SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 000-21898
INTERACTIVE GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 46-0408024
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(state or other jurisdiction of (IRS Employer ID No)
incorporation or organization)
204 N. Main, Humboldt, SD 57035
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(Address of principal executive offices)
(605) 363-5117
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Issuer's telephone number
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes.X.. No....
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 5,276,039 shares at February 18, 2003
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Transitional Small Business Disclosure Format (Check one): Yes No X
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1
INTERACTIVE GROUP, INC.
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Page(s)
-------
Balance Sheets -December 31, 2002 and September 30, 2002 3
Statements of Operations -Three Months Ended December 31, 2002 and 2001 4
Statement of Stockholders' Deficit - Three Months Ended December 31, 2002 5
Statements of Cash Flows - Three Months Ended December 31, 2002 and 2001 6
Notes to Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-10
Item 3. Controls and Procedures 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
2
INTERACTIVE GROUP, INC.
BALANCE SHEETS
ASSETS 12/31/2002 9/30/2002
Unaudited
------------ ------------
Current Assets
Cash $ 3,956 $ 18,491
Inventories 13,432 13,005
Prepaid expenses and other assets 627 627
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Total current assets 18,015 32,123
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Property and Equipment, at cost
Land, building and improvements 100,516 100,516
Equipment 12,694 12,694
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113,210 113,210
Less accumulated depreciation 83,475 81,772
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29,735 31,438
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Total assets $ 47,750 $ 63,561
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Notes payable, related parties $ 600,000 $ 600,000
Current maturities of long-term debt 6,000 6,000
Accounts payable 27,767 14,312
Accounts payable, related parties 245,540 244,217
Accrued expenses 23,813 23,599
Accrued expenses, related parties 714,409 698,614
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Total current liabilities 1,617,529 1,586,742
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Long-term Debt, less current maturities 26,000 27,500
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Stockholders' Deficit
Series A preferred stock, $.001 par value; authorized 2,000,000 shares;
issued and outstanding 2,000,000 shares; liquidation preference
at December 31, 2002 of $300,000 2,000 2,000
Common stock, $.001 par value; authorized 50,000,000 shares;
issued and outstanding 5,276,039 shares 5,276 5,276
Additional paid-in capital 8,054,967 8,054,967
Accumulated deficit (9,658,022) (9,612,924)
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Total stockholders' deficit (1,595,779) (1,550,681)
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Total liabilities and stockholders' deficit $ 47,750 $ 63,561
============ ============
See Notes to Financial Statements.
3
INTERACTIVE GROUP, INC.
STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2002 and 2001
(Unaudited)
Three months ended December 31,
2002 2001
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Net sales $ 1,569 $ 1,352
Cost of goods sold 51 60
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Gross profit 1,518 1,292
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Operating expenses
Selling 8,582 3,413
General and administrative 25,200 23,624
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33,782 27,037
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Operating (loss) (32,264) (25,745)
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Nonoperating income (expense):
Interest expense (12,834) (38,019)
Other income, net - 514
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(12,834) (37,505)
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(Loss) before income taxes (45,098) (63,250)
Income tax expense (benefit) 0 0
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Net (loss) $ (45,098) $ (63,250)
================= =================
Loss per common share $ (0.01) $ (0.01)
================= =================
See Notes to Financial Statements.
4
INTERACTIVE GROUP, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
Three months ended December 31, 2002
(Unaudited)
Series A Preferred Additional Paid-in Accumulated
Stock Common Stock Capital Deficit Total
------------------- ------------- ------------------- ------------- ------------
Balance, September 30, 2002 $ 2,000 $ 5,276 $ 8,054,967 $ (9,612,924) $(1,550,681)
Net loss - - - (45,098) (45,098)
------------------- ------------- ------------------- ------------- ------------
Balance, December 31, 2002 $ 2,000 $ 5,276 $ 8,054,967 $ (9,658,022) $(1,595,779)
=================== ============= =================== ============= ============
See Notes to Financial Statements.
5
INTERACTIVE GROUP, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended December 31, 2002 and 2001
(Unaudited)
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(45,098) $(63,250)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation 1,703 37
Change in assets and liabilities:
(Increase) in accounts receivable - (712)
(Increase) decrease in inventories (427) 60
Decrease in prepaid expenses and other assets - 50
Increase (decrease) in accounts payable 11,955 (1,175)
Increase in accrued expenses 16,009 38,128
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Net cash (used in) operating activities (15,858) (26,862)
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CASH FLOWS FROM FINANCING ACTIVITIES
Advances from related party 2,823 29,598
Principal payments on long-term debt (1,500) (1,000)
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Net cash provided by financing activities 1,323 28,598
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Net increase (decrease) in cash (14,535) 1,736
CASH
Beginning 18,491 271
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Ending $ 3,956 $ 2,007
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ - $ -
Income tax - -
See Notes to Financial Statements.
6
INTERACTIVE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The financial information presented has been prepared from the books and records
without audit, but in the opinion of management, includes all adjustments
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. The
results of operations for the three months ended December 31, 2002, are not
necessarily indicative of the results expected for the entire year.
NOTE 2. INCOME 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.
At December 31, 2002, the Company has for tax reporting purposes approximately
$15,000 in unused research and development credits and a net operating loss
carryforward of approximately $8,030,000 available to be offset against future
federal taxable income or income tax liabilities. These carryforwards expire in
varying amounts in years ending September 30, 2005 through 2022. The Company
has 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.
NOTE 3. LOSS PER COMMON AND COMMON EQUIVALENT SHARE
The loss per common and common equivalent share has been computed using the
weighted average of the number of shares outstanding for the three months ended
December 31, 2002 and 2001. Securities that could potentially dilute basic
earnings per share in the future that were not included in the computation of
diluted earnings per share for the three month period ended December 31, 2002,
because to do so would have been antidilutive are as follows: 20,000,000 shares
of common stock issuable upon the conversion of Series A preferred stock, 37,500
shares of common stock issuable upon the exercise of options, and 1,000,000
shares of common stock issuable upon the exercise of stock warrants. In
addition, the 3,400,000 remaining stock options contingently issuable under the
agreements with three independent sales consultants and any shares which may be
issuable upon conversion of the Bluestem Capital Partners III Limited
Partnership note payable, are not included in diluted earnings per share.
Securities that could potentially dilute basic earnings per share in the future
that were not included in the computation of diluted earnings per share for the
three month period ended December 31, 2001, because to do so would have been
antidilutive are as follows: 20,000,000 shares of common stock issuable upon
the conversion of Series A preferred stock, 44,834 shares of common stock
7
issuable upon the exercise of options, and 1,000,000 shares of common stock
issuable 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 number of common and common equivalent shares
outstanding for the three months ended December 31, 2002 and 2001were 5,276,039.
NOTE 4. NOTES PAYABLE
At December 31, 2002 and September 30, 2002, the Company had a $500,000 note
payable to Old TPR, Inc. (TPR), a related party, that is due on demand. The
note was originally to a bank and was assumed by TPR in a prior year on behalf
of the Company as a result of its guarantee of the loan. The note to TPR bears
interest at the rate of 13.6% and is secured by substantially all the assets of
the Company. In connection with the assumption of the loan, 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.
During fiscal 2002, the Company entered into an agreement with Bluestem Capital
Partners III Limited Partnership (Bluestem), a related party. Under the terms
of a subordinated convertible note, Bluestem loaned the Company the sum of
$100,000 with interest to accrue at the rate of 10% per year. The note is
payable April 23, 2003, unless previously converted. If the loan is converted,
it would be converted into Company stock, at a number of shares to be agreed
upon by the parties. Repayment of the loan is expressly subordinated to payment
in full of any and all Senior Indebtedness (as defined in the convertible note)
of the Company. At December 31, 2002, interest payable in the amount of $6,864
had been accrued for this note.
NOTE 5. MANAGEMENT'S PLANS
The Company has no significant revenue sources and the Company has
sustained operating losses for several years and its current liabilities
substantially exceeded current assets at December 31, 2002. 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 attempt to increase
its revenues through the Carlsbad Security Products Division (CSPD), which was
created in April 2002 with the assistance of TPR, a related party, for the
purpose of developing, marketing and selling networked monitoring and security
systems incorporating third party security components, such as digital video
recorders and video cameras, with the Company's SoundXchange products and
proprietary software. There can be no assurance that TPR will continue to
provide assistance or any other support to the Company. As of December 31, 2002,
the Company had not yet sold any networked security products. The directors and
management of the Company are in the process of reviewing the progress of the
security products sales efforts, and the prospects for raising new capital.
Following this review, it is contemplated that additional efforts may be made to
raise new debt or equity financing, and then to attempt to sell the Company's
current or additional products and services. There can be no assurance that the
Company will be successful in raising new capital, at least on terms that are
acceptable to the Company, or in selling sufficient products and/or services to
enable the Company to attain profitability.
8
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued certain Statements of
Financial Accounting Standards which have required effective dates occurring
during the Company's September 30, 2003 fiscal year end. The Company's
financial statements, including the disclosures in this Form 10-QSB, are not
expected to be materially affected by those accounting pronouncements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue. Net sales were $1,569 for the three months ended December 31,
2002 compared to $1,352 for the three month period ended December 31, 2001.
Gross Profit. Gross profit increased 17.5% to $1,518 for the three months
ended December 31, 2002 from $1,292 for the three months ended December 31,
2001.
Selling expenses. Selling expenses increased to $8,582 for the three
months ended December 31, 2002 from $3,413 for the three months ended December
31, 2001. This increase was primarily due to the Company's efforts to begin
selling digital security products. See also "Liquidity and Capital Resources"
section below.
General and administrative. General and administrative expenses were
$25,200 for the three months ended December 31, 2002 and $23,624 for the three
months ended December 31, 2001. The increase from the previous period is
primarily due to increased costs in support of the Company's efforts to enter
new markets.
Depreciation. Depreciation expense for the three months ended December 31,
2002 and 2001 was $1,703 and $37, respectively. The increase in depreciation
expense was mainly due to reclassifying land, building, and improvements from
being held for sale to being held and used during the quarter ending September
30, 2002 and adjusting the carrying amount of the related assets to their
carrying amount before being classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the assets been
continuously classified as held and used.
Nonoperating (expense). Nonoperating (expense) for the three months ended
December 31, 2002 and December 31, 2001 was ($12,834) and ($37,505),
respectively. The decrease in nonoperating expense is mainly due to a decrease
in interest expense to the Company as a result of the write off of a note
payable in fiscal year 2002.
Net Loss. Net loss for the three months ended December 31, 2002 was
$45,098 or ($0.01) per share compared to a net loss for the three months ended
December 31, 2001 of $63,250 or ($0.01) per share. The decrease in losses was
due largely to increased efforts on the part of the Company's management to
contain costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no significant revenue sources and the Company has
sustained operating losses for several years and its current liabilities
substantially exceeded current assets at December 31, 2002. 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 attempt to increase
its revenues through the CSPD, which was created in April 2002 with the
assistance of TPR, a related party, for the purpose of developing, marketing and
selling networked monitoring and security systems incorporating third party
security components, such as digital video recorders and video cameras, with the
10
Company's SoundXchange products and proprietary software. As of December 31,
2002 the Company had not yet sold any networked security products. There can be
no assurance that TPR will continue to provide assistance or any other support
to the Company. The directors and management of the Company are in the process
of reviewing the progress of the security products sales efforts, and the
prospects for raising new capital. Following this review, it is contemplated
that additional efforts may be made to raise new debt or equity financing and
then to attempt to sell the Company's current or additional security products
and services. There can be no assurance that the Company will be successful in
raising new capital, at least on terms that are acceptable to the Company, or in
selling sufficient products and/or services to enable the Company to attain
profitability.
During fiscal 2002, the Company entered into an agreement with Bluestem, a
related party. Under the terms of a subordinated convertible note, Bluestem
loaned the Company the sum of $100,000 with interest to accrue at the rate of
10% per year. The note is payable April 23, 2003, unless previously converted.
If the loan is converted, it would be converted into Company stock, at a number
of shares to be agreed upon by the parties. Repayment of the loan is expressly
subordinated to payment in full of any and all Senior Indebtedness (as defined
in the convertible note) of the Company. As of December 31, 2002 the Company
had retained only $3,956 in cash from the proceeds of this loan. The Company is
in process of negotiating with related parties for future financing for the
Company. There can be no assurance that these negotiations will be successful.
The Company has approximately $9,000 in past due accounts payable with
judgments against these amounts. The Company does not intend to pay any
unsecured debts until its obligations to its secured creditors are satisfied.
The Company follows the practice of writing off accounts payable, debt and
related accrued interest when extinguished under the statute of limitations.
Management believes that the largest challenges that the Company will
confront are in achieving increases in revenues and profitability in the future.
While the Company is optimistic about the possibility of overcoming these
challenges and achieving its goals, there can be no assurance that it will be
able to achieve any or all of its objectives.
ITEM 3. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report,
management, including the Company's President and Accounting Manager evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based upon, and as of the date of that evaluation, the
President and Accounting Manager concluded that the disclosure controls and
procedures were effective in all material respects, to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act is recorded, processed, summarized and reported as and when
required.
There have been no significant changes in the Company's internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation. There were no
significant deficiencies or material weaknesses identified in the evaluation
other than one person has the primary responsibility for performing the
accounting and financial duties. However, as a compensating control to this
concentration of duties, all banking and other monetary transactions are
reviewed and approved by the President or the Vice President of the Company.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 99.1 Principal officers certification
b. No reports on Form 8-K have been filed during the quarter for which this
report is filed
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: February 18, 2003 INTERACTIVE GROUP, INC.
/s/ Robert Stahl
-----------------------------------
Robert Stahl
President and Secretary
/s/ Carol Flickinger
-----------------------------------
Carol Flickinger
Accounting Manager
13
SECTION 302 CERTIFICATION
CERTIFICATION
Of the President
I, Robert J. Stahl, President of InterActive Group, Inc. (the "Company"),
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of the Company
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report:
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report:
4. The registrant's other certifying officer and I responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 18,2003 /s/ Robert Stahl
----------------- ----------------
Robert Stahl
President and Secretary
14
SECTION 302 CERTIFICATION
CERTIFICATION
of the Accounting Manager
I, Carol Flickinger of InterActive Group, Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report:
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report:
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined by the Exchange Act rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in the
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 18,2003 /s/ Carol Flickinger
---------------- --------------------
Carol Flickinger
Accounting Manager
15