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.
Consent of Independent Auditors
The Board of Directors
Enteractive, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-06780) on Form S-3 and registration statements (No. 33-4038 and No.
33-97208) on Form S-8 of Enteractive, Inc. of our report dated August 27, 1997,
relating to the 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, which report appears in the May 31, 1997 Annual Report on Form 10-KSB of
Enteractive, Inc.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
Jericho, New York
September 4, 1997
