SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
(Amendment No. __)
ENTERACTIVE, INC.
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(Name of Issuer)
ENTERACTIVE, INC.
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(Name of Person(s) Filing Statement)
Common Stock Purchase Warrant Expiring December 13, 2001
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(Title of Class of Securities)
(CUSIP Number of Class of Securities)
Andrew Gyenes
Enteractive, Inc.
110 West 40th Street, Suite 2100
New York, New York 10018
(212) 221-6559
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
Copy to:
Steven Wolosky, Esq.
Kenneth A. Schlesinger, Esq.
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, NY 10022
(212) 753-7200
Facsimile: (212) 755-1467
November , 1997
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(Date Tender Offer First Published, Sent or Given to Security Holders)
CALCULATION OF FILING FEE
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Transaction Valuation(1) Amount of Filing Fee
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$1,750,000 $350.00
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/ / Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously
paid. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
Amount previously paid: N/A Filing party: N/A
Form or registration no.: N/A Date filed: N/A
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(1) Estimated solely for purposes of calculating the fee in accordance with
Rule 0-11 under the Securities Exchange Act of 1934, as amended. Based
upon the value of the Warrants $.416, multiplied by the number of
Warrants that the issuer, Enteractive, Inc. (the "Company") is offering
to acquire (4,200,000) Warrants).
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Item 1. Security and Issuer.
(a) The name of the Issuer is Enteractive, Inc., a Delaware
corporation (the "Company"), which has its principal executive offices at 110
West 40th Street, Suite 2100, New York, New York 10018.
(b) The Company is seeking to acquire up to all of the
4,200,000 outstanding Common Stock Purchase Warrants expiring on December 13,
2001 (the "Warrants"). The Company is offering to exchange one share of its
Common Stock, $.01 par value per share (the "Common Stock"), for 2.8 Warrants
properly tendered and not validly withdrawn, upon the terms and subject to the
conditions set forth in the Offering Circular of the Company, dated November 19,
1997 (the "Offering Circular"), and the related Letter of Transmittal (the
"Exchange Offer"). In connection with the Exchange Offer the Company is
requesting that the holders of the Company's Series A Convertible Preferred
Stock (the "Preferred Stock") agree to modify the terms of the Preferred Stock
to delay the date when the Preferred Stock can first be converted into Common
Stock of the Company from April 30, 1998 to December 31, 1999 (the "Delayed
Conversion Option"). Copies of the Offering Circular and the Letter of
Transmittal relating to the Exchange Offer are filed herewith as Exhibits (a)(1)
and (a)(2), respectively. Information with respect to the number of Warrants
outstanding is set forth in the Offering Circular under "THE EXCHANGE OFFER --
General -- Exchange Offer" and is incorporated herein by reference. Officers,
directors and affiliates of the Company that own Warrants may participate in the
Exchange Offer on the same basis as all other holders of Warrants. Definitive
information with respect to their participation in the Exchange Offer will not
be available to the Company until the consummation thereof.
(c) There is currently no established trading market for the
Warrants.
(d) Not applicable.
Item 2. Source and Amount of Funds or Other Consideration.
(a) The consideration being offered in the Exchange Offer
consists of one share of Common Stock for every 2.8 Warrants as described in the
Offering Circular under "Summary -- The Offer" and "The Offer," which is
incorporated herein by reference. The Company had previously reserved 4,200,000
shares of its authorized but unissued Common Stock for issuance upon exercise of
the Warrants. The Company has reserved 1,500,000 shares of its authorized but
unissued Common Stock for issuance upon exchange of the Warrants.
(b) Not Applicable.
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Item 3. Purpose of the Tender Offer and Plans or Proposals of the Issuer or
Affiliate.
The information set forth in the Offering Circular under
"Summary -- Purposes and Effects of the Offer," "Purposes and Effects of the
Offer," and "The Offer" is incorporated herein by reference. All Warrants that
are exchanged pursuant to the terms and conditions of the Exchange Offer will be
canceled upon consummation of the Exchange Offer. The Company presently has no
plans or proposals that relate to or would result in any of the events listed in
Items 3(a)-3(j) of Schedule 13E-4, except as set forth below.
(a) The information set forth in the Offering Circular under
"The Offer -- Interests of Directors and Executive Officers" is incorporated
herein by reference.
(e) The capitalization of the Company will change as a result
of issuance of Common Stock in exchange for the Warrants. In addition, the terms
of the Preferred Stock will change as a result of the Delayed Conversion Option.
The information set forth in the Offering Circular under "Summary --
Capitalization of the Company" and "Description of Securities" is incorporated
herein by reference.
Item 4. Interest in Securities of the Issuer.
Based upon the Company's records and upon information provided
to the Company by the persons identified in General Instruction C of Schedule
13E-4 (the "Affiliated Persons"), neither the Company nor, to the best of the
Company's knowledge, any Affiliated Persons has effected any transactions in the
Warrants during the 40 business days prior to the date hereof.
Item 5. Contracts, Arrangements, Understandings or Relationships With Respect
to the Issuer's Securities.
Not applicable.
Item 6. Persons Retained, Employed or to be Compensated.
Not applicable.
Item 7. Financial Information.
(a) Audited financial statements of the Company for the two
most recent fiscal years are included in the Company's 1997 Annual Report on
Form 10-KSB for the fiscal year ended May 31, 1997 filed with the Securities and
Exchange Commission, which is
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incorporated herein by reference. A copy of the Company's 1997 Annual Report on
Form 10-KSB is filed herewith as Exhibit (a)(5). In addition, quarterly
financial statements of the Company for the quarter ended August 31, 1997 are
included into the Company's Quarterly Report on Form 10-QSB for the quarter
ended August 31, 1997 filed with the Securities and Exchange Commission, which
is incorporated herein by reference.
(b) Not Applicable.
Item 8. Additional Information.
(a)-(d) Not Applicable.
(e) The information set forth in the materials filed herewith
pursuant to Item 9 is incorporated herein by reference.
Item 9. Material to be Filed as Exhibits.
(a)(1) Offering Circular dated November 19, 1997.
(2) Form of Letter of Transmittal.
(3) Form of Press Release.
(4) Form of letter to Warrantholders from the Chairman of
the Board and Chief Executive Officer of the Company
dated November 19, 1997.
(5) 1997 Annual Report on Form 10-KSB.
(6) Quarterly Report on Form 10-QSB for the quarter ended
August 31, 1997.
(b)-(f) Not Applicable.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
ENTERACTIVE, INC.
By: /s/ Andrew Gyenes
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Name: Andrew Gyenes
Title: Chairman of the Board and Chief
Executive Officer
Dated: November 19, 1997
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OFFERING CIRCULAR/PROXY STATEMENT
ENTERACTIVE, INC.
OFFER TO EXCHANGE 2.8 COMMON STOCK PURCHASE WARRANTS
EXPIRING DECEMBER 13, 2001 INTO
ONE SHARE OF ITS COMMON STOCK
THE SECURITIES TO BE ISSUED IN EXCHANGE FOR THE WARRANTS HAVE NOT BEEN
APPROVED OR DISAPPROVED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT PASSED
UPON THE FAIRNESS OF SUCH TRANSACTION NOR CONFIRMED THE ACCURACY OR DETERMINED
THE ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
SINCE THE EXCHANGE OFFER IS CONDITIONED UPON THE APPROVAL OF CERTAIN AMENDMENTS
TO THE TERMS OF THE PREFERRED STOCK (INCLUDING BUT NOT LIMITED TO A DELAY IN THE
DATE THAT THE PREFERRED STOCK CAN FIRST BE CONVERTED INTO COMMON STOCK FROM MAY
1, 1998 TO JUNE 30, 1999), THE COMPANY IS REQUIRING THAT ANY WARRANT HOLDER WHO
WOULD LIKE TO PARTICIPATE IN THE EXCHANGE OFFER IS REQUIRED TO DELIVER A WRITTEN
CONSENT APPROVING SUCH AMENDMENTS TO THE COMPANY ALONG WITH THE LETTER OF
TRANSMITTAL INDICATING THAT THEY WILL EXCHANGE WARRANTS FOR COMMON STOCK.
Enteractive, Inc. ("Enteractive" or the "Company") hereby offers (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Offering Circular/Proxy Statement (the "Offering Circular/Proxy
Statement"), and in the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange 2.8 of its currently outstanding common stock
purchase warrants expiring December 13, 2001 (the "Warrants") into one share of
its common stock, $.01 par value per share (the "Common Stock"). All of the
Warrants were issued in a private placement to accredited investors consummated
in December 1996 (the "December 1996 Private Placement") whereby the Company
sold 84 Units, each Unit consisting of 50,000 Warrants and eighty (80) shares of
Class A Convertible Preferred Stock ("Preferred Stock"). As of the date of this
Offering Circular/Proxy Statement , there are 4,200,000 Warrants outstanding and
6,720 shares of Preferred Stock outstanding. Pursuant to the terms of the
Certificate of Designations, Preferences and Other Rights and Qualifications for
the Preferred Stock, each share of Preferred Stock is convertible at any time
after April 30, 1998 into such whole number of shares of Common Stock equal to
the aggregate stated value of the Preferred Stock to be converted divided by the
lesser of (i) $2.00 or (ii) 50% of the average closing sale price for the Common
Stock for the last ten trading days in the fiscal quarter of the Company prior
to such conversion. The Exchange Offer is being made for up to all outstanding
Warrants. Each Warrant currently entitles the registered holder to purchase one
share of the Company's Common Stock at an exercise price of $4.00 per Share.
After the expiration of the Exchange Offer and only up to December 18, 1997 at
5:00 p.m., New York City time, the holders of Warrant will be able to convert
such securities into shares of Common Stock at such exercise price.
In connection with the Exchange Offer and as a condition to the
consummation of the Exchange Offer, the Company is also seeking the written
consent of the holders of not less than a majority of all outstanding shares of
Preferred Stock to proposed amendments to the Certificate of Designations,
Preferences and Other Rights and Qualifications of Class A Preferred Stock which
would (i) delay the date when the Preferred Stock can first be converted into
Common Stock of the Company from May 1, 1998 to June 30, 1999 (the "Delayed
Conversion Option") and (ii) modify the redemption feature of the Preferred
Stock (the "Revised Redemption Terms") so that (a) one-third of the net proceeds
from any public offering consummated by the Company prior to January 1, 2000
will be used to redeem the outstanding Preferred Stock and (b) if the closing
price of the Company's Common Stock is at least $6.00 for 10 trading days in any
30 day period, the Company will use its best efforts to complete an
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underwritten offering of its Common Stock. The Preferred Stock will be redeemed
on a pro rata basis, as currently provided in the Certificate of Designations,
Preferences and Other Rights and Qualifications of Class A Preferred Stock. For
further information relating to the amendment of the terms of the Preferred
Stock, see "Amendment of Terms of Preferred Stock." If the proposal is
approved,the Company will send to all Preferred Stockholders who did not approve
the proposal a notice pursuant to Section 228(d) of the Delaware General
Corporation Law ("DGCL") that the proposal has been approved in accordance with
the DGCL. Accordingly, as required by Section 228(d) of the DGCL, such notice
may be sent even before the closing of the Exchange Offer, however, the
effectiveness of the amendment will be conditional upon the consummation of the
Exchange Offer..
The terms and conditions of the Exchange Offer will not be applicable
to any Warrants that are not accepted pursuant to the Exchange Offer, or which
are delivered for exchange after the Expiration Date.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
DECEMBER 18, 1997, UNLESS EXTENDED (SUCH DATE AS EXTENDED FROM TIME TO TIME, THE
"EXPIRATION DATE"). WARRANTS TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT
ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. AFTER
THE EXPIRATION DATE, WARRANTS TENDERED IN THE EXCHANGE OFFER MAY NOT BE
WITHDRAWN UNLESS THE EXCHANGE OFFER IS TERMINATED OR EXPIRES WITHOUT
CONSUMMATION THEREOF.
Notwithstanding any other provision of the Exchange Offer, the
Company's obligation to accept for exchange, and to exchange, Warrants properly
tendered and not withdrawn pursuant to the Exchange Offer is conditioned upon
certain conditions (including, among others, there shall be no litigation
instituted which seeks to prevent or enjoin this Exchange Offer) set forth under
"The Exchange Offer--Conditions to the Exchange Offer", including but not
limited to the agreement by each Warrant holder who tenders Warrants to approve
the proposal to amend the terms of the Preferred Stock. If the conditions of the
Exchange Offer are satisfied or waived and the Warrants are accepted by the
Company for exchange, the Common Stock will be exchanged on or promptly after
the date on which the Warrants are accepted for exchange (the "Exchange Offer
Acceptance Date"). Subject to applicable securities laws and the terms set forth
in this Offering Circular/Proxy Statement, the Company reserves the right (i) to
waive any and all conditions to the Exchange Offer, (ii) to extend the Exchange
Offer or (iii) otherwise to amend the Exchange Offer in any respect.
The terms of the Exchange Offer equate to one share of Common Stock
(trading at a last reported sales price on Nasdaq of $3.03125 on November 13,
1997) for 2.8 Warrants. The Common Stock is traded on the Nasdaq Small Cap
Market ("Nasdaq") and the Boston Stock Exchange, the symbols of which are "ENTR"
and "ENT", respectively.
See "Risk Factors" on page 17 for a discussion of certain factors that
should be carefully considered in connection with the exchange offered hereby.
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IMPORTANT
Any beneficial holder of Warrants desiring to tender all or any portion
of his Warrants and approve the proposal to amend the terms of the Preferred
Stock should either (i) complete and sign the Letter of Transmittal/Written
Consent (or a facsimile thereof) in accordance with the instructions in the
Letter of Transmittal and mail or (ii) deliver it, together with the
certificates representing tendered Warrants and any other required documents, to
Continental Stock Transfer & Trust Company (the "Exchange Agent"). Holders who
wish to tender Warrants and whose certificates representing such Warrants are
not immediately available or who cannot comply with the procedures for book
entry transfer on a timely basis may tender such Warrants by following the
procedures for guaranteed delivery set forth in "The Exchange Offer --
Procedures for Tendering."
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The date of this Offering Circular/Proxy Statement is November 19,
1997.
The Exchange Offer will expire at 5:00 p.m., New York City time, on
December 18, 1997 (such time and date, the "Expiration Date"), unless the
Company, in its sole discretion, extends the period during which the Exchange
Offer is open, in which event the term "Expiration Date" means the latest time
and date at which the Exchange Offer, as so extended by the Company, shall
expire. See "The Exchange Offer -- Expiration; Extension; Termination;
Amendment." Fractional shares of Common Stock will be rounded to the nearest
whole number.
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NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF
THE COMPANY AS TO WHETHER ANY HOLDER OF WARRANTS SHOULD TENDER WARRANTS PURSUANT
TO THE EXCHANGE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS, OTHER THAN THE INFORMATION AND REPRESENTATIONS
CONTAINED IN THIS OFFERING CIRCULAR/PROXY STATEMENT OR IN THE LETTER OF
TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATIONS, INFORMATION OR
REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR/PROXY STATEMENT NOR ANY
DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF. THIS OFFERING CIRCULAR/PROXY STATEMENT IS FURNISHED SOLELY TO HOLDERS OF
RECORD OF THE WARRANTS.
This Offering Circular/Proxy Statement does not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
securities covered by this Offering Circular/Proxy Statement, nor does it
constitute an offer to sell or a solicitation of an offer to buy any such
securities by any person in any jurisdiction in which such offer or solicitation
would be unlawful.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof. The Company
therefore will not pay any commission or other remuneration to any broker,
dealer, salesman or other person for soliciting tenders of Warrants. Officers,
directors and regular employees of the Company may solicit tenders of Warrants
but they will not receive additional compensation therefor. The Common Stock
that will be issued pursuant to the Exchange Offer will be "restricted
securities" as such term is defined under Rule 144 of the Securities Act.
However, the holders of such Common Stock will be able to "tack" the holding
period of the Warrants to their Common Stock for purposes of Rule 144.
Accordingly, since the Warrants were acquired on December 13, 1996, sales of the
Common Stock may be made in compliance with Rule 144 commencing December 13,
1997.
IN DECIDING WHETHER TO ACCEPT THE EXCHANGE OFFER, HOLDERS OF WARRANTS
MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE EXCHANGE
OFFER, INCLUDING THE MERITS AND RISKS INVOLVED.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), are hereby
incorporated by reference in this Offering Circular/Proxy Statement : (i) the
Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 1997,
(the "1997 Form 10-KSB"); (ii) the Company's Current Report on Form 8-K dated
October 8, 1997; (iii) the Company's Quarterly Report on Form 10-QSB for the
quarter ended August 31, 1997 (the "Form 10-QSB"); (iv) the Company's Current
Report on Form 8-K dated October 2, 1997; and (v) the description of the
Company's Common Stock contained in the Company's Registration Statement on Form
8-A filed with the Commission on September 28, 1994. EACH WARRANT HOLDER IS
URGED TO READ THE 1997 FORM 10-KSB IN ITS ENTIRETY. THE 1997 FORM 10-KSB AND THE
FORM 10-QSB AND THE FORM 10-QSB ARE ATTACHED HERETO AS ANNEX 1 AND ANNEX II,
RESPECTIVELY.
The Company also incorporates herein by reference all documents and
reports subsequently filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Offering Circular/Proxy Statement and prior to termination of this Exchange
Offer. Such documents and reports shall be deemed to be incorporated by
reference in this Offering Circular/Proxy Statement and to be a part hereof from
the date of filing of such documents or reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Offering Circular/Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded, except as so modified or superseded, shall not be deemed
to constitute a part of this Offering Circular/Proxy Statement.
The Company will provide without charge to each person to whom a copy
of this Offering Circular/Proxy Statement has been delivered, on the written or
oral request of such person, a copy of any or all of the documents incorporated
herein by reference, other than exhibits to such documents unless they are
specifically incorporated by reference into such documents. Requests for such
copies should be directed to: Enteractive, Inc., 110 West 40th Street, Suite
2100, New York, New York 10018 Attention: Mr. Kenneth Gruber, Chief Financial
Officer.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited and reported upon by its independent
accounting firm and make available to stockholders quarterly reports containing
unaudited interim financial information and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
This Offering Circular/Proxy Statement includes references to
trademarks of entities other than the Company which have reserved all rights
with respect to their respective trademarks.
AVAILABLE INFORMATION
The Company has filed with the Commission a Schedule 13E-4, which term
shall encompass any amendments thereto, under the Exchange Act, with respect to
the Exchange Offer. This Offering Circular/Proxy Statement does not contain all
the information set forth in the Schedule 13E-4 and the exhibits thereto, to
which reference is hereby made for further information about the Company and the
Exchange Offer.
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files periodic reports, proxy and
information statements, and other information with the Commission. The Schedule
13E-4 and all reports, proxy and information statements, and other information
filed by the Company with the Commission may be inspected at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at the Northeast Regional Office, Seven World Trade
Center, New York, New York 10048, and the Midwest
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Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can also be obtained from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
also maintains a home page on the World Wide Web that contains reports, proxy
and information statements, and other information regarding registrants that
file electronically. The address of such site is http://www.sec.gov.
The Company will provide without charge to each person to whom a copy
of this Offering Circular/Proxy Statement has been delivered, on the written and
oral request of such person, a copy of the Schedule 13E-4. Requests for such
copies should be directed to: Enteractive, Inc., 110 West 40th Street, Suite
2100, New York, New York 10018 Attention: Mr. Kenneth Gruber, Chief Financial
Officer; telephone (212) 221-6559.
The Common Stock is listed on Nasdaq, and all reports, proxy and
information statements, and other information filed with the Commission also may
be inspected at the Nasdaq SmallCap Market, 1735 K Street, N.W., Washington, DC
20006.
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TABLE OF CONTENTS
Incorporation of Certain Documents by Reference...........................4
Available Information.....................................................4
Offering Summary..........................................................7
Risk Factors............................................................ 14
Dilution................................................................ 19
Conditions to the Exchange Offer........................................ 19
Certain Federal Income Tax Considerations............................... 27
Exchange Agent.......................................................... 28
Miscellaneous............................................................28
Description of Securities............................................... 28
Proposal to Amend the Terms of the Preferred Stock.......................30
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OFFERING SUMMARY
The following is a summary of certain information included in this
Offering Circular/Proxy Statement or in documents incorporated by reference
herein. It is not intended to be complete and is qualified in its entirety by
the more detailed information found elsewhere in this Offering Circular/Proxy
Statement or in such documents, which should be read with care. As used herein,
unless the context otherwise requires, the "Company" refers to Enteractive, Inc.
and its subsidiaries. As used herein, the term "Offering Circular/Proxy
Statement" shall mean this Offering Circular/Proxy Statement and all Appendixes
and Exhibits hereto, as the same may be amended, supplemented, restated or
otherwise modified from time to time. The term "Exchange Offer" shall mean the
offering contemplated hereby. Reference to the Company's fiscal year shall refer
to the calendar year in which the Company's fiscal year ends (e.g., fiscal year
1997 refers to the Company's fiscal year ended May 31, 1997).
The Company
Enteractive, Inc., a Delaware corporation ("Enteractive" or the
"Company"), incorporated in December 1993, is the successor to Sonic Images
Productions, Inc., a District of Columbia corporation incorporated in 1979 which
was merged with and into the Company in May 1994 ("Merger"). The Company, as the
surviving entity of the Merger, continued its existence following the Merger as
a Delaware corporation. On February 29, 1996, Lyriq International Corporation
merged into a wholly owned subsidiary of the Company pursuant to an Agreement
and Plan of Merger. Headquartered in New York, New York, the Company offers
products and services to customers for the design, development, operation and
maintenance of customer Intranets or sites on the Internet and World Wide Web.
Its address is 110 West 40th Street, Suite 2100, New York, New York 10018 and
its telephone number is (212) 221- 6559. Its World Wide Web site address is
http://www.crstone.com.
Recent Developments
On September 26, 1997 the Company completed the previously announced
distribution agreement with Enteractive Distribution Company, LLC ("EDC"), an
unrelated company. Under the terms of the agreement EDC acquired the inventory
and certain accounts receivable existing at the date of the closing resulting
from the Company's interactive multimedia publishing business. In addition the
Company has assigned its domestic distribution contracts with its domestic
distributors to EDC and has granted EDC an exclusive license to market the
Company's interactive multimedia titles in North America for a minimum of two
years. Under the terms of the transaction, the Company has been guaranteed the
greater of $100,000 or 50% of EDC's proceeds from the sale of the inventory in
the 9 months following the closing and 50% of the accounts receivable balances
collected by EDC within 24 months of closing. The Company will also receive
royalties on sales of its products subsequent to liquidation of existing
inventory of 15% of the net sales for three years and 10% of the net sales
thereafter. EDC will also pay the Company a 5% royalty from the sales of any
third party products it sells. The Company is evaluating the most appropriate
manner to continue licensing its multimedia titles outside the United States.
The Company does not believe that it will incur significant ongoing costs
associated with the domestic or international distribution of its multimedia
titles.
As a result of the Company's agreement with EDC and its decision to
cease the direct sale marketing of its interactive multimedia related business
assets, the Company wrote down the majority of its interactive multimedia
related business assets in the fourth quarter of fiscal 1997 to the related
anticipated minimum proceeds of $100,000. These assets are classified as "assets
held for sale" in the Company's May 31, 1997 balance sheet.
On October 14, 1997 the Company completed an exchange offer (the
"Public Warrant Exchange Offer") whereby it issued 248,864 shares of Common
Stock in exchange for 4,977,280 of its publicly-traded common stock purchase
warrants which represents 97.2% of the publicly-traded stock purchase warrants
then outstanding. The remainder of the publicly-traded common stock purchase
warrants expired unexercised on October 20, 1997. As a
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<PAGE>
result of the foregoing, such common stock purchase warrants were delisted from
trading on the Nasdaq SmallCap Market and the Boston Stock Exchange.
In October 1997, the Company issued 50,000 shares of Common Stock
pursuant to the exercise of options. Such options had an exercise price of
$2.35.
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THE EXCHANGE OFFER
The Offering The Company is offering to exchange Warrants
tendered to the Company prior to the
Expiration Date and accepted by the Company
on the basis of 2.8 Warrants for one share
of Common Stock (the "Exchange Offer
Consideration"). The terms of the Exchange
Offer equate to one share of Common Stock
(trading at a last reported sales price on
Nasdaq of $3.03125 per share on November 13,
1997) for 2.8 Warrants. Each Warrant
currently entitles the registered holder to
purchase one share of the Company's Common
Stock at an exercise price of $4.00 per
Share. Although the Company has no current
intention to do so, if it should modify the
Exchange Offer Consideration, the modified
consideration would be applicable with
regard to all Warrants accepted in the
Exchange Offer, including those tendered
before the announcement of the modification.
If the Exchange Offer Consideration is
modified, the Exchange Offer will remain
open at least ten business days from the
date the Company gives notice by public
announcement or otherwise, of such. As
described herein, the Exchange Offer is
conditioned on the approval by the holders
of a majority of the Preferred Stock to the
proposed amendments to the Certificate of
Designations, Preferences and Other Rights
and Qualifications of the Preferred Stock.
See "The Exchange Offer -- Terms of the
Exchange Offer."
Purpose of Offering The purpose of the Exchange Offer Offering
is to reduce the overhang to the market for
the Common Stock by (i) continuing to reduce
the number of outstanding warrants (the
Company also reduced the number of
outstanding warrants through the Public
Warrant Exchange Offer) and (ii) delaying
the right of Preferred Stockholders to elect
to convert their Preferred Stock to Common
Stock to a date when the Company believes
that its Common Stock will be trading above
$4.00 thereby reducing the number of shares
of Common Stock that the Company might be
required to issue upon the conversion of the
Preferred Stock. However, there can be no
assurance as to the trading price of the
Common Stock at the time of conversion of
the Preferred Stock or at any other time.
During the ten (10) day trading period in
the fiscal quarter immediately preceding the
date of the commencement of the Exchange
Offer, the average closing sales price of
the Company's Common Stock as reported by
the Nasdaq SmallCap Market was $1.47 per
share. Assuming conversion of all
outstanding Preferred Stock based upon such
trading price an aggregate of 12,330,275
shares of Common Stock would be issued as of
the date of commencement of the
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Exchange Offer. The Exchange Offer also
enables the holders of the Warrants to
derive an earlier return on their investment
in the December 1996 Private Placement
through their ownership of the Common Stock
to be issued in the Exchange Offer since at
the present time, the Warrants are not
likely to be exercised because they have an
exercise price of $4.00 per share. In
contrast, under Rule 144, the Warrant
holders may combine the holding periods for
the Warrants and the Common Stock that they
will receive in the Exchange Offer.
Accordingly, since the Warrants were granted
on December 13, 1996, the Common Stock to be
received in the Exchange Offer may be sold
by the Warrant holders in the open market
commencing one year after they received the
Warrants (or December 13, 1997). See
"Purposes and Effects of the Exchange
Offer."
Expiration Date 5:00 p.m., New York City time, on December
18, 1997, unless extended by the Company.
See "The Exchange Offer -- Expiration;
Extensions; Termination; Amendment. After
expiration of the Exchange Offer and prior
to December 13, 2001 at 5:00 p.m., the
Warrants will be convertible into Common
Stock at an exercise price of $4.00 (as such
price may be adjusted in certain events).
Withdrawal of Tenders Tenders of Warrants may be withdrawn at any
time prior to the expiration of the Exchange
Offer. Thereafter, such tenders are
irrevocable, except that they may be
withdrawn after the expiration of 40
business days from the commencement of the
Exchange Offer, unless accepted for exchange
prior to that date. See "The Exchange Offer
-- Withdrawal Rights."
Acceptance of and Delivery
of Common Stock The Company will accept for exchange any and
all Warrants that are properly tendered
prior to the Expiration Date. Fractional
shares of Common Stock will be rounded to
the nearest whole number. The Common Stock
to be issued pursuant to the Exchange Offer
will be delivered on or promptly following
the Exchange Offer Acceptance Date. The
Exchange Agent (as defined herein) will act
as agent for tendering holders for the
purpose of issuing Common Stock. See "The
Exchange Offer -- Acceptance of Warrants;
Delivery of Common Stock."
Conditions to the Exchange
Offer The obligation of the Company to consummate
the Exchange Offer is subject to certain
conditions including, among others, there
shall be no litigation instituted which
seeks to prevent or enjoin the Exchange
Offer and the approval of the proposal to
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amend the terms of the Preferred Stock by a
majority of the holders of Preferred Stock.
The Company reserves the right to amend the
Exchange Offer at any time for any reason.
See "The Exchange Offer -- Conditions to the
Exchange Offer."
Procedures for Tendering
Warrants Each holder of Warrants wishing to accept
the Exchange Offer must complete and sign
the Letter of Transmittal, in accordance
with the instructions contained herein and
therein, and forward or hand deliver such
Letter of Transmittal, together with any
signature guarantees and any other documents
required by the Letter of Transmittal,
including certificates representing the
tendered Warrants or confirmations of, or an
Agent's Message (as defined herein) with
respect to, book entry transfers of such
Warrants, to the Exchange Agent at one of
its addresses set forth on the back cover
page of this Offering Circular/Proxy
Statement. Included with the Letter of
Transmittal is a written consent of the
holders of the Preferred Stock providing for
the approval of amendments to the terms of
the Preferred Stock. Since the Exchange
Offer is conditioned upon the approval of
the amendments to the Preferred Stock, the
Company is requiring that any Warrant holder
who would like to participate in the
Exchange Offer is required to deliver the
written consent to the Company along with
the Letter of Transmittal. Holders of
Preferred Stock who do not elect to exchange
Warrants for Common Stock may nevertheless
consent to the amendment to the Preferred
Stock by duly executing the written consent.
Any beneficial owner of Warrants whose
securities are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee is urged to contact
the registered holder(s) of such securities
promptly to instruct the registered
holder(s) whether to tender such beneficial
owner's securities. Beneficial Holders whose
certificates representing their Warrants are
not immediately available or who cannot
deliver their certificates or any other
required documents to the Exchange Agent
prior to the Expiration Date may tender
their Warrants pursuant to the guaranteed
delivery procedure set forth herein. See
"The Exchange Offer -- Procedures for
Tendering -- Guaranteed Delivery."
Certain Federal Income Tax
Consequences For a discussion of certain federal income
tax consequences of the Exchange Offer to
holders of Warrants, see "Certain Federal
Income Tax Considerations."
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The Warrants, the Common Stock
and the Preferred Stock As of October 31, 1997, there were 7,978,305
shares of Common Stock issued and
outstanding and 8,137,840 shares of Common
Stock reserved for issuance in connection
with the exercise of outstanding each of
options and warrants, including Warrants
reserved in connection with this Exchange
Offer. In addition, the Company has 6,720
shares of Convertible Preferred Stock issued
and outstanding each of which are
convertible commencing May 1, 1998 on the
basis of the aggregate stated value of the
Preferred Stock to be converted divided by
the lesser of (i) $2.00 per share of Common
Stock or (ii) 50% of the average closing
sale price for the Common Stock for the last
ten trading days in the fiscal quarter of
the Company prior to such conversion. If
such Preferred Stock was converted into
Common Stock as of the date of the
commencement of this Exchange Offer, such
Preferred Stock would be convertible into
12,330,275 shares of Common Stock. It is a
condition of the Exchange Offer that all
Warrant holders who tender their Warrants
approve the amendments to the terms of the
Preferred Stock which among other things
provides for the Delayed Conversion Option
and the Revised Redemption Terms. Since the
number of shares that are issuable upon the
conversion of the Convertible Preferred
Stock is based in part on the market price
of the Common Stock, the Delayed Conversion
Option could result in less shares of Common
Stock being issued upon the conversion of
the Preferred Stock. Assuming that all of
the holders of the outstanding Warrants
accept the Exchange Offer, the number of
issued and outstanding shares of Common
Stock upon the consummation of the Exchange
Offer would increase by 1,500,000 to
9,478,305 and the number of shares of Common
Stock reserved for issuance in connection
with the exercise of outstanding warrants,
options and Preferred Stock (assuming the
Preferred Stock was convertible into Common
Stock as of October 31, 1997) would be
16,268,115. See "Description of the
Warrants" and "Description of Capital
Stock."
Trading The Common Stock is reported on the Nasdaq
Small Cap Market ("Nasdaq") under the symbol
"ENTR." The Common Stock is also traded on
the Boston Stock Exchange under the symbol
"ENT".
Exchange Agent Continental Stock Transfer & Trust Company.
See "The Exchange Offer -- Exchange Agent."
Risk Factors See "Risk Factors" beginning on page
14 for discussion of certain risk factors
that should be carefully considered in
connection with deciding whether to tender
Warrants in the Exchange Offer.
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<PAGE>
Amendment to the Terms
of the Preferred Stock See "Proposal to Amend the Terms of the
Preferred Stock" for a description of
proposed amendments to the Preferred Stock
which must be approved by the holders of not
less than a majority of all outstanding
shares of Preferred Stock. Such approval is
a condition to the consummation of the
Exchange Offer.
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<PAGE>
RISK FACTORS
The securities offered hereby involve a high degree of risk.
Prospective investors should carefully consider the following risk factors, as
well as information contained elsewhere in this Offering Circular/Proxy
Statement, before making a decision to tender the Warrants in exchange for
shares of Common Stock and approving the proposal to amend the terms of the
Preferred Stock.
GENERAL RISKS AND RISKS RELATED TO CURRENT FINANCIAL CONDITION
History of Losses; Change in Strategy; Continuing Net Losses;
Accumulated Deficit. The Company has incurred significant losses since
inception. In July 1996, the Company announced a restructuring whereby certain
members of its management resigned and certain fixed costs were reduced as a
result of the Company's decision to focus its efforts on recreation and
entertainment products. Subsequently, the Company decided to capitalize on its
expertise in on-line and internet development to provide on-line and internet
web-site development and network solutions for corporations. In connection
therewith, the Company incurred significant expenses to start the Internet
services business and the Company continues to incur significant losses. For the
year ended May 31, 1997 and the quarter ended August 31, 1997, the Company had
net losses of $8,236,700 and $1,634,100, respectively. The Company had an
accumulated deficit of $24,589,600 as of August 31, 1997. The Company
anticipates that significant losses are likely to continue until such time, if
ever, as the Company can profitably deliver network solutions, services and
products.
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. 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 ability to attract
and retain highly trained executives and professionals with background
experience and knowledge of the Internet, intranet and other new media platforms
is critical to the success of the Company. The Company's ability to develop its
businesses 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.
Limited Working Capital; Possible Need for Additional Financing;
Uncertainty of Capital Funding. As of August 31, 1997, the Company had cash and
cash equivalents of $3,063,400. In May 1996, the Company consummated a public
offering whereby it received net proceeds of approximately $6,791,600. In
December 1996, the Company consummated the December 1996 Private Placement and
received approximately $7,869,100 in net proceeds. The Company expects that its
existing capital resources will enable it to undertake the Company's new
strategy and to maintain its current operations for the next 9 months. However,
based on management's assessment of the demand for Web-related services, the
Company may significantly alter the level of expenses both within the next 9
months and thereafter. Moreover, these funds may not be sufficient to meet the
Company's longer term cash requirements for operations. 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.
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<PAGE>
RISKS RELATED TO DESIGNING, DEVELOPING, INSTALLING, MAINTAINING AND HOSTING
CORPORATE WEB SITES
Developing Market For Providing Network Solutions, Products and
Services; New Entrants, USWeb Relationship. A portion of the Company's future
growth is dependent to a significant extent upon its ability to derive revenue
from sales to its customers of its "network related products and services,"
which the Company defines as designing, developing, installing, maintaining and
hosting corporate web sites and networks for internal communications as well as
external commerce. The market for designing, developing, installing, maintaining
and hosting corporate web sites and networks has only recently begun to develop,
is rapidly evolving, highly competitive, and is characterized by an increasing
number of market entrants who have introduced or developed products and services
for communication and commerce. Demand and market acceptance for such services
are subject to a high level of uncertainty and there can be no assurance that
commerce and communication through such services will continue to grow. In
connection with this new strategy, the Company has entered into an agreement
with US Web whereby it is a franchisee in a new franchise with no known
comparable franchise model and where the market for such franchise is untested.
USWeb has had limited experience as a franchisor and the Company has no previous
experience as a franchisee and the future success of the Company will be
dependent in part on the overall success of the US Web Network, which there can
be no assurance. While the Company believes that it can generate revenues as a
franchisee, there can be no assurance that it can generate revenues or become
profitable in the future. Finally, under the terms of the franchise agreement,
the Company can only serve certain territories and there can be no assurance
that the Company will be able to obtain additional franchises or serve
additional territories in the future.
Internet Services Competition; Low Barriers to Entry. The market for
the Company's web site related services is highly competitive. The Company faces
competition from national and regional advertising agencies, specialized and
integrated marketing communication firms as well as sole proprietorships and
small businesses in the computer network solutions industry. The Company expects
that new competitors that either provide integrated or specialized services
(e.g., corporate identity and packaging, advertising services or World Wide Web
site design) and are technologically proficient, will emerge and will be
competing with the Company. Many of the Company's competitors or potential
competitors have longer operating histories, longer client relationships and
significantly greater financial, management and other resources than the
Company. Although only a few of these competitors have to date offered a full
range of Internet and Intranet development and maintenance services, several
have announced their intention to offer comprehensive Internet and Intranet
solutions. Furthermore, most of the Company's current and potential competitors
have longer operating histories, larger installed customer bases, longer
relationships with customers and significantly greater financial, technical,
marketing and public relations resources than the Company and could decide to
increase their resource commitments to the Company's market. In addition, many
of the Company's competitors have lower overhead, more technical expertise and
more advanced technology. To the extent that existing competitors or new
competitors cause the Company to lose clients, the Company's business, financial
condition and operating results could be materially adversely affected.
Additionally, the Company has no significant proprietary technology that would
preclude or inhibit competitors from entering the integrated marketing
communication solutions market. The Company intends to compete on the basis of
price and the quality of its services. In addition, the market for Internet and
Intranet development is relatively new and subject to continuing definition,
and, as a result, the core business of certain competitors may better position
them to compete in this market as it matures. Competition of the type described
above could materially adversely affect the Company's business, results of
operations and financial condition. There can be no assurance that existing or
future competitors will not develop or offer marketing communication services
and products that provide significant performance, price, creative or other
advantages over those offered by the Company, which could have a material
adverse effect on the Company's business, financial condition and operating
results.
Uncertain Adoption of the Internet and Intranet as a Medium of Commerce
and Communications; Dependence on the Internet and Intranet. The Company's
ability to derive revenues from providing web-related and network solutions will
depend in part upon industry demand for Internet and Intranet services and the
type and quality of infrastructure for providing Internet and Intranet access
and carrying Internet and Intranet traffic. The
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Internet and Intranet may not become efficient, viable commercial marketplaces
because of issues such as, among other things, security, reliability, cost, ease
of use and access, and quality of service, and because of inadequate development
of the necessary solutions infrastructure, such as a reliable computer network
or timely development of complementary products, such as high speed modems. If
the necessary infrastructure or complementary products are not developed or the
Internet and Intranet do not become efficient, viable commercial marketplaces,
the Company's business, financial condition and operating results could be
materially adversely affected. Furthermore, even if the Internet and Intranet
become efficient, viable commercial marketplaces, there can be no assurance that
businesses will elect to outsource Web site and Intranet development and
maintenance services. If such services prove to be unreliable, ineffective or
too expensive, or if software companies develop tools sufficiently user-friendly
and cost-effective for nonprofessionals to use, enterprises may choose to
develop and maintain all or part of their Web sites or Intranets in-house.
Management of Growth. The rapid execution necessary for the Company to
exploit the market for its business model requires an effective planning and
management process. The Company's rapid growth has placed, and is expected to
continue to place, a significant strain on the Company's managerial, operational
and financial resources. The Company expects that continued hiring of new
personnel will be required to support its business. To manage its growth, the
Company must continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that the Company's management will be able
to achieve the rapid execution necessary to exploit the market for the Company's
business model. The Company's future operating results will also depend on its
ability to expand its Technology Services, Marketing and Affiliate Operations
organizations. If the Company is unable to manage growth effectively, the
Company's business, results or operations and financial condition will be
materially adversely affected.
Uncertain Acceptance and Maintenance of USWeb Brand. The Company
believes that establishing and maintaining the USWeb brand is a critical aspect
of its efforts to attract customers and that the importance of brand recognition
will increase due to the increasing number of companies entering the market for
Internet and Intranet service provision. Promotion of the USWeb brand will
depend largely on the success of USWeb's marketing and the ability of the
Company and other USWeb affiliates to provide high quality, reliable and cost
effective Web site and Intranet design, development and maintenance services.
Furthermore, in order to promote the USWeb brand in response to competitive
pressures, the Company may find it necessary to increase its marketing budget or
otherwise increase its financial commitment to creating and maintaining brand
loyalty among customers. If USWeb fails to promote and maintain its brand, or
incurs excessive expenses in an attempt to promote and maintain its brand, the
Company's business, results of operations and financial condition will be
materially adversely affected.
Risks Associated with Acquisitions. As part of its business strategy,
the Company expects to make acquisitions of, or significant investments in,
businesses that currently offer complementary web site and network solution
related services, products and technologies. Any such future acquisitions or
investments would be accompanied by the risks commonly encountered in
acquisitions of businesses. Such risks include, among other things, the
difficulty of assimilating the operations and personnel of the acquired
businesses, the potential disruption of the Company's ongoing business, the
inability of management to maximize the financial and strategic position of the
Company through the successful incorporation of acquired personnel and clients,
the maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and clients as a result of any
integration of new management personnel. The Company expects that future
acquisitions, if any, could provide for consideration to be paid in cash, stock
or a combination of cash and stock. There can be no assurance that any of these
acquisitions will be consummated. If an entity is acquired by the Company and
such entity is not efficiently or completely integrated with the Company, then
the Company's business, financial condition and operating results could be
materially adversely affected.
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RISKS RELATED TO THE CAPITALIZATION OF THE COMPANY
Authorization of Preferred Stock. In addition to the Preferred Stock,
the Company's Board of Directors has the authority, without further action by
the stockholders, to issue 1,993,280 shares of preferred stock, in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. While no additional class or series of
preferred stock can be senior to the Preferred Stock, the issuance of preferred
stock in the future could adversely affect the voting power of holders of the
Company's Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any additional shares of preferred stock.
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.
Outstanding Options and Warrants. There are currently outstanding
options and warrants to purchase 8,137,840 shares in the aggregate at exercise
prices ranging between $1.75 and $6.60, including 4,200,000 Warrants. In
addition, as of October 31, 1997, the Company has 6,720 shares of Preferred
Stock issued and outstanding which are convertible commencing May 1, 1998.
During the ten (10) day trading period in the fiscal quarter immediately
preceding the commencement of this Exchange Offer, the average closing sales
price of the Company's Common Stock as reported by the Nasdaq SmallCap Market
was $1.47 per share. Assuming conversion of all outstanding Preferred Stock
based upon such trading price an aggregate of 12,330,275 shares of Common Stock
would be issued. The exercise of such options and warrants or the conversion of
the Preferred Stock will have a dilutive effect on the ownership interests of
the Company's existing stockholders. It is a condition of the Exchange Offer
that all Warrant holders who tender their Warrants accept the Delayed Conversion
Option and the Revised Redemption Terms. Since the number of shares that are
issuable upon the conversion of the Preferred Stock is based in part on the
market price of the Common Stock, the Delayed Conversion Option could, depending
upon the trading price of the Company's Common Stock, result in less shares of
Common Stock being issued upon the conversion of the Preferred Stock.
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,
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.
Indefinite Amount of Common Stock Issuable upon the Conversion of
Preferred Stock. The holders of the Preferred Stock have the right, at the
holder's option, at any time after April 30, 1998 (or June 30, 1999 if the
Delayed Conversion Option is accepted), or from time to time to thereafter, to
convert each share of Preferred Stock into such whole number of shares of Common
Stock equal to the aggregate stated value ($1,250) of the Preferred Stock to be
converted divided by the lesser of (i) $2.00 or (ii) 50% of the average closing
sale price for the Common Stock for the last ten trading days in the fiscal
quarter of the Company prior to such conversion. Accordingly, if the price of
the Common Stock is below $4.00, the number of shares that the Company will be
required to issue upon the conversion of the Preferred Stock will be uncertain.
While the Company intends to have sufficient authorized capital with respect to
the conversion of the Preferred Stock, there can be no assurance that the
Company will in fact have a sufficient amount of authorized Common Stock to
cover all conversions of Preferred Stock.
New Nasdaq Regulations. On August 22, 1997, the Commission approved
changes previously approved by the Board of Directors of The Nasdaq Stock
Market, Inc. that further strengthen both the quantitative and qualitative
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standards for issuers listing on Nasdaq. While the Company presently meets the
new 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.
Forward Looking Statements. This Offering Circular/Proxy Statement
contains certain forward-looking statements, which are intended to be covered by
the safe harbors created by the Private Securities Litigation Reform Act of
1995. Investors are cautioned that all forward-looking statements involve risks
and uncertainty, including without limitation, the ability of the Company to
provide a full range of Internet and Intranet-based business solutions. Although
the Company believes that the assumptions, including the demand for Web-related
services, underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this press
release will prove to be accurate. In light of significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
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DILUTION
As of August 31, 1997, the unaudited pro forma net tangible book value
of the Company was $4,006,400, or approximately $.50 per share based on
7,978,305 shares of Common Stock outstanding after giving effect to the issuance
of 248,864 shares of Common Stock as a result of the Public Warrant Exchange
Offer and the exercise of options to purchase 50,000 shares of Common Stock at
an exercise price of $2.35 per share. Assuming the issuance of an additional
1,500,000 shares of Common Stock pursuant to this Exchange Offer (without giving
effect to the conversion of the Company's outstanding Preferred Stock and other
options and warrants outstanding), the pro forma net tangible book value of the
Company's Common Stock at August 31, 1997 would have been $4,006,400 or
approximately $.42 per share based on 9,478,305 shares of Common Stock
outstanding. Net tangible book value per share represents the tangible assets of
the Company less all liabilities, divided by the number of shares outstanding.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
will not be required to accept for exchange, subject to any applicable rules or
regulations of the Commission, any Warrants tendered for exchange and may
postpone the exchange of any Warrants tendered and to be exchanged by it, and
may terminate or amend the Exchange Offer as provided herein if any of the
following conditions exist:
(1) the written consent of the holders of not less than a
majority of all outstanding shares of Preferred Stock of the proposed amendments
to the Certificate of Designations, Preferences and Other Rights and
Qualifications of the Class A Preferred Stock (i.e., the Delayed Conversion
Option and the Revised Redemption Terms);
(2) there shall have been instituted or threatened or be
pending any action or proceeding before or by any court or governmental,
regulatory or administrative agency or instrumentality, or by any other person,
(i) that challenges the making of the Exchange Offer, or might, directly or
indirectly, prohibit, prevent, restrict or delay consummation of the Exchange
Offer or otherwise adversely affect, in any material manner, the Exchange Offer
or which requires the Company to file a registration statement in respect of the
Common Stock being offered as consideration in the Exchange Offer or (ii) that
is, or is reasonably likely to be, in the sole judgment of the Company,
materially adverse to the business, operations, properties, condition (financial
or otherwise), assets, liabilities or prospects of the Company;
(3) there shall have occurred any material adverse
development, in the sole judgment of the Company, with respect to any action or
proceeding concerning the Company;
(4) an order, statute, rule, regulation, executive order,
stay, decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or governmental,
regulatory or administrative agency or instrumentality that, in the sole
judgment of the Company, would or might prohibit, prevent, restrict or delay
consummation of the Exchange Offer or that is, or is reasonably likely to be,
materially adverse to the business, operations, properties, condition (financial
or otherwise), assets, liabilities or prospects of the Company;
(5) there shall have occurred or be likely to occur any event
affecting the business or financial affairs of the Company or which, in the sole
judgment of the Company, would or might prohibit, prevent, restrict or delay
consummation of the Exchange Offer, or that will, or is reasonably likely to,
materially impair the contemplated benefits to the Company of the Exchange
Offer, or otherwise result in the consummation of the Exchange Offer not being
or not reasonably likely to be in the best interests of the Company;
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(6) the Company shall not have received from any federal,
state or local governmental, regulatory or administrative agency or
instrumentality, any approval, authorization or consent that, in the sole
judgment of the Company, is necessary to effect the Exchange Offer; and
(7) there shall have occurred (a) any general suspension of,
or limitation on prices for, trading in securities in the United States
securities or financial markets, (b) any significant adverse change in the price
of the Warrants or the Common Stock in the United States securities or financial
markets, (c) a material impairment in the trading market for debt or equity
securities, (d) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States, (e) any limitation (whether
or not mandatory) by any government or governmental, administrative or
regulatory authority or agency, domestic or foreign, on, or other event that, in
the reasonable judgment of the Company, might affect, the extension of credit by
banks or other lending institutions, (f) a commencement of a war or armed
hostilities or other national or international calamity directly or indirectly
involving the United States, (g) any imposition of a general suspension of
trading or limitation of prices on Nasdaq, or (h) in the case of any of the
foregoing existing on the date hereof, a material acceleration or worsening
thereof.
All the foregoing conditions are for the sole benefit of the Company
and may be asserted by the Company at any time regardless of the circumstances
giving rise to such conditions and may be waived by the Company, in whole or in
part, at any time and from time to time, in the sole discretion of the Company.
The failure by the Company at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right, and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to time.
If any of the conditions set forth in this section shall not be
satisfied, the Company may, subject to applicable law, (i) terminate the
Exchange Offer and return all Warrants tendered pursuant to the Exchange Offer
to tendering holders; (ii) extend the Exchange Offer and retain all tendered
Warrants until the Expiration Date for the extended Exchange Offer; (iii) amend
the terms of the Exchange Offer or modify the consideration to be provided by
the Company pursuant to the Exchange Offer; or (iv) waive the unsatisfied
conditions with respect to the Exchange Offer and accept all Warrants tendered
pursuant to the Exchange Offer.
EXPIRATION; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer is scheduled to expire at 5:00 PM, New York City
time, on the Expiration Date. The Company expressly reserves the right, in its
sole discretion, at any time or from time to time, to extend the period of time
during which the Exchange Offer is open by giving oral or written notice of such
extension to the Exchange Agent and making a public announcement thereof as
described in the second succeeding paragraph. There can be no assurance that the
Company will exercise its right to extend the Exchange Offer. During any
extension of the Exchange Offer, all Warrants previously tendered pursuant
thereto and not exchanged or withdrawn will remain subject to the Exchange Offer
and may be accepted for exchange by the Company at the expiration of the
Exchange Offer subject to the right of a tendering holder to withdraw his
Warrants. See "The Exchange Offer -- Withdrawal of Tenders."
The Company also expressly reserves the right, subject to applicable
law, (i) to delay acceptance for exchange of any Warrants or, regardless of
whether such Warrants were theretofore accepted for exchange, to delay the
exchange of any Warrants pursuant to the Exchange Offer or to terminate the
Exchange Offer and not accept for exchange any Warrants, if any of the
conditions to the Exchange Offer specified herein fail to be satisfied by giving
oral or written notice of such delay or termination to the Exchange Agent; (ii)
to waive any condition to the Exchange Offer and accept all the Warrants
tendered; and (iii) at any time, or from time to time, to amend the terms of
Exchange Offer in any respect, including the Exchange Offer Consideration. The
reservation by the Company of the right to delay exchange or acceptance for
exchange of Warrants is subject to the provisions of Rule 13e-4(f)(5) under the
Exchange Act, which requires that the Company pay the consideration offered or
return the Warrants deposited by or on behalf of holders thereof promptly after
the termination or withdrawal of the Exchange Offer. No fractional shares of
Common Stock will be issued in the Exchange Offer. All fractional shares will be
rounded to the nearest whole number.
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Any extension, delay, termination or amendment of the Exchange Offer
will be followed as promptly as practicable by a public announcement thereof.
Without limiting the manner in which the Company may choose to make a public
announcement of any extension, delay, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by issuing a release to the
Dow Jones News Service, except in the case of an announcement of an extension of
the Exchange Offer, in which case the Company shall have no obligation to
publish, advertise or otherwise communicate such announcement other than by
issuing a notice of such extension by press release or other public
announcement, which notice shall be issued no later than 9:00 A.M., New York
City time, on the next business day after the previously scheduled Expiration
Date.
If the Company makes a material change in the terms of the Exchange
Offer or the information concerning the Exchange Offer, or if the Company waives
any condition of the Exchange Offer that results in a material change to the
circumstances of the Exchange Offer, the Company will disseminate additional
Exchange Offer materials in a manner reasonably calculated to inform holders of
Warrants of such change, and will provide holders of Warrants adequate time to
consider such materials and their participation in the Exchange Offer. The
minimum period during which the Exchange Offer must remain open following a
material change in the terms of the Exchange Offer or the information concerning
the Exchange Offer, other than a change in the Exchange Offer Consideration or
the percentage of the Warrants sought in the Exchange Offer, will depend upon
the facts and circumstances, including the relative materiality, of the changed
terms or information.
If the Company increases or decreases the Exchange Offer Consideration
or the amount of Warrants sought in the Exchange Offer, the Exchange Offer will
remain open at least ten business days from the date that the Company first
publishes, sends or gives notice, by public announcement or otherwise, of such
increase or decrease. The Company has no current intention to increase or
decrease the Exchange Offer Consideration currently offered or the amount of
Warrants sought to be purchased.
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The purpose of the Exchange Offer is to reduce the overhang to the
market for its Common Stock and offer Warrant holders the opportunity to
participate in the long term ownership of the Company's securities. The Company
believes that the overhang will be reduced in two ways. First, upon the
consummation of the Exchange Offer, the potential number of shares of Common
Stock issuable upon the exercise of outstanding Warrants and Options would be
substantially reduced. Second, the Company believes that the proposed amendments
to the Certificate of Designations, Preferences and Other Rights and
Qualifications of Class A Preferred Stock (and specifically the Delayed
Conversion Option) should result in the issuance of less shares of Common Stock
in the future since the Company believes that if its business plan is achieved
there could be an increase in the trading price of the Common Stock between May
1, 1998 and June 30, 1999 which may enable the trading price of its Common Stock
to be above $4.00 per share. Under the terms of the Preferred Stock, if the
trading price of the Common Stock is below $4.00 for the last ten trading days
in the fiscal quarter of the Company prior to such conversion, the number of
shares of Common Stock to be issued upon the conversion of Preferred Stock
increases at the same rate as the stock price decreases below $4.00 per share.
In contrast, if the trading price of the Common Stock is $4.00 or above for the
last ten trading days in the fiscal quarter of the Company prior to conversion,
4,200,000 shares of Common Stock would be issued upon the conversion of
Preferred Stock. Until recently, the trading price of the Company's Common Stock
during 1997 has been below $2.00 per share. During the ten (10) day trading
period in the fiscal quarter immediately preceding the date of the commencement
of the Exchange Offer offering, the closing sales price of the Company's Common
Stock as reported by the Nasdaq SmallCap was 1.47 per share. Assuming conversion
of all outstanding Preferred Stock based upon such trading price an aggregate of
12,330,275 shares of Common Stock would be issued as of the date of the
commencement of the Exchange Offer. However, there can be no assurance as to the
trading price of the Common Stock at the time of the initial right of Preferred
Stockholders to convert Preferred Stock into shares of Common Stock or at any
time thereafter.
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The Company reviewed various exchange ratios and has concluded that a
ratio of one share of Common Stock for every 2.8 warrants best serves the needs
of the Company, its stockholders and the Warrant holders. The Company believes
that such ratio will enable Warrant holders to receive immediate value for their
investment since the trading price of the Common Stock is currently below the
exercise price of the Warrants, while at the same time minimizing the dilutive
effect on its current Common Stockholders since only a maximum of 1,500,000
shares of Common Stock will be issued as a result of the exchange. The Exchange
Offer will also allow Warrant holders to participate through the ownership of
Common Stock, in any long term appreciation resulting therefrom. The holders of
such Common Stock will be able to "tack" the holding period of the Warrants to
their Common Stock for purposes of Rule 144. Accordingly, since the Warrants
were acquired on December 13, 1996, sales of the Common Stock may be made in
compliance with Rule 144 commencing December 13, 1997. The Company believes that
by allowing Warrant holders to immediately receive Common Stock without the
payment of the exercise price also negates any negative impact of the Delayed
Conversion Option.
PROCEDURES FOR TENDERING
TENDERS OF SECURITIES. For a Registered Holder to validly tender
Warrants pursuant to the Exchange Offer, a properly completed and validly
executed Letter of Transmittal (or a facsimile thereof), together with any
signature guarantees or, in the case of a Book-Entry Transfer (as defined
below), an Agent's Message (as defined below), and any other documents required
by the instructions to the Letter of Transmittal, must be received by the
Exchange Agent prior to the Expiration Date at the address set forth in the
Letter of Transmittal. In addition, the Exchange Agent must receive either
certificates for tendered Warrants at any of such addresses or such Warrants
must be transferred pursuant to the procedures for book-entry transfer described
below and a confirmation of, or an Agent's Message with respect to, such
book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date. A Registered Holder who desires to tender Warrants and who
cannot comply with the procedures set forth herein for tender on a timely basis
or whose Warrants are not immediately available must comply with the procedures
for guaranteed delivery set forth below. Letters of Transmittal, certificates
representing Warrants and confirmations of, or an Agent's Message with respect
to, book-entry transfer should be sent only to the Exchange Agent, and not to
the Company or the Trustee.
The term "Agent's Message" means (i) a message transmitted by a
Book-Entry Facility to, and received by, the Exchange Agent and forming a part
of a Book-Entry Confirmation, which states that such Book-Entry Transfer
Facility (as defined herein) has received an express acknowledgment from the
participant in such Book-Entry Transfer Facility, (ii) tendering the Warrants
that such participant has received and (iii) agreeing to be bound by the terms
of the Letter of Transmittal and that the Company may enforce such agreement
against the participant.
DELIVERY OF LETTERS OF TRANSMITTAL. If the certificates for Warrants
are registered in the name of a person other than the signer of the Letter of
Transmittal relating thereto, then, in order to tender such Warrants pursuant to
the Exchange Offer, the certificates evidencing such Warrants must be endorsed
or accompanied by appropriate bond powers signed exactly as the name or names of
the registered owner or owners appear on the certificates, with the signatures
on the certificates or bond powers guaranteed as provided below.
ANY BENEFICIAL OWNER WHOSE WARRANTS ARE REGISTERED IN THE NAME OF A
BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE AND WHO WISHES
TO TENDER WARRANTS IN THE EXCHANGE OFFER SHOULD CONTACT SUCH REGISTERED HOLDER
PROMPTLY AND INSTRUCT SUCH REGISTERED HOLDER TO TENDER THE WARRANTS ON SUCH
BENEFICIAL OWNER'S BEHALF. IF ANY BENEFICIAL OWNER WISHES TO TENDER WARRANTS
HIMSELF, THAT BENEFICIAL OWNER MUST, PRIOR TO COMPLETING AND EXECUTING THE
LETTER OF TRANSMITTAL AND, WHERE APPLICABLE, DELIVERING HIS WARRANTS, EITHER
MAKE APPROPRIATE ARRANGEMENTS TO REGISTER OWNERSHIP OF THE WARRANTS IN SUCH
BENEFICIAL OWNER'S NAME OR FOLLOW THE PROCEDURES DESCRIBED IN THE IMMEDIATELY
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PRECEDING PARAGRAPH. THE TRANSFER OF RECORD OWNERSHIP MAY TAKE A CONSIDERABLE
AMOUNT OF TIME.
The method of delivery of Warrants, Letters of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holder tendering the Warrants. If delivery is to be made by mail, it is
suggested that the holder use properly insured, registered mail with return
receipt requested, and that the mailing be made sufficiently in advance of the
Expiration Date to permit delivery to the Exchange Agent prior to that date and
time.
Included with the Letter of Transmittal is a written consent of the
holders of the Preferred Stock providing for the approval of amendments to the
terms of the Preferred Stock. Since the Exchange Offer is conditioned upon the
approval of the amendments to the Preferred Stock, any Warrant holder who would
like to participate in the Exchange Offer is required to deliver the written
consent to the Company along with the Letter of Transmittal. Since the Exchange
Offer is conditioned upon the approval of the amendments to the Preferred Stock,
the Company is requiring that any Warrant holder who would like to participate
in the Exchange Offer is required to deliver the written consent to the Company
along with the Letter of Transmittal.
BOOK-ENTRY TRANSFER. Promptly after the commencement of the Exchange
Offer, the Exchange Agent and the Company will seek to establish a new account
or utilize an existing account with respect to the Warrants at The Depository
Trust Company (a "Book-Entry Transfer Facility"). Any financial institution that
is a participant in the Book-Entry Transfer Facility system and whose name
appears on a security position listing as the owner of Warrants may make book-
entry delivery of such Warrants by causing the Book-Entry Transfer Facility to
transfer such Warrants into the Exchange Agent's account in accordance with the
Book-Entry Transfer Facility's procedures for such transfer. However, although
delivery of Warrants may be effected through book-entry transfer at a Book-Entry
Transfer Facility, the applicable Letter of Transmittal (or a facsimile or
electronic copy thereof or an electronic agreement to comply with the terms
thereof), properly completed and validly executed, with any required signature
guarantees, an Agent's Message and any other required documents, must, in any
case, be received by the Exchange Agent at one of its addresses set forth on the
back cover page of this Offering Circular/Proxy Statement on or prior to the
Expiration Date, or the tendering holder must comply with the guaranteed
delivery procedures described below. The Company may elect to waive receipt of a
written Letter of Transmittal if delivery is properly effected through the
Book-Entry Transfer Facility.
IN ORDER TO BE ASSURED OF PARTICIPATING IN THE EXCHANGE OFFER, ANY
BENEFICIAL OWNER WHOSE WARRANTS ARE REGISTERED IN THE NAME OF A BROKER, DEALER,
COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE OR WHO WISHES TO TENDER WARRANTS
SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY (LEAVING SUCH REGISTERED HOLDER
WITH SUFFICIENT TIME TO TENDER THE WARRANTS ON THE BENEFICIAL HOLDERS BEHALF)
AND INSTRUCT SUCH REGISTERED HOLDER TO TENDER THE WARRANTS ON SUCH BENEFICIAL
OWNER'S BEHALF.
SIGNATURE GUARANTEES. Signatures on the Letter of Transmittal must be
guaranteed by an "eligible guarantor institution" as defined in Rule 17Ad-15
under the Exchange Act (each of the foregoing being an "Eligible Institution")
unless (a) the Letter of Transmittal is signed by the registered holder of the
Warrants tendered therewith (or by a participant in one of the Book-Entry
Transfer Facilities whose name appears on a security position listing as the
owner of such Warrants) and neither the "Special Payment Instructions" box nor
the "Special Delivery Instructions" box of the Letter of Transmittal is
completed, or (b) such Warrants are tendered for the account of an Eligible
Institution.
GUARANTEED DELIVERY. If a holder desires to tender Warrants pursuant to
the Exchange Offer and (a) certificates representing such Warrants are not
immediately available, (b) time will not permit such holder's Letter of
Transmittal, certificates evidencing such Warrants or other required documents
to reach the Exchange Agent prior
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to the Expiration Date or (c) such holder cannot complete the procedures for
book-entry transfer prior to the Expiration Date, a tender may be effected if
all the following are complied with:
(a) such tender is made by or through an Eligible Institution;
(b) on or prior to the Expiration Date, the Exchange Agent has
received from such Eligible Institution, at the address of the Exchange Agent
set forth in the Letter of Transmittal, a properly completed and validly
executed Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail or hand delivery) in substantially the form accompanying this
Offering Circular/Proxy Statement , setting forth the name and address of the
registered holder and the principal amount or number of Warrants being tendered
and stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the date of the Notice of
Guaranteed Delivery, the Letter of Transmittal validly executed (or a facsimile
thereof), together with certificates evidencing the Warrants (or confirmation
of, or an Agent's Message with respect to, book-entry transfer of such Warrants
into the Exchange Agent's account with a Book-Entry Transfer Facility), and any
other documents required by the Letter of Transmittal and the instructions
thereto, will be deposited by such Eligible Institution with the Exchange Agent;
and
(c) such Letter of Transmittal (or a facsimile thereof),
properly completed and validly executed, together with certificates evidencing
all physically delivered Warrants in proper form for transfer (or confirmation
of, or an Agent's Message with respect to, book-entry transfer of such Warrants
into the Exchange Agent's account with a Book-Entry Transfer Facility) and any
other required documents are received by the Exchange Agent within three New
York Stock Exchange trading days after the date of such Notice of Guaranteed
Delivery.
LOST OR MISSING CERTIFICATES. If a holder desires to tender Warrants
pursuant to the Exchange Offer but the certificates evidencing such Warrants
have been mutilated, lost, stolen or destroyed, such holder should write to or
telephone the Trustee, at the address or telephone number listed below, about
procedures for obtaining replacement certificates for such Warrants or arranging
for indemnification or any other matter that requires handling by the Trustee:
Continental Stock Transfer & Trust Company
Two Broadway, 19th Floor
New York, New York 10004
Telephone No. (212) 509-4000 Ext. 535
Telecopy No. (212) 509-5150
TENDER CONSTITUTES AN AGREEMENT. The tender of Warrants into the
Exchange Offer pursuant to any of the procedures described above, including
tendering through a book- entry delivery, will constitute a binding agreement
between the tendering holder and the Company upon the terms and conditions of
the Exchange Offer, and a representation that (i) such holder owns the Warrants
being tendered and is entitled to tender such Warrants as contemplated by the
Exchange Offer all within the meaning of Rule 14e-4 under the Exchange Act, and
(ii) the tender of such Warrants complies with Rule 14e-4.
Further, by executing or transmitting a Letter of Transmittal (as set
forth above, including book-entry transfer, and subject to and effective upon
acceptance for exchange for the Warrants tendered therewith or effectively
agreeing to the terms of the Letter of Transmittal pursuant to a book- entry
delivery), a tendering holder irrevocably sells, assigns and transfers to or
upon the order of the Company or its assignee all right, title and interest in
and to all such Warrants tendered thereby, waives any and all rights with
respect to the Warrants and releases and discharges the Company from any and all
claims such holder may have now, or may have in the future, arising out of or
related to the Warrants, and each such holder irrevocably selects and appoints
the Exchange Agent the true and lawful agent and attorney-in-fact of such holder
with respect to such Warrants, with full power of substitution and
resubstitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest) to (a) deliver certificates representing such
Warrants, or transfer ownership of such Warrants on the account books maintained
by a
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Book-Entry Transfer Facility, together, in each case, with all accompanying
evidences of transfer and authenticity, to or upon the order of the Company, (b)
present such Warrants for transfer on the relevant security register and (c)
receive all benefits or otherwise exercise all rights of beneficial ownership of
such Warrants (except that the Depositary will have no rights to or control over
funds from the Company).
OTHER MATTERS. Notwithstanding any other provision of the Exchange
Offer, delivery of the shares of Common Stock for Warrants tendered and accepted
pursuant to the Exchange Offer will occur only after timely receipt by the
Exchange Agent of such Warrants (or confirmation of, or an Agent's Message with
respect to, book-entry transfer of such Warrants into the Exchange Agent's
account with a Book-Entry Transfer Facility), together with properly completed
and validly executed Letters of Transmittal (or a facsimile or electronic copy
thereof or an electronic agreement to comply with the terms thereof) and any
other required documents.
All questions as to the form of all documents, the validity (including
time of receipt) and acceptance of tenders of the Warrants will be determined by
the Company, in its sole discretion, the determination of which shall be final
and binding. Alternative, conditional or contingent tenders of Warrants will not
be considered valid. The Company reserves the absolute right to reject any or
all tenders of Warrants that are not in proper form or the acceptance of which,
in the Company's opinion, would be unlawful. The Company also reserves the right
to waive any defects, irregularities or conditions of tender as to particular
Warrants. If the Company waives its right to reject a defective tender of
Warrants, the holder will be entitled to the Exchange Offer Consideration. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding. Any defect or irregularity in connection with tenders of Warrants must
be cured within such time as the Company determines, unless waived by the
Company. Tenders of Warrants shall not be deemed to have been made until all
defects and irregularities have been waived by the Company or cured. None of the
Company, the Exchange Agent or any other person will be under any duty to give
notice of any defects or irregularities in tenders of Warrants, or will incur
any liability to holders for failure to give any such notice.
WITHDRAWAL OF TENDERS
Tenders of Warrants may be withdrawn at any time until the Expiration
Date as such date may be extended. Thereafter, such tenders are irrevocable,
except that they may be withdrawn after the expiration of 40 business days from
the commencement of the Exchange Offer (November 19, 1997) unless accepted for
exchange prior to that date.
Holders who wish to exercise their right of withdrawal with respect to
a Exchange Offer must give written notice of withdrawal, delivered by mail, hand
delivery or facsimile transmission, to the Exchange Agent at the address set
forth in the Letter of Transmittal prior to the Expiration Date or at such other
time as otherwise provided for herein. In order to be effective, a notice of
withdrawal must specify the name of the person who deposited the Warrants to be
withdrawn (the "Depositor"), the name in which the Warrants are registered, if
different from that of the Depositor, and the number of Warrants to be withdrawn
prior to the physical release of the certificates to be withdrawn. If tendered
Warrants to be withdrawn have been delivered or identified through confirmation
of book-entry transfer to the Exchange Agent, the notice of withdrawal also must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with withdrawn Warrants. The notice of withdrawal must be signed
by the registered holder of such Warrants in the same manner as the applicable
Letter of Transmittal (including any required signature guarantees), or be
accompanied by evidence satisfactory to the Company that the person withdrawing
the tender has succeeded to the beneficial ownership of such Warrants.
Withdrawals of tenders of Warrants may not be rescinded, and any Warrants
withdrawn will be deemed not validly tendered thereafter for purposes of the
Exchange Offer. However, properly withdrawn Warrants may be tendered again at
any time prior to the Expiration Date by following the procedures for tendering
not previously tendered Warrants described elsewhere herein.
All questions as to the form, validity and eligibility (including time
of receipt) of any withdrawal of tendered Warrants will be determined by the
Company, in its sole discretion, which determination shall be final and binding.
None of the Company, the Exchange Agent or any other person will be under any
duty to give notification of any
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defect or irregularity in any withdrawal of tendered Warrants, or will incur any
liability for failure to give any such notification.
If the Company is delayed in its acceptance for conversion and payment
for any Warrants or is unable to accept for conversion or convert any Warrants
pursuant to the Exchange Offer for any reason, then, without prejudice to the
Company's rights hereunder, tendered Warrants may be retained by the Exchange
Agent on behalf of the Company and may not be withdrawn (subject to Rule
13e-4(f)(5) under the Exchange Act, which requires that the issuer making the
tender offer pay the consideration offered, or return the tendered securities,
promptly after the termination or withdrawal of a tender offer), except as
otherwise permitted hereby.
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FRACTIONAL SHARES
No fractional shares of Common Stock will be issued in the Exchange
Offer. All fractional shares will be rounded to the nearest whole number.
ACCEPTANCE OF WARRANTS;
DELIVERY OF COMMON STOCK
The acceptance of the Warrants validly tendered for exchange and not
withdrawn will be made as promptly as practicable after the Expiration Date. For
purposes of the Exchange Offer, the Company will be deemed to have accepted for
exchange validly tendered Warrants if, as and when the Company gives oral or
written notice thereof to the Exchange Agent. Such notice of acceptance shall
constitute a binding contract between the Company and the tendering holder
pursuant to which the Company will be obligated to provide the Exchange Offer
Consideration therefor. Subject to the terms and conditions of the Exchange
Offer, delivery of Common Stock in respect of Warrants accepted and exchanged
pursuant to the Exchange Offer. The Exchange Agent will act as agent for the
tendering holders of Warrants for the purposes of receiving Common Stock and
transmitting the Common Stock (through Book-Entry Transfer or otherwise) to the
tendering holders. Tendered Warrants not accepted for conversion by the Company,
if any, will be returned without expense to the tendering holder of such
Warrants (or, in the case of Warrants tendered by book-entry transfer into the
Exchange Agent's account at a Book-Entry Transfer Facility, such Warrants will
be credited to an account maintained at a Book-Entry Transfer Facility) as
promptly as practicable following the Expiration Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO WARRANTHOLDERS
The following discussion summarizes the material federal income tax
consequences to holders of the Warrants (herein referred to as "Holders")
relating to the exchange of the Warrants for Common Stock of the Company. The
discussion is based upon the Internal Revenue Code of 1986 (the "Code"), the
applicable Treasury Regulations (the "Regulations") and judicial and
administrative interpretations of the Code and Regulations, all as in effect on
the date of this Prospectus. Each Holder should be aware that the Code and the
Regulations, and any interpretation thereof, are subject to change and that any
change could be applied retroactively. This summary does not discuss all aspects
of federal income taxation that may be relevant to a particular Holder in light
of his personal investment circumstances or to certain types of Holders subject
to special treatment under the federal income tax laws (for example, tax-exempt
entities and foreign taxpayers) and does not discuss any aspect of state, local
or foreign tax laws. Each Holder is urged to consult his own tax advisor to
determine the particular tax consequences to him (including the applicability
and effect of state, local, foreign and other tax laws) of the exchange of the
Warrants for Common Stock.
Exchange of Warrants for Common Stock
In general, a Holder exchanging Warrants for Common Stock will
recognize gain or loss equal to the difference between the amount realized upon
the exchange (which will be equal to the fair market value of the Common Stock
received in exchange for the Warrants), and the basis of the Warrants that were
exchanged therefor. Such gain or loss will be capital gain or loss if the
Warrants thus exchanged were a capital asset in the hands of the Holder and the
Common Stock which would have been acquired upon the exercise of a Warrant would
have been a capital asset if so acquired, and will be long-term capital gain or
loss if the Holder has held the Warrants for more than 18 months prior to the
sale.
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Tax Basis and Holding Period of the Common Stock
Shares of Common Stock acquired upon the exchange of the Warrants will
have a tax basis equal to their fair market value at the time of the exchange.
The Holder may not tack to his holding period of the Common Stock the period he
held the Warrants transferred in exchange for the Common Stock.
Disposition of Common Stock
Upon the sale or exchange of shares of Common Stock to or with a person
other than the Company, a Holder will, as a general rule, recognize capital gain
or loss equal to the difference between the amount realized upon such sale or
exchange and the Holder's adjusted tax basis in such shares. Any capital gain or
loss recognized will generally be treated as long-term capital gain or loss if
the Holder held such shares for more than 18 months.
EXCHANGE AGENT
Continental Stock Transfer & Trust Company has been appointed Exchange
Agent for the Exchange Offer. All deliveries and correspondence sent to the
Exchange Agent should be directed to the address set forth in the Letter of
Transmittal Requests for assistance or additional copies of this Offering
Circular/Proxy Statement and the Letter of Transmittal should be directed to the
Exchange Agent, at its address set forth on the back cover page of this Offering
Circular/Proxy Statement. The Company has agreed to pay the Exchange Agent
customary fees for its services and to reimburse the Exchange Agent for its
reasonable out-of-pocket expenses in connection therewith. The Company also has
agreed to indemnify the Exchange Agent for certain liabilities, including
liabilities under the federal securities laws.
MISCELLANEOUS
The Company has not retained any dealer manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting tenders of Warrants. However, directors,
officers and employees of the Company (who will not be separately compensated
for such services) may solicit exchanges by use of the mails, personally or by
telephone, facsimile or similar means of electronic transmission. The Company
also will pay brokerage houses and other custodians, nominees and fiduciaries
their reasonable out-of-pocket expenses incurred in forwarding copies of this
Offering Circular/Proxy Statement and related documents to the beneficial owners
of the Warrants and in handling or forwarding tenders of Warrants by their
customers.
DESCRIPTION OF SECURITIES
The Company is currently authorized to issue 50,000,000 shares of the
Company's Common Stock, par value $.01 per share, and 2,000,000 shares of
preferred stock, par value $.01 per share. As of the date of this Offering
Circular/Proxy Statement, 7,978,305 shares of the Company's Common Stock are
currently issued and outstanding and 6,720 shares of Preferred Stock are issued
are issued and outstanding. The Preferred Stock is currently convertible into
Common Stock commencing May 1, 1998. During the ten (10) day trading period in
the fiscal quarter immediately preceding the date of the commencement of the
Exchange Offer, the average closing sales price of the Company's Common Stock as
reported by the Nasdaq SmallCap Market was $1.47 per share. Assuming conversion
of all outstanding Preferred Stock based upon such trading price an aggregate of
12,330,275 shares of Common Stock would be issued. As part of the proposal to
amend the Certificate of Designations, Preferences and Other Rights and
Qualifications of the Preferred Stock, the Company is seeking to delay the date
in which the Preferred Stock is convertible to Common Stock from May 1, 1998 to
June 30, 1999.
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<PAGE>
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by shareholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted can elect all of the
directors then being elected at a meeting at which a quorum is present. The
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. In
the event of liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining available
for distribution to them after payment of liabilities and after provision has
been made for the Convertible Preferred Stock and any other class of stock, if
any, having preference over the Common Stock. Holders of shares of Common Stock,
as such, have no redemption, preemptive or other subscription rights, and there
are no conversion provisions applicable to the Common Stock.
Convertible Preferred Stock
The following describes the current designations, preferences and other
rights and qualifications of the Preferred Stock. See "Proposal to Amend the
Terms of the Preferred Stock" for a description of proposed amendments to the
terms of the Preferred Stock.
Stated Value. Each share of Preferred Stock will have a stated value
(the "Stated Value") equal to $1,250.
Liquidation Preferences. Upon a liquidation of the Company (including a
sale by the Company of all or substantially all of its assets or a merger or
consolidation of the Company with another Company where the Company is not the
surviving entity), the assets of the Company available for distribution to the
stockholders of the Company, whether from capital, surplus or earnings, shall be
distributed in the following order of priority: (i) the holders of the
Convertible Preferred Stock shall be entitled to receive, prior and in
preference to any distribution to the holders of any Junior Securities (as
defined below) of the Company, an amount equal to the product of the Stated
Value multiplied by 1.1 for each share of Convertible Preferred Stock then
outstanding and (ii) the remaining assets of the Company available for
distribution, if any, to the stockholders of the Company shall be distributed
pro rata to the holders of issued and outstanding shares of Common Stock.
Ranking. The Convertible Preferred Stock will rank senior to all
classes and series of capital stock of the Company now existing or hereinafter
authorized, issued or outstanding, including, without limitation, the Common
Stock, and any other classes and series of capital stock of the Company now or
hereinafter authorized, issued or outstanding (collectively, "Junior
Securities"). The Company will not issue any class or series of any class of
capital stock which ranks pari passu with the Convertible Preferred Stock with
respect to rights on liquidation, dissolution or winding up of the Company.
Dividends. The holders of the Convertible Preferred Stock shall not be
entitled to receive any dividends, cash or otherwise, in connection with the
Preferred Stock. No dividends shall be payable upon any Junior Securities unless
equivalent dividends, on an as-converted basis, are declared and paid
concurrently on the Convertible Preferred Stock. No dividends shall be payable
on any other classes of preferred stock during such time as the Convertible
Preferred Stock is outstanding.
Conversion. The holders of the Convertible Preferred Stock shall have
the right, at the holder's option, at any time after April 30, 1998 (or June 30,
1999 if the Delayed Conversion Option is accepted), or from time to time
thereafter, to convert each share of Convertible Preferred Stock into such whole
number of shares of Common Stock equal to the aggregate Stated Value of the
Convertible Preferred Stock to be converted divided by the lesser of (i) $2.00
or (ii) 50% of the average closing sale price for the Common Stock for the last
ten trading days in the fiscal quarter of the Company prior to such conversion
(the "Conversion Rate"). The Conversion Rate of the Convertible Preferred Stock
(when calculated on the basis of dividing the Stated Value by $2.00 only) will
be subject to
-29-
<PAGE>
adjustment to protect against dilution in the event of stock dividends, stock
splits, combinations, subdivision and reclassifications.
Redemption. (a) At any time and from time to time, the Company shall
have the option (unless otherwise prevented by law) to redeem all, or any
portion of on a pro-rata basis, the Convertible Preferred Stock, upon 30 days
prior written notice, at a redemption price equal to 1.1 multiplied by the
Stated Value for each such share of the Convertible Preferred Stock; and (b) the
Company must redeem the Convertible Preferred Stock at 1.1 multiplied by the
Stated Value, in the event the Company receives proceeds from (i) the exercise
of any of the Company's outstanding Common Stock Purchase Warrants, or (ii) any
other equity financing, provided, however, that only 50% of the proceeds from
such other financing will be used to redeem the Convertible Preferred Stock. If
the proceeds raised from the exercise of the Common Stock Purchase Warrants or
such other equity financing are not sufficient to redeem all of the Convertible
Preferred Stock, the Convertible Preferred Stock shall be redeemed with such
proceeds on a pro-rata basis. Pursuant to the Revised Redemption Terms,
one-third of the net proceeds from any public offering consummated by the
Company prior to January 1, 2000 will be used to redeem the Convertible
Preferred Stock and if the closing price of the Company's Common Stock is at
least $6.00 for 10 days in any 30 day period, the Company will use its best
efforts to complete an underwritten offering of its Common Stock.
Voting. The holders of the Convertible Preferred Stock shall be
entitled to vote on all matters submitted to the stockholders. Each share of
Convertible Preferred Stock shall have that number of votes equal to the number
of shares of Common Stock into which it is then convertible as of the record
date of the proposed stockholder action. The holders of the Convertible
Preferred Stock shall also vote as a separate class on all matters which the
General Corporate Law of the State of Delaware specifically requires the holders
of such Convertible Preferred Stock to vote as a separate class.
Other Preferred Stock
The Company's authorized shares of preferred stock may be issued in one
or more series, and the Board of Directors is authorized, without further action
by the stockholders, to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate par
value, preferences in liquidation and the number of shares constituting any
series. The Company believes that the availability of preferred stock issuable
in series will provide increased flexibility for structuring possible future
financings and acquisitions, if any, and in meeting other corporate needs. It is
not possible to state the actual effect of the authorization and issuance of any
series of preferred stock upon the rights of holders of Common Stock until the
Board of Directors determines the specific terms, rights and preferences of a
series of preferred stock. However, such effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, or impairing liquidation rights of such shares without further
action by holders of the Common Stock. In addition, under various circumstances,
the issuance of preferred stock may have the effect of facilitating, as well as
impeding or discouraging, a merger, tender offer, proxy contest, the assumption
of control by a holder of a large block of the Company's securities or the
removal of incumbent management. Issuance of preferred stock could also
adversely effect the market price of the Common Stock. The Company has no
present plan to issue any shares of preferred stock.
PROPOSAL TO AMEND THE TERMS OF THE PREFERRED STOCK
In connection with the Exchange Offer and as a condition to the
consummation of the Exchange Offer, the Company is seeking a written consent of
the holders of not less than a majority of all outstanding shares of Preferred
Stock to proposed amendments to the Certificate of Designations, Preferences and
Other Rights and Qualifications of Class A Preferred Stock which would (i) delay
the date when the Preferred Stock can first be converted into Common Stock of
the Company from May 1, 1998 to June 30, 1999 (the "Delayed Conversion Option")
and (ii) modify the redemption feature of the Preferred Stock (the "Revised
Redemption Terms") so that (a) one-third of the net proceeds from any public
offering consummated by the Company prior to January 1, 2000 will be used to
redeem the outstanding Preferred Stock and (b) if the closing price of the
Company's Common Stock is at least $6.00 for
-30-
<PAGE>
10 days in any 30 day period, the Company will use its best efforts to complete
an underwritten offering of its Common Stock. The Preferred Stock will be
redeemed on a pro rata basis, as currently provided in the Certificate of
Designations, Preferences and Other Rights and Qualifications of Class A
Preferred Stock.
The approval of the amendments to the terms of the Preferred Stock are
being proposed in connection with, and are a condition of, the approval of the
Exchange Offer. The Company believes that as part of providing the holders of
the Warrants with the opportunity to immediately receive Common Stock without
the payment of the exercise price, it must also reduce the overhang to the
market for the Common Stock. Management believes that the Delayed Conversion
Option would reduce the overhang to the market for its Common Stock since the
number of shares of Common Stock issuable upon exercise of Preferred Stock is
equal to the aggregate stated value of the Preferred Stock to be converted
divided by the lesser of (i) $2.00 or (ii) 50% of the average closing sale price
for the Common Stock for the last ten trading days in the fiscal quarter of the
Company prior to such conversion. The Company believes that if its business plan
is achieved there should be an increase in the trading price of the Common Stock
between May 1, 1998 and June 30, 1999. However, there can be no assurance as to
the trading price of the Common Stock at the time of conversion of the Preferred
Stock or at any time.
Management believes that the Revised Redemption Terms are necessitated
by the recently completed Exchange Offer for its publicly-traded common stock
purchase warrants. Currently the Company is required to use any proceeds it
receives from the redemption of any such common stock purchase warrants for the
redemption of the Preferred Stock. Since such Warrants are no longer outstanding
the proceeds from such common stock purchase warrants can no longer be used for
the redemption of the Preferred Stock. In addition, the Company would like to
decrease the amount of proceeds it is required to allocate toward redeeming the
Preferred Stock from 50% to 33% so that it can use any of such proceeds to
expand and develop its business. Accordingly, the Company believes that an
adjustment of the redemption feature of the Preferred Stock was required. The
Company believes, however, that in order to counteract any negative effects from
these actions on the redemption rights of Preferred Stock it will agree to
revise the redemption provision of the Certificate of Designations, Preferences
and Rights to provide that the Company will use its best efforts to complete an
underwritten offering of Common Stock if its Common Stock trades at $6.00 or
more for ten days in any thirty day period. In addition, the Company believes
any negative impact of the Revised Redemption Terms is also counter-balanced by
the Exchange Offer.
The approval of the proposed amendments to the Preferred Stock requires
the written consent of the holders of not less than a majority of all
outstanding shares of Preferred Stock. Included with the Letter of Transmittal
is a written consent of the holders of the Preferred Stock providing for the
approval of amendments to the terms of the Preferred Stock. Since the Exchange
Offer is conditioned upon the approval of the amendments to the Preferred Stock,
the Company is requiring that any Warrant holder who would like to participate
in the Exchange Offer is required to deliver the written consent to the Company
along with the Letter of Transmittal. Since the Exchange Offer is conditioned
upon the approval of the amendments to the Preferred Stock, the Company is
requiring that any Warrant holder who would like to participate in the Exchange
Offer is required to deliver the written consent to the Company along with the
Letter of Transmittal. The Company may, but is not obligated to, reject any
Letter of Transmittal which is not accompanied by a duly executed written
consent.
If the proposal is approved, the Company will send a notice pursuant to
Section 228(d) of the Delaware General Corporation Law ("DGCL") that the
proposal has been approved in accordance with the DGCL. Accordingly, as required
by Section 228(d) of the DGCL, such notice may be sent even before the closing
of the Exchange Offer, however, the effectiveness of the amendment will be
conditional upon the consummation of the Exchange Offer.
-31-
November 19, 1997
NOTE: If the name and address shown at
left are not correct, please make
any changes necessary
Gentlemen:
By execution hereof, the undersigned hereby acknowledges he has
received and reviewed the Offering Circular/Proxy Statement and this Letter of
Transmittal relating to the Company's offer to exchange (the "Exchange Offer")
2.8 Common Stock Purchase Warrants (the "Warrants") into one share of the
Company's Common Stock, par value $.01 per share (the "Exchange Offer
Consideration") upon the terms and subject to the conditions set forth in the
Offering Circular/Proxy Statement including but not limited to amending the
terms of the Company's Class A Preferred Stock (the "Preferred Stock").
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the number of Warrants indicated
above. The undersigned understands that the obligation of the Company to
consummate the Exchange Offer is subject to several conditions including but not
limited to the approval of the proposal to amend the terms of the Preferred
Stock as set forth in the Offering Circular/Proxy Statement under "Conditions to
the Exchange Offer."
The undersigned acknowledges that all the foregoing conditions are for
the sole benefit of the Company and may be asserted by the Company at any time
regardless of the circumstances giving rise to such conditions and may be waived
by the Company, in whole or in part, at any time and from time to time, in the
sole discretion of the Company. The failure by the Company at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right, and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. If any of the conditions set forth
in this section shall not be satisfied, the Company may, subject to applicable
law, (i) terminate the Exchange Offer and return all Warrants tendered pursuant
to the Exchange Offer to tendering holders; (ii) extend the Exchange Offer and
retain all tendered Warrants until the Expiration Date for the extended Exchange
Offer; (iii) amend the terms of the Exchange Offer or modify the consideration
to be provided by the Company pursuant to the Exchange Offer; or (iv) waive the
unsatisfied conditions with respect to the Exchange Offer and accept all
Warrants tendered pursuant to the Exchange Offer. Notwithstanding anything to
the contrary, the Company may extend the period of the Exchange Offer in its
sole discretion.
Subject to, and effective upon, the acceptance by the Company of the
number of Warrants tendered hereby for exchange pursuant to the terms of the
Exchange Offer, the undersigned hereby irrevocably sells, assigns and transfers
to, or upon the order of, the Company, all right, title and interest in and to,
and any and all claims in respect of or arising or having arisen as a result of
the undersigned's status as a holder of, all Warrants tendered
<PAGE>
hereby, waives any and all rights with respect to the Warrants tendered hereby
(including, without limitation, the undersigned's waiver of any existing or past
defaults and their consequences with respect to the Warrants) and releases and
discharges any obligor or parent of any obligor of the Warrants from any and all
claims the undersigned may have now, or may have in the future, arising out of
or related to the Warrants, including, without limitation, any claims that the
undersigned is entitled to participate in any redemption or defeasance of the
Warrants. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent (with full knowledge that the Exchange Agent also acts as agent
of the Company) as the true and lawful agent and attorney-in-fact of the
undersigned with respect to such Warrants, with full power of substitution (such
power-of-attorney being deemed to be an irrevocable power coupled with an
interest) to (a) deliver such Warrants, or transfer ownership of such Warrants
on the account books maintained by a Book- Entry Transfer Facility, together, in
either case, with all accompanying evidences of transfer and authenticity, to or
upon the order of the Company, (b) present such Warrants for transfer on the
books of the Company, and (c) receive all benefits and otherwise exercise all
rights of beneficial ownership of such Warrants, all in accordance with the
terms of the Exchange Offer.
The undersigned hereby represents and warrants that (i) the undersigned
has full power and authority to tender, sell, assign and transfer the Warrants
tendered hereby, and that when such Warrants are accepted for exchange by the
Company, the Company will acquire good, marketable and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
that none of such Warrants will be subject to any adverse claim or right; (ii)
the undersigned owns the Warrants being tendered hereby and is entitled to
tender such Warrants as contemplated by the Exchange Offer, all within the
meaning of Rule 13e-4 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and (iii) the tender of such Warrants complies with Rule 13e-4.
The undersigned, upon request, will execute and deliver all additional documents
deemed by the Exchange Agent or the Company to be necessary or desirable to
complete the sale, assignment and transfer of the Warrants tendered hereby.
The undersigned understands that tenders of Warrants pursuant to any of
the procedures described in the Offering Circular/Proxy Statement under the
caption "Procedures for Tendering" and in the instructions hereto will
constitute the undersigned's acceptance of the terms and conditions of the
Exchange Offer. The Company's acceptance of such Warrants for exchange pursuant
to the terms of the Exchange Offer will constitute a binding agreement between
the undersigned and the Company upon the terms and subject to the conditions of
the Exchange Offer. The undersigned has read and agrees to all terms and
conditions of the Exchange Offer. Delivery of the enclosed Warrants shall be
effected, and risk of loss and title of such Warrants shall pass, only upon
proper delivery thereof to the Exchange Agent.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death or incapacity of the undersigned and every
obligation of the undersigned under this Letter of Transmittal shall be binding
upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives. WARRANTS TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE
WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. See the information set
forth under the heading "Withdrawal of Tenders" in the Offering Circular/Proxy
Statement.
The undersigned surrenders herewith the following warrant
certificate(s) of Enteractive, Inc. (the "Company") in exchange for common
stock, $.01 par value (the
<PAGE>
"Common Stock") of the Company, on the basis of 2.8 Warrants for one share of
Common Stock (the "Exchange Offer"), with fractions of a share rounded down to
the nearest whole number if less than one-half share or rounded up to the
nearest whole share if equal to or greater than one-half share.
================================================================================
Certificate Numbers Number of Shares
================================================================================
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Please issue the new certificate(s) of Common Stock to which the
undersigned is entitled in the name appearing above, subject to the following
instructions:
============================================================
Fill in ONLY if new certificate(s) are to be issued in a
name OTHER than that of the owner whose name appears ABOVE
or if delivery is to be made other than to such owner.
- ------------------------------------------------------------
Issue Certificate(s) to (Please Print)
Name
- ------------------------------------------------------------
- ------------------------------------------------------------
Address
- ------------------------------------------------------------
- -----------------------------------------------------------
=============================================================
SIGNATURE(S)_______________________
_______________________
<PAGE>
Important Tax Information
Under the federal income tax law, a holder whose tendered Securities
are accepted for exchange is required by law to provide the Exchange Agent (as
payer) with such holder's correct TIN on Substitute Form W-9 below. If such
holder is an individual, the TIN is his or her social security number. If the
Exchange Agent is not provided with the correct TIN, a $50 penalty may be
imposed by the Internal Revenue Service, and payments of Exchange Offer
Consideration may be subject to backup withholding.
Certain holders (including, among others, corporations) are not subject
to these backup withholdings and reporting requirements. Exempt holders should
indicate their exempt status on Substitute Form W-9. In order for a foreign
individual to qualify as an exempt recipient, such individual must submit a
statement, signed under penalties of perjury, attesting to such individual's
exempt status. Forms of such statements can be obtained from the Exchange Agent.
See the enclosed "Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9" for additional instructions.
If backup withholding applies, the Exchange Agent is required to
withhold 31% of any reportable payments made to the holder or other payee.
Backup withholding is not an additional federal income tax. Rather, the federal
income tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on reportable payments made with respect
to securities accepted for conversion pursuant to the Exchange Offer, the holder
is required to notify the Exchange Agent of such holder's correct TIN by
completing the form below, certifying that the TIN provided on the Substitute
Form W-9 is correct (or that such holder is awaiting a TIN) and that (a) such
holder is exempt from backup withholding, (b) such holder has not been notified
by the Internal Revenue Service that he is subject to backup withholding as a
result of a failure to report all interest or dividends or (c) the Internal
Revenue Service has notified such holder that such holder is no longer subject
to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the holder of the Warrants
tendered hereby. If the Warrants are held in more than one name or are not held
in the name of the actual owner, consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE
<PAGE>
PAYOR'S NAME: CONTINENTAL STOCK TRANSFER & TRUST COMPANY.
NAME/ADDRESS:
SUBSTITUTE
FORM W-9
Department of PART 1(a) _ PLEASE TIN_______________
the Treasury PROVIDE YOUR TIN IN (Social Security
Internal BOX AT RIGHT AND Number or (Employer
Revenue Service CERTIFY BY SIGNING Identification
AND DATING BELOW Number)
PART 1(b) _ PLEASE CHECK THE BOX AT THE RIGHT
IF YOU HAVE APPLIED FOR, AND ARE AWAITING
RECEIPT OF, YOUR TIN [ ]
Payor's Request PART 2 - FOR PAYEES EXEMPT FROM BACKUP
for WITHHOLDING PLEASE WRITE "EXEMPT" HERE
Taxpayer (SEE INSTRUCTIONS)_______________________
Identification
Number ("TIN")
and Certification
PART 3 - CERTIFICATION UNDER PENALTIES OF
PERJURY, I CERTIFY THAT (X) The number
shown on this form is my correct TIN (or I
am waiting for a number to be issued to
me), and (Y) I am not subject to backup
withholding because: (a) I am exempt from
backup withholding, or (b) I have not been
notified by the Internal Revenue Service
(the "IRS") that I am subject to backup
withholding as a result of a failure to
report all interest or dividends, or (c)
the IRS has notified me that I am no
longer subject to backup withholding.
SIGNATURE___________________ DATE_________
You must cross out Item (Y) of Part 3 above if you have been notified
by the IRS that you are currently subject to backup withholding because of
underreporting interest or dividends on your tax return. However, if after being
notified by the IRS that you were subject to backup withholding you received
another notification from the IRS that you are no longer subject to backup
withholding, do not cross out Item (Y) of Part 3. (Also see Certification under
Specific Instructions in the enclosed Guidelines.)
<PAGE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 1(B)
OF THE SUBSTITUTE FORM W-9 INDICATING YOU HAVE APPLIED FOR, AND ARE AWAITING
RECEIPT OF, YOUR TIN
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I CERTIFY UNDER PENALTIES OF PERJURY THAT A TAXPAYER IDENTIFICATION NUMBER HAS
NOT BEEN ISSUED TO ME, AND THAT I MAILED OR DELIVERED AN APPLICATION TO RECEIVE
A TAXPAYER IDENTIFICATION NUMBER TO THE APPROPRIATE INTERNAL REVENUE SERVICE
CENTER OR SOCIAL SECURITY ADMINISTRATION OFFICE (OR I INTEND TO MAIL OR DELIVER
AN APPLICATION IN THE NEAR FUTURE). I UNDERSTAND THAT IF I DO NOT PROVIDE A
TAXPAYER IDENTIFICATION NUMBER TO THE PAYOR, 31 PERCENT OF ALL PAYMENTS MADE TO
ME PURSUANT TO THIS OFFER SHALL BE RETAINED UNTIL I PROVIDE A TAX IDENTIFICATION
NUMBER TO THE PAYOR AND THAT, IF I DO NOT PROVIDE MY TAXPAYER IDENTIFICATION
NUMBER WITHIN SIXTY (60) DAYS, SUCH RETAINED AMOUNTS SHALL BE REMITTED TO THE
IRS AS BACKUP WITHHOLDING AND 31 PERCENT OF ALL REPORTABLE PAYMENTS MADE TO ME
THEREAFTER WILL BE WITHHELD AND REMITTED TO THE IRS UNTIL I PROVIDE A TAXPAYER
IDENTIFICATION NUMBER.
- ------------------------------------ ------------------------
SIGNATURE DATE
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31 PERCENT OF ANY CASH PAYMENTS. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W- 9 FOR ADDITIONAL DETAILS.
<PAGE>
INSTRUCTIONS
1. Execution and Delivery of a Letter of Transmittal
This Letter of Transmittal should be completed, dated, signed and
mailed or hand delivered to Continental Stock Transfer & Trust Company (the
"Exchange Agent"), 2 Broadway, New York, New York 10004, accompanied by all
stock certificates held by you and which you intend to be exchanged. The method
of transmitting or delivering such certificate(s) and the risk of the loss
thereof is at the election of the owner, but if sent by mail, certified mail is
recommended.
2. Signatures
The Letter of Transmittal must be signed by or on behalf of the
registered holder(s) of the certificate(s) transmitted. If the stock covered by
such certificate(s) is registered in the name of two or more owners, all such
owners must sign. The signature(s) on the Letter of Transmittal should
correspond exactly to the name(s) written on the face of the stock
certificate(s) transmitted unless the stock described on the Letter of
Transmittal have been assigned by the registered holder, in which event the
Letter of Transmittal should be signed in exactly the same form as the name of
the last transferee appears in the transfers attached to or endorsed on the
certificate(s) transmitted.
3. Issuance of New Certificates in Same Name
If the certificate(s) representing Common Stock is to be issued in the
name of registered holder(s) as inscribed on the surrendered certificate(s), the
surrendered certificate(s) need not be endorsed and no guarantee of the
signature on the Letter of Transmittal is required.
4. Issuance of New Certificates in Different Names
If any certificate representing shares of Common Stock is to be issued
to the name of someone other than the registered holder(s) of the surrendered
certificate(s) then the certificate(s) surrendered must be properly endorsed (or
accompanied by appropriate stock powers properly executed) by the registered
holder(s) of such certificate(s) to the person who is to receive the Common
Stock. The signature of the registered holder(s) to the endorsement or stock
powers must correspond with the name as written upon the face of the
certificate(s) in every particular and must be guaranteed by a participant in a
Securities Transfer Association ("STA") recognized signature program.
<PAGE>
5. Supporting Evidence
In case any Letter of Transmittal, certificate endorsement or stock
power is executed by an agent attorney, administrator, executor, guardian,
trustee or any person in any of the fiduciary or representative capacity, or by
an officer of a corporation on behalf of the corporation, there must be
submitted with the Letter of Transmittal; surrendered certificate(s) and/or
powers, documentary evidence of appointment and authority to act in such
capacity (including court orders and corporate resolutions where necessary), as
well as evidence of the authority of the person making such execution to assign,
sell or transfer shares. Such documentary evidence of authority must be in form
satisfactory to the Transfer Agent.
6. Special Instructions for Deliveries by the Transfer Agent
Unless instructions to the contrary are given in the Special Delivery
Instructions, any certificate(s) representing the Common Stock to be distributed
upon exchange of the stock surrendered pursuant to this Letter of Transmittal
will be mailed to the address shown on the mailing label or to the address shown
in the Change of Address Instructions.
7. Inquiries
All inquires with respect to the completion of the Letter of
Transmittal and the surrender of any certificate(s) representing stock should be
made to Reorganization Department, Continental Stock Transfer & Trust Company
(212) 509-4000 ext. 227.
8. Lost Certificates
If your certificate is lost, advise the Transfer Agent in writing.
PRESS RELEASE Contact: Kenneth Gruber
NOVEMBER 19, 1997 (212) 221-6559
FOR IMMEDIATE RELEASE:
ENTERACTIVE, INC. ANNOUNCES EXCHANGE OFFER
Enteractive, Inc. - New York, New York. Enteractive, Inc. (NASDAQ --
ENTR Boston Stock Exchange -- ENT), today announced that it is offering to
exchange (the "Exchange Offer") 2.8 of its privately-held Common Stock Purchase
Warrants (the "Warrants") expiring December 13, 2001 into one share of its
Common Stock, $.01 par value. As of the date of this press release, there are
4,200,000 Warrants outstanding. The Exchange Offer is being made for up to all
outstanding Warrants. Each Warrant currently entitles the registered holder to
purchase through December 13, 2001 one share of the Company's Common Stock at an
exercise price of $4.00 per share. The Exchange Offer will expire at 5:00 P.M.,
New York City Time on December 18, 1997, unless extended. Continental Stock
Transfer & Trust Company will serve as Exchange Agent.
In connection with the Exchange Offer and as a condition to the
consummation of the Exchange Offer, the Company is also seeking the written
consent of the holders of not less than a majority of all outstanding shares of
the Company's Class A Convertible Preferred Stock (the "Preferred Stock") to
amend the terms of the Preferred Stock by (i) delaying the date when the
Preferred Stock can first be converted into Common Stock of the Company from May
1, 1998 to June 30, 1999 and (ii) modifying certain redemption features of the
Preferred Stock.
The purpose of the Exchange Offer and the amendments to the terms of
the Preferred Stock is to reduce the overhang to the market for the Company's
Common Stock. The Exchange Offer also offers Warrant holders the opportunity to
participate in any long term appreciation of the Company's securities.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended, afforded by Section 3(a)(9) thereof. The Company therefore will not pay
any commission or other remuneration to any broker, dealer, salesman or other
person for soliciting tenders of Warrants. Officers, directors and regular
employees of the Company may solicit tenders of Warrants but they will not
receive additional compensation therefor. It is anticipated that an Offering
Circular will be mailed to Warrant holders on or about November 19, 1997.
ENTERACTIVE, INC.
110 West 40th Street
New York, New York 100018
November 19, 1997
To The Holders of Enteractive, Inc.'s Common Stock Purchase
Warrants Expiring December 13, 2001:
I am pleased to tell you about a new financial initiative that the
Board of Directors has authorized which should improve our capital structure.
The Board has approved a plan to exchange one share of the Company's
Common Stock for 2.8 of its Common Stock Purchase Warrants Expiring December 13,
2001:
In connection with the Exchange Offer and as a condition to the
consummation of the Exchange Offer, the Company is also seeking the written
consent of the holders of not less than a majority of all outstanding shares of
the Company's Class A Convertible Preferred Stock (the "Preferred Stock") to
amend the terms of the Preferred Stock by (i) delaying the date when the
Preferred Stock can first be converted into Common Stock of the Company from May
1, 1998 to June 30, 1999 and (ii) modifying certain redemption features of the
Preferred Stock.
For a detailed description of this initiative, of the terms for the
proposed transaction and necessary procedures to participate in the Exchange
Offer, please see the enclosed Offering Circular/Proxy Statement dated November
19, 1997, the accompanying Letter of Transmittal, and the Written Consent of the
Holders of the Preferred Stock. The Exchange Offer is subject to certain
conditions, including the approval of the proposal to amend the terms of the
Preferred Stock.
Any person who wishes to participate in the Exchange Offer should
complete the Letter of Transmittal and the Written Consent and return such
documents to Continental Stock Transfer & Trust Company, 2 Broadway, New York,
New York 10004.
The purpose of the Exchange Offer and the amendments to the terms of
the Preferred Stock is to reduce the overhang to the market for the Company's
Common Stock. The Exchange Offer also provides Warrant holders the opportunity
to participate in any long term appreciation of the Company's securities.
The Company reviewed various exchange ratios and has concluded that a
ratio of one share of Common Stock for every 2.8
<PAGE>
warrants best serves the needs of the Company, its stockholders and the Warrant
holders.
Management and the Board of Directors are convinced that the Exchange
Offer and the amendments to the terms of the Preferred Stock are important part
of the Company's long-term strategy to improve its financial strength and its
capitalization and to meet its growth objectives.
We look forward to your continued support of our Company.
Sincerely,
/s/ Andrew Gyenes
----------------------------
Chairman of the Board and
Chief Executive Officer
-2-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission
File Number:
May 31, 1997 1-13360
Enteractive, Inc.
(Name of Small Business Issuer as Specified in its Charter)
Delaware 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 West 40th Street, Suite 2100
New York, NY 10018
(Address of principal executive offices) (Zip Code)
(212) 221-6559
(Issuer's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Exchange Act:
Common Stock and Warrants to
purchase Common Stock, par
value $.01 per share
Securities Registered pursuant to Section 12(g)of the Exchange Act:
None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[ X ]
Revenues for the Fiscal year ended May 31, 1997 were $1,655,700
The aggregate market value of the voting stock held by non - affiliates of the
Registrant, based upon the closing price of the Common Stock on August 25, 1997,
was approximately $7,949,496. As of August 25, 1997, the Registrant had
outstanding 7,679,441 shares of Common Stock.
<PAGE>
Enteractive, Inc.
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 3
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a vote of Security Holders 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 7. Consolidated Financial Statements 9
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure 10
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 10
Item 10. Executive Compensation 11
Item 11. Security Ownership of Certain Beneficial Owners and Management 14
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits, Lists and Reports on Form 8-K 19
<PAGE>
PART 1
Item 1 Description of Business
Enteractive, Inc., a Delaware corporation (the "Company"), incorporated in
December 1993, is the successor to Sonic Images Productions, Inc. ("Sonic"), a
District of Columbia corporation incorporated in 1979 which was merged with and
into the Company in May 1994 ("Merger"). The Company, as the surviving entity of
the Merger, continued its existence following the Merger as a Delaware
corporation. On February 29, 1996, Lyriq International Corporation ("Lyriq")
merged into a wholly owned subsidiary of the Company pursuant to an Agreement
and Plan of Merger ("Lyriq Acquisition"). Unless otherwise indicated, references
to the Company shall include its wholly owned subsidiaries and predecessor.
Headquartered in New York, New York, the Company offers products and services to
customers for the design, development, operation and maintenance of customer
Intranets or sites on the Internet and World Wide Web and publishes multimedia
titles to the home. As described under Recent Developments below, the Company
recently entered into an agreement, which provides that the Company will sell
its domestic distribution rights, inventory and certain accounts receivable from
its interactive multimedia publishing business to a third party. The Company's
address is 110 West 40th Street, Suite 2100, New York, New York 10018 and its
telephone number is (212) 221-6559. Its World Wide Web site address is
http://www.crstone.com.
On July 15, 1996, the Company announced a restructuring, comprised of a 45%
reduction of its Washington DC-based development staff, and changes in senior
management. In connection with the restructuring, John Ramo, President and Chief
Operating Officer and Jolie Barbiere, a Vice President, resigned their positions
as officers and members of the Company's Board of Directors. The Company
believes that the restructuring resulted in lowering certain fixed costs and
increased product development flexibility while maintaining high quality
standards.
Throughout the first half of fiscal 1997 the Company was primarily engaged in
the development, publishing and marketing of multimedia interactive software
with an emphasis on the CD-ROM platform. As a result of a rigorous review of the
CD-ROM market, the Company's performance and the related risks of continuing to
develop and market interactive multimedia titles, the Company concluded that it
could capitalize on what the Company believes to be a vibrant market and upon
its expertise in developing interactive multimedia products by redirecting its
business to provide network and Web-related solutions, products and services to
businesses and other entities.
The Company plans to, directly or in cooperation with third parties, design,
develop, install, maintain and host customer Intranets or sites on the Internet
and World Wide Web. The Company believes this to be a vibrant market. According
to an August 1996 report by Forrester Research the number of Web sites is
projected to grow from 43,000 at the end of 1996 to 657,000 at the end of 2000.
In addition businesses are demanding more complex Web sites, as these sites
become increasingly important first points of contact with current and
prospective customers. Accordingly, the Company believes that a company's Web
site is becoming a mission-critical component of the enterprise. Companies are
also increasingly deploying Intranets to manage their internal corporate
communications because they enable employees and business associates to receive
corporate information and training efficiently, communicate through e-mail, use
the internal network's client applications and access proprietary information
and legacy databases.
On December 4, 1996, the Company entered into an agreement (the "Enteractive
Affiliates Agreement") with USWeb Corporation ("USWeb") pursuant to which the
Company became an affiliate of USWeb and a member of USWeb's network of
independent affiliates (the "USWeb Network"). Under the Enteractive Affiliates
Agreement, the Company paid $625,000 for the right to operate USWeb affiliate
offices in certain localities for 10 years as provided below. USWeb is a
relatively new venture, which has raised approximately $34 million to date.
Principal investors include Softbank Corporation, which owns Comdex and
Ziff-Davis Publishing, 21st Century Communications Partners L.P., Wheatley
Partners L.P. and Reuters. See "Certain Relationships and Related Transactions."
USWeb is seeking to capitalize on the service opportunities presented by the
increasing use of the Internet and Intranets as commercial tools. The Company
has formed a subsidiary, Enteractive Network Solutions Inc., doing business as
USWeb Cornerstone, which is intended to provide a full range of Internet and
Intranet-based business solutions, including Website design, hosting and
management, design and implementation of database and e-commerce solutions,
educational programs and Web-related strategic consulting and marketing. The
Company is obligated to pay USWeb monthly royalty and service and marketing and
advertising fees equal in the aggregate to 7% of Adjusted Gross Revenues from
this business, as defined in the agreement, but not less than certain
contractual fee levels.
<PAGE>
The Company has been granted exclusive rights to develop new USWeb Affiliate
offices in Long Island (Nassau-Suffolk County), Philadelphia, Baltimore,
Stamford, CT, and Bergen County and Newark, NJ The Company has established a
USWeb Affiliate office in New York City and in each of the above territories.
The exclusive rights granted to the Company are subject to certain minimum
performance standards set forth in the Enteractive Affiliates Agreement. If the
Company is unable to meet these minimum performance standards, its exclusive
rights may be terminated.
Recent Developments
On August 15, 1997 the Company entered into an agreement with Enteractive
Distribution Company, LLC ("EDC"), an unrelated company, which is subject to the
satisfaction of certain closing conditions. Under the terms of the agreement EDC
will acquire the inventory and certain accounts receivable existing at the date
of the closing resulting from the Company's interactive multimedia publishing
business. In addition the Company has assigned its domestic distribution
contracts with its domestic distributors to EDC and has granted EDC an exclusive
license to market the Company's interactive multimedia titles in North America
for a minimum of two years. If the transaction is consummated, the Company has
been guaranteed the greater of $100,000 or 50% of EDC's proceeds from the sale
of the inventory in the 9 months following the closing and 50% of the accounts
receivable balances collected by EDC within 24 months of closing. The Company
will also receive royalties on sales of its products subsequent to liquidation
of existing inventory of 15% for three years and 10% thereafter. EDC will also
pay the Company a 5% royalty from the sales of any third party products it
sells. The Company is evaluating the most appropriate manner to continue
licensing its multimedia titles outside the United States. The Company does not
believe that it will incur significant ongoing costs associated with the
domestic or international distribution of its multimedia titles.
As a result of the Company's agreement with EDC, the Company wrote down the
majority of its interactive multimedia related business assets in the fourth
quarter of fiscal 1997 to the related anticipated minimum proceeds of $100,000.
These assets are classified as "assets held for sale" in the Company's May 31,
1997 balance sheet.
Company Strategy
The Company's goal is to become the leading professional services firm to
organizations requiring high quality, cost-effective business solutions
utilizing Internet presence and Intranet technology. The Company believes that a
network of branch offices will create economies of scale through the creation of
regional development centers, coordinated marketing, centralized research and
development and lower administrative costs. As an affiliate of the USWeb Network
the Company believes it will quickly establish itself and focus its resources on
revenue generating activities.
Under the arrangement with USWeb, the Company is required to pay license and
marketing fees totaling 7% of revenues (reduced by the cost of any third party
products) and receives a number of services including: (1) centralized
marketing, brand awareness and lead generation programs; (2) technology
services, including proprietary research on Web site and Intranet technologies
and an internal marketplace of skills and technologies and (3) strategic
relationships with leading hardware and software companies such as Microsoft,
Compaq Computer, and Wall Data. Currently the USWeb network has more than 50
offices nationwide.
Key elements of the Company's strategy are:
Provide customers solutions based on state of the art
proprietary or exclusive products. The Company believes that
proprietary solutions will provide it with a competitive
advantage. The Company has acquired (1) Black Book, a
sophisticated contact manager designed for mid-size
investment managers and (2) entered into an exclusive
relationship with USWeb Boise to sell WebWare Access
Framework in certain territories. This software delivers
digital asset management and workflow automation with dynamic
Intranet and Extranet Web capabilities. The Company will
concentrate its initial marketing efforts of WebWare Access
Framework in the printing, prepress and publishing
industries.
<PAGE>
Build a strong marketing and development team. The Company's
success requires highly trained executive and professionals
including a technically oriented marketing and sales staff
along with a development team, which includes creative web
site designers, database and application software engineers.
The Company believes that in order to quickly scale revenues
there will be ongoing investments in personnel, tools
(computer software and hardware) and training.
Leverage USWeb strategic relationships. USWeb has developed a
number of strategic relations with leading hardware and
software companies. For example, USWeb and Microsoft have
entered into a joint marketing and technical partnership
agreement. Additionally USWeb has entered into relationships
with Compaq Computer Corporation and Sun Microsystems, Inc. ,
which enables the company to participate in reseller, joint
marketing and technology programs, which the Company would
have not qualified for on a standalone basis. These programs
enable the Company to leverage the USWeb brand with those of
other industry leaders.
Competition
The market for the Company's professional services is highly competitive. The
Company faces competition from national and regional advertising agencies,
specialized and integrated marketing communication firms as well as sole
proprietorships and small businesses in the computer network solutions industry.
The Company expects that new competitors that either provide integrated or
specialized services (e.g. corporate identity and packaging, advertising
services or World Wide Web site design) and are technologically proficient will
emerge and will be competing with the Company. Many of the Company's competitors
and potential competitors have longer operating histories, longer client
relationships and significantly greater financial, management and other
resources than the Company. Further the skilled technical and sales personnel
the Company requires are also in high demand. Consequently, the Company may not
be able to hire enough personnel at affordable salaries to support projected
growth.
The Company will attempt to differentiate itself from its competitors through
its affiliation with USWeb by leveraging the brand and strategic relationships
they have created, providing proprietary solutions to its customers and
providing superior solutions to its clients.
Employees
As of August 31, 1997 the Company had 52 employees all of whom are employed on a
full-time basis. The staff is comprised of 25 sales and marketing, 16 in
development and 11 in general and administrative functions. The Company has
never experienced a work stoppage and its employees are not covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
Item 2 Properties
The Company owns no real property. The Company conducts its operations through
ten facilities. The Company leases office space in New York City, NY
(headquarters, sales and development), Baltimore, MD (sales), Philadelphia, PA
(sales), Lake Success, NY (sales), Cedar Knolls, NJ (sales), Clifton, NJ
(sales), Washington DC (development), and Stamford, CT (sales and development).
These leases total approximately 22,640 square feet and have a total minimum
annual rental of approximately $353,840. Most of the office facilities' leases
are non-cancelable and expire at various times through August 2002.
Item 3 Legal Proceedings
None
Item 4 Submission of Matters to a Vote of Security Holders
The Company has approximately 7,679,441 shares of Common Stock $.01 par value
("Common Stock") outstanding and 6,720 shares of Class A Convertible Preferred
Stock $.01 par value ("Preferred Stock") outstanding. Holders of Common Stock
are entitled to one vote for each share and holders of Preferred Stock and as of
April 1997 holders of Preferred Stock were entitled to 992 votes for each share
for an aggregate of 6,666,240 votes. In April, 1997 the Company's stockholders
approved the election of directors of the following individuals by a vote of
10,826,118 to 69,640: Andrew Gyenes, Michael Alford, Rino Bergonzi, Peter
Gyenes, Harrison Weaver, Randal Hujar, and Stephen Fisher (who subsequently
resigned). The stockholders also approved a proposal to increase the authorized
capital of the Company to 52,000,000 shares consisting of 50,000,000 shares of
Common Stock, and 2,000,000 shares of Preferred Stock. Approximately 10,654,004
shares of Common Stock and Preferred Stock or 74.2% of the Common shares
outstanding plus the voting rights held by holders of Preferred Stock voted in
favor of the proposal.
<PAGE>
The stockholders also approved a proposal, which increased the number of shares
of Common Stock reserved for issuance under the Company's 1994 Incentive and
Non-Qualified Stock Option Plan to 2,500,000. 7,220,867 shares of Common Stock
and Preferred Stock voted in favor of the proposal. This constituted 96% of the
total number of votes cast by holders of Common shares plus the voting rights
held by holders of Preferred Stock.
<PAGE>
PART 2
Item 5 Market for Common Equity and Related Stockholder Matters
The Common Stock of Enteractive is traded under the symbol ENTR on the NASDAQ
SmallCap Market. The Company's Common Stock is also traded on the Boston Stock
Exchange under the symbol "ENT". The following table sets forth the ranges of
the high and low closing bid prices for the Common Stock since May 31, 1995, as
reported on the Nasdaq SmallCap Market, the principal trading market for the
Common Stock. The quotations are interdealer prices without adjustment for
retail markups, markdowns, or commission and do not necessarily represent actual
transactions.
COMMON STOCK
YEAR ENDED MAY 31, 1996
High Low
First Quarter 4-3/8 3
Second Quarter 4-3/8 3-3/4
Third Quarter 4-1/2 3-5/8
Fourth Quarter 4-1/2 3-5/8
YEAR ENDED MAY 31, 1997
High Low
First Quarter 4 3/4 2-3/4
Second Quarter 3-1/4 2-5/16
Third Quarter 3-1/2 2-3/8
Fourth Quarter 3 1-1/2
As of August 25, 1997, the Company had outstanding 7,679,441 shares of Common
Stock and 53 holders of record of the Company's Common Stock. The company
believes that at such date, there were in excess of 500 beneficial owners of the
Company's Common Stock.
The Company has never paid any dividends on its Common Stock. The Company
currently intends to retain all earnings, if any, to support the development and
growth of the Company's business. Accordingly, the Company does not anticipate
that any cash dividends will be declared on its Common Stock for the foreseeable
future.
Item 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion and analysis should be read in conjunction with the Consolidated
financial Statements of Enteractive and Notes to the Consolidated Financial
Statements included elsewhere in this Form 10-KSB.
Overview
Headquartered in New York, New York, the Company offers products and services to
customers for the design, development, operation and maintenance of customer
Intranets or sites on the Internet and World Wide Web and publishes multimedia
titles to the home.
Throughout the first half of fiscal 1997 the Company was primarily engaged in
the development, publishing and marketing of multimedia interactive software
with an emphasis on the CD-ROM platform. As a result of a rigorous review of the
CD-ROM market, the Company's performance and the related risks of continuing to
develop and market interactive multimedia titles, the Company concluded that it
could capitalize on what the Company believes to be a vibrant market and upon
its expertise in developing interactive multimedia products by redirecting its
business to provide network and Web-related solutions, products and services to
businesses and other entities.
<PAGE>
The Company has become a member of US Web's network of independent affiliates.
Pursuant to the Enteractive Affiliates Agreement, the Company is obligated to
pay USWeb monthly royalty and service and marketing and advertising fees equal
in the aggregate to 7% of Adjusted Gross Revenues from this business, as defined
in the agreement, but not less than certain contractual fee minimums.
On December 12, 1996, the Company received approximately $7,869,000 in net
proceeds from the consummation of private placement whereby the Company issued
Preferred Stock and granted Warrants. See "Liquidity and Capital Resources".
In January 1997, as a result of agreements among the Company, certain former
employees and GKN Securities Corp ("GKN"), the placement agent for the private
placement and the Underwriter of the Company's public offerings, the Company
repaid $475,800 of its long-term debt plus related accrued interest. See
"Liquidity and Capital Resources".
Recent Developments
On August 15, 1997 the Company entered into an agreement with Enteractive
Distribution Company, LLC ("EDC"), an unrelated company, which is subject to the
satisfaction of certain closing conditions. Under the terms of the agreement EDC
will acquire the inventory and certain accounts receivable existing at the date
of the closing resulting from the Company's interactive multimedia publishing
business. In addition the Company has assigned its domestic distribution
contracts with its domestic distributors to EDC and has granted EDC an exclusive
license to market the Company's interactive multimedia titles in North America
for a minimum of two years. If the transaction is consummated, the Company has
been guaranteed the greater of $100,000 or 50% of EDC's proceeds from the sale
of the inventory in the 9 months following the closing and 50% of the accounts
receivable balances collected by EDC within 24 months of closing. The Company
will also receive royalties on sales of its products subsequent to liquidation
of existing inventory of 15% for three years and 10% thereafter. EDC will also
pay the Company a 5% royalty from the sales of any third party products it
sells. The Company is evaluating the most appropriate manner to continue
licensing its multimedia titles outside the United States. The Company does not
believe that it will incur any significant ongoing costs associated with the
domestic or international distribution of its multimedia titles.
As a result of the Company's agreement with EDC, the Company wrote down the
majority of its multimedia business related assets in the fourth quarter of
fiscal 1997 to the related anticipated minimum proceeds of $100,000. These
assets are classified as "assets held for sale" in the Company's May 31, 1997
balance sheet.
Quarterly results
The Company expects its quarterly results to vary significantly in the future.
The number of customer contracts signed as well as the ability of the solutions
to be readily implemented by the development staff significantly influence
revenues. Further market acceptance of the Company's offerings is dependent on
(1) the growth and utilization of the Internet as a medium for commerce, (2) the
success of USWeb establishing and positioning the USWeb brand in the territories
where the Company operates (3) the degree of market acceptance of the Company's
offerings and (4) the success of offerings by competitors. The Company does not
expect seasonal factors to be a significant influence on revenues.
Results of Operations - Years Ended May 31, 1997 and 1996
Beginning in February 1997 the Company incurred expenses to start the Internet
services business. The costs from February through May were $1,385,000 and are
allocated to the appropriate captions in the accompanying Consolidated
Statements of Operations. By May 31, 1997 the Company was no longer developing
or actively marketing its interactive multimedia titles. The fiscal 1997 results
of operations include adjustments to the carrying value of inventory and
accounts receivable and the write-off of previously capitalized software costs
totaling $1,070,600.
The Company recognized revenue of $922,500 and $461,900 in fiscal 1997 and
fiscal 1996, respectively, from sales of its published titles through
independent distributors, net of estimated returns and exchanges. Such amounts
represent sales of titles published by the Company. The increase in revenues
relates to higher volumes from more titles in the market in fiscal 1997 than
fiscal 1996.
<PAGE>
Product development revenue was $40,700 and $257,700 in fiscal 1997 and fiscal
1996, respectively. This revenue decreased because the Company adopted a
strategy in fiscal 1995 to develop titles for their own account and not for
others. The Company completely fulfilled all open contracts by May 31, 1997.
Royalty revenue was $692,500 and $133,600 in fiscal 1997 and fiscal 1996
respectively. The increase is due to higher levels of international licenses and
royalties received from original equipment manufacturers that packaged the
Company's products with their product offerings.
Cost of product sales was $901,600 and $286,000 for fiscal 1997 and fiscal 1996,
respectively. The increase is primarily due to an inventory write off of
approximately $400,000 as a result of the Company's contract with EDC discussed
above and to the higher unit sales in fiscal 1997.
Cost of development revenue was $37,000 and $225,500 in fiscal 1997 and fiscal
1996, respectively. The decrease was due to the related decrease in product
development revenue.
Research and development expense was $2,554,200 and $3,295,000 in fiscal 1997
and fiscal 1996, respectively. The fiscal 1997 amount includes $287,000 related
to the hiring of new development staff as well as training existing staff to
support Internet development. Exclusive of the Internet services expenses the
decrease in research and development is $1,027,800. This reflects the Company's
decision to stop developing interactive multimedia titles.
Marketing and selling expenses were $3,312,300 and $2,250,400 in fiscal 1997 and
fiscal 1996, respectively. Marketing expense in fiscal 1997 includes $41,000
related to the Internet services business. The increase exclusive of the
Internet services expenses of $1,020,900 reflects the increase in the number of
titles the Company was marketing throughout the year as well as the Company's
shift in fiscal 1997 to entertainment and recreational products, which required
higher levels of marketing support to generate sales.
General and administrative expenses were $2,230,500 and $1,509,800 for the
fiscal 1997 and fiscal 1996, respectively. Exclusive of $1,057,000 of Internet
services costs incurred in fiscal 1997, related to establishing and staffing
five new offices for the Internet services business, general and administrative
expenses are $1,173,500. This is $336,300 lower than fiscal 1996 as a result of
the change in business strategy, which occurred in the second half of fiscal
1997.
Interest expense was $33,100 and $98,500 in fiscal 1997 and fiscal 1996,
respectively. Interest expense in fiscal 1997 related to the borrowing
associated with the repurchase of Company common shares in May 1996, which was
paid by May 31, 1997 except for $$40,200 due May 1998. The interest expense in
fiscal 1996 primarily includes interest and other borrowing costs incurred in
connection with the issuance of convertible notes, which were repaid in May
1996.
<PAGE>
Interest income was $240,200 and $126,300 in fiscal 1997 and 1996, respectively,
due to interest earned on higher cash balances resulting from the public
offering of common stock in May 1996 and the private placement of Preferred
Stock in December 1996.
No income tax benefit was recorded in fiscal 1997 or 1996. The Company does not
believe it will generate taxable income during the period ending May 31, 1998.
Beyond such time, using the standards set forth in Financial Accounting Standard
No. 109, management cannot currently determine whether the Company will generate
taxable income during the period that the Company's net operating loss carry
forward may be applied towards the Company's taxable income, if any.
Accordingly, the Company has established a valuation allowance against its
deferred tax asset.
Liquidity and Capital Resources
Since June 1, 1995, the Company's principal sources of capital have been as
follows:
(i) In a bridge financing consummated in January 1996, the Company
received approximately $2,460,000 in net proceeds from the sale
of convertible notes and warrants. Simultaneously with the
closing on May 21, 1996 of the pubic offering described below,
convertible notes with an aggregate principal of $2,250,000
were converted into 740,734 shares of Common Stock, while
$450,000 of convertible notes were repaid.
(ii) On May 21, 1996, the Company consummated a public offering by
issuing 2,415,000 shares of Common Stock to the public. The net
proceeds from this offering were $6,791,600.
(iii) On December 12, 1996 the Company completed a private placement
of 84 units each consisting of 80 shares of Preferred Stock and
50,000 Common Stock Purchase Warrants to purchase in the
aggregate 4,200,000 shares of common stock at an exercise price
of $4.00 per share. Proceeds were approximately $7,869,000, net
of related expenses of $531,000. The Preferred Stock has a
stated value of $1,250 per share and each share is convertible
at any time after April 30, 1998 into such whole number of
shares of common stock equal to the aggregate stated value of
the Preferred Stock to be converted divided by the lesser of
(i) $2.00 or (ii) 50% of the average closing sale price for the
common stock for the last ten trading days in the fiscal
quarter of the Company prior to such conversion. The Company
must use the proceeds, if any, derived from the exercise of the
Company's currently outstanding public common stock warrants,
which expire in October 1997, or 50% of the proceeds from any
other equity financing, to redeem the Preferred Stock at 110%
of the stated value. The Company also has the option to redeem
the Preferred Stock at any time upon 30 days prior written
notice, at a redemption price equal to 110% of the stated
value.
<PAGE>
In May 1996 the Company consummated an agreement with certain of its officers
pursuant to which the Company repurchased 1,000,000 shares of Common Stock at
$1.00 per share. Under the purchase agreement as amended, the Company paid all
but $40,200 of the purchase price by May 31, 1997.
At May 31, 1997, the Company had cash and cash equivalents of $4,952,900. The
decrease of $1,052,500 in cash and cash equivalents from May 31, 1996 reflects
the funding of operating activities - $7,556,700, acquisition of the USWeb
affiliation rights - $625,000, purchase of fixed assets - $187,100 and
repayments of long-term debt - $626,500, partially offset by the private
placement described above which yielded $7,869,100. The decrease in both
accounts receivable and inventory are related to the Company's adjusting these
balances to their net realizable value.
Capital expenditures were $187,100 and $65,600 in fiscal 1997 and fiscal 1996.
The Company expects capital expenditures in the fiscal year ending May 31, 1998
to be higher than both fiscal 1997 and 1996 principally as a result of the cost
of acquiring the equipment required for the US Web affiliate field offices, web
site hosting and development centers.
The Company believes that its existing cash and cash equivalents and anticipated
revenues will be sufficient to meet its liquidity and cash requirements for at
least the next 12 months. However, these funds may not be sufficient to meet the
Company's longer-term cash requirements for operations. Based on management's
assessment of the future marketability of its titles and demand for Web related
services, the Company may significantly alter the level of expenses both within
the next 12 months and thereafter.
Forward looking statements
This Form 10-KSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to develop its products, the success of
its USWeb Cornerstone subsidiary as well as general market conditions,
competition and pricing. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-KSB will prove to
be accurate. In light of significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
Inflation
The past and expected future impact of inflation on the financial statements is
not significant.
Item 7 Consolidated Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this Form
10-KSB. See item 13
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART 3
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Executive Officers and Directors
The executive officers and directors of Enteractive, Inc. (the "Company" or
"Enteractive") as of August 29, 1997 are as follows:
Name Age Position
- ---- --- --------
Andrew Gyenes....... 61 Chairman of the Board and Chief Executive Officer
Kenneth Gruber...... 45 Executive Vice President, Chief Financial Officer
and Secretary
James McNiel........ 34 Executive Vice President, Business Development
Michael Alford...... 51 Senior Account Executive, and Director
Randal Hujar........ 37 General Manager (Stamford Office), and Director
Rino Bergonzi....... 51 Director
Peter Gyenes........ 52 Director
Harrison Weaver..... 65 Director
Andrew Gyenes has been Chairman of the Board and Chief Executive Officer of the
Company since May 1994. He was Chief Executive Officer, President and a director
of Enteractive from January 1994 through May 1994. For more than five years
before joining Enteractive, Mr. Gyenes was Vice President of Gyenes & Co., a
computer software consulting company, and Marketing Manager of Ann-Mar
Manufacturing, Inc. ("Ann-Mar"), a family owned textile company. Mr. Gyenes
continued in such position on a part-time basis through January 1995, and since
January 1995, has been a consultant to Ann-Mar (approximately 5% of his time).
Mr. Gyenes can continue to serve in such capacity so long as it does not prevent
him from performing his duties on behalf of the Company. Most of Mr. Gyenes'
career has been in the computer industry, including positions with Warner
Communications (most recently as an Assistant Vice President responsible for
Worldwide Information Systems), with IBM Corporation (most recently as Eastern
Regional Manager for Scientific Systems at Service Bureau Corporation, a former
wholly-owned IBM subsidiary), and with Western Union (most recently as Assistant
Vice President of Data Processing).
Kenneth Gruber has been Executive Vice President since May 1997 and Chief
Financial Officer and Secretary of the Company since November 7, 1994. Prior to
joining the Company, Mr. Gruber was employed by Children's Television Workshop
("CTW") since 1984, and served as CTW's Vice President and Chief Financial
Officer from 1993 to November 1994, as CTW's Vice-President of Finance and
Administration (1989-1993) and as Vice-President of Finance (1988-1989).
James McNiel has been Executive Vice President of Business Development since May
1997. Mr. McNiel also acted as a consultant to Enteractive from October 1996
through April 1997. Prior to joining the Company, Mr. McNiel was employed by
Cheyenne Software as Executive Vice President of corporate development from 1992
to 1997. At Cheyenne, Mr. McNiel expanded the OEM sales channels by signing
agreements with IBM, Intel, Compaq, Novell, Hewlett Packard, and other industry
leaders. Prior to Cheyenne, Mr. McNiel worked at Archive Corporation (now
Seagate), creating their retail marketing strategy and at AST Computer as senior
manager of advanced products. Mr. McNiel began his career in 1981 at LucasFilm
Ltd. as a lead software engineer where he worked on post-production film/video
editing systems.
Michael Alford has been Senior Account Executive since April 1997, and a
director of the Company since May 1994. Mr. Alford was Vice President, Executive
Producer of the Company from July 1996 to April 1997 and served as Vice
President Development of the Company from May 1994 to July 1996. From 1992
through May 1994, he was the Vice President Development and a director of Sonic,
the Company's predecessor in interest. Prior to 1992, Mr. Alford was department
head of Versar Incorporated, an environmental consulting firm, for more than
five years.
Randal Hujar has been a General Manager and Director of the Company since April
1997. From April 1996 to April 1997, Mr. Hujar was Vice President of Marketing
and Sales. Prior to joining the Company, Mr. Hujar was President and Chief
Executive Officer of Lyriq since its founding in December 1991. From February
1991 to March 1991, Mr. Hujar was the Managing Director of the Lyriq Group, a
marketing consulting firm. From January 1989 to January 1990 he was director of
1-2-3 Product Line Marketing at Lotus Development Corporation.
Rino Bergonzi has served as a director of the Company since January 1995. Since
November 1993, Mr. Bergonzi has served as Vice President and Division Executive
of Corporate Information Technology Services at AT&T, and has 25 years of
experience in the information services field that includes working for such
companies as Western Union, United Parcel Service Information Services and EDS
Corp.
<PAGE>
Peter Gyenes has served as a director of the Company since January 1995. Mr.
Peter Gyenes has served as President and Chief Executive Officer of VMARK
Software, Inc., a client/server software and services firm since April 1997.
From May 1996 to April 1997, My Gyenes was Executive Vice President of
International Operations of VMARK. Mr. Gyenes served as President and Chief
Executive Officer of Racal InterLan, Inc., a leading supplier of local area
networking products, from May 1995 to May 1996. Since January 1986 he has also
served as a director of Axis Computer Systems, Inc. From January 1994 to April
1994 he was President of the Americas Division of Fibronic International, Inc.
and from August 1990 to December 1993 Vice President and General Manager of Data
General Corporation's international operations and mini-computer business unit.
Mr. Peter Gyenes has also held management, marketing, sales and technical
positions with Encore Computer, Prime Computer, Xerox and IBM. Mr. Peter Gyenes
is the brother of Andrew Gyenes, Chairman of the Board and Chief Executive
Officer of the Company.
Harrison Weaver has been a director of the Company since December 1993. He was a
Vice President of the Company from December 1993 through May 1994. He has been a
director of The Continuum Group, Inc. ("Continuum") since 1987, the Chairman of
the Board and Chief Executive Officer of Continuum since December 1991 and the
President of Continuum since August 1994. In September 1995 Continuum applied
for protection under Chapter 11 of the United States Bankruptcy Code. Mr. Weaver
is the founder and President of Weaver Associates, a diversified printing
concern located in Cranford, New Jersey, which has been in business for over 25
years. He served for thirteen years as President of the New Jersey State Opera,
becoming President Emeritus in 1987. Mr. Weaver has received many distinguished
achievement awards, including the Governor's Award Medal for outstanding
contributions to the Arts for the State of New Jersey in 1978.
Item 10 Executive Compensation
The following table sets forth, for fiscal 1997, 1996 and 1995, all compensation
awarded to, earned by or paid to Andrew Gyenes, the Chairman of the Board and
Chief Executive Officer of the Company and Kenneth J. Gruber, Executive Vice
President, Chief Financial Officer and Secretary, the only other executive
officer of the Company whose salary and bonus exceeded $100,000 with respect to
the fiscal year ended May 31, 1997 (the "Named Executive Officers.")
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Long Term Compensation
Name and Principal Other Annual Awards Securities
position Fiscal Year Salary ($) Bonus ($) Compensation Underlying Options
- -------- ----------- ---------- --------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Andrew Gyenes 1997 $100,000 -- $13,357(1) 575,000 (2)
Chairman of the Board 1996 $100,000 -- $13,357(1) 100,000 (3)
and Chief Executive 1995 $100,000 -- -- --
Officer
Kenneth Gruber 1997 $87,000 $20,000 $11,787(1) 125,000 (5)
Executive Vice 1996 $80,000 $20,000 $11,787(1) 25,000 (6)
President, Chief 1995(4) $11,667 -- -- 75,000 (7)
Financial Officer
</TABLE>
- ----------------------
(1) Represents payments by the Company for a leased automobile and related
insurance and amounts paid by the Company toward health insurance
premiums.
(2) Represents options to purchase (i) 300,000 shares of the Company's
Common Stock granted on August 15, 1996 under the Company's 1994
Incentive and Non-qualified Plan (the "1994 Plan"), and (ii) 275,000
shares of Common Stock granted on May 7,1997 under the 1994 Plan. None
of such options have been exercised.
(3) Represents options to purchase 100,000 shares of Common Stock granted
on June 12, 1995 under the 1994 Plan. None of such options have been
exercised.
(4) Mr. Gruber's employment commenced November 7, 1994.
(5) Represents options to purchase (i) 50,000 shares of Common Stock
granted on August 15, 1996 under the 1994 Plan, and (ii) 75,000 shares
of Common Stock granted on May 7, 1997 under the 1994 Plan. None of
such options have been exercised.
(6) Represents options to purchase 25,000 shares of Common Stock granted on
June 12, 1995 under the 1994 Plan. None of such options have been
exercised.
(7) Represents options to purchase 75,000 shares of Common Stock granted on
November 7, 1994 under the 1994 Plan. None of such options have been
exercised.
<PAGE>
STOCK OPTION GRANTS
The following table provides further information with respect to the
options granted in fiscal 1997 to Mr. Gyenes and Mr. Gruber under the 1994 Plan.
STOCK OPTION TABLE
<TABLE>
<CAPTION>
% of Total Potential Value At
Number of Options Assumed Annual Rates
Securities Granted to of Stock Price
Name and Principal Underlying Employees in Exercise or Expiration Appreciation For
Position Option Fiscal Year Base Price Date Option Term(1)
-------- ------ ----------- ---------- ---- --------------
5% 10%
Andrew Gyenes
<S> <C> <C> <C> <C> <C> <C>
Chairman of the Board 300,000 20% $3.00 8/15/01 $248,653 $549,459
and Chief Executive
Officer 275,000 19% $1.625 5/7/02 $123,463 $272,822
Kenneth Gruber
Executive Vice 50,000 3% $3.00 8/15/01 $41,442 $91,577
President, Chief
Financial Officer 75,000 5% $1.625 5/7/02 $33,672 $74,406
</TABLE>
(1) The potential realizable portion of the foregoing table is determined
by using the market price of the Company's Common Stock on the date of
grant. The potential realizable portion of the foregoing table
illustrates value that might be realized upon exercise of option
immediately prior to the expiration of their term, assuming the
specified compounded rates of appreciation on the Company's Common
Stock over the term of the option, These numbers do not take into
account provisions providing for termination of the option following
termination of employment, nontransferability or differences in vesting
periods. Regardless of the theoretical value of an option, its ultimate
value will depend on the market value of the Common Stock at a future
date, and that will depend on a variety of factors, including the
overall condition of the stock market and the Company's results of
operations and financial condition. There can be no assurance that the
values reflected in this table will be achieved.
Fiscal Year End Option Values
No options were exercised by the Named Executive Officers during fiscal 1997.
The following table shows, for Mr. Gyenes, and Mr. Gruber the number of shares
covered by both exercisable and unexercisable employee stock options as of May
31, 1997, and the values for "in-the-money" options, which represent the
positive spread between the exercise price of any outstanding stock option and
the price of the Common Stock as of May 31, 1997, which was $1.875.
<PAGE>
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Name Number of Securities Underlying Value of Unexercised in-the-Money
Unexercised Options at FY End(#) Options at FY-End($)
Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C>
Andrew Gyenes 363,889/536,111 0/$68,750
Kenneth Gruber 78,472/146,528 0/$18,750
</TABLE>
<PAGE>
Item 11 Security Ownership of Certain Beneficial Owners and Management
The following table sets forth beneficial ownership of the Company's Common
Stock and Class A Preferred Stock, $.01 par value ("Preferred Stock"), as of
July 31, 1997 by (a) each stockholder known by the Company to be the beneficial
owner of five percent or more of the outstanding Common Stock and Preferred
Stock, (b) each director and Named Executive Officer of the Company
individually, and (c) all directors and executive officers as a group. Holders
of Common Stock are entitled to one vote for each share held on all matters.
Holders of each share of Preferred Stock are entitled to such number of votes
based on the number of shares that they are convertible into. Except as
otherwise indicated in the footnotes below, (x) the Company believes that each
of the beneficial owners of the Common Stock and Preferred Stock listed in the
table, based on information furnished by such owner, has sole investment and
voting power with respect to such shares, and (y) where no address is indicated,
the address of the beneficial owner is the address of the principal executive
offices of the Company.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ ---------------
Name and Address of Beneficial Owner Number of Shares (1) % of Class Number of Shares % of Class
<S> <C> <C> <C> <C>
Barry Rubenstein 4,818,329(2) 44.0% 4,560(2) 67.9%
68 Wheatley Road
Brookville, NY 11545
Woodland Venture Fund 1,074,503(3) 13.0% 560(3) 8.3%
68 Wheatley Road
Brookville, NY 11545
Seneca Ventures 1,074,503(4) 13.0% 560(4) 8.3%
68 Wheatley Road
Brookville, NY 11545
Woodland Services Corp. 1,074,503(5) 13.0% 560(5) 8.3%
68 Wheatley Road
Brookville, NY 11545
Woodland Partners 1,074,503(6) 13.0% 560(6) 8.3%
68 Wheatley Road
Brookville, NY 11545
Irwin Lieber 3,385,826(7) 33.1% 4,000(7) 59.5%
767 Fifth Avenue
45th Floor
NY, NY 10153
21st Century
Communications Foreign Partners, L.P.
Fiduciary Trust 1,836,522(8) 20.6% 2,000(11) 29.8%
(Cayman) Limited
P.O. Box 1062
Grand Cayman, B.W.I
21st Century
Communications Partners, L.P. 1,836,522(9) 20.6% 2,000(11) 29.8%
767 Fifth Avenue
45th floor
New York, NY 10153
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
21st Century
Communications T-E Partners, L.P. 1,836,522(10) 20.6% 2,000(11) 29.8%
767 Fifth Avenue
45th floor
NY, NY 10153
Michael J. Marocco 1,836,522(12) 20.6% 2,000(12) 29.8%
767 Fifth Avenue
45th floor
NY, NY 10153
Barry Lewis 1,836,522(12) 20.6% 2,000(12) 29.8%
767 Fifth Avenue
45th floor
NY, NY 10153
John Kornreich 1,836,522(12) 20.6% 2,000(12) 29.8%
767 Fifth Avenue
45th floor
NY, NY 10153
Harvey Sandler 1,836,522(12) 20.6% 2,000(12) 29.8%
767 Fifth Avenue
45th floor
NY, NY 10153
Andrew Sandler 1,836,522(12) 20.6% 2,000(12) 29.8%
767 Fifth Avenue
45th floor
NY, NY 10153
Barry Fingerhut 3,363,826(13) 33.0% 4,000(13) 59.5%
767 Fifth Avenue
45th floor
NY, NY 10153
Applewood Associates, L.P. 1,507,304(14) 16.9% 2,000(14) 29.8%
68 Wheatley Road
Brookville, NY 11545
Applewood Capital Corp. 1,507,304(14) 16.9% 2,000(14) 29.8%
68 Wheatley Road
Brookville, NY 11545
Seth Lieber 1,507,304(14) 16.9% 2,000(14) 29.8%
767 Fifth Avenue
New York, NY 10153
Jonathan Lieber 1,507,304(14) 16.9% 2,000(14) 29.8%
767 Fifth Avenue
New York, NY 10153
Marilyn Rubenstein 1,074,503(15) 13.0% 560(15) 8.3%
68 Wheatley Road
Brookville, NY 11545
The Marilyn & Barry Rubenstein Family
Foundation 1,074,503(16) 13.0% 560(16) 8.3%
Andrew Gyenes 457,639(17) 5.6% 0 *
Michael Alford 172,997(18) 2.2% 0 *
Ken Gruber 97,222(19) 1.3% 0 *
Harrison Weaver 35,000(20) * 0 *
Rino Bergonzi 25,000(21) * 0 *
Peter Gyenes 21,000(22) * 0 *
Randal Hujar 255,734(23) 3.3% 0 *
All directors and executive
officers as a group 1,151,417(24) 13.8% 0 *
</TABLE>
- ----------------------
* less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes any person
who, directly or indirectly, through any contract, arrangement,
understanding or otherwise, has or shares voting or investment power
with respect to securities. Shares of Common Stock issuable upon the
exercise of options, warrants and convertible notes currently
exercisable or convertible, or exercisable or convertible within 60
days are deemed outstanding for computing the percentage ownership of
the person holding such options or warrants or convertible notes but
are not deemed outstanding for computing the percentage ownership of
any other person.
(2) Based on Amendment Number 4 to a Schedule 13D filed on June 17, 1997 by
Barry Rubenstein, Woodland Venture Fund ("Woodland Fund"), Seneca
Ventures ("Seneca"), Woodland Services Corp. ("Woodland Corp."), 21st
Century Communications Partners, L.P. ("21st Partners"), 21st Century
Communications T-E Partners, L.P. ("21st T-E"), 21st Century
Communications Foreign Partners, L.P. ("21st Foreign"), Michael J.
Marocco, Barry Lewis, John Kornreich, Harvey Sandler, Andrew Sandler,
Barry Fingerhut, Irwin Lieber, Woodland Partners, Applewood Associates,
L.P. ("Applewood"), Applewood Capital Corp. ("Applewood Capital"), Seth
Lieber, Jonathan Lieber, Marilyn Rubenstein, The Marilyn and Barry
Rubenstein Family Foundation (the "Foundation"), and Brian Rubenstein
(the "June 1997 13D"), Barry Rubenstein has sole beneficial ownership
of 332,500 shares of Common Stock. Mr. Rubenstein may also be deemed to
share beneficial ownership of 4,485,829 shares of Common Stock by
virtue of being: (i) a stockholder, officer and director of InfoMedia
Associates, Ltd. ("InfoMedia") which is a general partner of 21st
Partners, 21st T-E and 21st Foreign which collectively hold 1,836,522
shares of Common Stock (including 1,250,000 shares of Common Stock
underlying presently exercisable warrants issued in connection with the
Company's public offering in May 1996 (the "Common Stock Warrants"));
(ii) a trustee of the Foundation which holds 123,237 shares of Common
Stock (including 20,000 shares of Common Stock underlying presently
exercisable Common Stock Warrants); (iii) a general partner of each of
Applewood, Seneca, the Woodland Fund, Woodland Partners and Revwood
General Partners which hold an aggregate of 2,426,070 shares of Common
Stock (including 1,980,000 shares of Common Stock underlying presently
exercisable Common Stock Warrants). In addition, Mr. Rubenstein shares
beneficial ownership of 4,560 shares of Preferred Stock with the above
listed entities. Mr. Rubenstein disclaims beneficial ownership of these
securities, except to the extent of his equity interest therein.
<PAGE>
(3) Based on the June 1997 13D, the Woodland Fund has sole beneficial
ownership of 310,844 shares of Common Stock (including 150,000 shares
of Common Stock underlying presently exercisable Common Stock
Warrants). The Woodland Fund may also be deemed to share beneficial
ownership of 763,659 shares of Common Stock with Seneca, Woodland
Corp., Woodland Partners, and the Foundation. In addition, the Woodland
Fund has sole beneficial ownership of 240 shares of Preferred Stock and
shares beneficial ownership of 320 shares of Preferred Stock with the
above listed entities. The Woodland Fund disclaims beneficial ownership
of these securities, except to the extent of its equity interest
therein.
(4) Based on the June 1997 13D, Seneca has sole beneficial ownership of
207,922 shares of Common Stock (including 100,000 shares of Common
Stock underlying presently exercisable Common Stock Warrants). Seneca
may also be deemed to share beneficial ownership of 866,581 shares of
Common Stock with the Woodland Fund, Woodland Corp., Woodland Partners,
and the Foundation. In addition, Seneca has sole beneficial ownership
of 160 shares of Preferred Stock and shares beneficial ownership of 400
shares of Preferred Stock with the above listed entities. Seneca
disclaims beneficial ownership of these securities, except to the
extent of its equity interest therein.
(5) Based on the June 1997 13D, Woodland Corp. shares beneficial ownership
of 1,074,503 shares of Common Stock and 560 shares of Preferred Stock
with the Woodland Fund, Seneca, Woodland Partners, and the Foundation.
Woodland Corp. disclaims beneficial ownership of these securities,
except to the extent of its equity interest therein.
(6) Based on the June 1997 13D, Woodland Partners has sole beneficial
ownership of 100,000 shares of Common Stock (including 100,000 shares
of Common Stock underlying presently exercisable Common Stock
Warrants). Woodland Partners may also be deemed to share beneficial
ownership of 974,503 shares of Common Stock with the Woodland Fund,
Seneca, Woodland Corp., and the Foundation. In addition, Woodland
Partners has sole beneficial ownership of 160 shares of Preferred Stock
and shares beneficial ownership of 400 shares of Preferred Stock with
the above listed entities. Woodland Partners disclaims beneficial
ownership of these securities, except to the extent of its equity
interest therein.
(7) Based on the June 1997 13D, Irwin Lieber has sole beneficial ownership
of 42,000 shares of Common Stock (including 37,000 shares of Common
Stock underlying presently exercisable Common Stock Warrants). By
virtue of being a stockholder, officer and director of InfoMedia and a
general partner of Applewood, Irwin Lieber may be deemed to share
beneficial ownership of 3,343,826 shares of Common Stock (including
2,500,000 shares of Common Stock underlying presently exercisable
Common Stock Warrants). In addition, Mr. Lieber shares beneficial
ownership of 4,000 shares of Preferred Stock with the above listed
entities. Mr. Lieber disclaims beneficial ownership of these
securities, except to the extent of his equity ownership therein.
(8) Based on the June 1997 13D, this amount includes 48,896 shares of
Common Stock and 114,000 shares of Common Stock underlying presently
exercisable Common Stock Warrants. 21st Foreign disclaims beneficial
ownership of 398,490 shares of Common Stock and 847,500 shares of
Common Stock underlying presently exercisable Common Stock Warrants
owned by 21st Partners and 139,136 shares of Common Stock and 288,500
shares of Common Stock underlying presently exercisable Common Stock
Warrants owned by 21st T-E.
(9) Based on the June 1997 13D, this amount includes 398,490 shares of
Common Stock and 847,500 shares of Common Stock underlying presently
exercisable Common Stock Warrants. 21st Partners disclaims beneficial
ownership of 139,136 shares of Common Stock and 288,500 shares of
Common Stock underlying presently exercisable Common Stock Warrants
owned by 21st T-E and 48,896 shares of Common Stock and 114,000 shares
of Common Stock underlying presently exercisable Common Stock Warrants
owned by 21st Foreign.
(10) Based on the June 1997 13D, this amount includes 139,136 shares of
Common Stock and 288,500 shares of Common Stock underlying presently
exercisable Common Stock Warrants. 21st T-E disclaims beneficial
ownership 398,490 shares of Common Stock and 847,500 shares of Common
Stock underlying presently exercisable Common Stock Warrants owned by
21st Partners and 48,896 shares of Common Stock and 114,000 shares of
Common Stock underlying presently exercisable Common Stock Warrants
owned by 21st Foreign.
(11) Beneficial ownership of these shares of Preferred Stock is shared by
21st Foreign, 21st T-E, and 21st Partners.
(12) Based on the June 1997 13D, Messrs. Marocco, Lewis, Kornreich, H.
Sandler and A. Sandler are each the sole stockholder, officer and
director of an entity which is a general partner of an entity which is
a general partner of 21st Partners, 21st T-E and 21st Foreign.
Accordingly, they may each be deemed to share beneficial ownership of
1,836,522 shares of Common Stock (including 1,250,000 shares of Common
Stock underlying presently exercisable Common Stock Warrants) and 2,000
shares of Preferred Stock which are collectively held by 21st Partners,
21st T-E and 21st Foreign. Each individual disclaims beneficial
ownership of these securities, except to the extent of his equity
interest therein.
(13) Based on the June 1997 13D, Barry Fingerhut has sole beneficial
ownership of 20,000 shares of Common Stock underlying Common Stock
Warrants. By virtue of being a stockholder, officer and director of
InfoMedia and a general partner of Applewood, Barry Fingerhut may be
deemed to share beneficial ownership of 3,343,826 shares of Common
Stock (including 2,500,000 shares of Common Stock underlying presently
exercisable Common Stock Warrants) and 4,000 shares of Preferred Stock.
Mr. Fingerhut disclaims beneficial ownership of these securities,
except to the extent of his equity interest therein.
(14) Based on the June 1997 13D, these amounts include 257,304 shares of
Common Stock, 1,250,000 shares of Common Stock underlying Common Stock
Warrants and 2,000 shares of Preferred Stock beneficially owned by
Applewood. By virtue of being a general partner of Applewood, Applewood
Capital may be deemed to share beneficial ownership of these shares. In
addition, by virtue of being officers of Applewood Capital, Seth and
Jonathan Lieber may also be deemed to share beneficial ownership of
these shares. Applewood Capital, Seth Lieber, and Jonathan Lieber each
disclaim beneficial ownership of these securities, except to the extent
of their equity interests therein.
(15) Based on the June 1997 13D, by virtue of being a general partner of
Woodland Partners, a trustee of the Foundation, and the wife of Barry
Rubenstein, Marilyn Rubenstein may be deemed to share beneficial
ownership of 1,074,503 shares of Common Stock and 560 shares of
Preferred Stock. Ms. Rubenstein disclaims beneficial ownership of these
securities, except to the extent of her equity interest therein.
(16) Based on the June 1997 13D, the Foundation has sole beneficial
ownership of 123,237 shares of Common Stock (including 20,000 shares of
Common Stock underlying presently exercisable Common Stock Warrants).
In addition, the Foundation may be deemed to share beneficial ownership
of 951,266 shares of Common Stock and 560 shares of Preferred Stock
with Mr. and Ms. Rubenstein, the Woodland Fund, Seneca, Woodland Corp.
and Woodland Partners. The Foundation disclaims beneficial ownership of
these securities, except to the extent of its equity interest therein.
(17) Consists of 457,639 shares of Common Stock issuable upon exercise of
presently exercisable options.
(18) Consists of 163,275 of Common Stock and 9,722 shares of Common Stock
issuable upon exercise of presently exercisable options.
(19) Consists of 97,222 shares of Common Stock issuable upon exercise of
presently exercisable options.
(20) Consists of 20,000 shares of Common Stock issuable upon exercise of
presently exercisable options and 15,000 shares of Common Stock
issuable upon exercise of presently exercisable options granted
pursuant to the 1995 Stock Option Plan for Outside Directors (the
"Outside Directors' Plan"). Excludes 50,000 presently exercisable
options held by The Continuum Group, Inc., which options Mr. Weaver
disclaims beneficial ownership of.
(21) Consists of 5,000 shares of Common Stock owned by Mr. Bergonzi, 5,000
shares of Common Stock issuable upon exercise of presently exercisable
Common Stock Warrants and 15,000 shares of Common Stock issuable upon
exercise of presently exercisable options granted pursuant to the
Outside Directors' Plan.
(22) Consists of 3,000 shares of Common Stock owned by Mr. Peter Gyenes,
3,000 shares of Common Stock issuable upon exercise of presently
exercisable Common Stock Warrants and 15,000 shares of Common Stock
issuable upon exercise of presently exercisable options granted
pursuant to the Outside Directors' Plan.
(23) Consists of 253,651 of Common Stock and 2,083 shares of Common Stock
issuable upon exercise of presently exercisable options.
(24) Also, includes presently exercisable options to purchase 28,510 shares
of Common Stock and 564,518 shares of Common Stock held by certain
executive officers who are not Named Executive Officers.
<PAGE>
Item 12 Certain Relationships and Related Transactions
In August 1996, the Company entered into separation agreements with
John Ramo, President, Chief Operating Officer and a director of the Company, and
Mr. Ramo's wife, Jolie Barbiere, a vice president and director of the Company.
Pursuant to the separation agreements: Mr. Ramo resigned his officer positions
and received a lump sum payment of $132,461 representing the remaining balance
of compensation due him under his employment agreement through its original
termination date of October 20, 1997; Ms. Barbiere's employment agreement, which
expired July 16, 1996, was not renewed, and she received a lump sum severance
payment of $40,000; and both Mr. Ramo and Ms. Barbiere resigned as members of
the Board. In addition, the parties agreed that a substantial potion of the
remaining payments due under a Stock Purchase Agreement entered into in December
1995 (the "Stock Purchase Agreement"), in respect of the Common Stock purchased
from Mr. Ramo and Ms. Barbiere, would be accelerated. As part of Mr. Ramo's and
Ms. Barbiere's separation agreements, a stockholders agreement by and among the
Company, Andrew Gyenes, John Ramo, Jolie Barbiere, Zenon Slawinski and Michael
Alford, which agreement provided for certain rights of refusal with respect to
the issuance of Company securities and certain rights with respect to the
election of directors, was terminated. The Company also entered into a
separation agreement with Zenon Slawinski in August 1996. Pursuant to the
separation agreement, Mr. Slawinski's employment agreement, which expired July
15, 1996, was not renewed and he received a lump sum severance payment of
$40,000. No payments due Mr. Slawinski under the Stock Purchase Agreement were
accelerated at that time.
In October 1996, the Company agreed to further accelerate the remaining
amounts due Mr. Ramo and Ms. Barbiere and to accelerate the remaining amounts
due Mr. Slawinski under the Stock Purchase Agreement if GKN could locate a buyer
for all of the remaining shares of the Company's Common Stock then owned by Mr.
Ramo, Ms. Barbiere, and Mr. Slawinski at a specified purchase price. In January
1997, Mr. Ramo, Ms. Barbiere and Mr. Slawinski sold such shares, through GKN,
and the Company paid Mr. Ramo, Ms. Barbiere and Mr. Slawinski approximately
$160,000, $175,000 and $148,000, respectively, which amounts included accrued
interest, in full satisfaction of its obligations under the Stock Purchase
Agreement.
In December 1996, the Company consummated a $8,400,000 private
placement of 84 units at a purchase price of $100,000 per unit, each unit
consisting of 80 shares of Preferred and 50,000 Common Stock Purchase Warrants
to purchase in the aggregate 4,200,000 shares of Common Stock at an exercise
price of $4.00 per share. The following entities which may be deemed to be 5%
stockholders of the Company purchased units in the private placement: Applewood
Associates, L.P. (25 units), Seneca Ventures (2 units), 21st Century
Communications-Foreign Partners, L.P. (2.28 units), 21st Century Communications
Partners, L.P. (16.95 units), 21st Century Communications T-E Partners, L.P.
(5.77 units), Woodland Partners (2 units) and Woodland Venture Fund (3 units).
Investors in USWeb include 21st Century Communications Partners, L.P.,
and Wheatley Partners, L.P. Such entity is controlled by Wheatley Partners, LLC,
a limited liability company which is the general partner of Wheatley Partners,
L.P. The members and officers of Wheatley Partners, LLC include Barry
Rubenstein, Irwin Lieber, Seth Lieber and Jonathan Lieber, each of whom may be
deemed 5% stockholders of the Company.
All of the above transactions resulted from arms-length negotiations
and were approved by the independent members of the Company's Board of Directors
who did not have an interest in the transaction. The Company believes that the
terms of such transaction were on terms that were no less favorable than were
available from unaffiliated third parties. Future and ongoing transactions with
affiliates of the Company, if any, will be on terms believed by the Company to
be no less favorable than are available from unaffiliated third parties and will
be approved by a majority of the independent members of the Company's Board of
Directors who do not have an interest in the transaction.
Item 13 Exhibits, Lists and Reports on Form 8-K
(a) 1 Financial Statements
The following financial Statements are filed as part of this report
Page
Report of Independent Auditors 21
Consolidated Balance Sheets as of May 31, 1997 and 1996 22
Consolidated Statements of Operations for the years ended
May 31, 1997 and 1996 23
Consolidated Statements of Stockholders' Equity for the
years ended May 31, 1997 and 1996 24
Consolidated Statements of Cash Flows for the
years ended May 31, 1997 and 1996 25
Notes to Financial Statements 26
(a) 2 Financial Statement Schedules
None required
<PAGE>
(a) 3 Exhibits
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission. The Company shall
furnish copies of exhibits for a reasonable fee (covering the expense of
furnishing copies) upon request.
Exhibit Number Description of Exhibit
**2.2 Agreement and Plan of Merger dated as of February 29,
1996, by and among the company, Lyriq International
Corp., Enteractive Acquisition Corp., Randal Hujar and
Gary Skiba.
**3.1 Certificate of Incorporation of the Company, as
amended.
*3.2 Amendment to Certificate of Incorporation.
**3.3 By-laws of the Company, as amended.
*****3.4 Amendment to Certificate of Incorporation
**4.6 Form of Common Stock Purchase Warrant Certificate.
**4.7 Form of Unit Purchase Option granted to the Underwriter
of its designees.
**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 or its designees.
***4.10 Form of Warrant issued in connection with the 1996
Private Placement.
***4.11 Certificate of Designation for Class A Convertible
Preferred Stock.
**10.1 Employment Agreement dated as January 3, 1994, by and
between the Company and Andrew Gyenes.
*10.4 Form of Indemnification Agreement between each of the
Officers and Directors of the Company and the Company.
*****10.8 1994 Incentive and Non-Qualified Stock Plan Option.
**10.9 1994 Consultant Stock Option Plan.
**10.14 1995 Stock Option Plan for Outside Directors.
*10.16 Registration Rights Agreement dated February 29, 1996,
between the Company and Randal Hujar.
****10.20 Agreement dated December 4, 1996 between the Company
and USWeb Corporation.
****10.21 Agreement dated August 15, 1997 between the Company and
Enteractive Distribution Company.
*****23.1 Consent of KPMG Peat Marwick LLP.
* Incorporated herein by reference to such Exhibit to the
Registration Statement on Form SB-2 of the Registrant
(Registration No. 333-2244) Filed in March 1996, as
amended.
** Incorporated herein by reference to such Exhibit to the
Registration Statement on Form SB-2 of the Registrant
(Registration No. 33-83694) filed on September 6, 1994.
*** Incorporated herein by reference to such exhibit to the
Registration Statement on Form S-3 of the Registrant
(Registration No. 333-22713) Filed in March 1997, as
amended.
**** To be filed by Amendment to this Annual Report on Form
10-KSB.
***** Filed herewith.
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Enteractive, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Enteractive,
Inc. and subsidiaries as of May 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enteractive, Inc.
and subsidiaries as of May 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
August 27, 1997
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 31 May 31
1997 1996
------------------- ----------------------------
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 4,952,900 $ 6,005,400
Accounts receivable, net 224,400 147,400
Income taxes receivable - 16,400
Assets held for sale 100,000 -
Inventories - 439,500
Prepaid expenses and other 93,800 10,200
------------------- ----------------------------
Total current assets 5,371,100 6,618,900
Capitalized software - 1,070,600
Affiliation rights, net 593,800 -
Property and equipment, net 154,900 231,300
Other 61,500 24,200
------------------- ----------------------------
$ 6,181,300 $ 7,945,000
------------------- ----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 287,900 $ 1,404,300
Accrued expenses 623,900 895,300
Deferred revenue 69,500 -
Current maturities of long-term debt 40,200 498,900
------------------- ----------------------------
Total current liabilities 1,021,500 2,798,500
Long-term debt, excluding current maturities - 167,800
------------------- ----------------------------
Total liabilities 1,021,500 2,966,300
------------------- ----------------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value,
2,000,000 shares authorized; 6,720 and no
shares issued and outstanding at May 31, 1997
and 1996, respectively 100 -
Common stock, $.01 par value, 50,000,000 shares
authorized; 7,679,441 and 7,656,435 shares issued
and outstanding at May 31, 1997 and 1996,
Respectively 76,800 76,600
Additional paid-in capital 28,038,400 19,620,900
Accumulated deficit (22,955,500) (14,718,800)
------------------- ----------------------------
Total stockholders' equity 5,159,800 4,978,700
------------------- ----------------------------
$ 6,181,300 $ 7,945,000
------------------- ----------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1997 May 31, 1996
------------------------------- -----------------------------------
<S> <C> <C>
Net product sales $ 922,500 $ 461,900
Product development revenue 40,700 257,700
Royalty revenue 692,500 133,600
------------------------------- -----------------------------------
Total revenues 1,655,700 853,200
------------------------------- -----------------------------------
Cost of product sales 901,600 286,000
Amortization and write-off of capitalized software 1,070,600 214,200
Cost of development revenue 37,000 225,500
Research and development expenses 2,554,200 3,295,000
Marketing and selling expenses 3,312,300 2,250,400
General and administrative expenses 2,230,500 1,509,800
Acquired in-process research and development 2,293,500
-
Reorganization expenses 431,300
-
------------------------------- -----------------------------------
Total costs and expenses 10,106,200 10,505,700
------------------------------- -----------------------------------
Operating loss (8,450,500) (9,652,500)
Other income (expense):
Interest expense (33,100) (98,500)
Interest income 240,200 126,300
Amortization of debt discount and (780,000)
debt acquisition costs -
Other 6,700 0
------------------------------- -----------------------------------
Loss before income taxes (8,236,700) (10,404,700)
Income tax benefit
- -
------------------------------- -----------------------------------
Net loss $ (8,236,700) $ (10,404,700)
------------------------------- -----------------------------------
Loss per common and
common equivalent share (1.07) $ (2.07)
------------------------------- -----------------------------------
Weighted average shares of common
stock 7,679,331 5,022,573
=============================== ===================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
------------------------ -----------------------
<S> <C> <C> <C> <C>
Balance May 31, 1995 - $ - 4,775,489 $47,800
Issuance of common stock warrants - - - -
Stock options - consulting expense - - - -
Issuance of common stock to
purchase
Lyriq - - 725,212 7,200
Repurchase and retirement of
common stock - - (1,000,000) (10,000)
Conversion of convertible - - 740,734 7,400
promissory notes
Sale of common stock, net - - 2,415,000 24,200
Net loss - - - -
------------------------------------------------------
Balance May 31, 1996 - - 7,656,435 76,600
Stock options exercised - - 23,006 200
Sale of convertible preferred 6,720 100 - -
stock
Stock option consulting expense - - - -
Net loss - - - -
-----------------------------------------------------
Balance May 31, 1997 6,720 $100 7,679,441 $76,800
-----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
------------- -------------------
<S> <C> <C> <C>
Balance May 31, 1995 $8,130,300 $(4,314,100) $3,864,000
Issuance of common stock warrants 540,000 - 540,000
Stock options - consulting expense 37,000 - 37,000
Issuance of common stock to
purchase
Lyriq 2,893,600 - 2,900,800
Repurchase and retirement of
common stock (990,000) - (1,000,000)
Conversion of convertible 2,242,600 - 2,250,000
promissory notes
Sale of common stock, net 6,767,400 - 6,791,600
Net loss - (10,404,700) (10,404,700)
---------------------------------------------------------
Balance May 31, 1996 19,620,900 (14,718,800) 4,978,700
Stock options exercised 73,500 - 73,700
Sale of convertible preferred 7,869,000 - 7,869,100
stock
Stock option consulting expense 475,000 - 475,000
Net loss - (8,236,700) (8,236,700)
---------------------------------------------------------
Balance May 31, 1997 $28,038,400 $(22,955,500) $5,159,800
---------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Enteractive, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended May 31,
1997 1996
Cash flows from Operating Activities
<S> <C> <C>
Net Loss $ (8,236,700) $ (10,404,700)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 722,900 1,182,700
Acquired in-process research and development - 2,293,500
Write-off of capitalized software costs 642,400 -
Stock option consulting expense 475,000 37,000
Changes in assets and liabilities, net of acquisition of Lyriq (1996)
Accounts receivable (77,000) 22,300
Assets held for sale (100,000) -
Income taxes receivable 16,400 13,700
Inventories 439,500 (276,000)
Prepaid expenses and other (83,600) 46,200
Other assets (37,300) (2,700)
Accounts payable (1,116,400) 765,400
Accrued expenses (271,400) (115,000)
Deferred revenue 69,500 -
--------------------------------------
Net cash used in operating activities (7,556,700) (6,437,600)
--------------------------------------
Cash flows from investing activities
Proceeds from sale of investments - 1,116,100
Cash acquired in Lyriq acquisition - 11,300
Purchase of affiliation rights (625,000) -
Purchases of property and equipment (187,100) (65,600)
--------------------------------------
Net cash (used in ) provided by investing activities (812,100) 1,061,800
--------------------------------------
Cash flows from financing activities
Proceeds from exercise of stock options 73,700 -
Proceeds from sale of common stock, net - 6,791,600
Issuance of convertible notes payable and warrants, net - 2,460,000
Repurchase and retirement of common stock - (333,300)
Repayment of convertible notes payable - (450,000)
Net proceeds from issuance of convertible preferred stock 7,869,100 -
Principal payments under long-term debt (626,500) (15,200)
Principal payments under capital lease obligations - (4,300)
--------------------------------------
Net cash provided by financing activities 7,316,300 8,448,800
--------------------------------------
Net increase (decrease) in cash and cash equivalents (1,052,500) 3,073,000
Cash and cash equivalents
Beginning of year 6,005,400 2,932,400
--------------------------------------
End of year $ 4,952,900 $ 6,005,400
======================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(1) Business and Related Matters
Throughout fiscal 1997 Enteractive, Inc. (the "Company") designed,
published and marketed interactive multimedia titles for the
entertainment and recreation markets. On December 4, 1996 the Company
signed multiple market affiliate agreements with USWeb Corporation and
paid $625,000 for the right to operate USWeb affiliate offices in New
York City, Long Island, Philadelphia, Baltimore, Stamford, CT and
Bergen County and Newark, NJ, for a ten-year period. The operation,
which will be doing business as USWeb Cornerstone, is intended to
provide a full range of Internet and Intranet-based business solutions,
including Web site design, hosting and management, design and
implementation of database and e-commerce solutions, educational
programs and Web-related strategic consulting and marketing. Revenues
from this new business will commence in fiscal 1998.
In August 1997 the Company entered into an agreement, which is subject
to the satisfaction of certain closing conditions. The agreement
provides that the Company will sell its inventory and certain accounts
receivable existing at the date of the closing from its interactive
multimedia publishing business to a third party. In addition the
Company has assigned its distribution contracts with its domestic
distributors to the third party and has entered into an exclusive
license with the same party, which allows them to market the Company's
interactive multimedia titles in North America for a minimum of two
years. If the transaction is consummated the Company has been
guaranteed the greater of $100,000 or 50% of the proceeds from the sale
of the inventory in the 9 months following the closing and 50% of the
accounts receivable balances collected within 24 months of closing. The
Company will also receive royalties on sales of its products subsequent
to liquidation of existing inventory of 15% for three years and 10%
thereafter. The Company will also receive a 5% royalty from the sales
of any new products the third party sells. The Company is evaluating
the most appropriate manner to continue licensing its multimedia titles
outside the United States. The Company does not believe that it will
incur any significant ongoing costs associated with the domestic or
international distribution of its multimedia titles. As a result, the
Company wrote down its interactive multimedia business related assets
(excluding certain retained receivables) in the fourth quarter of
fiscal 1997 to the related anticipated minimum proceeds of $100,000.
These assets are classified as "assets held for sale" in the Company's
May 31, 1997 balance sheet.
The Company's new Internet and Intranet solutions services business is
primarily in its development stage. The Company has commenced
operations related to this new business in fiscal 1997, but has not
generated revenue therefrom and there is no assurance of future
revenues. The Company is subject to a number of risks that may impact
its liquidity, including risks relating to generating sufficient
revenue to cover operating and capital expenditures, reliance on key
personnel, the ability to attract marketing, sales and technical
personnel to achieve the Company's business plan and competition.
As of May 31, 1997 the Company has cash and cash equivalents of
$4,953,000 and working capital of $4,350,000, which with anticipated
revenues the Company believes will be sufficient to meet its liquidity
requirements for fiscal 1998. The Company may be required to raise
additional capital to meet the Company's longer-term cash requirements
for operations. In the event the Company does not generate sufficient
revenues in fiscal 1998, management will modify the Company's business
plan to delay or eliminate expansion plans and implement measures to
significantly reduce operating expenditures planned in fiscal 1998.
Such actions, if necessary, will enable the Company to remain liquid
for the remainder of fiscal 1998.
On February 29, 1996, the Company acquired Lyriq International
Corporation ("Lyriq), a developer and publisher of interactive
multimedia software, whereby Lyriq was merged into a wholly-owned
subsidiary of the Company. The merger was accounted for under the
purchase method of accounting and, accordingly, the net assets and
operations of Lyriq are included in the Company's consolidated
financial statements commencing February 29, 1996.
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(1) Business and Related Matters (continued)
The purchase price was determined as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
725,212 shares of Enteractive common stock at fair value ($4.00 per share) $2,900,848
Excess of fair value of liabilities assumed over assets acquired of Lyriq 625,400
Acquisition costs 52,102
-----------
===========
Total $3,578,300
===========
</TABLE>
In connection with the acquisition, the Company recorded a $2,293,500
expense for purchased research and development and $1,284,800 of
capitalized software which it originally planned to amortize on a
straight-line basis over three years. Capitalized software at May 31,
1996 resulted from the Lyriq acquisition and is net of accumulated
amortization of $214,200. Due to the Company's decision to discontinue
directly selling its multimedia software products and based on the
terms of the agreement entered into in August 1997 as described above,
the remaining balance of the capitalized software of $642,400 was
written off at May 31, 1997. The charge for purchased research and
development equaled the estimated current fair value of the future
related cash flows to be derived from specifically identified
technologies (discounted at a risk-adjusted rate of 30%) for which
technological feasibility had not yet been established pursuant to SFAS
No. 86 (consistent with management's definition of internally developed
software) and the technologies have no alternative future use.
The following unaudited pro forma consolidated results of operations
reflects the results of the Company's operations for the year ended May
31, 1996 as if the merger with Lyriq had occurred at the beginning of
the year and reflect the historical results of operations of the
purchased business adjusted for increased amortization expense and
increased common shares outstanding from the acquisition.
Total revenues $ 1,715,600
Net loss $(8,708,100)
Net loss per share $ (1.57)
The pro forma information does not necessarily indicate what would have
occurred had the acquisition been consummated at the beginning of
fiscal 1996, or of the results that may occur in the future.
(2) Summary of Significant Accounting Policies
(a) Consolidation Policy
The consolidated financial statements include the accounts of
Enteractive, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated in consolidation.
(b) Cash and Cash 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 $4,865,600 and
$5,654,200 at May 31, 1997 and 1996, respectively, consist of
cash held in interest-bearing money market accounts.
(c) 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 priced 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.
<PAGE>
(2) Summary of Significant Accounting Policies (continued)
The Company's agreements with certain product distributors and
retailers permit them to exchange or return products for which
the Company provides an allowance reflected as a reduction of
accounts receivable in the accompanying balance sheets. The
allowance for doubtful accounts and returns at May 31, 1997
and 1996 was $70,000 and $138,000, respectively.
Provided that acceptance is probable, revenue from Internet
and Intranet-based business solution services is recognized as
services are rendered. Deferred revenue represents amounts
billable or paid by the customer for which the related
services were not provided at the balance sheet date.
(d) Inventories
Inventories of multimedia software and related components are
recorded at the lower of cost (on a first-in, first-out basis)
or market.
(e) Affiliation Rights
Fees for affiliation rights were paid to USWeb for the right
to join the USWeb network and operate as an affiliate in the
territories indicated in Note 1. The fee is being amortized
over the 10-year life of the agreement with USWeb. Affiliation
rights at May 31, 1997 were net of accumulated amortization of
$31,200.
(f) Property and Equipment
Property and equipment are stated at cost and are depreciated
over their estimated useful lives using the straight-line
method, except for leasehold improvements, which are amortized
over the lesser of the lease term or the life of the related
asset.
(g) Income Taxes
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be realized or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
(h) Long-Lived Assets
Statement of Financial Accounting Standards No 121 ("SFAS No
121") establishes accounting standards for the impairment of
long lived assets, certain intangibles and goodwill related to
those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. The
Company reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of expected cash
flows, undiscounted and without interest, is less than the
carrying amount of the asset, an impairment loss is recognized
as the amount by which the carrying value of the asset exceeds
its fair value.
(i) 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.
<PAGE>
(j) Earnings Per Share
Net loss per share for fiscal 1997 and 1996 is based on the
weighted average number of shares of common stock outstanding,
excluding common stock equivalents (common stock options and
warrants and convertible preferred stock) since they are
antidilutive.
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share", is required to be adopted for interim and annual
periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used
to compute earnings per share and restate all prior periods.
Basic and diluted earnings per share will replace primary and
fully diluted earnings per share. The dilutive effect of stock
options and other common stock equivalents will be excluded
from the calculation of basic earnings per share, but will be
reflected in diluted earnings per share. The implementation of
SFAS No. 128 would not have impacted earnings per share for
fiscal 1997 due to the Company's net loss. However, it could
have an impact in the future, depending on whether the Company
has net income and the value of the Company's common stock.
(l) Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock
options only if the current market price of the underlying
stock exceeds the exercise price on the date of the grant. On
June 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company has elected not to
implement the fair value based accounting method for employee
stock options, but has elected to disclose the pro forma net
earnings per share for employee stock option grants made
beginning in fiscal 1996 as if such method had been used to
account for stock-based compensation cost as described in SFAS
No. 123.
(k) Fair Value of Financial Instruments
At May 31, 1997 and 1996, the fair value of the Company's cash
and cash equivalents, accounts receivable, assets held for
sale, accounts payable and accrued expenses approximate their
carrying value in the consolidated financial statements due to
the short maturity of those instruments. The book value of the
Company's debt approximates fair value since the interest rate
is prime based and accordingly is adjusted for market rate
fluctuations.
(l) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(3) Property and Equipment
Property and equipment, at May 31, 1997 and 1996, consists of the
following:
<TABLE>
<CAPTION>
1997 1996 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Computer equipment $1,060,100 $ 873,200 3 years
Furniture and other equipment 54,300 54,100 3-5 years
Leasehold improvements 200,300 200,300 Lease Term
--------------------------------
1,314,700 1,127,600
Accumulated depreciation and amortization (1,159,800) (896,300)
--------------------------------
Property and equipment, net $ 154,900 $ 231,300
=========== ==========
</TABLE>
<PAGE>
(4) Reorganization and Related Accrued Expenses
In July 1996, the Company reduced its Washington DC based work force by
approximately 45%. This included the separation of the Company's
President and a Vice -President. The total severance and other related
costs of $431,300 is reflected as an accrued liability at May 31, 1996
since such costs related to fiscal 1996 and prior years.
(5) Long-Term Debt
Long-term debt at May 31, 1997 and 1996, consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
Notes payable in connection with the repurchase of 1,000,000
shares of common stock, which accrues interest at prime
<S> <C> <C>
(8.50% at May 31, 1997) $ 40,200 $666,700
Less current maturities (40,200) (498,900)
----------------- -----------------
Long-term debt, excluding current maturities $ - $167,800
================= =================
</TABLE>
Interest costs of approximately $33,100 and $98,500 (including interest
on bridge loans repaid in May 1996) were paid in fiscal 1997 and 1996,
respectively.
(6) Convertible Promissory Notes
In January 1996, the Company consummated a $2,700,000 financing of 54
units; each consisting of a $50,000 unsecured convertible promissory
note with interest at 10% and 10,000 warrants. Each warrant enables the
holder to purchase one share of common stock at $4.00 per share. Debt
acquisition costs totaled $240,000 and net proceeds to the Company were
$2,460,000.
The fair market value of the warrants was $540,000 at the time of
issuance. Such amount was reflected as an increase in additional paid
in capital and as a discount on the convertible promissory notes to be
amortized over the term of the notes.
Investors holding an aggregate of $2,250,000 of convertible promissory
notes elected to convert their convertible promissory notes into
740,734 shares of the Company's common stock and 1,481,468 warrants at
the closing of the May 1996 public offering (Note 7). The remaining
$450,000 of convertible promissory notes were repaid at that time and
the remaining debt discount was expensed.
(7) Public Offering of Common Stock
In May 1996, the Company sold 2,415,000 shares of the Company's common
stock to the public at a price of $3.375 per share. Proceeds were
approximately $6,791,600, net of related expenses of approximately
$1,359,000. In connection with this sale the Company sold to the
underwriter, for an aggregate of $100, the right to purchase 210,000
shares of common stock at a price of $3.71 per share through May 21,
2001. In connection with this right the underwriter received certain
"piggyback" and demand registration rights.
(8) Convertible Preferred Stock
On December 12, 1996 the Company completed a private placement of 84
units each consisting of 80 shares of Class A Convertible Preferred
Stock and 50,000 common stock purchase warrants to purchase in the
aggregate 4,200,000 shares of common stock at an exercise price of
$4.00 per share. Proceeds were approximately $7,869,100, net of related
expenses of $531,000. The preferred stock has a stated value of $1,250
per share and each share is convertible at any time after April 30,
1998 into such whole number of shares of common stock equal to the
aggregate stated value of the preferred stock to be converted divided
by the lesser of (i) $2.00 or (ii) 50% of the average closing sale
price for the common stock for the last ten trading days in the fiscal
quarter of the Company prior to such conversion. The Company must use
the proceeds, if any, derived from the exercise of the Company's
currently outstanding public common stock warrants, which expire in
October 1997, or 50% of the proceeds from any other equity financing to
redeem the preferred stock at 110% of the stated value. The Company
also has the option to redeem all, or any
<PAGE>
(8) Convertible Preferred Stock (continued)
portion of on a pro rata basis, the preferred stock at any time upon 30
days prior written notice, at a redemption price equal to 110% of the
stated value.
The conversion rate of the convertible preferred stock (when calculated
on the basis of dividing the stated value by $2.00 only) will be
subject to adjustments to protect against dilution in the event of
stock dividends, stock splits, combinations, subdivision and
reclassifications.
(9) Stock Options and Warrants
During fiscal 1997 the Company's shareholders approved an amendment to
the Company's 1994 Incentive and Stock Option Plan (the "Employee
Plan") increasing the number of shares of common stock authorized for
issuance upon exercise of the options granted pursuant to the plan to
2,500,000 from 1,500,000. The Company has also adopted the 1994 Stock
Option Plan for Consultants and the 1995 Stock Option Plan for
Directors and has reserved 1,000,000 and 150,000 shares, as amended,
for issuance to consultants and non-employee directors, respectively.
At May 31, 1997, 1,965,316 options have been granted and 534,684 are
available for grant under the Employee Plan. 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 up to 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 monthly in equal increments over the first
three years after the date of grant. Payment for the exercise price of
an option may be made with previously acquired common stock of the
Company with certain limitations.
In November 1994, a total of 250,000 options were granted to two
consultants (one of which was a former director of the Company) under
the 1994 Stock option plan for consultants for advisory services. The
options are exercisable for 10 years from date of grant at an exercise
price of $3.75. In fiscal 1997, the Company granted 400,000 options to
a partnership, which provides consulting services to the Company. The
options are exercisable for a three year period from the date of grant
at an exercise price of $2.375. The expense related to the services is
being recognized over the one-year vesting period. In addition, in
fiscal 1997, 214,080 options were granted to various consultants at
exercise prices ranging from $1.75 to $3.00. Each are exercisable for
periods from five to ten years from the date of grant. The expense
relating to the services is being recognized over the vesting periods
which range from zero to one year. Total stock option compensation
expense for fiscal 1997 and 1996 was $475,000 and $37,000,
respectively. A total of 135,920 options remain available for grant
under the consulting plan.
Under the 1995 Stock Option Plan for Outside Directors, each person who
is an outside director on January 1 of each calendar year, commencing
January 1, 1995, shall be granted 5,000 options to purchase shares of
common stock of the Company. At May 31, 1997, 45,000 options have been
granted under the 1995 Stock Option Plan for Outside Directors and
105,000 are available for grant.
<PAGE>
(9) Stock Options and Warrants (continued)
A summary of all stock option transactions of the Company is as
follows:
<TABLE>
<CAPTION>
Number of Price range per Weighted
options share average share
------- ----- -------------
<S> <C> <C>
Outstanding May 31, 1995 1,001,770 $1.71 - 4.00
Granted 190,000 $3.00 - 3.25
Exercised -
Canceled (82,000) $3.00 - 4.00
--------
Outstanding at May 31, 1996 1,109,770 $1.71 - 3.75
Granted 2,202,580 $1.63 - 3.75
Exercised ( 23,006) $3.00 - 3.25
Canceled (155,954) -
----------
Outstanding at May 31, 1997 3,133,390 $1.63 - 3.75 $ 2.53
==========
Exercisable at May 31, 1997 1,631,028 $1.63 - 3.75 $ 2.86
========== ==================== ===============
</TABLE>
The options outstanding as of May 31, 1997 are summarized in ranges
as follows:
<TABLE>
<CAPTION>
Weighted Average Number of Options Weighted Average
Range of Exercise Price Exercise Price Outstanding Remaining Life
- ------------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
$1.63 - 2.70 $1.99 1,726,010 4 Years
$2.71 - 3.75 $3.20 1,407,380 3 Years
-----------------
3,133,390
=================
</TABLE>
The per share weighted-average fair value of stock options granted
during fiscal 1997 and fiscal 1996 was $1.17 and $1.77, respectively,
on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions: 1997 - expected dividend
yield of 0%, risk free interest rate of 6%, expected stock volatility
of 54%, and an expected option life of 5 years; 1996- expected dividend
yield of 0%, risk free interest rate of 6%, expected stock volatility
of 54%, and an expected option life of 5 years.
The company applies APB Opinion No. 25 in accounting for its stock
options grants and, accordingly, no compensation cost has been
recognized in the financial statements for its employee and director
stock options which have an exercise price equal to or greater than the
fair value of the stock on the date of the grant. Had the Company
determined compensation costs based on the fair value at the grant date
for its stock options under SFAS No.123, the Company's net loss and net
loss per common share would have been increased to the pro forma
amounts indicated below.
1997 1996
---- ----
Net loss:
As reported ($8,236,700) ($10,404,700)
Pro forma ($8,664,100) ($10,537,700)
Net loss per share:
As reported ($1.07) ($2.07)
Pro forma ($1.13) ($2.10)
<PAGE>
Pro forma net loss reflects only options granted in fiscal 1997 and
fiscal 1996. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro
forma net loss amounts presented above because compensation cost is
reflected over the options' vesting period and compensation cost for
options granted prior to June 1, 1995 was not considered.
At May 31, 1997, the Company had reserved, authorized and unissued
common shares for the following purposes (excluding those for stock
options and convertible preferred stock):
<TABLE>
<CAPTION>
Shares of Common Stock
Exercise Price Issuable Expiration
============== ======================== ================
<S> <C> <C> <C>
Warrants issued in connection with common stock offerings $4 5,121,468 October, 1997
Warrants issued in connection with the convertible preferred stock $4 4,200,000 December, 2001
offering
Warrants issued with private placement $2.35 340,000 January, 1999
Unit purchase options for one warrant and one share of common stock $6.60 200,000 October, 1999
Warrants to be issued upon exercise of the unit purchase options $5.20 200,000 October, 1997
Stock purchase rights sold to underwriter $3.71 210,000 May, 2001
===========
Total 10,271,468
===========
</TABLE>
(10) Income Taxes
The actual income tax benefit for fiscal 1997 and 1996 differs from the
"expected" income tax benefit, computed by applying the U.S. Federal
corporate tax rate of 34 percent to loss before income taxes, as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(2,800,500) $(3,537,600)
Increase (reduction) in income taxes resulting from:
Non-deductible expenses 532,400 861,500
Increase in valuation allowance, primarily due to 2,268,100 2,676,100
Federal net operating loss carryforwards
------------- -------------
Actual tax benefit - -
============= =============
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May
31, 1997and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $6,076,800 $3,907,000
Allowance for doubtful accounts receivable and returns 23,800 46,900
Accrued expenses 25,800 49,600
Research and development credit carryforward 127,800 -
Property and equipment depreciation 13,900 -
Valuation allowance (6,268,100) (4,000,000)
-------------------------------------
Net deferred tax asset -- 3,500
Deferred tax liability - property and equipment, depreciation
- 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 the
entire deferred tax asset will be realized. The ultimate realization of
the deferred tax asset is dependent upon the generation of future
taxable income during the periods in which temporary differences become
deductible. The Company believes that it is more likely than not that
it will not be able to realize its deferred tax asset and has
established a valuation allowance of $6,268,100 at May 31, 1997, based
upon the provisions of Statement of Financial Accounting Standards No.
109, the Company's historical taxable losses and lack of offsetting
objective evidence, the Company's projected taxable loss through May
31, 1998 and that management cannot currently determine whether the
Company will generate taxable income during the remainder of the net
operating loss carryforward period.
At May 31, 1997, the Company had available approximately $17,873,000 of
tax loss carryforwards, which expire in the years 2009 through 2012.
The utilization of certain of these tax loss carryforwards is subject
to annual limitations imposed by the Internal Revenue Code Section 382
due to the Company's various equity transactions.
(11) Employee Benefit Plan
The Company sponsors an employee savings plan under Section 401(k) of
the Internal Revenue Code (IRC) that covers substantially all employees
of the Company who elect to participate on a voluntary basis.
Participants may authorize salary deferral amounts under the plan up to
15 percent of their compensation limited to a maximum amount stipulated
in the IRC. The plan also provides for a discretionary Company
contribution, which is determined by the Board of Directors. No
discretionary Company contributions were made during the years ended
May 31, 1997 and 1996.
<PAGE>
(12) Commitments
Rent expense for operating leases for 1997 and 1996 approximated
$204,100 and $186,500, respectively. The Company leases office space
under non-cancelable operating leases which expire at various times
through 2002. Minimum future rentals by fiscal year for operating
leases with noncancellable terms in excess of one year are as follows:
1998 - $353,840 1999 - $332,445 2000 - $332,445 2001 - $286,439 2002 -
$268,940
(13) Business and Credit Concentrations
In fiscal 1997 there were no customers that individually comprised more
than 10% of revenue. In 1996 there were three such customers, amounting
to 69% of revenue in the aggregate.
(14) Repurchase and Retirement of Common Stock
Simultaneously with the May 1996 closing of the secondary public
offering of common stock (note 7), the Company repurchased and retired
an aggregate of 1,000,000 shares of common stock at $1.00 per share
from certain of its officers. Under the purchase agreement as amended
in August 1996 and again in January 1997 the Company paid all except
$40,200 (note 5) of the purchase price by May 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ENTERACTIVE, INC.
Date: September 2, 1997 By: ANDREW GYENES
-------------
Andrew Gyenes
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the persons on behalf of the registrant and in the
capacities and on the date indicated.
Name Title Date
- ---- ----- ----
/S/ ANDREW GYENES Chairman of the Board and September 2, 1997
- ----------------- Chief Executive Officer
Andrew Gyenes
/S/KENNETH GRUBER Vice President, Chief Financial September 2, 1997
- ----------------- Officer (Principal Accounting Officer)
Kenneth Gruber
/S/MICHAEL ALFORD Vice President and Director September 2, 1997
- -----------------
Michael Alford
/S/RINO BERGONZI Director September 2, 1997
- -----------------
Rino Bergonzi
/S/PETER GYENES Director September 2, 1997
- -----------------
Peter Gyenes
/S/RANDAL HUJAR Vice President and Director September 2, 1997
- ---------------
Randal Hujar
/S/HARRISON WEAVER Director September 2, 1997
- ------------------
Harrison Weaver
EXHIBIT 3.3
AMENDMENT TO CERTIFICATE OF INCORPORATION
The Certificate of Incorporation of the Company is hereby amended by
deleting the first paragraph of Article FOURTH thereof in its entirety and
substituting the following paragraph in lieu thereof:
"The total number of shares of capital stock which
the Company shall have authority to issue is
fifty-two million (52,000,000) shares, of which
fifty million (50,000,000) shares are to be shares
of Common Stock, par value $.01 per share, and two
million (2,000,000) shares are to be shares of
Preferred Stock, par value $.01 per share."
1994 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN OF
ENTERACTIVE, INC
1. PURPOSE OF THE PLAN
This 1994 Incentive and Nonqualified Stock Option Plan (the "Plan") is
intended as an incentive, to retain in the employ of Enteractive, Inc. (the
"Company") and any Subsidiary of the Company (within the meaning of Section
424(f) of the Internal Revenue Code of 1986, as amended (the "Code")), persons
of training, experience and ability, to attract new employees whose services are
consider valuable, to encourage the sense of proprietorship and to stimulate the
active interest of such persons in the development and financial success of the
Company and its Subsidiaries.
It is further intended that certain options granted pursuant to the
Plan shall constitute incentive stock options within the meaning of Section 422
of the Code ("Incentive Options") while certain other options granted pursuant
to the Plan shall be nonqualified stock options ("Nonqualified Options").
Incentive Options and the Nonqualified Options are hereinafter referred to
collectively as "Options".
2. ADMINISTRATION OF THE PLAN
The Board of Directors of the Company (the "Board") shall appoint and
maintain as administrator of the Plan a Committee (the "Committee") consisting
of two or more directors of the Company, or the entire Board. Unless otherwise
determined by the Board, no person shall be eligible to service on the Committee
unless he is then a "non-employee director" within the meaning of Rule 16b-3 of
the Securities and Exchange Commission ("Rule 16b-3") promulgated under the
Securities Exchange Act of 1934, as amended (the "Act"), if and as Rule 16b-3 is
then in effect. The members of the Committee shall serve at the pleasure of the
Board.
The Committee, subject to Section 3 hereof, shall have full power and
authority to designate recipients of Options, to determine the terms and
conditions of respective Option agreements (which need not be identical) and to
interpret the provisions and supervise the administration of the Plan. Subject
to Section 7 hereof, the Committee shall have the authority, without limitation,
to designate which Options granted under the Plan shall be Incentive Options and
which shall be Nonqualified Options. To the extent any Option does not qualify
as an Incentive Option, it shall
<PAGE>
constitute a separate Nonqualified Option. Notwithstanding any provision in the
Plan to the contrary, no Options may be granted under the Plan to any member of
the Committee during the term of his membership on the Committee.
Subject to the provisions of the Plan, the Committee shall interpret
the Plan and all Options granted under the Plan, shall make such rules as it
deems necessary for the proper administration of the Plan, shall make all other
determinations necessary or advisable for the administration of the Plan and
shall correct any defects or supply any omission or reconcile any inconsistency
in the Plan or in any Options granted under the Plan in the manner and to the
extent that the Committee deems desirable to carry the Plan or any Options into
effect. The act or determination of a majority of the Committee shall be deemed
to be the act or determination of the Committee and any decision reduced to
writing and signed by all of the members of the Committee shall be fully
effective as if it had been made by a majority at a meeting duly held. Subject
to the provisions of the Plan, any action taken or determination made by the
Committee pursuant to this and the other paragraphs of the Plan shall be
conclusive on all parties.
3. DESIGNATION OF OPTIONEES
The persons eligible for participation in the Plan as recipients of
Options ("Optionees") shall include only full-time key employees (including
full-time key employees who also serve as directors) of the Company or any
Subsidiary. In selecting Optionees, and in determining the number of shares to
be covered by each Option granted to Optionees, the Committee may consider the
office or position held by the Optionee, the Optionee's degree of responsibility
for and contribution to the growth and success of the Company or any Subsidiary,
the Optionee's length of service, age, promotions, potential and any other
factors which the Committee may consider relevant. An employee who has been
granted an Option hereunder may be granted an additional Option or Options, if
the Committee shall so determine.
4. STOCK RESERVED FOR THE PLAN
Subject to adjustment as provided in Section 7 hereof, a total of two
million five hundred thousand (2,500,000) shares of common stock, $.01 par value
("Stock"), of the Company shall be subject to the Plan. The shares of Stock
subject to the Plan shall consist of unissued shares or previously issued shares
reacquired and held by the Company or any Subsidiary of the Company, and such
amount of shares of Stock shall be and is hereby reserved for such purpose. Any
of such shares of Stock which may remain unsold and which are not subject to
outstanding Options at the termination of the Plan shall cease to be reserved
for the purpose of the Plan, but until termination of the Plan the Company shall
at all times reserve a sufficient number of shares of Stock to meet the
requirements of the Plan. Should any Option expire or be cancelled prior to its
exercise in full or should the number of shares of Stock to be delivered upon
the exercise in full of an Option be reduced for any reason, the shares of Stock
theretofore subject to such Option may again be subject to an Option under the
Plan.
5. TERMS AND CONDITIONS OF OPTIONS
<PAGE>
Options granted under the Plan shall be subject to the following
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) Option Price. The purchase price of each share of Stock
purchasable under an Option shall be determined by the Committee at the time of
grant but shall not be less than 100% of the fair market value of such share of
Stock on the date the Option is granted in the case of an Incentive Option and
not less than 75% of the fair market value of such share of Stock on the date
the Option is granted in the case of a non-Incentive Option; provided, however,
that with respect to an Incentive Option, in the case of an Optionee who at the
time such Option is granted, owns (within the meaning of Section 424(d) of the
Code) more than 10% of the total combined voting power of all classes of stock
of the Company or of any Subsidiary, then the purchase price per share of Stock
shall be at least 110% of the Fair Market Value (as defined below) per share of
Stock at the time of grant. The exercise price for each Incentive Option shall
be subject to adjustment as provided in Section 7 below. The fair market value
("Fair Market Value") means the closing price of publicly traded shares of Stock
on the national securities exchange on which shares of Stock are listed (if the
shares of Stock are so listed) or on the NASDAQ National Market System or NASDAQ
over-the-counter system (if the shares of Stock are regularly quoted on the
NASDAQ National Market System or NASDAQ over-the-counter system), or, if not so
listed or regularly quoted, the mean between the closing bid and asked prices of
publicly traded shares of Stock in the Over-The-Counter Electronic Bulletin
Board, or, if such bid and asked prices shall not be available, as reported by
any nationally recognized quotation service selected by the Company, or as
determined by the Committee in a manner consistent with the provisions of the
Code.
(b) Option Term. The term of each Option shall be fixed by the
Committee, but no Option shall be exercisable more than ten years after the date
such Option is granted; provided, however, that in the case of an Optionee who,
at the time an Incentive Option is granted, owns more than 10% of the total
combined voting power of all classes of stock of the Company or any Subsidiary,
then such Incentive Option shall not be exercisable with respect to any of the
shares subject to such Incentive Option later than the date which is five years
after the date of grant.
(c) Exercisability. Subject to paragraph (j) of this Section 5,
Options shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee at grant, provided, however,
that except as provided in paragraphs (f) and (g) of this Section 5, unless a
shorter or longer vesting period is otherwise determined by the Committee at
grant, Options shall be exercisable as follows: up to thirty-three (33%) percent
of the aggregate initial shares of Stock purchasable under an Option shall be
exercisable commencing one year after the date of grant, an additional
thirty-four (34%) percent of the aggregate initial shares of Stock purchasable
under an Option shall be exercisable commencing two years after the date of
grant and up to an additional thirty-three (33%) percent of the aggregate
initial shares of Stock purchasable under an Option shall be exercisable
commencing three years from the date of grant. The
<PAGE>
Committee may waive such installment exercise provision at any time in whole or
in part based on performance and/or such other factors as the Committee may
determine in its sole discretion, provided, however, no Option shall be
exercisable until more than six months have elapsed from the date of grant of
such Option.
(d) Method of Exercise. Options may be exercised in whole or in part
at any time during the option period, by giving written notice to the Company
specifying the number of shares to be purchased, accompanied by payment in full
of the purchase price, in cash, by check or such other instrument as may be
acceptable to the Committee. As determined by the Committee, in its sole
discretion, at or after grant, payment in full or in part may also be made in
the form of Stock owned by the Optionee (based on the Fair Market Value of the
Stock on the trading day before the Option is exercised); provided, however,
that if such Stock was issued pursuant to the exercise of an Incentive Option
under the Plan, the holding requirements for such Stock under the Code shall
have first been satisfied. An Optionee shall have the rights to dividends or
other rights of a stockholder with respect to shares subject to the Option after
(i) the Optionee has given written notice of exercise and has paid in full for
such shares and (ii) becomes a stockholder of record.
(e) Non-transferability of Options. Options are not transferable and
may be exercised solely by the Optionee during his lifetime or after his death
by the person or persons entitled thereto under his will or the laws of descent
and distribution. Any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of, or to subject to execution, attachment or similar process,
any Option contrary to the provisions hereof shall be void and ineffective and
shall give no right to the purported transferee.
(f) Termination by Death. Unless otherwise determined by the Committee
at grant, if any Optionee's employment with the Company or any Subsidiary
terminates by reason of death, the Option may thereafter be immediately
exercised, to the extent then exercisable (or on such accelerated basis as the
Committee shall determine at or after grant), by the legal representative of the
estate or by the legatee of the Optionee under the will of the Optionee, for a
period of one year from the date of such death or until the expiration of the
stated term of such Option as provided under the Plan, whichever period is
shorter.
(g) Termination by Reason of Disability. Unless otherwise determined
by the Committee at grant, if any Optionee's employment with the Company or any
Subsidiary terminates by reason of total and permanent disability as determined
under the Company's long term disability policy ("Disability"), any Option held
by such Optionee may thereafter be exercised, to the extent it was exercisable
at the time of termination due to Disability (or on such accelerated basis as
the Committee shall determine at or after grant), but may not be exercised after
one year from the date of such termination of employment or the expiration of
the stated term of such Option, whichever period is shorter; provided, however,
that, if the Optionee dies within such one-year period, any unexercised Option
held by such Optionee shall thereafter be exercisable to the extent to which it
was exercisable at the time of death for a period of one year from the date of
such death or
<PAGE>
for the stated term of such option, whichever period is shorter.
(h) Termination by Reason of Retirement. Unless otherwise determined
by the Committee at grant, if any Optionee's employment with the Company or any
Subsidiary terminates by reason of Normal or Early Retirement (as such terms are
defined below), any Option held by such Optionee may thereafter be exercised to
the extent it was exercisable at the time of such Retirement (as defined below)
(or on such accelerated basis as the Committee shall determine at or after
grant), but may not be exercised after three months from the date of such
termination of employment or the expiration of the stated term of such Option,
whichever period is shorter; provided, however, that, if Optionee dies within
such three-month period, any unexercised Option held by such Optionee shall
thereafter be exercisable, to the extent to which it was exercisable at the time
of death, for a period of one year from the date of such death or for the stated
term of such Option, whichever period is shorter.
For purposes of this paragraph (h), Normal Retirement shall mean
retirement from active employment with the Company or any Subsidiary on or after
the normal retirement date specified in the applicable Company or Subsidiary
pension plan. Early Retirement shall mean retirement from active employment with
the Company or any Subsidiary pursuant to the early retirement provisions of the
applicable Company or Subsidiary pension plan. Retirement shall mean Normal or
Early Retirement.
(i) Other Termination. Unless otherwise determined by the Committee at
grant, if any Optionee's employment with the Company or any Subsidiary
terminates for any reason other than death, Disability or Retirement, the Option
shall thereupon terminate, except that the exercisable portion of any Option
which was exercisable on the date of such termination of employment may be
exercised for the lesser of three months from the date of termination or the
balance of such Option's term if the Optionee's employment with the Company or
any Subsidiary is involuntarily terminated by the Optionee's employer without
Cause. Cause shall mean a felony conviction or the failure of any Optionee to
contest prosecution for a felony or an Optionee's willful misconduct or
dishonesty, any of which is harmful to the business or reputation of the Company
or any Subsidiary. The transfer of an Optionee from the employ of the Company to
a Subsidiary, or vice versa, or from one Subsidiary to another, shall not be
deemed to constitute a termination of employment for purposes of the Plan.
(j) Limit on Value of Incentive Option. The aggregate Fair Market
Value, determined as of the date the Option is granted, of the Stock for which
Incentive Options are exercisable for the first time by any Optionee during any
calendar year under the Plan (and/or any other stock option plans of the Company
or any Subsidiary) shall not exceed $100,000.
(k) Transfer of Incentive Option Shares. The stock option agreement
evidencing any Incentive Options granted under this Plan shall provide that if
the Optionee makes a disposition, within the meaning of Section 424(c) of the
Code and regulations promulgated thereunder, of any share or shares of Stock
issued to him pursuant to his exercise of an Incentive Option granted under the
Plan within the two-year period commencing on the day after the
<PAGE>
date of the grant of such Incentive Option or within a one-year period
commencing on the day after the date of transfer of the share or shares to him
pursuant to the exercise of such Incentive Option, he shall, within ten days of
such disposition, notify the Company thereof and immediately deliver to the
Company any amount of federal income tax withholding required by law.
6. TERMS OF PLAN
No Option shall be granted pursuant to the Plan on or after the tenth
anniversary of the date the Plan is approved by the Board, but Options granted
may extend beyond that date.
7. CAPITAL CHANGE OF THE COMPANY
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares reserved for issuance under the Plan
and in the number and option price of shares subject to outstanding Options
granted under the Plan, to the end that after such event each Optionee's
proportionate interest shall be maintained as immediately before the occurrence
of such event.
8. PURCHASE FOR INVESTMENT
Unless the Options and shares covered by the Plan have been registered
under the Securities Act of 1933, as amended, or the Company has determined that
such registration is unnecessary, each person exercising an Option under the
Plan may be required by the Company to give a representation in writing that he
is acquiring the shares for his own account for investment and not with a view
to, or for sale in connection with, the distribution of any part thereof.
9. TAXES
The Company may make such provisions as it may deem appropriate,
consistent with applicable law, in connection with any Options granted under the
Plan with respect to the withholding of any taxes or any other tax matters.
10. EFFECTIVE DATE OF PLAN
The Plan shall be effective on the date it is approved by the Board;
provided, however, that the Plan shall subsequently be approved by majority vote
of the Company's stockholders in the manner contemplated by Rule 16b-3 within
one (l) year from the date approved by the Board.
11. AMENDMENT AND TERMINATION
The Board may amend, suspend or terminate the Plan; provided, however,
that the Plan may not be amended without stockholder approval to the extent that
such approval is required (a) for the Plan to meet the requirements of Rule
16b-3 under the Act, or (b) by any other provision of applicable law.
The Committee may amend the terms of any Option therefore
<PAGE>
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any Optionee without his consent. The Committee may also substitute
new Options for previously granted Options, including options granted under
other plan applicable to the participant and previously granted Options having
higher option prices, upon such terms as the Committee may deem appropriate.
12. GOVERNMENT REGULATIONS
The Plan, and the granting and exercise of Options hereunder, and the
obligation of the Company to sell and deliver shares under such Options, shall
be subject to all applicable laws, rules and regulations, and, to such approvals
by any governmental agencies or national securities exchanges as may be
required.
13. RULE 16B-3 COMPLIANCE
The Company intends that the Plan meet the requirements of Rule 16b-3
and that grants and transactions pursuant to the Plan will be exempt from the
operations of Section 16(b) of the Act. In all cases, the terms, provisions,
conditions and limitations of the Plan shall be construed and interpreted
consistent with the Company's intent as stated in this Section 13.
14. GENERAL PROVISIONS
(a) Certificates. All certificates for shares of Stock delivered under
the Plan shall be subject to such stock transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the stock is then listed and any applicable Federal or state securities
law, and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
(b) Employment Matters. The adoption of the Plan shall not confer upon
any Optionee of the Company or any Subsidiary, any right to continued employment
(or, in case the Optionee is also a director, continued retention as a director)
with the Company or a Subsidiary, as the case may be, nor shall it interfere in
any way with the right of the Company or Subsidiary to terminate the employment
of its employees at any time.
(c) Limitation of Liability. No member of the Board or the Committee,
or any officer or employee of the Company acting on behalf of the Board or the
Committee, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Committee and each and any officer or employee of
the Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
determination or interpretation.
(d) Registration of Options. Notwithstanding any other provision in
the Plan, no Option may be exercised unless and until the Stock to be issued
upon the exercise thereof has been registered under the Securities Act of 1933
and applicable state securities laws, or are, in the opinion of counsel to the
Company, exempt from such registration. The Company shall not be under any
<PAGE>
obligation to register, under applicable federal or state securities laws, any
Stock to be issued upon the exercise of an Option granted hereunder, or to
comply with an appropriate exemption from registration under such laws in order
to permit the exercise of an Option and the issuance and sale of the Stock
subject to such Option however, the Company may in its sole discretion register
such Stock at such time as the Company shall determine. If the Company chooses
to comply with such an exemption from registration, the Stock issued under the
Plan may, at the direction of the Committee, bear an appropriate restrictive
legend restricting the transfer or pledge of the Stock represented thereby, and
the Committee may also give appropriate stop-transfer instructions to the
transfer agent to the Company.
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to _______________
Commission file number: 1-13360
ENTERACTIVE, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 West 40th Street, Suite 2100, New York, NY 10018
(Address of Principal Executive Offices)
(212) 221-6559
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES / X / NO / /
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Number Outstanding
Title of Class As of August 31, 1997
-------------- ---------------------
Common Stock, $.01 Par Value 7,679,441
Transitional Small Business Disclosure Format: Yes / / No /X/
1
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Consolidated Balance Sheets at August 31, 1997
and May 31, 1997 5
Consolidated Statements of Operations for the three
months ended August 31, 1997 and 1996 5
Consolidated Statements of Cash Flows for the three
months ended August 31, 1997 and 1996 5
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 11
Item 2. Change in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submissions of Matters to a Vote by Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
2
<PAGE>
ENTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31 May 31
1997 1997
<S> <C> <C>
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 3,063,400 $ 4,952,900
Accounts receivable 213,400 224,400
Assets held for sale 62,700 100,000
Prepaid expenses and other 143,600 93,800
------------------ --------------------
Total current assets 3,483,100 5,371,100
Affiliation Rights, net 578,100 593,800
Property and equipment, net 351,800 154,900
Other 54,000 61,500
------------------ --------------------
$ 4,467,000 $ 6,181,300
------------------ --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 311,300 $ 287,900
Accrued expenses 570,200 623,900
Deferred revenue 19,600 69,500
Current maturities of long-term debt 40,200 40,200
------------------ --------------------
Total current liabilities 941,300 1,021,500
Commitments and contingencies
Stockholders' Equity
Preferred Stock $.01 par value,
2,000,000 shares authorized and 6,720
shares issued and outstanding 100 100
Common Stock $.01 par value, 50,000,000 shares authorized;
7,679,441 issued and outstanding 76,800 76,800
Additional paid-in capital 28,038,400 28,038,400
Accumulated deficit (24,589,600) (22,955,500)
------------------ --------------------
Total stockholders' equity 3,525,700 5,159,800
See notes to consolidated financial
statements. $ 4,467,000 $ 6,181,300
------------------ --------------------
</TABLE>
3
<PAGE>
ENTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
August 31 August 31
1997 1996
---------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
Internet services revenues $ 142,400 $ -
Net product sales - 324,600
Product development revenue - 40,700
Software licensing and royalty revenue 34,500 177,700
---------------------- ---------------------
Total revenues 176,900 543,000
Cost of internet services revenues 99,500 -
Cost of product sales - 236,100
Cost of development revenue - 27,600
Research and development expenses 399,500 820,800
Marketing and selling expenses 799,000 696,500
General and administrative expenses 566,600 439,300
---------------------- ---------------------
Total costs and expenses 1,864,600 2,220,300
Operating loss (1,687,700) (1,677,300)
---------------------- ---------------------
Other income (expense):
Interest expense - (17,400)
Interest income 53,600 57,000
---------------------- ---------------------
Loss before income taxes (1,634,100) (1,637,700)
Income tax benefit - -
---------------------- ---------------------
Net loss $ (1,634,100) $ (1,637,700)
---------------------- ---------------------
Loss per common and
$
common equivalent share $ (0.21) (0.21)
---------------------- ---------------------
Weighted average shares of common
stock and common stock equivalents 7,679,441 7,678,989
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
ENTERACTIVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
August 31 August 31
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net Loss $(1,634,100) $(1,637,700)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 46,600 148,600
Stock option consulting expense -- 118,800
Changes in assets and liabilities
Accounts Receivable 11,000 (344,700)
Assets held for sale 37,300 --
Inventories -- (113,300)
Prepaid expenses and other (49,800) (35,100)
Other assets 7,500
Accounts payable 23,400 (402,500)
Accrued expenses (53,700) (641,900)
Deferred revenue (49,900) --
----------- -----------
Net cash used in operating activities (1,661,700) (2,907,800)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (227,800) (14,500)
----------- -----------
Net cash used in investing activities (227,800) (14,500)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 73,800
Principal payments under long-term debt -- (110,400)
----------- -----------
Net cash provided by financing activities -- (36,600)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,889,500) (2,958,900)
CASH AND CASH EQUIVALENTS
Beginning of year 4,952,900 6,005,400
----------- -----------
End of period $ 3,063,400 $ 3,046,500
=========== ===========
See notes to consolidated financial statements
</TABLE>
5
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and in the opinion of
management contain all adjustments (consisting of only normal recurring
entries) necessary to present fairly the Company's financial position
as of August 31, 1997, and the results of its operations and its cash
flows for the three months ended August 31, 1997 and 1996. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. The interim financial statements should
be read in conjunction with the Company's financial statements and
related notes in the May 31, 1997 Annual Report on Form 10-KSB. The
results for the three month period ended August 31, 1997 are not
necessarily indicative of the results to be obtained for the full year.
2. BUSINESS
Headquartered in New York, New York, Enteractive, Inc. (the "Company")
offers products and services to customers for the design, development,
operation and maintenance of customer Intranets or sites on the
Internet and World Wide Web and publishes multimedia titles to the
home. As described below, the Company recently entered into an
agreement, which provides that the Company will sell its domestic
distribution rights, inventory and certain accounts receivable from its
interactive multimedia publishing business to a third party. The
Company's address is 110 West 40th Street, Suite 2100, New York, New
York 10018 and its telephone number is (212) 221-6559. Its World Wide
Web site address is http://www.crstone.com.
Throughout the first half of fiscal 1997 the Company was primarily
engaged in the development, publishing and marketing of multimedia
interactive software with an emphasis on the CD-ROM platform. As a
result of a rigorous review of the CD-ROM market, the Company's
performance and the related risks of continuing to develop and market
interactive multimedia titles, the Company concluded that it could
capitalize on what the Company believes to be a vibrant market and upon
its expertise in development by redirecting its business to provide
network and web-related solutions, products and services to businesses
and other entities.
The Company plans to, directly or in cooperation with third parties,
design, develop, install, maintain and host customer Intranets or sites
on the Internet and World Wide Web. According to an August 1996 report
by Forrester Research the number of Web sites is projected to grow from
43,000 at the end of 1996 to 657,000 at the end of 2000. In addition,
businesses are demanding more complex Web sites, as these sites become
increasingly important first points of contact with current and
prospective customers. Accordingly, the Company believes that a
company's web site is becoming a mission-critical component of the
enterprise. Companies are also increasingly deploying Intranets to
manage their internal corporate communications because they enable
employees and business associates to receive corporate information and
training efficiently, communicate through e-mail, use the internal
network's client applications and access proprietary information and
legacy databases.
On December 4, 1996, the Company entered into an agreement (the
"Enteractive Affiliates Agreement") with USWeb Corporation ("USWeb")
pursuant to which the Company became an affiliate of USWeb and a member
of USWeb's network of independent affiliates (the "USWeb Network").
Under the Affiliates Agreement, the Company paid $625,000 for the right
to operate USWeb affiliate offices in certain localities for 10 years
as provided below. USWeb is a relatively new venture, which has raised
approximately $34 million to date. Principal investors include Softbank
Corporation, which owns Comdex and Ziff-Davis Publishing, 21st Century
Communications Partners L.P., Wheatly Partners L.P. and Reuters. USWeb
is seeking to capitalize on the service opportunities presented by the
increasing use of the Internet and Intranets as commercial tools. The
Company has formed a subsidiary, Enteractive Network Solutions Inc.,
doing business as USWeb Cornerstone, which is intended to provide a
full range of Internet and Intranet-based business solutions, including
Website design, hosting and management, design and implementation of
6
<PAGE>
database and e-commerce solutions, educational programs and Web-related
strategic consulting and marketing. The Company is obligated to pay
USWeb monthly royalty and service and marketing and advertising fees
equal in the aggregate to 7% of Adjusted Gross Revenues from this
business, as defined in the agreement, but not less than certain
contractual fee levels.
The Company has been granted exclusive rights to develop new USWeb
Affiliate offices in Long Island (Nassau-Suffolk County), Philadelphia,
Baltimore, Stamford, CT, and Bergen County and Newark, NJ. The Company
has established a USWeb Affiliate office in New York City and in each
of the above territories. The exclusive rights granted to the Company
are subject to certain minimum performance standards set forth in the
Affiliates Agreement. If the Company is unable to meet these minimum
performance standards, its exclusive rights may be terminated.
On August 15, 1997 the Company consummated an agreement with
Enteractive Distribution Company, LLC ("EDC"), an unrelated company.
Under the terms of the agreement EDC acquired the inventory and certain
accounts receivable existing August 15, 1997 resulting from the
Company's interactive multimedia publishing business. In addition the
Company has assigned its domestic distribution contracts with its
domestic distributors to EDC and granted EDC an exclusive license to
market the Company's interactive multimedia titles in North America for
a minimum of two years. The sales price includes the greater of
$100,000 or 50% of EDC's proceeds from the sale of the inventory in the
9 months following the closing and 50% of the accounts receivable
balances collected by EDC within 24 months of closing. The Company will
also receive royalties on sales of its products subsequent to
liquidation of existing inventory of 15% for three years and 10%
thereafter. EDC will also pay the Company a 5% royalty from the sales
of any third party products it sells through August, 2002. The Company
is evaluating the most appropriate manner to continue licensing its
multimedia titles outside the United States. The Company does not
believe that it will incur any future significant costs associated with
the domestic or international distribution of its multimedia titles.
As a result of the Company's agreement with EDC, the Company wrote down
the majority of its interactive multimedia related business assets in
the fourth quarter of fiscal 1997 to the related anticipated minimum
proceeds of $100,000. These assets are classified as "assets held for
sale" in the financial statements and in the Company's May 31, 1997
balance sheet in the Form 10-KSB.
3. AFFILIATE RIGHTS
Fees for affiliation rights were paid to USWeb for the right to join
the USWeb network and operate as an affiliate in the territories
indicated in note 2. The fee is being amortized over the 10 year life
of the agreement with USWeb. Affiliate rights at August 31, 1997 were
net of accumulated amortization of $46,900.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
5. PRIVATE PLACEMENT
On December 12, 1996 the Company completed a private placement of 84
units each consisting of 80 shares of Class A Convertible Preferred
Stock ("Preferred Stock") and 50,000 Common Stock Purchase Warrants to
purchase in the aggregate 4,200,000 shares of Common Stock at an
exercise price of $4.00 per share. Proceeds were approximately
$7,869,100, net of related expenses of $531,000. The Preferred Stock
has a stated value of $1,250 per share and each share is convertible at
any time after April 30, 1998 into such whole number of shares of
Common Stock equal to the aggregate stated value of the Preferred Stock
to be converted divided by the lesser of (I) $2.00 or (ii) 50% of the
average closing sale price for the Common Stock for the last ten
trading days in the fiscal quarter of the Company prior to such
conversion.
7
<PAGE>
The Company must use the proceeds, if any, derived from the exercise of
the Company's currently outstanding public Common Stock Warrants, which
expire in October 1997, or 50% of the proceeds from any other equity
financing, to redeem the Preferred Stock at 110% of stated value. The
Company also has the option to redeem all, or any portion on a pro rata
basis of the Preferred Stock at any time upon 30 days prior written
notice, at a redemption price equal to 110% of the stated value. The
Conversion Rate of the Convertible Preferred Stock (when calculated on
the basis of dividing the Stated Value by $2.00 only) will be subject
to adjustment to protect against dilution in the event of stock
dividends, stock splits, combinations, subdivision and
reclassifications.
6. WARRANT EXCHANGE
On September 16, 1997, the Company announced that it is offering to
exchange (the "Exchange Offer") twenty of its publicly-traded Common
Stock Purchase Warrants (the "Warrants") expiring October 20, 1997 for
one share of newly-issued Common Stock, $.01 par value. As of the date
of this Form 10-QSB, there are 5,121,468 Warrants outstanding. Thus, if
all the Warrants are exchanged, approximately 256,000 shares of Common
Stock will be issued. The fair market value of the common shares
ultimately issued will be recorded as a financing expense in the second
quarter of fiscal year 1998. Each Warrant currently entitles the
registered holder to purchase through October 20, 1997 one share of the
Company's Common Stock at an exercise price of $4.00 per share. The
Exchange Offer will expire at 5:00 P.M., New York City Time on October
14, 1997, unless extended. The purpose of the Exchange Offer is to (i)
reduce the overhang to the market for the Company's Common Stock and
(ii) offer Warrant holders the opportunity to participate in any long
term appreciation of the Company's securities, since absent the
Exchange Offer, it is likely that the Warrants will expire unexercised
on October 20, 1997.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis below should be read in conjunction with
the Financial Statements of Enteractive and the Notes to Financial
Statements included elsewhere in this Form 10-QSB.
OVERVIEW
Enteractive was formed in December 1993 to develop, publish and market
interactive multimedia software products. On December 4, 1996 the
Company signed an agreement with USWeb Corporation under which the
Company has established a subsidiary to operate USWeb affiliate offices
in New York and the exclusive rights to develop new USWeb affiliate
offices in Long Island, Philadelphia, Baltimore, Stamford, CT and
Bergen County and Newark, NJ. USWeb Cornerstone, the subsidiary,
provides a full range of Internet and Intranet-based business
solutions; including Web site design, hosting and management, design
and implementation of database and e-commerce solutions, and
Web-related strategic consulting and marketing.
QUARTERLY RESULTS
Since signing the affiliate agreement with USWeb Corporation, the
Company has been building infrastructure to support anticipated sales.
As a result, expenses reflected in the fiscal 1998 financial statements
are disproportionately high relative to the respective revenue amounts.
As revenues grow, the Company will monitor and, if necessary, adjust
expense levels to support the revenue stream. By May 31, 1997, the
Company no longer utilized significant resources for development or
marketing of multimedia products and consequently most comparisons to
the previous years' quarter are not applicable.
The Company expects its quarterly results to vary significantly in the
future. The number of customer contracts signed and fulfilled
significantly influence revenues. Further market acceptance of the
Company's offerings is dependent on (1) the growth and utilization of
the Internet as a medium for commerce, (2) the success of USWeb
establishing and positioning the USWeb brand in the territories where
the Company operates (3) the degree of market acceptance of the
Company's offerings and (4) the success of offerings by competitors.
The Company does not expect seasonal factors to be a significant
influence on revenues.
8
<PAGE>
RESULTS OF OPERATIONS - QUARTER ENDED AUGUST 31, 1997
Net product sales for the quarter ended August 31, 1997 were $0
compared to $324,600 for the quarter ended August 31, 1996. The
decrease is due to the Company's discontinuation of this line of
business. Prospectively, the Company does not expect any revenues from
CD-ROM title sales other than royalty income as discussed below.
Internet services revenue was $142,400 for the quarter ended August 31,
1997. These revenues are comprised of providing custom solutions and
hosting of web sites.
Royalty revenue for the quarter ended August 31, 1997 was $34,500
compared to $177,700 for the quarter ended August 31, 1996. The
decrease is due to the Company's assignment of domestic distribution
rights to Enteractive Distribution Company, LLC combined with the
Company's focus on increasing revenues through sales of Internet
related services.
Cost of Internet services revenue was $99,500 for the quarter ended
August 31, 1997. These costs consist of labor, related benefits,
overhead, software, and related equipment.
Research and development expenses were $399,500 for the quarter ended
August 31, 1997 compared to $820,800 for the quarter ended August 31,
1996. The decrease is due to the reduction in interactive media product
development and consolidation of development resources. These amounts
may increase in the short term, but, relative to revenue, should
decrease over time as development resources are utilized to fulfill
contracts.
Marketing and selling expenses were $799,000 for the quarter ended
August 31, 1997 compared to $696,500 for the quarter ended August 31,
1996. The Company has recently opened multiple sales offices and
incurred non-recurring costs to staff and equip each office. Similar to
research and development expense, selling expense as a percentage of
revenues should decrease.
General and administrative expenses include costs for accounting,
information systems, human resources, legal, general facilities and
senior executives. General and administrative expenses were $566,600
for the quarter ended August 31, 1997 compared to $439,300 for the
quarter ended August 31, 1996. This number has increased due to costs
associated with restructuring various departments to support the
Company's new strategic direction.
Interest income decreased from $57,000 for the quarter ended August
31,1996 to $53,600 for the quarter ended August 31, 1997 due to lower
cash balances.
No income tax benefit was recorded for the quarter ended August 31,
1997. The Company does not believe it will generate taxable income for
the period ending May 31, 1998. Beyond such time, using the standards
set forth in Financial Accounting Standard No. 109, management cannot
currently determine whether the Company will generate taxable income
during the period that the Company's net operating loss carry forward
may be applied towards the Company's taxable income, if any.
Accordingly, the Company has established a valuation allowance against
its deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
Since June 1, 1995, the Company's principal sources of capital have
been as follows:
(i) In a bridge financing consummated in January 1996, the Company
received approximately $2,460,000 in net proceeds from the sale of
convertible notes and warrants. Simultaneously with the closing on
May 21, 1996 of the pubic offering described below, convertible
notes with an aggregate principal of $2,250,000 were converted into
740,734 shares of Common Stock, while $450,000 of convertible notes
were repaid.
(ii) On May 21, 1996, the Company consummated a public offering by
issuing 2,415,000 shares of Common Stock to the public. The net
proceeds from this offering were $6,791,600.
9
<PAGE>
(iii)On December 12, 1996 the Company completed a private placement of
84 units each consisting of 80 shares of Preferred Stock and
50,000 Common Stock Purchase Warrants to purchase in the aggregate
4,200,000 shares of common stock at an exercise price of $4.00 per
share. Proceeds were approximately $7,869,000, net of related
expenses of $531,000. The Preferred Stock has a stated value of
$1,250 per share and each share is convertible at any time after
April 30, 1998 into such whole number of shares of common stock
equal to the aggregate stated value of the Preferred Stock to be
converted divided by the lesser of (i) $2.00 or (ii) 50% of the
average closing sale price for the common stock for the last ten
trading days in the fiscal quarter of the Company prior to such
conversion. The Company must use the proceeds, if any, derived
from the exercise of the Company's currently outstanding public
common stock warrants, which expire in October 1997, or 50% of the
proceeds from any other equity financing, to redeem the Preferred
Stock at 110% of the stated value. The Company also has the option
to redeem the Preferred Stock at any time upon 30 days prior
written notice, at a redemption price equal to 110% of the stated
value.
In May 1996, the Company consummated an agreement with certain of its
officers pursuant to which the Company repurchased 1,000,000 shares of
Common Stock at $1.00 per share. Under the purchase agreement as
amended, the Company paid all but $40,200 of the purchase price by
August 31, 1997.
At August 31, 1997, the Company had cash and cash equivalents of
$3,063,400. The decrease of $1,889,500 in cash and cash equivalents
from May 31, 1997 reflects the funding of operating activities -
$1,661,700, and the purchase of fixed assets - $227,800. The decrease
in both accounts receivable and inventory are related to the Company's
adjusting those balances related to its multimedia products to their
net realizable value based on the sale of that line of business.
Capital expenditures were $227,800 for the quarter ended August 31,
1997 compared to $14,500 for the quarter ended August 31, 1996. The
Company anticipated higher capital expenditures in the first quarter as
a result of acquiring equipment required for the US Web affiliate field
offices, companywide wide area network, new employees, web site hosting
and development centers. Prospectively, the Company expects capital
expenditures to stabilize as much of the expenditures in the first
quarter fiscal year 1998 were non-recurring.
The Company believes that its existing cash and cash equivalents and
anticipated revenues will be sufficient to meet its liquidity and cash
requirements for at least the next 9 months. However, these funds may
not be sufficient to meet the Company's longer-term cash requirements
for operations. Based on management's assessment of the future
marketability of its titles and demand for Internet related services,
the Company may significantly alter the level of expenses both within
the next 9 months and thereafter.
FORWARD LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, which
are intended to be covered by the safe harbors created thereby.
Investors are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, the ability of the
Company to develop its products, the success of its USWeb Cornerstone
subsidiary as well as general market conditions, competition and
pricing. Although the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of
the assumptions could be inaccurate, and therefore, there can be no
assurance that the forward-looking statements included in this Form
10-KSB will prove to be accurate. In light of significant uncertainties
inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives
and plans of the Company will be achieved.
INFLATION
The past and expected future impact of inflation on the financial
statements is not significant.
10
<PAGE>
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote Security Holders
None
Item 5. Other Information
On August 15, 1997, the Company completed the previously announced
distribution contract with EDC. See Note 2 of Notes to Condensed
Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ENTERACTIVE, INC.
-----------------
(Registrant)
Date October 14, 1997 /s/ Kenneth Gruber
------------------------------
Kenneth Gruber
Chief Financial Officer and
Principal Accounting Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
* * * THIS IS FROM 10-QSB FOR PERIOD 08/31/97 * * *
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE QUARTER ENDED AUGUST 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 3,063,400
<SECURITIES> 0
<RECEIVABLES> 213,400
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,483,100
<PP&E> 536,138
<DEPRECIATION> 184,338
<TOTAL-ASSETS> 4,467,000
<CURRENT-LIABILITIES> 941,300
<BONDS> 0
0
100
<COMMON> 76,800
<OTHER-SE> 3,448,800
<TOTAL-LIABILITY-AND-EQUITY> 4,467,000
<SALES> 142,400
<TOTAL-REVENUES> 176,900
<CGS> 99,500
<TOTAL-COSTS> 1,864,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,634,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,634,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,634,100)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
