As filed with the Securities and Exchange Commission on June 28, 1996
Registration No. 333-2244
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
ON FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ENTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3272662
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
110 West 40th Street, Suite 2100
New York, New York 10018
(212) 221-6559
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(Address, including zip code, and telephone
number, including area code, of Registrant's
principal executive offices)
Mr. Andrew Gyenes
Enteractive, Inc.
110 West 40th Street, Suite 2100
New York, New York 10018
(212) 221-6559
(Name, address and telephone number of agent for service of process)
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Copies to:
Steven Wolosky, Esq.
Kenneth A. Schlesinger, Esq.
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
(212) 753-7200
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Approximate date of commencement of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
ENTERACTIVE, INC.
5,461,468 Shares of Common Stock
This Prospectus relates to 5,461,468 shares (the "Shares") of common
stock, $.01 par value per share (the "Common Stock") of Enteractive, Inc., a
Delaware corporation (the "Company"). Of such Shares of Common Stock, 5,121,468
Shares are issuable by the Company upon the exercise of 5,121,468 Common Stock
Purchase Warrants (the "Warrants"). Each Warrant entitles the holder to purchase
one share of Common Stock for $4.00 until October 20, 1997. The Warrants are not
redeemable by the Company. In addition, 340,000 Shares are issuable by the
Company upon the exercise of warrants ("January 1994 Warrants") issued in
connection with a private placement in January 1994. The January 1994 Warrants
are currently exercisable for $2.35 per share and expire on January 24, 1999.
The Common Stock and the Warrants are currently traded on the Nasdaq
SmallCap Market under the symbols "ENTR" and "ENTRW," respectively. On June 27,
1996, the closing sales price of the Common Stock and the Warrants was $3.50 and
$1.375, respectively.
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THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE, INVOLVE A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AT PAGE 7 HEREOF AND
"DILUTION" AT PAGE 14 HEREOF.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June __, 1996
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates in this Prospectus by reference the
following documents which have been filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Exchange Act of 1934
(the "Exchange Act"): (i) the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 1995, (ii) the Company's Quarterly Reports on Form 10-
QSB for the quarters ended August 31, 1995, November 30, 1995 and February 29,
1996 and (iii) the Company's Current Reports on Form 8-K dated October 3, 1995,
February 8, 1996 and April 25, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of this offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing of such
documents.
The Company's Application for registration of its Common Stock under
Section 12(b) of the Exchange Act filed with the Securities and Exchange
Commission on September 28, 1994, is incorporated by reference into this
Prospectus and shall be deemed to be a part thereof.
Any person receiving a copy of this Prospectus may obtain without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(unless such exhibits are specifically incorporated by reference in such
documents). Such requests should be directed to the Company, 110 West 40th
Street, Suite 2100, New York, New York 10018, Attention: Kenneth Gruber,
telephone number (212) 221-6559.
AVAILABLE INFORMATION
The Company has filed with the Commission three separate Registration
Statements under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statements and the exhibits thereto, certain portions having been
omitted from this Prospectus in accordance with the rules and regulations of the
Commission. For further information with respect to the Company, the securities
offered by this Prospectus and such omitted information, reference is made to
the Registration Statements, including any and all exhibits and amendments
thereto. Statements contained in this Prospectus concerning the provisions of
any document filed as an exhibit are of necessity brief descriptions thereof and
are not necessarily complete, and in each instance reference is made to the copy
of the document filed as an exhibit to the Registration Statements, each such
statement being qualified in its entirety by this reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith the
Company files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at public reference facilities of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
New York, New York 10048. Copies of such material, including the Registration
Statement, can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common
Stock is traded on the Nasdaq SmallCap Market and The Boston Stock Exchange. The
foregoing material also should be available for inspection at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.,
20006 and The Boston Stock Exchange, One Boston Place, Boston, Massachusetts
02108.
The Company intends to furnish its stockholders with annual reports
containing financial statements which will be audited and reported on by its
independent public accounting firm, and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety and the financial statements (including the notes
thereto).
THE COMPANY
The Company designs, develops, publishes and markets interactive
multimedia titles to the home and school markets. The Company believes that it
has been a pioneer in the development and production of interactive new media
titles having entertainment and educational content, based upon its introduction
in 1991 of one of the industry's first titles for the CD-I format. Prior to
1995, the Company's focus was on the development of titles on a work-for-hire
basis. From 1991 to 1994, the Company developed 11 CD-I titles for Philips
Interactive of America, a division of N.V. Philips ("Philips"). Toward the end
of 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
four titles: Cities Under the Sea: Coral Reefs, the first of up to three titles
to be 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; Ask Isaac Asimov . . . About Space, the
first title of a multimedia series based on the respected series of children's
science books written by scientist and author Isaac Asimov, and PIGS, the first
in a collection of animated interactive stories for children. The Company has
established its own marketing and distribution capability and a presence on the
Internet to market its titles. Recently, in order to expand its library of
titles and broaden its product line, the Company acquired Lyriq International
Corporation ("Lyriq"), a developer and publisher of interactive multimedia
products for the education, game and recreation markets. Lyriq has developed and
published, among other things, the Picture Perfect Golf series of interactive
media titles and several Crosswords puzzle titles. It is the Company's belief
that the Lyriq acquisition will provide the Company with rights to valuable
multimedia titles, access to significant creative and technical talent and
expanded research and development abilities. 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. See "Business-Titles" and
"Title Development."
The Company has in-house multimedia development facilities with
computer graphics, animation, video and audio capabilities, including
professional video production 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 educational content and entertainment value. See
"Business-Company Strategy."
Since shifting its strategy, the Company has incurred significant
losses and expects that losses will increase and continue until such time, if
ever, as the Company can successfully and profitably develop and distribute a
broad line of interactive multimedia titles. The Company's experience has been
that it takes between nine months to one year to develop each multimedia title
and anticipates that a broad line of products could take two or more years to
develop, depending upon market acceptance, if any, of the Company's products.
There can be no assurance that the Company's strategy will be successful or that
it will become profitable in the future. See "Risk Factors-History of Losses;
Change in Strategy; Continuing Net Losses."
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<PAGE>
RECENT DEVELOPMENTS
In its initial public offering consummated in October 1994 ("IPO"), the
Company received $7,579,900 in net proceeds by selling 2,300,000 units, each
unit consisting of one share of Common Stock and one Warrant.
In January 1996, the Company consummated a $2,700,000 bridge financing
("January 1996 Bridge Financing") of 54 Units ("Bridge Units") at a purchase
price of $50,000 per Bridge Unit, each Bridge Unit consisting of a $50,000
principal amount unsecured convertible promissory note ("Convertible Note") of
the Company and 10,000 warrants ("January 1996 Warrants"), each to purchase one
share of Common Stock at a purchase price of $4.00 per share. Upon the
consummation of the May 1996 Offering (as defined herein) the January 1996
Warrants were exchanged for 540,000 Warrants. Investors in the January 1996
Bridge Financing holding an aggregate of $2,250,000 of Convertible Notes elected
to convert their Convertible Notes which, based on the May 1996 Offering price
of $3.375 per share, converted into 740,734 Conversion Shares and 1,481,468
Conversion Warrants.
In connection with the January 1996 Bridge Financing, the Company
entered into an agreement with certain executive officers of the Company
pursuant to which the Company repurchased, simultaneously with the closing of
the May 1996 Offering, an aggregate of 1,000,000 shares of Common Stock
("Contribution Shares") at a purchase price of $1 per share, or an aggregate of
$1,000,000, of which $333,334 was paid on the closing of the May 1996 Offering,
with the balance payable in two equal installments of $333,333 each on May 15,
1997 and May 15, 1998. Interest will accrue at the prime rate and is payable
quarterly. The Company entered into the agreement to purchase the Contribution
Shares in connection with its negotiations with GKN Securities Corp. (the
"Underwriter"), the Underwriter of the May 1996 Offering, regarding the terms of
the January 1996 Bridge Financing and the May 1996 Offering. For the quarter
ended May 31, 1996, the Company incurred one-time charges for the write-off of
debt acquisition costs and the discount on the Convertible Notes totalling
$736,700, based on the balances at February 29, 1996.
On February 29, 1996, Lyriq merged into a wholly-owned subsidiary of
the Company pursuant to an Agreement and Plan of Merger ("Lyriq Acquisition").
As consideration for this transaction, the Company issued an aggregate of
725,212 shares of Common Stock, including 303,651 and 310,867 shares of Common
Stock, respectively, to Messrs. Randal Hujar and Gary Skiba, former principals
of Lyriq, both of whom entered into employment contracts with the Company. The
Company has agreed to register the Common Stock issued to Messrs. Hujar and
Skiba in connection with the Lyriq Acquisition after February 28, 1997, with
certain exceptions. The transfer of such shares is subject to lock-up
restrictions.
In May 1996, the Company consummated a public offering (the "May 1996
Offering") consisting of 2,415,000 shares of Common Stock. In the May 1996
Offering, the Company received net proceeds of approximately $6,873,000.
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<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements of Enteractive and Lyriq appearing elsewhere in this
Prospectus. This information should be read in conjunction with such financial
statements, including the notes thereto. Enteractive's historical information
presented for the fiscal years ended May 31, 1995 and 1994 and the nine months
ended February 29, 1996 and February 28, 1995 include the historical results of
Sonic (as defined herein) through May 10, 1994, the date of the Merger (as
defined herein), and the combined results of Enteractive and Sonic thereafter.
The Balance Sheet Data at February 29, 1996 includes the consolidated accounts
of Enteractive and Lyriq.
The unaudited pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Lyriq Acquisition had been
consummated as of such date nor is it necessarily indicative of future operating
results or financial position. The Lyriq Acquisition has been accounted for
under the purchase method of accounting.
<TABLE>
<CAPTION>
Enteractive Summary Financial Information
Nine Months Ended
Year Ended -------------------------- Pro Forma Nine
May 31, Pro Forma Year Months Ended
-------------------- Ended May 31, February 29, February 28, February 29,
1995 1994 1995(1) 1996 1995 1996(1)
---- ---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Product sales.................... $ ---- $ ---- $ 617,500 $ 324,800 $ ---- $ 842,200
Product development revenue...... 365,600 2,371,500 527,700 257,700 292,600 378,700
Royalty and other revenue........ 3,500 10,700 468,400 103,300 2,400 327,300
Operating loss................... (3,969,800) (382,100) (4,617,900) (6,435,500) (2,409,300) (5,086,400)
Net loss......................... (3,997,400) (373,200) (4,656,900) (6,378,800) (2,512,600) (5,060,600)
Net loss per common share........ $ (0.93) $ (0.11) $ (0.93) $ (1.34) $ (0.62) $ (0.92)
Weighted average shares.......... 4,275,908 3,419,409 5,001,120 4,775,489 4,057,812 5,500,701
</TABLE>
<TABLE>
<CAPTION>
February 29, 1996
---------------------------
Actual Pro Forma(2)
------------ ------------
Balance Sheet Data:
<S> <C> <C>
Total assets..................... $4,558,200 $10,331,200
Working capital (deficit)........ (537,900) 7,121,700
Total liabilities................ 3,632,200 2,078,900
Stockholders' equity............. $ 926,000 $8,252,300
</TABLE>
(1) The pro forma Statement of Operations Data for May 31, 1995 and
February 29, 1996 reflects the effect of the Lyriq Acquisition,
including the amortization of capitalized software acquired in
connection therewith and excluding the non-recurring in-process
research and development charge of $1,915,100.
(2) Reflects (i) the sale by the Company of the Common Stock in the May
1996 Offering and the application of the estimated net proceeds
therefrom, (ii) the conversion of $2,250,000 principal amount of
Convertible Notes into Conversion Shares and Conversion Warrants and
(iii) the repurchase of the Contribution Shares.
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<PAGE>
<TABLE>
<CAPTION>
Lyriq Summary Financial Information
Year Ended
June 30, Nine Months Ended
--------------------------------- ------------------------------------
February 29, February 28,
1995 1994 1996 1995
--------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Product sales............................ $ 617,536 $206,339 $517,444 $607,760
Product development revenue.............. 162,132 171,262 121,000 125,487
Royalty and other revenue................ 464,906 47,031 223,961 303,053
Operating income (loss).................. (219,998) (8,661) (352,011) 49,539
Net income (loss)........................ $(231,457) $(15,013) $(382,902) $ 46,592
</TABLE>
Unless otherwise indicated, the information in this Prospectus does not include
(i) 1,500,000 shares of Common Stock reserved for issuance upon exercise of
stock options which may be granted under the Company's 1994 Incentive and
Non-Qualified Stock Option Plan ("1994 Plan"), of which options to purchase
576,097 shares of Common Stock are outstanding; (ii) 1,000,000 shares of Common
Stock reserved for issuance upon exercise of stock options which may be granted
under the Company's 1994 Consultant Stock Option Plan ("Consultant Plan"), of
which options to purchase 250,000 shares of Common Stock have been granted;
(iii) 150,000 shares of Common Stock reserved for issuance under the Company's
1995 Directors Stock Option Plan ("Directors Plan"), of which options to
purchase 30,000 shares of Common Stock have been granted; (iv) 282,000 shares of
Common Stock reserved for issuance upon exercise of certain other outstanding
non-qualified stock options; (v) 340,000 shares of Common Stock reserved for
issuance upon exercise of the January 1994 Warrants; (vi) 5,121,468 shares of
Common Stock reserved for issuance upon the exercise of Warrants, including (a)
800,000 Warrants issued in exchange for warrants to purchase 800,000 shares of
Common Stock ("May 1994 Warrants") issued in connection with a bridge financing
in May 1994 ("May 1994 Bridge Financing"), (b) 540,000 Warrants issued upon
exchange of 540,000 January 1996 Warrants and (c) the conversion of the
Convertible Notes into 1,481,468 Conversion Warrants; (vii) 400,000 shares of
Common Stock reserved for issuance upon the exercise of the underwriter's unit
purchase option granted to the underwriters of the IPO ("Underwriter's UPO");
and (viii) 210,000 shares of Common Stock reserved for issuance with the
exercise of a common stock purchase option granted to the Underwriter (the
"Underwriter's UPO").
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<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and involve a
high degree of risk. Accordingly, in analyzing an investment in these
securities, prospective investors should carefully consider, along with the
other matters referred to herein, the following risk factors.
History of Losses; Change in Strategy; Continuing Net Losses. The
Company has incurred significant losses since the Merger. At the end of 1994,
the Company shifted its focus from being primarily a provider of product
development services for others to being a developer and publisher of titles in
which the Company maintains a significant ownership interest and, in many cases,
distribution rights. However, the Company continues to incur significant losses.
For the fiscal year ended May 31, 1995 and the nine months ended February 29,
1996, the Company had net losses of $3,997,400 and $6,378,800, respectively. The
net loss for the nine months ended February 29, 1996 includes a non-recurring
charge of $1,915,100 for acquired in-process research and development in
connection with the Lyriq Acquisition. The Company expects that losses will
increase and continue until such time, if ever, as the Company can successfully
and profitably develop, produce and distribute a broad line of interactive
multimedia titles. The Company's experience has been that it takes between nine
months to one year to develop each multimedia title and anticipates that a broad
line of products could take two or more years to develop, depending upon market
acceptance, if any, of the Company's products. The operating results of the
Company will continue to be adversely affected since the Company will incur
additional expenses to implement its strategy, particularly expenses in research
and development and distribution and marketing operations, which are expected to
be in excess of anticipated product sales. Accordingly, the Company anticipates
that should its products not meet with, or be delayed in obtaining, market
acceptance, the Company will explore various alternatives to achieve
profitability including, but not limited to, reducing personnel, performing
product development services for third parties, acquiring existing titles from
third parties or seeking partners to participate in development and marketing.
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 carryforward may be applied towards the Company's
taxable income, if any. There can be no assurance that the Company's strategy
will be successful or that the Company will become profitable in the future.
Possible Need for Additional Financing; Absence of Credit Facility.
Management believes that the net proceeds of the May 1996 Offering, together
with the Company's existing resources and cash generated from future revenues,
if any, will be adequate for the Company's cash requirements until (twelve
months from the date of this Prospectus). However, these funds may not be
sufficient to meet the Company's longer term cash requirements for operations.
If necessary, the Company may return to performing product development for third
parties in order to help meet its cash requirements or if the Company otherwise
deems it appropriate while continuing to develop and market several of its own
production titles. The Company may also be required to obtain additional
financing to continue to operate its business. The Company does not currently
have a line of credit. There can be no assurance that any additional financing,
if required, will be available to the Company on acceptable terms, if at all.
Any inability by the Company to obtain additional financing, if required, will
have a material adverse effect on the operations of the Company.
Uncertain Sources of Revenue. Prior to fiscal 1996, the Company's
revenues were primarily derived from development projects provided for other
entities and grants received for development work. For the fiscal years ended
May 31, 1994 and May 31, 1995, the Company had product development revenue of
$2,371,500 and $365,600, respectively, representing a substantial portion of the
Company's total revenue for such fiscal years. As a result of the Company's new
strategy, the Company has shifted away from externally-funded development work
and anticipates that a majority of its revenues in the future will be generated
from sales of its titles. The Company is actively marketing four of its own
interactive multimedia titles and, as a result of the Lyriq Acquisition, seven
additional Company-owned titles. While the Company generated revenues of
$324,800, or 47% of total revenues,
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<PAGE>
from title sales during the nine months ended February 29, 1996, there can be no
assurance that revenues from title sales will continue, increase or exceed
operating expenses in the future.
Dependence on New Titles; Short Title Life Cycles; Market Acceptance;
Families of Titles. The nature of the interactive multimedia publishing industry
is such that a significant number of titles will be unsuccessful and that the
revenues derived from the successful titles will be used to cover the costs of
the failures. The Company's success depends on the timely introduction of
successful new titles and sequels or updates to existing titles to replace
declining revenues from older titles. The life cycle of a successful title is
difficult to predict and may be as short as three months. In addition, each
title is an individual artistic work and its commercial success is primarily
determined by consumer taste, which is unpredictable and constantly changing.
Few consumer software products achieve sustained market acceptance. The Company
believes that a title achieves market acceptance if it is widely purchased by
consumers. There can be no assurance that any of the Company's new titles will
achieve market acceptance or that, if accepted, such acceptance will be
sustained for a period long enough to recoup costs or realize profits. If market
acceptance is not sustained, the Company may be required to write-down unsold
excess inventory and/or accept substantial product returns to maintain its
access to distribution channels and accordingly, the Company's results of
operations could be materially adversely affected. In addition, part of the
Company's business strategy is to create families of titles through the use of
similar characters, themes, titles and educational approaches throughout a
product line. When the Company chooses to develop a family of titles, it may
make a substantial development investment before the Company can assess whether
a family of titles will be successful. Accordingly, if a family of titles is
unsuccessful, it could have a material adverse effect on the results of
operations of the Company.
Rapid Technological Change; Competing Computer Platforms; Emphasis on
CD-ROM. The market for educational and entertainment multimedia titles is
subject to frequent and rapid changes in technology resulting in short title
life cycles and rapid price declines. The Company's success is dependent upon,
among other things, the ability of the Company to achieve and maintain
technological expertise and to continue to introduce quality titles by
anticipating and reacting to new technologies. There are multiple platforms and
technologies on which interactive multimedia titles can be based. Each of these
platforms and technologies have been developed and produced by third party
hardware manufacturers. These platforms are not compatible with each other and,
consequently, interactive multimedia titles developed for one platform cannot be
used on other platforms. The titles released by the Company in 1995 were for
CD-ROM. Titles currently being developed by the Company are for the CD-ROM, the
Internet or commercial on-line platforms, which the Company believes are
currently the dominant platforms in the industry. There can be no assurance,
however, that such platforms will continue to be the dominant industry platforms
or that the Company will successfully integrate its products into the Internet
or commercial on-line platforms. While the Company anticipates developing titles
for other platforms that achieve market acceptance, because the development of
titles for a new platform, as well as the migration of a title from one platform
to another, is time consuming and expensive, a leveling off or decline in
CD-ROM, the Internet or commercial on-line services or any subsequent change in
the dominant industry platforms could have a material adverse effect on the
Company. In addition, uncertainty over which platforms will become dominant may
impede product sales, and the emergence of a dominant platform other than
CD-ROM, the Internet or commercial on-line services could severely reduce sales
of the Company's titles. The Company's success in marketing its titles will
depend upon its ability to anticipate and respond to trends in the emergence of
these platforms.
Marketing and Distribution Arrangements; Competition for Shelf Space.
The Company has only recently begun to distribute its own titles. The Company
generally sells its titles to distributors who then distribute such titles to
retailers or sell its titles directly to retailers. These distributors typically
can return the Company's product at any time for credit without an offsetting
order. Accordingly, the Company may experience substantial product returns which
could have a material adverse affect on its revenues. Since retailers typically
have a limited amount of shelf space and promotional resources and there is
intense competition among multimedia software producers, there can be no
assurance that the Company will gain adequate levels of shelf space and
promotional support for its titles to generate sales volume. Due to increased
competition for limited shelf space, retailers and distributors are increasingly
in a better position to negotiate favorable terms of sale, including price
discounts and product return policies. The
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<PAGE>
Company may be competing in distribution against much larger organizations with
more influence over retailers and distributors and greater marketing and
distribution resources. In addition, other types of retail outlets and methods
of product distribution, such as Internet or on-line services, will become
increasingly important and accordingly, the success of the Company will depend
on its ability to gain access to these channels of distribution. There can be no
assurance that the Company will be successful in the development of its
distribution networks or gain such access, and if the Company is unsuccessful in
such development it will have a material adverse effect on the results of
operations of the Company.
Intense Competition. The home education and entertainment software
industry is intensely competitive, and market acceptance for the Company's
titles may be adversely affected by the introduction of similar titles by
competitors. The Company competes, in both the home education and entertainment
and the school markets, against a large number of other companies of varying
sizes and resources. Many of these competitors have substantially greater
financial, technical and marketing resources than the Company and may be more
successful in securing shelf space for their titles. Existing competitors may
continue to broaden their product lines and new competitors, including large
computer or software manufacturers, entertainment companies and educational
publishers, are entering or increasing their focus on the home education and
entertainment and the school markets, resulting in increased competition for the
Company. Increased competition may result in loss of shelf space for the
Company's titles at retail stores, loss of or difficulty in recruiting key
employees and significant price competition, any of which could adversely affect
the Company's operating results. The Company also faces intense competition for
a finite amount of discretionary consumer spending for other forms of
entertainment offered by film companies, record companies, video companies and
others.
Seasonal Business; Quarterly Fluctuations. The home education and
entertainment software business is highly seasonal. Typically, net revenues are
highest during the last calendar quarter, 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 education and entertainment
software products during the year-end holiday buying season. With respect to the
school market, sales are highest during June (the end of the budget period for
most schools) and from August through October (the beginning of the school
year). Accordingly, the Company's revenues will reflect these seasonal patterns
and will vary within a particular year depending on whether its sales mix is
more heavily weighted toward the home education and entertainment or the school
markets. In addition, quarterly fluctuations in operating results will be
exacerbated by delays in new product introductions, the introduction of
competitive products, the popularity of particular multimedia platforms and a
variety of other factors relating to the distribution and development process
for the products involved, including software malfunctions in title offerings. A
significant portion of the Company's operating expenses are relatively fixed,
and certain expenditures are based on sales forecasts. If net sales do not meet
the Company's expectations in a given quarter, the Company's operating results
or financial condition could be adversely affected.
Lyriq's Dependence on a Significant Customer. The Princeton Review
accounted for $265,500, or 21%, and $211,500, or 25%, of Lyriq's total revenues
for the fiscal year ended June 30, 1995 and the nine months ended February 29,
1996, respectively. On a pro forma basis reflecting the Lyriq Acquisition, such
customer would have accounted for 16% and 14%, respectively, of the Company's
total revenues for the fiscal year ended May 31, 1995 and the nine months ended
February 29, 1996. Accordingly, the loss of such customer or a significant
decrease in the royalties the Company receives from The Princeton Review could
have a material adverse effect on the financial condition and results of
operations of the Company.
Dependence on Third Party Manufacturers. The Company's titles are
manufactured by third-party manufacturers and therefore the Company does not
have direct control over the quality of manufacturing. Additionally, some of the
third party manufacturers may publish competitive titles of their own, to which
preferential treatment may be given. Any of the foregoing would adversely affect
the Company's revenues from the sale of its titles. Management believes that
current arrangements for the manufacture of the Company's titles are
satisfactory for the Company's anticipated requirements. Nevertheless, there can
be no assurance that in the future these third
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<PAGE>
parties' manufacturing capacities will be sufficient to satisfy the Company's
requirements, that interruptions or delays in manufacturing will not adversely
affect the Company's operations, or that alternative manufacturing sources will
be available to the Company on commercially reasonable terms or at all. In
particular, 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.
Availability and Restrictive Nature of Licenses. The Company currently
licenses a wide variety of intellectual property from others for use in its
titles. There can be no assurance that the terms of these licenses will survive
the marketing lives of the titles to which they relate or that the Company will
be able to renew such licenses on commercially reasonable terms, if at all. The
Company expects to continue to incorporate the intellectual property of others
into the titles it develops in the future. As such it will need to obtain
licenses to use such intellectual property. The Company will attempt to obtain
future licenses on commercially reasonable terms and with terms of duration
which will survive the lives of the titles to which they relate. However, there
can be no assurance that the Company will be able to obtain licenses of
sufficient duration on commercially reasonable terms or will be able to renew
existing licenses on commercially reasonable terms. The inability to obtain or
renew such licenses, as the case may be, could have an adverse effect on the
business of the Company.
Software Technology; Lack of Patent Protection. 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 completed titles
developed by the Company. There can be no assurance that the steps taken by the
Company to protect its rights will be adequate to deter misappropriation,
especially since the Company operates in an industry in which revenues are
adversely affected by the unauthorized reproduction of products for commercial
sale, commonly referred to as "piracy." Moreover, although the Company does not
believe that it is infringing on the intellectual property rights of others,
there can be no assurance that such infringement claims will not be asserted
against the Company in the future and if an infringement claim is successful, it
could have a material adverse effect on the Company. Copyright and other
proprietary rights to material licensed for use on CD-ROM and other multimedia
platforms is a relatively new area of the law. Although the Company is not a
party to any such claim, there is the possibility of legal challenges in respect
of all such rights.
Control by Officers and Directors and Principal Stockholder;
Stockholders Agreement. The Company's officers and directors and their
affiliates currently own approximately 29.1% of the outstanding Common Stock and
have significant influence over the outcome of all matters submitted to the
stockholders for approval, including the election of directors of the Company.
Moreover, a stockholder of the Company individually and through related entities
beneficially owns 27.0% of the Company's Common Stock (consisting of (i) 760,093
shares of Common Stock, and (ii) 1,790,186 shares of Common Stock underlying
presently exercisable options and warrants) and accordingly if the presently
exercisable options and warrants are exercised, that stockholder will also have
significant influence over the outcome of all matters submitted to the
stockholders for approval, including the election of Directors. In addition, the
Company, John Ramo, Jolie Barbiere, Michael Alford, Zenon Slawinski and Andrew
Gyenes have entered into a Stockholders' Agreement which terminates in August
1997 with respect to the election of directors and provides for a seven-member
Board of Directors consisting of three nominees designated by Andrew Gyenes and
three nominees designated by John Ramo (provided that such nominees are
reasonably acceptable to each of Mr. Gyenes and Mr. Ramo) and one person
mutually agreed upon by Mr. Ramo and Mr. Gyenes. Each of John Ramo, Jolie
Barbiere, Michael Alford and Zenon Slawinski have agreed to vote all of their
shares in favor of the
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<PAGE>
election of such seven persons. The Company has also agreed to use its best
efforts to elect one designee selected jointly by Randal Hujar and Gary Skiba to
be a member of the Board of Directors until the earlier of February 28, 1998 or
the termination of the lock-up agreement between the Company and Messrs. Hujar
and Skiba.
Dependence on Management; Need to Attract Additional Personnel. The
Company is dependent upon the business and technical expertise of its executive
and creative personnel. In particular, the loss of the services of Andrew
Gyenes, the Chairman of the Board and Chief Executive Officer, could have a
material adverse effect upon the Company. There can be no assurance that an
adequate replacement could be found if the Company were to lose the services of
Mr. Gyenes. The Company has an employment agreement with Mr. Gyenes which
expires in October 1997. The Company has obtained a "key person" insurance
policy on the life of Mr. Gyenes in the amount of $1,000,000 under which the
Company is the beneficiary. In addition, the Company's ability to develop its
business will depend upon its ability to recruit and retain additional
personnel, including engineering, marketing and management personnel.
Competition for qualified personnel is intense and accordingly, there can be no
assurance that the Company will be able to retain or hire all of the necessary
personnel or that the Company may not otherwise need to change its personnel to
compete in its rapidly changing market. See "Management - Executive Officers and
Directors" and "- Employment Agreements."
Dilution. This Offering involves immediate dilution to holders of the
Warrants and the January 1994 Warrants of $1.84 per share, or 46% and $.19 per
share, or 8% respectively, representing the difference between the pro forma net
tangible book value per share of the Common Stock assuming the Warrants and the
January 1994 Warrants are exercised and the respective exercise price per share
of the Warrants and the January 1994 Warrants. See "Dilution."
No Dividends. The Company has never paid cash dividends on the Common
Stock. The Company intends to retain any future earnings to finance its growth.
Accordingly, any potential investor who anticipates the need for current
dividends from an investment in the Common Stock should not purchase any of the
shares of Common Stock offered hereby. See "Dividend Policy."
Effect of Outstanding Options and Warrants. Currently, not including
the Underwriter's UPO and the Underwriter's Purchase Option, there are
outstanding options and warrants to purchase, in the aggregate, 6,389,770 shares
of Common Stock at per share exercise prices ranging from $1.71 to $4.00. In
addition to the Underwriter's Purchase Option and the Underwriter's UPO, there
are outstanding options to purchase an aggregate of 1,138,097 shares of Common
Stock consisting of (i) options to purchase 576,097 shares of Common Stock at
exercise prices ranging from $1.71 to $3.75 per share granted under the 1994
Plan, of which options to purchase 298,252 shares of Common Stock are currently
exercisable; (ii) options to purchase 250,000 shares of Common Stock at exercise
prices ranging from $2.35 to $3.00 per share granted under the Consultant Plan,
all of which are currently exercisable; (iii) options to purchase 30,000 shares
of Common Stock at exercise prices of $3.00 and $3.75 per share granted under
the Directors Plan, all of which are currently exercisable; and (iv) options to
purchase 282,000 shares of Common Stock at exercise prices of $2.35 and $3.00,
all of which are currently exercisable. In addition to the Underwriter's UPO,
there are outstanding warrants to purchase an aggregate of 5,230,000 shares of
Common Stock consisting of (i) Warrants to purchase 5,121,468 shares of Common
Stock including (a) 800,000 Warrants issued in exchange for 800,000 May 1994
Warrants, (b) 540,000 Warrants issued in exchange for 540,000 January 1996
Warrants and (c) 1,481,468 Conversion Warrants, all of which will be currently
exercisable at a price of $4.00 per share until October 20, 1997; and (ii)
340,000 January 1994 Warrants which are currently exercisable at a price of
$2.35 per share until January 24, 1999. The exercise of the foregoing options
and warrants and the Underwriter's UPO (and the warrants included therein) and
the Underwriter's Purchase Option will dilute the percentage ownership of the
Company's stockholders and any sales in the public market of shares of Common
Stock underlying such securities may adversely effect prevailing market prices
for the Common Stock. Moreover, the terms upon which the Company will be able to
obtain additional equity capital may be adversely affected since the holders of
the outstanding securities will, to the extent they are able, likely exercise
them at a time when the Company could, in all likelihood, obtain any needed
capital on terms more favorable to the Company than those provided in the
options and the warrants.
-11-
<PAGE>
Registration Rights. The sale of 740,734 Conversion Shares has been
registered and the sale of 1,481,468 Conversion Warrants, 540,000 IPO Warrants
issued in exchange for the January 1996 Warrants and the issuance of the shares
of Common Stock underlying such warrants is being registered under the
Registration Statement of which this Prospectus forms a part. The holders of
such securities have agreed not to sell any of such securities for a period of
one year from May 15, 1996 without the Underwriter's consent. In addition, the
Company has entered into a registration rights agreement under which the Company
provides each of certain shareholders ("Sonic Group") with (i) "demand"
registration rights whereby each can, with certain exceptions, on two occasions
require the Company to register under the Securities Act the Common Stock held
by the Sonic Group and (ii) "piggyback" registration rights whereby each can,
with certain exceptions, require the Company to include the Common Stock it
holds in any registration statement filed by the Company. In addition, the
Company has entered into a registration rights agreement with Randal Hujar and
Gary Skiba providing for (i) "demand" registration rights whereby Messrs. Hujar
and Skiba can after February 28, 1997, with certain exceptions, require the
Company to register under the Securities Act the Common Stock they hold and (ii)
"piggyback" registration rights whereby Messrs. Hujar and Skiba can after
February 28, 1997, with certain exceptions, require the Company to include the
Common Stock they hold in any registration statement filed by the Company. The
Company has also entered into a registration rights agreement with other former
shareholders of Lyriq (holding in aggregate 110,694 shares of Common Stock)
providing for "piggyback" rights whereby such individuals, with certain
exceptions, can require the Company to include the Common Stock they hold in any
registration statement filed by the Company pursuant to the "demand"
registration rights of Messrs. Hujar and Skiba. The registration rights of any
of the holders could result in substantial future expense to the Company and
could adversely affect any future equity or debt financings by the Company.
Furthermore, the sale of the Common Stock or other securities held by or
issuable to the holders, or merely the potential of such sales, could have an
adverse effect on the market prices of the Company's securities. In addition,
the Company has granted certain demand and piggy-back registration rights to the
Underwriter with respect to the securities issuable upon exercise of the
Underwriter's UPO and the Underwriter's Purchase Option.
Future Sales of Common Stock. Of the 7,678,108 shares of Common Stock
currently outstanding, 4,736,673 have been registered and therefore are "freely
tradeable." In addition, 740,734 Conversion Shares, which have been registered
by means of a Registration Statement and may be sold by the holders thereof if
at the time of such sale there is a current prospectus relating to the
Conversion Shares (subject to the lock-up period described below). The remaining
2,200,701 shares of Common Stock are "restricted securities" as that term is
defined in Rule 144 under the Securities Act, and under certain circumstances
may be sold without registration pursuant to such rule. Of such outstanding
shares, 1,400,489 (of which 1,353,512 shares are subject to the lock-up period
described below) were available for sale pursuant to Rule 144 commencing May
1996, 75,000 shares will be available for sale pursuant to Rule 144 commencing
August 1996 and 725,212 shares (614,618 of which shares are subject to the
lock-up period described below) will be available for sale pursuant to Rule 144
commencing February 1998. All officers and directors of the Company as of May
15, 1996 (who hold in the aggregate 1,976,130 shares) have agreed that until the
earlier of two years from May 15, 1996 or the 20th day after the end of the
second consecutive whole fiscal quarter after May 15, 1996 during which the
Company had positive net income on a consolidated basis (each of such quarters
being referred to as a "Positive Quarter"), they will not sell any of their
shares without the prior consent of the Underwriter (unless such shares were
acquired in the open market), provided, however, that each officer and director
of the Company who was a stockholder of record as of December 29, 1995 and
Randal Hujar and Gary Skiba shall be permitted to sell at the earlier of one
year after May 15, 1996 or any time after the 20th day after the end of the
first Positive Quarter, up to 15% of the shares owned by such holder on the date
hereof. In addition, prior to February 28, 1997, Mr. Hujar may pledge up to
fifty percent of his Common Stock to cover personal expenses. The Selling
Securityholders have agreed that they will not sell the Conversion Shares, the
Conversion Warrants and the IPO Warrants they received in exchange for the
January 1996 Warrants until twelve months after May 15, 1996 without the
Underwriter's consent. The Company is unable to predict the effect that sales
made under Rule 144 or otherwise may have on the market price of the Common
Stock prevailing at the time of any such sales.
Possible Volatility of Securities Prices. The market price of Common
Stock has in the past been, and may in the future continue to be, volatile. A
variety of events, including quarter to quarter variations in operating results,
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<PAGE>
news announcements or the introduction of new products by the Company or its
competitors, as well as market conditions in the interactive multimedia industry
or changes in earnings estimates by securities analysts may cause the market
price of the Common Stock to fluctuate significantly. In addition, the stock
market in recent years has experienced significant price and volume fluctuations
which have particularly affected the market prices of equity securities of many
companies that service the software industry and which often have been unrelated
to the operating performance of such companies. These market fluctuations may
adversely affect the price of the Common Stock.
Qualification Requirements for Nasdaq Securities. The Common Stock is
presently quoted on Nasdaq, which is administered by the National Association of
Securities Dealers, Inc. (the "NASD"). For the Company's Common Stock to
continue to be eligible for inclusion on Nasdaq, the Company must, among other
things, maintain at least $2,000,000 in total assets and have at least
$1,000,000 of capital and surplus and the bid price of the Common Stock must be
at least $1.00 per share, provided, however, that, if the Company's Common Stock
falls below such minimum bid price, it will remain eligible for continued
inclusion if the market value of the public float is at least $1,000,000 and the
Company has at least $2,000,000 in capital and surplus. While the Company
presently meets the required standards, there can be no assurance that it will
continue to be able to do so. If it should fail to meet one or more of such
standards, its Common Stock would be subject to deletion from Nasdaq. If this
should occur, trading, if any, in the Common Stock, would then continue to be
conducted in the over-the-counter market on the OTC Bulletin Board, an
NASD-sponsored inter-dealer quotation system, or in what are commonly referred
to as "pink sheets." As a result, an investor may find it more difficult to
dispose of or to obtain accurate quotations as to the market value of, the
Company's Common Stock. In addition, if the Company's Common Stock ceases to be
quoted on Nasdaq and the Company fails to meet certain other criteria, they
would be subject to a Commission rule (Rule 15g-9) that imposes additional sales
practice requirements on broker-dealers who sell such Common Stock to persons
other than established customers and accredited investors. For transactions
covered by this rule, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, if the Company's Common
Stock were no longer quoted on Nasdaq, the rule may affect the ability of
broker-dealers to sell the Company's Common Stock and the ability of purchasers
in this offering to sell their Common Stock in the secondary market.
Issuance of Preferred Stock; Anti-Takeover Provisions. Pursuant to its
Certificate of Incorporation, as amended, the Company has an authorized class of
2,000,000 shares of Preferred Stock which may be issued by the Board of
Directors on such terms and with such rights, preferences and designations as
the Board may determine without any vote of the stockholders. Issuance of such
preferred stock, depending upon the rights, preferences and designations
thereof, may have the effect of delaying, deterring or preventing a change in
control of the Company. Issuance of additional shares of Common Stock could
result in the dilution of the voting power of the Common Stock purchased in this
Offering. In addition, certain "anti-takeover" provisions of the Delaware
General Corporation Law, among other things, may restrict the ability of the
stockholders to approve a merger or business combination or obtain control of
the Company.
USE OF PROCEEDS
If the Warrants and the January 1994 Warrants are exercised in full at
$4.00 and $2.35 per share, respectively, the Company would receive net proceeds
of approximately $21,285,000. However, there is no assurance that all or any
portion of the Warrants or the January 1994 Warrants will be exercised. The
funds raised by exercise of the Warrants and the January 1994 Warrants will be
retained and used for working capital and other general corporate purposes. The
Company will not receive any proceeds from the sale of Shares by the holders of
the Warrants.
DILUTION
As of February 29, 1996, the net tangible book value of the Company was
$(478,500) or $(.09) per share of Common Stock based on the 5,500,701 shares of
Common Stock outstanding. Net tangible book value per share
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represents the amount of the Company's total assets less intangible assets and
total liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the May 1996 Offering, including the conversion of
$2,250,000 of Convertible Notes into 740,734 Conversion Shares and the
repurchase of the Contribution Shares, and the receipt of net proceeds
(estimated to be approximately $21,285,000) from the exercise of all of the
Warrants and January 1994 Warrants offered hereby, the pro forma net tangible
book value of the Company at February 29, 1996 would have been $28,359,000 or
$2.16 per share of Common Stock, representing immediate dilution of
approximately 46% or $1.84 per share of Common Stock to investors upon the
exercise of Warrants and approximately 8% or $.19 per share of Common Stock to
investors upon exercise of the January 1994 Warrants. The following table
illustrates the per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Warrant Exercise price per share of Common Stock................. $4.00
January 1994 Warrant Exercise price per share of Common
Stock............................................................ $2.35
Net tangible book value per share of Common Stock at
February 29, 1996................................................ $(.09)
Increase in net tangible book value per share of Common
Stock at February 29, 1996 to reflect the May 1996 Offering...... 1.01
Increase attributable to exercise of Warrants and January 1994
Warrants......................................................... $1.15
Pro Forma net tangible book value per share of Common
Stock after exercise of Warrants and January 1994 Warrants....... $2.16 $2.16
Dilution to investors upon exercise of Warrants.................. $1.84
Dilution to investors upon exercise of January 1994 Warrants..... $.19
</TABLE>
DIVIDEND POLICY
The Company has never paid any cash dividends on the Common Stock and
it is currently the intention of the Company not to pay cash dividends on its
Common Stock in the foreseeable future. Management intends to reinvest earnings,
if any, in the development and expansion of the Company's business. Any future
declaration of cash dividends will be at the discretion of the Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, general economic conditions and other pertinent
factors.
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<PAGE>
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Common Stock
and Warrants is Continental Stock Transfer & Trust Company, New York, New York.
There is no warrant agent for the January 1994 Warrants.
PLAN OF DISTRIBUTION
This offering is self-underwritten; the Company has not employed an
underwriter for the issuance of the Common Stock upon the exercise of the
Warrants and the January 1994 Warrants and will bear all expenses of the
offering.
The Warrants may be exercised, at the discretion of the holder, by the
delivery to Continental Stock Transfer & Trust Company (the "Warrant Agent") at
2 Broadway, New York, New York 10004 of the Warrant certificate (the "Warrant
Certificate") accompanied by an election of exercise and payment of the warrant
exercise price for each share of Common Stock purchased in accordance with the
terms of such warrant. Payment must be made in the form of cash or a cashier's
or certified check payable to the order of the Company. Delivery of the
certificates representing the Warrant Shares will be made upon receipt of a
certificate representing the underlying stock purchase rights, duly executed for
transfer together with payment for the exercise price thereof. If fewer than all
Warrants are exercised, a new Warrant Certificate evidencing the Warrants
remaining unexercised will be issued to the Warrantholder. The January 1994
Warrants may be exercised in a similar manner except the January 1994 Warrants
should be delivered to the Company at 110 West 40th Street, Suite 2100, New
York, New York 10018, Attn: Kenneth Gruber.
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by Olshan Grundman Frome & Rosenzweig LLP, New York, New York.
EXPERTS
The financial statements of Enteractive, Inc. as of May 31, 1995 and
1994 and for each of the years in the two-year period ended May 31, 1995 and the
financial statements of Lyriq International Corporation as of June 30, 1995 and
1994 and for each of the years in the two-year period ended June 30, 1995 have
been included herein and in the Registration Statement of which this Prospectus
is a part, in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. The report of KPMG Peat
Marwick LLP covering the May 31, 1995 and 1994 financial statements of
Enteractive, Inc. refers to a change in the method of accounting for income
taxes.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ENTERACTIVE, INC.
Independent Auditors' Report............................................. F-3
Balance Sheets at May 31, 1995 and May 31, 1994.......................... F-4
Statements of Operations for the years ended May 31, 1995 and 1994....... F-5
Statements of Stockholders' Equity for the years ended May 31, 1995 and
1994.................................................................... F-6
Statements of Cash Flows for the years ended May 31, 1995 and 1994....... F-7
Notes to Financial Statements............................................ F-8
Consolidated Balance Sheets at February 29, 1996 (unaudited) and May 31,
1995.................................................................... F-16
Consolidated Statements of Operations for the nine months ended February
29, 1996 and February 28, 1995 (unaudited).............................. F-17
Consolidated Statements of Cash Flows for the nine months ended February
29, 1996 and February 28, 1995 (unaudited).............................. F-18
Notes to Condensed Financial Statements.................................. F-19
LYRIQ INTERNATIONAL CORPORATION
Independent Auditors' Report............................................. F-22
Balance Sheets at June 30, 1995 and June 30, 1994........................ F-23
Statements of Operations for the years ended June 30, 1995 and 1994...... F-24
Statements of Stockholders' Deficit for the years ended June 30, 1995 and
1994.................................................................... F-25
Statements of Cash Flows for the years ended June 30, 1995 and 1994...... F-26
Notes to Financial Statements............................................ F-27
Statements of Operations for the nine months ended February 29, 1996 and
February 28, 1995 (unaudited)........................................... F-31
Statements of Stockholders' Deficit for the nine months ended February
29, 1996 (unaudited).................................................... F-32
Statements of Cash Flows for the nine months ended February 29, 1996 and
February 28, 1995 (unaudited)........................................... F-33
Notes to Financial Statements............................................ F-34
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
PRO FORMA FINANCIAL INFORMATION ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL
CORPORATION*
Pro Forma Combined Statement of Operations for the nine months ended
February 29, 1996 (unaudited)........................................... F-36
Pro Forma Combined Statement of Operations for the year ended May 31,
1995 (unaudited)........................................................ F-38
Notes to Pro Forma Combined Financial Statements (unaudited)............. F-40
</TABLE>
- --------
* Lyriq International Corporation was acquired by Enteractive on February 29,
1996. The transaction was accounted for as a purchase and the balances of
Lyriq International Corporation are included in Enteractive, Inc.'s
consolidated balance sheet at February 29, 1996.
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Enteractive, Inc.:
We have audited the accompanying balance sheets of Enteractive, Inc. as of May
31, 1995 and 1994, and the related statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 misstatement. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Enteractive, Inc. as of May
31, 1995 and 1994, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the financial statements, the Company adopted a new
method of accounting for income taxes in fiscal 1994.
KPMG PEAT MARWICK LLP
New York, New York
July 27, 1995
F-3
<PAGE>
ENTERACTIVE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31
-----------------------
1995 1994
----------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents................................ $ 2,932,400 $2,343,000
Investments......................................... 1,116,100 449,500
Accounts receivable................................. 126,700 73,900
Income taxes receivable............................. 30,100 39,400
Inventories......................................... 44,000 --
Prepaid expenses and other.......................... 45,900 5,400
Debt issue costs.................................... -- 44,000
----------- ----------
Total current assets.............................. 4,295,200 2,955,200
Investments........................................... -- 491,800
Property and equipment, net........................... 319,300 215,000
Other................................................. 15,700 21,100
----------- ----------
$ 4,630,200 $3,683,100
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.................................... $ 439,100 $ 241,500
Accrued expenses.................................... 307,600 122,300
Short-term borrowings............................... -- 75,000
Current maturities of long-term debt................ 15,200 86,500
Current maturities of obligations under capital
leases............................................. 4,300 5,400
Convertible notes payable, net of $150,000
discount........................................... -- 1,850,000
----------- ----------
Total current liabilities......................... 766,200 2,380,700
Long-term debt, excluding current maturities.......... -- 16,200
Obligations under capital leases, excluding current
maturities........................................... -- 4,700
----------- ----------
Total liabilities................................. 766,200 2,401,600
Commitments and contingencies
Stockholders' Equity
Preferred Stock $.01 par value, 2,000,000 shares
authorized and none issued......................... -- --
Common Stock $.01 par value, 15,000,000 shares
authorized; 4,775,489 and 3,075,489 shares issued
and outstanding for 1995 and 1994, respectively.... 47,800 30,800
Additional paid-in capital.......................... 8,130,300 1,567,400
Accumulated deficit................................. (4,314,100) (316,700)
----------- ----------
Total stockholders' equity........................ 3,864,000 1,281,500
----------- ----------
$ 4,630,200 $3,683,100
=========== ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ENTERACTIVE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------
1995 1994
----------- ----------
<S> <C> <C>
Product development revenue.......................... $ 365,600 $2,371,500
Royalty revenue...................................... 3,500 10,700
----------- ----------
Total revenues................................... 369,100 2,382,200
Cost of development revenue.......................... 285,600 1,946,600
Research and development expenses.................... 2,487,600 173,200
Marketing and selling expenses....................... 521,500 --
General and administrative expenses.................. 1,044,200 644,500
----------- ----------
Total costs and expenses......................... 4,338,900 2,764,300
Operating loss....................................... (3,969,800) (382,100)
----------- ----------
Other income (expense):
Interest expense................................... (252,900) (30,600)
Interest income.................................... 214,300 15,600
Other.............................................. 11,000 (2,600)
----------- ----------
Loss before income taxes............................. (3,997,400) (399,700)
Income tax benefit................................... -- (26,500)
----------- ----------
Net loss............................................. $(3,997,400) $ (373,200)
=========== ==========
Loss per common and common equivalent share.......... $ (0.93) $ (0.11)
=========== ==========
Weighted average shares of common stock and common
stock equivalents................................... 4,275,908 3,419,409
=========== ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ENTERACTIVE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1995 AND 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
----------------- ------------------ PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------- -------- --------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1993.... -- $ -- 1,212 $ 2,400 $ 58,300 $ 56,500 $ 117,200
Conversion of 1,212
shares of Sonic common
stock pursuant to
business combination... -- -- 2,474,277 22,400 (22,400) -- --
Issuance of common stock
at incorporation....... -- -- 600,000 6,000 1,525,100 -- 1,531,100
Issuance of common stock
warrant................ -- -- -- -- 150,000 -- 150,000
Adjustment for business
combination............ -- -- -- -- (143,600) -- (143,600)
Net loss................ -- -- -- -- -- (373,200) (373,200)
------- -------- --------- ------- ---------- ----------- -----------
Balance May 31, 1994.... -- -- 3,075,489 30,800 1,567,400 (316,700) 1,281,500
Repurchase and
retirement of common
stock.................. -- -- (600,000) (6,000) (994,000) -- (1,000,000)
Sale of common stock,
net.................... -- -- 2,300,000 23,000 7,556,900 -- 7,579,900
Net loss................ -- -- -- -- -- (3,997,400) (3,997,400)
------- -------- --------- ------- ---------- ----------- -----------
Balance May 31, 1995.... -- $ -- 4,775,489 $47,800 $8,130,300 $(4,314,100) $ 3,864,000
======= ======== ========= ======= ========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
ENTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------
1995 1994
----------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss............................................ $(3,997,400) $ (373,200)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 314,000 100,600
Gain on sale of investments....................... (8,800) --
(Gain) loss on disposal of assets................. (1,100) 1,200
Changes in assets and liabilities:
Accounts receivable............................... (52,800) (22,000)
Income taxes receivable........................... 9,300 (39,500)
Inventories....................................... (44,000) --
Prepaid expenses and other........................ (40,500) (2,700)
Other assets...................................... 5,400 900
Accounts payable.................................. 197,600 202,700
Accrued expenses.................................. 185,300 89,000
Deferred revenues................................. -- (287,600)
----------- ----------
Net cash used in operating activities........... (3,433,000) (330,600)
----------- ----------
Cash flows from investing activities
Purchases of investments............................ (1,831,700) --
Proceeds from sale of investments................... 1,665,700 --
Cash acquired in merger............................. -- 2,325,800
Purchases of property and equipment................. (223,200) (80,000)
----------- ----------
Net cash (used in) provided by investing
activities..................................... (389,200) 2,245,800
----------- ----------
Cash flows from financing activities
Proceeds from sale of common stock, net............. 7,579,900 --
Proceeds from short-term borrowings................. -- 75,000
Proceeds from borrowings under long-term debt....... -- 35,000
Repurchase and retirement of common stock........... (1,000,000) --
Repayment of short-term borrowings.................. (75,000) --
Repayment of convertible notes payable.............. (2,000,000) --
Principal payments under long-term debt............. (87,500) (166,000)
Principal payments under capital lease obligations.. (5,800) (10,900)
----------- ----------
Net cash provided by (used in) financing
activities..................................... 4,411,600 (66,900)
Net increase in cash and equivalents.................. 589,400 1,848,300
Cash and equivalents
Beginning of year................................... 2,343,000 494,700
----------- ----------
End of year......................................... $ 2,932,400 $2,343,000
=========== ==========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
ENTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995
(1) BASIS OF PRESENTATION AND BUSINESS COMBINATION
Enteractive, Inc. (Enteractive) was formed in December 1993 as a wholly
owned subsidiary of The Continuum Group through an initial cash investment of
$1,531,097, net of associated costs of $18,903, in return for 600,000 shares
of Enteractive's common stock. In May 1994, as a condition to the merger
agreement described below, Enteractive raised an additional $2,000,000 through
the sale of convertible notes and the issuance of warrants to purchase 800,000
shares of the Company's common stock (see note 8).
On May 10, 1994, Enteractive consummated a merger with Sonic Images
Productions, Inc. (Sonic) whereby 2,475,489 shares of Enteractive's common
stock was exchanged for 100% of the outstanding common stock of Sonic. The
merger was accounted for under the purchase method of accounting with Sonic as
the acquiring entity, as its former shareholders received 80% of the voting
common stock of the surviving entity (the Company). Sonic was a privately-held
multimedia software development company without a readily determinable market
value. Accordingly, the consideration for the purchase was determined to be
the fair value of the net assets acquired from Enteractive. The accompanying
financial statements include the historical results of Sonic and reflect the
results of operations of the Company from the date of the merger. The capital
stock accounts of the former Sonic have been adjusted to reflect the capital
stock of the surviving entity, Enteractive. 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. Total costs incurred for these activities from
Enteractive's inception date until the effective date of the merger amounted
to $143,600. This amount has been reflected as a reduction of additional paid-
in capital in the accompanying financial statements.
(2) INITIAL PUBLIC OFFERING
On October 20, 1994, 2,300,000 units of interest in the Company were sold in
an initial public offering filed with the Securities and Exchange Commission
("SEC") on Form SB-2. 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 at any time during the period from October 20, 1995 to
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 from October 20, 1995 through October 20, 1999, and have certain
"piggy back" and demand registration rights.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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. Cash
equivalents of $2,662,600 and $2,307,300 at May 31, 1995 and 1994,
respectively, consist of cash held in interest-bearing money market accounts.
(b) Investments
Investments at May 31, 1995, consist of certificates of deposit and are
carried at cost, which approximates market. Investments at May 31, 1994,
consists of certain debt securities of the U.S. Government and, in accordance
with provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain
F-8
<PAGE>
ENTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investments in Debt and Equity Securities, have been classified as "available
for sale" and are carried at fair value.
(c) Revenue Recognition
Revenues under fixed price product development contracts are recognized
using the percentage of completion method based on progress to date, which is
measured by comparing costs to date to total estimated costs. Losses on
contracts, if any, are recognized in the period they become estimable. Royalty
revenue is recognized when earned.
(d) Inventories
Inventories of multimedia software are recorded at the lower of cost (on a
first-in, first-out basis) or market.
(e) Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line depreciation method, except for
the leasehold improvements which are amortized over the lesser of the lease
term or the life of the related asset.
(f) Income Taxes
Effective as of June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. The cumulative
effect of the change in the method of accounting for income taxes was not
material. 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.
(g) 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. There were no capitalized software development costs at May 31,
1995 or 1994 due to the short period of time and insignificance of costs
incurred from the time the Company's products were determined to be
technologically feasible and the time they were available for general release
to the public.
F-9
<PAGE>
ENTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(h) 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 for the
years ended May 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Weighted average shares of common stock outstanding,
exclusive of issuance's within twelve months prior to
the IPO............................................... 4,031,928 2,475,489
Shares issued within twelve months prior to the IPO
assumed to be outstanding for the entire period....... -- 600,000
Incremental shares assumed to be outstanding related to
common stock options and warrants granted within
twelve months prior to the IPO........................ 243,980 343,920
--------- ---------
4,275,908 3,419,409
========= =========
</TABLE>
(4) INVESTMENTS
Investments at May 31, 1995, consist of certificates of deposit maturing at
various dates through November 1995. Investments at May 31, 1994, consisted of
U.S. Treasury Notes and Federal agency securities having a fair value of
$941,300, which approximated the amortized cost.
(5) PROPERTY AND EQUIPMENT
Property and equipment, at May 31, 1995 and 1994, consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Computer and production equipment..................... $ 791,100 $ 585,500
Furniture and other equipment......................... 54,100 41,000
Leasehold improvements................................ 200,300 193,700
---------- ---------
1,045,500 820,200
Accumulated depreciation and amortization............. (726,200) (605,200)
---------- ---------
Property and equipment, net........................... $ 319,300 $ 215,000
========== =========
</TABLE>
(6) ACCRUED EXPENSES
At May 31, 1995, accrued expenses totaled $307,600 and included $163,100 of
accrued compensation.
(7) SHORT-TERM BORROWINGS
At May 31, 1994, the Company had an outstanding line of credit agreement
which provided for borrowings up to $75,000. The line of credit agreement
expired in June 1994 at which time the Company repaid all outstanding amounts.
(8) CONVERTIBLE NOTES PAYABLE
On May 9, 1994, the Company entered into a series of debt financing
agreements. Under the terms of these agreements, the Company received
$2,000,000 in cash in exchange for the issuance of $2,000,000 in 10%
F-10
<PAGE>
ENTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
convertible notes payable and common stock purchase warrants (note 10) for the
purchase of 800,000 shares of the Company's common stock. The estimated value
of the warrants at the time of issuance was $150,000, which was reflected as a
component of equity and unamortized discount on the convertible notes payable.
In accordance with its planned use of the proceeds received from the initial
public offering, the Company, in November 1994, repaid all principal and
interest amounts outstanding under its convertible notes payable.
(9) LONG-TERM DEBT
Long-term debt at May 31, 1995 and 1994, consists of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Note payable in monthly installments of $1,173, including
interest at the lending institution's prime rate (7.5% at
May 31, 1995) plus 2%, (note is collateralized by certain
property and equipment).................................. $12,600 $24,200
Various notes payable with interest approximating prime,
repaid in fiscal 1995.................................... -- 68,400
Other notes payable....................................... 2,600 10,100
------- -------
Total long term debt.................................. 15,200 102,700
Less current maturities................................. 15,200 86,500
------- -------
Long term debt, excluding current maturities.......... $ -- $16,200
======= =======
</TABLE>
Interest costs of approximately $102,900 (principally relating to a bridge
loan repaid in October 1994) and $19,100 were paid in fiscal 1995 and 1994,
respectively.
F-11
<PAGE>
ENTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10) STOCK OPTIONS AND WARRANTS
The Company has reserved 750,000 shares of unissued common stock under its
1994 Incentive and Non-qualified Stock Option Plan (the "1994 Plan") for
employees. At May 31, 1995, 469,770 options have been granted under the 1994
Plan, of which 427,217 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. A
summary of all stock option transactions of the Company is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS PRICE PER SHARE
----------------- ---------------
<S> <C> <C>
Outstanding May 31, 1993
Granted.................................. 531,510 $1.71-3.00
Exercised................................ -- --
Canceled................................. -- --
--------- ----------
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
========= ==========
Exercisable at May 31, 1995................ 523,340 $1.71-3.00
========= ==========
</TABLE>
On August 12, 1994, the Company's Board of Directors increased the number of
shares reserved under the 1994 Plan from 500,000 to 750,000 shares. In
addition, the Board approved a new stock option plan for consultants under
which 250,000 shares of common stock have been reserved for issuance. 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 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 will be recognized over the period the services are provided
Under a separate Stock Option Plan for Outside Directors, each person who is
an outside director on January 1 of each calendar year, commencing January 1,
1996, shall be granted 5,000 options to purchase shares of common stock of the
Company. Approval of this option plan is subject to approval by the Company's
shareholders.
In December 1994, the Company registered with the SEC 800,000 common stock
warrants which were issued in May 1994 in connection with the issuance of
convertible notes payable, which were repaid in October 1994. The warrants
entitle the holder to purchase one share of common stock for $4.00 during the
two-year period commencing October 20, 1995.
In connection with the initial capitalization of the Company, the Company
issued warrants to purchase 340,000 shares of common stock at $2.35 per share.
The warrants are currently exercisable and expire in January 1999. No value
was ascribed to these warrants.
F-12
<PAGE>
ENTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
All of the warrants issued by the Company carry certain limited "piggyback"
registration rights which provide the warrant holders with the right to have
the shares into which the warrants have been or will be converted included in
any registration statement filed by the Company with the Securities and
Exchange Commission, other than a registration statement filed in connection
with an IPO or on Forms S-4 or S-8. Additionally, certain stockholders have
entered into demand registration rights agreements with the Company whereby
they can require the Company, with certain exceptions, to register shares
under the Securities Act of 1933.
(11) 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.
(12) INCOME TAXES
Income tax benefit consists of the following for the years ended May 31,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Current:
Federal................................................. $ -- $(13,700)
State................................................... -- (12,800)
-------- --------
-- (26,500)
======== ========
Deferred:
Federal................................................. -- --
State................................................... -- --
-------- --------
$ -- $(26,500)
======== ========
</TABLE>
Income tax benefit amounted to $26,500 for 1994, an effective rate of 7
percent. The actual benefit differs from the "expected" tax benefit for 1995
and 1994, computed by applying the U.S. Federal corporate tax rate of 34
percent to loss before income taxes, as follows:
<TABLE>
<CAPTION>
1994 1994
----------- ---------
<S> <C> <C>
Computed "expected" tax benefit.................... $(1,359,100) $(135,900)
Increase (reduction) in income taxes resulting
from:
State income taxes, net of Federal benefit....... (185,700) (8,400)
Increase in valuation allowance, primarily due to
Federal net operating loss carry forwards....... 1,537,800 105,300
Other............................................ 7,000 12,500
----------- ---------
$ -- $ (26,500)
=========== =========
</TABLE>
F-13
<PAGE>
ENTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May 31,
1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards................. $ 1,582,600 $ 108,900
Accrued expenses.................................. 64,000 --
Valuation allowance............................... (1,643,100) (105,400)
----------- ---------
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................ $ -- $ --
=========== =========
</TABLE>
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. Management considers
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies which can be implemented by the Company in
making this assessment. 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 $1,643,000 at May 31,1995, based upon the provisions
of Statement of Financial Accounting Standard No. 109, the Company's
historical taxable losses and the lack of offsetting objective evidence, the
Company's projected taxable loss through May 31, 1997 and the fact that the
Company cannot produce reasonably reliable projections during 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 a refund is expected in fiscal 1996. At May 31, 1995, the
Company had available approximately $4,100,000 of tax loss carry forwards
which expire in years 2009 through 2010.
(13) 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, 1995 and 1994.
(14) COMMITMENTS
(a) Leases
The Company leases its office facilities under several non-cancelable
operating leases which expire at various times through May 31, 1997. The
following is a schedule by years of future minimum lease commitments required
under the Company's non-cancelable operating leases:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-----------------
<S> <C>
1996.............................................................. $175,700
1997.............................................................. 182,400
--------
$358,100
========
</TABLE>
F-14
<PAGE>
ENTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for operating leases for 1995 and 1994 approximated $129,700
and $136,500, respectively.
(b) Employment Agreements
The Company has entered into employment agreements with certain key
executives and employees. Minimum salary commitments under these agreements
are approximately $585,000, $485,000, and $185,400 for the years ending May
31, 1996, 1997, and 1998, respectively.
(15) BUSINESS AND CREDIT CONCENTRATIONS
During 1994 approximately $1,450,000 of the Company's total revenues were
received under a grant from the National Science Foundation (NSF). The grant
was used for the development of a specific educational multimedia product.
Under the terms of the grant, the Company owns all rights to the completed
product; however, the Company must provide the NSF with a royalty-free license
to use the material for government purposes and a percentage of the Company's
royalties earned on sales of the initial version of the product to the
American Academy for the Advancement of Sciences. The product was
substantially completed as of May 31, 1994, and no additional funds were
received under this grant in fiscal 1995.
In addition there was one customer that comprised 25% of total revenue in
1995 and 1994 and two other customers that comprised 51% and 20% of total
revenue in 1995.
(16) REPURCHASE AND RETIREMENT OF COMMON STOCK
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.
F-15
<PAGE>
ENTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29, MAY 31,
1996 1995
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents.......................... $ 1,842,000 $ 2,932,400
Investments................................... 30,400 1,116,100
Accounts receivable, net...................... 649,200 126,700
Income taxes receivable....................... 16,400 30,100
Inventories................................... 303,700 44,000
Debt issuance costs........................... 226,700 --
Prepaid expenses and other.................... 25,900 45,900
------------ -----------
Total current assets........................ 3,094,300 4,295,200
Property and equipment, net..................... 261,900 319,300
Capitalized software, net....................... 1,177,800 --
Other........................................... 24,200 15,700
------------ -----------
$ 4,558,200 $ 4,630,200
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.............................. $ 962,400 $ 439,100
Accrued expenses.............................. 354,800 307,600
Notes payable................................. 123,600 15,200
Convertible promissory notes.................. 2,190,000 --
Obligations under capital leases.............. 1,400 4,300
------------ -----------
Total current liabilities................... 3,632,200 766,200
Commitments and contingencies
Stockholders' Equity
Preferred Stock $.01 par value, 2,000,000
shares authorized, none issued............... -- --
Common Stock $.01 par value, 15,000,000 shares
authorized; 5,500,701 and 4,775,489 shares
issued and outstanding February 29, 1996 and
May 31, 1995, respectively................... 55,000 47,800
Additional paid-in capital...................... 11,563,900 8,130,300
Accumulated deficit............................. (10,692,900) (4,314,100)
------------ -----------
Total stockholders' equity.................. 926,000 3,864,000
------------ -----------
$ 4,558,200 $ 4,630,200
============ ===========
</TABLE>
See notes to financial statements.
F-16
<PAGE>
ENTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
Product sales...................................... $ 324,800 $ --
Product development revenue........................ 257,700 292,600
Royalty revenue.................................... 103,300 2,400
----------- -----------
Total revenues................................. 685,800 295,000
Cost of product sales.............................. 77,600 --
Cost of development revenue........................ 225,500 237,600
Research and development expenses.................. 2,301,500 1,592,900
Marketing and selling expenses..................... 1,354,700 117,600
General and administrative expenses................ 1,246,900 756,200
Acquired in-process research and development....... 1,915,100 --
----------- -----------
Total costs and expenses....................... 7,121,300 2,704,300
Operating loss..................................... (6,435,500) (2,409,300)
Other income (expense):
Interest expense................................. (58,200) (252,000)
Interest income.................................. 110,000 138,400
Other............................................ 4,900 10,300
----------- -----------
Net loss........................................... $(6,378,800) $(2,512,600)
=========== ===========
Loss per common and common equivalent share........ $ (1.34) $ (0.62)
=========== ===========
Weighted average shares of common stock and common
stock equivalent.................................. 4,775,489 4,057,812
=========== ===========
</TABLE>
See notes to financial statements.
F-17
<PAGE>
ENTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
FEB. 29, FEB. 28,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................... $(6,378,800) $(2,512,600)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 287,400 268,900
Acquired in-process research and development...... 1,915,100 --
Gain on sale of investments....................... -- (8,800)
Gain on disposal of assets........................ (9,000) --
Changes in assets and liabilities net of acquisi-
tion of Lyriq:
Accounts receivable............................... (101,000) (87,200)
Income taxes receivable........................... 13,700 9,300
Inventories....................................... (140,200) --
Prepaid expenses and other........................ 30,400 (53,100)
Other assets...................................... (2,800) (1,800)
Accounts payable.................................. 271,400 22,800
Accrued expenses.................................. (194,000) 125,500
----------- -----------
Net cash used in operating activities............ (4,307,800) (2,237,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments................. 1,085,700 950,100
Notes receivable.................................. (285,800) --
Cash acquired from Lyriq acquisition.............. 11,300 --
Purchases of property and equipment............... (35,700) (165,800)
----------- -----------
Net cash provided by investing activities........ 775,500 784,300
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obliga-
tions............................................ (2,900) (4,400)
Repayment of short-term borrowings................ (15,200) (75,000)
Principal payments under long-term debt........... -- (82,400)
Principal payments under convertible notes pay-
able............................................. -- (2,000,000)
Repurchase and retirement of common stock......... -- (1,000,000)
Proceeds from issuance of convertible notes, net.. 2,460,000 --
Proceeds from sale of common stock, net........... -- 7,579,800
----------- -----------
Net cash provided by financing activities........ 2,441,900 4,418,000
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS.. (1,090,400) 2,965,300
CASH AND EQUIVALENTS
Beginning of period................................ 2,932,400 2,343,000
----------- -----------
End of period...................................... $ 1,842,000 $ 5,308,300
=========== ===========
</TABLE>
See notes to financial statements.
F-18
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and in the opinion of
management contain all adjustments (consisting of only normal recurring
entries) necessary to present fairly the Company's interim financial
statements. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The interim financial statements
should be read in conjunction with the Company's financial statements and
related notes in the May 31, 1995 Annual Report on Form 10-KSB. The results
for the three and nine month period ended February 29, 1996 are not
necessarily indicative of the results to be obtained for the full year.
2. BUSINESS
The Company's primary business is the development and publication of
proprietary entertainment and educational interactive multimedia software for
distribution on personal computers utilizing the CD-ROM platform. Initial
shipment of these products commenced in June 1995 and represent the first
sales of titles published by the Company. To a limited extent, the Company
continues to develop interactive titles for others.
3. 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.
4. CONVERTIBLE PROMISSORY NOTES
On January 23, 1996, the Company consummated a $2,700,000 bridge financing
through the issuance of 54 units, each consisting of a $50,000 unsecured
convertible promissory note and 10,000 warrants. Each warrant will enable the
holder to purchase one share of common stock at $4.00 per share. The promissory
notes are convertible into a number of common shares equal to the principal of
the notes divided by 90% of the $3.375 per share offering price of the Company's
common stock in its May 1996 public offering (Note 7) plus twice that number of
warrants to purchase common stock at $4.00 per share. Debt acquisition costs
totaled $240,000.
The fair market value of the warrants was $540,000 at 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.
The convertible notes bear interest at 10% per annum through June 30, 1996,
and thereafter until paid at 15% per annum, with principal and interest due the
earlier of July 23, 1997 or the closing of a public offering of shares of the
Company's common stock. 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 stock and 1,481,468 warrants at the
closing of the May 1996 public offering (Note 7). The remaining $450,000 of
convertible promissory notes were repaid at that time.
5. MERGER
On February 29, 1996, the Company completed its merger with Lyriq
International Corporation, a developer and publisher of interactive multimedia
software, pursuant to an Agreement and Plan of Merger, whereby Lyriq
F-19
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 beginning on February 29, 1996.
The purchase price was determined as follows:
<TABLE>
<S> <C>
725,212 shares of Enteractive common stock at $4.00 per
share........................................................ $2,900,848
Excess of fair value of liabilities assumed over assets ac-
quired of Lyriq.............................................. 247,050
Acquisition costs............................................. 52,102
----------
Total....................................................... $3,200,000
==========
The acquisition price was allocated as follows:
In-process research and development expense................... $1,915,156
Capitalized software.......................................... 1,284,844
----------
Total....................................................... $3,200,000
==========
</TABLE>
The Company recorded an expense of $1,915,100 on February 29, 1996 for the
acquired in-process research and development, including certain core
technology, that will be used in the development of additional titles in the
future. The statement of operations charge 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) and
the technologies have no alternative future use.
Capitalized software will be amortized over a three year period.
6. UNAUDITED PRO FORMA INFORMATION
The following unaudited combined pro forma information shows the results of
the Company's operations for the nine month periods presented had the merger
with Lyriq occurred at the beginning of each period.
<TABLE>
<CAPTION>
NINE MONTHS ENDING
------------------------
FEBRUARY FEBRUARY
29, 28,
1996 1995
----------- -----------
<S> <C> <C>
Total revenues.................................... $ 1,548,200 $ 1,331,300
Net loss.......................................... $(5,060,600) $(2,787,000)
Net loss per share................................ $ (.92) $ (0.58)
</TABLE>
The 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. Pro-forma adjustments included
amortization of acquired capitalized software over three years.
F-20
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. SUBSEQUENT EVENTS
On March 29, 1996 the Company amended its charter to increase the number of
authorized common shares from 15,000,000 to 30,000,000. In addition the
Company increased the number of shares authorized for issuance under its stock
option plans as follows:
<TABLE>
<CAPTION>
PLAN FROM TO
---- ------- ---------
<S> <C> <C>
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
</TABLE>
On May 15, 1996, the Company consummated a public offering (May 1996 public
offering) to sell 2,415,000 shares of the Company's common stock. Net proceeds
to the Company were approximately $6,873,000. During the quarter ended May 31,
1996, the Company incurred one-time charges for the write-off of debt
acquisition costs and the discount on the Convertible Notes totalling $736,700,
based on the balances at February 29, 1996.
In December 1995, the Company entered into an agreement with certain of its
officers pursuant to which the Company repurchased simultaneously with the
closing of the May 1996 Public Offering of common stock, an aggregate of
1,000,000 shares of common stock at $1.00 per share. Under the purchase
agreement one third of the purchase price was paid at the closing of the May
1996 public offering with the balance payable in two equal installments of
$333,333 each in May 1997 and May 1998. The outstanding balance will accrue
interest at the prime rate and is payable quarterly.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Lyriq International Corporation:
We have audited the accompanying balance sheets of Lyriq International
Corporation as of June 30, 1995 and 1994, and the related statements of
operations, stockholders' deficit and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 misstatement. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Lyriq International
Corporation as of June 30, 1995 and 1994, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
March 1, 1996
F-22
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
-------------------
1995 1994
--------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash................................................... $ 8,638 $ 24,200
Accounts receivable, net............................... 233,030 115,346
Inventories............................................ 103,418 34,125
Prepaid expenses and other............................. 19,807 1,646
--------- --------
Total current assets................................. 364,893 175,317
Property and equipment, net.............................. 18,595 38,888
Other.................................................... 5,795 5,795
--------- --------
$ 389,283 $220,000
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable....................................... $ 285,459 $ 57,865
Accrued expenses....................................... 163,983 12,700
Notes payable.......................................... 54,590 0
Convertible debt....................................... 0 100,000
16,743 49,470
--------- --------
Total current liabilities............................ 520,775 220,035
Commitments and contingencies
Stockholders' Deficit
Common Stock, no par value, 1,250,000 shares authorized,
895,525 and 845,500 shares issued and outstanding at
June 30, 1995 and 1994, respectively.................... 101,000 1,000
Accumulated deficit...................................... (232,492) (1,035)
--------- --------
Total stockholders' deficit.......................... (131,492) (35)
--------- --------
$ 389,283 $220,000
========= ========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
--------------------
1995 1994
---------- --------
<S> <C> <C>
Product revenues......................................... $ 617,536 $206,339
Product development revenue.............................. 162,132 171,262
Royalty and other revenue................................ 464,906 47,031
---------- --------
Total revenues....................................... 1,244,574 424,632
Cost of product revenues................................. 250,932 51,098
Cost of product development revenue...................... 185,225 65,806
Research and development expenses........................ 342,444 175,103
Marketing and selling expenses........................... 431,077 52,858
General and administrative expenses...................... 254,894 88,428
---------- --------
Total operating expenses............................. 1,464,572 433,293
Operating loss........................................... (219,998) (8,661)
Other income (expense):
Interest expense....................................... (10,023) (1,963)
Other.................................................. (821) (2,558)
---------- --------
Loss before income taxes................................. (230,842) (13,182)
Provision for income taxes............................... 615 1,831
---------- --------
Net loss................................................. $ (231,457) $(15,013)
========== ========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
STATEMENTS OF STOCKHOLDER'S DEFICIT
YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
---------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, June 30, 1993............... 845,500 $ 1,000 $ 13,978 $ 14,978
Net Loss............................. -- -- (15,013) (15,013)
------- -------- --------- ---------
Balance, June 30, 1994............... 845,500 1,000 (1,035) (35)
Shares issued upon conversion of
debt................................ 50,025 100,000 -- 100,000
Net loss............................. -- -- (231,457) (231,457)
------- -------- --------- ---------
Balance, June 30, 1995............... 895,525 $101,000 $(232,492) $(131,492)
======= ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net loss............................................... $(231,457) $(15,013)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 19,177 17,345
Loss on disposal of assets............................. 1,802 --
Changes in assets and liabilities:
Accounts receivable.................................. (117,684) (111,739)
Inventories.......................................... (69,293) (15,188)
Prepaid expenses and other........................... (18,161) 354
Other assets......................................... -- 1,255
Accounts payable..................................... 227,594 34,073
Accrued expenses..................................... 151,283 11,250
--------- ---------
Net cash used in operating activities.............. (36,739) (77,663)
--------- ---------
Cash flows from investing activities
Purchases of property and equipment.................... (686) (9,758)
--------- ---------
Net cash used in investing activities.............. (686) (9,758)
--------- ---------
Cash flows from financing activities
Short-term borrowings.................................. 54,590 --
Proceeds from issuance of convertible debt............. -- 100,000
(Repayment of) proceeds from shareholder loans......... (32,727) 8,206
--------- ---------
Net cash provided by financing activities.......... 21,863 108,206
Net (decrease) increase in cash and equivalents.... (15,562) 20,785
Cash
Beginning of period.................................... 24,200 3,415
--------- ---------
End of period.......................................... $ 8,638 $ 24,200
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................. $ 11,266 $ 4,877
Cash paid during the year for income taxes............. $ 615 $ 1,831
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
(1) BUSINESS
Lyriq International Corporation (the Company) was founded in December 1991
and is primarily engaged in the development of interactive multimedia titles
for the home education and recreation markets. The Company is currently
developing software for the CD-ROM platform as well as the Internet and
commercial on-line services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash
Cash of $8,638 and $24,200 at June 30, 1995 and 1994, respectively, consists
of cash held in interest-bearing commercial bank accounts.
(b) Revenue Recognition
Sales and related costs are recorded by the Company upon shipment of
products provided no significant vendor obligations remain and collection of
the resulting receivable is deemed probable. The Companys agreements with
certain product distributors and retailers permit them to exchange or return
products for which the Company provides an allowance. Royalty revenue is
recognized when earned. Product development revenue is recognized as the
services are provided.
(c) Inventories
Inventories of multimedia software and related components are recorded at
the lower of cost (on a first-in, first-out basis) or market.
(d) Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives of 3 to 5 years using the straight-line depreciation
method, except for the leasehold improvements which are amortized over the
lesser of the lease term or the life of the related asset.
(e) 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.
(f) 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. There were no capitalized software development costs at June 30, 1995
or 1994 due to the short period of time and insignificance of costs incurred
from the time the Company's products were determined to be technologically
feasible and the time they were available for general release to the public.
F-27
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1995 AND 1994
(g) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(3) ACCOUNTS RECEIVABLE
At June 30, 1995 and 1994 accounts receivable totaled $233,030 and $115,346
net of allowance for doubtful accounts and product returns of $154,049 and
$20,500 in 1995 and 1994, respectively.
(4) PROPERTY AND EQUIPMENT
Property and equipment, at June 30, 1995 and 1994, consists of the
following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Property and equipment................................... $ 68,922 $ 72,740
Accumulated depreciation and amortization................ (50,327) (33,852)
-------- --------
Property and equipment, net.............................. $ 18,595 $ 38,888
======== ========
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses at June 30, 1995 consists of accrued payroll and related
payroll costs totaling $86,643, and $77,340 for amounts owed a vendor for
marketing and sales services. The amount owed to the vendor was paid by the
issuance of 50,000 shares of the Company's common stock in September 1995
(Note 13).
(6) NOTES PAYABLE
The notes payable at June 30, 1995 consists of the following: $9,152 charged
to a company credit card bearing interest at 14%; a $10,000 loan payable to an
individual bearing interest at a rate of 10% which was subsequently satisfied
by the issuance of 5,000 shares of the Company's common stock in September
1995 (Note 13); and, $35,438 advanced from a factoring company. The factoring
agreement, dated November 1994, allows the Company to borrow against eligible
accounts receivable at an interest rate of 3% of the outstanding amount per
month with the amounts outstanding secured by the assets of the Company.
(7) CONVERTIBLE DEBT
On April 27, 1994, the Company borrowed $100,000 from an individual which,
at the culmination of certain events per the loan and stock purchase
agreement, would be converted into shares of the Company's common stock. The
terms of the loan provided for interest at a rate of 10% per annum. On
September 30, 1994, the debt was converted into 50,025 shares of common stock
(after giving effect to the stock split--Note 13). Total interest paid on the
loan until conversion was $6,722.
(8) DUE TO STOCKHOLDERS
At June 30, 1995 and 1994, the Company owed the stockholders of the Company
a total of $16,743 and $49,470, respectively. These amounts advanced to the
Company are payable upon demand and bear interest at 20% per year after
outstanding for 30 days.
F-28
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1995 AND 1994
(9) INCOME TAXES
The provision for income taxes in fiscal 1995 and 1994 were comprised of
state minimum taxes.
The actual income tax benefit differs from the "expected" tax benefit for
1995 and 1994, computed by applying the U.S. Federal corporate tax rate of 34
percent to loss before income taxes, as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Computed "expected" Federal income tax benefit........ $ (78,700) $ (5,100)
Increase in income taxes resulting from:
State income taxes, net of Federal benefit.......... 615 1,831
Increase in valuation allowance, primarily due to
reserves........................................... 78,700 5,100
--------- --------
$ 615 $ 1,831
========= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserve........................... $ 64,700 $ --
Net operating loss carryforward....................... 20,100 --
Accrued vacation...................................... 4,100 4,100
-------- -------
88,900 4,100
Valuation allowance..................................... (82,800) (4,100)
-------- -------
Deferred tax asset.................................... 6,100 --
-------- -------
Deferred tax liability--property and equipment,
principally due to differences in depreciation
methods................................................ 6,100 --
-------- -------
Net deferred income taxes............................... $ -- $ --
======== =======
</TABLE>
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. Management considers
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies which can be implemented by the Company in
making this assessment. Based upon the Company's historical taxable losses and
scheduled reversal of deferred tax liabilities, the Company has established a
valuation allowance of $82,800 and $4,100 at June 30, 1995 and 1994,
respectively.
(10) COMMITMENTS
The Company leases approximately 4,875 square feet of office space under a
non-cancelable operating lease which expired September 30, 1994. Since the
expiration of the current lease the Company has been paying the landlord
$2,250 per month. Rent expense for the operating lease for fiscal 1995 and
1994 approximated $27,000 per year.
F-29
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1995 AND 1994
(11) SIGNIFICANT CUSTOMER
The Company received 21% and 49% of its total revenues from one customer in
1995 and 1994, respectively. These revenues represent royalty payments earned
from sales of educational titles developed by the Company and product
development fees
(12) STOCK OPTIONS
In October 1994 and September 1995, the Company granted options to purchase
8,455 and 5,000 shares of the Company's common stock at an exercise price of
$.01 and $2.50 per share, respectively. Such options were converted to options
of Enteractive on February 29, 1996 (Note 13).
(13) SUBSEQUENT EVENTS
In September 1995, the Companys Board of Directors authorized an increase in
the number of authorized shares of common stock, without par value, from 3,000
to 1,250,000. On September 1, 1995, the Board of Directors authorized a 422.75
to 1 stock split, which resulted in the issuance of 893,407 shares of common
stock of the Company. All references to the number of shares of common stock
of the Company and to stock option data reflect the stock split.
Additionally, in September 1995 the following transactions occurred:
The Company satisfied $10,000 of notes payable to an individual by issuing
5,000 shares of the Company's common stock.
The Companys Board of Directors authorized the issuance of 50,000 shares of
common stock to a vendor of the Company as payment for sales and marketing
services. The Company recorded an expense of $77,340 in fiscal 1995 for the
portion of the services provided in that year.
The Companys Board of Directors authorized the issuance of 2,000 shares of
common stock to a consultant of the Company as payment for marketing services.
The Companys Board of Directors authorized the issuance of a total of 36,375
shares of common stock of the Company to employees of the Company.
On September 28, 1995, the Company entered into an agreement with
Enteractive, Inc., an interactive multimedia software publisher, to merge the
Company into a wholly owned subsidiary of Enteractive. Per the agreement to
merge the companies, the Company borrowed $250,000 from Enteractive at an
interest rate of prime plus 2% to be used for working capital. On February 29,
1996, the merger was consummated with the Companys shareholders receiving
725,212 shares of common stock of Enteractive representing 13% of the combined
companys outstanding shares. Of the shares received, 10%, or 72,521 shares
will be held in escrow to be released subject to certain conditions. Upon
consummation of the merger, the $250,000 loan became an inter-company payable.
F-30
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Product revenues.................................. $ 517,444 $ 607,760
Product development revenue....................... 121,000 125,487
Royalty and other revenue......................... 223,961 303,053
---------- ---------
Total revenues.................................. 862,405 1,036,300
Cost of product revenues.......................... 182,104 232,488
Cost of product development revenue............... 131,020 119,571
Research and development expenses................. 386,887 234,260
Marketing and selling expenses.................... 360,114 285,775
General and administrative expenses............... 154,291 114,667
---------- ---------
Total costs and expenses........................ 1,214,416 986,761
Operating (loss) income........................... (352,011) 49,539
---------- ---------
Other income (expense):
Interest expense................................ (32,632) (1,950)
Other........................................... 1,741 (997)
---------- ---------
Net (loss) income................................. $ (382,902) $ 46,592
========== =========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED FEBRUARY 29, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
SHARES AMOUNT ACCUMULATED DEFICIT TOTAL
------- --------- ------------------- ---------
<S> <C> <C> <C> <C>
Balance, June 30, 1995....... 895,525 $ 101,000 $ (232,492) $(131,492)
Shares issued upon conversion
of debt..................... 5,000 10,000 -- 10,000
Stock issued as payment for
services.................... 52,000 105,000 -- 105,000
Stock issued to employees.... 36,375 72,750 -- 72,750
Net loss..................... -- -- (382,902) (382,902)
------- --------- ---------- ---------
Balance, February 29, 1996... 988,900 $ 288,750 $ (615,394) $(326,644)
======= ========= ========== =========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net (loss) income.................................. $(382,902) $ 46,592
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.................... 10,223 14,656
Loss on disposal of assets....................... -- 1,802
Common stock issued for services................. 105,000 --
Stock compensation expense....................... 72,750 --
Changes in assets and liabilities:
Accounts receivable.............................. (188,398) (171,007)
Inventories...................................... (16,110) (70,903)
Prepaid expenses and other....................... 9,323 (17,737)
Accounts payable................................. (6,026) 129,689
Accrued expenses................................. (12,472) 45,048
--------- ---------
Net cash used in operating activities.......... (408,612) (21,860)
--------- ---------
Cash flows from investing activities
Purchases of property and equipment.............. (16,301) --
--------- ---------
Net cash used in investing activities.......... (16,301) --
--------- ---------
Cash flows from financing activities
Short-term borrowings.............................. 422,025 56,193
Proceeds from (repayment of) shareholder loans..... 5,757 (27,726)
--------- ---------
Net cash provided by financing activities...... 427,782 28,467
Net increase (decrease) in cash and
equivalents................................... 2,869 6,607
Cash
Beginning of period................................ 8,638 24,200
--------- ---------
End of period...................................... $ 11,507 $ 30,807
========= =========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(UNAUDITED)
1. GENERAL
In the opinion of management the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring entries)
necessary to present fairly the Company's financial position as of February
29, 1996 and the results of its operations and its cash flows for the nine
months ended February 29, 1996 and February 28, 1995. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted. The interim financial statements should be read in conjunction
with the Company's June 30, 1995 audited financial statements and related
notes. The results for the nine month period ended February 29, 1996 are not
necessarily indicative of the results to be obtained for the full year.
2. BUSINESS
Lyriq International Corporation (the Company) was founded in December 1991
and is primarily engaged in the development of interactive multimedia titles
for the home education and recreation markets. The Company is currently
developing software for the CD-ROM platform as well as the Internet and
commercial on-line services.
3. 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. 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.
4. STOCKHOLDERS DEFICIT
In September 1995, the Company's Board of Directors authorized an increase
in the number of authorized shares of common stock, without par value, from
3,000 to 1,250,000. On September 1, 1995, the Board of Directors authorized a
422.75 to 1 stock split which resulted in the issuance of 893,407 shares of
common stock of the Company. All references to the number of shares of common
stock of the Company and to stock option data reflect the stock split.
Additionally, in September 1995 the following transactions occurred:
The Company satisfied $10,000 of notes payable to an individual by issuing
5,000 shares of the Company's common stock.
The Company's Board of Directors authorized the issuance of 50,000 shares of
common stock to a vendor of the Company as payment for sales and marketing
services. The Company recorded an expense of $77,340 in fiscal 1995 for the
portion of the services provided in that year.
The Company's Board of Directors authorized the issuance of 2,000 shares of
common stock to a consultant of the Company as payment for marketing services.
The Company's Board of Directors authorized the issuance of a total of
36,375 shares of common stock of the Company to employees of the Company.
F-34
<PAGE>
LYRIQ INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. MERGER
On February 29, 1996, the Company completed its merger with Enteractive,
Inc., a developer and publisher of interactive multimedia software, pursuant
to an Agreement and Plan of Merger, whereby the Company was merged into a
wholly-owned subsidiary of Enteractive. The merger was accounted for under the
purchase method of accounting and, accordingly, the net assets and operations
of the Company are included in Enteractive's consolidated financial statements
beginning on February 29, 1996. As consideration for this transaction, the
shareholders of the Company were issued a total of 725,212 shares of common
stock of Enteractive.
F-35
<PAGE>
PRO FORMA FINANCIAL INFORMATION ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL
CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
The following pro forma combined statement of operations (unaudited)
combines, on a purchase basis of accounting, the statement of operations of
Enteractive for the nine months ended February 29, 1996 (unaudited) with the
statement of operations of Lyriq for the nine months ended February 29, 1996
(unaudited).
The pro forma combined statement of operations gives effect to the
acquisition of Lyriq as if it had occurred on June 1, 1995. The pro forma
combined statement of operations is not necessarily indicative of future
operating results and should not be used as a forecast of future operations of
Enteractive and Lyriq as an Enteractive subsidiary. This pro forma statement
should be read in conjunction with the notes to the pro forma combined
financial statements and the historical financial statements of both companies
included elsewhere herein.
F-36
<PAGE>
ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL CORPORATION
PROFORMA STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 29, 1996 PRO FORMA
NINE MONTHS ENDED LYRIQ ADJUSTMENTS
FEBRUARY 29, 1996 INTERNATIONAL ---------------------- PRO FORMA
ENTERACTIVE, INC. CORPORATION DEBIT CREDIT COMBINED
----------------- ----------------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Product sales........... $ 324,800 $ 517,400 $ 842,200
Product development
revenue................ 257,700 121,000 378,700
Royalty and other
revenue................ 103,300 224,000 327,300
----------- ---------- -----------
Total revenues........ 685,800 862,400 1,548,200
Cost of product
revenues............... 77,600 182,100 214,000(b) 473,700
Cost of development
revenue................ 225,500 131,000 356,500
Research and development
expenses............... 2,301,500 386,900 2,688,400
Marketing and selling
expenses............... 1,354,700 360,100 1,714,800
General and
administrative
expenses............... 1,246,900 154,300 1,401,200
Acquired in-process
technology............. 1,915,100 -- 1,915,100(a) --
----------- ---------- -------- ---------- -----------
Total costs and
expenses............. 7,121,300 1,214,400 214,000 1,915,100 6,634,600
Operating loss.......... (6,435,500) (352,000) 214,000 1,915,100 (5,086,400)
----------- ---------- -------- ---------- -----------
Other income (expense):
Interest expense...... (58,200) (32,600) (90,800)
Interest income....... 110,000 -- 110,000
Other................. 4,900 1,700 6,600
----------- ---------- -----------
Loss before income
taxes.................. (6,378,800) (382,900) 214,000 1,915,100 (5,060,600)
----------- ---------- -------- ---------- -----------
Net loss................ $(6,378,800) $ (382,900) $214,000 $1,915,100 $(5,060,600)
=========== ========== ======== ========== ===========
Loss per common share... $ (0.92)
===========
Weighted average shares
of common stock........ (c) 5,500,701
===========
</TABLE>
See notes to pro forma combined financial statements.
F-37
<PAGE>
PRO FORMA FINANCIAL INFORMATION ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL
CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
The following pro forma combined statement of operations (unaudited)
combines, on a purchase basis of accounting, the statement of operations of
Enteractive for the year ended May 31, 1995 with the statement of operations
of Lyriq for the year ended June 30, 1995.
The pro forma combined statement of operations gives effect to the
acquisition of Lyriq as if it had occurred at the beginning of the year. The
pro forma combined statement of operations is not necessarily indicative of
future operating results and should not be used as a forecast of future
operations of Enteractive and Lyriq as an Enteractive subsidiary. This pro
forma statement should be read in conjunction with the notes to the pro forma
combined financial statements and the historical financial statements of both
companies included elsewhere herein.
F-38
<PAGE>
ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL CORPORATION
PROFORMA STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1995 PRO FORMA
YEAR ENDED LYRIQ ADJUSTMENTS
MAY 31, 1995 INTERNATIONAL ----------------- PRO FORMA
ENTERACTIVE, INC. CORPORATION DEBIT CREDIT COMBINED
----------------- ------------- ------- ------ -----------
<S> <C> <C> <C> <C> <C>
Product sales........... $ -- $ 617,500 $ 617,500
Product development
revenue................ 365,600 162,100 527,700
Royalty and other
revenue................ 3,500 464,900 468,400
----------- ---------- ------- --- -----------
Total revenues........ 369,100 1,244,500 1,613,600
Cost of product
revenues............... -- 250,900 428,000(b) 678,900
Cost of development
revenue................ 285,600 185,200 470,800
Research and development
expenses............... 2,487,600 342,500 2,830,100
Marketing and selling
expenses............... 521,500 431,100 952,600
General and
administrative
expenses............... 1,044,200 254,900 1,299,100
----------- ---------- ------- --- -----------
Total costs and
expenses............. 4,338,900 1,464,600 428,000 6,231,500
Operating loss.......... (3,969,800) (220,100) 428,000 (4,617,900)
----------- ---------- ------- --- -----------
Other income (expense):
Interest expense...... (252,900) (10,000) (262,900)
Interest income....... 214,300 -- 214,300
Other................. 11,000 (800) 10,200
----------- ---------- ------- --- -----------
Loss before income
taxes.................. (3,997,400) (230,900) 428,000 (4,656,300)
----------- ---------- ------- --- -----------
Provision for income
taxes.................. -- 600 600
Net loss................ $(3,997,400) $ (231,500) 428,000 $(4,656,900)
=========== ========== ======= === ===========
Loss per common share... $ (0.93)
===========
Weighted average shares
of common stock........ (c) 5,001,120
===========
</TABLE>
See notes to pro forma combined financial statements.
F-39
<PAGE>
ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The acquisition of Lyriq is accounted for as a purchase and, in accordance
with generally accepted accounting principles, Enteractive's purchase price is
allocated to the assets and liabilities of Lyriq based on their fair values at
the date of the acquisition.
2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The pro forma combined financial statements of Enteractive and Lyriq give
effect to the following pro forma adjustments and assumptions:
a. This adjustment records the acquisition of Lyriq as described
elsewhere herein with the purchase price determined as follows:
<TABLE>
<S> <C>
725,212 shares of Enteractive common stock @ $4.00 per share.. $2,900,848
Excess of fair value of liabilities assumed over assets
acquired of Lyriq............................................ 247,050
Acquisition costs............................................. 52,102
----------
Total..................................................... $3,200,000
==========
The acquisition price was allocated as follows:
In-process research and development expense................. $1,915,156
Capitalized software........................................ 1,284,844
----------
Total..................................................... $3,200,000
==========
</TABLE>
The Company recorded an expense of $1,915,100 on February 29, 1996 for the
acquired in-process research and development that will be used in the
development of additional titles in the future. As this charge will not
have a continuing impact, it has been eliminated from the pro forma
statements of operations. The statement of operations charge 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) and the technologies have no
alternative future use.
b. Records amortization of acquired capitalized software over three
years, as if the acquisition had taken place at the beginning of the
period.
c. Reflects weighted average shares of Enteractive for the period
(4,775,489 for the nine months ended February 29, 1996 and 4,275,908 for
the year ended May 31, 1995, plus 725,212 shares of Enteractive common
stock issued to Lyriq.)
F-40
<PAGE>
No dealer, salesman or any other person is authorized to give any information or
to make any representations in connection with this offering not contained in
this Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or any other person.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the Securities offered by this Prospectus
or an offer by any person in any jurisdiction where such an offer or
solicitation is not authorized or is unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that information herein is correct as of any time subsequent to
its date.
TABLE OF CONTENTS
Page
----
Incorporation of Certain Documents
By Reference......................................... 2
Available Information.................................. 2
The Company............................................ 3
Recent Developments................................... 4
Summary Financial Information......................... 5
Risk Factors.......................................... 7
Use of Proceeds........................................ 13
Dilution............................................... 13
Dividend Policy........................................ 14
Transfer Agent, Warrant Agent and Register............. 15
Plan of Distribution................................... 15
Legal Matters.......................................... 15
Experts................................................ 15
Financial Statements................................... F-1
ENTERACTIVE, INC.
5,461,468 Shares of Common Stock
PROSPECTUS
June ___, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses to be
borne by the Company in connection with the offering described in the
Registration Statement, other than underwriting commissions and discounts.
<TABLE>
<CAPTION>
<S> <C>
Registration Fee............................................................ $9,309.76
National Association of Securities Dealers, Inc. Fee........................ 3,102.00
Nasdaq SmallCap Market and The Boston Stock Exchange Filing Fee............. 27,500.00
Legal Fees and Expenses..................................................... 100,000.00
Accounting Fees and Expenses................................................ 50,000.00
Printing and Engraving Expenses............................................. 60,000.00
Blue Sky Fees and Expenses.................................................. 25,000.00
Transfer Agent's and Registrar's Fees....................................... 5,000.00
Miscellaneous Expenses...................................................... 20,088.24
---------------
Total...............................................................$300,000.00
===============
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except as hereinafter set forth, there is no statute, charter
provision, by-law, contract or other arrangement under which any controlling
person, director or officer of Enteractive, Inc. ("Company") is insured or
indemnified in any manner against liability which he may incur in his capacity
as such.
The Certificate of Incorporation, as amended ("Certificate of
Incorporation"), of the Company provides that the Company shall indemnify to the
fullest extent permitted by Delaware law any person whom it may indemnify
thereunder, including directors, officers, employees and agents of the Company.
The pertinent section of Delaware law is set forth below in full. Such
indemnification (other than as ordered by a court) shall be made by the Company
only upon a determination that indemnification is proper in the circumstances
because the individual met the applicable standard of conduct. Advances for such
indemnification may be made pending such determination. Such determination shall
be made by a majority vote of a quorum consisting of disinterested directors, or
by independent legal counsel or by the stockholders. In addition, the
Certificate of Incorporation provides for the elimination, to the extent
permitted by Delaware law, of personal liability of directors to the Company and
its stockholders for monetary damages for breach of fiduciary duty as directors.
The Company obtained a directors and officers insurance and company
reimbursement policy in the amount of $1,000,000. The policy insures directors
and officers against unindemnified loss arising from certain wrongful acts in
their capacities and would reimburse the Company for such loss for which the
Company has lawfully indemnified the directors and officers.
See the second and third paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission with respect to
the effect of any indemnification for liabilities arising under the Securities
Act of 1933, as amended ("Securities Act").
Section 145 of the General Corporation Law provides as follows:
(a) A corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than action by or in the right
of the corporation) by reason of the fact
II-1
<PAGE>
that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was
unlawful.
(b) A corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense
or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent
of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b) of this section, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made (1) by the board of directors by a majority
vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable,
or, even if obtainable a quorum of disinterested directors so directs,
by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses incurred by an officer or director in defending a
civil or criminal action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation
as authorized in this section. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided
by, or granted pursuant to, the other subsections of this section shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the
request
II-2
<PAGE>
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such
liability under this section.
(h) For purposes of this section, references to "the
corporation" shall include, in addition to the resulting corporation,
any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any
person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with
respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other
enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving at the
request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent
with respect to any employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the corporation" as
referred to in this section.
(j) The indemnification and advancement of expenses provided
by, or granted pursuant to, this section shall, unless otherwise
provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a
person.
The Company has also agreed to indemnify each director and executive
officer pursuant to an Indemnification Agreement with each such director and
executive officer from and against any and all expenses, losses, claims, damages
and liability incurred by such director or executive officer for or as a result
of action taken or not taken while such director or executive officer was acting
in his capacity as a director, officer, employee or agent of the Company.
Item 16. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
<S> <C>
***1 Form of Underwriting Agreement by and among the Company and GKN Securities Corp.
(the "Underwriter.")
**4.1 Form of Common Stock Certificate.
**4.2 Form of warrant, as amended, issued in connection with January 1994 Private Placement.
**4.3 Form of warrant issued in connection with May 1994 Private Placement.
**4.5 Shareholders Agreement dated as of August 31, 1994, by and among the Company, Andrew
Gyenes, John Ramo, Jolie Barbiere, Zenon Slawinski and Michael Alford.
**4.6 Form of IPO Warrant Certificate.
**4.7 Form of Unit Purchase Option granted to GKN Securities Corp. (the "Underwriter").
**4.8 Warrant Agreement between Continental Stock Transfer and Trust Company and the
Company.
***4.9 Form of Common Stock Purchase Option granted to the Underwriter.
***5 Opinion of Olshan Grundman Frome & Rosenzweig LLP.
*23.1 Consent of KPMG Peat Marwick LLP.
***23.2 Consent of Olshan Grundman Frome & Rosenzweig LLP, included in Exhibit 5.
</TABLE>
II-3
<PAGE>
______________________
* Filed herewith
** Incorporated herein by reference to the Company's Registration
Statement on Form SB-2 [(Registration No. 33-83694)]
*** Previously Filed
Item 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of an action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to
be part of this Registration Statement as of the time it was declared effective.
(c) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Post-Effective Amendment No. 1 on Form S-3
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York on the 28th day of June, 1996.
ENTERACTIVE, INC.
By: /s/ Andrew Gyenes
------------------
Name: Andrew Gyenes
Title: Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------- -------------------------------------------- -------------------
<S> <C> <C>
/s/ Andrew Gyenes Chairman of the Board and Chief Executive June 28, 1996
- ----------------- Officer (Principal Executive Officer)
Andrew Gyenes
* President, Chief Operating Officer and Director June 28, 1996
- -------------------
John Ramo
* Vice President for Creative Development and June 28, 1996
- ------------------- Director
Jolie Barbiere
* Vice President for Development and Director June 28, 1996
- -------------------
Michael Alford
* Director June 28, 1996
- -------------------
Peter Gyenes
* Director June 28, 1996
- -------------------
Harrison Weaver
* Director June 28, 1996
- -------------------
Rino Bergonzi
* Vice President, Chief Financial Officer June 28, 1996
- ------------------- (Principal Financial Officer and Principal
Kenneth Gruber Accounting Officer) and Secretary
/s/ Andrew Gyenes
- -------------------
*By: Andrew Gyenes, Attorney-in-Fact
</TABLE>
II-5
Independent Auditors' Consent
The Board of Directors
Enteractive, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Our report, related to the financial statements for Enteractive, Inc., refers to
a change in the method of accounting for income taxes.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG PEAT MARWICK LLP
Jericho, New York
June 27, 1996
