View:
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: March 31, 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) (IRS Employer ID No) 204 N. Main, Humboldt, SD 57035 (Address of principal executive offices) (605) 363-5117 Issuer's telephone number 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 . . . 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 March 31, 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 March 31, 1998 3 Statements of Operations for the Six Months Ended March 31, 1998 4 Statement of Stockholders' Equity for Six Months Ended March 31, 1998 5 Statements of Cash Flows for the Six Months Ended March 31, 1998 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART 2. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 2. Changes in Securities 10 Item 3. Defaults Upon Senior Securities 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 5. Other Information 10 Item 6. Exhibits and Reports on Form 8-K 10 3 INTERACTIVE INC. BALANCE SHEET March 31, 1998 (Unaudited) ASSETS CURRENT ASSETS 9/30/97 Cash $ 1,121 $ 1,165 Accounts Receivable 5,422 10,418 Inventories 20,078 21,713 Prepaid expenses and other 4,192 800 _____________ _____________ Total current assets $ 30,813 $ 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 84,532 77,032 _____________ _____________ $ 56,639 $ 64,138 _____________ _____________ OTHER ASSETS Cost $ 253,971 $ 253,971 Less accumulated amortization 246,183 244,526 _____________ _____________ $ 7,788 $ 9,445 _____________ _____________ Total assets $ 95,240 $ 107,679 _____________ _____________ _____________ _____________ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable, bank $ 213,500 $ 213,500 Notes payable, related party 545,000 545,000 Current maturities of long-term debt 265,436 265,436 Accounts payable, trade 1,129,365 1,119,092 Accounts payable, trade, Torrey Pines Research 296,297 296,297 Accrued expenses 248,009 244,526 _____________ ____________ Total current liabilities $ 2,697,607 $ 2,683,851 _____________ ____________ LONG-TERM DEBT $ 265,436 $ 265,436 Less current maturities (265,436) (265,436) _____________ ____________ $ 0 $ 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 (9,440,341) (9,414,071) _____________ ___________ Total stockholders' equity $ (2,602,367) $(2,576,172) Total liabilities and stockholders' equity $ 95,240 $ 107,679 _____________ ___________ _____________ ___________ 4 INTERACTIVE INC. STATEMENTS OF OPERATIONS Six and Three Months Ended March 31, 1998 and 1997 (Unaudited) Six months ended Three months ended March 31, March 31, ________________________ ________________________ 1998 1997 1998 1997 _________________________________________________ Net Sales $ 39,777 $ 42,441 $ 28,504 $ 13,719 Cost of goods sold, exclusive of depreciation and amortization shown separately below 19,591 19,623 14,587 6,523 __________ __________ __________ ___________ Gross profit $ 20,186 $ 22,818 $ 13,916 $ 7,196 __________ __________ __________ ___________ Operating expenses Marketing $ 27,811 $ 40,365 $ 16,616 $ 20,950 Support and Production 1,564 2,841 1,183 1,134 General and administrative 5,884 7,380 4,264 3,404 Depreciation and amortization9,156 51,909 4,578 25,954 __________ __________ __________ ___________ $ 44,415 $ 102,495 $ 26,641 $ 51,442 __________ __________ __________ ___________ Operating Loss $ (31,629) $ (79,677) $ (20,124) $ (44,246) __________ __________ __________ ___________ Nonoperating income (expense): Rental income $ 468 $ 2,725 $ 239 $ 625 Interest expense (20,745) (20,050) (10,504) (10,007) Miscellaneous income 25,634 636 21,639 0 __________ __________ __________ ___________ Nonoperating income (expense)$ 5,357 $ (16,689) $ 11,374 $ (9,382) __________ __________ __________ ___________ Net loss $ (26,272) $ (96,366) $ (8,750) $ (53,628) __________ __________ __________ ___________ __________ __________ __________ ___________ Loss per common and common equivalent share $ (0.01) $ (0.03) $ 0.00 $ (0.02) __________ __________ __________ ___________ __________ __________ __________ ___________ See Notes to Financial Statements 5 INTERACTIVE INC. STATEMENT OF STOCKHOLDERS' EQUITY Six Months Ended March 31, 1998 (Unaudited) Additional 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 Net loss (26,272) _________ _________ ____________ ____________ Balance March 31, 1998 $ 114 $ 3,266 $ 6,834,594 $(9,440,342) See Notes to Financial Statements. 6 INTERACTIVE INC. STATEMENTS OF CASH FLOWS Six Months Ended March 31, 1998 and 1997 (Unaudited) Six months ended March 31, __________________________ 1998 1997 ____________ ____________ CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (26,271) $ (96,365) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation and amortization 9,156 51,909 Issuance of common stock for services 75 5,528 Decrease in accounts receivable 4,996 13,331 Decrease in inventories 1,635 10,743 (Increase) in prepaid expenses and others (3,392) (341) Increase (decrease) in accounts payable 10,273 (2,509) Increase in accrued expenses 3,483 22,417 _____________ ____________ Net cash (used in) operating activities $ (45) $ 4,713 _____________ ____________ CASH FLOW FROM FINANCING ACTIVITIES Principal payments on long term debt $ 0 $ (4,428) _____________ ____________ Net cash provided by (used in) financing activities $ 0 $ (4,428) _____________ ____________ Net increase (decrease)in cash and cash equivalents $ (45) $ 285 CASH AND CASH EQUIVALENTS Beginning $ 1,165 $ 1,034 _____________ ____________ Ending $ 1,120 $ 1,319 _____________ ____________ _____________ ____________ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for interest $ 0 $ 105 _____________ ____________ _____________ ____________ 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 six months ended March 31, 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 March 31, 1998, the Company had a net operating loss carryforward for tax purposes of approximately $8,126,853. For financial reporting purposes, the operating loss carryforward is approximately $9,440,791, 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 six and three months ended March 31, 1998 and 1997. The weighted number of common and common equivalent shares outstanding for the six and three months ended March 31, 1998 and 1997 are 3,174,641, 3,117,131, 3,156,291 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. 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 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 than 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 Company has 133,333 shares of common stock reserved for options as of March 31, 1998. The following details the stock options issued and outstanding as of March 31, 1998. 8 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 2,256 0.32 2005 Non-statutory 3,000 3,000 0.25 2003 Non-statutory 18,000 18,000 0.25 2004 Non-statutory 36,000 30,000 0.25 2005 Non-statutory 10,000 4,992 0.32 2006 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 March 31, 1998. Warrants Warrant Expiration Issued Price Date ________ _______ __________ Underwriters' warrants 100,000 5.40 6-26-98 Warrants for refinancing note 1,000,000 .50 3-31-99 Note 5. Bank Line of Credit The Company has a line-of-credit aggregating $213,500 from a bank. At March 31, 1998 the agreement with the bank allowed up to a total of $213,500 to be borrowed under this line-of-credit. The line is 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 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. 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 bank line of credit, its subordinated long term notes, most of 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 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 canbe 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 March 31, 1998, accounted for approximately 65.1% 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 SoundXchange hardware at a profit. 9 The Company was also unable to pay its auditors in order to have audited financial statements for the 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 six months ended March 31, 1998 and 1997 were $39,777 and $42,441 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 the six months ended March 31, 1998 was approximately 51%, down from a gross margin of 54% for the six months ended March 31, 1997. The decrease from the previous year is due primarily to 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 six months ended March 31, 1998 and 1997 were $28,000 and $40,000, respectively. Research and development. There were no research and development expenses for the six months ended March 31, 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), to 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. There were no amounts capitalized in connection with software development for the six months ended March 31, 1998 and 1997. Software development amortization expense for the six months ended March 31, 1998 and 1997 were $0 and $21,000, respectively. The Company believes that ongoing support of the Company's SoundXchange products is critical to the long term viability of such products and the future revenues of the Company. General and administrative. General and administrative expenses for the six months ended March 31, 1998 and 1997 were $6,000 and $7,000, respectively. Depreciation and Amortization. Depreciation and amortization expenses for the six months ended March 31, 1998 and 1997 were $9,200 and $51,900, 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 six months ended March 31, 1998 and 1997 were ($2,000 and ($16,700) 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 six months ended March 31, 1998 of $26,300 or $0.01 per share on 3,174,641 weighted average shares outstanding compared to a net loss for the six months ended March 31, 1997 of $96,400 or $0.03 per share on 3,117,131 weighted average shares outstanding. 10 Management believes that the largest challenges that the Company will continue to confront during 1998 are to obtain adequate financing and in achieving positive cash flow and profitability. While the Company is optimistic about the possibility of its overcoming these challenges and achieving its goals, the Company is a high technology company and there can be no assurance that it will be able to achieve any or all of its objectives. 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 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 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 11 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: May 8, 1998 INTERACTIVE INC. /s/ Robert Stahl ______________________ Robert Stahl President /s/ Gerard L. Kappenman _______________________ Gerard L. Kappenman Secretary {PAGE|3}