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Interactive Objects, Inc. Form 10-QSB
Three Months Ended June 30, 2000
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 and six-month period ended June 30, 2000.
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________
INTERACTIVE OBJECTS, INC.
(Exact name of small business issuer as specified in its charter)
Commission file number: 0-25373
WASHINGTON 87-0434226
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
12600 SE 38th Street, Suite 150
Bellevue, WA 98006
(Address of principal executive offices)
(425) 653-5505
(Issuer's telephone number)
___________________
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: As of June 30, 2000, the Registrant
had 14,779,952 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]
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ITEM 1: FINANCIAL STATEMENTS.
INTERACTIVE OBJECTS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(Unaudited) (Audited)
--------------------- ----------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $1,125,126 $1,922,392
Certificates of deposit 113,207 110,743
Accounts receivable 79,766 174,935
Prepaid expenses 29,753 67,994
---------- ----------
Total current assets 1,347,852 2,276,064
Furniture and Equipment, at cost,
less accumulated depreciation
of $263,238 and $202,344 364,460 371,042
Other assets
Deposits 17,161 17,161
---------- ----------
$1,729,473 $2,664,267
========== ==========
*See accompanying notes to financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 313,816 $ 330,873
Accrued expenses 110,262 148,134
Unearned revenue - 59,113
Notes Payable 19,000 61,000
----------- -----------
Total current liabilities 443,078 599,120
Stockholders' Equity
Common Stock 147,807 146, 169
Additional paid-in capital 8,309,350 8,126,950
Retained deficit (7,170,762) (6,207,972)
----------- -----------
1,286,395 2,065,147
----------- -----------
$ 1,729,473 $ 2,664,267
=========== ===========
</TABLE>
*See accompanying notes to financial statements.
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INTERACTIVE OBJECTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three and Six Months Ended June 30, 2000 and June 30, 1999
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues
Service and sales $ 150,221 $ 1,203,096 $ 448,340 $ 1,785,926
Expenses
Labor and benefits 403,914 799,513 865,532 1,684,741
Selling, general and
administrative 337,684 243,558 581,955 737,728
----------- ------------ ----------- ------------
741,598 1,043,071 1,447,487 2,422,469
----------- ------------ ----------- ------------
Income (loss) from operations (591,377) 160,025 (999,147) (636,543)
Interest Income 16,961 18,888 36,357 45,906
----------- ------------ ----------- ------------
Net income (Loss) $ (574,416) $ 178,913 $ (962,790) $ (590,637)
=========== ============ =========== ============
Basic earnings (loss) per share of
common stock $ (0.04) $ 0.01 $ (0.07) $ (0.04)
=========== ============ =========== ============
Diluted earnings (loss) per share
of common stock $ (0.04) $ 0.01 $ (0.07) $ (0.04)
=========== ============ =========== ============
Weighted average number of
common shares outstanding -
basic 14,682,765 14,616,952 14,649,858 15,015, 847
=========== ============ =========== ============
Weighted number of common shares
outstanding - diluted 14,682,765 15,210,102 14,649,858 15,015,847
=========== ============ =========== ============
</TABLE>
*See accompanying notes to financial statements.
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INTERACTIVE OBJECTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2000 and June 30, 1999
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net (Loss) $ (962,790) $ (590,637)
Adjustments to reconcile net loss/gain to
net cash used in operating activities
Depreciation 60,894 47,179
Changes in operating assets and liabilities
Accounts receivable 95,169 (194,390)
Prepaid expenses and other 35,778 52,961
Accounts payable (146,243) 90,107
Accrued expenses 91,314 (208,234)
Unearned revenue (59,113) 250,000
---------- -----------
Cash flow from operating activities (884,991) (553,014)
Cash Flows from Investing Activities
Purchase of equipment (54,313) (114,409)
---------- -----------
Cash flows from investing activities (54,313) (114,409)
Cash Flows from Financing Activities
Issuance of stock 184,038
Redemption of stock (475,000)
Payments on notes payable (42,000) (11,666)
---------- -----------
Cash Flows from financing activities 142,038 (486,666)
---------- -----------
Net (decrease) in cash (797,266) (1,154,089)
Cash, beginning of period 1,922,392 3,346,535
---------- -----------
Cash, end of period $1,125,126 $ 2,192,446
========== ===========
</TABLE>
*See accompanying notes to financial statements.
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INTERACTIVE OBJECTS, INC.
Notes To Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all disclosures necessary for a fair presentation of financial position,
results of operations, and cash flows in conformity with generally accepted
accounting principles. The unaudited consolidated financial statements include
the accounts of Interactive Objects, Inc. ("Interactive Objects") and its wholly
owned subsidiary Avatar Interactive, Inc. ("Avatar"). Significant intercompany
transactions have been eliminated in the accompanying unaudited consolidated
financial statements. The operating results for interim periods are unaudited
and are not necessarily an indication of the results to be expected for the full
fiscal year. In the opinion of management, the results of operations as
reported for the interim period reflect all adjustments which are necessary for
a fair presentation of operating results.
Note 2. Per Share Information
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in the
period. Diluted earnings per share takes into consideration common shares
outstanding (computed under basic earnings per share) and potentially dilutive
common shares. Except for the three months ended June 30, 1999, employee stock
options outstanding have not been reflected as exercised for the purposes of
computing diluted earnings or loss per share since the exercise of such options
would be antidilutive. Also, except for the period noted above, stock purchase
warrants outstanding have not been reflected as exercised since the exercise of
such warrants would be antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
INTERACTIVE OBJECTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Statement of Forward-Looking Information
This discussion and analysis should be read together with our condensed
financial statements and related notes appearing in Item 1, above. This report
contains both objective historical information and subjective "forward-looking
statements" that are subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, and bear certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Generally, forward looking statements are prefaced by the words:
"believe," "expect," "intend," "anticipate," and similar expressions; but their
absence does not mean that a statement is not forward-looking. Numerous factors
both within and outside our control could affect our actual
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results, including but not limited to the factors set forth in the "Risk
Factors," and "Business" contained in our Amended Annual Report on Form 10-KSB/A
for the year ended December 31, 1999. These risk factors, among others, could
cause results to differ materially from those presently anticipated by us.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. We undertake no
obligation to publicly release the results of any revisions to these forward-
looking statements that may be made to reflect events or circumstances after the
date of this report or to reflect the occurrence of anticipated events.
General
Interactive Objects, Inc., which was founded in 1995 by several former
Microsoft employees, is a rapidly growing designer, marketer and developer of
Microsoft-compatible object software for both commercial Internet and intranet
applications. Since our inception, we have continued to evolve by expanding our
product offerings, by leveraging revenue generating intellectual property, and
by hiring, retaining and training technically talented and motivated employees.
Recent acquisitions, particularly that of Avatar Interactive in March 1999,
have expanded and diversified our revenue base, augmented our ability to service
customers' technology needs, and enabled us to offer a full range of software
development services including custom software solutions, Internet development
services, software training, and product testing. The Company's information
appliances division continues to develop and enhance its research, and product
development capabilities, which have been provided to a variety of customers,
including Microsoft, iOmega and I-Jam Multi-media. Additionally, the Company's
software consulting division provides a wide array of technology consulting
services to a variety of Fortune 1000 companies including Microsoft, Airborne
Express, SAFECO, Paccar, Pinnacle, CourtLink, Eddie Bauer and Port Townsend
Paper.
Shift to Developing Microsoft-Based Products
In the first quarter of 1998, we released two software component products
and acquired a Novell-based software component product. Thereupon, we decided to
focus our operations exclusively on developing Microsoft-based software
component products. In October 1998, we released a suite of seven Microsoft-
based components.
Acquisition of Avatar
On March 31, 1999, we acquired Avatar Interactive, Inc., a Washington
corporation ("Avatar") by means of a forward merger under which Avatar became a
wholly-owned subsidiary of Interactive Objects. The merger was accounted for as
a pooling-of-interests.
Products and Services
For the quarter ended June 30, 2000, our reportable revenues were derived
from the information appliances division and the software consulting group.
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The information appliances division's technology, which provides support
for Windows Media Technologies, Windows Media Audio (WMA), codec and MP3, is
stationed on the cutting edge of digital audio technology. The information
appliances division has two primary objectives. First, providing clients with
the necessary tools to navigate and use emerging technology. Second, forging and
maintaining strategic partnerships with hardware, software and platform
providers to deliver to our clients the necessary tools to use new technology
more efficiently. Noteworthy information appliances division achievements
include developing the Microsoft Mobile Audio Player, the first digital audio
player software for the Microsoft Windows CE operating system and maintaining a
long-term contract with Microsoft to develop streaming technology for the
Windows CE operating system.
We anticipate investing additional resources towards developing our
information appliances division throughout the remainder of fiscal 2000. All
costs incurred in the research and development of products and enhancements to
existing products have been expensed as incurred.
Results of Operation - Three and Six Months Ended June 30, 2000 Compared to Same
Period in 1999
Revenues. Revenues for the three-month periods ended June 30, 1999 and
June 30, 2000 decreased by 87.5% from $1,203,096 to $150,221, respectively.
Revenues for the six months ended June 30, 1999 and June 30, 2000 decreased by
74.9% from $1,785,926 to $448,340, respectively. During the three and six month
periods ended June 30, 2000, our revenue was generated by the information
appliances division and the consulting services group. The decrease in gross
revenue during the three and six months periods ending June 30, 2000, compared
to the same period in the prior year is attributable primarily to a decrease in
consulting services.
Labor and Benefits Expenses. This category comprises all internal labor
costs including: salaries, taxes, employee benefits, and all other direct costs
related to Company performance, including project specific independent
contractor fees, labor costs, supplies and other miscellaneous related expenses.
Our labor and benefits expenses for the three-month period ended June 30, 1999
and June 30, 2000 decreased by 49.5% from $799,513 to $403,914, respectively.
During the six months ended June 30, 1999 and June 30, 2000, our labor and
benefits expenses decreased by 48.6% from $1,684,741 to $865,532, respectively.
The decrease in labor and benefits expenses from the second quarter and the
first six months of 1999 compared to the same period in 2000 was directly
attributable the decrease in consulting services and contract labor for those
services.
At June 30, 2000, we had 11 employees working in our software consulting
services and product development department, 1 employee in our sales and
marketing department, and 3 employees in our general and administrative
department. We also retain and expect to continue hiring, on a case by case
basis, independent contractors to augment our consulting and project-service
capabilities. Generally, we hire independent contractors within 90 days of the
intended
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project. We expect to hire additional staff, as needed, to meet the demands of
both current and prospective clients.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three-month periods ended June 30, 1999 and June
30, 2000 increased by 38.6% from $243,558 to $337,684, respectively. In each
period, these expenses consisted primarily of employee recruiting, travel,
professional fees, occupancy costs, telephone and related Internet connectivity
fees, computer network costs, office expenses and supplies, marketing,
advertising and new business development costs. This increase was due to an
increase in administrative staff. Our expenses in this category were equal to
224.8% of our gross revenue for the three month period ended June 20, 2000, as
compared to 20.2% for the same period in 1999. The increase as a percentage of
gross revenue was due to the decrease in consulting revenue and the increase in
new product development costs.
Selling, general and administrative expenses for the six months ended June
30, 1999 and June 30, 2000 decreased by 21.1%from $737,728 to $581,955,
respectively. This decrease was due to decreased staffing, investment in
infrastructure and associated expenses, partially offset by increased new
product development costs. Our expenses in this category was equal to 129.8% of
our gross revenue for the six months ended June 30, 2000, as compared to 41.3 %
for the same period in 1999. The increase as a percentage of revenue reflected
reduced consulting revenue, and increased new product development costs.
We believe that our selling, general and administrative expenses will
increase in dollar amount for the remainder of fiscal 2000 as a result of an
anticipated expansion of our administrative staff required to support its
growing operations.
Interest Income. Interest income for the three-month period ended June 30,
1999 and June 30, 2000 decreased by 10.2% from $18,888 to $16,961, respectively.
This decrease is primarily due to lower available cash balances due to the use
of funds for working capital purposes. Interest Income. Interest income for the
six months ended June 30, 1999 and June 30, 2000 decreased by 20.8% from $45,906
to $36,357, respectively.
Net Loss. Interactive Objects recognized a net loss for the three-month
period ended June 30, 2000 of $574,416 compared to a net gain of $178,913 for
the same period in 1999. The Company recognized a net loss of $962,790 for the
six month period ended June 20, 2000, as compared with a net loss of $590,637
for the same period in 1999. Net loss as a percentage of gross revenue was
382.4% as compared with a 14.9% increase in income as a percentage of gross
revenue in 1999. The net loss as a percentage of gross revenue was 214.7% for
the six months ended June 30, 2000, as compared to a net gain as a percentage of
revenue of 33.1% for the same period in 1999. This increase in net loss as a
percentage of gross revenue was due primarily to an increase in new product
development costs.
Liquidity and Capital Resources. At June 30, 2000, we had working capital
of $904,774 compared with working capital of $1,955,510 at June 30, 1999. At
June 30, 2000, we had cash and cash equivalents of $1,347,852 as compared to
$2,608,328 for the same period in 1999. In the first six months of 2000, total
cash used in operating activities was $884,981,
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which was primarily due to purchases of equipment and operating expenses. During
the first six months of 1999, total cash used in operating activities was
$553,014 which was primarily due to the Company's net loss for the period,
partially offset by unearned revenue. During the first six months of 1999 and
2000, investing activities used net cash of $54,313 and $114,409, respectively,
to purchase equipment. During the first six months of 1999, total cash used in
financing activities was $486,666, which represents redemption of stock and
payments on notes payable. In the six months ended June 30, 2000, the Company
generated cash of $142,038 from the sale of common stock, net of distributions
to shareholders.
Based on our current proposed plans and assumptions relating to product
releases and sales, we anticipate that we may require additional capital
financing in the fourth quarter of 2000. If our plans change or our assumptions
prove to be inaccurate, we may be required to seek either additional equity or
debt financing or both sooner than currently anticipated. We have no current
arrangements to secure additional financing. Moreover, we cannot guarantee that
any additional financing will be available to us when needed, or on commercially
reasonable terms.
Miscellaneous Accounting Information
Statement of Financial Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" established accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
133 has no impact on our financial statements because we do not currently engage
in any derivatives or hedging activities.
Statement of Financial Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" does not apply to us.
Year 2000 Compliance
To date our systems and software have not experienced any material
disruption due to the onset of the Year 2000. As discussed in prior filings, we
undertook certain planning and implementation efforts. However, we cannot assure
that we will not experience disruptions in the future as a consequence of the
Year 2000 bug. We cannot quantify the amount of our potential exposure, but do
not believe it to be material.
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PART II--OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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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.
INTERACTIVE OBJECTS, INC.
Dated: August 10, 2000 By: /s/ Steven G. Wollach
----------------------------
Steven G. Wollach
Chairman, Chief Executive Officer,
Chief Financial Officer and Treasurer
(Principal Executive, Financial and
Accounting Officer)
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