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, 2001.
[ ] 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 Group, 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 St.
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:
Common Stock, $.001 par value
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 revenue for its most recent fiscal year: $9,312.
The aggregate market value of the Company's outstanding Common stock held by
non-affiliates was approximately $62,961, based upon the bid price of the
Registrant's Common Stock on December 6, 2001.
As of December 6, 2001 there were 5,276,039 shares of the issuer's common stock
outstanding.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
During fiscal year 2001, InterActive Inc. a South Dakota corporation,
reincorporated in Delaware by merging into a newly formed and wholly-owned
Delaware subsidiary, InterActive Group, Inc. InterActive Group, Inc. (the
Company) is the surviving Company.
Prior to 1995, InterActive Inc. ("InterActive") was engaged in providing
computer consulting services and the development, manufacture and marketing,
nationally and internationally, of computer software, systems and peripheral
hardware products, including a line of SoundXchange products, that were designed
to enable users to create and send messages across local area networks and wide
area networks of personal computers. In fiscal 1994, InterActive substantially
reduced its operations and, since that time, except for sporadic sales of
SoundXchange products from existing inventories, InterActive has not conducted
any significant operations. See Item 6, "Management's Discussion and Analysis
or Plan of Operation." At present, the Company is not involved in the
production of any products or providing services on a significant level.
The Company continues to evaluate a number of possibilities for revenue
generation, which may include plans to provide Internet consulting services with
the assistance of TPR Group, Inc. (together with its affiliated entities,
"TPR"), a related party. Implementation of one or more of these plans will be
necessary to generate all or a substantial portion of the income needed to
achieve profitable operations in the future. However, there can be no assurance
that the Company will be able to develop or successfully implement any such
strategy, nor that the Company will be able to achieve profitable operations in
the near term, if at all. It may also be necessary for the Company to seek
additional equity and/or debt financing to provide a portion of the funds needed
to implement this strategy. There can be no assurance that the assistance
provided by TPR will enable the Company to develop a profitable consulting
services business, nor that any additional funds needed through private
investments or loans will be available to the Company on acceptable terms, if at
all.
The Company has sustained operating losses for several years. Continued
operations of the Company are dependent on the Company's ability to generate
future revenues that are sufficient for the Company to meet its existing debt
obligations and finance new product and/or service development and continuing
operations. For these reasons, the report of the independent certified public
accountants on the Company's audited financial statements included herein
contains a "going concern" qualification. See Item 7, "Audited Financial
Statements." The Company has several judgments against it and more have been
threatened as a result of its inability to pay its obligations to its unsecured
creditors. See Item 3 "Legal Proceedings".
As of September 30, 2001, 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 is not a party to
any collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its relations with its employee are excellent.
On January 19, 2001, the Company's Board of Directors approved a change in
InterActive's state of incorporation from South Dakota to Delaware. The
reincorporation was accomplished by merging InterActive into a wholly-owned
Delaware subsidiary ("InterActive Group, Inc.") newly formed for this purpose.
As a consequence of the reincorporation, among other things, all of the
previously outstanding shares of InterActive's common stock were automatically
converted on a one-for-one basis into shares of the common stock of InterActive
Group, Inc., and each share of the InterActive's series A preferred stock was
converted automatically into one share of the common stock of InterActive Group,
IncIn addition, all outstanding options and warrants to purchase shares of
InterActive's common stock were converted into options or warrants, as the case
may be, to purchase the same number of shares of the common stock of InterActive
Group, Inc., at the same price per share and on the same terms and conditions.
InterActive's outstanding shares of series B preferred stock were also converted
automatically as a consequence of the reincorporation into an equal number of
shares of the series A preferred stock of InterActive Group, Inc. having the
same rights, preferences, privileges and restrictions as InterActive's
outstanding series B preferred stock had. The reincorporation was accomplished
pursuant to the terms and conditions of an Agreement and Plan of Reincorporation
(the "Plan of Reincorporation") entered into between InterActive Inc. and
InterActive Group, Inc.
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ITEM 2. DESCRIPTION OF PROPERTY
Facilities
The Company owns the 22,000 square foot facility that it occupies in
Humboldt, South Dakota. The Humboldt property is subject to a lien in
connection with the Company's inability to pay for building improvements
performed by a contractor. This liability has been assumed by a related party.
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. South Dakota currently has no state income
tax on corporations.
The Company believes that its current facilities are in reasonably good
condition. At September 30, 2001, this facility is being held for sale. To
date, no offer has been tendered. The Company is liable for past due taxes,
which, if unpaid could cause the building to be claimed by a third party who has
purchased the back taxes.
ITEM 3. LEGAL PROCEEDINGS
The Company is delinquent on its interest payments on its secured note, one
of its subordinated long term notes and a portion of its trade accounts payable.
The Company has several judgments against it 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 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
remaining creditors. The Company believes that a liquidation of its assets
would only satisfy a small portion of the Company's obligations to its secured
creditors and provide nothing for the Company's unsecured creditors or its
stockholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During fiscal 2001, the Company issued 100,000 shares of its Common Stock
for satisfaction of Company liabilities.
The Company's common stock is currently quoted on the OTC Bulletin Board
under the symbol "IACG".
The following table sets forth the bid price of the Company's Common stock
as of each period indicated as quoted on the OTC Bulletin Board.
FY 2001 FY 2000
---------------------- ----------------------
High Low High Low
---------- ---------- ---------- ----------
1st Quarter .125 .062 .09 .05
2nd Quarter .062 .04 .25 .13
3rd Quarter .06 .03 .25 .16
4th Quarter .065 .025 .16 .13
On September 30, 2001 there were approximately 427 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 or Preferred Stock and
does not anticipate that it will do so in the foreseeable future. The future
payment of dividends, if any, on the Common or Preferred 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
In 2001, the Company issued 100,000 shares of common stock in satisfaction
of Company liabilities.
The Company's inventory of SoundXchange hardware, which, as of September
30, 2001, accounted for 13% 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 has a net operating loss carryforward for tax purposes of
approximately $7,748,000 and research and development tax credits carryforwards
of approximately $15,000 at September 30, 2001. The Company will not be able to
utilize any such credits unless it is able to achieve 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.
At September 30, 2001, the Company's facility is for sale, but no
acceptable offers have been received.
The Company has sustained operating losses for several years and its
current liabilities exceeded current assets at September 30, 2001 and 2000.
Continued operations of the Company are dependent upon the Company's ability to
meet its debt requirements on a continuing basis and its ability to generate
profitable future operations. Management's plans in this regard are to increase
its revenues by providing Internet consulting services with the assistance of
TPR Group and its affiliates (TPR), related parties, and generating cash through
private investments or loans. There can be no assurance that TPR will provide
such assistance or any other support to the Company.
It is anticipated that the Company's management will continue to explore
the possibility of causing the Company to enter into joint ventures and
strategic alliances. Given the Company's limited cash resources, it is
4
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
In fiscal 1994, InterActive substantially reduced its operations and, since
that time, except for sporadic sales of SoundXchange products from existing
inventories, InterActive has not conducted any significant operations.
COMPARISON OF FISCAL YEARS 2000 AND 2001
Revenue. Net sales for fiscal years 2001 and 2000 were $9,000 and $25,000,
respectively. The Company's decrease in sales is attributable mainly to less
demand for its SoundXchange Model K product.
Gross Profit. The gross margin for fiscal years 2001 and 2000 was 32% and
92%, respectively. The decrease in gross margin is due to a write-down of
inventory during 2001.
Sales and marketing expenses. Sales and marketing expenses for fiscal 2001
and 2000 were $18,000 and $30,000, respectively. The decrease in sales and
marketing expense was largely due to a decrease in emphasis on marketing the
Company's SoundXchange product.
General and administrative. General and administrative expenses for fiscal
2001 and 2000 were $92,000 and $102,000, respectively. The decrease was
primarily due to an increased effort on the Company's behalf to decrease
expenses.
Depreciation. Depreciation expense for fiscal 2001 and 2000 was $4,000 and
$8,000. The decrease in depreciation expense was mainly due to the ceasing of
recording depreciation on the building facility in accordance with management's
plan to sell the property. In fiscal year 2001, an impairment loss of $6,700
was recorded on the land, building and improvements to reduce the depreciated
cost of the assets to estimated fair value less costs to sell.
Nonoperating (Expense). Nonoperating (expense) for fiscal 2001 and 2000
was ($79,000) and ($28,000), respectively. The increase in nonoperating expense
was due to an increase in interest expense and a decrease in write off of
accounts payable.
Net (Loss). The Company showed a net loss for fiscal 2001 of ($186,000) or
($0.04) per share on 5,237,329 weighted average shares outstanding compared to a
net loss for fiscal 2000 of ($138,000) or ($0.03) per share on 5,021,018
weighted average shares outstanding. The increase in net loss in 2001 was
largely due to a decrease in sales and an increase in nonoperating expense.
Management believes that the largest challenges that the Company will
confront during 2002 are in its attempt to achieve increases in revenues and
profitability during fiscal 2002. There can be no assurance that the Company
will be able to achieve any or all of its objectives for fiscal 2002.
ITEM 7. AUDITED FINANCIAL STATEMENTS
The Audited Financial Statements are filed as part of this Annual
Report on form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the directors and
executive officers of the Company:
5
Robert Stahl, 44, 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.
William J Hanson, 54, has served as a director of the Company since October
1989. He was Chief Operating Officer of InterActive, Inc. from October 1992 to
December 1993. Mr. Hanson is a founder of Old TPR, Inc. and TPR Group, Inc. who
are shareholders of the Company. Mr. Hanson serves on the Board of Directors of
several privately held companies including: Old TPR, Inc., TPR Group, Inc.,
Torrey Pines Research, Inc., a subsidiary of TPR Group, Inc., AcuPrint, Inc.,
San Diego Magnetics, Inc., Eagle Manufacturing and Technolgy, Inc., and Pronto,
Inc. He is CEO of Torrey Pines Research and of San Diego Magnetics. Mr. Hanson
holds several patents related to laser printing technology. Mr. Hanson's prior
experience includes engineering and management positions at Datagraphix (a
General Dynamics subsidiary) and Xerox Corporation. Mr. Hanson holds a BSME
degree from the New Jersey Institute of Technology.
J. Randolph Sanders, 48, has served as a director of the Company since
January 2001. He is the President of Torrey Pines Research, Inc. He serves on
the Board of Directors of TPR Group, Inc., Old TPR, Inc., Torrey Pines Research,
a subsidiary of TPR Group, Inc., and San Diego Magnetics, Inc. He is an expert
in non-impact printing technology and holds several patents in this field. Mr.
Sanders' prior experience includes engineering and management positions at
Datagraphix (a former General dynamics subsidiary) and Burroughs Corporation.
Mr. Sanders holds BSME and MSME degrees from the University of Florida.
Paul Schock, 43, has served as a director of the Company since January
2001. He is a cofounder of Bluestem Capital Company, a South Dakota based
venture capital firm. He serves on the Board of Directors of several companies,
including: CoEv, Inc., Dakota Balance, Inc., and Fiksdal Motel. He was a
director of InterActive from April 1991 to December 1994, and CFO from March
1993 to October 1993. Mr. Schock was President of Schock Financial Services,
the pre-cursor of Bluestem Capital Company. He was CFO of American Western
Corporation, a public manufacturing company in Sioux Falls, South Dakota. He
also served as Vice President of First Bank Systems. Mr. Schock attended
Stanford University and graduated magna cum laude from Augustana College with a
degree in Business.
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
EXECUTIVE COMPENSATION
The following summary compensation table sets forth all compensation paid
or accrued by the Company for services rendered in all capacities during the
three fiscal years ended September 30, 2001 by the Company's president. There
was no other compensated executive officer of the Company. There were no
executive officers of the Company whose total salary and bonus exceeded $100,000
in the 2001 fiscal year.
Other Restricted
Name & Annual Stock All Other
Principal Compen- Awards Options/ LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) ($) SAR (#) Payouts sation
- -------------------- ---- ---------- --------- ---------- ----------- --------- ------- ---------
Robert Stahl . . . . 2001 4,621
- -------------------- ---- ----------
President, Secretary 2000 11,520
1999 7,281 844
STOCK OPTION PLANS
Prior to the reincorporation of the Company in Delaware, the Board of
Directors and shareholders of the Company had adopted and approved two stock
option plans, the 1991 Stock Option Plan (the "1991 Plan") and the 1992 Stock
Option Plan (the "1992 Plan"), pursuant to which options to purchase up to an
aggregate of 133,333 shares of the Company's Common Stock (33,333 shares and
100,000 shares, respectively) could be granted to officers, directors and
employees, and to consultants, vendors, customers and others expected to provide
significant services to the Company. If an option granted under either the 1991
Plan or the 1992 Plan expired or terminated, the shares subject to any
unexercised portion of that option would again become available for the issuance
6
other options under the applicable plan. Options could be granted under
either plan which were intended to qualify as "incentive stock options" under
Section 422A of the Code ("Incentive Stock Options") or, alternatively, as stock
options which would not so qualify ("Nonstatutory Options").
The Board or a committee designated by the Board was empowered to determine
the terms and conditions of each option granted under either or both of the
plans. However, the exercise price of an Incentive Stock Option cannot be less
than the fair market value of the Common Stock on the date of grant (110% if
granted to an employee who owns 10% or more of the Common Stock), and the
exercise price of a Non-Statutory Option can not be less than 85% of the fair
market value of the Common Stock on the date of grant. No Incentive Stock
Option can have a term in excess of ten years (five years if granted to an
employee owning 10% or more of the Common Stock), and no Incentive Stock Option
can be granted to anyone other than a full-time employee of the Company. All of
the options granted under the 1991 Plan vest over a 48 month period of
continuous service to the Company from the date of grant, and all options
granted under the 1992 plan vest over a 36 month period of continuous service.
As of September 30, 2001, options to purchase 23,834 shares of Common
Stock, at an exercise price of $0.25 to $0.32 per share had been granted to a
total of three participants and were outstanding under the 1991 Plan, and
options to purchase 21,000 shares of Common Stock, at an exercise price of $0.25
per share had been granted to a total of 3 participants and were outstanding
under the 1992 Plan.
In addition to the stock options previously granted by InterActive which
were replaced with identical InterActive Group, Inc. stock options, the Board of
Directors of InterActive Group, Inc. has adopted a 2000 Stock Option Plan
pursuant to which options to purchase up to 3,000,000 shares of the Common Stock
of InterActive Group, Inc. may be granted. No options have been granted or are
outstanding under this plan at September 30, 2001.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant stock options or stock appreciation rights in
fiscal 2001 to any of the executive officers of the Company named above.
Aggregated Option Exercises in Fiscal 2001 and Option Values as of
---------------------------------------------------------------------------
September 30,2001
------------------
No options were exercised in fiscal 2001 by any of the Company's executive
officers. The value of unexercised options at September 30, 2001, for each of
the executive officers of the Company identified in the Executive Compensation
table above were as follows:
Number of Value of
Unexercised Unexercised
Options/SARs at In-the-Money
9/30/2001 (#) Options/SARs at
Shares 9/30/2001 ($)
Acquired on Value Exercisable / Exercisable /
Name Exercise (#) Realized ($) Unexercisable Unexercisable
Robert Stahl 0 0 10,000/0 N/A
The value of unexercised in-the-money options is determined by using the
difference between the exercise price and the average bid price for a share of
the Company's Common Stock on September 30, 2001, as quoted on the OTC Counter
Bulletin Board, which was $0.025. Since the exercise price of each of the
options indicated in the table was greater than $0.025, no value has been
ascribed to any of them.
COMPENSATION OF DIRECTORS
Non-employee directors of InterActive Group, Inc. receive a fee of $100 for
each Board meeting attended and are reimbursed for travel expenses connected
with a Board meeting. No additional fees are paid to directors for serving on
committees. The Company has accrued these fees for fiscal year 2001. Directors
who are not employees of the Company are eligible for the grant of non-statutory
stock options under the Company's stock option plan.
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 Delaware law. At present, there is no pending litigation or
7
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 30, 2001
with respect to the beneficial ownership of the Company's Common Stock and
Preferred Stock by (i) each person or group known by the Company to be the
beneficial owner of shares of the Company's Common Stock and/or Preferred Stock
entitled to cast more than 5% of the total number of votes entitled to be cast
on all matters presented to the Company's shareholders for their approval, (ii)
each director of the Company, (iii) each executive officer of the Company named
in the Summary Compensation Table below, and (iv) all directors and executive
officers of the Company as a group. Unless otherwise indicated in the
footnotes, each person listed below has sole voting and investment power with
respect to the shares beneficially owned by such person, subject to applicable
community property laws, and the address of each such person is care of the
Company, 204 North Main, Humboldt, South Dakota 57035.
Shares Owned Beneficially (1)
----------------------------------------------------------------------------------
Common and Series A Preferred (2) Series A Preferred (2)
------------------- ------------------- ------------------- -------------------
NAME Number % of Total Number % of Total
- ---- ------------------- ------------------- ------------------- -------------------
Russell A. Pohl 396,137 7.5 0 0
William J. Hanson(3) 21,986,143 83.6 2,000,000 100
J. Randolph Sanders 26,700 0.5 0 0
Paul Schock 3,334 0.1 0 0
Robert Stahl/CSS Ltd.(4) 111,812 2.1 0 0
Old TPR, Inc.(5) 2,030,157 32.4 0 0
TPR Group, Inc.(6) 22,030,157 83.9 2,000,000 100
============================================ =================== =================== =================== ===================
All directors and officers as a group (four 22,127,989 84.7 2,000,000 100
individuals) (3)(4)
============================================ =================== =================== =================== ===================
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission, based on information
furnished by each person listed. Beneficial ownership includes shares that each
named shareholder has the right to acquire within sixty days of the Record Date.
In calculating percentage ownership of shares entitled to vote, all shares which
a named shareholder has the right to so acquire are deemed outstanding for the
purpose of computing the percentage ownership of that person, but are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person. Listed persons may disclaim beneficial ownership of certain shares.
(2) The holder of the Company's Series A Preferred Stock is entitled to
cast ten votes for each share of Series A Preferred Stock owned of record as of
the Record Date on each matter to be presented to the shareholders of the
Company for their approval at the Meeting, voting together with the holders of
the Company's Common Stock.
(3) Includes 78,401 shares of Common Stock owned of record by Mr. Hanson
and 18,000 shares of Common Stock issuable to Mr. Hanson upon exercise of
outstanding stock options, 889,742 shares of Common Stock owned of record by Old
TPR, Inc., a California corporation of which Mr. Hanson is a director, executive
officer and principal shareholder, and a total of 1,000,000 shares of Common
Stock issuable upon exercise of stock purchase warrants held of record by Old
TPR, Inc. Also includes the 2,000,000 shares of the Company's Series A
Preferred Stock owned of record by TPR Group, Inc., a Delaware corporation of
which Mr. Hanson is a director, executive officer and principal stockholder,
which entitle TPR Group, Inc. to cast an aggregate of 20,000,000 votes on all
matters to be presented to the shareholders of the Company for their approval.
Does not include an additional 6,000,000 shares of Common Stock which would be
issuable upon conversion of 600,000 shares of the Company's Series B Preferred
Stock which may be issued to TPR Group, Inc. at a future date pursuant to the
terms and conditions of the Term Sheet dated December 4, 1998. See "Certain
relationships and related party transactions." Also does not include the total
of 44,014 shares of common stock owned of record by Mr. Sanders and Mr. Love
(see note 6 below), the beneficial ownership of which is disclaimed by Mr.
Hanson.
8
(4) Includes 10,000 shares of Common Stock issuable upon exercise of
options pursuant to the Company's 1992 Stock Option Plan.
(5) Includes 889,742 shares of Common Stock owned of record by Old TPR,
Inc. and 1,000,000 shares of Common Stock issuable upon exercise of stock
purchase warrants held by Old TPR, Inc. Also includes a total of 96,401 of
Common Stock owned of record and exercise of stock options held by, Mr. Hanson,
who may be deemed to be an "affiliate" of Old TPR, Inc. Also includes 26,700
shares of Common stock owned of record by J. Randolph Sanders, and 17,314 shares
of Common stock owned of record by Richard Love, each of whom is an officer,
director and principal shareholder and may, therefore, be deemed to be an
"affiliate" of Old TPR.
(6) Includes 2,000,000 shares of the Company's Series A Preferred Stock
owned of record by TPR Group, Inc., which entitle TPR Group, Inc. to cast an
aggregate of 20,000,000 votes on all matters to be presented to the shareholders
of the Company for their approval. Also includes the total of 1,889,742 shares
of Common Stock beneficially owned by Old TPR, Inc., which is under common
control with TPR Group, Inc. as well as a total of 96,401 of Common Stock owned
of record and exercise of stock options held by, Mr. Hanson, who may be deemed
to be an "affiliate" of TPR Group, Inc. Also includes 26,700 shares of Common
stock owned of record by J. Randolph Sanders, and 17,314 shares of Common stock
owned of record by Richard Love, each of whom is an officer, director and
principal shareholder and may, therefore, be deemed to be an "affiliate" of TPR
Group, Inc.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1996, Mr. Stahl was appointed President, COO. In April 1997,
Mr. Stahl's compensation was revised to a sliding commission based on volume of
sales. During 2001, CSS Ltd. (a company in which Mr. Stahl is a principal) was
paid $4,621 in commissions for Mr. Stahl's services.
The Company previously had a line of credit under which it owed $213,500 in
principal amount to a bank. In May 1998, Mr. Stahl purchased the promissory
note evidencing borrowings under the line of credit from the bank for $10,000.
This note, which was secured by a lien on all of the Company's assets, was
subsequently purchased from Mr. Stahl by TPR Group, Inc. for $10,000. As
discussed below, this debt, which then totaled $289,440, including $75,940 of
accrued interest, was subsequently surrendered for cancellation by TPR Group,
Inc. in exchange, along with other consideration, for the issuance of 2,000,000
shares of the Company's Series A Preferred Stock.
In December, 1998, the Company initiated an offer to its creditors,
pursuant to which the Company proposed to issue shares of its Common Stock to
settle accrued expenses, accounts payable, notes payable and long-term debt. In
June 1999, the Company announced a "successful" consummation of this "Debt
Restructuring," in that the holders of approximately $1,569,756 of the Company's
previously outstanding debt had agreed to accept shares of the Company's common
stock in exchange therefore. TPR Group, Inc. and its affiliated entities
received 296,298 shares of the Company's Common Stock in exchange for $296,298
of unsecured debt. Mr. Hanson is a director, executive officer and principal
shareholder of TPR Group, Inc. and each of its affiliated entities.
In addition, in connection with the Debt Restructuring, TPR Group, Inc.
acquired 2,000,000 shares of the Company's Series A Preferred Stock in exchange
for the surrender to the Company for cancellation of the $289,440 of secured
debt that had been acquired by TPR Group, Inc. from Mr. Stahl, and the
contribution to the capital of the Company of $35,324 in cash and a $4,000 note
due TPR Group, Inc. from the Company.
In August 1995, a $500,000 note payable that originally was issued by the
Company to a bank was acquired by Old TPR, Inc. as a consequence of its
guarantee of the Company's obligations thereunder. This note, which is due on
demand, bears interest at a 13.6% rate of interest as of September 30, 2001, and
is secured by substantially all of the assets of the Company. In connection
with the performance of this guarantee, Old TPR, Inc. received a warrant to
purchase up to 1,000,000 shares of the Company's Common Stock at the price of
$.50 per share. The warrant is exercisable for so long as the note remains
outstanding, and for one full year thereafter. As of September 30, 2001,
$1,043,654 of principal and accrued interest was due and payable under this
note. In connection with the Debt Restructuring, TPR Group, Inc. agreed to
exchange this secured debt for 600,000 shares of Series B Preferred Stock at a
later date, provided that at least 18 months has expired since the Debt
Restructuring, the Company has not become subject to certain additional
obligations or liabilities, the Company's common stock has been publicly traded
for at least the 180-day period immediately preceding the date on which the
indebtedness is to be contributed, and the Company has publicly reported
positive net income for at least two full quarters prior to the date on which
the indebtedness is to be contributed.
At September 30, 2001, the Company owed TPR Group for loans to the Company
to pay for operating expenses the amount of $158,114, of which $84,133 was
incurred during fiscal 2001.
9
In June of 1999, Robert Stahl purchased a debt from a contractor who held a
mechanics lien on the Company's building in the amount of $11,625 for the sum of
$5,000. This debt was subsequently purchased from Mr. Stahl by Mr. Hanson for
$5,000. Additionally, the Company accrued $500 for Director's fees for Mr.
Hanson.
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.
10
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.
--------------------- ---------
Independent Auditor's Report F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Deficit F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6/13
2. Exhibits
--------
Exhibit Number
--------------
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to
Company's Registration Statement on Form SB-2 (File No. 33-60774-D),
filed with the Commission on April 8, 1993 ("Registration Statement").
3.2 By-laws (incorporated by reference to Exhibit 3.2 to Registration
Statement).
10.01 Sale of Assets Agreement dated as of November 2, 1993, between
Powerhouse Computer Sales, Ltd. and the Company (Form 8-K dated
November 2, 1993, file number 000-21898)
10.02 Disbursement Request and Authorization, and Promissory Note payable
to Western Bank, dated January 20, 1994*
10.03 Disbursement Request and Authorization, and Promissory Note payable
to Western Bank, each dated November 2, 1993 (Form 10-QSB dated
February 8, 1994, file number 000-21898)
10.04 Agreement dated as of September 29, 1993, between the Company and
Torrey Pines Research (Form 10-KSB dated December 27, 1993, file
number 000-21898)
10.05 Sublease Agreement dated as of July 1, 1993, between the Company and
Torrey Pines Research (Form 10-KSB dated December 27, 1993, file
number 000-21898)
10.06 Assignment of Lease dated November 2, 1993 between Powerhouse
Computer Sales, Ltd. and the Company.*
10.07 Employment Agreement dated as of October 1, 1993 between the Company
and James R. Cink (Form 10-QSB dated February 8, 1994, file number
000-21898)
10.08 Nations Credit Dealer Agreement*
10.09 "Term Sheet" between the Company and TPR outlining terms of "Offer to
Creditors", previously filed in connection with Form 10KSB, filed
January 10, 2000.
* The exhibits marked with an asterisk have been filed with Form
SB-2 registration No. 33-77240.
** Refer to Form 14-C filed on January 19, 2001 including InterActive
Group, Inc. Delaware Articles of Incorporation and InterActive Group,
Inc. 2000 stock option plan.
(b) Reports on Form 8-K
None
11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: December 18, 2001 INTERACTIVE GROUP, INC.
BY: \s\ Robert Stahl
----------------
Robert Stahl
President, 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, Secretary December 18, 2001
- ---------------------- ---------------------
Robert Stahl
\s\Paul Schock Director December 18, 2001
- ---------------------- ---------------------
Paul Schock
\s\William J. Hanson Director December 18, 2001
- ---------------------- ---------------------
William J. Hanson
\s\J. Randolph Sanders Director December 18, 2001
- ---------------------- ---------------------
J. Randolph Sanders
12
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
InterActive Group, Inc.
Humboldt, South Dakota
We have audited the accompanying balance sheets of InterActive Group, Inc.
(formerly InterActive Inc.) as of September 30, 2001 and 2000, and the related
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InterActive Group, Inc. as of
September 30, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and its total liabilities exceed its total assets. This raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ McGladrey & Pullen, LLP
Sioux Falls, South Dakota
October 29, 2001
F-1
INTERACTIVE GROUP, INC.
BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
ASSETS (NOTE 5) 2001 2000
- ------------------------------------------------------------------------------------------
Current Assets
Cash $ 271 $ 1,952
Accounts receivable 640 1,280
Inventories 5,925 12,222
Land, building and improvements held for sale 38,395 -
Prepaid expenses and other assets 628 628
------------ ------------
TOTAL CURRENT ASSETS 45,859 16,082
------------ ------------
Property and Equipment, at cost
Land, building and improvements, less accumulated
depreciation of $58,744 at September 30, 2000 - 48,472
Equipment, less accumulated depreciation of $10,573
and $10,424 at September 30, 2001 and 2000 446 595
------------ ------------
446 49,067
------------ ------------
TOTAL ASSETS $ 46,305 $ 65,149
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ------------------------------------------------------------------------------------------
Current Liabilities
Notes payable, related party (Note 5) $ 500,000 $ 500,000
Current maturities of long-term debt (Note 5) 26,000 24,000
Accounts payable (Note 4) 8,789 63,076
Accounts payable, related parties (Note 4) 171,238 97,605
Accrued expenses 67,777 57,823
Accrued expenses, related parties (Note 5) 543,974 412,798
------------ ------------
TOTAL CURRENT LIABILITIES 1,317,779 1,155,302
------------ ------------
Long-Term Debt, less current maturities (Note 5) 33,000 39,000
------------ ------------
Contingencies (Notes 4 and 5)
Stockholders' Deficit (Notes 3 and 8)
Series A preferred stock, 2,000,000 and 113,901 shares issued
at September 30, 2001 and 2000, total liquidation preference
of outstanding shares of $300,000 at September 30, 2001 2,000 114
Series B preferred stock, 2,000,000 shares issued at
September 30, 2000 - 2,000
Common stock, 5,276,039 and 5,062,138 shares issued
at September 30, 2001 and 2000 5,276 5,062
Additional paid-in capital 8,054,967 8,044,567
Accumulated deficit (9,366,717) (9,180,896)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (1,304,474) (1,129,153)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 46,305 $ 65,149
============ ============
See Notes to Financial Statements.
F-2
INTERACTIVE GROUP, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000
- ---------------------------------------------------------------
Net sales $ 9,312 $ 24,878
Cost of goods sold 6,297 2,094
------------ ------------
GROSS PROFIT 3,015 22,784
------------ ------------
Operating expenses:
Selling 17,764 30,316
General and administrative 91,516 101,703
------------ ------------
109,280 132,019
------------ ------------
OPERATING (LOSS) (106,265) (109,235)
------------ ------------
Nonoperating income (expense):
Write off of accounts payable 58,311 87,671
Other income, net 1,953 6,183
Interest expense (139,820) (122,172)
------------ ------------
(79,556) (28,318)
------------ ------------
(LOSS) BEFORE INCOME TAXES (185,821) (137,553)
Income tax expense (Note 6) - -
------------ ------------
NET (LOSS) $ (185,821) $ (137,553)
============ ============
(Loss) per common share $ (0.04) $ (0.03)
============ ============
See Notes to Financial Statements.
F-3
INTERACTIVE GROUP, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
Series A Series B Additional
Preferred Preferred Common Paid-In Accumulated
Stock Stock Stock Capital Deficit Total
- ----------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $ 114 $ 2,000 $ 4,912 $ 8,040,217 $ (9,043,343) $ (996,100)
Net (loss) - - - - (137,553) (137,553)
Issuance of common stock for
satisfaction of Company
liabilities (Note 4):
Related parties, including
stockholders - - 100 2,900 - 3,000
Others - - 50 1,450 - 1,500
----------- ----------- ------- ----------- ------------- ------------
Balance, September 30, 2000 114 2,000 5,062 8,044,567 (9,180,896) (1,129,153)
Net (loss) - - - - (185,821) (185,821)
Issuance of common stock
for satisfaction of
Company related party
liabilities (Note 4) - - 100 10,400 - 10,500
Conversion of Series A
preferred stock to
common stock (114) - 114 - - -
Conversion of Series B
preferred stock to
Series A preferred stock 2,000 (2,000) - - - -
----------- ----------- ------- ----------- ------------- ------------
Balance, September 30, 2001 $ 2,000 $ - $ 5,276 $ 8,054,967 $ (9,366,717) $(1,304,474)
=========== =========== ======= =========== ============= ============
See Notes to Financial Statements.
F-4
INTERACTIVE GROUP, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000
- -----------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net (loss) $(185,821) $(137,553)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation 3,526 7,622
Provision for doubtful accounts - 816
Impairment loss on land, building and improvements held for sale 6,700 -
Write off of accounts payable (58,311) (87,671)
Changes in working capital components:
(Increase) decrease in:
Accounts receivable 640 9,204
Inventories 6,297 2,073
Prepaid expenses and other assets - (1)
Increase (decrease) in:
Accounts payable 4,024 (950)
Accrued expenses 141,131 126,373
---------- ----------
NET CASH (USED IN) OPERATING ACTIVITIES (81,814) (80,087)
---------- ----------
Cash Flows From Investing Activities
Purchase of property and equipment - (742)
---------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES - (742)
---------- ----------
Cash Flows From Financing Activities
Advances from related party 84,133 84,657
Principal payments on long-term borrowings (4,000) (2,000)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 80,133 82,657
---------- ----------
NET INCREASE (DECREASE) IN CASH (1,681) 1,828
Cash
Beginning 1,952 124
---------- ----------
Ending $ 271 $ 1,952
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ - $ 80
Income taxes - -
See Notes to Financial Statements.
F-5
INTERACTIVE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: During fiscal year 2001, InterActive Inc., a South Dakota
- --------------------
corporation, reincorporated in Delaware by merging into a newly formed and
wholly-owned Delaware subsidiary, InterActive Group, Inc. (Note 3). InterActive
Group, Inc. is the surviving company. The Company developed, manufactured and
marketed, nationally and internationally, peripheral hardware products that
enable users to create and send messages across local and wide area networks.
It is producing no products or significant services currently and is evaluating
alternative plans for future operations (Note 2).
A summary of the Company's significant accounting policies follows:
Use of estimates: The preparation of financial statements requires management
- ------------------
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
- -----------
method) or market. The composition of inventories is as follows:
2001 2000
--------- ---------
Raw Materials $ 5,871 $ 11,742
Finished Goods 54 480
--------- ---------
$ 5,925 $ 12,222
========= =========
Property and equipment: Depreciation of equipment is computed by the
- ------------------------
straight-line method over estimated useful lives ranging between five to seven
years. Property and equipment is subject to a lien as a result of the Company's
inability to pay for building improvements performed by a contractor. This
liability has been assumed by a related party. The building is also subject to
a tax lien as a result of the nonpayment of property taxes.
As of March 31, 2001, land, building and improvements were reclassified to held
for sale concurrent with management's plan to sell the property. Accordingly,
the accounting policy for such property was changed from being carried at cost,
less accumulated depreciation with estimated depreciable lives of the building
and improvements ranging between seven to fifteen years, to being carried at the
lower of its depreciated cost or estimated fair value less costs to sell, and
the recording of depreciation was ceased as of March 31, 2001. An impairment
loss of $6,700 was recorded on the land, building and improvements to reduce the
depreciated cost of the assets to estimated fair value less costs to sell.
F-6
INTERACTIVE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(Loss) per share: (Loss) per share has been computed on the basis of the
- ------------------
weighted-average number of common shares outstanding during each period
presented. Securities that could potentially dilute basic (loss) per share in
the future that were not included in the computation of diluted (loss) per share
during fiscal year 2001, because to do so would have been antidilutive to the
net (loss), are as follows: 20,000,000 shares of common stock issueable upon
the conversion of Series A preferred stock, 44,834 shares of common stock
issueable upon the exercise of options, and 1,000,000 shares of common stock
issueable upon the exercise of stock warrants.
Securities that could potentially dilute basic (loss) per share in the future
that were not included in the computation of diluted (loss) per share during
fiscal year 2000, because to do so would have been antidilutive to the net
(loss), are as follows: 20,000,000 shares of common stock issueable upon the
conversion of Series B preferred stock, 221,632 shares of common stock issueable
upon the conversion of Series A preferred stock, 83,834 shares of common stock
issueable upon the exercise of options, and 1,000,000 shares of common stock
issueable upon the exercise of stock warrants.
All references to (loss) per share in the financial statements are to basic
(loss) per share. Diluted (loss) per share is the same as basic (loss) per
share for all per share amounts presented. The weighted average number of
common shares outstanding was 5,237,329 and 5,021,018 for the years ended
September 30, 2001 and 2000, respectively.
Deferred taxes: Deferred taxes are provided on an asset and liability method
- ---------------
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
NOTE 2. CONTINUATION OF OPERATIONS
The Company has sustained operating losses for several years and its current
liabilities exceeded current assets at September 30, 2001 and 2000. Continued
operations of the Company are dependent upon the Company's ability to meet its
debt requirements on a continuing basis and its ability to generate profitable
future operations. Management's plans in this regard are to increase its
revenues by providing Internet consulting services with the assistance of TPR
Group and its affiliates (TPR), related parties, and generating cash through
private investments or loans. There can be no assurance that TPR will provide
such assistance or any other support to the Company.
F-7
INTERACTIVE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. CAPITAL STOCK AND REINCORPORATION
On January 19, 2001, InterActive Inc.'s shareholders approved a proposal to
change InterActive Inc.'s state of incorporation from South Dakota to Delaware
(the "Reincorporation"). The Reincorporation was consummated by merging
InterActive Inc. into a wholly-owned Delaware subsidiary, InterActive Group,
Inc. which was newly formed for this purpose. As a consequence of the
Reincorporation, among other things, all of the previously outstanding shares of
InterActive Inc.'s common stock at the Reincorporation date (5,162,138 total
shares) were automatically converted on a one-for-one basis into shares of the
common stock of the Company, and each share of InterActive Inc.'s series A
preferred stock (113,901 total shares) was converted automatically into one
share of the common stock of the Company. In addition, all outstanding options
and warrants to purchase shares of InterActive Inc.'s common stock (83,834
shares issueable upon the exercise of options and 1,000,000 shares issueable
upon the exercise of stock warrants) were converted into options or warrants, as
the case may be, to purchase the same number of shares of the common stock of
the Company, at the same price per share and on the same terms and conditions.
InterActive Inc.'s outstanding series B preferred stock (2,000,000 total shares)
was also converted automatically as a consequence of the Reincorporation into an
equal number of shares of series A preferred stock of the Company having the
same rights, preferences, privileges and restrictions as InterActive Inc.'s
outstanding series B preferred stock formerly had.
Capital stock consisted of the following at September 30, 2001:
Series A convertible preferred stock, voting, $.001 par value, authorized
2,000,000 shares; issued and outstanding 2,000,000 shares $2,000
Common stock, voting, $.001 par value, authorized 50,000,000 shares;
issued and outstanding 5,276,039 shares 5,276
Capital stock consisted of the following at September 30, 2000:
Series A preferred stock, voting, $.001 par value, authorized 5,000,000
shares; issued and outstanding 113,901 shares $ 114
Series B preferred stock, voting, $.001 par value; authorized 2,000,000
shares; issued and outstanding 2,000,000 shares 2,000
Common stock, voting, $.001 par value, authorized 10,000,000 shares;
issued and outstanding 5,062,138 shares 5,062
The authorized capital stock of the Company consists of 50,000,000 shares of
common stock, $.001 par value, and 10,000,000 shares of preferred Stock, $.001
par value. The Board of Directors of the Company is authorized, subject to the
limitations prescribed by law and the provisions of its certificate of
incorporation, to provide for the issuance of preferred stock in series and to
establish the number of shares to be included in each series, and to fix the
designation, powers, preferences and rights of the shares of each series and the
qualifications, limitations and restrictions thereof.
F-8
INTERACTIVE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. CAPITAL STOCK AND REINCORPORATION (CONTINUED)
The Board of Directors of the Company has authorized the creation of one series
of preferred stock to be designated as "Series A Convertible Preferred Stock".
As a part of the Reincorporation, 2,000,000 shares of Series A convertible
preferred stock were outstanding as of September 30, 2001 and are convertible
into 20,000,000 shares of common stock, with such conversion rate subject to
adjustment if certain events occur. The Series A convertible preferred stock
has a liquidation preference before common stock of $.15 per share, plus any and
all accumulated and unpaid dividends. The stock is voting for the same number
of shares in which it is entitled to be converted. In addition, 600,000 shares
of Series B preferred stock of the Company have been reserved for future
issuance to TPR in connection with an agreement with TPR (agreement continued in
full force and effect from InterActive Inc.) in which TPR would exchange
$500,000 of debt plus accrued interest owing from the Company for 600,000 shares
of Series B preferred stock if certain conditions in the agreement are
satisfied.
NOTE 4. SETTLEMENT OF LIABILITIES
In fiscal year 2001, the Company issued 100,000 shares of common stock to a
related party to settle certain accounts payable totaling $10,500. No gain was
recognized on the settlement of this obligation. In fiscal year 2000, the
Company issued 150,000 shares of common stock (of which 100,000 shares were
issued to a related party, including shareholders) to settle certain accounts
payable totaling $4,500. No gain was recognized on the settlement of these
obligations.
Substantially all of the Company's accounts payable are several years past due.
The Company does not anticipate making any payments on these obligations in the
near term. The Company has several judgments against it and more threatened as
a result of its inability to pay its obligations to its unsecured creditors.
The Company follows the practice of writing off accounts payable when
extinguished under the statute of limitations.
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT
At September 30, 2001 and 2000, the Company has a $500,000 note payable to TPR
that is due on demand. This note was originally to a bank and was assumed by
TPR on behalf of the Company as a result of its guarantee of the loan. In
connection with the assumption of the loan in a prior year, TPR received
1,000,000 restricted common stock warrants that each represent the right to
purchase one share of common stock at $.50. The warrants expire one year
following satisfaction of the note.
The note to TPR bears interest at a variable rate of interest (compounded at
13.6% as of September 30, 2001) and is secured by substantially all assets of
the Company. Accrued interest payable in the accompanying balance sheets
includes $543,655 and $412,094, respectively, at September 30, 2001 and 2000 of
accrued interest due to TPR under the demand note discussed above. TPR has an
agreement with the Company in which TPR would exchange the $500,000 of debt plus
accrued interest owing from the Company for 600,000 shares of Series B preferred
stock if certain conditions in the agreement are satisfied.
F-9
INTERACTIVE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Long-term debt consists of the following at September 30, 2001 and 2000:
2001 2000
----------- -----------
0% Settlement payable, due in monthly installments of $167
through March 2001, and monthly installments of $500
thereafter through March 2008 $ 39,000 $ 43,000
15% Note, due November 30, 1995, collateralized
by substantially all assets of the Company 20,000 20,000
----------- -----------
59,000 63,000
Less current maturities 26,000 24,000
----------- -----------
$ 33,000 $ 39,000
=========== ===========
An accounts payable amount of $62,712 due as of September 30, 1997, was
restructured through an agreed settlement in which interest in the amount of
$16,509 was forgiven, with the balance converted to a long term settlement
payable. If the Company fails to comply with the terms of the settlement, then
the entire unpaid obligation under the settlement plus the abated interest of
$16,509 will be due and payable immediately. Accordingly, the $16,509 is
included in the accompanying balance sheets in accrued expenses as of September
30, 2001 and 2000.
Aggregate maturities on long term debt as September 30, 2001 are due in future
years as follows: 2002 $26,000; 2003 $6,000; 2004 $6,000; 2005 $6,000; 2006
$6,000; and thereafter $9,000.
It is not practicable to estimate the fair value of the notes payable and
long-term debt obligations noted above due to the credit position of the Company
and its inability to obtain financing from any lender other than related
parties.
F-10
INTERACTIVE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. INCOME TAX MATTERS
Net deferred tax assets consist of the following components as of September 30,
2001 and 2000:
2001 2000
----------- -----------
Deferred tax assets:
Operating loss carryforward $2,634,300 $2,576,174
Inventory 206,128 204,113
Tax credit carryforward 15,269 15,269
Property and equipment 13,653 11,138
Accrued expenses 3,598 340
----------- -----------
2,872,948 2,807,034
Less valuation allowance 2,872,948 2,807,034
----------- -----------
$ - $ -
=========== ===========
The Company recorded a full valuation allowance on the deferred tax assets due
to lack of assurance that the tax benefits can be realized. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income.
At September 30, 2001, the Company has for tax reporting purposes approximately
$15,000 in unused research and development credits and a net operating loss
carryforward of approximately $7,748,000 available to be offset against future
federal taxable income or income tax liabilities. These carryforwards expire in
varying amounts in years ending September 30, 2008 through 2021.
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax (loss) from continuing
operations for the years ended September 30, 2001 and 2000 due to the following:
2001 2000
----------- -----------
Computed "expected" tax (credits) $ (65,037) $ (48,144)
Increase (decrease) in income taxes resulting from:
Change in valuation allowance 65,914 43,131
Other, net (877) 5,013
----------- -----------
$ - $ -
=========== ===========
F-11
INTERACTIVE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. RELATED PARTY TRANSACTIONS NOT DISCLOSED ELSEWHERE
During 2001 and 2000, the Company incurred $4,621 and $13,539, respectively, for
sales commissions to officers of the Company. During 2000, the Company incurred
$10,500 for services provided by the Company's chief executive officer.
NOTE 8. STOCK OPTIONS
The Company has three incentive stock option plans, two of which were in place
at September 30, 2000 (Existing Plans). A total of 133,333 options are
available under the Existing Plans to be granted to employees and other
individuals that provide services to the Company. 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 with the Company. The option price is
established by the Board of Directors, but at a price not less than fair market
value for incentive stock options and a price not less than 85% of fair market
value for nonstatutory stock options.
In addition to the Existing Plans, the Board of Directors of the Company adopted
a 2000 Stock Option Plan pursuant to which options to purchase up to 3,000,000
shares of the common stock of the Company may be granted. No options had been
granted pursuant to this plan as of September 30, 2001.
During the year ended September 30, 2001, no options were granted or exercised
and 39,000 options were forfeited. During the year ended September 30, 2000, no
options were granted, exercised or forfeited. Accordingly, at September 30,
2001 and 2000, 44,834 and 83,834 options, respectively, were outstanding at a
weighted average exercise price of $.27 and $.26, respectively.
Fixed options outstanding at September 30, 2001 are summarized as follows:
Options Outstanding Options Exercisable
------------------------ ----------------------
Remaining
Number Number Contractual Exercise
Outstanding Exercisable Life Price
----------- ----------- ----------- ---------
3,000 3,000 2 years $ 0.25
18,000 18,000 4 years 0.25
5,334 5,334 4 years 0.25
4,000 4,000 4 years 0.25
14,500 14,500 5 years 0.32
----------- -----------
44,834 44,834
=========== ===========
F-12
INTERACTIVE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. MAJOR CUSTOMERS
A major customer is defined as a customer to whom sales greater than 10% were
made during the period. Sales to three customers amounted to $5,120, $2,000 and
$1,350, respectively, and comprised 91% of the net sales for the year ended
September 30, 2001. Sales to two customers amounted to $10,075 and $6,656,
respectively, and comprised 67% of the net sales for the year ended September
30, 2000.
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
2001 2000
----------- -----------
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of common stock for satisfaction of
liabilities: Accounts payable, related parties $ 10,500 $ 3,000
Accounts payable - 1,500
F-13