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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 30, 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
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INTERACTIVE GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2925769
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5095 MURPHY CANYON ROAD, SAN DIEGO, CA 92123
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(Address of principal executive offices) (Zip Code)
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
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The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, as of August 12, 1997 was 4,596,995.
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERACTIVE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
JUNE 30, DECEMBER 31,
1997 1996
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,697 $ 3,682
Accounts receivable, net 17,110 16,064
Deferred income taxes 540 540
Prepaid expenses and other current assets 1,529 1,561
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Total current assets 22,876 21,847
Property and equipment, net 3,133 3,063
Intangible assets, net 2,286 2,353
Deferred income taxes 1,152 1,134
Deposits and other assets 768 579
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Total assets $30,215 $28,976
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LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 5,361 $ 6,770
Accrued salaries and commissions 2,341 2,086
Value added taxes payable 321 682
Other accrued expenses 2,528 2,766
Current portion of obligations under capital leases 221 172
Short-term borrowings and current portion of long-term obligations 3,949 2,013
Customer deposits 354 448
Deferred revenue 2,071 1,888
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Total current liabilities 17,146 16,825
Obligations under capital leases, less current portion 329 170
Long-term obligations, less current portion 1,630 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 - 4,593,745 and 4,485,712
shares at June 30, 1997 and December 31, 1996, respectively 5 4
Additional capital 7,506 7,019
Retained earnings 3,494 3,127
Cumulative foreign currency translation adjustments 105 137
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Total stockholders' equity 11,110 10,287
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Total liabilities and stockholders' equity $30,215 $28,976
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See accompanying notes to condensed consolidated financial statements.
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INTERACTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1997 1996 1997 1996
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Revenues $ 15,252 $ 13,761 $ 28,442 $ 27,592
Cost of revenues 7,109 6,899 13,553 13,935
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Gross margin 8,143 6,862 14,889 13,657
Operating expenses:
Research and development 891 1,117 1,712 2,053
Selling, general and administrative 6,437 4,951 12,404 10,027
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Total 7,328 6,068 14,116 12,080
Income from operations 815 794 773 1,577
Other income (expense), net (78) (39) (143) (72)
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Income before income taxes 737 755 630 1,505
Provision for income taxes 300 302 263 610
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Net income $ 437 $ 453 $ 367 $ 895
======== ======== ======== ========
Net income per common and
common share equivalents outstanding $ 0.10 $ 0.10 $ 0.08 $ 0.20
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Weighted average number of common and
common share equivalents outstanding 4,579 4,427 4,554 4,430
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See accompanying notes to condensed consolidated financial statements.
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INTERACTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
1997 1996
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OPERATING ACTIVITIES:
Net income $ 367 $ 895
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Depreciation and amortization 847 649
Compensation relating to the granting of options
and stock bonus 46 43
Changes in operating assets and liabilities (2,885) (786)
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Net cash (used in) provided by operating activities (1,625) 801
INVESTING ACTIVITIES:
Purchase of property and equipment (390) (958)
Acquisition of business -- (264)
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Net cash used in investing activities (390) (1,222)
FINANCING ACTIVITIES:
Proceeds from short-term borrowings 1,800 --
Principal payments on short-term borrowings -- (340)
Principal payments on long-term obligations (567) (184)
Proceeds from long-term borrowings 500 164
Proceeds from issuance of common stock 442 279
Principal payments on capital leases (113) (213)
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Net cash provided by (used in) financing activities 2,062 (294)
Effect of exchange rate (32) (177)
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Net increase (decrease) in cash and cash equivalents 15 (892)
Cash and cash equivalents at beginning of period 3,682 4,467
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Cash and cash equivalents at end of period $ 3,697 $ 3,575
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ 180 $ 138
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Income taxes $ 8 $ 43
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Non-cash transactions:
Long-term obligation associated with business acquisitions $ 139 $ 193
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Property and equipment acquired under capital lease obligations $ 321 $ -
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See accompanying notes to condensed consolidated financial statements.
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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 and six
month periods ended June 30, 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 PER SHARE
Earnings 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 both interim and annual periods ending after December 15, 1997. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of SFAS 128 on the calculations of
primary earnings per share and fully diluted earnings per share for the three
and six months ended June 30, 1997 and 1996 is not expected to be material.
4. SUBSEQUENT EVENTS
On July 31, 1997, the Company entered into a definitive agreement (the "Merger
Agreement") with DataWorks Corporation ("DataWorks"), a supplier of software
solutions for discrete and repetitive manufacturers in the mid-range market,
pursuant to which the Company will become a wholly-owned subsidiary of DataWorks
in a stock-for-stock merger (the "Merger") intended to qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended, and accounted for as a pooling-of-interests for financial
reporting purposes. Under the terms of the Merger Agreement, stockholders of the
Company will receive 0.8054 shares of DataWorks common stock for each share of
Company common stock they own at the time the Merger is consummated. In
addition, options and warrants to acquire Company common stock will be converted
as a result of the Merger into equivalent options and warrants for DataWorks
common stock, based upon the exchange ratio. In connection with the execution of
the Merger Agreement, the Company granted DataWorks an option to purchase up to
344,531 shares of Company common stock (approximately 7.5% of the number of
shares currently outstanding), exercisable upon the occurrence of certain events
involving a termination of the Merger Agreement. The Merger is expected to be
completed this fall, subject to approval of the Merger Agreement and the Merger
by the stockholders of the Company and the shareholders of DataWorks as well as
the satisfaction or waiver of customary closing conditions. In connection with
the execution of the Merger Agreement, certain stockholders of the Company
owning approximately 39% of the outstanding shares of Company common stock
(Robert C. Vernon, Mark Hellinger and Randolph S. Naylor) and certain
shareholders of DataWorks
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owning approximately 20% of the outstanding shares of DataWorks common stock
have entered into forms of Voting Agreements pursuant to which they have agreed
to vote their shares in favor of approval of the Merger Agreement and the
Merger. The Company has filed a Current Report on Form 8-K (date of Report: July
31, 1997) with respect to the transactions involving the Company and DataWorks,
and the foregoing description of such transactions and the various agreements
entered into in connection therewith is qualified in its entirety by reference
to the documents filed as exhibits to such Form 8-K.
On July 25, 1997, the Company acquired substantially all of the outstanding
shares of Genie Productique/Gestion de Production ("GP2"), a small provider of
ERP software solutions to the manufacturing mid-market in France, in exchange
for approximately $400,000 plus an additional $160,000 contingent consideration
payable over three years based on a percentage of future revenues generated
primarily from GP2's installed base of customers. The transaction will be
accounted for as a purchase, and the results of operations of GP2 will be
included with the results of the Company's operations subsequent to the date of
acquisition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q for the three and six months ended June 30,
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. and other European operations
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. In
addition, the discussion below does not take into account any effects on the
Company of the proposed merger transaction with DataWorks Corporation described
in Note 4 to the Condensed Consolidated Financial Statements contained in this
quarterly report on Form 10-Q.
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 third-party
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.
Any future growth of the Company will 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 Company's ability to acquire
direct interests in strategic software companies as well as the success of the
Company's "affiliates", or business partner program. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations and
personnel of the acquired business, the integration of management information
and accounting systems of the acquired business, the diversion of management's
attention from other business concerns, risks of entering markets in which the
Company has no direct prior experience, and the potential loss of key employees
of the acquired business. The affiliate program is 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
acquire direct interests in foreign companies or implement its international
business partner program.
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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
Revenues- Total revenues increased 11 percent to $15.3 million from $13.8
million and increased 3 percent to $28.4 million from $27.6 million for the
three and six months ended June 30, 1997, respectively, as compared to the same
periods in 1996. The increase in revenues was primarily a result of higher sales
volumes in all areas except for third-party hardware sales which the Company has
continued to de-emphasize. Accordingly, revenues from third-party hardware sales
dropped 27 percent or $481,000 and 39 percent or $1.5 million for the three and
six months ended June 30, 1997, respectively, as compared to the same periods in
1996. The increase in revenues for the six months ended June 30, 1997 compared
to the same period in 1996 was partially offset by a decrease in revenues for
the three months ended March 31, 1997 compared to the same period in 1996 as a
result of higher revenues than originally expected in the first quarter of 1996
due to delays in shipment of systems booked in the fourth quarter of 1995.
Revenues from international operations remained consistent at 30 percent and 29
percent of the Company's total revenues for the three and six months ended June
30, 1997, respectively, compared to the same periods in 1996.
Cost of Revenues- Total cost of revenues increased 3 percent to $7.1 million
from $6.9 million and decreased 3 percent to $13.6 million from $13.9 million
for the three and six months ended June 30, 1997, respectively, compared to the
same periods in 1996. The fluctuations in the cost of revenues were primarily
attributable to a reduction in third-party hardware costs as discussed above. In
addition, during the three and six months ended June 30, 1997, the Company
experienced higher personnel costs related to its growth in software support
services and maintenance contracts. As a result, the reduction in hardware costs
were more than offset by the increase in personnel costs for the three months
ended June 30, 1997 while the reduction in hardware costs were only partially
offset by the increase in personnel costs for the six months ended June 30, 1997
as compared to the same periods in 1996.
Gross Margin- Gross margin increased by 19 percent to $8.1 million from $6.9
million and 9 percent to $14.9 million from $13.7 million for the three and six
months ended June 30, 1997, respectively, compared to the same periods in 1996.
As a percentage of total revenues, gross margin increased 3 basis points for the
three and six months ended June 30, 1997 to 53 percent and 52 percent,
respectively, compared to the same periods in 1996. The increase resulted
primarily from the Company's emphasis on selling software licenses and services
versus third-party hardware. Software licenses historically have produced gross
margins approximately 80 percent of revenues while hardware sales historically
have produced gross margins approximately 28 percent of revenues. In addition,
an increase in the volume of maintenance contracts from the Company's growing
customer base contributed to the higher gross margins while the Company
maintained consistent gross margins of 57 percent of related revenues.
Research and Development Expenses- Research and development expenses, which
consist largely of software development costs, decreased 20 percent to $0.9
million from $1.1 million and 17 percent to $1.7 million from $2.1 million for
the three and six months ended June 30, 1997, respectively, compared to the same
periods in 1996. The decreases were primarily a result of the termination of
contractors associated with JIT's research and development expenditures during
the first part of 1997.
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Selling, General and Administrative Expenses- Selling, general and
administrative expenses increased 30 percent to $6.4 million from $5.0 million
and 24 percent to $12.4 million from $10.0 million for the three and six months
ended June 30, 1997, respectively, compared to the same periods in 1996. As a
percentage of total revenues, selling, general and administrative expenses
increased to 42 percent and 44 percent for the three and six months ended June
30, 1997 compared to 36 percent for the same periods in 1996. The increase in
selling, general and administrative expenses was primarily attributable to the
Company's continued expansion into Europe, which included the business
development and infrastructure costs for Interactive France, Nordic, Ireland and
the Netherlands, the expenses associated with developing and supporting the
Evosoft distributorship for Germany and Hungary, and the translation and
localization of its software for international markets. The Company anticipates
that these costs will continue to increase in absolute dollars in future periods
as the Company attempts to continue its growth.
Provision for Income Taxes- The Company's estimated effective tax rate remained
consistent at around 41 percent for the three and six months ended June 30, 1997
and 1996 which approximates federal and state 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 market 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 June 30, 1997, the Company had cash and cash equivalents totaling $3.7
million and working capital of $5.7 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 $4.8 million secured by substantially all the assets
of the Company and expires July 15, 1998. As of June 30, 1997, $3.0 million was
outstanding under these lines. The Company currently invests its excess cash in
money market accounts.
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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.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company (the "Annual
Meeting") was held on June 3, 1997 in San Diego, California.
Proposal 1 - Election of Directors
Each of the candidates listed below were duly elected to the Board of
Directors at the Annual Meeting by the tally indicated.
Candidate Votes in Favor Votes Withheld
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Robert C. Vernon 3,903,232 16,237
Mark Hellinger 3,890,232 29,237
Randolph S. Naylor 3,891,232 28,237
Lyndol L. Cook 3,903,259 16,210
Proposal 2 - Approval of Employee Stock Purchase Plan, as amended
Votes in Favor Votes Against Votes Abstained Non-Votes
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3,483,689 48,130 387,650 -
Proposal 3 - Ratification of Selection of Independent Auditors
Votes in Favor Votes Against Votes Abstained Non-Votes
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3,907,855 4,200 7,414 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Agreement for Sale and Purchase of Stock between the
Company and Genie Productique/Gestion de Production and
Sodriv dated July 25, 1997
10.1 Line of Credit Agreement between the Company and Sanwa Bank
California dated June 30, 1997
10.2 The Company's 1995 Stock Option Plan, as amended on June 3,
1997
10.3 The Company's Employee Stock Purchase Plan, as amended on
June 3, 1997
10.4 The Company's 1997 Nonstatutory Stock Option Plan (Filed as
an exhibit to the Company's registration statement on form
S-8 (No. 333-30259) and incorporated herein by reference.)
11.1 Statement of Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
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SIGNATURE
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.
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(Registrant)
Dated: August 12, 1997 /s/ MARK HELLINGER
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MARK HELLINGER
President, Chief Operating Officer
and Director (Acting Principal
Financial and Accounting Officer)
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