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1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number: 000-21898 INTERACTIVE INC. (Exact name of small business issuer as specified in its charter) South Dakota 46- 0408024 (state of incorporation or organization) (IRS Employer ID No) 204 N. Main, Humboldt, SD 57035 (Address of principal executive offices) (605) 363-5117 Issuer's telephone number N/A (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes . . . No .X. . APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes . . . No .X . . APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 3,265,976 shares at June 30, 1998 Transitional Small Business Disclosure Format (Check one): Yes No X 2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) INDEX TO FINANCIAL STATEMENTS Page ____ Balance Sheet as of June 30, 1998 3 Statements of Operations for Nine and Three Months Ended June 30, 1998 and 1997 4 Statement of Stockholders' Equity for Nine Months Ended June 30, 1998 5 Statements of Cash Flows for the Nine Months Ended June 30, 1998 and 1997 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART 2. OTHER INFORMATION Item 1. Legal Proceedings 1 1 Item 2. Changes in Securities 1 1 Item 3. Defaults Upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 1 1 Item 6. Exhibits and Reports on Form 8-K 11 3 INTERACTIVE INC. BALANCE SHEETS June 30, 1998 (Unaudited) ASSETS 9/30/97 _____________ CURRENT ASSETS Cash and cash equivalents $ 2,278 $ 1,165 Accounts receivable 4,089 10,418 Inventories 23,939 21,713 Prepaid expenses and other 800 800 _____________ ______________ Total current assets $ 31,106 $ 34,096 _____________ ______________ PROPERTY AND EQUIPMENT, at cost Land $ 1,962 $ 1,962 Building and improvements 84,962 84,962 Computer and office equipment 54,246 54,246 _____________ ______________ $ 141,170 $ 141,170 Less accumulated depreciation 88,282 77,032 _____________ ______________ $ 52,888 $ 64,138 _____________ ______________ OTHER ASSETS, at cost Cost $ 253,971 $ 253,971 Less accumulated amortization 247,010 244,526 _____________ ______________ $ 6,961 $ 9,445 _____________ ______________ $ 90,955 $ 107,679 _____________ ______________ _____________ ______________ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable, bank $ 0 $ 213,500 Notes payable, related parties 758,500 545,000 Current maturities of long-term debt 265,936 265,436 Accounts payable, trade 1,131,293 1,119,092 Accounts payable, trade, Torrey Pines Research, Inc. 296,297 296,297 Accrued expenses 196,151 244,526 _____________ _____________ Total current liabilities $ 2,648,177 $ 2,683,851 _____________ _____________ LONG-TERM DEBT $ 311,435 $ 265,436 Less current maturities (265,936) (265,436) _____________ _____________ $ 45,499 $ 0 _____________ _____________ STOCKHOLDERS' EQUITY Series A preferred stock, par value $.001 per share; authorized 5,000,000 shares; issued 113,901 shares $ 114 $ 114 Common stock, par value $.001 per share; authorized 10,000,000 shares: issued 3,265,976 3,266 3,191 Additional paid-in capital 6,834,594 6,834,594 Accumulated deficit (9,440,695) (9,414,071) _____________ _____________ $ (2,602,721) $ (2,576,172) _____________ _____________ $ 90,955 $ 107,679 _____________ _____________ _____________ _____________ See Notes to Financial Statements. 4 INTERACTIVE INC. STATEMENTS OF OPERATIONS Nine and Three Months Ended June 30, 1998 and 1997 (Unaudited) Nine months ended June 30, Three months ended June 30, __________________________ ___________________________ 1998 1997 1998 1997 __________ __________ __________ __________ Net Sales $ 49,523 $ 61,608 $ 9,746 $ 19,167 Cost of goods sold, exclusive of depreciation and amortization shown separately below 27,266 28,894 7,675 9,271 ___________ ___________ ___________ ___________ Gross profit $ 22,257 $ 32,714 $ 2,071 $ 9,896 ___________ ___________ ___________ ___________ Operating expenses Sales and Marketing $ 24,963 $ 50,983 $ (2,847) $ 10,618 Support and production (4,013) 3,850 (5,577) 1,009 General and administrative 9,537 9,176 3,653 1,803 Depreciation and amortization 13,734 77,833 4,578 25,924 ___________ ___________ ___________ ___________ $ 44,221 $ 141,842 $ (193) $ 39,354 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Operating Loss $ (21,964) $ (109,128) $ 2,264 $ (29,458) ___________ ___________ ___________ ___________ Nonoperating income (expense): Rental income 618 5,250 150 2,525 Interest expense (30,867) (30,510) (10,122) (10,460) Miscellaneous income 25,588 629 7,354 0 ___________ __________ ___________ __________ Nonoperating income (expense): $ (4,661) $ (24,631) $ (2,618) $ (7,935) ___________ __________ ___________ __________ Net loss $ (26,625) $(133,759) $ (354) $ (37,393) ___________ __________ ___________ __________ ___________ __________ ___________ __________ Loss per common and common equivalent share $ (0.01) $ (0.04) $ (0.00) $ (0.01) ___________ __________ ___________ __________ ___________ __________ ___________ __________ See Notes to Financial Statements 5 INTERACTIVE INC. STATEMENT OF STOCKHOLDERS' EQUITY Nine months ended June 30, 1998 (Unaudited) Retained Additional Earnings Capital Stock Issued Paid-in (Accumulated ____________________ Preferred Common Capital Deficit) _________ _________ ___________ ____________ Balance, September 30, 1997 $ 114 $ 3,191 $ 6,834,594 $(9,414,070) Issuance of common stock for services 75 Conversion of preferred stock to common stock Net loss (26,625) __________ _________ ____________ ____________ Balance, June 30, 1998 $ 114 $ 3,266 $ 6,834,594 $(9,440,695) __________ _________ ____________ ____________ __________ _________ ____________ ____________ See Notes to Financial Statements. 6 INTERACTIVE INC. STATEMENTS OF CASH FLOWS Nine Months Ended June 30, 1998 and 1997 (Unaudited) Nine months ended June 30, 1998 1997 ___________ ___________ CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (26,624) $ (134,024) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation and amortization 13,734 77,833 Issuance of common stock for services 75 5,576 Change in assets and liabilities; Decrease in receivables 6,329 12,470 Decrease (increase) in inventories (2,226) 16,698 Decrease in prepaid expenses and other 0 731 Increase in accounts payable, trade 12,200 4,551 (Decrease) in accounts payable Torrey Pines Research 0 (4,000) Increase (decrease) in accrued expenses (48,375) 24,830 ___________ ___________ Net cash (used in) operating activities $ (44,887) $ 4,665 ___________ ___________ CASH FLOW FROM FINANCING ACTIVITIES Proceeds from long term debt $ 46,000 $ 0 Principal payments on long term debt 0 (4,431) ___________ ___________ Net cash provided by financing activities $ 46,000 $ (4,431) ___________ ___________ Net increase in cash and cash equivalents $ 1,113 $ 234 CASH AND CASH EQUIVALENTS Beginning $ 1,165 $ 1,034 ___________ ___________ Ending $ 2,278 $ 1,268 ___________ ___________ ___________ ___________ See Notes to Financial Statements. 7 INTERACTIVE INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1. Interim Financial Statements The financial information presented has been prepared from the books and records without audit but, in the opinion of management, includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial information for the periods presented. The results of operations for the nine and three months ended June 30, 1998, are not necessarily indicative of the results expected for the entire year. Note 2. Income Taxes The Company adopted the Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes on October 1, 1993. Statement 109 requires that deferred taxes be recorded on a liability method and adjusted when new tax rates are enacted. There was no effect to the Company's financial statements as a result of adopting Statement 109. At June 30, 1998, the Company had a net operating loss carryforward for tax purposes of approximately $8,127,000. For financial reporting purposes, the operating loss carryforward is approximately $9,441,000, which represents the amount of future tax deductions for which a tax benefit has not been recognized in the financial statements. No deferred asset has been recorded for the benefit of the net operating loss or any other temporary differences as the related valuation allowance would be equal to the net deferred tax asset. Note 3. Loss Per Common and Common Equivalent Share The loss per common and common equivalent share has been computed using the weighted average of the number of shares outstanding for the nine and three months ended June, 1998 and 1997. The weighted number of common and common equivalent shares outstanding for the nine and three months ended June 30, 1998 and 1997 are 3,193,123, 3,130,059, 3,230,086, and 3,123,109, respectively. The loss per common and common equivalent share assuming full dilution is the same as the loss per common and common equivalent share since the convertible preferred stock, convertible notes and common stock options and warrants have not been included in the computation as their inclusion would be anti-dilutive. 8 Note 4. Stock Options and Warrants The Company has a plan to grant incentive stock options to employees and non- statutory stock options to other individuals who provide services to the Company. All options granted are at the discretion of the Board of Directors and vest with the option holder over a 36 or 48 month period of continuous service to the Company. The option price is to be established by the Board of Directors. The Company has 133,333 shares of common stock reserved for options as of June 30, 1998. The following details the stock options issued and outstanding as of June 30, 1998. Options Options Option Expi ration Issued Exercisable Price Year Ended _______ ___________ ______ __________ Incentive 9,334 9,334 $.25 200 1 Incentive 3,000 3,000 .25 2004 Incentive 4,500 2,538 .32 2005 Non-statutory 3,000 3,000 .25 2003 Non-statutory 18,000 18,000 .25 2004 Non-statutory 36,000 33,000 .25 2005 Non-statutory 10,000 5,616 .32 2 006 ______ ______ 93,334 65,274 ______ ______ The Company has issued common stock warrants to purchase shares of common stock at a set price. The following details the common stock warrants issued and outstanding as of June 30, 1998. Warrants Warrant Expiration Issued Price Date _________ _______ __________ Warrants for refinancing note 1,000,000 .50 6-30-99 Note 5. Bank Line of Credit The Company had a line-of-credit aggregating $213,500 from a bank. The line was at a variable interest rate of .75% over the banks commercial base rate (10.43% at March 31, 1998), with interest on the outstanding balance due monthly. The Company was unable to pay the principle or the monthly interest payments, but accrued the interest. The line was secured by substantially all of the assets of the Company. In May of 1998 the note was purchased from the bank by Robert Stahl, a related party. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources The Company is delinquent on its interest payments on its former bank line of credit, most of its subordinated long term notes, its leases and most of its trade accounts payable. The Company has several judgments against it and several more threatened as a result of its inability to pay its obligations to its unsecured trade creditors. The judgments are all from unsecured creditors which the Company is no longer using for ongoing operations and the Company does not intend to pay these unsecured debts until its obligations to its secured creditors are satisfied. The exposure to judgments could include all of the current liabilities, which total $2,648,177 at June 30, 1998. The company currently feels that the best possibility it has available to repay its secured and unsecured creditors and to return value to its stockholders is to continue to operate the Company and to work out long term payment plans if it is able to do so in the future. While the Company does not expect that it will be forced into bankruptcy by its secured or unsecured creditors, there can be no assurance that this will not happen because of the Company's inability to meet its obligations to its creditors. The Company believes that a liquidation of its assets would only satisfy a small portion of the Company's obligations to its secured creditors and provide nothing for the Company's unsecured creditors or its stockholders. The Company's inventory of SoundXchange hardware, which, as of June 30, 1998, accounted for approximately 76.9% of the Company's current assets, is liquid only to the extent of the Company's sales of such product. The Company has made minor engineering changes in the product in order to be aboe t9 utilize the inventory for newly developing markets and the Company hopes to continue to be able to do so in the future. Although, there can be not gurantee that this will increase sales of the SoundXchange hardware, the Company believes that an increase in sales will occur allowing the Company to recuce its inventory of the SoundXchange hardware at a profit. The Company was also unable to pay its auditor in order to have audited financial statements for years ended September 30, 1994, 1995, 1996 and 1997. The absence of audited financial statements may jeopardize the ability of the Company to continue as a reporting Company and may jeopardize the ability for the Company's stock to continue to trade on the OTC Bulletin Board. Results of Operations Revenue. Net sales for the nine months ended June 30, 1998 and 1997 were $49,500 and $61,600, respectively. Net sales for the first three quarters of 1998 were down primarily due to a reduction in slaes and marketing and a reduction in advertising expenditures. Gross Profit. The gross margin for th nine months ended June 30, 1998 was approximately 45% down from a gross margin of 53% for the nine months ended June 30, 1997. The decrease from the previous year is due primarily to a decrease in sales of the higher profit margin SounXchange Model K and Model T and an increase in sales of the SoundXchange Model VC with its relatively lower profit margin. Sales and marketing expenses. Sales and marketing expenses for the nine months ended June 30, 1998 and 1997 were $25,000 and $51,000, respectively. In the first thee quarters of fiscal 1998, the Company did not pursue advertising efforts similar in magnitude to those in 1997. The Company also reduced the number of sales and marketing employees from fiscal 1997 to fiscal 1998. 10 Research and development. There were no research and development expenses for the nine months ended June 30, 1998. The Company does not have any employees currently engaged in research, product development and engineering, but the Company currently has access, through a temporary consulting arrangement with Torrey Pines Research (TPR), the Company's former key research and development employees who are now employees of TPR. Although TPR is a stockholder of InterActive, and TPR has performed as a strategic partner in past development efforts of InterActive, there can be no assurance that TPR will continue to provide InterActive consulting service because of InterActive's current inability to pay for those consulting services. There were no amounts capitalized in connection with software development for the nine months ended June 30, 1998 and 1997. Software development amortization expense for the nine months ended June 30, 1998 and 1997 were $0 and $64,100, respectively. General and administrative. General and administrative expenses for the nine months ended June 30, 1998 and 1997 were $9,500 and $9,200, respectively. Depreciation and Amortization. Depreciation and amortization expenses for the nine months ended June 30, 1998 and 1997 were $13,700 and $77,800, respectively. The decrease in depreciation and amortization expense was due primarily to a one time write down of assets at fiscal year end 1997. Nonoperating Income (Expense). Nonoperating income (expense) for the nine months ended June 30, 1998 and 1997 were ($4,700) and ($24,600) respectively. The decrease in nonoperating expense was a result of income shown from recapture of inventory which was written down at September 30, 1997. Net Loss. The Company suffered a net loss for the nine months ended June 30, 1998 of $26,600 or $0.01 per share on 3,193,123 weighted average shares outstanding compared to a net loss for the nine months ended June 30, 1997 of $133,800 or $0.04 per share on 3,130,059 weighted average shares outstanding. The decrease in net loss was primarily a result of an agreement with the South Dakota Department of Revenue which reduced the use tax liability to the state. This liability was realized during the first nine months of fiscal 1997. Management believes that the largest challenges that the Company will continue to confront during 199 are to obtain adequate financing and in achieving its goal of positive cash flow and profitability. While the Company is optimistic about the possibility of its overcoming these challenges and achieving its goals, there can be no assurance that it will be able to achieve any or all of its objectives. 11 PART II OTHER INFORMATION Item 1. Legal Proceedings. The Company has several judgments against it and several more threatened as a result of its inability to pay its obligations to its unsecured trade creditors. The judgments are all from unsecured creditors which the Company is no longer using for on going operations and the Company does not intend to pay these unsecured debts until its obligations to its secured creditors are satisfied. The Company currently feels that the best possibility it has available to repay its secured and unsecured creditors and to return value to its stockholders is to continue to operate the Company and to work out long term payment plans if it is able to do so in the future. While the Company does not expect that it will be forced into bankruptcy by its secured or unsecured creditors, there can be no assurance that this will not happen because of the Company's inability to meet its obligations to its creditors. The Company believe that a liquidation of its assets would only satisfy a small portion of the company's obligations to its secured creditors and provide nothing for the Company's unsecured creditors or its stockholders. Item 2. Changes in Securities. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None (b) Reports on Form 8-K. None 12 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 7, 1998 INTERACTIVE INC. /s/ Robert Stahl _____________________ Robert Stahl President /s/ Gerard L. Kappenman _______________________ Gerard L. Kappenman Secretary