SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission
File Number:
MAY 31, 1996 1-13360
ENTERACTIVE, INC.
(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) (Zip Code)
(212) 221-6559
(Issuer's telephone number, including area code)
Securities Registered pursuant to Warrants to purchase common Stock,
Section 12(b)of the Exchange Act: par value $.01 per share
Common Stock, par value $.01 per share
Securities Registered pursuant to
Section 12(g)of the Exchange Act:
None
Check whether the Issuer (1) has 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 / /
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
/ X /
Revenues for the Fiscal year ended May 31, 1996 were $853,200
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of the Common Stock on September 11,
1996, was approximately $14,798,924. As of September 11, 1996, the Registrant
had outstanding 7,656,435 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement (pursuant to Regulation 14A)
concerning the Annual Meeting of Shareholders is incorporated by reference to
Part III of this Form 10-KSB. Although such Proxy Statement is not available, it
will be filed with the Commission by September 30, 1996.
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ENTERACTIVE, INC.
1996 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
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Item 1. Description of Business 3
Item 2. Description of Property 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7. Consolidated Financial Statements 21
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 21
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 22
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain Beneficial Owners and
Management 22
Item 12. Certain Relationships and Related Transactions 22
Item 13. Exhibits, Lists and Reports on Form 8-K 22
SIGNATURES 40
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Enteractive, Inc. (the "Company" or "Enteractive") designs,
develops, publishes and markets interactive multimedia titles to the home and
school markets. Prior to fiscal 1995, the Company's focus was on the development
of titles on a work-for-hire basis. Toward the end of fiscal 1994, the Company
shifted its focus to being a developer and publisher of titles in which the
Company maintains significant ownership interests and distribution rights. Since
adopting this strategy, the Company has published five titles: Cities Under the
Sea: Coral Reefs developed in collaboration with Jean-Michel Cousteau, a noted
sea explorer and the son of Jacques Cousteau; The Alchemist, a fortune-telling
game, the first in the Mystic Messenger series; The Enchanted Tarot , which
provides insight into the user's future based on Tarot readings, the second in
the Mystic Messenger Series; Ask Isaac Asimov . . . About Space, based on the
respected series of children's science books written by scientist and author
Isaac Asimov, and PIGS, an original interactive story for children. The Company
has its own marketing capability and a presence on the Internet to market its
titles.
In order to expand its library of titles and broaden its product line, on
February 29, 1996 the Company acquired Lyriq International, Inc. (Lyriq), a
developer and publisher of interactive multimedia products for the education,
games and recreation markets. Lyriq has developed and published, among other
things, the Picture Perfect Golf series of interactive multimedia titles and
several Crosswords puzzle titles. It is the Company's belief that Lyriq has
provided the Company with rights to valuable multimedia titles, access to
significant creative and technical talent and expanded research and development
capabilities. The Company also believes that the combined product lines and
development and marketing expertise will facilitate greater access to sales
channels and a more widely available offering of software titles for the home
and educational markets.
The Company has in-house multimedia development facilities with computer
graphics, animation, video and audio capabilities, including professional video
production
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equipment, lighting and fully digital audio studios. The Company's strategy is
to develop high quality interactive new media titles on all popular platforms,
with a current emphasis on CD-ROM, the Internet and commercial on-line services.
The Company will continue to focus on strategic acquisitions in order to
increase its product offerings and market penetration. It anticipates that
future product development will center on building a catalog of titles with
strong entertainment value.
Company Reorganization
In July 1996 the Company announced a reorganization to focus its development on
entertainment and recreational products and to lower its fixed costs. The
restructuring included a 45% (16 positions) reduction of its Washington DC-based
development staff and changes in senior management. John Ramo, President and
chief operating officer and Jolie Barbiere, a vice president resigned as
directors and officers of the Company in order to pursue other interests. The
Company accrued $431,300 consisting primarily of severance, in fiscal 1996 in
connection with this reorganization . The Company believes that the
reorganization will enable it to focus on the entertainment and recreational
market, as opposed to the educational market and expand the Company's presence
on the Internet and on-line services.
Company Strategy
The Company's goal is to become a leading developer and publisher of interactive
multimedia titles. The Company believes that its development and marketing
strategy will enable it to achieve a broad market penetration. The Company
believes that its experience in the development of interactive multimedia
software gained over the past ten years, combined with the rapid evolution and
high growth rate of the multimedia software industry, creates an opportunity for
the Company to enhance its brand name and expand its catalog of titles and its
library of digital content. In connection with the reorganization, the Company
will create titles for the entertainment and recreational markets, which it
believes are larger and have more mature distribution channels then the market
and distribution channels for edutainment products. The Company believes that
the elements required to achieve its goal are titles with significant
entertainment value based on credible intellectual property, either original or
licensed, as well as high quality creative talent to successfully develop titles
and the capability to distribute and market those titles both in the United
States and abroad to the home. The Company believes that there will continue to
be consolidation opportunities among the producers and developers of interactive
multimedia products. Accordingly, in addition to the Lyriq acquisition, the
Company intends to accelerate its growth and increase its market penetration by
acquiring other developers and publishers of interactive multimedia titles. The
Company also intends to take advantage of opportunities in new interactive
electronic media by participating in publishing and marketing opportunities on
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commercial on-line services and on the Internet. Key elements of the Company's
strategy are:
~ Continue to Develop High Quality Titles. The Company intends to develop
additional titles through internal development and in collaboration with
recognized content providers. The Company has sought to enter into agreements
which provide it with either access to marketable content or a credible name to
add stature to its products. The Company believes that its relationships with
Jean-Michel Cousteau, Richie Sambora and Terry Gilliam will enhance the
marketability of certain of its titles. The Company intends to continue the
process of entering into agreements to obtain intellectual property from
entities recognized in particular areas and to collaborate with recognized
artists and personalities. In addition, the Company's product development
strategy may include joint ventures with strategic partners to minimize up-front
development costs.
~ Expand Distribution. The Company sells its titles to distributors who resell
such titles to retailers, and also sells its titles directly to retailers. The
Company intends to direct significant marketing resources toward establishing
greater market penetration in the mass market channel. Such efforts will include
the use of in-store merchandising, in-store promotion and consumer advertising.
The Company will also seek to expand its sales directly to end users through the
use of the Internet and other new media. In addition, the Company intends to
continue to pursue international opportunities with English language or
localized versions of its titles. The Company intends to license school
distribution rights of its educational titles to independent distributors who
focus on this market.
~ Increase Number of Titles by Acquisition of Companies or Rights to Externally
Developed Titles. The Company believes that there will be many potential product
acquisition opportunities, particularly since there are many independent
developers and producers of interactive multimedia who lack financing to market
and/or access to retail shelf space. For example, the Company has acquired
exclusive worldwide distribution rights to the Sacred Mirror of Kofun, a title
developed by an independent software developer. The Company may also publish
titles developed by other multimedia developers or contract with other
independent software developers to create titles that the Company will publish.
Currently, however, other than the Sacred Mirror of Kofun the Company has no
other commitments or agreements with respect to acquisitions of specific
products, publishing arrangements or the acquisition of businesses.
~ Exploit Digital Network Delivery Systems. The Company believes that the
increasing ease and decreasing cost of accessing the Internet and commercial
on-line services may create opportunities for on-line access to the Company's
software titles in the future. The Internet and commercial on-line services
could provide revenue to the Company through access to the Company's games and
other titles on a pay-for-play
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basis, delivery of content updates, and could also support multiple player and
team play opportunities. In addition, the Company believes that broadband and
interactive television may emerge as a significant factor in the multimedia
industry. In order to ensure that the Company will benefit from the potential
future growth of these delivery systems, the Company acquires, whenever
possible, all electronic rights to existing and future delivery systems such as
digital video disk ("DVD") and interactive television in its licensing
agreements. The Company intends to make its titles available for all delivery
systems if and when justified by consumer demand.
On-Line Activities
The Company recognizes the potential of on-line activity in marketing and
distribution. It also recognizes that the development of on-line access features
may enhance the marketability of the Company's interactive multimedia titles.
The Company has begun to market its titles on-line. Its Worldwide Web site,
http://www.enteractive.com, is designed to attract and encourage Internet users
to visit and allows interactive trials of the Company's titles. Several methods
of purchase are being developed, both off-line (traditional toll-free calling
and a printout of an automatically-generated order form that may be faxed or
mailed) and, eventually, on-line ordering. On-line delivery of interactive
multimedia titles may become a significant source of revenue in the future and
as part of the Company's reorganization the Company will attempt to expand its
presence on the Internet and commercial on-line services.
Title Development
The Company develops titles through internal and external resources. The Company
may also acquire titles through co-publishing arrangements and/or the
acquisition of other software companies and content licenses.
Internal Development
The Company has in-house multimedia development facilities to create all
original material, with computer graphics, animation, video and audio
capabilities, including professional video production equipment, lighting and
fully digital audio studios. The Company owns a wide range of computers,
software tools, video and sound equipment, computer peripherals and test
equipment, all selected to enable the efficient development and production of
interactive multimedia titles and services. The Company upgrades and enhances
this equipment on a regular basis.
The Company believes that on-going investment in title development is required
to remain competitive in the home interactive multimedia marketplace, and it has
invested continuously in the necessary development tools, library and techniques
that allow for technical innovation, increased efficiency and product quality in
its finished titles. The
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titles that have been developed and published are designed either for immediate
or eventual release on both Macintosh-and Windows-based CD-ROM platforms.
The Company is currently developing its software for the CD-ROM platform, as
well as the Internet and commercial on-line services. These platforms are
currently the dominant platforms in the industry and the Company believes that
they will remain so for the near term. If there is a shift in the industry's
dominant platform away from CD-ROM, the Internet or commercial on-line services
to DVD or interactive television, or if the Company perceives market demand for
an alternative platform, the Company believes it will be in a position to
"migrate" its existing titles to other platforms or to develop new titles for
such other platform. Such migration or new development, however, is a
time-consuming and costly process.
As of July 31, 1996, the Company employed 31 full-time and part-time persons
dedicated to product development, testing and technical support activities. This
staff includes multimedia project management personnel with extensive creative
backgrounds and expertise in product design. The staff also includes specialists
in product research, graphic arts, animation, software engineering, music and
video production, CD-ROM engineering, game design, programming, local area
network engineering, digitized voice technology, quality assurance and technical
writing.
The Company's title development process involves multi-disciplinary product
teams. Each product team has responsibility for designing, planning and creating
the product. Products evolve through four phases of development: (i) market
analysis and product concept, (ii) product design, storyboarding and technical
analysis, (iii) product creation and (iv) end-user testing and release. Where
appropriate, the Company solicits input from consumers and/or experts regarding
the product's desirability and effectiveness in achieving stated objectives. The
Company's testing team tests each title for technical quality, adherence to
user-interface standards and operability on a wide variety of hardware
configurations within the same platform. The Company's products require varying
periods of development time depending upon the technical complexity of the
title. The development period for titles that are designed for multiple
platforms for the home markets generally ranges from 10 to 14 months. The
Company expects to invest substantial resources in its product development
efforts, and there can be no assurance that marketable titles will result from
its efforts.
Using its multimedia studios, the Company has developed interactive titles
incorporating graphics, animation, speech, sound and music. The Company's
proprietary software development library of tools and content includes
animation, sophisticated imaging and networking capability. The Company believes
that the use of these tools streamlines the development process, allowing
members of the development team to focus their efforts on the play and
simulation aspects of the product under development. To supplement its internal
research and development
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effort, the Company also has entered into collaborative arrangements with such
entities as Microsoft to create development tools and content for animation.
External Development
To supplement its internal development teams, the Company may continue to
contract with independent software developers. The Company's strategy in hiring
third-party developers is to attract the broadest base of available talent for
creating new products and supplementing its production capabilities. The Company
may continue to engage in consulting or development agreements with independent
software developers, and manage the development process by establishing budget
schedules and milestones. In addition, the Company may continue to provide its
third-party developers with access to its library of tools and content as well
as audio visual displays, artwork, musical work, sound recordings and other
components for the developer's use in creating the product. The Company has less
control over the scheduling and the quality of work of independent contractors,
than it has over its own employees, and its success in its external development
efforts depends in part on its continued ability to effectively manage the
third-party development effort to ensure adherence to its quality standards,
schedules and budgets. Compensation of outside developers includes payment of
development costs and possibly royalties.
Additional Sources of New Titles
Publishing and Acquisitions. The Company also may extend its title offerings
through relationships with outside developers from whom it may acquire the
rights to finished titles or with whom it may enter into publishing agreements.
The Company may enter into publishing agreements which would provide the Company
with the rights to publish, market and sell a title for certain identified
platforms, over a specific length of time in a specific territory, in exchange
for royalties based on sales of the title. In addition, the Company may increase
its product line by acquiring other developers of multimedia titles. The Company
from time to time evaluates potential acquisition opportunities of related
businesses. Currently, other than the "Sacred Mirror of Kofun", the Company has
no commitments or agreements with respect to any acquisition of products,
publishing agreements or acquisition of related businesses.
Licenses. In the normal course of its business, the Company acquires various
licenses to content created and owned by others for use in the Company's own
products. The Company has sought and obtained licenses from publishers, popular
authors, artists and film and television companies as part of its strategy to
create titles containing high quality and recognizable content. Such licenses
have been necessary to permit the Company to use various songs, characters,
content and references in its products. Due to the multimedia nature of the
Company's titles, licenses are required for audio, video, and written materials
to supplement original content provided by the Company. For each
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particular title being developed, the Company seeks to obtain content licenses
from various authors and other rights holders as the development of the title
progresses. Licenses typically run for the life of the Company's title, cover
world rights, and may provide for an up-front payment to the rights holder
and/or royalties based on sales of the Company's title containing the licensed
material. Licensing expenses are expected to rise significantly as the Company
develops more titles, and as competition increases in interactive software
publishing.
Marketing and Distribution
The Company's sales and marketing efforts are designed to broaden product
distribution, increase the number of first time and repeat purchasers, promote
brand-name recognition, assist retailers and properly position, package and
merchandise the Company's products. The Company utilizes various marketing
techniques designed to promote brand awareness and recognition and to maximize
the acquisition of shelf space in retail outlets, including in-store promotions,
publicity campaigns and press tours, advertising, direct mail, trade shows and
selective "bundling arrangements."
Interactive multimedia software is sold primarily by large computer and
software specialty retailers, as well as by mass merchants and warehouse club
stores. All of the Company's titles are or will be sold through some or all of
the following retail channels, some of which are not currently significant
distributors of interactive multimedia software products: (i) computer and
software retail stores; (ii) traditional and discount department and consumer
electronics stores; (iii) book stores, video stores and music stores; (iv)
on-line services; and (v) mail order and catalog. The Company believes that book
stores, video stores and music stores may become strong sales channels in the
future as the market for multimedia software broadens to a wider group of
consumers. The Company may also sell certain of its titles such as the Picture
Perfect Golf series in specialty retail outlets. It has already secured
distribution of Cities Under the Sea in dive shops, zoos, aquariums and museum
gift shops.
The Company sells its titles both to distributors who then resell such titles
to retailers and directly to retailers. The Company's titles are distributed
through the interactive multimedia industry's primary wholesale distributors,
including Ingram Micro, Tech Data, American Hardware and Software, Micro
Central, Navarre and Baker & Taylor. These distributors typically can return the
Company's product at any time for credit without an offsetting order. In order
to expand sales, the Company has hired distribution and marketing personnel to
enable the Company to assess the most effective means of distributing its titles
and develop and manage strong relationships with distributors. The Company has
also hired an independent sales representation organization, Channel Sources, to
take advantage of retail channels of distribution by using its contacts and
experience with major retail buyers.
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The Company may distribute its titles from time to time through OEM (Original
Equipment Manufacturers) bundling arrangements. These arrangements may be made
with companies who wish to bundle a particular software title with other titles,
multimedia computers, CD-ROM drives, sound cards and other peripherals. Under
such arrangements, the Company would receive a royalty for the incorporation of
its titles into these bundles. These arrangements would generally involve a
prepaid royalty, guaranteed minimum purchase or a minimum royalty to be paid to
the Company over a specified term. The Company distributes the English language
version of its titles in certain western European countries and intends to
increase such distribution and to distribute its titles internationally through
agreements providing for the production of localized versions of its titles.
The Company's marketing strategy and activities support market recognition and
sales in the distribution channels described above. The Company intends to
continue its corporate and product advertising in trade and general consumer
media. The Company also intends to continue its corporate and product publicity
efforts, resulting in articles and title reviews in trade and general consumer
media. The Company or its titles have been profiled in such magazines and
newspapers as People Magazine, USA Today and The Wall Street Journal. In the
past year, reviews have been an important method of establishing the Company's
credibility in the retail channel and among consumers. The Company intends to
continue participating in in-store promotional opportunities and programs in
selected retail outlets. The Company intends to continue its direct marketing
through third-party catalog resellers including Tiger Direct, PC Zone and Mac
Zone, as well as enhancing its own efforts to market titles directly to its
customer base, in addition to direct marketing through the use of direct mail
lists. Electronic direct marketing is a strategy the Company intends to pursue
via promotion and publicity on the Internet and commercial on-line services. The
Company also exhibits its titles at recognized industry trade shows. Through
these exhibits, the Company enhances its exposure to the retail markets and
gains information about the technology, needs, and desires of the marketplace.
Manufacturing and Shipping
The production of the Company's software includes CD-ROM pressing, assembly of
purchased product components, printing of product packaging and user manuals and
shipping of finished goods, which is performed by third-party vendors in
accordance with the Company's specifications. Except as provided herein the
Company believes that there are alternate sources for these services that could
be implemented without delay and to date, the Company has not experienced any
material difficulties or delays in the
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production of its titles, or any material returns due to title defects. Delivery
times are typically six weeks, allowing the Company to maintain reasonable
inventory levels.
The Company frequently packages and sells titles in its Picture Perfect Golf
series together with an infrared golf club, which is currently available from
only one independent third party manufacturer. Occasionally, the Company has
postponed delivery of titles in its Picture Perfect Golf series as a result of
the manufacturer's inability to timely deliver the infrared golf club. While the
Company is seeking to establish alternative sources which can produce the
infrared golf club or acquire the rights to manufacture the infrared golf club
currently utilized in the Picture Perfect Golf series, there can be no assurance
that such efforts will be successful. If the Company does not receive infrared
golf clubs on a timely basis, it could have a material adverse effect on the
Company's results of operations.
The Company warrants its titles to consumers for full functionality, in
accordance with industry practice. The Company accepts returns of defective
titles, if any, to maintain its credibility and build goodwill with customers.
Although the Company provides reserves for returns that it believes are
adequate, the Company could be forced to accept substantial product returns to
maintain its access to distribution channels. Any significant amount of returns
in excess of related reserves, will have a material adverse effect on the
Company's business, operating results and financial condition.
Protection of Proprietary Rights
The Company's future success will be heavily dependent upon its
software technology and the Company will rely on a combination of contractual
rights, trade secrets and copyright laws to establish or protect its technology
in the countries where it will conduct business. The Company currently does not
possess any patent or other registered intellectual property rights with respect
to its software technology other than copyrights with respect to the overall
content of its completed titles.
The Company believes that its products and other properties do not
infringe upon the proprietary rights of third parties. The Company seeks
whenever possible to obtain warranties and indemnification from intellectual
property licensers and third-party software developers to protect the Company
from claims of infringement by third parties of their property rights. There can
be no assurance that such warranties and indemnification will protect the
Company from liability arising from such claims or from a resultant material
adverse effect to its business.
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Competition
Competition in the recreation and entertainment market is based on brand name
recognition, breadth of product line, title content, distribution strength and
price.
The consumer entertainment software and educational software industries are
intensely competitive. The Company's competitors range from small companies with
limited resources to large companies with greater financial, technical and
marketing resources than those of the Company. The Company considers the
competitors in the interactive software markets to include Broderbund Software,
Inc., Knowledge Adventure, Electronic Arts., SoftKey International, Inc., Edmark
Corporation and Microsoft Corporation, among others. Because the markets for
interactive software titles are still emerging and the cost barriers to entry
into these markets are relatively low, the Company expects the number of
competitors to increase. Companies with greater financial resources than the
Company may be able to make greater investments in research and development,
carry larger inventories, undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make higher offers or guarantees to
licensors for commercially desirable characters and motion picture and
television properties than the Company. In addition, the Company believes that
potential new competitors, including large software companies, media companies
and film studios, are increasing their focus on the interactive entertainment
and educational software markets. Competition for the Company's products is
influenced by the timing of competitive product releases and the similarity of
such titles to those of the Company, which may result in significant price
competition, reduced profit margins, loss of shelf space or a reduction in
sell-through of the Company's titles at retail stores, loss of or difficulty in
recruiting new key employees and/or acquiring licenses, and significant price
competition, any of which would adversely affect the Company's operating
results. In addition, since the Company has begun to distribute products through
its own third-party distribution channels, it will be competing for the
attention of and service from these third-party distributors, who usually
represent one or more of the Company's competitors. The Company's competitors,
who may have more, or more highly recognized, products may find it easier to
receive the necessary attention and service from these third-party distributors.
The Company will attempt to differentiate itself from its competitors by the
relationships it has fostered with prominent personalities, its focus on titles
providing high-quality content with entertainment features, and the skill and
creativity of its management and creative personnel. There can be no assurance
that the Company will be able to successfully compete in the home and
entertainment software industry in the future.
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Employees
As of July 31, 1996, the Company had 37 full-time employees, 9 of whom are
computer software engineers, 3 of whom are computer graphics artists, 7 of whom
are production related personnel, 1 of whom is a media developer and 17 of whom
perform general and administrative and marketing and sales functions. The
Company has never experienced a work stoppage and its employees are not covered
by a collective bargaining agreement. The Company believes that its relations
with its employees are good.
ITEM 2. PROPERTIES
The Company owns no real property. The Company conducts its operations through
three facilities. The Company leases approximately 2,000 square feet of office
space in New York City at a current rental of $32,000 per year plus utilities.
This lease is for a 35-month term and will expire April 30, 1997. The Company
also leases approximately 8,480 square feet of space in Washington, DC.. at a
rental of $130,000 per year including utilities plus taxes. This lease is for a
five-year term expiring on March 31, 1997. The Company has leased approximately
4,900 square feet of office space in Cheshire, Connecticut on a month-to-month
basis at an annualized rate of $27,000.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In March, 1996 the Company's stockholders approved by written consent a proposal
to increase the authorized capital of the Company to 32,000,000 shares
consisting of 30,000,000 shares of Common Stock, $.01 par value ("Common Stock")
and 2,000,000 shares of Preferred Stock.
The stockholders also approved a proposal which (1) increased the number of
shares of Common Stock reserved for issuance under the Company's 1994 Incentive
and Non-Qualified Stock Option Plan to 1,500,000, (2) increased the number of
shares of Common Stock reserved for issuance under the 1994 Stock Option Plan
for Consultants to 1,000,000 and (3) increased the number of shares of Common
Stock reserved for issuance under the 1995 Stock Option Plan for Directors to
150,000. Approximately 2,970,400 shares of Common Stock or 54% of the then
outstanding shares voted in favor of the proposal. All the stockholders were
duly notified pursuant to applicable Delaware law.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of Enteractive is traded under the symbol ENTR on
the NASDAQ SmallCap Market. The Company's Common Stock is also traded on the
Boston Stock Exchange under the symbol "ENT". The following table sets forth the
ranges of the high and low closing bid prices for the Common Stock since October
20, 1994, the effective date of the Company's initial public offering as
reported on the Nasdaq SmallCap Market, the principal trading market for the
Common Stock. The quotations are interdealer prices without adjustment for
retail markups, markdowns, or commission and do not necessarily represent actual
transactions.
COMMON STOCK
YEAR ENDED MAY 31, 1995
HIGH LOW
---- ---
First Quarter N/A N/A
Second Quarter 4-1/4 3-3/4
Third Quarter 3-3/4 3-1/8
Fourth Quarter 3-3/4 3
YEAR ENDED MAY 31, 1996
HIGH LOW
---- ---
First Quarter 4-3/8 3
Second Quarter 4-3/8 3-3/4
Third Quarter 4-1/2 3-5/8
Fourth Quarter 4-1/2 3-5/8
As of August 16, 1996, the Company had outstanding 7,656,435 shares
of Common Stock and approximately 27 holders of record of the Common Stock.
The Company has never paid any dividends on its Common Stock. The
Company currently intends to retain all earnings, if any, to support the
development and growth of the Company's business. Accordingly, the Company does
not anticipate that any cash dividends will be declared on its Common Stock for
the foreseeable future.
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ITEM 6. 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-KSB.
Overview
Enteractive was formed in December 1993 to develop, publish and market
interactive multimedia software products, and consummated the merger with Sonic
Images Productions, Inc. ("Sonic"), an established multimedia software
developer, in May 1994. Prior to the merger, Enteractive had no operations and
had only expenses related to administrative costs associated with formation,
raising equity and debt financing and certain other merger activities and Sonic
was engaged in the development of multimedia software products.
Prior to fiscal 1996, the Company derived the majority of its revenues from
grants or contracts to develop specific titles. In the fiscal year ended May 31,
1995, the Company undertook a transition from such externally-funded development
projects to developing, either by itself or with a co-publisher, its own titles
and, accordingly, will derive its future revenues principally from product sales
and royalties. The Company first generated revenues from title sales in fiscal
1996. Title sales by quarter for fiscal 1996, commencing with the first quarter,
were $25,500, $204,100, $95,200 and $137,100.
As is typical in the interactive multimedia software industry, the Company
depends on the introduction of new titles or sequels to existing titles to
replace declining revenues from older titles. In order to generate revenues in
the future, the Company believes it will be necessary to develop, or obtain
rights to, new titles that are developed for the appropriate platforms, are
introduced in a timely manner and are able to achieve market acceptance for a
significant period of time. As a result , the Company will continue to incur
additional costs in connection with developing and marketing its own titles. For
the year ended May 31, 1996 approximately 70% of the Company's costs and
expenses (exclusive of the $2,293,500 non-recurring expense related to the
acquisition of in-process research and development incurred in connection with
the Lyriq acquisition) were incurred in connection with the development and/or
marketing of specific titles. The Company's costs vary significantly based on
the number of titles being developed for and marketed by the Company.
Accordingly, adjustments in the level of expenditures can be readily
implemented.
15
<PAGE>
Reorganization
On July 15, 1996 the Company announced a restructuring, comprised of a 45%
reduction of its Washington DC based development staff, and changes in senior
management. In connection with the downsizing, John Ramo, president and chief
operating officer and Jolie Barbiere a vice president have resigned their
positions as officers and members of the Company's Board of Directors.
The Company believes that the restructuring will result in lower fixed costs and
increased product development flexibility while maintaining high quality
standards. The management changes and the reduction in fixed costs were based
upon the Company's decision to focus on recreation and entertainment products.
It is the Company's intention to continue to market the Picture Perfect golf
series, Richie Sambora: Interactive Guitar, Sacred Mirror of Kofun, an
interactive adventure game, and to expand its presence on the Internet and the
on-line services.
Quarterly results
The Company's quarterly operating results have in the past and are likely in the
future to vary significantly depending on factors such as the timing of new
hardware and software title introductions, the degree of market acceptance of
such titles and the introduction of titles competitive with those of the
Company. In addition, the home recreation and entertainment software business is
highly seasonal. Typically, revenues are highest during the last calendar
quarter (which includes the holiday buying season), decline in the first
calendar quarter and are lowest in the second and third calendar quarters. This
seasonal pattern is due primarily to the increased demand for home recreation
and entertainment software titles during the year-end holiday buying season.
The Company expects its future revenues and operating results will reflect these
seasonal factors.
Merger
On February 29, 1996, the Company completed the acquisition of Lyriq , whereby
Lyriq was merged into a wholly-owned subsidiary of the Company. The Lyriq
acquisition was accounted for under the purchase method of accounting with the
Company as the acquiring entity. See footnote 1 to the accompanying consolidated
financial statements.
Results of Operations
The Company recognized revenue of $461,900 from sales of its published titles
through independent distributors, net of estimated returns and exchanges, for
the year ended May 31, 1996. Such amounts represent sales of new titles
published by the Company and the Company had no similar titles for sale in any
previous period. The increases in both accounts receivable and inventory are
related to the Company's publishing operations.
16
<PAGE>
Product development revenue in the year ended May 31, 1996 was $257,700
compared to $365,600 in the year ended May 31, 1995. As discussed previously,
the Company changed its focus from being a developer to a publisher, and
development work will most likely decline in the future unless the Company finds
it necessary or appropriate to perform such work to generate operating funds.
Royalty revenue in the year ended May 31, 1996 was $133,600 compared to $3,500
for the year ended May 31, 1995. The increase is primarily due to $100,000 of
royalty revenue earned from a license from one customer in the year ended May
31, 1996. The Company will not receive additional royalties from this license
since the underlying licensing agreement has been terminated.
Cost of product sales was $500,200 in the year ended May 31, 1996. This
includes $214,200 related to the amortization of the capitalized software
acquired in connection with the Lyriq acquisition. There were no corresponding
sales in the prior year.
Cost of development revenue in the year ended May 31, 1996 was $225,500, or
88% of product development revenue compared to $285,600 in the year ended May
31, 1995, or 78% of product development revenue. The increase in the percentage
of cost of product development revenue was the result of higher overhead costs.
Research and development expense in the year ended May 31, 1996 was $3,295,000
compared to $2,487,600 in the year ended May 31, 1995. The increase of $807,400,
or 32%, is primarily related to the change in strategy from performing
externally-funded development work to publishing titles. The fiscal 1996 amounts
include a greater number of internal development staff than in the same period
of the prior fiscal year, and the increased use of independent developers to
supplement the internal staff.
Marketing and selling expenses were $2,250,400 and $521,500, for the years
ended May 31, 1996 and May 31, 1995, respectively. The significant increase
relates to the change in the Company's strategy to market and sell its own
titles.
General and administrative expense increased by $465,600 or 45%, to $1,509,800
for the year ended May 31, 1996, from $1,044,200 for the year ended May 31,
1995. This increase reflects the costs associated with additional financial
management, consulting and other related costs added in the third quarter of
fiscal 1995 to implement the strategy previously discussed.
The Company recorded a non-recurring expense of $2,293,500 for the acquired
in-process research and development that will be used in the development of
additional titles in the future. Consistent with management's definition of
internally developed software and its belief that such technologies have no
alternative future use, the $2,293,500 charge equaled the estimated current fair
value of the future related cash
17
<PAGE>
flows (discounted at a risk-adjusted rate of 30%) to be derived from
specifically identified technologies for which technological feasibility had not
yet been established.
Interest expense decreased to $98,500 from $252,900 for the years ended May
31, 1996 and May 31, 1995, respectively. The majority of the interest expense
incurred in the year ended May 31, 1995 was due to interest and other borrowing
costs incurred on the Company's convertible notes payable issued in May 1994 and
repaid in October 1994. In addition, the Company incurred one-time charges for
the write-off of debt acquisition costs and the discount on the Convertible
Notes issued in January 1996 totaling $780,000. (See note 7 to the accompanying
consolidated financial statements).
Interest income decreased to $126,300 for the year ended May 31, 1996, from
$214,300 for the year ended May 31, 1995, due to interest earned on the lower
remaining cash proceeds from the Company's initial public offering, which was
consummated in October 1994..
No income tax provisions are necessary as the Company is in a net tax loss
carryforward position.
The Company does not believe it will generate taxable income during the period
ending May 31, 1997. 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. Accordingly, the Company has established a valuation allowance
against its deferred tax asset.
The Company reported a net loss of $10,404,700, or a per-share loss of $2.07,
for the year ended May 31, 1996. This compares to a net loss of $3,997,400, or a
per share loss of $0.93 for the year ended May 31, 1995. The increase in net
loss of $6,407,300 from 1995 to 1996 is principally a result of: the shift of
the Company's strategy from performing externally-funded development work to
publishing its own titles, the one time charge to operations of $2,293,500 for
the acquired in-process research and development as part of the Lyriq
acquisition; the costs associated with a bridge financing consummated in January
1996 and the accrued expenses associated with the Company's recent
restructuring.
18
<PAGE>
Liquidity and Capital Resources
Enteractive was formed in December 1993 and raised $1,531,100 from the sale of
600,000 shares of Common Stock in a January 1994 private placement. Subsequent
to January 1994 , the Company's principal sources of capital have been as
follows:
(i) In May 1994 the Company raised $2 million from the sale of notes
and warrants. Such notes were repaid with the proceeds of the
Company's initial public offering. In October 1994, the Company sold
2,300,000 units in the initial public offering, each unit consisting
of one share of Common Stock and a warrant to purchase one share of
Common Stock. The net proceeds from the initial public offering were
$7,579,900 .
(ii) In a bridge financing consummated in January 1996, the Company
received approximately $2,460,000 in net proceeds from the sale of
convertible notes and warrants. Simultaneously with the closing on
May 21, 1996 of the pubic offering described below convertible notes
with an aggregate principal of $2,250,000 were converted into
740,734 shares, while $450,000 of convertible notes were repaid.
(iii) On May 21, 1996, the Company consummated a public offering by
issuing 2,415,000 shares of Common Stock to the public. The net
proceeds from this offering were $6,791,600.
In May 1996 the Company consummated an agreement with certain of its officers
pursuant to which the Company repurchased 1,000,000 shares of Common Stock at
$1.00 per share. One third of the purchase price was paid on May 21, 1996,
$498,900 will be paid on May 21, 1997 and $167,800 will be paid on May 21, 1998.
Interest will accrue on the unpaid balances at the prime rate and is payable
quarterly.
(ii) In a bridge financing consummated in January 1996 the Company received
approximately $2,460,000 in net proceeds from the sale of convertible notes and
warrants. Simultaneously with the closing of the secondary pubic offering on May
21, 1996 convertible notes with an aggregate principal of $2,250,000 were
converted into 740,734 common shares, while $450,000 of convertible notes were
repaid.
(iii) On May 21, 1996, the Company consummated another public offering by
issuing 2,415,000 shares of common stock to the public. The net proceeds from
this offering were $6,791,600.
At May 31, 1996, the Company had cash and equivalents of $6,005,400. The
increase of $3,073,000 in cash and equivalents from May 31, 1995 is primarily a
result of the net
19
<PAGE>
proceeds from the May 1996 public offering of $6,791,600 and net proceeds of
$2,460,000 from the 1996 sale of Convertible notes and warrants offset by the
$6,437,600 used to fund operating activities and repayment of the Convertible
Notes and cash paid to reacquire shares from certain officers, totaling
$783,300.
Capital expenditures were $65,600 for fiscal 1996 as compared to $223,200 for
fiscal 1995. The Company expects capital expenditures in the fiscal year ending
May 31, 1997 to be consistent with the average of both fiscal 1996 and 1995 and
may increase depending on product development needs and changes in technology.
The Company believes that its existing cash and equivalents, investments and
anticipated revenues will be sufficient to meet its liquidity and cash
requirements for at least the next 12 months. However, these funds may not be
sufficient to meet the Company's longer term cash requirements for operations.
Since the Company's costs vary significantly based on the number of titles being
developed and marketed by the Company, adjustments in the level of expenditures
can be readily implemented. Based on management's assessment of the future
marketability of its titles, the Company may significantly alter the level of
expenses both within the next 12 months and thereafter. If necessary, the
Company may return to performing product development for third party companies
in order to maintain its infrastructure while continuing with several of its own
titles.
Forward looking Statements
This Form 10-KSB 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, including without
limitation, the ability of the Company to develop its products, 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-KSB 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.
20
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of
this Form 10-KSB. See Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEMS 9, 10, 11, AND 12. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT; EXECUTIVE
COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT;
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items is omitted because the Company
will file a definitive proxy statement pursuant to Regulation 14A, which
information is herein incorporated by reference as if set out in full.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report:
PAGE
----
Report of Independent Auditors 24
Consolidated Balance Sheets as of May 31, 1996 and 1995 25
Consolidated Statements of Operations for the years ended
May 31, 1996 and 1995 26
Consolidated Statements of Stockholders' Equity for the years ended
May 31, 1996 and 1995 27
Consolidated Statements of Cash Flows for the years ended
May 31, 1996 and 1995 28
Notes to Financial Statements 29
21
<PAGE>
(a) 2. FINANCIAL STATEMENT SCHEDULES
None required.
a) 3. EXHIBITS -
The following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission. The Company shall furnish copies
of exhibits for a reasonable fee (covering the expense of furnishing copies)
upon request.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
**2.1 Merger Agreement dated as of April 11, 1994 by and among the
Company and Sonic Images Productions, Inc.
*2.2 Agreement and Plan of Merger dated as of February 29, 1996,
by and among the Company, Lyriq International Corp.,
Enteractive Acquisition Corp., Randal Hujar and Gary Skiba.
**3.1 Certificate of Incorporation of the Company, as amended.
*3.2 Amendment to Certificate of Incorporation.
**3.3 By-laws of the Company, as amended.
**10.1 Employment Agreement dated as January 3, 1994, by and
between the Company and Andrew Gyenes.
**10.3 Registration Rights Agreement dated May 10, 1994 by and
among the Company and John Ramo, Jolie Barbiere, Zenon
Slawinski, Ernest B. Kelly, III and Michael Alford.
**10.4 Form of Indemnification Agreement between each of the
Officers and Directors of the Company and the Company.
**10.6 Agreement of Lease dated February 17, 1994, by and between
the Company and 110 W. 40 Joint Venture.
**10.7 Agreement of Lease dated March 30, 1992, and March 1, 1993,
by and between the Company and William K. Montouri/ZAR
Limited.
**10.8 1994 Incentive and Non-Qualified Stock Plan Option.
22
<PAGE>
**10.9 1994 Consultant Stock Option Plan.
*10.12 Repurchase Agreement dated December 28, 1995, by and among
the Company and John Ramo, Jolie, Barbiere, Zenon Slawinski
and Michael Alford.
*10.13 Form of Unsecured Convertible Promissory Note issued in
connection with January 1996 Private Placement.
***10.14 1995 Stock Option Plan for Outside Directors.
*10.16 Registration Rights Agreement dated February 29, 1996,
between the Company and Randal Hujar.
*10.17 Employment Agreement dated as of February 29, 1996 between
the Company and Randal Hujar.
*10.18 Employment Agreement dated as of February 29, 1996 between
the Company and Gary Skiba.
****10.19 Release and Termination Agreement by and between the
Company and John Ramo.
****23.1 Consent of KPMG Peat Marwick LLP.
- ---------------------
* Incorporated herein by reference to such Exhibit to the Registration
Statement on Form SB-2 of the Registrant (Registration No. 333-2244).
** Incorporated herein by reference to such Exhibit to the Registration
Statement on Form SB-2 of the Registrant (Registration No. 33-83694)
filed on September 6, 1994.
*** Incorporated herein by reference to such Exhibit to the Company's
Annual Report on Form 10-KSB (Commission File NO. 1-13360).
**** Filed herewith.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Enteractive, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Enteractive,
Inc. and subsidiaries as of May 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enteractive, Inc.
and subsidiaries as of May 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
New York, New York
August 22, 1996
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS ENTERACTIVE, INC. AND SUBSIDIARIES
May 31
----------------------------------------------------
1996 1995
----------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 6,005,400 $ 2,932,400
Investments - 1,116,100
Accounts receivable, less
allowance for doubtful accounts
of $138,000 at May 31, 1996 147,400 126,700
Income taxes receivable 16,400 30,100
Inventories 439,500 44,000
Prepaid expenses and other 10,200 45,900
--------------- -----------------
Total current assets 6,618,900 4,295,200
Capitalized Software 1,070,600 -
Property and equipment, net 231,300 319,300
Other 24,200 15,700
--------------- -----------------
$ 7,945,000 $ 4,630,200
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,404,300 $ 439,100
Accrued expenses 895,300 307,600
Current maturities of long-term debt 498,900 15,200
Current maturities of obligations under capital leases - 4,300
--------------- -----------------
Total current liabilities 2,798,500 766,200
Long-term debt, excluding current maturities 167,800 -
--------------- -----------------
Total liabilities 2,966,300 766,200
Commitments and contingencies
Stockholders' Equity
Preferred Stock $.01 par value,
2,000,000 shares authorized and none issued - -
Common Stock $.01 par value, 30,000,000 shares
authorized; 7,656,435 and 4,775,489 shares issued
and outstanding for 1996 and 1995, respectively 76,600 47,800
Additional paid-in capital 19,620,900 8,130,300
Accumulated deficit (14,718,800) (4,314,100)
--------------- -----------------
Total stockholders' equity 4,978,700 3,864,000
$ 7,945,000 $ 4,630,200
=============== =================
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS ENTERACTIVE, INC. AND SUBSIDIARIES
Year Ended May 31
--------------------------------------------------
1996 1995
--------------------------------------------------
<S> <C> <C>
Net product sales 461,900 -
Product development revenue 257,700 365,600
Royalty revenue 133,600 3,500
--------------- -------------------
Total revenues 853,200 369,100
Cost of product sales 286,000 -
Amortization of capitalized software 214,200 -
Cost of development revenue 225,500 285,600
Research and development expenses 3,295,000 2,487,600
Marketing and selling expenses 2,250,400 521,500
General and administrative expenses 1,509,800 1,044,200
Acquired in-process research and development 2,293,500 -
Reorganization expenses 431,300 -
--------------- --------------------
Total costs and expenses 10,505,700 4,338,900
--------------- -------------------
Operating loss (9,652,500) (3,969,800)
Other income (expense):
Interest expense (98,500) (102,900)
Interest income 126,300 214,300
Amortization of debt discount and debt acquisition
costs (780,000) (150,000)
Other - 11,000
--------------- --------------------
Loss before income taxes (10,404,700) (3,997,400)
Income tax benefit - -
--------------- --------------------
Net loss $ (10,404,700) (3,997,400)
--------------- -------------------
Loss per common and
common equivalent share $ (2.07) $ (0.93)
=============== ===================
Weighted average shares of common
stock and common stock equivalents 5,022,573 4,275,908
=============== ===================
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
CONSOIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ENTERACTIVE, INC. AND SUBSIDIARIES
YEARS ENDED MAY 31, 1996 AND 1995
PREFERRED STOCK COMMON STOCK
------------------------------ --------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance May 31, 1994 - $ - 3,075,489 $ 30,800
Repurchase and retirement of
common stock - - (600,000) (6,000)
Sale of common stock, net - - 2,300,000 23,000
Net loss - - - -
--- ------ ---------- --------------
Balance May 31, 1995 - - 4,775,489 47,800
Issuance of common stock warrants - - - -
Stock options - consulting expense
Issuance of common stock to purchase
Lyriq - - 725,212 7,200
Repurchase and retirement of
common stock - - (1,000,000) (10,000)
Conversion of convertible promissory notes - - 740,734 7,400
Sale of common stock, net - - 2,415,000 24,200
Net loss - - - -
--- ------ ----------- --------------
Balance May 31, 1996 - $ - 7,656,435 $ 76,600
=== ====== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------------------------------------------------------------
<S> <C> <C> <C>
Balance May 31, 1994 $ 1,567,400 $ (316,700) $ 1,281,500
Repurchase and retirement of
common stock (994,000) - (1,000,000)
Sale of common stock, net 7,556,900 - 7,579,900
Net loss - (3,997,400) (3,997,400)
--------------- ----------------- ---------------
Balance May 31, 1995 8,130,300 (4,314,100) 3,864,000
Issuance of common stock warrants 540,000 - 540,000
Stock options - consulting expense 37,000 37,000
Issuance of common stock to purchase
Lyriq 2,893,600 - 2,900,800
Repurchase and retirement of
common stock (990,000) - (1,000,000)
Conversion of convertible promissory notes 2,242,600 - 2,250,000
Sale of common stock, net 6,767,400 - 6,791,600
Net loss - (10,404,700) (10,404,700)
--------------- ----------------- ---------------
Balance May 31, 1996 $ 19,620,900 $ (14,718,800) $ 4,978,700
=============== ================= ===============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
CONSOIDATED STATEMENTS OF CASH FLOWS ENTERACTIVE, INC. AND SUBSIDIARIES
YEAR ENDED MAY 31
-------------------------------------------------
1996 1995
-------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (10,404,700) $ (3,997,400)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,182,700 314,000
Acquired Research and Development 2,293,500 -
Stock option consulting expense 37,000 -
Gain on sale of investments - (8,800)
Gain on disposal of assets - (1,100)
Changes in assets and liabilities net of acquisition of Lyriq:
Accounts receivable 22,300 (52,800)
Income taxes receivable 13,700 9,300
Inventories (276,000) (44,000)
Prepaid expenses and other 46,200 (40,500)
Other assets (2,700) 5,400
Accounts payable 765,400 197,600
Accrued expenses (115,000) 185,300
-------------- -------------
Net cash used in operating activities (6,437,600) (3,433,000)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments - (1,831,700)
Proceeds from sale of investments 1,116,100 1,665,700
Cash acquired in Lyriq acquisition 11,300 -
Purchases of property and equipment (65,600) (223,200)
-------------- -------------
Net cash (used in) provided by investing activities 1,061,800 (389,200)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net 6,791,600 7,579,900
Issuance of convertible notes payable 2,460,000 -
Repurchase and retirement of common stock (333,300) (1,000,000)
Repayment of short-term borrowings - (75,000)
Repayment of convertible notes payable (450,000) (2,000,000)
Principal payments under long-term debt (15,200) (87,500)
Principal payments under capital lease obligations (4,300) (5,800)
-------------- -------------
Net cash provided by financing activities 8,448,800 4,411,600
-------------- -------------
NET INCREASE IN CASH AND EQUIVALENTS 3,073,000 589,400
CASH AND EQUIVALENTS
Beginning of year 2,932,400 2,343,000
-------------- -------------
End of year $ 6,005,400 $ 2,932,400
-------------- -------------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996
(1) BUSINESS
Enteractive, Inc. (the "Company") designs, publishes and markets
interactive multimedia titles to the home and school markets
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.
29
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS (CONTINUED)
The following unaudited pro forma consolidated results of operations
reflects the results of the Company's operations for the years ended May
31, 1996 and 1995 as if the merger with Lyriq had occurred at the
beginning of each 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.
Year Ended
----------------------------------
May 31 May 31
1996 1995
---------------- ---------------
Total revenues....... $ 1,715,600 $ 1,613,600
Net loss............. $(8,708,100) $(4,656,900)
Net loss per share... $ (1.57) $ (0.93)
The pro forma information does not necessarily indicate what would have
occurred had the acquisition been consummated at the beginning of the
respective periods, or of the results that may occur in the future.
(2) 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 sale 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.
30
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CONSOLIDATION POLICY
The consolidated financial statements include the accounts
of Enteractive, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have
been eliminated in consolidation.
(B) CASH AND EQUIVALENTS
All highly liquid debt instruments with maturities of three
months or less at the time of purchase are considered to be
cash equivalents. At May 31, 1996 cash in banks was
$351,200. Cash equivalents of $5,654,200 and $2,932,400 at
May 31, 1996 and 1995, respectively, consist of cash held
in interest-bearing money market accounts.
(C) INVESTMENTS
At May 31, 1995 investments consist of certificates of
deposit, which are carried at cost, which approximates
market.
(D) REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment,
provided no significant vendor obligations remain and
collection of the resulting receivable is deemed probable.
Revenue under fixed price product development contracts is
recognized using the percentage of completion method based
on progress to date, which is measured by comparing costs
to date to total estimated costs. Royalty revenue is
recognized when earned.
The Company's agreements with certain product distributors
and retailers permit them to exchange or return products
for which the Company provides an allowance reflected as a
reduction of accounts receivable in the accompanying
balance sheets.
(E) INVENTORIES
Inventories of multimedia software and related components
are recorded at the lower of cost (on a first-in, first-out
basis) or market.
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are
depreciated over their estimated useful lives using the
straight-line method, except for leasehold improvements
which are amortized over the lesser of the lease term or
the life of the related asset.
31
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) INCOME TAXES
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be
realized or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(H) 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 May 31, 1996 resulted
from the Lyriq acquisition and is net of accumulated
amortization of $214,200.
In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No 121
("SFAS No 121") that establishes accounting standards for
the impairment of long lived assets, certain intangibles
and goodwill related to those assets to be held and used,
and for long-lived assets and certain identifiable
intangibles to be disposed of. In conformity with SFAS No.
121, it is the Company's policy to evaluate and recognize
an impairment of capitalized software and other long lived
assets if it is probable that the recorded amounts are in
excess of anticipated undiscounted future cash flows.
(I) EARNINGS PER SHARE
Pursuant to SEC Staff Accounting Bulletin Topic 4:D, stock
issued and stock options and warrants granted during the
twelve month period preceding the date of the Company's
initial public offering (the "IPO") have been included in
the calculation of weighted average shares of common stock
outstanding. Weighted average shares of common stock and
common equivalents outstanding of 4,275,908 for the year
ended May 31, 1995 includes 243,980 incremental shares
assumed to be outstanding related to common stock options
and warrants granted within twelve months prior to the IPO.
32
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) EARNINGS PER SHARE (CONTINUED)
Net loss per share for fiscal 1996 is based on the weighted
average number of shares of common stock outstanding,
excluding common stock equivalents (stock options and
warrants) since they are antidilutive.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107,
"Disclosure About Fair Value of Financial Instruments"
requires disclosure of the fair value of certain financial
instruments. At May 31, 1996 and 1995, the fair value of
the Company's cash and equivalents, accounts receivable,
accounts payable and accrued expenses approximate book
value due to the short maturity of those instruments. The
book value of the Company's long-term debt approximates
fair value since the interest rate is prime based and
accordingly is adjusted for market rate fluctuations.
(K) 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.
(4) PROPERTY AND EQUIPMENT
Property and equipment, at May 31, 1996 and 1995, consists of the
following:
1996 1995
---- ----
Computer and production equipment $ 873,200 $ 791,100
Furniture and other equipment 54,100 54,100
Leasehold improvements 200,300 200,300
---------- ----------
1,127,600 1,045,500
Accumulated depreciation and amortization (896,300) ( 726,200)
----------- -----------
Property and equipment, net $ 231,300 $ 319,300
========== ==========
33
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ACCRUED EXPENSES
At May 31, 1996 and 1995, accrued expenses totaled $895,300 and $307,600,
respectively. The 1996 and 1995 amounts included $66,400 and $163,100 of
accrued compensation, respectively. The 1996 balance also includes
$363,500 of accrued severance costs relating to fiscal 1996 services that
were paid during July and August, 1996
(6) LONG-TERM DEBT
Long-term debt at May 31, 1996 and 1995, consists of the following:
1996 1995
---- ----
Notes payable in connection with the repurchase of
1,000,000 shares of common stock, which accrues
interest at prime (8.25% at May 31, 1996). $666,700 $ -
Notes payable with interest at prime plus 2% - 15,200
-------- -------
Total long-term debt 666,700 15,200
Less current maturities 498,900 15,200
-------- -------
Long-term debt, excluding current maturities $167,800 $ -
======== =======
Interest costs of approximately $98,500 and $102,900 (principally relating
to bridge loans repaid in May 1996 and October 1994, respectively) were
paid in fiscal 1996 and 1995, respectively.
(7) CONVERTIBLE PROMISSORY NOTES
In January, 1996, the Company consummated a $2,700,000 financing of 54
units, each consisting of a $50,000 unsecured convertible promissory note
with interest at 10% and 10,000 warrants. Each warrant enables the holder
to purchase one share of common stock at $4.00 per share. Debt acquisition
costs totaled $240,000 and net proceeds to the Company were $2,460,000.
The fair market value of the warrants was $540,000 at the time of
issuance. Such amount was reflected as an increase in additional paid in
capital and as a discount on the convertible promissory notes to be
amortized over the term of the notes.
Investors holding an aggregate of $2,250,000 of convertible promissory
notes elected to convert their convertible promissory notes into 740,734
shares of the Company's common stock and 1,481,468 warrants at the closing
of the May, 1996 public offering (Note 2). The remaining $450,000 of
convertible promissory notes were repaid at that time and the remaining
unamortized debt discount was expensed.
34
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) STOCK OPTIONS AND WARRANTS
During fiscal 1996 the Company increased the number of shares authorized
for issuance under its stock option plans as follows:
PLAN FROM TO
---- ---- --
1994 Incentive and Non-qualified Stock
Option Plan 750,000 1,500,000
1994 Stock option plan for consultants 350,000 1,000,000
1995 Stock option Plan for Outside
Directors 75,000 150,000
At May 31, 1996, 547,770 options have been granted under the 1994
Incentive and Non-Qualified Stock Option plan for employees, of which
505,217 represent non-qualified stock options and 42,553 represent
incentive stock options. Additionally, the Company periodically grants
stock options outside the 1994 Plan to other parties. All stock options,
which have been granted by the Company, with the exception of those
options granted to persons holding more than ten percent of the voting
common stock in the Company on the date of grant, expire ten years after
grant and are issued at exercise prices which are not less than the fair
value of the stock on the date of grant. Options granted to persons
holding more than ten percent of the voting common stock of the Company on
the date of grant expire five years after grant and are issued at exercise
prices which are not less than 110 percent of the fair value of the stock
on the date of grant. Stock options generally vest one-third in each of
the first three years after the date of grant. Payment for the exercise
price of an option may be made with previously acquired common stock of
the Company with certain limitations.
In November 1994, a total of 250,000 options were granted to two
consultants (one of which was a former director of the Company) under the
1994 Stock option plan for consultants for advisory services. The options
are exercisable for 10 years from date of grant at an exercise price of
$3.75. The expense related to the services is being recognized over the
period the services are provided.
Under the 1995 Stock Option Plan for Outside Directors, each person who is
an outside director on January 1 of each calendar year, commencing January
1, 1995, shall be granted 5,000 options to purchase shares of common stock
of the Company.
35
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of all stock option transactions of the Company is as follows:
NUMBER OF
OPTIONS PRICE PER SHARE
------- ---------------
Outstanding May 31, 1994 531,510 $ 1.71 - 3.00
Granted 470,260 $ 1.71 - 4.00
Exercised - -
Canceled - -
-------- ---------------
Outstanding May 31, 1995 1,001,770 $ 1.71 - 4.00
Granted 190,000 3.00 - 3.25
Exercised - -
Canceled (82,000) 3.00 - 4.00
Outstanding at May 31, 1996 1,109,770 $ 1.71 - 3.75
========= ===============
Exercisable at May 31, 1996 872,895
=========
In June, 1996, the Company registered with the SEC 5,461,468 common stock
warrants. A portion were issued in May 1994 (800,000), January, 1996
(540,000) and May 1996 (1,481,468) in connection with the issuance of
convertible notes payable, which were repaid and 2,300,000 were issued in
the Company's IPO. All such warrants entitle the holder to purchase one
share of common stock for $4.00 until October 20, 1997. The remaining
340,000 warrants registered were issued at $2.35 per share. These warrants
are currently exercisable and expire in January 1999.
In October of 1995 the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," which must
be adopted by the Company in fiscal 1997. The Company has elected not to
implement the fair value based accounting method for employee stock
options, but has elected to disclose commencing in fiscal 1997, the
proforma net income and earnings per share as if such method had been used
to account for stock-based compensation costs as described in the
Statement.
36
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) PREFERRED STOCK
On August 12, 1994, the Company's Board of Directors authorized the
Company to issue up to 2,000,000 shares of preferred stock, with a par
value of $.01, none of which has been issued.
(10) INCOME TAXES
The actual income tax benefit differs from the "expected" income tax
benefit, computed by applying the U.S. Federal corporate tax rate of 34
percent to loss before income taxes, as follows:
1996 1995
---- ----
Computed "expected" tax benefit $(3,537,600) (1,359,100)
Increase (reduction) in income taxes
resulting from:
State income taxes, net of Federal benefit - (185,700)
Non-deductible expenses 861,500 -
Increase in valuation allowance, primarily
due to Federal net operating loss
carryforwards 2,676,100 1,537,800
Other - 7,000
---------- ----------
$ - -
========== ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May
31, 1996 and 1995, are as follows:
1996 1995
---- ----
Deferred tax assets:
Net operating loss carry forwards $ 3,978,000 $1,582,600
Allowance for doubtful accounts
receivable and returns 46,900
Accrued expenses 49,600 64,000
Valuation allowance (4,071,000) (1,643,100)
------------ -----------
Net deferred tax asset 3,500 3,500
------------ -----------
Deferred tax liability - property
and equipment, principally
due to differences in
depreciation methods 3,500 3,500
----------- ----------
Net deferred tax asset/
liability $ - $ -
=========== =============
37
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) INCOME TAXES (CONTINUED)
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax asset will be realized. The ultimate realization of the
deferred tax asset is dependent upon the generation of future taxable
income during the periods in which temporary differences become
deductible. The Company believes that it is more likely than not that it
will not be able to realize its deferred tax asset and has established a
valuation allowance of $4,071,000 at May 31, 1996, based upon the
provisions of Statement of Financial Accounting Standards No. 109, the
Company's historical taxable losses and lack of offsetting objective
evidence, the Company's projected taxable loss through May 31, 1997 and
that the Company cannot produce reasonably reliable projections covering
the remainder of the net operating loss carry forward period.
Approximately $ 30,100 was paid in income taxes for the year ended May 31,
1994 and for which $13,700 was received as a refund in fiscal 1996. At May
31, 1996, the Company had available approximately $11,700,000 of tax loss
carry forwards (NOL's) which expire in years 2009 through 2011. The
utilization of such NOL's for income tax purposes is subject to annual
limitations imposed by the Internal Revenue Code Section 382 due to the
Company's various equity transactions.
(11) EMPLOYEE BENEFIT PLAN
The Company sponsors an employee savings plan under Section 401(k) of the
Internal Revenue Code (IRC) that covers substantially all employees of the
Company who elect to participate on a voluntary basis. Participants may
authorize salary deferral amounts under the plan up to 15 percent of their
compensation limited to a maximum amount stipulated in the IRC. The plan
also provides for a discretionary Company contribution which is determined
by the Board of Directors. No discretionary Company contributions were
made during the years ended May 31, 1996 and 1995.
(12) COMMITMENTS
(A) LEASES
The Company leases its office facilities under several non-cancelable
operating leases which expire at various times through May 1997 with
minimum lease payments of $182,500.
Rent expense for operating leases for 1996 and 1995 approximated $186,500
and $129,700, respectively.
38
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(B) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain key
executives and employees. Minimum salary commitments under these
agreements are approximately $313,000 and $192,000 for the years ending
May 31, 1997 and 1998, respectively.
(16) BUSINESS AND CREDIT CONCENTRATIONS
In fiscal 1996 there were three customers that each comprised more than
10% of total revenue, amounting to 61% of revenue in the aggregate and
there were three such customers in fiscal 1995 that comprised 96% of
revenue in the aggregate. The Company is also currently dependent upon a
single manufacturer of infrared golf clubs utilized in the Company's
Picture Perfect Golf Series of products.
(17) REPURCHASE AND RETIREMENT OF COMMON STOCK
Simultaneously with the May, 1996 closing of the secondary public offering
of common stock, the Company repurchased an aggregate of 1,000,000 shares
of common stock at $1.00 per share from certain of its officers. Under the
purchase agreement as amended in August 1996, one third of the purchase
price was paid at the closing of the public offering, $498,900 will be
paid in fiscal 1997 and $167,800 in fiscal 1998. The outstanding balance,
which is included in debt (Note 6), will accrue interest at prime and is
payable quarterly.
On August 31, 1994, the Company repurchased and retired 600,000 shares of
its outstanding common stock from a stockholder at a price of $1,000,000.
(18) REORGANIZATION
Subsequent to May 31, 1996 the Company reduced its Washington DC based
work force by approximately 45%. This included the separation of the
Company's President and a Vice-President. The total severance and other
related costs of $431,300 is reflected as an accrued liability in the
accompanying financial statements since such costs relate to fiscal 1996
and prior years services and a significant portion was paid by August,
1996.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ENTERACTIVE, INC.
Date:September X, 1996 By:/S/ ANDREW GYENES
-----------------
Andrew Gyenes
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the persons on behalf of the registrant and in the
capacities and on the date indicated.
NAME TITLE DATE
- ---- ----- -----
/S/ANDREW GYENES Chairman of the Board September , 1996
- ----------------- and Chief Executive Officer
Andrew Gyenes
/S/ KENNETH GRUBER Vice President, Chief Financial September 5, 1996
- ------------------- Officer (Principal Accounting Officer)
Kenneth Gruber
/S/ MICHAEL ALFORD Vice President Development September 5, 1996
- ------------------ and Director
Michael Alford
/S/ RINO BERGONZI Director September 5, 1996
- ------------------
Rino Bergonzi
/S/ PETER GYENES Director September 5, 1996
- -----------------
Peter Gyenes
/S/ HARRISON WEAVER Director September 5, 1996
- -------------------
Harrison Weaver
RELEASE AND TERMINATION AGREEMENT
This Release and Termination Agreement ("Agreement"), dated
this 8th day of August, 1996, by and between Enteractive, Inc. (the "Company"),
a Delaware corporation, and John Ramo ("Ramo").
W I T N E S S E T H:
WHEREAS, Ramo and the Company are parties to an Employment
Agreement, dated as of July 15, 1992, as amended from time to time (the
"Employment Agreement"), which by its terms expires on October 20, 1997; and
WHEREAS, Ramo and the Company have determined that it is in
their mutual interests for Ramo's employment with the Company to end at this
time, and for the parties to agree to certain other arrangements among
themselves as set forth herein;
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. RESIGNATION. Ramo hereby resigns all appointments he holds
with the Company as a director, officer, employee, member of any committee of
the board of directors or trustee of an employee benefit plan. Ramo will submit
a letter of resignation in the form attached hereto as Exhibit A upon signing
this Agreement, which resignation shall be effective upon the Effective Date of
this Agreement as set forth in Section 10 hereof. Ramo understands and agrees
that his active employment with the Company concluded on July 16, 1996, that the
Employment Agreement is hereby terminated in its entirety, including Section 4
thereof which shall not survive termination of Ramo's employment, and that
effective July 16, 1996, he is no longer authorized to incur any expenses,
obligations or liabilities on behalf of the Company. At or prior to the Closing
(as hereinafter defined), Ramo shall deliver his Company provided car to the
Company, along with all keys, the registration, insurance and other
documentation pertaining to the car. Should Ramo desire to purchase the car, the
Company agrees to provide its reasonable assistance to Ramo to document such
purchase at or in advance of the Closing.
2. EXTENDED SALARY PAYMENT. Within three (3) business days of
the Effective Date, at a time, date and place mutually convenient to Ramo and
the Company (the "Closing"), the Company shall pay Ramo by certified check a
lump sum of $132,461.54, less all applicable federal, state and local
withholding taxes, which amount represents Ramo's salary under
<PAGE>
the Employment Agreement through its expiration date of October 20, 1997. Ramo
accepts the foregoing in full satisfaction of any and all amounts Ramo may claim
as compensation from the Company, including, without limitation, salary, bonuses
and vacation pay.
3. PREPAYMENTS OF PROMISSORY NOTE. At the Closing, the Company
shall make a prepayment to Ramo pursuant to the Stock Purchase Agreement and
that certain promissory note from the Company to Ramo of May 21, 1996 in the
principal amount of $210,180 (the "Note") in accordance with the provisions of
this Section 3. At the Closing, Ramo shall surrender the Note to the Company and
upon surrender, the Company (i) shall make a prepayment to Ramo by certified
check in an amount equal to $52,545 (being a sum equal to 50 percent of the
payment that would otherwise be due to Ramo under the Stock Purchase Agreement
and the Note on May 21, 1997), along with interest accrued through the date of
payment and (ii) shall issue a substitute promissory note to Ramo in the
principal amount of $157,634 and in the form annexed hereto as Exhibit B (the
"New Note"). Payment of the amount set forth in clause (i) of the preceding
sentence and payments under the New Note shall constitute full satisfaction of
the Company's obligations to Ramo under the Stock Purchase Agreement and the New
Note.
4. ASSIGNMENT OF NAME.
a. On May 21, 1998, or at an earlier time at the
Company's sole option, the Company shall assign all of its right, title and
interest in the name and trademark "Sonic Images", U.S. Reg. No. 1,811,157 (the
"Mark") to Ramo, together with all goodwill associated therewith, and all rights
to causes of action that accrue following assignment and all remedies related
thereto (provided, however, that the Company shall maintain the sole right,
subject to subsection b, below, to sue for past infringements or violations of
rights associated with the foregoing), and any and all other rights and
interests arising out of, in connection with, or in relation to the Mark. The
Company agrees that it shall, at the time of assignment, provide Ramo with such
documentation as is reasonably necessary to effect said assignment. Prior to
assignment, the Company shall use commercially reasonable efforts to prevent the
registration of the Mark from lapsing or prevent the Mark from being abandoned.
b. The Company and Ramo each agree to give the
other prompt written notice of any prohibited use by a third party or parties of
the Mark, and the Company shall be offered the option of maintaining such
actions or proceedings as are appropriate in connection with such prohibited
activities. In the event the Company elects to prosecute such an action or
proceeding, all legal and related costs shall be borne by the Company, and the
Company will receive any damages as are awarded in the action or proceeding. In
the event the Company elects not
-2-
<PAGE>
to prosecute such an action or proceeding, Ramo may elect to do so at his
expense, in which case all damages and costs awarded and/or imposed therein
shall inure to Ramo and/or shall be Ramo's responsibility. The Company and Ramo
agree to cooperate in any action or proceeding described herein including, in
the case of the Company, its provision of its consent to be named as a sole
complainant or co-complainant in such an action or proceeding.
5. SHAREHOLDERS AGREEMENT. At the Closing, the parties shall
execute a termination of the Shareholders Agreements between and among the
Company, Ramo, Jolie Barbiere, Zenon Slawinski, Michael Alford and Andrew Gyenes
in the form annexed hereto as Exhibit C.
6. RELEASES.
a. RELEASE BY RAMO.
(1) In consideration of the payments and
benefits described in the preceding Sections of this Agreement, Ramo
hereby voluntarily, knowingly and willingly releases and forever
discharges the Company, its subsidiaries and affiliates, together with
their respective officers, directors, shareholders, employees and
agents, and each of their predecessors, successors and assigns
(collectively the "Releasees"), from any and all charges, complaints,
claims, promises, agreements, controversies, causes of action and
demands of any nature whatsoever which against them Ramo or his
executors, administrators, successors or assigns ever had, now have or
hereafter can, shall or may have by reason of any matter, event, cause
or thing whatsoever arising, or any fact or state of facts in
existence, known or unknown, up to and including the Effective Date of
this Agreement.
(2) By signing this Agreement, Ramo
represents that he has not commenced any proceeding against the Company
in any forum (administrative or judicial) concerning his employment or
the termination thereof or any other matter arising out of his
relationship to the Company or any Releasee or any agreement to which
he and the Company or any Releasee are parties, and that he will not do
so in the future. Ramo further agrees that he will not seek or be
entitled to any award of equitable or monetary relief in any proceeding
of any nature brought on his behalf arising out of any of the matters
released by this Section 6, and that he will not finance, encourage or
assist any other person or entity in bringing any proceeding which Ramo
would be prohibited from bringing under this Section 6.
(3) This release by Ramo includes, but is
not limited to, any rights or claims (x) relating in any way
-3-
<PAGE>
to Ramo's employment relationship with the Company, or the termination
thereof; (y) arising in any way pursuant to or in connection with any
other agreement to which Ramo and the Company or any Releasee are
parties or as a result of or in connection with any other relationship
Ramo has had or currently has with the Company or any Releasee,
including his relationship as a director or shareholder of the Company
or its predecessors; or (z) arising under any statute, including the
federal Age Discrimination in Employment Act (the "ADEA), Title VII of
the Civil Rights Act, the Americans with Disabilities Act, the District
of Columbia Human Rights Law, the Virginia Human Rights Act, the New
York State and City Human Rights Laws or any other federal, state or
local law.
(4) This Agreement will serve as a complete
defense to any action that Ramo may bring against the Company or any of
the Releasees arising out of any matter released hereby. Should Ramo
bring any such action, he shall indemnify the Company for the costs of
defense thereof (including attorneys' fees) and for any consequent
damages.
b. RELEASE BY THE COMPANY.
(1) In consideration of Ramo's execution of
this Agreement, the Company hereby voluntarily, knowingly and willingly releases
and forever discharges Ramo and his heirs, administrators, successors and
assigns (collectively, the "Ramo Releasees") from any and all charges,
complaints, claims, promises, agreements, controversies, causes of action and
demands of any nature whatsoever which against them the Company or its
successors or assigns ever had, now have or hereafter can, shall or may have by
reason of any matter, event, cause or thing whatsoever arising, or any fact or
state of facts of existence, known or unknown, up to and including the Effective
Date of this Agreement.
(2) By signing this Agreement, the Company
represents that it has not commenced any proceedings against Ramo in any forum
(administrative or judicial) concerning his employment or the termination
thereof or any other matter arising out of his relationship to the Company or
any agreement to which he and the Company are parties, and that it will not do
so in the future. The Company further agrees that it will not seek or be
entitled to any award of equitable or monetary relief in any proceeding of any
nature brought on its behalf arising out of any of the matters released by this
Section 6, and that it will not finance, encourage or assist any other person or
entity in bringing any proceeding which the Company would be prohibited from
bringing under this Section 6.
-4-
<PAGE>
(3) This release by the Company includes,
but is not limited to, any rights or claims (x) relating in any way to Ramo's
employment relationship with the Company, or the termination thereof; or (y)
arising in any way pursuant to or in connection with any other agreement to
which Ramo and the Company are parties or as a result of or in connection with
any other relationship Ramo has had or currently has with the Company, including
his relationship as a director or shareholder of the Company or its
predecessors.
(4) This Agreement will serve as a complete
defense to any action that the Company may bring against Ramo or any of the Ramo
Releasees arising out of any matter released hereby. Should the Company bring
any such action, it shall indemnify Ramo for the costs of defense thereof
(including attorneys' fees) and for any consequent damages.
c. MATTERS NOT RELEASED. The releases by the parties
set forth above shall not be construed to prohibit either party from commencing
an action: (1) to enforce this Agreement; or (2) to the extent the event(s),
fact(s) or state of facts giving rise to the claim or cause of action occurs or
comes into existence after the date of this Agreement, including claims so
arising under the terms of any agreement between the parties which remains in
effect.
7. CONFIDENTIALITY, NON-COMPETITION AND NON-
SOLICITATION.
a. Ramo represents that he has returned or will
immediately return to the Company all "Company Information," including, without
limitation, mailing lists, reports, files, memoranda, records and software,
credit cards, door and file keys, computer access codes or disks and
instructional manuals, and other physical or personal property that he received
or prepared or helped to prepare in connection with his employment with the
Company, and that he will not retain any copies, duplicates, reproductions,
notes, excerpts or abstracts thereof. In the event Ramo hereafter discovers any
Company Information in his possession, he agrees to immediately return such
material or materials to the Company. Should Ramo be uncertain as to whether any
material or materials in his possession constitute Company information, he
agrees to submit a written list thereof to the Company and make such material or
materials available for inspection by the Company, and Ramo shall abide by the
Company's reasonable designation of such materials as Company Information. Ramo
shall be permitted to retain a copy of his personal rolodex which is on the
Company's computer system and copies of certain Sonic Images files designated by
Ramo and subject to review by the Company, and provided that at least one copy
of each of the foregoing is left with the Company. In addition to the foregoing,
"Company Information" as used in this Agreement means
-5-
<PAGE>
(i) confidential information of the Company or any of the Releasees, including,
without limitation, information received from the Company or from third parties
under confidential conditions, (ii) all information related to the Company's
projects, including the ideas listed on Exhibit D hereto, and (iii) other
technical, business or financial information or trade secrets, the use or
disclosure of which might reasonably be construed to be contrary to the
interests of the Company or any of the Releasees.
b. Ramo and the Company agree that in the course of
his employment with the Company, Ramo acquired Company Information as defined in
Section 7.a. Ramo agrees that such Company Information has been disclosed to him
in confidence and for the use only of the Company. Ramo acknowledges that he has
no ownership right or interest in any Company Information used or developed
during the course of his employment. Ramo agrees (i) that he will keep such
Company Information confidential at all times after his employment with the
Company, and (ii) that he will not make use of Company Information on his own
behalf or on behalf of any third party.
c. Ramo agrees that in the event he receives any
request or demand for information concerning the Company or any of the Releasees
from any third party, including any subpoena or demand for discovery, he shall
notify an officer of the Company immediately upon receipt of such a request or
demand. Ramo agrees to cooperate with any effort by the Company, at its expense,
to lawfully oppose, limit or quash any such subpoena, request or demand for
information.
d. Ramo agrees that until May 21, 1998, he shall not,
whether as an owner, partner, shareholder, officer, director, employee,
consultant or in any other capacity, develop or market, or participate in the
development or marketing of "Competitive Products." For purposes of this
Agreement, a Competitive Product means a CD-ROM product that: (i) competes in
concept or theme with products of the Company or the Releasees that he has
worked on directly or that are marketed, sold, or offered for sale by the
Company within six (6) months following his departure, and on which he worked on
directly; or (ii) is or could reasonably be construed to have been developed or
marketed by use of Company Information. This clause shall not otherwise prevent
Ramo from competing with the Company, or from working for an employer offering
Competitive Products provided, in the latter instance, that Ramo provides an
undertaking satisfactory to the Company that: (x) he will not participate in the
development or marketing, or management of the development or marketing, of such
Competitive products; and (y) he has informed such employer of his obligations
under this Section 7.
-6-
<PAGE>
e. Ramo agrees that until May 21, 1998, he will
not, without the Company's express written consent, solicit for employment on
his own behalf or on behalf of a third party any person who was an employee of
the Company or any of the Releasees on the date of this Agreement, or enter into
a business venture with any such person. This Section 7.e. shall not apply to
solicitation of Jolie Barbiere for employment. This Section 7.e. shall not
restrict the ability of any future employer of Ramo to solicit any employee of
the Company or a Releasee, or enter into a business venture with any such
person, so long as Ramo is not involved directly or indirectly in the
solicitation.
f. Ramo acknowledges and agrees that the Company
Information constitutes a legitimate, protectible interest of the Company. Ramo
further acknowledges that, in light of his exposure to Company Information and
the uniqueness of his services to the Company, the restrictions contained in
this Section 7 are reasonable and necessary to protect the Company's business
and goodwill, and that a violation of this Section 7 are reasonable and
necessary to protect the Company's business and goodwill, and that a violation
of this Section 7 would cause irreparable damage to the Company. The parties
agree that any violation of this Paragraph 7 shall be a material breach
entitling the non-breaching party to recover $20,000.00 or the actual damages
sustained by reason of the breach, whichever is higher, and to obtain injunctive
relief without the necessity of posting any bond or security, in either case
without otherwise affecting any other rights or remedies available to the
aggrieved party at common law or otherwise.
8. NON-DISPARAGEMENT. Both parties agree that they will not
make, or cause to be made, any statements, observations or opinions, or
communicate any information (whether oral or written) that disparages or is
likely in any way to harm the business, reputation or financial condition of the
other and, in the case of Ramo, the business, reputation or financial condition
of any of the Releasees.
9. CONFIDENTIALITY OF AGREEMENT. The parties agree that they
will maintain the terms of this Agreement completely confidential, subject only
to disclosure to their respective attorneys or tax advisors; in the case of
Ramo, members of his immediate family; in the case of the Company, as required
in connection with financial and other mandated public disclosures; and by
either party for purposes of enforcement hereof or as required by law.
10. REVIEW AND CONSIDERATION OF AGREEMENT.
a. The Company hereby advises, and Ramo acknowledges
that the Company has advised him in writing to consult with an attorney of his
choice prior to signing this
-7-
<PAGE>
Agreement, and that he has availed himself of that right or voluntarily chosen
not to do so. Ramo acknowledges that he understands and agrees that the Company
is under no obligation to offer to him the various payments and other benefits
set forth in Sections 2 through 4 (including the acceleration of payments under
the Stock Purchase Agreement and Note), that he is under no obligation to
consent to the release set forth in Section 6 and that he has entered into this
Agreement freely, knowingly and voluntarily.
b. Ramo shall have at least 21 days to consider
the terms of this Agreement, although he may sign and return it
sooner if he wishes.
c. Ramo shall have seven (7) days from the date
of execution of this Agreement to revoke his consent to waiver of claims under
the ADEA. If Ramo determines to revoke his consent to waiver of claims under the
ADEA, he shall give written notice to the Company at 110 West 40th Street, Suite
2100, New York, New York 10018, attention Mr. Gyenes, prior to expiration of
such seven (7) day period. Provided that Ramo has not revoked his consent to
waiver of claims under the ADEA, this Agreement shall become effective in all
respects upon expiration of the revocation period (the "Effective Date").
d. In the event Ramo does revoke his consent to
waiver of claims under the ADEA, Ramo agrees that upon such revocation, at the
Company's sole option: (i) the Agreement shall become effective as to all
matters other than Ramo's waiver of claims under the ADEA, and in such instance,
the payment under Section 2 shall be reduced by half, and all payments under the
Stock Purchase Agreement and the Note shall be made on their previously
scheduled due dates, without regard to Section 3 hereof, which Section shall be
considered null and void and of no further force or effect; or (ii) this
Agreement shall be null and void in its entirety. In the event of revocation as
set forth herein, the Company shall notify Ramo of the Company's election of (i)
or (ii) above within three (3) business days of receipt of notice of revocation.
In the event the Company makes election (i) above, the date on which the Company
so notifies Ramo shall be the Effective Date of this Agreement.
11. COBRA ELECTION/PENSION. Ramo will receive the opportunity
to elect continued medical coverage for himself and eligible dependents in
accordance with the terms of the Company's medical plans and applicable law,
details of which will be provided separately. Further, this Agreement does not
alter or affect Ramo's vested benefits under the Company's 401(k) plan, which
benefits shall be paid in accordance with said plan.
12. COMPLETE AGREEMENT. Except to the extent otherwise set
forth expressly herein, the terms set forth in this
-8-
<PAGE>
Agreement and attachments hereto constitute the entire agreement between the
parties with respect to the subject matter hereof and may not be altered or
modified other than in a writing signed by Ramo and the Company. This Agreement
supersedes all prior agreements and understandings between the parties
concerning the subject matter hereof, including, without limitation, the
Employment Agreement. This Agreement shall be binding upon the parties hereto
and inure to the benefit of their successors and permitted assigns. The
Agreement may not be assigned by Ramo without the prior written consent of the
Company.
13. SEVERABILITY. In the event any one or more of the
provisions of this Agreement is held to be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions will not
in any way be affected or impaired thereby. Moreover, if any one or more of the
provisions contained in this Agreement is held to be excessively broad as to
duration, geographical scope, activity or subject, such provisions will be
construed by limiting and reducing them so as to be enforceable to the maximum
extent compatible with applicable law.
14. GOVERNING LAW. This Agreement will be governed by the laws
of the State of New York, without reference to its choice of law rules. Ramo
agrees that any action or proceeding arising out of or relating to this
Agreement shall be determined by the federal or state courts sitting in the
State, City and County of New York. Ramo expressly consents to the personal
jurisdiction of such courts for the purposes set forth herein.
15. NOTICES. Any notices, transmittals, or other
communications required or permitted hereunder shall be given in writing and
shall be delivered or sent by next day delivery service, personal delivery,
facsimile or certified or registered mail, postage prepaid, addressed as
follows:
If to the Company, to:
Enteractive, Inc.
110 West 40th Street, Suite 2100
New York, New York 10018
Attn: Chief Executive Officer
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
1440 New York Avenue, N.W.
Washington, D.C. 20005
Attn: Marcia R. Nirenstein, Esq.
If to Ramo, to:
-9-
<PAGE>
John Ramo
1237 Providence Terrace
McLean, Virginia 22101
with a copy to:
Berliner Corcoran & Rowe
1101 17th Street, N.W.
Suite 1100
Washington, D.C. 20036
Attn: Wayne Rusch, Esq.
or to such other address as shall be furnished in writing by such party, and any
such notice or communication shall be effective and be deemed to have been given
as of the date so dispatched, delivered, or mailed; provided, however, that any
notice or communication changing any of the addresses set forth shall be
effective and deemed given only upon its receipt.
16. SECTION HEADINGS. The section headings used in this
Agreement are for convenience only, and shall not in any way affect the meaning
or interpretation of this Agreement.
17. COUNTERPARTS. The parties may execute this Agreement in
one or more counterparts, each of which shall be one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first written above.
ENTERACTIVE, INC.
By: /s/
-------------------------
/s/ Name:________________________
- --------------------------
John Ramo
Title:_______________________
-10-
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements No.
333-04038 and 33-97208 on Form S-8 and No. 333-2244 on Form S-3 of Enteractive,
Inc. and subsidiaries of our report dated August 22, 1996, relating to the
consolidated balance sheets of Enteractive, Inc. and subsidiaries as of May 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended, which report
appears in the May 31, 1996 annual report on Form 10-KSB of Enteractive, Inc.
and subsidiaries.
KPMG PEAT MARWICK LLP
New York, New York
September 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE QUARTER ENDED MAY 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1995
<CASH> 6,005,400
<SECURITIES> 0
<RECEIVABLES> 285,400
<ALLOWANCES> 138,000
<INVENTORY> 439,500
<CURRENT-ASSETS> 6,618,900
<PP&E> 1,127,600
<DEPRECIATION> 896,300
<TOTAL-ASSETS> 7,945,000
<CURRENT-LIABILITIES> 2,798,500
<BONDS> 0
0
0
<COMMON> 76,600
<OTHER-SE> 4,902,100
<TOTAL-LIABILITY-AND-EQUITY> 7,945,000
<SALES> 461,900
<TOTAL-REVENUES> 853,200
<CGS> 286,000
<TOTAL-COSTS> 10,505,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (10,404,700)
<INTEREST-EXPENSE> 98,500
<INCOME-PRETAX> (10,404,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,404,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,404,700)
<EPS-PRIMARY> (2.07)
<EPS-DILUTED> (2.07)
</TABLE>
