<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------------------
FORM 10-Q
(Mark one)
[x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1997
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
--------
.
--------
Commission File Number: 0-26026
INTERACTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-2925769
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5095 MURPHY CANYON ROAD, SAN DIEGO, CA 92123
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (619) 560-8525
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. (1) Yes X No ___ (2) Yes X No ___
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, as of May 14, 1997 was 4,485,712.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERACTIVE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1997 1996
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,061 $ 3,682
Accounts receivable, net 16,002 16,064
Deferred income taxes 540 540
Prepaid expenses and other current assets 1,914 1,561
------- -------
Total current assets 20,517 21,847
Property and equipment, net 2,954 3,063
Intangible assets, net 2,322 2,353
Deferred income taxes 1,152 1,134
Deposits and other assets 757 579
------- -------
TOTAL ASSETS $27,703 $28,976
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,637 $ 6,770
Accrued salaries and commissions 2,190 2,086
Value added taxes payable 289 682
Other accrued expenses 2,240 2,766
Current portion of obligations under capital leases 132 172
Short-term borrowings and current portion of long-term obligations 2,131 2,013
Customer deposits 717 448
Deferred revenue 2,111 1,888
------- -------
Total current liabilities 15,445 16,825
Obligations under capital leases, less current portion 227 170
Long-term obligations, less current portion 1,873 1,694
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000,000
None issued and outstanding -- --
Common stock, $.001 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 4,485,712 4 4
Additional capital 7,035 7,019
Retained earnings 3,057 3,127
Cumulative foreign currency translation adjustments 62 137
------- -------
Total stockholders' equity 10,158 10,287
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,703 $28,976
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
INTERACTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
REVENUES $ 13,190 $ 13,831
COST OF REVENUES 6,445 7,036
-------- --------
Gross margin 6,745 6,795
OPERATING EXPENSES:
Research and development 821 936
Selling, general and administrative 5,967 5,076
-------- --------
Total 6,788 6,012
INCOME (LOSS) FROM OPERATIONS (43) 783
Other expense, net (64) (33)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (107) 750
Provision (benefit) for income taxes (37) 308
-------- --------
NET INCOME (LOSS) $ (70) $ 442
======== ========
EARNINGS (LOSS) PER SHARE $ (0.02) $ 0.10
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,486 4,434
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
INTERACTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------- -------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (70) $ 442
Adjustments to reconcile net income (loss) to cash
(used in) provided by operating activities:
Depreciation and amortization 426 304
Compensation related to the granting of options
and stock bonus 23 22
Deferred income taxes (18) --
Changes in operating assets and liabilities (1,925) (514)
------- -------
Net cash (used in) provided by operating activities (1,564) 254
INVESTING ACTIVITIES:
Purchase of property and equipment (163) (403)
Acquisition of business -- (68)
------- -------
Net cash used in investing activities (163) (471)
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 475 --
Principal payments on long-term obligations (252) --
Principal payments on capital leases (60) (113)
Net short-term borrowings -- 118
Other (7) --
------- -------
Net cash provided by financing activities 156 5
EFFECT OF EXCHANGE RATE (50) (35)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,621) (247)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,682 4,467
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,061 $ 4,220
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ 82 $ 67
======= =======
Income taxes $ 6 $ 30
======= =======
Non-cash transactions:
Long-term obligation associated with business acquisition $ 74 $ 94
======= =======
Property and equipment acquired under capital lease obligation $ 85 $ --
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Interactive Group, Inc. (hereinafter referred to as the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of the financial position and operating results for the interim
periods presented have been included. Operating results for the three month
period ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. The unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1996 included in the Company's Annual Report on Form 10-K. All intercompany
accounts and transactions have been eliminated in consolidation.
2. Cash equivalents
Cash equivalents consist of highly liquid investments with original maturities
of 90 days or less.
3. Earnings (Loss) per share
Earnings (Loss) per common share is computed using the weighted average number
of shares of common stock and the dilutive effect, if any, of common stock
equivalents outstanding during all periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"),
effective for fiscal years ending after December 15, 1997. SFAS 128 specifies
the computation, presentation, and disclosure requirements for basic earnings
per share and diluted earnings per share. The Company's calculation of earnings
per share under the new standard would be as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Basic earnings (loss) per share $ (.02) $ .10
Diluted earnings (loss) per share $ (.02) $ .10
</TABLE>
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q for the three months ended March 31, 1997
contains forward-looking statements that involve risks and uncertainties. The
Company's actual future results could differ materially from those statements.
Factors that could cause or contribute to such differences include, but are not
limited to, the potential for significant fluctuations in the Company's
quarterly results, management of growth, timing and amounts of future revenues
and risks associated with the integration of the operations and product
offerings of Just-In-Time Enterprise Systems, Inc. into the Company's operations
and product offerings, as well as the other factors discussed elsewhere in this
quarterly report on Form 10-Q and in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
OVERVIEW
The Company develops, markets, implements and supports integrated business
information systems that enable discrete manufacturers to manage their
enterprise-wide information requirements. The Company primarily sells and
implements its business information systems directly. Since 1992, the Company
has expanded its sales, implementation, and customer service capabilities
through the addition of offices as well as the establishment of centralized
customer service centers in both the United States and United Kingdom.
Substantially all of the Company's revenues are generated from the sale of its
systems, which usually consist of proprietary and third-party software licenses,
implementation and software support services, third-party hardware and
maintenance contracts. The Company's proprietary software licenses are sold on a
packaged or individual module basis, and the license fee is determined in part
by the number of modules and concurrent system users. Implementation and
software support services are furnished on a daily or hourly basis and billed
monthly as incurred. Maintenance fees are based on a percentage of software
license fees.
Revenues from software licenses are recognized upon delivery, provided that no
significant obligations of the Company remain and collection of the related
receivable is deemed probable. Software support services revenues are recognized
in the period in which the services are performed. Revenues from hardware sales
are recognized upon shipment of the product. Revenues from software maintenance
contracts are recognized ratably over the period of the contract. Revenues from
turnkey systems, which include both hardware and software, are recognized upon
delivery of the software and related hardware that is considered essential to
the functionality of the system, provided that no significant obligations remain
and collection of the related receivable is deemed probable.
The Company derives a significant portion of its revenues from its international
business, which is subject to various risks common to international activities,
including currency fluctuations. Revenues and expenses of the Company's
international operations are translated at the average exchange rate in effect
during the period. Translation adjustments are reported as a separate component
of stockholders' equity.
The Company plans to expand its business through expansion of its distribution
network in the United States and internationally with the objective of
increasing total revenues and profits. There can be no assurance, however, that
the efforts and funds directed to expansion of the Company's distribution
network will result in revenue and profit growth. Any future growth of the
Company will also depend on, among other things, the Company's ability to gain
market acceptance for its products in new geographic areas and its ability to
monitor and control the additional costs and expenses associated with expansion
and new product development. There can be no assurance that the Company will be
able to successfully manage these aspects of its business. The success of the
Company's expansion in continental Europe and other international markets will
depend largely upon the success of Company's "affiliates", or business partner
program. This program is, in turn, dependent upon the successful identification
and recruitment of appropriate international partners, the Company's success in
instilling a service-driven culture in these foreign organizations that the
Company does not own or control, and the development of adequate resources
within each affiliate to successfully sell and implement the Company's business
information systems on a turnkey basis. No assurance can be given that the
Company will be able to meet these challenges or successfully implement its
international business partner program.
6
<PAGE> 7
On December 31, 1995, the Company acquired all of the outstanding shares of
Just-In-Time Enterprise Systems ("JIT"), which, prior to the acquisition,
developed and marketed the Company's JIT Enterprise System application software
product. Interactive and JIT differ in certain respects, and the Company
anticipates that the integration of JIT will continue to divert some of its
management resources and working capital for an indefinite period of time. There
can be no assurance that difficulties will not arise in integrating the
operations of JIT. Moreover, there can be no assurance that the Company will
realize any product enhancements or increased revenues as a result of the
acquisition of JIT. The success of the acquisition of JIT will depend, in large
part, on the ability of the Company to retain the customers and employees of
JIT, to continue to develop and release product enhancements and new product
releases of the JIT product, and to successfully market and sell such new
product releases. There can be no assurance that the Company will be successful
in this regard. The failure to accomplish any of the goals of the acquisition,
or the failure to successfully integrate the operations of JIT, could have a
material adverse effect on the Company's future operating results and working
capital.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Revenues- Total revenues decreased 5% to $13.2 million for the three months
ended March 31, 1997 compared to $13.8 million for the same period in 1996. The
decrease was primarily attributable to revenues for the three months ended March
31, 1996 being higher than originally expected due to delays in shipment of
systems booked in the fourth quarter of 1995. Additionally, as a result of the
Company's de-emphasis on selling hardware, hardware sales decreased 49% to $1.1
million for the three months ended March 31, 1997 compared to $2.1 million for
the same period in 1996. International revenues made up 28% and 29% of the
Company's total revenues for the first quarter of 1997 and 1996, respectively.
Cost of Revenues- Total cost of revenues decreased 8% to $6.4 million for the
three months ended March 31, 1997 compared to $7.0 million for the same period
in 1996. The decrease was primarily attributable to decreases in the cost of
hardware included in the Company's system sales.
Gross Margin- Gross margin decreased by 1% to $6.7 million for the three months
ended March 31, 1997 from $6.8 million for the same period in 1996. As a
percentage of total revenues, gross margin increased to 51% for the three months
ended March 31, 1997 from 49% for the same period in 1996, mainly as a result of
the Company's de-emphasis on hardware sales. Gross margins for software licenses
decreased slightly to 80% for the three months ended March 31, 1997 compared to
81% for the same period in 1996. Gross margins for software support services
decreased to 22% for the three months ended March 31, 1997 from 32% for the same
period in 1996. The Company attributes this decrease to higher personnel costs
and increases in other costs associated with providing implementation,
programming, education and training services. Hardware margins increased to 32%
for the three months ended March 31, 1997 compared to 25% for the same period in
1996 due to decreased cost of hardware purchased from vendors. Gross margins for
maintenance contracts decreased to 55% for the three months ended March 31, 1997
from 56% for the same period in 1996.
Research and Development Expenses- Research and development expenses, which
consist largely of software development costs, decreased 12% to $821,000 for the
three months ended March 31, 1997 compared to $936,000 for the same period in
1996, primarily as a result of terminating JIT contractors. As a percentage of
total revenues, research and development expenses decreased to 6% for the three
months ended March 31, 1997 compared to 7% for the same period in 1996.
Selling, General and Administrative Expenses- Selling, general and
administrative expenses increased 18% to $6.0 million for the three months ended
March 31, 1997 from $5.1 million for the same period in 1996. As a percentage of
total revenues, selling, general and administrative expenses increased to 45%
compared to 37% for the same period in 1996. The increase in selling, general
and administrative expenses is due
7
<PAGE> 8
primarily to the Company's expansion into Europe, where new offices were opened
and a distributor agreement was signed in 1996. The Company anticipates that
these costs will continue to increase in absolute dollars in future periods to
support the Company's growth.
Provision (Benefit) for Income Taxes- The Company's effective tax rate was 35%
for the three months ended March 31, 1997 compared to 41% for the same period in
1996. The lower tax rate for the three months ended March 31, 1997 resulted
primarily from the mix of earnings between the Company's domestic and foreign
operations, the latter of which are taxed at rates lower than the U.S. statutory
rates.
QUARTERLY RESULTS; SEASONALITY
The Company has experienced and expects to continue to experience significant
fluctuations in its quarterly results. Such fluctuations may be caused by many
factors, including, but not limited to: the size and timing of individual
orders; seasonality of revenues; lengthy sales cycles; delays in introduction of
products or product enhancements by the Company or other providers of hardware,
software and components for the Company's systems; competition and pricing in
the software industry; market acceptance of new products; reduction in demand
for existing products and shortening of product life cycles as a result of new
product introductions by competitors; foreign currency exchange rates; mix of
products sold; customer order deferrals in anticipation of new products; changes
in customer budgets; changes in Company strategy; personnel changes; changes in
operating expenses; conditions or events in the manufacturing industry; and
general economic conditions.
The Company's expense levels are based in part on its forecasts of future
revenues. Accordingly, since the majority of the Company's expenses are fixed in
nature, the Company would not be able to quickly curtail expenses in response to
a decline in revenues, and operating results and working capital for a given
quarter could be adversely affected. As a result, revenues for any quarter are
subject to significant variation and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Fluctuations in
quarterly operating results may also result in volatility in the price of the
Company's common stock.
The Company's revenues have typically occurred to a greater degree in the third
month of each fiscal quarter, and tend to be concentrated in the latter half of
such third month. As a result, the Company's quarterly results are difficult to
predict, and delays in hardware delivery or contract signings near the end of a
quarter could cause quarterly revenues and, to a greater degree net income, to
be significantly less than anticipated. The procurement process of the Company's
customers is long and involves competing capital budget decisions. As a result
of such budgeting and buying patterns, the Company's prospective customers are
typically more likely to order the Company's products near the end of each year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had cash and cash equivalents totaling $2.1
million and working capital of $5.1 million, compared to cash and cash
equivalents of $3.7 million and working capital of $5.0 million as of December
31, 1996. The Company has lines of credit with commercial banks under which it
may borrow up to a total of $5.3 million. As of March 31, 1997, $1.7 million was
outstanding under these lines. The Company currently invests its excess cash in
U.S. Government securities and money market accounts.
The Company believes that its existing cash and cash equivalents together with
its available lines of credit and cash flow from operations will be sufficient
to meet its anticipated working capital requirements for at least the next
twelve months.
8
<PAGE> 9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
An amended report on Form 8-K was filed by the Company on February 21,
1997 (relating to the Company's Form 8-K/A dated March 12, 1996 and the
Company's Form 8-K dated December 15, 1995).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERACTIVE GROUP, INC.
(Registrant)
Dated: May 14, 1997 /s/ Mark Hellinger
---------------------------------------------------
MARK HELLINGER
President, Chief Operating Officer and Director
(Acting Principal Financial and Accounting Officer)
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,061
<SECURITIES> 0
<RECEIVABLES> 16,428
<ALLOWANCES> 426
<INVENTORY> 0
<CURRENT-ASSETS> 20,517
<PP&E> 7,659
<DEPRECIATION> 4,705
<TOTAL-ASSETS> 27,703
<CURRENT-LIABILITIES> 15,445
<BONDS> 0
<COMMON> 4
0
0
<OTHER-SE> 10,154
<TOTAL-LIABILITY-AND-EQUITY> 27,703
<SALES> 13,190
<TOTAL-REVENUES> 13,190
<CGS> 1,718
<TOTAL-COSTS> 6,445
<OTHER-EXPENSES> 6,788
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78
<INCOME-PRETAX> (107)
<INCOME-TAX> (37)
<INCOME-CONTINUING> (70)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
