SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4/A
REGISTRATION STATEMENT
Under
The Securities Act of 1933
Interactive Technologies Corp., Inc.
(Exact name of registrant as specified in its charter)
Wyoming 98-0120805
State of Incorporation (I.R.S. Employer Identification Number)
0000883041
(Primary Standard Industrial Classification Code Number)
102 South Harbor City Blvd., Melbourne, Fl. 32901; (407) 953-4811
(Address, including zip code, and telephone number, including area code,
of Registrant's Principal Executive Offices)
Perry Douglas West, Chief Executive Officer
Interactive Technologies Corp., Inc.
102 South Harbor City Blvd., Melbourne, Fl. 32901; (407) 953-4811
With a Copy to:
Perry D. West, P.A.
Post Office Box 1656, Cocoa, FL 32923-1656, (407) 636-5804
(Name, Address, and Telephone Number, Including Zip Code and Area Code,
of Agent for Service of Process)
-----------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Title of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Share (1) Offering Price (1) Fee
- --------------------------------------------------------------------------------
Common Stock 29,707,140(1) $1.00 $29,707,140 $9002.16
- --------------------------------------------------------------------------------
(1) Includes 8,850,000 shares of underlying Preferred Stock which is
convertible into Common Stock at $1.00 per share. Also includes $9,000,000
par amount of Debentures convertible into Common Stock at a price of $0.70
per share.
"The Company hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Company 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 this Registration Statement shall become
effective on such date as the Commission acting pursuant to said section 8(a)
may determine."
<PAGE>
CROSS REFERENCE SHEET
PART I
A. INFORMATION ABOUT THE TRANSACTION.
ITEM 1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus.................Forepart and Outside Cover Page
ITEM 2. Inside Front and Outside
Back Cover Pages of Prospectus.............Inside Front and Outside Back
ITEM 3. Summary Information..............................................Summary
Risk Factors................................................Risk Factors
Ratio of Earnings to Fixed Charges........................Not Applicable
ITEM 4. Terms of the Transaction.................................The Transaction
ITEM 5. Pro Forma Financial Information..........Pro Forma Financial Information
ITEM 6. Material Contacts with the
Company Being Acquired...................................The Transaction
ITEM 7. Additional Information Required for Reoffering
by Persons Deemed to be Underwriters......................Not Applicable
ITEM 8. Interests of Named Experts and Counsel...............Experts and Counsel
ITEM 9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities...............Indemnification for Securities Act Liabilities
B. INFORMATION ABOUT THE REGISTRANT.
ITEM 10. Information with Respect to S-3 Registrants..............Not Applicable
ITEM 11. Incorporation of Certain
Information by Reference.................................Not Applicable
ITEM 12. Information with Respect
to S-2 or S-3 Registrants................................Not Applicable
ITEM 13. Incorporation of Certain
Information by Reference.................................Not Applicable
ITEM 14. Information with Respect to
Other Than S-2 or S-3 Registrants........................The Registrant
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED.
ITEM 15. Information with Respect to S-3 Companies................Not Applicable
ITEM 16. Information with Respect to S-2 or S-3 Companies.........Not Applicable
ITEM 17. Information with Respect to
Other Than S-2 or S-3 Companies...The Acquired Company; The Transaction
D. VOTING AND MANAGEMENT INFORMATION.
ITEM 18. Information if Proxies, Consents
or Authorizations Are to be Solicited....................Not Applicable
ITEM 19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited.......Voting and Management Info
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
ITEM 21. Exhibits and Financial Statement Schedules
a. Audited Financial Statements of
Airtech International Corporation as of May 31, 1997
with Independent Auditor's Report
b. Consent of Experts Turner, Stone & Company, LLP
c. Consent of Experts Alvin L. Dahl & Associates, PC
ITEM 22. Undertakings
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
Interactive Technologies Corp., Inc.
29,707,142 Shares Common Stock
8,850,000 Convertible Preferred Shares
$9,000,000 Convertible 10% Debentures
- --------------------------------------------------------------------------------
This Prospectus pertains to an offer by Interactive Technologies Corp.,
Inc. ("ITC"), a Wyoming corporation, to purchase all, but not less than 81%, of
the issued and outstanding $0.0001 par value common stock (the "AIRTECH Common
Stock") of AIRTECH International Corporation ("AIRTECH"). The offer is being
made pursuant to a Stock Purchase Agreement (herein so called), dated as of May
8, 1997, as amended and restated as of August 1, 1997. Pursuant to the Stock
Purchase Agreement, each holder of the AIRTECH common stock shall receive in
exchange for such AIRTECH Common Stock: (i) his pro-rata percent of 8,000,000
shares of the $0.01 par value ITC common stock (the "ITC Common Stock") being
registered hereunder; (ii) his pro-rata share of 8,850,000 shares of ITC's
Convertible Preferred Shares (the ITC Preferred Shares"), and his pro-rata share
of $9,000,000 aggregate principal amount of ITC Convertible 10% Debentures (the
"ITC Debentures"). The remaining 21,707142 shares of ITC Common Stock being
registered hereunder will be reserved by ITC for the conversion, if any, of the
ITC Preferred Shares and the ITC Debentures, in accordance with their terms.
(See EXHIBIT "A" - Terms of ITC Preferred Stock. See also EXHIBIT "B" -Terms of
ITC Debentures.)
See "Risk Factors" for a discussion of certain material factors which
should be considered in connection with an investment in the Securities.
- ----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
The date of this Prospectus is December 10, 1997.
<PAGE>
AVAILABLE INFORMATION
ITC is subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by ITC under the Exchange Act can be inspected and copied, at
the prescribed rates, at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and at
certain of its regional offices. The Commission maintains a web site on the
Internet at www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants, including ITC, that file
electronically.
This prospectus incorporates documents by reference which are not presented
herein. These documents are available upon request from Interactive Technologies
Corp., Inc., (407) 953-4811, Attn: Chief Executive Officer, 102 S. Harbor City
Blvd, Melbourne, Florida 32901. In order to ensure timely delivery of the
documents, any request should be made by ____________, 1997.
TABLE OF CONTENTS
Page
Summary Information..................................................... 1
Risk Factors............................................................ 3
The Transaction......................................................... 6
Means of Offer and Acceptance........................................... 7
Management's Discussion and Analysis.................................... 8
Selected Pro Forma Financial Data....................................... 11
The Registrant.......................................................... 32
The Acquired Company.................................................... 37
Management Information.................................................. 41
Voting Securities and Principal Holders Thereof......................... 44
Interests of Experts and Counsel........................................ 48
Certain Legal Matters................................................... 48
Experts................................................................. 48
Transfer Agent.......................................................... 48
Indemnification for Securities Act Liabilities......................... 48
SIGNATURES
EXHIBITS
EXHIBIT "A" - Terms of ITC Preferred Stock ....................A-1
EXHIBIT "B" - Terms of ITC Debenture...........................B-1
EXHIBIT "C" - Form for Accepting Tender Offer..................C-1
<PAGE>
SUMMARY INFORMATION
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements appearing elsewhere, or
incorporated by reference, in this Prospectus. The securities offered hereby
involve a high degree of risk. Investors should carefully consider the
information set forth under the heading "Risk Factors".
Principal Offices. Interactive Technologies Corp., Inc. ("ITC")
102 South Harbor City Blvd.
Melbourne, FL 32901
Tele: (407) 953-4811
AIRTECH International Corporation
15400 Knoll Trail, Ste. 106
Dallas, TX 75248
Tele: (972) 960-9400
Business of ITC. ITC's principal business activities involve the
development and marketing of an interactive programming
product known as Rebate TV (tm). Additionally, ITC's
is exploring opportunities in Interactive Video and Data
Services ("IVDS"). (See "THE REGISTRANT-Principal Products
or Services and their Markets".)
Business
of AIRTECH. AIRTECH International Corporation ("AIRTECH") is developing
a line of airfiltration systems for use indoors and in
automobiles. (See "THE ACQUIRED COMPANY.") Through its
wholly owned subsidiary Airsopure, Inc. ("Airsopure"),
AIRTECH began offering franchises in April 1997. (See
"THE ACQUIRED COMPANY - The Franchise Program".)
The Transaction. ITC has offered to purchase all, but not less than 81%, of
the issued and outstanding $0.0001 par value common stock
of AIRTECH pursuant to a Stock Purchase Agreement, dated as
of May 8, 1997. (Such Stock Purchase Agreement, as amended
and restated as of August 1, 1997, the "Stock Purchase
Agreement") Pursuant to the Stock Purchase Agreement, each
holder of the AIRTECH common stock (the "AIRTECH Common
Stock") which accepts ITC's purchase offer shall receive in
exchange for such AIRTECH Common Stock: (i) his pro-rata
percent of 8,000,000 shares of ITC's $.01 par value common
shares;(ii) his pro-rata share of 8,850,000 shares of ITC's
Convertible Preferred Shares (the "ITC Preferred Shares"),
and his pro-rata share of $9,000,000 aggregate principal
amount of ITC's Convertible 10% Debentures (the "ITC
Debentures"). The remaining 21,707,142 shares of Common
Stock being registered hereunder will be reserved by ITC
against the conversion, if any,of the Convertible Preferred
Shares and the ITC Debentures.
Market Value
of Securities. The following sets forth the market value of ITC and
AIRTECH (both on an historical and equivalent per share
basis) as of the end of the most recent fiscal quarter and
as of May 8, 1997, the date preceding the date of the
public announcement of the proposed transaction:
ITC (1) AIRTECH(2)
High Lo
Quarter ended November 30, 1997
Quarter ended August 31, 1997
May 8, 1997 1 9/16 1 3/8 $1.00
Quarter ended February 28, 1997 1 1/2 1 1/8 $2.00
Quarter ended November 30, 1996 4 1 1/4 $1.50
Quarter ended August 31, 1996 5 1/4 4 1/4 $1.50
Quarter ended May 31, 1996 5 4 7/8 (2)
Quarter ended March 29, 1996 4 3/4 3 7/8 (2)
Quarter ended December 29, 1995 4 2 1/2 (2)
1
<PAGE>
(1) From April 30, 1996, to October 22, 1997 the ITC Common
Stock has been traded on the National Association
of Securities Dealers Automated Quotation System
(NASDAQ) SmallCap Market under the Symbol "ITNL". Prior
to being traded on the NASDAQ exchange the ITC Common
Stock were traded in the "over-the-Counter" or
"Bulletin Board" market. Prior to the quarter ended
December 29, 1995, to the best of ITC's knowledge, no
trading occurred in the ITC Common Stock.
(2) The AIRTECH Common Stock has never been traded on a
market. During 1996, AIRTECH has sold shares of
AIRTECH Common Stock in a Private Placement pursuant
to Regulation 504, at the prices and during the periods
reflected in the table above.
SELECTED FINANCIAL INFORMATION
(In Thousands, except per share data)
HISTORICAL PRO FORMA
ITC AIRTECH COMBINED
Book Value - Fiscal Year 5/31/97 $3,954 $3,451 $11,984
Book Value - Three Months Ended
August 31, 1997 3,607 3,383 11,569
Earnings (Loss) per Share:
Fiscal year ended 5/31/97(1)
Primary ($ 0.22) ($ 0.01) ($ 0.22)
Fully Diluted ($ 0.22) ($ 0.01) ($ 0.22)
Three months ended 8/31/97(1)
Primary ($ 0.03) ($ 0.01) ($ 0.03)
Fully Diluted ($ 0.03) ($ 0.01) ($ 0.03)
(1) See Exhibits for explanation of principals of
consolidation, earnings per share and computation of
primary and fully diluted shares outstanding)
Voting and
Affiliate Votes. Directors, executive officers and their
affiliates of ITC control approximately 49% of the
issued and outstanding shares of ITC's Common Stock.
Authorization of the transaction by ITC does not
require the approving vote of the Shareholders of the
ITC Common Stock. The transaction has been approved
by the ITC Board of Directors.
Directors, executive officers and their affiliates of
AIRTECH control approximately 43% of the issued and
outstanding shares of AIRTECH's Common Stock. On
April 20, 1997 AIRTECH shareholders, in a special
shareholders, meeting voted on acceptance of the
Stock Purchase Agreement submitted by ITC. At that
meeting held in Dallas, Texas at 7:00 AM, on April
20, 1997 15,652,825 shares (representing
approximately 90% of the issued and outstanding
AIRTECH Common Stock) voted in favor of authorizing
the officers and directors of AIRTECH to enter into
the Stock Purchase Agreement ( See Stock Purchase
Agreement) and to take such other actions as should
be reasonably required and necessary to assist ITC in
the preparation of its tender offer contemplated
thereby. No (0.0%) shares voted against the
proposition, and 1,082,175 (representing
approximately 0.6% of the issued and outstanding
AIRTECH Common Stock) abstained. This vote exceeds
the 81% required by the Stock Purchase Agreement.
Regulatory
Approval No federal or state regulatory requirements must be
complied with or approval obtained in connection with
the proposed transaction.
2
<PAGE>
Dissenter's Rights Holders of the AIRTECH Common Stock electing not
to sell their shares to ITC have no dissenters rights
of appraisal.
Tax Consequences The transaction is being structured as a "tax-free
exchange" pursuant to Section 368(a)(1)(b) of the
Internal Revenue Code of 1986, as amended.
(the "Code").
RISK FACTORS
An exchange of the AIRTECH Common Stock for the securities of ITC, as described
in this Prospectus, involves a high degree of risk. Prospective investors should
consider carefully the following risk factors, in addition to the other
information contained in this Prospectus, before agreeing to the exchange of the
AIRTECH Common Stock or otherwise purchasing the securities of ITC. This
Prospectus contains certain statements of a forward-looking nature relating to
future events or the future financial performance of ITC and AIRTECH's
operations as a wholly owned subsidiary of ITC. Prospective investors are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, prospective
investors should specifically consider the various factors identified in this
Prospectus, including the matters set forth below, which could cause actual
results to differ materially from those indicated by such forward-looking
statements.
ITC - Negative Cash Flow and Operating Losses
- ---------------------------------------------
ITC has had a net loss from operations from inception. ITC does not
anticipate that it will generate income from operations during its fiscal year
ended May 31, 1998.
Limited History of Operations - General
- ---------------------------------------
The likelihood of the success of ITC and AIRTECH must be considered in the
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with the formation of a new business and
the competitive environments in which ITC and AIRTECH operate.
In light of the limited operating history of ITC and AIRTECH, their history
of significant operating losses and their expectation that they will continue to
incur significant expenses and operating losses for the foreseeable future,
there can be no assurance that either ITC or AIRTECH will be able to implement
its growth strategy, or achieve or sustain profitability.
Losses
- ------
ITC has had a net loss from inception.
Limited History of Operations - ITC.
- ------------------------------------
Rebate TV(TM). Rebate TV(TM) is a relatively new product that has not yet
become widely utilized and IVDS is a new communications industry licensed by the
FCC for the first time in 1993. There is no assurance that Rebate TV(TM) or the
proposed IVDS services will result in revenue or profit to ITC. See "THE
REGISTRANT - Principal Products or Services and Their Markets."
Limited History of Operations - AIRTECH .
- -----------------------------------------
AIRTECH has conducted operations for approximately two (2) years and had a
net loss from inception. There is no assurance that the operations of AIRTECH
will result in revenue or profit. See "THE ACQUIRED COMPANY".
3
<PAGE>
Significant Future Capital Requirements
- ---------------------------------------
The development of the businesses of ITC and AIRTECH, and the development,
sales and delivery of their products and services require significant
expenditures, a substantial portion of which must be made before any revenues
can be realized. Certain of the expenditures, including marketing, sales and
general and administrative costs, will be expensed as incurred, while certain
other expenditures, including product design, network design and costs to obtain
legal and regulatory approval, are deferred until the applicable network or
product is installed and operational. ITC and AIRTECH will continue to incur
significant expenditures in connection with the construction, acquisition,
development and expansion of their products, services and customer base.
ITC and AIRTECH expect to fund additional capital requirements through
additional equity and debt offerings, secured credit facilities, and internally
generated funds, as appropriate. There can be no assurance, however, that either
ITC or AIRTECH will be successful in generating sufficient cash flow or in
raising sufficient capital on terms that it will consider acceptable, or at all.
Competition - ITC.
- ------------------
Other companies that have announced that they will provide programming to
the interactive television marketplace. Many of these companies will be better
capitalized than ITC and will be better positioned to take to take advantage of
this emerging market. There is no assurance that ITC will secure a competitive
position in such market or that its activities will result in profit to ITC.
Competition - AIRTECH.
- ----------------------
The demand for air purification technology is rapidly growing and the
industry is becoming highly competitive. Most larger metropolitan areas have one
or more small distributors or small manufacturers, such as AIRTECH, each with
limited capital and limited products. The largest competitor in the industry is
Honeywell with its Duracraft and Envirocare subsidiaries.
Competition will increase with society's growing awareness of air quality
problems such as the sick building syndrome (where respiratory illness spreads
through out a building by the heating and air conditioning system, increasing
loss of workers productivity and the development of asthma in infants and small
children). Competition will also increase with the identification of niche
markets, such as (i) the food and beverage industry where smoking problems exist
or local regulations make certain demands, (ii) the growth of cigar bars, (iii)
the creation of lounges for smoking in airports and other public buildings,
(iii) and other smoking and non-smoking environment demands.
As competition increases, there will be many companies engaging in the air
purification industry which are more experienced, more established and
financially stronger than ITC. There can be no assurance that AIRTECH will be
able to successfully compete against such companies.
Dependence upon Key Management
- ------------------------------
Both ITC and AIRTECH are dependent on their present officers and key
employees with respect to their current business and growth strategy. (See
"MANAGEMENT INFORMATION - Directors and Executive Officers".) Should one or more
of them cease to be affiliated with the companies before acceptable replacements
are found, there could be a material adverse effect on the combined companies'
business and prospects, and no assurance can be given that suitable replacements
could be hired, if at all, except at substantial additional cost to ITC. As a
result, each company may be subject to the effect of possible conflicts of
interest arising from the relationship of such persons in connection with the
pursuit of business opportunities. There can be no assurance that any such
conflict will be resolved in favor of the companies.
Expansion Risk
- --------------
ITC and AIRTECH expect to experience a period of rapid expansion. The
operating complexity of the companies, as well as the level of responsibility
for management personnel, are expected to increase as a result of such
expansion. ITC's ability to manage such growth effectively will require it and
AIRTECH to continue to expand and improve its operational and financial systems
and to expand, train and manage their employee base.
4
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Rapid Technological Changes
- ---------------------------
The telecommunications and air purification industries are subject to rapid
and significant changes in technology. While ITC believes that for the
foreseeable future these changes will not materially hinder the companies
ability to acquire necessary technologies, the effect of technological changes
on the businesses of ITC and AIRTECH cannot be predicted. Thus, there can be no
assurance that technological developments will not have a material adverse
effect on ITC and AIRTECH.
Control of AIRTECH by ITC.
- --------------------------
Upon completion of the proposed acquisition, ITC will own a controlling
number of the outstanding voting stock of ITC and will control the affairs and
policies of AIRTECH.
Limited Prior Trading Market; Potential Volatility
- --------------------------------------------------
There has been a limited public market for the ITC Common Stock. There has
been no public market for the ITC Preferred Stock or the ITC Debentures. The
AIRTECH Common Stock has not been publicly traded. There can be no assurance
that an active trading market will develop for the ITC Preferred Stock or the
ITC Debentures. Nor can there be any assurance that an active trading market for
the ITC Common Stock will develop or be sustained after the date hereof. The
market price of the shares of ITC Common Stock may be significantly affected by
factors such as actual or anticipated fluctuations in ITC's and AIRTECH's
operating results, new products or services or new contracts by ITC, AIRTECH or
their competitors, legislative and regulatory developments, conditions and
trends in the telecommunications industry, the air purification industry,
general market conditions and other factors. In addition, the stock market, from
time to time, has experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stock of
telecommunications, high technology and other companies that have often been
unrelated to the operating performance of particular companies. These broad
market fluctuations may also adversely affect the market price of ITC's Common
Stock, the ITC Preferred Stock or the ITC Debentures.
Shares Eligible for Future Sale; Dilution.
- ------------------------------------------
If the proposed stock purchase takes place following the acceptance of
ITC's tender offer by holders of 81% or more of the AIRTECH Common Stock, there
will be no immediate dilution in the net tangible book value of the ITC Common
Stock computed on a fully diluted basis.
However, ITC has a significant number of authorized, but unissued shares,
which may be issued by the Board of Directors without shareholder approval.
Sales of substantial amounts of ITC Common Stock in the public market following
completion of the proposed transaction may have an adverse effect on the market
price of the ITC Common Stock. ITC has not agreed to, directly or indirectly,
offer, sell, grant any option to purchase or otherwise dispose (or approve any
offer, sale, grant or other disposition) of any shares of the ITC Common Stock
or other capital stock of ITC or any securities convertible into, or exercisable
or exchangeable for, any share of ITC Common Stock or other capital stock of
ITC. Unless otherwise restricted, all shares of the ITC Common Stock offered
hereby will be immediately eligible for sale in the public market.
No Dividend's
- --------------
Neither ITC nor AIRTECH have ever declared or paid any cash dividends and
neither expects to declare any such dividends in the foreseeable future. Payment
of any future dividends will depend upon earnings and capital requirements of
ITC and AIRTECH, their debt facilities and other factors the Board of Directors
considers appropriate. ITC intends to retain its earnings, if any, to finance
the development and expansion of its business and, therefore, does not
anticipate paying any dividends in the foreseeable future. In addition, ITC
anticipates entering into certain borrowing arrangements which will restrict its
ability to pay dividends. Upon completion of the proposed transaction, ITC
intends to adopt a policy that, for the foreseeable future, it will not take any
action to upstream the earnings of AIRTECH from that subsidiary.
5
<PAGE>
Government Regulation
- ---------------------
The ability of ITC to provide IVDS services in the United States will be
subject to the rules and regulations promulgated by the FCC. At present there
are only limited rules or regulations. However, there is no assurance that there
will not be further rules and regulations forthcoming which are adverse to the
interests of ITC.
One of several significant market for AIRTECH's products will be Medicare
recipients. To access this market AIRTECH has sought approval from the United
States Federal Drug Administration as a manufacturer, and will be
making application to have the AIRTECH 950 Air Purification and Filtration
System described herein (i) to be designated as a Class II Medical Device, and
(ii) to receive Medicare approval for a Medicare Part B Code with the approved
reimbursement as a related billing charge. There is no assurance that such
designation will be obtained.
THE TRANSACTION
The Stock Purchase Agreement.
- -----------------------------
General. The following is a summary of certain provisions of the Stock
Purchase Agreement (herein so called), executed as of May 8, 1997, by and
between ITC, AIRTECH, and certain shareholders of AIRTECH, as amended and
restated as of August 1, 1997. The Stock Purchase Agreement was filed as an
exhibit to ITC's Current Report on Form 8-K on May 22, 1997, and the First
Amended and Restated Stock Purchase Agreement has been filed as an Exhibit to
the Registration Statement of which this Prospectus is a part. (Reference is
hereby made to such filings for the full text of the agreements between the
parties concerning the proposed transactions. See also herein, "MEANS OF OFFER
AND ACCEPTANCE".)
Offer to Purchase. Subject to and upon the terms and conditions contained
in the Stock Purchase Agreement, ITC will accept and acquire from those
shareholders of AIRTECH (the "Selling Shareholders"), in the aggregate: a
minimum of eighty-one percent (81%) of, and up to a maximum of one hundred
percent (100%) of, the issued and outstanding shares of the AIRTECH Common
Stock. At the Closing (as defined in the Stock Purchase Agreement), the Selling
Shareholders shall assign, transfer, convey and deliver their respective AIRTECH
Common Stock, free and clear of any liens, encumbrances and charges whatsoever.
Consideration. At the Closing, in consideration of the shares of AIRTECH
Common Stock of the Selling Shareholders, ITC shall deliver to the Escrow Agent,
defined below, for the benefit of the Selling Shareholders, one or more
certificates representing shares of his pro-rata percentage of: (i) 8,000,000
shares of ITC's $.01 par value Common Stock; (ii) 8,850,000 shares of ITC's
Convertible Preferred Shares, and (iii) $9,000,000 principal amount ITC
Debentures. (If the proposed transaction closes with only the minimum percentage
(81%) of the AIRTECH Common Stock being exchanged, then the Selling Shareholders
would receive their pro rata share of (i) 6,480,000 shares of ITC's $.01 par
value Common Stock; (ii) 7,168,500 shares of ITC's Convertible Preferred Shares,
and (iii) $7,290,000 principal amount ITC Debentures.)
Escrow Agent. Interwest Transfer Company, P.O. Box 17136, Salt Lake City,
Utah 84117, Tele: 801-272-9294, Fax: 801-277-3147 will serve as Escrow Agent
(the "Escrow Agent") for the transaction pursuant to the terms of the Escrow
Agreement, the form of which is included as an Exhibit to the Registration
Statement of which this Prospectus is a part (the "Escrow Agreement") and which
is incorporated herein by reference.
Closing. The closing of the transaction contemplated hereby shall occur on
the twentieth (20) day following the date of delivery of this Prospectus to
AIRTECH shareholders, or on such later date after required compliance with state
and federal laws, and receipt of the acceptances from Selling Shareholders
owning at least eighty-one percent (81%) of the issued and outstanding AIRTECH
Common Stock.
ITC Preferred Stock. Each share of the 8,850,000 shares of ITC's one dollar
($1.00) par value Convertible Preferred Stock being registered hereunder, if not
earlier converted, shall be convertible at the option of the holder thereof,
into one registered share of ITC Common Stock from and after the expiration of
24 months following the Closing. At its option, ITC may elect to convert these
shares of Preferred Stock at any time during the 24 month period. (See "EXHIBIT
"A" - Terms of ITC Preferred Stock".)
6
<PAGE>
ITC Debentures. ITC's $9,000,000 principal amount Convertible 10%
Debentures will be secured by the shares of AIRTECH Common Stock purchased by
ITC in the proposed transaction, and shall be convertible after 24 months into
registered shares of ITC Common Stock at a rate of $0.70 per share. ITC at its
option, may elect to convert the ITC Debentures at any time during the 24 month
period. The interest accruing on the ITC Debentures, at ITC's option, can be
paid in cash or in additional registered shares of ITC's Common Stock. If such
interest is paid in shares of ITC Common Stock, the convertible rate shall be
$0.70. The remaining 21,857,143 shares of Common Stock being registered
hereunder will be reserved by ITC against conversion, if any, of the ITC Stock
and the ITC Debentures. (See "EXHIBIT "B" - Terms of ITC Debenture".)
Reasons for Entering into the Proposed Transaction.
- ---------------------------------------------------
ITC believes that the business of AIRTECH has the potential for growth. The
management of AIRTECH is of the opinion that the access to the capital markets
which will result from the proposed transaction, will expedite the development
of AIRTECH's product line and the implementation of AIRTECH's franchise program.
Management of AIRTECH is of the opinion that such developments, together with
the liquidity provided to AIRTECH's shareholders, is in the best long-term
interest of AIRTECH's shareholders.
Material Contacts between ITC and AIRTECH.
- ------------------------------------------
Prior to the meetings resulting in the execution of the Stock Purchase
Agreement, there were no material contacts between ITC and AIRTECH. ITC and
AIRTECH have negotiated of offer and sale in a private placement to accredited
investors a series of ITC Series M Preferred Stock which will have pledged
thereto a portion of AIRTECH'S revenue stream. (See "RISK FACTORS - Shares
Eligible for Future Sale; Dilution".)
Accounting Treatment.
- ---------------------
The proposed transaction is being treated as a purchase.
Tax Consequences.
- -----------------
The transaction is being structured as a "tax-free exchange" pursuant to
Section 368(a)(1)(b) of the Code. Prior to accepting ITC's exchange offer,
AIRTECH Common Stockholders should consult with their tax advisor concerning the
affect of any sale of the ITC shares received upon completion of the proposed
transaction.
MEANS OF OFFER AND ACCEPTANCE
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
Meeting of Shareholders.
- ------------------------
No meeting is required of either the shareholders of ITC or AIRTECH in
connection with the proposed offering. On April 20, 1997, AIRTECH shareholders,
in a special shareholders, meeting voted on of the Stock Purchase Agreement
submitted by ITC. At that meeting held in Dallas, Texas at 7:00 AM on April 20,
1997 15,652,825 shares voted for the agreement representing 90%, 0 shares voted
against the agreement and 1,082,175 abstained representing 6%.This vote exceeds
the 81% required by the Stock Purchase Agreement.
Means of Offer
- --------------
The offer to purchase the AIRTECH Common Stock is being made by ITC solely
by means of this Prospectus.
Means of Acceptance
- -------------------
Holders of AIRTECH's Common Stock may accept ITC's offer to purchase at any
time during the twenty (20) calendar day period commencing on the date of
delivery of this Prospectus, or during such longer period as shall be
established from time to time by ITC. Acceptance of the offer may be made solely
by delivery to the Escrow Agent of a fully completed, executed and notarized
Acceptance Certificate in the form attached hereto as EXHIBIT "C".
7
<PAGE>
Delivery of Tendered Shares.
- ----------------------------
The certificates (the "Certificates") representing the AIRTECH Common Stock
tendered by Selling Shareholders shall be delivered to the Escrow Agent by the
Selling Shareholders at such time as they deliver their acceptance of ITC's
tender offer in the form attached hereto as EXHIBIT "C". The Certificates, when
delivered by the Selling Shareholders with their acceptances, shall be in
suitable form for transfer by delivery or shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to Escrow Agent and ITC.
If less than 81% of the issued and outstanding shares of the AIRTECH Common
Stock are tendered with an acceptance of ITC's offer prior to the passage of 20
days (the "Acceptance Period") following delivery of the Prospectus; then,
unless the Escrow Agent shall have received written notice from both ITC and
AIRTECH extending the Acceptance Period, the Escrow Agent shall return the
Certificates, together with all related endorsements, to the respective Selling
Shareholders tendering the same.
If 81% or more of the issued and outstanding shares of the AIRTECH Common
Stock are tendered with an acceptance of ITC's offer prior to the passage of the
Acceptance Period or any extension thereof, then the Certificates shall be held
by Escrow Agent for the benefit of each Secured Party.
Delivery of Prospectus
- ----------------------
This Prospectus shall be delivered to the holders of the AIRTECH Common
Stock as soon as practical following its effective date. Delivery shall be made
by hand delivery, overnight courier, or the deposit of this Prospectus in the
United States mail. All costs of such offering are being paid by ITC.
Acceptance Revocable
- --------------------
Any consent or acceptance of ITC's offer given prior to receipt of this
Prospectus is revocable at any time.
Dissenters' Rights of Appraisal
- -------------------------------
Holders of the AIRTECH Common Stock electing not to sell their shares to
ITC have no dissenters rights of appraisal.
Material Interests of Affiliates
- --------------------------------
None of the affiliates of ITC or AIRTECH have any material interest in the
proposed transaction, direct or indirect, by security holdings or otherwise,
except to the extent that affiliates of AIRTECH have interests arising from
their security holdings in AIRTECH which is shared on a pro rata basis with all
other holders of the AIRTECH common stock.
Record Date
- -----------
The record date for the transaction contemplated hereby is November 15, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
- ---------------------
Revenues for the combined operations of ITC and AIRTECH were $270,994 for
the three months ending August 31, 1997, with a Gross Profit of $86,786
after Cost of Goods Sold.
8
<PAGE>
ITC's operations for the same three month period consisted of primarily of
completion of its initial market testing of its Rebate TVTM television program
in the Central Florida Market. Net revenues for this period were $3,070. ITC has
developed and operates a computer system and communications system to support
its Rebate TVTM program on a national basis. The operation of these systems and
the development of a national marketing program during such period, resulted in
General and Administrative Expenses of $117,880 and a net loss from operations
of $347,426. During this period ITC realized a gain of $311,500 from the sale of
a 90% interest in its Charleston, South Carolina IVDS license. Development of
ITC's computer system and communications link are substantially complete and now
available for access on a national basis.
AIRTECH for such three month period had Gross Revenues in the amount of
$267,924 resulting in Gross Income after Cost of Goods sold of $83,716. During
such period, AIRTECH was completing development of a new line of air filtration
equipment after cancellation of its agreement with Honeywell Environmental Air
Control, Inc. Cancellation of such Agreement, resulted in General and
Administrative Expenses of $290,816 and a Net Loss of $215,350 before
depreciation and amortization. Development of AIRTECH's basic line of products
is substantially complete and AIRTECH has begun marketing its products directly
and through its new franchise program.
Material Changes in Operations and Financial Condition
- ------------------------------------------------------
With the end of its initial market testing, ITC has changed its focus from
program development and testing to market expansion. Operation of Rebate TVTM,
although currently distributable and supportable on a national basis, requires
that it be rolled out on a market by market basis. ITC faces a number of
decisions as to whether to concentrate its resources on local markets supported
by smaller vendors or to concentrate on multiple markets driven by regional and
national advertisers . ITC is currently developing promotional programs to drive
subscribers to either market but is concentrating on a single market approach to
support each market with such programs as its School Organization Promotion
(Rebate TVTM goes to School).
ITC has been subject to several delays in its expansion with the departure
of An officer and key employee who was in charge of the market expansion effort
including some additional delays in recovering company files and information
from this person. ITC is currently in pre-production of its new program and
expects it to air within the Fall 1997. Also during this period, ITC withdrew
from a production studio project in New Jersey due to substantial delays caused
by both the real estate lessor and the studio equipment lessor. This decision by
management was encouraged by substantial changes in post production equipment
and software technology in the very short term which would have required
additional capital expenditures by ITC.
The Company continues to produce Rebate TV(TM) in central Florida and has
entered into a strategic relationship with Bottomline, Inc. of Atlanta, Georgia
which will make available to ITC production and post production resources to
meet requirements by the ITC as it expands into additional markets.
AIRTECH until May of 1996 was a full service distributor for Honeywell
Environmental Air Control, Inc. Upon termination of that contract, AIRTECH began
development of a complete line of air purification products to replace the
Honeywell line. (See "THE ACQUIRED COMPANY - Principal Products or Services and
Their Markets). In March 1997, AIRTECH incorporated Airsopure, Inc. as a wholly
owned subsidiary for the implementation and operation of a franchise sales
program for the distribution and sales of air purification products. (See
"Franchise Program"). AIRTECH continues to distribute products directly and
through its subsidiary McClesky Sales and Service, Inc. In addition, AIRTECH has
developed certain products which has presented for distribution to the
multilevel marketing industry.
Liquidity and Capital Resources
- -------------------------------
During the three months ended August 31, 1997, ITC and AIRTECH continued to
fund operations and expansion through revenues and private sales of equity
securities and debt. In fiscal year 1997, ITC received net cash from financing
activities in the amount of $1,487,740 with AIRTECH receiving $1,427,065 during
that period. Although neither ITC nor AIRTECH have commitments for future
funding, management believes that it can continue to raise additional capital
for expansion of its markets though revenue and private sources.
9
<PAGE>
In addition, ITC has agreed to issue $5,000,000 in Series M Preferred Stock
(the "Series M Stock") on a private basis to accredited investors in the form of
200 units consisting of 25,000 shares of convertible preferred stock convertible
into common at the rate of one share for one share of preferred and 25,000
warrants convertible into common stock at a price of $2.00 per share. The
preference for this series is to a pro rata portion of 20% of the Gross Profits
from the sales of the AIRTECH Model 950 Air Purification and Filtration System
being developed as a Class II Medical Device for Medicare Recipients with
Respiratory Conditions. This preference is for a period of three years from the
date production begins. AIRTECH has agreed to assign a 25% interest in this
revenue stream to ITC out of which this 20% will be set aside for this
preference. The Series M Stock will be offered pursuant to Rule 506 of
Regulation D of the Securities Act of 1933. Twenty-five percent (25%) of the net
proceeds of the sale of the Series M Stock will be used for market expansion and
distribution of the Rebate TVTM programming, and seventy-five percent (75%) of
such net proceeds will be allocated for the development and distribution of the
AIRTECH Model 950. ITC does not have an underwriter for this placement.
Management expects that the sales of the Series M Stock will be completed,
although there is no assurance that either it will be completed or that the
funds will otherwise be available to fund the operations and expansion of the
combined companies.
10
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
PRO-FORMA COMBINED BALANCE SHEETS
AUGUST 31, 1997
(Unaudited)
Historical Acquired
Acquisition
ITC AIRTECH Adjustments Combined
--- ------- ----------- --------
ASSETS
Current Assets $ 68,580 $1,228,458 $1,329,446
Stock subscription receivable 507,577(2) 507,577
Property and equipment
net of depreciation 80,871 229,264 310,135
Notes receivable 783,957 783,957
Intellectual properties
Net of amortization 4,684,766(2) 1,146,318(3) 12,250,000(4) 18,081,084
Goodwill 1,329,252(4) 1,408,474
Other Assets 1,466 1,169,685 1,171,151
----- --------- ---------- ---------
Total Assets $4,835,683 $4,557,682 $13,579,252 $ 22,972,617
========= =========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities $ 680,436 $ 732,428 $1,412,864
Deferred Revenue 400,000 400,000
Long-term Liabilities 548,673 42,419 591,092
9,000,000(4) 9,000,000
--------- --------- ----------
Total Liabilities 1,229,109 1,174,847 11,403,956
--------- --------- ----------
Commitments and Contingencies (5)
Stockholders' Equity
Paid in Capital 10,970,830 4,225,428 4,579,252(4) 19,775,510
Retained Earning (Deficit) (7,364,256) (842,593) (8,206,849)
----------- ---------- -----------
3,606,574 3,382,835 11,568,661
----------- ---------- ----------- -----------
Total Liabilities and
Stockholders' Equity $ 4,835,683 $4,557,682 $13,579,252 $22,972,617
========== ========== =========== ============
See Notes to Pro-Forma Combines Finanical Statements
11
<PAGE>
PRO-FORMA COMBINED STATEMENT OF OPERATIONS
For The Three Months Ended August 31, 1997
(Unaudited)
Historical
-------------
Acquired
--------
Acquisition
ITC AIRTECH Adjustments Combined
--- ------- ----------- --------
Net Revenues $ 3,070 $ 267,924 $ 270,994
Cost of Sales 184,208 184,208
--------- ----------- -----------
Gross Income 3,070 83,716 86,786
General and Administrative 117,880 290,816 408,696
--------- ----------- -----------
Net Income from Operations
Before depreciation,
Amortization and taxes (114,810) (207,100) (321,910)
Depreciation
and amortization 232,616 8,250 240,866
--------- ---------- -----------
Net Income (Loss)
from Operations (347,426) (215,350) (562,776)
Income Taxes -0- -0- -0-
------------ ---------- ------------
Net Income $ (347,426) $(215,350) $ (562,776)
============ ========== ============
Primary (loss) per share $ (0.03)(1) $ (0.01)(1) $ (0.03)
Diluted (loss) per share $ (0.03)(1) $ (0.01)(1) $ (0.03)
See notes to Pro-Forma Combined Financial Statements
12
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
For the Three Months Ended August 31, 1997
(Unaudited)
1. Basis of Presentation
The accompanying Pro-Forma Combined balance sheet at August 31, 1997 and
related combined statement of operations for the nine months then ended have
been prepared as if the business combination had occurred on June 1, 1997 the
start of the current fiscal year of Interactive.
The purchase of the outstanding stock of Airtech by Interactive is being
reflected in these Pro-Forma Combined Financial Statements using the purchase
method for recording the transaction. The excess of cost over book value has
been reclassified to other assets of Airtech based on managements estimates and
outside valuation based on projected cash flows and revenues from the revalued
assets. No provision for amortization of these revalued assets or goodwill are
reflected in these combined financial statements.
There have been no changes in generally accepted accounting principals in
the presentation of the combined financial statements from the historical
audited financial statements included herein by reference as previously filed or
in the audited financial statements of Airtech for its fiscal year ended May 31,
1997.
Earnings per Share (EPS) is reflected as primary earning per share and
fully dilluted earnings per share set forth in the following table used for EPS
computation:
Historical
----------
ITC Airtech
----- --------
Weighted average number of shares 12,139,865 17,485,000
Less shares cancelled ( 3,400,000)
Add shares issued for debentures 1,144,444
Adjustment for combined presentation (17,485,000)
Common shares issued for acquired 8,000,000
Primary shares outstanding 17,884,309
Assuming conversion of convertable
preferred issued for acquired 8,850,000
Assuming conversion of convertable
Debentures issued for acquired 12,857,143
Fully diluted shares outstanding 39,591,452
Notes to Historical Financial Statements
1. Intellectual properties reflected on the balance sheet of Interactive consist
of the following:
License rights net of accumulated amortization
of $294,334 $ 337,500
Proprietary software and trademark, net of accumulated
amortization of $1,063,776 4,347,266
-----------
$ 4,684,766
13
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
For the Three Months Ended August 31, 1997
(Unaudited)
License rights consist of ITC's Federal Communications Commission
Interactive Video and Data Services (IVDS) radio station license in the
Melbourne-Titusville-Palm Bay, Florida and the retained 10% interest in IVDS
license in the Charleston-North Charleston, South Carolina service areas
representing an additional enhancement to ITC's programming distribution. These
licenses have a duration of an initial five years, and are renewable if all
conditions of the license are met. IVDS, a two way communications system , will
allow viewer to take an active role in systems delivered through broadcast
television, cable television, wireless cable, direct broadcast satellite or
other future television delivery methods. IVDS is regulated as a personal radio
service under the rules of the FCC which has allocated spectrum in the 218-219
MHZ range for its use. IVDS systems are designed to operate with a hand-held
remote control device that controls the interactive set top[ device on the
subscriber's television set. A viewer would interact with the TV station through
a radio signal using an IVDS frequency.
Proprietary software and trademarks consist of software developed for
integration into the rebate television market and a trademark known as Rebate TV
(TM) purchased in October 1995. This proprietary software allows ITC to be a
developer and producer of television, interactive television and interactive
digital media programming. These programs can be developed in various
interactive formats for cable, broadcast and direct broadcast satellite
television as well as for Internet distribution. Rebate TV is a television
program which incorporates interactive media and computer data management
allowing retail vendors to communicate their message to consumers, the allow the
consumer to verify his or her purchase, with the consumer receiving a cash
rebate from ITC for their purchases. Retailers represent a broad spectrum of the
business community including grocer chains, furniture stores, tire service
stores, banks, restaurants, car dealers and a variety of other specialty
businesses.
2. Intellectual properties reflected on the balance of Airtech consist of the
cost incurred to date for the development of a full line of air purification
products for commercial, consumer, automobile and medical use. Several of the
products will be eligible for a US and foreign patents with patent applications
currently in process or planned (See Note ). Adjustments for Acquisition
3. Per the stock purchase agreement entered into on May 8, 1997 between
Interactive Technologies Corporation, Inc. and Airtech International Corporation
the following presents the securities and the related valuation of the purchase
of 100% of the issued and outstanding common stock of Airtech:
Value
Description of Securities Per Share Total
-------------------------- ---------- ---------
8,000,000 shares of Interactive
Common Stock, registered $0.56(a) $ 4,480,000
8,850,000 shares of Interactive
Preferred Stock, registered and
convertible into Common Stock $0.45(b) 3,982,500
$9,000,000 in Convertible
Debentures At Face 9,000,000
Total value of purchase of 100%
of Airtech Common Stock $ 17,462,500
(a) The closing of bid price of Interactive common stock on May 8, 1997 was
$1.125, for valuation of a private placement type transaction of registered
shares of common stock Interactive has discounted the price per share by 50%.
(b) The Preferred Stock is convertible into one (1) share of Common Stock after
24 months or can be called by the Company during that time, for valuation
purposes the assigned value of the common shares was reduced by 20%.
14
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
For the Three Months Ended August 31, 1997
(Unaudited)
The following represents the allocation of the purchase price:
Book value of Airtech common stock $ 3,804,026
Intellectual properties 12,250,000
Excess of purchase price over cost 1,408,474
-------------
Total purchase price $ 17,462,500
4. Interactive Technologies has the following litigation pending:
The Company is a defendant in a proceeding filed in the United States
District Court for the Southern District of New York. It accepted service April
5, 1997 in an action brought by Studiolink Corporation and Steven Campus for
damages arising out of an equipment lease agreement. The Company expects to
assert counterclaims against the Plaintiffs for losses suffered as a result of
their failure to perform. Settlement discussions have been ongoing and the
Company expects this matter to be settled in a manner not unfavorable to the
Company. In addition, in related matters, the Company is in litigation with LLB
Realty, L.L.C. which has filed a claim alleging claims under an office lease
agreement in Superior Court of New Jersey, Mercer County. The Company has
asserted claims against L.L.B. Realty, L.L.C. for failure to perform under the
conditions of the agreement. Settlement negotiations have been ongoing and the
Company expects this matter to be settled in a manner not unfavorable to the
Company.
The Company is not a party to any other pending legal proceedings except
for claims and lawsuits arising in the normal course of business. The Company
does not believe that these claims or lawsuits will have a material effect on
ITC's financial condition or results of operations. Accordingly no provision or
accrual for potential losses are reflected in the Pro-Forma Combined Financial
Statements.
Airtech International Corporation has the following litigation pending:
Airtech International Corporation, McCleskey Sales and Service, Inc., C.J.
Comu and John Potter, plaintiffs vs Honeywell, Inc., Honeywell Environmental Air
Control, Inc. And Suzanne Haas, defendants; No. 3:96CV-1855-D, United States
District Court for the Northern District of Texas, Dallas Division.
In this case, Airtech, a subsidiary and two of its officers filed suit
against Honeywell, Inc. And a Honeywell subsidiary and an employee asserting
several causes of action. These causes of action include breach of contract
relating to termination of the Company's Full Service Distributorship
agreements, for defamation and tortious interference with contract relating to a
merger agreement between the Company and DCX, Inc., for unfair competition
regarding claims made by Honeywell about it air purification products, for
negligent misrepresentation regarding representations made to the Company and
its subsidiary regarding the exclusivity of certain arrangements with the
defendants, and for declaratory relief and attorney's fees. Honeywell filed a
counterclaim against the Company, McCleskey, Comu and Potter. Honeywell alleges
that the Company and McCleskey owe Honeywell money for past purchases, and that
Comu and Potter interfered with the relationship between McCleskey and
Honeywell. Honeywell seeks $71,000 in actual damages and unspecified punitive
damages and attorney's fees. The Company has denied all of the material
allegations of Honeywell's counterclaim. The Company plans to vigorously defend
the counterclaim and believes the counterclaim to be without merit.
Honeywell, Inc., plaintiff, vs Airtech International Corporation,
AirSoPure, Inc. And Richard Allegrati, defendants: No. WMN 97-238 United States
District Court for the District of Maryland, Baltimore Division.
15
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
For the Three Months Ended August 31, 1997
(Unaudited)
Honeywell filed suit against the Company, a subsidiary and an employee,
alleging violations of the Lanham Act and the Maryland Uniform Trade Secrets Act
and the common law. The suit alleges that certain Airtech and AirSoPure products
were sold in violation of the Honeywell's trademarks, and that the cover design
of certain products of Airtech/AirSoPure was wrongfully obtained. The suit seeks
an injunction and unspecified damages. Rather than incur substantial additional
attorney's fees, the Company agreed to the entry of a preliminary injunction
regarding the sale of a very small number of modified Honeywell products,
immaterial to the Company's business. The Company denies all of the material
allegations of Honeywell's claims, is vigorously defending this case. The
Company believes Honeywell's claims to be without merit.
Accordingly no reserve or accrual has been reflected in these Combined
Pro-Forma Financial Statements for this pending litigation.
16
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997 and 1996
Assets
August 31, August 31,
1997 1996
---- ----
Current assets:
Cash $11,009 $14,695
Accounts and note receivable, trade, 24,167
net of $25,000, of allowance for
uncollectible amounts 42,165 -
Prepaid expenses and other assets 15,406 15,593
--------- --------
Total current assets 68,580 54,455
--------- --------
Property and equipment, at cost, net of
$34,270 and $13,138, respectively of
accumulated depreciation 80,871 101,692
--------- --------
Other assets:
Organizational costs, net of $2,534
and $1,734, respectively of
accumulated amortization 1,466 2,266
Investment in Subsidiary - SNT - 314,899
License rights, net of $337,500
and $294,334, respectively of
accumulated amortization 337,500 670,666
Proprietary software and trademark,
net of $1,063,776 amd 289,877,
respectively of accumulated
amortization 4,347,266 5,121,165
--------- ---------
4,767,103 6,108,996
--------- ---------
$4,835,683 $6,265,143
========== ==========
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997 AND 1996
Liabilities and Stockholders' Equity
August 31, August 31,
1997 1996
---- ----
Current liabilities:
Accounts payable, trade $ 127,812 $ 225,023
Accrued expenses 67,862 77,683
Contract of sale deposit - 500,000
Notes payable 274,685
Loans Payable
Related Parties
Others 252,462
Current portion of long-term
liabilities 210,077 171,227
--------- --------
Total current liabilities 680,436 $1,226,395
--------- ----------
Long-term liabilities:
License rights payable 329,923 499,573
Capital lease obligation 218,750 -
Convertible debentures payable - 800,000
--------- ---------
548,673 1,299,573
Commitments and contingencies:
Stockholders' equity:
Common stock, $.01 par value
50,000,000 and 12,500,000 shares
authorized, respectively
13,479,613 and 11,866,491,
respectively, shares issued
and outstanding 134,796 118,665
Paid in capital in excess of par 10,836,034 8,796,652
Accumulated deficit ( 7,364,256) (5,176,142)
------------ -----------
3,606,574 3,739,175
------------ -----------
$ 4,835,683 $ 6,265,143
============ ============
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
Interactive Technologies Corporation, Incorporated
Statements of Operations
For the Three Months Ended August 31, 1997 and 1996
AUGUST 31, AUGUST 31,
1997 1996
------------- -----------
(unaudited) (unaudited)
------------- -----------
Revenue $ 3,070 $ 12,835
------------- -----------
Operating expenses:
Depreciation 5,414 5,403
Amortization 227,202 240,809
Production costs 912 -
General and administrative 104,704 658,175
Interest expense:
Stockholder - -
Other 12,264 -
Management fee-stockholder - -
------------- -----------
350,496 904,387
------------- -----------
Loss from operations (347,426) (891,552)
Income/(loss) before income taxes (347,426) (891,552)
Provision for income taxes - -
------------- -----------
Net income/(loss) $ (347,426) $ (891,552)
============= ===========
Net income/(loss) per share
Primary $ 0.03 $ 0.08
Diluted $ 0.03 $ 0.08
Accompaning notes are an integral part of the financial statements.
19
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
Interactive Technologies Corporation, Inc. (the Company) was incorporated
in the state of Wyoming on August 8, 1991. On October 20, 1995, the Company
entered into a reverse acquisition transaction, described below, with
Syneractive, Inc. (SI). SI was incorporated in the state of Florida on August
31, 1995. Prior to October 20, 1995, the Company was engaged primarily in the
business of exploiting its rights under a license granted by CST Entertainment
Imaging, Inc. The license gave the Company the exclusive right to colorize
black-and-white film and videotape, including black-and-white theatrical films
and television programs, which were originally produced for distribution
primarily within European countries. However, the Company abandoned the business
of exploiting the license (see Note 3) on October 18, 1995 as a result of being
unable to realize any revenue from the license. SI, which was acquired in a
reverse acquisition, obtained license rights from the Federal Communications
Commission to operate interactive and data service systems in the Charleston -
North Charleston, SC and Melbourne - Titusville, Florida metropolitan areas.
Syneractive, Inc. also acquired proprietary software and a trademark known
as Rebate TV, which is a marketing and sales medium for a wide variety of
products and services. Advertisers on Rebate TV will offer substantial rebates
to the network's viewers through a unique interactive rebate program. Touch-tone
phones will initially interact the network to secured earned rebates, and later
the network will be accessed via wireless digital communications networks
currently under development. The Rebate TV operations commenced April 15, 1996
and serve customers in the eastern United States. Management expects
exploitation of the FCC licenses to commence in 1997. They intend to hire the
necessary management personnel, raise addition capital and generate profitable
operations needed to continue its existence.
Syneractive, Inc. was dissolved on October 30, 1995.
Reverse acquisition
- -------------------
On October 1, 1995, the Company issued 5,700,000 shares of common stock to
its current sole director and officer in exchange for the net assets of SI.
After the issuance of such stock, the current director and officer effectively
controlled the Company, holding approximately 50.1% of the outstanding common
stock.
Prior to the reverse acquisition, the current sole director and officer of
the Company owned all of the outstanding common stock of SI. Accordingly, the
reverse acquisition has been accounted for at the historical cost of the assets
acquired.
Basis of Presentation
- ---------------------
The financial information presented as of any date other than May 31 has
been prepared from the books and records without audit. The accompanying
financial statements have been prepared in accordance with the instructions to
Form 10QSB and do not include all of the information and the footnotes required
by generally accepted accounting principals for complete statements. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such financial statements,
have been included.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended May 31,
1996 contained in the Company's 10KSB Annual Report.
Management 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.
20
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
Cash flow
- ---------
For purposes of the statement of cash flows, cash includes demand deposits and
time deposits with maturities of less than three months. None of the Company's
cash is restricted.
Earnings per share
Primary and fully diluted earnings per share amounts are based upon 13,479,613
and 11,866,491, respectively, weighted average shares of common stock and common
stock equivalents outstanding. No effect has been given to the assumed exercise
of stock options and warrants and convertible debentures as the effect would be
antidilutive.
In February 1997, the Financial Standards Accounting Board (FASB) issued
Statement of Financial Accounting Standards No. 128 Earnings Per Share effective
for financial statement periods ending after December 15, 1997. Earlier
application is not permitted. For pro forma disclosure purposes, there is no
difference in the amounts of net loss per share and weighted average shares of
common stock outstanding computed using FASB 128 and those reflected in the
accompanying financial statements.
2. COMMITMENTS AND CONTINGENCIES
Operating leases
Through October 31, 1995, the Company used office space provided free of charge
by its stockholder, the value of which was not material. The Company presently
leases its facilities in Florida under non-cancelable operating lease agreements
expiring through April 1998. From May 1996 through August 1996, the Company also
leased facilities in New Jersey in connection with its SNT operations (Notes 1
and 3). For the years ended May 31, 1997 and 1996, rent expense under these
leases totaled $62,803 and $24,603, respectively.
Minimum future rental payments required under the above operating leases are as
follows.
Year Ending
May 31, Amount
1998 $ 22,464
=========
Capital lease obligations
On March 27, 1996, the Company acquired various studio equipment under a capital
lease obligation payable monthly through March 2001 with imputed interest at
11.0%, secured by the equipment and 250,000 common stock shares of the Company.
As part of the transaction, the stockholder of the lessor/corporation purchased
50,000 common stock shares of the Company for $200,000 cash and received
warrants to purchase 50,000 common stock shares at $2.00 per share. At May 31,
1996, the cost of equipment acquired under this lease and related accumulated
depreciation totaled $1,100,000 and $26,190, respectively.
During the year ended May 31, 1997, the Company withdrew from this lease
obligation, resulting in a lawsuit, (Notes 1 and 3) and wrote off the $1,100,000
capitalized cost of the equipment, $77,435 of additional related equipment, the
related accumulated depreciation of $56,068 and all but $218,750 of the related
capital lease obligation.
License fees payable
The Company, through SI, has acquired licenses from the Federal Communications
Commission to operate interactive video and data service systems in various
metropolitan statistical areas (Note 1). The license rights are payable interest
only, at 7.7 percent for two years with principal and interest payable monthly
over the remaining three years of the licenses. Interest has been accrued from
the dates the licenses were formally issued.
21
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
During the year ended May 31, 1997, the Company received the remaining amounts
due under a contract of sale for the North Charleston, SC license rights (Note
1) and the sales transaction was completed.
Future principal payments under the remaining Titusville, FL license right
obligation are as follows:
Year Ending
May 31, Amount
1998 $ 210,077
1999 183,113
2000 146,810
-----------
$ 540,000
Employment agreement
During the year ended May 31, 1996, the Company entered into an employment
agreement, with a director and principal member of management, which provided
for annual compensation equal to 5% of the gross profit from the Rebate TV
operations, with a minimum salary for the first year of $125,000. In addition,
the Company provided a monthly automobile allowance. The agreement expired in
October 2005, and provided for full payment if the employees should be
terminated without cause, become disabled, or die before such date. In November
1996 the employee left the Company and has since filed a lawsuit claiming an
unspecified amount of damages for breach of contract. The first year minimum
compensation required under the agreement was paid in full. The Company
anticipates a favorable outcome to this litigation and the accompanying
financial statements do not contain any reserve for this contingency.
The Company's current compensation benefits do not provide any other
post-retirement or post-employment benefits.
3. LITIGATION
Rental operating lease
The Company is defendant, and it has filed counter claims, in a lawsuit filed by
the lessor of office space facilities in New Jersey (Note 2). The Company never
occupied the space due to the lessor's failures to finish out the space to the
Company's specifications. The lessor seeks to recover remaining lease payments
due under the lease of $606,913 and the Company seeks to recover damages under a
capital lease obligation (Note 2) for equipment located in the New Jersey
facilities and contractually precluded from being removed from the facilities.
Although the Company anticipates a favorable settlement of this lawsuit the
outcome of it is uncertain. The accompanying financial statements do not contain
any reserve for this contingency.
Capital lease obligation
The Company was defendant, and it had filed counter claims, in a lawsuit filed
by the lessor of equipment subject to a capital lease obligation (Note 2). The
Company withdrew from the lease because of the lessor's inability to correct
defects in a major revenue producing component of the equipment and the
inability to use the equipment.
The lessor sought to recover lease payments due under the lease totaling
$1,043,021 and the Company sought to recover lost revenues caused by the
deficient equipment. On August 21, 1997, the Company settled this lawsuit
agreeing to issue 350,000 common stock shares (plus an additional 162,500 or
325,000 shares if the Company fails to file a Registration Statement with the
S.E.C. by December 1, 1997 or January 2, 1998, respectively). The settlement
loss was valued at the $.625 August 21st closing price of the common stock
shares, or $218,750, and is recorded in the accompanying financial statements by
reducing the carrying value of the capital lease obligation at May 31, 1997 to
$218,750.
22
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
4. CONVERTIBLE DEBENTURES
NONE
5. NOTES PAYABLE
The Company's notes payable consist of loans from various corporations and
individuals provided for working capital purposes. The notes, which contain no
significant restrictions, bear interest at rates of 10.0% to 18.0%, are due
through March 1998 and are unsecured.
6. RELATED PARTY TRANSACTIONS
Stockholder
The Company had a 50% interest in a joint venture with another corporation to
exploit its license (Note 1) and accounted for this investment using the equity
method. At May 31, 1995, the joint venture had no assets and the carrying value
of its investment was $0. Also at May 31, 1995 the Company had available a
$700,000 financing arrangement through a stockholder corporation with an
interest rate of 12.5%. The amount outstanding at May 31, 1995 totaled $656,831.
The stockholder corporation also charged a monthly management fee of $4,167
through September 30, 1995. In October 1995 the Company sold its joint venture
interest in exchange for its release from the amount owed under the financing
arrangement plus accrued interest and management fees through September of 1995,
resulting in a gain of $701,865, the excess of these amounts over the carrying
value of its investment in the joint venture.
7. INCOME TAXES
The Company used the accrual method of accounting for tax and financial
reporting purposes. At August 31, 1997, the Company had net operating loss
carryforwards for financial and tax reporting purposes of approximately
$7,000,000. This carryforwards expire through the year 2011, and are further
subject to the provisions of Internal Revenue Code Section 382.
Pursuant to Statement of Financial Accounting Standards No. 109, the Company has
recognized a $2,385,722 deferred tax asset attributable to the net operating
loss carryover, net of a $118,391 deferred tax liability related to amortization
timing differences, in the amount of $2,267,331 which have been fully offset by
a valuation allowances in the same amount, as follows:
1997 1996
---- ----
Beginning balance $ 1,469,703 $ 1,330,781
Increase during period 797,628 138,922
------------ ------------
Ending balance $ 2,267,331 $ 1,469,703
============ ============
8. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of its cash, accounts receivable,
trade and its convertible debentures payable.
Cash
The Company maintains its cash in bank deposit and other accounts which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts, and does not believes it is subject to any credit risks
involving its cash.
Accounts and note receivable, trade
The Company accounts and note receivable are unsecured and represent sales not
collected at the end of the year. Management believes these accounts and note
receivable are fairly stated at estimated net realizable amounts.
23
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
Convertible debentures payable
Management believes the carrying value of their debentures payable represents
the fair value of these financial instruments because their terms are similar to
those in the lending market for comparable loans with comparable risks.
9. SUBSEQUENT EVENT
Subsequent to May 1997, the Company entered into an agreement to acquire Airtech
International Corporation (AIC), a Texas corporation, through the issuance of
its common stock shares in a transaction to be accounted as an acquisition by
ITC. The transaction is subject to final AIC stockholder approval upon the
effective date of a Form S-4 Registration Statement, which has been filed.
24
<PAGE>
AIRTECH INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1997 and 1996
(Unaudited)
1997 1996
-------------- --------------
Assets
Current Assets:
Cash and cash equivalents $ 15,916 $ 932,358
Accounts Receivable 382,274 447,299
Inventories 294,008 163,109
Other Currents Assets 536,260 95,267
--------------- --------------
Total Current Assets 1,228,458 1,638,033
Property, Plant and Equipment Net of
Accumulated Depreciation 229,264 123,203
Property held for Resale - 400,000
Intellectual Properties 1,146,318 90,681
Notes Receivable-Long Term 783,957 -
Investment in Subsidiaries 650,000 650,000
Other Assets 519,685 519,050
---------------- --------------
Total Assets $ 4,557,682 $ 3,420,967
================ ==============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 21,310 $ 10,391
Accounts Payable-trade 398,896 139,938
Accrued Payroll and employee benefits 272,222 46,915
Loans from Officers 40,000 -
--------------- --------------
Total Current Liabilities 732,428 197,244
Long-Term Debt 42,419 20,916
Deferred Revenue 400,000 -
Commitments and Contingent Liabilities
Stockholders' Equity
Common Stock, issued 16,223,642 shares
in 1997 and 14,917,342 shares in 1996 162 149
Series C Preferred Stock, issued 1,000
shares in 1997 and 1,000 shares in 1996 1,000 1,000
Paid-in Capital 4,224,266 3,679,198
Retained Earnings (Deficit) (842,593) (477,540)
------------- --------------
Total Stockholders' Equity 3,382,835 3,202,807
------------- --------------
Total Liabilities and
Stockholders' Equity $ 4,557,682 $ 3,420,967
============= ==============
See Notes to the Consolidated Financial Statements.
25
<PAGE>
AIRTECH INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 1997 AND 1996
(Unaudited)
1997 1996
-------------- ------------
Sales $ 267,924 $ 326,020
Cost of Sales 184,208 117,310
-------------- ------------
Gross Income 83,716 208,710
General and Administrative expenses 299,066 206,565
-------------- ------------
Net Income ( Loss) $ (215,350) $ 2,145
============== ============
Primary Income ( Loss) per share $ 0.03 $ 0.00
Dulited Income ( Loss) per share $ 0.03 $ 0.00
See Notes to Consolidated Financial Statements.
26
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Organization. Airtech International Corporation (the Company) was
incorporated in the state of Texas in March of 1995. In August of 1995, the
Company became a Full Service Distributor for Honeywell Enviracaire, a
manufacturer of commercial air filtration systems, and began marketing and sales
of these products. In August of 1995, the Company determined that the
Enviracaire model 13000 could be eligible for Medicare Part B Code and began the
pursuit of an application for such code, receiving notification of a pending
issuance of a Medicare Part B Code in April of 1996. In May of 1996, Honeywell
Enviracaire cancelled the Company's Full Service Distributorship and the Company
withdrew its Medicare application.
In December 1995, the Company acquired 100% of McCleskey Sales and Service,
Inc., (MSS) a Texas corporation, in exchange for 165,000 shares of common stock.
MSS is engaged in the sales and service of heating and air conditioning
equipment. MSS was also a Honeywell Enviracaire Full Service Distributor with
prior knowledge of the installation and service of this air filtration
equipment.
In September 1996, the Company initiated a design program to create a
complete line of air filtration and purification products. This line of products
includes commercial ceiling mounted units, wall mounted units, ductable units
and a down draft salon table for the nail industry as well as a portable
automobile unit and a portable unit for Medicare. The technology being developed
by the Company will combine ozone generation with air filtration, a new concept.
In March 1996, the Company incorporated AirSoPure, Incorporated (ASP) in
the state of Texas as a wholly-owned subsidiary. ASP was formed to establish a
franchise program for the Airtech products. The franchisees will be the primary
source for the marketing, sales and distribution of the Company's commercial
technology.
Basis of Financial Statement Presentation. The consolidated financial
statements include the accounts of the Company and its subsidiaries.
Intercompany transactions and accounts have been eliminated. Subsidiaries
purchased are recorded at cost using the equity method of accounting for
acquisitions.
Cash Equivalents. Holdings of highly liquid investments with maturities of
three months or less when purchased are considered to be cash equivalents.
Inventories. Inventories are valued at the lower of the first-in, first-out
(FIFO) cost or market. Assembled units are valued at the cost of components plus
allocated labor.
Property, Plant, and Equipment. Property, plant, and equipment are recorded
at cost less depreciation and amortization. Depreciation and amortization are
primarily accounted for on the Straight line method based on estimated useful
lives. The amortization of leasehold improvements is based on the shorter of the
lease term or the life of the improvement. Betterments and large renewals which
extend the life of the asset are capitalized whereas maintenance and repairs and
small renewals are expended as incurred.
Sales. Income is recognized in the financial statements (and the customer
billed) either when materials are shipped from stock or when the vendor bills
the Company for the order. Net sales are arrived at by deducting discounts,
freight, and sales tax from gross sales.
Franchise Fees. Franchise fees are recognized in the financial statements
when all material services relating to the sale of a franchise have been
performed by the Company and there is no obligation to refund any cash received
or forgive any unpaid notes or receivables.
Intellectual Properties. Cost incurred by the Company in developing its
products which are considered patentable are capitalized and will be amortized
over the estimated useful life of the related patents. The technical
requirements for the design, testing and completion of working proto-types are
the primary cost capitalized. Amortization will be recorded after a unit has
been placed in production.
27
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes. The Company uses the asset and liability method as identified
in SFAS 109, Accounting for Income Taxes.
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.
Stock-Based Compensation. The Company follows the intrinsic value based
method of accounting as prescribed by APB 25, Accounting for Stock Issued to
Employees, for its stock-base compensation.
Principals of Consolidation. The Company acquired McCleskey Sales and
Service, Inc. in November 1995 electing the equity purchase method for
accounting for this purchase. The Company incorporated AirSoPure Incorporated in
March 1997. The accompanying consolidated financial statements include the
general accounts of the Company and these wholly owned subsidiaries. All
material intercompany accounts and balances have been eliminated in the
consolidation except for cash advances to a subsidiary.
Nature of Operations. The Company's primary business is the manufacture,
sales and distribution of air filtration equipment. The technology utilized in
the Company's air filtration equipment will remove odors, gases, viruses,
pollen, mold spores and other airborne particulates. Uses of this technology
include, restaurants, medical facilities, public buildings, schools, gaming and
bingo facilities.
Note 2: Other Current Assets
At 1997 and 1996 other assets are comprised of the following:
1997 1996
Prepaid expenses $ 44,805 $ 12,940
Prepaid legal 118,841
Prepaid Merger cost 346,689 66,227
Prepaid Private Placement Cost 25,925 16,100
Total $ 536,260 $ 95,267
The Company has entered into a contingent fee agreement with the law firm
representing its interest in the Honeywell law suit. Under the terms of this
agreement the Company will pay certain out-of-pocket expenses incurred during
the litigation, to date these expenses have totaled $118,841.
Merger costs consist of cost incurred by the Company in its merger pursuit.
Under the terms of its stock purchase agreement with Interactive Technologies
Corporation, Inc., dated May 1997, these costs will be reimbursed and included
as direct costs of acquisition on completion of the merger
Note 3: Property, Plant and Equipment
At August 31, 1997 and 1996, property plant and equipment comprised of the
following:
1997 1996
Furniture and fixtures $ 17,750 $ 17,750
Computers and equipment 130,401 98,440
Vehicles 116,787 77,686
Leasehold improvements 9,388
Assembly equipment 65,266
Total 339,592 193,876
Less: Accumulated depreciation 110,328 70,673
Net property, plant and equipment $ 229,264 $ 123,203
28
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4: Property Held for Resale
In 1995 the Company purchased the exclusive rights to Honeywell Enviracaire
products for the county of Turkey for $250,000 and for the country of Taiwan for
$150,000.
Note 5: Intellectual Properties
Prior to the cancellation of the Company's Full Service Distributorship in
the U.S. by Honeywell in May of 1996 the Company had received notification of
approval within 90 days of its Medicare Part B application for a portable air
filtration system manufactured by Honeywell. Subsequent to this cancellation the
Company withdrew it Medicare Part B application. While the Company is pursuing
the development of a full line of commercial air filtration systems, its primary
focus has been on the development of a portable air filtration system that will
qualify for Medicare Part B and a portable air filtration unit for vehicles.
The Company has incurred costs totaling $1,146,318 at August 31, 1997 and
$90,681 at August 31, 1996 in its design and testing of these products. The
Company currently has in production one commercial model and anticipates its
complete line of commercial air filtration products to be in production during
the 1998 fiscal year. The portable air filtration unit for vehicle use is
scheduled for production by the end of 1997. The air filtration system being
designed for Medicare Part B applications should be in a working proto-type by
the end of 1997 and the application submitted during the first quarter of 1998.
The Company forecast additional cost of approximately $1 million dollars for
completion of the vehicle and Medicare Part B units. The Company has and will
continue to apply for patents on its products.
Note 6: Notes Receivable
At August 31, 1997 and 1996, notes receivable is comprised of the
following:
1997 1996
Domestic notes receivable $ 300,000 $ 0
Foreign notes receivable 666,500 0
Total 966,500 0
Less: Current Maturities 182,543
Net Non-Current Notes Receivable $ 783,957 $ 0
These notes receivable bear interest at 8% and are payable in terms ranging
from 12 months to 36 months. Credit is extended on a evaluation of the payee's
financial condition and general credit information. If the note is for a
franchise fee or for equipment, these will serve as collateral.
Note 7: Other Assets
At August 31, 1997 and 1996, other assets is comprised of the following:
1997 1996
Deposits $ 16,739 $ 16,279
Prepaid royalties 500,000 500,000
Other 2,946 2,771
Total $ 519,985 $ 515,910
Note 8 Notes Payable
At August 31, 1997 and 1996, notes payable is comprised of the following:
1997 1996
-------------------------
Nations Bank $ 24,172 $ 31,307
Resource One 39,558
Total 63,729 31,307
Less: Current maturities 21,310 10,391
Net Long-Term Debt $ 42,419 $ 20,916
29
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 9: Earnings Per Common Share
Earnings per common share are computed by dividing net income by the
average number of Common shares outstanding during the period. The weighted
average number of Common shares outstanding at August 31, 1997 were
approximately 16,100,000 and approximately 9,200,000 at August 31, 1996.
Note 10: Income Taxes
The Company uses the accrual method of accounting for tax and financial
reporting purposes. At August 31, 1997 and 1996, the Company had net operating
loss carryforwards for financial and tax reporting purposes. These carryforwards
expire through the year 2011, and are further subject to the provisions of the
Internal Revenue Code Section 382.
Note 11: Operating Leases
The Company presently leases its facilities in Texas under non-cancelable
operating lease agreements expiring through September 1999. These leased
facilities total approximately 13,000 square feet of office and warehouse space.
Minimum future rental payments under the above operating leases are as
follows:
Amount
---------
1998 $ 78,000
1999 37,680
---------
Total $ 115,680
Note 12: Commitments and Contingencies
An original petition was filed in State District Court, Dallas, Texas in
August 1995 by Kristen S. Venable naming McCleskey Sales and Service, Inc., and
Trane, Inc., Defendants, alleging breach of contract, breach of warranty and
negligence relating to the installation of Trane air conditioning equipment. The
complaint seeks damages in excess of the minimum, jurisdictional limits of the
Court, plus punitive and exemplary damages. McCleskey and Trane have filed
answers denying all claims. The matter is currently awaiting a trial date. The
claims against McCleskey are covered by insurance which coverage amount is
believed by management to be sufficient to cover the claims in the event of an
adverse judgement.
Airtech International Corporation, McCleskey Sales and Service, Inc., C.J.
Comu and John Potter, plaintiffs, vs Honeywell Environmental Air Control, Inc.,
and Suzanne Haas, defendants; No. 3:96CV-1855-D, United States District Court
for the Northern District of Texas, Dallas Division.
In this case, Airtech, a subsidiary and two of its officers filed suit
against Honeywell, Inc. and a Honeywell subsidiary and an employee asserting
several causes of action. These causes of action include breach of Contract
relating to the termination of the Company's Full Service Distributorship
agreements, for defamation and tortious interference with a contract relating to
a merger agreement, for unfair competition regarding claims made by Honeywell
about its air purification products, for negligent misrepresentation regarding
representations made to the Company and its subsidiary regarding the exclusivity
of certain arrangements with the defendants, and for declaratory relief and
attorney's fees. Honeywell filed a counter claim against the Company, McCleskey,
Comu and Potter. Honeywell alleges that the Company and McCleskey owe Honeywell
money for past purchases, and that Comu and Potter interfered with the
relationship between McCleskey and Honeywell. Honeywell seeks $71,000 in actual
damages and unspecified punitive damages and attorney's fees. The Company has
denied all of the material allegations of Honeywell's counterclaim. The Company
plans to vigorously defend the counterclaim and believes the counterclaim to be
without merit.
30
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Honeywell, Inc., plaintiff, vs Airtech International Corporation,
AirSoPure, Inc. and Richard Allegrati, defendants: No. WMN 97-238 United States
District Court for the District of Maryland, Baltimore Division.
Honeywell filed suit against the Company, a subsidiary and an employee,
alleging violations of the Lanham Act and the Maryland Uniform Trade Secrets Act
and the common law. The suit alleges that certain Airtech and AirSoPure products
were sold in violation of the Honeywell trademarks, and that the cover design of
certain products of Airtech/AirSoPure was wrongfully obtained. The suit seeks an
injunction and unspecified damages. The venue of this suit has been changed to
United States District Court for the Northern District of Texas, Dallas
Division, without injunctive relief and will be included in the other action
pending before this court. The Company denies all of the material allegations of
Honeywell's claims, and is vigorously defending this case.
Note 19: Subsequent Events
On May 8, 1997 the Company entered into a Stock Purchase Agreement with
Interactive Technologies Corporation, Inc (ITC). Under the terms of this
agreement ITC will purchase a minimum of 81% of the outstanding common stock of
the Company in exchange for 8,000,000 shares of ITC Common stock, 8,850,000
shares of ITC convertible Preferred Stock and $9,000,000 in ITC 8% convertible
Debentures.
This transaction will be closed at such time as registration statement
filed with the Securities and Exchange. At August 31, 1997 a registration
statement had been filed and was pending action by the Securities and Exchange
Commission. On notification by the Commission that the registration is effective
and a minimum of 81% of the shares tendered have been offered for exchange.
On August 1, 1997, Airtech entered into a Manufacture and Distribution
Agreement with Interactive. This agreement relating the the Medicare Model 950
air filtration unit, has been used by Interactive for the Private Placement of
additional securities. Approximately $100,000 in additional capital has been
raised from the sale of these securities. If the total securities offered for
sale under this Private Placement, Interactive would receive a total of
$5,000,000 in additional capital less the related expenses of the sales. Under
the terms of this Agreement, Airtech would be advanced 75% of the net proceeds
from the sale of these securities.
31
<PAGE>
THE REGISTRANT
Background.
- -----------
Interactive Technologies Corporation, Inc. ("ITC") was incorporated in the
state of Wyoming on August 8, 1991. At that time, ITC was engaged in the
business of exploiting its rights under a license granted by CST Entertainment
Imaging, Inc. ("CST"). Such license gave ITC the exclusive right to use CST's
coloring process to convert to color black-and-white film and videotape,
including black-and-white theatrical films and television programs produced for
distribution in Europe. ITC also had exclusive right to use CST's technology to
provide digital special visual effects for new film and video productions
produced for distribution primarily in the European territory. ITC ceased this
effort on October 18, 1995, when it exchanged the license in satisfaction of
certain of its debt.
On October 20, 1995, ITC entered into an agreement to acquire assets of
Syneractive, Inc. ("SI"), a Florida corporation. SI's assets included
intellectual property consisting of a television production and the trade name
Rebate TV. The assets also included license rights from the FCC to provide
Interactive Video and Data Service ("IVDS") in the Charleston-North Charleston,
South Carolina, and Melbourne-Titusville-Palm Bay, Florida metropolitan areas.
In exchange for such assets, ITC issued 5,700,000 shares of common stock to
Perry Douglas West, its current sole director and officer. In November 1996, ITC
sold a 90% interest in the Charleston-North Charleston license.
Principal Products or Services and Their Markets.
- -------------------------------------------------
General. ITC develops and produces interactive television and interactive
digital media programming for distribution on cable, by broadcast and direct
satellite television, and over the Internet. ITC's principal interactive
programming product is Rebate TV TM. The product allows a consumer to receive a
cash rebate from ITC for purchases of products advertised on the Rebate TV TM
television program by incorporating interactive media and computer data
management. Rebate TVTM is designed to utilize existing communication
technologies for consumer responses. It now uses the telephone and the Internet
as return links. However, it is also designed to easily accommodate the emerging
interactive television systems as they come into use, such as IVDS and
Interactive Television (via fiber optic cable/telephone cable etc.)
Beta Test. ITC conducted a beta test of Rebate TVTM from April 15, 1996,
through December, 1996 (the "Test Period"). During the Test Period, Rebate TVTM
aired 1/2 hour daily, seven days a week, on WIRB/Channel 56 in the central
Florida market. That market serves a population of approximately 2,175,000.
During the Test Period, the television program was divided into 14 one
minute retail information segments which were utilized by advertisers to provide
information about their company and a brief description of the cash rebate
offered to the consumer. The balance of the program consisted of information
segments, rebate reviews and instructional segments. Retailers represented a
broad spectrum of business including grocery chains, furniture stores, tire
service stores, retail banks, restaurants, car dealers and various specialty
businesses. ITC collected point-of-sale information from the vendors who
participated during the Test Period, and processed that data along with Rebate
TVTM customer call-in data. Rebates were credited to customer accounts as they
were verified. ITC manages escrow accounts for retail vendors so that rebates
are transferred to a general customer escrow fund as they are credited.
Consumers making a purchase of items of product or in dollar amounts which
carried the rebate offered by a participating retailer (i.e. a $5 rebate on a
purchase of $50 or more, or $10 rebate on the purchase of a brake package,
etc.). By calling ITC's toll free telephone number, 1-888-REBATE, the consumer
would be connected to ITC's computer data base, and could then register the
Rebate TVTM number on the bottom of the receipt. At the end of the month, ITC
sends a check to the Rebate TVTM customer for a total of all rebates processed
during that month. These rebates are in addition to coupons or other promotional
offers by the vendor. Rebate TVTM had approximately 4,000 subscribers by the end
of the Test Period.
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Revenue Sources. ITC receives revenues of two types from Rebate TVTM.
First, retail vendors will pay an initial production fee to ITC for the
production of the information segment that becomes part of the television show.
Then, the retail vendors will pay ITC a transaction fee based upon verified
sales. The amount of the transaction fee will vary with the type of retailer and
the frequency of purchase of its products. For instance, the transaction fee for
a automobile sale is much higher than a grocery store because of the size and
frequency of purchase.
Program Development.
- --------------------
ITC's research and development efforts consumed the technical efforts of
ITC from October 1995 through the airing of Rebate TVTM on April 15, 1996, and
involved two basic areas: the television programming for the shows, and the data
management and computer interface development efforts for the interaction with
the retailers and the consumers. None of this expense will be borne directly by
the retailers or the consumers, but will be recouped through profits as ITC
expands its markets.
Development of Rebate TVTM basic programming by ITC has been done during
the fiscal year with Century III at Universal Studios, Florida. Established in
1976, Century III has serviced a widely diverse client base with high production
values utilizing the latest and finest in production and post-production
hardware. This includes local, regional, national and international projects for
all four broadcast television networks, national cable networks such as
Nickelodeon and HBO, major independent producers, advertising agencies and major
corporate and governmental organizations such as Digital Equipment Corporation,
Harris Corporation, General Electric, NCR, AT&T, Kodak, Polaroid, Walt Disney
World, Harcourt Brace Jovanovich, FPL Group, Westinghouse, McDonnell Douglas,
Martin Marietta, Reebok, International and NASA. The creative director for
Rebate TVTM is Michael Hamilton who has designed, directed and produced such
television series as "Magnum P.I.", "Simon & Simon", "Wings" and "The Twilight
Zone". His commercial experience includes such clients as CadillacTM, Texaco,
Coca ColaTM, Heineken, American Airlines, Donna Karan, Elizabeth Arden, QVC,
Business Technology Management and the Family Channel.
The computer development efforts related to Rebate TVTM were done at ITC's
engineering offices in Melbourne, Florida, where the hardware and software
designs and specifications were developed, tested and implemented during Fiscal
Years 95/96 and 96/97, to: (i) manage the large amounts of data and transactions
involved in collecting and verifying sales information from the Rebate TVTM
retailers; (ii) calculate the rebates, record the credits, and issue the checks
to the consumer; (iii) accommodate and record the telephone rebate requests, and
(iv) provide automated participation information to the public.
Internet Access.
- -----------------
ITC's Internet home pages for use with Rebate TVTM allow viewers to access
the program's data base through the Internet. It allows them to view the status
of their accounts, enter vendor rebate claims, and later will allow viewers to
access a variety of products and services associated with Rebate TVTM which ITC
expects to include. ITC's home page is located at http://www.REBATETV.com.
Network Operations.
- -------------------
ITC intends to develop and produce its own television channel and to
distribute its Rebate TVTM video programming in this format to customers. ITC's
distribution plan currently provides for distribution of this programming
started in the central Florida markets to expand from there. ITC's business plan
calls for Rebate TVTM to expand into additional national markets. ITC expects to
hire additional employees over the next 24 months to support the operation of
this programming and to continue to develop and refine the programming as ITC
adds markets for these services.
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Interactive Video and Data Services.
- ------------------------------------
Federal Communications Commission Interactive Video and Data Services
("IVDS") radio station licenses in the Charleston-North Charleston, South
Carolina, and Melbourne-Titusville-Palm Bay, Florida service areas represent an
additional enhancement to ITC's programming distribution. These licenses have a
duration of an initial five years, and are renewable if all conditions of the
license are met. Such conditions include, among other requirements: that the
license fee be paid quarterly, that 30%of the licensed area be built out within
three years and that 50%of the licensed area be built out within five years of
the date of the granting of the license. Pending the promulgation of
regulations, ITC has obtained temporary waivers of certain of the build out
requirements.
IVDS, a two way communications system, will allow viewers to take an active
role in systems delivered through broadcast television, cable television,
wireless cable, direct broadcast satellite or other future television delivery
methods. IVDS is regulated as a personal radio service under the rules of the
FCC which has allocated spectrum in the 218-219 MHZ range for its use. IVDS
systems are designed to operate with a hand-held remote control device that
controls the interactive set top device on the subscriber's television set. A
viewer would interact with the TV station through a radio signal using an IVDS
frequency.
ITC has sold 90% of its ownership of the Charleston-North Charleston
license, and has reserved rights to provide programming to this license area
when it is in operation.
ITC is reviewing alternative uses and equipment proposals for its
Melbourne-Titusville-Palm Bay, Florida license and expects to proceed to install
a system for the license. Although ITC will run its Rebate TVTM and other
programs on its own service area systems, the programs it develops are intended
for use on various interactive delivery systems and are not specific to
Interactive Video and Data Services systems. They are marketed to all of these
various delivery systems. For broadcast of Rebate TVTM programming ITC currently
uses and plans to use standard video media distribution methods such as cable,
broadcast stations, wireless cable and direct broadcast satellite. Although ITC
has designed its programs to utilize an IVDS return link (a "return link" is the
method by which data is sent from the consumer or viewer back to the originator
of the program), they are also designed to accommodate other return links such
as the telephone. ITC has purchased equipment and software to provide a
telephone return link as an interim return link for its own license areas as
well as other areas where it is providing programming, to be utilized where IVDS
is not available; until the installation an operation of the IVDS equipment as a
return link is completed as well as for use with non subscribers to IVDS.
Intellectual Content.
- ---------------------
ITC has developed a plan for the accumulation and sale of intellectual
content. This content takes several forms, including completed television and
video programming, both developed and produced by ITC and by third parties;
property rights to written scripts and publications for the purpose of producing
or having produced television or motion picture products; and program ideas,
concepts and designs. In addition to the Rebate TVTM programs, ITC has filed and
had accepted trademark applications with the United States Patent and Trademark
Office for "Rebate TV", for "DEAL! DEALS! DEALS!" (a direct shopping program
which ITC has produced), and "Television that pays you to shop".
ITC has in addition under this plan a number of projects under
consideration and review. To date, revenue from these activities has been
limited to the Rebate TVTM television program, and to a limited showing of its
DEAL! DEALS! DEALS! program. There is associated with each of these shows and
projects a lead time or advance period necessary for development and scheduling.
In addition, ITC may elect to sell outright or resell any of these properties.
ITC acquired $1,040,800 in working capital during Fiscal Year 96/97,
through loans and private stock sales. ITC believes that it can meet its cash
requirements during the first quarter of the Fiscal Year 97/98 but expects to
require additional funds over the next 12 months for the expansion and addition
of markets for its product and for operations. Although ITC currently has no
written commitments for additional funds, it believes that it can raise
additional cash required from private sources. A $5 million offering is
presently being structured in conjunction with AIRTECH. (See "MANAGEMENT'S
DISCUSSION AND ANALYSIS - Liquidity and Capital Resources".)
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ITC continually accumulates data in the operation of its Rebate TVTM, and
examines this data with regard to indicated changes in its programming. ITC
expects to continue research and development of its products based upon the
collection of this data.
Competitive Conditions.
- -----------------------
ITC is unaware of any direct competition with Rebate TVTM. However, there
are other companies in the interactive television industry that have announced
that they will provide programming to the interactive television marketplace.
Many of these companies will be better capitalized than ITC and will be better
positioned to take to take advantage of this emerging market. There is no
assurance that ITC will secure a competitive position in such market or that its
activities will result in profit to ITC.
FCC Licensing.
- --------------
The ability of ITC to provide IVDS services in the United States is subject
to the rules and regulations, if any, promulgated by the FCC. At present there
are only limited rules or regulations. However, there is no assurance that there
will not be rules and regulations forth coming which are adverse to the
interests of ITC.
Number of Persons Employed.
- ---------------------------
As of August 1, 1997, ITC had five employees, four of which are full-time.
Description of Properties.
- --------------------------
ITC currently has executive and engineering offices at 102 South Harbor
City Boulevard, Suite A, Melbourne, Florida; programming and media offices at
Century III at Universal Studios, 2000 Universal Studios Plaza, Suite 100,
Orlando, Florida. The Melbourne facility consists of 1,250 square feet of office
and engineering space, and is leased for a term of one year, with automatic
renewal for an additional 12 months unless either Landlord or Tenant is notified
in writing by the other party at least 60 days prior to termination date.
Monthly lease payments are $1,250.00 plus applicable Florida sales tax. ITC's
Century III office at Universal Studios consists of approximately 250 square
feet of office space and use of common areas. The cost of this space is included
in invoicing for production work Century III is performing for ITC.
Legal Proceedings.
- ------------------
ITC is a defendant in a proceeding filed in the United States District
Court for the Southern District of New York, Cause No. 97 CIV 1988(ss). It
accepted service April 5, 1997, in an action brought by Studiolink Corporation
and Steven Campus for damages arising out of an equipment lease agreement. ITC
expects to assert counterclaims against the plaintiffs in that action for losses
suffered as a result of their failure to perform. Settlement discussions have
been ongoing and ITC expects this matter to be settled in a manner not
unfavorable to ITC. In related matters, ITC is also in litigation with LLB
Realty, L.L.C. which has filed a claim alleging claims under an office lease
agreement in Superior Court of New Jersey, Mercer County, Cause No. MER-L00
1535-97. ITC has asserted claims against LLB Realty, L. L.C. for failure to
perform under the conditions of the office lease agreement. Settlement
negotiations have been ongoing and ITC expects this matter to be settled in a
manner no unfavorable ITC. ITC is not as party to any other pending legal
proceedings except for claims and lawsuits arising in the normal course of
business. ITC does not believe that these claims or lawsuits will have a
material effect on ITC's financial condition or results of operations
ITC Securities.
- ---------------
Capital Stock. ITC is authorized to issue 70 million shares of capital
stock, consisting of 50 million $0.01 par value common shares, and 20 million
$1.00 par value preferred shares. As of August 1, 1997, there were issued and
outstanding 13,284,309 shares of the ITC common stock. These shares have full
voting rights. Of the common shares outstanding, 7,457,134 were restricted, of
which 3,400,000 shares are acheduled to be cancelled upon the closing of the
proposed transaction. There were no ITC preferred shares issued and outstanding
as of August 1, 1997.
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Stock Options. ITC has not authorized and does not have outstanding any
stock options to key employees.
Convertible Debentures. Effective as of May 31, 1997, Exergon Capital
S.A.,Laughlin Securities Limited, Crestridge Investments, Ltd. and Jayhead
Investments Ltd. (collectively, the "Converting Debenture Holders" exercised
their $1,050,000 principal amount of ITC's Convertible Debentures (the "May 1997
Debentures") in exchange for 1,144,444, aggregate number, of ITC's Common Stock.
In connection with such conversion, the Converting Debenture Holders received
the May 31 Warrants (defined below).
May 31 Warrants. In connection with the conversion of the May 31
Debentures, the Converting Debenture Holders received warrants (the "May 31
Warrants") which are exercisable within five years from May 31, 1997, upon 30
days written notice and upon payment of the exercise price. The May 31 Warrants
may be converted, in the aggregate, into 1,144,444 shares of ITC common stock as
follows:
Debenture Holder No. Of Shares Exercise Price
Per Share
Exergon Capital, S.A. 333,333 $0.90
Laughlin Securities Limited 250,000 $0.90
Crestridge Investments Ltd. 250,000 $0.75
Jayhead Investments Ltd. 250,000 $1.00
Shares to Consultants and Other Claimants. ITC has reserved 500,000 shares
of ITC Common Stock for issuance to consultants in lieu of other compensation,
and to other claimants.
Warrants. ITC has issued warrants to George Clark, a current employee, and
to a non-affiliate former employee in lieu of deferred compensation. Such
warrants are exercisable within five years from the date of issuance at $0.75
per share.
Market Information - Common Shares. ITC's common shares are traded on the
National Association of Securities Dealers Automated Quotation Systems
("NASDAQ") SmallCap Market under the symbol "ITNL". ITC" common shares began
trading on the NASDAQ exchange on April 30, 1996. High and low quotes for May 8,
1997, the day immediately preceding the announcement of the proposed acquisition
of the shares of AIRTECH were 1 9/16 and 1 3/8.
High and low quotes for the last quarter of ITC's fiscal year when the shares
began trading on NASDAQ were:
High Low
Fiscal Year 1997 4th Quarter 1 15/16 1 3/8
3rd Quarter 1 1/2 1 1/8
2nd Quarter 4 1 1/4
1st Quarter 5 1/4 4 1/4
Fiscal Year 1996 4th Quarter 5 4 7/8
Prior to being traded on the NASDAQ exchange, the Company's common shares were
traded in the "over-the-counter" or "Bulletin Board" market. The following
quotes represent the quarterly high and low quotes available through the quarter
ending December 29, 1995. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions:
High Low
Fiscal Year 1996
Quarter Ending 3/29/96 4 3/8 3 7/8
Quarter Ending 12/29/95 4 2 1/2
Prior to the quarter ending December 29, 1995 of ITC's 1996 Fiscal Year, and
during the previous 1995 Fiscal Year, to the best of ITC's knowledge, no trading
occurred in ITC's common stock.
Other Market Information. To the best of ITC's knowledge, no trading
occurred in ITC's preferred shares or ITC's debentures.
Holders. As of August 1, 1997, there were approximately 950 record holders
of ITC's Common Stock.
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Dividends. ITC has never paid any cash dividends on its Common Stock and
has no present intent to pay any cash dividends in the foreseeable future. The
declaration of cash dividends will depend on future earnings, if any, the
financial needs of ITC, and other pertinent factors. Further, the declaration of
dividends will be at the discretion of ITC's Board of Directors.
Selected Financial Data. The selected financial data shown below for the
years ended May 31, 1996, 1995, 1994 and the three month periods ended August
31, 1997 and 1996, have been derived from, and is qualified by reference to, the
Financial Statements of ITC and have been audited by Turner, Stone & Company,
LLP, independent public accountants, except for the three month periods ended
August 31, 1997 and 1996 which are unaudited. The data set forth below are
qualified by reference to, and should be read in conjunction with "Management's
Discussion and Analysis.
Summary Financial Information
(In thousands, except per share and other portfolio data)
August 31 Year ended May 31
----------- -----------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
STATEMENT OF
OPERATIONAL DATA
Total Revenue $ 3 $ 13 $198 $ 57 $ -0-
Net Loss ( 347) ( 892) (2,655) ( 447) ( 136)
Net Loss Per Share ( .03) (0.08) (0.22) (0.05) (0.02)
BALANCE SHEET DATA
Working Capital ($612) ($1,172) ($497) (1,089) (665)
Total Assets $4,836 $6,265 $5,179 $7,485 $ 12
Changes In and Disagreements With Accountants. By unanimous consent of its
Board of Directors on November 10, 1995, ITC engaged the accounting firm of
Turner, Stone & Company, LLP of Dallas, Texas as independent accountants for ITC
for the fiscal year beginning June 1, 1995, and voted to excuse the accounting
firm of Lumsden & McCormick from further service to ITC after the completion of
its work on the audit for ITC for the fiscal year ending May 31, 1995. During
the previous two fiscal years ending May 31, 1995, there were no disagreements
with Lumsden & Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure or any reportable
events.
Important Considerations Related to Forward-Looking Statements
- --------------------------------------------------------------
It should be noted that this discussion contains forward looking statements
which are subject to substantial risks and uncertainties. There are a number of
factors which could cause actual results to differ materially from those
anticipated by statements made herein. Such factors include, but are not limited
to, changes in general economic conditions, the growth rate of the market for
ITC's products and services, the timely availability and market acceptance of
these products and services, the effect of competitive products and pricing, and
the irregular pattern of revenues, as well as a number of other risk factors
which could effect the future performance of ITC.
THE ACQUIRED COMPANY
Background.
- -----------
AIRTECH was incorporated in Texas in March 1995, as an operating company
which has engaged in the sales, distribution and installation of Honeywell air
purification systems. In January of 1996, AIRTECH began manufacturing its Series
2000 Manicure Table. In the spring of 1996, AIRTECH'S affiliation with Honeywell
was terminated and in September 1996, AIRTECH started the design of a line of
air purification products. When fully developed AIRTECH anticipates that its
product line will include ceiling and wall mounted units, ductable units,
portable units and an automobile unit. AIRTECH strategy for the marketing
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and distribution of its products includes direct sales by personnel of AIRTECH,
a franchise program and sales to multi-level network marketing firms. It is
anticipated that several of the products being designed will be subject to
patent or trademark.
Principal Products or Services and Their Markets.
- -------------------------------------------------
AIRTECH has the following air purification products in production:
Series 12000: The series 12000 is designed to fit into a 2 foot x 4 foot
space of a ceiling. Markets for this unit include facilities such as
restaurants and nursing with problems involving cigarette or cigar smoke,
particulates larger than .3 microns or odors. AIRTECH has sold
approximately 60 of the series 2000 units, 45 of which sales occurred in
October 1997.
Series 2000 Down Draft Table: The series 2000 was designed for the nail
manicure industry and was first introduced in January 1996. This series has
a single speed 450 CFM blower with sorbent media filter designed for
special need of this industry. AIRTECH has sold approximately 11 of the
series 2000 units, 11 of which sales occured in October 1997.
Series 3000 Down Draft Table: The series 3000 is a modified version of the
series 2000 designed to appeal to the pathology/histology environment, the
dental lab industry and other light industrial markets. This series
utilizes a 700 CFM two speed blower using the same sorbent media filter as
that used in the series 2000. However, the minerals in the filter will be
varied to the correct absorbent for the application. The series 3000 will
use a polyester pre-filter as standard and offer up to a 95% ASHRAE 2" x 4"
pleated as an option. AIRTECH has sold approximately 4 of the series 3000
units, 4 of which sales occurred in October 1997.
AIRTECH has completed working models of the following products:
Series 14000: The series 14000 is a larger version of the series 13000. The
unit will be approximately 48" x 17" x 17" and filter 650 cubic feet of air
per minute. Visually it will have the same ABS plastic sculptured geometric
appearance. This unit will be installed where the series 12000 is not
usable or multiple 13000's are not suitable.
Series 900: The series 900 is a small portable unit designed for the
automobile that will remove both gases and particulates. It will clean
approximately 30 cubic feet of air per minute. AIRTECH anticipates that the
cost of completing a sufficient number of working models (approximately 75
units individually made with a lazer lathe) will be approximately $100,000.
And that subsequent costs to commence production will be approximately
$400,000. Subject to receipt of financing AIRTECH anticipates commencing
production in March 1998.
Series 950: The series 950 is a portable air cleaner designed to sit on the
floor and will clean approximately 250 cubic feet of air per minute. This
series will remove both particulates and gases utilizing an air flow
pattern discharged from the top of the unit. This product will be
configured to meet the needs of the medical community. AIRTECH anticipates
that, in March 1998 it will file its application to qualify the unit for
reimbursement by Medicare. It is anticipated that AIRTECH will commence
production in the summer of 1998.
In addition to the above, AIRTECH anticipates developing the following products:
Series 850: The series 850 will be a less expensive version of the series
950 and will be designed by retail sales.
Series 21000: The series 21000 is a ductable unit for both commercial and
light industrial applications. This unit will allow remote positioning
(i.e. on the roof) and collection of contaminants from distant zones. The
clean air discharge can be directed to zones as needed. This unit permits
creation of negative and positive pressure zones providing maximum control
of airborne contaminant movement. The air cleaning capacity will be
approximately 1800 cubic feet per minute. This unit will also be available
for the upscale residential market for both new construction and retrofit.
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Series 22000: The series 22000 is a simple fugitive capture air cleaner
designed for light industrial applications for the collection of airborne
dust and particulates in smoke. The markets for this series include auto
body repair shops, small welding and machine shops, woodworking and ceramic
shops, vocational schools and college industrial arts classes. This unit
will clean 2500 cubic feet of air per minute of particulates only, it is
not suitable for gas and odor control.
Replacement Filters: The Company will manufacture its sorbent media
filters, pre-filter material will be purchase in bulk and cut to proper
sizes and the HEPA type filters will be out-sourced. The life of the
filters will vary application and the degree of contaminates however the
Company anticipates each unit sold will require an average one to two
complete filter changes per year.
Prospective Operations/Marketing.
- ---------------------------------
General. During 1996 and 1997 AIRTECH identified niche markets having a
need for air purification technology. Change in, and Federal, state and local
regulatory enforcement of, air quality regulations has increased the size and
scope of these markets. In 1996 the City of Plano, Texas choose the Honeywell
technology represented by AIRTECH, as the exception to its smoking ban. In 1997,
AIRTECH, using its technology, has worked with Fort Worth, Texas and Grand
Prairie, Texas on the smoking ordinances as well as with the counties of Niagra
and Erie New York on their smoking ordinances. The cities of Toronto and
Vancouver Canada have also contacted AIRTECH for assistance in changing their no
smoking ordinances. In each case, the AIRTECH technology will meet the minimum
standards required under these ordinances for permitting smoking in public
areas.
In 1996 AIRTECH completed installations in excess of 100 ceiling mounted
units primarily for smoking related problems using Honeywell technology. These
installations included restaurants, bingo halls, office buildings and the
conference room for the board of directors of Southwest Airlines. Since
September 1996, AIRTECH has completed installations of approximately 40 of its
series 12000 ceiling mounted units, and as of November 1, 1997 had orders or
installations in progress for approximately 35 additional units. The AIRTECH
model 12000 ceiling units has been installed in 6 restaurants being developed by
Lone Star Steakhouses in all their new restaurants in the future (Del Fresco,
Sullivan's and Longhorn restaurants) and demonstration models have been
installed in facilities operated by two large nursing home groups, a major truck
stop chain and a casino.
Property Management. The air quality problems that exist in office building
and shopping centers caused by smoking, odors caused by sewer gas backup,
methane gas, fumes from parking garages, cooking odors, odors from beauty salons
or print shops has opened the door for sales by AIRTECH franchises to Property
Management companies. These problems are prevalent in most building including
schools, city and county building and other governmental installations.
Down Draft Tables. Many manicurist are independent contractors renting
space in a shop and have limited capital or credit. Therefore, AIRTECH has
developed a rental program requiring a deposit and first months rent. This
recovers the cost of the table in approximately 3 months. AIRTECH applies one
half of the monthly rental to the full retail purchase price thus allowing the
manicurist to own the table in 12 to 18 months.
Multilevel Marketing
- --------------------
In April 1997, AIRTECH entered into a license agreement with Air Care,
L.L.C. giving marketing rights for Mexico and certain regions of the U.S. for
its series 900 portable automobile unit. AIRTECH is currently exploring possible
relationships with various multilevel marketing organizations with respect to
the marketing of the series 900 at such time as it enters production.
Additionally AIRTECH has entered into discussions with a durable medical
equipment network for the marketing of the series 950 Medicare unit at such time
as it enters production.
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The Franchise Program
- ---------------------
AIRTECH intends to operate its franchise program through its wholly owned
subsidiary for the Airsopure, Inc. The Airsopure name was registered as a
trademark and will be the product name used by AIRTECH for its various
commerical and consumer products. A copy of the Airsopure Uniform Offering
Circular has been filed as an Exhibit to the Registration Statement of which
this Prospectus is a part, which Uniform Offering Circular is incorporated
herein by reference.
The franchising program was first introduced at the International Franchise
Show in Washington D. C. in April 1997; and AIRTECH intends to be a regular
exhibitor at franchise shows throughout the fiscal year. As of November 1, 1997,
Airsopure has sold 3 foreign franchises and 4 domestic franchises, with several
other franchise sales pending. AIRTECH is forecasting that Airsopure will sell
approximately 100 franchises by fiscal year end May 31, 1998.
Competitive Conditions.
- -----------------------
Honeywell Environmental Air Control, Inc. is the only manufacturer with a
national distribution system for commercial air filtration systems. Since the
corporate restructure of this division in the spring of 1996 the commercial
division has been downsized. What continued presence is planned by Honeywell in
the commercial air filtration market is unknown to AIRTECH . In most
metropolitan area's there exist one or more independent manufacturer or service
companies for commercial grade air filtration systems. Most deal with
electrostatic filtration or smoke eaters a very ineffective method of
particulate removal but some offer charcoal and HEPA based systems. These
independent companies are usually small with very limited marketing servicing a
specific niche market. By the end of calender year 1997, with the air filtration
systems outlined above, AIRTECH will have the most complete line of air
filtration systems available in the U.S.
Number of Persons Employed.
- ---------------------------
AIRTECH presently has 21 employees, ten of which are employed by its
subsidiary McCleskey Sales and Service, Inc.("McCleskey"), and two of which are
employed by its subsidiary AirSoPure, Inc.
Legal Proceedings.
- ------------------
Airtech International Corporation, McClesksy Sales and Service, Inc., C.J.
Comu and John Potter, plaintiffs, v. Honeywell, Inc., Honeywell Environmental
Air Control, Inc. and Suzanne Haas, defendants; No. 3:96-CV-1855.D (United
States District Court for the Northern District of Texas, Dallas Division). In
this case, AIRTECH, of its subsidiaries and two of its officers flied suit
against Honeywell, Inc. and a Honeywell subsidiary and employee asserting
several causes of action. These causes of action include breach of contract
relating to termination of Full Service Distributorship agreements, for
defamation and tortious interference with contract relating to a merger
agreement between AIRTECH and DCX, Inc., for unfair competition regarding claims
made by Honeywell about its air purification products, for negligent
misrepresentation regarding representations made to AIRTECH and its subsidiary
regarding the exclusivity of certain arrangements with the defendants, and for
declaratory relief and attorney's fees. Honeywell filed a counterclaim against
AIRTECH, McCleskey, Mr. Comu and Mr. Potter. Honeywell alleges that AIRTECH and
McCleskey owe Honeywell money for past purchases, and that Comu and Potter
interfered with the relationship between McCleskey and Honeywell. Honeywell seek
$ 71,000 in actual damages and unspecified punitive damages and attorney's fees.
AIRTECH has denied all of the material allegations of Honeywell's counterclaim.
AIRTECH plans to vigorously defend the counterclaim and believes the
counterclaim to be without merit.
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Honeywell, Inc., plaintiff, v. Airtech International Corporation,
AirSoPure, Inc. and Richard Allegrati, defendants; No. WMN 97-238 (United States
District Court for the District of Maryland, Baltimore Division). Honeywell
filed suit against AIRTECH and a subsidiary and an employee, alleging violations
of the Lanham Act and the Maryland Uniform Trade Secrets Act and the common law.
The suit alleges that certain Airtech and AirSoPure products were sold in
violation of Honeywell's trademarks, and that the cover design of certain
products of Airtech and AirSoPure was wrongfully obtained. The suit seeks and
injunction and unspecified damages. Rarher than incur substantial additional
attorney's fees, AIRTECH agreed to the entry of a preliminary injunction
regarding the sale of a very small number of modified Honeywell products,
immaterial to AIRTECH's business. AIRTECH denies all of the material allegations
of Honeywell's claims and is vigorously defending this case. AIRTECH believes
Honeywell's claims to be without merit.
AIRTECH Securities.
- -------------------
Common Stock. AIRTECH is authorized to issue 90 million common shares at a
par value of $0.0001 per share. These shares have full voting rights. There were
17,491,129 shares issued as of November 1, 1997 all of which were restricted.
Preferred Stock. AIRTECH is authorized to issue 10 million shares of
preferred stock at a par value of $1.00 per share. There were no shares issued
and outstanding as of November 1, 1997.
Class C Common. At November 1, 1997, there were 1,000 shares of Class C
Preferred issued and outstanding. These shares are scheduled to be canceled as a
result of the completion of the proposed transaction with ITC.
Stock Options. AIRTECH has not authorized and does not have outstanding any
stock options.
Important Considerations Related to Forward-Looking Statements
- --------------------------------------------------------------
It should be noted that this discussion contains forward looking statements
which are subject to substantial risks and uncertainties. There are a number of
factors which could cause actual results to differ materially from those
anticipated by statements made herein. Such factors include, but are not limited
to, changes in general economic conditions, the growth rate of the market for
AIRTECH's products and services, the timely availability and market acceptance
of these products and services, the effect of competitive products and pricing,
and the irregular pattern of revenues, as well as a number of other risk factors
which could effect the future performance of AIRTECH.
MANAGEMENT INFORMATION
Directors and Executive Officers
- --------------------------------
The following table sets forth, as of November 1, 1997, the name, age,
position and biographical information of each executive officer and director and
the term of office of each director of ITC.
Perry Douglas West, 50.
- ------------------------
Mr. West joined ITC in October 1995, and is Chairman and Chief Executive
Officer of ITC. Mr. West co-founded American Financial Network in July of 1985.
Headquartered in Dallas, Texas, American Financial Network operated a national
computerized mortgage loan origination network. Mr. West served as Executive
Vice President/Director and General Counsel of this public company from 1985 to
1991. Mr. West has practiced law in Florida since 1974, representing various
business institutions in the financial, computer, natural resources and general
business industries and international transactions. He was graduated with a
Bachelor of Arts degree from The Florida State University in 1968 and with a
Juris Doctorate degree from The Florida State University, College of Law in
1974.
John Potter, 53.
- -----------------------
Mr. Potter, was appointed to serve as a director of ITC in July, 1997. Mr.
Potter serves as President & Director of AIRTECH. (See below.)
41
<PAGE>
George C. Clark, Ph.D., 59.
- ---------------------------
Dr. Clark joined ITC in November 1995 as Director of Systems Development.
He was previously a Senior Scientist in the Advanced Technology Department in
the Electronics Systems Sector of Harris Corporation, headquartered in
Melbourne, Florida from 1964 through 1994. During his tenure at Harris, Dr.
Clark conducted advanced research and development in antennas, electronic
communications systems, statistical communication theory, error correction
coding, computer-aided design of electronic circuits and systems, object
oriented programming methodologies, and modeling of transportation systems. He
also served as Director of the Advanced Technology Department at Harris,
co-authored a graduate level text book on error correction coding, spent two
years as a Visiting Scientist at the MIT Laboratory for Computer Science, and
taught many undergraduate courses in Electronic Engineering, Artificial
Intelligence and in Signal and Systems Theory. Dr. Clark holds a Bachelor of
Science degree in Electrical Engineering from the Massachusetts Institute of
Technology in 1959, a Masters Degree in Physics from the University of Miami in
1961 and a Ph.D. degree in Electrical Engineering from Purdue University in
1965.
Dr. Clark managed the development of the computer software and hardware
systems that form the infrastructure to the operations of Rebate TVTM, and his
absence from ITC would have an initial adverse effect on operations.
Michael Hamilton, 50.
- ----------------------
Mr. Hamilton joined ITC in April 1996 as Executive Vice President,
Production, in charge of all creative operations and new program development for
ITC. Mr. Hamilton is an entertainment industry veteran, whose recent credits
include developing a Movie of the Week for the ABC network, a feature in
conjunction with Jason Alexander's Daeson Productions, and transactional
programming for QVC. He also designed and directed such television series as
Wings, Murder She Wrote, The Twilight Zone and Magnum P.I., with experience
extending to commercial clients such as Donna Karan, CadillacTM and Coca-ColaTM.
His absence from the Company would have an initial adverse effect on programming
operations.
The following table sets forth, as of June 1, 1997, the name, age, position
and biographical information of each executive officer and director of AIRTECH.
John Potter, 53.
- ------------------------
Mr. Potter, President & Director of AIRTECH, began his business career with
Xerox Corporation. He moved into the world of finance with Wells Fargo &
Company, handling their national leasing division. Mr. Potter, was the founder
of Alpha Leasing, which grew into one of the largest leasing companies in the
Southwest. Mr. Potter co-founded Transworld Leasing Corporation, with
Mr.C.J.Comu, providing financing and marketing expertise to the medical,
computer and corporate sector, prior to the formation and launch of AIRTECH .
Prior to beginning his business career Mr. Potter was an officer in the US Army.
Mr. Potter has served as a director of ITC since 1997.
C. J. Comu, 36.
- ---------------
Mr. Comu, Chief Executive Officer & Director of AIRTECH, began his career
in the stock and commodities business as a specialist in precious metals and
currencies. Mr. Comu co-founded MBA Corporate Group, one of the largest
financial application software companies. Mr. Comu has been an entrepreneur,
financier and turnaround professional to several start ups and operating
companies during his term as President of Credit America Holdings Group, a
privately held and managed investment banking and consulting firm. Mr. Comu
co-founded Transworld Leasing with Mr. Potter, a full service leasing and
finance firm, prior to the formation of AIRTECH. It is anticipated that Mr. Comu
will become a director of ITC if the proposed transaction is completed.
42
<PAGE>
Scott McCleskey, 38.
- --------------------
Mr. McCleskey, President of McCleskey Sales and Service, a wholly owned
subsidiary of AIRTECH, has over 15 years experience in the HVAC industry, along
with sales, service and repair of commercial air cleaning technology.
Douglas S. Keane, 46.
- ---------------------
Mr. Keane, Vice President of Franchise Development, joined Airtech in
January of 1997. He was moved to Airsopure, Incorporated in the same capacity in
March of 1997. From 1980 until January 1997 he served as a franchise experience
and is the founder of National Pet Care Centers, Beauty Secrets International,
featuring Victoria Jackson Cosmetics and Nutra First Corporation. He has owned
franchised regions for Realty World Corporation and Vidtron International
Corporation.
Term of Office
- --------------
Each director of ITC serves for a term of one year, and thereafter until
his or her successor is elected at ITC's annual shareholder's meeting, and is
qualified, subject to removal by ITC's shareholders. Each officer serves, at the
pleasure of the Board of Directors, for a term of one year.
Executive Compensation
- ----------------------
Perry Douglas West, Chairman and Chief Executive Officer of ITC has no
employment agreement in force as of May 31, 1997, and receives no current
compensation. Mr. West has agreed to defer compensation and compensation issues
until a future date.
Set forth below is a summary of the annual compensation set for fiscal year
1996-97.
Bonus
Cash Restricted
Name and Position Salary Bonus Stock
----------------- ------ ----- -----
John Potter, $250,000 none none
President
C. J. Comu, $250,000 none none
Chief Executive Officer
Transactions with and Indebtedness of Management and Others
- -----------------------------------------------------------
AIRTECH is obligated to pay a royalty to C. J. Comu, John Potter and John
Harris, officers of AIRTECH , based on the future sales of any portable air
cleaning machine which has received the appropriate Medicare Part B Billing Code
(necessary to enable a purchaser to receive Medicare reimbursement). Messrs
Potter and Comu will each receive $2.50 and Mr. Harris will receive $1.00 for
each machine purchased through Medicare. AIRTECH has issued 1,340,000 shares of
common stock each to Messrs Potter and Comu as a pre-paid royalty for the sale
of the first 100,000 such machines. AIRTECH has a royalty agreement with Richard
A. Allegrati, dated in 1995, based on 4% of the wholesale sales of the Airtech
2000 Manicure Table quarterly, for a period of 5 years As of financial statement
date no royalty payments have been made.
Except as described above, there were no material transactions or series of
similar transactions, since the beginning of ITC's last fiscal year, or any
currently proposed transactions, or series of similar transactions, to which ITC
was or is to be a party, in which the amount involved exceeds $60,000 and in
which any director or executive officer, or any security holder who is known to
ITC to own of record or beneficially more than 5% of any class of ITC's common
stock, or any member of the immediate family of any of the foregoing persons,
has an interest.
43
<PAGE>
Involvement in Certain Legal Proceedings
- ----------------------------------------
To the knowledge of management, during the past five years, no present or
former director, executive officer, person nominated to become a director or an
executive officer of ITC, promoter, or control person:
(1) filed a petition under the federal bankruptcy laws or any
state insolvency law, nor had a receiver, fiscal agent or similar officer
appointed by a court for the business or property of such person, or any
partnership in which he was a general partner at or within two years
before the time of such filing, or any corporation or business
association of which he was an executive officer at or within two years
before the time of such filing, or any corporation or business
association of which he was an executive officer at or within two years
before the time of such filing;
(2) was convicted in a criminal proceeding or named the subject of
a pending criminal proceeding (excluding traffic violation and other
minor offenses);
(3) was the subject of any order, judgement or decree, not
subsequently reversed, suspended, or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him from or otherwise
limiting, the following activities: acting as a futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator, floor broker, leveraged transaction merchant associated person
of any of the foregoing, or as an investment advisor, underwriter,
broker, or dealer in securities, or as an affiliate person, director, or
employee of any investment company, or engaging in or continuing any
conduct or practice in connection with such activity; (ii) engaging in
any type of business practice; or (ii) engaging in any activity in
connection with the purchase or sale of any security or commodity or in
connection with any violation of federal or state securities laws or
federal commodities laws;
(4) was the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any federal or state
authority barring, suspending, or otherwise limiting for more than 60
days the right of such person to engage in any activity described above
under this item, or to be associated with persons engaged in any such
activity;
(5) was found by a court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission to have violated any
federal or state securities law, and the judgment in such civil action or
finding by the Securities and Exchange Commission has not been
subsequently reversed, suspended, or vacated; or
(6) was found by a court of competent jurisdiction in a civil
action or by the Commodity Futures Trading Commission to have violated
any federal commodities law, and the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended, or vacated.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
ITC - Preclosing.
- -----------------
The following tables set forth as of December 4, 1997, the address, and the
number of shares of ITC's Common Stock, par value $0.001 per share, held of
record or beneficially by each person who held of record, or was known by ITC to
own beneficially, more than 5% of the then 14,773,024 issued and outstanding
shares of ITC' s Common Stock, and the name and share holdings of each director
and of all officers and directors as a group:
44
<PAGE>
Security Ownership of Certain Beneficial Owners
As of August 1, 1997
%of
Class Beneficial Owner Amount Class
----- ---------------- ------ -----
Common Perry Douglas West 5,700,000 38.58%
Security Ownership of Management. The following table sets forth
information with respect to the share ownership of Common Stock, par value
$0.01, of ITC by its officers and directors, both individually and as a group,
who are the beneficial owner of more than 5% of ITC's Common Shares.
- --------------------------------------------------------------------------------
(1) (2) (3) (4)
Name & Address Nature of Amount and
Title of Class of Beneficial Owner 1 Beneficial Ownership 2 Percent of Class
- --------------------------------------------------------------------------------
Common Perry Douglas West 5,700,000 38.58
1270 Orange Avenue
Suite A
Winter Park, FL 32789
All Directors and Officers as a group 5,728,600 38.77
NOTES:
1. Each person has sole voting and investment power with respect to the
shares indicated as owned beneficially by each person.
2. Except as other wise noted, all shares listed are owned both of record
and beneficially.
3. As part of the proposed acquisition of AIRTECH common stock, Mr. West
has agreed to transfer back to ITC, at closing, 3,400,000 shares of ITC
common stock.
AIRTECH - Preclosing
- --------------------
The following tables set forth as of November 1, 1997, the address, and the
number of shares of AIRTECH's Common Stock, par value $0.001 per share, held of
record or beneficially by each person who held of record, or was known by
AIRTECH to own beneficially, more than 5% of the then 15,743,569 issued and
outstanding shares of AIRTECH' s Common Stock, of AIRTECH'S Series C Preferred
Stock. The tables also include the name and share holdings of each director and
of all officers and directors as a group:
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
As of August 1, 1997
%of
Class Beneficial Owner Amount Class
----- ---------------- ------ -----
Series C John Potter 500 50.00%
Preferred
Series C C.J. Comu 500 50.00%
Preferred
Common John Potter 1,346,217 08.00%
Common C.J. Comu 1,840,000 12.00%
Common Clean Air Partnership 1,601,277 10.00%
45
<PAGE>
Security Ownership of Management. The following table sets forth
information with respect to the share ownership of Common Stock, par value
$0.0001, of AIRTECH by its officers and directors, both individually and as a
group, who are the beneficial owner of more than 5% of AIRTECH's Common Shares.
- --------------------------------------------------------------------------------
(1) (2) (3) (4)
Name & Address Nature of Amount and
Title of Class of Beneficial Owner 1 Beneficial Ownership 2 Percent of Class
- --------------------------------------------------------------------------------
Common John Potter 1,346,217 08.00%
Dallas, Texas
Common C.J. Comu 1,840,000 12.00%
Dallas, Texas
Common Richard A. Allegrati, 100,000 01.00%
Dallas, Texas
Common Paul Williams 25,000 0.25%
Dallas, Texas
Common Scott McCleskey 282,500 02.00%
Dallas, Texas
All Officers and
Directors as a
Group (7)
4,512,534 29.00%
Common Clean Air Partnership 1,601,277 10.00%
Eerie, NY
NOTES:
1. Each person has sole voting and investment power with respect to the
shares indicated as owned beneficially by each person.
2. Except as other wise noted, all shares listed are owned both of record
and beneficially.
Post Closing
- ------------
The following pro forma tables set forth the number of shares of ITC Common
Stock which will be held of record or beneficially, after giving effect to the
proposed transaction, by each person who held of record, or was known by AIRTECH
or ITC to own beneficially, more than 5% of their then issued and outstanding
shares of common stock as of the closing of the transaction. The tables also
include the name and share holdings of each proposed director and of all
proposed officers and directors as a group:
Security Ownership of Certain Beneficial Owners
As of August 1, 1997
%of
Class Beneficial Owner Amount Class
----- ---------------- ------ -----
Common Perry Douglas West 2,300,000 10.77
46
<PAGE>
Security Ownership of Management. The following table sets forth
information with respect to the share ownership of Common Stock, par value
$0.01, of ITC by its officers and directors, both individually and as a group,
who are the beneficial owner of more than 5% of ITC's Common Shares.
- --------------------------------------------------------------------------------
(1) (2) (3) (4)
Name & Address Nature of Amount and
Title of Class of Beneficial Owner 1 Beneficial Ownership 2 Percent of Class
- --------------------------------------------------------------------------------
Common Perry Douglas West 2,300,000 10.77%
Winter Park, FL
Common John Potter 586,137 2.75%
Dallas, Texas
Common C.J. Comu 687,491 3.22%
Dallas, Texas
Common Richard A. Allegrati, 45,737 .21%
Dallas, Texas
Common Paul Williams 11,434 .01%
Dallas, Texas
Common Scott McCleskey 118,917 .56%
Dallas, Texas
All Officers and
Directors as a
Group (7) 3,944,100 22.17%
NOTES:
1. Each person has sole voting and investment power with respect to the
shares indicated as owned beneficially by each person.
2. Except as other wise noted, all shares listed are owned both of record
and beneficially.
Post Closing - Post Conversion
- ------------------------------
Both the ITC Preferred Shares and the ITC Debentures are subject to
conversion at the option of itc at any time within 24 months following the date
of issuance, assuming that ITC elected to convert.
- --------------------------------------------------------------------------------
(1) (2) (3) (4)
Name & Address Nature of Amount and
Title of Class of Beneficial Owner 1 Beneficial Ownership 2 Percent of Class
- --------------------------------------------------------------------------------
Common Perry Douglas West 2,300,000 6.54%
Winter Park, FL
Common John Potter 586,137 1.66%
Dallas, Texas
Common C.J. Comu 687,491 1.95%
Dallas, Texas
Common Richard A. Allegrati, 45,737 .13%
Dallas, Texas
Common Paul Williams 11,434 .03%
Dallas, Texas
Common Scott McCleskey 118,917 .34%
Dallas, Texas
All Officers and
Directors as a
Group (7) 3,944,100 11.21%
NOTES:
1. Each person has sole voting and investment power with respect to the
shares indicated as owned beneficially by each person.
2. Except as other wise noted, all shares listed are owned both of record
and beneficially.
47
<PAGE>
INTERESTS OF EXPERTS AND COUNSEL
No expert named in this prospectus as having prepared or certified any part of
this prospectus, no person having prepared or certified a report or valuation
for use in connection with this prospectus, and no counsel named in this
prospectus as having rendered an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of such securities was employed for such purpose on a contingent
basis, or at the time of such preparation, certification or opinion or at any
time thereafter through the date of effectiveness of the registration statement
had, or is to receive, in connection with the offering, a substantial interest,
direct or indirect, in the registrant or any of its parents or subsidiaries, or
was an underwriter, voting trustee, director, officer, or employee.
CERTAIN LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock which
are the subject of this Prospectus will be passed upon by Perry West, Esq.
EXPERTS
The consolidated financial statements and schedules of ITC, included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Turner, Stone & Company, Dallas Texas, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm of experts in giving said reports.
The consolidated financial statements and schedules of AIRTECH, included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Alvin L. Dahl Associates, P.C., independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm of experts in giving said reports.
TRANSFER AGENT
Interwest Transfer Company, P.O. Box 17136, Salt Lake City, Utah 84117,
Tele: 801-272-9294, Fax: 801-277-3147 will act as Transfer Agent for the ITC
Common Stock. ITC will act as transfer agent for the ITC Debentures and the ITC
Preferred Stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling ITC
pursuant to the foregoing provisions, ITC has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
48
<PAGE>
EXHIBIT "A"
TERMS OF ITC PREFERRED STOCK
The ITC Preferred Stock shall consist of 8,850,000 shares, each share
having the par value of $1.00 per share, and shall be designated Senior
Cumulative Convertible Preferred Stock. All shares of the ITC Preferred Stock
shall be identical with each other in all respects.
Part 1. Dividends.
- ------------------
1.01 No Dividends. No dividends are payable on the ITC Preferred Shares.
Part 2. Redemption.
- --------------------
2.01 Redemption. The ITC Preferred Shares may not be redeemed by ITC.
Part 3. Conversion.
- --------------------
3.01 Conversion Procedure. Each ITC Preferred Share may be converted into
one share of ITC Common Stock as hereinafter set forth:
(a) Conversion by Shareholder. Each Registered Holder of ITC
Preferred Shares may exercise all or a portion of the conversion rights
at any time or from time to time after the second anniversary of the
date of issuance.
(b) Conversion by ITC. At its option, ITC may convert all or any
portion of the ITC Preferred Shares at any time or from time to time
after the date of issuance.
(c) Exercise Procedure. Any ITC Preferred Share shall be deemed
to have been exercised (the "Exercise Time") when ITC shall have
received the certificate evidencing such shares appropriately endorsed
to reflect conversion thereof; whereupon ITC shall issue so many shares
of its Common Stock ("Conversion Stock") computed on the basis of one
share of Common Stock for one share of ITC Preferred Share so
converted.
(d) Delivery of New Certificates. Certificates for Conversion
Shares shall be delivered to the Holder named therein within 15 days
after the Exercise Time. Unless all of the ITC Preferred Shares
evidenced by the certificate delivered shall have been converted or
shall have been redeemed, ITC shall within a 15-day period prepare a
new certificate, substantially identical to that surrendered,
representing the balance of the ITC Preferred Shares formerly
represented by the certificate which shall not have converted or
redeemed and shall within the said 15-day period deliver such
certificate to the person designated as the holder thereof.
(e) Return of Certificate. The certificate evidencing the ITC
Preferred Shares shall be endorsed to reflect the conversion of all or
such portion thereof as the Registered Holder determines to convert. If
the Conversion Shares are not to be issued in the name of the Holder to
whom the Preferred Shares are registered, such registered holder shall
also state the name of the person to whom the certificate for the
Conversion Shares are to be issued, and if the Conversion Shares to be
issued shall not be all the Conversion Shares into which the ITC
Preferred Shares may be converted upon surrender of the ITC Preferred
Share certificates so surrendered, the name of the person to whom shall
be delivered a new certificate evidencing the balance of the ITC
Preferred Shares.
(f) Assignment. Assignment of ITC Preferred Shares shall be in
the form set forth on the reverse side of the certificate evidencing
same.
(g) Authorization and Issuance. ITC covenants and agrees that:
(i) All Conversion Shares which may be issued upon any
conversion of any ITC Preferred Shares will, upon issuance, be fully
paid and non-assessable and free from all taxes, liens and charges with
respect to the issue thereof.
A-1
<PAGE>
(ii) ITC will take all such action as may be necessary to assure
that all Conversion Shares issuable upon conversion of ITC Preferred
Shares may be issued without violation of any applicable law or
regulation or of any requirements of any domestic securities exchange
upon which securities of the same class may be listed.
(iii) The issuance of certificates for Conversion Shares upon
conversion of the ITC Preferred Shares shall be made without charge to
the registered holder thereof for any issuance tax in respect thereof
or other cost incurred by ITC in connection with the conversion of the
ITC Preferred Shares and the related issuance of Conversion Shares.
(iv) ITC will at no time close its transfer books against the
transfer of the ITC Preferred Share or of any Conversion Shares issued
or issuable upon the conversion of the ITC Preferred Shares in any
manner which interferes with the timely conversion of the ITC Preferred
Shares.
(h) Transferability. The ITC Preferred Shares and all rights
evidenced thereby are transferable on ITC's books by the registered
holder in person or by duly authorized attorney upon surrender of
certificate(s) evidencing said ITC Preferred Shares properly endorsed
at ITC's principal office provided that the registered holder complies
with such provisions governing transfer as shall be reasonably
established by ITC.
(i) Break-up of Certificates. Each certificate evidencing ITC
Preferred Shares is exchangeable, upon the surrender of the certificate
by the registered holder at ITC's principal office, for a new
certificate or certificates of like tenor representing in the aggregate
the right to purchase the number of Conversion Shares which may be
purchased under the Certificate surrendered, each of which new
certificates shall represent the right to purchase the number of
Conversion Shares as shall be designated by the registered holder
of this certificate at the time of such surrender.
Part 4. Liquidation.
- ---------------------
4.01 Rights of Holders of ITC Preferred Shares. In the event of any
voluntary or involuntary liquidation (whether complete or partial), dissolution
or winding up of ITC, the holders of ITC Preferred Shares shall be entitled to
be paid out of the assets of ITC available for distribution to its stockholders,
whether from capital, surplus or earnings, prior to the making of any
distribution shall be made on any Junior Security of ITC by reason of any
voluntary or involuntary liquidation (whether complete or partial), dissolution
or winding up of ITC.
4.02 Allocation of Liquidation Payments Among Holders of ITC Preferred
Shares. If upon any dissolution, liquidation (whether complete or partial), or
winding up of ITC, the assets of ITC available for distribution to holders of
ITC Preferred Shares (hereinafter in this ss.4.02 called the "Total Amount
Available") shall be insufficient to pay the holders of outstanding ITC
Preferred Shares, the full amounts to which they shall be entitled under
ss.4.01, each holder of ITC Preferred Shares shall be entitled to receive an
amount equal to the product derived by multiplying the Total Amount Available
times a fraction the numerator of which shall be the number of shares of ITC
Preferred Shares held by such holder and the denominator of which shall be the
total number of shares of ITC Preferred Shares then outstanding.
5. Additional Provisions Governing ITC Preferred Shares.
- ----------------------------------------------------------
5.01 Voting Rights. (a) Each outstanding share of Preferred Stock shall
entitle the holder thereof to notice of, and the right to vote at, any meeting
of stockholders at which any provision of ITC's certificate of incorporation or
any of ITC's bylaws is to be adopted, repealed, or amended or at which a merger,
consolidation, reorganization, dissolution, liquidation, winding up or sale of
all or substantially all of ITC's assets is to be or is voted upon.
Additionally, each outstanding share of Preferred Stock shall entitle the holder
thereof to notice of, and the right to vote upon all matters at, any meeting of
stockholders during the duration of an Event of Non-Compliance (as defined in
Section 6.01 below).
A-2
<PAGE>
(b) Except as otherwise provided by law, the entire voting power for
the election of directors and for all other purposes shall be vested exclusively
in the holders of the outstanding Common Stock.
(c) Except for any other rights set forth in the Certificate of
Incorporation and ss.5.01(a) hereof, the holders of Preferred Stock shall have
no voting rights.
5.02 Amendment and Waiver. No change in the provision of this Section
affecting any interests of the holders of any shares of ITC Preferred Share
shall be binding or effective unless such change shall have been approved in
writing by at least two unaffiliated holders of at least 66-2/3% of the ITC
Preferred Shares outstanding at the time such change shall be made, provided
that no change shall be made in the provisions for conversion contained herein.
5.03 Registration of Transfer of Preferred Stock. ITC will keep at its
principal office a register for the registration of the Preferred Stock. Upon
the surrender of any certificate representing ITC Preferred Shares at ITC's
principal office, ITC will, at the request of the registered holder of such
certificate, execute and deliver, at ITC's expense, a new certificate or
certificates in exchange representing the number of shares of ITC Preferred
Share represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall represent such number of ITC
Preferred Shares as shall be requested by the holder of the surrendered
certificate, and shall be substantially identical in form to the surrendered
certificate, and the ITC Preferred Shares represented by such new certificate
shall earn cumulative dividends.
5.06 Replacement. Upon receipt by ITC of evidence reasonably satisfactory
to it of the ownership of and the loss, theft, destruction or mutilation of any
certificate evidencing one or more of the ITC Preferred Shares (an affidavit of
the registered holder, without bond shall be satisfactory), ITC at its expense
will execute and deliver in lieu of such certificate, a new certificate of like
kind, representing the number of shares of the ITC Preferred Shares which shall
have been represented by such lost, stolen, destroyed, or mutilated certificate,
dated and earning cumulative dividends from the date to which dividends shall
have paid on such lost, stolen, destroyed or mutilated certificate.
6. Events of Noncompliance.
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6.01 Definitions.
(a) For purposes of this Section, an Event of Noncompliance will be
deemed to have occurred if:
(i) ITC or any of its subsidiaries shall fail in a material
manner to perform or observe any provision of these terms or
shall fail to comply with any other provision of the Agreement and the
holders of the ITC Preferred Shares shall have given at least 30 days
prior written notice of such failure and the same shall not have been
cured; or any representation, warranty or information contained in any
writing supplied by ITC or any of its subsidiaries or by an officer or
director thereof to any holder of ITC Preferred Shares shall be
materially false or misleading in any material respect on the date on
which made or furnished; or
(ii) ITC or any of its subsidiaries shall be in default under
any material contract(s) or agreement(s) to which it is a party, which
default could have a material adverse effect on the consolidated
operating results of ITC, whether or not a default has been declared;
or
(iii) without limiting the generality of (ii) above, ITC or any
of its subsidiaries shall fail to make any payment due on any other
obligation and the effect of such failure shall be to cause such
obligation to become due prior to its date of maturity; or
(iv) if ITC shall fail to pay when due any payment of money
including any payment due under any securities or otherwise not comply
with the provisions of any such security or allow any default under any
other agreement involving the borrowing or money or the advance of
credit, if such default gives to the holder of the obligation concerned
the right to accelerate the indebtedness; or
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(v) a receiver, liquidator or trustee of ITC or any of its
subsidiaries or of any property of ITC or any of its subsidiaries,
shall be appointed by court order and such appointment shall remain in
effect for 30 days; or ITC or any of its subsidiaries shall be adjudged
bankrupt or insolvent; or any of the property of ITC or any of its
subsidiaries shall be sequestered by court order and such order shall
remain in effect for more than 30 days; or a petition to reorganize ITC
or any of its subsidiaries under any bankruptcy, reorganization or
insolvency law shall be filed against ITC or any of its subsidiaries
and shall not be dismissed within 30 days after such filing; or
(vi) ITC or any of its subsidiaries shall file a petition in
voluntary bankruptcy or requesting reorganization under any provision
of any bankruptcy, reorganization or insolvency law or shall consent to
the filing of any petition against it under any such law; or
(vii) ITC or any of its subsidiaries shall make a formal or
informal assignment for the benefit of its creditors or admit in
writing its inability to pay its debts generally when they become due
or consent to the appointment of a receiver, trustee or liquidator of
ITC or any of its subsidiaries or of all or any part or the property of
ITC or any of its subsidiaries; or
(viii)final judgment for payment of money aggregating in excess
of $250,000 shall be outstanding against ITC or any of its subsidiaries
and any one of such judgments shall have been outstanding for more than
30 days from the date of its entry and shall not have been discharged
in full or stayed and such event shall not have been cured within a
period of 30 days.
(b) An Event of Non-compliance shall be deemed to exist at any time any
state of facts shall have come about voluntarily or involuntarily or shall be
beyond ITC's control or shall have come about or been effected by operation of
law or pursuant to or in compliance with any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
6.02 Action to be Taken in Case of Certain Events of Non-compliance. In the
event that any Event of Non-compliance described in Section 6.01 shall exist,
then at least two unaffiliated holders of an aggregate of at least 66-2/3% of
the then outstanding ITC Preferred Shares shall have the right to demand and
shall be given the right to vote on all matters.
6.03 Non-Exclusivity. The rights under ss.6.02 shall not be deemed to be
exclusive. If any Event of Non-compliance shall exist, the holders of shares of
ITC Preferred Share shall have all other rights which such holder shall have
been granted under any contract or agreement at any time, and all other rights
which such holders shall have under any law Any person having any rights under
any provision in this Section shall be entitled to enforce such person's rights
specifically, to recover damages by reason of any non-compliance with any
provision in this Section, and to exercise all other rights granted by law.
Part 7. Interpretation of this Instrument.
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7.01 Definitions. Each term defined in this Section 7.01 has the meaning
indicated in this instrument whenever such term is used in this instrument.
"Common Stock" or "Common Shares" designates and includes ITC's
existing Common Stock of all classes and any capital stock of any class
of ITC authorized after the date of the Agreement which shall not be
limited to a fixed sum or a percentage of par value in respect to the
rights of the holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation or
winding-up of ITC.
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"Conversion Share" means one share of ITC's authorized Common
Stock, provided that if under the provisions hereof, there shall be a
change such that the securities purchasable hereunder shall be issued
by an entity other than ITC or class of securities purchasable
hereunder, then the term "Conversion Share" shall mean one share of the
security purchasable upon the exercise of the rights granted hereunder
if such security shall be issuable in shares or shall mean the smallest
unit which such security shall be issuable if such security shall not
be issuable in shares.
"Conversion Shares" means the aggregate Conversion Shares at any
time issuable upon conversion of the ITC Preferred Shares.
"ITC Preferred Stock" or " ITC Preferred Shares" means 8,000,000
shares of the ITC Convertible Preferred Stock so designated which shall
be convertible into shares of Common Stock, as set forth in Section 7
hereof.
"Junior Securities" shall mean any equity security of any kind
which ITC or any subsidiary shall at any time issue or be authorized to
issue other than ITC Preferred Shares.
"Number of Common Shares Deemed Outstanding" at any given time
means the sum of (a) the number of Common Shares actually outstanding
at such time, plus (b) the number of the Company's Common Shares deemed
to be outstanding under sub-sections (i) to (ix) inclusive, of ss.8.02
hereof at such time.
Part 8. Anti-dilution Provisions.
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8.01 Adjustment of Number of Shares. In order to prevent dilution of the
rights granted hereunder, the Conversion Price shall be subject to adjustment
from time to time as follows:
(a) If ITC shall: (A) declare a dividend on its ITC Common Stock
in shares of ITC Common Stock or make a distribution in shares of ITC
Common Stock, (B) subdivide its outstanding shares of ITC Common Stock,
(C) combine its outstanding shares of ITC Common Stock into a smaller
number of shares of ITC Common Stock or (D) issue by reclassification
of its shares of ITC Common Stock other securities of ITC (including
any such reclassification in connection with a consolidation or merger
in which ITC is the continuing corporation); then the number of shares
of ITC Common Stock issuable upon conversion of the ITC Preferred
Shares immediately prior thereto shall be adjusted so that the holder
of the ITC Preferred Shares shall be entitled to receive the kind and
number of shares of ITC Common Stock of ITC which he would have owned
or have been entitled to receive after the happening of any of the
events described above, had the ITC Preferred Shares been converted
immediately prior to the happening of such event or any record date
with respect thereto. An adjustment made pursuant to this paragraph
shall become effective immediately after the effective
date of such event retroactive to immediately after the record date, if
any, for such event.
(b) If ITC shall issue either (A) any shares of ITC
Common Stock or (B) any right to buy ITC Common Stock at a price per
share which is less than the fair market value per share of the ITC
Common Stock as of the time of any such issuance, in an amount which
has a material dilutive effect (which for purposes hereof shall mean
issuance, at less than fair market value, of an aggregate number of
shares of ITC Common Stock equal to at least ten percent (10%) of the
then issued and outstanding shares of ITC ); then the number of shares
of ITC Common Stock which the Conversion Rate shall thereafter entitle
the holders of the ITC Preferred Shares to receive shall be determined
by multiplying the number of shares of ITC Common Stock which the
Conversion Rate entitled the holder to receive immediately prior to
such issuance by a fraction, the numerator of which shall be the number
of shares of ITC Common Stock outstanding immediately prior to such
issuance plus the number of additional shares of ITC Common Stock so
issued, and the denominator of which shall be the number of shares of
ITC Common Stock outstanding immediately prior to such issuance plus
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the number of shares of ITC Common Stock which the consideration
received by ITC would purchase at fair market value (as determined in
good faith by the Board of Directors of ITC ). This provision shall not
apply to any shares of ITC Common Stock issued pursuant to any
presently existing option, warrant or right to convert any obligation
of ITC into shares of its ITC Common Stock which are issued and
outstanding as of the date of the adoption of the Designation of Rights
and Preferences of the ITC Preferred Stock or to shares issued pursuant
to the conversion of debentures of ITC or to shares issued pursuant
to options or warrants hereafter granted if the exercise price for the
purchase of said shares was equal to or greater than fair market value
(as determined in good faith by the Board of Directors of ITC ) at the
date of such grant. In determining the fair market value for purposes
of this paragraph, a recent bid price for ITC 's ITC Common Stock
may be conclusively presumed to be the fair market value by the Board
of Directors; provided that the Board of Directors may consider other
factors, in good faith, if they so choose.
(c) No adjustment in the number of shares of ITC Common Stock
issuable hereunder shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the
number of shares of ITC Common Stock issuable upon the conversion of
the ITC Preferred Shares.
(d) If the number of shares of ITC Common Stock issuable upon
the conversion of the ITC Preferred Shares or the conversion price of
such ITC Common Stock is adjusted as provided above, then ITC shall
mail promptly, by first class mail, postage prepaid, to each holder
notice of such adjustment or adjustments.
(e) In case of any consolidation of ITC or merger or share
exchange of ITC with or into another corporation or in case of any sale
or conveyance to another corporation of the property of ITC as an
entirety or substantially as an entirety, ITC or such successor or
purchasing corporation (or an affiliate of such successor or purchasing
corporation), as the case may be, agrees that each holder shall have
the right thereafter to convert the ITC Preferred Shares into the kind
and amount of shares and other securities and property (including cash)
which such holder would have owned or have been entitled to receive
after the happening of such consolidation, merger, sale or conveyance
had the ITC Preferred Shares been converted immediately prior to such
action. The provisions of this paragraph shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(g) Notwithstanding any adjustment in the number or kind of
shares issuable upon the conversion of the ITC Preferred Shares,
certificates representing shares of ITC Preferred Shares issued prior
or subsequent to such adjustment may continue to refer to the same
number and kind of shares as were issuable prior to such adjustment.
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ATTACHMENT "B"
TERMS OF ITC SENIOR CONVERTIBLE PREFERRED DEBENTURE
1. Description. The Debentures (the "Debentures") are a series of debentures
aggregating SIX MILLION DOLLARS ($6,000,000)
2. Rate. The Debentures bear interest on the unpaid principal amount at the
rate of ten percent (10%) per annum from the date hereof until paid in
full.
3. Payments Dates. Interest on the Debenture's is payable annually, commencing
on the first anniversary of the issuance thereof and continuing thereafter
until the entire principal of and interest on the Debenture's shall have
been paid in full. Debenture shall be payable on the fith anniversary of
the issuance thereof. The principal of the Debentures may be prepaid in
whole or in part, and if in part by lot, at any time.
4. Currency for Payment. Both the principal of and interest on the Debenture's
are payable in the lawful money of the United States of America; provided
however, at ITC's option, interest on the Debentures may be paid by the
issuance of shares of ITC's $0.01 par value Common Stock (the "Common
Stock"). If ITC elects to so issue its Common Stock in payment of interest
on the Debentures, the initial rate shall be at seventy cents ($0.70) per
share.
5. Place of Payment. Both the principal of and interest on the Debentures are
payable at such address as shall have been provided to the Company, in
writing, by the Registered Holder hereof.
6. Conversion - Holder's Option. Any portion of the principal amount of a
debenture may be converted, at the option of the registered holder hereof,
at 100% or so much of the principal amount of this Debenture as is so
converted into Common Stock at the Conversion Price (described below) in
effect at the date of the conversion. A registered holder of any debenture
may exercise all or any portion of the conversion rights at any time or
from time to time after the second anniversary of the issuance hereof.
7. Conversion - Company's Option. Each Debenture or any portion of the
principal amount thereof, may be converted, at the option of the ITC, at
100% or so much of the principal amount of this Debenture as is so
converted into Common Stock at the Conversion Price, in effect at the date
of the conversion. ITC may exercise all or any portion of the conversion
rights at any time or from time to time after the date of the issuance of
the Debentures.
8. Conversion Price. The price at which shares of Common Stock shall be
delivered upon conversion (the "Conversion Price") shall initially be
seventy cents ($0.70) per share of Common Stock. The Conversion Price in
effect or to be in effect at any time shall be subject to adjustment from
time to time.
9. Application of Prepayment or Conversions. Prepayments or conversions
(whether made at the option of ITC or at the option of the Registered
Holder) shall be applied as follows: (i) cash, if any, shall be applied
first to accrued and unpaid interest and then to principal in inverse order
of maturity, then (ii) payments in stock or conversions shall be applied
first to accrued and unpaid interest and then to principal in inverse order
of maturity.
10. Adjustment of Conversion Price. Upon each adjustment of the Conversion
Price, the Registered Holder of the Debenture shall thereafter be entitles
to purchase, at the conversion price resulting from such the adjustment,
number of shares obtained by multiplying the Conversion Price in effect
immediately prior to such adjustment b the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the
product thereof by the conversion price resulting from such adjustment. The
Conversion Price shall be subject to adjustment from time to time as
follows:
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<PAGE>
A. If ITC shall at any time or from time to time after the date hereof: (i)
issue or sell any additional shares of Common Stock for a consideration per
share less than the Conversion Price in effect immediately prior to the
issue or sale of such additional shares, or without consideration, or (ii)
pay or make a dividend (other than in cash payable from retained earnings
or earned surplus) or other distribution on Common Stock, then and
thereafter successively upon each such issue, sale, dividend or other
distribution, the Conversion Price for each share of Common Stock in effect
immediately prior to such issue, sale, dividend or other distribution shall
forthwith be reduced to a price (calculated to the nearest full cent) equal
to the quotient obtained by dividing (i) an amount equal to the sum of (a)
the total number of shares of Common Stock outstanding immediately prior to
such issue, sale, dividend or other distribution multiplied by such
Conversion Price in effect immediately prior to such issue, sale, dividend
or other distribution, plus (b) in the case of such an issue or sale, the
consideration, if any, received by the Company upon such issue or sale, or
minus (c) in the case of such a dividend or other distribution, the amount
of such dividend or other distribution, by (ii) the total number of shares
of Common Stock outstanding immediately after such issue, sale, dividend or
other distribution. The Company shall not be required to make any
adjustment of the Conversion Price if the amount of such adjustment shall
be less than five cents ($0.05) per share, but in such case any adjustment
that would otherwise be required then to be made shall be carried forward
and shall be made at the time and together with the next subsequent
adjustment, which, together with any adjustment so carried forward, shall
amount to not less than (insert amount) per share.
B. For the purposes of any adjustment as provided in subsection A, the
following provisions shall also be applicable:
(i) In case of the issue of additional shares of Common Stock for cash, the
consideration received by ITC therefor shall be deemed to be the cash
proceeds received by ITC for such shares, without deduction therefrom of
any expenses incurred or any underwriting commissions or concessions paid
or allowed by the Company in connection therewith;
(ii) If, at any time, ITC shall grant any rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
other securities convertible into or exchangeable for Common Stock (such
convertible or exchangeable stock or securities being herein called
"Convertible Securities"), whether or not such rights or options or the
rights to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such rights or options or upon conversion or
exchange of such Convertible Securities, (determined by dividing (a) the
total amount, if any, received or receivable by ITC as consideration for
the granting of such rights or options, plus the minimum aggregate amount
of additional consideration payable to ITC upon the exercise of such rights
or options, plus, in the case of any such rights or options which relate to
such Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (b) the total
maximum numbers of shares of Common Stock issuable upon the exercise of
such rights or options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such rights or
options) shall be less than the conversion price in effect immediately
prior to the time of the granting of such rights or options, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
rights or options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise of such
rights or options shall (as of the date of granting of such rights or
options) be deemed to be outstanding and to have been issued for such price
per share. No further adjustments of the conversion price shall be made
upon the actual issue of such Common Stock or of such Convertible
Securities upon exercise of such rights or options or upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible
Securities.
(iii)If, at any time, ITC shall declare a dividend or make any other
distribution upon any stock of the Company payable in Common Stock or
Convertible Securities, any Common Stock or Convertible Securities, as the
case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
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<PAGE>
(iv) If any shares of Common Stock or Convertible Securities or any rights or
options to purchase any such Common Stock or Convertible Securities shall
be issued or sold, in whole or in part, for a consideration other than
cash, the amount of the consideration other than cash received by ITC shall
be deemed to be the fair value of such consideration as determined by the
Board of Directors of the Company.
(v) In the event of the consolidation of ITC with or the merger of ITC into any
other corporation or of the sale of the properties and assets of the
Company as, or substantially as, an entirety for stock or other securities
of any corporation, or the merger of any other corporation into the Company
as a result of which the Registered Holders of shares of Common Stock of
the Company shall be deemed to have become the holders of, or shall become
entitled to, stock or other securities of any corporation other than the
Company, the Company shall be deemed to have issued a number of shares of
its Common Stock for such stock or securities computed on the basis of the
exchange ratio actually applied in the transaction and for a consideration
equal to the fair market value on the date of such transaction of such
stock or securities of the other corporation. If such determination shall
cause an adjustment in the Conversion Price, the determination of the
number of shares of Common Stock issuable upon the conversion of any
Debenture immediately prior to such consolidation, merger or sale for the
purposes of subsection (iii) of this subsection shall be made after giving
effect to such adjustment of the Conversion Price.
(vi) In case of the payment or making of a dividend or other distribution on
Common Stock in property (other than in shares of Common Stock and
securities convertible into or exchangeable for shares of Common Stock, but
including all other securities) such dividend or other distribution shall
be deemed to have been paid or made at the close of business at the record
date fixed for the determination of Registered Holders entitled to receive
such dividend or other distribution and the amount of such dividend or
other distribution shall be the amount of cash and, if in property other
than cash,shall be deemed to be the value of such property as determined in
good faith by the Board of Directors of the Company at the time of the
declaration of such dividend or other distribution.
(vii)The number of shares of Common Stock outstanding at any given time shall
not include shares owned or held by or for the account of the Company, and
the disposition of any such shares shall be considered an issue of sale of
Common Stock.
B. Anything to the contrary notwithstanding, ITC shall not be required to make
any adjustment of the Conversion Price as a result of the happening of any
of the following:
(i) The issuance of any of the Debentures
(ii) The issue of shares of Common Stock upon the conversion from time to time
of the Debentures.
C. If, at any time, ITC shall subdivide its outstanding shares of Common Stock
into a greater number of shares, the Conversion Price in effect immediately
prior to such subdivision shall be proportionately reduced.
D. If any capital reorganization or reclassification of the capital stock of
ITC, or consolidation or merger of ITC with another corporation, or the
sale of all or substantially all of its assets to another corporation shall
be effected in such a way that Registered Holders of Common Stock (or any
other securities of the Company then issuable upon the conversion of this
Debenture) shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock (or such other securities) then,
as a condition of such reorganization, reclassification, consolidation,
merger or sale, lawful and adequate provision shall be made whereby the
Registered Holder hereof shall thereafter have the right to purchase and
receive upon the basis and upon the terms arid conditions specified in this
Debenture and in lieu of the shares of the Common Stock (or other
securities) of ITC immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby, such shares of stock,
securities or assets as may be issued or payable with respect to or in
exchange for a number of shares of such Common Stock (or such other
securities) immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any
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such case appropriate provision shall be made with respect to the rights and
interests of the Registered Holders of the Debenture's to the end that the
provisions hereof (including without limitation provisions for adjustments
of the conversion price and of the number of shares purchasable upon the
conversion of the Debenture's) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the conversion hereof (including an immediate adjustment,
by reason of such consolidation, merger or sale, of the conversion price,
to the value for the Common Stock reflected by the terms of such
consolidation, merger or sale if the value so reflected is less than the
conversion price in effect immediately prior to such consolidation, merger
or sale). ITC shall not effect any such consolidation, merger or sale,
unless prior to the consummation thereof the successor corporation (if
other than ITC) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume, by written instrument
executed and mailed to the Registered Holder hereof at the last address of
such Registered Holder appearing on the books of ITC, the obligation to
deliver to such Registered Holder such shares of stock, securities or
assets, as, in accordance with the foregoing provisions, such Registered
Holder may be entitled to purchase. The successor corporation shall be
deemed substituted for ITC for all purposes of this Agreement and the
Debentures. The provisions of this subsection governing the substitution of
another corporation for ITC shall similarly apply to successive instances
in which the corporation then deemed to be ITC shall either sell all or
substantially all of its properties and assets to any other corporation,
shall consolidate with or merge into any other corporation or shall be the
surviving corporation of the merger into it of any other corporation as a
result of which the Registered Holders of any of its stock or other
securities shall be deemed to have become the Registered Holders of, or
shall become entitled to, the stock or other securities of any corporation
other than the corporation at the time deemed to be ITC hereunder.
11. Notice of Conversion Price. Upon any adjustment of the conversion price,
then and in each such case ITC shall give written notice thereof, to the
Registered Holder thereof, which notice shall state the conversion price
resulting from such adjustment and the increase if any, in the number of
shares purchasable at such price upon the exercise of the Debenture's,
setting forth in reasonable detail the method of calculation and the facts
upon which such calculation is based. ITC will, within 90 days after the
end of each of its fiscal years, and at such other times as the Registered
Holder may reasonably request, mail to the Registered Holders a certificate
of the independent public accountants for ITC specifying the Conversion
Price in effect as of the end of such fiscal year and the number of shares
of Common Stock, or the kind and amount of any securities or property other
than Common Stock or both, issuable upon the conversion of the Debentures.
12. Manner of Exercise of Conversion and Pre-Payment Rights by Company.
A. CONVERSION.
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(a) When any of the Debentures are to be converted pursuant to Section 6, the
Escrow Agent shall cause a notice of conversion to be mailed to the
Registered Holders thereof at least thirty (30) but not more than
forty-five (45) days prior to the date fixed for conversion.
(b) Each notice of conversion shall be deposited by the Escrow Agent in the
United States mail with first class postage prepaid and addressed to the
Registered Holders of the Debentures called for conversion at their
respective addresses appearing upon the records of the Escrow Agent.
(c) Any defect in any notice given pursuant to this Section shall not affect
the validity of the proceedings for the proposed conversion.
(d) Each notice shall state: (1) the maturity date and rate of interest borne
by each Debenture being converted; (2) the date fixed for conversion; (3)
the conversion price; (4) the date on which such notice is mailed; (5) if
less than all outstanding Debentures are to be converted, the Debenture
number (and, in the case of a partial conversion of any Debenture, the
Principal Amount) of each Debenture to be converted; (6) that on such
conversion date there shall become due and payable upon each Debenture to
be pre-paid the conversion price thereof, or the conversion price of the
specified component of the Principal Amount thereof in the case of
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Debentures to be pre-paid in part only, together with interest with respect
thereto to the conversion date, and that from and after such date interest
with respect thereto shall cease to accrue and be payable; (7) that the
Debentures to be converted, whether as a whole or in part are to be
surrendered for payment of the conversion price at the corporate trust
office of the Escrow Agent; and (8) the name and telephone number of a
person designated to be responsible for such conversion.
B. PREPAYMENT RIGHTS.
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(a) When any of the Debentures are to be pre-paid, the Escrow Agent shall cause
a notice of pre-payment to be mailed to the Registered Holders thereof at
least thirty (30) but not more than forty-five (45) days prior to the date
fixed for pre-payment.
(b) Each notice of pre-payment shall be deposited in the United States mail
with first class postage prepaid and addressed to the Registered Holders of
the Debentures called for pre-payment.
(c) Any defect in any notice given pursuant to this Section shall not affect
the validity of the proceedings for the proposed pre-payment.
(d) Each notice shall state: (1) the maturity date and rate of interest borne
by each Debenture being pre-paid; (2) the date fixed for pre-payment; (3)
the pre-payment price; (4) the date on which such notice is mailed; (5) if
less than all outstanding Debentures are to be pre-paid, the Debenture
number (and, in the case of a partial pre-payment of any Debenture, the
Principal Amount) of each Debenture to be pre-paid; (6) that on such
pre-payment date there shall become due and payable upon each Debenture to
be pre-paid the pre-payment price thereof, or the pre-payment price of the
specified component of the Principal Amount thereof in the case of
Debentures to be pre-paid in part only, together with interest with respect
thereto to the pre-payment date, and that from and after such date interest
with respect thereto shall cease to accrue and be payable; (7) that the
Debentures to be pre-paid, whether as a whole or in part are to be
surrendered for payment of the pre-payment price at the corporate trust
office of the Escrow Agent; and (8) the name and telephone number of a
person designated to be responsible for such pre-payment.
(e) If at the time of mailing of notice of any pre-payment, ITC shall not have
deposited with the person responsible for such repayment moneys sufficient
to redeem all the Debentures called for pre-payment, such notice shall
state that it is conditional, subject to the deposit of funds with such
person not later than the pre-payment date, and such notice shall be of no
effect unless such moneys are so deposited.
COSTS OF CONVERSION OR PRE-PAYMENT.
-----------------------------------
When Debentures are to be pre-paid or converted, all pre-payment costs or
conversion costs, including the amounts necessary to pay all costs of
required mailing, any other costs incidental to the pre-payment or
conversion, and to pay the principal, and all interest accrued and to
accrue to the date fixed for pre-payment (or any earlier date to which
interest shall be paid), shall be set aside and held in separate trust to
be established therefor exclusively for such purposes. Notice having been
given in the manner hereinbefore provided, or written waivers of notice
having been filed with prior to the date set for pre-payment or conversion,
the Debentures so called for pre-payment or conversion shall become due and
payable on the pre-payment date or conversion date so designated and
interest on such Debentures shall cease to accrue from the pre-payment or
conversion date whether or not the Debentures shall be presented for
payment. The final distribution (representing principal and accrued
interest) on any Debenture so called for pre-payment or conversion shall be
paid upon presentation and surrender thereof.
13. Manner of Exercise of Conversion Rights by Holder. In order to exercise the
conversion privilege, registered holders may surrender the Debenture's to
the Company at any time after the second anniversary of the date of the
initial issuance thereof, during usual business hours at its office or
agency in the City of Dallas, TX, accompanied by written notice to ITC at
such office or agency that the Registered Holder elects to convert this
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Stock which shall be issuable on such conversion shall be issued. All
Debentures surrendered for conversion shall (if so required by ITC) be
accompanied by proper assignments thereof to the Company or be blank. As
promptly as practicable after the receipt of such notice and the surrender
of this Debenture as aforesaid, ITC shall issue and deliver at such office
or agency to the Registered Holder, or on his written order, a certificate
or certificates for the number of full shares of Common Stock issuable on
such conversion and cash in respect of any fraction of a share of Common
Stock otherwise issuable upon such conversion. Such conversion shall be
deemed to have been effected at the close of business on the date of
conversion, and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the Registered Holder
or Registered Holders of record of the shares represented thereby on such
date; provided, however, that any such surrender on any date when the stock
transfer books of ITC shall be closed shall constitute the person or
persons in whose name or names the certificate or certificates for such
shares are to be issued as the record Registered Holder or Registered
Holders thereof for all purposes at the close of business on the next
succeeding day on which such stock transfer books are open, and the
surrendered Debenture shall not be deemed to have been converted until such
time for all purposes, but such conversion shall be at the conversion price
in effect at the close of business on the date of such surrender. In case a
Debenture shall be surrendered for conversion of only a portion of the
principal amount thereof, ITC shall execute and deliver to the Registered
Holder of such Debenture, at the expense of the Company, a new Debenture in
the denomination or denominations ($1,000 and integral multiples thereof,
plus one Debenture in a lesser denomination, if required) as such
Registered Holder may request in an aggregate principal amount equal to the
unconverted portion of the Debenture so surrendered.
14. Fractions of Share. ITC shall not be required to issue fractions of a share
or scrip representing fractional shares of Common Stock upon conversion of
this Debenture. If any fraction of a share of Common Stock would otherwise
be issuable on the conversion of a Debenture (or specified portions
hereof), ITC shall pay a cash adjustment in respect of such fraction, equal
to the value of such fraction based on the then conversion price.
15. Delivery of New Certificates. Certificates for Conversion Shares shall be
delivered to the Registered Holder named therein within 15 days after the
date of conversion. Unless all of the principal amount evidenced by this
Certificate shall have been converted or shall have been redeemed, ITC,
within a 15-day period, prepare a new certificate, substantially identical
to that surrendered, representing the balance of the principal amount which
shall not have converted or redeemed and shall within the said 15-day
period deliver such certificate to the person designated as the Registered
Holder thereof.
16. Authorization and Issuance. ITC covenants and agrees that:
(i) Conversion Shares which may be issued upon any conversion of any portion of
the principal amount of a Debenture, upon issuance, will be fully paid and
non-assessable and free from all taxes, liens and charges with respect to
the issue thereof.
(ii) ITC will take all such action as may be necessary to assure that all
Conversion Shares issuable upon conversion of a Debenture may be issued
without violation of any applicable law or regulation or of any
requirements of any domestic securities exchange upon which securities of
the same class may be listed.
(iii)The issuance of certificates for Conversion Shares upon conversion of a
Debenture shall be made without charge to the Registered Holder hereof for
any issuance tax in respect thereof or other cost incurred by ITC in
connection with the conversion of this Debenture and the related issuance
of Conversion Shares.
(iv) ITC will at no time close its transfer books against the transfer of a
Debenture or of any Conversion Shares issued or issuable upon the
conversion of a Debenture in any manner which interferes with the timely
conversion of a Debenture.
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(v) The Company shall not at any time authorize or issue any security which
under the definition given in 31 constitutes "Common Stock" and which
grants to its security holders rights to share in dividends or any other
distributions of any kind at any time made by the Company (including but
not limited to liquidating distributions) which could result in the
distribution of a greater amount per share than the amount per share
distributable on the Company's Existing Common Stock or which are in any
respect more favorable than the corresponding rights attributable to
Existing Common Stock.
17. Transferability. The Debenture's and all rights evidenced hereby are
transferable on ITC's books by the Registered Holder in person or by a duly
authorized attorney upon surrender hereof properly endorsed at ITC's
principal office; provided that the Registered Holder complies with such
provisions governing transfer as shall be reasonably established by the
Company.
18. Break-up of Certificates. The Debenture's are exchangeable, upon the
surrender of thereof by the Registered Holder at ITC's principal office,
for a new certificate or certificates of like tenor representing in the
aggregate the principal amount hereof, each of which new certificates shall
represent shall be in the principal amount designated by the Registered
Holder at the time of such surrender.
19. Notice of Distributions, Rights of Reorganization, Etc. In case, at any
time:
(i) ITC shall pay any dividend payable in stock upon its Common Stock or make
any distribution (other than regular cash dividends) to the Registered
Holders of its Common Stock;
(ii) ITC shall offer for subscription pro rata to the Registered Holders of its
Common Stock any additional shares of stock of any class or other rights;
(iii)there shall be any capital reorganization, or reclassification of the
capital stock of ITC, or consolidation or merger of ITC, or sale of all or
substantially all of its assets to, another corporation; or
(iv) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more said cases, ITC shall give written notice, to the
Registered Holder of the Debenture's, of the date on which (a) the books of
ITC shall close or a record shall be taken for such dividend, distribution
or subscription rights, or (b) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up shall
take place, as the case may be. Such notice shall also specify the date as
of which the Registered Holders of the Debenture's shall participate in
such dividend, distribution or subscription rights, or shall be entitled to
exchange this Debenture for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Such written
notice shall be given at least 20 days prior to the action in question, and
not less than 20 days prior to the record date or the date on which ITC's
transfer books are closed in respect thereto.
20. Company to Reserve. ITC shall at all times reserve and keep available out
of its authorized but unissued stock, for the purpose of converting the
Debentures, such number of its duly authorized shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding Debentures.
21. No Rights as Stock Holders. Prior to the conversion of the Debenture, the
Registered Holders shall not be entitled to any rights of a stock holder of
ITC, including without limitation the right to vote, to receive dividends
or other distributions or to exercise any pre-emptive rights, and shall not
be entitled to receive any notice of any proceedings of ITC, except as
provided herein.
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<PAGE>
22. Rights of Registered Holder Upon Liquidation. In the event of any voluntary
or involuntary liquidation (whether complete or partial), dissolution or
winding up of ITC, the Registered Holder shall be entitled to be paid out
of the assets of ITC, prior to the making of any payment on any Equity
Security or Junior Indebtedness of ITC.
23. Allocation of Liquidation Payments Among Registered Holders of The
Debentures. If upon any dissolution, liquidation (whether complete or
partial), or winding up of ITC, the assets of the Company available
therefor (hereinafter in this Section called the "Total Amount Available")
shall be insufficient to pay the Registered Holders of outstanding the
Debentures the full amounts to which they shall be entitled thereunder,
each Registered Holder of the Debentures shall be entitled to receive an
amount equal to the product derived by multiplying the Total Amount
Available times a fraction the numerator of which shall be the aggregate
principal amount of the Debentures held by such Registered Holder and the
denominator of which shall be the aggregate principal amount of all of the
Debentures then outstanding.
24. Amendment and Waiver. No change in the provision of this Section affecting
any interests of the Registered Holders of any of the Debentures shall be
binding or effective unless such change shall have been approved in writing
by at least two unaffiliated Registered Holders of at least 66-2/3% of the
aggregate principal amount of all Debentures outstanding at the time such
change shall be made, provided that no change shall be made in the
provisions for conversion contained herein.
25. Registration of Transfer of Debentures. The Company will keep at its
principal office a register for the registration of the Debentures. Upon
the surrender of this Debenture at the ITC's principal office, ITC, at the
request of the Registered Holder, will execute and deliver, at ITC's
expense, a new certificate or certificates in exchange representing the
aggregate principal amount of this Debenture. Each such new certificate
shall be registered in such name and shall represent such principal amount
as shall be requested by the Registered Holder of the surrendered
certificate, and shall be substantially identical in form, except as to
principal amount, to the surrendered certificate.
26. Replacement. Upon receipt by ITC of evidence reasonably satisfactory to it
of the ownership of and the loss, theft, destruction or mutilation of any
certificate evidencing one or more of the Debentures (an affidavit of the
Registered Holder, without bond shall be satisfactory), the Company at its
expense will execute and deliver in lieu of such certificate, a new
certificate of like kind, representing the then outstanding principal
amount of the Debenture which shall have been represented by such lost,
stolen, destroyed, or mutilated certificate, dated and earning interest
from the date to which interest shall have paid on such lost, stolen,
destroyed or mutilated certificate.
27. Events of Noncompliance.
Definitions. For purposes of this Section, an "Event of Noncompliance" will be
deemed to have occurred if:
(i) ITC or any of its subsidiaries shall fail in a material manner to perform
or observe any covenant set forth in the Agreement or shall fail to comply
with any other provision of the Agreement and the Registered Holders of the
Debentures shall have given at least 30 days prior written notice of such
failure and the same shall not have been cured; or any representation,
warranty or information contained in any writing supplied by the Company or
any of its subsidiaries or by an officer or director thereof to any
Registered Holder shall be materially false or misleading in any material
respect on the date on which made or furnished; or
(ii) ITC or any of its subsidiaries shall be in default under any material
contract(s) or agreement(s) to which it is a party, which default could
have a material adverse effect on the consolidated operating results of the
Company, whether or not a default has been declared; or
B-8
<PAGE>
(iii)without limiting the generality of (ii) above, ITC or any of its
subsidiaries shall fail to make any payment due on any other obligation and
the effect of such failure shall be to cause such obligation to become due
prior to its date of maturity; or
(iv) if ITC shall fail to pay when due any payment of money including any
payment due under any securities or otherwise not comply with the
provisions of any such security or allow any default under any other
agreement involving the borrowing or money or the advance of credit, if
such default gives to the owner of the obligation concerned the right to
accelerate the indebtedness; or
(v) a receiver, liquidator or trustee of the Company or any of its subsidiaries
or of any property of ITC or any of its subsidiaries, shall be appointed by
court order and such appointment shall remain in effect for 30 days; or the
Company or any of its subsidiaries shall be adjudged bankrupt or insolvent;
or any of the property of ITC or any of its subsidiaries shall be
sequestered by court order and such order shall remain in effect for more
than 30 days; or a petition to reorganize the Company or any of its
subsidiaries under any bankruptcy, reorganization or insolvency law shall
be filed against the Company or any of its subsidiaries and shall not be
dismissed within 30 days after such filing; or
(vi) ITC or any of its subsidiaries shall file a petition in voluntary
bankruptcy or requesting reorganization under any provision of any
bankruptcy, reorganization or insolvency law or shall consent to the filing
of any petition against it under any such law; or
(vii)ITC or any of its subsidiaries shall make a formal or informal assignment
for the benefit of its creditors or admit in writing its inability to pay
its debts generally when they become due or consent to the appointment of a
receiver, trustee or liquidator of the Company or any of its subsidiaries
or of all or any part or the property of ITC or any of its subsidiaries; or
(viii) final judgment for payment of money aggregating in excess of $250,000
shall be outstanding against ITC or any of its subsidiaries and any one of
such judgments shall have been outstanding for more than 30 days from the
date of its entry and shall not have been discharged in full or stayed and
such event shall not have been cured within a period of 30 days.
An event of Non-compliance shall be deemed to exist any time any state of
facts shall have come about voluntarily or involuntarily or shall be beyond
ITC's control or shall have come about or been effected by operation of law
or pursuant to or in compliance with any judgment, decree or order of any
court or any order, rule or regulation of any administrative or
governmental body.
28. Action to be Taken in Case of Certain Events of Non-compliance. In the
event that any Event of Non-compliance described herein shall exist, then,
up demand of at least two unaffiliated Registered Holders of an aggregate
of at least 66-2/3% of the then outstanding principal amount of the
Debentures the Registered Holders shall be given the right to vote on all
matters which may be properly brought before the shareholders. For the
purpose of calculating the votes which may be cast by such Registered
Holders, each Registered Holder here shall be allowed to vote the number of
Conversion Shares into which this Debenture is convertible as of the record
date established for such vote.
29. Non-Exclusivity. The rights under this Section shall not be deemed to be
exclusive. If any Event of Non-compliance shall exist, the Registered
Holders of shares of Debenture shall have all other rights which such
Registered Holder shall have been granted under any contract or agreement
at any time, and all other rights which such Registered
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<PAGE>
Holders shall have under any law Any person having any rights under any
provision in this Section shall be entitled to enforce such person's rights
specifically, to recover damages by reason of any non-compliance with any
provision in this Section, and to exercise all other rights granted by law.
30. Definitions.
"Common Stock" "Common Shares" designates and includes ITC Existing Common
Stock of all classes and any capital stock of any class of ITC authorized
after the date of the Agreement which shall not be limited to a fixed sum
or a percentage of par value in respect to the rights of the Registered
Holders thereof to participate in dividends or in the distribution of
assets upon the voluntary or involuntary liquidation or winding-up of ITC.
"Conversion Share" means one share of ITC's authorized Common Stock,
that if under the provisions hereof, there shall be a change such that the
securities purchasable hereunder shall be issued by an entity other than
ITC or class of securities purchasable hereunder, then the term "Conversion
Share" shall mean one share of the security purchasable upon the exercise
of the rights granted hereunder if such security shall be issuable in
shares or shall mean the smallest unit which such security shall be
issuable if such security shall not be issuable in shares.
"Conversion Shares" means the aggregate Conversion Shares at any time
issuable upon conversion of the Debentures.
"Equity Security" means any of ITC's securities other than the Debentures
or any Junior Debt.
"Existing Common Stock" designates ITC-authorized Common Stock, par value
$0.01 per share, of all classes, as constituted on the Closing Date as set
forth in the Agreement.
"Junior Debt" shall mean any debt security of any kind which ITC or any
subsidiary shall at any time issue or be authorized to issue other than
the Debentures.
"Number of Common Shares Deemed Outstanding" at any given time means the
sum of (a) the number of Common Shares actually outstanding at such time,
31. Adjustment of Number of Shares. In order to prevent dilution of the rights
granted hereunder, the Conversion Price shall be subject to adjustment from
time to time as follows:
(a) If ITC shall: (A) declare a dividend on its the Common Stock in shares of
the Common Stock or make a distribution in shares of the Common Stock, (B)
subdivide its outstanding shares of the Common Stock, (C) combine its
outstanding shares of the Common Stock into a smaller number of shares of
the Common Stock or (D) issue by reclassification of its shares of the
Common Stock other securities of ITC (including any such reclassification
in connection with a consolidation or merger in which ITC is the continuing
corporation); then the number of shares of the Common Stock issuable upon
conversion of the Debentures immediately prior thereto shall be adjusted so
that the Registered Holder of this Debenture shall be entitled to receive
the kind and number of shares of the Common Stock of ITC which he would
have owned or have been entitled to receive after the happening of any of
the events described above, had the this Debenture been converted
immediately prior to the happening of such event or any record date with
respect thereto. An adjustment made pursuant to this paragraph shall become
effective immediately after the effective date of such event retroactive to
immediately after the record date, if any, for such event.
(b) If ITC shall issue either (A) any shares of the Common Stock or (B) any
right to buy the Common Stock at a price per share which is less than the
fair market value per share of the Common Stock as of the time of any such
issuance, in an amount which has a material
B-10
<PAGE>
dilutive effect (which for purposes hereof shall mean issuance,at less than
fair market value, of an aggregate number of shares of the Common Stock
equal to at least ten percent (10%) of the then issued and outstanding
shares of ITC ); then the number of shares of the Common Stock which the
Conversion Rate shall thereafter entitle the Registered Holders of the
Debentures to receive shall be determined by multiplying the number of
shares of the Common Stock which the Conversion Rate entitled the
Registered Holder to receive immediately prior to such issuance by a
fraction, the numerator of which shall be the number of shares of the
Common Stock outstanding immediately prior to such issuance plus the number
of additional shares of The Common Stock so issued, and the denominator of
which shall be the number of shares of the Common Stock outstanding
immediately prior to such issuance plus the number of shares of the Common
Stock which the consideration received by ITC would purchase at fair market
value (as determined in good faith by the Board of Directors of ITC ). This
provision shall not apply to any shares of the Common Stock issued pursuant
to any presently existing option, warrant or right to convert any
obligation of ITC into shares of the Common Stock which are issued and
outstanding as of the date of the adoption of the Designation of Rights and
Preferences or to shares issued pursuant to the conversion of debentures of
ITC or to shares issued pursuant to options or warrants hereafter granted
if the exercise price for the purchase of said shares was equal to or
greater than fair market value (as determined in good faith by the Board of
Directors of ITC ) at the date of such grant. In determining the fair
market value for purposes of this paragraph, a recent bid price for ITC's
Common Stock may be conclusively presumed to be the fair market value by
the Board of Directors; provided that the Board of Directors may consider
other factors, in good faith, if they so choose.
(c) No adjustment in the number of shares of the Common Stock issuable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of shares
of the Common Stock issuable upon the conversion of the Debentures.
(d) If the number of shares of the Common Stock issuable upon the conversion of
the this Debenture or the conversion price of such The Common Stock is
adjusted as provided above, then the Company shall mail promptly, by first
class mail, postage prepaid, to each Registered Holder notice of such
adjustment or adjustments.
(e) In case of any consolidation of ITC or merger or share exchange of ITC with
or into another corporation or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially
as an entirety, ITC or such successor or purchasing corporation (or an
affiliate of such successor or purchasing corporation), as the case may be,
agrees that each Registered Holder shall have the right thereafter to
convert this Debenture into the kind and amount of shares and other
securities and property (including cash) which such Registered Holder would
have owned or have been entitled to receive after the happening of such
consolidation, merger, sale or conveyance had the This Debenture been
converted immediately prior to such action. The provisions of this
paragraph shall similarly apply to successive consolidations, mergers,
sales or conveyances.
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<PAGE>
EXHIBIT "C"
ACCEPTANCE OF TENDER OFFER AND STOCK POWER
RECEIPT AND REVIEW OF PROSPECTUS.
The undersigned Shareholder ("Shareholder") of $0.0001 par value common
stock (the "AIRTECH Common Stock") of AIRTECH International Corporation
("AIRTECH") does hereby acknowledge and affirm that Shareholder has received and
reviewed that certain Prospectus, dated September ___, 1997 (the "Prospectus")
delivered by Interactive Technologies Corp., Inc. ("ITC") with respect to the
tender offer (the "Offer") by ITC for all but not less than eighty-one percent
(81%) of the AIRTECH Common Stock, upon the terms and conditions described in
the Prospectus. Shareholder acknowledges and affirms that it has had the
opportunity to request and review those portions of the registration statement
of which the prospectus is a part, and other information as shall be on file
with the Securities and Exchange Commission concerning ITC.
RECEIPT AND REVIEW OF ESCROW AND PLEDGE AGREEMENT.
Shareholder does hereby acknowledge and affirm that Shareholder has
received and reviewed that certain Escrow and Pledge Agreement to be executed
and delivered by and between AIRTECH, ITC and Interwest Transfer Company (the
"Escrow Agent") which is referenced in the Prospectus and included in the
Registration Statement of which this Prospectus is a part.
ACCEPTANCE OF TENDER OFFER.
Subject to the acceptance thereof by the holders of at least eighty-one
percent (81%) of the issued and outstanding shares of the Common Stock (the
"Requisite Number"), shareholder does hereby accept the Offer; and Shareholder
does hereby tender to Interwest Transfer Company, as escrow and transfer agent,
certificates evidencing the number of shares set forth below opposite
Shareholder's name and address. Such tender is made in trust however, pending
acceptance of the Offer by the Requisite Number.
STOCK POWER.
Subject to the acceptance thereof by the Requisite Number, and the closing
of the exchange of shares as described in the Prospectus, and further subject to
the pledge thereof as security for the ITC Debentures described in the
Prospectus, Shareholder hereby sells, assigns, and transfers to Interactive
Technologies, Corp., Inc. the number of shares of AIRTECH Common Stock set forth
opposite Shareholder's name and address, now standing in the name of Seller on
the books of AIRTECH, and represented by Certificate(s) Number(s) set forth
opposite Shareholder's name and address.
Subject to the acceptance thereof by the Requisite Number, and the closing
of the exchange of shares as described in the Prospectus, and further subject to
the pledge thereof as security for the ITC Debentures described in the
Prospectus, hereby irrevocably appoints, with full power of substitution,
Interwest Transfer Company, to transfer the stock listed in the preceding
paragraph on the books of the AIRTECH.
Dated: ______________, 1997.
Certificate No.(s)/Number of Shares____________
__________________________
_______________________________________________ [SIGNATURE OF SHAREHOLDER]
_______________________________________________
By:________________________________________
[OFFICIAL SIGNATURE, TYPED NAME & TITLE]
SIGNATURE GUARANTEED
_______________________________________
[NAME OF BANK, TRUST COMPANY OR BROKER]
By: ___________________________________________________
[OFFICIAL SIGNATURE] [TYPED NAME AND TITLE]
C-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Wyoming Business Corporation Act authorizes a corporation, under certain
circumstances, to indemnify its directors and officers, including reimbursement
for expenses incurred. ITC has provided in its by-laws for indemnification to
the fullest extent permitted by the Wyoming Statute.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
EXHIBIT NO. DESCRIPTION REFERENCE
1.1 Form of Underwriting Agreement Not Applicable.
2.1 First Amended and Restated Stock
Purchase Agreement Incorporated herein by reference
3.1 Certificate of Incorporation
of the Company, together
with all amendments Incorporated herein by reference
3.2 Bylaws of ITC. Incorporated herein by reference
5.1 Opinion of Counsel for ITC Filed herewith.
23.1 Consent of Counsel to ITC
(contained in its opinion filed as
Exhibit 5.1 hereto). Filed herewith.
23.2 Consent of Accountants Filed herewith.
24.1 Power of Attorney. Not Applicable
27.1 Financial Data Schedule. Not Applicable
27.2(99) Other Financial Information
27.2.1 Audited Financial Statements
of ITC for the 12 month
period ended May 31, 1996 Incorporated herein by reference
27.2.2 Audited Financial Statements
of Airtech for the 12 month
period ended May 31, 1997 Filed herewith.
28.1 AIRTECH Uniform Offering Circular Incorporated herein by reference
28.2 Form of Escrow and Pledge Agreement Incorporated herein by reference
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Part II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned hereunto duly authorized in the City of Melbourne,
State of Florida on August 22, 1997.
Interactive Technologies Corp., Inc.,
a Wyoming corporation
/s/ Perry Douglas West
-----------------------------------
Perry Douglas West
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been duly signed by the following persons in the capacities and on
the date indicated.
/s/ Perry Douglas West
------------------------------------
Perry Douglas West
Chief Executive Officer and Director
Part II-2
PERRY DOUGLAS WEST
Attorney and Counsellor at Law
1270 Orange Avenue, Suite A
Winter Park, Florida 32789
407-647-5552
407-647-5766 (fax)
Interactive Technologies Corp., Inc.
102 South Harbor City Boulevard
Melbourne, Florida 32901
Re: Registration Statement on Form S-4
Gentlemen:
At your request, we have examined the Registration Statement, on Form S-4
together with exhibits thereto, to be filed by you relating to the registration
of 29,707,140 shares of common stock, $.01 par value per share (the Common
Stock), by Interactive Technologies Corp., Inc., a Wyoming corporation (ITC).
In connection with the proposed public offering, we have examined the
Amended and Restated Certificate of Incorporation of ITC, the Bylaws of ITC, as
amended, the relevant corporate proceedings of ITC, the Registration Statement
on Form S-4 covering the proposed public offering (the "Registration
Statement"), and such other documents, records, certificates of public
officials, statutes and decisions as we considered necessary to express the
opinions contained herein. In the examination of such documents, we have assumed
the genuiness of all signatures and the authenticity of all documents submitted
to us as originals and the conformity to the original documents of all documents
submitted to us as certified or photostatic copies.
We understand that the shares of Common Stock are to offered and sold in
the manner described in the Prospectus which is a part of the Registration
Statement.
Based on the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of Wyoming with an
authorized and issued capital stock as set forth in the Prospectus; it is duly
authorized and empowered to own its properties and to transact its business as
described in the Prospectus.
2. The Common Stock being offered in the Prospectus, upon the consummation
of the offering, will have been duly and validly authorized and issued, fully
paid and non-assessable as stated in the Prospectus, and will conform to the
descriptions thereof contained in the Prospectus.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Prospectus under the
heading "Legal Matters."
Very truly,
/s/ Perry Douglas West
- ----------------------
Perry Douglas West
5.1
<PAGE>
ALVIN L. DAHL & ASSOCIATES, PC
11615 Forest Central Drive
Suite 301
Dallas, TX 75243
(214)340-5885
Independent Auditor's Consent
Board of Directors and Stockholders
Airtech International Corporation
We consent to the use and inclusion in this Form S-4 Registration Statement
and the Prospectus, which is part of this Registration Statement, of our report
dated September 19, 1997 on our audit of the consolidated financial statements
of Airtech International Corporation at May 31, 1997 and 1996 and for the years
then ended.
We also consent to the reference of our Firm under the caption "Experts" in
the Registration Statement and Prospectus.
/s/ Alvin L. Dahl
- --------------------
ALVIN L. DAHL & Associates, PC
Certified Public Accountants
Dallas, Texas
December 5, 1997
23.2
<PAGE>
TURNER, STONE & COMPANY
Certified Public Accountants
12700 Park Central Dr
Suite 1610
Dallas, TX 75251
(972) 239-1660
Independent Auditors' Consent
The Board of Directors and
Stockholders of Interactive Technologies Corporation, Inc.
We consent to the incorporation by reference in this Form S-4 Registration
Statement of Interactive Technologies Corporation, Inc. of our report dated
September 11, 1997 appearing in and incorporated by reference in the Annual
Report on Form 10-KSB of Interactive Technologies Corporation, Inc. for the year
ended May 31, 1997.
We also consent to the reference of our Firm under the caption "Experts" in
such Registration Statement.
/s/ Turner, Stone & Company, L.L.P.
- ------------------------------------
Turner, Stone & Company, L.L.P.
Certified Public Accountants
Dallas, Texas
December 5, 1997
23.2
Independent Auditor's Report
Board of Directors and Stockholders
Airtech International Corporation
15400 Knoll Trail, Suite 106
Dallas, TX 75240
We have audited the accompanying balance sheets of Airtech International
Corporation as of May 31, 1997 and 1996, and the related statements of income,
retained earnings, 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Airtech International
Corporation as of May 31, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
ALVIN L. DAHL & Associates, PC
September 19, 1997
Dallas, Texas
27.2.2
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, 1997 and 1996
1997 1996
-------------- --------------
Assets
Current Assets:
Cash and cash equivalents $ 19,877 $ 172,224
Accounts Receivable (Note 2) 389,418 251,659
Inventories (Note 3) 283,910 165,563
Other Currents Assets (Note 4) 351,925 91,265
--------------- --------------
Total Current Assets 1,045,130 680,711
Property, Plant and Equipment Net (Note 5) 230,426 88,702
Property held for Resale (Note 6) - 400,000
Intellectual Properties (Note 7) 1,087,397 91,482
Notes Receivable (Note 8) 783,957 -
Goodwill, net 617,500 633,750
Other Assets (Note 9) 519,689 515,910
---------------- --------------
Total Assets $ 4,284,099 $ 2,410,555
================ ==============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt
(Note 10) $ 21,310 $ 10,391
Accounts Payable-trade 239,992 90,989
Accrued Payroll and employee benefits 124,306 68,164
--------------- --------------
Total Current Liabilities 385,608 169,544
Long-Term Debt (Note 10) 47,743 23,703
Deferred Revenue (Note 20) 400,000 -
Commitments and Contingent Liabilities (Note 17)
Stockholders' Equity
Common Stock, issued 14,917,342 shares
in 1996 and 16,098,642 shares in 1997 161 149
Series C Preferred Stock, issued 1,000
shares in 1996 and 1,000 shares in 1997 1,000 1,000
Paid-in Capital 4,109,330 2,724,136
Retained Earnings (Deficit) (659,743) (500,477)
Treasury stock-at cost, Common stock,
50,000 shares in 1996 and -0-
shares in 1997 0 ( 7,500)
------------- --------------
Total Stockholders' Equity 3,450,748 2,217,308
------------- --------------
Total Liabilities and
Stockholders' Equity $ 4,284,099 $ 2,410,555
============= ==============
See Notes to the Consolidated Financial Statements.
27.2.2 2
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE TWO YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
-------------- ------------
Net Sales $ 1,875,264 $1,450,882
Cost of Sales 1,018,804 889,256
General and Administrative expenses 1,015,726 987,929
-------------- ------------
Total Costs and Expenses 2,034,530 1,877,185
-------------- ------------
Income (Loss) Before Income Taxes $ (159,266) $ (426,303)
Estimated Income Taxes 0 0
-------------- ------------
Net Income (loss) $ (159,266) $ (426,303)
============== ============
Earnings (Loss) Per Common Share: (Note 12)
Primary $ ( 0.01) $ (0.06)
Fully Dulited $ ( 0.01) $ (0.06)
See Notes to Consolidated Financial Statements.
27.2.2 3
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Two Years Ended May 31, 1997 and 1996
1997 1996
Cash Flows From Operating Activities:
Net Income (Loss) $ (159,266) $ (426,303)
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and Amortization 50,613 20,250
Change in operating assets and liabilities:
Accounts receivable (137,759) (199,151)
Inventory (118,347) ( 74,081)
Other Current Assets (260,660) ( 91,265)
Prepaid royalties (500,000)
Intellectual properties (995,915) ( 91,482)
Property held for resale 400,000
Notes receivable (783,957)
Other non-current assets 396,221 ( 12,802)
Accounts payable-trade 149,003 36,908
Accrued payroll and employee benefits 56,114 68,165
----------- ----------
Net Cash Provided (Used) by
Operating Activities (1,403,953) (1,269,761)
Cash Flows From Investing Activities:
Capital Expenditures on plant and equipment (175,429) ( 54,475)
Investment in subsidiary (650,000)
---------- ----------
Net Cash Provided (Used) by
Investing Activities (175,429) (704,475)
Cash Flows From Financing Activities:
Increase in long-term debt 34,329 27,582
Sale of stock net of treasury stock purchase 1,392,706 2,102,253
---------- ----------
Net Cash Provided (Used) by
Financing Activities 1,427,065 2,129,835
Net Increase (Decrease) in Cash and Cash Equivalents (152,347) 155,599
Cash and Cash Equivalents at Beginning of Year 172,224 16,625
---------- ----------
Cash and Cash Equivalents at End of Year $ 19,877 $ 172,224
========== ==========
See Notes to Consolidated Financial Statements
27.2.2 4
<PAGE>
Consolidated Statements of Stockholders' Equity
For the Two Years Ended May 31, 1997 and 1996
Common Series A Series C Paid-in Retained Treasury
Stock Preferred Preferred Capital Earnings Stock Total
Balance, June 1,1995 $40 $50,000 $1,000 $446,675 ($74,174) $423,541
Net Income (Loss) (426,303) (426,303)
Sale of Shares net
of fees 1,430,045 1,430,045
Discount on Preferred
Stock (328,000) (328,000)
McCleskey Stock
Exchange 2 649,998 650,000
Sale of Shares 1 75,599 76,000
Exchange for fees 15 15
Employee benefit plan 10 990 1,000
Prepayment of royalty 27 499,973 500,000
Conversation of Series
A Preferred 53 (1,480,045) 1,479,993
Dividend on Preferred
Shares 1 (101,092) (101,090)
Purchase of Treasury
Shares (7,500) (7,500)
----------------------------------------------------------
Balance, May 31, 1996 149 0 1,000 2,724,136(500,477)(7,500)2,217,308
Net Income (159,266) (159,266)
Stock Sales 12 1,372,330 1,372,342
Employee bonus 12,864 12,864
Sale of Treasury Shares 7,500
---------------------------------------------------------
Balance, May 31, 1997 $161 $0 $1,000 $4,109,330($659,743) $0 $3,450,748
==========================================================
See Notes to Consolidated Financial Statements
27.2.2 5
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Supplemented Schedule of Non-Cash Investing and Financing Activities
For the Two Years Ended May 31, 1997 and 1996
1997 1996
----------- ----------
Acquisition of Subsidiary $ $ 650,000
Issuance of Stock as Prepaid Royalty 500,000
Issuance of Stock as Compensation 12,864 1,000
Issuance of Stock as Preferred Stock Dividend 101,090
Issuance of Stock for Services 75,600
See Notes to Consolidated Financial Statements
27.2.2 6
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Organization. Airtech International Corporation (the Company) was incorporated
in the state of Texas in March of 1995. In August of 1995, the Company became a
Full Service Distributor for Honeywell Enviracare, a manufacturer of commercial
air filtration systems, and began marketing and sales of these products. In
August of 1995, the Company determined that the Enviracare model 13000 could be
eligible for Medicare Part B Code and began the pursuit of an application for
such code, receiving notification of a pending issuance of a Medicare Part B
Code in April of 1996. In May of 1996, Honeywell Enviracare canceled the
Company's Full Service Distributorship (See Note 17) and the Company withdrew
its Medicare application.
In December 1995, the Company acquired 100% of McCleskey Sales and Service,
Inc., (MSS) a Texas corporation, in exchange for 165,000 shares of common stock.
MSS was also a Honeywell Enviracare Full Service Distributor with prior
knowledge of the installation and service of this air filtration equipment.
In September 1996, the Company initiated a design program to create a complete
line of air filtration and purification products. This line of products will
include commercial ceiling mounted units, wall mounted units, ductable units and
a down draft salon table for the nail industry as well as a portable automobile
unit and a portable unit for Medicare. The technology being developed by the
Company will combine ozone generation with air filtration, a new concept.
In March 1996, the Company incorporated AirSoPure, Incorporated (ASP) in the
state of Texas as a wholly owned subsidiary. ASP was formed to establish a
franchise program for the Airtech products. The franchisees will be the primary
source for the marketing, sales, and distribution of the Company's commercial
technology.
Basis of Financial Statement Presentation. The consolidated financial statements
include the accounts of the Company and its subsidiaries. Intercompany
transactions and accounts have been eliminated. Subsidiaries purchased are
recorded at cost using the equity method of accounting for acquisitions.
Cash Equivalents. Holdings of highly liquid investments with maturities of three
months or less when purchased are considered to be cash equivalents.
Inventories. Inventories are valued at the lower of the first-in, first-out
(FIFO) cost or market. Assembled units are valued at the cost of components plus
allocated labor.
Property, Plant, and Equipment. Property, plant, and equipment are recorded at
cost less depreciation and amortization. Depreciation and amortization are
primarily accounted for on the straight-line method based on estimated useful
lives. The amortization of leasehold improvements is based on the shorter of the
lease term or the life of the improvement. Betterments and large renewals that
extend the life of the asset are capitalized whereas maintenance and repairs and
small renewals are expended as incurred.
Sales. Income is recognized in the financial statements (and the customer
billed) either when materials are shipped from stock or when the vendor bills
the Company for the order. Net sales are arrived at by deducting discounts,
freight, and sales tax from gross sales.
Franchise Fees. Franchise fees are recognized in the financial statements when
all material services relating to the sale of a franchise have been performed by
the Company, and there is no obligation to refund any cash received or forgive
any unpaid notes or receivables.
Intellectual Properties. Cost incurred by the Company in developing its products
which are considered patentable are capitalized and will be amortized over the
estimated useful life of the related patents. The technical requirements for the
design, testing, and completion of working prototypes are the primary cost
capitalized. Amortization will be recorded after a unit has been placed in
production.
Income Taxes. The Company uses the asset and liability method as identified in
SFAS 109, Accounting for Income Taxes.
27.2.2 7
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
Stock-Based Compensation. The Company follows the intrinsic value based method
of accounting as prescribed by APB 25, Accounting for Stock Issued to Employees,
for its stock-base compensation.
Principles of Consolidation. The Company acquired McCleskey Sales and Service,
Inc. in November 1995 electing the equity purchase method of accounting for this
purchase. The Company incorporated AirSoPure Incorporated in March 1997. The
accompanying consolidated financial statements include the general accounts of
the Company and these wholly owned subsidiaries. All material intercompany
accounts and balances have been eliminated in the consolidation except for cash
advances to a subsidiary.
Nature of Operations. The Company's primary business is the manufacture, sales,
and distribution of air filtration equipment. The technology utilized in the
Company's air filtration equipment will remove odors, gases, viruses, pollen,
mold spores, and other airborne particles. Users of this technology include
restaurants, medical facilities, public buildings, schools, and gaming and bingo
facilities.
Note 2: Accounts Receivable
At balance sheet date, accounts receivable is comprised of the following:
1997 1996
------- -------
Trade receivables $138,621 $251,659
Advances to subsidiary 68,254
Current maturities of Notes receivable 182,543
------- -------
Total $389,418 $251,659
======== ========
Credit is extended on an evaluation of the customer's financial condition and
credit rating, generally collateral is not required.
Note 3: Inventories
At 1997 and 1996 inventories are comprised of the following:
1997 1996
------- -------
Components $ 92,909 $
Finished goods 191,001 165,563
------- -------
Total $283,910 $165,563
======== ========
A separate inventory is maintained for component parts used in the assembly of
the Company's line of air purification units and filters. Finished goods is
comprised of completed assemblies including an allocation for direct labor and
packaging for shipment.
Note 4: Other Current Assets
At 1997 and 1996 other assets are comprised of the following:
1997 1996
Prepaid expenses $ 44,026 $ 8,000
Prepaid legal 55,805
Prepaid Merger cost 252,094 67,165
Prepaid Private Placement cost 16,100
--------- --------
Total $351,925 $ 91,625
========= =========
27.2.2 8
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has entered into a contingent fee agreement with the law firm
representing its interest in the Honeywell lawsuit (See Note 17). Under the
terms of this agreement the Company will pay certain out-of-pocket expenses
incurred during litigation. To date these expenses have totaled $55,805.
Merger costs consist of cost incurred by the Company in its merger pursuit.
Under the terms of its stock purchase agreement with Interactive Technologies
Corporation, Inc., dated May 1997, these costs will be reimbursed and included
as direct costs of acquisition upon completion of the merger.
Note 5: Property, Plant, and Equipment
At 1997 and 1996, property, plant and equipment comprised of the following:
1997 1996
------- -------
Furniture and fixtures $ 17,750 $ 8,816
Computers and equipment 130,183 59,745
Vehicles 116,787 77,686
Leasehold improvements 9,388
Assembly equipment 64,395
-------- --------
Total 338,503 145,617
Less: Accumulated depreciation 108,077 56,915
-------- --------
Net property, plant and equipment $ 230,426 $ 88,702
========== =========
Note 6: Property Held for Resale
In 1995 the Company purchased the exclusive rights to Honeywell Enviracare
products for the country of Turkey for $250,000 and for the country of Taiwan
for $150,000. In 1997 the Company sold these rights and the franchise rights for
its line of air purification products in these countries for total consideration
of $525,000.
Note 7: Intellectual Properties
SFAS 2 provides that research and development costs incurred in the ordinary
course of business be expensed in the period in which they are incurred unless
they have alternative future uses. R&D costs that have alternative future uses
are capitalized and amortized in accordance with APB 17 which includes
intangible assets that are non-current, nonphysical assets that entitle the
enterprise to certain legal rights or competitive advantages.
In prior periods, Airtech was a development stage enterprise and, accordingly,
has capitalized its research and development activities.
Prior to the cancellation of the Company's Full Service Distributorship in the
U.S. by Honeywell in May of 1996, the Company had received notification of
preliminary approval of its Medicare Part B application for a portable air
filtration system manufactured by Honeywell (See Note 17). After this
cancellation, the Company withdrew its Medicare Part B application. The Company
has continued its development of a full line of commercial air filtration
systems and focused on the development of a portable air filtration system to
submit for Medicare Part B approval. Development of portable air filtration
systems for the automotive after market is also in process. The Company is
currently exploring the patent and/or copyright process on these products.
At balance sheet date, the Company has incurred cost of $1,087,397 in its design
and testing of these products. The Company currently has in production one
commercial model and anticipates its complete line of commercial air filtration
products to be in production during the 1998 fiscal year. The portable air
filtration unit for vehicle use is scheduled for production by the end of 1997.
The air filtration system being designed for Medicare Part B applications should
be in a working prototype by the end of 1997 and the application submitted
during the first quarter of 1998. The Company forecast additional cost of
approximately $1 million dollars for completion of the vehicle and Medicare Part
B units. The Company has and will continue to apply for patents on its products.
27.2.2 9
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8: Notes Receivable
At 1997, and 1996, notes receivable is comprised of the following:
1997 1996
------- -------
Domestic notes receivable $300,000 $ 0
Foreign notes receivable $666,500 0
------- -------
Total 966,500 0
Less: Current Maturities 182,543
--------
Net Non-Current Notes Receivable $783,957 $ 0
======== =======
These notes receivable bear interest at 8% and are payable in terms ranging from
12 to 36 months. Credit is extended on an evaluation of the payee's financial
condition and general credit information. If the note is for a franchise fee or
for equipment, these will serve as collateral.
Note 9: Other Assets
At 1997 and 1996, other assets is comprised of the following:
1997 1996
Deposits $ 16,739 $ 13,139
Prepaid royalties 500,000 500,000
Other 2,946 2,771
---------- --------
Total $519,985 $515,910
========== ========
Note 10: Notes Payable
At 1997 and 1996, notes payable is comprised of the following:
1997 1996
Nations Bank $ 26,756 $ 34,094
Resource One 42,095
---------
Total 69,053 34,094
Less: Current maturities 21,310 10,391
---------- ----------
Net Long-Term Debt $ 47,743 $ 23,703
Note 11: Stockholders' Equity
At May 31, 1997 and 1996, the number of authorized and issued shares of Common
stock, Preferred stock and Preferred stock designated as Series C with the
related par value and dividends paid are as follows:
(In thousands) 1997 1996
Common stock, authorized 90,000 90,000
Preferred stock, authorized 10,000 10,000
Preferred Series C stock, authorized 1 1
Common stock, issued 16,099 14,917
Preferred stock, issued 0 0
Preferred Series C stock, issued 1 1
Common stock, outstanding 16,099 14,917
Preferred Series C stock, outstanding 1 1
Common stock, per share par value $0.0001 $0.0001
Preferred Series C, per share par value $ 1.00 $ 1.00
Cash dividends paid on stock 0 0
27.2.2 10
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Common stock shareholders are entitled to one vote per share on issues such as
mergers and consolidations. Preferred Series C shareholders hold all the voting
rights on the election of the board of directors. Under the terms of the stock
purchase agreement entered into on May 8,1997, on approval of the tender offer,
the Preferred Series C shares will be canceled.
Note 12: Earnings Per Common Share
Earnings per common share are computed by dividing net income by the average
number of Common shares outstanding during the year. The weighted average number
of Common shares outstanding during the year ended May 31, 1997 were
approximately 15,713,000 and approximately 7,067,000 during the year ended 1996.
Note 13: Income taxes
The Company uses the accrual method of accounting for tax and financial
reporting purposes. At May 31, 1997 and 1996, the Company had net operating loss
carryforwards for financial and tax reporting purposes of approximately $660,000
and $500,000 respectively. These carryforwards expire through the year 2011, and
are further subject to the provisions of the Internal Revenue Code Section 382.
Pursuant to Statement of Financial Accounting Standards No. 109, the Company has
recognized a $77,535 deferred tax asset attributable to the net operating loss
carryover, which has been fully offset by a valuation allowance in the same
amount, as follows:
1997 1996
Beginning balance $175,168 $ 25,961
Increase (Decrease) during period 55,743 149,207
-------- ---------
Ending balance $230,911 $175,168
======== =========
Note 14: Operating Leases
The Company presently leases its facilities in Texas under non-cancelable
operating lease agreements expiring through September 1999. These leased
facilities total approximately 13,000 square feet of office and warehouse space.
For the years ended May 31, 1997 and 1996, rent expense under these leases
totaled $68,583 and $40,332, respectively.
Minimum future rental payments under the above operating leases are as follows:
Year ending May 31, Amount
--------
1998 $ 78,000
1999 37,680
--------
Total $115,680
========
Note 15: Development Stage Corporation
For fiscal years ending prior to May 31, 1997, the Company was a Development
Stage Corporation. This status changed at balance sheet date of the current
fiscal year due to the earnings during this fiscal year.
Note 16: Change in Fiscal Year
Pursuant to the Stock Purchase Agreement entered into on May 8, 1997, the
Company's Board of Directors elected to change the fiscal year to correspond
with that of Interactive Technologies Corp., Inc. (See Note 19).
27.2.2 11
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 17: Commitments and Contingencies
An original petition was filed in State District Court, Dallas, Texas in August
1995 by Kristen S. Venable naming McCleskey Sales and Service, Inc. and Trane,
Inc. Defendants, alleging breach of contract, breach of warranty and negligence
relating to the installation of Trane air conditioning equipment. The complaint
seeks damages in excess of the minimum, jurisdictional limits of the Court, plus
punitive and exemplary damages.
McCleskey and Trane have filed answers denying all claims. The matter is
currently awaiting a trial date. The claims against McCleskey are covered by
insurance which coverage amount is believed by management to be sufficient to
cover the claims in the event of an adverse judgment.
Airtech International Corporation, McCleskey Sales and Service, Inc., C.J. Comu
and John Potter, plaintiffs, v. Honeywell Environmental Air Control, Inc., and
Suzanne Haas, defendants; No. 3:96CV-1855-D, United States District Court for
the Northern District of Texas, Dallas Division.
In this case, Airtech, a subsidiary and tow of its officers filed suit against
Honeywell, Inc. and a Honeywell subsidiary and an employee asserting several
causes of action. These causes of action include Breach of Contract relating to
the termination of the Company's Full Service Distributorship agreements, for
defamation and tortious interference with a contract relating to a merger
agreement, for unfair competition regarding claims made by Honeywell about its
air purification products, for negligent misrepresentation regarding
representations made to the Company and its subsidiary regarding the exclusivity
of certain arrangements with the defendants, and for declaratory relief and
attorney's fees. Honeywell filed a counterclaim against the Company, McCleskey,
Comu, and Potter. Honeywell alleges that the Company and McCleskey owe Honeywell
money for past purchases, and that Comu and Potter interfered with the
relationship between McCleskey and Honeywell. Honeywell seeks $71,000 in actual
damages and unspecified punitive damages and attorney's fees. The Company has
denied all of the material allegations of Honeywell's counterclaim. The Company
plans to vigorously defend the counterclaim and believes the counterclaim to be
without merit.
Honeywell, Inc., plaintiff, v. Airtech International Corporation, AirSoPure,
Inc. and Richard Allegrati, defendants: No. WMN 97-238 United States District
Court for the District of Maryland, Baltimore Division.
Honeywell filed suit against the Company, a subsidiary, and an employee,
alleging violations of the Lanham Act and the Maryland Uniform Trade Secrets Act
and the common law. The suit alleges that certain Airtech and AirSoPure products
were sold in violation of the Honeywell trademarks, and that the cover design of
certain products of Airtech/AirSoPure was wrongfully obtained. The suit seeks an
injunction and unspecified damages.
The venue of this suit has been changed to United States District Court for the
Northern District of Texas, Dallas Division, without injunctive relief and will
be included in the other action pending before this court. The Company denies
all of the material allegations of Honeywell's claims, and is vigorously
defending this case.
Note 18: Business Segments
Airtech International Corporation and its consolidated subsidiaries are engaged
in the manufacture and distribution of air filtration equipment, the sales and
service of heating and air conditioning equipment, sales and support of
franchises.
The Company's air filtration segment will be providing a full line of commercial
and retail air filtration equipment. The products are sold to commercial
operations, the general public and qualified Medicare recipients.
The heating and air conditioning subsidiary sells 85% to commercial business and
15% to the general public. Services include installation of equipment, repairs,
and maintenance and sales of replacement filters.
The franchise subsidiary is engaged in developing a network of franchisees to
market, install, and service the Company's line of air filtration products.
27.2.2 12
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 19: Subsequent Events
On May 8, 1997 the Company entered into a Stock Purchase Agreement with
Interactive Technologies Corporation, Inc. (ITC). Under the terms of this
agreement ITC will purchase a minimum of 81% of the outstanding common stock of
the Company in exchange for 8,850,000 shares of ITC convertible Preferred Stock
and 9,000,000 in ITC 8% convertible Debentures. This transaction will be closed
at such time as registration statement filed with the Securities and Exchange
Commission is effective and a minimum of 81% of the shares tendered have been
offered for exchange. An S-4 registration statement is currently pending with
the SEC.
Following balance sheet date the Company sold additional shares of Common stock
totaling 136,111 shares for a total consideration of $130,000. The Company will
not sell additional shares due to the pending Stock Purchase Agreement.
Note 20:Deferred Revenue
The Company's subsidiary, AirSoPure, entered four area franchise agreements
during fiscal 1997. Under SFAS 45, Accounting by Franchisors, revenues are
recognized after all initial services and conditions required under the
franchise agreement have been satisfied: the franchisor has no remaining
obligation or intent to refund any cash received or forgive any unpaid notes or
receivables, and no other material conditions or obligations related to the
determination of substantial performance exist. Since new franchisors often are
required to perform services above those required by the franchise agreement to
assist the franchisee, the Company has elected to defer recognition of the
franchise income to subsequent periods to more closely match franchise expenses.
27.2.2 13
