U. S. 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 June 30, 2003 [ ] 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. ----------------------- (Exact name of small business issuer as specified in its charter) Delaware 46-0408024 -------- ---------- (state or other jurisdiction (IRS Employer ID No) of incorporation or organization) 204 N. Main, Humboldt, SD 57035 ------------------------------------ (Address of principal executive offices) (605) 363-5117 --------------- Issuer's telephone number N/A -------------------------------------------------------------------------- (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 atAugust13, 2003 --------------------------------- Transitional Small Business Disclosure Format (Check one): Yes No X --- --- INTERACTIVE GROUP, INC. TABLE OF CONTENTS PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Page(s) ------- Balance Sheets -June 30, 2003 and September 30, 2002 3 Statements of Operations - Nine and Three Months Ended June 30, 2003 and 2002 4 Statement of Stockholders' Deficit - Nine Months Ended June 30, 2003 5 Statements of Cash Flows - Nine Months Ended June 30, 2003 and 2002 6 Notes to Financial Statements 7-9 Item 2. Management's Discussion and Analysis or Plan of Operation 10-11 Item 3. Controls and Procedures 11-12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 2 INTERACTIVE GROUP, INC. BALANCE SHEETS 6/30/2003 '9/30/2002 ASSETS Unaudited Audited ------------ ------------ Current Assets Cash $ 4,954 $ 18,491 Inventories 13,402 13,005 Prepaid expenses and other assets 1,427 627 ------------ ------------ Total current assets 19,783 32,123 ------------ ------------ Property and Equipment, at cost Land, building and improvements 100,516 100,516 Equipment 12,694 12,694 ------------ ------------ 113,210 113,210 Less accumulated depreciation 86,880 81,772 ------------ ------------ 26,330 31,438 ------------ ------------ Total assets $ 46,113 $ 63,561 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Notes payable, related parties $ 600,000 $ 600,000 Current maturities of long-term debt 2,000 6,000 Accounts payable 21,457 14,312 Accounts payable, related parties 295,973 244,217 Accrued expenses 24,314 23,599 Accrued expenses, related parties 828,921 698,614 ------------ ------------ Total current liabilities 1,772,665 1,586,742 ------------ ------------ Long-term Debt, less current maturities 27,500 27,500 ------------ ------------ Stockholders' Deficit Series A preferred stock, $.001 par value; authorized 2,000,000 shares; issued and outstanding 2,000,000 shares; liquidation preference 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 (9,816,295) (9,612,924) ------------ ------------ Total stockholders' deficit (1,754,052) (1,550,681) ------------ ------------ Total liabilities and stockholders' deficit $ 46,113 $ 63,561 ============ ============ See Notes to Financial Statements. 3 INTERACTIVE GROUP, INC. STATEMENTS OF OPERATIONS Nine and three Months Ended June 30, 2003 and 2002 (Unaudited) Nine months Three months ended June 30, ended June 30, 2003 2002 2003 2002 ---------- ---------- --------- --------- Net sales $ 2,651 $ 2,177 $ 207 $ 270 Cost of goods sold 81 84 9 9 ---------- ---------- --------- --------- Gross profit 2,570 2,093 198 261 ---------- ---------- --------- --------- Operating expenses Selling 15,021 30,392 2,678 19,622 General and administrative 64,383 68,744 12,621 29,510 ---------- ---------- --------- --------- 79,404 99,136 15,299 49,132 ---------- ---------- --------- --------- Operating (loss) (76,834) (97,043) (15,101) (48,871) ---------- ---------- --------- --------- Nonoperating income (expense): Write off of accounts payable and debt, net - 51,626 - 2,770 Interest expense (127,346) (117,142) (38,493) (42,151) Other income, net 809 1,073 84 169 ---------- ---------- --------- --------- (126,537) (64,443) (38,409) (39,212) ---------- ---------- --------- --------- (Loss) before income taxes (203,371) (161,486) (53,510) (88,083) Income tax expense 0 0 0 0 ---------- ---------- --------- --------- Net (loss) $(203,371) $(161,486) $(53,510) $(88,083) ========== ========== ========= ========= Loss per common share $ (0.04) $ (0.03) $ (0.01) $ (0.02) ========== ========== ========= ========= See Notes to Financial Statements. 4 INTERACTIVE GROUP, INC. STATEMENTS OF CASH FLOWS Nine Months Ended June 30, 2003 and 2002 (Unaudited) 2003 2002 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) $(203,371) $(161,486) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Depreciation 5,108 5,112 Write off of accounts payble and debt, net - (51,626) Change in assets and liabilities: Decrease in accounts receivable - 568 (Increase) in inventories (397) (6,411) (Increase) decrease in prepaid expenses and other assets (800) 135 Increase in accounts payable 7,145 15,653 Increase in accrued expenses 131,022 106,299 ---------- ---------- Net cash (used in) operating activities (61,293) (91,756) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment - (1,675) ---------- ---------- Net cash (used in) investing activities - (1,675) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Advances from related party 51,756 53,941 Proceeds from related party loan - 100,000 Principal payments on long-term debt (4,000) (4,000) ---------- ---------- Net cash provided by financing activities 47,756 149,941 ---------- ---------- Net increase (decrease)in cash (13,537) 56,510 CASH Beginning 18,491 271 ---------- ---------- Ending $ 4,954 $ 56,781 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ - $ - Income taxes - - See Notes to Financial Statements. 5 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 nine months ended June 30, 2003, are not necessarily indicative of the results expected for the entire year. NOTE 2. STOCK OPTIONS The Company has stock-based compensation plans which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for its options to employees and outside directors. The Company grants options at market price on the date of grant, and accordingly, no compensation cost has been recognized for such grants. Options issued to other than employees and outside directors are accounted for under the provisions of Financial Accounting Standards Board Statement No. 123. A total of 100,000 options were provided for under the 1993 plan 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, have a maximum term of 10 years, and vest with the holder over three years of continuous service with the Company. The plan expired March 2003. A total of 3,000,000 options were provided for under the 2000 plan 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, have a maximum term of 10 years, or 5 years if the option holder has more than a 10% interest of the combined voting power of all classes of outstanding stock of the Company. No options are outstanding under this plan as of June 30, 2003. The plan expires February 2011. In connection with the creation of the Carlsbad Security Products Division (CSPD) during 2002, the Board of Directors authorized the issuance of 3,800,000 nonqualified options to three independent sales consultants. These options were issued outside of the 1993 and 2000 plans and have an exercise price of $.05 per share. These options are only exercisable (vest) upon the achievement of minimum revenue and gross margin performance criteria of the Company as defined in the respective stock option agreement with each independent sales consultant. During the nine months ended June 30, 2003, 600,000 options expired as minimum revenue and gross margin performance criteria were not met. For pro forma presentation purposes, had compensation cost for the Company's stock-based compensation plans been determined based on the grant date fair values of awards (the method described in Financial Accounting Standards Board Statement No. 123), the reported net loss and loss per share amounts would have been the same as the reported net loss and loss per share amounts for the three and nine months ended June 30, 2003 and 2002, as the fair value of 6 each grant is estimated at the grant date using the Black-Scholes option-pricing model with an assumption that all outstanding options will be 100% forfeited. NOTE 3. 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 June 30, 2003, the Company has for tax reporting purposes approximately $15,000 in unused research and development credits and a net operating loss carryforward of approximately $8,188,000 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 2023. 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 4. 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 nine and three months ended June 30, 2003 and 2002. 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 nine and three month periods ended June 30, 2003, 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 2,800,000 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 nine and three month periods ended June 30, 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, 44,834 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 3,800,000 stock options contingently issuable under the agreements with the three independent sales consultants and any shares which may be issualbe upon conversion of the Bluestem Capital partners III Limited Partnership note payable, are not included in diluted earnings per share. 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 nine and three months ended June 30, 2003 and 2002 was 5,276,039. 7 NOTE 5. NOTES PAYABLE At June 30, 2003 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 was payable April 23, 2003. The Company has entered into an agreement to extend the due date for this note with Bluestem to April 30, 2004. 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 June 30, 2003, interest payable in the amount of $12,297 had been accrued for this note. NOTE 6. 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 June 30, 2003. 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 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 June 30, 2003, 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. NOTE 7. 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 and 2004 fiscal year ends. The Company's financial statements, including the disclosures in this Form 10-QSB, are not expected to be materially affected by those accounting pronouncements. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS Revenue. Net sales were $207 and $2,651 for the three and nine months ended June 30, 2003 compared to $270 and $2,177 for the three and nine month period ended June 30, 2002. The Company's increase in sales was primarily attributable to a slight increase in demand for it's SoundXchange product for the nine month period ended June 30, 2003. Gross Profit. Gross profit decreased 24% to $198 for the three months ended June 30, 2003 from $261 for the three months ended June 30, 2002. Gross profit increased 23% to $2,570 for the nine months ended June 30, 2003 from $2,093 for the nine months ended June 30, 2002. The increase in the nine month period ended June 30,2003 was due to a slight increase in sales of the Company's SoundXchange product. Selling expenses. Selling expenses decreased to $2,678 for the three months ended June 30, 2003 from $19,622 for the three months ended June 30, 2002. Selling expenses decreased to $15,021 for the nine months ended June 30, 2003 from $30,392 for the nine months ended June 30, 2002. The decrease in the three and nine month period was due to less emphasis in the quarter on the Company's efforts to sell digital security products. See also "Liquidity and Capital Resources" section. General and administrative. General and administrative expenses were $12,621 and $64,383 for the three and nine months ended June 30, 2003 and $29,510 and $68,744 for the three and nine months ended June 30, 2002. The decrease from the previous periods is primarily due to decreased emphasis in support of the Company's efforts to enter new markets. Depreciation. Depreciation expense for the three months ended June 30, 2003 and 2002 was $1,703 and $5,011, respectively. Depreciation expense for the nine months ended June 30, 2003 and 2002 was $5,108 and $5,112, respectively. The decrease 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 June 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 June 30, 2003 and June 30, 2002 was ($38,408) and ($39,212), respectively. Nonoperating (expense) for the nine months ended June 30, 2003 and 2002 was ($126,536) and ($64,443), respectively. The increase in nonoperating expense for the nine month period ending June 30, 2003 was primarily due to an increase in interest accruals on past due liabilities. Net Loss. Net loss for the three months ended June 30, 2003 was ($53,510) or ($0.01) per share compared to a net loss for the three months ended June 30, 2002 of ($88,083) or ($0.02) per share. Net loss for the nine months ended June 30, 2003 was ($203,371) or ($0.04) per share compared to a net loss for the nine months ended June 30, 2002 of ($161,486) or ($0.03) per share. The increase in losses for the nine months ended June 30, 2003 was due largely to the write off of accounts payable and debt, which was included in nonoperating income during fiscal year 2002. 9 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 June 30, 2003. 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 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. As of June 30, 2003 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. 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 was payable April 23, 2003. The Company has entered into an agreement to extend the due date for this note with Bluestem to April 30, 2004. 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 June 30, 2003, interest payable in the amount of $12,297 had been accrued for this note. 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 and obtaining financing to fund operations. 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. DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and accounting manager, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation, the principal executive officer and accounting manager concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, 10 summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit No. Exhibit 31.1 Section 302(a) Certification of Principal Executive Officer 31.2 Section 302(a) Certification Accounting Manager 32 Certification of Principal Executive Officer and Accounting Manager Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 b. No reports on Form 8-K have been filed during the quarter for which this report is filed 11 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 13, 2003 INTERACTIVE GROUP, INC. /s/ Robert Stahl ------------------ Robert Stahl President and Secretary /s/ Carol Flickinger ---------------------- Carol Flickinger Accounting Manager 12