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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTERACTIVE TELESIS INC.
(Exact name of registrant as specified in its charter)
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Delaware SERVICES-COMPUTER PROGRAMMING 33-0649915
(State or other jurisdiction of (Primary standard (IRS employer identification
incorporation or organization) industrial classification number number)
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INTERACTIVE TELESIS INC.
12636 High Bluff Dr., Suite 200, San Diego, California 92130
858-523-4000
FAX 858-523-4001
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Donald E. Cameron, Chief Executive Officer
INTERACTIVE TELESIS INC.
12636 High Bluff Dr., Suite 200, San Diego, California 92130
858-523-4000
FAX 858-523-4001
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Bruce J. Rushall, Esq.
RUSHALL & McGEEVER, APLC
1903 Wright Place, Suite 250
Carlsbad, California 92056
(760) 438-6855
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE OF REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
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Common stock, par value $.001 per share 9,753,445 $ 0.6562 (1) $ 6,400,211 $ 1,691.00
issuable upon exercise of Series A ----------------- ---------------- ---------------
preferred stock.
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(1) Estimated solely for the purpose of calculating the registration fee based
on the average of the closing bid and asked price of the common stock on
the OTC Bulletin Board market on December 18, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION ON ______________, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE. IT MIGHT CHANGE. WE CANNOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT THAT WE HAVE FILED WITH
THE SEC IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL, NOR DOES IT
SOLICIT OFFERS TO BUY, THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
9,753,445 Shares
[LOGO]
INTERACTIVE TELESIS INC.
Common Stock
This prospectus may be used only in connection with the following resales
of common stock of INTERACTIVE TELESIS INC.:
- 7,228,916 shares may be offered and sold, from time to time, by
Hambrecht & Quist Guaranty Finance, LLC ("H&QGF"), who will
originally receive these shares by converting shares of preferred
stock which we have and may, in the future, issue and sell to them
under our Equity Line of Credit with H&QGF and we may also issue some
of these shares to H&QGF as dividends on their preferred stock.
- An additiona1 1,084,337 shares may be offered and sold, from time to
time, by H&QGF, who will originally receive these shares as dividends
in kind on their shares of Series A Preferred Stock.
- An additional 394,737 shares may be offered and sold, from time to
time, by H&QGF, who will originally receive these shares by
converting shares of preferred stock issuable to H&QGF upon exercise
of a warrant.
- An additional 1,045,455 shares which may be offered and sold, from
time to time, by H&QGF who will originally receive all or a portion
of these shares by converting shares of preferred stock which we may
issue to them upon conversion of the $1.15 million principal amount
of 7.5% secured convertible note due November 20, 2003 that we issued
to H&QGF in November 2000.
We refer to H&QGF as "selling stockholder."
We will not request effectiveness of this Registration Statement unless
the amendment to our charter authorizing the issuance of the Series A preferred
stock is approved at our annual meeting of shareholders noticed for January 26,
2001.
Our common stock is traded on the OTC Bulletin Board market under the
symbol "TSIS" On December 18, 2000, the last sale price of our common stock
on the Nasdaq over-the-counter-market was $0.6562 per share.
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Investing in our common stock involves risks. See "RISK FACTORS"
beginning on page 6.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OUR SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. IT IS ILLEGAL FOR ANYONE TO TELL YOU OTHERWISE.
THE DATE OF THIS PROSPECTUS IS DECEMBER 20, 2000.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY............................................................................-5-
The Company.............................................................................-5-
The Offering............................................................................-5-
RISK FACTORS..................................................................................-6-
Risks Related to the Company's Business.................................................-6-
We have a limited operating history...............................................-6-
We have a history of losses and may incur losses in the future....................-6-
Our current business is dependent upon a small number of customers who account
for the majority of our revenues.............................................-6-
The loss of one or more of these customers and our inability to replace them
could materially adversely affect our short-term profitability.... .........-7-
Our current business depends on certain skilled and experienced employees.........-7-
Revenues from portions of our business may vary throughout our fiscal year........-7-
We do not have copyright or patent protection for our proprietary software
systems......................................................................-7-
Many of our customers have greater technical and financial resources than we do...-7-
We do not believe substantial barriers exist to the entry by other companies
into one or more of the services we provide..................................-7-
If we are unable to develop new services or expand features of existing
services, we may not be able to expand our operations........................-7-
Our business is subject to changes in the computer and telecommunication
industries which are occurring at a rapid rate...............................-7-
We rely significantly on third parties............................................-7-
Risks Related to an Investment in the Company's Common Stock............................-8-
Potential lack of liquidity in our common stock due to penny stock regulations....-8-
We expect our share price to remain highly volatile...............................-8-
There are dilutive effects of the equity line of credit agreement with H&QGF
and potential dilutive effects of the convertible note that we issued
to H&QGF.....................................................................-8-
We do not pay dividends on our common stock and have no plans to do so............-9-
Our management has broad discretion over establishing and implementing our
operational strategies and goals.............................................-9-
H&QGF FINANCING...............................................................................-9-
The Equity Line of Credit Agreement.....................................................-9-
The 7.5% Secured Convertible Loan Due November 20, 2003................................-11-
Determination of Offering Price........................................................-11-
USE OF PROCEEDS..............................................................................-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................................-12-
Results of Operations..................................................................-12-
Impact of Acquisition of Paragon Voice Systems on Revenue and Earnings.................-13-
Cost of Revenue and Major Expenses.....................................................-13-
Liquidity and Capital Resources........................................................-14-
Future Expectations....................................................................-16-
BUSINESS.....................................................................................-16-
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General................................................................................-16-
Digital Record and Replay Services.....................................................-18-
Automated Surveys......................................................................-18-
MarketREACH-TM- - Enhanced Services....................................................-19-
Sales and Marketing....................................................................-19-
Acquisition of Paragon Voice Systems...................................................-19-
Subsidiaries...........................................................................-20-
Competition............................................................................-20-
Business Concentration.................................................................-20-
Trademark and Copyright Issues.........................................................-20-
Governmental Regulation................................................................-21-
Properties.............................................................................-21-
Employees..............................................................................-22-
MANAGEMENT...................................................................................-22-
Board of Directors Meetings............................................................-24-
EXECUTIVE COMPENSATION.......................................................................-24-
Compensation of Non-employee Directors.................................................-27-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................-27-
DESCRIPTION OF CAPITAL STOCK.................................................................-29-
Authorized Stock.......................................................................-29-
Common Stock...........................................................................-29-
Preferred Stock........................................................................-29-
Warrants...............................................................................-30-
Options................................................................................-31-
Market Price of and Dividends on the Company's Common Equity and Other
Shareholder Matters..............................................................-31-
Anti-dilution Rights...................................................................-31-
Transfer Agent and Warrant Agent.......................................................-32-
SELLING STOCKHOLDER..........................................................................-32-
LEGAL PROCEEDINGS............................................................................-33-
PLAN OF DISTRIBUTION.........................................................................-33-
LEGAL MATTERS................................................................................-34-
EXPERTS......................................................................................-34-
ADDITIONAL INFORMATION.......................................................................-34-
INDEX TO FINANCIAL STATEMENTS................................................................-36-
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PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including our
financial statements and related notes, and especially the risks described under
"RISK FACTORS."
THE COMPANY
OUR BUSINESS.
Interactive Telesis Inc. (also referred to as the "Company" or "we") is a
leading provider of specialized interactive voice response (IVR) services and in
the deployment of automated speech recognition (ASR) technologies and
speech-enabled hosting services. Interactive Telesis presents very compelling
solutions for companies desiring to leverage the benefits of speech recognition
without the high cost of ownership responsibilities, capital outlay and internal
IT staff requirements.
In December 1999, we acquired a controlling interest in Paragon Voice
Systems, which is a value-added reseller and developer of computer telephony
solutions in the emerging technology field of ASR services. Paragon is a San
Diego based reseller of speech recognition software and application building
blocks for the technology as a part of its integrated solutions. We purchased a
controlling interest in Paragon with a view of joining forces to develop and
deploy advanced speech recognition solutions for corporate customers. Our
intention for the immediate future is to position Interactive Telesis as a
leading hosting provider for complex ASR software applications.
Our principal executive offices are located at 12636 High Bluff Dr., Suite
200, San Diego, California 92130. Our telephone number is 858-523-4000. Our
Internet website is located at www.interactivetelesis.com.
THE OFFERING
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Common stock offered 9,753,445
Common stock outstanding 31,874,460
Use of Proceeds We will not receive proceeds from the sale
of the shares registered hereby, all such
proceeds will go to the selling stockholder.
We will however, receive the proceeds from
the sale of our preferred stock to H&QGF
under their equity line of credit and upon
exercise of their warrant. We will use any
such proceeds for general corporate
purposes.
OTC Bulletin Board symbol TSIS
Risk Factors You should read the "RISK FACTORS"
section beginning on page 6 and the other
cautionary statements in this prospectus to
ensure that you understand the risks associated
with an investment in our common stock.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We intend
the forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position and operating results, our business strategy and our
plans are forward-looking statements. These statements can sometimes be
identified by our use of words such as "may," "anticipate," "expect," "intend,"
"believe," "estimate" or similar expressions. Our expectations in any
forward-looking statements may not turn out to be correct. Our actual results
could be materially different from our expectations. Important factors that
could cause our actual results to be materially different from our expectations
include those discussed under "Risk Factors." We have no obligation to update
these statements to reflect events and circumstances after the date of this
prospectus.
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
WE HAVE A LIMITED OPERATING HISTORY. We implemented our current plan of
business in 1994 and remain dependent upon a limited variety of services and
small number of significant customers. See "Business" on page 16 and
"Business Concentration" on page 20. We intend to expand the scope of our
services and our customer base but there is no assurance that our long-term
operating strategies for the sales of our ASR hosting services in selected
markets will be successful.
WE HAVE A HISTORY OF LOSSES AND MAY INCUR LOSSES IN THE FUTURE. Until our
fiscal year ended July 31, 1999, we had incurred significant net losses under
our current plan of business. There is no assurance that our revenues will grow
or that we will maintain profitability in the future. Our ability to increase
revenue and maintain profitability will be affected by other risks and
uncertainties described below, most of which are outside of our control.
OUR CURRENT BUSINESS IS DEPENDENT UPON A SMALL NUMBER OF CUSTOMERS WHO
ACCOUNT FOR THE MAJORITY OF OUR REVENUES. Historically we have relied on a small
number of customers for most of our revenues and earnings.
THE LOSS OF ONE OR MORE OF THESE CUSTOMERS AND OUR INABILITY TO REPLACE
THEM COULD MATERIALLY ADVERSELY AFFECT OUR SHORT-TERM PROFITABILITY. For
example, AT&T stopped using our record and replay services in July 2000. AT&T
had been a significant record and replay service customer since 1998.
OUR CURRENT BUSINESS DEPENDS ON CERTAIN SKILLED AND EXPERIENCED EMPLOYEES.
These include our Chief Executive Officer and VP of Operations. We have no
long-term contracts with our key employees. Competition for skilled and
experienced software programmers and supporting skills in our geographic region
is intense and we may not be able to hire or retain key employees as needed. If
we
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are unable to hire, train and manage new skilled and experienced employees as
needed, we would be unable to support our planned growth and future operations.
REVENUES FROM PORTIONS OF OUR BUSINESS MAY VARY THROUGHOUT OUR FISCAL
YEAR. For example, our Digital Record & Replay services 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.
WE DO NOT HAVE COPYRIGHT OR PATENT PROTECTION FOR OUR PROPRIETARY SOFTWARE
SYSTEMS. We do not consider our service mark or trade secrets to be material to
our financial results and/or results of operations.
MANY OF OUR CUSTOMERS HAVE GREATER TECHNICAL AND FINANCIAL RESOURCES THAN
WE DO. Should they deem it advisable and economically feasible, our major
customers could choose to internally provide the services they contract us to
provide. Accordingly, there is no assurance that in the future one or more of
our major customers may not provide internally services which it now purchases
from us.
WE DO NOT BELIEVE SUBSTANTIAL BARRIERS EXIST TO THE ENTRY BY OTHER
COMPANIES INTO ONE OR MORE OF THE SERVICES WE PROVIDE. Accordingly, we could, in
the future, encounter significant competition for our services from one or more
competitors which have significantly greater technical and/or financial
resources than us.
IF WE ARE UNABLE TO DEVELOP NEW SERVICES OR EXPAND FEATURES OF EXISTING
SERVICES, WE MAY NOT BE ABLE TO EXPAND OUR OPERATIONS. We must continually
explore additional areas and services which we may offer to our customers. Our
inability to manage our growth could harm our business. Also, if we are unable
to continually improve our ability to deliver services to customers, we may not
be able to accommodate the increasing level of use or expanding needs of our
customer base.
OUR 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 our
services and/or the means by which we provide our services. Our failure to adapt
to such changes could adversely affect our volume or cause our services to
become obsolete.
WE RELY SIGNIFICANTLY ON THIRD PARTIES. Our operations depend to a
significant degree on a number of other third parties, including
telecommunication service providers. We have no effective control over these
third parties. From time to time, we could experience temporary interruptions in
our telecommunications access. Continuous or prolonged interruptions in our
telecommunications access would have a material adverse affect on our business,
financial condition, and results of operations. Our agreements with our
telecommunications providers place certain limits on our ability to obtain
damages from the service providers for failure to maintain services to our
facilities.
RISKS RELATED TO AN INVESTMENT IN THE COMPANY'S COMMON STOCK
POTENTIAL LACK OF LIQUIDITY IN OUR COMMON STOCK DUE TO PENNY STOCK
REGULATIONS. Because our common stock trades below $5.00 per share, we are
subject to the Securities Enforcement and Penny Stock Reform Act of 1990 (the
"Penny Stock Rules"). The Penny Stock Rules adversely affect the market
liquidity for our common stock because broker-dealers trading in Penny Stocks
must, among other things, provide customers with a risk disclosure statement
setting forth certain specified
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information prior to a purchase transaction; disclose to the customer inside bid
quotation and outside offer quotation for this Penny Stock, or, in a principal
transaction, the broker-dealer's offer price for the Penny Stock; disclose the
aggregate amount of any compensation the broker-dealer receives in the
transaction; disclose the aggregate amount of the cash compensation that any
associated person of the broker-dealer, who is a natural person, will receive in
connection with the transaction; deliver to the customer after the transaction
certain information concerning determination of the price and market trading
activity of the Penny Stock. Also, prior to the transaction, the broker-dealer
must approve the customer's account for transactions in Penny Stocks and receive
from the customer a written agreement to the transaction setting forth the
identity and quantity of the Penny Stock to be purchased. Also, under the Penny
Stock Rules, broker-dealers must provide monthly account statements to customers
which include the above-disclosures regarding penny stock investments. These
requirements make it more difficult administratively for broker-dealers to buy
and sell our stock on behalf of their customers. Consequently, the Penny Stock
Rules affect the ability of our shareholders to sell the Company's shares in the
secondary market.
WE EXPECT OUR SHARE PRICE TO REMAIN HIGHLY VOLATILE. The market price for
our 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 our business, including
announcements of technological innovations, fluctuations in customer orders,
customer cancellations, the introduction of new products by our competitors,
service problems and/or quarterly variations in the actual or anticipated
results of our operations. Also, the over-the-counter market in which our stock
trades have 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 our stock.
THERE ARE DILUTIVE EFFECTS OF THE EQUITY LINE OF CREDIT AGREEMENT WITH
H&QGF AND POTENTIAL DILUTIVE EFFECTS OF THE CONVERTIBLE NOTE THAT WE ISSUED TO
H&QGF. The sale of stock pursuant to the equity line of credit agreement with
H&QGF will have, and payments of interest on and principal repayments of the
convertible note we issued to H&QGF could have, a dilutive impact on our
stockholders. As a result, our net income per share could be materially
decreased, or net loss per share materially decreased, in future periods and the
market price of our common stock could be materially and adversely affected. The
shares of preferred stock to be issued under the equity line of credit
agreement, which will be convertible into a like number of shares of common
stock, will be issued at a discount to the then-prevailing market price of the
common stock. These discounted sales could have an immediate adverse effect on
the market price of the common stock. The warrant we issued to H&QGF to purchase
394,737 shares of preferred stock convertible, initially, into an equal number
of shares of common stock, at an exercise price of $1.52 per share. The issuance
of shares of preferred stock under the equity line of credit agreement or upon
exercise of the H&QGF warrant, and the subsequent conversion of those shares
into common stock and resale of the common stock would have a further dilutive
effect on our common stock and could adversely affect its market price.
WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK AND HAVE NO PLANS TO DO SO. We
intend to retain any earnings to finance growth and development of our business
and do not anticipate paying cash dividends in the foreseeable future.
Accordingly, our shareholders will need to look for appreciation in the market
price of our stock, if any, for a return on their investment.
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OUR MANAGEMENT HAS BROAD DISCRETION OVER ESTABLISHING AND IMPLEMENTING OUR
OPERATIONAL STRATEGIES AND GOALS. Our management may devise, modify, abandon or
implement operating strategies at any time within their discretion without a
vote of our shareholders. Accordingly, investors must depend on our management's
experience and judgment in making critical decisions affecting our business and
operating results.
H&QGF FINANCING
THE EQUITY LINE OF CREDIT AGREEMENT
On November 21, 2000, we entered into an equity line of credit agreement
with H&QGF, pursuant to which, subject to the satisfaction of certain
conditions, we may issue and sell, from time to time, up to an aggregate of $3.0
million, subject to certain limitations, of our Series A convertible preferred
stock.
Beginning on the date the registration statement, of which this prospectus
forms a part, is declared effective by the Securities and Exchange Commission
(the "effective date"), and continuing for the commitment period, we may from
time to time, in our sole discretion, sell ("put") shares of our preferred stock
to H&QGF at a price per share equal to 83% of the lower of (X) the average of
the bid prices of our common stock over the five-day period ending on the
relevant closing date and (Y) the closing price of our common stock on the
relevant closing date. The commitment period is the 12- month period following
the effective date. Our ability to put shares of our preferred stock to H&QGF is
also subject to certain conditions and limitations, including, but not limited
to, the following:
- the maximum amount of shares that we may put at any time
equals the lesser of (a) $500,000 or (b) 2 multiplied by the
average trading volume computed as of the put date. Average
dollar trading volume with respect to any put date is
calculated by (a) multiplying the reported trading volume of
our common stock on each of the trading days in the 22 days
immediately preceding the put notice date by the average of
the high and low reported share price on such dates, (b)
adding the results together, and (c) dividing the sum of the
number of trading days obtained pursuant to (a) above;
- the registration statement, of which this prospectus is a part,
must have previously become effective and shall remain effective
on the date of each put;
- our representations and warranties to H&QGF set forth in the
equity line of credit agreement must be true and correct in all
material respects as of the date of each put;
- no statute, rule, regulation, executive order, decree, ruling or
injunction shall be in effect that prohibits, nor any action,
suit or proceeding shall be in progress, pending or threatened
that seeks to enjoin or prohibit, the transactions contemplated
under the equity line of credit agreement, or otherwise has a
material adverse effect on our business, operations, properties
or financial condition;
- at the time of a put, there shall have been no material adverse
change in our business, operations, properties, prospects or
financial condition, except as disclosed
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in our reports filed with the SEC pursuant to the Securities
Exchange Act of 1934, as amended;
- our common stock shall not have been delisted from its principal
market (currently the over-the-counter bulletin board market
("OTCBB")) nor suspended from trading;
- the issuance of shares to H&QGF shall not violate the OTCBB
(or other principal market) shareholder approval requirements;
- the total of all H&QGF's purchases of preferred stock under the
equity line of credit agreement shall not exceed $3.0 million;
- no more than the lesser of two times the average daily trading
volume for the 30 days preceding the put and $500,000 of
preferred stock can be put to H&QGF at a time and at least 15
trading days must elapse between puts; and
- the number of shares of preferred stock already held by H&QGF,
together with those shares we propose to put to H&QGF, shall not
exceed 9.9% of the total amount of our common stock that would
be outstanding after completion of the put, including the
preferred stock on an as-converted basis.
We cannot assure you that we will satisfy all conditions required under
the equity line agreement with H&QGF, or that we will be able to sell any shares
to H&QGF thereunder. If, for example, we fail to maintain the quotation of our
common stock on the OTCBB, we will not be able to sell preferred stock to H&QGF
under the equity line of credit agreement.
In conjunction with the equity line of credit agreement, on November 21,
2000, we issued to H&QGF a warrant to purchase 394,737 shares of our preferred
stock, initially convertible into a like number of shares of common stock, at an
exercise price of $1.52 per share. The H&QGF warrant is exercisable through
November 20, 2007. The warrant contains provisions that protect H&QGF against
dilution by adjustment of the exercise price and the number of shares issuable
thereunder upon the occurrence of certain events, such as a merger, stock split
or reverse stock split, stock dividend or recapitalization. The exercise price
of the H&QGF warrant is payable either in cash or by cashless exercise, in which
that number of shares of preferred stock issuable pursuant to the warrant having
a fair market value at the time of exercise equal to the aggregate exercise
price are canceled as payment of the exercise price. The fair market value of
the preferred stock shall be determined using the then- current market price of
our common stock and the ratio for converting preferred stock into common stock
then in effect.
Under the equity line of credit agreement, H&QGF's convertible loan
described below and H&QGF's warrant, we agree to register for resale the common
stock issuable upon conversion of any preferred stock issued to H&QGF pursuant
to the equity line of credit, the conversion of the convertible loan, and upon
its exercise of its warrant. We have filed a registration statement of which
this prospectus is a part. Registration will permit H&QGF to resell this common
stock from time to time in the market or in privately-negotiated transactions.
We will prepare and file amendments and supplements to the registration
statement as may be necessary in order to keep the registration statement
effective as long as H&QGF holds shares of our stock.
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Under the Equity Line of Credit Agreement, we agreed to pay H&QGF's
reasonable out-of- pocket expenses, including legal expenses incurred in
connection with the preparation, negotiation, execution and delivery of that
agreements and in the preparation of this Registration Statement. In addition,
we agreed to pay H&QGF a one-time transaction fee of $30,000 and a quarterly fee
equal to $.002 multiplied by the maximum unused financing available at the end
of each ninetieth day period following the subscription date (a "quarter
anniversary date"), plus a prorated fee due ten days following the end of the
commitment period equal to the unused commitment as of the end of the commitment
period multiplied by .002 multiplied by the number of days between the last
quarter anniversary date during the commitment period and the end of the
commitment period divided by ninety.
H&QGF, or other underwriters of the securities, have the right to review
this registration statement and our records and properties to obtain information
about us and the accuracy of this registration statement and prospectus. H&QGF
has the opportunity to comment on the registration statement and prospectus, but
is not entitled to reject a put by us based on their review. H&QGF may be
entitled to indemnification by us for any lawsuits based on language in this
prospectus with which it does not agree. We have agreed to bear certain expenses
(other than broker discounts and commissions, if any), including H&QGF's legal
fees, in connection with the registration statement.
THE 7.5% SECURED CONVERTIBLE LOAN DUE NOVEMBER 20, 2003
On November 21, 2000, we executed a Loan and Security Agreement
providing for up to $1.15 million loan financing by H&QGF under this
Agreement. Six Hundred Fifty Thousand Dollars was funded upon execution, and
the remaining $500,000 is to be funded upon the execution date of this
Registration Statement. Interest on the loan is payable monthly through July
31, 2002, and then quarterly. Principal on the note is payable in six equal
quarterly payments commencing in August 2002. Payment of the loan is secured
by a lien on our equipment and fixtures, inventory, accounts receivable and
general intangibles, including trade names, trademarks, patents and
copyrights. The loan is convertible, at the option of the holder, into shares
of our Series A preferred stock at a price per share of $1.10 per share if
converted prior to November 20, 2001, at a price of $1.52 per share if
converted thereafter until November 20, 2002 and at $2.00 per share
thereafter. The conversion price is subject to adjustment for stock splits,
stock dividends and reverse stock splits.
DETERMINATION OF OFFERING PRICE
The Selling Stockholder may offer, pursuant to this prospectus, shares of
common stock to purchasers from time to time in public or private transactions,
on or off the over-the-counter bulletin board, at prevailing market prices or at
privately negotiated prices. As such, the offering price is indeterminate as of
the date of this prospectus. See "Plan of Distribution."
USE OF PROCEEDS
The proceeds from the sale of the common stock will be received directly
by the Selling Stockholder. We will not receive any of the proceeds from the
sale of the common stock offered hereby. However, we will receive the put price
pursuant to the equity line of credit agreement with H&QGF if and to the extent
we issue and sell preferred stock (convertible into common stock offered by this
prospectus) to H&QGF pursuant to that agreement, and we will receive the
purchase price of
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preferred stock sold to H&QGF pursuant to the exercise of their warrant. As
determined under the equity credit line agreement, the put price equals 83% of
the lower of (X) the closing market price of our common stock on the date of
issuance or (Y) the average of the closing bid prices of our common stock over
the five-day period ending on the day preceding the date of issuance. We will
also receive the proceeds, if any, relating to the exercise of the warrant
granted to H&QGF in connection with the equity line of credit agreement. We will
use all proceeds from the sale of preferred stock under the Equity Line
Agreement and from the exercise of the H&QGF warrant for general corporate
purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company, exclusive of Paragon Voice Systems, generated revenue of
$4,787,265 and net income of $248,977 for the year ended July 31, 2000 versus
revenue of $3,022,290 and net income of $321,740 for the year ended July 31,
1999. The revenue increase of $1,764,975 was due primarily to the increase in
volume/usage of the existing customers of Digital Record & Replay.
On a combined basis, the Company had revenues of $4,832,094 and a net loss
of $132,221 for the year ended July 31, 2000 versus revenues of $ 3,022,290 and
net income of $321,740 for the year ended July 31, 1999. The reduction in
profitability over the prior year was due primarily to the acquisition of
Paragon Voice Systems, the realignment of that subsidiary as a software
development organization and the increased depreciation and amortization from
$177,067 in 1999 to $428,372 in year 2000. The increase in depreciation is a
result of the Company's capital expenditures and capital leases of computer and
related equipment for the planned expansion into the voice hosting services
business.
Basic earnings per share were $(0.0) for the year ended July 31, 2000 as
compared to $0.01 per share for the year ended July 31, 1999.
The year-to-year increase in revenue of approximately $1,809,804, or 60%,
was a result of two items. Approximately $1,678,815, was an increase in revenues
of two existing customers of the Digital Record & Replay, which includes
transport revenues of $290,148. The remaining increase is a result of adding new
customers to Automated Survey services in the amount of $102,231 and
InvestorReach-TM- along with the inclusion of Paragon in the net amount of
$28,758, during the twelve months ended July 31, 2000 compared to the same
period in 1999.
IMPACT OF ACQUISITION OF PARAGON VOICE SYSTEMS ON REVENUE AND EARNINGS
Paragon Voice Systems generated $103,569 in revenue (of these revenues
$58,740 were sales to Interactive which have been eliminated in consolidation).
Since the date of acquisition, December 17, 1999, Paragon incurred a net loss of
$534,711 of which $303,003 is the Company's share. Amortization of Goodwill on
the acquisition of Paragon amounted to $78,195 for the period ended July 31,
2000.
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COST OF REVENUE AND MAJOR EXPENSES
FISCAL 2000 VERSUS 1999.
Cost of Revenue consists of the expenses associated with providing the
telecommunication services based on usage, recurring monthly charges for T-1's,
and local loop charges. These costs are a mix of both variable and fixed costs.
The cost of revenues for fiscal year 2000 was 8% of revenue (excluding pass-thru
revenue and expense of transport costs) compared to 7% of revenue for fiscal
year 1999. Transport revenues and costs were a temporary accommodation for a
large customer and have been discontinued. The increase of $437,054 for the
current fiscal year is made up of three parts: (1) increased costs as a result
of increased usage $97,096, (2) Paragon costs $49,810 and (3) transport costs
$290,148. Transport costs are pass-thru costs on which the company does not
generate any profit but passes its costs onto the customer without markup.
Salaries and wages increased 91% from fiscal 1999 to fiscal 2000 as a
result of adding eighteen full-time employees (a 100% increase in staff) during
fiscal year 2000 and an additional eight people associated with the acquisition
of Paragon Voice Systems. The increase in staff was necessary to provide the
Information Technology and Systems Department with the skills and experience
needed to meet and support the requirements of the customers which enabled the
Company's growth in revenue and the planned expansion into the voice hosting
services business.
Sales and marketing expenses increased during the fiscal year 2000 by 50%
from $266,626 in fiscal year 1999 to $401,050 in fiscal year 2000, as a result
of adding staff, the addition of Paragon Voice Systems and increased travel
expenditures to promote the growth and development of the business.
Depreciation and amortization increased 142% during the period as a result
of adding computer and related equipment and amortization of goodwill recorded
on the purchase of Paragon Voice Systems of $78,195. The increase in the
Company's property and equipment of approximately $915,000 was financed by way
of 70% capital leases secured by the equipment and personally guaranteed by the
Company's CEO and 30% capital expenditures made by the Company. Management is
not aware of any trends or events that are expected to have a material impact on
the Company's revenue or income from continuing operations, other than those
discussed under Item 7A. regarding the loss of AT&T, one of our largest record
and replay customers. 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 purchases will be financed through a
combination of cash on hand and capital leases on the equipment purchased.
Litigation contingency expense for the year ended July 31, 2000 of
$117,000 represents the settlement, over the previously provided for amounts, of
the Madison case for 100,000 shares of our common stock.
FISCAL 1999 VERSUS 1998.
For the fiscal year ended July 31, 1999, cost of revenue increased 125%
over 1998, due to increased usage.
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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
Department with the skills and experience needed to meet and support the
requirements of the customers, which enabled the Company's growth in revenue.
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
operating leases secured by the equipment and personally guaranteed by the
Company's CEO.
Income taxes have not been provided for in the accompanying financial
statements due to the net operating loss carry forwards generated in prior years
that are available for carryforward against current and future year(s) income.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased to $2,747,327 at July 31, 2000, due
primarily to an increase in cash from a stock private placement of $2,267,000
and an increase in prepaid deposits of $144,000 which more than offset a decline
in Accounts Receivable of $350,000 and an increase in Accounts Payable, Notes
Payable and current lease obligations of $352,000.
Based on the current cash flow projections, management expects that the
Company can continue operations for the current fiscal year without any
infusions of cash, but it will not achieve its planned level of expended ASR
services unless the financing committed in the November 21, 2000 H&QGF Agreement
discussed above or the financing from the stock private placement referenced
below are received as scheduled.
ACQUISITION OF CONTROLLING INTEREST IN PARAGON.
On December 17, 1999, the Company purchased 510,000 shares of common
stock of Paragon Voice Systems. The shares were purchased for $1,200,000,
$300,000 of which was paid at closing and the remainder of which was or will
be paid in installments $300,000 paid April 1, 2000, and July 1, 2000,
$100,000 paid October 1, 2000, and November 1, 2000, $50,000 paid December 1,
2000, and $50,000 to be paid January 1, 2001, respectively.
ASR technology essentially allows computers to understand the human voice
and respond to voice commands. Management expects this technology not only to
replace most current IVR applications over time but also to dramatically expand
the number of applications for which current IVR technology is not sufficient.
PRIVATE PLACEMENT.
BH Capital Investments, L.P. and Excalibur Limited Partnership are both
Canadian-based limited partnerships whose principal business is investing
primarily in publicly-traded U.S. companies by means of private placements
and/or Regulation S offerings. Excalibur Limited Partnership and BH Capital
Investments, L.P. have been engaged in this business since 1997 and 1999,
respectively. We were introduced to these investors by Next Millennium Capital
Holdings, LLC, one of the unrelated finders in the transaction, which we had
contacted regarding possible financing sources. We have had no prior dealings
with any of the investors or finders in the transaction.
Pursuant to an agreement dated June 12, 2000, as amended, BH Capital and
Excalibur agreed to purchase up to $4,500,000 of our common stock in three
separate closings of $2.5 million, $1 million and $1 million, respectively. The
first closing for the purchase of 905,797 shares at a price of $2.76
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per share was effective on June 12, 2000. The second and third closings,
which are scheduled to occur on or about December 31, 2000 and February 15,
2001, subject to satisfaction of all conditions thereto. Under their
agreement, these investors agreed to purchase shares of our common stock for
a price equal to the average closing bid price for our stock on the five
consecutive trading days preceding the respective closing date. We also
agreed to issue at each closing warrants for the purchase of shares equal to
15% of the purchase price of the shares divided by the exercise price of the
warrants which is 110% of the share purchase price at the respective closing.
At the first closing, these investors received warrants for the purchase of
135,870 shares at a price of $3.03 per share. In addition, at each closing we
are required to grant these investors repricing rights with respect to the
shares and anti-dilution rights with respect to the shares and the warrants.
We agreed to pay a cash fee equal to 7.5% of the investors' investment to
two unrelated finders at each of the three closings as well as issue them
warrants for the purchase of our common stock at the rate of 20,000 shares for
each $1 million of securities purchased by the investors.
We agreed to file a separate Registration Statement covering the shares
issued and issuable as part of each closing, including the shares underlying the
warrants, and the repricing rights, issued at each closing. We have the right to
repurchase the shares and repricing rights at a premium.
By mutual consent of the parties as a result of the H&QGF financing
discussed above, the terms of the second and third closings are currently being
renegotiated.
We realized net proceeds of approximately $2,266,328 from the $2,500,000
initial closing after the payment of the finder's compensation, legal and
accounting fees and/or other direct costs of the transactions. These amounts do
not include the additional $413,045 we may receive from the exercise of the
warrants we issued in the first closing or the additional amounts we may receive
upon the exercise of the warrants we will issue in the second and third
closings. We used these funds to purchase additional computer equipment,
including servers and supporting hardware and to initially fund additional
personnel necessary to expand our ASR hosting services. We have no minimum
budget for these expenditures and our expansion plans may be scaled and timed to
meet our available cash resources.
FUTURE EXPECTATIONS
For the fiscal year ending July 31, 2001, the Company is projecting
revenue increases, with a corresponding increase in net income from operations
(before tax). Achieving growth in both revenues and net operating income will be
contingent upon the Company securing high-margin contracts with new customers,
and there is no certainty that these objectives will be achieved.
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The Company's telecommunication costs should be reduced over the next
fiscal year, resulting from volume discounts.
As of July 31, 2000, Interactive has net operating loss carryforwards for
both federal and state income tax purposes. Federal and state net operating loss
carryforwards totaling approximately $1,495,000 and $942,000, respectively, as
of July 31, 2000, begin to expire in 2011. Paragon has federal and state net
operating loss carryforwards totaling approximately $841,000 as of July 31,
2000, which begin to expire in 2010 and 2000 respectively. Since Paragon does
not file a consolidated federal income tax return with Interactive, its
operation loss carryforwards are available to Paragon only and are limited. The
amount of Paragon's annual taxable income which can be offset by the net
operating loss carryforwards will be limited to approximately $127,000. 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.
Our goal is to become the leading ASR hosting service for complex ASR
applications. In order to achieve this goal, management believes we will need
additional infusions of cash to staff the organization and purchase computer and
related equipment in order to expand our systems capabilities. We have no
minimum budget for these expenditures and our expansion plans will be scaled and
timed to meet our available cash resources.
IMPACT OF INFLATION.
We do not believe inflation has had a significant effect on our
operations.
YEAR 2000 EFFECTS.
We incurred approximately $8,800 in Year 2000 remediation costs, which was
funded from working capital. We incurred no material adverse effects from Year
2000 related conditions.
BUSINESS
GENERAL
We currently offer specific IVR services, both directly to medium and
large corporations, as well as allowing our services to be bundled with our
partners' product offerings. We are not a solution-provider - that is, we do not
develop IVR solutions for a fee and then install them at the customer's site.
Rather, we host all applications and provide all of our services through our own
software and hardware systems located at our facilities. In some cases, in order
to reduce telecommunication costs, we install our equipment at a customer's
location, which we remotely monitor and manage and it remains our property. Our
systems consist of industry standard hardware and a combination of off-the-shelf
and proprietary software. The systems are modular and can be scaled to
accommodate very large applications.
We currently offer the following services:
INVESTORREACH-TM-
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InvestorREACH-TM- is an automated shareholder communication service which
allows customer public companies to provide a toll-free telephone number which
they advertise to their investors. Investors calling the number hear a
personalized greeting from the customer company, 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.
We also provide mail fulfillment services. We charge a monthly service
fee, a per-minute usage fee for voice, fax, and call transfer, and transactional
fees for mail fulfillment services.
The range of our fees for the services are:
<TABLE>
<S> <C>
Service Fee $300 to $500 per month
Per-minute IVR Usage $0.24 to $0.35 U.S. ($0.39 to $0.65 Canada)
Mail Fulfillment $2.35 - $2.50 fee plus a pass-through on first-class postage.
</TABLE>
We determine the exact fees charged for each contract through negotiations
with the customer. Factors we consider when determining fees include the
financial and segment strength of the customer, scope of service, volume of
usage and set-up costs.
We offer InvestorREACH-TM- on a month-to-month basis, with no set-up fee,
no long-term contract, and no termination fees.
We currently have 43 InvestorREACH-TM-customers in various industries. Our
customers include Wells Fargo, Nike, Yahoo!, Excite@Home, National Fuel Gas, and
the Tribune Corporation.
Revenues for the fiscal year ended July 31, 2000 derived from our largest
InvestorREACH-TM- customers were as follows:
<TABLE>
<CAPTION>
CUSTOMER FISCAL YEAR 2000 REVENUE
-------- ------------------------
<S> <C>
Wells Fargo $53,506
Yahoo $73,695
National Fuel Gas $12,184
Tribune Group $23,780
</TABLE>
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To experience the InvestorREACH-TM- service, call 1/888/474-9910.
DIGITAL RECORD AND REPLAY SERVICES
In November, 1997, we 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 is customer-branded such that endusers are not aware the
service has been outsourced to us. We invoice the teleconferencing company
semi-monthly, based on per-minute replay usage. We complement 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 customer.
We currently provide these services to one teleconferencing provider,
Global Crossing, as well as directly to other corporate customers for internal
use.
We provide services to Global Crossing (formerly Frontier ConferTech)
pursuant to a contract dated September 15, 1999, as extended on November 7,
2000. These services include digital recording and automated replay of the
customer's teleconference calls originating from its Westminster, Colorado and
Canadian operations. Under this contract, payments are due to us for services
provided at the stated rates within 45 days of the date billed. This contract
may be terminated at any time upon notice by either party.
AUTOMATED SURVEYS
We have 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. We have registered the service mark TeleSurvey-SM- in
conjunction with this service.
We have initial sales and marketing efforts with respect to this offering
are focused on the prepaid phone card market in the United States. We have
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 our
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 customer's prepaid telecommunication platform to dial their outgoing
telephone call.
Upon securing reselling relationships with these partners, we structured a
Channel Partner Program to support the sales and marketing efforts of our
partners with a view to increasing revenue from this sector.
MARKETREACH-TM- - ENHANCED SERVICES
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We have 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
We have created applications, and are continuing to pursue additional
opportunities utilizing this functionality, including Third Party Verification
(TPV) and contests/sweepstakes applications.
SALES AND MARKETING
We have a sales force of five individuals targeting customers in specific
industry sectors (e.g., telecommunications, speech technology voice portals, and
managed computer services). Sales strategies include telemarketing, face-to-face
meetings, presentations, and providing free demonstrations.
In speech technology and managed services, the purpose is to leverage the
existing sales forces of the partners in selling our services bundled with the
partner's offering.
ACQUISITION OF PARAGON VOICE SYSTEMS
On December 17, 1999, we purchased 510,000 shares of common stock of
Paragon Voice Systems, a leading value-added reseller and developer of computer
telephony solutions in the emerging technology field of ASR. Paragon resells
speech recognition software and application building blocks for the technology
as a part of its integrated solutions. Upon consummation of the transaction,
Paragon had a total of 900,000 shares outstanding of which we owned 56.67%.
We 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. Our relationship with
Paragon will allow us to provide additional development, integration and support
capabilities for ASR applications. Our acquisition of Paragon helps position us
to become one of the premiere hosting providers for complex ASR applications.
SUBSIDIARIES
In addition to acquiring our Paragon subsidiary as discussed above, in
August 2000, we formed Voconex, Inc. (formerly VoiceVault, Inc.), a California
corporation, as our wholly owned subsidiary. We are considering operating one or
more of our service divisions through Voconex, Inc. in the future.
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COMPETITION
The Company is aware of numerous companies in the United States and Canada
who have IVR capability. In most instances, these competitors use IVR
functionality 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 bureau services similar to the business strategy
of the Company. In general, the Company finds itself in competition with large
call center competitors that 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. Three customers accounted for 83% and 78% of the Company's
revenue for the years ended July 31, 2000 and 1999, respectively. All of the
Company's contracts are terminable upon notice by either party. Effective July
12, 2000, AT&T, one of our largest customers, stopped using our record and
replay services.
The Company is anticipating that the majority of its growth in the future
will come from customers other than those referenced above; hence, the Company
expects ultimately to have a lesser dependence on these customers.
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-TM-
- TeleSurvey
- VoiceVault
- The Voice of Experience
GOVERNMENTAL REGULATION
We are 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
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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
products and services. We do not provide customer information to third parties
and, therefore, do not anticipate any current or proposed legislation relating
to online privacy to directly affect our activities to a material extent.
We are not certain how our 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 our 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 our business depends. Future government
regulation may have an adverse affect on our cost of doing business.
PROPERTIES
The Company's principal executive offices are located at 12636 High Bluff
Dr., Suite 200, San Diego, California, 92130 and consist of approximately 13636
square feet. This facility is leased on a long-term lease (see leases). The
company also leases 1,500 square feet of computer facility space at 10180
Telesis Court, San Diego, California. Our telephone number is 858-523-4000.
Interactive Telesis' Internet website is located at www.interactivetelesis.com.
In addition, the Company leases approximately 5063 square feet of office
space at its former executive offices at 535 Encinitas Blvd., Suite 116,
Encinitas, California 92024. This lease expires in August 2001. The Company
subleases these facilities to Cardio-Now (see leases) on a sub-lease which
expires in August 2001.
The executive offices for Paragon Voice Systems are located at 12625 High
Bluff Dr., Suite 302 and Suite 314, San Diego, California 92130. The lease on
this facility will expire in 2001. Paragon will continue to rent the facilities
on a month-to-month basis. Paragon's telephone number is 858-259-0071. Paragon's
Internet website is located at www.paravoice.com.
EMPLOYEES
We currently have fifty full-time employees, including eight full-time
employees of Paragon Voice Systems. Our success will depend in large part on our
ability to attract and retain skilled and
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experienced employees. We believe that our relations with our employees is good.
We do not currently have any key-man life insurance on any of our employees,
directors, or executive officers.
We have no written or oral contracts for employment with any of our
employees, directors, or executive officers.
MANAGEMENT
The following table sets forth information about our directors and
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald E. Cameron 48 President and CEO; Director since 1993
William R. Adams 51 Chief Financial Officer/Secretary
Douglas Luke 35 Vice President of Technology
Kenneth M. Gotthelf 38 Vice President of Sales and Strategic Alliance
Larry Ohl 43 Vice President of Engineering & Operations
Willard Lee McVey 53 Director appointed October 27, 2000
Kenneth Ravazzolo(1) 45 Director appointed October 27, 2000
Albert L. Staerkel(2) 47 Director appointed November 15, 2000
Robert Wilson(1)(2) 56 Director since 1994
</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. Mr. Cameron attended the University of British
Columbia where he received a BA in Economics and an LLB.
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). Mr. Adams received a BA from Chapman College and an MBA from
California State University at Fullerton.
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Douglas T. Luke. Mr. Luke joined the Company in March 1999 and is
currently Vice President of Technology. 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).
Kenneth M. Gotthelf. Mr. Gotthelf joined the Company in June 2000 and is
currently Vice President Sales and Strategic Alliance. From 1995 until he joined
the Company, Mr. Gotthelf was employed by Stik-ees, a manufacturing and
marketing company headquartered in San Diego, CA, where he served as Vice
President of Sales and Marketing from 1995 to 1997 and President and CEO from
1998 until his departure. Mr. Gotthelf previously served as Vice President of
Operations of ITC Worldwide Communications, an enhanced facsimile service bureau
from 1992 until he jointed Stik-ees.
Larry Ohl. Mr. Ohl joined the Company in September 2000 and is currently
Vice President of Engineering and Operations. From 1998 until joining the
Company, Mr. Ohl was Technical Infrastructure Manager for Electronic Data
Systems System Management Center in San Jose, California. Mr. Ohl previously
served as Corporate Operating Systems Manager for AT&T Multiquest from 1995 to
1998, where he managed the Mainframes, Unix Client/Server and PC Network
environments. Prior to joining AT&T, Mr. Ohl served as Corporate Operating
Systems Director for IntegreTel, Inc., where he was responsible for managing the
IBM Mainframes, Unix Servers, Novell Servers and LAN/WAN networks.
Willard Lee McVey. Mr. McVey is currently a consultant specializing in
Electrical Engineering providing consulting services to power utilities and
large industrial firms. Prior to consulting Mr. McVey was an Electrical Engineer
(1998-2000) and the Electrical Utility Systems Manager (1990-1997) at Lawrence
Livermore National Laboratory. Mr. McVey received a BSEE from California State
University at Fresno and an MSEE from the University of Santa Clara.
Kenneth G. Ravazzolo. Since 1991 Mr. Ravazzolo has been the President and
CEO of Paragon Voice Systems, a subsidiary of Interactive Telesis Inc. Mr.
Ravazzolo was Marketing Manager at Simpact Associates from 1990-1991. Prior to
joining Simpact Associates, Mr. Ravazzolo was Vice President, Industry Marketing
at Data Acquisition from 1974-1990.
Albert L. Staerkel. Mr. Staerkel is Vice President of Sales and Marketing
and a director of SL3D, Inc., a Boulder, Colorado-based technology startup
company. Prior to joining SL3D, Inc., in 2000, Mr. Staerkel had been a financial
advisor and registered representative for Morgan Stanley Dean Witter since 1998
and a financial consultant and registered representative with Merrill Lynch
Fenner and Smith from 1991 until 1998. Mr. Staerkel holds a B.S. degree in
Engineering from the United States Military Academy.
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 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. Mr. Wilson received a BS from the University
of Alberta and an MBA from the University of Western Ontario.
-23-
<PAGE>
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 Mr. Wilson and Mr. Ravazzolo, and a Compensation Committee,
consisting of Mr. Wilson and Mr. Staerkel. 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.
Effective October 13, 2000, the Board has accepted the resignation of Marc
Goyette. Mr. Goyette, who is President of ROI International, an executive
recruiting firm, cited his need to spend more time at ROI International and
other business commitments as a reason for his resignation.
BOARD OF DIRECTORS MEETINGS
The Board of Directors had four meetings during the fiscal year ended July
31, 2000, which were attended by all Directors.
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, 2000, 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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION AWARDS PAYOUTS COMPENSATION
SECURITIES RESTRICTED
NAME AND UNDER SHARES OR
PRINCIPAL FINANCIAL SALARY BONUS OTHER ANNUAL OPTIONS RESTRICTED
POSITION YEAR-END ($U.S.) ($) COMPENSATION GRANTED(#) SHARE UNITS
<S> <C> <C> <C> <C> <C> <C>
Donald Cameron 1998 $108,300 --- --- --- ---
President/CEO
Donald Cameron 1999 $120,000 $36,250* --- --- ---
President/CEO
Donald Cameron 2000 $150,000 15,697 --- ---
President/CEO
David J. Webb 2000 $120,000
Chief Operating
Officer
</TABLE>
-24-
<PAGE>
* 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.
------------------------
The Company's executive bonuses are determined by the Compensation
Committee of the Board of Directors. Annual bonuses are determined by the
Committee based on the executive's performance against the annual objectives and
goals of the Company set by the Committee. A member of the Committee recuses
himself from voting on his own bonus compensation amounts.
THE 1996 STOCK PLAN
The Board of Directors adopted the Interactive Telesis Inc. 1996 Stock
Plan (the "1996 Plan") on October 3, 1996 and by our stockholders on December
20, 1996. The 1996 Plan allows our Board of Directors, in its discretion, to
award key full-time employees, non-employee directors, consultants or advisors,
as an additional incentive to promote the success of our Company's business,
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("ISOs"), non-qualified stock options ("NSOs"),
restricted stock, stock appreciation rights and/or phantom stocks.
To date, the Board has issued only options under the 1996 Plan. As of
November 30, 2000, options for 2,906,250 shares were outstanding under the 1996
Plan having a weighted average exercise price of $0.65 per share. Through
November 30, 2000, 112,750 shares of common stock had been issued upon exercise
of options granted under the 1996 Plan. At November 30, 2000, approximately
fifty-two persons were eligible to receive grants under the 1996 Plan.
On October 26, 2000, the Board approved an amendment to the 1996 Plan
increasing the number of shares issuable under the Plan by 1,500,000 shares,
from 3,335,000 shares to 4,835,000 shares. This amendment is subject to approval
by our shareholders at their annual meeting noticed for January 26, 2001. If the
amendment is not approved by our shareholders, only 101,000 shares remain
available for issuance under the 1996 Plan as ISOs. NSOs or other grants and all
future grants from the increase of 1,500,000 made by this amendment may be made
by the Board but will not qualify as incentive stock options.
The 1996 Plan is administered by the Board. Subject to the restrictions of
the 1996 Plan, the Board determines who is granted options, the terms of options
granted, including exercise price, the number of shares subject to the option
and the option's exercisability. The exercise price of options granted under the
1996 Plan is determined on the date of grant, and in the case of ISOs must be at
least 100% of the fair market value per share at the time of grant. The exercise
price of any option granted to an optionee who owns stock possessing more than
10% of the voting power of our outstanding capital stock must equal at least
110% of the fair market value of the common stock on the date of grant. The
aggregate fair market value of common stock (determined as of the date of the
option grant) for which ISOs may for the first time become exercisable by any
individual in any calendar year may not exceed $100,000. Payment of the exercise
price may be made by delivery of cash or a check to the order of the Company, or
by any other means determined by the Board.
-25-
<PAGE>
Options granted to employees under the 1996 Plan generally become
exercisable in increments, based on the optionee's continued employment with us,
over a period of up to four years at the rate of 25% per year. The form of
option agreement generally provides that options granted under the 1996 Plan,
whether ISOs or NSOs, expire 10 years from the date of grant. ISOs granted
pursuant to the 1996 Plan are not transferable by the optionee, other than by
will or the laws of descent and distribution, and are exercisable during the
optionee's lifetime only by the optionee. The Board may amend the 1996 Plan at
any time or from time to time or may terminate the 1996 Plan without the
approval of the stockholders, provided that stockholder approval is required for
any amendment to the 1996 Plan requiring stockholder approval under applicable
law as in effect at the time. However, no action by the Board or our
shareholders may alter or impair any option previously granted under the 1996
Plan. The Board may accelerate the exercisability of any option or waive any
condition or restriction pertaining to such option at any time. The 1996 Plan
will terminate in August 2006, unless terminated sooner by the Board.
An optionee who is granted an ISO will generally not recognize taxable
income either at the time the option is granted or upon its exercise, although
the exercise will increase the optionee's alternative minimum taxable income by
an amount equal to the difference, if any, between the fair market value of the
shares at the time of exercise and the option's exercise price, and therefore
may subject the optionee to the alternative minimum tax. Upon the sale or
exchange of the shares more than two years after grant of the option and more
than one year after exercising the option, any gain or loss will be treated as
long-term capital gain or loss. If these holding periods are not satisfied, the
optionee will recognize ordinary income at the time of sale or exchange equal to
the difference between the exercise price and the lower of (i) the fair market
value of the shares at the date of the option's exercise or (ii) the sale price
of the shares. We will be entitled to a deduction in the same amount as the
ordinary income recognized by the optionee. Any gain or loss recognized on such
a premature disposition of the shares in excess of the amount treated as
ordinary income will be characterized as long-term or short- term capital gain
or loss, depending on the optionee's holding period with respect to such shares.
All other options that do not qualify as an ISO are an NSO. Generally, an
optionee will not recognize any taxable income at the time he or she is granted
an NSO. Upon the exercise of an NSO, however, the optionee will generally
recognize taxable ordinary income measured as the excess of the
then fair market value of the shares acquired over the exercise price of the
option. Any taxable income recognized in connection with an option exercise by
an optionee who is also one of our employees will be subject to tax withholding
by us. We will be entitled to a tax deduction in the same amount as the ordinary
income recognized by the optionee with respect to shares acquired upon exercise
of a nonstatutory option. Upon resale of such shares by the optionee, any
difference between the sales price received and the fair market value for the
shares on the date of exercise of the option will be treated as long-term or
short-term capital gain or loss, depending on the optionee's holding period with
respect to such shares.
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.
- Stock Option
-26-
<PAGE>
We 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 an 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 director and former director were granted options
to purchase securities as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
NAME SHARES PRICE
<S> <C> <C>
Marc Goyette 100,000 40 cents
Marc Goyette* 25,000 35 cents
Robert Wilson 100,000 40 cents
Robert Wilson* 25,000 35 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, except Mr. Goyette's options expire
on April 30, 2001.
--------------------
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.
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 November 27, 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>
NUMBER OF SHARES OWNED PERCENTAGE OWNED
NAME OR FULLY VESTED OR FULLY VESTED
---- ---------------------- ----------------
<S> <C> <C>
William R. Adams(1)(5) 37,500 0.11%
Donald E. Cameron(1)(2) 1,479,544 4.45%
Kenneth M. Gotthelf(1) N/A N/A
Marc Goyette(1)(3) 169,643 0.53%
Douglas T. Luke(1) 27,350 0.08%
Willard Lee McVey(1) 1,038,000 3.37%
Larry W. Ohl(1) N/A N/A
Kenneth Ravazzolo(1) N/A N/A
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES OWNED PERCENTAGE OWNED
NAME OR FULLY VESTED OR FULLY VESTED
---- ---------------------- ----------------
<S> <C> <C>
Albert Staerkel(1) 264,150 0.84%
David Webb(1)(4) 250,000 0.78%
Robert Wilson(1)(3) 62,500 0.19%
All directors and officers as a 3,328,687 9.52%
group (eleven)
</TABLE>
(1) Address is 12636 High Bluff Drive, Suite 200, San Diego, California 92130.
(2) Includes fully vested 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
(37,500 vested shares each), and 25,000 shares each of Common Stock at an
exercise price of 35 cents per share (all shares granted under this option
fully vested). Effective October 13, 2000, the Board has accepted the
resignation of Marc Goyette. In connection with Mr. Goyette's departure,
the Board extended the exercise period for his options to April 30, 2001.
(4) Includes fully vested 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. Effective
October 31, 2000, the Board accepted Mr. Webb's resignation as an officer.
Mr. Webb continues to serve as a technical consultant to the Company.
(5) 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 (2,000
vested) and at 35 cents per share for 71,000 shares (35,500 vested).
-------------------
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED STOCK
THE COMPANY HAS ONLY ONE CLASS OF STOCK. As of the date of this
prospectus, our authorized capital stock consists of 50 million shares of Common
Stock, $0.001 par value, of which, as of November 27, 2000, 31,874,460 shares
were issued and outstanding and held of record by 747 stockholders. As of
November 27, 2000, we had approximately 8,300 beneficial owners of our Common
Stock. Subject to approval by our shareholders at our annual shareholders
meeting noticed for January 26, 2001, our Board has approved an amendment to our
charter authorizing an aggregate of 125 million shares, 100 million of which
will be $0.001 par value common stock and 25 million of which will be preferred
stock.
-28-
<PAGE>
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 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.
PREFERRED STOCK
If the proposed amendment to our charter is approved by our shareholders,
we will have the authority to issue up to 25 million shares of preferred stock,
$0.001 par value per share, in one or more series as determined by the Board of
Directors of the Company. The Board of Directors of the Company may, without
further action by the stockholders of the Company, issue one or more series of
preferred stock and fix the rights and preferences of such shares, including the
dividend rights, dividend rates, conversion rights, exchange rights, voting
rights, terms of redemption, redemption price or prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series. The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of preferred stock issued by the
Company in the future. In addition, the issuance of preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
The Company will, upon the effective date of the amendment, designate 10
million shares of Series A convertible preferred stock, for issuance to H&QGF
under their November 21, 2000 agreements.
The following is a summary of the terms, rights and privileges of the
Series A preferred stock.
RANK. Our Series A preferred stock ranks prior to the common stock as to
dividends and distributions of assets.
-29-
<PAGE>
DIVIDENDS. Holders of Series A preferred stock are entitled to receive a
7.5% annual dividend, compounded and paid monthly in shares of Series A
preferred stock valued at 83% of the closing price of our common stock on the
dividend payment date.
CONVERSION RATE. The conversion price for the Series A preferred stock is
initially the purchase price paid for that stock (so that these series of
preferred stock initially converts into common stock on a 1-to-1 basis), as may
be adjusted from time to time to account for any stock splits, stock dividends,
recapitalizations, mergers, asset sales or similar events.
LIQUIDATION. Upon a change in control, liquidation, dissolution or winding
up of our affairs, each holder of shares of any series of our preferred stock
will be entitled, on an equal basis with all other holders of our preferred
stock, to a liquidation preference prior in right to any holders of common
stock. The liquidation preference equals the amount paid for the preferred
stock.
REDEMPTION. Holders of the Series A preferred stock do not have redemption
rights.
VOTING. Holders of shares of any series of our preferred stock are
entitled to vote on all matters submitted to stockholders for a vote, voting
together with the holders of our common stock as a single class. Holders of
Series A preferred stock are entitled to one vote per share of preferred stock
held. Holders of Series A preferred stock are entitled to one vote for each
share of common stock into which the preferred stock they hold is convertible.
Each series of preferred stock is entitled to vote as a separate class on
the creation of any new series of preferred stock or the issuance of additional
shares of capital stock ranking senior or equal to that series of preferred
stock.
WARRANTS
As of the date of this prospectus, we had issued warrants to purchase an
aggregate of 988,008 shares of common stock (including 394,737 warrant shares
registered under this prospectus) at a weighted average exercise price of $1.36
per share, all of which are currently exercisable. These warrants expire at
various times between June 2003 and November 2003.
OPTIONS
See "Management -- Stock Plans" for a discussion of our outstanding
options.
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
Our common stock has been traded on the OTC Bulletin Board Market under
the symbol "TSIS" since October 1996. The following table shows the high and low
closing sales prices per share of our common stock as reported for the OTC
Bulletin Board Market for each quarter since the calendar quarter ending October
31, 1998.
-30-
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW CLOSE
<S> <C> <C> <C>
FISCAL YEAR 2001
First Quarter (8/1/2000 - 10/31/2000) $2.5938 $0.9375 $1.25
FISCAL YEAR 2000
First Quarter (8/1/99 - 10/31/99) 25/64 5/16 5/16
Second Quarter (11/1/99 - 1/31/00) 1 19/32 5/16 2 1/2
Third Quarter (2/1/00 - 4/30/00) 5 4/64 1 1/2 2 62/64
Fourth Quarter (5/1/00 - 7/31/00) 3 2 3/16 2 1/2
FISCAL YEAR 1999
First Quarter (8/1/98 - 10/31/98) 33/64 1/4 25/64
Second Quarter (11/1/98 - 1/31/99) 27/64 1/4 17/64
Third Quarter 2/1/99 - 4/30/99) 33/64 17/64 13/32
Fourth Quarter (5/1/99 - 7/31/99) 7/16 23/64 3/8
</TABLE>
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not represent actual transactions.
We have never declared or paid any dividends on our common stock, and we
do not expect to declare or pay any cash dividends in the foreseeable future.
The payment of dividends, if any, in the future is within the discretion of our
board of directors and will depend upon our earnings, if any, our capital
requirements and financial condition and other relevant factors.
ANTI-DILUTION RIGHTS
We may be required to issue additional shares of common stock to satisfy
anti-dilution adjustments to the warrants and preferred stock issued to H&QGF
pursuant to their convertible note, equity line of credit and warrant issued
pursuant to their November 21, 2000 agreements with us, described above.
TRANSFER AGENT AND WARRANT AGENT
The Registrar and transfer agent for our common stock and warrant agent
for the public warrants is Pacific Corporate Trust, located in Vancouver, BC,
Canada.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that such
a stockholder became an interested stockholder, unless (i) the corporation has
elected in its original certificate of incorporation not to be governed by
Section 203; (ii) the business combination was
-31-
<PAGE>
approved by the Board of Directors of the corporation before the other party to
the business combination became an interested stockholder, (iii) upon
consummation of the transaction that made it an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by directors who are also officers or held in employee benefit plans in which
the employees do not have a confidential right to tender or vote stock held by
the plan); or (iv) the business combination was approved by the Board of
Directors of the corporation and ratified by two-thirds of the voting stock
which the interested stockholder did not own. The three-year prohibition also
does not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of the majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets or
stock of the corporation or its majority-owned subsidiaries and transactions
which increase an interested stockholder's percentage ownership of stock. The
term "interested stockholder" is defined generally as a stockholder who,
together with affiliates and associates, owns (or, within three years prior, did
own) 15% or more of a Delaware corporation's voting stock. Section 203 could
prohibit or delay a merger, takeover or other change in control of the Company
and therefore could discourage attempts to acquire the Company.
SELLING STOCKHOLDER
The following table sets forth certain information as of the date of this
prospectus, relating to the selling stockholder. The selling stockholder has
never held any position or office with us or had any material relationship with
us. The shares beneficially owned do not include shares issuable under repricing
rights or anti-dilution provisions.
<TABLE>
<CAPTION>
SHARES TO BE SHARES
SHARES BENEFICIALLY SOLD BENEFICIALLY
OWNED PRIOR TO IN THE OWNED AFTER THE
OFFERING OFFERING OFFERING(4)
-------- -------- -----------
NUMBER PERCENT
------ -------
<S> <C> <C> <C> <C>
Hambrecht & Quist Guaranty Finance, LLC 9,753,445(1) 23.43%(2) 9,753,445(3) None
</TABLE>
(1) Consists of shares of common stock issuable upon conversion of Series A
preferred stock issued to H&QGF in connection with the equity line of
credit, the conversion of their convertible note and the exercise of their
warrant.
(2) If all of the shares offered hereby were purchased and held by H&QGF, it
would hold 23.43% of our outstanding common stock. However, under the
equity line of credit agreement, H&QGF is not obligated to purchase Series
A preferred stock if such purchase would result in H&QGF beneficially
owning more than 9.9% of the Company's outstanding common stock.
(3) Assumes that all shares acquired pursuant to the Equity Line of Credit
Agreement, the convertible note, and the warrant issued to H&QGF in
connection with the November 21, 2000 agreements are sold pursuant to this
prospectus. The actual number of shares to be issued to H&QGF in
connection with the
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<PAGE>
Equity Line of Credit will depend on the market price of our common stock
each time we draw down on the equity credit line.
(4) Assumes the sale of all shares offered hereby.
Except as set forth above, no selling shareholder has had any material
relationship with Interactive Telesis Inc. during the last three years.
-------------------
LEGAL PROCEEDINGS
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 $2.0 million, amended from
the initial claim of $400,000 filed in fiscal 1999. At the present stage of
litigation, the probability that the Company will be required to pay damages
cannot be determined. Accordingly, no contingent liability has been provided for
in the accompanying consolidated financial statements.
Beginning in approximately March 1997 through August 1998, we authorized
the repurchase of up to $2 million of our common stock through open market
transactions for the intended purpose of reducing our outstanding stock. As
described in Note 8 to our financial statements for the years ended July 31,
1999 and 1998, 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.
PLAN OF DISTRIBUTION
This prospectus covers the proposed resale of up to an estimated
9,753,445 shares of our common stock by the selling stockholder. No shares
will be sold by us. The selling stockholder may offer the shares at various
times in one or more of the following transactions:
- on the OTC Bulletin Board;
- in transactions other than market transactions;
- if otherwise permitted, in connection with short sales of our shares;
- by pledge to secure debts or other obligations;
- if otherwise permitted, in connection with the writing of non-traded
and exchange-traded call options, in hedge transactions and in
settlement of other transactions in standardized or over-the-counter
options; or
- in a combination of any of the above.
The selling stockholder may sell shares at market prices then prevailing,
at prices related to prevailing market prices, at negotiated prices or at fixed
prices.
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<PAGE>
The selling stockholder may use broker-dealers to sell shares. If this
happens, broker-dealers will either receive discounts or commissions from the
selling stockholder, or they will receive commissions from purchasers of shares
for whom they have acted as agents. Selling stockholder may be deemed to be an
underwriter with respect to the shares is sells.
During such time as they may be engaged in a distribution of the shares
the selling stockholder is required to comply with Regulation M promulgated
under the Securities Exchange Act of 1934. With certain exceptions, Regulation M
precludes the selling stockholder, any affiliated purchasers and any
broker-dealer or other person who participates in such distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase any
security which is the subject of the distribution until the entire distribution
is complete. Regulation M also prohibits any bids or purchases made in order to
stabilize the price of a security in connection with the distribution of that
security. All of the foregoing may affect the marketability of the common stock.
It is possible that a significant number of shares may be sold and,
accordingly, such sales or the possibility thereof may have a depressive effect
on the market price of the common stock. The selling stockholder, H&QGF, is an
underwriter with respect to any other shares it sells.
LEGAL MATTERS
Rushall & McGeever, APLC, Carlsbad, California will pass upon the validity
of the common stock.
EXPERTS
Our financial statements as of July 31, 2000 and 1999, and for the years
then ended included in this prospectus have been included in reliance upon the
report of Pannell Kerr Forster, Certified Public Accounts, A Professional
Corporation, given upon the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We are subject to the reporting requirements of the Securities Exchange
Act of 1934 and, in accordance therewith, file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies
of such material can be obtained from the Public Reference Section of the SEC
upon payment of certain fees prescribed by the SEC. The SEC's Web site contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of that site is
http://www.sec.gov. Our common stock is traded on the OTC Bulletin Board market
and our reports, proxy statements and other information may also be inspected at
the offices of Nasdaq Operations, 1735 K Street, N.W.,Washington, D.C. 20006. We
have filed a registration statement on Form SB-2 with the SEC under the
Securities Act with respect to the securities offered in this prospectus. This
prospectus, which is filed as part of that registration statement, does not
contain all of the information set forth in the registration statement, certain
portions
-34-
<PAGE>
of which have been omitted in accordance with the SEC's rules and regulations.
Statements made in this prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete and are qualified in
their entirety by reference to each such contract, agreement or other document
which is filed as an exhibit to the registration statement. The registration
statement may be inspected without charge at the public reference facilities
maintained by the SEC, and copies of such materials can be obtained from the
Public Reference Section of the SEC at prescribed rates.
-35-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Audited consolidated financial statements of Interactive Telesis Inc. and subsidiary
as of July 31, 2000 and 1999...............................................................F-1--F-17
Unaudited consolidated financial statements of Interactive Telesis Inc. and subsidiary
for three months ended October 31, 2000....................................................F-18--F-21
</TABLE>
-36-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Interactive Telesis, Inc. and Subsidiary
Encinitas, California
We have audited the consolidated balance sheets of Interactive Telesis, Inc.
and Subsidiary (the "Company") as of July 31, 2000 and 1999, and the
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Interactive Telesis, Inc. and Subsidiary as of July 31, 2000 and 1999, and
the results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
San Diego, California PANNELL KERR FORSTER
September 19, 2000 Certified Public Accountants
A Professional Corporation
F - 1
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
July 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,925,051 $ 490,152
Accounts receivable 332,808 682,815
Inventory 5,635 --
Deposits, prepaid expenses and other current assets 152,198 7,730
------------ -----------
Total current assets 3,415,692 1,180,697
------------ -----------
Property and equipment, net 1,285,780 762,508
------------ -----------
Intangible asset, net 547,395 --
------------ -----------
Total assets $ 5,248,867 $ 1,943,205
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 250,518 $ 111,469
Note payable to related party 31,000 --
Deferred revenue 8,354 --
Current portion of note payable 14,039 --
Current portion of capital lease obligations 364,454 205,044
------------ -----------
Total current liabilities 668,365 316,513
------------ -----------
Long-term obligations:
Note payable, net of current portion 145,961 --
Capital lease obligations, net of current portion 404,920 292,229
------------ -----------
Total long-term obligations 550,881 292,229
------------ -----------
Total liabilities 1,219,246 608,742
------------ -----------
Commitments and contingencies (Note 7)
Minority interest in net assets of subsidiary 207,547 --
------------ -----------
Shareholders' equity:
Common stock, $.001 par value, 50,000,000 shares
authorized; 31,764,486 and 30,599,888 shares issued
and outstanding at July 31, 2000 and 1999, respectively 31,765 30,600
Additional paid in capital 12,258,358 9,639,691
Accumulated deficit (8,468,049) (8,335,828)
------------ -----------
Total shareholders' equity 3,822,074 1,334,463
------------ -----------
Total liabilities and shareholders' equity $ 5,248,867 $ 1,943,205
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 2
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended July 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Revenues $ 4,832,094 $ 3,022,290
Costs and expenses:
Cost of revenues 658,560 221,506
Salaries and wages 2,261,217 1,184,523
General and administrative 1,275,418 742,801
Sales and marketing 401,050 266,626
Depreciation and amortization 428,372 177,067
------------ -----------
Total costs and expenses 5,024,617 2,592,523
------------ -----------
Operating (loss) income (192,523) 429,767
Other expenses:
Interest expense 54,406 28,027
Litigation settlement costs 117,000 80,000
------------ -----------
Total other expenses 171,406 108,027
------------ -----------
(Loss) income before income taxes and minority
interest in subsidiary (363,929) 321,740
Minority interest in net loss of subsidiary 231,708 --
------------ -----------
(Loss) income before income taxes (132,221) 321,740
Provision for income taxes -- --
------------ -----------
Net (loss) income $ (132,221) $ 321,740
============ ===========
Basic net income (loss) per share $ 0.00 $ 0.01
============ ===========
Shares used to compute basic net income (loss) per share 30,885,571 30,365,097
============ ===========
Diluted net income (loss) per share $ 0.00 $ 0.01
============ ===========
Shares used to compute diluted net income (loss) per share 30,885,571 31,160,123
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended July 31, 2000 and 1999
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------- -------------------------
Shares Amount Shares Amount
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Balance, July 31, 1998 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
Issuances 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 -- --
Issue of common stock for cash,
net of issuance costs 905,798 906 -- --
Issue of common stock for
litigation settlement 100,000 100 -- --
Issuance of stock common stock and
options to directors, consultants,
employees and former employees 158,800 159 -- --
Net loss -- -- -- --
---------- -------- --------- ---------
Balance, July 31, 2000 31,764,486 $ 31,765 -- $ --
========== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid In Accumulated Shareholders'
Capital Deficit Equity (Deficit)
------------ ----------- ----------------
<S> <C> <C> <C>
Balance, July 31, 1998 $ 10,048,457 $(8,657,568) $ 998,581
Reissue of treasury stock (630,847) -- (208,941)
Retirement of treasury stock -- -- --
Issuances 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
Issue of common stock for cash,
net of issuance costs 2,266,328 -- 2,267,234
Issue of common stock for
litigation settlement 196,900 -- 197,000
Issuance of stock common stock and
options to directors, consultants,
employees and former employees 155,439 -- 155,598
Net loss -- (132,221) (132,221)
------------ ----------- -----------
Balance, July 31, 2000 $ 12,258,358 $(8,468,049) $ 3,822,074
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended July 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (132,221) $ 321,740
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Bad debts 4,938 11,573
Depreciation and amortization 428,372 177,067
Interest on capital leases and long-term debt 53,216 28,027
Minority interest (231,708) --
Amount due from director forgiven -- 21,000
Issuance of common stock and stock options
to directors and employees -- 7,667
Issuance of common stock and stock options
to consultants 38,566 --
Litigation settlement/contingency 117,000 80,000
Changes in operating assets and liabilities, net of business acquired:
Decrease (increase) in accounts receivable 348,147 (262,966)
Increase in inventory (5,635) --
(Increase) decrease in prepaid expenses and deposits (144,468) 475
Increase (decrease) in accounts payable and
accrued liabilities 51,390 (18,146)
Increase (decrease) in deferred revenue 8,354 (12,500)
----------- -----------
Net cash flows provided by operating activities 535,951 353,937
----------- -----------
Cash flows from investing activities:
Minority interest 439,255 --
Business acquisition, net of cash acquired (418,043) --
Purchase of property and equipment (288,623) (91,240)
----------- -----------
Net cash flows used in investing activities (267,411) (91,240)
----------- -----------
Cash flows from financing activities:
Borrowings on notes payable 160,000 --
Repayments on borrowings from shareholder (45,000) --
Proceeds on issuance of common stock 2,384,266 215,416
Repayments on capital leases (332,907) (185,110)
Purchase of treasury stock and related costs -- (208,941)
----------- -----------
Net cash flows (used in) provided by financing activities 2,166,359 (178,635)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,434,899 84,062
Cash and cash equivalents at beginning of year 490,152 406,090
----------- -----------
Cash and cash equivalents at end of year $ 2,925,051 $ 490,152
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F - 5
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the years ended July 31, 2000 and 1999
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $ 54,406 $ 28,027
======== ========
Income taxes $ - $ -
======== ========
Supplemental disclosure of noncash investing and financing activities:
Treasury stock transactions $ - $209,787
======== ========
Purchase of property and equipment on capital leases $551,792 $554,565
======== ========
Issuance of common shares for litigation settlement $197,000 $ -
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F - 6
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Interactive Telesis, Inc. ("Interactive") 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 as well as voice
hosting and integration services to customers primarily located in the
United States.
Consolidation
On December 17, 1999, Interactive acquired majority ownership of Paragon
Voice Systems ("Paragon"), collectively known as the "Company." Paragon
is in the business of developing and installing computer telephony
solutions incorporating automated speech recognition systems. The
Company has used the purchase method to record this transaction at
historical cost. The purchase price of the subsidiary was $1.2 million
which allowed Interactive to control 56.67%. All significant
intercompany accounts and transactions have been eliminated at
consolidation. See Note 12 for pro-forma financial information.
Financial Instruments
The carrying amounts reported in the balance sheets for cash, accounts
receivable, prepaid expenses and deposits, 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 and notes
payable approximates the carrying amounts 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 to five years.
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.
F - 7
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Revenues are generated by the Company's interactive voice response
services. Revenue is recognized when these services are provided by the
Company.
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.
Three customers accounted for 83% and 78% of the Company's revenue for
the years ended July 31, 2000 and 1999, 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, 2000 and 1999, the Company's uninsured cash
balances totaled $2,725,051 and $390,152, 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 8).
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>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventory
The Company's inventory consists of computer equipment for sale to
customers as part of the installation of its computer telephony
solutions. Inventory is stated at the lower of cost (determined on a
first-in, first-out basis) or market.
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, 2000, outstanding options and
warrants to purchase 2,127,521 common shares were included in the
weighted average share computation. During the year ended July 31, 1999,
outstanding options and warrants to purchase 838,901 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.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of July 31, 2000 and
1999:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Computer and related equipment $ 1,815,230 $ 933,799
Office furniture and fixtures 97,661 64,198
Motor vehicle 42,072 42,072
----------- -----------
1,954,963 1,040,069
Less: Accumulated depreciation (669,183) (277,561)
----------- -----------
Net property and equipment $ 1,285,780 $ 762,508
=========== ===========
</TABLE>
F - 9
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
NOTE 3 - INTANGIBLE ASSET
Goodwill in the amount of $625,590 recorded on the purchase of Paragon
on December 17, 1999 is being amortized on a straight line basis over 5
years. For the year ended July 31, 2000, amortization was $78,195.
NOTE 4 - NOTE PAYABLE
During the year ended July 31, 2000, Paragon consolidated its trade
payables into one note payable in the amount of $160,000, maturing on
June 5, 2007 and bearing interest at 12.25% per annum.
NOTE 5 - RELATED PARTY TRANSACTIONS
Amount due to a shareholder of the subsidiary consists of the following
as of July 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------- ----
<S> <C> <C>
Unsecured loan from the CEO of Paragon bearing
interest at 6% per annum and payable on demand $31,000 $ -
======= ====
</TABLE>
NOTE 6 - CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist of the following as of July 31, 2000
and 1999:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Capital lease obligations, bearing interest at rates of up to 28%, with
interest and principal payable in monthly installments of approximately
$40,200. 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 2001 and June
2003 $ 769,374 $ 497,273
Less: Current portion (364,454) (205,044)
--------- ---------
Capital lease obligation, long-term $ 404,920 $ 292,229
========= =========
</TABLE>
Aggregate maturities of capital lease obligations as of July 31, 2000,
are as follows:
<TABLE>
<CAPTION>
Year Ended July 31, Amount
------------------- ---------
<S> <C>
2001 $ 442,798
2002 333,004
2003 158,992
---------
Total minimum lease payments 934,794
Less: Amount representing interest (165,420)
---------
$ 769,374
=========
</TABLE>
F - 10
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
NOTE 6 - CAPITAL LEASE OBLIGATIONS (Continued)
Capitalized leases included in property and equipment amounted to
approximately $1,263,000 and $712,000 before accumulated amortization of
$316,000 and $165,000 as of July 31, 2000 and 1999, respectively.
Included in depreciation and amortization expense is amortization of
capital lease assets in the amounts of approximately $151,000 and
$120,000 for the years ended July 31, 2000 and 1999, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and other equipment under
non-cancelable operating leases that expire at various dates through
July 2005. Minimum future obligations under these leases as of July 31,
2000, are as follows:
<TABLE>
<CAPTION>
Rental Sub-Lease
Year ended July 31, Obligation Income Net
------------------- ---------- ---------- -----------
<S> <C> <C> <C>
2001 $ 554,467 $ 100,248 $ 454,219
2002 449,917 8,354 441,563
2003 438,226 -- 438,226
2004 440,142 -- 440,142
2005 449,995 -- 449,995
---------- ---------- ----------
Total minimum lease payments $2,332,747 $ 108,602 $2,224,145
========== ========== ==========
</TABLE>
Rent expense under the non-cancelable operating leases was $158,676 and
$103,185 for the years ended July 31, 2000 and 1999.
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
$2.0 million, amended from the initial claim of $400,000 filed in fiscal
1999. At the present stage of litigation, the probability that the
Company will be required to pay damages cannot be determined.
Accordingly, no contingent liability has been provided for in the
accompanying consolidated financial statements.
The Company was 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. A provision of
$80,000 for the litigation settlement was provided for in the fiscal
1999 financial statements. During the year ended July 31, 2000, final
settlement was reached for 100,000 shares of common stock valued at
$1.97 each. The additional $117,000 in litigation expense is included in
the consolidated statement of operations for the year ended July 31,
2000.
Other
No contingent liability has been provided for in the accompanying
consolidated financial statements that relates to the Company's 1997
stock repurchase program, as discussed in Note 8.
F - 11
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
NOTE 8 - SHAREHOLDERS' EQUITY
Stock and warrant issuances
In June 2000, the Company entered into a Securities Purchase Agreement
(the "Agreement") with two institutional investors (the "investors") for
the sale of up to $4.5 million of its common stock. Under the terms of
the Agreement, on the date of each issuance of common stock (the
"closing date"), the investors will also receive warrants (the
"warrants") entitling them to purchase shares of the Company's common
stock in an amount equal to 15% of the shares issued for cash at an
exercise price which is the lower of 110% of: the market price of the
Company's common stock on the closing date, or the average of the market
price for the 5 trading days immediately preceding 181 days thereafter
(the "warrants"). The warrants expire three years from the closing date.
Under the Agreement, during the year ended July 31, 2000, the Company
issued 905,798 shares of its common stock for net proceeds of
$2,267,234, net of cash issuance costs $232,766, and 135,870 warrants at
an exercise price which is the lower of: $3.03 per share, or the average
of the market price for the 5 trading days immediately preceding 181
days thereafter. The warrants expire in June 2003 and are all
outstanding as of July 31, 2000. In accordance with the Agreement, the
Company issued 50,000 share purchase warrants as part of the non-cash
issuance costs. The warrants entitle the holders to purchase 50,000
shares of common stock at $3.31 per share, and expire in June 2003. All
of the warrants are outstanding as of July 31, 2000.
The Agreement calls for the two subsequent common stock issuances of one
million dollars each approximately 90 days and 180 days subsequent to
July 31, 2000, at the market price of the Company's common stock on each
of these respective dates.
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. All of the warrants are
outstanding as of July 31, 2000.
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 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, the Company paid
$208,941 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.
F - 12
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
NOTE 8 - SHAREHOLDERS' EQUITY (Continued)
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,
subsequently amended to 3,335,000, 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 1,947,000
and 132,000 shares of common stock for the years ended July 31, 2000 and
1999, respectively.
The Company has elected to account for grants under its Plan following
APB No. 25 and related interpretations. Accordingly, compensation costs
of $4,000 and $7,667 have been recognized for options granted to
employees during the years ended July 31, 2000 and 1999, respectively.
Under SFAS No. 123, the fair value of each option granted during the
years ended July 31, 2000 and 1999, 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 5.3% and 6.0%, price volatility of between 0.53 and
1.67, and no dividends.
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, 2000 July 31, 1999
------------- -------------
<S> <C> <C>
Net income (loss):
As reported $ (132,221) $ 321,740
Pro forma $ (480,314) $ 261,659
Basic net income (loss) per share:
As reported $ 0.00 $ 0.01
Pro forma $ (0.02) $ 0.01
Diluted net income (loss) per share:
As reported $ 0.00 $ 0.01
Pro forma $ (0.02) $ 0.01
</TABLE>
F - 13
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
NOTE 8 - SHAREHOLDERS' EQUITY (Continued)
Stock option plans (Continued)
A summary of the activity of the stock options for the years ended July
31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Year ended Year ended
July 31, 2000 July 31, 1999
--------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of
period 940,000 $ 0.38 808,000 $ 0.38
Granted 1,947,000 0.69 132,000 0.40
Exercised (96,750) 0.30 -- --
Forfeited (103,000) 2.29 -- --
Expired -- -- -- --
---------- ---------- ---------- ----------
Outstanding at end of period 2,687,250 $ 0.53 940,000 $ 0.38
========== ========== ========== ==========
Exercisable at end of period 1,534,250 $ 0.36 431,500 $ 0.36
========== ========== ========== ==========
Weighted-average fair value
of options granted during the period $ 0.63 $ 0.32
========== ==========
Weighted-average remaining contractual
life of options outstanding at end of period 8.8 years 7 years
========== ==========
</TABLE>
NOTE 9 - 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>
2000 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 906,200 $ 866,000
Other 10,200 35,000
--------- ---------
Gross deferred tax assets 916,400 901,000
Less: Valuation allowance (796,600) (614,000)
--------- ---------
Net deferred tax assets 119,800 287,000
Deferred tax liabilities:
Property and equipment (61,100) (28,000)
Cash basis accounting for tax purposes (58,700) (259,000)
--------- ---------
Net deferred tax liabilities (119,800) (287,000)
Net deferred tax $ - $ -
========= =========
</TABLE>
F - 14
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
NOTE 9 - INCOME TAXES (Continued)
Realization of deferred tax assets is dependant upon sufficient future
taxable income during the period that deductible temporary differences
and carryforwards 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
increased by $182,600 from 1999 and decreased by $128,000 from 1998.
$130,500 of the valuation allowance increase from 1999 is due to
Paragon's 1998 valuation allowance being recorded on the books.
As of July 31, 2000, Interactive has net operating loss carryforwards
for both federal and state income tax purposes. Federal and state net
operating loss carryforwards totaling approximately $1,495,000 and
$942,000, respectively, as of July 31, 2000, begin to expire in 2011.
Paragon has federal and state net operating loss carryforwards totaling
approximately $841,000 as of July 31, 2000, which begin to expire in
2010 and 2000 respectively. Since Paragon does not file a consolidated
federal income tax return with Interactive, its operating loss
carryforwards are available to Paragon only and are limited. The amount
of Paragon's annual taxable income which can be offset by the net
operating loss carryforwards will be limited to approximately $127,000.
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>
2000 1999
--------- ---------
<S> <C> <C>
Income tax expense (benefit) at 35% statutory rate $ (46,300) $ 113,000
Change in valuation allowance 182,600 (128,000)
Change in valuation allowance attributable to Paragon (130,500) --
Nondeductible expenses 37,200 --
State income taxes, net (7,700) 19,000
Other (35,300) (4,000)
--------- ---------
$ - $ -
========= =========
</TABLE>
NOTE 10 - 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").
During fiscal 2000, negotiations were terminated and the Company still
owns and operates InvestorReach.
NOTE 11 - SUBSEQUENT EVENT
Subsequent to fiscal 2000, the Company lost one of its major IVR
customers which represented 38% of revenues for the year ended July 31,
2000 and 47% for the year ended July 31, 1999. However, management
expects that this is a temporary loss of revenue and will be offset by
new customers for its voice hosting and integration services.
F - 15
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended July 31, 2000 and 1999
NOTE 12 - PRO-FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated statements of operations
are presented as if the acquisition of Paragon had been made at the
beginning of the periods presented. The pro forma consolidated
statements of operations include adjustments to give effect to
amortization of goodwill and the elimination of inter-company amounts.
The unaudited pro forma information is not necessarily indicative of the
results of operations that would have occurred had the purchase been
made at the beginning of the periods presented or the future results of
the combined operations.
<TABLE>
<CAPTION>
Paragon
Interactive Voice
Telesis, Inc. Systems Pro Forma
For the year For the year For the year
ended ended Pro Forma ended
July 31, 1999 July 31, 1999 Adjustments July 31, 1999
------------- ------------- ----------- -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 3,022,290 $ 399,768 $ (65,375) $ 3,356,683
Costs and expenses:
Cost of revenues 221,506 182,951 (65,375) 339,082
Salaries and wages 1,184,523 176,689 -- 1,361,212
General and administrative 742,801 77,062 -- 819,863
Sales and marketing 266,626 33,504 -- 300,130
Depreciation and amortization 177,067 11,999 130,197 319,263
----------- ----------- ----------- ------------
Total costs and expenses 2,592,523 482,205 64,822 3,139,550
----------- ----------- ----------- ------------
Operating income (loss) 429,767 (82,437) (130,197) 217,133
Other expenses:
Interest expense 28,027 10,528 -- 38,555
Litigation settlement expense 80,000 -- -- 80,000
----------- ----------- ----------- ------------
Total other expenses 108,027 10,528 -- 118,555
----------- ----------- ----------- ------------
Income (loss) before income taxes and
minority interest in subsidiary 321,740 (92,965) (130,197) 98,578
Minority interest net loss of subsidiary -- -- 40,282 40,282
----------- ----------- ----------- ------------
Income (loss) before income taxes 321,740 (92,965) (89,915) 138,860
Income taxes -- -- -- --
----------- ----------- ----------- ------------
Net income (loss) $ 321,740 $ (92,965) $ (89,915) $ 138,860
=========== =========== =========== ============
Basic net income per share $ 0.01 $ 0.00
=========== ============
Shares used to compute basic net
income per share 30,365,097 30,365,097
=========== ============
Diluted net income per share $ 0.01 $ 0.00
=========== ============
Shares used to compute diluted
net income per share 31,160,123 31,160,123
=========== ============
</TABLE>
F - 16
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended July 31, 2000 and 1999
NOTE 12 - PRO-FORMA FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
Paragon
Interactive Voice
Telesis, Inc. Systems
For the year For the year Pro Forma Pro Forma
ended ended Adjustments For the year
July 31, 2000 July 31, 2000 July 31, 2000 ended
------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 4,787,265 $ 184,011 $ (58,740) $ 4,912,536
Costs and expenses:
Cost of revenues 628,326 114,938 (58,740) 684,524
Salaries and wages 1,902,119 404,031 -- 2,306,150
General and administrative 1,155,343 168,374 -- 1,323,717
Sales and marketing 346,425 38,801 -- 385,226
Depreciation and amortization 335,860 14,317 125,112 475,289
------------ ------------ ------------ ------------
Total costs and expenses 4,368,073 740,461 66,372 5,174,906
------------ ------------ ------------ ------------
Operating income (loss) 419,192 (556,450) (125,112) (262,370)
Other expenses:
Interest expense 53,215 4,823 -- 58,038
Loss settlement expense 117,000 -- -- 117,000
------------ ------------ ------------ ------------
Total other expenses 170,215 4,823 -- 175,038
------------ ------------ ------------ ------------
Income (loss) before income taxes
and minority interest in subsidiary 248,977 (561,273) (125,112) (437,408)
Minority interest net loss of subsidiary -- -- 243,218 243,218
------------ ------------ ------------ ------------
Income (loss) before income taxes 248,977 (561,273) 118,106 (194,190)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 248,977 $ (561,273) $ 118,106 $ (194,190)
============ ============ ============ ============
Basic net income per share $ 0.01 $ (0.01)
============ ============
Shares used to compute basic net
income per share 30,885,571 30,885,571
============ ============
Diluted net income per share $ 0.01 $ (0.01)
============ ============
Shares used to compute diluted
net income per share 32,478,659 30,885,571
============ ============
</TABLE>
F - 17
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 2000 and July 31, 2000
<TABLE>
<CAPTION>
OCT 31, 2000 JUL 31, 2000
------------ -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,228,099 $ 2,925,051
Accounts receivable 436,219 332,808
Inventory 12,955 5,635
Deposits, prepaid expenses and other current assets 64,750 152,198
------------ -----------
Total current assets 1,742,023 3,415,692
------------ -----------
Property and equipment, net 2,787,346 1,285,780
------------ -----------
Intangible asset, net 516,115 547,395
------------ -----------
Total assets $ 5,045,484 $ 5,248,867
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 480,646 $ 250,518
Note payable to related party 24,000 31,000
Deferred revenue -- 8,354
Current portion of note payable 9,585 14,039
Current portion of capital lease obligations 568,192 364,454
------------ -----------
Total current liabilities 1,082,423 668,365
------------ -----------
Long-term obligations:
Note payable, net of current portion 145,961 145,961
Capital lease obligations, net of current portion 1,315,968 404,920
------------ -----------
Total long-term obligations 1,461,929 550,881
------------ -----------
Total liabilities 2,544,352 1,219,246
------------ -----------
Commitments and contingencies
Minority interest in net assets of subsidiary 91,935 207,547
------------ -----------
Shareholders' equity:
Common stock, $.001 par value, 50,000,000 shares
authorized; 31,783,386 and 31,764,486 shares issued
and outstanding at Oct. 31, 2000 and July 31, 1999,
respectively 31,784 31,765
Additional paid in capital 12,263,939 12,258,358
Accumulated deficit (9,886,526) (8,468,049)
------------ -----------
Total shareholders' equity 2,409,197 3,822,074
------------ -----------
Total liabilities and shareholders' equity $ 5,045,484 $ 5,248,867
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 18
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended October 31, 2000 and 1999
(UNAUDITED)
<TABLE>
<CAPTION>
OCT 31, 2000 OCT 31, 1999
------------ ------------
<S> <C> <C>
Revenues $ 790,208 $ 1,200,935
Costs and expenses:
Cost of revenues 183,046 99,458
Salaries and wages 1,086,542 398,985
General and administrative 638,117 262,204
Sales and marketing 248,002 51,076
Depreciation and amortization 126,280 58,413
------------ -----------
Total costs and expenses 2,281,987 870,136
------------ -----------
Operating (loss) income (1,491,779) 330,799
Other expenses:
Interest expense 42,311 10,869
------------ -----------
Total other expenses 42,311 10,869
------------ -----------
(Loss) income before income taxes and minority
interest in subsidiary (1,534,090) 319,930
Minority interest in net loss of subsidiary 115,612 --
------------ -----------
(Loss) income before income taxes (1,418,478) 319,930
Provision for income taxes -- --
------------ -----------
Net (loss) income $ (1,418,478) $ 319,930
============ ===========
Basic net income (loss) per share $ (0.04) $ 0.01
============ ===========
Shares used to compute basic net income (loss) per share 31,774,787 30,625,513
============ ===========
Diluted net income (loss) per share $ (0.04) $ 0.01
============ ===========
Shares used to compute diluted net income (loss) per share 31,774,787 31,947,914
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 19
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended October 31, 2000 and 1999
(UNAUDITED)
<TABLE>
<CAPTION>
OCT 31, 2000 OCT 31, 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,418,478) $ 319,930
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Bad debts 3,000 --
Depreciation and amortization 126,280 58,413
Interest on capital leases and long-term debt 42,311 10,869
Minority interest (115,612) --
Changes in operating assets and liabilities, net of business acquired:
Decrease (increase) in accounts receivable (106,411) 15,198
Increase in inventory (7,320) --
(Increase) decrease in prepaid expenses and deposits 87,447 --
Increase (decrease) in accounts payable and
accrued liabilities 225,674 47,295
Increase (decrease) in deferred revenue (8,354) --
----------- -----------
Net cash flows provided by operating activities (1,171,463) 451,705
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (302,175) (110,740)
----------- -----------
Net cash flows used in investing activities (302,175) (110,740)
----------- -----------
Cash flows from financing activities:
Repayments on borrowings from shareholder (7,000) --
Proceeds on issuance of common stock 5,600 20,000
Repayments on capital leases (221,914) (71,323)
----------- -----------
Net cash flows (used in) provided by financing activities (223,314) (51,323)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,696,952) 289,642
Cash and cash equivalents at beginning of period 2,925,051 490,152
----------- -----------
Cash and cash equivalents at end of period $ 1,228,099 $ 779,794
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F - 20
<PAGE>
INTERACTIVE TELESIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the three months ended October 31, 2000 and 1999
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
OCT 31, 2000 OCT 31, 1999
------------ ------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 42,311 $ 10,869
========== ========
Income taxes $ - $ -
========== ========
Supplemental disclosure of non-cash investing and financing activities:
Purchase of property and equipment on capital leases $1,294,391 $ -
========== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-21
<PAGE>
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL")
contains the provisions entitling the Registrant's directors and officers to
indemnification from judgments, fines, amounts paid in settlement, and
reasonable expenses (including attorney's fees) as the result of an action or
proceeding in which they may be involved by reason of having been a director or
officer of the Registrant. In its Certificate of Incorporation, the Registrant
has included a provision that limits, to the fullest extent now or hereafter
permitted by the DGCL, the personal liability of its directors to the Registrant
or its stockholders for monetary damages arising from a breach of their
fiduciary duties as directors. Under the DGCL as currently in effect, this
provision limits a director's liability except where such director (i) breaches
his duty of loyalty to the Registrant or its stockholders, (ii) fails to act in
good faith or engages in intentional misconduct or a knowing violation of law,
(iii) authorizes payment of an unlawful dividend or stock purchase or redemption
as provided in Section 174 of the DGCL, or (iv) obtains an improper personal
benefit. This provision does not prevent the Registrant or its stockholders from
seeking equitable remedies, such as injunctive relief or rescission. If
equitable remedies are found not to be available to stockholders in any
particular case, stockholders may not have any effective remedy against actions
taken by directors that constitute negligence or gross negligence. The
Certificate of Incorporation also includes provisions to the effect that
(subject to certain exceptions) the Registrant shall, to the maximum extent
permitted from time to time under the law of the State of Delaware, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such indemnification and advancement of expenses is permitted under
such law, as may from time to time be in effect. In addition, the By-Laws
require the Registrant to indemnify, to the full extent permitted by law, any
director, officer, employee or agent of the Registrant for acts which such
person reasonably believes are not in violation of the Registrant's corporate
purposes as set forth in the Certificate of Incorporation. At present, the DGCL
provides that, in order to be entitled to indemnification, an individual must
have acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the Registrant's best interests. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant pursuant to any
charter provision, by-law, contract, arrangement, statute or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
SEC registration $ 1691.00
------------
Printing and engraving costs $ *
------------
Legal fees and expenses $ *
------------
Accounting fees and expenses $ *
------------
Miscellaneous $ *
------------
Total $ *
------------
II-1
<PAGE>
*To be provided by amendment.
---------------------
Item 26. Recent Sales of Unregistered Securities
During the last three years, the Company sold unregistered shares of
its Common Stock as follows:
On 10/30/00, in accordance with a Securities Purchase Agreement
Repricing Rights, the Company issued 2,900 shares of common stock. BH Capital
Investments, LP received 1,450 shares and Excalibur Limited Partnership
received 1,450 shares. Please refer to the SEC Form SB-2/A filed October 4,
2000 for more information on the Securities Purchase Agreement.
On June 12, 2000, the Company entered into an agreement with two
investors to purchase up to $4,500,000 of our common stock in three closings of
$2.5 million, $1 million and $1 million each. The initial closing for the
purchase of 905,797 shares at a price of $2.76 per share was completed on June
13, 2000. The second and third closings are scheduled to occur approximately 130
days and 180 days, respectively, after the initial closing date. Each of the
closings is for shares at a price equal to the average closing bid price for our
stock on the five consecutive trading days preceding the respective closing
date. At each closing, the Company will also issue 3-year warrants for the
purchase of shares equal to 15% of the purchase price of the shares divided by
the exercise price of the warrants which is equal to 110% of the share purchase
price at the respective closing. At the initial closing, the Company issued
warrants for the purchase of 135,870 shares at a price of $3.04 per share. In
addition, the Company granted the investors repricing rights with respect to the
shares and antidilution rights with respect to the shares and the warrants. The
Company agreed to include the shares, including the shares underlying the
warrants and the repricing rights, issued and issuable at the first closing for
resale under this Registration Statement. The Company has agreed to register the
resale of the Shares issued and issuable in connection with the second and third
closings on separate registration statements. Under certain circumstances, the
Company has the conditional right to repurchase the shares and repricing rights
at a premium..
The Company paid two unrelated finders an aggregate cash fee equal to
7.5% payable pro rata at each closing and 3-year warrants for the purchase of
20,000 shares per each $1.0 million of the financing closed at a price equal to
120% of the purchase price for the shares at the respective closing. In selling
these securities to the two investors and the two finders, the Company relied on
the exemption from registration under the Securities Act of 1933 set forth in
Regulation S thereof.
From November 1996 through November 30, 2000, the Company has issued
an aggregate of 3,234,000 options to purchase its Common Stock, with exercise
prices ranging from 25 cents to $3.00 per share to employees, directors, and
service providers under its 1996 Stock Option Plan. Of these options, 215,000
have expired or been canceled without being exercised; options for 112,750
shares have been exercised; as of November 30, 2000, 2,906,250 options remain
outstanding. The issuance of these options and option shares were exempt from
registration pursuant to Section 4(2) of the 1933 Act or, where applicable,
Rule 701 under the 1933 Act.
In a private placement 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. Of these 48 investors, 42 were accredited investors.
II-2
<PAGE>
Each subscriber in this private placement had or was provided prior to
his or her investment 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
Canadian generally accepted accounting practices. Each of these sales was made
in reliance on Section 4(2) of the 1933 Act or Rule 506 thereunder. For each
sale, 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 representing that he
or she was an accredited investor was reasonably believed by the Company to be
an accredited investor within the meaning of Rule 501(a) of the 1933 Act.
The offering was made directly by the Company except the Company paid
commissions and/or finder's fees ranging from 10% to 15% in connection with the
sale of stock to 10 investors. The Company's determination of whether investors
were accredited investors, within the meaning of Regulation D, was based on the
Company's examination of the investors' executed subscription documents.
Item 27. Exhibits
Description
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+
3.7 Certificate of Amendment of Certificate of Incorporation ++++
3.8 Certificate of Designations, Preferences and Rights
of Series A Convertible Preferred Stock ++++
5.1 Opinion of Rushall & McGeever, APC as to the legality of the shares
being registered.++++
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+
II-3
<PAGE>
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+
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+
10.22 Securities Purchase Agreement dated June 12, 2000++
10.23 Registration Rights Agreement dated June 12, 2000.++
10.24 Warrant Agreement with BH Capital.++
10.25 Warrant Agreement with Excalibur.++
10.26 Amendment No. 1 to Securities Purchase Agreement.++
II-4
<PAGE>
10.27 Amendment No. 1 to Registration Rights Agreement.++
10.28 I&G Highbluff, Inc. Lease dated April 25, 2000.++
10.29 North Cost Business Park Sublease dated 5/31/00.+++
10.30 Bank of the West Equipment Lease dated 9/7/99.+++
10.31 Affinity Funding.com Equipment Lease dated 5/23/00.+++
10.32 Textron Financial Equipment Lease dated 5/18/00.+++
10.33 Santa Barbara Bank & Trust Commercial Lease Agreement dated 4/26/00.+++
10.34 GE Capital Equipment Lease dated 4/26/00.+++
10.35 GE Capital Equipment Lease dated 4/24/00.+++
10.36 GE Capital Equipment Lease dated 5/10/00.+++
10.37 Advanta Leasing Services Equipment Lease dated 6/22/00.+++
10.38 Landmark Financial Corporation Equipment Lease dated 7/10/00.+++
10.39 United Capital Equipment Lease dated 6/30/00.+++
10.40 Santa Barbara Bank & Trust Equipment Lease dated 7/14/00.+++
10.41 Centerpoint Financial Equipment Lease dated 8/28/00.+++
10.42 Ford Financial Services, Inc. Equipment Lease Agreement
10.43 Information Leasing Corp Equipment Lease Agreement
10.44 Irwin Business Finance Equipment Lease Agreement
10.45 Taycor, LLC Equipment Lease Agreement
10.46 Amembal Capital Corporation Equipment Lease Agreement
10.47 Amembal Capital Corporation Equipment Lease Agreement
10.48 Amembal Capital Corporation Equipment Lease Agreement
10.49 Landmark Financial Corporation Equipment and Furniture Lease Agreement
10.50 Media Capital Associates, LLC Equipment Lease Agreement
II-5
<PAGE>
10.51 Landmark Financial Corporation Equipment Lease Agreement
10.52 Hambrecht & Quist Guaranty Finance, LLC Loan and Security Agreement
with Schedule
10.53 Hambrecht & Quist Guaranty Finance, LLC Intellectual Property Security
Agreement
10.54 Hambrecht & Quist Guaranty Finance, LLC Equity Line of Credit Agreement
10.55 Hambrecht & Quist Guaranty Finance, LLC Warrant Agreement with form of
Warrant
10.56 Hambrecht & Quist Guaranty Finance, LLC Registration Rights Agreement
23.1 Consent of Pannell Kerr Forster dated December 19, 2000.
23.3 Consent of Rushall & McGeever, APC (included in Exhibit 5.1).
27.1 Financial Data Schedule+
------------------------------
+ Incorporated by reference to the exhibit with the corresponding number
contained in the Company's Registration Statement on Form 10-SB/A filed
on April 21, 2000 (accession No. 0000936392-00-000215).
++ Incorporated by reference to the exhibit with the corresponding number
in the Company's Registration Statement on Form SB-2, as amended, filed
on July 12, 2000 (accession No. 0001095811-00-001944).
+++ Incorporated by reference to the Exhibit with the corresponding number
in the Company's Annual Statement on Form 10-KSB filed on October 30,
2000 (accession No. 0001095811-00-
004139
++++ To be filed by amendment to this Registration Statement.
Item 28. Undertakings The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act; and
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the
II-6
<PAGE>
changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(c) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; provided, however, that paragraphs (i)
and (ii) above do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant
to Section 13 and Section 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(1) That, for purposes of determining any liability under the Securities
Act, each such post- effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(3) That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(4) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, in the County of San Diego, California, on December 19, 2000.
INTERACTIVE TELESIS INC.
By: /s/ Donald E. Cameron
---------------------
Donald E. Cameron, Chief Executive Officer
Each person whose signature appears below on this Registration
Statement hereby constitutes and appoints Donald E. Cameron, as his true and
lawful attorney-in-fact and agent, with full power of substitution for him and
in his name, place and stead, in any and all capacities (until revoked in
writing) to sign any and all amendments (including post-effective amendments and
amendments thereto) to this Registration Statement on Form SB-2 of Interactive
Telesis Inc. and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission. Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/Donald E. Cameron Chief Executive officer, President and December 19, 2000
-------------------- Director (Principal Executive Officer)
Donald E. Cameron
/s/William R. Adams Chief Financial Officer and Secretary December 19, 2000
------------------- (Principal Accounting Officer)
William R. Adams
/s/Willard Lee McVey Director December 19, 2000
--------------------
Willard Lee McVey
/s/Kenneth Ravazzolo Director December 19, 2000
--------------------
Kenneth Ravazzolo
/s/Albert L. Staerkel Director December 19, 2000
---------------------
Albert L. Staerkel
Director December , 2000
----------------
Robert Wilson
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
Description
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+
3.7 Certificate of Amendment of Certificate of Incorporation ++++
3.8 Certificate of Designations, Preferences and Rights
of Series A Convertible Preferred Stock ++++
5.1 Opinion of Rushall & McGeever, APC as to the legality of the shares
being registered.++++
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+
<PAGE>
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+
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+
10.22 Securities Purchase Agreement dated June 12, 2000++
10.23 Registration Rights Agreement dated June 12, 2000.++
10.24 Warrant Agreement with BH Capital.++
10.25 Warrant Agreement with Excalibur.++
10.26 Amendment No. 1 to Securities Purchase Agreement.++
<PAGE>
10.27 Amendment No. 1 to Registration Rights Agreement.++
10.28 I&G Highbluff, Inc. Lease dated April 25, 2000.++
10.29 North Cost Business Park Sublease dated 5/31/00.+++
10.30 Bank of the West Equipment Lease dated 9/7/99.+++
10.31 Affinity Funding.com Equipment Lease dated 5/23/00.+++
10.32 Textron Financial Equipment Lease dated 5/18/00.+++
10.33 Santa Barbara Bank & Trust Commercial Lease Agreement dated 4/26/00.+++
10.34 GE Capital Equipment Lease dated 4/26/00.+++
10.35 GE Capital Equipment Lease dated 4/24/00.+++
10.36 GE Capital Equipment Lease dated 5/10/00.+++
10.37 Advanta Leasing Services Equipment Lease dated 6/22/00.+++
10.38 Landmark Financial Corporation Equipment Lease dated 7/10/00.+++
10.39 United Capital Equipment Lease dated 6/30/00.+++
10.40 Santa Barbara Bank & Trust Equipment Lease dated 7/14/00.+++
10.41 Centerpoint Financial Equipment Lease dated 8/28/00.+++
10.42 Ford Financial Services, Inc. Equipment Lease Agreement
10.43 Information Leasing Corp Equipment Lease Agreement
10.44 Irwin Business Finance Equipment Lease Agreement
10.45 Taycor, LLC Equipment Lease Agreement
10.46 Amembal Capital Corporation Equipment Lease Agreement
10.47 Amembal Capital Corporation Equipment Lease Agreement
10.48 Amembal Capital Corporation Equipment Lease Agreement
10.49 Landmark Financial Corporation Equipment and Furniture Lease Agreement
10.50 Media Capital Associates, LLC Equipment Lease Agreement
<PAGE>
10.51 Landmark Financial Corporation Equipment Lease Agreement
10.52 Hambrecht & Quist Guaranty Finance, LLC Loan and Security Agreement
with Schedule
10.53 Hambrecht & Quist Guaranty Finance, LLC Intellectual Property Security
Agreement
10.54 Hambrecht & Quist Guaranty Finance, LLC Equity Line of Credit Agreement
10.55 Hambrecht & Quist Guaranty Finance, LLC Warrant Agreement with form of
Warrant
10.56 Hambrecht & Quist Guaranty Finance, LLC Registration Rights Agreement
23.1 Consent of Pannell Kerr Forster dated December 19, 2000.
23.3 Consent of Rushall & McGeever, APC (included in Exhibit 5.1).
27.1 Financial Data Schedule+
------------------------------
+ Incorporated by reference to the exhibit with the corresponding number
contained in the Company's Registration Statement on Form 10-SB/A filed
on April 21, 2000 (accession No. 0000936392-00-000215).
++ Incorporated by reference to the exhibit with the corresponding number
in the Company's Registration Statement on Form SB-2, as amended, filed
on July 12, 2000 (accession No. 0001095811-00-001944).
+++ Incorporated by reference to the Exhibit with the corresponding number
in the Company's Annual Statement on Form 10-KSB filed on October 30,
2000 (accession No. 0001095811-00-
004139
++++ To be filed by amendment to this Registration Statement.
