-----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, HoJAXzEDMdoq/HCfNjY984griitkCEib1cNKjyJux8KQ1wxBZ+YNxW3g9iyHQ5Xe mZx5dJ5nDukKQeGZ8UYyOw== 0000921895-98-000392.txt : 19980508 0000921895-98-000392.hdr.sgml : 19980508 ACCESSION NUMBER: 0000921895-98-000392 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19980507 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: 10KSB/A SEC ACT: SEC FILE NUMBER: 001-13360 FILM NUMBER: 98612336 BUSINESS ADDRESS: STREET 1: 110 W 40TH ST STE 2100 CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2122216559 MAIL ADDRESS: STREET 1: 110 W 40TH ST STE 210 CITY: NEW YORK STATE: NY ZIP: 10018 10KSB/A 1 FORM 10KSB/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSBA ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File Number: May 31, 1997 1-13360 Enteractive, Inc. (Name of Small Business Issuer as Specified in its Charter) Delaware 22-3272662 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 110 West 40th Street, Suite 2100 New York, NY 10018 (Address of principal executive offices) (Zip Code) (212) 221-6559 (Issuer's telephone number, including area code) Securities Registered pursuant to Section 12(b) of the Exchange Act: Common Stock and Warrants to purchase Common Stock, par value $.01 per share Securities Registered pursuant to Section 12(g)of the Exchange Act: None Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ] Revenues for the Fiscal year ended May 31, 1997 were $1,655,700 The aggregate market value of the voting stock held by non - affiliates of the Registrant, based upon the closing price of the Common Stock on August 25, 1997, was approximately $7,949,496. As of August 25, 1997, the Registrant had outstanding 7,679,441 shares of Common Stock. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Item 1 Financial Statements Independent Auditors' Report 3 Consolidated Balance Sheets at May 31, 1997 and May 31, 1996 4 Consolidated Statements of Operations for the years ended May 31, 1997 and 1996 5 Consolidated Statements of Stockholders' Equity at May 31, 1997 and May 31, 1996 6 Consolidated Statements of Cash Flows for the years ended May 31, 1997 and 1996 7 Notes to Financial Statements 8 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Consent of Independent Auditors 22 SIGNATURES 23 Independent Auditors' Report The Board of Directors and Stockholders Enteractive, Inc. and subsidiaries: We have audited the accompanying consolidated balance sheets of Enteractive, Inc. and subsidiaries as of May 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Enteractive, Inc. and subsidiaries as of May 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in note 8 to the consolidated financial statements, the Company has restated its fiscal 1997 net loss per common share calculation to comply with a Securities and Exchange Commission Staff position announced in 1997 on accounting for convertible securities having beneficial conversion features. KPMG PEAT MARWICK LLP New York, New York August 27, 1997, except as to the last paragraph of note 8, which is as of April 17, 1998 3 ENTERACTIVE INC. and Subsidiaries Consolidated Balance Sheets
May 31 May 31 1997 1996 ----------------- ----------------- ASSETS Current Assets Cash and cash equivalents $ 4,952,900 $ 6,005,400 Accounts receivable, net 224,400 147,400 Income taxes receivable - 16,400 Assets held for sale 100,000 - Inventories - 439,500 Prepaid expenses and other 93,800 10,200 ----------------- ----------------- Total current assets 5,371,100 6,618,900 Capitalized software - 1,070,600 Affiliation rights, net 593,800 - Property and equipment, net 154,900 231,300 Other 61,500 24,200 ----------------- ----------------- $ 6,181,300 $ 7,945,000 ----------------- ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 287,900 $ 1,404,300 Accrued expenses 623,900 895,300 Deferred revenue 69,500 - Current maturities of long-term debt 40,200 498,900 ----------------- ----------------- Total current liabilities 1,021,500 2,798,500 Long-term debt, excluding current maturities - 167,800 ----------------- ----------------- Total liabilities 1,021,500 2,966,300 ----------------- ----------------- Commitments and contingencies Stockholders' Equity Preferred stock, $.01 par value, 2,000,000 shares authorized; 6,720 and no shares issued and outstanding at May 31, 1997 and 1996, respectively 100 - Common stock, $.01 par value, 50,000,000 shares authorized; 7,679,441 and 7,656,435 shares issued and outstanding at May 31, 1997 and 1996, Respectively 76,800 76,600 Additional paid-in capital 28,038,400 19,620,900 Accumulated deficit (22,955,500) (14,718,800) ----------------- ----------------- Total stockholders' equity 5,159,800 4,978,700 ----------------- ----------------- $ 6,181,300 $ 7,945,000 ----------------- -----------------
See notes to consolidated financial statements. 4 ENTERACTIVE INC. and Subsidiaries Consolidated Statements of Operations
Year Ended Year Ended May 31, 1997 May 31, 1996 ---------------- ------------ Net product sales $ 922,500 $ 461,900 Product development revenue 40,700 257,700 Royalty revenue 692,500 133,600 --------------- -------------- Total revenues 1,655,700 853,200 --------------- -------------- Cost of product sales 901,600 286,000 Amortization and write-off of capitalized software 1,070,600 214,200 Cost of development revenue 37,000 225,500 Research and development expenses 2,554,200 3,295,000 Marketing and selling expenses 3,312,300 2,250,400 General and administrative expenses 2,230,500 1,509,800 Acquired in-process research and development - 2,293,500 Reorganization expenses - 431,300 --------------- -------------- Total costs and expenses 10,106,200 10,505,700 --------------- -------------- Operating loss (8,450,500) (9,652,500) Other income (expense): Interest expense (33,100) (98,500) Interest income 240,200 126,300 Amortization of debt discount and debt acquisition costs - (780,000) Other 6,700 0 --------------- -------------- Loss before income taxes (8,236,700) (10,404,700) Income tax benefit - - --------------- -------------- Net loss $ (8,236,700) $ (10,404,700) --------------- -------------- Preferred stock preferences (1997 restated - Note 8) (2,392,800) - Net loss to common shareholders (1997 restated - Note 8) $(10,629,500) $ (10,404,700) --------------- -------------- Loss per common and common equivalent share (1997 restated - Note 8) (1.38) $ (2.07) --------------- -------------- Weighted average shares of common stock $ 7,679,331 $ 5,022,573 =============== =============
See notes to consolidated financial statements. 5 ENTERACTIVE INC. and Subsidiaries Consolidated Statements of Stockholders' Equity Years ended May 31, 1997 and 1996
Additional Preferred Stock Common Stock Paid-In Accumulated Shares Amount Shares Amount Capital Deficit Total ------------------ -------------------------- ---------------- ------------ ----- Balance May 31, 1995 - $ - 4,775,489 $47,800 $8,130,300 $(4,314,100) $3,864,000 Issuance of common stock warrants - - - - 540,000 - 540,000 Stock options - consulting expense - - - - 37,000 - 37,000 Issuance of common stock to purchase Lyriq - - 725,212 7,200 2,893,600 - 2,900,800 Repurchase and retirement of Common stock - - (1,000,000) (10,000) (990,000) - (1,000,000) Conversion of convertible - - 740,734 7,400 2,242,600 - 2,250,000 promissory notes Sale of common stock, net - - 2,415,000 24,200 6,767,400 - 6,791,600 Net loss - - - - - (10,404,700) (10,404,700) ------------------------------------------------------------------------------------------------- Balance May 31, 1996 - - 7,656,435 76,600 19,620,900 (14,718,800) 4,978,700 Stock options exercised - - 23,006 200 73,500 - 73,700 Sale of convertible preferred stock 6,720 100 - - 7,869,000 - 7,869,100 Stock option consulting expense - - - - 475,000 - 475,000 Net loss - - - - - (8,236,700) (8,236,700) ------------------------------------------------------------------------------------------------- Balance May 31, 1997 6,720 $100 7,679,441 $76,800 $28,038,400 $(22,955,500) $5,159,800 -------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 6 Enteractive, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year Ended May 31, 1997 1996 -------------------------------------- Cash flows from Operating Activities Net Loss $ (8,236,700) $ (10,404,700) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 722,900 1,182,700 Acquired in-process research and development - 2,293,500 Write-off of capitalized software costs 642,400 - Stock option consulting expense 475,000 37,000 Changes in assets and liabilities, net of acquisition of Lyriq (1996) Accounts receivable (77,000) 22,300 Assets held for sale (100,000) - Income taxes receivable 16,400 13,700 Inventories 439,500 (276,000) Prepaid expenses and other (83,600) 46,200 Other assets (37,300) (2,700) Accounts payable (1,116,400) 765,400 Accrued expenses (271,400) (115,000) Deferred revenue 69,500 - ------------------------------------- Net cash used in operating activities (7,556,700) (6,437,600) ------------------------------------- Cash flows from investing activities Proceeds from sale of investments - 1,116,100 Cash acquired in Lyriq acquisition - 11,300 Purchase of affiliation rights (625,000) - Purchases of property and equipment (187,100) (65,600) ------------------------------------- Net cash (used in ) provided by investing activities (812,100) 1,061,800 ------------------------------------- Cash flows from financing activities Proceeds from exercise of stock options 73,700 - Proceeds from sale of common stock, net - 6,791,600 Issuance of convertible notes payable and warrants, net - 2,460,000 Repurchase and retirement of common stock - (333,300) Repayment of convertible notes payable - (450,000) Net proceeds from issuance of convertible preferred stock 7,869,100 - Principal payments under long-term debt (626,500) (15,200) Principal payments under capital lease obligations - (4,300) ------------------------------------- Net cash provided by financing activities 7,316,300 8,448,800 ------------------------------------- Net increase (decrease) in cash and cash equivalents (1,052,500) 3,073,000 Cash and cash equivalents Beginning of year 6,005,400 2,932,400 ------------------------------------- End of year $ 4,952,900 $ 6,005,400 =====================================
See notes to consolidated financial statements 7 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (1) Business and Related Matters Throughout fiscal 1997 Enteractive, Inc. (the "Company") designed, published and marketed interactive multimedia titles for the entertainment and recreation markets. On December 4, 1996 the Company signed multiple market affiliate agreements with USWeb Corporation and paid $625,000 for the right to operate USWeb affiliate offices in New York City, Long Island, Philadelphia, Baltimore, Stamford, CT and Bergen County and Newark, NJ, for a ten-year period. The operation, which will be doing business as USWeb Cornerstone, is intended to provide a full range of Internet and Intranet-based business solutions, including Web site design, hosting and management, design and implementation of database and e-commerce solutions, educational programs and Web-related strategic consulting and marketing. Revenues from this new business will commence in fiscal 1998. In August 1997 the Company entered into an agreement, which is subject to the satisfaction of certain closing conditions. The agreement provides that the Company will sell its inventory and certain accounts receivable existing at the date of the closing from its interactive multimedia publishing business to a third party. In addition the Company has assigned its distribution contracts with its domestic distributors to the third party and has entered into an exclusive license with the same party, which allows them to market the Company's interactive multimedia titles in North America for a minimum of two years. If the transaction is consummated the Company has been guaranteed the greater of $100,000 or 50% of the proceeds from the sale of the inventory in the 9 months following the closing and 50% of the accounts receivable balances collected within 24 months of closing. The Company will also receive royalties on sales of its products subsequent to liquidation of existing inventory of 15% for three years and 10% thereafter. The Company will also receive a 5% royalty from the sales of any new products the third party sells. The Company is evaluating the most appropriate manner to continue licensing its multimedia titles outside the United States. The Company does not believe that it will incur any significant ongoing costs associated with the domestic or international distribution of its multimedia titles. As a result, the Company wrote down its interactive multimedia business related assets (excluding certain retained receivables), which had a carrying value of $1,142,400 in the fourth quarter of fiscal 1997 to their estimated fair value of $100,000. These assets are classified as "assets held for sale" in the Company's May 31, 1997 balance sheet. The portion of the writedown related to inventory and capitalized software costs, amounting to $400,000 and $642,400 were included in cost of product sales and amortization and write off of capitalized software, respectively. The Company's new Internet and Intranet solutions services business is primarily in its development stage. The Company has commenced operations related to this new business in fiscal 1997, but has not generated revenue therefrom and there is no assurance of future revenues. The Company is subject to a number of risks that may impact its liquidity, including risks relating to generating sufficient revenue to cover operating and capital expenditures, reliance on key personnel, the ability to attract marketing, sales and technical personnel to achieve the Company's business plan and competition. As of May 31, 1997 the Company has cash and cash equivalents of $4,953,000 and working capital of $4,350,000, which with anticipated revenues the Company believes will be sufficient to meet its liquidity requirements for fiscal 1998. The Company may be required to raise additional capital to meet the Company's longer-term cash requirements for operations. In the event the Company does not generate sufficient revenues in fiscal 1998, management will modify the Company's business plan to delay or eliminate expansion plans and implement measures to significantly reduce operating expenditures planned in fiscal 1998. Such actions, if necessary, will enable the Company to remain liquid for the remainder of fiscal 1998. On February 29, 1996, the Company acquired Lyriq International Corporation ("Lyriq), a developer and publisher of interactive multimedia software, whereby Lyriq was merged into a wholly-owned subsidiary of the Company. The merger was accounted for under the purchase method of accounting and, accordingly, the net assets and operations of Lyriq are included in the Company's consolidated financial statements commencing February 29, 1996. 8 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (1) Business and Related Matters (continued)
The purchase price was determined as follows: 725,212 shares of Enteractive common stock at fair value ($4.00 per share) $2,900,848 Excess of fair value of liabilities assumed over assets acquired of Lyriq 625,400 Acquisition costs 52,102 ---------- Total $3,578,300 ==========
In connection with the acquisition, the Company recorded a $2,293,500 expense for purchased research and development and $1,284,800 of capitalized software which it originally planned to amortize on a straight-line basis over three years. Capitalized software at May 31, 1996 resulted from the Lyriq acquisition and is net of accumulated amortization of $214,200. Due to the Company's decision to discontinue directly selling its multimedia software products and based on the terms of the agreement entered into in August 1997 as described above, the remaining balance of the capitalized software of $642,400 was written off at May 31, 1997. The charge for purchased research and development equaled the estimated current fair value of the future related cash flows to be derived from specifically identified technologies (discounted at a risk-adjusted rate of 30%) for which technological feasibility had not yet been established pursuant to SFAS No. 86 (consistent with management's definition of internally developed software) and the technologies have no alternative future use. The following unaudited pro forma consolidated results of operations reflects the results of the Company's operations for the year ended May 31, 1996 as if the merger with Lyriq had occurred at the beginning of the year and reflect the historical results of operations of the purchased business adjusted for increased amortization expense and increased common shares outstanding from the acquisition. Total revenues $ 1,715,600 Net loss $(8,708,100) Net loss per share $ (1.57) The pro forma information does not necessarily indicate what would have occurred had the acquisition been consummated at the beginning of fiscal 1996, or of the results that may occur in the future. (2) Summary of Significant Accounting Policies (a) Consolidation Policy The consolidated financial statements include the accounts of Enteractive, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. (b) Cash and Cash Equivalents All highly liquid debt instruments with maturities of three months or less at the time of purchase are considered to be cash equivalents. Cash equivalents of $4,865,600 and $5,654,200 at May 31, 1997 and 1996, respectively, consist of cash held in interest-bearing money market accounts. (c) Revenue Recognition Revenue from product sales is recognized upon shipment, provided no significant vendor obligations remain and collection of the resulting receivable is deemed probable. Revenue under fixed priced development contracts is recognized using the percentage of completion method based on progress to date, which is measured by comparing costs to date to total estimated costs. Royalty revenue is recognized when earned. 9 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (2) Summary of Significant Accounting Policies (continued) The Company's agreements with certain product distributors and retailers permit them to exchange or return products for which the Company provides an allowance reflected as a reduction of accounts receivable in the accompanying balance sheets. The allowance for doubtful accounts and returns at May 31, 1997 and 1996 was $70,000 and $138,000, respectively. Provided that acceptance is probable, revenue from Internet and Intranet-based business solution services is recognized as services are rendered. Deferred revenue represents amounts billable or paid by the customer for which the related services were not provided at the balance sheet date. (d) Inventories Inventories of multimedia software and related components are recorded at the lower of cost (on a first-in, first-out basis) or market. (e) Affiliation Rights Fees for affiliation rights were paid to USWeb for the right to join the USWeb network and operate as an affiliate in the territories indicated in Note 1. The fee is being amortized over the 10-year life of the agreement with USWeb. Affiliation rights at May 31, 1997 were net of accumulated amortization of $31,200. (f) Property and Equipment Property and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method, except for leasehold improvements, which are amortized over the lesser of the lease term or the life of the related asset. (g) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Long-Lived Assets Statement of Financial Accounting Standards No. 121 ("SFAS No. 121") establishes accounting standards for the impairment of long lived assets, certain intangibles and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying value of the asset exceeds its fair value. (i) Software Development Costs Capitalization of costs associated with internally developed software begins upon the determination by the Company of a product's technological feasibility, as evidenced by a working model. Capitalized software development costs are amortized over related sales on a per-unit basis based on estimated total sales, with a minimum amortization based on a straight-line method over three years. 10 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (2) Summary of Significant Accounting Policies (continued) (j) Earnings Per Share Net loss per share for fiscal 1997 and 1996 is based on the weighted average number of shares of common stock outstanding, excluding common stock equivalents (common stock options and warrants and convertible preferred stock) since they are antidilutive. Statement of Financial Accounting Standards No. 128, "Earnings Per Share", is required to be adopted for interim and annual periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and restate all prior periods. Basic and diluted earnings per share will replace primary and fully diluted earnings per share. The dilutive effect of stock options and other common stock equivalents will be excluded from the calculation of basic earnings per share, but will be reflected in diluted earnings per share. The implementation of SFAS No. 128 would not have impacted earnings per share for fiscal 1997 due to the Company's net loss. However, it could have an impact in the future, depending on whether the Company has net income and the value of the Company's common stock. (l) Accounting for Stock-Based Compensation The Company records compensation expense for employee stock options only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. On June 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose the pro forma net earnings per share for employee stock option grants made beginning in fiscal 1996 as if such method had been used to account for stock-based compensation cost as described in SFAS No. 123. (k) Fair Value of Financial Instruments At May 31, 1997 and 1996, the fair value of the Company's cash and cash equivalents, accounts receivable, assets held for sale, accounts payable and accrued expenses approximate their carrying value in the consolidated financial statements due to the short maturity of those instruments. The book value of the Company's debt approximates fair value since the interest rate is prime based and accordingly is adjusted for market rate fluctuations. (l) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) Property and Equipment Property and equipment, at May 31, 1997 and 1996, consists of the following:
1997 1996 Useful Life ---- ---- ----------- Computer equipment $1,060,100 $ 873,200 3 years Furniture and other equipment 54,300 54,100 3-5 years Leasehold improvements 200,300 200,300 Lease Term --------------------------------- 1,314,700 1,127,600 Accumulated depreciation and amortization (1,159,800) (896,300) --------------------------------- Property and equipment, net $ 154,900 $ 231,300 =========== ==========
11 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (4) Reorganization and Related Accrued Expenses In July 1996, the Company reduced its Washington DC based work force by approximately 45%. This included the separation of the Company's President and a Vice-President. The total severance and other related costs of $431,300 is reflected as an accrued liability at May 31, 1996 since such costs related to fiscal 1996 and prior years. (5) Long-Term Debt Long-term debt at May 31, 1997 and 1996, consists of the following:
1997 1996 ---- ---- Notes payable in connection with the repurchase of 1,000,000 shares of common stock, which accrues interest at prime (8.50% at May 31, 1997) $ 40,200 $666,700 Less current maturities (40,200) (498,900) --------- ----------- Long-term debt, excluding current maturities $ - $167,800 ========= ===========
Interest costs of approximately $33,100 and $98,500 (including interest on bridge loans repaid in May 1996) were paid in fiscal 1997 and 1996, respectively. (6) Convertible Promissory Notes In January 1996, the Company consummated a $2,700,000 financing of 54 units; each consisting of a $50,000 unsecured convertible promissory note with interest at 10% and 10,000 warrants. Each warrant enables the holder to purchase one share of common stock at $4.00 per share. Debt acquisition costs totaled $240,000 and net proceeds to the Company were $2,460,000. The fair market value of the warrants was $540,000 at the time of issuance. Such amount was reflected as an increase in additional paid in capital and as a discount on the convertible promissory notes to be amortized over the term of the notes. Investors holding an aggregate of $2,250,000 of convertible promissory notes elected to convert their convertible promissory notes into 740,734 shares of the Company's common stock and 1,481,468 warrants at the closing of the May 1996 public offering (Note 7). The remaining $450,000 of convertible promissory notes were repaid at that time and the remaining debt discount was expensed. (7) Public Offering of Common Stock In May 1996, the Company sold 2,415,000 shares of the Company's common stock to the public at a price of $3.375 per share. Proceeds were approximately $6,791,600, net of related expenses of approximately $1,359,000. In connection with this sale the Company sold to the underwriter, for an aggregate of $100, the right to purchase 210,000 shares of common stock at a price of $3.71 per share through May 21, 2001. In connection with this right the underwriter received certain "piggyback" and demand registration rights. (8) Convertible Preferred Stock On December 12, 1996 the Company completed a private placement of 84 units each consisting of 80 shares of Class A Convertible Preferred Stock and 50,000 common stock purchase warrants to purchase in the aggregate 4,200,000 shares of common stock at an exercise price of $4.00 per share. Proceeds were approximately $7,869,100, net of related expenses of $531,000. The preferred stock has a stated value of $1,250 per share and each share is convertible at any time after April 30, 1998 into such whole number of shares of common stock equal to the aggregate stated value of the preferred stock to be converted divided by the lesser of (i) $2.00 or (ii) 50% of the average closing sale price for the common stock for the last ten trading days in the fiscal quarter of the Company prior to such conversion. The Company must use the proceeds, if any, derived from the exercise of the Company's currently outstanding public common stock warrants, which expire in October 1997, or 50% of the proceeds from any other equity financing to redeem the preferred stock at 110% of the stated value. The Company also has the option to redeem all, or any 12 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (8) Convertible Preferred Stock (continued) portion of on a pro rata basis, the preferred stock at any time upon 30 days prior written notice, at a redemption price equal to 110% of the stated value. The conversion rate of the convertible preferred stock (when calculated on the basis of dividing the stated value by $2.00 only) will be subject to adjustments to protect against dilution in the event of stock dividends, stock splits, combinations, subdivision and reclassifications. In a 1997 announcement, the staff of the Securities and exchange Commission ("SEC") indicated that when preferred stock is convertible at a discount from the then current common stock market price, the discounted amount reflects at that time an incremental yield, e.g. a "beneficial conversion feature", which should be recognized as a return to the preferred shareholders. Based on the market price of the Company's common stock and the fair value of the warrants on the date of issuance the Class A Preferred Stock had a non-cash beneficial conversion feature of $13,390,000. The beneficial conversion feature is recognized solely in the calculation of loss per common share over a 17 month period, beginning with the issuance of the preferred stock to April 30,1998 the first date that conversion can occur. As a result, the loss per common share for the year ended May 31, 1997 has been restated to reflect an increase of ($0.31) as a result of the SEC announcement. (9) Stock Options and Warrants During fiscal 1997 the Company's shareholders approved an amendment to the Company's 1994 Incentive and Stock Option Plan (the "Employee Plan") increasing the number of shares of common stock authorized for issuance upon exercise of the options granted pursuant to the plan to 2,500,000 from 1,500,000. The Company has also adopted the 1994 Stock Option Plan for Consultants and the 1995 Stock Option Plan for Directors and has reserved 1,000,000 and 150,000 shares, as amended, for issuance to consultants and non-employee directors, respectively. At May 31, 1997, 1,965,316 options have been granted and 534,684 are available for grant under the Employee Plan. Additionally, the Company periodically grants stock options outside the 1994 Plan to other parties. All stock options, which have been granted by the Company, with the exception of those options granted to persons holding more than ten percent of the voting common stock in the Company on the date of grant, expire up to ten years after grant and are issued at exercise prices which are not less than the fair value of the stock on the date of grant. Options granted to persons holding more than ten percent of the voting common stock of the Company on the date of grant expire five years after grant and are issued at exercise prices which are not less than 110 percent of the fair value of the stock on the date of grant. Stock options generally vest monthly in equal increments over the first three years after the date of grant. Payment for the exercise price of an option may be made with previously acquired common stock of the Company with certain limitations. In November 1994, a total of 250,000 options were granted to two consultants (one of which was a former director of the Company) under the 1994 Stock option plan for consultants for advisory services. The options are exercisable for 10 years from date of grant at an exercise price of $3.75. In fiscal 1997, the Company granted 400,000 options to a partnership, which provides consulting services to the Company. The options are exercisable for a three year period from the date of grant at an exercise price of $2.375. The expense related to the services is being recognized over the one-year vesting period. In addition, in fiscal 1997, 214,080 options were granted to various consultants at exercise prices ranging from $1.75 to $3.00. Each are exercisable for periods from five to ten years from the date of grant. The expense relating to the services is being recognized over the vesting periods which range from zero to one year. Total stock option compensation expense for fiscal 1997 and 1996 was $475,000 and $37,000, respectively. A total of 135,920 options remain available for grant under the consulting plan. 13 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (9) Stock Options and Warrants (continued) Under the 1995 Stock Option Plan for Outside Directors, each person who is an outside director on January 1 of each calendar year, commencing January 1, 1995, shall be granted 5,000 options to purchase shares of common stock of the Company. At May 31, 1997, 45,000 options have been granted under the 1995 Stock Option Plan for Outside Directors and 105,000 are available for grant. A summary of all stock option transactions of the Company is as follows:
Number of Price range Weighted average options per share average price ------- --------- ------------- Outstanding May 31, 1995 1,001,770 $1.71 - 4.00 Granted 190,000 $3.00 - 3.25 Exercised - Canceled (82,000) $3.00 - 4.00 -------- Outstanding at May 31, 1996 1,109,770 $1.71 - 3.75 Granted 2,202,580 $1.63 - 3.75 Exercised ( 23,006) $3.00 - 3.25 Canceled (155,954) - --------- Outstanding at May 31, 1997 3,133,390 $1.63 - 3.75 $ 2.53 ========= Exercisable at May 31, 1997 1,631,028 $1.63 - 3.75 $ 2.86 ========== ==================== ======
The options outstanding as of May 31, 1997 are summarized in ranges as follows:
Weighted Average Range of Exercise Price Weighted Average Exercise Price Number of Options Outstanding Remaining Life - ------------------------------- ----------------------------------- ------------------------------------ --------------------------- $1.63 - 2.70 $1.99 1,726,010 4 Years $2.71 - 3.75 $3.20 1,407,380 3 Years ------------------------------- 3,133,390 ===============================
The per share weighted-average fair value of stock options granted during fiscal 1997 and fiscal 1996 was $1.17 and $1.77, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1997 - expected dividend yield of 0%, risk free interest rate of 6%, expected stock volatility of 54%, and an expected option life of 5 years; 1996- expected dividend yield of 0%, risk free interest rate of 6%, expected stock volatility of 54%, and an expected option life of 5 years. The Company applies APB Opinion No. 25 in accounting for its stock options grants and, accordingly, no compensation cost has been recognized in the financial statements for its employee and director stock options which have an exercise price equal to or greater than the fair value of the stock on the date of the grant. Had the Company determined compensation costs based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss and net loss per common share would have been increased to the pro forma amounts indicated below. 14 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (9) Stock Options and Warrants (continued) 1997 1996 ---- ---- Net loss: As reported ($8,236,700) ($10,404,700) Pro forma ($8,664,100) ($10,537,700) Net loss per share: As reported ($1.07) ($2.07) Pro forma ($1.13) ($2.10) Pro forma net loss reflects only options granted in fiscal 1997 and fiscal 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to June 1, 1995 was not considered. At May 31, 1997, the Company had reserved, authorized and unissued common shares for the following purposes (excluding those for stock options and convertible preferred stock):
Exercise Price Shares of Common Stock Issuable Expiration ----------------------------------------------------- Warrants issued in connection with common stock offerings $4 5,121,468 October, 1997 Warrants issued in connection with the convertible preferred stock $4 4,200,000 December, 2001 offering Warrants issued with private placement $2.35 340,000 January, 1999 Unit purchase options for one warrant and one share of common stock $6.60 200,000 October, 1999 Warrants to be issued upon exercise of the unit purchase options $5.20 200,000 October, 1997 Stock purchase rights sold to underwriter $3.71 210,000 May, 2001 ============== Total 10,271,468 ==============
15 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (10) Income Taxes The actual income tax benefit for fiscal 1997 and 1996 differs from the "expected" income tax benefit, computed by applying the U.S. Federal corporate tax rate of 34 percent to loss before income taxes, as follows:
1997 1996 ---- ---- Computed "expected" tax benefit $(2,800,500) $(3,537,600) Increase (reduction) in income taxes resulting from: Non-deductible expenses 532,400 861,500 Increase in valuation allowance, primarily due to Federal net operating loss carryforwards 2,268,100 2,676,100 ------------------------------- Actual tax benefit - - ===============================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at May 31, 1997 and 1996, are as follows:
1997 1996 ---- ---- Deferred tax assets: Net operating loss carryforwards $6,076,800 $3,907,000 Allowance for doubtful accounts receivable and returns 23,800 46,900 Accrued expenses 25,800 49,600 Research and development credit carryforward 127,800 - Property and equipment depreciation 13,900 - Valuation allowance (6,268,100) (4,000,000) ---------------------------------------- Net deferred tax asset -- 3,500 Deferred tax liability - property and equipment, depreciation - 3,500 ---------------------------------------- Net deferred tax asset/liability $ - $ - ========================================
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. The Company believes that it is more likely than not that it will not be able to realize its deferred tax asset and has established a valuation allowance of $6,268,100 at May 31, 1997, based upon the provisions of Statement of Financial Accounting Standards No. 109, the Company's historical taxable losses and lack of offsetting objective evidence, the Company's projected taxable loss through May 31, 1998 and that management cannot currently determine whether the Company will generate taxable income during the remainder of the net operating loss carryforward period. At May 31, 1997, the Company had available approximately $17,873,000 of tax loss carryforwards, which expire in the years 2009 through 2012. The utilization of certain of these tax loss carryforwards is subject to annual limitations imposed by the Internal Revenue Code Section 382 due to the Company's various equity transactions. 16 ENTERACTIVE, INC. Notes to Consolidated Financial Statements May 31, 1997 (11) Employee Benefit Plan The Company sponsors an employee savings plan under Section 401(k) of the Internal Revenue Code (IRC) that covers substantially all employees of the Company who elect to participate on a voluntary basis. Participants may authorize salary deferral amounts under the plan up to 15 percent of their compensation limited to a maximum amount stipulated in the IRC. The plan also provides for a discretionary Company contribution, which is determined by the Board of Directors. No discretionary Company contributions were made during the years ended May 31, 1997 and 1996. (12) Commitments Rent expense for operating leases for 1997 and 1996 approximated $204,100 and $186,500, respectively. The Company leases office space under non-cancelable operating leases which expire at various times through 2002. Minimum future rentals by fiscal year for operating leases with noncancellable terms in excess of one year are as follows: 1998 - $353,840, 1999 - $332,445. 2000 - $332,445 2001 - $286,439 and 2002 - $268,940 (13) Business and Credit Concentrations In fiscal 1997 there were no customers that individually comprised more than 10% of revenue. In 1996 there were three such customers, amounting to 69% of revenue in the aggregate. (14) Repurchase and Retirement of Common Stock Simultaneously with the May 1996 closing of the secondary public offering of common stock (Note 7), the Company repurchased and retired an aggregate of 1,000,000 shares of common stock at $1.00 per share from certain of its officers. Under the purchase agreement as amended in August 1996 and again in January 1997 the Company paid all except $40,200 (Note 5) of the purchase price by May 31, 1997. 17 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion and analysis should be read in conjunction with the Consolidated financial Statements of Enteractive and Notes to the Consolidated Financial Statements included elsewhere in this Form 10-KSB. Overview Headquartered in New York, New York, the Company offers products and services to customers for the design, development, operation and maintenance of customer Intranets or sites on the Internet and World Wide Web and publishes multimedia titles to the home. Throughout the first half of fiscal 1997 the Company was primarily engaged in the development, publishing and marketing of multimedia interactive software with an emphasis on the CD-ROM platform. As a result of a rigorous review of the CD-ROM market, the Company's performance and the related risks of continuing to develop and market interactive multimedia titles, the Company concluded that it could capitalize on what the Company believes to be a vibrant market and upon its expertise in developing interactive multimedia products by redirecting its business to provide network and web-related solutions, products and services to businesses and other entities. The Company has become a member of US Web's network of independent affiliates. Pursuant to the Enteractive Affiliates Agreement, the Company is obligated to pay USWeb monthly royalty and service and marketing and advertising fees equal in the aggregate to 7% of Adjusted Gross Revenues from this business, as defined in the agreement, but not less than certain contractual fee minimums. On December 12, 1996, the Company received approximately $7,869,000 in net proceeds from the consummation of private placement whereby the Company issued Preferred Stock and granted Warrants. See "Liquidity and Capital Resources". In January 1997, as a result of agreements among the Company, certain former employees and GKN Securities Corp ("GKN"), the placement agent for the private placement and the Underwriter of the Company's public offerings, the Company repaid $475,800 of its long-term debt plus related accrued interest. See "Liquidity and Capital Resources". Recent Developments On August 15, 1997 the Company entered into an agreement with Enteractive Distribution Company, LLC ("EDC"), an unrelated company, which is subject to the satisfaction of certain closing conditions. Under the terms of the agreement EDC will acquire the inventory and certain accounts receivable existing at the date of the closing resulting from the Company's interactive multimedia publishing business. In addition the Company has assigned its domestic distribution contracts with its domestic distributors to EDC and has granted EDC an exclusive license to market the Company's interactive multimedia titles in North America for a minimum of two years. If the transaction is consummated, the Company has been guaranteed the greater of $100,000 or 50% of EDC's proceeds from the sale of the inventory in the 9 months following the closing and 50% of the accounts receivable balances collected by EDC within 24 months of closing. The Company will also receive royalties on sales of its products subsequent to liquidation of existing inventory of 15% for three years and 10% thereafter. EDC will also pay the Company a 5% royalty from the sales of any third party products it sells. The Company is evaluating the most appropriate manner to continue licensing its multimedia titles outside the United States. The Company does not believe that it will incur any significant ongoing costs associated with the domestic or international distribution of its multimedia titles. As a result of the Company's agreement with EDC, the Company wrote down the majority of its multimedia business related assets in the fourth quarter of fiscal 1997 to their estimated fair value of $100,000. These assets are classified as "assets held for sale" in the Company's May 31, 1997 balance sheet. Quarterly results The Company expects its quarterly results to vary significantly in the future. The number of customer contracts signed as well as the ability of the solutions to be readily implemented by the development staff significantly influence revenues. Further market acceptance of the Company's offerings is dependent on (1) the growth and utilization of the Internet as a medium for commerce, (2) the success of USWeb establishing and positioning the USWeb brand in the territories where the Company operates (3) the degree of market acceptance of the Company's offerings and (4) the success of offerings by competitors. The Company does not expect seasonal factors to be a significant influence on revenues. 18 Results of Operations - Years Ended May 31, 1997 and 1996 Beginning in February 1997 the Company incurred expenses to start the Internet services business. The costs from February through May were $1,385,000 and are allocated to the appropriate captions in the accompanying Consolidated Statements of Operations. By May 31, 1997 the Company was no longer developing or actively marketing its interactive multimedia titles. The fiscal 1997 results of operations include adjustments to the carrying value of inventory and accounts receivable and the write-off of previously capitalized software costs totaling $1,070,600. The Company recognized revenue of $922,500 and $461,900 in fiscal 1997 and fiscal 1996, respectively, from sales of its published titles through independent distributors, net of estimated returns and exchanges. Such amounts represent sales of titles published by the Company. The increase in revenues relates to higher volumes from more titles in the market in fiscal 1997 than fiscal 1996. Product development revenue was $40,700 and $257,700 in fiscal 1997 and fiscal 1996, respectively. This revenue decreased because the Company adopted a strategy in fiscal 1995 to develop titles for their own account and not for others. The Company completely fulfilled all open contracts by May 31, 1997. Royalty revenue was $692,500 and $133,600 in fiscal 1997 and fiscal 1996 respectively. The increase is due to higher levels of international licenses and royalties received from original equipment manufacturers that packaged the Company's products with their product offerings. Cost of product sales was $901,600 and $286,000 for fiscal 1997 and fiscal 1996, respectively. The increase is primarily due to an inventory write off of approximately $400,000 as a result of the Company's contract with EDC discussed above and to the higher unit sales in fiscal 1997. Cost of development revenue was $37,000 and $225,500 in fiscal 1997 and fiscal 1996, respectively. The decrease was due to the related decrease in product development revenue. Research and development expense was $2,554,200 and $3,295,000 in fiscal 1997 and fiscal 1996, respectively. The fiscal 1997 amount includes $287,000 related to the hiring of new development staff as well as training existing staff to support Internet development. Exclusive of the Internet services expenses the decrease in research and development is $1,027,800. This reflects the Company's decision to stop developing interactive multimedia titles. Marketing and selling expenses were $3,312,300 and $2,250,400 in fiscal 1997 and fiscal 1996, respectively. Marketing expense in fiscal 1997 includes $41,000 related to the Internet services business. The increase exclusive of the Internet services expenses of $1,020,900 reflects the increase in the number of titles the Company was marketing throughout the year as well as the Company's shift in fiscal 1997 to entertainment and recreational products, which required higher levels of marketing support to generate sales. General and administrative expenses were $2,230,500 and $1,509,800 for the fiscal 1997 and fiscal 1996, respectively. Exclusive of $1,057,000 of Internet services costs incurred in fiscal 1997, related to establishing and staffing five new offices for the Internet services business, general and administrative expenses are $1,173,500. This is $336,300 lower than fiscal 1996 as a result of the change in business strategy, which occurred in the second half of fiscal 1997. Interest expense was $33,100 and $98,500 in fiscal 1997 and fiscal 1996, respectively. Interest expense in fiscal 1997 related to the borrowing associated with the repurchase of Company common shares in May 1996, which was paid by May 31, 1997 except for $$40,200 due May 1998. The interest expense in fiscal 1996 primarily includes interest and other borrowing costs incurred in connection with the issuance of convertible notes, which were repaid in May 1996. Interest income was $240,200 and $126,300 in fiscal 1997 and 1996, respectively, due to interest earned on higher cash balances resulting from the public offering of common stock in May 1996 and the private placement of Preferred Stock in December 1996. 19 No income tax benefit was recorded in fiscal 1997 or 1996. The Company does not believe it will generate taxable income during the period ending May 31, 1998. Beyond such time, using the standards set forth in Financial Accounting Standard No. 109, management cannot currently determine whether the Company will generate taxable income during the period that the Company's net operating loss carry forward may be applied towards the Company's taxable income, if any. Accordingly, the Company has established a valuation allowance against its deferred tax asset. Liquidity and Capital Resources Since June 1, 1995, the Company's principal sources of capital have been as follows: (i) In a bridge financing consummated in January 1996, the Company received approximately $2,460,000 in net proceeds from the sale of convertible notes and warrants. Simultaneously with the closing on May 21, 1996 of the pubic offering described below, convertible notes with an aggregate principal of $2,250,000 were converted into 740,734 shares of Common Stock, while $450,000 of convertible notes were repaid. (ii) On May 21, 1996, the Company consummated a public offering by issuing 2,415,000 shares of Common Stock to the public. The net proceeds from this Offering were $6,791,600. (iii) On December 12, 1996 the Company completed a private placement of 84 units each consisting of 80 shares of Preferred Stock and 50,000 Common Stock Purchase Warrants to purchase in the aggregate 4,200,000 shares of common stock at an exercise price of $4.00 per share. Proceeds were approximately $7,869,000, net of related expenses of $531,000. The Preferred Stock has a stated value of $1,250 per share and each share is convertible at any time after April 30, 1998 into such whole number of shares of common stock equal to the aggregate stated value of the Preferred Stock to be converted divided by the lesser of (i) $2.00 or (ii) 50% of the average closing sale price for the common stock for the last ten trading days in the fiscal quarter of the Company prior to such conversion. The Company must use the proceeds, if any, derived from the exercise of the Company's currently outstanding public common stock warrants, which expire in October 1997, or 50% of the proceeds from any other equity financing, to redeem the Preferred Stock at 110% of the stated value. The Company also has the option to redeem the Preferred Stock at any time upon 30 days prior written notice, at a redemption price equal to 110% of the stated value. In May 1996 the Company consummated an agreement with certain of its officers pursuant to which the Company repurchased 1,000,000 shares of Common Stock at $1.00 per share. Under the purchase agreement as amended, the Company paid all but $40,200 of the purchase price by May 31, 1997. At May 31, 1997, the Company had cash and cash equivalents of $4,952,900. The decrease of $1,052,500 in cash and cash equivalents from May 31, 1996 reflects the funding of operating activities - $7,556,700, acquisition of the USWeb affiliation rights - $625,000, purchase of fixed assets - $187,100 and repayments of long-term debt - $626,500, partially offset by the private placement described above which yielded $7,869,100. The decrease in both accounts receivable and inventory are related to the Company's adjusting these balances to their net realizable value. Capital expenditures were $187,100 and $65,600 in fiscal 1997 and fiscal 1996. The Company expects capital expenditures in the fiscal year ending May 31, 1998 to be higher than both fiscal 1997 and 1996 principally as a result of the cost of acquiring the equipment required for the US Web affiliate field offices, web site hosting and development centers. The Company believes that its existing cash and cash equivalents and anticipated revenues will be sufficient to meet its liquidity and cash requirements for at least the next 12 months. However, these funds may not be sufficient to meet the Company's longer-term cash requirements for operations. Based on management's assessment of the future marketability of its titles and demand for Web related services, the Company may significantly alter the level of expenses both within the next 12 months and thereafter. 20 Forward looking statements This Form 10-KSB contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the ability of the Company to develop its products, the success of its USWeb Cornerstone subsidiary as well as general market conditions, competition and pricing. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-KSB will prove to be accurate. In light of significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Inflation The past and expected future impact of inflation on the financial statements is not significant. 21 Consent of Independent Auditors The Board of Directors Enteractive, Inc.: We consent to incorporation by reference in the Registration Statement (No. 333-06780) on Form S-3 and Registration Statements (No. 33-4038 and No. 33-97208) on Form S-8 of Enteractive, Inc. of our report dated August 27, 1997, except as to the last paragraph of Note 8 which is as of April 17, 1998, relating to the consolidated balance sheets of Enteractive, Inc. and subsidiaries as of May 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended, which report appears in the May 31, 1997 Annual Report on Form 10-KSB of Enteractive, Inc. The auditors' report indicates that the Company has restated its fiscal 1997 net loss per common share calculation to comply with a Securities and Exchange Commission Staff position announced in 1997 on accounting for convertible securities having beneficial conversion features. KPMG PEAT MARWICK LLP Jericho, New York May 4, 1998 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENTERACTIVE, INC. Date: April 30, 1998 By: Ken Gruber ---------- Ken Gruber Chief Financial Officer 23 -----END PRIVACY-ENHANCED MESSAGE-----