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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
General Form for Registration of Securities of
Small Business Issuers
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Interactive Telesis, Inc.
(Name of Small Business Issuer in its charter)
Delaware 33-0649915
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(State of incorporation) (IRS Employer Identification No.)
535 Encinitas Boulevard
Suite 116
Encinitas, California 92024
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 760-632-1700
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Copy To: Bruce J. Rushall, Esq.
1903 Wright Place, Suite 250
Carlsbad, CA 92008
(760) 438-6855
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of class)
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
General
Interactive Telesis Inc. ("the Company" or "ITI") provides customized
interactive voice response (IVR) services. IVR generally consists of accessing
or interacting with information in a computer database using a touch-tone phone.
The Company specializes in providing customized IVR systems meeting specific
customer needs utilizing proprietary software. The Company commenced providing
IVR services in 1993. The Company's initial service offering was an automated
shareholder communication service, marketed to public companies under the
service name InvestorREACH(TM). A description of the Company's current service
offerings is provided below. ITI's services are sold to medium- and large-size
corporations for internal use and, in some instances, are bundled with a
partner's service offering for resale to their customers. The Company offers its
services nationwide in the United States and in Canada.
History
The Company was formed under the laws of the province of British Columbia on
June 19, 1987, under the name "Butter Rock Resources Ltd.," and, on September
23, 1996, the Company's jurisdiction of incorporation was continued to the State
of Delaware. The Company was originally involved in mineral exploration until
its acquisition in 1992 of Investment News Network, a company with a business
concept to utilize IVR to create an automated shareholder communication service
by which public companies could communicate in a timely and cost-effective
manner with their investors.
The Company's shares were originally listed for trading on the Vancouver Stock
Exchange in 1992, under the name "Butter Rock Resources Ltd." In 1993, the
Company acquired Investment News Network Inc., a Nevada corporation, and changed
its name to "INN Investment News Network Ltd." In September of 1995, the
Company's shares were posted for trading on the OTC Bulletin Board. Effective
October of 1995, the Company conducted a one-for-seven share consolidation and
commenced trading under the ticker symbol "TSIS." The Company voluntarily
de-listed from the Vancouver Stock Exchange in March, 1996. The Company's shares
have remained trading on the OTC Bulletin Board under the ticker symbol "TSIS"
since that date.
The Company has not participated in any material reclassification, merger,
consolidation or purchaser sale of assets outside the ordinary course of
business during the last three years.
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Business
The Company currently offers specific IVR services, both directly to medium and
large corporations, as well as allowing its services to be bundled with its
partners' product offerings. The Company is not a solution-provider - that is,
it does not develop IVR solutions for a fee and then install them at the
customer's site. Rather, the Company hosts all applications and provides all of
its services through its own software and hardware systems located at the
Company's facilities. In some cases, in order to reduce telecommunication costs,
the Company installs equipment at a customer's location, which is remotely
monitored and managed and remains the property of the Company. The Company's
systems consist of industry standard hardware and the Company's proprietary
software. The systems are modular and can be scaled to accommodate even the
largest applications.
The following are descriptions of the Company's current service offerings:
InvestorREACH(TM)
InvestorREACH(TM) is an automated shareholder communication service
which allows client public companies to provide a toll-free telephone
number which the corporations advertise to their investors. Investors
calling the number hear a personalized greeting from the client company,
are provided with a stock quote, and may select from a menu of options
which may include:
- Stock quote (high, low, volume)
- News releases (voice and fax)
- Financial statements (quarterly, annual, and management
discussion)
- Request information material to be mailed
- Be transferred to the investor relations department or
transfer agent of the public corporation.
The Company also provides mail fulfillment services. The Company charges
a monthly service fee, a per-minute usage fee for voice, fax, and call
transfer, and transactional fees for mail fulfillment services.
The Company offers InvestorREACH(TM) on a month-to-month basis, with no
set-up fee, no long-term contract, and no termination fees.
The Company currently has 52 InvestorREACH(TM) customers in various
industries. Larger clients include Wells Fargo, Nike, Yahoo!, Excite,
National Fuel Gas, and the Tribune Corporation.
To experience the InvestorREACH(TM) service, call 1/888/474-9910.
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The negotiations for the sale of InvestorREACH(TM) referenced in Note 8
to the financial statements have been terminated.
Digital Record and Replay Services
In November, 1997, the Company began providing digital record and replay
services to the teleconference industry. The service allows
teleconference providers to digitally record teleconferences they
conduct on behalf of their customers. These calls are then made
available for immediate replay by end users using a touch-tone
telephone. The system is 100% automated (except where special editing is
requested) and are client-branded such that endusers are not aware the
service has been outsourced to the Company. The Company invoices the
teleconferencing company semi-monthly, based on per-minute replay usage.
The Company complements the telephonic replay with Internet replay
capability, allowing end users to access sound files from a site hosted
on behalf of the teleconference provider or by the client company.
The Company currently provides these services to two large
teleconferencing providers, as well as directly to certain large
corporations for internal use.
Automated Surveys
The Company has developed proprietary software applications which permit
surveys to be conducted via IVR on an automated basis without human
intervention. Surveys can be linear or branching and responses can be
multiple choice or voice-recorded. The Company has registered the
service mark TeleSurvey(SM) in conjunction with this service.
The Company's initial sales and marketing efforts with respect to this
offering are focused on the prepaid phone card market in the United
States. The Company has partnered with approximately 17 issuers of
prepaid phone cards to add the survey capability as a value-added option
to their prepaid offering, thus enhancing their value proposition to
their customers.
The service involves a user of a prepaid phone card being routed to the
Company's IVR system at the time of activation (only) of the prepaid
phone card for a 3-5-question survey. At the conclusion of the survey,
the customer is returned to the prepaid telecommunication platform to
dial their outgoing telephone call.
Upon securing reselling relationships with these partners, the Company
structured a Channel Partner Program to support the sales and marketing
efforts of the Company's partners with a view to increasing revenue from
this sector. In addition to the prepaid phone card industry, the Company
is pursuing survey application opportunities in the call center and
credit card industries.
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MarketReach(TM) - Enhanced Services
The Company has developed proprietary software which provides the
following customized IVR functionality:
- Message recording
- Record and replay message (telephone)
- Internet message replay
- Fax-on-demand
- Automated call transfer
- Dealer locator
- Caller surveys
- Credit card transactions
- Broadcast fax
- Broadcast e-mail
The Company has created applications, and is continuing to pursue
additional opportunities utilizing this functionality, including Third
Party Verification (TPV) and contests/sweepstakes applications.
Acquisition of Paragon Voice Systems
On December 17, 1999, Interactive Telesis, Inc. (the "Company") purchased
510,000 shares of common stock of Paragon Voice Systems ("Paragon").
Upon consummation of the transaction, Paragon had a total of 900,000 shares
outstanding of which the Company owns 56.67%.
Paragon is a leading value-added reseller and developer of computer telephony
solutions in the emerging technology field of Automated Speech Recognition
("ASR"). Paragon resells speech recognition software and application building
blocks for the technology as a part of its integrated solutions. Paragon is a
California corporation based in San Diego, California.
The Company is a long-time customer of Paragon and purchased a controlling
interest in Paragon with a view of joining forces to develop and deploy the
most advanced speech recognition solutions for corporate customers. The Company
hopes that its relationship with Paragon will allow Paragon to provide the
development, integration and support services for ASR applications the Company
builds for its customers to handle their ASR calls and communication needs.
The Paragon Acquisition helps position the Company to become one of the
premiere hosting facilities for complex ASR applications.
Sales and Marketing
The Company has a proprietary sales force of five individuals targeting
customers in specific industry sectors (e.g., teleconferencing and prepaid long
distance). Sales strategies include telemarketing, face-to-face meetings,
presentations, and providing free demonstrations.
In the Prepaid Channel Program, the purpose is to leverage the existing sales
forces of the Channel partners in selling the Company's services bundled with
the partner's prepaid minutes. The Company has recently created partner
handbooks and an entire Channel Partner Program to support and increase revenues
for the Company and its partners in the sale of automated surveys in combination
with prepaid phone cards.
Competition
To the Company's knowledge, there are more than one hundred companies in the
United States and Canada which have IVR capability, although in most instances,
the IVR functionality is used to supplement live-agent call center services. The
Company does not offer any live-agent services and wherever these services are
required as a complement to the Company's IVR services, the Company out-sources
the live-agent services to one of several call centers with which the Company
has partnered.
The IVR industry is dominated by perhaps ten large corporations capable of
handling extremely high volume applications which are usually associated with
direct response television advertising. There are also dozens of smaller
companies providing IVR service
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bureau services similar to the business strategy of the Company. In general, the
Company finds itself in competition with large call center competitors which
also offer IVR services. The Company is pursuing business with large, national
companies, including a majority of the large telephone companies in the United
States and Canada, and, as a result, usually competes against much larger
companies.
Business Concentration
A majority of the Company's revenues to date has been generated by record and
replay services. 78% and 68% of the Company's revenue was generated by three and
one customer(s) for the years ended July 31, 1999, and 1998, respectively. The
Company's relationship with these customers is good and the Company expects to
be providing additional services in the future to these customers beyond those
currently being provided. All of the Company's contracts are terminable upon
notice by either party.
Trademark and Copyright Issues
The Company develops all of its proprietary software in house and does not
incorporate any third-party software other than off-the-shelf, commercially
available software.
The Company has applied for the following service marks:
- InvestorREACH(TM)
- MarketREACH
- TeleSurvey
Governmental Regulation
The Company is not currently subject to direct federal, state, or local
regulation in the United States other than regulations applicable to businesses
generally or directly applicable to electronic commerce. However, because the
Internet is becoming increasingly popular, it is possible that a number of laws
and regulations may be adopted in the United States with respect to the
Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. Several states have proposed legislation to limit the use of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has indicated that it
may propose legislation on this issue to Congress in the near future and has
initiated action against at least one online service regarding the manner in
which personal information was collected from users and provided to third
parties. The adoption of such consumer protection laws could create uncertainty
in Internet usage and reduce the demand for all
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products and services. The Company does not provide customer information to
third parties and, therefore, does not anticipate any current or proposed
legislation relating to online privacy to directly affect its activities to a
material extent.
The Company is not certain how its business may be affected by the application
of existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of those laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws
intended to address such issues could create uncertainty in the Internet
marketplace. That uncertainty could reduce demand for the Company's services or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs.
In addition, it is uncertain what impact government regulation may have on
telecommunication providers on which the Company's business depends. Future
government regulation may have an adverse affect on the Company's cost of doing
business.
Employees
The Company currently has 23 full-time employees and three part-time employees.
The Company's success will depend in large part on its ability to attract and
retain skilled and experienced employees. The Company believes that its
relations with its employees is good. The Company does not currently have any
key-man life insurance on any of its employees, directors, or executive
officers.
The Company has no written or oral contracts for employment with any of its
employees, directors, or executive officers.
Risk Factors
The business of the Company involves a number of risks and uncertainties that
could cause actual results to differ materially from results projected in any
forward-looking statement in this report. The Company's securities are
speculative and investment in the Company's securities involves a high degree of
risk and the possibility that the investor will suffer the loss of the entire
amount invested.
RISKS RELATED TO THE COMPANY'S BUSINESS
- THE COMPANY HAS A LIMITED OPERATING HISTORY. The Company implemented
its current plan of business in 1994 and remains dependent upon a
limited variety of services (as specified under "Business" on page 3)
and small number of significant customers (See "Business
Concentration" on page 6.) Because of the Company's limited
experience in its principal markets and its anticipated need to
expand the scope of its services and its customer base, there is no
assurance that the Company's long-term operating strategies for the
sales of its services in its selected markets will be successful.
- POTENTIAL LACK OF LIQUIDITY IN OUR COMMON STOCK DUE TO PENNY STOCK
REGULATIONS. Because our common stock trades at below $5.00 per
share, it is subject to the penny stock regulations. The penny stock
rules will generally adversely affect the market liquidity for our
common stock, because among other things, they require broker-dealers
to make a special suitability determination for the purchaser and to
receive the purchaser's written consent to the transaction prior to
sale. These requirements make it more difficult administratively for
broker-dealers to buy and sell stock subject to the penny stock
regulations on behalf of their customers. Consequently, the rules
affect the ability of broker-dealers to sell our shares and affect
the ability of holders to sell them in the secondary market.
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- THE COMPANY HAS A HISTORY OF LOSSES AND MAY INCUR LOSSES IN THE
FUTURE. Until its fiscal year ended July 31, 1999, the Company had
incurred significant net losses under its current plan of business.
There is no assurance that the Company's revenues will grow or that
it will maintain profitability in the future. The Company's ability
to increase revenue and maintain profitability will be affected by
other risks and uncertainties described below, most of which are
outside of the Company's control.
- THE COMPANY'S BUSINESS IS DEPENDENT UPON A SMALL NUMBER OF CUSTOMERS
WHO ACCOUNT FOR THE MAJORITY OF THE COMPANY'S REVENUES. The loss of
one or more of these customers and the Company's inability to replace
them would materially adversely affect the Company's business.
- THE COMPANY'S BUSINESS DEPENDS ON CERTAIN SKILLED AND EXPERIENCED
EMPLOYEES. These include the Company's Chief Executive Officer, VP of
Operations and its senior software programmers. The Company does not
maintain long-term employment contracts with its CEO or any of its
key employees. Competition for skilled and experienced software
programmers and supporting skills in the Company's geographic region
is intense and the Company may not be able to hire or retain key
employees. If the Company is unable to hire, train and manage new
skilled and experienced employees as needed, it would be unable to
support its planned growth and future operations.
- REVENUES FROM PORTIONS OF THE COMPANY'S BUSINESS MAY VARY THROUGHOUT
ITS FISCAL YEAR. For example, the Company's Digital Record & Replay
service may be utilized mostly during the quarterly earnings season,
which is typically held by calendar-year companies during the months
of January, April, July and October.
- THE COMPANY DOES NOT GENERALLY CHARGE ITS CUSTOMERS FOR ITS INITIAL
SET-UP COSTS FOR ESTABLISHING A CUSTOMIZED INTERACTIVE VOICE RESPONSE
SERVICE, BUT RECOUPS THESE COSTS OVER THE FIRST SEVERAL MONTHS OF A
CONTRACT. The majority of Company's services accounts with customers
are cancelable by either party upon 30 days notice. Therefore, there
is no assurance that an account, once established, will be maintained
for a time sufficient to allow the Company to recoup its set-up
costs.
- The Company does not have copyright or patent protection for its
proprietary software systems. The company does not consider its
service mark or trade secrets to be material to its financial
results and/or results of operations.
- MANY OF THE COMPANY'S CUSTOMERS HAVE GREATER TECHNICAL AND FINANCIAL
RESOURCES THAN THE COMPANY AND COULD, SHOULD THEY DEEM IT ADVISABLE
AND ECONOMICALLY FEASIBLE, PROVIDE INTERNALLY THE SERVICES OTHERWISE
PROVIDED BY
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THE COMPANY. Accordingly, there is no assurance that in the future
one or more of the major customers may not provide internally
services which it now purchases from the Company.
- THE COMPANY DOES NOT BELIEVE SUBSTANTIAL BARRIERS EXIST TO THE ENTRY
BY OTHER COMPANIES INTO ONE OR MORE OF THE SERVICES THE COMPANY
PROVIDES. Accordingly, the Company could, in the future, encounter
significant competition for its services from one or more competitors
which have significantly greater technical and/or financial resources
than the Company.
- IF THE COMPANY IS UNABLE TO DEVELOP NEW SERVICES OR EXPAND FEATURES
OF EXISTING SERVICES, IT MAY NOT BE ABLE TO EXPAND ITS OPERATIONS.
The Company must continually explore additional areas and services
which it may offer to its customers. The Company's inability to
manage its growth could harm its business. Also, if the Company is
unable to continually improve its ability to deliver services to
customers, it may not be able to accommodate the increasing level of
use or expanding needs of its customer base.
- THE COMPANY'S BUSINESS IS SUBJECT TO CHANGES IN THE COMPUTER AND
TELECOMMUNICATION INDUSTRIES WHICH ARE OCCURRING AT A RAPID RATE. It
is possible that future changes in these industries could
significantly change the demand for the Company's services and/or the
means by which the Company provides its services. The Company's
failure to adapt to such changes could adversely affect the Company's
volume or cause the Company's services to become obsolete.
- THE COMPANY RELIES SIGNIFICANTLY ON THIRD PARTIES. The Company's
operations depend to a significant degree on a number of other third
parties, including telecommunication service providers. The Company
has no effective control over these third parties and no long-term
contractual relationships with any of them. From time to time, the
Company could experience temporary interruptions in its Internet Web
site connections and its telecommunications access. Continuous or
prolonged interruptions in the Company's Internet Web site
connections or in its telecommunications access would have a material
adverse affect on the Company's business, financial condition, and
results of operations. The Company's agreements with its
telecommunications providers place certain limits
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on the Company's ability to obtain damages from the service providers
for failure to maintain services to the Company's facilities.
RISKS RELATED TO AN INVESTMENT IN THE COMPANY'S COMMON STOCK
- THE COMPANY EXPECTS ITS SHARE PRICE TO REMAIN HIGHLY VOLATILE. The
market price for the Company's stock has in the past fluctuated
significantly and is expected to continue to fluctuate primarily
because of the number of shares outstanding, the low trading price of
the stock, developments in the Company's business, including
announcements of technological innovations, fluctuations in customer
orders, customer cancellations, the introduction of new products by
the Company or its competitors, service problems and/or quarterly
variations in the actual or anticipated results of the Company's
operations. Also, the over-the-counter market in which the Company's
stock trades has historically experienced extreme price and volume
volatility, which has particularly affected market prices of
technology companies. This volatility has often been unrelated to the
operating performance of the companies. Broad market volatility may
adversely affect the market and price of the Company's stock.
- THE COMPANY DOES NOT PAY DIVIDENDS ON ITS COMMON STOCK AND HAS NO
PLANS TO DO SO. The Company has not paid any cash dividends on its
common shares to date. The Company intends to retain any earnings to
finance growth and development of its business and does not
anticipate paying cash dividends in the foreseeable future.
Accordingly, the Company's shareholders will need to look for
appreciation in the market price of the Company's stock for a return
on their investment in the Company.
- MANAGEMENT HAS BROAD DISCRETION OVER ESTABLISHING AND IMPLEMENTING
THE COMPANY'S OPERATIONAL STRATEGIES AND GOALS. Management may
devise, modify, abandon or implement operating strategies at any time
within their discretion without a vote of the Company's shareholders.
Accordingly, investors in the Company must depend on management's
experience and judgment in making critical decisions affecting the
Company's business and operating results.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Revenues for fiscal year 1999 nearly tripled from the prior fiscal year to
$3,022,290. The increase in revenue from $1,102,241 in fiscal year 1998 to
$3,022,290 in fiscal year 1999 was a result of adding clients in the areas of
InvestorREACH(TM), which accounted for $263,195 in additional revenue, and
Digital Record and Replay, which increased from $828,173 in fiscal year 1998 to
$2,278,591, an increase of $1,450,346 or 175% over fiscal year 1998. The Digital
Record and Replay increase is due to an increase in revenue of $574,858 or 70%
of one existing customer, and 105%, or $877,793 is a result of adding a new
customer. The Company also added new customers to the Automated Surveys service
in the amount of $206,743 in revenue in fiscal year 1999. Automated Survey
service had no revenue in fiscal year 1998. Net income totaled $321,740,
representing earnings of just over 1 cent per share. In the fourth quarter of
the 1999 fiscal year, revenues were up 18% over the Company's third quarter
revenues, while third quarter revenues were up 66% from the second quarter of
1999. To October 31, 1999, the Company has recorded seven consecutive quarters
of increasing revenues.
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Cost of Revenue and Major Expenses
Fiscal 1999 versus 1998
Cost of Revenue consists of the expenses associated with providing the
telecommunication services based on usage, and recurring fixed monthly
telecommunications costs. These costs are a mix of both variable and fixed
costs. For the fiscal year ended July 31, 1999, cost of revenue increased 125%
over 1998, due to increased usage.
Salaries and wages increased 44% from fiscal 1998 to fiscal 1999 as a result of
adding five full-time employees during fiscal year 1999. The increase in staff
was necessary to provide the Information Technology and Systems skills and
experience needed to meet and support the requirements of the customers, which
enabled the Company's growth in revenue.
General and administrative costs are made up of the following major expenses:
consulting and legal fees, office rent, printing, postage, and telephone/
facsimile. These five accounts made up 80% of the general and administrative
expenses for fiscal year 1999 and 81% for fiscal year 1998. General and
administrative expense for fiscal year 1998 was $627,831 and for fiscal year
1999 was $742,802, or an increase of $114,971 or 18.3%. The increase was the
result of higher consulting and legal fees for fiscal year 1999 over 1998 by
$105,786, or 58%. The additional consulting and legal fees were necessary to
help grow the business from revenue of $1,102,241 in fiscal year 1998 to
$3,022,290 in fiscal year 1999.
Sales and marketing expenses increased during the period 88% as a result of
adding staff and also increased travel expenditures to promote the growth of the
business.
Depreciation and amortization increased 174% during the period as a result of
adding computer and related equipment. The increase in the Company's property
and equipment of approximately $575,000 was financed primarily by way of capital
leases secured by the equipment and personally guaranteed by the Company's CEO.
Upon successfully securing additional long-term contracts, the Company will be
required to increase the size of its IVR systems to support the additional
growth. Equipment will be acquired through a combination of cash on hand and
capital leases on the equipment purchased.
Management believes that Automated Speech Recognition based on natural language
engines will begin replacing traditional, existing IVR technology based on DTMF
(callers making selections by pressing buttons on the telephone keypad). ASR
technology essentially allows computers to understand the human voice and
respond to voice commands. Management expects this technology to not only
dramatically expand the number of applications for which current IVR technology
is not sufficient but also to replace most current IVR applications over time.
The Company has recently begun focusing its efforts with the goal of becoming a
premier developer and hosting facility for ASR applications. Reference is made
to the heading "Business" for a description of the Company's recent acquisition
of Paragon Voice Systems.
At the 1999 Annual General Meeting the Board of Directors sought and received
authorization from shareholders for the sale of the Company's automated
shareholder communication service, InvestorREACH(TM). However, the Company has
since terminated discussions for the sale of InvestorREACH(TM).
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Liquidity and Capital Resources
Net working capital increased to $864,184 at July 31, 1999, due primarily to an
increase in Accounts Receivable as a result of increased revenue for fiscal year
1999. Fiscal year 1999 revenue nearly tripled from fiscal year 1998, from $1.1
million to $3.0 million.
Detail of cash flows for fiscal year 1999 and 1998
Operating activities - Cash flows of $353,937 were provided by operations in
fiscal year 1999, compared to cash flows used in operations of $(543,705) in
fiscal 1998. The increase is primarily due to the Company reporting net income
of $321,740 in fiscal year 1999, compared to net loss of $(677,417) in fiscal
year 1998, an adjustment for depreciation (non-cash expenditure) of $177,067 in
fiscal year 1999, compared to $64,615 in fiscal 1998, and a litigation
contingency (non-cash expenditure) of $80,000 in fiscal year 1999.
Investing activities - Cash flows used in investing activities was $91,240 for
the purchase of property and equipment, other than leasing of property and
equipment, during fiscal year 1999, compared to $104,955 during fiscal 1998.
Financing activities - Cash flows used in financing activities was $(178,635)
in fiscal year 1999, compared to cash flows provided by financing activities of
$518,093 in fiscal year 1998. The decrease is primarily due to cash used for
the repayment of capital leases of $185,110, and the decrease in issuances of
common stock and purchases of treasury shares. Refer to page F-4, Statements of
Changes in Shareholders' Equity for Fiscal Year 1999 and 1998.
The causes for material changes from period to period in the balance sheet were
as follows:
- - Accounts Receivable increased in 1999 as a result of increased revenue in
1999.
- - Property and equipment increased in 1999, which was necessary for the
growth of the Company. Computer and related equipment were both purchased
with cash and leased to enable the Company to provide the services
necessary to grow the revenue of the Company in 1999 and future years.
- - Liabilities increased in 1999 as a result of leasing computers and
equipment as stated above. The liabilities in 1999 also increased as a
result of providing for a litigation contingency of $80,000.
Management is confident that the Company's positive cash flow is sufficient to
meet its anticipated capital expenditures on both a short- and long-term basis.
The Company's systems are modular in nature and scalable, depending on demand.
Accordingly, capital expenditures on the Company's telecommunications network
are usually made only immediately prior to use; hence, an increase in revenue
and net income. Based on current cash flow projections, management expects that
the Company can continue operations and expand its computer network where
necessary in the future without any outside infusions of cash.
Future Expectations
For the fiscal year ending July 31, 2000, the Company is projecting revenue
increases, with a corresponding increase in net income (before tax). Achieving
growth in both revenues and net income will be contingent upon the Company
securing additional contracts with existing customers as well as long-term,
high-margin contracts with new customers, and there is no certainty that these
objectives will be achieved.
The Company's telecommunication costs should be reduced over the next fiscal
year, resulting from volume discounts.
The Company has both federal and state income tax loss carry-forwards of
approximately $2,255,000 and $1,703,000, respectively, which can be used to
offset future income taxes. The Company has made a valuation allowance for the
deferred tax assets, including the portion related to the net operating loss
carry-forwards. A valuation allowance is recorded 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. To the extent that the Company is able to
achieve net operating income in the future, the tax loss carry-forwards will
have a significant, positive effect on the Company's after-tax income.
Forward Looking Statements
This registration statement contains forward-looking statements that are based
on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this registration statement,
the words "believe," "endeavor," "expect," "anticipate," "estimate," "intends,"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks, uncertainties and assumptions,
including, without limitation, the risks and uncertainties concerning
technological changes, increased competition, and general economic conditions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, or projected. The Company cautions potential
investors not to place undue reliance on any such forward-looking statements,
all of which speak only as of the date made.
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Year 2000 Issue
The Year 2000 Problem generally involved whether a computer system, software
product or business system, when working alone or in conjunction with other
software or hardware systems, accepted input of, stored, manipulated and output,
dates in the Year 2000 or thereafter without error or interruption (the "Year
2000 Problem"). The Year 2000 Problem had the potential to impact the Company in
the following principal areas: (i) the Company's internal technology systems;
(ii) the Company's non-internal technology systems which contain embedded
computer devices; and (iii) the business systems of the Company's partners,
vendors and customers. The Director of Operations and the Corporate Systems
staff managed the Company's Year 2000 efforts and the Company had no significant
Y2K issues occur and none of the Company's processes or services were effected
negatively at the commencement of January 2000.
The Company incurred approximately $8,800 in Year 2000 remediation
costs, which was funded from working capital.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's executive offices are located in Encinitas, California, and
consist of approximately 5063 square feet, under a non-cancelable operating
lease, at a monthly cost of $7,935. The lease expires on August 31, 2001. The
Company's principal computer facility is located in San Diego in a shared
facility with a co-location lease for $2,000 per month with one of the Company's
telecommunication suppliers. The Company is in process of transitioning systems
from this facility to its new technology center at 10180 Telesis Court, San
Diego CA. This facility comprises 1,500 square feet that the Company sublets
from an existing tenant in exchange for network services.
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<PAGE> 14
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the shares of Common Stock as of February 1, 2000, by (i) each
person who is known by the Company to be the beneficial owner of more than five
percent (5%) of the issued and outstanding shares of Common Stock, (ii) each of
the Company's directors and executive officers, and (iii) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage Owned
- ---------------- ---------------- ----------------
<S> <C> <C>
Donald E. Cameron(1)(2) 2,401,008 7.32%
Marc Goyette(1)(3) 200,000 .61%
Robert Wilson(1)(3) 120,000 .37%
David Webb(1)(4) 250,000 .76%
Michael Hutchison(1)(5) 100,000 .31%
William R. Adams(1)(6) 75,000 .23%
Douglas T. Luke(1)(7) 102,350 .31%
--------- -------
All directors & officers as a group 3,248,358 9.91%
</TABLE>
(1) Address is 535 Encinitas Blvd., Suite 116, Encinitas, CA 92024
(2) Includes options granted to Mr. Cameron to purchase 965,000 shares of Common
Stock at an exercise price of 40 cents per share for 395,000 shares and 35
cents per share for 570,000 shares and 407,401 warrants granted to Mr.
Cameron pursuant to a 1996 private placement to purchase 407,401 shares of
Common Stock at an exercise price of 40 cents per share
(3) Includes options granted to Messrs. Goyette and Wilson to purchase 100,000
shares each of Common Stock at an exercise price of 40 cents per share
(4) Includes options granted to Mr. Webb to purchase 250,000 shares of Common
Stock at an exercise price of 40 cents per share for 100,000 shares and at
35 cents per share for 150,000 shares
(5) Includes options granted to Mr. Hutchison to purchase 100,000 shares of
common stock at an exercise price of 35 cents per share
(6) Includes options granted to Mr. Adams to purchase 75,000 shares of Common
Stock at an exercise price of 40 cents per share for 4,000 shares and at 35
cents per share for 71,000 shares
(7) Includes options granted to Mr. Luke to purchase 75,000 shares of Common
Stock at an exercise price of 35 cents per share
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
Set forth below are the Directors and Officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Donald E. Cameron 47 President and CEO;
Director since 1993
Marc Goyette(1)(2) 43 Director since 1998
Robert Wilson(1)(2) 55 Director since 1996
David J. Webb 37 Chief Operating Officer
Michael Hutchison 38 Vice President of Business Development
</TABLE>
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<PAGE> 15
<TABLE>
<S> <C> <C>
William R. Adams 50 Chief Financial Officer/Secretary
Douglas T. Luke 34 Vice President of Operations
</TABLE>
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Donald E. Cameron
Mr. Cameron founded and has served as President and CEO of Interactive Telesis
since 1993. Prior to joining the Company, Mr. Cameron was a lawyer specializing
in the area of corporate/securities law for a period of thirteen years and was
partner in the law firm of Worrall, Scott, and Page, Vancouver, Canada. As CEO
of the Company, Mr. Cameron oversees all areas of the Company's activities,
including sales, marketing, technical development, operations, and
administration.
Marc Goyette
Since 1993 Mr. Goyette has been the Founder and President of ROI International,
an executive recruiting firm. In 1988, Mr. Goyette joined Phoenix Network, a
national long distance company, as its Chief Operating Officer and was later
promoted to President. Prior to Phoenix Network, Mr. Goyette held positions as
head of MIS Development for the electronics division of General Dynamics and
Senior Financial Consultant for Merrill Lynch.
Robert Wilson
Since 1992, Mr. Wilson has been an active Board member for several private and
public companies in the United States and Canada, including Nanovation
Technologies Inc., a private company in Miami involved in high-tech optical
engineering; Stamford International Inc., an Ontario, Canada-based merchant
banking firm traded on the OTC Toronto; and Amusement International Ltd., a
Calgary company, traded on the ASE.
David J. Webb
Mr. Webb joined the Company in November, 1995 and is currently Chief Operating
Officer. His background includes an M.A. in mathematics and a B.S. in computer
science. He worked as a software development team leader at IBM (1986-1987). He
also taught at Penn State University (1987-1990). Mr. Webb held the position as
Vice President of Information Systems for Phoenix Network (1990-1994),
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<PAGE> 16
Mr. Webb has served as an independent consultant (1994-1995) to several
communications firms based in California.
Michael Hutchison
Mr. Hutchison joined the Company in April, 1998 and is currently Vice President
of Business Development for Interactive Telesis. He began his career in
marketing with Electronic Data Systems as manager of EDS/General Motors'
international operations. He was the Vice President of Sales and Marketing for
Anthony Robbins' product and seminar training company from 1987 to 1994. He then
served as President of the Ambassador Management Group, providing sales and
marketing services to emerging growth "start -up" companies, from 1994 to 1998.
Mr. Hutchison is a member of the San Diego Telecom Council.
William R. Adams
Mr. Adams joined the Company in June, 1998 and is currently Chief Financial
Officer. His financial experience includes over fifteen years (1977 to 1993) at
Hughes Electronics, where he was Group Finance Manager, and Delco Electronics
(1995 to 1997), where he was a Senior Financial Specialist. Mr. Adams also
served as Vice President and Controller of Cubic Applications (1997 to 1998),
and CFO at DQDT, a start-up design engineering firm (1993 to 1995).
Douglas T. Luke
Mr. Luke joined the Company in March 1999 and is currently Vice President of
Operations. His background includes an MS in Computer Science and MCSE
(Microsoft Certified Systems Engineer). He worked as a System Analyst for the US
Government (1988-1992), a Telecom Manager for the US State Department
(1992-1996), a consultant for Telos Information Systems (1996), a Manager IS
Support for DataWorks Corp. (1996-1998) and a Principal Owner/Consultant for
SkyLine Systems (1998-1999).
Each Director holds office until his successor is elected and qualified or until
his earlier resignation in the manner provided in the bylaws of the Company. The
Board of Directors has established an Audit Committee, consisting of Messrs.
Goyette and Wilson, and a Compensation Committee, consisting of Messrs. Goyette
and Wilson. The Audit Committee reviews the Company's independent auditors, the
scope and timing of the audit services, and other services they are asked to
perform, the Auditor's Report on the Company's financial statements following
completion of the audit, and the Company's policies and procedures, with respect
to internal accounting and financial controls. In addition, the Audit Committee
makes annual recommendations to the Board of Directors for the appointment of
independent auditors for the ensuing year. The Compensation Committee reviews
and recommends to the Board of Directors the compensation and benefits of all
officers of the Company and reviews general policy matters relating to
compensation and benefits of employees of the Company.
Compensation of Non-Employee Directors
The Company has the following arrangement by which non-employee directors are
compensated:
- - Cash
$6,000 per annum plus out of pocket expenses to attend meetings - paid
quarterly.
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<PAGE> 17
- - Stock Option
The Company proposes to grant stock options to purchase 25,000 shares of the
Company annually to each director of the Company under the 1996 Stock Option
Plan, to a maximum of 150,000 shares. The options are granted immediately after
the Annual General Meeting with a exercise price equal to the market price at
the time of granting. The options vest at the end of the fiscal year they are
granted.
Previously the following directors were granted options to purchase securities
as follows:
<TABLE>
<CAPTION>
No. of Shares Exercise Price
------------- --------------
<S> <C> <C>
Marc Goyette 100,000 40 cents
Robert Wilson 100,000 40 cents
</TABLE>
These options vest annually over four years. Under the 1996 Stock Option Plan,
all stock options terminate ninety (90) days after the optionee ceases to hold
his or her position with the Company.
The Company has granted stock options to directors to assist the Company in
compensating, attracting, retaining, and motivating the directors of the Company
and to closely align the personal interests of the directors with those of the
shareholders.
Board of Directors Meetings
The Board of Directors had six meetings during the fiscal year ended July 31,
1999, which were attended by all directors.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth all annual and long-term compensation for
services in all capacities to the Company for the last three fiscal years in
respect of each of the individuals who were, as at July 31, 1999, the Chief
Executive Officer and the other four most highly compensated executive officers
of the Company (collectively "the Named Executive Officers"), including any
individual who would have qualified as a Named Executive Officer but for the
fact that individual was not serving as such an Officer at the end of the most
recently completed financial year. The Company has one Named Executive Officer.
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<PAGE> 18
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------------------
Annual Compensation Awards Payouts
-------------------------- ---------- -----------
Name Other Securities Restricted All
And Annual Under Shares or LTIP other
Principal Financial Salary Bonus Compen- Options Restricted Payouts Compen-
Position Year-End ($U.S.) ($) sation granted(#) Share Units ($) sation($)
- -------------- --------- -------- ------- ------- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald Cameron 1997 $ 96,300 - - 395,000 - - -
President/CEO
Donald Cameron 1998 $108,000 - - - - - -
President/CEO
Donald Cameron 1999 $120,000 $36,250 - - - - -
President/CEO *
</TABLE>
* Bonus to CEO/Director was used to pay off a loan due from CEO/Director of
$21,000 plus the income taxes associated with such bonus.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 8. DESCRIPTION OF SECURITIES
Common Stock
The Company has only one class of stock.
The Company is authorized to issue 50,000,000 shares of Common Stock, $0.001 par
value, of which, as of November 1, 1999, 30,651,138 shares were issued and
outstanding and held of record by 1,049 stockholders. As of November 1, 1999,
the Company had 3,370 beneficial owners of its Common Stock.
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders generally. Approval of proposals
submitted to shareholders at a duly held meeting, other than the election of
directors, requires a vote of the shareholders holding a majority of the shares
eligible to vote at the meeting who are present in person or by proxy. The
foregoing notwithstanding, the Corporation's Articles of Incorporation provide
that any amendment, alteration, change or repeal of any provision contained in
the Articles of Incorporation require a vote of the shareholders owning at least
75% of the shares entitled to vote on the measure who are present in person or
by proxy at the meeting. Also subject to Delaware law, the Corporation's Bylaws
provide that any ordinary resolution passed by the vote of the shareholders
holding 50% of the shares entitled to vote which are present in person
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<PAGE> 19
or by proxy at a duly called meeting are required to (i) approve a contract
where there are no disinterested directors; or (ii) approve a sale of all or
substantially all the Corporation's assets; or (iii) to approve the dissolution,
winding up or liquidation of the Corporation. The Corporation's Bylaws provide
that the holders of 33-1/3% or more of the Corporation's outstanding stock
entitled to vote at a meeting constitute a quorum at all shareholder meetings
for the transaction of business, except as otherwise required by statute or the
Articles of Incorporation.
Stockholders are entitled to receive dividends as may be declared from time to
time by the Board of Directors out of funds legally available therefore, and in
the event of liquidation, dissolution or winding up of the Company to share
ratably in all assets remaining after payment of liabilities. The holders of
shares of Common Stock have no preemptive, conversion, subscription or
cumulative voting rights.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
Market Information
The Company's Common Stock has been posted for trading on the OTC Bulletin Board
under the symbol "TSIS" since October, 1996.
Commencing with the fiscal quarter ending October 31, 1997, the high and low bid
prices for each quarter were as follows:
<TABLE>
<CAPTION>
Quarter ended High Low
-------------- -------- --------
<S> <C> <C> <C>
Oct. 31, 1997 86 cents 62 cents
Jan. 31, 1998 72 cents 30 cents
April 30, 1998 60 cents 41 cents
July 31, 1998 66 cents 48 cents
Oct. 31, 1998 51 cents 25 cents
Jan. 31, 1999 42 cents 25 cents
April 30, 1999 51 cents 27 cents
July 31, 1999 43 cents 36 cents
Oct. 31, 1999 36 cents 31 cents
</TABLE>
The quotations reflect inter-dealer prices, without retail mark-up, mark-down,
or commission, and may not represent actual transactions.
The Company has not paid any cash dividends since its inception and does not
anticipate paying dividends in the foreseeable future. It is anticipated that
earnings, if any, will be retained for the expansion of the Company's business.
19
<PAGE> 20
ITEM 2. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit brought in the Superior Court of
California in January, 1999, by Dieter Sauer, a former consultant, claiming
wrongful termination by the Company. The consultant alleges special, general and
punitive damages in excess of $400,000.
The Company is a defendant in a lawsuit brought in the District Court of Nevada
in November, 1997, by Scott Madison, a stockholder. The stockholder is claiming
that the Company, an Officer of the Company, and individuals associated with a
fiscal agent who assisted the Company in raising equity capital in 1996, made
misrepresentations to the plaintiff in the sale of shares of the Company's
Common Stock. The plaintiff alleges special, general and punitive damages in
excess of $1,000,000. Although the Company intends to vigorously defend the
action, counsel for the Company believes it is probable the Company will be
required to pay some damages. A reserve of $80,000 has been provided for in the
Company's financial statements.
The Company is not aware of any proceedings or potential proceedings that any
governmental authority is contemplating.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
In December, 1998, the Company did not reappoint Buckley Dodds and Associates as
independent auditors for the Company and appointed Pannell Kerr Forster as
independent auditors. Pannell Kerr Forster was engaged to perform the audits for
the fiscal years ended July 31, 1998 and 1999. The decision to change
independent auditors was approved by the Board of Directors of the Company.
There were no disagreements between the Company and Buckley Dodds and Associates
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures.
Buckley Dodds and Associates had not issued a report in the past two fiscal
years containing a disclaimer or adverse or qualified opinion.
There were no disagreements between the date of the last audit report prepared
by Buckley Dodds and Associates and the date they were discharged in favor of
Pannell Kerr Forster.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Company sold unregistered shares of its Common
Stock as follows:
A. Between March and September, 1997, the Company issued an aggregate of
12,537,572 shares to a total of 63 investors for aggregate consideration of
$4,427,999. The offering was carried out by Capital Resolutions. The sales were
made in reliance upon Rule 506 and Section 4.2 of the 1933 Act.
B. In 1998, the Company issued an aggregate of 13,255,530 shares to a total of
48 investors for aggregate consideration of $3,720,137. The sales were made in
reliance upon Rule 506 and Section 4.2 of the 1933 Act.
Prior to investing, each subscriber was provided with or had access to all
information regarding the Company that would be included in the registration
statement on Form SB 2, except that the financial statements provided to
subscribers were audited in accordance with
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<PAGE> 21
Canadian generally accepted accounting practices. With regards to the sales made
in reliance on Section 4.2 of the 1933 Act or Rule 506 thereunder, the Company
had reasonable grounds to believe, prior to accepting the subscription of each
subscriber, based in part on the subscription agreements or investment letters
executed by the subscribers, that each of the subscribers were sophisticated
enough to evaluate the merits of an investment in Common Stock and that each
subscriber was purchasing with investment intent and not with a view to
distribution. In addition, each subscriber was reasonably believed by the
Company to be an accredited investor within the meaning of Rule 501A of the 1933
Act.
Stock Options
The Company established the Interactive Telesis 1996 Stock Plan as a means
whereby the Company may, through awards of (i) incentive stock options ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code, (ii) stock
appreciation rights ("SARs"), (iii) nonqualified stock options ("NSOs"), (iv)
restricted stock ("Restricted Stock"), and (v) phantom stock ("Phantom Stock"):
(a) provide key full-time employees, non-employee directors, consultants
or advisors, with additional incentive to promote the success of the
Company's business;
(b) encourage such persons to continue to promote the success of the
Company; and
(c) enable such person to acquire proprietary interests in the Company.
The Stock Option Plan as of November 1, 1999, is authorized to grant
options to acquire a maximum of 1,485,000 shares of Common Stock. The
provisions of this Plan do not apply to or affect any option, stock,
stock appreciation right, restricted stock or phantom stock heretofore
or hereafter granted under any other stock plan of the Company, and all
such options, stock, stock appreciation rights, restricted stock or
phantom stock continue to be governed by and subject to the applicable
provisions of the plan under which they were granted.
Since November of 1996, the Company has issued an aggregate of 1,052,000
options to purchase its Common Stock, with exercise prices ranging from
25 cents to 40 cents per share to employees, directors, and service
providers under its 1996 Stock Option Plan. Of these options, 112,000
have been cancelled without being exercised; options for 50,000 shares
have been exercised; as of November 1, 1999, 890,000 options remain
outstanding. The issuance of these option shares were exempt from
registration pursuant to Section 4(2) of the 1933 Act or, where
applicable, Rule 701 under the 1933 Act.
21
<PAGE> 22
STOCK OPTIONS AS OF NOVEMBER 1, 1999
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE DATE GRANTED EXPIRATION DATE
---------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Directors 395,000 $0.40 10/3/96 10/3/06
Directors 100,000 $0.40 5/15/98 5/15/08
Directors 100,000 $0.40 5/15/99 5/15/09
Employees 190,000 $0.40 10/3/96 10/3/06
Consultants 105,000 $0.25 5/15/98 5/15/00
Consultant 50,000 $0.40 10/3/96 10/3/06
----------
Subtotal 940,000
Consultant (Exercised 10/14/99) 50,000
Total Outstanding Options ==========
as of November 1, 1999 890,000
==========
</TABLE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that, to the fullest extent
permitted by Section 102(b)(7) of the General Corporation Law of the State of
Delaware, as amended from time to time, or in analogous provisions of successor
law, there shall be no liability on any part of any director of the Corporation
to the Corporation or to its stockholders for monetary damages for breach of
fiduciary duty as a director. Any repeal or modification of Section 102(b)(7)
shall not adversely affect any right or protection of a director of the
Corporation existing hereunder with respect to any act or omission occurring
prior to or at the time of such repeal or modification.
Section 145 of the Delaware General Corporation Law, as amended, provides for
the indemnification of the Company's officers, directors, employees and agents
under certain circumstances as follows:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
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<PAGE> 23
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
23
<PAGE> 24
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
The Company's Bylaws provide for the indemnification of the Company's directors,
officers, employees, or agents under certain circumstances as follows:
6.1 Right to Indemnification. The Corporation shall indemnify and hold harmless,
to the fullest extent permitted by applicable law as it presently exists or may
hereafter by amended, any person who was or is made or is threatened to be made
a party of is otherwise involved in
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<PAGE> 25
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact the he or she, or a person
for whom he or she is the legal representative, is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust, enterprise or nonprofit entity,
including service with respect to employee benefit plans, against all liability
and loss suffered and expenses reasonably incurred by such person. The
Corporation shall be required to indemnify a person in connection with a
proceeding initiated by such person only if the proceeding was authorized by the
Board of Directors of the Corporation.
6.2 Prepayment of Expenses. The Corporation shall pay the expenses incurred in
defending any proceeding in advance of its final disposition, provided, however,
that the payment of expenses incurred by a director or officer in advance of the
final disposition of the proceeding shall be made only upon receipt of an
undertaking by the director or officer to repay all amounts advanced if it
should be ultimately determined that the director or officer is not entitled to
be indemnified under this Article or otherwise.
6.3 Claims. If a claim for indemnification or payment of expenses under this
Article is not paid in full within sixty days after a written claim therefore
has been received by the Corporation, the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action,
the Corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification or payment of expenses under
applicable law.
6.4 Non-Exclusivity of Rights. The rights conferred on any person by this
Article VI shall not be exclusive of any other rights which such person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, these bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.
6.5 Other Indemnification. The Corporation's obligation, if any, to indemnify
any person who was or is serving at its request as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust enterprise or
non-profit entity shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust,
enterprise or non-profit enterprise.
6.6 Amendment of Renewal. Any repeal or modification of the foregoing provisions
of this Article VI shall not adversely affect any right or protection hereunder
of any person with respect to any act or omission occurring prior to the time of
such repeal or modification.
25
<PAGE> 26
PART F/S
INTERACTIVE TELESIS, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITOR'S REPORT.......................................... F-1
FINANCIAL STATEMENTS
Balance Sheets................................................. F-2
Statements of Operations ...................................... F-3
Statements of Changes in Shareholders' Equity.................. F-4
Statements of Cash Flows....................................... F-5 - F-6
NOTES TO FINANCIAL STATEMENTS........................................ F-7 - F-15
</TABLE>
<PAGE> 27
[PKF LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Interactive Telesis, Inc.
Encinitas, California
We have audited the balance sheets of Interactive Telesis, Inc. (the "Company")
as of July 31, 1999 and 1998, and the statements of operations, changes in
shareholders' equity, 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 audits 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 Telesis, Inc. as of
July 31, 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.
/s/ PANNELL KERR FORSTER
-----------------------------------
San Diego, California PANNELL KERR FORSTER
September 17, 1999 Certified Public Accountants
A Professional Corporation
F-1
<PAGE> 28
INTERACTIVE TELESIS, INC.
BALANCE SHEETS
July 31, 1999 and 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 490,152 $ 406,090
Accounts receivable, net of allowance for doubtful
accounts of $0 and $0 at July 31, 1999 and 1998,
respectively 682,815 431,422
Deposits 7,730 8,205
Amount due from director -- 21,000
----------- -----------
Total current assets 1,180,697 866,717
----------- -----------
Property and equipment, net 762,508 293,770
----------- -----------
Total assets $ 1,943,205 $ 1,160,487
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 111,469 $ 49,615
Deferred revenue -- 12,500
Current portion of capital lease obligations 205,044 24,000
----------- -----------
Total current liabilities 316,513 86,115
----------- -----------
Capital lease obligations, net of current portion 292,229 75,791
----------- -----------
Total liabilities 608,742 161,906
----------- -----------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock, $.001 par value, 50,000,000 shares
authorized; 30,599,888 and 29,914,140 shares issued
at July 31, 1999 and 1998, respectively; 30,599,888 and
28,751,945 shares outstanding at July 31, 1999 and
1998, respectively 30,600 29,914
Additional paid in capital 9,639,691 10,048,457
Accumulated deficit (8,335,828) (8,657,568)
Treasury stock, at cost, 0 and 1,162,195 shares
at July 31, 1999 and 1998, respectively -- (422,222)
----------- -----------
Total shareholders' equity 1,334,463 998,581
----------- -----------
Total liabilities and shareholders' equity $ 1,943,205 $ 1,160,487
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 29
INTERACTIVE TELESIS, INC.
STATEMENTS OF OPERATIONS
For the years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues $ 3,022,290 $ 1,102,241
Costs and expenses:
Cost of revenues 221,506 98,055
Salaries and wages 1,184,523 822,035
General and administrative 742,801 627,831
Sales and marketing 266,626 141,432
Depreciation and amortization 177,067 64,615
----------- -----------
Total costs and expenses 2,592,523 1,753,968
----------- -----------
Operating income (loss) 429,767 (651,727)
Other expenses:
Interest expense 28,027 25,690
Litigation contingency 80,000 --
----------- -----------
Total other expenses 108,027 25,690
----------- -----------
Income (loss) before income taxes 321,740 (677,417)
Provision for income taxes -- --
----------- -----------
Net income (loss) $ 321,740 $ (677,417)
=========== ===========
Basic net income (loss) per share $ 0.01 $ (0.03)
=========== ===========
Shares used to compute basic net income (loss) per share 30,365,097 22,973,001
=========== ===========
Diluted net income (loss) per share $ 0.01 $ (0.03)
=========== ===========
Shares used to compute diluted net income (loss) per share 31,160,123 22,973,001
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 30
INTERACTIVE TELESIS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------ ----------------------------
Shares Amount Shares Amount
---------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, July 31, 1997 16,658,610 $16,659 1,212,220 $(1,185,462)
Issue of common stock for cash,
net of issuance costs 14,352,204 14,352 -- --
Issue of common stock to
directors and employees 850,602 850 -- --
Issue of stock options to
directors and employees -- -- -- --
Purchase of treasury stock -- -- 1,897,251 (3,138,169)
Retirement of treasury stock (1,947,276) (1,947) (1,947,276) 3,901,409
Net loss -- -- -- --
---------- ------- ---------- -----------
Balance, July 31, 1998,
as restated (See Note 9) 29,914,140 29,914 1,162,195 (422,222)
Reissue of treasury stock -- -- (845,668) 421,906
Retirement of treasury stock (316,527) (316) (316,527) 316
Issue of common stock for cash,
net of issuance costs 1,002,275 1,002 -- --
Issue of stock options to
directors and employees -- -- -- --
Net income -- -- -- --
---------- ------- ---------- -----------
Balance, July 31, 1999 30,599,888 $30,600 -- $ --
========== ======= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid In Accumulated Shareholders'
Capital Deficit Equity (Deficit)
----------- ----------- ----------------
<S> <C> <C> <C>
Balance, July 31, 1997 $ 6,307,636 $(5,344,472) $ (205,639)
Issue of common stock for cash,
net of issuance costs 4,572,315 -- 4,586,667
Issue of common stock to
directors and employees 398,350 -- 399,200
Issue of stock options to
directors and employees 33,939 -- 33,939
Purchase of treasury stock -- -- (3,138,169)
Retirement of treasury stock (1,263,783) (2,635,679) --
Net loss -- (677,417) (677,417)
----------- ----------- -----------
Balance, July 31, 1998,
as restated (See Note 9) 10,048,457 (8,657,568) 998,581
Reissue of treasury stock (630,847) -- (208,941)
Retirement of treasury stock -- -- --
Issue of common stock for cash,
net of issuance costs 214,414 -- 215,416
Issue of stock options to
directors and employees 7,667 -- 7,667
Net income -- 321,740 321,740
----------- ----------- -----------
Balance, July 31, 1999 $ 9,639,691 $(8,335,828) $ 1,334,463
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 31
INTERACTIVE TELESIS, INC.
STATEMENTS OF CASH FLOWS
For the years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 321,740 $ (677,417)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debts 11,573 --
Depreciation and amortization 177,067 64,615
Interest on capital leases and long-term debt 28,027 25,690
Amount due from director forgiven 21,000 --
Issuance of common stock and stock options
to directors and employees 7,667 433,139
Litigation contingency 80,000 --
Changes in operating assets and liabilities:
Increase in accounts receivable (262,966) (385,359)
Decrease in prepaid expenses and deposits 475 1,022
Decrease in stock subscription receivable -- 78,200
Decrease in accounts payable and accrued liabilities (18,146) (84,032)
(Decrease) increase in deferred revenue (12,500) 437
--------- -----------
Net cash flows provided by (used in) operating activities 353,937 (543,705)
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment (91,240) (104,955)
--------- -----------
Net cash flows used in investing activities (91,240) (104,955)
--------- -----------
Cash flows from financing activities:
Proceeds on issuance of common stock 215,416 4,586,667
Repayments on long-term debt -- (66,463)
Repayments on capital leases (185,110) (127,748)
Purchase of treasury stock and related costs (208,941) (3,138,169)
Decrease in stock subscriptions -- (735,384)
--------- -----------
Net cash flows (used in) provided by financing activities (178,635) 518,903
--------- -----------
Net increase (decrease) in cash 84,062 (129,757)
Cash at beginning of year 406,090 535,847
--------- -----------
Cash at end of year $ 490,152 $ 406,090
========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 32
INTERACTIVE TELESIS, INC.
STATEMENTS OF CASH FLOWS (Continued)
For the years ended July 31, 1999 and 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Cash paid during the period for:
Interest $ 28,027 $ 25,690
======== ==========
Income taxes $ -- $ --
======== ==========
Supplemental disclosure of noncash investing and financing activities:
Treasury stock transactions $209,787 $2,635,679
======== ==========
Purchase of property and equipment on capital lease $554,565 $ 156,790
======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 33
INTERACTIVE TELESIS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended July 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Interactive Telesis, Inc. (the "Company") was incorporated under the laws of the
Province of British Columbia, Canada, on June 19, 1987, and on September 23,
1996, the Company's jurisdiction of incorporation was changed to the state of
Delaware. It is in the business of developing and marketing customized
interactive voice response services to customers primarily located in the United
States.
Financial Instruments
The carrying amounts reported in the balance sheets for cash, accounts
receivable, prepaid expenses and deposits, amount due from director, accounts
payable and accrued liabilities, and deferred revenue approximate fair value due
to the immediate short-term maturity of these financial instruments.
The fair value of the Company's capital lease obligations approximates the
carrying amount based on the current rates offered to the Company for debt of
the same remaining maturities with similar collateral requirements.
Cash and Cash Equivalents
The Company considers all cash accounts, which are not subject to withdrawal
restrictions or penalties, and certificates of deposit and money market funds
purchased with an original maturity of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated on a
declining balance basis over the estimated useful lives of the depreciable
assets which range from three years for computer and related equipment to five
years for office furniture and fixtures, and motor vehicles.
Treasury Stock
The Company's repurchases of shares of common stock are recorded as treasury
stock, at cost, and result in a reduction of shareholders' equity. When treasury
shares are retired, the Company uses a first-in, first-out method and the excess
of repurchase cost over additional paid in capital is treated as an increase in
accumulated deficit. When treasury shares are reissued, the Company uses a
first-in, first-out method and the excess of repurchase cost over reissuance
price is treated as a reduction of additional paid in capital.
Revenue Recognition
Revenues are generated by the Company's interactive voice response services.
Revenue is recognized when these services are provided by the Company.
Cost of Revenues
Cost of revenues represent the direct telecommunication costs incurred by the
Company to provide its interactive voice response services.
F-7
<PAGE> 34
INTERACTIVE TELESIS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended July 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration Risk
A majority of the Company's revenues are generated by record and replay
services. If the demand for this service decreased or if the Company's ability
to continue to provide this service was impaired, the Company's revenue source
would be impacted.
78% and 68% of the Company's revenue was generated by three and one customer(s)
for the years ended July 31, 1999 and 1998, respectively.
The Company maintains its primary checking and savings accounts at one financial
institution located in California. Accounts at this bank are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000. At July 31, 1999
and 1998, the Company's uninsured cash balances totaled $390,152 and $306,090,
respectively. The Company has not experienced any losses in such accounts and
management believes it places its cash on deposit with financial institutions
which are financially stable.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." This statement encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options,
and other equity instruments based on a fair-value method of accounting.
Companies that do not choose to adopt the expense recognition rules of SFAS No.
123 will continue to apply the existing accounting rules contained in Accounting
Principles Board Opinion (APB) No. 25, but are required to provide pro forma
disclosures of the compensation expense determined under the fair-value
provisions of SFAS No. 123. APB No. 25 requires no recognition of compensation
expense for most of the stock-based compensation arrangements provided by the
Company, namely, broad-based employee stock purchase plans and option grants
where the exercise price is equal to the market price at the date of the grant.
The Company has adopted the disclosure provisions of SFAS No. 123 effective
August 1, 1997. The Company has opted to follow the accounting provisions of APB
No. 25 for stock- based compensation and to furnish the pro forma disclosures
required under SFAS No. 123 (See Note 6).
Long-Lived Assets
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of the impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. SFAS No. 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. The Company adopted SFAS No. 121 effective
August 1, 1997.
F-8
<PAGE> 35
INTERACTIVE TELESIS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended July 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
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.
Net Income (Loss) Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. SFAS No. 128 supercedes
the provisions of APB No. 15, and requires the presentation of basic earnings
per share and diluted earnings per share. The Company has adopted the provisions
of SFAS No. 128 effective August 1, 1997.
Basic net income (loss) per share excludes dilution and is computed by dividing
net income (loss) by the weighted average number of common shares outstanding
during the reported periods. Diluted net income (loss) per share reflects the
potential dilution that could occur if stock options and other commitments to
issue common stock were exercised. During the year ended July 31, 1999,
outstanding options and warrants to purchase 838,901 common shares were included
in the weighted average share computation. During the year ended July 31, 1998,
outstanding options and warrants to purchase 1,000,651 common shares were
anti-dilutive and have been excluded from the weighted average share
computation.
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.
The Company reviews the ageing of its accounts receivable on a periodic basis
and writes-off as bad debts those accounts receivable which it estimates are
doubtful of collection.
NOTE 2 - RELATED PARTY TRANSACTIONS
Amount due from director
Amount due from director consists of the following as of July 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- -------
<S> <C> <C>
Unsecured loan to the CEO, bearing interest at 8%,
for legal costs related to a legal action resulting from
his position as a director and officer of the Company.
In July 1999, the loan was forgiven via a bonus to the
CEO for achieving certain revenue targets for the
Company. $-- $21,000
==== =======
</TABLE>
F-9
<PAGE> 36
INTERACTIVE TELESIS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended July 31, 1999 and 1998
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of July 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Computer and related equipment $ 933,799 $ 357,730
Office furniture and fixtures 64,198 36,534
Motor vehicle 42,072 -
---------- ---------
1,040,069 394,264
Less: Accumulated depreciation (277,561) (100,494)
---------- ---------
Net property and equipment $ 762,508 $ 293,770
========== =========
</TABLE>
NOTE 4 - CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist of the following as of July 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Capital lease obligations, bearing interest at rates
of up to 28%, with interest and principal payable in
monthly installments of approximately $21,400. The
capital lease obligations are secured by the computer
and related equipment, and by personal guarantees of
the CEO. The capital lease obligations are due at
various dates between July 2000 and June 2003. $ 497,273 $ 99,791
Less: Current portion (205,044) (24,000)
--------- --------
Capital lease obligation, long-term $ 292,229 $ 75,791
========= ========
</TABLE>
Aggregate maturities of capital lease obligations as of July 31, 1999, are as
follows:
<TABLE>
<CAPTION>
Year Ended July 31, Amount
------------------- ---------
<S> <C>
2000 $ 257,171
2001 228,465
2002 102,906
2003 13,299
---------
Total minimum lease payments 601,841
Less: Amount representing interest (104,568)
---------
$ 497,273
=========
</TABLE>
Capitalized leases included in property and equipment amounted to approximately
$712,000 and $157,000 before accumulated amortization of $165,000 and $45,000 as
of July 31, 1999 and 1998, respectively. Included in depreciation and
amortization expense is amortization of capital lease assets in the amounts of
approximately $120,000 and $34,000 for the years ended July 31, 1999 and 1998,
respectively.
F-10
<PAGE> 37
INTERACTIVE TELESIS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended July 31, 1999 and 1998
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities under a non-cancelable operating
leases that expire at various dates through July 2002. Minimum future
obligations under these leases as of July 31, 1999, are as follows:
<TABLE>
<CAPTION>
Year ended July 31, Amount
------------------- --------
<S> <C>
2000 $129,147
2001 104,202
2002 13,732
--------
Total minimum lease payments $247,081
========
</TABLE>
Rent expense under the non-cancelable operating leases was $103,185 and $62,589
for the years ended July 31, 1999 and 1998.
Litigation
The Company is a defendant in a lawsuit brought by an individual claiming that
the Company wrongfully terminated the plaintiff. The plaintiff alleges special,
general and punitive damages in excess of $400,000. At the present stage of
litigation, the probability that the Company will be required to pay damages
cannot be determined and therefore an estimate of the amount of loss cannot be
made. Accordingly, no contingent liability has been provided for in the
accompanying financial statements.
The Company is a defendant in a lawsuit brought by an individual claiming that
the Company and other defendants made misrepresentations in the sale of shares
of the Company's common stock. The plaintiff alleges special, general and
punitive damages in excess of $1,000,000. Although the case has been vigorously
defended, it is probable that the Company will be required to pay damages. The
Company's best estimate of the amount of the probable loss is $80,000 and
accordingly, a provision of $80,000 has been provided for in the accompanying
financial statements.
Other
No contingent liability has been provided for in the accompanying financial
statements that relates to the Company's 1997 stock repurchase program, as
discussed in Note 6, as an estimate of the amount of loss cannot be made.
F-11
<PAGE> 38
INTERACTIVE TELESIS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended July 31, 1999 and 1998
NOTE 6 - SHAREHOLDERS' EQUITY
Stock repurchase program
In 1997, the Company authorized the repurchase of up to $2,000,000 worth of its
shares through open market transactions with the intention of retiring this
stock. For the years ended July 31, 1999 and 1998, the Company paid $208,941 and
$3,138,169 to five brokerage accounts of the Company and certain shareholders
(the "Brokerage Accounts") and purchased and resold shares at values varying
between $0.30 and $1.06. As of July 31, 1999, the Company did not hold any
treasury stock and had settled all the Brokerage Accounts. Certain aspects of
the stock repurchase program may not have been in strict compliance with
regulatory requirements, which could lead to certain liabilities, the nature and
outcome of which are uncertain (see Note 5 -- other).
Stock purchase warrants
In January 1997, the Company issued 407,401 share purchase warrants to the CEO
in connection with the settlement of a debt. The warrants entitle the director
to purchase 407,401 shares of common stock at $.40 per share, and expire in
November 2001. None of the warrants had been exercised as of July 31, 1999.
In January 1997, the Company issued 675,000 share purchase warrants to a
corporation in connection with the issue of shares of common stock. The warrants
entitled the corporation to purchase 337,500 shares of common stock at $.20 per
share, and expired unexercised in January 1999.
Stock option plans
In October 1996, the Company adopted a non-qualified stock option plan (the
"Plan") under which options to purchase up to 1,485,000 shares of common stock
may be granted to directors, officers or employees of the Company, as well as to
consultants and other service providers of the Company. The Plan provides for
grants of options with a term of up to 10 years.
Pursuant to the Plan, the Company granted options to purchase 132,000 and
205,000 shares of common stock for the years ended July 31, 1999 and 1998,
respectively.
The Company has elected to account for grants under its Plan following APB No.
25 and related interpretations. Accordingly, compensation costs of $7,667 and
$33,939 have been recognized for options granted during the years ended July 31,
1999 and 1998, respectively. Under SFAS No.123, the fair value of each option
granted during the years ended July 31, 1999 and 1998, was estimated on the
measurement date utilizing the then current fair value of the underlying shares,
as estimated by management, less the exercise price discounted over the average
expected life of the options, with an average risk free interest rate of between
4.9% and 6.7%, price volatility of between .53 and 1, and no dividends.
F-12
<PAGE> 39
INTERACTIVE TELESIS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended July 31, 1999 and 1998
NOTE 6 - SHAREHOLDERS' EQUITY (Continued)
Stock option plans (Continued)
Had compensation cost for all awards been determined based on the fair value
method as prescribed by SFAS No.123, reported net income (loss) and net income
(loss) per share would have been as follows:
<TABLE>
<CAPTION>
July 31, 1999 July 31, 1998
------------- -------------
<S> <C> <C>
Net income (loss):
As reported $321,740 $(677,417)
Pro forma $261,659 $(779,733)
Basic net income (loss) per share:
As reported $ 0.01 $ (0.03)
Pro forma $ 0.01 $ (0.03)
Diluted net income (loss) per share:
As reported $ 0.01 $ (0.03)
Pro forma $ 0.01 $ (0.03)
</TABLE>
A summary of the activity of the stock options for the years ended July 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
Year ended Year ended
July 31, 1999 July 31, 1998
------------------------ -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 808,000 $ 0.38 715,000 $ 0.40
Granted 132,000 0.40 205,000 0.33
Forfeited -- -- (112,000) 0.40
Expired -- -- -- --
------- -------- --------- -------
Outstanding at end of period 940,000 $ 0.38 808,000 $ 0.38
======= ======== ========= =======
Exercisable at end of period 431,500 $ 0.36 255,750 $ 0.34
======= ======== ========= =======
Weighted-average fair value
of options granted during the period $ 0.32 $ 0.39
========= =======
Weighted-average remaining contractual
life of options outstanding at end
of period 7 years 7 years
======== =======
</TABLE>
F-13
<PAGE> 40
INTERACTIVE TELESIS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended July 31, 1999 and 1998
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. The tax effect of temporary
differences consisted of the following as of July 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 866,000 $ 900,000
Other 35,000 --
--------- ---------
Gross deferred tax assets 901,000 900,000
Less: Valuation allowance (614,000) (742,000)
--------- ---------
Net deferred tax assets 287,000 158,000
Deferred tax liabilities:
Property and equipment (28,000) (11,000)
Cash basis accounting for tax purposes (259,000) (147,000)
--------- ---------
$ -- $ --
========= =========
</TABLE>
Realization of deferred tax assets is dependant upon sufficient future taxable
income during the period that deductible temporary differences and carryforward
are expected to be available to reduce taxable income. As the achievement of
required future taxable income is uncertain, the Company recorded a valuation
allowance. The valuation allowance decreased by $128,000 from 1998 and increased
by $221,000 from 1997.
As of July 31, 1999, the Company has net operating loss carryforwards for both
federal and state income tax purposes. Federal and state net operating loss
carryforwards totaling approximately $2,255,000 and $1,703,000, respectively, as
of July 31, 1999, begin to expire in 2011. Under federal and state laws, the
availability of operating loss carryforwards are limited in the event of a
cumulative change in the Company's ownership resulting in a change in control.
The Company has not performed an analysis to determine if such a change has
taken place, however, management does not believe such a change has taken place.
A reconciliation of the effective tax rates with the federal statutory rate is
as follows as of July 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Income tax expense (benefit) at 35% statutory rate $ 113,000 $(237,000)
Change in valuation allowance (128,000) 221,000
Nondeductible expenses -- 14,000
State income taxes, net 19,000 (39,000)
Other (4,000) 41,000
--------- ---------
$ -- $ --
========= =========
</TABLE>
F-14
<PAGE> 41
INTERACTIVE TELESIS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended July 31, 1999 and 1998
NOTE 8 - PROPOSED SALE OF PRODUCT SERVICE LINE
On June 25, 1999, the Company's Board of Directors authorized management to
negotiate the sale of the InvestorReach service ("InvestorReach"). Revenues and
net income (loss) from InvestorReach were $537,028 and $145,973 for the year
ended July 31, 1999, and $272,833 and $(16,781) for the year ended July 31,
1998, respectively. InvestorReach does not have any separately identifiable
assets and liabilities. Management is currently negotiating the sale of
InvestorReach.
NOTE 9 - RESTATEMENT AND RECLASSIFICATION
The July 31, 1998 financial statements were previously issued under Canadian
Generally Accepted Accounting Principles. As a result, no compensation expense
was recognized for the issue of stock options to directors and employees, and
the cost of treasury stock was allocated between common stock par value and
additional paid in capital. Accordingly, the additional paid in capital and net
loss as of and for the year ended July 31, 1998, have been restated to account
for the issue of such stock options in accordance with APB No. 25, and the cost
of treasury stock has been reclassified from common stock par value and
additional paid in capital to treasury stock, at cost.
As a result of the above, $33,939 has been recognized as compensation expense
for the year ended July 31, 1998, increasing the net loss from $(643,478) as
previously reported, to $(677,417). Also, $(1,162) and $(421,060) have been
reclassified from common stock par value and additional paid-in capital,
respectively, to treasury stock, at cost, as of July 31, 1998, to properly
reflect treasury stock, with no effect on total shareholders' equity.
F-15
<PAGE> 42
PART III
ITEM 1. Index of Exhibits
<TABLE>
<CAPTION>
Description
-----------
<S> <C>
3.1* Province of British Columbia, Company Act, Certificate of
Incorporation, Butter Rock Resources
3.2* Company Act, Memorandum, Butter Rock Resources
3.3* Articles of Incorporation, Interactive Telesis - 1992
3.4* Certificate of Incorporation of the Company - Delaware
3.5* Certificate of Amendment of Certificate of Incorporation of the
Company - Delaware
3.6* Bylaws of the Company
10.1* ITI Stock Option Plan (1996)
10.2* Lease Agreement between the Company and North Coast Business
Park, dated Feb. 15, 1995, with amendments dated April 30, 1999
10.3* Lease Agreement between the Company and U.S. Net Solutions, Inc.,
dated Feb. 22, 1999
10.4* Sublease Agreement between the Company and The Townsend Agency,
dated Aug. 13, 1999
10.5* Balboa Capital Corporate Equipment Lease Agreement
10.6* Balboa Capital Corporate Equipment Lease Agreement
10.7* Toshiba Corporate Equipment Lease Agreement
10.8* Westover Financial Corporate Equipment Lease Agreement
10.9* Westover Financial Corporate Equipment Lease Agreement
10.10* Ford Financial Services Corporate Equipment Lease Agreement
10.11* Ford Financial Services Corporate Equipment Lease Agreement
- --------------------
* Previously filed.
</TABLE>
27
<PAGE> 43
<TABLE>
<S> <C>
10.12* Imperial Business Credit Corporate Equipment Lease Agreement
10.13* Media Capital, LLC Corporate Equipment Lease Agreement
10.14* Dell Financial Services Corporate Equipment Lease Agreement
10.15* Imperial Business Credit Corporate Equipment Lease Agreement
10.16* First Sierra Financial Corporate Equipment Lease Agreement
10.17* United Capital Leasing Corporate Equipment Lease Agreement
10.18* ADVANTA Business Service Corporate Equipment Lease Agreement
10.19* Ford Financial Services Corporate Equipment Lease Agreement
10.20* ADVANTA Bank Corporation Corporate Equipment Lease Agreement
10.21* Financial Pacific Leasing Corporate Equipment Lease Agreement
16.1* Letter from Buckley Dodds and Associates, dated Oct. 29, 1999
27.1* Financial Data Schedule
- --------------------
* Previously filed.
</TABLE>
28
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERACTIVE TELESIS INC.
(a Delaware corporation)
------------------------------------
(Registrant)
Dated: February 24, 2000 By: /s/ Donald E. Cameron
---------------------------------
Donald E. Cameron
President and CEO
29
