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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended July 31, 2000
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from ____________ to ____________
Commission File Number: 000-28215
Interactive Telesis Inc.
(Name of small business issuer in its charter)
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<S> <C>
Delaware 33-0649915
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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12636 High Bluff Drive, Suite 200
San Diego, California 92130
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: Voice 858 523-4000,
Fax 858 523-4001
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, $0.001 par value NASDAQ OTC Bulletin Board
Securities registered pursuant to Section 12(g) of the Act:
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Revenues for the issuer's most recent fiscal year: $4,832,094
On September 30, 2000 the aggregate market value of the Common equity held by
non-affiliates (based upon the average of bid and asked price as of September
30, 2000) was $79,438,715.
As of September 30, 2000 the Issuer has 31,775,486 Outstanding Shares of Common
Stock, $0.001 par value.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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Part I
Item 1. Business
Interactive Telesis Inc. (also referred to as the "Company" or "we") is a leader
in specialized interactive voice response (IVR) services and deployment of
automated speech recognition (ASR) technologies and speech-enabled hosting
services. Interactive Telesis presents a very compelling offering for companies
wishing to leverage the benefits of speech recognition without the high cost of
ownership, capital outlay and internal IT staff requirements.
The Company was formed under the laws of the province of British Columbia on
June 19, 1987, and, on September 23, 1996, the Company's jurisdiction of
incorporation was continued to the State of Delaware. The Company has
concentrated on its IVR and ASR services and development activities since 1998.
In September of 1995, the Company's shares were posted for trading on the OTC
Bulletin Board. Effective October of 1995, the Company conducted a one-for-seven
share consolidation and commenced trading under the ticker symbol "TSIS."
SUBSIDIARIES
In December 1999, we acquired a controlling interest in one of our suppliers,
Paragon Voice Systems ("Paragon"), which is a value-added reseller and developer
of computer telephony solutions in the emerging technology field of Automated
Speech Recognition or ASR. 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.
In August 2000, we formed VoiceVault, Inc., a California Corporation, which is
currently inactive, as our wholly owned subsidiary.
Competition
The Company is aware of over one hundred 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
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The Company develops all of its proprietary software in house and does not
incorporate any third-party software other than off-the-shelf, commercially
available software.
The Company has applied for the following service marks:
- InvestorREACH(TM)
- MarketREACH
- TeleSurvey
- VoiceVault
- The Voice of Experience
Governmental Regulation
The Company is not currently subject to direct federal, state, or local
regulation in the United States other than regulations applicable to businesses
generally or directly applicable to electronic commerce. However, because the
Internet is becoming increasingly popular, it is possible that a number of laws
and regulations may be adopted in the United States with respect to the
Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. Several states have proposed legislation to limit the use of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has indicated that it
may propose legislation on this issue to Congress in the near future and has
initiated action against at least one online service regarding the manner in
which personal information was collected from users and provided to third
parties. The adoption of such consumer protection laws could create uncertainty
in Internet usage and reduce the demand for all products and services. The
Company does not provide customer information to third parties and, therefore,
does not anticipate any current or proposed legislation relating to online
privacy to directly affect its activities to a material extent.
The Company is not certain how its business may be affected by the application
of existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of those laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws
intended to address such issues could create uncertainty in the Internet
marketplace. That uncertainty could reduce demand for the Company's services or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs.
In addition, it is uncertain what impact government regulation may have on
telecommunication providers on which the Company's business depends. Future
government regulation may have an adverse effect on the Company's cost of doing
business.
EMPLOYEES
On July 31, 2000 the Company had forty-four full-time employees, including eight
full time employees at Paragon Voice Systems. Our success will depend in large
part on our ability to attract and retain skilled and experienced employees. We
believe that our relations with our employees are 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.
Item 2. 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.
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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.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Stockholders
Not applicable
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Stock Trading Symbol - TSIS
Stock Exchange Listings - NASDAQ OTC Bulletin Board
Shareholders - At September 30, 2000, there were approximately 754 shareholders
of record.
Dividend Policy - The Company has not declared a dividend nor does it expect to
declare a dividend in the near future.
Stock Prices -
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Fiscal Year 2000 High Low Close
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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
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Fiscal Year 1999 High Low Close
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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
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Item 6. Selected Financial Data
Interactive Telesis, Inc. and Subsidiary
(in thousands except per share amounts)
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2000(a) 1999 1998
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Net Sales 4,832 3,022 1,102
Income (loss) from continuing operations (132) 322 (677)
Income (loss) per share - continuing operations 0.00 0.01 (0.03)
Total Assets 5,249 1,943 1,160
Long term debt 551 292 76
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(a) Includes revenue and related expenses associated with the acquisition of
Paragon Voice Systems in December 1999.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Forward-Looking Statements
Certain information set forth herein (other than historical data and
information) may constitute forward-looking statements regarding events and
trends which may affect the Company's future operating results and financial
trends which may affect the Company's future operating results and financial
position. The words "believe," "endeavor," "expect," "anticipate," "estimate,"
"intends," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks, uncertainties and
assumptions, including, without limitation, the risks and uncertainties
concerning technological changes, increased competition, and general economic
conditions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, or projected. The Company cautions
potential investors not to place undue reliance on any such forward-looking
statements, all of which speak only as of the date of this Annual Report on Form
10-KSB. It is not possible to foresee or identify all such factors. The Company
disclaims any intention, commitment or obligation to revise or update any
forward-looking statement, or to disclose any facts, events or circumstances
that occur after the date hereof, which may affect the accuracy of any
forward-looking statement.
INTRODUCTION
Business
Interactive Telesis is a leader in specialized interactive voice response
services and deployment of automated speech recognition technologies and
speech-enabled hosting services. Interactive Telesis presents a very compelling
offering for companies wishing to leverage the benefits of speech recognition
without the high cost of ownership, capital outlay and internal IT staff
requirements.
Paragon Voice Systems, our majority-owned subsidiary, is a leading developer of
computer telephony solutions. Based in San Diego, California and founded in
1991, Paragon Voice Systems specializes in open, PC-based systems and provides
solutions to start-ups, Fortune 1000 corporations (including five of the six
largest oil companies), educational institutions and government agencies.
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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 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.
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, systems 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
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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.
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, if the $2,000,000 committed in the stock private placement is received as
scheduled.
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 additional contracts with existing
customers as well as long-term, high-margin contracts with new customers, and
there is no certainty that these objectives will be achieved.
The Company's telecommunication costs should be reduced over the next fiscal
year, resulting from volume discounts.
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.
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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 may be scaled and
timed to meet our available cash resources.
Item 7A. Market Risk Disclosures
BUSINESS CONCENTRATION
The Company currently relies 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 major record and replay service customer since 1998.
REVENUE RECOGNITION
The Company recognizes revenue when services are provided. The Company bills for
services in the month in which the services are utilized.
REVENUE VARIABILITY
Our Digital Record & Replay service may be utilized mostly during the quarterly
earnings season, which is typically held by calendar-year companies during the
months of January, April, July and October. We do not generally charge our
customers for our initial set-up costs in establishing a customized interactive
voice response service. Instead, we recoup these costs over the first several
months of a contract. The majority of our contracts with our customers are
cancelable by either party upon 30 days' notice. Therefore, there is no
assurance that an account, once established, will be maintained for a time
sufficient to allow us to recoup its set-up costs.
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.
BARRIERS TO ENTRY
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 that have significantly greater technical and/or financial
resources.
We must continually explore additional areas and services that 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.
THIRD PARTY SUPPLIERS
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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.
EMPLOYEE TURNOVER
Our current business depends on certain skilled and experienced employees. These
include our Chief Executive Officer, Chief Financial Officer, Chief Operating
Officer and Vice Presidents. 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 are unable to hire, train and
manage new skilled and experienced employees as needed, we will be unable to
support our planned growth and future operations.
Item 8. Financial Statements and Supplementary Data
Included on pages F-2 thru F-17
Item 9. Changes in and Disagreements with Accountants
CHANGE IN INDEPENDENT AUDITORS
In December 1998, we did not reappoint Buckley Dodds and Associates as our
independent auditors and appointed Pannell Kerr Forster as our independent
auditors. Pannell Kerr Forster was engaged to perform the audits for the fiscal
years ended July 31, 1998 and 1999. Our board of directors approved our change
in independent auditors. We had no disagreements with Buckley Dodds and
Associates on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures and there were no
disagreements between the date of their last audit report and the date they were
discharged. Buckley Dodds and Associates had not issued a report in the past two
fiscal years containing a disclaimer or adverse or qualified opinion.
PART III
Item 10 Directors and Executive Officers of the Registrant
The following table sets forth information about our directors and executive
officers.
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NAME AGE POSITION
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Donald E. Cameron 48 President and CEO; Director since 1993
Kenneth Ravazzolo(1) 45 Director appointed October 27, 2000
Willard Lee McVey 53 Director appointed October 27, 2000
Robert Wilson (1)(2) 56 Director since 1994
David J. Webb 38 Chief Operating Officer
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
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(1) Member of the Audit Committee
(2) Member of the Compensation Committee
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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.
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.
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.
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.
David J. Webb. Mr. Webb joined the Company in November 1995 and is currently
Chief Operating Officer. He worked as a software development team leader at IBM
(1986-1987). He also taught at Penn State University (1987-1990). Mr. Webb held
the position as Vice President of Information Systems for Phoenix Network
(1990-1994). Mr. Webb has served as an independent consultant (1994-1995) to
several communications firms based in California. His background includes an MA
in mathematics and BS in computer science.
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.
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.
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
10
<PAGE> 11
Directors has established an Audit Committee, consisting of Mr. Wilson, and a
Compensation Committee, consisting of Mr. Wilson. The Audit Committee reviews
the Company's independent auditors, the scope and timing of the audit services,
and other services they are asked to perform, the Auditor's Report on the
Company's financial statements following completion of the audit, and the
Company's policies and procedures, with respect to internal accounting and
financial controls. In addition, the Audit Committee makes annual
recommendations to the Board of Directors for the appointment of independent
auditors for the ensuing year. The Compensation Committee reviews and recommends
to the Board of Directors the compensation and benefits of all officers of the
Company and reviews general policy matters relating to compensation and benefits
of employees of the Company.
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 as a
reason for his resignation.
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
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 directors were granted options to purchase securities
as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES EXERCISE 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.
The Company has granted stock options to directors to assist the Company in
compensating, attracting, retaining, and motivating the directors of the Company
and to closely align the personal interests of the directors with those of the
shareholders.
BOARD OF DIRECTORS MEETINGS
The Board of Directors had four meetings during the fiscal year ended July 31,
2000, which were attended by all directors.
11
<PAGE> 12
Item 11. 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>
LONG-TERM
ANNUAL COMPENSATION AWARDS PAYOUTS COMPENSATION
RESTRICTED
NAME AND SECURITIES SHARES OR
PRINCIPAL FINANCIAL SALARY BONUS OTHER ANNUAL UNDER 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>
* 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.
Item 12. 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 July 31, 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.
12
<PAGE> 13
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OWNED OR OWNED OR
NAME AND FULLY VESTED FULLY VESTED
-------- --------------- ------------
<S> <C> <C>
Donald E. Cameron (1)(2) 1,479,544 4.46%
Marc Goyette (1)(3) 169,643 0.53%
Robert Wilson (1)(3) 62,500 0.19%
David Webb (1)(4) 250,000 0.78%
William R. Adams (1)(5) 37,500 0.11%
Douglas T. Luke (1) 27,350 0.08%
All directors and
officers as a group (six) 2,026,537 6.04%
</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.
(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.
(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).
Item 13. Certain Relationships and Related Transactions
None
PART IV
Item 14. Exhibits, Financial Statements, Reports on Form 8-K
(a) 1. Financial Statements - See Index to Financial Information on page
F-2.
2. Exhibits - See Index to Exhibits on page E-1.
(b) Report on Form 8-K - None.
13
<PAGE> 14
Signatures
Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange
Act of 1934, Interactive Telesis Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated October 27, 2000
Interactive Telesis Inc.
By: /s/ Donald E. Cameron
-------------------------------------
Donald E. Cameron
President and CEO
14
<PAGE> 15
Index to Exhibits - Item 14 (a) (2)
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
3.1 Province of British Columbia, Company Act, Certificate of
Incorporation, Butter Rock Resources+
3.2 Company Act, Memorandum, Butter Rock Resources+
3.3 Articles of Incorporation, Interactive Telesis - 1992+
3.4 Certificate of Incorporation of the Company - Delaware+
3.5 Certificate of Amendment of Certificate of Incorporation of
the Company - Delaware +
3.6 Bylaws of the Company+
10.1 ITI Stock Option Plan (1996)+
10.2 Lease Agreement between the Company and North Coast Business
Park, dated Feb. 15, 1995, with amendments dated April 30,
1999+
10.3 Lease Agreement between the Company and U.S. Net Solutions,
inc., dated Feb. 22, 1999+
10.4 Sublease Agreement between the Company and The Townsend
Agency, dated Aug. 13, 1999+
10.5 Balboa Capital Corporate Equipment Lease Agreement+
10.6 Balboa Capital Corporate Equipment Lease Agreement+
10.7 Toshiba Corporate Equipment Lease Agreement+
10.8 Westover Financial Corporate Equipment Lease Agreement+
10.9 Westover Financial Corporate Equipment Lease Agreement+
10.10 Ford Financial Services Corporate Equipment Lease Agreement+
10.11 Ford Financial Services Corporate Equipment Lease Agreement+
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+
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
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. ++
10.27 Amendment No. 1 to Registration Rights Agreement. ++
10.28 I&G Highbluff, Inc. Lease dated April 25, 2000. ++
10.29 North Coast Business Park - Standard Sublease, May 31, 2000
10.30 Bank of the West Equipment Lease Agreement
10.31 Affinity Funding.com Equipment Lease Agreement
10.32 Textron Financial Equipment Lease Agreement
10.33 Santa Barbara Bank & Trust Equipment Lease Agreement
10.34 GE Capital Colonial Pacific Leasing Equipment Lease Agreement
10.35 GE Capital Colonial Pacific Leasing Equipment Lease Agreement
10.36 GE Capital Colonial Pacific Leasing Equipment Lease Agreement
10.37 Advanta Leasing Services Equipment Lease Agreement
10.38 Landmark Financial Corp Equipment Lease Agreement
10.39 United Capital Equipment Lease Agreement
10.40 Santa Barbara Bank & Trust Equipment Lease Agreement
10.41 Centerpoint Financial Equipment Lease Agreement
16.1 Letter from Buckley Dodds and associates, dated Oct. 29, 1999+
23.1 Consent of Pannell Kerr Forster dated October 26, 2000
regarding Registrant.
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
27.1 Financial Data Schedule
</TABLE>
+ Incorporated by reference to the corresponding exhibit contained in the
Company's Registration Statement on Form 10-SB/A filed on April 21, 2000
++ Previously filed with Registration Statement Form SB-2/A filed on October 2,
2000.
17
<PAGE> 18
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITOR'S REPORT ........................................... F - 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .................................... F - 2
Consolidated Statements of Operations .......................... F - 3
Consolidated Statements of Changes in Shareholders' Equity ..... F - 4
Consolidated Statements of Cash Flows .......................... F5 - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................. F7 - 17
</TABLE>
<PAGE> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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>
NOTE 3 - INTANGIBLE ASSET
F - 9
<PAGE> 28
INTERACTIVE TELESIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended July 31, 2000 and 1999
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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
