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.
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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 (IRS Employer ID No)
of 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 atAugust13, 2003
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Transitional Small Business Disclosure Format (Check one): Yes No X
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INTERACTIVE GROUP, INC.
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Page(s)
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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
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Current Assets
Cash $ 4,954 $ 18,491
Inventories 13,402 13,005
Prepaid expenses and other assets 1,427 627
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Total current assets 19,783 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 86,880 81,772
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26,330 31,438
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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
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Total current liabilities 1,772,665 1,586,742
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Long-term Debt, less current maturities 27,500 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
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)
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Total stockholders' deficit (1,754,052) (1,550,681)
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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
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Net sales $ 2,651 $ 2,177 $ 207 $ 270
Cost of goods sold 81 84 9 9
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Gross profit 2,570 2,093 198 261
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Operating expenses
Selling 15,021 30,392 2,678 19,622
General and administrative 64,383 68,744 12,621 29,510
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79,404 99,136 15,299 49,132
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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
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(126,537) (64,443) (38,409) (39,212)
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(Loss) before income taxes (203,371) (161,486) (53,510) (88,083)
Income tax expense 0 0 0 0
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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.
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INTERACTIVE GROUP, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
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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
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Net cash (used in) operating activities (61,293) (91,756)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - (1,675)
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Net cash (used in) investing activities - (1,675)
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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)
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Net cash provided by financing activities 47,756 149,941
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Net increase (decrease)in cash (13,537) 56,510
CASH
Beginning 18,491 271
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Ending $ 4,954 $ 56,781
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ - $ -
Income taxes - -
See Notes to Financial Statements.
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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
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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.
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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.
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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.
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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,
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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
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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
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Robert Stahl
President and Secretary
/s/ Carol Flickinger
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Carol Flickinger
Accounting Manager
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