfilled
significantly influence revenues. Further market acceptance of the
Company's offerings is dependent on (1) the growth and utilization of
the Internet as a medium for commerce, (2) the success of USWeb
establishing and positioning the USWeb brand in the territories where
the Company operates and (3) the success of offerings by competitors.
The Company does not expect seasonal factors to be a significant
influence on revenues.
9
<PAGE>
Results of Operations - Quarter and Nine Months Ended February 28, 1998
Net product sales for the three and nine month periods ended February
28, 1998 were $0 compared to $115,200 and $881,300 for the three and
nine month periods ended February 28, 1997. The decrease is due to the
Company's decision to license others to market and distribute its
interactive multimedia products. Revenues from these relationships in
fiscal 1998 are reflected as royalties. Prospectively, the Company does
not expect any revenues from CD-ROM title sales other than royalty
income as discussed below.
Internet services revenue for the three and nine month periods ended
February 28, 1998 were $426,200 and $944,500 respectively compared to
$0 for the three and nine month periods ended February 28, 1997. These
revenues consist of consulting and services revenues from USWeb
Cornerstone, which began operations in the current fiscal year.
Software Licensing and Royalty revenue for the three and nine month
periods ended February 28, 1998 were $74,000 and $206,400 respectively
compared to $152,600 and $527,900 for the three and nine month periods
ended February 28, 1997. The decrease is the result of the Company's
decision to focus on the Internet business of USWEB Cornerstone. The
royalties relate to sales of titles, all of which were first marketed
over 12 months ago. This revenue stream is expected to continue to
diminish as the titles continue to age.
Cost of Internet Services Revenue for the three and nine month periods
ended February 28, 1998 were $617,000 and $1,919,400 respectively
compared to 0 for the three and nine month periods ended February 28,
1997. The Company's Internet Services revenues increased as a
percentage of cost from 40% through the six months ended November 30,
1997 to 69% for the three months ended February 28, 1998. This increase
is principally the result of higher revenues. For the three months,
ended February 28, 1998 revenues averaged $142,000 per month compared
to $86,000 per month for the 6 months ended November 30, 1997.
Research and Development expenses were $0 in the three and nine month
periods ended February 28, 1998, compared to $686,200 and $2,126,400
for the three and nine month periods ended February 28, 1997. The
decrease is due to the Company's decision to focus on the Internet
business of USWeb Cornerstone and elimination of interactive
multi-media product development.
Marketing and selling expenses for the three and nine month periods
ended February 28, 1998 were $610,100 and $2,362,600 respectively
compared to $913,600 and $2,719,900 for the three and nine month
periods ended February 28, 1997. Year over year comparisons of
marketing and selling are not meaningful because the current year
expenses relate to the Internet Services business of USWeb Cornerstone.
The costs in fiscal 1997 relate to the selling and marketing of
interactive multi-media products. During the quarter ended February 28,
1998, average monthly marketing expenses were $203,000 compared to
$318,000 for the quarter ended November 30, 1997. This decrease is the
result of the Company's decision to consolidate its sales facilities
and operations and eliminate redundant positions.
General and administrative expenses for the three and nine month
periods ended February 28, 1998 were $494,700 and $1,553,500
respectively compared to $504,700 and $1,412,115 for the three and nine
month periods ended February 28,1997. General and administrative
expenses include costs for accounting, information systems, human
resources, legal, general facilities and senior executives.
Interest and other income includes interest and dividend payments on
cash balances. Interest and other income for the three and nine month
periods ended February 28, 1998 were $11,300 and $90,200 respectively
compared to $81,800 and $165,200 for the three and nine month periods
ended February 28, 1997 due to lower cash balances.
No income tax benefit was recorded for the quarter ended February
28,1998. The Company does not believe it will generate taxable income
for the period ending May 31, 1998. 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, if
any. Accordingly, the Company has established a valuation allowance
against its deferred tax asset.
10
<PAGE>
Liquidity and Capital Resources
Since June 1, 1995, the Company's principal sources of capital have
been as follows:
a) On February 20, 1998 the Company closed a $2,000,000 private
placement. The Company issued Series B par value $.01 Convertible
Preferred Stock ("Series B Preferred Stock"). The Series B Preferred
Stock has a stated per share value of $1,000, is entitled to vote on
all matters submitted to holders of the Company's Common Stock, pays no
dividends and is not redeemable. The Series B Preferred Stock is not
convertible until March 1, 1999 unless the Company has a private
placement or public offering of common stock where the gross proceeds
to the Company are in excess of $2,000,000 (the "Financing"). Upon the
closing of a Financing all of the Series B Preferred Stock shall
automatically convert into shares of the Company's Common Stock equal
to the aggregate stated value of the Series B Preferred Stock
($2,000,000) divided by the greater of (a) 90% of the per share
offering price of the financing or (b) $1.00. Subsequent to March 1,
1999 the Series B Preferred Stock is convertible into shares of common
stock equal to the aggregate stated value of preferred shares to be
converted divided by $1.00. The maximum number of common shares
issuable upon conversion of preferred stock is 2,000,000.
b) On December 12, 1996 the Company completed a private placement of 84
units each consisting of 80 shares of Preferred Stock and 50,000
December 1996 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 $7,869,000, net of related expenses of $531,000. The
Preferred Stock has a stated value of $1,250 per share. As further
described in Note 6 to the Consolidated Financial Statements on
February 6, 1998 the Company completed a Warrant Exchange offer under
which the Company issued 1,397,323 shares of Common Stock in exchange
for 3,912,500 warrants and amended the terms of the Preferred Stock for
holders who participated in the Warrant Exchange.
In May 1996, the Company consummated an agreement with certain of its
former officers pursuant to which the Company repurchased 1,000,000
shares of Common Stock at $1.00 per share. Under the purchase agreement
as amended, the Company has paid all but $40,200 of the purchase price,
which is due in May 1998.
During the third quarter of fiscal 1998, the Company sold and leased
back equipment under a three-year sale/leaseback agreement with a
leasing company secured by the company's accounts receivable and
equipment. The Company received $250,000 which approximated the net
book value of the equipment. The effective interest rate of the lease
is 8 1/2% and the monthly payment is $10,080.
At February 28, 1998, the Company had cash and cash equivalents of
$2,085,700. The decrease of $2,867,300 in cash, and cash equivalents
from May 31, 1997 reflects the funding of operating activities of
$4,926,000, and the purchase of fixed assets of $483,000 partially
offset by the proceeds from the February 1998 private placement, sale
and leaseback of equipment discussed above, and proceeds from the
exercise of stock options.
Capital expenditures were $482,700 for the nine months ended February
28, 1998 compared to $60,100 for the nine months ended February 28,
1997. The Company's higher fiscal 1998 capital expenditures result from
acquiring equipment required for the US Web affiliate sales offices.
The Company does not anticipate significant capital expenditures for
the remaining of the fiscal year.
In August 1997, Nasdaq enacted new standards for the listing of its
member companies on its Small Cap Market. These standards, which took
effect on February 23, 1998, require listed companies to maintain
certain financial and corporate governance criterion for continued
listing on the SmallCap market.. As of February 28,1998, the Company
meets the financial criterion for continued listing on the SmallCap
market. After such standards take effect, companies that do not meet
the new standards could be subject to de-listing from the SmallCap
market. There can be no assurances that the Company will be able to
maintain compliance with the Nasdaq listing standards. The failure to
meet the maintenance criteria in the future may result in the Common
Stock no longer being eligible for quotation on Nasdaq and trading, if
any, of the Common Stock would thereafter be conducted in the
non-nasdaq over - the -counter market. As a result of such delisting of
the Common Stock from Nasdaq, it may be more difficult for investors to
dispose of, or to obtain accurate quotations as to the market value of,
the Common Stock.
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,
11
<PAGE>
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-QKSB 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.
Item 1. Legal Proceedings
None
Item 2. Change in Securities
As described in Note 6 to Notes to Condensed Consolidated Financial
Statements, the Company completed the exchange offer with respect to
the December 1996 Warrants during the quarter ended February 28, 1998.
On February 20, 1998, the Company closed a private placement of
$2,000,000 of Series B Preferred Stock. The sale was made pursuant to
the exemption contained in Section 4(2) of the Securities Act of 1933
as amended. The Company engaged no underwriter or placement agent in
connection with the private placement. For further information relating
to the private placement, please see note 7 to the consolidated
financial statements.
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K - The Company filed two reports on form
8-K under Item 5 during the quarter ended February 28, 1998
as follows:
On February 6, 1998, the Company completed the exchange offer to
exchange 2.8 December 1996 Warrants expiring December 13, 2001 (the
"Warrants") into one share of its common stock, $.01 par value per
share.
On February 19, 1998, the company completed a private placement of
$2,000,000 of newly issued Series B preferred stock.
12
<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 17, 1998 /s/ Kenneth Gruber
------------------
Kenneth Gruber
Chief Financial Officer and
Principal Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE QUARTER ENDED FEBRUARY 28, 1998 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> DEC-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 2,085,700
<SECURITIES> 115,100
<RECEIVABLES> 336,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,722,400
<PP&E> 1,625,532
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,945,300
<CURRENT-LIABILITIES> 1,355,800
<BONDS> 0
0
200
<COMMON> 94,200
<OTHER-SE> 2,346,300
<TOTAL-LIABILITY-AND-EQUITY> 3,945,300
<SALES> 0
<TOTAL-REVENUES> 500,200
<CGS> 623,100
<TOTAL-COSTS> 1,727,900
<OTHER-EXPENSES> 900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,600
<INCOME-PRETAX> 0
<INCOME-TAX> (1,221,900)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,221,900)
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
</TABLE>
