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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1997.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from .................to............................
Commission file number 000-21898
InterActive Inc.
(Name of small business issuer in its charter)
South Dakota 46-0408024
(State of incorporation) (I.R.S. Employer ID No.)
204 North Main
Humboldt, SD 57035
(605) 363-5117
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Units, each consisting of one share of Common Stock and one Redeemable
Common Stock Purchase Warrant
Common Stock, $.001 par value
Redeemable Common Stock Purchase Warrants
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 X No ___
Check if disclosure of delinquent filers in response to item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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].
Issuer's revenues for its most recent fiscal year $ 77,130.
As of September 30, 1997 there were 3,190,976 shares of the issuer's
common stock outstanding.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
InterActive Inc. ("InterActive" or the "Company") develops, manufactures
and markets, nationally and internationally, peripheral hardware products
which enable users to create and send voice messages across local area networks
and wide area networks of personal computers. During fiscal year 1995, these
products were introduced on the Internet and the products were enhanced to help
make them more appropriate for use on the Internet. During 1996, additional
enhancements were added to create a kiosk unit for use by banks and in
security systems.
The Company also manufactured and marketed regionally a line of IBM
compatible personal computers under the brand name "Powerhouse Computers".
The Company discontinued its Powerhouse Computer manufacturing and marketing
operations during fiscal 1995 because of the related financing problems, the
relatively unattractive profit margins and the ongoing losses associated with
the manufacture and marketing of this product line.
Business Development
The Company was originally incorporated as Kappenman Enterprises, Inc.,
in October 1989. The Company changed its name to InterActive Inc. in January
1991. From its organization until July 1991, the Company was primarily
involved in market research and in research and development of multimedia
hardware and software products. The Company introduced its M-Mail (Multimedia-
Mail) software product in July 1991, and its first SoundXchange business audio
hardware product in November 1992. From July 1991, the Company has divided its
resources and efforts between developing new products and marketing existing
products. The M-message product has become obsolete as the Company has not
had the resources to upgrade the product to be compatible with Windows 95.
On October 1, 1993, the Company purchased substantially all of the assets
of Powerhouse Computer Sales, Ltd., a privately held manufacturer of
"Powerhouse" brand computers, with sales concentrated in South Dakota. Since
such acquisition, the Company continued to manufacture, market and sell
Powerhouse computers through its Powerhouse division until mid fiscal 1995.
The primary purpose for the acquisition, however, was to acquire the
technological expertise in integrating various hardware and software
components necessary to manufacture and market the Company's "InterActive
Communicator" personal computer. The Company discontinued sales of its
InterActive Communicator product line during mid fiscal 1995 because of
financing problems. The Company believes that sales could increase in 1998
due to anticipated increases in sales of its SoundXchange products for use
over the Internet and for PC videoconferencing as well a result of increased
marketing focus on the SoundXchange Kiosk products.
Market for the Company's Products
The Company markets its SoundXchange products to large and small
businesses with existing local and wide area personal computer networks and
businesses which plan to connect existing personal computers into such a
network. The Company's management believes that the emerging CTI (Computer
Telephone Integrated) technologies will help stimulate future growth in the PC
business audio market and result in increased sales of its SoundXchange
hardware.
The Company also hopes to expand its marketing efforts for SoundXchange
hardware products for use with PC Videoconferencing, for computer telephone
use on the Internet and for kiosk use. According to Electronic Engineering
Times "...the packed house for a demonstration of real-time phone calls over
the Net signaled that big changes may lie ahead in how we communicate by
telephone." The Company's SoundXchange hardware is compatible with software
packages that are in use for these purposes.
The Company's Strategy
The Company's strategy is to offer easy to use and cost effective
communication products for use in home and business. Central to this strategy
is the Company's commitment to a continuing effort to enhance its existing
products, to reduce product manufacturing costs without sacrificing product
quality, and to enhance its communications products. The success of such
strategy, however, is dependent upon the acceptance of its communications
products in the home and the office environment. The Company is faced with
severe cash flow problems which limit the development and marketing of its
products.
The Company's Products
SoundXchange Hardware.
The Company's principal hardware product is the SoundXchange. Six
versions of SoundXchange are available. All six products use a telephone
hand-set/speakerphone attachment to permit users to record and play voice
messages on a personal computer, to communicate over the Internet or, when
used as a kiosk application to communicate with a remote location. Since the
SoundXchange incorporates a microphone and amplified speaker, along with a
hand-set, users are able to communicate or record or play back messages in a
"hands-free" mode, or, if privacy is desired, by speaking or listening
directly through the hand-set. The Company decided to base its audio hardware
products on this "speakerphone metaphor" believing that users are more
comfortable using the familiar speakerphone-like device in a business or home
environment than using stand-alone speakers, microphones or headsets, which
are typically used for voice input and output on a personal computer.
SoundXchange Model AX and IP are intended for users that currently have
audio boards, circuit boards which give a personal computer sound
capabilities, installed on their personal computers, or that prefer to use
third party audio board products. Several personal computer manufacturers,
including Compaq and IBM, currently sell personal computer systems with
built in audio capability. Additionally, a number of audio board upgrades
currently are available, such as those manufactured by Creative Technology.
The Model IP provides support for external stereo speakers while the Model AX
utilizes an internal amplified speaker for hands free use.
SoundXchange Models B and BX incorporate an audio board, making it
unnecessary for the user to purchase and install one separately. Both models
B and BX plug directly into the parallel port of a personal computer. The
SoundXchange Model B has a parallel port connector which permits continued
connection and use of a printer attached at the parallel port. The
SoundXchange Model BX is designed for network users who do not have a local
printer, and therefore it does not include such a connector. Both models are
designed to work with Windows 3.1 software applications that permit recording
of sound files utilizing object linking and embedding (OLE).
SoundXchange Model T is designed specifically for the emerging CTI and
desktop video conferencing markets. The Model T includes all of the features
of the SoundXchange Model AX and is optimized for use with digital signal
processing boards.
During 1996, a sixth version of the SoundXchange, the Model K was
developed for kiosk use by banks and security systems. SoundXchange Model K
is designed with a commercial style handset, armored cord and switch plate.
During 1997, the Company began to engineer models individually for specific
uses by companies involved in the banking and security industries.
Product Warranty and Support
The Company's SoundXchange products are sold with a 1-year warranty
covering parts and labor. When these products are sold by resellers, the
Company expects that the first level of support will be provided by the
resellers. Since the Company also sells its products directly to end-users,
it provides direct support to both its resellers and end-users of its products.
Manufacturing
To date, the Company has had its SoundXchange products manufactured by
Joinsoon Electronics Manufacturing, Ltd., a Taiwanese electronics
manufacturing firm that also is a stockholder of the Company. While there is
no formal agreement between the Company and Joinsoon, they have agreed that
the Company may periodically solicit competitive price quotes from other
manufacturers, and that the Company may produce its SoundXchange products
through other manufacturers if Joinsoon is unable or unwilling to reduce
manufacturing prices to meet any such price quotes within 90 days after having
been notified of such quotes.
The time between order and receipt of SoundXchange products has
historically ranged up to 120 days, depending upon the model and inventory
levels of key components at the Taiwanese manufacturer. The Company currently
has inventory levels sufficient to supply 120 days or more of anticipated
demand for each current model of the SoundXchange except Model T, Model IP,
and Model K. The SoundXchange Model T, IP and Model K orders are currently
being filled by modifying SoundXchange Model AX's. The SoundXchange Model IP
and Model K modifications are performed in house and the work on the Model T
is performed by a third party manufacturer. The time required for modifying
the Model AX's to produce Model T's is approximately 45 days and the Company
is currently having the work done on a per order basis. There can be no
assurance that the Company's operating results will not be adversely affected
in the future by a reduction or interruption in supply from third-party
contractors, particularly in light of the Company's cash flow problems.
While the Company has not historically experienced any significant level
of defective components or products, and it has generally been able to obtain
lower prices in response to competitive price reductions, its operating
results could be adversely affected in the future by the receipt of defective
components or products, its inability to obtain products in a timely fashion
because of problems with its suppliers related to its cash flow problems, an
increase in prices from suppliers, or the inability of the Company to obtain
lower prices in response to competitive price reductions.
Marketing and Distribution
The Company sells its SoundXchange peripherals products directly to
end-users, through independent dealers for resale to end users, and through
the Internet. The Company has agreements with two internet software companies
to bundle the SoundXchange with their software. There can be no assurance that
these agreements will result in substantial future sales.
Research and Development
In the fiscal years ended September 30, 1997 and 1996, there were no
research and development expenses. Software development costs for the fiscal
years ended September 30, 1997 and 1996 were $0 and $858 respectively. The
Company does not have any employees currently engaged in research, product
development and engineering, but the Company currently has access, through a
consulting agreement with Torrey Pines Research (TPR), to five of 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
services because of InterActive's current inability to pay for these
consulting services. The Company believes that modifications to the
Company's SoundXchange products is important to the long term viability of
such products and the future revenues of the Company.
Competition
There are a number of other companies which have developed and are now
marketing products which may be considered competitive with the Company's
SoundXchange products. These products include multimedia input/output
hardware and software from Creative Technology and Logitech. To date,
however, the Company is unaware of any other sound input/output device for the
personal computer currently on the market that uses a speakerphone style
device similar to that used in the InterActive SoundXchange.
Despite the Company's belief that its products are well positioned to
compete successfully in what it believes to be a growing market for home and
business-oriented multimedia communications, many other companies, both
domestic and foreign, with technical, marketing, and financial resources
considerably larger than the Company's, are capable of developing and
introducing products which are more directly competitive with the Company's
products. The Company will attempt to establish and maintain brand name
recognition and product demand through, whenever practical, creative
marketing, by maintaining competitive pricing, and by continuing to introduce
innovative products.
Proprietary Rights
The Company's ability to compete successfully will depend in part on its
ability to protect its proprietary know-how and technology, including its
proprietary software, its proprietary hardware and its know-how related to
audio-visual and personal computer technologies. The Company intends to rely
on a combination of copyright protection, trade secrets, patents, non-
disclosure agreements, and licensing agreements to protect its proprietary
rights. The Company has been awarded a U.S., a Chinese, and a Taiwanese
patent on its SoundXchange product. The Company intends to continue to file
patent applications covering its products as appropriate.
From time to time, the Company receives letters alleging the possible
infringement by the Company in its use of its products. The Company does not
believe that any such claims made to date will have any material adverse
impact on the Company's financial position or operations.
The laws of some foreign countries do not provide the same degree of
protection of proprietary rights as do the laws of the United States.
Therefore, there can be no assurance that any measures taken by the Company
will prove to be sufficient to prevent the unauthorized use of its technology
in such countries. Moreover, the Company believes that its success will
depend more upon its ability to respond to changing market demands through
continuing product refinement, the introduction of new products, and
development of effective marketing programs.
Major Customer
During fiscal 1997, the Company had two major customers who accounted for
23.7% and 9.8% of its sales respectively. Although there can be no assurance
that these customers will continue to purchase at this level, the Company
feels that the prospects that overall sales may increase which will make
dependence on these customers unnecessary.
Employees
As of September 30, 1997, the Company had no full time employees. The
Company has an agreement with an outside consultant engaged in finance and
administrative operations. The Company also has an agreement with an outside
sales representative who receives commission on salesand also is engaged in
administration. The Company does not currently have any employees engaged in
research, product development and engineering, but the Company does have
access, through a consulting agreement with Torrey Pines Research (TPR), to
five of the Company's former key research and development employees who are
now employees of TPR. Although TPR is a stockholder of InterActive, and 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 services because of InterActive's current inability to pay for
these consulting services. The Company is not a party to any collective
bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
Facilities
The Company owns the 22,000 square foot facility that it occupies in
Humboldt, South Dakota. It conducts all of its activities from this facility
and from the facility owned and operated by its outside salesman. The
Humboldt property is subject to mortgages in favor of the Company's bank and
the City of Humboldt, South Dakota granted by the Company in connection with
the purchase of the facility and to certain liens in connection with the
Company's inability to pay for building improvements performed by contractors.
The Company believes that the location of its principal facilities in
South Dakota provides the Company with access to highly motivated, well
trained workers, and a low cost of living, which the Company believes will
help constrain future operating costs. The Company has received support at
both the local and state levels in the form of low interest loans from both
the City of Humboldt and the State of South Dakota. South Dakota currently
has no state income tax on corporations.
The Company believes that its current facilities are in reasonably good
condition and will satisfy its needs for at least the next few years.
ITEM 3. 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 ongoing operations and the Company does not intend to
pay these unsecured debts until its obligations to its secured creditors are
satisfied. The Company is not able to meet its obligations to its secured
creditors at this time.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
fiscal year 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its initial public offering on June 16, 1993.
The offering consisted of Units each consisting of one share of Common Stock
and one redeemable Common Stock Purchase Warrant to purchase one share of
Common Stock at a price of $6.75. These warrants expired June 16, 1996.
The Common Stock and Warrants included in the Units were not separately
transferable until December 13, 1993. The Warrants would have been redeemable
by the Company at $.05 per Warrant upon 30 days' notice mailed within 20 days
after the closing bid price of the Common Stock equaled or exceeded $8.00 for
a period of 20 consecutive trading days.
The Units were quoted on the Nasdaq Small Cap Market from June 16, 1993
to July 21, 1994 under the symbol "IACT-U". The Common Stock and Warrants
were quoted on the Nasdaq Small Cap Market from December 13, 1993 to July 21,
1994 under the symbols "IACT" and "IACT-W" respectively. On July 21, 1994
the Company's securities were delisted from the Nasdaq Small Cap Market
because of the Company's inability to maintain Nasdaq's minimum stockholder's
equity requirements for listing. The Company's common stock is currently
quoted on the OTC Bulletin Board under the symbol "INAV". The Company's Units
and Warrants are not currently trading.
On September 30, 1997 there were approximately 352 shareholders of record of
the Common Stock of the Company, based on information provided by the Company's
transfer agent.
Dividends
The Company has never paid dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payment
of dividends, if any, on the Common Stock is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition and other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources
Since its inception, the Company has financed its operations primarily
through the private and public sale of equity securities and convertible
debt, loans from its principal stockholder, Torrey Pines Research, short
term bank borrowings under bank lines of credit, and capital equipment leases.
On February 28, 1993, the Company completed an exempt offering of common
stock at a purchase price of $5.25 per share pursuant to Rule 504 under the
Securities Act of 1933, as amended. The Company sold 123,700 shares of
common stock and raised $636,567, net of stock issuance costs of $12,858.
On June 16, 1993, the Company completed a initial public offering of 1,150,000
units at $4.50 per unit, each unit consisting of one share of the Company's
common stock and one redeemable common stock purchase warrant to purchase one
share of common stock at a price of $6.75. This offering raised $4,270,541,
net of stock issuance costs of $904,459. On June 1, 1994 the Company became
effective with a registration statement filed with the Securities and Exchange
Commission. The Company offered 1,930,547 shares of Common Stock to
stockholders of record on May 20, 1994, at a price of $1.25 per share. The
offering was held open to the stockholders through June 22, 1994. From
June 23, 1994 to December 22, 1994 the offering was open to the public
generally, on a first come first serve basis. Through September 30, 1995 the
Company issued 821,000 shares and received $116,587 in cash, $574,075 in
conversion of notes and note interest, lease settlement, consulting and
accounts payable net of offering expenses of $89,747.
The Company used the proceeds of these offerings to fund an initial
marketing push in an attempt to increase the name recognition of and customer
demand for its SoundXchange, M-Mail, M-Message and InterActive Communicator
products, which included purchasing advertising in trade publications and
showing the Company's products at the Comdex industry trade show in November
1993. The Company also used proceeds to purchase $543,974 in SoundXchange
inventory in the fourth quarter of fiscal year 1993, and an additional
$418,721 in SoundXchange inventory in the first quarter of fiscal year 1994,
in anticipation of significant increases in sales, which at the time were
projected to begin in the first half of fiscal year 1994. Also in
anticipation of increased sales, the Company increased its total personnel
from 21 employees in June 1993 to 60 as of December 31, 1993. Over the same
period, the Company purchased $325,474 in property and equipment and acquired,
by means of long term capital leases, $50,837 in property and equipment.
In January 1994, the Company obtained a 90 day, $500,000 line of credit
from a local bank. The line of credit was at a variable interest rate of 2%
over the bank's commercial base rate with interest on the outstanding balance
due monthly. This line was secured by liens against substantially all of the
Company's assets, a pledge by Torrey Pines Research of a $250,000 certificate
of deposit, the corporate guaranty of Torrey Pines Research and the personal
guaranty of the Company's Chief Executive Officer. At September 30, 1994,
the Company had borrowings of $500,000 outstanding under this line of credit.
The Company had intended to reduce or pay off this line of credit out of the
net proceeds of the June 1, 1994 offering. Due to the limited amount of cash
proceeds raised in the offering, the Company was unable to pay this note.
This note was paid off by Torrey Pines Research, Inc., a related party in
exchange for a subordinated secured interest, a $500,000 note payable to
Torrey Pines Research, Inc. and the issuance of 1,000,000 warrants to purchase
the Company's common stock based on an exercise price of $.50 per share. The
warrants are exercisable for a period of 18 months after repayment of the
note. The note to Torrey Pines Research is at a variable interest rate of 1%
less than the variable interest rate charged by the bank (9.43% at September
30, 1997), with principal and accrued interest due on September 6, 1995. The
Company was unable to pay principal or interest on this note and is now in
default.
The Company has an additional line of credit with the same bank, which
it entered into in connection with the Powerhouse acquisition, for the lesser
of $500,000 or a borrowing base equal to the sum of 85% of certain accounts
receivable owed by government agencies, 75% of certain accounts receivable
owed by third persons other than government agencies, and 60% of inventory
of the Company's Powerhouse division. Borrowings under this line are payable
upon demand. The line of credit bears interest at a variable interest rate of
.75% over the bank's commercial base rate (10.43% at September 30, 1997) with
interest on the outstanding balance due monthly. This line is secured by
liens against substantially all of the Company's assets. At September 30,
1997, the Company had borrowed $213,500 under this line of credit. The
Company has been unable to make the monthly interest payments and is accruing
the interest.
The Company is delinquent on its notes payable to the bank, most of its
leases and most of its trade accounts payable. Although the bank has taken
no steps to force liquidation of the Company in order to satisfy its
obligation, there can be no guarantee that this will not change in the
future. The Company also has a South Dakota Use Tax obligation of
approximately $62,600 plus penalty and interest. This obligation was incurred
over a period of three years and is being appealed by the Company. 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 and
long term liabilities, which total $2,684,000 at September 30, 1997. 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 bank is in first
position as a secured creditor.
The Company's inventory of SoundXchange hardware, which, as of September
30, 1997, accounted for 64% 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 able to 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 no guarantee that this will
increase sales of the SoundXchange hardware, the Company believes that an
increase in sales will occur allowing the Company to reduce its inventory of
the SoundXchange hardware.
The Company was also unable to pay its auditors in order to have audited
financial statements for the years ended September 30, 1997, 1996, 1995 and
1994. 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 trade on the OTC Bulletin Board.
In March, April and May of 1994, the Company borrowed an aggregate of
$71,000 from a total of seven investors, including certain of the Company's
executive officers and existing stockholders, to raise cash needed for
operations. Interest is payable quarterly at a 15% annual rate and is being
accrued. Each of these loans was repayable on April 15, 1997, unless
previously converted at any time after April 15, 1995 into shares of the
Company's Common Stock at the conversion price of $2.75 per share. In June
1994, $66,000 of these notes and accrued interest were converted into common
stock registered by the June 1, 1994 Prospectus. The Company was unable to
meet its obligation to repay the balance of these loans.
The Company has a net operating loss carryforward for tax purposes of
approximately $8,108,000 and research and development tax credits carryforward
of approximately $16,500 at September 30, 1997. For financial reporting
purposes, the operating loss carryforward is approximately $9,414,000 which
represents the amount of future tax deductions for which a tax benefit has not
been recognized on the financial statements. However, the Company will not be
able to utilize any such credits unless it has sufficient sales to generate
taxable net income. Also, the amounts of the credits could be substantially
limited if a change in control of the Company were to take place.
Capital Expenditures
On September 29, 1993, the Company purchased the exclusive rights to the
Company's SoundXchange product from Torrey Pines Research, its principal
stockholder which worked with the Company to co-develop the SoundXchange.
The purchase was paid for with $95,000 in cash and warrants to purchase 95,000
shares of Common Stock at $6.75 per share. The Company recorded a gain on the
transaction of $68,714, resulting from the purchase of such rights at a cost
lower than the liability that the Company had been reflecting on its balance
sheet. As a result of such purchase, the Company no longer has to pay a
royalty fee to Torrey Pines Research of $5.00 per SoundXchange unit. See
"Certain Transactions - Torrey Pines Research/William J. Hanson."
On October 1, 1993, the Company purchased substantially all of the assets
of Powerhouse Computer Sales, Ltd. ("Powerhouse") for $75,000 cash, 30,000
shares of common stock valued at $97,500, and the assumption of liabilities of
Powerhouse totaling $484,927. The acquisition has been accounted for as a
purchase and the purchase price was allocated to the acquired assets and
liabilities.
Results of Operations
Comparison of Fiscal Years 1996 and 1997
Revenue. Net sales for fiscal years 1997 and 1996 were $77,000 and
$130,000, respectively. The Company's decrease in sales is attributable
mainly to less demand for its SoundXchange Models A, B and BX.
Gross Profit. The gross margin for fiscal years 1997 and 1996 were 52%
and 35%, respectively. The increase from the previous year is due primarily
to an increased emphasis on indiviually engineered units with their relatively
higher profit margins.
Sales and marketing expenses. Sales and marketing expenses for fiscal
1997 and 1996 were $78,000 and $139,000, respectively. During fiscal year
1997, the Company continued its marketing efforts to increase the market
exposure of its SoundXchange. The Company plans to pursue marketing efforts
primarily through editorial review and the Internet during fiscal 1998.
Research and development. There were no research and development
expenses for fiscal 1997 and 1996. The Company continued its emphasis on
enhancements to its existing products which were enhanced primarily by its
outside sales consultant. Amounts capitalized in connection with software
development for fiscal 1997 and 1996 were $0 and $900, respectively. Software
development amortization expense for fiscal 1997 and 1996 was $85,000 and
$85,000, respectively. The Company wrote off the remaining value of its
capitalized software development costs at September 30, 1997. These amounts
were reduced because the Company has not sold any of its software products in
the past six months and does not expect to be able to do so in the forseeable
future.
General and administrative. General and administrative expenses for
fiscal 1997 and 1996 were $11,000 and $38,000, respectively. As the scope of
the Company's operations decreased, general and administrative expenses
decreased. The Company currently has outside consultants engaged in
administrative duties.
Depreciation and Amortization. Depreciation and amortization expenses
for fiscal 1997 and 1996 were $104,000 and $104,000, respectively.
Nonoperating Income (Expense). Nonoperating income (expense) for fiscal
1997 and 1996 were ($672,000) and ($24,000), respectively. In 1997, the
Company wrote down $661,680 of assets which included $634,851 of inventories,
to reflect lower of cost or estimated fair value based on salvage values
provided by two outside liquidating companies and $26,829 of previously
capitalized software development costs, to reflect the Company's current
estimates of fair market value of these assets under the Company's current
financial constraints.
Net Loss. The Company suffered a net loss for fiscal 1997 of $854,535
or $0.27 per share on 3,136,670 weighted average shares outstanding compared
to a net loss for fiscal 1996 of $274,000 or $0.09 per share on 3,018,992
weighted average shares outstanding. The increase in the net loss was due
primarily to the writedown of inventories and other assets to bring them to
reflect their estimated current value.
Management believes that the largest challenges that the Company will
confront during 1998 are in its attempt to achieve increases in revenues and
profitability during fiscal 1998. While the Company is optimistic about the
possibility of its overcoming these challenges and achieving its goals in the
long term, there can be no assurance that the Company can continue to be an
ongoing concern or that it will be able to achieve any or all of its
objectives for fiscal 1998.
ITEM 7. FINANCIAL STATEMENTS (unaudited)
The Unaudited Financial Statements are filed as part of this Annual Report
on form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the directors and
executive officers of the Company:
Robert Stahl, 40, has served as President, COO of the Company since
November, 1996. Mr. Stahl previously was Vice President of Sales for the
Company. Mr. Stahl is co-founder and Vice President of CSS Ltd (CSS) since
its founding in 1989. He is also owner and operator of a family farm. From
1990 to 1995, Mr. Stahl was in charge of National Sales for Medical
Communications Software, a company involved in providing computer software to
nursing homes nationally.
Russell Pohl, 72, has served as a director of the Company since February
1993 and as President from September 1995 to November 1996. Mr. Pohl served
as Branch Chief and Chief of Data Services for the Earth Resources Observation
Systems Data Center of the U.S. Department of the Interior from 1975 to May
1991. Mr. Pohl retired from that position in May 1991. Prior to his work
with the Federal government, Mr. Pohl was Vice-President of Raven Industries,
Inc. for some 16 years. Early in his career, he was a physicist for a
Fortune 500 company.
Gerard L. Kappenman, 53, served as President, Chief Executive Officer and
a director of the Company from its incorporation in October 1989 until
September 1995. He continues to serve as a director and Secretary. Mr.
Kappenman is currently a computer information systems instructor at Southeast
Technical Institute. Prior to joining InterActive, Mr. Kappenman was a self-
employed product and marketing consultant from March 1988 through September
1989. From February 1987 to March 1988, Mr. Kappenman was Senior Vice
President, Product Marketing at Data Voice Solutions, a company engaged in the
development and marketing of personal computer-based communications products.
William J. Hanson, 49, has served as a director of the Company since its
incorporation in October 1989 and as its Chief Operating Officer from October
1992 to January 1994. Mr. Hanson is a founder and President of Torrey Pines
Research, Inc. ("Torrey Pines") since its founding in October 1986. Torrey
Pines is a technical research and development firm.
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
Executive Compensation
The following table sets forth the compensation received from the Company
by the Company's CEO and President, COO for services rendered in all
capacities to the Company during the fiscal year ended September 30, 1997, as
well as such compensation received by him from the Company during the
Company's two previous fiscal years:
SUMMARY COMPENSATION TABLE
Long-term Compensation
Annual Compensation Awards
Restricted
Stock
Other Awards
Name and
Principal Position Year $ $
___________________________________________________________________
Robert Stahl 1997 18,271 6,500
President, COO
Russ Pohl 1997 2,140 5,720
CEO 1996 0 19,700
Stock Options
The CEO and President did not exercise any options during fiscal year
1997.
Compensation of Directors
Each member of the Board of Directors of the Company who is not an
officer of the Company receives a fee of $100 for each meeting attended and is
reimbursed for all reasonable expenses incurred by such member in attending
such meeting. During 1997 the Company accrued but did not pay the $100 per
meeting to the directors.
The Company's Bylaws provide that the Company must indemnify its officers
and directors, and may indemnify its employees and other agents, to the
fullest extent permitted by South Dakota law. At present, there is no pending
litigation or proceeding involving any director, officer, employee, or agent
of the Company where indemnification will be required or permitted. Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may be permitted to officers, directors or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed 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.
Employment Arrangements
In March 1993, the Company entered into a three-year employment agreement
with Mr. Kappenman, providing for a base annual salary of $72,000 per year
effective June 1, 1993. In addition, Mr. Kappenman was entitled to receive
annual incentive bonuses in amounts up to 100% of his base annual salary if
the Company achieved revenue and profitability goals outlined in annual
operating plans adopted each fiscal year by the Company's Board of Directors.
In connection with the execution of this employment agreement, Mr. Kappenman
also was granted options under the Company's 1992 Stock Option Plan to
purchase 50,000 shares of the Company's Common Stock at $5.85 per share. In
August 1995, Mr. Kappenman voluntarily terminated the agreement without
remuneration.
In October 1993, in connection with the acquisition of Powerhouse
Computer, Ltd., the Company entered into a three year employment agreement
with James R. Cink, providing a base annual salary of $70,000 effective
October 1, 1993. In addition, Mr. Cink was to be entitled to receive annual
incentive bonuses if the Company achieved revenue and profitability goals. In
connection with the execution of this employment agreement, Mr. Cink also was
granted options under the Company's 1992 Stock Option Plan to purchase 20,000
shares of the Company's Common Stock at $5.25 per share. On August 31, 1994
the Company terminated the employment agreement. Under the terms of the
employment agreement the Company could be liable to Mr. Cink for up to an
additional $100,000. The Company has not accrued this liability because it
does not feel that the amount is owed due to the performance of the Powerhouse
division during fiscal 1994. The Company did offer to return the Powerhouse
division to Mr. Cink, the alternative discussed in the employment agreement,
but Mr. Cink declined the offer.
In September 1995, the Company entered into an employment agreement with
Mr. Pohl, providing for a base monthly salary of $1,500. During fiscal 1996,
Mr. Pohl elected to receive InterActive restricted common stock for his
services at a value of $0.15 per share. Mr. Pohl voluntarily resigned as
president in November, 1996 but continues to serve as CEO and a director.
His remuneration as CEO was 5,000 shares of restricted common stock monthly.
In April, 1997 the Company revised Mr. Pohls compensation to commissions on a
sliding scale based on volume of sales.
In November 1996, Mr. Stahl was appointed President, CEO with
remuneration of 10,000 shares of restricted common stock monthly. In April,
1997 Mr. Stahls compensation was revised to a sliding commission based on
volume of sales.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of shares of the Company's Common Stock as of September
30, 1997 by (i) each of the Company's directors, (ii) each person known to the
Company to beneficially own more than 5% of the outstanding shares of Common
Stock, and (iii) all directors and officers of the Company as a group. The
address for each stockholder listed is in care of the Company, 204 North Main,
Humboldt, South Dakota 57035.
Name Number of Shares Percent of
Beneficially Owned(1) Outstanding Shares
_____________________ __________________
Gerard L. Kappenman(2) 115,170 3.6
William J. Hanson(3) 1,746,544 41.6
Russell Pohl(4) 200,757 6.3
Robert Stahl(5) 77,410 2.5
Torrey Pines Research(6) 1,507,299 39.6
All directors and officers as a
group (four persons) (2)(3)(4)(5) 1,100,836 50.4
____________________________________________________________________________
____________________________________________________________________________
(1) The percentages shown include the shares of Common Stock which
each named stockholder has the right to acquire within 60 days
of September 30, 1997. In calculating percentage ownership,
all shares of Common Stock which a named stockholder has the
right to acquire upon conversion of Series A Preferred Stock
and of convertible notes payable by the Company and exercise
of warrants and of options issued pursuant to the Company's
stock option plans are deemed to be outstanding for the purpose
of computing the percentage of Common Stock owned by such
stockholder, but are not deemed to be outstanding for the
purpose of computing the percentage of Common Stock owned by
any other stockholder.
(2) Includes 6,667 shares of Common Stock issuable upon conversion of
Series A Preferred Stock, 12,000 shares of Common Stock
issuable upon exercise of options.
(3) Includes 45,001 shares of Common Stock issuable upon conversion
of Series A Preferred Stock and 1,000,000 shares of Common
Stock issuable upon exercise of warrants. Of this total, an
aggregate of 89,100 shares are owned of record by Mr. Hanson,
and 1,657,444 shares are owned of record by Torrey Pines.
(4) Includes 4,168 shares of Common Stock issuable upon conversion of
Series A Preferred Stock and 21,000 shares of Common Stock
issuable upon exercise of options pursuant to the Company's
1992 Stock Option Plan.
(5) Includes 3,744 shares of Common Stock issuable upon exercise of
options pursuant to the Company's 1992 Stock Option Plan.
(6) Includes 36,667 shares of Common Stock issuable upon conversion of
Series A Preferred Stock, and 1,096,000 shares of Common Stock
issuable upon exercise of warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CSS Ltd./Robert Stahl
Consulting fees and commissions. During 1997, the Company issued 6,500
shares of restricted common stock to Mr. Stahl as compensation for services.
CSS Ltd./Robert Stahl earned $18,271 in commission on sales of which the
Company was only able to pay $1,484 because of its financial constraints.
The Company also paid CSS Ltd. $6,970 for inventory which was purchased on the
Companys behalf.
Russell A. Pohl
Salary. During fiscal 1996 the Company issued 131,333 shares of
restricted common stock to Mr. Pohl in lieu of salary. During 1997, Mr. Pohl
was issued 15,000 shares of restricted common stock as compensation for
services and earned commissions in the amount of $2,140.
Gerard L. Kappenman.
Loans to the Company. In fiscal 1991 the Company sold an aggregate of
$4,000 of 14% convertible notes to Mr. Kappenman. In fiscal 1994 the Company
sold an aggregate of $16,000 of 15% convertible notes to Mr. Kappenman. These
notes were subsequently converted to common stock, see stock and warrant
purchases and awards below.
Guarantees. In fiscal 1992, Mr. Kappenman guaranteed repayment of
borrowing by the Company under its then current bank line of credit. In
January 1992, Mr. Kappenman guaranteed repayment of borrowing by the Company
of a $40,000 loan made with the South Dakota Governor's Office of Economic
Development. In fiscal 1993, Mr. Kappenman guaranteed repayment of borrowing
by the Company under its then current bank line of credit. This guaranty was
terminated upon the completion of the Company's initial public offering in
June 1993. In January 1994 Mr. Kappenman guaranteed the Company's $500,000
secured line of credit that matured on July 20, 1994. This guaranty was
terminated when Torrey Pines Research assumed the note (see below).
Stock and Warrant Purchases and Awards. In connection with the
incorporation and initial organization of the Company, Gerard A. Kappenman
purchased, on October 10, 1989, 180,000 shares of Common Stock at $0.003 per
share, for an aggregate purchase price of $540. During the fiscal year ended
September 30, 1991, Mr. Kappenman purchased 6,667 shares of the Company's
Series A Preferred Stock, having a liquidation preference of $1.35 per share,
for $9,000 in cash and returned 33,333 shares of Common Stock of the Company
to help offset the dilution of the Company's equity from the offering of such
Preferred Stock to existing stockholders. In fiscal year 1992, the Company
granted 1,330 shares of the Company's Common Stock to Mr. Kappenman for
services rendered to the Company, and Mr. Kappenman converted 14% convertible
notes and accrued interest aggregating $4,216.33 into 1,406 shares of Common
Stock. As incentive for the early conversion of such notes, Mr. Kappenman was
granted a warrant to purchase 703 shares of Common Stock at a price of $3.00
per share exercisable at any time through December 31, 1995. In March 1993,
the Company's Board of Directors granted to Mr. Kappenman an option to
purchase up to 50,000 shares of the Company's Common Stock pursuant to the
Company's 1992 Stock Option Plan at an exercise price equal to 130% of the
initial offering price of the units, subject to stockholder approval of the
increase in the number of shares issuable. The options expired 90 days
following Mr. Kappenman's resignation as President of the Company. In 1994
Mr. Kappenman converted $16,384 of convertible notes and accrued interest
into 13,107 shares of common stock registered by the Company's Prospectus
dated June 1, 1994. Mr. Kappenman was granted 18,000 options by the Board of
Directors in September, 1995 pursuant to the Company's 1993 Stock Option Plan
at an exercise price of $0.25 per share. The options in equal portions vest
over a period of 36 months.
Consulting Fees and Salary. On October 12, 1989, the Company paid $540
to Mr. Kappenman for consulting services provided prior to October 1, 1989.
During fiscal year 1990, the Company paid Mr. Kappenman $27,871 in combined
salary and bonus. During fiscal year 1991 and 1992 the Company paid Mr.
Kappenman $23,500 and $22,000, respectively, in salary. In fiscal year 1993
Mr. Kappenman received $42,000 in salary and a bonus of $25,000 for services
rendered during such year. In 1994 Mr. Kappenman received $70,000 in salary.
In 1995 Mr. Kappenman received $32,230 in salary.
Torrey Pines Research, Inc./William J. Hanson
SoundXchange Royalty Agreement/Buyout. Torrey Pines co-developed the
Company's SoundXchange products with the Company under terms that provided for
royalty payments of $5.00 for each SoundXchange unit sold by InterActive.
Under the terms of this agreement, the Company retained an exclusive right to
sell and distribute SoundXchange and its derivative products, subject to the
requirement that payments to Torrey Pines of at least $50,000 were made in
the first year following introduction of SoundXchange and $100,000 in the
second year. In September 1993, the Company purchased all unowned rights to
SoundXchange for $95,000 in cash and warrants to purchase 95,000 shares of
Common Stock at $6.75 per share, expiring on September 29, 1997.
Leases. The Company received rental income from Torrey Pines for the use
of office space at the InterActive facility, in the amount of $18,600 for the
fiscal year ended September 30, 1992. In July 1993, Torrey Pines and the
Company entered into a two-year sub-lease agreement pursuant to which the
Company sub-leased office space from Torrey Pines at a rate of $5,050 per
month. The Company and Torrey Pines subsequently agreed to reduce the space
leased pursuant to the lease, and to reduce the rent to $500 per month, for a
period of 9 months. The term of the lease was also extended from June 1995
through March 1996. This lease was bought out for 36,000 shares of common
stock registered by the Company's prospectus dated June 1, 1994. During 1995,
the Company rented office space to Torrey Pines for $1,000 month to month
rental. In 1996, rent from Torrey Pines was $6,000 and the month to month
rental was terminated.
Loans to the Company. During fiscal 1991 the Company sold an aggregate
of $45,000 of 14% convertible notes to Torrey Pines. During fiscal 1992, the
Company sold an aggregate of $65,000 in principal amount of its 15% convertible
notes to Torrey Pines, and $35,000 principal amount of such notes to William
Hanson. During that same year, Torrey Pines converted its 14% convertible
notes and accrued interest aggregating $48,039 into 16,013 shares of Common
Stock, and, as an incentive for such early conversion, was granted warrants to
purchase 8,007 shares of Common Stock at a price of $3.00 per share at any
time through December 31, 1995. In fiscal 1993, the Company entered into an
agreement evidenced by a demand note with Torrey Pines pursuant to which
Torrey Pines agreed to lend the Company up to a maximum of $100,000 to be
used by the Company to purchase inventory of certain products. During fiscal
1993, the Company borrowed $95,049 from Torrey Pines which was payable at an
annual interest rate of 12%. The Company repaid all $95,049 of such
principal amount plus all $2,767 in accrued interest during fiscal 1993. In
1994, the Company sold an aggregate of $25,000 and $15,000, respectively, of
15% convertible notes to Torrey Pines and Mr. Hanson, these notes were
subsequently converted to common stock, see below.
Guarantees/Pledge. In fiscal 1992, Torrey Pines guaranteed repayment of
borrowing by the Company under its then current bank line of credit. In
connection therewith, in January 1992 Torrey Pines was granted three-year
warrants to purchase 6,667 shares of Common Stock at $3.00 per share. This
guaranty was terminated upon the completion of the Company's initial public
offering in June 1993. In January 1994 Torrey Pines guaranteed the Company's
$500,000 secured line of credit that matured July 20, 1994, and pledged a
$250,000 certificate of deposit to secure such line. During fiscal 1995 the
bank requested repayment of the $500,000 line of credit and Torrey Pines
Research paid the note in exchange for a subordinated secured interest, a
$500,000 note payable to Torrey Pines Research, Inc. and the issuance of
1,000,000 warrants to purchase the Company's common stock based on an exercise
price of $.50 per share. The warrants are exercisable for a period of 18
months from the date the note is paid. The new note to Torrey Pines Research
is at a variable interest rate of 1% less than the variable interest rate
charged by the bank (9.68% at September 30, 1995), with principal and accrued
interest due on September 6,1995. The Company was unable to pay the principal
or interest on this note and is now in default.
Consulting Services. On October 12, 1989, the Company paid $460 to
Torrey Pines for consulting services provided prior to October 1, 1989.
During the fiscal year ended September 30, 1990, the Company received $104,000
in consulting fees from Torrey Pines for services provided related to research
in multimedia technologies. The Company received additional consulting fees
from Torrey Pines amounting to $6,000 during fiscal 1991, $8,248 in fiscal
1992, and $3,000 for the six months ended March 31, 1994. Torrey Pines
performed consulting services for the Company during the fiscal year ended
September 30, 1992 having a value of $75,659, which was paid through the
issuance of an aggregate of 28,916 shares of the Company's Common Stock.
Torrey Pines also was awarded 5,000 shares of Common Stock in fiscal 1992 for
services rendered to the Company. During fiscal 1993, in consideration for
$202,614 of consulting services provided to the Company by Torrey Pines during
the first calendar quarter of 1993, the Company issued 20,000 shares of its
Common Stock, valued at $5.25 per share, to Torrey Pines and paid Torrey Pines
$97,614 in cash. For fiscal 1994, the Company paid or accrued to Torrey
Pines $112,665 for consulting services. During fiscal 1995, the Company sold
an aggregate of $14,460.50 of equipment which was no longer in use by the
Company to Torrey Pines. Torrey Pines prepaid $13,339 in consulting fees.
During fiscal 1996, the Company issued an aggregate of 169,280 share of
restricted Common Stock having a value of $25,391 to Torrey Pines in
settlement of prepaid consulting fees which the Company was unable to perform.
From July through December 1993 the Company paid Mr. Hanson $6,000 per
month as compensation for serving as Chief Operating Officer of the Company.
Additional Stock and Warrant Purchases and Awards. In connection with
the incorporation and initial organization of the Company, Torrey Pines
purchased, on October 10, 1989, 153,333 shares of Common Stock at a price of
$0.003 per share, for an aggregate purchase price of $460. During fiscal
1991, Torrey Pines purchased 20,000 shares of the Series A Preferred Stock,
having a liquidation preference of $1.35 per share, for $27,000 in cash, and
16,667 shares of the Series A Preferred Stock, having a liquidation preference
of $1.80 per share, for $30,000 in cash. In addition Mr. Hanson purchased
5,278 shares of the Series A Preferred Stock having a liquidation preference
of $1.35 per share for $7,125 in cash and 3,056 shares of the Series A
Preferred Stock having a liquidation preference of $1.80 per share for $5,500
in cash. During the fiscal 1992, Torrey Pines purchased 13,889 shares of the
Company's Common Stock for $35,000 in cash and Mr. Hanson purchased 14,668
shares of the Company's Common Stock, for $31,000 in cash (approximately
$2.11 per share).
During fiscal year 1993, in connection with the Company's sales of an
aggregate of 123,700 shares of Common Stock at $5.25 per share subsequent to
September 30, 1992, Torrey Pines purchased 9,400 shares of the Company's
Common Stock for $49,350 in cash and Mr. Hanson purchased 4,572 shares of
Common Stock for $24,003 in cash. During fiscal year 1994 the Company issued
Torrey Pines and Mr. Hanson 186,350 shares and 41,686 shares, respectively,
of common stock registered by its prospectus dated June 1, 1994, for
convertible notes and interest, accounts payable and lease settlement.
Recent Transactions.
All transactions between the Company and its executive officers,
directors, or principal stockholders, or any of their affiliates, have been
approved by a majority of the disinterested members of the Company's Board of
Directors, or have been on terms that the Company believes to be no less
favorable to the Company than those that could be obtained from an
unaffiliated third party in arms-length transactions.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements Page No.
Management's statement on Unaudited Financial Statements F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-7
2. Exhibits
Exhibit Number
10.01 Sale of Assets Agreement dated as of November 2, 1993, between
Powerhouse Computer Sales, Ltd. and the Company (Form 8-K
dated November 2, 1993, file number 000-21898)
10.02 Disbursement Request and Authorization, and Promissory Note
payable to Western Bank, dated January 20, 1994*
10.03 Disbursement Request and Authorization, and Promissory Note
payable to Western Bank, each dated November 2, 1993 (Form 10-
QSB dated February 8, 1994, file number 000-21898)
10.04 Agreement dated as of September 29, 1993, between the Company and
Torrey Pines Research (Form 10-KSB dated December 27, 1993,
file number 000-21898)
10.05 Sublease Agreement dated as of July 1, 1993, between the Company
and Torrey Pines Research (Form 10-KSB dated December 27,
1993, file number 000-21898)
10.06 Assignment of Lease dated November 2, 1993 between Powerhouse
Computer Sales, Ltd. and the Company.*
10.07 Employment Agreement dated as of October 1, 1993 between the
Company and James R. Cink (Form 10-QSB dated February 8, 1994,
file number 000-21898)
10.08 Nations Credit Dealer Agreement*
* The exhibits marked with an asterisk have been filed with Form SB-2
registration
No. 33-77240.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
September 30, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: December 5, 1997 INTERACTIVE INC.
BY: /s/ Robert Stahl
_________________
Robert Stahl
President
BY: /s/ Gerard Kappenman
____________________
Gerard L. Kappenman
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company,
in the capacities, and on the dates, indicated:
SIGNATURES TITLES DATE
/s/ Robert Stahl December 5, 1997
_______________________
Robert Stahl President
/s/ Gerard L. Kappenman Secretary December 5, 1997
_______________________
Gerard L. Kappenman Director
/s/ William J. Hanson Director December 5, 1997
_______________________
William J. Hanson
/s/ Russell A. Pohl Director December 5, 1997
_______________________
Russell A. Pohl
INTERACTIVE INC.
FINANCIAL REPORT
SEPTEMBER 30, 1997
CONTENTS
Page
Letter from management on unaudited financial statements F-1
FINANCIAL STATEMENTS (unaudited)
Balance sheets F-2
Statements of operations F-3
Statements of stockholders' equity F-4
Statements of cash flows F-5
Notes to financial statements F-6 to F-13
Statement from management on unaudited financial statements
The following financial statements are unaudited, the Company was not able to
pay its auditors to complete the audit of its financial statements for the
year ended September 30, 1997. 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 normal recurring
adjustments, necessary for a fair presentation of the financial information
for the periods presented.
INTERACTIVE INC.
BALANCE SHEETS
September 30, 1997 and 1996
(Unaudited)
ASSETS 1997 1996
_____________ _____________
CURRENT ASSETS (Notes 3 and 4)
Cash and cash equivalents $ 1,165 $ 1,034
Accounts receivable 10,418 20,571
Inventories 21,713 681,369
Prepaid expenses and other 800 1,531
_____________ _____________
Total current assets $ 34,096 $ 704,505
PROPERTY AND EQUIPMENT, at cost (Notes 3, 4 and 5)
Land $ 1,962 $ 1,962
Building and improvements 84,963 84,962
Computer and office equipment 54,246 54,246
_____________ ____________
$ 141,170 $ 141,170
Less accumulated depreciation 77,032 62,032
_____________ ____________
$ 64,138 $ 79,138
_____________ ____________
OTHER ASSETS, at cost (Notes 2, 3 and 4)
Cost $ 253,971 $ 280,800
Less accumulated amortization 244,526 155,739
_____________ ___________
$ 9,444 $ 125,061
_____________ ___________
$ 107,679 $ 908,704
_____________ __________
_____________ __________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, bank (Note 3) $ 213,500 $ 213,500
Notes payable, related party 545,000 545,000
Current maturities of long-term debt
(Note 4) 265,436 264,847
Accounts payable, trade 1,119,092 1,113,964
Accounts payable, trade,
Torrey Pines Research, Inc. 296,297 300,297
Accrued expenses 244,526 193,288
___________ ___________
Total current liabilities $ 2,683,851 $ 2,630,896
___________ ___________
LONG-TERM DEBT (Notes 4 and 5)
$ 265,436 $ 269,863
Less current maturities (265,436) (264,846)
___________ __________
$ 0 $ 5,017
STOCKHOLDERS' EQUITY (Notes 4, 9 and 10)
Series A preferred stock, par value $.001 per share; authorized
5,000,000 shares; issued 1997 113,901 shares; 1996 117,235 shares;
total liquidation preference 1997 of $178,019; 1996 of $182,520
$ 114 $ 117
Common stock, par value $.001 per share; authorized 10,000,000 shares;
issued 1997 3,190,976 shares; 1996 3,105,793 shares
3,191 3,106
Additional paid-in capital 6,834,594 6,829,103
Accumulated deficit (9,414,070) (8,559,535)
___________ ___________
$(2,576,172) $(1,727,209)
___________ ___________
$ 107,679 $ 908,704
___________ ___________
___________ ___________
See Notes to Financial Statements.
INTERACTIVE INC.
STATEMENTS OF OPERATIONS
Years Ended September 30, 1997 and 1996
(Unaudited)
1997 1998
____________ ___________
Net Sales $ 76,590 $ 130,117
Cost of goods sold, exclusive of depreciation
and amortization shown separately below 36,972 84,404
____________ ___________
Gross profit $ 39,619 $ 45,713
____________ ___________
Operating expenses
Sales and Marketing $ 78,477 $ 139,432
Support and production 4,692 14,945
General and administrative 11,281 37,501
Depreciation and amortization 103,787 103,769
____________ ___________
$ 198,238 $ 295,647
____________ ___________
Operating Loss $ (158,619) $ (249,934)
____________ ___________
Nonoperating income (expense):
Rental income 5,400 15,213
Miscellaneous expense (661,681) 0
Interest expense, others (40,632) (46,699)
Miscellaneous income 996 7,637
____________ ___________
Nonoperating income (expense): $ (695,916) $ (23,849)
____________ ___________
Net loss $ (854,535) $ (273,783)
____________ ___________
____________ ___________
Loss per common and common
equivalent share $ (0.27) $ (0.09)
_____________ ___________
_____________ ___________
See Notes to Financial Statements
INTERACTIVE INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997 and 1996
(Unaudited)
Retained
Additional Earnings
Capital Stock Issued Paid-in (Accumulated
____________________
Preferred Common Capital Deficit
________ _______ ____________ ____________
Balance,
September 30, 1995 $ 127 $ 2,756 $ 6,782,186 $
(8,285,752)
Issuance of common stock for:
Services 0 340 46,917
Conversion of preferred stock to
common stock (10) 10
Net loss (273,783)
_________ ________ ____________ ____________
Balance,
September 30, 1996 $ 117 $ 3,106 $ 6,829,103 $
(8,559,535)
Issuance of common stock for:
Services 82 5,491
Conversion of preferred stock to
common stock (3) 3
Net loss
(854,535)
__________ _________ ____________ ____________
Balance
September 30, 1997 $ 114 $ 3,191 $ 6,834,594 $
(9,414,070)
__________ _________ ____________ ____________
_________ _________ ____________ ____________
See Notes to Financial Statements.
INTERACTIVE INC.
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997 and 1996
(Unaudited)
1997 1996
__________ ____________
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (854,535) $ (273,783)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 103,787 103,769
Issuance of common stock for services 5,573 42,758
Loss on write-down of assets 0 661,680
Change in assets and liabilities
(Increase) decrease in receivables 10,153 (12,023)
Decrease in inventories 24,805 68,366
Decrease in prepaid expenses and other 731 6,204
Increase (decrease) in deferred revenue 0 (13,339)
Increase (decrease) in outstanding checks
in excess of bank balance 0 (2,714)
Increase (decrease) in accounts payable, trade 5,128 (12,256)
Increase (decrease) in accounts payable, trade,
Torrey Pines Research (4,000) 15,785
Increase in accrued expenses 51,240 84,357
___________ ___________
Net cash (used in) operating activities $ 4,562 $ 7,124
___________ ___________
CASH FLOW FROM INVESTING ACTIVITIES
Payments for other assets 0 (858)
___________ ___________
Net cash (used in) investing activities $ 0 $ (858)
___________ ___________
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from note payable related party $ 0 $ 4,000
Issuance of common stock for cash,
net of offering costs 0 4,500
Principal payments on long term debt (4,427) (13,732)
___________ __________
Net cash provided by financing activities $ (4,427) $ (5,232)
___________ __________
Net increase (decrease) in cash
and cash equivalents $ 133 $ 1,034
CASH AND CASH EQUIVALENTS
Beginning $ 1,034 $ 0
___________ ___________
Ending $ 1,165 $ 1,034
___________ ___________
___________ ___________
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 225 $ 716
___________ ___________
___________ ___________
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock to satisfy convertible notes, accrued interest
payable, prepaid expenses, lease settlement
and accounts payable $ 0 $ 42,767
___________ ____________
___________ ____________
Other assets acquired by incurring accounts payable, trade,
Torrey Pines Research, Inc. $ 0 $ 858
___________ ____________
___________ ____________
See Notes to Financial Statements.
INTERACTIVE INC.
NOTES TO FINANCIAL STATEMENTS (unaudited)
Note 1. Organization and Nature of Business and Significant Accounting Policies
Organization and nature of business:
The Company was incorporated in the State of South Dakota on October 4, 1989.
Its intended business is to design, develop, manufacture, and market high
technology personal computer based multimedia communications products.
Efforts to define the Company's products and markets and develop a business
plan were begun in the first year. Beginning in October 1990, the Company's
activities were focused entirely on product development and initial market
development. Sales of product began in July, 1991. Operations of the Company
during its years ended September 30, 1997 and 1996 were funded primarily by
sales of the Companys products and the issuance of stock respectively. See
Note 10 for additional information on stock offerings, loans from stockholders
and other loans.
Significant accounting policies:
Revenue recognition on consulting agreements:
Revenue on consulting agreements has been recognized during the period in
which the services are performed. The related expenses are charged to
operations as incurred.
Cash and cash equivalents:
For purposes of reporting cash flows, the Company considers all highly liquid
debt instruction and money funds with a maturity of three months or less to be
cash equivalents.
Inventories:
Inventories for 1996 are stated at the lower of cost (first-in, first-out
method) or market. Inventories for 1997 are stated at cost or estimated fair
value based on salvage values. The major classifications of inventories are
as follows:
1997 1996
________ ________
Materials $ 10,380 $583,422
Work-in-process 5,577 0
Finished work 5,756 97,947
________ ________
$ 21,713 $681.369
________ ________
________ ________
NOTES TO FINANCIAL STATEMENTS (unaudited)
Note 1. Organization and Nature of Business and Significant Accounting
Policies (cont.)
Significant accounting polices (continued):
Depreciation:
Depreciation of property and equipment is computed on straight-line and
accelerated methods over the following estimated useful lives:
Years
_____
Buildings and improvements 7-15
Computer and office equipment 3-7
Other assets:
Other assets are stated at cost and are amortized on the straight-line method
over the following periods:
Years
_____
Software development costs 3
Product trademark costs 20
Patent costs 5
Organization costs 5
Expenditures related to software development are charged to operations as
incurred until technological feasibility is determined to be established for
the product. Software development costs capitalized for the years ended
September 30, 1997 and 1996 were $256,517 and $256,517 respectively.
Amortization expense for the years ended September 30, 1997 and 1996 were
$85,457 and $85,457 respectively.
Income taxes:
The company records deferred income taxes resulting from timing differences
between financial and income tax reporting. The principal timing difference
is charging software development costs and hardware production costs to
operations for income tax purposes. General business tax credits are
accounted for by reducing the income tax provision for the year in which the
credit is utilized.
Loss per common and common equivalent share has been computed using the
weighted average of the number of shares outstanding during the years ended
September 30, 1997 and 1996. The common stock equivalents discussed in Notes
9 and 10 of the Notes to Financial Statements have not been included in the
computation since their inclusion would have an anti-dilutive effect.
NOTES TO FINANCIAL STATEMENTS (unaudited)
Note 1. Organization and Nature of Business and Significant Accounting Policies
(cont.)
Income taxes: (continued)
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. The weighted average number of common and common equivalent shares
outstanding at September 30, 1997 and 1996 are 3,136,670 and 3,018,992
respectively.
Note 2. Other Assets
Other assets consist of the following:
1997 1996
____ ____
Software development costs, less accumulated
amortization of $229,687 and $144,212 at
September 30, 1997 and 1996 $ 0 $112,305
Product trademark costs, less accumulated amortization
of $2,606 and $2,126 at September 30,
1997 and 1996 6,596 7,076
Patent costs, less accumulated amortization of
$11,474 and $8,642 at September 30,
1997 and 1996 2,698 5,530
Deposits 150 150
_______ ________
$ 9,444 $212,937
_______ ________
_______ ________
Note 3. Note Payable, Bank
The Company has a line-of-credit aggregating $213,500 from a bank. At
September 30, 1997 the Company had borrowed $213,500 under this line-of-
credit. The line is at a variable interest rate of .75% over the banks
commercial base rate (10.43% at September 30, 1997), with interest on the
outstanding balance due monthly. The Company has been unable to make the
monthly interest payments, but is accruing the interest. The line is secured
by substantially all of the assets of the Company. A second line-of- credit
with the same bank for $500,000 whose balance was requested by the bank to be
paid during the fiscal year 1995 and which was also secured by substantially
all assets of the Company was paid off during fiscal year 1995 by Torrey Pines
Research, Inc., a related party, in exchange for a subordinated secured
interest, a $500,000 note payable to Torrey Pines Research, Inc. and the
issuance of 1,000,000 warrants to purchase the Company's common stock based
on an exercise price of $.50 per share. The warrants are exercisable for a
period of 18 months following repayment of the loan. The new note to Torrey
Pines Research is at a variable interest rate of 1% less than the variable
interest rate charged by the bank (9.43% at September 30, 1997), with
principal and accrued interest due on September 6, 1995. The Company was
unable to pay principal or interest on this note and is now in default.
NOTES TO FINANCIAL STATEMENTS (unaudited)
Note 4. Long-Term Debt
1997 1996
____ ____
10.75% Note payable to South Dakota Board of Economic
Development, due in monthly installments of $741,
including interest, through January 1997, secured by
substantially all assets of the Company, and guaranteed
by the Company's president and Torrey Pines
Research, Inc. $ 0 $ 2,952
4% Note payable to City of Humboldt, due in monthly
installments of $594, including interest, beginning
January 1994 through April 1998, secured by a third
position on a mortgage on the building. 27,736 27,736
15% Convertible notes to stockholders, principal
due October 1995 with interest due quarterly;
principal convertible to common stock at the option
of the noteholders on or before October 1, 1995 at
$6.00 of debt for each share of common stock: 115,000 115,000
15% Convertible notes to stockholders, principal
due April 15, 1997 with interest due quarterly,
principal convertible to common stock at the option
of the noteholders on or before April 15, 1997 at
$2.75 of debt for each share of common stock. 5,000 5,000
4% Note payable to City of Humboldt, due in monthly
installments of $364, including interest, beginning
January 1994 through April 1998, secured by a junior
security interest on equipment. 18,428 18,428
Capital lease obligations for equipment, payable in
monthly installments including interest (Note 5). 99,671 101,147
________ ________
$265,435 $269,863
Less current maturities $265,435 $264,847
________ ________
$ 0 $ 5,017
________ ________
________ ________
Aggregate maturates of long-term debt at September 30, 1997 are: 1998 $0, 1999
$0, 2000 $0.
Note 5: Lease Commitments
Company leases equipment. Future minimum payments under the leases are as
follows:
Year Ended Capital
September 30, Lease
_____________ ________
1998 $ 99,671
________
Total minimum lease payments $ 99,671
Amount representing interest 0
________
Present value of net minimum lease payments $ 99,671
________
During fiscal year ending September 30, 1996, the Company was unable to meet
certain lease payments and that leased equipment was returned, at which time
the total lease payments were accelerated.
Note 6. Federal Income Taxes
For the year ending September 30, 1997, the Company adopted Financial
Accounting Standards Board Statement No. 109. 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 September 30, 1997, the Company had a net operating loss carryforward for
tax purposes of approximately $8,108,000 and research and development tax
credits carryforward of approximately $16,500 which were available for future
reductions of tax payments, subject to certain limitations, and will expire
September 30, 2009. The research and development tax credits will be
reflected as future reductions of tax provisions for financial reporting
purposes in the year utilized. For financial reporting purposes, the
operating loss carryforward is approximately $9,414,000, which represents the
amount of future tax deductions for which a tax benefit has not been
recognized in the financial statements.
Note 7. Related Party Transactions
During 1996, Torrey Pines Research, Inc. performed consulting and other
services for the Company. Consulting fees to the company were $0 and $16,363
for the years ended September 30, 1997 and 1996, respectively.
Note 8. Patent Infringement Claims
The Company is not currently engaged in any litigation relating to patent
infringement, although it has been contacted by a third party which claims the
Company's products may infringe upon the third party's patent. Management of
The Company and the Company's patent attorney do not currently believe that
the claim will have any significant adverse effect on the Company's financial
statements.
Due to the nature of the Company's products, the Company may in the future,
receive communications from unrelated third parties that the Company's
products or trademarks infringe upon the proprietary rights of those third
parties.
NOTES TO FINANCIAL STATEMENTS (unaudited)
Note 9. 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 48 or 36 month period of continuous
service to the Company. The option price for all options granted to date is
established by the board of Directors. The exercise price for options granted
to an optionee who owns stock greater that 10% of the total voting power of
all classes of stock of the Company shall be 110% of the fair market value of
the stock on the date the option is granted. The Plan was approved by the
Board of Directors on June 18, 1991 for 33,333 shares and was ratified by the
stockholders in November, 1991. All options are to be granted within ten
years of the Plan approval. On August 28, 1992, the Board of Directors
approved additional stock options for 100,000 shares, which was ratified by
the stockholders on November 26, 1992, that vest with the option holder over
36 month period of continuous service to the Company. The Company has 133,333
shares of common stock reserved for options as of September 30, 1997.
The following details the stock options issued and outstanding as of
September 30, 1997:
Options Options Option Expiration,
Issued Exercisable Price Year Ended
_______ ___________ ______ ___________
Incentive 9,334 9,334 $ 0.25 2001
Incentive 3,000 3,000 0.25 2004
Incentive 4,500 1,692 0.32 2005
Company's President 10,000 3,744 0.32 2006
Non-statutory 3,000 3,000 0.25 2003
Non-statutory 18,000 18,000 0.25 2004
Non-statutory 36,000 24,000 0.25 2005
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 at September 30, 1997.
Warrants Warrant Expiration
Issued Price Date
________ _______ ___________
Underwriters' warrants 100,000 5.40 6-26-98
Warrants for incentive
to pay off note 1,000,000 0.50 6-30-98
NOTES TO FINANCIAL STATEMENTS (unaudited)
Note 10. Other Stock Matters
Series A preferred stock:
The series A preferred stock has a liquidation preference before common stock
($1.35 per share on 60,006 shares and $1.80 per share on 53,895 shares). Such
stock is non-voting, has no dividend provisions, and is convertible into
common stock on a share for share basis with antidilution provisions if
additional common stock is issued at less than $1.80 per share.
Nonmonetary stock transactions:
During 1997 and 1996, the Company issued stock for other services. The
transactions were recorded at the estimated fair market value of the stock at
the date that the stock was issued.
Common stock offerings:
On January 26, 1993, the Board of Directors authorized the Company to proceed
with an SEC registered public offering. The offering was completed in June
1993 with the Company selling 1,150,000 units at $4.50 per unit, each unit
consisting of one share of the Company's common stock and one redeemable
common stock purchase warrant to purchase one share of common stock at a
price of $6.75. The stock warrants expired on June 16, 1996. In addition,
the warrants were redeemable in whole and not in part by the Company upon 30
days notice at a price of $.05 per warrant at any time after separation of the
units, if the closing bid price of the Company's common stock equaled or
exceeded $8.00 for any 20 consecutive trading days ending not more than 20
days prior to the date the notice of redemption is mailed to warrant holders.
This public offering raised $4,270,541, net of stock issuance costs of
$904,459.
On June 1, 1994 the Company became effective with a registration statement
filed with the Securities and Exchange Commission. The Company offered
1,930,547 shares of Common Stock to stockholders of record on May 20, 1994, at
a price of $1.25 per share. The offering was held open to the stockholders
through June 22, 1994. From June 23, 1994 to December 22, 1994 the offering
was open to the public generally, on a first come first serve basis. Through
September 30, 1994 the Company issued 651,542 shares and received $116,587 in
cash, $390,593 in conversion of notes and note interest, lease settlement,
consulting and accounts payable net of offering expenses of $89,747.
Note 11. Major Customer
For the year ended September 30, 1996, sales to two customers accounted for
12% and 8.74% of its sales respectively. For the year ended September 30,
1997, there were two major customers who accounted for 23.7% and 9.8% of its
sales respectively.
Note 12. Write down of assets
At September 30, 1997 the Company wrote down the value of its inventories
and other assets to reflect lower of cost or estimated fair value. The
following is a break down of the amounts written down.
Inventories $634,851
Software development $ 26,829
________
Total write downs $661,680
________
