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 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
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Consolidated Balance Sheets at February 28, 1997 and
February 29,1996 3
Consolidated Statements of Operations for the three months
and nine months ended February 28, 1997 and February 29, 1996 4,5
Consolidated Statements of Cash Flows for the nine months
ended February 28, 1997 and February 29, 1996 6
Notes to Condensed Consolidated Financial Statements 7
SIGNATURES 10
<PAGE>
ENTERACTIVE INC. and Subsidiaries
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
Affiliate Right 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 941,300 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 and 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
See notes to consolidated financial statements $ 8,819,100 $ 7,945,000
------------ ------------
</TABLE>
3
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
February 28 February 29
1997 1996
------------ ---------------
<S> <C> <C>
Net product sales $ 115,200 $ 95,200
Product development revenue -- 57,200
Royalty revenue 152,600 900
----------- -----------
Total revenues 267,800 153,300
Cost of product sales 113,600 22,300
Amortization of capitalized software 107,000 --
Cost of development revenue -- 37,300
Research and development expense 542,000 844,200
Marketing and selling expenses 835,500 344,300
Internet services expenses 516,700 --
General and administrative expenses 210,600 587,300
Acquired in-process research and development -- 1,915,100
----------- -----------
Total costs and expenses 2,325,400 3,750,500
----------- -----------
Operating loss (2,057,600) (3,597,200)
----------- -----------
Other income (expense):
Interest expense (10,900) (57,500)
Interest income 81,800 19,800
Other -- (4,000)
----------- -----------
Net Loss $(1,986,700) $(3,638,900)
----------- -----------
Preferred stock preferences(1997 restated - Note 7) (932,100)
----------- -----------
Net loss to common shareholders (1997 restated -Note 7) $(2,918,800) $(3,638,900)
----------- -----------
Loss per common and common equivalent share (1997 restated - Note 7) $ (0.38) $ (0.76)
----------- -----------
Weighted average shares of common stock outstanding 7,679,441 4,775,489
----------- -----------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Feb. 28, 1997 Feb. 28, 1996
------------- --------------
<S> <C> <C>
Net product sales 881,300 324,800
Product development revenue 40,700 257,700
Royalty revenue 527,900 103,300
---------- -----------
Total revenues 1,449,900 685,800
Cost of product sales 462,500 77,600
Amortization of capitalized software 321,200 --
Cost of Development revenue 37,000 225,500
Research and development expenses 1,982,200 2,301,500
Marketing and selling expenses 2,641,300 1,354,700
Internet services expense 516,700 --
General and administrative expenses 1,118,100 1,246,900
Acquired in process research and development -- 1,915,100
----------- -----------
Total costs and expenses 7,079,000 7,121,300
----------- -----------
Operating loss (5,629,100) (6,435,500)
----------- -----------
Other income (expense):
Interest expense (33,100) (33,100)
Interest income 165,200 110,000
Other 6,900 4,900
----------- -----------
Net loss (5,490,100) (6,378,800)
----------- -----------
Preferred stock preferences (1997 restated - Note 7) (932,100)
------------ -----------
Net loss to common shareholders (1997 restated - Note 7) $(6,422,200) $(6,378,800)
------------ -----------
Loss per common and common equivalent share (1997 restated - Note 7) $ (0.84) $ (1.34)
------------ -----------
Weighted average shares of common
stock outstanding 7,679,295 4,775,489
------------ -----------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
February 28,1997 February 28,1997
----------------- ----------------
(unaudited) (unaudited)
<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 -- (285,200)
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) 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 provided by financing activities 7,356,300 2,441,900
----------- -----------
Net increase (decrease) in cash and cash equivalents 511,300 (1,090,400)
Cash and cash equivalents
Beginning of year 6,005,400 2,932,400
----------- -----------
End of period $ 6,516,700 $ 1,842,000
=========== ===========
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
ENTERACTIVE, INC
Notes to Condensed Consolidated Financial Statement
(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
----------
Total $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 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)
7
<PAGE>
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.
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. 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.
8
<PAGE>
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 for the
three and nine months ended February 28, 1997 have been restated to
reflect an increase of ($0.12) as a result of the SEC announcement.
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.
9
<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 30, 1998 /S/ Kenneth Gruber
----------------------------
Kenneth Gruber
Chief Financial Officer and
Principal Accounting Officer
