-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V1xLk8GiMphNpMK8fBTqnMK8YiQDHHBx63SeK6MzzpK2wM24lmf/Gb7pzqsM5CLq OpKmBYKNPdhVt240H96jfQ== 0000921895-96-000234.txt : 19960702 0000921895-96-000234.hdr.sgml : 19960702 ACCESSION NUMBER: 0000921895-96-000234 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960701 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTERACTIVE INC /DE/ CENTRAL INDEX KEY: 0000929648 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 223272662 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 333-02244 FILM NUMBER: 96588954 BUSINESS ADDRESS: STREET 1: 110 W 40TH ST STE 2100 CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2023331063 MAIL ADDRESS: STREET 1: 110 W 40TH ST STE 210 CITY: NEW YORK STATE: NY ZIP: 10018 POS AM 1 AMENDMENT NO. 1 TO FORM SB-2 ON FORM S-3 As filed with the Securities and Exchange Commission on June 28, 1996 Registration No. 333-2244 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ POST-EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2 ON FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ ENTERACTIVE, INC. (Exact name of Registrant as specified in its charter) Delaware 22-3272662 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 110 West 40th Street, Suite 2100 New York, New York 10018 (212) 221-6559 ------------------------------------ (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Mr. Andrew Gyenes Enteractive, Inc. 110 West 40th Street, Suite 2100 New York, New York 10018 (212) 221-6559 (Name, address and telephone number of agent for service of process) ------------------------------------ Copies to: Steven Wolosky, Esq. Kenneth A. Schlesinger, Esq. Olshan Grundman Frome & Rosenzweig LLP 505 Park Avenue New York, New York 10022 (212) 753-7200 ------------------------------------ Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective. ------------------------------------ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS ENTERACTIVE, INC. 5,461,468 Shares of Common Stock This Prospectus relates to 5,461,468 shares (the "Shares") of common stock, $.01 par value per share (the "Common Stock") of Enteractive, Inc., a Delaware corporation (the "Company"). Of such Shares of Common Stock, 5,121,468 Shares are issuable by the Company upon the exercise of 5,121,468 Common Stock Purchase Warrants (the "Warrants"). Each Warrant entitles the holder to purchase one share of Common Stock for $4.00 until October 20, 1997. The Warrants are not redeemable by the Company. In addition, 340,000 Shares are issuable by the Company upon the exercise of warrants ("January 1994 Warrants") issued in connection with a private placement in January 1994. The January 1994 Warrants are currently exercisable for $2.35 per share and expire on January 24, 1999. The Common Stock and the Warrants are currently traded on the Nasdaq SmallCap Market under the symbols "ENTR" and "ENTRW," respectively. On June 27, 1996, the closing sales price of the Common Stock and the Warrants was $3.50 and $1.375, respectively. ------------------------------------ THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AT PAGE 7 HEREOF AND "DILUTION" AT PAGE 14 HEREOF. ------------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is June __, 1996 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company hereby incorporates in this Prospectus by reference the following documents which have been filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"): (i) the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 1995, (ii) the Company's Quarterly Reports on Form 10- QSB for the quarters ended August 31, 1995, November 30, 1995 and February 29, 1996 and (iii) the Company's Current Reports on Form 8-K dated October 3, 1995, February 8, 1996 and April 25, 1996. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. The Company's Application for registration of its Common Stock under Section 12(b) of the Exchange Act filed with the Securities and Exchange Commission on September 28, 1994, is incorporated by reference into this Prospectus and shall be deemed to be a part thereof. Any person receiving a copy of this Prospectus may obtain without charge, upon written or oral request, a copy of any of the documents incorporated by reference herein, except for the exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents). Such requests should be directed to the Company, 110 West 40th Street, Suite 2100, New York, New York 10018, Attention: Kenneth Gruber, telephone number (212) 221-6559. AVAILABLE INFORMATION The Company has filed with the Commission three separate Registration Statements under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statements and the exhibits thereto, certain portions having been omitted from this Prospectus in accordance with the rules and regulations of the Commission. For further information with respect to the Company, the securities offered by this Prospectus and such omitted information, reference is made to the Registration Statements, including any and all exhibits and amendments thereto. Statements contained in this Prospectus concerning the provisions of any document filed as an exhibit are of necessity brief descriptions thereof and are not necessarily complete, and in each instance reference is made to the copy of the document filed as an exhibit to the Registration Statements, each such statement being qualified in its entirety by this reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith the Company files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be inspected and copied at public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, New York, New York 10048. Copies of such material, including the Registration Statement, can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is traded on the Nasdaq SmallCap Market and The Boston Stock Exchange. The foregoing material also should be available for inspection at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C., 20006 and The Boston Stock Exchange, One Boston Place, Boston, Massachusetts 02108. The Company intends to furnish its stockholders with annual reports containing financial statements which will be audited and reported on by its independent public accounting firm, and such other periodic reports as the Company may determine to be appropriate or as may be required by law. -2- PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety and the financial statements (including the notes thereto). THE COMPANY The Company designs, develops, publishes and markets interactive multimedia titles to the home and school markets. The Company believes that it has been a pioneer in the development and production of interactive new media titles having entertainment and educational content, based upon its introduction in 1991 of one of the industry's first titles for the CD-I format. Prior to 1995, the Company's focus was on the development of titles on a work-for-hire basis. From 1991 to 1994, the Company developed 11 CD-I titles for Philips Interactive of America, a division of N.V. Philips ("Philips"). Toward the end of 1994, the Company shifted its focus to being a developer and publisher of titles in which the Company maintains significant ownership interests and distribution rights. Since adopting this strategy, the Company has published four titles: Cities Under the Sea: Coral Reefs, the first of up to three titles to be developed in collaboration with Jean-Michel Cousteau, a noted sea explorer and the son of Jacques Cousteau; The Alchemist, a fortune-telling game, the first in the Mystic Messenger series; Ask Isaac Asimov . . . About Space, the first title of a multimedia series based on the respected series of children's science books written by scientist and author Isaac Asimov, and PIGS, the first in a collection of animated interactive stories for children. The Company has established its own marketing and distribution capability and a presence on the Internet to market its titles. Recently, in order to expand its library of titles and broaden its product line, the Company acquired Lyriq International Corporation ("Lyriq"), a developer and publisher of interactive multimedia products for the education, game and recreation markets. Lyriq has developed and published, among other things, the Picture Perfect Golf series of interactive media titles and several Crosswords puzzle titles. It is the Company's belief that the Lyriq acquisition will provide the Company with rights to valuable multimedia titles, access to significant creative and technical talent and expanded research and development abilities. The Company also believes that the combined product lines and development and marketing expertise will facilitate greater access to sales channels and a more widely available offering of software titles for the home and educational markets. See "Business-Titles" and "Title Development." The Company has in-house multimedia development facilities with computer graphics, animation, video and audio capabilities, including professional video production equipment, lighting and fully digital audio studios. The Company's strategy is to develop high quality interactive new media titles on all popular platforms, with a current emphasis on CD-ROM, the Internet and commercial on-line services. The Company will continue to focus on strategic acquisitions in order to increase its product offerings and market penetration. It anticipates that future product development will center on building a catalog of titles with strong educational content and entertainment value. See "Business-Company Strategy." Since shifting its strategy, the Company has incurred significant losses and expects that losses will increase and continue until such time, if ever, as the Company can successfully and profitably develop and distribute a broad line of interactive multimedia titles. The Company's experience has been that it takes between nine months to one year to develop each multimedia title and anticipates that a broad line of products could take two or more years to develop, depending upon market acceptance, if any, of the Company's products. There can be no assurance that the Company's strategy will be successful or that it will become profitable in the future. See "Risk Factors-History of Losses; Change in Strategy; Continuing Net Losses." -3- RECENT DEVELOPMENTS In its initial public offering consummated in October 1994 ("IPO"), the Company received $7,579,900 in net proceeds by selling 2,300,000 units, each unit consisting of one share of Common Stock and one Warrant. In January 1996, the Company consummated a $2,700,000 bridge financing ("January 1996 Bridge Financing") of 54 Units ("Bridge Units") at a purchase price of $50,000 per Bridge Unit, each Bridge Unit consisting of a $50,000 principal amount unsecured convertible promissory note ("Convertible Note") of the Company and 10,000 warrants ("January 1996 Warrants"), each to purchase one share of Common Stock at a purchase price of $4.00 per share. Upon the consummation of the May 1996 Offering (as defined herein) the January 1996 Warrants were exchanged for 540,000 Warrants. Investors in the January 1996 Bridge Financing holding an aggregate of $2,250,000 of Convertible Notes elected to convert their Convertible Notes which, based on the May 1996 Offering price of $3.375 per share, converted into 740,734 Conversion Shares and 1,481,468 Conversion Warrants. In connection with the January 1996 Bridge Financing, the Company entered into an agreement with certain executive officers of the Company pursuant to which the Company repurchased, simultaneously with the closing of the May 1996 Offering, an aggregate of 1,000,000 shares of Common Stock ("Contribution Shares") at a purchase price of $1 per share, or an aggregate of $1,000,000, of which $333,334 was paid on the closing of the May 1996 Offering, with the balance payable in two equal installments of $333,333 each on May 15, 1997 and May 15, 1998. Interest will accrue at the prime rate and is payable quarterly. The Company entered into the agreement to purchase the Contribution Shares in connection with its negotiations with GKN Securities Corp. (the "Underwriter"), the Underwriter of the May 1996 Offering, regarding the terms of the January 1996 Bridge Financing and the May 1996 Offering. For the quarter ended May 31, 1996, the Company incurred one-time charges for the write-off of debt acquisition costs and the discount on the Convertible Notes totalling $736,700, based on the balances at February 29, 1996. On February 29, 1996, Lyriq merged into a wholly-owned subsidiary of the Company pursuant to an Agreement and Plan of Merger ("Lyriq Acquisition"). As consideration for this transaction, the Company issued an aggregate of 725,212 shares of Common Stock, including 303,651 and 310,867 shares of Common Stock, respectively, to Messrs. Randal Hujar and Gary Skiba, former principals of Lyriq, both of whom entered into employment contracts with the Company. The Company has agreed to register the Common Stock issued to Messrs. Hujar and Skiba in connection with the Lyriq Acquisition after February 28, 1997, with certain exceptions. The transfer of such shares is subject to lock-up restrictions. In May 1996, the Company consummated a public offering (the "May 1996 Offering") consisting of 2,415,000 shares of Common Stock. In the May 1996 Offering, the Company received net proceeds of approximately $6,873,000. -4- SUMMARY FINANCIAL INFORMATION The summary financial information set forth below is derived from the financial statements of Enteractive and Lyriq appearing elsewhere in this Prospectus. This information should be read in conjunction with such financial statements, including the notes thereto. Enteractive's historical information presented for the fiscal years ended May 31, 1995 and 1994 and the nine months ended February 29, 1996 and February 28, 1995 include the historical results of Sonic (as defined herein) through May 10, 1994, the date of the Merger (as defined herein), and the combined results of Enteractive and Sonic thereafter. The Balance Sheet Data at February 29, 1996 includes the consolidated accounts of Enteractive and Lyriq. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Lyriq Acquisition had been consummated as of such date nor is it necessarily indicative of future operating results or financial position. The Lyriq Acquisition has been accounted for under the purchase method of accounting.
Enteractive Summary Financial Information Nine Months Ended Year Ended -------------------------- Pro Forma Nine May 31, Pro Forma Year Months Ended -------------------- Ended May 31, February 29, February 28, February 29, 1995 1994 1995(1) 1996 1995 1996(1) ---- ---- ------------ ------------ ------------ ------------ Statement of Operations Data: Product sales.................... $ ---- $ ---- $ 617,500 $ 324,800 $ ---- $ 842,200 Product development revenue...... 365,600 2,371,500 527,700 257,700 292,600 378,700 Royalty and other revenue........ 3,500 10,700 468,400 103,300 2,400 327,300 Operating loss................... (3,969,800) (382,100) (4,617,900) (6,435,500) (2,409,300) (5,086,400) Net loss......................... (3,997,400) (373,200) (4,656,900) (6,378,800) (2,512,600) (5,060,600) Net loss per common share........ $ (0.93) $ (0.11) $ (0.93) $ (1.34) $ (0.62) $ (0.92) Weighted average shares.......... 4,275,908 3,419,409 5,001,120 4,775,489 4,057,812 5,500,701
February 29, 1996 --------------------------- Actual Pro Forma(2) ------------ ------------ Balance Sheet Data: Total assets..................... $4,558,200 $10,331,200 Working capital (deficit)........ (537,900) 7,121,700 Total liabilities................ 3,632,200 2,078,900 Stockholders' equity............. $ 926,000 $8,252,300
(1) The pro forma Statement of Operations Data for May 31, 1995 and February 29, 1996 reflects the effect of the Lyriq Acquisition, including the amortization of capitalized software acquired in connection therewith and excluding the non-recurring in-process research and development charge of $1,915,100. (2) Reflects (i) the sale by the Company of the Common Stock in the May 1996 Offering and the application of the estimated net proceeds therefrom, (ii) the conversion of $2,250,000 principal amount of Convertible Notes into Conversion Shares and Conversion Warrants and (iii) the repurchase of the Contribution Shares. -5-
Lyriq Summary Financial Information Year Ended June 30, Nine Months Ended --------------------------------- ------------------------------------ February 29, February 28, 1995 1994 1996 1995 --------------- --------------- ----------------- ----------------- Statement of Operations Data: Product sales............................ $ 617,536 $206,339 $517,444 $607,760 Product development revenue.............. 162,132 171,262 121,000 125,487 Royalty and other revenue................ 464,906 47,031 223,961 303,053 Operating income (loss).................. (219,998) (8,661) (352,011) 49,539 Net income (loss)........................ $(231,457) $(15,013) $(382,902) $ 46,592
Unless otherwise indicated, the information in this Prospectus does not include (i) 1,500,000 shares of Common Stock reserved for issuance upon exercise of stock options which may be granted under the Company's 1994 Incentive and Non-Qualified Stock Option Plan ("1994 Plan"), of which options to purchase 576,097 shares of Common Stock are outstanding; (ii) 1,000,000 shares of Common Stock reserved for issuance upon exercise of stock options which may be granted under the Company's 1994 Consultant Stock Option Plan ("Consultant Plan"), of which options to purchase 250,000 shares of Common Stock have been granted; (iii) 150,000 shares of Common Stock reserved for issuance under the Company's 1995 Directors Stock Option Plan ("Directors Plan"), of which options to purchase 30,000 shares of Common Stock have been granted; (iv) 282,000 shares of Common Stock reserved for issuance upon exercise of certain other outstanding non-qualified stock options; (v) 340,000 shares of Common Stock reserved for issuance upon exercise of the January 1994 Warrants; (vi) 5,121,468 shares of Common Stock reserved for issuance upon the exercise of Warrants, including (a) 800,000 Warrants issued in exchange for warrants to purchase 800,000 shares of Common Stock ("May 1994 Warrants") issued in connection with a bridge financing in May 1994 ("May 1994 Bridge Financing"), (b) 540,000 Warrants issued upon exchange of 540,000 January 1996 Warrants and (c) the conversion of the Convertible Notes into 1,481,468 Conversion Warrants; (vii) 400,000 shares of Common Stock reserved for issuance upon the exercise of the underwriter's unit purchase option granted to the underwriters of the IPO ("Underwriter's UPO"); and (viii) 210,000 shares of Common Stock reserved for issuance with the exercise of a common stock purchase option granted to the Underwriter (the "Underwriter's UPO"). -6- RISK FACTORS The securities offered hereby are speculative in nature and involve a high degree of risk. Accordingly, in analyzing an investment in these securities, prospective investors should carefully consider, along with the other matters referred to herein, the following risk factors. History of Losses; Change in Strategy; Continuing Net Losses. The Company has incurred significant losses since the Merger. At the end of 1994, the Company shifted its focus from being primarily a provider of product development services for others to being a developer and publisher of titles in which the Company maintains a significant ownership interest and, in many cases, distribution rights. However, the Company continues to incur significant losses. For the fiscal year ended May 31, 1995 and the nine months ended February 29, 1996, the Company had net losses of $3,997,400 and $6,378,800, respectively. The net loss for the nine months ended February 29, 1996 includes a non-recurring charge of $1,915,100 for acquired in-process research and development in connection with the Lyriq Acquisition. The Company expects that losses will increase and continue until such time, if ever, as the Company can successfully and profitably develop, produce and distribute a broad line of interactive multimedia titles. The Company's experience has been that it takes between nine months to one year to develop each multimedia title and anticipates that a broad line of products could take two or more years to develop, depending upon market acceptance, if any, of the Company's products. The operating results of the Company will continue to be adversely affected since the Company will incur additional expenses to implement its strategy, particularly expenses in research and development and distribution and marketing operations, which are expected to be in excess of anticipated product sales. Accordingly, the Company anticipates that should its products not meet with, or be delayed in obtaining, market acceptance, the Company will explore various alternatives to achieve profitability including, but not limited to, reducing personnel, performing product development services for third parties, acquiring existing titles from third parties or seeking partners to participate in development and marketing. The Company does not believe it will generate taxable income during the period ending May 31, 1997. Beyond such time, using the standards set forth in Financial Accounting Standard No. 109, management cannot currently determine whether the Company will generate taxable income during the period that the Company's net operating loss carryforward may be applied towards the Company's taxable income, if any. There can be no assurance that the Company's strategy will be successful or that the Company will become profitable in the future. Possible Need for Additional Financing; Absence of Credit Facility. Management believes that the net proceeds of the May 1996 Offering, together with the Company's existing resources and cash generated from future revenues, if any, will be adequate for the Company's cash requirements until (twelve months from the date of this Prospectus). However, these funds may not be sufficient to meet the Company's longer term cash requirements for operations. If necessary, the Company may return to performing product development for third parties in order to help meet its cash requirements or if the Company otherwise deems it appropriate while continuing to develop and market several of its own production titles. The Company may also be required to obtain additional financing to continue to operate its business. The Company does not currently have a line of credit. There can be no assurance that any additional financing, if required, will be available to the Company on acceptable terms, if at all. Any inability by the Company to obtain additional financing, if required, will have a material adverse effect on the operations of the Company. Uncertain Sources of Revenue. Prior to fiscal 1996, the Company's revenues were primarily derived from development projects provided for other entities and grants received for development work. For the fiscal years ended May 31, 1994 and May 31, 1995, the Company had product development revenue of $2,371,500 and $365,600, respectively, representing a substantial portion of the Company's total revenue for such fiscal years. As a result of the Company's new strategy, the Company has shifted away from externally-funded development work and anticipates that a majority of its revenues in the future will be generated from sales of its titles. The Company is actively marketing four of its own interactive multimedia titles and, as a result of the Lyriq Acquisition, seven additional Company-owned titles. While the Company generated revenues of $324,800, or 47% of total revenues, -7- from title sales during the nine months ended February 29, 1996, there can be no assurance that revenues from title sales will continue, increase or exceed operating expenses in the future. Dependence on New Titles; Short Title Life Cycles; Market Acceptance; Families of Titles. The nature of the interactive multimedia publishing industry is such that a significant number of titles will be unsuccessful and that the revenues derived from the successful titles will be used to cover the costs of the failures. The Company's success depends on the timely introduction of successful new titles and sequels or updates to existing titles to replace declining revenues from older titles. The life cycle of a successful title is difficult to predict and may be as short as three months. In addition, each title is an individual artistic work and its commercial success is primarily determined by consumer taste, which is unpredictable and constantly changing. Few consumer software products achieve sustained market acceptance. The Company believes that a title achieves market acceptance if it is widely purchased by consumers. There can be no assurance that any of the Company's new titles will achieve market acceptance or that, if accepted, such acceptance will be sustained for a period long enough to recoup costs or realize profits. If market acceptance is not sustained, the Company may be required to write-down unsold excess inventory and/or accept substantial product returns to maintain its access to distribution channels and accordingly, the Company's results of operations could be materially adversely affected. In addition, part of the Company's business strategy is to create families of titles through the use of similar characters, themes, titles and educational approaches throughout a product line. When the Company chooses to develop a family of titles, it may make a substantial development investment before the Company can assess whether a family of titles will be successful. Accordingly, if a family of titles is unsuccessful, it could have a material adverse effect on the results of operations of the Company. Rapid Technological Change; Competing Computer Platforms; Emphasis on CD-ROM. The market for educational and entertainment multimedia titles is subject to frequent and rapid changes in technology resulting in short title life cycles and rapid price declines. The Company's success is dependent upon, among other things, the ability of the Company to achieve and maintain technological expertise and to continue to introduce quality titles by anticipating and reacting to new technologies. There are multiple platforms and technologies on which interactive multimedia titles can be based. Each of these platforms and technologies have been developed and produced by third party hardware manufacturers. These platforms are not compatible with each other and, consequently, interactive multimedia titles developed for one platform cannot be used on other platforms. The titles released by the Company in 1995 were for CD-ROM. Titles currently being developed by the Company are for the CD-ROM, the Internet or commercial on-line platforms, which the Company believes are currently the dominant platforms in the industry. There can be no assurance, however, that such platforms will continue to be the dominant industry platforms or that the Company will successfully integrate its products into the Internet or commercial on-line platforms. While the Company anticipates developing titles for other platforms that achieve market acceptance, because the development of titles for a new platform, as well as the migration of a title from one platform to another, is time consuming and expensive, a leveling off or decline in CD-ROM, the Internet or commercial on-line services or any subsequent change in the dominant industry platforms could have a material adverse effect on the Company. In addition, uncertainty over which platforms will become dominant may impede product sales, and the emergence of a dominant platform other than CD-ROM, the Internet or commercial on-line services could severely reduce sales of the Company's titles. The Company's success in marketing its titles will depend upon its ability to anticipate and respond to trends in the emergence of these platforms. Marketing and Distribution Arrangements; Competition for Shelf Space. The Company has only recently begun to distribute its own titles. The Company generally sells its titles to distributors who then distribute such titles to retailers or sell its titles directly to retailers. These distributors typically can return the Company's product at any time for credit without an offsetting order. Accordingly, the Company may experience substantial product returns which could have a material adverse affect on its revenues. Since retailers typically have a limited amount of shelf space and promotional resources and there is intense competition among multimedia software producers, there can be no assurance that the Company will gain adequate levels of shelf space and promotional support for its titles to generate sales volume. Due to increased competition for limited shelf space, retailers and distributors are increasingly in a better position to negotiate favorable terms of sale, including price discounts and product return policies. The -8- Company may be competing in distribution against much larger organizations with more influence over retailers and distributors and greater marketing and distribution resources. In addition, other types of retail outlets and methods of product distribution, such as Internet or on-line services, will become increasingly important and accordingly, the success of the Company will depend on its ability to gain access to these channels of distribution. There can be no assurance that the Company will be successful in the development of its distribution networks or gain such access, and if the Company is unsuccessful in such development it will have a material adverse effect on the results of operations of the Company. Intense Competition. The home education and entertainment software industry is intensely competitive, and market acceptance for the Company's titles may be adversely affected by the introduction of similar titles by competitors. The Company competes, in both the home education and entertainment and the school markets, against a large number of other companies of varying sizes and resources. Many of these competitors have substantially greater financial, technical and marketing resources than the Company and may be more successful in securing shelf space for their titles. Existing competitors may continue to broaden their product lines and new competitors, including large computer or software manufacturers, entertainment companies and educational publishers, are entering or increasing their focus on the home education and entertainment and the school markets, resulting in increased competition for the Company. Increased competition may result in loss of shelf space for the Company's titles at retail stores, loss of or difficulty in recruiting key employees and significant price competition, any of which could adversely affect the Company's operating results. The Company also faces intense competition for a finite amount of discretionary consumer spending for other forms of entertainment offered by film companies, record companies, video companies and others. Seasonal Business; Quarterly Fluctuations. The home education and entertainment software business is highly seasonal. Typically, net revenues are highest during the last calendar quarter, decline in the first calendar quarter and are lowest in the second and third calendar quarters. This seasonal pattern is due primarily to the increased demand for home education and entertainment software products during the year-end holiday buying season. With respect to the school market, sales are highest during June (the end of the budget period for most schools) and from August through October (the beginning of the school year). Accordingly, the Company's revenues will reflect these seasonal patterns and will vary within a particular year depending on whether its sales mix is more heavily weighted toward the home education and entertainment or the school markets. In addition, quarterly fluctuations in operating results will be exacerbated by delays in new product introductions, the introduction of competitive products, the popularity of particular multimedia platforms and a variety of other factors relating to the distribution and development process for the products involved, including software malfunctions in title offerings. A significant portion of the Company's operating expenses are relatively fixed, and certain expenditures are based on sales forecasts. If net sales do not meet the Company's expectations in a given quarter, the Company's operating results or financial condition could be adversely affected. Lyriq's Dependence on a Significant Customer. The Princeton Review accounted for $265,500, or 21%, and $211,500, or 25%, of Lyriq's total revenues for the fiscal year ended June 30, 1995 and the nine months ended February 29, 1996, respectively. On a pro forma basis reflecting the Lyriq Acquisition, such customer would have accounted for 16% and 14%, respectively, of the Company's total revenues for the fiscal year ended May 31, 1995 and the nine months ended February 29, 1996. Accordingly, the loss of such customer or a significant decrease in the royalties the Company receives from The Princeton Review could have a material adverse effect on the financial condition and results of operations of the Company. Dependence on Third Party Manufacturers. The Company's titles are manufactured by third-party manufacturers and therefore the Company does not have direct control over the quality of manufacturing. Additionally, some of the third party manufacturers may publish competitive titles of their own, to which preferential treatment may be given. Any of the foregoing would adversely affect the Company's revenues from the sale of its titles. Management believes that current arrangements for the manufacture of the Company's titles are satisfactory for the Company's anticipated requirements. Nevertheless, there can be no assurance that in the future these third -9- parties' manufacturing capacities will be sufficient to satisfy the Company's requirements, that interruptions or delays in manufacturing will not adversely affect the Company's operations, or that alternative manufacturing sources will be available to the Company on commercially reasonable terms or at all. In particular, the Company frequently packages and sells titles in its Picture Perfect Golf series together with an infrared golf club, which is currently available from only one independent third party manufacturer. Occasionally, the Company has postponed delivery of titles in its Picture Perfect Golf series as a result of the manufacturer's inability to timely deliver the infrared golf club. While the Company is seeking to establish alternative sources which can produce the infrared golf club or acquire the rights to manufacture the infrared golf club currently utilized in the Picture Perfect Golf series, there can be no assurance that such efforts will be successful. If the Company does not receive infrared golf clubs on a timely basis, it could have a material adverse effect on the Company's results of operations. Availability and Restrictive Nature of Licenses. The Company currently licenses a wide variety of intellectual property from others for use in its titles. There can be no assurance that the terms of these licenses will survive the marketing lives of the titles to which they relate or that the Company will be able to renew such licenses on commercially reasonable terms, if at all. The Company expects to continue to incorporate the intellectual property of others into the titles it develops in the future. As such it will need to obtain licenses to use such intellectual property. The Company will attempt to obtain future licenses on commercially reasonable terms and with terms of duration which will survive the lives of the titles to which they relate. However, there can be no assurance that the Company will be able to obtain licenses of sufficient duration on commercially reasonable terms or will be able to renew existing licenses on commercially reasonable terms. The inability to obtain or renew such licenses, as the case may be, could have an adverse effect on the business of the Company. Software Technology; Lack of Patent Protection. The Company's future success will be heavily dependent upon its software technology; and the Company will rely on a combination of contractual rights, trade secrets and copyright laws to establish or protect its technology in the countries where it will conduct business. The Company currently does not possess any patent or other registered intellectual property rights with respect to its software technology, other than copyrights with respect to the overall content of completed titles developed by the Company. There can be no assurance that the steps taken by the Company to protect its rights will be adequate to deter misappropriation, especially since the Company operates in an industry in which revenues are adversely affected by the unauthorized reproduction of products for commercial sale, commonly referred to as "piracy." Moreover, although the Company does not believe that it is infringing on the intellectual property rights of others, there can be no assurance that such infringement claims will not be asserted against the Company in the future and if an infringement claim is successful, it could have a material adverse effect on the Company. Copyright and other proprietary rights to material licensed for use on CD-ROM and other multimedia platforms is a relatively new area of the law. Although the Company is not a party to any such claim, there is the possibility of legal challenges in respect of all such rights. Control by Officers and Directors and Principal Stockholder; Stockholders Agreement. The Company's officers and directors and their affiliates currently own approximately 29.1% of the outstanding Common Stock and have significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of directors of the Company. Moreover, a stockholder of the Company individually and through related entities beneficially owns 27.0% of the Company's Common Stock (consisting of (i) 760,093 shares of Common Stock, and (ii) 1,790,186 shares of Common Stock underlying presently exercisable options and warrants) and accordingly if the presently exercisable options and warrants are exercised, that stockholder will also have significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of Directors. In addition, the Company, John Ramo, Jolie Barbiere, Michael Alford, Zenon Slawinski and Andrew Gyenes have entered into a Stockholders' Agreement which terminates in August 1997 with respect to the election of directors and provides for a seven-member Board of Directors consisting of three nominees designated by Andrew Gyenes and three nominees designated by John Ramo (provided that such nominees are reasonably acceptable to each of Mr. Gyenes and Mr. Ramo) and one person mutually agreed upon by Mr. Ramo and Mr. Gyenes. Each of John Ramo, Jolie Barbiere, Michael Alford and Zenon Slawinski have agreed to vote all of their shares in favor of the -10- election of such seven persons. The Company has also agreed to use its best efforts to elect one designee selected jointly by Randal Hujar and Gary Skiba to be a member of the Board of Directors until the earlier of February 28, 1998 or the termination of the lock-up agreement between the Company and Messrs. Hujar and Skiba. Dependence on Management; Need to Attract Additional Personnel. The Company is dependent upon the business and technical expertise of its executive and creative personnel. In particular, the loss of the services of Andrew Gyenes, the Chairman of the Board and Chief Executive Officer, could have a material adverse effect upon the Company. There can be no assurance that an adequate replacement could be found if the Company were to lose the services of Mr. Gyenes. The Company has an employment agreement with Mr. Gyenes which expires in October 1997. The Company has obtained a "key person" insurance policy on the life of Mr. Gyenes in the amount of $1,000,000 under which the Company is the beneficiary. In addition, the Company's ability to develop its business will depend upon its ability to recruit and retain additional personnel, including engineering, marketing and management personnel. Competition for qualified personnel is intense and accordingly, there can be no assurance that the Company will be able to retain or hire all of the necessary personnel or that the Company may not otherwise need to change its personnel to compete in its rapidly changing market. See "Management - Executive Officers and Directors" and "- Employment Agreements." Dilution. This Offering involves immediate dilution to holders of the Warrants and the January 1994 Warrants of $1.84 per share, or 46% and $.19 per share, or 8% respectively, representing the difference between the pro forma net tangible book value per share of the Common Stock assuming the Warrants and the January 1994 Warrants are exercised and the respective exercise price per share of the Warrants and the January 1994 Warrants. See "Dilution." No Dividends. The Company has never paid cash dividends on the Common Stock. The Company intends to retain any future earnings to finance its growth. Accordingly, any potential investor who anticipates the need for current dividends from an investment in the Common Stock should not purchase any of the shares of Common Stock offered hereby. See "Dividend Policy." Effect of Outstanding Options and Warrants. Currently, not including the Underwriter's UPO and the Underwriter's Purchase Option, there are outstanding options and warrants to purchase, in the aggregate, 6,389,770 shares of Common Stock at per share exercise prices ranging from $1.71 to $4.00. In addition to the Underwriter's Purchase Option and the Underwriter's UPO, there are outstanding options to purchase an aggregate of 1,138,097 shares of Common Stock consisting of (i) options to purchase 576,097 shares of Common Stock at exercise prices ranging from $1.71 to $3.75 per share granted under the 1994 Plan, of which options to purchase 298,252 shares of Common Stock are currently exercisable; (ii) options to purchase 250,000 shares of Common Stock at exercise prices ranging from $2.35 to $3.00 per share granted under the Consultant Plan, all of which are currently exercisable; (iii) options to purchase 30,000 shares of Common Stock at exercise prices of $3.00 and $3.75 per share granted under the Directors Plan, all of which are currently exercisable; and (iv) options to purchase 282,000 shares of Common Stock at exercise prices of $2.35 and $3.00, all of which are currently exercisable. In addition to the Underwriter's UPO, there are outstanding warrants to purchase an aggregate of 5,230,000 shares of Common Stock consisting of (i) Warrants to purchase 5,121,468 shares of Common Stock including (a) 800,000 Warrants issued in exchange for 800,000 May 1994 Warrants, (b) 540,000 Warrants issued in exchange for 540,000 January 1996 Warrants and (c) 1,481,468 Conversion Warrants, all of which will be currently exercisable at a price of $4.00 per share until October 20, 1997; and (ii) 340,000 January 1994 Warrants which are currently exercisable at a price of $2.35 per share until January 24, 1999. The exercise of the foregoing options and warrants and the Underwriter's UPO (and the warrants included therein) and the Underwriter's Purchase Option will dilute the percentage ownership of the Company's stockholders and any sales in the public market of shares of Common Stock underlying such securities may adversely effect prevailing market prices for the Common Stock. Moreover, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected since the holders of the outstanding securities will, to the extent they are able, likely exercise them at a time when the Company could, in all likelihood, obtain any needed capital on terms more favorable to the Company than those provided in the options and the warrants. -11- Registration Rights. The sale of 740,734 Conversion Shares has been registered and the sale of 1,481,468 Conversion Warrants, 540,000 IPO Warrants issued in exchange for the January 1996 Warrants and the issuance of the shares of Common Stock underlying such warrants is being registered under the Registration Statement of which this Prospectus forms a part. The holders of such securities have agreed not to sell any of such securities for a period of one year from May 15, 1996 without the Underwriter's consent. In addition, the Company has entered into a registration rights agreement under which the Company provides each of certain shareholders ("Sonic Group") with (i) "demand" registration rights whereby each can, with certain exceptions, on two occasions require the Company to register under the Securities Act the Common Stock held by the Sonic Group and (ii) "piggyback" registration rights whereby each can, with certain exceptions, require the Company to include the Common Stock it holds in any registration statement filed by the Company. In addition, the Company has entered into a registration rights agreement with Randal Hujar and Gary Skiba providing for (i) "demand" registration rights whereby Messrs. Hujar and Skiba can after February 28, 1997, with certain exceptions, require the Company to register under the Securities Act the Common Stock they hold and (ii) "piggyback" registration rights whereby Messrs. Hujar and Skiba can after February 28, 1997, with certain exceptions, require the Company to include the Common Stock they hold in any registration statement filed by the Company. The Company has also entered into a registration rights agreement with other former shareholders of Lyriq (holding in aggregate 110,694 shares of Common Stock) providing for "piggyback" rights whereby such individuals, with certain exceptions, can require the Company to include the Common Stock they hold in any registration statement filed by the Company pursuant to the "demand" registration rights of Messrs. Hujar and Skiba. The registration rights of any of the holders could result in substantial future expense to the Company and could adversely affect any future equity or debt financings by the Company. Furthermore, the sale of the Common Stock or other securities held by or issuable to the holders, or merely the potential of such sales, could have an adverse effect on the market prices of the Company's securities. In addition, the Company has granted certain demand and piggy-back registration rights to the Underwriter with respect to the securities issuable upon exercise of the Underwriter's UPO and the Underwriter's Purchase Option. Future Sales of Common Stock. Of the 7,678,108 shares of Common Stock currently outstanding, 4,736,673 have been registered and therefore are "freely tradeable." In addition, 740,734 Conversion Shares, which have been registered by means of a Registration Statement and may be sold by the holders thereof if at the time of such sale there is a current prospectus relating to the Conversion Shares (subject to the lock-up period described below). The remaining 2,200,701 shares of Common Stock are "restricted securities" as that term is defined in Rule 144 under the Securities Act, and under certain circumstances may be sold without registration pursuant to such rule. Of such outstanding shares, 1,400,489 (of which 1,353,512 shares are subject to the lock-up period described below) were available for sale pursuant to Rule 144 commencing May 1996, 75,000 shares will be available for sale pursuant to Rule 144 commencing August 1996 and 725,212 shares (614,618 of which shares are subject to the lock-up period described below) will be available for sale pursuant to Rule 144 commencing February 1998. All officers and directors of the Company as of May 15, 1996 (who hold in the aggregate 1,976,130 shares) have agreed that until the earlier of two years from May 15, 1996 or the 20th day after the end of the second consecutive whole fiscal quarter after May 15, 1996 during which the Company had positive net income on a consolidated basis (each of such quarters being referred to as a "Positive Quarter"), they will not sell any of their shares without the prior consent of the Underwriter (unless such shares were acquired in the open market), provided, however, that each officer and director of the Company who was a stockholder of record as of December 29, 1995 and Randal Hujar and Gary Skiba shall be permitted to sell at the earlier of one year after May 15, 1996 or any time after the 20th day after the end of the first Positive Quarter, up to 15% of the shares owned by such holder on the date hereof. In addition, prior to February 28, 1997, Mr. Hujar may pledge up to fifty percent of his Common Stock to cover personal expenses. The Selling Securityholders have agreed that they will not sell the Conversion Shares, the Conversion Warrants and the IPO Warrants they received in exchange for the January 1996 Warrants until twelve months after May 15, 1996 without the Underwriter's consent. The Company is unable to predict the effect that sales made under Rule 144 or otherwise may have on the market price of the Common Stock prevailing at the time of any such sales. Possible Volatility of Securities Prices. The market price of Common Stock has in the past been, and may in the future continue to be, volatile. A variety of events, including quarter to quarter variations in operating results, -12- news announcements or the introduction of new products by the Company or its competitors, as well as market conditions in the interactive multimedia industry or changes in earnings estimates by securities analysts may cause the market price of the Common Stock to fluctuate significantly. In addition, the stock market in recent years has experienced significant price and volume fluctuations which have particularly affected the market prices of equity securities of many companies that service the software industry and which often have been unrelated to the operating performance of such companies. These market fluctuations may adversely affect the price of the Common Stock. Qualification Requirements for Nasdaq Securities. The Common Stock is presently quoted on Nasdaq, which is administered by the National Association of Securities Dealers, Inc. (the "NASD"). For the Company's Common Stock to continue to be eligible for inclusion on Nasdaq, the Company must, among other things, maintain at least $2,000,000 in total assets and have at least $1,000,000 of capital and surplus and the bid price of the Common Stock must be at least $1.00 per share, provided, however, that, if the Company's Common Stock falls below such minimum bid price, it will remain eligible for continued inclusion if the market value of the public float is at least $1,000,000 and the Company has at least $2,000,000 in capital and surplus. While the Company presently meets the required standards, there can be no assurance that it will continue to be able to do so. If it should fail to meet one or more of such standards, its Common Stock would be subject to deletion from Nasdaq. If this should occur, trading, if any, in the Common Stock, would then continue to be conducted in the over-the-counter market on the OTC Bulletin Board, an NASD-sponsored inter-dealer quotation system, or in what are commonly referred to as "pink sheets." As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the market value of, the Company's Common Stock. In addition, if the Company's Common Stock ceases to be quoted on Nasdaq and the Company fails to meet certain other criteria, they would be subject to a Commission rule (Rule 15g-9) that imposes additional sales practice requirements on broker-dealers who sell such Common Stock to persons other than established customers and accredited investors. For transactions covered by this rule, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, if the Company's Common Stock were no longer quoted on Nasdaq, the rule may affect the ability of broker-dealers to sell the Company's Common Stock and the ability of purchasers in this offering to sell their Common Stock in the secondary market. Issuance of Preferred Stock; Anti-Takeover Provisions. Pursuant to its Certificate of Incorporation, as amended, the Company has an authorized class of 2,000,000 shares of Preferred Stock which may be issued by the Board of Directors on such terms and with such rights, preferences and designations as the Board may determine without any vote of the stockholders. Issuance of such preferred stock, depending upon the rights, preferences and designations thereof, may have the effect of delaying, deterring or preventing a change in control of the Company. Issuance of additional shares of Common Stock could result in the dilution of the voting power of the Common Stock purchased in this Offering. In addition, certain "anti-takeover" provisions of the Delaware General Corporation Law, among other things, may restrict the ability of the stockholders to approve a merger or business combination or obtain control of the Company. USE OF PROCEEDS If the Warrants and the January 1994 Warrants are exercised in full at $4.00 and $2.35 per share, respectively, the Company would receive net proceeds of approximately $21,285,000. However, there is no assurance that all or any portion of the Warrants or the January 1994 Warrants will be exercised. The funds raised by exercise of the Warrants and the January 1994 Warrants will be retained and used for working capital and other general corporate purposes. The Company will not receive any proceeds from the sale of Shares by the holders of the Warrants. DILUTION As of February 29, 1996, the net tangible book value of the Company was $(478,500) or $(.09) per share of Common Stock based on the 5,500,701 shares of Common Stock outstanding. Net tangible book value per share -13- represents the amount of the Company's total assets less intangible assets and total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the May 1996 Offering, including the conversion of $2,250,000 of Convertible Notes into 740,734 Conversion Shares and the repurchase of the Contribution Shares, and the receipt of net proceeds (estimated to be approximately $21,285,000) from the exercise of all of the Warrants and January 1994 Warrants offered hereby, the pro forma net tangible book value of the Company at February 29, 1996 would have been $28,359,000 or $2.16 per share of Common Stock, representing immediate dilution of approximately 46% or $1.84 per share of Common Stock to investors upon the exercise of Warrants and approximately 8% or $.19 per share of Common Stock to investors upon exercise of the January 1994 Warrants. The following table illustrates the per share dilution:
Warrant Exercise price per share of Common Stock................. $4.00 January 1994 Warrant Exercise price per share of Common Stock............................................................ $2.35 Net tangible book value per share of Common Stock at February 29, 1996................................................ $(.09) Increase in net tangible book value per share of Common Stock at February 29, 1996 to reflect the May 1996 Offering...... 1.01 Increase attributable to exercise of Warrants and January 1994 Warrants......................................................... $1.15 Pro Forma net tangible book value per share of Common Stock after exercise of Warrants and January 1994 Warrants....... $2.16 $2.16 Dilution to investors upon exercise of Warrants.................. $1.84 Dilution to investors upon exercise of January 1994 Warrants..... $.19
DIVIDEND POLICY The Company has never paid any cash dividends on the Common Stock and it is currently the intention of the Company not to pay cash dividends on its Common Stock in the foreseeable future. Management intends to reinvest earnings, if any, in the development and expansion of the Company's business. Any future declaration of cash dividends will be at the discretion of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. -14- TRANSFER AGENT, WARRANT AGENT AND REGISTRAR The transfer agent, warrant agent and registrar for the Common Stock and Warrants is Continental Stock Transfer & Trust Company, New York, New York. There is no warrant agent for the January 1994 Warrants. PLAN OF DISTRIBUTION This offering is self-underwritten; the Company has not employed an underwriter for the issuance of the Common Stock upon the exercise of the Warrants and the January 1994 Warrants and will bear all expenses of the offering. The Warrants may be exercised, at the discretion of the holder, by the delivery to Continental Stock Transfer & Trust Company (the "Warrant Agent") at 2 Broadway, New York, New York 10004 of the Warrant certificate (the "Warrant Certificate") accompanied by an election of exercise and payment of the warrant exercise price for each share of Common Stock purchased in accordance with the terms of such warrant. Payment must be made in the form of cash or a cashier's or certified check payable to the order of the Company. Delivery of the certificates representing the Warrant Shares will be made upon receipt of a certificate representing the underlying stock purchase rights, duly executed for transfer together with payment for the exercise price thereof. If fewer than all Warrants are exercised, a new Warrant Certificate evidencing the Warrants remaining unexercised will be issued to the Warrantholder. The January 1994 Warrants may be exercised in a similar manner except the January 1994 Warrants should be delivered to the Company at 110 West 40th Street, Suite 2100, New York, New York 10018, Attn: Kenneth Gruber. LEGAL MATTERS The legality of the Shares offered hereby will be passed upon for the Company by Olshan Grundman Frome & Rosenzweig LLP, New York, New York. EXPERTS The financial statements of Enteractive, Inc. as of May 31, 1995 and 1994 and for each of the years in the two-year period ended May 31, 1995 and the financial statements of Lyriq International Corporation as of June 30, 1995 and 1994 and for each of the years in the two-year period ended June 30, 1995 have been included herein and in the Registration Statement of which this Prospectus is a part, in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the May 31, 1995 and 1994 financial statements of Enteractive, Inc. refers to a change in the method of accounting for income taxes. -15- INDEX TO FINANCIAL STATEMENTS
PAGE ---- ENTERACTIVE, INC. Independent Auditors' Report............................................. F-3 Balance Sheets at May 31, 1995 and May 31, 1994.......................... F-4 Statements of Operations for the years ended May 31, 1995 and 1994....... F-5 Statements of Stockholders' Equity for the years ended May 31, 1995 and 1994.................................................................... F-6 Statements of Cash Flows for the years ended May 31, 1995 and 1994....... F-7 Notes to Financial Statements............................................ F-8 Consolidated Balance Sheets at February 29, 1996 (unaudited) and May 31, 1995.................................................................... F-16 Consolidated Statements of Operations for the nine months ended February 29, 1996 and February 28, 1995 (unaudited).............................. F-17 Consolidated Statements of Cash Flows for the nine months ended February 29, 1996 and February 28, 1995 (unaudited).............................. F-18 Notes to Condensed Financial Statements.................................. F-19 LYRIQ INTERNATIONAL CORPORATION Independent Auditors' Report............................................. F-22 Balance Sheets at June 30, 1995 and June 30, 1994........................ F-23 Statements of Operations for the years ended June 30, 1995 and 1994...... F-24 Statements of Stockholders' Deficit for the years ended June 30, 1995 and 1994.................................................................... F-25 Statements of Cash Flows for the years ended June 30, 1995 and 1994...... F-26 Notes to Financial Statements............................................ F-27 Statements of Operations for the nine months ended February 29, 1996 and February 28, 1995 (unaudited)........................................... F-31 Statements of Stockholders' Deficit for the nine months ended February 29, 1996 (unaudited).................................................... F-32 Statements of Cash Flows for the nine months ended February 29, 1996 and February 28, 1995 (unaudited)........................................... F-33 Notes to Financial Statements............................................ F-34
F-1 PRO FORMA FINANCIAL INFORMATION ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL CORPORATION* Pro Forma Combined Statement of Operations for the nine months ended February 29, 1996 (unaudited)........................................... F-36 Pro Forma Combined Statement of Operations for the year ended May 31, 1995 (unaudited)........................................................ F-38 Notes to Pro Forma Combined Financial Statements (unaudited)............. F-40
- -------- * Lyriq International Corporation was acquired by Enteractive on February 29, 1996. The transaction was accounted for as a purchase and the balances of Lyriq International Corporation are included in Enteractive, Inc.'s consolidated balance sheet at February 29, 1996. F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Enteractive, Inc.: We have audited the accompanying balance sheets of Enteractive, Inc. as of May 31, 1995 and 1994, and the related statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enteractive, Inc. as of May 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in Note 3 to the financial statements, the Company adopted a new method of accounting for income taxes in fiscal 1994. KPMG PEAT MARWICK LLP New York, New York July 27, 1995 F-3 ENTERACTIVE, INC. BALANCE SHEETS
MAY 31 ----------------------- 1995 1994 ----------- ---------- ASSETS Current Assets Cash and equivalents................................ $ 2,932,400 $2,343,000 Investments......................................... 1,116,100 449,500 Accounts receivable................................. 126,700 73,900 Income taxes receivable............................. 30,100 39,400 Inventories......................................... 44,000 -- Prepaid expenses and other.......................... 45,900 5,400 Debt issue costs.................................... -- 44,000 ----------- ---------- Total current assets.............................. 4,295,200 2,955,200 Investments........................................... -- 491,800 Property and equipment, net........................... 319,300 215,000 Other................................................. 15,700 21,100 ----------- ---------- $ 4,630,200 $3,683,100 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable.................................... $ 439,100 $ 241,500 Accrued expenses.................................... 307,600 122,300 Short-term borrowings............................... -- 75,000 Current maturities of long-term debt................ 15,200 86,500 Current maturities of obligations under capital leases............................................. 4,300 5,400 Convertible notes payable, net of $150,000 discount........................................... -- 1,850,000 ----------- ---------- Total current liabilities......................... 766,200 2,380,700 Long-term debt, excluding current maturities.......... -- 16,200 Obligations under capital leases, excluding current maturities........................................... -- 4,700 ----------- ---------- Total liabilities................................. 766,200 2,401,600 Commitments and contingencies Stockholders' Equity Preferred Stock $.01 par value, 2,000,000 shares authorized and none issued......................... -- -- Common Stock $.01 par value, 15,000,000 shares authorized; 4,775,489 and 3,075,489 shares issued and outstanding for 1995 and 1994, respectively.... 47,800 30,800 Additional paid-in capital.......................... 8,130,300 1,567,400 Accumulated deficit................................. (4,314,100) (316,700) ----------- ---------- Total stockholders' equity........................ 3,864,000 1,281,500 ----------- ---------- $ 4,630,200 $3,683,100 =========== ==========
See notes to financial statements. F-4 ENTERACTIVE, INC. STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31, ----------------------- 1995 1994 ----------- ---------- Product development revenue.......................... $ 365,600 $2,371,500 Royalty revenue...................................... 3,500 10,700 ----------- ---------- Total revenues................................... 369,100 2,382,200 Cost of development revenue.......................... 285,600 1,946,600 Research and development expenses.................... 2,487,600 173,200 Marketing and selling expenses....................... 521,500 -- General and administrative expenses.................. 1,044,200 644,500 ----------- ---------- Total costs and expenses......................... 4,338,900 2,764,300 Operating loss....................................... (3,969,800) (382,100) ----------- ---------- Other income (expense): Interest expense................................... (252,900) (30,600) Interest income.................................... 214,300 15,600 Other.............................................. 11,000 (2,600) ----------- ---------- Loss before income taxes............................. (3,997,400) (399,700) Income tax benefit................................... -- (26,500) ----------- ---------- Net loss............................................. $(3,997,400) $ (373,200) =========== ========== Loss per common and common equivalent share.......... $ (0.93) $ (0.11) =========== ========== Weighted average shares of common stock and common stock equivalents................................... 4,275,908 3,419,409 =========== ==========
See notes to financial statements. F-5 ENTERACTIVE, INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED MAY 31, 1995 AND 1994
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED ----------------- ------------------ PAID-IN EARNINGS SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ------- -------- --------- ------- ---------- ----------- ----------- Balance May 31, 1993.... -- $ -- 1,212 $ 2,400 $ 58,300 $ 56,500 $ 117,200 Conversion of 1,212 shares of Sonic common stock pursuant to business combination... -- -- 2,474,277 22,400 (22,400) -- -- Issuance of common stock at incorporation....... -- -- 600,000 6,000 1,525,100 -- 1,531,100 Issuance of common stock warrant................ -- -- -- -- 150,000 -- 150,000 Adjustment for business combination............ -- -- -- -- (143,600) -- (143,600) Net loss................ -- -- -- -- -- (373,200) (373,200) ------- -------- --------- ------- ---------- ----------- ----------- Balance May 31, 1994.... -- -- 3,075,489 30,800 1,567,400 (316,700) 1,281,500 Repurchase and retirement of common stock.................. -- -- (600,000) (6,000) (994,000) -- (1,000,000) Sale of common stock, net.................... -- -- 2,300,000 23,000 7,556,900 -- 7,579,900 Net loss................ -- -- -- -- -- (3,997,400) (3,997,400) ------- -------- --------- ------- ---------- ----------- ----------- Balance May 31, 1995.... -- $ -- 4,775,489 $47,800 $8,130,300 $(4,314,100) $ 3,864,000 ======= ======== ========= ======= ========== =========== ===========
See notes to financial statements. F-6 ENTERACTIVE, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31, ----------------------- 1995 1994 ----------- ---------- Cash flows from operating activities Net loss............................................ $(3,997,400) $ (373,200) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization..................... 314,000 100,600 Gain on sale of investments....................... (8,800) -- (Gain) loss on disposal of assets................. (1,100) 1,200 Changes in assets and liabilities: Accounts receivable............................... (52,800) (22,000) Income taxes receivable........................... 9,300 (39,500) Inventories....................................... (44,000) -- Prepaid expenses and other........................ (40,500) (2,700) Other assets...................................... 5,400 900 Accounts payable.................................. 197,600 202,700 Accrued expenses.................................. 185,300 89,000 Deferred revenues................................. -- (287,600) ----------- ---------- Net cash used in operating activities........... (3,433,000) (330,600) ----------- ---------- Cash flows from investing activities Purchases of investments............................ (1,831,700) -- Proceeds from sale of investments................... 1,665,700 -- Cash acquired in merger............................. -- 2,325,800 Purchases of property and equipment................. (223,200) (80,000) ----------- ---------- Net cash (used in) provided by investing activities..................................... (389,200) 2,245,800 ----------- ---------- Cash flows from financing activities Proceeds from sale of common stock, net............. 7,579,900 -- Proceeds from short-term borrowings................. -- 75,000 Proceeds from borrowings under long-term debt....... -- 35,000 Repurchase and retirement of common stock........... (1,000,000) -- Repayment of short-term borrowings.................. (75,000) -- Repayment of convertible notes payable.............. (2,000,000) -- Principal payments under long-term debt............. (87,500) (166,000) Principal payments under capital lease obligations.. (5,800) (10,900) ----------- ---------- Net cash provided by (used in) financing activities..................................... 4,411,600 (66,900) Net increase in cash and equivalents.................. 589,400 1,848,300 Cash and equivalents Beginning of year................................... 2,343,000 494,700 ----------- ---------- End of year......................................... $ 2,932,400 $2,343,000 =========== ==========
See notes to financial statements. F-7 ENTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS MAY 31, 1995 (1) BASIS OF PRESENTATION AND BUSINESS COMBINATION Enteractive, Inc. (Enteractive) was formed in December 1993 as a wholly owned subsidiary of The Continuum Group through an initial cash investment of $1,531,097, net of associated costs of $18,903, in return for 600,000 shares of Enteractive's common stock. In May 1994, as a condition to the merger agreement described below, Enteractive raised an additional $2,000,000 through the sale of convertible notes and the issuance of warrants to purchase 800,000 shares of the Company's common stock (see note 8). On May 10, 1994, Enteractive consummated a merger with Sonic Images Productions, Inc. (Sonic) whereby 2,475,489 shares of Enteractive's common stock was exchanged for 100% of the outstanding common stock of Sonic. The merger was accounted for under the purchase method of accounting with Sonic as the acquiring entity, as its former shareholders received 80% of the voting common stock of the surviving entity (the Company). Sonic was a privately-held multimedia software development company without a readily determinable market value. Accordingly, the consideration for the purchase was determined to be the fair value of the net assets acquired from Enteractive. The accompanying financial statements include the historical results of Sonic and reflect the results of operations of the Company from the date of the merger. The capital stock accounts of the former Sonic have been adjusted to reflect the capital stock of the surviving entity, Enteractive. Prior to the Merger, Enteractive had no operations and had only expenses related to administrative costs associated with formation, raising equity and debt financing, and certain other merger activities. Total costs incurred for these activities from Enteractive's inception date until the effective date of the merger amounted to $143,600. This amount has been reflected as a reduction of additional paid- in capital in the accompanying financial statements. (2) INITIAL PUBLIC OFFERING On October 20, 1994, 2,300,000 units of interest in the Company were sold in an initial public offering filed with the Securities and Exchange Commission ("SEC") on Form SB-2. Each unit, which was sold for $4.00, consisted of one share of the Company's common stock and one common stock purchase warrant, which entitles the warrant holder to purchase one share of the Company's common stock for $4.00 at any time during the period from October 20, 1995 to October 20, 1997. Proceeds of approximately $7,600,000, net of related expenses of approximately $1.6 million, were received in exchange for the units issued. In connection with this sale of units, the Company sold to the underwriter, for an aggregate of $50, the right to purchase 200,000 units with identical terms to those sold in the initial public offering, except that the exercise price of the warrants is $5.20. Such units are exercisable at $6.60 per unit from October 20, 1995 through October 20, 1999, and have certain "piggy back" and demand registration rights. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Cash and Equivalents All highly liquid debt instruments with maturities of three months or less at the time of purchase are considered to be cash equivalents. Cash equivalents of $2,662,600 and $2,307,300 at May 31, 1995 and 1994, respectively, consist of cash held in interest-bearing money market accounts. (b) Investments Investments at May 31, 1995, consist of certificates of deposit and are carried at cost, which approximates market. Investments at May 31, 1994, consists of certain debt securities of the U.S. Government and, in accordance with provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain F-8 ENTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Investments in Debt and Equity Securities, have been classified as "available for sale" and are carried at fair value. (c) Revenue Recognition Revenues under fixed price product development contracts are recognized using the percentage of completion method based on progress to date, which is measured by comparing costs to date to total estimated costs. Losses on contracts, if any, are recognized in the period they become estimable. Royalty revenue is recognized when earned. (d) Inventories Inventories of multimedia software are recorded at the lower of cost (on a first-in, first-out basis) or market. (e) Property and Equipment Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line depreciation method, except for the leasehold improvements which are amortized over the lesser of the lease term or the life of the related asset. (f) Income Taxes Effective as of June 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The cumulative effect of the change in the method of accounting for income taxes was not material. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Software Development Costs Capitalization of costs associated with internally developed software begins upon the determination by the Company of a product's technological feasibility, as evidenced by a working model. Capitalized software development costs are amortized over related sales on a per-unit basis based on estimated total sales, with a minimum amortization based on a straight-line method over three years. There were no capitalized software development costs at May 31, 1995 or 1994 due to the short period of time and insignificance of costs incurred from the time the Company's products were determined to be technologically feasible and the time they were available for general release to the public. F-9 ENTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (h) Earnings Per Share Pursuant to SEC Staff Accounting Bulletin Topic 4:D, stock issued and stock options and warrants granted during the twelve month period preceding the date of the Company's initial public offering (the "IPO") have been included in the calculation of weighted average shares of common stock outstanding weighted average shares of common stock and common equivalents outstanding for the years ended May 31, 1995 and 1994 is as follows:
1995 1994 --------- --------- Weighted average shares of common stock outstanding, exclusive of issuance's within twelve months prior to the IPO............................................... 4,031,928 2,475,489 Shares issued within twelve months prior to the IPO assumed to be outstanding for the entire period....... -- 600,000 Incremental shares assumed to be outstanding related to common stock options and warrants granted within twelve months prior to the IPO........................ 243,980 343,920 --------- --------- 4,275,908 3,419,409 ========= =========
(4) INVESTMENTS Investments at May 31, 1995, consist of certificates of deposit maturing at various dates through November 1995. Investments at May 31, 1994, consisted of U.S. Treasury Notes and Federal agency securities having a fair value of $941,300, which approximated the amortized cost. (5) PROPERTY AND EQUIPMENT Property and equipment, at May 31, 1995 and 1994, consists of the following:
1995 1994 ---------- --------- Computer and production equipment..................... $ 791,100 $ 585,500 Furniture and other equipment......................... 54,100 41,000 Leasehold improvements................................ 200,300 193,700 ---------- --------- 1,045,500 820,200 Accumulated depreciation and amortization............. (726,200) (605,200) ---------- --------- Property and equipment, net........................... $ 319,300 $ 215,000 ========== =========
(6) ACCRUED EXPENSES At May 31, 1995, accrued expenses totaled $307,600 and included $163,100 of accrued compensation. (7) SHORT-TERM BORROWINGS At May 31, 1994, the Company had an outstanding line of credit agreement which provided for borrowings up to $75,000. The line of credit agreement expired in June 1994 at which time the Company repaid all outstanding amounts. (8) CONVERTIBLE NOTES PAYABLE On May 9, 1994, the Company entered into a series of debt financing agreements. Under the terms of these agreements, the Company received $2,000,000 in cash in exchange for the issuance of $2,000,000 in 10% F-10 ENTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) convertible notes payable and common stock purchase warrants (note 10) for the purchase of 800,000 shares of the Company's common stock. The estimated value of the warrants at the time of issuance was $150,000, which was reflected as a component of equity and unamortized discount on the convertible notes payable. In accordance with its planned use of the proceeds received from the initial public offering, the Company, in November 1994, repaid all principal and interest amounts outstanding under its convertible notes payable. (9) LONG-TERM DEBT Long-term debt at May 31, 1995 and 1994, consists of the following:
1995 1994 ------- ------- Note payable in monthly installments of $1,173, including interest at the lending institution's prime rate (7.5% at May 31, 1995) plus 2%, (note is collateralized by certain property and equipment).................................. $12,600 $24,200 Various notes payable with interest approximating prime, repaid in fiscal 1995.................................... -- 68,400 Other notes payable....................................... 2,600 10,100 ------- ------- Total long term debt.................................. 15,200 102,700 Less current maturities................................. 15,200 86,500 ------- ------- Long term debt, excluding current maturities.......... $ -- $16,200 ======= =======
Interest costs of approximately $102,900 (principally relating to a bridge loan repaid in October 1994) and $19,100 were paid in fiscal 1995 and 1994, respectively. F-11 ENTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (10) STOCK OPTIONS AND WARRANTS The Company has reserved 750,000 shares of unissued common stock under its 1994 Incentive and Non-qualified Stock Option Plan (the "1994 Plan") for employees. At May 31, 1995, 469,770 options have been granted under the 1994 Plan, of which 427,217 represent non-qualified stock options and 42,553 represent incentive stock options. Additionally, the Company periodically grants stock options outside the 1994 Plan to other parties. All stock options, which have been granted by the Company, with the exception of those options granted to persons holding more than ten percent of the voting common stock in the Company on the date of grant, expire ten years after grant and are issued at exercise prices which are not less than the fair value of the stock on the date of grant. Options granted to persons holding more than ten percent of the voting common stock of the Company on the date of grant expire five years after grant and are issued at exercise prices which are not less than 110 percent of the fair value of the stock on the date of grant. Stock options generally vest one-third in each of the first three years after the date of grant. Payment for the exercise price of an option may be made with previously acquired common stock of the Company with certain limitations. A summary of all stock option transactions of the Company is as follows:
NUMBER OF OPTIONS PRICE PER SHARE ----------------- --------------- Outstanding May 31, 1993 Granted.................................. 531,510 $1.71-3.00 Exercised................................ -- -- Canceled................................. -- -- --------- ---------- Outstanding May 31, 1994................... 531,510 $1.71-3.00 Granted.................................. 470,260 $1.71-4.00 Exercised................................ -- -- Canceled................................. -- -- --------- ---------- Outstanding May 31, 1995................... 1,001,770 $1.71-4.00 ========= ========== Exercisable at May 31, 1995................ 523,340 $1.71-3.00 ========= ==========
On August 12, 1994, the Company's Board of Directors increased the number of shares reserved under the 1994 Plan from 500,000 to 750,000 shares. In addition, the Board approved a new stock option plan for consultants under which 250,000 shares of common stock have been reserved for issuance. In November 1994, a total of 250,000 options were granted to two consultants (one of which was a former director of the Company) under the stock option plan for consultants for advisory services. The options are exercisable for 10 years from date of grant at an exercise price of $3.75. The expense related to the services will be recognized over the period the services are provided Under a separate Stock Option Plan for Outside Directors, each person who is an outside director on January 1 of each calendar year, commencing January 1, 1996, shall be granted 5,000 options to purchase shares of common stock of the Company. Approval of this option plan is subject to approval by the Company's shareholders. In December 1994, the Company registered with the SEC 800,000 common stock warrants which were issued in May 1994 in connection with the issuance of convertible notes payable, which were repaid in October 1994. The warrants entitle the holder to purchase one share of common stock for $4.00 during the two-year period commencing October 20, 1995. In connection with the initial capitalization of the Company, the Company issued warrants to purchase 340,000 shares of common stock at $2.35 per share. The warrants are currently exercisable and expire in January 1999. No value was ascribed to these warrants. F-12 ENTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) All of the warrants issued by the Company carry certain limited "piggyback" registration rights which provide the warrant holders with the right to have the shares into which the warrants have been or will be converted included in any registration statement filed by the Company with the Securities and Exchange Commission, other than a registration statement filed in connection with an IPO or on Forms S-4 or S-8. Additionally, certain stockholders have entered into demand registration rights agreements with the Company whereby they can require the Company, with certain exceptions, to register shares under the Securities Act of 1933. (11) PREFERRED STOCK On August 12, 1994, the Company's Board of Directors authorized the Company to issue up to 2,000,000 shares of preferred stock, with a par value of $.01, none of which has been issued. (12) INCOME TAXES Income tax benefit consists of the following for the years ended May 31, 1995 and 1994:
1995 1994 -------- -------- Current: Federal................................................. $ -- $(13,700) State................................................... -- (12,800) -------- -------- -- (26,500) ======== ======== Deferred: Federal................................................. -- -- State................................................... -- -- -------- -------- $ -- $(26,500) ======== ========
Income tax benefit amounted to $26,500 for 1994, an effective rate of 7 percent. The actual benefit differs from the "expected" tax benefit for 1995 and 1994, computed by applying the U.S. Federal corporate tax rate of 34 percent to loss before income taxes, as follows:
1994 1994 ----------- --------- Computed "expected" tax benefit.................... $(1,359,100) $(135,900) Increase (reduction) in income taxes resulting from: State income taxes, net of Federal benefit....... (185,700) (8,400) Increase in valuation allowance, primarily due to Federal net operating loss carry forwards....... 1,537,800 105,300 Other............................................ 7,000 12,500 ----------- --------- $ -- $ (26,500) =========== =========
F-13 ENTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at May 31, 1995 and 1994, are as follows:
1995 1994 ----------- --------- Deferred tax assets: Net operating loss carry forwards................. $ 1,582,600 $ 108,900 Accrued expenses.................................. 64,000 -- Valuation allowance............................... (1,643,100) (105,400) ----------- --------- Net deferred tax asset.......................... 3,500 3,500 ----------- --------- Deferred tax liability--property and equipment, principally due to differences in depreciation methods............................................ 3,500 3,500 ----------- --------- Net deferred tax asset/liability................ $ -- $ -- =========== =========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies which can be implemented by the Company in making this assessment. The Company believes that it is more likely than not that it will not be able to realize its deferred tax asset and has established a valuation allowance of $1,643,000 at May 31,1995, based upon the provisions of Statement of Financial Accounting Standard No. 109, the Company's historical taxable losses and the lack of offsetting objective evidence, the Company's projected taxable loss through May 31, 1997 and the fact that the Company cannot produce reasonably reliable projections during the remainder of the net operating loss carry forward period. Approximately $ 30,100 was paid in income taxes for the year ended May 31, 1994 and for which a refund is expected in fiscal 1996. At May 31, 1995, the Company had available approximately $4,100,000 of tax loss carry forwards which expire in years 2009 through 2010. (13) EMPLOYEE BENEFIT PLAN The Company sponsors an employee savings plan under Section 401(k) of the Internal Revenue Code (IRC) that covers substantially all employees of the Company who elect to participate on a voluntary basis. Participants may authorize salary deferral amounts under the plan up to 15 percent of their compensation limited to a maximum amount stipulated in the IRC. The plan also provides for a discretionary Company contribution which is determined by the Board of Directors. No discretionary Company contributions were made during the years ended May 31, 1995 and 1994. (14) COMMITMENTS (a) Leases The Company leases its office facilities under several non-cancelable operating leases which expire at various times through May 31, 1997. The following is a schedule by years of future minimum lease commitments required under the Company's non-cancelable operating leases:
YEAR ENDED MAY 31 ----------------- 1996.............................................................. $175,700 1997.............................................................. 182,400 -------- $358,100 ========
F-14 ENTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Rent expense for operating leases for 1995 and 1994 approximated $129,700 and $136,500, respectively. (b) Employment Agreements The Company has entered into employment agreements with certain key executives and employees. Minimum salary commitments under these agreements are approximately $585,000, $485,000, and $185,400 for the years ending May 31, 1996, 1997, and 1998, respectively. (15) BUSINESS AND CREDIT CONCENTRATIONS During 1994 approximately $1,450,000 of the Company's total revenues were received under a grant from the National Science Foundation (NSF). The grant was used for the development of a specific educational multimedia product. Under the terms of the grant, the Company owns all rights to the completed product; however, the Company must provide the NSF with a royalty-free license to use the material for government purposes and a percentage of the Company's royalties earned on sales of the initial version of the product to the American Academy for the Advancement of Sciences. The product was substantially completed as of May 31, 1994, and no additional funds were received under this grant in fiscal 1995. In addition there was one customer that comprised 25% of total revenue in 1995 and 1994 and two other customers that comprised 51% and 20% of total revenue in 1995. (16) REPURCHASE AND RETIREMENT OF COMMON STOCK On August 31, 1994, the Company repurchased and retired 600,000 shares of its outstanding common stock from a stockholder at a price of $1,000,000. F-15 ENTERACTIVE, INC. CONSOLIDATED BALANCE SHEETS
FEBRUARY 29, MAY 31, 1996 1995 ------------ ----------- (UNAUDITED) ASSETS Current Assets Cash and equivalents.......................... $ 1,842,000 $ 2,932,400 Investments................................... 30,400 1,116,100 Accounts receivable, net...................... 649,200 126,700 Income taxes receivable....................... 16,400 30,100 Inventories................................... 303,700 44,000 Debt issuance costs........................... 226,700 -- Prepaid expenses and other.................... 25,900 45,900 ------------ ----------- Total current assets........................ 3,094,300 4,295,200 Property and equipment, net..................... 261,900 319,300 Capitalized software, net....................... 1,177,800 -- Other........................................... 24,200 15,700 ------------ ----------- $ 4,558,200 $ 4,630,200 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable.............................. $ 962,400 $ 439,100 Accrued expenses.............................. 354,800 307,600 Notes payable................................. 123,600 15,200 Convertible promissory notes.................. 2,190,000 -- Obligations under capital leases.............. 1,400 4,300 ------------ ----------- Total current liabilities................... 3,632,200 766,200 Commitments and contingencies Stockholders' Equity Preferred Stock $.01 par value, 2,000,000 shares authorized, none issued............... -- -- Common Stock $.01 par value, 15,000,000 shares authorized; 5,500,701 and 4,775,489 shares issued and outstanding February 29, 1996 and May 31, 1995, respectively................... 55,000 47,800 Additional paid-in capital...................... 11,563,900 8,130,300 Accumulated deficit............................. (10,692,900) (4,314,100) ------------ ----------- Total stockholders' equity.................. 926,000 3,864,000 ------------ ----------- $ 4,558,200 $ 4,630,200 ============ ===========
See notes to financial statements. F-16 ENTERACTIVE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED -------------------------- FEBRUARY 29, FEBRUARY 28, 1996 1995 ------------ ------------ Product sales...................................... $ 324,800 $ -- Product development revenue........................ 257,700 292,600 Royalty revenue.................................... 103,300 2,400 ----------- ----------- Total revenues................................. 685,800 295,000 Cost of product sales.............................. 77,600 -- Cost of development revenue........................ 225,500 237,600 Research and development expenses.................. 2,301,500 1,592,900 Marketing and selling expenses..................... 1,354,700 117,600 General and administrative expenses................ 1,246,900 756,200 Acquired in-process research and development....... 1,915,100 -- ----------- ----------- Total costs and expenses....................... 7,121,300 2,704,300 Operating loss..................................... (6,435,500) (2,409,300) Other income (expense): Interest expense................................. (58,200) (252,000) Interest income.................................. 110,000 138,400 Other............................................ 4,900 10,300 ----------- ----------- Net loss........................................... $(6,378,800) $(2,512,600) =========== =========== Loss per common and common equivalent share........ $ (1.34) $ (0.62) =========== =========== Weighted average shares of common stock and common stock equivalent.................................. 4,775,489 4,057,812 =========== ===========
See notes to financial statements. F-17 ENTERACTIVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED ------------------------ FEB. 29, FEB. 28, 1996 1995 ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................... $(6,378,800) $(2,512,600) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization..................... 287,400 268,900 Acquired in-process research and development...... 1,915,100 -- Gain on sale of investments....................... -- (8,800) Gain on disposal of assets........................ (9,000) -- Changes in assets and liabilities net of acquisi- tion of Lyriq: Accounts receivable............................... (101,000) (87,200) Income taxes receivable........................... 13,700 9,300 Inventories....................................... (140,200) -- Prepaid expenses and other........................ 30,400 (53,100) Other assets...................................... (2,800) (1,800) Accounts payable.................................. 271,400 22,800 Accrued expenses.................................. (194,000) 125,500 ----------- ----------- Net cash used in operating activities............ (4,307,800) (2,237,000) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments................. 1,085,700 950,100 Notes receivable.................................. (285,800) -- Cash acquired from Lyriq acquisition.............. 11,300 -- Purchases of property and equipment............... (35,700) (165,800) ----------- ----------- Net cash provided by investing activities........ 775,500 784,300 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments under capital lease obliga- tions............................................ (2,900) (4,400) Repayment of short-term borrowings................ (15,200) (75,000) Principal payments under long-term debt........... -- (82,400) Principal payments under convertible notes pay- able............................................. -- (2,000,000) Repurchase and retirement of common stock......... -- (1,000,000) Proceeds from issuance of convertible notes, net.. 2,460,000 -- Proceeds from sale of common stock, net........... -- 7,579,800 ----------- ----------- Net cash provided by financing activities........ 2,441,900 4,418,000 NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS.. (1,090,400) 2,965,300 CASH AND EQUIVALENTS Beginning of period................................ 2,932,400 2,343,000 ----------- ----------- End of period...................................... $ 1,842,000 $ 5,308,300 =========== ===========
See notes to financial statements. F-18 ENTERACTIVE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-QSB and in the opinion of management contain all adjustments (consisting of only normal recurring entries) necessary to present fairly the Company's interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The interim financial statements should be read in conjunction with the Company's financial statements and related notes in the May 31, 1995 Annual Report on Form 10-KSB. The results for the three and nine month period ended February 29, 1996 are not necessarily indicative of the results to be obtained for the full year. 2. BUSINESS The Company's primary business is the development and publication of proprietary entertainment and educational interactive multimedia software for distribution on personal computers utilizing the CD-ROM platform. Initial shipment of these products commenced in June 1995 and represent the first sales of titles published by the Company. To a limited extent, the Company continues to develop interactive titles for others. 3. REVENUE RECOGNITION Revenue from product sales is recognized upon shipment, provided no significant vendor obligations remain and collection of the resulting receivable is deemed probable. Revenue under fixed price product development contracts is recognized using the percentage of completion method based on progress to date, which is measured by comparing costs to date to total estimated costs. Royalty revenue is recognized when earned. The Company's agreements with certain product distributors and retailers permit them to exchange or return products for which the Company provides an allowance. 4. CONVERTIBLE PROMISSORY NOTES On January 23, 1996, the Company consummated a $2,700,000 bridge financing through the issuance of 54 units, each consisting of a $50,000 unsecured convertible promissory note and 10,000 warrants. Each warrant will enable the holder to purchase one share of common stock at $4.00 per share. The promissory notes are convertible into a number of common shares equal to the principal of the notes divided by 90% of the $3.375 per share offering price of the Company's common stock in its May 1996 public offering (Note 7) plus twice that number of warrants to purchase common stock at $4.00 per share. Debt acquisition costs totaled $240,000. The fair market value of the warrants was $540,000 at time of issuance. Such amount was reflected as an increase in additional paid in capital and as a discount on the convertible promissory notes to be amortized over the term of the notes. The convertible notes bear interest at 10% per annum through June 30, 1996, and thereafter until paid at 15% per annum, with principal and interest due the earlier of July 23, 1997 or the closing of a public offering of shares of the Company's common stock. Investors holding an aggregate of $2,250,000 of convertible promissory notes elected to convert their convertible promissory notes into 740,734 shares of the Company's stock and 1,481,468 warrants at the closing of the May 1996 public offering (Note 7). The remaining $450,000 of convertible promissory notes were repaid at that time. 5. MERGER On February 29, 1996, the Company completed its merger with Lyriq International Corporation, a developer and publisher of interactive multimedia software, pursuant to an Agreement and Plan of Merger, whereby Lyriq F-19 ENTERACTIVE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) was merged into a wholly-owned subsidiary of the Company. The merger was accounted for under the purchase method of accounting and, accordingly, the net assets and operations of Lyriq are included in the Company's consolidated financial statements beginning on February 29, 1996. The purchase price was determined as follows: 725,212 shares of Enteractive common stock at $4.00 per share........................................................ $2,900,848 Excess of fair value of liabilities assumed over assets ac- quired of Lyriq.............................................. 247,050 Acquisition costs............................................. 52,102 ---------- Total....................................................... $3,200,000 ========== The acquisition price was allocated as follows: In-process research and development expense................... $1,915,156 Capitalized software.......................................... 1,284,844 ---------- Total....................................................... $3,200,000 ==========
The Company recorded an expense of $1,915,100 on February 29, 1996 for the acquired in-process research and development, including certain core technology, that will be used in the development of additional titles in the future. The statement of operations charge equaled the estimated current fair value of the future related cash flows to be derived from specifically identified technologies (discounted at a risk-adjusted rate of 30%) for which technological feasibility had not yet been established pursuant to SFAS No. 86 (consistent with management's definition of internally developed software) and the technologies have no alternative future use. Capitalized software will be amortized over a three year period. 6. UNAUDITED PRO FORMA INFORMATION The following unaudited combined pro forma information shows the results of the Company's operations for the nine month periods presented had the merger with Lyriq occurred at the beginning of each period.
NINE MONTHS ENDING ------------------------ FEBRUARY FEBRUARY 29, 28, 1996 1995 ----------- ----------- Total revenues.................................... $ 1,548,200 $ 1,331,300 Net loss.......................................... $(5,060,600) $(2,787,000) Net loss per share................................ $ (.92) $ (0.58)
The information does not necessarily indicate what would have occurred had the acquisition been consummated at the beginning of the respective periods, or of the results that may occur in the future. Pro-forma adjustments included amortization of acquired capitalized software over three years. F-20 ENTERACTIVE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 7. SUBSEQUENT EVENTS On March 29, 1996 the Company amended its charter to increase the number of authorized common shares from 15,000,000 to 30,000,000. In addition the Company increased the number of shares authorized for issuance under its stock option plans as follows:
PLAN FROM TO ---- ------- --------- 1994 Incentive and Non-qualified Stock Option Plan...... 750,000 1,500,000 1994 Stock option plan for consultants.................. 350,000 1,000,000 1995 Stock Option Plan for Outside Directors............ 75,000 150,000
On May 15, 1996, the Company consummated a public offering (May 1996 public offering) to sell 2,415,000 shares of the Company's common stock. Net proceeds to the Company were approximately $6,873,000. During the quarter ended May 31, 1996, the Company incurred one-time charges for the write-off of debt acquisition costs and the discount on the Convertible Notes totalling $736,700, based on the balances at February 29, 1996. In December 1995, the Company entered into an agreement with certain of its officers pursuant to which the Company repurchased simultaneously with the closing of the May 1996 Public Offering of common stock, an aggregate of 1,000,000 shares of common stock at $1.00 per share. Under the purchase agreement one third of the purchase price was paid at the closing of the May 1996 public offering with the balance payable in two equal installments of $333,333 each in May 1997 and May 1998. The outstanding balance will accrue interest at the prime rate and is payable quarterly. F-21 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Lyriq International Corporation: We have audited the accompanying balance sheets of Lyriq International Corporation as of June 30, 1995 and 1994, and the related statements of operations, stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lyriq International Corporation as of June 30, 1995 and 1994, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP New York, New York March 1, 1996 F-22 LYRIQ INTERNATIONAL CORPORATION BALANCE SHEETS
YEARS ENDED JUNE 30, ------------------- 1995 1994 --------- -------- ASSETS Current Assets Cash................................................... $ 8,638 $ 24,200 Accounts receivable, net............................... 233,030 115,346 Inventories............................................ 103,418 34,125 Prepaid expenses and other............................. 19,807 1,646 --------- -------- Total current assets................................. 364,893 175,317 Property and equipment, net.............................. 18,595 38,888 Other.................................................... 5,795 5,795 --------- -------- $ 389,283 $220,000 ========= ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable....................................... $ 285,459 $ 57,865 Accrued expenses....................................... 163,983 12,700 Notes payable.......................................... 54,590 0 Convertible debt....................................... 0 100,000 16,743 49,470 --------- -------- Total current liabilities............................ 520,775 220,035 Commitments and contingencies Stockholders' Deficit Common Stock, no par value, 1,250,000 shares authorized, 895,525 and 845,500 shares issued and outstanding at June 30, 1995 and 1994, respectively.................... 101,000 1,000 Accumulated deficit...................................... (232,492) (1,035) --------- -------- Total stockholders' deficit.......................... (131,492) (35) --------- -------- $ 389,283 $220,000 ========= ========
See accompanying notes to financial statements. F-23 LYRIQ INTERNATIONAL CORPORATION STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, -------------------- 1995 1994 ---------- -------- Product revenues......................................... $ 617,536 $206,339 Product development revenue.............................. 162,132 171,262 Royalty and other revenue................................ 464,906 47,031 ---------- -------- Total revenues....................................... 1,244,574 424,632 Cost of product revenues................................. 250,932 51,098 Cost of product development revenue...................... 185,225 65,806 Research and development expenses........................ 342,444 175,103 Marketing and selling expenses........................... 431,077 52,858 General and administrative expenses...................... 254,894 88,428 ---------- -------- Total operating expenses............................. 1,464,572 433,293 Operating loss........................................... (219,998) (8,661) Other income (expense): Interest expense....................................... (10,023) (1,963) Other.................................................. (821) (2,558) ---------- -------- Loss before income taxes................................. (230,842) (13,182) Provision for income taxes............................... 615 1,831 ---------- -------- Net loss................................................. $ (231,457) $(15,013) ========== ========
See accompanying notes to financial statements. F-24 LYRIQ INTERNATIONAL CORPORATION STATEMENTS OF STOCKHOLDER'S DEFICIT YEARS ENDED JUNE 30, 1995 AND 1994
RETAINED COMMON STOCK EARNINGS ---------------- (ACCUMULATED SHARES AMOUNT DEFICIT) TOTAL ------- -------- ------------ --------- Balance, June 30, 1993............... 845,500 $ 1,000 $ 13,978 $ 14,978 Net Loss............................. -- -- (15,013) (15,013) ------- -------- --------- --------- Balance, June 30, 1994............... 845,500 1,000 (1,035) (35) Shares issued upon conversion of debt................................ 50,025 100,000 -- 100,000 Net loss............................. -- -- (231,457) (231,457) ------- -------- --------- --------- Balance, June 30, 1995............... 895,525 $101,000 $(232,492) $(131,492) ======= ======== ========= =========
See accompanying notes to financial statements. F-25 LYRIQ INTERNATIONAL CORPORATION STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, -------------------- 1995 1994 --------- --------- Cash flows from operating activities Net loss............................................... $(231,457) $(15,013) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 19,177 17,345 Loss on disposal of assets............................. 1,802 -- Changes in assets and liabilities: Accounts receivable.................................. (117,684) (111,739) Inventories.......................................... (69,293) (15,188) Prepaid expenses and other........................... (18,161) 354 Other assets......................................... -- 1,255 Accounts payable..................................... 227,594 34,073 Accrued expenses..................................... 151,283 11,250 --------- --------- Net cash used in operating activities.............. (36,739) (77,663) --------- --------- Cash flows from investing activities Purchases of property and equipment.................... (686) (9,758) --------- --------- Net cash used in investing activities.............. (686) (9,758) --------- --------- Cash flows from financing activities Short-term borrowings.................................. 54,590 -- Proceeds from issuance of convertible debt............. -- 100,000 (Repayment of) proceeds from shareholder loans......... (32,727) 8,206 --------- --------- Net cash provided by financing activities.......... 21,863 108,206 Net (decrease) increase in cash and equivalents.... (15,562) 20,785 Cash Beginning of period.................................... 24,200 3,415 --------- --------- End of period.......................................... $ 8,638 $ 24,200 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for interest................. $ 11,266 $ 4,877 Cash paid during the year for income taxes............. $ 615 $ 1,831
See accompanying notes to financial statements. F-26 LYRIQ INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 AND 1994 (1) BUSINESS Lyriq International Corporation (the Company) was founded in December 1991 and is primarily engaged in the development of interactive multimedia titles for the home education and recreation markets. The Company is currently developing software for the CD-ROM platform as well as the Internet and commercial on-line services. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Cash Cash of $8,638 and $24,200 at June 30, 1995 and 1994, respectively, consists of cash held in interest-bearing commercial bank accounts. (b) Revenue Recognition Sales and related costs are recorded by the Company upon shipment of products provided no significant vendor obligations remain and collection of the resulting receivable is deemed probable. The Companys agreements with certain product distributors and retailers permit them to exchange or return products for which the Company provides an allowance. Royalty revenue is recognized when earned. Product development revenue is recognized as the services are provided. (c) Inventories Inventories of multimedia software and related components are recorded at the lower of cost (on a first-in, first-out basis) or market. (d) Property and Equipment Property and equipment are stated at cost and are depreciated over their estimated useful lives of 3 to 5 years using the straight-line depreciation method, except for the leasehold improvements which are amortized over the lesser of the lease term or the life of the related asset. (e) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (f) Software Development Costs Capitalization of costs associated with internally developed software begins upon the determination by the Company of a product's technological feasibility as evidenced by a working model. Capitalized software development costs are amortized over related sales on a per-unit basis based on estimated total sales, with a minimum amortization based on a straight-line method over three years. There were no capitalized software development costs at June 30, 1995 or 1994 due to the short period of time and insignificance of costs incurred from the time the Company's products were determined to be technologically feasible and the time they were available for general release to the public. F-27 LYRIQ INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1995 AND 1994 (g) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) ACCOUNTS RECEIVABLE At June 30, 1995 and 1994 accounts receivable totaled $233,030 and $115,346 net of allowance for doubtful accounts and product returns of $154,049 and $20,500 in 1995 and 1994, respectively. (4) PROPERTY AND EQUIPMENT Property and equipment, at June 30, 1995 and 1994, consists of the following:
1995 1994 -------- -------- Property and equipment................................... $ 68,922 $ 72,740 Accumulated depreciation and amortization................ (50,327) (33,852) -------- -------- Property and equipment, net.............................. $ 18,595 $ 38,888 ======== ========
(5) ACCRUED EXPENSES Accrued expenses at June 30, 1995 consists of accrued payroll and related payroll costs totaling $86,643, and $77,340 for amounts owed a vendor for marketing and sales services. The amount owed to the vendor was paid by the issuance of 50,000 shares of the Company's common stock in September 1995 (Note 13). (6) NOTES PAYABLE The notes payable at June 30, 1995 consists of the following: $9,152 charged to a company credit card bearing interest at 14%; a $10,000 loan payable to an individual bearing interest at a rate of 10% which was subsequently satisfied by the issuance of 5,000 shares of the Company's common stock in September 1995 (Note 13); and, $35,438 advanced from a factoring company. The factoring agreement, dated November 1994, allows the Company to borrow against eligible accounts receivable at an interest rate of 3% of the outstanding amount per month with the amounts outstanding secured by the assets of the Company. (7) CONVERTIBLE DEBT On April 27, 1994, the Company borrowed $100,000 from an individual which, at the culmination of certain events per the loan and stock purchase agreement, would be converted into shares of the Company's common stock. The terms of the loan provided for interest at a rate of 10% per annum. On September 30, 1994, the debt was converted into 50,025 shares of common stock (after giving effect to the stock split--Note 13). Total interest paid on the loan until conversion was $6,722. (8) DUE TO STOCKHOLDERS At June 30, 1995 and 1994, the Company owed the stockholders of the Company a total of $16,743 and $49,470, respectively. These amounts advanced to the Company are payable upon demand and bear interest at 20% per year after outstanding for 30 days. F-28 LYRIQ INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1995 AND 1994 (9) INCOME TAXES The provision for income taxes in fiscal 1995 and 1994 were comprised of state minimum taxes. The actual income tax benefit differs from the "expected" tax benefit for 1995 and 1994, computed by applying the U.S. Federal corporate tax rate of 34 percent to loss before income taxes, as follows:
1995 1994 --------- -------- Computed "expected" Federal income tax benefit........ $ (78,700) $ (5,100) Increase in income taxes resulting from: State income taxes, net of Federal benefit.......... 615 1,831 Increase in valuation allowance, primarily due to reserves........................................... 78,700 5,100 --------- -------- $ 615 $ 1,831 ========= ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 1995 and 1994, are as follows:
1995 1994 -------- ------- Deferred tax assets: Accounts receivable reserve........................... $ 64,700 $ -- Net operating loss carryforward....................... 20,100 -- Accrued vacation...................................... 4,100 4,100 -------- ------- 88,900 4,100 Valuation allowance..................................... (82,800) (4,100) -------- ------- Deferred tax asset.................................... 6,100 -- -------- ------- Deferred tax liability--property and equipment, principally due to differences in depreciation methods................................................ 6,100 -- -------- ------- Net deferred income taxes............................... $ -- $ -- ======== =======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies which can be implemented by the Company in making this assessment. Based upon the Company's historical taxable losses and scheduled reversal of deferred tax liabilities, the Company has established a valuation allowance of $82,800 and $4,100 at June 30, 1995 and 1994, respectively. (10) COMMITMENTS The Company leases approximately 4,875 square feet of office space under a non-cancelable operating lease which expired September 30, 1994. Since the expiration of the current lease the Company has been paying the landlord $2,250 per month. Rent expense for the operating lease for fiscal 1995 and 1994 approximated $27,000 per year. F-29 LYRIQ INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1995 AND 1994 (11) SIGNIFICANT CUSTOMER The Company received 21% and 49% of its total revenues from one customer in 1995 and 1994, respectively. These revenues represent royalty payments earned from sales of educational titles developed by the Company and product development fees (12) STOCK OPTIONS In October 1994 and September 1995, the Company granted options to purchase 8,455 and 5,000 shares of the Company's common stock at an exercise price of $.01 and $2.50 per share, respectively. Such options were converted to options of Enteractive on February 29, 1996 (Note 13). (13) SUBSEQUENT EVENTS In September 1995, the Companys Board of Directors authorized an increase in the number of authorized shares of common stock, without par value, from 3,000 to 1,250,000. On September 1, 1995, the Board of Directors authorized a 422.75 to 1 stock split, which resulted in the issuance of 893,407 shares of common stock of the Company. All references to the number of shares of common stock of the Company and to stock option data reflect the stock split. Additionally, in September 1995 the following transactions occurred: The Company satisfied $10,000 of notes payable to an individual by issuing 5,000 shares of the Company's common stock. The Companys Board of Directors authorized the issuance of 50,000 shares of common stock to a vendor of the Company as payment for sales and marketing services. The Company recorded an expense of $77,340 in fiscal 1995 for the portion of the services provided in that year. The Companys Board of Directors authorized the issuance of 2,000 shares of common stock to a consultant of the Company as payment for marketing services. The Companys Board of Directors authorized the issuance of a total of 36,375 shares of common stock of the Company to employees of the Company. On September 28, 1995, the Company entered into an agreement with Enteractive, Inc., an interactive multimedia software publisher, to merge the Company into a wholly owned subsidiary of Enteractive. Per the agreement to merge the companies, the Company borrowed $250,000 from Enteractive at an interest rate of prime plus 2% to be used for working capital. On February 29, 1996, the merger was consummated with the Companys shareholders receiving 725,212 shares of common stock of Enteractive representing 13% of the combined companys outstanding shares. Of the shares received, 10%, or 72,521 shares will be held in escrow to be released subject to certain conditions. Upon consummation of the merger, the $250,000 loan became an inter-company payable. F-30 LYRIQ INTERNATIONAL CORPORATION STATEMENTS OF OPERATIONS
NINE MONTHS ENDED ------------------------- FEBRUARY 29, FEBRUARY 28, 1996 1995 ------------ ------------ (UNAUDITED) Product revenues.................................. $ 517,444 $ 607,760 Product development revenue....................... 121,000 125,487 Royalty and other revenue......................... 223,961 303,053 ---------- --------- Total revenues.................................. 862,405 1,036,300 Cost of product revenues.......................... 182,104 232,488 Cost of product development revenue............... 131,020 119,571 Research and development expenses................. 386,887 234,260 Marketing and selling expenses.................... 360,114 285,775 General and administrative expenses............... 154,291 114,667 ---------- --------- Total costs and expenses........................ 1,214,416 986,761 Operating (loss) income........................... (352,011) 49,539 ---------- --------- Other income (expense): Interest expense................................ (32,632) (1,950) Other........................................... 1,741 (997) ---------- --------- Net (loss) income................................. $ (382,902) $ 46,592 ========== =========
See accompanying notes to financial statements. F-31 LYRIQ INTERNATIONAL CORPORATION STATEMENTS OF STOCKHOLDERS' DEFICIT NINE MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED)
COMMON STOCK ----------------- SHARES AMOUNT ACCUMULATED DEFICIT TOTAL ------- --------- ------------------- --------- Balance, June 30, 1995....... 895,525 $ 101,000 $ (232,492) $(131,492) Shares issued upon conversion of debt..................... 5,000 10,000 -- 10,000 Stock issued as payment for services.................... 52,000 105,000 -- 105,000 Stock issued to employees.... 36,375 72,750 -- 72,750 Net loss..................... -- -- (382,902) (382,902) ------- --------- ---------- --------- Balance, February 29, 1996... 988,900 $ 288,750 $ (615,394) $(326,644) ======= ========= ========== =========
See accompanying notes to financial statements. F-32 LYRIQ INTERNATIONAL CORPORATION STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED ------------------------- FEBRUARY 29, FEBRUARY 28, 1996 1995 ------------ ------------ (UNAUDITED) Cash flows from operating activities Net (loss) income.................................. $(382,902) $ 46,592 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................... 10,223 14,656 Loss on disposal of assets....................... -- 1,802 Common stock issued for services................. 105,000 -- Stock compensation expense....................... 72,750 -- Changes in assets and liabilities: Accounts receivable.............................. (188,398) (171,007) Inventories...................................... (16,110) (70,903) Prepaid expenses and other....................... 9,323 (17,737) Accounts payable................................. (6,026) 129,689 Accrued expenses................................. (12,472) 45,048 --------- --------- Net cash used in operating activities.......... (408,612) (21,860) --------- --------- Cash flows from investing activities Purchases of property and equipment.............. (16,301) -- --------- --------- Net cash used in investing activities.......... (16,301) -- --------- --------- Cash flows from financing activities Short-term borrowings.............................. 422,025 56,193 Proceeds from (repayment of) shareholder loans..... 5,757 (27,726) --------- --------- Net cash provided by financing activities...... 427,782 28,467 Net increase (decrease) in cash and equivalents................................... 2,869 6,607 Cash Beginning of period................................ 8,638 24,200 --------- --------- End of period...................................... $ 11,507 $ 30,807 ========= =========
See accompanying notes to financial statements. F-33 LYRIQ INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 (UNAUDITED) 1. GENERAL In the opinion of management the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring entries) necessary to present fairly the Company's financial position as of February 29, 1996 and the results of its operations and its cash flows for the nine months ended February 29, 1996 and February 28, 1995. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The interim financial statements should be read in conjunction with the Company's June 30, 1995 audited financial statements and related notes. The results for the nine month period ended February 29, 1996 are not necessarily indicative of the results to be obtained for the full year. 2. BUSINESS Lyriq International Corporation (the Company) was founded in December 1991 and is primarily engaged in the development of interactive multimedia titles for the home education and recreation markets. The Company is currently developing software for the CD-ROM platform as well as the Internet and commercial on-line services. 3. REVENUE RECOGNITION Revenue from product sales is recognized upon shipment, provided no significant vendor obligations remain and collection of the resulting receivable is deemed probable. Royalty revenue is recognized when earned. The Company's agreements with certain product distributors and retailers permit them to exchange or return products for which the Company provides an allowance. 4. STOCKHOLDERS DEFICIT In September 1995, the Company's Board of Directors authorized an increase in the number of authorized shares of common stock, without par value, from 3,000 to 1,250,000. On September 1, 1995, the Board of Directors authorized a 422.75 to 1 stock split which resulted in the issuance of 893,407 shares of common stock of the Company. All references to the number of shares of common stock of the Company and to stock option data reflect the stock split. Additionally, in September 1995 the following transactions occurred: The Company satisfied $10,000 of notes payable to an individual by issuing 5,000 shares of the Company's common stock. The Company's Board of Directors authorized the issuance of 50,000 shares of common stock to a vendor of the Company as payment for sales and marketing services. The Company recorded an expense of $77,340 in fiscal 1995 for the portion of the services provided in that year. The Company's Board of Directors authorized the issuance of 2,000 shares of common stock to a consultant of the Company as payment for marketing services. The Company's Board of Directors authorized the issuance of a total of 36,375 shares of common stock of the Company to employees of the Company. F-34 LYRIQ INTERNATIONAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. MERGER On February 29, 1996, the Company completed its merger with Enteractive, Inc., a developer and publisher of interactive multimedia software, pursuant to an Agreement and Plan of Merger, whereby the Company was merged into a wholly-owned subsidiary of Enteractive. The merger was accounted for under the purchase method of accounting and, accordingly, the net assets and operations of the Company are included in Enteractive's consolidated financial statements beginning on February 29, 1996. As consideration for this transaction, the shareholders of the Company were issued a total of 725,212 shares of common stock of Enteractive. F-35 PRO FORMA FINANCIAL INFORMATION ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) The following pro forma combined statement of operations (unaudited) combines, on a purchase basis of accounting, the statement of operations of Enteractive for the nine months ended February 29, 1996 (unaudited) with the statement of operations of Lyriq for the nine months ended February 29, 1996 (unaudited). The pro forma combined statement of operations gives effect to the acquisition of Lyriq as if it had occurred on June 1, 1995. The pro forma combined statement of operations is not necessarily indicative of future operating results and should not be used as a forecast of future operations of Enteractive and Lyriq as an Enteractive subsidiary. This pro forma statement should be read in conjunction with the notes to the pro forma combined financial statements and the historical financial statements of both companies included elsewhere herein. F-36 ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL CORPORATION PROFORMA STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED FEBRUARY 29, 1996 PRO FORMA NINE MONTHS ENDED LYRIQ ADJUSTMENTS FEBRUARY 29, 1996 INTERNATIONAL ---------------------- PRO FORMA ENTERACTIVE, INC. CORPORATION DEBIT CREDIT COMBINED ----------------- ----------------- -------- ---------- ----------- Product sales........... $ 324,800 $ 517,400 $ 842,200 Product development revenue................ 257,700 121,000 378,700 Royalty and other revenue................ 103,300 224,000 327,300 ----------- ---------- ----------- Total revenues........ 685,800 862,400 1,548,200 Cost of product revenues............... 77,600 182,100 214,000(b) 473,700 Cost of development revenue................ 225,500 131,000 356,500 Research and development expenses............... 2,301,500 386,900 2,688,400 Marketing and selling expenses............... 1,354,700 360,100 1,714,800 General and administrative expenses............... 1,246,900 154,300 1,401,200 Acquired in-process technology............. 1,915,100 -- 1,915,100(a) -- ----------- ---------- -------- ---------- ----------- Total costs and expenses............. 7,121,300 1,214,400 214,000 1,915,100 6,634,600 Operating loss.......... (6,435,500) (352,000) 214,000 1,915,100 (5,086,400) ----------- ---------- -------- ---------- ----------- Other income (expense): Interest expense...... (58,200) (32,600) (90,800) Interest income....... 110,000 -- 110,000 Other................. 4,900 1,700 6,600 ----------- ---------- ----------- Loss before income taxes.................. (6,378,800) (382,900) 214,000 1,915,100 (5,060,600) ----------- ---------- -------- ---------- ----------- Net loss................ $(6,378,800) $ (382,900) $214,000 $1,915,100 $(5,060,600) =========== ========== ======== ========== =========== Loss per common share... $ (0.92) =========== Weighted average shares of common stock........ (c) 5,500,701 ===========
See notes to pro forma combined financial statements. F-37 PRO FORMA FINANCIAL INFORMATION ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) The following pro forma combined statement of operations (unaudited) combines, on a purchase basis of accounting, the statement of operations of Enteractive for the year ended May 31, 1995 with the statement of operations of Lyriq for the year ended June 30, 1995. The pro forma combined statement of operations gives effect to the acquisition of Lyriq as if it had occurred at the beginning of the year. The pro forma combined statement of operations is not necessarily indicative of future operating results and should not be used as a forecast of future operations of Enteractive and Lyriq as an Enteractive subsidiary. This pro forma statement should be read in conjunction with the notes to the pro forma combined financial statements and the historical financial statements of both companies included elsewhere herein. F-38 ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL CORPORATION PROFORMA STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED JUNE 30, 1995 PRO FORMA YEAR ENDED LYRIQ ADJUSTMENTS MAY 31, 1995 INTERNATIONAL ----------------- PRO FORMA ENTERACTIVE, INC. CORPORATION DEBIT CREDIT COMBINED ----------------- ------------- ------- ------ ----------- Product sales........... $ -- $ 617,500 $ 617,500 Product development revenue................ 365,600 162,100 527,700 Royalty and other revenue................ 3,500 464,900 468,400 ----------- ---------- ------- --- ----------- Total revenues........ 369,100 1,244,500 1,613,600 Cost of product revenues............... -- 250,900 428,000(b) 678,900 Cost of development revenue................ 285,600 185,200 470,800 Research and development expenses............... 2,487,600 342,500 2,830,100 Marketing and selling expenses............... 521,500 431,100 952,600 General and administrative expenses............... 1,044,200 254,900 1,299,100 ----------- ---------- ------- --- ----------- Total costs and expenses............. 4,338,900 1,464,600 428,000 6,231,500 Operating loss.......... (3,969,800) (220,100) 428,000 (4,617,900) ----------- ---------- ------- --- ----------- Other income (expense): Interest expense...... (252,900) (10,000) (262,900) Interest income....... 214,300 -- 214,300 Other................. 11,000 (800) 10,200 ----------- ---------- ------- --- ----------- Loss before income taxes.................. (3,997,400) (230,900) 428,000 (4,656,300) ----------- ---------- ------- --- ----------- Provision for income taxes.................. -- 600 600 Net loss................ $(3,997,400) $ (231,500) 428,000 $(4,656,900) =========== ========== ======= === =========== Loss per common share... $ (0.93) =========== Weighted average shares of common stock........ (c) 5,001,120 ===========
See notes to pro forma combined financial statements. F-39 ENTERACTIVE, INC. AND LYRIQ INTERNATIONAL CORPORATION NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The acquisition of Lyriq is accounted for as a purchase and, in accordance with generally accepted accounting principles, Enteractive's purchase price is allocated to the assets and liabilities of Lyriq based on their fair values at the date of the acquisition. 2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS The pro forma combined financial statements of Enteractive and Lyriq give effect to the following pro forma adjustments and assumptions: a. This adjustment records the acquisition of Lyriq as described elsewhere herein with the purchase price determined as follows: 725,212 shares of Enteractive common stock @ $4.00 per share.. $2,900,848 Excess of fair value of liabilities assumed over assets acquired of Lyriq............................................ 247,050 Acquisition costs............................................. 52,102 ---------- Total..................................................... $3,200,000 ========== The acquisition price was allocated as follows: In-process research and development expense................. $1,915,156 Capitalized software........................................ 1,284,844 ---------- Total..................................................... $3,200,000 ==========
The Company recorded an expense of $1,915,100 on February 29, 1996 for the acquired in-process research and development that will be used in the development of additional titles in the future. As this charge will not have a continuing impact, it has been eliminated from the pro forma statements of operations. The statement of operations charge equaled the estimated current fair value of the future related cash flows to be derived from specifically identified technologies (discounted at a risk-adjusted rate of 30%) for which technological feasibility had not yet been established pursuant to SFAS No. 86 (consistent with management's definition of internally developed software) and the technologies have no alternative future use. b. Records amortization of acquired capitalized software over three years, as if the acquisition had taken place at the beginning of the period. c. Reflects weighted average shares of Enteractive for the period (4,775,489 for the nine months ended February 29, 1996 and 4,275,908 for the year ended May 31, 1995, plus 725,212 shares of Enteractive common stock issued to Lyriq.) F-40 No dealer, salesman or any other person is authorized to give any information or to make any representations in connection with this offering not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any other person. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the Securities offered by this Prospectus or an offer by any person in any jurisdiction where such an offer or solicitation is not authorized or is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that information herein is correct as of any time subsequent to its date. TABLE OF CONTENTS Page ---- Incorporation of Certain Documents By Reference......................................... 2 Available Information.................................. 2 The Company............................................ 3 Recent Developments................................... 4 Summary Financial Information......................... 5 Risk Factors.......................................... 7 Use of Proceeds........................................ 13 Dilution............................................... 13 Dividend Policy........................................ 14 Transfer Agent, Warrant Agent and Register............. 15 Plan of Distribution................................... 15 Legal Matters.......................................... 15 Experts................................................ 15 Financial Statements................................... F-1 ENTERACTIVE, INC. 5,461,468 Shares of Common Stock PROSPECTUS June ___, 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated costs and expenses to be borne by the Company in connection with the offering described in the Registration Statement, other than underwriting commissions and discounts.
Registration Fee............................................................ $9,309.76 National Association of Securities Dealers, Inc. Fee........................ 3,102.00 Nasdaq SmallCap Market and The Boston Stock Exchange Filing Fee............. 27,500.00 Legal Fees and Expenses..................................................... 100,000.00 Accounting Fees and Expenses................................................ 50,000.00 Printing and Engraving Expenses............................................. 60,000.00 Blue Sky Fees and Expenses.................................................. 25,000.00 Transfer Agent's and Registrar's Fees....................................... 5,000.00 Miscellaneous Expenses...................................................... 20,088.24 --------------- Total...............................................................$300,000.00 ===============
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Except as hereinafter set forth, there is no statute, charter provision, by-law, contract or other arrangement under which any controlling person, director or officer of Enteractive, Inc. ("Company") is insured or indemnified in any manner against liability which he may incur in his capacity as such. The Certificate of Incorporation, as amended ("Certificate of Incorporation"), of the Company provides that the Company shall indemnify to the fullest extent permitted by Delaware law any person whom it may indemnify thereunder, including directors, officers, employees and agents of the Company. The pertinent section of Delaware law is set forth below in full. Such indemnification (other than as ordered by a court) shall be made by the Company only upon a determination that indemnification is proper in the circumstances because the individual met the applicable standard of conduct. Advances for such indemnification may be made pending such determination. Such determination shall be made by a majority vote of a quorum consisting of disinterested directors, or by independent legal counsel or by the stockholders. In addition, the Certificate of Incorporation provides for the elimination, to the extent permitted by Delaware law, of personal liability of directors to the Company and its stockholders for monetary damages for breach of fiduciary duty as directors. The Company obtained a directors and officers insurance and company reimbursement policy in the amount of $1,000,000. The policy insures directors and officers against unindemnified loss arising from certain wrongful acts in their capacities and would reimburse the Company for such loss for which the Company has lawfully indemnified the directors and officers. See the second and third paragraphs of Item 28 below for information regarding the position of the Securities and Exchange Commission with respect to the effect of any indemnification for liabilities arising under the Securities Act of 1933, as amended ("Securities Act"). Section 145 of the General Corporation Law provides as follows: (a) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than action by or in the right of the corporation) by reason of the fact II-1 that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this section. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request II-2 of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to any employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Company has also agreed to indemnify each director and executive officer pursuant to an Indemnification Agreement with each such director and executive officer from and against any and all expenses, losses, claims, damages and liability incurred by such director or executive officer for or as a result of action taken or not taken while such director or executive officer was acting in his capacity as a director, officer, employee or agent of the Company. Item 16. EXHIBITS
Exhibit No. ***1 Form of Underwriting Agreement by and among the Company and GKN Securities Corp. (the "Underwriter.") **4.1 Form of Common Stock Certificate. **4.2 Form of warrant, as amended, issued in connection with January 1994 Private Placement. **4.3 Form of warrant issued in connection with May 1994 Private Placement. **4.5 Shareholders Agreement dated as of August 31, 1994, by and among the Company, Andrew Gyenes, John Ramo, Jolie Barbiere, Zenon Slawinski and Michael Alford. **4.6 Form of IPO Warrant Certificate. **4.7 Form of Unit Purchase Option granted to GKN Securities Corp. (the "Underwriter"). **4.8 Warrant Agreement between Continental Stock Transfer and Trust Company and the Company. ***4.9 Form of Common Stock Purchase Option granted to the Underwriter. ***5 Opinion of Olshan Grundman Frome & Rosenzweig LLP. *23.1 Consent of KPMG Peat Marwick LLP. ***23.2 Consent of Olshan Grundman Frome & Rosenzweig LLP, included in Exhibit 5.
II-3 ______________________ * Filed herewith ** Incorporated herein by reference to the Company's Registration Statement on Form SB-2 [(Registration No. 33-83694)] *** Previously Filed Item 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of an action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective. (c) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Post-Effective Amendment No. 1 on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on the 28th day of June, 1996. ENTERACTIVE, INC. By: /s/ Andrew Gyenes ------------------ Name: Andrew Gyenes Title: Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Name Title Date - --------------------- -------------------------------------------- ------------------- /s/ Andrew Gyenes Chairman of the Board and Chief Executive June 28, 1996 - ----------------- Officer (Principal Executive Officer) Andrew Gyenes * President, Chief Operating Officer and Director June 28, 1996 - ------------------- John Ramo * Vice President for Creative Development and June 28, 1996 - ------------------- Director Jolie Barbiere * Vice President for Development and Director June 28, 1996 - ------------------- Michael Alford * Director June 28, 1996 - ------------------- Peter Gyenes * Director June 28, 1996 - ------------------- Harrison Weaver * Director June 28, 1996 - ------------------- Rino Bergonzi * Vice President, Chief Financial Officer June 28, 1996 - ------------------- (Principal Financial Officer and Principal Kenneth Gruber Accounting Officer) and Secretary /s/ Andrew Gyenes - ------------------- *By: Andrew Gyenes, Attorney-in-Fact
II-5 EX-23 2 ACCOUNTANTS CONSENT Independent Auditors' Consent The Board of Directors Enteractive, Inc.: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. Our report, related to the financial statements for Enteractive, Inc., refers to a change in the method of accounting for income taxes. /s/ KPMG Peat Marwick LLP ------------------------- KPMG PEAT MARWICK LLP Jericho, New York June 27, 1996 -----END PRIVACY-ENHANCED MESSAGE-----