View:
PAGE <1>
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, 1998.
[ ] 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 Identification 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 $ 60,738.
As of September 30, 1998 there were 3,289,976 shares of the issuer's common
stock outstanding.
PAGE <2>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
InterActive Inc. ("InterActive" or the "Company") develops, manufactures and
markets, nationally and internationally, periperal hardware products which
enable users to create and send messages across local area networks and wide
area networks of personal computers. 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 its
related financing problems, the relatively unattractive profit margins and the
ongoing losses associated with the manufacture and marketing of this product
line.
The Company is delinquent on its notes payable to secured creditors, its
leases and most of its trade accounts payable. The Company currently believes
that the best possibility it has available to repay its secured and unsecured
creditors and to return value to its stockholders to attempt to implement a plan
to restructure its debt during fiscal 1999. The Company plans to offer to its
secured and unsecured creditors restricted common stock for debt. If its
creditors decide not to accept the Company's offer, then the Company may decide
to initiate a Chapter 11 re-organization. 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 it stockholders. Since 1994 the Company's financial
statements have not been audited by independent outside auditors. See ITEM 3.
LEGAL PROCEEDINGS.
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-Mail 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.
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 could 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. The Company's SoundXchange hardware is
compatible with software packages that are in use for these purposes.
Page <3>
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 has limited the development and marketing of
its products and may force the Company to revise its strategy.
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. SoundXchange Model AX also is
compatible with Apple Macintosh models Si, Cx and Bx, and with Sun Microsystems
workstations such as the SPARC Station. 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 software applications that permit recording of sound files
utilizing object linking and embedding (OLE).
SoundXchange Model T is designed specifically for the newly 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 such as the IBM M-Wave board.
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.
Page <4>
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. 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.
Research and Development
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 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 research and development support of 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
Page <5>
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.
The Company believes that the ease of installation and use of speakerphone
style products such as the SoundXchange will be a positive factor in the
acceptance of voice input/output for personal computers in the home and office
environment. Most competitive products utilize microphones, loud speakers, or
headphones, which the Company believes will impede acceptance of such devices
for general office use. The Company has focused specific marketing attention
on these user-friendly aspects of its voice input/output hardware.
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.
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 1998, the Company had three major customers who accounted for
22.4%, 9.33% and 9% 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 will increase significantly
will make dependence on these customers unnecessary.
Employees
As of September 30, 1998, the Company had one full time employee engaged
in finance and administrative operations. The Company also has an agreement
with an outside sales representative who receives commission on sales. This
sales representative 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), the Company's former key research and
development employees who are now employees of TPR. Although TPR is a
Page <6>
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. The Company has never experienced
a work stoppage and believes that its relations with its employees are
excellent.
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.
The Humboldt property is subject to mortgages in favor of 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 good condition and
will satisfy its needs for at least the next year, but will consider leasing
additional space in other geographical locations if the need for regional
sales, distribution, or other business facilities should materialize.
ITEM 3. LEGAL PROCEEDINGS
The Company is delinquent on its notes payable to secured creditors, its
leases and most of its trade accounts payable. Although the secured creditors
have taken no steps to force liquidation of the the Company in order to satisfy
its obligation, there can be no guarantee that this will not change in the
future. 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. The Company currently
believes that the best possibility it has available to repay its secured and
unsecured creditors and to return value to its stockholders is to implement a
plan to restructure its debt during fiscal 1999. The Company plans to offer
to its secured and unsecured creditors restricted common stock for debt. If
its creditors decide not to accept the Company's offer, then the Company may
decide to initiate a Chapter 11 re-organization. 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 1998.
Page <7>
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, 1998 there were approximately 347 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 to 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.
Page <8>
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, 1998), 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 had 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 were payable upon
demand. The line of credit bore interest at a variable interest rate of .75%
over the bank's commercial base rate (10.43% at March 31, 1998) with interest on
the outstanding balance due monthly. This line was secured by liens against
substantially all of the Company's assets. At March 31, 1998, the Company had
borrowed $213,500 under this line of credit. The Company was unable to make
the monthly interest payments and was accruing the interest. In May of 1998,
the note was purchased from the bank for $10,000 by Robert Stahl, a related
party. The note was subsequently purchased from Mr. Stahl by TPR Group, Inc.,
a related pary, for $10,000.
The Company is delinquent on its notes payable to its secured creditors.,
its leases and most of its trade accounts payable. Although the secured
creditors have taken no steps to force liquidation of the Company in order to
attempt to satisfy its obligation, there can be no guarantee that this will not
change in the future. The Company also incurred 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 was assessed in 1997.
During 1998, the Company reached agreement with the South Dakota Department of
Revenue in which current and future interest and penalty were waived and the
Company was given 10 years to pay off the remaining $46,000 obligation. 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 $2,979,000 at September 30, 1998. The company currently
feels that the best possibility it has available to repay its secured and
unsecured creditors and to return value to its stockholders is to implement a
plan to restructure its debt during fiscal year 1999. The Company plans to
offer to its secured and unsecured creditors restricted common stock for debt.
If its creditors decide not to accept the Company's offer, then the Company may
decide to initiate a Chapter 11 re-organization. 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 September
30, 1998, accounted for 76% 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.
The Company was also unable to pay its auditors in order to have audited
financial statements for the years ended September 30, 1998 1997, 1996, 1995
and 1994. The absence of audited financial statements may jeopardize the
Page <9>
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 these loans.
The Company has a net operating loss carryforward for tax purposes of
approximately $8,147,000 and research and development tax credits carryforward
of approximately $16,500 at September 30, 1998. For financial reporting
purposes, the operating loss carryforward is approximately $9,466,000, 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 until 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.
It is anticipated that the Company's management will continue to explore
the possibility of acquiring additional, complementary businesses, product
lines, or technologies, or causing the Company to enter into joint ventures and
strategic alliances, for the purposes of enabling the Company to expand the
breadth of its product offerings and to obtain additional distribution channels
for the Company's existing products. Given the Company's limited cash
resources, it is contemplated that any such acquisition would be accomplished,
if at all, primarily through the issuance of stock. However, it should be
anticipated that any such acquisition, even if made solely for stock, could
place additional demands upon the Company's available working capital. The
Company has not entered into a definitive agreement pertaining to any such
acquisition, joint venture or marketing alliance, nor is the Company currently
in negotiations with any third party with respect thereto.
Results of Operations
Comparison of Fiscal Years 1997 and 1998
Revenue. Net sales for fiscal years 1998 and 1997 were $60,000 and
$77,000, respectively. The Company's decrease in sales is attributable mainly
to a reduction in sales and marketing and a reduction in advertising
expenditures.
Gross Profit. The gross margin for fiscal years 1998 and 1997 were 44%
and 52%, respectively. The decrease from the previous year is due primarily to
a decrease in sales of the higher profit margin SoundXchange Model K and Model T
and an increase in sales of the SoundXchange Model VC with its relatively lower
profit margin.
Page <10>
Sales and marketing expenses. Sales and marketing expenses for fiscal 1998
and 1997 were $38,000 and $78,000, respectively. During fiscal year 1998, the
Company did not pursue advertising efforts similar in magnitude to those in
1997. The Company also reduced the number of sales and marketing employees from
fiscal 1997 to fiscal 1998.
Research and development. There were no research and development expenses
for fiscal 1998 and 1997. The Company continued its emphasis on enhancements
to its existing products, primarily its SoundXchange products. There were no
amounts capitalized in connection with software development for fiscal 1998 and
1997. Software development amortization expense for fiscal 1998 and 1997 was $0
and $85,000, respectively. The Company wrote off the value of its capitalized
software development costs at September 30, 1997.
General and administrative. General and administrative expenses for fiscal
1998 and 1997 were $12,000 and $11,000, respectively.
Depreciation and Amortization. Depreciation and amortization expenses for
fiscal 1998 and 1997 were $18,000 and $104,000, 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 fiscal
1998 and 1997 were ($9,000) and ($672,000), respectively. In 1997, the
Company wrote down $661,700 of assets to reflect the Company's estimates of
fair market value of those assets under the Company's financial restraints.
Net Loss. The Company suffered a net loss for fiscal 1998 of $52,000 or
$0.02 per share on 3,253,121 weighted average shares outstanding compared to a
net loss for fiscal 1997 of $855,000 or $0.27 per share on 3,136,670 weighted
average shares outstanding. The decrease in the net loss was due primarily to
to the writedown of inventories and other assets in fiscal 1997 and an agreement
with the South Dakota Department of Revenue which reduced the use tax liability
to the state.
Management believes that the largest challenges that the Company will
confront during 1999 are in its attempt to achieve increases in revenues and
profitability during fiscal 1999. While the Company is optimistic about the
possibility of its overcoming these challenges and achieving its goals, and
there can be no assurance that it will be able to achieve any or all of its
objectives for fiscal 1999.
The Company does not believe that the year 2000 issues will have a material
effect on the Company's business, results of operations or financial condition.
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
Page <11>
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, 41, has served as President, COO of the Company from
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, 73, has served as a director of the Company since February,
1993 and served as President from September 1995 to November 1996. From
November 1996 Mr. Pohl has served as CEO. 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, 54, 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 an 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, 50, has served as a director of the Company since its
incorporation in October 1989 and has served 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 and
CEO of TPR Group, Inc. founded in 1996. 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, 1998, 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 Payouts
Restricted
Stock
Salary Bonus Other Awards Options
Name and Principal Position Year $ $ $ $ #
___________________________ ____ ______ _____ _____ ______ _______
Robert Stahl 1998 23,337
President, COO 1997 18,271 6,500
Russ Pohl 1998 5,202 12
CEO 1997 2,140 5,720
1996 19,700
Stock Options
The CEO and President did not exercise any options during fiscal year 1998.
Page <12>
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. Because of the financial restraints of the Company since 1994, these
fees have not been paid, but have been accrued.
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 renumeration.
During fiscal year 1998, Mr. Kappenman provided consulting services to the
Company and was paid with 12,000 shares of restricted common stock of the
Company.
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 sale based
on volume of sales. During fiscal 1998, Mr. Pohl was paid 12,000 shares of
restricted common stock of the Company for consulting services.
In November 1997, Mr. Stahl was appointed President, with remuneration of
10,000 share of restricted common stock monthly. In April, 1997 Mr. Stahls
compensation was revised to a sliding commission based on volume of sales.
Page <13>
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,
1998 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 Percent of
Shares Outstanding
Beneficially Shares
Owned(1)
___________ __________
Gerard L. Kappenman(2) 133,171 4.0
William J. Hanson(3) 1,752,544 40.7
Russell Pohl(4) 212,757 6.4
Robert Stahl(5) 79,906 2.4
Torrey Pines Research(6) 1,657,444 38.3
All directors and officers as a group
(four persons) (2)(3)(4)(5) 2,178,378 49.5
______________________________________________________________________________
(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, 1998.
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, 18,000 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, 18,000 shares of Common stock issuable upon exercise
of options and 1,000,000 shares of Common Stock issuable upon exercise of
warrants. Of this total, an aggregate of 95,100 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 6,240 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 1,000,000 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
Company's behalf. During 1998, CSS Ltd./obert Stahl was paid $10,760 of
commissions which totalled $23,337. CSS Ltd. was also paid $1,856 for inventory
which it purchased on the Company's behalf. The Company is currently unable to
pay CSS Ltd./Mr. Stahl the total of $29,364 which is owed him in commissions.
Other transactions. The Company had a line of credit for $213,000 and
accrued interest from a bank. In May, 1998 Mr. Stahl purchased the promissory
note for the former line of credit from the bank for $10,000. This note was
subsequently purchased by TPR Group, Inc. for $10,000.
Page <14>
Russell A. Pohl
Compensation. 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. During 1998, Mr. Pohl earned
$5,202 in commissions of which the Company was only able to pay $2,380 because
of its financial restraints. Mr. Pohl was also granted 12,000 shares of
restricted common stock for consulting services he performed for the Company.
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 payments on 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. In 1998, Mr. Kappenman
received 12,000 share of restricted common stock for consulting services
provided to the Company.
Torrey Pines Research, Inc./TPR Group, 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.
Page <15>
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, rental
income from Torrey Pines totalled $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.
The Company had borrowings of $213,000 and accrued interest under a line of
credit from a bank. In May, 1998 Mr. Stahl purchased the promissory note for
the former line of credit from the bank for $10,000. This note was subsequently
purchased by TPR Group, Inc. for $10,000.
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.
Page <16>
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, and
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)
Page <17>
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 year ended September 30,
1998.
Page <18>
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: November 20, 1998 INTERACTIVE INC.
BY: \s\Robert Stahl
________________________________
Robert Stahl
President
BY: \s\Gerard L. 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 President November 20, 1998
______________________
Robert Stahl
\s\Gerard L. Kappenman Secretary November 20, 1998
_______________________
Gerard L. Kappenman Director
\s\William J. Hanson Director November 20, 1998
________________________
William J. Hanson
\s\Russell A. Pohl Director November 20, 1998
_________________________
Russell A. Pohl CEO
Page <19>
INTERACTIVE INC.
FINANCIAL REPORT
SEPTEMBER 30, 1998
Page <20>
CONTENTS
Page
____
Letter from management on unaudited financial statemnts 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-12
Page
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, 1998. 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.
Page
INTERACTIVE INC.
BALANCE SHEETS
September 30, 1998 and 1997
(Unaudited)
ASSETS 1998 1997
____________ ____________
CURRENT ASSETS (Notes 3 and 4)
Cash and cash equivalents $ 1,018 $ 1,165
Accounts receivable 4,175 10,418
Inventories 22,480 21,173
Prepaid expenses and other 1,837 800
____________ ____________
Total current assets $ 29,510 $ 34,096
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 92,032 77,032
____________ ____________
$ 49,138 $ 64,138
____________ ____________
____________ ____________
OTHER ASSETS, at cost (Notes 2, 3 and 4)
Cost $ 253,971 $ 253,971
Less accumulated amortization 247,838 244,526
____________ ____________
$ 6,132 $ 9,444
____________ ____________
$ 84,780 $ 107,679
____________ ____________
____________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, bank (Note 3) $ 0 $ 213,500
Notes payable, related parties (Note 3) 758,500 545,000
Current maturities of long-term debt (Note 4) 266,436 265,436
Accounts payable, trade 1,139,015 1,119,092
Accounts payable, trade,
Torrey Pines Research, Inc. 296,297 296,297
Accrued expenses 207,227 244,526
____________ ____________
Total current liabilities $ 2,667,474 $ 2,683,851
____________ ____________
LONG-TERM DEBT (Notes 4 and 5)
$ 311,435 $ 265,436
Less current maturities (266,436) (265,436)
____________ ____________
$ 45,000 $ 0
____________ ____________
STOCKHOLDERS' EQUITY (Notes 4, 9 and 10)
Series A preferred stock, par value $.001 per
share; authorized 5,000,000 shares; issued 1998
113,901 shares; 1997 113,901 shares; total
liquidation preference 1998 of $178,019; 1997
of $178,019 $ 114 $ 114
Common stock, par value $.001 per share;
authorized 10,000,000 shares; issued 1998
3,289,976 shares; 1997 3,190,976 shares 3,289 3,191
Additional paid-in capital 6,834,594 6,834,594
Accumulated deficit (9,465,690) (9,414,070)
____________ ____________
$ (2,627,694) $ (2,576,172)
____________ ____________
$ 84,780 $ 107,679
____________ ____________
____________ ____________
See Notes to Financial Statements.
Page
INTERACTIVE INC.
STATEMENTS OF OPERATIONS
Years Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
____________ ____________
Net Sales $ 60,378 $ 76,590
Cost of goods sold, exclusive of depreciation
and amortization shown separately below 33,785 36,972
____________ ____________
Gross profit $ 26,593 $ 39,619
____________ ____________
Operating expenses
Sales and Marketing $ 38,135 $ 78,477
Support and production 0 4,692
General and administrative 12,441 11,281
Depreciation and amortization 18,312 103,787
____________ ____________
$ 68,889 $ 198,238
____________ ____________
Operating Loss $ (42,297) $ (158,619)
____________ ____________
Nonoperating income (expense):
Rental income 890 5,400
Miscellaneous expense 0 (661,681)
Interest expense (41,105) (40,632)
Miscellaneous income 30,872 996
____________ ____________
Nonoperating income (expense): $ (9,323) $ (695,916)
____________ ____________
Net loss $ (51,620) $ (854,535)
____________ ____________
____________ ____________
Loss per common and common equivalent share $ (0.02) $ (0.27)
See Notes to Financial Statements
Page
INTERACTIVE INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1998 and 1997
(Unaudited)
Retained
Additional Earnings
Capital Stock Issued Paid-in (Accumulated
____________________
Preferred Common Capital Deficit)
_________ _________ ____________ ____________
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)
Issuance of common stock for:
Services 98
Net loss (51,620)
_________ _________ ____________ ____________
Balance September 30, 1998 $ 114 $ 3,290 $ 6,834,594 $(9,465,690)
_________ _________ ____________ ____________
_________ _________ ____________ ____________
See Notes to Financial Statements.
Page
INTERACTIVE INC.
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
__________ __________
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (51,620) $ (854,535)
Adjustments to reconcile net loss to net
cash (used in) operating activities:
Depreciation and amortization 18,312 103,787
Issuance of common stock for services 98 5,573
Loss on write down of assets 661,680
Change in assets and liabilities
Decrease in receivables 6,243 10,153
Decrease (increase) in inventories (767) 24,085
Decrease (increase) in prepaid expenses and other (1,037) 731
Increase (decrease) in accounts payable, trade 19,923 5,128
Decrease in accounts payable, trade,
Torrey Pines Research 0 (4,000)
Increase (decrease) in accrued expenses (37,299) 51,240
__________ __________
Net cash provided by (used in) operating
activities $ (46,147) $ 4,562
__________ __________
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long term debt $ 46,000 0
Principal payments on long term debt 0 (4,427)
__________ __________
Net cash provided by (used in)
financing activities $ 46,000 $ (4,427)
__________ __________
Net increase (decrease) in cash
and cash equivalents $ (147) $ 133
CASH AND CASH EQUIVALENTS
Beginning $ 1,165 $ 1,034
__________ __________
Ending $ 1,018 $ 1,165
__________ __________
__________ __________
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 0 $ 225
__________ __________
__________ __________
See Notes to Financial Statements.
Page
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, 1998 and 1997 were funded primarily by sales of the
Companys products.
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 are stated at the lower of cost (first-in, first-out method) or
market. The major classifications of inventories are as follows:
1998 1997
___________ __________
Materials $ 8,445 $ 10,380
Work-in-process 6,765 5,577
Finished work 7,270 5,756
___________ __________
$ 22,480 $ 21.713
___________ __________
Page
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 were charged to operations as
incurred until technological feasibility was determined to be established for
the product. Software development costs capitalized for the years ended
September 30, 1998 and 1997 were $0 and $256,517 respectively. Amortization
expense for the years ended September 30, 1998 and 1997 were $3,312 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,
1998 and 1997. 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.
Page
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, 1998 and 1997 are 3,253,121 and 3,136,670 respectively.
Note 2. Other Assets
Other assets consist of the following:
1998 1997
____ ____
Product trademark costs, less accumulated amortization
of $3,086 and $2,606 at September 30,
1998 and 1997 $ 6,116 $ 6,596
Patent costs, less accumulated amortization of
$14,172 and $11,474 at September 30, 1998 and 1997 0 2,698
Deposits 150 150
_______ _______
$ 6,266 $ 9,444
_______ _______
_______ _______
Note 3. Note Payable, Bank
The Company had a line-of-credit aggregating $213,500 from a bank. At March 31,
1998 the Company had borrowed $213,500 under this line-of-credit. The line was
at a variable interest rate of .75% over the banks commercial base rate (10.43%
at March 31, 1998), with interest on the outstanding balance due monthly. The
Company was unable to make the monthly interest payments, but did accrue the
interest. The line was secured by substantially all of the assets of the
Company. The note was purchased for $10,000 from the bank by Robert Stahl, a
related party in May, 1998. Additionally, if the note is sold or paid to Robert
Stahl the bank is to be paid one-half of any proceeds exceeding the $10,000
purchase price. 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, 1998), 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.
Page
NOTES TO FINANCIAL STATEMENTS (unaudited)
Note 4. Long-Term Debt
1998 1997
__________ __________
Non-interest bearing Note payable to South
Dakota Department of Revenue due in monthly
installments of $167 beginning April 1999
and increasing to $500 monthly April 2001
through March 2008 $ 46,000 $ 0
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 27,336 27,336
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
__________ __________
$ 311,435 $ 265,435
Less current maturities $ 266,436 $ 265,435
__________ __________
$ 44,999 $ 0
__________ __________
__________ __________
Aggregate maturates of long-term debt at September 30, 1998 are: 1999 $2,000,
2000 $4,000, 2001 $6,000.
Page
Note 5: Lease Commitments
Company has leased equipment. Future minimum payments under the leases are as
follows:
Year Ended Capital
September 30, Lease
_____________ ________
1999 $ 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, 1998, 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, 1998, the Company had a net operating loss carryforward for tax
purposes of approximately $8,147,000 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 $9,466,000, 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
The Company had borrowings of $213,000 and accrued interst under a line of
credit
from a bank. In May of 1998, Mr. Stahl purchased the promissory note for the
former line of credit from the bank for $10,000. This note was subsequently
purchased by TPR Group, Inc. for $10,000.
Note 8. Patent Infringement Claims
The Company is not currently engaged in any litigation relating to patent
infringement, although it has been contracted 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.
Page
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, 1998.
The following details the stock options issued and outstanding as of September
30, 1998:
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 2,820 0.32 2005
Company's President 10,000 6,240 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 36,000 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, 1998.
Warrants Warrant Expiration
Issued Price Date
________ _______ __________
Warrants for incentive to pay
off note 1,000,000 0.50 6-30-99
Page
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 1998 and 1997, 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, 1997, sales to two customers accounted for
23.7% and 9.8% of its sales respectively. For the year ended September 30, 1998,
there were three major customers who accounted for 22.4%, 9.3% and 9.0% of its
sales respectively.