U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1999.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
Commission file number 000-21898
InterActive Inc.
(Name of small business issuer in its charter)
South Dakota 46-0408024
(State of incorporation) (I.R.S. Employer Identification No.)
204 North Main
Humboldt, SD 57035
(605) 363-5117
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if disclosure of delinquent filers in response to item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
Issuer's revenues for its most recent fiscal year $36,998.
The aggregate market value of the voting stock (Common stock) held by
non-affiliates was approximately $158,753 based upon the closing sale price of
the Registrant's Common Stock on December 21, 1999.
As of December 21, 1999 there were 5,012,138 shares of the issuer's common stock
outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Prior to 1994, InterActive Inc. ("InterActive" or the "Company") was
engaged in the development, manufacture and marketing, nationally and
internationally, of peripheral hardware products, principally a line of
SoundXchange products, that were designed to enable users to create and send
messages across local area networks and wide area networks of personal
computers. In 1994, the Company substantially reduced its operations and, since
that time, except for sporadic sales of SoundXchange products from existing
inventories, the Company has not conducted any significant operations. See Item
6, "Management's Discussion and Analysis or Plan of Operations." In 1997, in an
effort to generate additional sales of its inventory of existing products, the
Company began modifying certain SoundXchange products in its inventory for use
in kiosks for banks and security systems to exchange audio messages over the
Internet. However, at present, the Company is not involved in the production of
any products or providing services on a significant level, and is evaluating
alternative plans for future operations as discussed below.
The Company has sustained operating losses for several years. Continued
operations of the Company are dependent on the Company's ability to generate
future revenues that are sufficient for the Company to meet its existing debt
obligations and finance new product and/or service development and continuing
operations. For these reasons, the report of the independent certified public
accountants on the Company's audited financial statements included herein is
subject to a "going concern" qualification. See Item 7, "Audited Financial
Statements." The Company has several judgments against it and more threatened
as a result of its inability to pay its obligations to its unsecured creditors.
See Item 3 "Legal Proceedings".
In December, 1998, the Company initiated an "Offer to Creditors", pursuant
to which the Company proposed to issue shares of its Common Stock to settle
accrued expenses, accounts payable, notes payable and long-term debt. In June
1999, the Company announced a "successful" consummation of the "Offer to
Creditors", in that the holders of approximately $1,570,000 of the Company's
previously outstanding debt had agreed to accept shares of the Company's common
stock in exchange therefore. TPR Group, Inc., (together with its affiliated
entities, TPR), a related party received 296,298 shares of the Company's Common
Stock in exchange for $296,298 of unsecured debt. Additionally, TPR acquired
2,000,000 shares of a new series of the Company's authorized but un-issued
Series B Preferred Stock which is initially convertible to Common Stock on a 10
to one basis and has contributed $289,440 in principal and accrued interest
secured by a lien on the Company's assets, $35,324 in cash, and a $4,000 note to
the capital of the Company. TPR has also agreed to exchange approximately
$800,000 of the Company's secured debt and accrued interest for shares of Series
C Preferred Stock at a later date, subject to certain conditions. For a further
description of these transactions, please see Item 6, "Management's Discussion
and Analysis or Plan of Operations - Liquidity and Capital Resources" and Item
12, "Certain Relationships and Related Transactions" below. As a consequence,
TPR currently has the right to cast approximately 85% of all votes to be cast on
any and all matters to be presented for the approval of the stockholders of the
Company. See Item 11, "Security Ownership of Certain Beneficial Owners and
Management".
The Company's SoundXchange products were designed to be marketed to large
and small businesses that have existing local and wide area networks of personal
computers, and businesses that plan to connect existing personal computers into
such a network. These products currently are being sold primarily on a direct
basis to end-users through the Internet and through independent dealers for
resale to end-users. The Company's management believes that the emerging CTI
(Computer Telephone Integrated) technologies could help stimulate future growth
in the PC audio market, which could result in increased sales of its
SoundXchange hardware. The Company also hopes to expand its marketing efforts
for SoundXchange hardware products for use with PC Video-conferencing, for
computer telephone use on the Internet, and for kiosk uses. The Company's
SoundXchange hardware is compatible with many software packages that are in use
for these purposes.
Four versions of SoundXchange are available All four products use a
telephone hand-set/speakerphone attachment to permit users to record and play
voice messages on a personal computer, to communicate over the Internet, or when
used in a kiosk application to communicate with a remote location. Since the
SoundXchange incorporates a microphone and amplified speaker, along with a
hand-set, users are able to communicate or record or play back messages in a
"hands-free" mode, or, if privacy is desired, by speaking or listening directly
through the hand-set. The Company decided to base its audio hardware products
on this "speakerphone metaphor" believing that users are more comfortable using
the familiar speakerphone-like device in a business or home environment than
using stand-alone speakers, microphones or headsets, which are typically used
for voice input and output on a personal computer.
SoundXchange Model AX, VC and IP are intended for users that currently have
audio boards, circuit boards which give a personal computer sound capabilities,
installed on their personal computers, or that prefer to use third party audio
2
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board products. Most personal computer manufacturers, including Compaq and IBM,
currently sell personal computer systems with built in audio capability.
Additionally, a number of audio board upgrades currently are available, such as
those manufactured by Creative Technology. The Model IP provides support for
external stereo speakers while the Model AX utilizes an internal amplified
speaker for hands free use.
The Model K was developed for kiosk use by banks and security systems.
SoundXchange Model K is designed with a commercial style handset, armored cord
and switch plate.
The Company currently has in inventory a substantial number of SoundXchange
Model AX's, and orders for the other models currently are being filled by
modifying these SoundXchange Model AX's by the Company's in-house personnel.
Based upon recent levels of product sales, Management believes that the
Company's inventory level is sufficient to supply 12 months or more of
anticipated demand for each of the four models of the SoundXchange.
There are a number of other companies which have developed and are now
marketing products which may be considered competitive with the Company's
SoundXchange products. These products include multimedia input/output hardware
and software from Creative Technology and Logitech. To date, however, the
Company is unaware of any other sound input/output device for the personal
computer currently on the market that uses a speakerphone style device similar
to that used in the InterActive SoundXchange. The Company believes that the
ease of installation and use of speakerphone style products such as the
SoundXchange will be a positive factor in the acceptance of voice input/output
for personal computers in the home and office environment. In addition, most
competitive products utilize microphones, loud speakers, or headphones, which
the Company believes will impede acceptance of such devices for general office
use. The Company has focused specific marketing attention on these
user-friendly aspects of its voice input/output hardware.
The Company's ability to compete successfully will depend in part on its
ability to protect its proprietary know-how and technology, including its
proprietary software, its proprietary hardware and its know-how related to
audio-visual and personal computer technologies. The Company intends to rely on
a combination of copyright protection, trade secrets, patents, non-disclosure
agreements, and licensing agreements to protect its proprietary rights. The
Company has a U.S. patent on its SoundXchange product. The Company intends to
continue to file patent applications covering its products as appropriate.
In the fiscal years ended September 30, 1999 and 1998, there were no
research and development expenses. There were no software development costs for
the fiscal years ended September 30, 1999 and 1998. The Company does not have
any employees currently engaged in research, product development and
engineering, but the Company could have access, through TPR, to certain of the
Company's former key research and development employees who are now employees of
TPR. Although TPR is a stockholder of InterActive, and TPR has performed as a
strategic partner in past development efforts of InterActive, there can be no
assurance that TPR will continue to provide InterActive consulting services
because of InterActive's current inability to pay for these consulting services.
The Company believes that research and development support of the Company's
products, is important to the long-term viability of such products and the
future revenues of the Company.
Recognizing that sales of SoundXchange products have not produced
sufficient revenue in recent periods, Management has determined that additional
products and/or services must be developed and successfully introduced if the
Company is to generate profitable operations in the future. Management is in
the process of formulating plans in this regard, which are expected to include
entry into additional multimedia markets. In addition, the Company hopes to
increase revenue through varying methods of Internet sales. However, there can
be no assurance that the Company will be able to develop or successfully
implement any such strategy, nor that the Company will be able to achieve
profitable operations in the near term, if at all. In the interim, the Company
intends to provide consulting services with the assistance of TPR, which
Management believes will generate all or a substantial portion of the cash
needed to finance the Company's entry into these new markets. It may also be
necessary for the Company to seek additional equity and/or debt financing to
provide a portion of the funds needed to implement this strategy. There can be
no assurance that the assistance provided by TPR will enable the Company to
develop a profitable consulting services business, nor that any additional funds
needed through private investments or loans will be available to the Company on
acceptable terms, if at all.
As of September 30, 1999, the Company had one full time employee engaged in
finance and administrative operations. The Company also has an agreement with
an outside sales representative who receives commission on sales. This sales
representative also is engaged in administration. The Company is not a party to
any collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its relations with its employee are excellent.
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ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company owns the 22,000 square foot facility that it occupies in
Humboldt, South Dakota. The Humboldt property is subject to a lien in
connection with the Company's inability to pay for building improvements
performed by a contractor. This liability has been assumed by a related party.
The Company believes that the location of its principal facilities in South
Dakota provides the Company with access to highly motivated, well trained
workers, and a low cost of living, which the Company believes will help
constrain future operating costs. South Dakota currently has no state income
tax on corporations.
The Company believes that its current facilities are in reasonably good
condition and will satisfy its needs for at least the next year, but will
consider leasing additional space in other geographical locations if the need
for regional sales, distribution, or other business facilities should
materialize.
ITEM 3. LEGAL PROCEEDINGS
Although the Company successfully closed it's "Offer to Creditors" during
1999, the Company is delinquent on its interest payments on its secured note,
one of its subordinated long term notes and a portion of its trade accounts
payable. The Company has several judgments against it and several more
threatened as a result of its inability to pay its obligations to its unsecured
trade creditors. The judgments are all from unsecured creditors which the
Company is no longer using for ongoing operations and the Company does not
intend to pay these unsecured debts until its obligations to its secured
creditors are satisfied. The company currently feels that the best possibility
it has available to repay its secured and unsecured creditors and to return
value to its stockholders is to continue to operate the Company and to work out
payment plans if it is able to do so in the future. While the Company does not
expect that it will be forced into bankruptcy by its secured or unsecured
creditors, there can be no assurance that this will not happen because of the
Company's inability to meet its obligations to its remaining creditors. The
Company believes that a liquidation of its assets would only satisfy a small
portion of the Company's obligations to its secured creditors and provide
nothing for the Company's unsecured creditors or its stockholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during fiscal
year 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During 1999, the Company issued 1,686,162 shares of its Common Stock to
creditors in exchange for satisfaction of trade accounts payable, long and short
term debt and convertible notes.
` The Company's common stock is currently quoted on the OTC Bulletin Board
under the symbol "INAVE".
Stock prices for the past two years are not presented because of the
infrequency of trade in the Company's stock.
On September 30, 1999 there were approximately 426 shareholders of
record of the Common Stock of the Company, based on information provided by the
Company's transfer agent.
DIVIDENDS
The Company has never paid dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payment of
dividends, if any, on the Common Stock is within the discretion of the Board of
Directors and will depend on the Company's earnings, its capital requirements
and financial condition and other relevant factors.
4
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
In 1999, the Company issued 1,686,162 shares of common stock (of which
581,773 shares were issued to related parties, including shareholders) to settle
certain accrued expenses, accounts payable, notes payable and long-term debt
totaling $1,569,756 (of which $575,162 was payable to related parties, including
shareholders). Included in the above amount was $296,298 of accounts payable
due to TPR, which was settled through the issuance of 296, 298 shares of common
stock.
The Company's inventory of SoundXchange hardware, which, as of September
30, 1999, accounted for 54% of the Company's current assets, is liquid only to
the extent of the Company's sales of such product. The Company has made minor
engineering changes in the product in order to be able to utilize the inventory
for newly developing markets and the Company hopes to continue to be able to do
so in the future.
The Company has a net operating loss carryforward for tax purposes of
approximately $7,454,000 and research and development tax credits carryforward
of approximately $15,000 at September 30, 1999. The Company will not be able to
utilize any such credits unless it is able to achieve sufficient sales to
generate taxable net income. Also, the amounts of the credits could be
substantially limited if a change in control of the Company were to take place.
CAPITAL EXPENDITURES
It is anticipated that the Company's management will continue to explore
the possibility of acquiring additional, complementary businesses, product
lines, or technologies, or causing the Company to enter into joint ventures and
strategic alliances, for the purposes of enabling the Company to expand the
breadth of its product offerings and to obtain additional distribution channels
for the Company's existing products. Given the Company's limited cash
resources, it is contemplated that any such acquisition would be accomplished,
if at all, primarily through the issuance of stock. However, it should be
anticipated that any such acquisition, even if made solely for stock, could
place additional demands upon the Company's available working capital. The
Company has not entered into a definitive agreement pertaining to any such
acquisition, joint venture or marketing alliance, nor is the Company currently
in negotiations with any third party with respect thereto.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS 1998 AND 1999
Revenue. Net sales for fiscal years 1999 and 1998 were $37,000 and
$60,000, respectively. The Company's decrease in sales is attributable mainly
to less emphasis on marketing during the period. Management's main objective
was to implement debt to equity conversions with the Company's creditors.
Gross Profit. The gross margin for fiscal years 1999 and 1998 were 92% and
89%, respectively. The increase from the previous year is due primarily to a
relative increase in sales of the higher profit margin SoundXchange Model K.
Sales and marketing expenses. Sales and marketing expenses for fiscal 1999
and 1998 were $34,000 and $38,000, respectively.
Research and development. There were no research and development expenses
for fiscal 1999 and 1998. There were no amounts capitalized in connection with
software development for fiscal 1999 and 1998.
General and administrative. General and administrative expenses for fiscal
1999 and 1998 were $56,000 and $40,000, respectively. The increase was
primarily due to the additional costs to consummate the Offer to Creditors.
Depreciation and Amortization. Depreciation and amortization expenses for
fiscal 1999 and 1998 were $8,000 and $9,000, respectively
Nonoperating Income (Expense). Nonoperating expenses for fiscal 1999 and
1998 were $312,000 and $141,000, respectively. In 1999, the Company incurred
debt conversion expenses of $261,000 related to the issuance of Series B
Preferred stock.
5
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Net Gain (Loss). The Company showed a net gain for fiscal 1999 of $593,000
or $0.15 per share on 3,905,990 weighted average shares outstanding compared to
a net loss for fiscal 1998 of ($165,000) or ($0.05) per share on 3,191,369
weighted average shares outstanding. The increase in income in 1999 was due
largely to gain on settlement of liabilities of $961,000 which is reported as an
extraordinary item.
Management believes that the largest challenges that the Company will
confront during 2000 are in its attempt to achieve increases in revenues and
profitability during fiscal 2000. While the Company is optimistic about the
possibility of its 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
for fiscal 2000.
The Company's management does not believe that the year 2000 issues will
have a material effect on the Company's business, results of operations or
financial condition. The Company operates on a stand-alone PC, which the
manufacturer has represented to be year 2000 compliant. The SoundXchange
product manufactured by the Company does not require software; therefore,
Company management believes the risk of the year 2000 affecting these products
is remote.
ITEM 7. AUDITED FINANCIAL STATEMENTS
The Audited Financial Statements are filed as part of this Annual
Report on form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the directors and
executive officers of the Company:
Robert Stahl, 42, has served as President, COO of the Company from
November, 1996. Mr. Stahl previously was Vice President of Sales for the
Company. Mr. Stahl is co-founder and Vice President of CSS Ltd. (CSS) since its
founding in 1989. He is also owner and operator of a family farm. From 1990 to
1995, Mr. Stahl was in charge of National Sales for Medical Communications
Software, a company involved in providing computer software to nursing homes
nationally.
Russell Pohl, 74, has served as a director of the Company since February
1993 and served as President from September 1995 to November 1996. From
November 1996 Mr. Pohl has served as CEO. Mr. Pohl served as Branch Chief and
Chief of Data Services for the Earth Resources Observation Systems Data Center
of the U.S. Department of the Interior from 1975 to May 1991. Mr. Pohl retired
from that position in May 1991. Prior to his work with the Federal government,
Mr. Pohl was Vice-President of Raven Industries, Inc. for some 16 years. Early
in his career, he was a physicist for a Fortune 500 company.
Gerard L. Kappenman, 55, served as President, Chief Executive Officer and a
director of the Company from its incorporation in October 1989 until September
1995. He continues to serve as a director and Secretary. Mr. Kappenman is
currently an instructor at Southeast Technical Institute. Prior to joining
InterActive, Mr. Kappenman was a self-employed product and marketing consultant
from March 1988 through September 1989. From February 1987 to March 1988, Mr.
Kappenman was Senior Vice President, Product Marketing at Data Voice Solutions,
a company engaged in the development and marketing of personal computer-based
communications products.
William J. Hanson, 51, has served as a director of the Company since its
incorporation in October 1989 and served as its Chief Operating Officer from
October 1992 to January 1994. Mr. Hanson is a founder and President of Torrey
Pines Research, Inc. ("Torrey Pines") since its founding in October 1986 and CEO
of TPR Group, Inc. founded in 1996. Torrey Pines is a technical research and
development firm.
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ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
EXECUTIVE COMPENSATION
The following table sets forth the compensation received from the Company
by the Company's CEO and President, COO for services rendered in all capacities
to the Company during the fiscal year ended September 30, 1999, as well as such
compensation received by him from the Company during the Company's two previous
fiscal years:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------- --------------------
RESTRICTED ALL
STOCK OTHER
SALARY BONUS OTHER AWARDS OPTIONS LTIP COMPEN-
NAME AND PRINCIPAL POSITION YEAR $ $ $ $ # PAYOUTS SATION
- --------------------------- ---- ------- ------ ------- ----------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Stahl 1999 7,281 844
President, COO. . . . . . 1998 23,337
1997 18,271 195
Russ Pohl . . . . . . . . . 1999 938 131
CEO . . . . . . . . . . . 1998 5,202 360
1997 2,140 172
</TABLE>
STOCK OPTIONS
The CEO and President did not exercise any options during fiscal year 1999.
COMPENSATION OF DIRECTORS
Each member of the Board of Directors of the Company who is not an officer
of the Company receives a fee of $100 for each meeting attended and is
reimbursed for all reasonable expenses incurred by such member in attending such
meeting.
The Company's Bylaws provide that the Company must indemnify its officers
and directors, and may indemnify its employees and other agents, to the fullest
extent permitted by South Dakota law. At present, there is no pending
litigation or proceeding involving any director, officer, employee, or agent of
the Company where indemnification will be required or permitted. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to officers, directors or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
EMPLOYMENT ARRANGEMENTS
Mr. Pohl has served as CEO and director since November 1996. Mr. Pohl's
compensation as CEO is commissions on a sliding scale based on volume of sales.
In October 1998, the Board of Directors agreed to pay Mr. Pohl 100,000 shares of
the Company's restricted Common Stock each year for a period of two years.
During fiscal 1999, Mr. Pohl was paid $938 in commissions and was issued 3,480
shares of Common Stock for unpaid commissions and 900 shares for unpaid
Director's fees.
In November 1997, Mr. Stahl was appointed President, COO. In April 1997,
Mr. Stahl's compensation was revised to a sliding commission based on volume of
sales. During 1999, CSS Ltd. (a Company in which Mr. Stahl is a principal) was
paid $7,281 in commissions and issued 28,146 shares of Common Stock for Mr.
Stahl's services.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Common Stock as of September 30, 1999 by
(i) each of the Company's directors, (ii) each person known to the Company to
beneficially own more than 5% of the outstanding shares of Common Stock, and
(iii) all directors and officers of the Company as a group. The address for
each stockholder listed is in care of the Company, 204 North Main, Humboldt,
South Dakota 57035.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME SHARES OUTSTANDING SHARES
- ---- ------------ ------------------
BENEFICIALLY
------------
OWNED(1)
------------
<S> <C> <C>
Gerard L. Kappenman(2) . . . . . . . . . . . 156,722 3.1
William J. Hanson(3) . . . . . . . . . . . . 22,064,450 84.7
Russell Pohl(4) 217,512 4.4
Robert Stahl/CSS Ltd.(5) 110,548 2.3
TPR(6) . . . . . . . . . . . . . . . . . . . 21,893,042 84.4
All directors and officers as a group (four 22,549,232 86.4
persons) (2)(3)(4)(5)
===============================================================================
<FN>
(1) The percentages shown include the shares of Common Stock which each
named stockholder has the right to acquire within 60 days of September 30, 1999.
In calculating percentage ownership, all shares of Common Stock which a named
stockholder has the right to acquire upon conversion of Series A Preferred Stock
(taking into consideration the liquidation preferences of the Series A Preferred
Stock), Series B Preferred Stock and of notes payable by the Company and
exercise of warrants and of options issued pursuant to the Company's stock
option plans are deemed to be outstanding for the purpose of computing the
percentage of Common Stock owned by such stockholder, but are not deemed to be
outstanding for the purpose of computing the percentage of Common Stock owned by
any other stockholder.
(2) Includes 7,267 shares of Common Stock issuable upon conversion of Series
A Preferred Stock, 18,000 shares of Common Stock issuable upon
exercise of options.
(3) Includes 123,308 shares of Common Stock issuable upon conversion of
Series A Preferred Stock, 18,000 shares of Common stock issuable upon
exercise of options, 1,000,000 shares of Common Stock issuable upon
exercise of warrants and 20,000,000 shares of Common Stock issuable
on conversion of Series B Preferred Stock. Of this total, an
aggregate of 171,408 shares are owned of record by Mr. Hanson, and
21,893,042 shares are owned of record by TPR.
(4) Includes 4,543 shares of Common Stock issuable upon conversion of Series
A Preferred Stock, and 21,000 shares of Common Stock issuable upon
exercise of options pursuant to the Company's 1992 Stock Option Plan.
(5) Includes 8,736 shares of Common Stock issuable upon exercise of options
pursuant to the Company's 1992 Stock Option Plan.
(6) Includes 39,967 shares of Common Stock issuable upon conversion of
Series A Preferred Stock, 20,000,000 shares of Common Stock
issuable upon conversion of Series B Preferred Stock and 1,000,000
shares of Common Stock issuable upon exercise of warrants.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CSS LTD./ROBERT STAHL
Consulting fees and commissions. During 1999, CSS Ltd. (a Company in which
Mr. Stahl is a principal) was paid $7,281 in commissions and issued 28,146
shares of Common Stock for Mr. Stahl's services.
Other transactions. The Company had a line of credit for $213,500 and
accrued interest from a bank. In May 1998 Mr. Stahl purchased the promissory
note for the former line of credit from the bank for $10,000. This note was
subsequently purchased from Mr. Stahl by TPR Group, Inc. for $10,000. As
discussed below, the debt of $213,500 and related accrued interest was
subsequently exchanged in connection with the issuance of Series B Preferred
stock.
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RUSSELL A. POHL
Compensation. During fiscal 1999, Mr. Pohl was paid $938 in commissions
and was issued 3,480 shares of Common Stock for unpaid commissions and 900
shares for previously unpaid Director's fees.
GERARD L. KAPPENMAN.
Other transactions. During 1999, Mr. Kappenman agreed to exchange a note
payable due him in the amount of $18,000 for 18,000 shares of Common Stock and
$4,921 in debt for 4,921 shares of the Company's restricted Common Stock.
TORREY PINES RESEARCH, INC./TPR GROUP, INC./WILLIAM J. HANSON.
TPR acquired 296,298 shares of the Company's Common stock in exchange for
$296,298 of unsecured debt. Under the terms of an agreement between the Company
and TPR, TPR would pay in cash on behalf of the Company certain operating and
other expenses of the Company up to $50,000 and also forgive $213,500 of debt
that was secured by substantially all of the Company's assets and $75,940 of
related accrued interest, in exchange for 2,000,000 shares of Series B preferred
stock. At September 30, 1998, the Company also had a $4,000 loan from TPR.
During 1999, the Company received an additional $35,324 from TPR and issued
2,000,000 shares of Series B preferred stock (convertible to 20,000,000 shares
of common stock) to TPR in settlement of the above amounts due.
At September 30, 1999 and 1998, the Company had a $500,000 note payable to
TPR that is due on demand. This note was originally to a bank and was assumed
by TPR on behalf of the Company, as a result of its guarantee of the loan. In
connection with the assumption of the loan, TPR received 1,000,000 restricted
common stock warrants that each represent the right to purchase one share of
common stock at $.50. The warrants expire one year following satisfaction of
the note. The note to TPR bears interest at a variable rate of interest
(compounded at 13.6% as of September 30, 1999) and is secured by substantially
all assets of the Company. Accrued interest of $297,118 is due to TPR under the
demand note as of September 30, 1999. Under terms of an agreement, TPR would
exchange the $500,000 of debt plus accrued interest owing from the Company for
600,000 shares of a new series of preferred stock (not yet authorized by the
Board of Directors) if certain conditions in the agreement are satisfied. The
proposed terms of the Series C preferred stock are that it will have an initial
liquidation preference of $1.00 per share and will be convertible at the option
of the holder at the rate of 10 shares of the Company's common stock for each
share of Series C preferred stock. The Series C preferred stock will be
redeemable by the Company, in whole or in part, at a price of $1.00 per share
upon request of the holder given at any time after expiration of one full year
from the date the Series C stock is issued.
RECENT TRANSACTIONS.
All transactions between the Company and its executive officers, directors,
or principal stockholders, or any of their affiliates, have been approved by a
majority of the disinterested members of the Company's Board of Directors, and
have been on terms that the Company believes to be no less favorable to the
Company than those that could be obtained from an unaffiliated third party in
arms-length transactions.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements Page No.
--------------------- --------
Independent Auditor's Report F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Deficit F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6/13
2. Exhibits
--------
9
<PAGE>
Exhibit
Number
- -----------
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1
to Company's Registration Statement on Form SB-2 (File No.
33-60774-D), filed with the Commission on April 8, 1993
("Registration Statement").
3.2 By-laws (incorporated by reference to Exhibit 3.2 to
Registration Statement).
10.01 Sale of Assets Agreement dated as of November 2, 1993,
between Powerhouse Computer Sales, Ltd. and the Company (Form 8-K
dated November 2, 1993, file number 000-21898)
10.02 Disbursement Request and Authorization, and Promissory Note
payable to Western Bank, dated January 20, 1994*
10.03 Disbursement Request and Authorization, and Promissory Note
payable to Western Bank, each dated November 2, 1993 (Form 10-QSB
dated February 8, 1994, file number 000-21898)
10.04 Agreement dated as of September 29, 1993, between the
Company and Torrey Pines Research (Form 10-KSB dated
December 27, 1993, file number 000-21898)
10.05 Sublease Agreement dated as of July 1, 1993, between the
Company and Torrey Pines Research (Form 10-KSB dated
December 27, 1993, file number 000-21898)
10.06 Assignment of Lease dated November 2, 1993 between
Powerhouse Computer Sales, Ltd. and the Company.*
10.07 Employment Agreement dated as of October 1, 1993 between the
Company and James R. Cink (Form 10-QSB dated
February 8, 1994, file number 000-21898)
10.08 Nations Credit Dealer Agreement*
10.09 "Term Sheet" between the Company and TPR outlining terms of "Offer
to Creditors" filed herewith.
27.1 Financial Data Schedule.
* The exhibits marked with an asterisk have been filed with
Form SB-2 registration No. 33-77240.
(b) Reports on Form 8-K
None
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: January 6, 2000 INTERACTIVE INC.
BY: /s/ Robert Stahl
------------------
Robert Stahl
President
BY: /s/ Gerard L. Kappenman
------------------------
Gerard L. Kappenman
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company, in the
capacities, and on the dates, indicated:
SIGNATURES TITLES DATE
/s/ Robert Stahl January 6, 2000
- ----------------------- -----------------
Robert Stahl President
/s/ Gerard L. Kappenman Secretary January 6, 2000
- ----------------------- -----------------
Gerard L. Kappenman Director
/s/ William J. Hanson Director January 6, 2000
- ----------------------- -----------------
William J. Hanson
/s/ Russell A. Pohl Director January 6, 2000
- ----------------------- -----------------
Russell A. Pohl
11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
InterActive Inc.
Humboldt, South Dakota
We have audited the accompanying balance sheets of InterActive Inc. as of
September 30, 1999 and 1998, and the related statements of operations,
stockholders' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InterActive Inc. as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and its total liabilities exceeds its total assets. This raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/S/ McGLADREY & PULLEN, LLP
Sioux Falls, South Dakota
December 13, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE INC.
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
ASSETS (NOTE 4) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 124 $ 1,018
Accounts receivable 11,300 3,175
Inventories 14,295 16,643
Prepaid expenses and other assets 627 1,187
------------ ------------
TOTAL CURRENT ASSETS 26,346 22,023
------------ ------------
Property and Equipment, at cost
Buildings and improvements 107,216 107,216
Equipment 10,277 10,277
------------ ------------
117,493 117,493
Less accumulated depreciation 61,546 53,426
------------ ------------
55,947 64,067
------------ ------------
TOTAL ASSETS $ 82,293 $ 86,090
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------------------------------------
Current Liabilities
Notes payable, related party (Note 4) $ 500,000 $ 504,000
Current maturities of long-term debt (Notes 3 and 4) 22,000 520,935
Accounts payable (Note 3) 154,520 1,101,527
Accounts payable, related parties (Note 3) 14,625 303,450
Accrued expenses (Note 3) 47,076 103,461
Accrued expenses, related parties (Notes 3 and 4) 297,172 305,444
------------ ------------
TOTAL CURRENT LIABILITIES 1,035,393 2,838,817
------------ ------------
Long-Term Debt, less current maturities (Notes 3 and 4) 43,000 45,000
------------ ------------
Contingencies (Notes 3 and 4)
Stockholders' Deficit (Notes 3 and 8)
Series A preferred stock, $.001 par value; authorized
5,000,000 shares; issued and outstanding 113,901 shares;
total liquidation preference of outstanding shares $172,069 114 114
Series B preferred stock, $.001 par value; authorized
2,000,000 shares; 2,000,000 and 0 shares issued
and outstanding at September 30, 1999 and 1998;
total liquidation preference of outstanding shares $300,000 2,000 -
Common stock, $.001 par value; authorized 10,000,000
shares; 4,912,138 and 3,214,976 shares issued and
outstanding at September 30, 1999 and 1998 4,912 3,215
Additional paid-in capital 8,040,217 6,835,290
Accumulated deficit (9,043,343) (9,636,346)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (996,100) (2,797,727)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 82,293 $ 86,090
============ ============
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 36,998 $ 60,378
Cost of goods sold 2,852 6,672
---------- ----------
GROSS PROFIT 34,146 53,706
---------- ----------
Operating expenses:
Selling 34,180 38,059
General and administrative 56,182 39,946
---------- ----------
90,362 78,005
---------- ----------
OPERATING (LOSS) (56,216) (24,299)
---------- ----------
Nonoperating income (expense):
Write off of accounts payable 52,898 -
Other income 1,103 889
Debt conversion expense (Note 4) (260,560) -
Interest expense (105,684) (141,615)
---------- ----------
(312,243) (140,726)
---------- ----------
(LOSS) BEFORE INCOME TAXES (368,459) (165,025)
Income tax expense (Note 5) - -
---------- ----------
(LOSS) BEFORE EXTRAORDINARY INCOME (368,459) (165,025)
Extraordinary income, gain on settlement of liabilities (Note 3) 961,462 -
---------- ----------
NET INCOME (LOSS) $ 593,003 $(165,025)
========== ==========
Earnings (loss) per common share
(Loss) before extraordinary income $ (0.10) $ (0.05)
Extraordinary income 0.25 -
---------- ----------
NET INCOME (LOSS) $ 0.15 $ (0.05)
========== ==========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
SERIES A SERIES B ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
---------- ---------- ------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 $ 114 $ - $ 3,191 $ 6,834,594 $ (9,471,321) $(2,633,422)
Net (loss) - - - - (165,025) (165,025)
Issuance of common stock
for services (Note 6) - - 24 696 - 720
---------- ---------- ------- ----------- ------------- ------------
Balance, September 30, 1998 114 - 3,215 6,835,290 (9,636,346) (2,797,727)
Net income - - - - 593,003 593,003
Issuance of common stock for:
Satisfaction of Company
liabilities (Note 3):
Related parties,
including
shareholders - - 582 574,580 - 575,162
Others - - 1,104 32,028 - 33,132
Services (Note 6) - - 11 319 - 330
Issuance of Series B preferred
stock for satisfaction of
Company liabilities (Note 4) - 2,000 - 598,000 - 600,000
---------- ---------- ------- ----------- ------------- ------------
Balance, September 30, 1999 $ 114 $ 2,000 $ 4,912 $ 8,040,217 $ (9,043,343) $ (996,100)
========== ========== ======= =========== ============= ============
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
INTERACTIVE INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 593,003 $(165,025)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 8,120 9,188
Provision for doubtful accounts - 1,714
Issuance of common stock for services 330 720
Gain on settlement of Company liabilities (961,462) -
Debt conversion expense settled by issuance of stock 260,560 -
Changes in working capital components:
(Increase) decrease in:
Accounts receivable 2,551 5,529
Inventories 2,348 (1,223)
Prepaid expenses and other assets 560 (1,037)
Increase (decrease) in:
Accounts payable (49,947) (11,911)
Accrued expenses 108,719 162,101
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (35,218) 56
---------- ----------
Cash Flows From Financing Activities
Net borrowings on related party notes payable 35,324 -
Principal payments on long-term borrowings (1,000) (203)
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 34,324 (203)
---------- ----------
NET (DECREASE) IN CASH (894) (147)
Cash
Beginning 1,018 1,165
---------- ----------
Ending $ 124 $ 1,018
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 106 $ 802
Income taxes - -
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
INTERACTIVE INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: InterActive Inc. (the Company) developed, manufactured and
- -------------------
marketed, nationally and internationally, peripheral hardware products that
enable users to create and send messages across local and wide area networks.
It is producing no products or significant services currently and is evaluating
alternative plans for future operations (Note 2).
A summary of the Company's significant accounting policies follows:
Use of estimates: The preparation of financial statements in conformity with
- ------------------
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
- -----------
method) or market. The composition of inventories is as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Raw materials $12,780 $13,488
Finished goods 1,515 3,155
------- -------
$14,295 $16,643
======= =======
</TABLE>
Property and equipment: Depreciation of property and equipment is computed by
- ------------------------
the straight-line method over the following estimated useful lives:
Years
------
Buildings and improvements 7 - 15
Equipment 7
Property and equipment is subject to a lien as a result of the Company's
inability to pay for building improvements performed by a contractor. This
liability has been assumed by a related party.
F-6
<PAGE>
INTERACTIVE INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings (loss) per share: Earnings (loss) per share has been computed on the
- ---------------------------
basis of the weighted-average number of common shares outstanding during each
period presented. Securities that could potentially dilute basic earnings per
share in the future that were not included in the computation of diluted
earnings per share, because to do so would have been antidilutive to the loss
before extraordinary income, are as follows: 20,000,000 shares of common stock
issueable upon the conversion of Series B preferred stock in 1999, 215,053 and
140,752 shares of common stock issueable upon the conversion of Series A
preferred stock in 1999 and 1998, respectively, 83,834 shares of common stock
issueable upon the exercise of options in 1999 and 1998 and 1,000,000 shares of
common stock issueable upon the exercise of stock warrants in 1999 and 1998.
All references to earnings (loss) per share in the financial statements are to
basic earnings (loss) per share. Diluted earnings (loss) per share are the same
as basic earnings (loss) per share for all per share amounts presented. The
weighted average number of common shares outstanding was 3,905,990 and 3,191,369
as of September 30, 1999 and 1998, respectively.
Deferred taxes: Deferred taxes are provided on a liability method whereby
- ---------------
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
NOTE 2. CONTINUATION OF OPERATIONS
The Company has sustained operating losses for several years and its current
liabilities exceeded current assets at September 30, 1999 and 1998. 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 is formulating plans in this regard which are
expected to include entry into multimedia markets. In addition, the Company
plans to increase revenue generated through varying methods of Internet sales.
The Company expects to finance its entry into these new markets primarily
through providing consulting services with the assistance of TPR Group and its
affiliates (TPR), related parties, and generating cash through private
investments or loans. There can be no assurance that TPR will provide such
assistance or any other support to the Company.
F-7
<PAGE>
INTERACTIVE INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. SETTLEMENT OF LIABILITIES
In 1999 the Company issued 1,686,162 shares of common stock (of which 581,773
shares were issued to related parties, including shareholders) to settle certain
accrued expenses, accounts payable, notes payable and long-term debt totaling
$1,569,756 (of which $575,162 was payable to related parties, including
shareholders). The common stock issued to nonrelated party creditors to settle
liabilities was recorded at fair value. The difference between the fair value
of the common stock issued and the carrying amount of the liabilities settled
was recognized as a gain on restructuring of liabilities and classified as an
extraordinary item. The common stock issued to related parties was recorded at
the carrying amount of the liabilities and no gain was recognized on common
stock issued to related parties. Included in the above amount was $296,298 of
accounts payable due to TPR, which was settled through the issuance of 296,298
shares of common stock.
Under the terms of an agreement between the Company and TPR in connection with
the debt restructuring described above, TPR agreed to pay in cash on behalf of
the Company certain operating and other expenses of the Company up to $50,000,
and also forgive $213,500 of debt and $75,940 of related accrued interest, all
of which was secured by a first lien on all of the Company's assets, in exchange
for 2,000,000 shares of Series B preferred stock. At September 30, 1998, the
Company also had a $4,000 loan from TPR. During 1999, the Company received an
additional $35,324 from TPR and issued 2,000,000 shares of Series B preferred
stock (convertible to 20,000,000 shares of common stock) to TPR in settlement of
the above amounts due. The Company recorded the settlement of these obligations
at the fair value of the equivalent common shares issued (assumed for these
purposes to be 3 cents per share, an aggregate of $600,000). The estimated fair
value of the stock issued in excess of debt and accrued interest forgiven and
cash advanced, which excess totaled $260,560, is reflected in the statement of
operations as debt conversion expense.
Substantially all of the Company's accounts payable are several years past due.
The Company does not anticipate making any payments on these obligations in the
near term. The Company has several judgments against it and several more
threatened as a result of its inability to pay its obligations to its unsecured
creditors.
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
At September 30, 1999 and 1998, the Company has a $500,000 note payable to TPR
that is due on demand. This note was originally to a bank and was assumed by
TPR on behalf of the Company as a result of its guarantee of the loan. In
connection with the assumption of the loan, 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.
F-8
<PAGE>
INTERACTIVE INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The note to TPR bears interest at a variable rate of interest (compounded at
13.6% as of September 30, 1999) and is secured by substantially all assets of
the Company. Accrued interest in the accompanying balance sheets includes
$297,118 and $197,670, respectively, at September 30, 1999 and 1998 of accrued
interest due to TPR under the demand note discussed above. During fiscal year
1999, TPR entered into an agreement with the Company in which TPR would exchange
the $500,000 of debt plus accrued interest owing from the Company for 600,000
shares of a new series of preferred stock (not yet Board of Director authorized)
if certain conditions in the agreement are satisfied. The proposed terms of the
Series C preferred stock are that it will have an initial liquidation preference
of $1.00 per share and will be convertible at the option of the holder at the
rate of 10 shares of the Company's common stock for each share of Series C
preferred stock. The Series C preferred stock will be redeemable by the Company,
in whole or in part, at a price of $1.00 per share upon request of the holder
given at any time after the expiration of one full year from the date the Series
C stock is issued.
Long-term debt consists of the following at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
0% Settlement payable, due in monthly installments of $167
through March 2001, and monthly installments of $500
thereafter through March 2008 $45,000 $ 46,000
15% Note, due November 30, 1995, collateralized
by substantially all assets of the Company 20,000 20,000
Other past due notes payable, settled for stock - 499,935
------- --------
65,000 565,935
Less current maturities 22,000 520,935
------- --------
$43,000 $ 45,000
======= ========
</TABLE>
An accounts payable amount of $62,712 due as of September 30, 1997, was
restructured through an agreed settlement in which interest in the amount of
$16,509 was forgiven, with the balance converted to a long term settlement
payable. If the Company fails to comply with the terms of the settlement, then
the entire unpaid obligation under the settlement plus the abated interest of
$16,509 will be due and payable immediately. Accordingly, the $16,509 is
included in the accompanying balance sheets in accrued expenses as of September
30, 1999 and 1998.
Aggregate maturities on long term debt as September 30, 1999 are due in future
years as follows: 2000 $22,000; 2001 $4,000; 2002 $6,000; 2003 $6,000; 2004
$6,000; and thereafter $21,000.
It is not practicable to estimate the fair value of the notes payable and
long-term debt obligations noted above due to the credit position of the Company
and its inability to obtain financing from any lender other than related
parties.
F-9
<PAGE>
INTERACTIVE INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 5. INCOME TAX MATTERS
Net deferred tax assets consist of the following components as of September 30,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforward $2,534,437 $2,925,495
Inventory 204,113 211,970
Tax credit carryforward 15,269 15,269
Property and equipment 9,744 8,345
Accrued warranty 340 -
---------- ----------
2,763,903 3,161,079
Less valuation allowance 2,763,903 3,161,079
---------- ----------
$ - $ -
========== ==========
</TABLE>
The Company recorded a full valuation allowance on the deferred tax assets due
to lack of assurance that the tax benefits can be realized. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income.
At September 30, 1999, the Company has for tax reporting purposes approximately
$15,000 in unused research and development credits and a net operating loss
carryforward of approximately $7,454,000 available to be offset against future
federal taxable income or income tax liabilities. These carryforwards expire in
varying amounts in years ending September 30, 2000 through 2012.
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax (loss) from continuing
operations for the years ended September 30, 1999 and 1998 due to the following:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Computed "expected" tax (credits) $(128,961) $(57,759)
Increase (decrease) in income taxes resulting from:
Issuance of common stock to related parties
for satisfaction of Company liabilities 201,307 -
Change in valuation allowance, excluding change
related to extraordinary income of $326,897 (70,279) 56,109
Other, related to tax bracket rate differences (2,067) 1,650
---------- ---------
$ - $ -
========== =========
</TABLE>
F-10
<PAGE>
INTERACTIVE INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 6. STOCK ISSUED FOR SERVICES
During 1999, an individual performed consulting and other services and was
compensated with 11,000 shares of restricted common stock. As a result of the
issuance of this stock, $11 was included in common stock, $319 was included in
additional paid-in-capital, and $330 was included in expense in the
accompanying financial statements.
During 1998, two directors of the Company performed consulting and other
services. Each director was compensated through the issuance of 12,000 shares
of restricted common stock. As a result of the issuance of this stock, $24 was
included in common stock, $696 was included in additional paid-in-capital, and
$720 was included in expense in the accompanying financial statements.
NOTE 7. STOCK OPTIONS
The Company has two incentive stock option plans. A total of 133,333 options
are available under the plans to be granted to employees and other individuals
that provide services to the Company. Options granted are at the discretion of
the Board of Directors and vest with the option holder over a 48 or 36 month
period of continuous service with the Company. The option price is established
by the Board of Directors, but at a price not less than fair market value for
incentive stock options and a price not less than 85% of fair market value for
nonstatutory stock options
During the years ending September 30, 1999 and 1998, no options were granted,
forfeited or exercised. Accordingly, at September 30, 1999 and 1998, 83,834
options were outstanding at a weighted average exercise price of $.26.
Fixed options outstanding at September 30, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------ ---------------------------
Remaining
Number Number Contractual Life Exercise
Outstanding Exercisable Life Price
- ----------- ----------- ---------------- ---------
<S> <C> <C> <C>
5,334 5,334 1 year $ 0.25
4,000 4,000 2 years 0.25
3,000 3,000 4 years 0.25
21,000 21,000 5 years 0.25
36,000 36,000 6 years 0.25
14,500 12,684 7 years 0.32
- ----------- -----------
83,834 82,018
=========== ===========
</TABLE>
F-11
<PAGE>
INTERACTIVE INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 8. OTHER STOCK MATTERS
Series A preferred stock: The series A preferred stock has a liquidation
- ---------------------------
preference before common stock ($1.35 to $1.80 per share). Such stock is
nonvoting, has no dividend provisions, and is convertible into common stock on a
share for share basis with antidilution provisions if additional common stock
were to be issued at less than the preferred stock's liquidation preference.
Series B preferred stock: The series B preferred stock has a liquidation
- ---------------------------
preference before common stock of $.15 per share. The stock is voting for the
same number of shares in which it is entitled to be converted. The stock is
convertible into common stock on a ten to one share basis with a provision for
this conversion ratio to be adjusted if certain events occur.
NOTE 9. MAJOR CUSTOMERS.
A major customer is defined as a customer to whom sales greater than 10% were
made during the period. Sales to three customers amounted to $9,095, $7,200 and
$6,080 respectively, and comprised 60% of the net sales for the year ended
September 30, 1999. Sales to one customer amounted to $13,528, and comprised
22% of the net sales for the year ended September 30, 1998.
NOTE 10. RESTATEMENT
The Company's financial statements for the year ended September 30, 1998 were
previously unaudited. The accompanying audited amounts differ from previously
reported amounts as follows:
As Reported
In the
As Accompanying
Originally Financial
Reported Statements
--------------------------
Net (loss) $ (51,620) $ (165,025)
(Loss) per common share (0.02) (0.05)
F-12
<PAGE>
INTERACTIVE INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of common stock for satisfaction of liabilities:
Accounts payable - related parties $303,450 $ -
Accounts payable 882,435 -
Accrued expenses, other than interest - related parties 32,516 -
Notes payable and long-term debt - related parties 41,000 -
Notes payable and long-term debt 245,435 -
Accrued interest on notes payable and long-term debt 64,920 -
Issuance of Series B preferred stock for satisfaction
of Company liabilities:
Notes payable and long-term debt - related parties 252,824 -
Accrued interest on notes payable and long-term 75,940 -
debt - related parties
</TABLE>
F-13
<PAGE>
Exhibit 10.09
TERM SHEET
Set forth below are the principle terms and conditions upon which TPR
Group, Inc., a Delaware corporation ("TPRG"), proposes to provide capital and
other resources to InterActive, Inc., a South Dakota corporation (the
"Company"), in connection with the contemplated reorganization of the Company
through a voluntary compromise with creditors course of action (the
"Reorganization"):
1. Subject to the fulfillment of each of the conditions set forth below
to the satisfaction of TPRG, in its sole discretion, TPRG, perhaps with several
other individuals and entities, would purchase an aggregate of 2,000,000 shares
of a new series of the Company's preferred stock (the "Series B Preferred
Stock") on the terms and for the consideration set forth below:
(a) TPRG would pay, in cash, in the name and on behalf of the
Company, up to $50,000, for the following purposes:
(i) Payment of legal and accounting fees and expenses
incurred and to be incurred in connection with the proposed Reorganization;
(ii) Payment of up to $15,000, over the 3-month period ending
February 23, 1999 (the "Reorganization Period"), to Robert Stahl, in
consideration of his continuing services as the President of the Company and
implementing the proposed Reorganization, all as more particularly outlined in a
separate letter agreement with Mr. Stahl; and
(iii) Payment of the reasonable continuing costs incurred by
the Company during the Reorganization Period (i.e., staff, rent, utilities,
postage, etc.) to the extent sales of SoundXchanges by the Company do not
generate the necessary funds.
(b) The Series B Preferred Stock would have an initial liquidation
preference of $.15 per share, would be convertible at the option of the holder
at the rate of 10 shares of the Company's Common Stock for each share of Series
B Preferred Stock, would be entitled to elect 3 of 5 directors of the Company
and to vote along with the holders of the Company's Common Stock on all other
matters, with the right to cast that number of votes per share of Series B
Preferred Stock as is equal to the number of shares of Common Stock into which
each share of Series B Preferred Stock is then convertible, and would contain
standard conversion price adjustment provisions to reflect stock splits, stock
dividends and the like.
2. In addition to purchasing the Series B Preferred Stock, TPRG would
use its best efforts during the Reorganization Period to assist the officers and
directors of the Company, in such manner as TPRG determines to be necessary or
desirable and appropriate, in its sole discretion, in implementing and
consummating the proposed Reorganization.
<PAGE>
3. Assuming that the proposed Reorganization can successfully be
consummated, TPRG would use its best efforts to assist the
officers and directors of the Company, in such manner as TPRG
determines to be necessary or desirable and appropriate, in its sole
discretion, in (a) developing a technical consulting service
business, and (b) developing and/or acquiring such other business
or businesses as the officers and directors of the Company, in
consultation with TPRG, deem desirable and appropriate. In addition,
TPRG would contribute to the capital of the Company the
indebtedness in the principal amount of $289,440 currently owed by
the Company to TPRG which is secured by a first lien against all
of the Company's assets.
4. It is contemplated that the Reorganization would consist of the
following primary components:
(a) Offer to Creditors.
---------------------
(i) The Company would offer each of the creditors of the
Company identified on the listing attached hereto as Exhibit B the right to
receive one (1) share of the Company's Common Stock for each $1.00 owed to such
creditor as reflected on Exhibit B, to be delivered at the Closing.
(ii) Torrey Pines Research, to which the Company currently owes
$500,000 plus accrued but unpaid interest, shall agree to exchange such debt for
600,000 shares of a second series of the Company's preferred stock (the "Series
C Preferred Stock") upon satisfaction of each of the conditions specified in
Exhibit A attached hereto. The Series C Preferred Stock will have an initial
liquidation preference of $1.00 per share and will be convertible at the option
of the holder at the rate of 10 shares of the Company's Common Stock for each
share of Series C Preferred Stock. The Series C Preferred Stock will be
redeemable by the Company, in whole or in part, at a price of $1.00 per share
upon request of the holder given at any time after the expiration of one full
year from the date the Series C Stock is issued provided that: (1) the Company
has net income before taxes for the previous fiscal year end as reported on
audited statements filed with the SEC; and (2) at the date of the redemption,
the Company has sufficient cash on hand so that after the redemption, cash plus
accounts receivable will exceed accounts payable and other current liabilities
payable in cash. Series C Preferred Shareholders will be entitled to vote along
with the holders of the Company's Common Stock on all matters, with the right to
cast that number of votes per share of Series C Preferred Stock as is equal to
the number of shares of Common Stock into which each share of Series C Preferred
Stock is then convertible, and would contain standard conversion price
adjustment provisions to reflect stock splits, stock dividends and the like.
(b) Implementation. It is contemplated that the offer to
---------------
creditors outlined in paragraph 4(a) above would be implemented as follows:
<PAGE>
(i) Within ten (10) business days following the finalization
hereof and acceptance of such final terms and conditions by the Company, TPRG
and the officers and directors of the Company would work together to develop and
mail the documentation necessary to communicate the offer to creditors;
(ii) Robert Stahl, with the assistance of the other officers
and directors of the Company as necessary, would directly contact each creditor
owed $1,000 or more to encourage acceptance of the offer;
(iii) Among other things, consummation of the Reorganization
will be conditioned upon acceptance of the offer by creditors holding at least
95% of all of the indebtedness of the Company reflected on Exhibit B; and
(iv) Following consummation of the Reorganization, except the
indebtedness of the Company to the State of South Dakota which is to survive the
Reorganization, the debts, obligations and liabilities of the Company shall not
exceed 5% of the aggregate amount reflected on Exhibit B, all of which shall be
and remain subject to applicable statutes of limitations on actions to be
brought by creditors on account thereof.
(c) Closing. Consummation of the Reorganization would occur at a
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Closing to be held within three business days following the satisfaction of all
conditions precedent thereto set forth herein, and such other conditions as
TPRG, in its sole discretion, shall deem to be necessary or desirable and
appropriate. Without limiting the generality of the foregoing, the Closing
shall be conditioned upon a determination by TPRG, in its sole discretion, that
the transactions contemplated as part of the proposed Reorganization will not
constitute a "change in control" for purposes of Section 382 of the Internal
Revenue Code which would limit the use by the Company of its net operating loss
carry-forwards from and after the Closing.
(d) Confidentiality. During the period between the date hereof
----------------
and the Closing, each the Company shall give to TPRG and its authorized
representatives full access, during reasonable business hours, in such a manner
as not unduly to disrupt normal business activities, to any and all of the
Company's premises, properties, contracts, books, records and affairs, and shall
cause the Company's officers to furnish any and all data and information
pertaining to the Company's business that TPRG or its representatives may from
time to time reasonably require. The Closing will be conditioned upon
verification by TPRG that the assets and liabilities, and the prospects and
condition, financial and otherwise, of the Company are as have been represented
to TPRG. Unless and until the transactions contemplated by this letter have
been consummated, neither the Company or any of its officers and directors, one
the one hand, nor TPRG or any of its officers and directors, on the other hand,
shall make any announcement or other disclosure with respect to the receipt or
acceptance of this Term Sheet, or the transaction proposed herein, or the
closing of the transactions contemplated hereby, without the consent of the
other party (which shall not unreasonably be withheld), and each shall hold in
confidence all information obtained from the other. In the event that the
<PAGE>
transactions contemplated hereby are not consummated, each party shall return to
the other all documents so obtained. This obligation of confidentiality shall
not extend to any information which is shown to have previously been (i) known
to the party receiving it, (ii) generally known to others engaged in the trade
or business of the party receiving it, (iii) part of public knowledge or
literature, or (iv) lawfully received from a third party not having a duty of
confidentiality.
5. Beginning immediately upon acceptance of the final terms and
conditions hereof by the parties and continuing until the Closing, neither party
shall entertain, negotiate or discuss with any third party, directly or
indirectly, at any time between the date hereof and the Closing, any possible
business combination, sale or assets or stock, or other transaction which is
inconsistent with the transactions contemplated hereby.
If each of the members of the Board of Directors of the Company (other than
Mr. Hanson) is in agreement with the terms and conditions set forth above,
please so indicate by signing this Term Sheet where indicated below, and by
causing this Term Sheet to be signed on behalf of the Company as indicated
below.
Dated: December 4, 1998
TPR GROUP, INC.,
A Delaware corporation
By: /S/ William J. Hanson, President
--------------------------------
William J. Hanson, President
AGREED TO AND ACCEPTED,
this 4th day of December 1998:
- ------------------------
Russell Pohl
INTERACTIVE INC.
- ------------------------
Gary Kappenman
By:
--------------------------------
<PAGE>
EXHIBIT A
to
Term Sheet
It is understood and agreed that Torrey Pines Research, Inc. would have no
obligation to exchange stock for indebtedness owed by the Company to Torrey
Pines Research, Inc. which is referred to in paragraph 4(a)(ii) of the Term
Sheet unless and until each of the following conditions have been satisfied:
1. At least 18 months shall have expired since the consummation of the
Reorganization as contemplated by paragraph 4(b)(iii) of the Term Sheet;
2. The Company shall not be or have become subject to any obligations
or liabilities existing as of the consummation of the Reorganization other than
those expressly contemplated by paragraph 4(b)(iv) of the Term Sheet;
3. The Company's common stock shall have been publicly traded for at
least the 180-day period immediately preceding the date on which the
indebtedness is to be contributed; and
4. The Company shall have publicly reported positive net income for at
least two full quarters prior to the date on which the indebtedness is to be
contributed.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 124
<SECURITIES> 0
<RECEIVABLES> 11300
<ALLOWANCES> 0
<INVENTORY> 14295
<CURRENT-ASSETS> 26346
<PP&E> 117493
<DEPRECIATION> 61546
<TOTAL-ASSETS> 82293
<CURRENT-LIABILITIES> 1035393
<BONDS> 0
0
2114
<COMMON> 4912
<OTHER-SE> 8040217
<TOTAL-LIABILITY-AND-EQUITY> 82293
<SALES> 36998
<TOTAL-REVENUES> 36998
<CGS> 2852
<TOTAL-COSTS> 2852
<OTHER-EXPENSES> 350922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105684
<INCOME-PRETAX> (368459)
<INCOME-TAX> 0
<INCOME-CONTINUING> 54001
<DISCONTINUED> 0
<EXTRAORDINARY> 961462
<CHANGES> 0
<NET-INCOME> 593003
<EPS-BASIC> .15
<EPS-DILUTED> .15
</TABLE>
