U.S. Securities and Exchange Commission WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 Commission file number 0-29750 IENTERTAINMENT NETWORK, INC. (Exact name of small business issuer as specified in its charter) North Carolina 56-2092059 (State of incorporation) (I.R.S. Employer Identification Number) 124-126 Quade Drive Cary, North Carolina 27513 (Address of principal executive office) (919) 678-8301 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 | | As of May 2, 2001, (the most recent practicable date), there were15,914,311 shares of the issuer's Common Stock, $.10 par value per share, outstanding. Transitional Small Business Disclosure Format (check one) Yes |_| No | X | IENTERTAINMENT NETWORK, Inc. Form 10-QSB Quarterly Report INDEX PART I FINANCIAL INFORMATION PAGE Item 1 Financial Statements 3 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 PART II OTHER INFORMATION 20 Item 1 Legal Proceedings 20 Item 2 Changes in Securities and Use of Proceeds 20 Item 3 Defaults Upon Senior Securities 20 Item 4 Submission of Matters to a Vote of Security Holders 20 Item 5 Other Information 20 Item 6 Exhibits and Reports on Form 8-K 21 SIGNATURES 22 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IENTERTAINMENT NETWORK, Inc. Consolidated Balance Sheets (IN THOUSANDS, EXCEPT SHARE DATA) March 31 December 31 2001 2000 UNAUDITED AUDITED ---------------- ------------- Assets Current assets: Cash and cash equivalents $ 491 $ 437 Trade receivables, net of allowances of $120 and $80 at March 31, 2001 and December 31, 2000, respectively 251 814 Software development costs, net 813 658 Prepaid expenses and other 160 169 -------------- ------- Total current assets 1,715 2,078 Property and equipment, net 937 914 Other noncurrent assets 18 18 ------------- -------- Total assets $ 2,670 $ 3,010 ============= ======== 3 March 31 December 31 2001 2000 UNAUDITED AUDITED --------------- ------------ Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 928 $ 1,181 Current portion of capital lease obligations 31 36 --------------- ------------- Total current liabilities 959 1,217 Capital lease obligations, less current portion 35 43 --------------- -------------- Total liabilities 994 1,260 Stockholders' equity: Series D Convertible Preferred Stock $.10 par value; liquidation and stated value of $1,000 per share, plus accumulated accretion, 4,911 shares authorized, issued and outstanding 5,319 5,246 Common stock, $.10 par value; 50,000,000 shares authorized; 15,914,311 shares issued and outstanding 1,591 1,591 Additional paid-in capital 38,157 38,157 Accumulated deficit (43,338) (43,188) Accumulated other comprehensive loss (53) (56) ---------------- ------------- Total stockholders' equity 1,676 1,750 ---------------- ------------- Total liabilities and stockholders' equity $ 2,670 $ 3,010 ================ ============= See accompanying notes. 4 iEntertainment Network, Inc. Consolidated Statements of Operations (In thousands, except share and per share data) Three months ended March 31 2001 2000 --------------- ------------- Net revenues: CD-ROM product sales $ - $ 10 Online sales 257 423 Advertising and other 314 1,061 Royalties and licenses 3 61 --------------- ------------- Total net revenues 574 1,555 Cost of revenues: Cost of products and services 37 18 Royalties and amortized software costs 13 253 --------------- ------------- Total cost of revenues 50 271 --------------- ------------- Gross profit 524 1,284 Operating expenses: Sales and marketing 538 743 Product development 263 575 General and administrative 272 616 Reversal of accrued liabilities for prize points (453) - Goodwill amortization - 400 --------------- ------------- Total operating expenses 620 2,334 --------------- ------------- Operating loss (96) (1,050) Other (income) expense: Interest (income)/expense - 5 Other (19) (51) --------------- ------------- Total other income (19) (46) --------------- ------------- Loss before income taxes (77) (1,004) Income tax expense - 6 --------------- ------------- Net loss (77) (1,010) Accretion of Series D Convertible Preferred Stock (74) (74) --------------- ------------- Net loss available to common stockholders $ (151) $ (1,084) =============== ============= Basic and diluted loss per share: --------------- ------------- Net loss per share $ (0.01) $ (0.07) =============== ============= Weighted average shares used in computing basic and diluted loss per share 15,914,311 14,936,800 =============== ============= 5 iEntertainment Network, Inc. Consolidated Statements of Cash Flows (In Thousands) Three months ended March 31 2001 2000 ---------------- ------------- Operating activities Net loss $ (77) $ (1,010) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 119 473 Amortization of capitalized software development costs 12 - Noncash compensation expense - 10 Issuance of common stock for services - 35 Reversal of accrued liability for prize points (343) - Changes in operating assets and liabilities: Trade receivables 563 (406) Prepaid expenses and other assets 9 17 Accounts payable and accrued expenses 90 (337) Royalties and commissions payable - (47) ---------------- ------------- Net cash provided by (used in) operating activities 373 (1,265) Investing activities Purchase of property and equipment (142) (112) Capitalized software development costs (167) - ---------------- ------------- Net cash used in investing activities (309) (112) 6 iEntertainment Network, Inc. Consolidated Statements of Cash Flows (continued) (In Thousands) Three months ended March 31 2001 2000 ---------------- ------------- Financing activities Proceeds from issuance of common and preferred stock - 233 Stock registration costs - (50) Payments on capital lease obligations (13) (15) Net cash provided by financing activities (13) 168 ---------------- ------------ Effect of currency exchange rate changes on cash and cash equivalents 3 38 Net increase (decrease) in cash and cash equivalents 54 (1,171) Cash and cash equivalents at beginning of period 437 3,092 ----------------- ------------- Cash and cash equivalents at end of period $ 491 $ 1,921 ================= ============= Supplemental disclosure of cash flow information Cash paid for interest $ 58 $ 112 Cash paid for income taxes $ - $ 41 Noncash investing and financing activities Issuance of common stock in connection with development agreement $ - $ 49 Issuance of common stock in connection with employee severance $ $ 62 Issuance of common stock in settlement of liabilities $ - $ 300 Fixed assets acquired under capital lease $ - $ 47 See accompanying notes. 7 iEntertainment Network, Inc. Notes to Consolidated Financial Statements (INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 IS UNAUDITED) 1. Description of Business and Significant Accounting Policies (continued) Description of Business iEntertainment Network, Inc. (the "Company") is a developer and publisher of Internet games and an operator of online game services. The Company develops and publishes proprietary online multi-player games and has built an Internet distribution infrastructure that offers online gamers a variety of free, subscription and pay-per-play games and services, including simulation, parlor, strategy, role playing and action games. Disposition of CD-ROM Assets In connection with the Company's June 1999 disposition of its CD-ROM assets, management decided to terminate certain CD-ROM distribution agreements and began negotiations to mutually release each partner from any obligation under the terms of these agreements. In the second quarter of 1999, the Company estimated a liability of $850,000 for potential settlements upon termination of these agreements. The balance of this liability at March 31, 2001 and December 31, 2000 was $195,000 and is reflected as accounts payable and accrued expenses in the consolidated balance sheets. In the first quarter of 2000, the Company settled with its two largest distributors by paying $250,000 in cash and issuing common stock valued at $300,000. Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, iMagicOnline Corporation, Interactive Magic Ltd. and Interactive Magic GmbH. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash and cash equivalents include amounts in demand deposit accounts and investments with an original maturity date of three months or less when purchased. 8 iEntertainment Network, Inc. Notes to Consolidated Financial Statements (continued) 1. Description of Business and Significant Accounting Policies (continued) Software Development Costs The Company capitalizes costs incurred in the development of its gaming software. Capitalization of such costs is discontinued when a product is available for general release to customers. Capitalized software development costs are capitalized at the lower of cost or net realizable value and amortized using the greater of the revenue curve method or the straight-line method over the estimated economic life of the related product. Amortization begins when a product is ready for general release to customers. Information related to net capitalized software development costs is as follows: (in thousands): March 31 December 31 2001 2000 ---------------- --------------- Balance at beginning of year $ 658 $ 92 Capitalized 167 658 Amortized (12) (92) ---------------- ---------------- Balance at end of period $ 813 $ 658 ================ =============== Revenue Recognition Revenue from online sales is recognized at the time the game is played and is based either upon actual usage by the customer on an hourly basis or on an unlimited use subscription basis. The Company records advertising revenues in the period the advertising impressions are delivered to customers. The Company records advertising revenues net of related administrative fees as reported by its outside advertising vendor. The Company's advertising contracts do not guarantee a minimum number of impressions to be delivered. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB No. 101 provides guidance on a variety of revenue recognition issues, including gross versus net income statement presentation. Based on the criteria of SAB No. 101, the Company presents its advertising revenues net of these administrative fees. 9 iEntertainment Network, Inc. Notes to Consolidated Financial Statements (continued) 1. Description of Business and Significant Accounting Policies (continued) Revenue Recognition (continued) Revenue from CD-ROM product sales was recognized at the time of product shipment. Revenue from royalties and licenses is recognized when earned under the terms of the relevant agreements with original equipment manufacturers ("OEMs"), international distributors and other third parties. With respect to license agreements that provide customers the right to multiple copies in exchange for guaranteed amounts, net revenue is recognized upon delivery of the product master or the first copy, provided collectibility is probable. Per copy royalties on sales that exceed the guarantee are recognized as earned. The Company accepts product returns and provides price protection on certain unsold merchandise. Revenue is recorded net of an allowance for estimated future returns, markdowns, price protection and warranty costs. Such reserves are based upon management's evaluation of historical experience, current industry trends and estimated costs. In October 1997, the Accounting Standards Executive Committee "(AcSEC)" issued Statement of Position "(SOP)" 97-2, "Software Revenue Recognition" as amended in March 1998 by SOP 98-4 and October 1998 by SOP 98-9. These SOPs provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The Company adopted SOP 97-2 for software transactions entered into beginning January 1, 1998. Based on the current requirements of the SOPs, application of these statements did not have a material impact on the Company's revenue recognition policies. However, AcSEC is currently reviewing further modifications to the SOP with the objective of providing more definitive, detailed implementation guidelines. This guidance could lead to unanticipated changes in the Company's operations and revenue recognition practices. Revenue from certain software development contracts with fixed price components is recognized on the percentage of completion basis in accordance with the American Institute of Certified Public Accountants' SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." In accordance with SOP 81-1, the Company recognizes percentage of completion revenue based upon the ratio of accumulated incurred costs to the total estimated costs to complete each contract. The accounts receivable allowance at March 31, 2001, and December 31, 2000, includes a reserve for doubtful accounts, which management records based on historical experience and current evaluation of potential collectibility issues. The Company does not require collateral for unpaid balances. Credit losses have historically been within management's expectations. 10 iEntertainment Network, Inc. Notes to Consolidated Financial Statements (continued) 1. Description of Business and Significant Accounting Policies (continued) Comprehensive Loss The following chart details the Company's comprehensive loss for the periods presented: Three months ended March 31 2001 2000 --------- --------- Net Loss $(77) $(1,010) Other comprehensive income - foreign currency translation adjustment 3 38 -------- ---------- Comprehensive loss $(74) $ (972) ======== ========== 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 amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include provisions for doubtful accounts, sales returns and allowances, warranty provisions, and estimates regarding the recoverability of capitalized software development costs. Actual results could differ from those estimates. Foreign Currency Translation The Company follows the principles of the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," using the local currency of its operating subsidiaries as the functional currency. Accordingly, all assets and liabilities outside the United States are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted average exchange rate prevailing during the period. Adjustments resulting from translation of financial statements are reflected as a component of accumulated other comprehensive loss. Basic Net Loss Per Share Basic net loss per share has been calculated in accordance with SFAS No. 128, "Earnings Per Share." Basic net loss per share is calculated by dividing net loss available to common stockholders by the weighted average shares of common stock outstanding during the period. Had the Company been in a net income position, diluted earnings per share would have been presented and would have included potential common shares related to outstanding options and warrants. The diluted earnings per share computation is not included, as all potential common shares are antidilutive. 11 iEntertainment Network, Inc. Notes to Consolidated Financial Statements (continued) 1. Description of Business and Significant Accounting Policies (continued) Impact of Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, is required to be adopted in years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, the Company's January 1, 2001 adoption of the new statement did not have a significant affect on earnings or the consolidated financial position of the Company. 2. Stockholders' Equity Series D Redeemable Convertible Preferred Stock The following is a summary of the terms of the Series D Redeemable Convertible Preferred Stock ("Series D Preferred"): Dividends There are no dividends automatically payable on the Series D Preferred. No dividends may be paid to the common stockholders while any Series D Preferred shares is outstanding. Liquidation Preferences Upon any liquidation, dissolution or winding up of the Company, before anything can be paid to the holders of common stock, the holders of the Series D Preferred will be entitled to receive $1,000 per share, plus an amount equal to a 6% annual return on that amount since the November 1999 issuance date and any penalty amounts due thereunder, if any. 12 iEntertainment Network, Inc. Notes to Consolidated Financial Statements (continued) 2. Stockholders' Equity (continued) Redemption The Series D Preferred must be redeemed by the Company if it is requested to do so by the holders of a majority of the outstanding Series D Preferred shares upon: (1) failure by the Company to comply with certain terms of the Articles of Incorporation, the Securities Purchase and Exchange Agreement or the related Registration Rights Agreement with respect to the Series D Preferred; (2) bankruptcy of the Company; or (3) certain changes in control of the Company. In any such event, the redemption price per share would be equal to the greater of (1) $1,200 per share, plus an amount equal to a 6% annual return since November 1999 on the $1,000 paid for each share and any penalty amounts due under the terms of the Series D Preferred (including, but not limited to, as a result of the failure to convert or deliver shares on a timely basis), and (2) the "Parity Value" of the shares, which equals the product of (a) the number of shares of the Company's common stock into which the Series D Preferred could have been converted multiplied by (b) the highest reported closing price per share of the common stock between the event triggering the right to request redemption and the payment of the redemption price. A registration statement was filed and became effective in March 2000 that removed the redemption feature that was outside the control of the Company. Accordingly, the Company classified the Series D preferred stock as permanent equity during the first quarter of 2000. The Series D preferred stockholders are entitled to a 6% annual return on the stated value of the preferred stock, upon liquidation, conversion, and redemption within control of the Company. Accordingly, the Company has recorded this return as accretion to the stated value of the preferred stock and a charge to accumulated deficit. For the three months ended March 31, 2001 and 2000, the recorded accretion was $74,000 and $74,000, respectively. Accumulated accretion at March 31, 2001, and December 31, 2000 was $409,000 and $335,000, respectively. 13 iEntertainment Network, Inc. Notes to Consolidated Financial Statements (continued) 2. Stockholders' Equity (continued) Conversion Following shareholder approval of the Series D Preferred Stock financing in December 1999, the Series D Preferred shares were convertible at $1 per share of common stock. At any time, a holder of Series D Preferred Stock may convert all of those shares into common stock. Each share of Series D Preferred was initially convertible into 1,000 shares of common stock. The number of shares of common stock issuable upon conversion of a share of Series D Preferred increases over time to provide the holder additional common stock equal to a 6% annual return since November 1999 and any penalty amounts otherwise due thereunder. Subject to certain conditions, the Series D Preferred Stock will automatically convert into common stock in November 2002. Voting The Series D Preferred has no voting rights other than as provided by law and except that the approval of the holders of a majority of the outstanding Series D Preferred is required for: (1) any adverse change to the rights of the Series D Preferred; (2) the creation of securities having senior or equal rights; (3) an increase in the authorized number of shares of Series D Preferred; (4) an increase in the par value of the common stock; or (5) any action that would result in certain taxes being imposed on the Series D Preferred. 15 iEntertainment Network, Inc. Notes to Consolidated Financial Statements (continued) 3. Stock Options and Warrants The following summarizes the Company's stock option and warrant activity: Weighted- Shares Shares Average Available Available Exercise for Grant - for Grant - Options Price Per 1995 Plans 1998 Plans Outstanding Share -------------- --------------- -------------- -------------- Balances at December 31, 2000 331,985 309,815 3,410,142 $1.84 Options granted (90,000) - 90,000 $0.25 Options canceled 12,713 - (12,713) $2.32 -------------- -------------- --------------- -------------- Balances at March 31, 2001 254,698 309,815 3,487,429 $1.80 ============== ============== =============== ============== At March 31, 2001, the Company had 2,654,621 options exercisable at exercise prices ranging from $0.25 - $6.00 per share. The Company had 1,131,905 and 1,210,903 warrants outstanding at March 31, 2001 and December 31, 2000, respectively, all of which were exercisable at prices ranging from $1.00 to $9.60 per share. 4. Accrued Liability for Prize Points The Company has operated a prize point system for the users of its online games. In 2000, prize points were redeemable for cash and other prizes. The Company had recorded an accrued liability of $343,000 in accounts payable and accrued expenses on its December 31, 2000 balance sheet based on management's best estimate of prize points that have not been redeemed. At December 31, 2000, the Company also recorded a liability in accounts payable for redeemed but unpaid prize points of $112,000. In 2001, the Company revised its prize point redemption policy such that prize points are no longer directly redeemable for cash or merchandise. Prize points have been converted to chance points and may now be used by customers to enter prize drawings. Due to the change in its prize point system, Management has determined that the Company no longer has prize point obligations as previously recorded in the December 31, 2000 balance sheets. Accordingly, the accrued liability of $343,000 and the payable of $112,000 have been reversed and were netted against Sales and Marketing operating expenses in the Consolidated statements of Operations for the quarter ending March 31, 2001. 15 IENTERTAINMENT NETWORK, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 OVERVIEW During the fourth quarter of fiscal 2000, the Company, reacting to an adverse pricing environment for online advertising, restructured its operations, thereby significantly reducing personnel and overhead costs. NET REVENUES Net revenues decreased by 63% to $.6 million for the three months ended March 31, 2001 from $1.6 million for the three months ended March 31, 2000. The following table summarizes the changes in the components of revenue from 2000 to 2001: Three Months ended March 31 ($000) ----------------- Revenue for the period in 2000 $ 1,555 Increase / (Decrease) in Advertising and Other Revenue (747) Increase / (Decrease) in Pay for Play Revenue (166) Increase / (Decrease) in Royalty & Licensing (58) Increase / (Decrease) in CD-ROM revenue (10) --------- Revenue for the period in 2001 $ 574 ========= Advertising revenues decreased 70% from Q1 2000 to Q1 2001. A 171% increase in advertising impressions served over that period was more than offset by a precipitous drop in advertising pricing across the Internet. Pay-for-Play revenue decreased in the three month period ending March 31, 2001 from the prior year's comparable period, primarily due to changes in the pricing model that management implemented in order to stimulate user growth and increase revenues. During the fourth quarter of fiscal 2000, the Company introduced a flat fee, unlimited play option into its pricing matrix. Previously, players paid for each hour played. The new plan drew a significant portion of existing players, but failed to attract sufficient numbers of new players to offset the loss of revenues generated by high usage players. 16 IENTERTAINMENT NETWORK, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COST OF REVENUES Cost of revenues consists of costs of products sold (including cost of Internet access) and royalties and amortization of software development costs. Cost of revenues in the three month period ending March 31, 2001 decreased to $0.1 million from $0.3 million in the same period of 2000. This decrease was due primarily to the elimination of royalties associated with operating third-party software. OPERATING EXPENSES Operating expenses decreased by 73% to $.6 million for the three months ended March 31, 2001 from $2.3 million for the three months ended March 31, 2000. The following table summarizes the changes in the components of operating expenses from 2000 to 2001: Three Months ended March 31 ($000) -------------- Operating Expenses for the period in 2000 $ 2,334 Increase/ (Decrease) in Sales and Marketing (658) Increase/ (Decrease) in Product Development (312) Increase/ (Decrease) in General and Administrative (344) Increase/ (Decrease) in Goodwill Amortization (400) ------------ Operating Expenses for the period in 2001 $ 620 ============ SALES AND MARKETING Sales and marketing expenses decreased during the first quarter from the prior year's comparable period, due primarily to the reduction of costs associated with customer incentives and personnel cost savings arising from the Company's restructuring in late 2000. Beginning with Q1 2001, the Company revised its prize point redemption policy such that prize points are no longer directly redeemable for cash or merchandise. Prize points have been converted to chance points and are used to enter fixed-value prize drawings, resulting in a decrease of $0.2 million. Accordingly, the associated accrued liability related to unredeemed prize points of $0.3 million and the payable related to redeemed, but unpaid, prize points were reversed against operating expenses in the quarter ending March 31, 2001. PRODUCT DEVELOPMENT Product development expenses decreased in the three month period ending March 31, 2001 from the prior year's comparable period, primarily due to the increase in software development costs capitalized on the balance sheet of $0.1 million, as well as the decrease in staffing costs of $0.2 million effected by the Company's restructuring in December 2000. 17 IENTERTAINMENT NETWORK, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) GENERAL AND ADMINISTRATIVE General and administrative expenses decreased in the three month period ending March 31, 2001 from the prior year's comparable period, primarily due to savings associated with the closure of the Company's European operations. GOODWILL AMORTIZATION Goodwill from the MPG-Net acquisition, acquired in mid first quarter 1999, was previously being amortized to expense over 36 months. Goodwill from the Gamers Net acquisition, acquired in third quarter 1999, was previously being amortized to expense over 24 months. During the second half of fiscal 2000, the Company experienced a significant revenue stream reduction as a result of a downturn in the online advertising market, which indicated potential impairment of its recorded goodwill values. The Company determined that unamortized goodwill relating to both MPG-Net and The Gamers Net had become fully and permanently impaired. And accordingly, the balance at December 31, 2000 was written down to $0. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, the Company had cash and cash equivalents of $.5 million. The following is a condensed table of cash and cash equivalents on hand and major cash flow items: Cash and cash equivalents on hand, December 31, 2000 $ 437 Net loss (77) Add: non-cash charges and expenses (212) Changes in working capital 662 -------- Net Cash Provided By Operations 373 Net investing and financing activities (322) Effect of exchange rates on cash and cash equivalents 3 -------- Net change in cash and cash equivalents 54 -------- Cash and cash equivalents on hand, March 31, 2001 $ 491 ======== 18 IENTERTAINMENT NETWORK, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Company used $1.6 million less net cash in operating activities during the first three months of 2001 compared with the same period in 2000. This decrease was primarily due to the contraction of the business as effected by the Company's restructuring during the fourth quarter of fiscal 2000, resulting in reduced cash operating requirements. The Company's success is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required, and ultimately to attain profitability. Management expects to be able to attract additional capital, if needed, for its online operations. However, there can be no assurance that management's plans will be executed as anticipated. As of the balance sheet date, the Company believes that it may not have sufficient cash resources to fund its operations through the next twelve months. There is no assurance that the Company will be able to close on any financing transaction. The Company does not have any current arrangements or commitments for any future financing. The Company may not be able to obtain sufficient additional financing to satisfy its cash requirements. The Company may be required to obtain financing on terms that are not favorable to it and its shareholders. The Company received a going concern opinion on its December 31, 2000 audited financial statements. If the Company is unable to obtain additional financing when needed, it may be required to delay or scale back product development and marketing programs in order to meet its short-term cash requirements, which could have a material adverse effect on its business, financial condition and results of operations. The Company's forecast for the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary. The factors described in the preceding paragraphs will impact the Company's future capital requirements and the adequacy of its available funds. EURO CONVERSION On January 1, 1999, the European Community began denominating significant financial transactions in a new monetary unit, the Euro. The Euro is intended to replace the traditional currencies of the individual EU member countries. During the fourth quarter of 1999, the Company decided to close its European operations and therefore is not converting internal financial systems to the Euro as a functional currency during this closure period. 19 IENTERTAINMENT NETWORK, Inc. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS From January 1, 2001 through March 31, 2001, the Company (1) granted options to purchase 12,500 shares of common stock to two contractors for services priced at market value on the date of issuance; (2) granted options to purchase 77,500 shares of common stock to 10 employees priced at market value on the date of grant. Items (1) and (2) were exempt from registration under Section 5 of the Securities Act of 1933, as amended, by reason of Section 4(2) of the Act and Regulation D of the Securities and Exchange Commission. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Forward Looking Statements In connection with the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers of this document are advised that this document contains both statements of historical facts and forward-looking statements. Our forward-looking statements include statements related to capital needs, ability to raise capital, and the market for our common stock. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are intended to identify forward-looking statements. Our forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. Our forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by management. These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict. We undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. 20 IENTERTAINMENT NETWORK, Inc. ITEM 5. OTHER INFORMATION (continued) You should carefully consider the risks described in the Company's Form 10-KSB, together with all of the other information included in this Form 10-QSB, before making an investment decision. The risks and uncertainties described are not the only ones we face. If any of the these risks actually occur, it is likely that our business, financial condition or operating results would be harmed. In such case, the trading price of our common stock could decline, and you could lose all or part of your investment. Delisting of our Common Stock from Nasdaq's SmallCap MarketTM Because the Company had failed to comply with the $1.00 minimum bid requirement for continued listing of its common stock on the SmallCap MarketTM as set forth in Marketplace Rule 4310(c)(8)(B). As of the close of business on March 23, 2001, our minimum bid price was $0.1875 per share. The Company's common stock was delisted from the SmallCap MarketTM at the opening of business on April 5, 2001. The Company decided not to appeal this determination. Following this delisting, trading in the Company's common stock has been conducted in the over-the-counter markets such as the OTC Bulletin Board(R). The OTCBB is a regulated quotation service that displays real-time quotes and volume information in over-the-counter equity securities. The OTCBB does not impose listing standards or requirements other than regular filings with the SEC. It also does not provide automatic trade executions and does not maintain relationships with quoted issuers. Stocks traded on the OTCBB may face a loss of market makers and a lack of readily available bid and ask prices. These stocks may also experience a greater spread between the bid and ask price and a general loss of liquidity. Certain investors have policies against purchasing or holding OTCBB securities. The delisting and subsequent trading on the OTCBB, have had, and will continue to have, a material adverse effect on both trading volume and market value of our stock. Since delisting, our stock price has traded from a low of $0.08 to a high of $0.28 per share, and the closing price of our stock on May 10, 2001 was $0.23. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS None (B) REPORTS ON FORM 8-K None 21 IENTERTAINMENT NETWORK, Inc. 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. IENTERTAINMENT NETWORK, INC. By: /s/ Michael C. Pearce ---------------------- Michael C. Pearce Chief Executive Officer By: /s/ Allan Kalbarczyk ---------------------- Allan Kalbarczyk Chief Accounting Officer 22