SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSBA
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>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Independent Auditors' Report 3
Consolidated Balance Sheets at May 31, 1997 and May 31, 1996 4
Consolidated Statements of Operations for the years ended
May 31, 1997 and 1996 5
Consolidated Statements of Stockholders' Equity
at May 31, 1997 and May 31, 1996 6
Consolidated Statements of Cash Flows for the years
ended May 31, 1997 and 1996 7
Notes to Financial Statements 8
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Consent of Independent Auditors 22
SIGNATURES 23
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Enteractive, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Enteractive,
Inc. and subsidiaries as of May 31, 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.
As discussed in note 8 to the consolidated financial statements, the Company has
restated its fiscal 1997 net loss per common share calculation to comply with a
Securities and Exchange Commission Staff position announced in 1997 on
accounting for convertible securities having beneficial conversion features.
KPMG PEAT MARWICK LLP
New York, New York
August 27, 1997, except as to
the last paragraph of note 8,
which is as of April 17, 1998
3
<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.
4
<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
debt acquisition costs - (780,000)
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)
--------------- --------------
Preferred stock preferences (1997 restated - Note 8) (2,392,800) -
Net loss to common shareholders (1997 restated - Note 8) $(10,629,500) $ (10,404,700)
--------------- --------------
Loss per common and common equivalent share
(1997 restated - Note 8) (1.38) $ (2.07)
--------------- --------------
Weighted average shares of common
stock $ 7,679,331 $ 5,022,573
=============== =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------------ -------------------------- ---------------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1995 - $ - 4,775,489 $47,800 $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 - - 725,212 7,200 2,893,600 - 2,900,800
Repurchase and
retirement of
Common stock - - (1,000,000) (10,000) (990,000) - (1,000,000)
Conversion of
convertible - - 740,734 7,400 2,242,600 - 2,250,000
promissory notes
Sale of common stock,
net - - 2,415,000 24,200 6,767,400 - 6,791,600
Net loss - - - - - (10,404,700) (10,404,700)
-------------------------------------------------------------------------------------------------
Balance May 31, 1996 - - 7,656,435 76,600 19,620,900 (14,718,800) 4,978,700
Stock options exercised - - 23,006 200 73,500 - 73,700
Sale of convertible
preferred stock 6,720 100 - - 7,869,000 - 7,869,100
Stock option
consulting expense - - - - 475,000 - 475,000
Net loss - - - - - (8,236,700) (8,236,700)
-------------------------------------------------------------------------------------------------
Balance May 31, 1997 6,720 $100 7,679,441 $76,800 $28,038,400 $(22,955,500) $5,159,800
-------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
6
<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
7
<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), which had a carrying value of $1,142,400 in the fourth
quarter of fiscal 1997 to their estimated fair value of $100,000. These
assets are classified as "assets held for sale" in the Company's May 31,
1997 balance sheet. The portion of the writedown related to inventory and
capitalized software costs, amounting to $400,000 and $642,400 were
included in cost of product sales and amortization and write off of
capitalized software, respectively.
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.
8
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(1) Business and Related Matters (continued)
<TABLE>
<CAPTION>
The purchase price was determined as follows:
<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.
9
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(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.
10
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(2) Summary of Significant Accounting Policies (continued)
(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>
11
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(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
---- ----
<S> <C> <C>
Notes payable in connection with the repurchase of 1,000,000
shares of common stock, which accrues interest at prime
(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
12
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(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.
In a 1997 announcement, the staff of the Securities and exchange
Commission ("SEC") indicated that when preferred stock is convertible at
a discount from the then current common stock market price, the
discounted amount reflects at that time an incremental yield, e.g. a
"beneficial conversion feature", which should be recognized as a return
to the preferred shareholders. Based on the market price of the
Company's common stock and the fair value of the warrants on the date of
issuance the Class A Preferred Stock had a non-cash beneficial
conversion feature of $13,390,000. The beneficial conversion feature is
recognized solely in the calculation of loss per common share over a 17
month period, beginning with the issuance of the preferred stock to
April 30,1998 the first date that conversion can occur. As a result, the
loss per common share for the year ended May 31, 1997 has been restated
to reflect an increase of ($0.31) as a result of the SEC announcement.
(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.
13
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(9) Stock Options and Warrants (continued)
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.
A summary of all stock option transactions of the Company is as follows:
<TABLE>
<CAPTION>
Number of Price range Weighted average
options per share average price
------- --------- -------------
<S> <C> <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
Range of Exercise Price Weighted Average Exercise Price Number of Options Outstanding Remaining Life
- ------------------------------- ----------------------------------- ------------------------------------ ---------------------------
<S> <C> <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.
14
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(9) Stock Options and Warrants (continued)
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)
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>
Exercise Price Shares of Common Stock
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>
15
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(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
Federal net operating loss carryforwards 2,268,100 2,676,100
-------------------------------
Actual tax benefit - -
===============================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May
31, 1997 and 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.
16
<PAGE>
ENTERACTIVE, INC.
Notes to Consolidated Financial Statements
May 31, 1997
(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.
(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 and 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.
17
<PAGE>
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.
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 their estimated fair value 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.
18
<PAGE>
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.
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.
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.
19
<PAGE>
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.
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.
20
<PAGE>
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.
21
<PAGE>
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,
except as to the last paragraph of Note 8 which is as of April 17, 1998,
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.
The auditors' report indicates that the Company has restated its fiscal 1997 net
loss per common share calculation to comply with a Securities and Exchange
Commission Staff position announced in 1997 on accounting for convertible
securities having beneficial conversion features.
KPMG PEAT MARWICK LLP
Jericho, New York
May 4, 1998
22
<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: April 30, 1998 By: Ken Gruber
----------
Ken Gruber
Chief Financial Officer
23
