UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES ACT OF 1934 FOR THE FISCAL YEAR ENDED
May 31, 1997
COMMISSION FILE NUMBER: 0-19796
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
(Exact name of registrant as specified in charter)
Wyoming 98-0120805
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
102 SOUTH HARBOR CITY BOULEVARD
MELBOURNE, FLORIDA 32901
(Address of Principal Executive Offices)
Registrant's telephone number including area code: 407-953-4811
Securities Registered Under Section 12(b) of the Exchange Act: NONE
Securities Registered Under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.01 PAR VALUE.
Check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes_X_ No___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. _X_
The Registrant's operating revenues for its most recent fiscal year were:
$197,781.27
The aggregate market value of voting stock held by non-affiliates of
the Registrant, based on the average of the closing bid and asked prices of the
Registrant's Common Stock in the NASDAQ market as reported by NASDAQ on May
31,1997, was approximately $8,224,515. Shares of voting stock held by each
officer and director and by each person who owns 5% or more of the outstanding
voting stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive.
As of May 31, 1997, 12,279,612 shares of Common Stock, $0.01 par value,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in PART IV, Item 13 herein on page 26.
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TABLE OF CONTENTS
PART I:
Page
Item 1. Description of Business 1
Item 2. Description of Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote
of Security Holders 4
PART II:
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 5
Item 6. Management's Plan of Operation 5
Item 7 Financial Statements 7
Item 8 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III:
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act 22
Item 10. Executive Compensation 23
Item 11. Security Ownership of Certain Beneficial
Owners and Management 23
Item 12. Certain Relationships and Related Transactions 24
PART IV:
Item 13. Exhibits, and Reports on Form 8-K 25
SIGNATURES 27
<PAGE>
PART I
Item 1. Description of Business.
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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.
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 TV(TM) 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.)
Initial Market. ITC conducted a beta test of Rebate TV(TM) from April 15,
1996, through January, 1997 (the "Test Period"). During the Test Period, Rebate
TV(TM) aired one half 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
TV(TM) 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, 1-888-2REBATE, the consumer
would be connected to ITC's computer data base, and could then register the
Rebate TV(TM) number on the bottom of the receipt. At the end of the month, ITC
sends a check to the Rebate TV(TM) 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 TV(TM) had approximately 4,000 subscribers by the
end of the Test Period.
Revenue Sources. ITC receives revenues of two types from Rebate TV(TM).
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.
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Program Development.
ITC's research and development efforts consumed the technical efforts of
ITC from October 1995 through the airing of Rebate TV(TM) 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 TV(TM) 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 TV(TM) 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 TV(TM) were done at
ITC's engineering offices in Melbourne, Florida, where the hardware and software
designs and specifications were developed, tested and implemented during the
past two fiscal years to: (i) manage the large amounts of data and transactions
involved in collecting and verifying sales information from the Rebate TV(TM)
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.
ITC looks to Rebate TV(TM) to attract its share of the communications
industry end-user market which is estimated to be $189.3 billion by 1998.
Interactive digital media is projected to remain the fastest growing category in
the industry.
Internet Access. ITC's Internet home pages for use with Rebate TV(TM) 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 TV(TM) 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 TV(TM) 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.
Interactive Video and Data Services. As part of ITC's commitment to the
evolution of interactive television, its 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.
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 under contract, 90% of this ownership of this license and
equipment and has reserved rights to provide programming to this license area
when it is in operation.
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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 this license within the next 24-36 months. Although ITC will run
its Rebate TV(TM) 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 TV(TM) 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
TV(TM) 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 TV(TM) 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 continually accumulates data in the operation of its Rebate TV(TM), 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 TV(TM). 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 no such 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.
Acquisition of Airtech International Corporation.
The Company has entered into an agreement for the acquisiton of Airtech
International Corporation of Dallas, Texas and has filed a registration
statement under the Securities Act of 1933 on form S-4. The discussion below
includes a discussion of both the Company's information and that of Airtech
International Corporation which is incorporated by reference. This agreement
calls for the Company 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
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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 is being reserved by ITC
against the conversion, if any, of the Convertible Preferred Shares and the ITC
Debentures.
Number of Persons Employed.
As of August 1, 1997, ITC had five employees, three of which are full-time.
The Company's fiscal year runs from June 1 to May 31 of each year.
Item 2. Description of Properties.
- ------------------------------------
The Company currently has executive and engineering offices at 102 South
Harbor City Boulevard, Melbourne, Florida and 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 from The Network Group, 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.
The Company'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 the Company.
Item 3 Legal Proceedings
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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 asseted 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 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
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
A Special Meeting of Shareholders was had on May 2, 1997 at the Company's
offices are 102 South Harbor City Boulevard, Melbourne, Florida 32901. Of the
12,209,612 shares eligible to vote, 7,581,808 were present to vote at the
meeting. By an affirmative vote of 7,581,808 shares the Shareholders voted to
amend the Articles of Incorporation of the Company to increase the authorized
common shares of stock in the Company to 50,000,000 and to increase the
authorized preferred shares of stock in the Company to 20,000,000. The Board of
Directors did not solicit proxies for this meeting and no proxy statement was
filed or distributed.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------------------
a. Market Information
Interactive Technologies, Inc. common shares are traded on the National
Association of Securities Dealers Automated Quotation Systems (NASDAQ) SmallCap
Market under the symbol "ITNL". The Company's shares were traded on the NASDAQ
exchange beginning April 30, 1996. High and low quotes for the last quarter of
the Company's fiscal year when the shares began trading on NASDAQ were:
High Low
Fiscal Year 1997 4th Quarter 1 15/16 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 12/29/95. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions:
Fiscal Year 1996
High Low
Quarter Ending 3/29/96 4 3/4 3 7/8
Quarter Ending 12/29/95 4 2 1/2
Prior to the quarter ending 12/29/95 of the Company's FY 96, and during the
previous FY 95, to the best of the Company's knowledge, no trading occurred in
the Company's common stock.
b. Holders
As of August 1, 1997, there were approximately 950 record holders of the
Company's Common Stock.
c. Dividends
The Company 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 the Company, and other pertinent factors. Further, the
declaration of dividends will be at the discretion of the Company's Board of
Directors.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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Results of Operations
ITC's operations for the same nine month period consisted of primarily of
completion of its initial market testing of its Rebate TV(TM) television program
in the Central Florida Market. Net revenues for this period were $194,804. ITC
has developed and operates a computer system and communications system to
support its Rebate TV(TM) program on a national basis. The operation of these
systems and the development of a national marketing program during this period
resulted in General and Administrative Expenses of $1,356,397 and a net loss
from operations of $1,158,593. 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.
Revenues for the combined operations of ITC and AIRTECH were $1,648,878 for
the nine months ending February 28, 1997, with a Gross Profit of $1,048,391
after Cost of Goods Sold.
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AIRTECH for such nine month period had Gross Revenues in the amount of
$1,648,878 resulting in Gross Income after Cost of Goods sold of $1,048,391.
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 $2,102,894 and a Net Loss of $1,054,503
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 TV(TM)
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 (such as Bedroom Land and Kobe Steak Houses) or to
concentrate on multiple markets driven by regional and national advertisers
(such as Airtran Airways and Cakes Across America). 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 TV(TM) goes to School).
ITC has been subject to several delays in its expansion with the departure
of Mr. Poe who was in charge of the market expansion effort including some
additional delays in recovering company files and information from Mr. Poe. ITC
is currently in pre-production of its new program and expects it to air within
the fall of 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. AIRTECH sales for the 9 month period referenced above are a
result of this product development (See Principal Products and Services). In May
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 McClusky
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 nine month period ending February 28, 1997, ITC and AIRTECH
continued to fund operations and expansion through revenues and private sales of
equity securities and debt. In fiscal year 1996, ITC received net cash from
financing activities in the amount of $1,172,150 with AIRTECH receiving
$2,698,530 during that period. For the nine month period referenced above, the
combined companies received $1,837,023 in cash and subscription receivables from
financing activities. 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.
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
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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 TV(TM) 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.
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
Item 7. Financial Statement.
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Independent Auditor's Report
Board of Directors
Interactive Technologies Corporation, Inc.
Melbourne, Florida
We have audited the accompanying consolidated balance sheets of Interactive
Technologies Corporation, Inc. and subsidiary as of May 31, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Interactive
Technologies Corporation, Inc. and subsidiary at 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.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has no prior operating
history in its new industry and the success of its new business operations are
dependent upon adequate financing to fund its operations, all of which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Certified Public Accountants
September 11, 1997
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INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND 1996
Assets
1997 1996
---- ----
Current assets:
Cash $ 13,605 $ 63,114
Accounts and note receivable, trade,
net of $25,000 and $0, respectively
of allowance for uncollectible amounts 150,656 31,792
Prepaid expenses and other assets 14,790 49,153
--------- ----------
Total current assets 179,051 144,059
--------- ----------
Property and equipment, at cost, net of
$28,855 and $35,255, respectively of
accumulated depreciation 86,285 1,256,344
--------- ----------
Other assets:
Organizational costs, net of $2,334
and $1,534, respectively of
accumulated amortization 1,666 2,466
License rights, net of $303,750 and
$246,084, respectively of
accumulated amortization 371,250 718,916
Proprietary software and trademark,
net of $870,525 and $97,519, respectively
of accumulated amortization 4,540,518 5,363,524
--------- ----------
4,913,434 6,084,906
$5,178,770 $7,485,309
========== ===========
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND 1996
Liabilities and Stockholders' Equity
1997 1996
---- ----
Current liabilities:
Accounts payable, trade $ 172,656 $ 362,802
Accrued expenses 68,678 119,670
Contract of sale deposit - 401,901
Notes payable 224,685 -
Current portion of long-term
liabilities 210,077 348,295
--------- ----------
Total current liabilities 676,096 1,232,668
--------- ----------
Long-term liabilities:
License rights payable 329,923 731,573
Capital lease obligation 218,750 873,070
Convertible debentures payable - 500,000
--------- ----------
548,673 2,104,643
Commitments and contingencies: - -
Stockholders' equity:
Common stock, $.01 par value
50,000,000 shares authorized,
13,479,613 and 11,742,044,
respectively, shares issued
and outstanding 134,796 117,420
Paid in capital in excess of par 10,836,034 8,392,240
Accumulated deficit ( 7,016,829) ( 4,361,662)
------------ ------------
3,954,001 4,147,998
$ 5,178,770 $ 7,485,309
============ ============
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
---- ----
Revenue $ 197,781 $ 56,532
---------- ---------
Operating expenses:
Depreciation 49,669 34,741
Amortization 932,973 210,569
Production costs 286,646 178,607
General and administrative 1,652,853 738,045
Management fee, stockholder - 16,666
Interest expense:
Stockholder - 27,368
Others 177,213 -
--------- ---------
3,099,354 1,205,996
Loss from operations ( 2,901,573) (1,149,464)
Gain on disposition of joint
venture interest - 701,865
Gain from sale of license rights 543,501 -
Loss from abandonment of
equipment and related capital
lease obligation ( 297,095) -
----------- ---------
Loss before income taxes (2,655,167) ( 447,599)
Provision for income taxes - -
----------- ---------
Net loss $(2,655,167) $( 447,599)
=========== =========
Net loss per share:
Primary $( .22) $( .05)
Fully diluted $( .22) $( .05)
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997 AND 1996
Common Stock Add'l Paid Accumulated
Shares Amount In Capital Deficit Total
------ ------ ---------- ------- -----
Balance at May 31, 1995 5,689,544 $ 56,895 $3,192,082 $(3,914,063) $(665,086)
Issuance of common stock
for cash 102,500 1,025 408,975 - 410,000
Issuance of common stock
in reverse acquisition
transaction 5,700,000 57,000 4,793,683 - 4,850,683
Issuance of common stock
as security for capital
lease obligation 250,000 2,500 ( 2,500) - -
Net loss - - - ( 47,599) (447,599)
-------- -------- --------- ----------- ---------
Balance at May 31, 1996 11,742,044 117,420 8,392,240 (4,361,662) 4,147,998
Issuance of common stock
for cash 289,549 2,895 749,978 - 752,873
Issuance of common stock
in exchange for
services 248,021 2,481 543,039 - 545,520
Issuance of common stock
upon conversion of
debt 1,199,999 12,000 1,150,777 - 1,162,777
Net loss - - - (2,655,167)(2,655,167)
--------- ------ --------- ----------- ----------
Balance at May 31,1997 13,479,613 $134,796 $10,836,034 $(7,016,829) $3,954,001
========== ======== =========== =========== ==========
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
---- ----
Cash flows from operating activities:
Cash received from customers $ 53,917 $ 26,390
Cash paid to employees ( 363,452) ( 171,974)
Cash paid to suppliers (1,173,869) ( 278,114)
Interest paid:
Stockholder - -
Others ( 52,869) ( 48,847)
Taxes paid - -
----------- ----------
Net cash used in operating activities (1,536,273) ( 472,545)
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment ( 976) ( 187,193)
Capitalized software development - ( 461,043)
----------- ----------
Net cash used in investing activities ( 976) ( 648,236)
----------- ----------
Cash flows from financing activities:
Issuance of convertible debentures 419,200 630,800
Issuance of common stock in reverse
acquisition - 20,861
Proceeds from notes payable 452,947 -
Repayments of notes payable ( 228,262) -
Proceeds from note payable,
stockholder corporation - 1,000
Contract of sale deposits received 98,099 159,351
Repayment of capital lease
obligation ( 7,117) ( 49,862)
Proceeds from issuance of common stock 752,873 410,000
---------- ----------
Net cash provided by financing activities 1,487,740 1,172,150
---------- ----------
Net increase (decrease) in cash ( 49,509) 51,369
Cash at beginning of period 63,114 11,745
---------- ----------
Cash at end of period $ 13,605 $ 63,114
========== ==========
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
Reconciliation of Net Income to Net Cash
Used in Operating Activities
1997 1996
---- ----
Net loss $(2,655,167) $( 447,599)
------------ ------------
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization 932,973 210,569
Depreciation 49,669 34,741
Provision for uncollectible accounts 25,000 -
Common stock issued for services 545,520 -
Increase in accounts receivable ( 143,864) ( 30,142)
Decrease in prepaid expenses 34,363 847
Increase (decrease) accounts payable ( 140,146) 362,802
Increase in accrued expenses 61,785 54,068
Increase in accrued management
fees payable, stockholder - 16,666
Increase in accrued interest
payable, stockholder - 27,368
Gain on disposition of joint
venture interest - ( 701,865)
Gain on sale of license rights ( 543,501) -
Loss on abandonment of capital lease
equipment 297,095 -
------------ -----------
Total adjustments 1,118,894 ( 24,946)
------------ -----------
Net cash used in operating activities $( 1,536,273) $( 472,545)
============= =============
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
Supplemental Schedule of Non-Cash Investing
and Financing Activities
Issuance of common stock for assets,
net of various liabilities in reverse
acquisition transaction $ - $ 4,829,822
Disposition of joint venture interest
in exchange for note payable and
accrued interest and management
fees payable $ - $ 701,865
Purchase of equipment under capital
lease obligation $ - $ 1,100,000
Reduction of proprietory software costs
in exchange for accounts payable
reduction $ 50,000 $ -
Common stock issued in exchange for
services $ 545,520 $ -
Abandonment of equipment, net of
accumulated depreciation and
related capital lease obligation $ 297,095 $ -
Sale of license rights, net of accumulated
amortization and related license rights
obligation $ 543,501 $ -
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
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 additional 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.
Consolidated principles
On April 9, 1996, the Company formed a wholly owned subsidiary, Satellite
Network Television (SNT), by issuing 1,000,000 common stock shares to ITC.
Through October 1996, when the Company and SNT encountered problems with its
leased equipment and New Jersey facilities (Notes 2 and 3), SNT operated a
television studio, a post production facility and satellite link producing
commercials, infomericals, business videos, commercial programming, and remote
broadcasts for both the Company's Rebate TV operations and for outside
customers. These operations have not yet been resumed.
The accompanying consolidated financial statements include the general accounts
of the Company and SNT. All material intercompany accounts and balances have
been eliminated in the consolidation.
15
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is currently being provided by straight
line and accelerated methods for financial and tax reporting purposes,
respectively, over estimated useful lives of five years.
Amortization
Organizational costs, which were acquired from Syneractive, Inc. are being
amortized using the straight line method of five years. For the years ended May
31, 1997 and 1996, amortization expense totaled $800 and $466, respectively.
License rights are being amortized over the initial five year term of the
licenses. Although they are renewable at no additional consideration, there is
no guarantee the Company will renew these licenses. For the year ended May 31,
1997 and 1996, amortization expense totaled $159,167 and $112,584, respectively.
Software and trademark costs will be amortized at an annual amount equal to the
greater of the amount computed using (a) the ratio that current gross revenues
bear to the total of current and anticipated future gross revenues or (b) the
straight-line method over a seven year estimated economic life beginning April
18, 1996. For the year ended May 31, 1997 and 1996, amortization expense totaled
$773,006 and $97,519, respectively.
Advertising
The Company's advertising costs, which consist of radio airtime for the Rebate
TV operations, are charged to expense when incurred. For the years ended May 31,
1997 and 1996, advertising costs totaled $33,146 and $197,229, respectively.
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.
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 12,062,320
and 9,558,539, 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.
16
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO 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.
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.
17
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
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.
18
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
4. CONVERTIBLE DEBENTURES
During the years ended May 31, 1997 and 1996, the Company issued $419,200 and
$630,800, respectively, of 8% convertible debentures maturing through April
2001. The bonds are convertible into shares of the Company's common stock at
conversion prices of $1.00 to $3.75. In the event that the Company becomes a
private company, the lenders have the right to immediately require redemption at
a rate 10% of par in the first year the Company becomes private plus an
additional 1% for each year to redemption.
During the year ended May 31, 1997, the entire $1,050,000 of outstanding
debentures were converted into 1,199,999 common stock shares.
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.
During the years ended May 31, 1997 and 1996 interest expense totaling $0
and $27,368, respectively, and management fees totaling $0 and $16,666,
respectively, accrued to the stockholder corporation.
7. INCOME TAXES
The Company used 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
$7,000,000 and $4,300,000, respectively. These carryforwards expire through the
year 2011, and are further subject to the provisions of Internal Revenue Code
Section 382.
19
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
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.
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 for as a pooling of
interest. The transaction is subject to final AIC stockholder approval upon the
effective date of a Form S-4 Registration Statement, which has been filed.
10. STOCK OPTIONS AND WARRANTS
During the years ended May 31, 1997 and 1996, the Company issued various stock
options and warrants to employees and others and uses the intrinsic value method
of accounting for these stock options. Compensation cost for options granted has
not been recognized in the accompanying financial statements because the amounts
are not material. The options and warrants expire between January 1999 and May
2002 and are exercisable at prices from $.75 to $4.50 per warrant.
20
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
The following is a schedule of the activity relating to the Company's stock
options and warrants:
Year Ended Year Ended
May 31, 1997 May 31, 1996
------------ ------------
Weighted Avg. Weighted Avg.
Shares Exercise Shares Exercise
(x 1,000) Price (x 1,000) Price
--------- ----------- --------- ------------
Options and warrants
outstanding at
beginning of year 169 $ 2.79 25 $ 2.00
Granted 1,200 $ .83 169 $ 2.79
Exercised - -
Expired - (25) $ 2.00
----- ----
Options and warrants
outstanding and
exercisable at end
of year 1,369 $ 1.08 169 $ 2.79
===== ====
Weighted average fair
value of options and
warrants granted during
the year $ .13 $ .06
The following table summarizes information about the Company's stock options and
warrants outstanding at May 31, 1997, all of which are exercisable.
Weighted Average
Range of Number Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- --------------
$.75-1.00 1,200 5.0 years $ .83
$2.00 115 3.2 years $ 2.00
$4.50 54 3.0 years $ 4.50
For pro forma disclosure purposes, there are no differences in net income and
earnings per share amounts assuming the Company accounted for stock options
granted using the fair value method pursuant to Statement of Financial
Accounting Standards No. 123.
During the year ended May 31, 1997, the Company also issued 248,021 common stock
shares in exchange for services. These services were recorded at their fair
value of $545,520 and were charged to expense.
21
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
By unanimous consent of the Board of Directors of the Company on November
10, 1995, the Registrant engaged the accounting firm of Turner, Stone & Company
of Dallas, Texas as independent accountants for the Registrant for the fiscal
year beginning June 1, 1995, and voted to excuse the accounting firm of Lumsden
& McCormick from further service to the Company after the completion of its work
on the audit for the Registrant for the fiscal year ending May 31, 1996. 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.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance With Section 16(a) of the Exchange Act.
---------------------------------------------------
a. Directors and Executive Officers.
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company as of May 31, 1996. A summary of
the background and experience of each of these individuals is set forth after
the table.
The directors and executive officers are:
NAME AGE POSITION
Perry Douglas West 50 Chairman, Chief Executive Officer
The Board of Directors currently consists of two Directors, each holding
office for a term of one year. Mr. John Potter 53, was added after the end of
the fiscal year.
Perry Douglas West joined the Company in October 1995, and is Chairman and
Chief Executive Officer of the Company. Mr. West co-founded American Financial
Network in July of l985. 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 l968 and with a Juris Doctorate degree from The Florida
State University, College of Law in l974.
George C. Clark, Ph.D, joined the Company 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 TV(TM), and his
absence from the Company would have an initial adverse effect on operations.
22
<PAGE>
Michael Hamilton joined the Company in April 1996 as Executive Vice
President, Production, in charge of all creative operations and new program
development for the Company. 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, Cadillac and
Coca-Cola. His absence from the Company would have an initial adverse effect on
programming operations.
c. Family Relationships.
None.
Item 10. Executive Compensation.
- --------------------------------
Perry Douglas West, Chairman and Chief Executive Officer of the Company has
no employment agreement in force as of May 31, 1996, Mr. West received $8,000 in
miscellaneous compemsation during the fiscal year. Mr. West has agreed to defer
contract compensation and contract compensation issues until a future date.
Robert J. Poe, Chief Operating Officer was employed with an employment
agreement with the Company until November 1, 1997. He was paid through that
date. Mr. Poe's agreement called for him to receive a base salary of $12,500 per
month for the first twelve calendar months of his contract. In addition he is to
receive 5% of the gross profits from the operation of the Company's Rebate
TV(TM) television programming, as well as other programming brought into the
Company by Mr. Poe.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
a. Security Ownership of Certain Beneficial Owners.
The Company knows of no persons or groups being the beneficial owner of
more than 5% of the Company's Common Shares other than Mr. West.
b. Security Ownership of Management.
The following table sets forth information with respect to the share
ownership of Common Stock, par value $0.01, of the Company by its officers and
directors, both individually and as a group, who are the beneficial owner of
more than 5% of the Company's Common Shares.
- --------------------------------------------------------------------------------
(1) (2) (3) (4)
Title of Class Name Amount and Percent of
Address of Nature of Class3
Beneficial Beneficial
Owner1 Ownership2
- --------------------------------------------------------------------------------
Common Perry Douglas West 5,700,000 46.4
1270 Orange Avenue
Suite A
Winter Park, FL 32789
All Directors and Officers 5,700,000 46.4
as a group
NOTES
1 Each person has sole voting and investment power with respect to the as
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 Based upon 12,279,612 shares of Common Stock outstanding as of May 04,
1997.
23
<PAGE>
c. Changes in Control.
During the previous fiscal year, pursuant to an Asset Purchase Agreement
("Asset Purchase Agreement") signed on October 20, 1995, among Interactive
Technologies Corporation, Inc., a Wyoming corporation ("Registrant"),
Syneractive, Inc., a Florida corporation, and Perry Douglas West, the Registrant
purchased certain assets in exchange for 5,214,464 shares of the Registrant's
common stock and agreed to purchase additional assets for an additional 485,536
shares of the Registrant's common stock.
Control of the registrant after this transaction was in the hands of Perry
Douglas West who previously owned approximately 47.82% of the outstanding common
stock and owned 50.04% of the outstanding common stock after the completion of
the acquisition of additional assets pursuant to the Asset Purchase Agreement.
Prior to the transaction, no single shareholder held more than 10% of the
common stock. The directors and officers of the Registrant as a whole owned
l8.69% of the outstanding common stock of the Registrant prior to the
transaction.
Resolutions were delivered at closing electing Perry Douglas West as
Chairman of the Board of Directors and Chief Executive Officer of the
Registrant. At that time Morton J. Glickman resigned as Chairman and Director of
the Board of Directors.
Item 12. Certain Relationships and Related Transactions.
- --------------------------------------------------------
On October l8, l995 the Registrant entered into a Purchase Agreement
("Purchase Agreement") with Jayhead Investments, Ltd. for the sale of a certain
joint venture interest with CST Entertainment Imaging, Inc. in which the
Registrant had contributed its license to colorize black and white film and
videotape and other related features in certain European countries, the terms of
which are set forth in that certain license agreement, as amended, granted by
CST Entertainment Imaging, Inc. to Exergon, S.A., and subsequently assigned to
the Registrant and all proceeds due therefrom. This asset has been written off
of the Registrant's books and carries no value in the Registrant's financial
statements.
This Purchase Agreement provided for the exchange of this asset for the
satisfaction of $701,865 in debt owed by the Registrant to Jayhead Investment,
Ltd., a company which is controlled by a former Director and Officer of the
Company. This interest has been assigned subject to necessary third party
approval and the indebtedness forgiven.
On October 20, 1995, the Registrant executed the purchase of certain asset
pursuant to a Asset Purchase Agreement ("Asset Purchase Agreement") signed on
October 20, 1995 among Interactive Technologies Corporation, Inc., a Wyoming
corporation ("Registrant"), Syneractive, Inc., a Florida corporation and Perry
Douglas West, the Registrant purchased certain assets in exchange for 5,214,464
shares of the Registrant's common stock and has agreed to purchase additional
assets for an additional 485,536 shares of the Registrant's common stock.
The assets purchased consist primarily of all right title and interest in
and to a video program concept and design created for interactive television
known as "Rebate TV(TM)", certain engineering reports and data, contract
receivables and cash in the approximate amount of $50,000 plus equipment
deposits in the amount of $43,875.
The additional assets which the Registrant agreed to purchase upon the
approval of the transfer by the Federal Communications Commission include
Federal Communications Commission Radio Station Licenses for Interactive Video
and Data Services radio service in service areas 137 and 90. These licenses are
subject to amounts due over the period of the licenses (five years) to the
Federal Communications Commission of $540,000 for service area 137 and $232,000
for service area 90. In addition, the license for service area 90 is subject to
a contract agreement which gives a third party the right to purchase, subject to
the retention of an interest in the nature of a 10% royalty, up to 90% of this
license for $500,000. These assets also include the rights to a contract for the
purchase of certain radio station equipment for the license area 90. These are
assets and do not include any current operations. The Registrant has placed the
net value of the total of these assets at $5,700,000.
Perry Douglas West is now Chief Executive Officer, and Director of the
Company.
24
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
- ------------------------------------------
25
<PAGE>
EXHIBIT INDEX
(a.) Exhibit Page
3.0 Charter and By-Laws (1)
4.0 Instruments Defining Rights of Securities Holders
4.1 Form S-4 Registration Statement filed 8-22-97 defining
rights of securities to be acquired by Airtech
International Corporation shareholders (2)
10.0 Material Contracts
10.1 ITC lease with The Network Group, Inc. for Melbourne, Florida (3)
office and engineering space, dated October 25, 1996
10.2 ITC Equipment Lease Agreement with Studiolink Corporation, (3)
dated March 27, 1996
10.3 ITC Employment Agreement with Chief Operating Officer/Director (3)
Bob Poe, dated November 1, 1995
10.4 Satellite Network Television lease with LLB Realty,L.L.C./Keller, (3)
Dodds & Wentworth for Princeton, New Jersey
television studio and production facility, dated March 1996
10.5 Stock Purchase Agreement dated May 5, 1997 with
Airtech International Corporation (4)
99.0 Additional Exhibits
99.1 Proforma Balance Sheet and Statement of
Operations for Registrant and Airtech
International Corporation dated 2-28-97 (4)
(1) This exhibit was previously filed as an exhibit to the Registrant's Form 10
filed January 14, 1992 and is herein incorporated by reference.
(2) Filed form S-3 August 22, 1997
(3) Set out in Form KSB for year ended May 31, 1996.
(4) This exhibit was previously filed with Registrants For 10KSB for year ended
May 31, 1997.
(b.) Reports on Form 8-K.
Form 8-K dated March 17, 1997 setting out Company's filing of Form S-8 with
Securities and Exchang Commission
Form 8-K dated May 5, 1997 setting out changes in the Company's Articles of
Incorporation increasing authorized capital to 50,000,000 common shares and
20,000,000 preferred shares
Form 8-K dated May 22, 1997 setting out agreement for the acquisition of
all of the outstanding stock in Airtech International Corporation of Dallas
Texas.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Interactive Technologies Corporation, Inc.
by: /s/ Perry Douglas West
--------------------------
Perry Douglas West, Chief Executive Officer
Dated: September 12, 1997
27
<PAGE>
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