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 November 30, 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.)
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 December 22, 1997
-------------- -----------------------
Common Stock, $.01 Par Value 8,019,555
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 November 30, 1997
and May 31, 1997 3
Consolidated Statements of Operations for the three months
and six months ended November 30, 1997 and 1996 4,5
Consolidated Statements of Cash Flows for the six months
ended November 30, 1997 and 1996 6
Notes to Financial Statements 7
SIGNATURES 10
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
November 30 May 31
1997 1997
ASSETS (unaudited)
------------- ------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 1,351,500 $ 4,952,900
Accounts receivable 232,200 224,400
Assets held for sale 19,900 100,000
Prepaid expenses and other 225,200 93,800
------------ ------------
Total current assets 1,828,800 5,371,100
Affiliation Rights, net 562,500 593,800
Property and equipment, net 505,500 154,900
Other 119,300 61,500
------------ ------------
$ 3,016,100 $ 6,181,300
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 415,900 $ 287,900
Accrued restructuring expenses 336,300 --
Accrued payroll and related expenses 93,600 --
Other accrued expenses 424,400 623,900
Deferred revenue -- 69,500
Current maturities of long-term debt 104,700 40,200
------------ ------------
Total current liabilities 1,374,900 1,021,500
Long-term debt 104,300 --
------------ ------------
Total liabilities 1,479,200 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;
8,019,555 and 7,679,441 shares issued and outstanding for 80,200 76,800
November 30, 1997 and May 31, 1997 respectively
Additional paid-in capital 28,249,500 28,038,400
Accumulated deficit (26,792,900) (22,955,500)
------------ ------------
Total stockholders' equity 1,536,900 5,159,800
$ 3,016,100 $ 6,181,300
------------ ------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended November 30
1997 1996
--------------------------------------
<S> <C> <C>
Net product sales $ -- $ 441,500
Internet services revenues 376,000 --
Software licensing and royalty revenue 98,000 197,600
----------- -----------
Total revenues 474,000 639,100
Cost of product sales -- 219,900
Amortization of capitalized software -- 107,100
Cost of Internet services revenues 319,300 --
Cost of licensing and royalty revenue 22,200 9,400
Research and development expenses 484,100 619,400
Marketing and selling expenses 953,500 1,109,300
General and administrative expenses 492,400 468,200
Restructuring expenses 427,700 --
----------- -----------
Total costs and expenses 2,699,200 2,533,300
Operating loss (2,225,200) (1,894,200)
----------- -----------
Other income (expense):
Interest expense (3,400) (4,800)
Other income -- 6,900
Interest income 25,400 26,400
-----------
Loss before income taxes (2,203,200) (1,865,700)
Income tax expense -- --
----------- -----------
Net loss $(2,203,200) $(1,865,700)
============ ===========
Preferred stock preferences (1997 restated - Note 6) (2,608,700) --
Net loss to common shareholders (1997 restated - Note 6) $(4,811,900) $(1,865,700)
------------ -----------
Loss per common and common equivalent share (1997 restated - Note 6) $ (0.61) $ (0.24)
=========== ===========
Weighted average shares of common
stock and common stock equivalents 7,828,751 7,679,441
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended November 30
1997 1996
---------------- --------------
<S> <C> <C>
Net product sales $ -- $ 766,100
Product development revenue -- 40,700
Internet revenues 518,300 --
----------- -----------
Software licensing and royalty revenue 132,400 375,300
----------- -----------
Total revenues 650,700 1,182,100
Cost of product sales -- 348,900
Amortization of capitalized software -- 214,200
Cost of internet revenues 418,800 --
----------- -----------
Cost of licensing and royalty revenue 22,200 37,000
Research and development expenses 883,600 1,440,200
Marketing and selling expenses 1,752,500 1,805,800
General and administrative expenses 1,058,800 907,500
Restructuring expenses 427,700 --
----------- -----------
Total costs and expenses 4,563,600 4,753,600
Operating loss (3,912,900) (3,571,500)
----------- -----------
Other income (expense):
Interest expense (3,400) (22,200)
Other income (expense) -- 83,400
Interest income 78,900 6,900
----------- -----------
Net loss $(3,837,400) $(3,503,400)
----------- -----------
Preferred stock preferences (1997 restated - Note 6) (4,560,800) --
----------- -----------
Net loss to common shareholders (1997 restated - Note 6) $(8,398,200) $(3,503,400)
Loss per common and common equivalent share(1997 restated -Note 6) $ (1.08) $ (0.46)
----------- -----------
Weighted average shares of common
stock and common stock equivalents 7,754,096 7,679,441
</TABLE>
See notes to consolidated financial statements
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended November 30
1997 1996
-------------------------------
(unaudited) (unaudited)
Cash flows from Operating Activities
<S> <C> <C>
Net Loss $(3,837,400) $(3,503,400)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 109,400 297,600
Stock Option Consulting expense -- 237,500
Changes in assets and liabilities
Accounts receivable (7,800) (499,000)
Assets held for sale 80,100 --
Inventories -- (156,300)
Prepaid expenses and other (131,400) (232,100)
Other assets (57,800) --
Accounts payable 128,000 (61,600)
Accrued expenses 230,400 (739,400)
Deferred revenue (69,500) --
----------- -----------
Net cash used in operating activities (3,556,100) (4,656,700)
Cash flows from investing activities
Purchases of property and equipment (428,700) (33,700)
------------- -----------
Net cash (used in) provided by investing activities (428,700) (33,700)
Cash flows from financing activities
Proceeds from exercise of stock options 214,500 73,800
Proceeds from sale and leaseback of equipment 168,800 --
Principal payments under long-term debt -- (110,400)
------------- -----------
Net cash provided by financing activities 383,400 (36,600)
------------- -----------
Net decrease in cash and cash equivalents (3,601,400) (4,727,000)
Cash and cash equivalents
Beginning of period 4,952,900 6,005,400
------------- -----------
End of period $ 1,351,500 $ 1,278,400
============= ===========
</TABLE>
See notes to consolidated financial statements
6
<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 November 30, 1997, and the results of its operations and its cash flows
for the six month and three month periods ended November 30, 1997. 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 six month period ended November 30, 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.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.
The Company, directly or in cooperation with third parties, designs,
develops, installs, maintains and hosts 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 public company whose principal investors include Intel,
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 Web Site
design, hosting and management, design and implementation of 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 was 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.
7
<PAGE>
ENTERACTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 offices in New Jersey, Long
Island, NY Philadelphia, PA and Stamford CT and operate from offices
located in New York City and Baltimore, Maryland. The statement of
operations for the three month period ended November 30, 1997 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. Affiliate rights at November 30, 1997 were net of accumulated
amortization of $62,500.
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. 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, $.01 par value. On September 16, 1997, there were 5,121,468
Warrants outstanding. The purpose of the Exchange Offer was 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 have would expired unexercised on October
20, 1997. On October 14, 1997 the company issued 248,864 shares of common
stock, $.01 par value in exchange of 4,977,280 warrants which were
exchanged as part of the Exchange Offer. The balance of the outstanding
Warrants expired unexercised.
On November 19, 1997 the Company offered to the holders of 4,200,000
common stock purchase warrants to issue one share of its par value $.01
common stock for 2.8 warrants. The exchange offer is conditioned on all
holders of the warrants agreeing to the exchange and expires on January
20, 1998, unless extended. The warrants subject to the offer entitled the
registered holder to purchase through December 13, 2001 one share of
common stock at $4.00 per share. As a condition to closing the exchange
offer, the Company is seeking the consent of all the holders of its
Convertible Preferred Stock to (1) delay the date when the Preferred Stock
can 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 will be used
to redeem the outstanding Preferred Stock and 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 approve
the delay in the conversion date will receive a special monthly interest
payment 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 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)
6. 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 has a stated value of $1,250 per
share and each share is convertible at any
8
<PAGE>
ENTERACTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 50% of the proceeds from any 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 ($0.33) and ($0.59) for the three and
six months ended November 30, 1997.
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
