SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB/A
Pursuant to Section 13 or 15(d) of
the Securities Act of 1934
For the Quarter Ended Commission File
August 30, 1998 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)
15400 Knoll Trail, Ste 106
Dallas, Texas 75248
(address of Principal Executive Offices)
972-960-9400
(Registrant's telephone number including area code)
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the exchange Act during the preceding 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 __________
The Registrant has 48,229,616 shares of common stock, par value $0.01 per
share issued and outstanding as of August 30, 1998.
Traditional Small Business Disclosure Format
Yes _____X_____ No __________
<PAGE>
Interactive Technologies Corporation, Inc.
Table of Contents
PART I - FINANCIAL INFORMATION Page No.
Item 1. Interactive Technologies Corp, Inc. 1 - 15
Financial Statements
Balance Sheet as of August 31, 1998 and 1997
Statement of Operations for the three
months ended August 31, 1998 and 1997
Consolidated Statement of Stockholders' Equity
Statement of Cash Flows for the three months
ended August 31, 1998 and 1997
Notes to Financial Statements
Item 2. Management's Discussion and Analysis 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K None
SIGNATURE PAGE 17
<PAGE>
Part 1-Financial Information
Item 1 Financial Statements
-----------------------------
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 AND 1997
Assets
1998 1997
Current assets:
Cash $ 40,356 $ 11,009
Accounts and note receivable, trade,
net of $10,080 and $25,000, respectively
of allowance for uncollectible amounts 245,925 42,165
Inventories 293,727 -
Prepaid expenses and other assets 118,884 15,406
---------- ------------
Total current assets 698,892 68,580
---------- ------------
Property and equipment, at cost, net of
$219,758 and $34,270, respectively of
accumulated depreciation 192,849 80,871
---------- ------------
Other assets:
Organizational costs, net of $3,334
and $2,534, respectively of
accumulated amortization 4,047 1,466
Net assets of discontinued operations,
Held for resale 3,463,762 4,684,766
Intellectual properties, net of $154,772
of accumulated amortization 22,147,112 -
Notes receivable, net of $0 of allowance
for uncollectible amounts 899,833 -
Other 531,772 -
Goodwill 6,487,072 -
---------- -----------
33,533,598 4,686,232
---------- -----------
Total Assets $34,425,339 $4,835,683
========== ===========
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 AND 1997
Liabilities and Stockholders' Equity
1998 1997
Current liabilities:
Accounts payable, trade $ 392,475 $ 127,812
Accrued expenses 100,245 67,862
Notes payable 109,795 274,685
Advances from officers 40,602 -
Current portion of license rights
payable 210,077 210,077
---------- -------------
Total current liabilities 853,194 680,436
---------- -------------
Long-term liabilities:
License rights payable 329,923 329,923
Capital lease obligation - 218,750
Deferred revenue 400,000 -
Deferred income tax payable 6,487,072 -
---------- -------------
7,216,995 548,673
---------- -------------
Commitments and contingencies: - -
Stockholders' equity:
Preferred stock Series M, $.001
par value, 5,000,000 shares
authorized, 1,143,000 and
0, respectively, shares
issued and outstanding 1,143 -
Common stock, $.01 par value
50,000,000 shares authorized,
48,229,616 and 13,479,613,
respectively, shares issued
and outstanding 482,295 134,796
Paid in capital in excess of par 34,745,299 10,836,034
Accumulated deficit ( 8,873,587) ( 7,364,256)
------------ --------------
26,355,150 3,606,574
------------ --------------
$34,425,339 $ 4,835,683
============ ==============
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
1998 1997
Revenue $ 472,365 $ 3,070
Cost of Goods Sold 261,876 -
----------- ------------
Gross income from operations 210,489 3,070
----------- ------------
Operating expenses:
Depreciation 15,181 5,414
Amortization 154,772 227,202
Production costs - 912
General and administrative 235,220 104,704
Interest expense 122,479 12,264
----------- --------------
527,652 350,496
----------- --------------
Loss from operations ( 317,163) ( 347,426)
Estimated income taxes - -
------------ --------------
Net loss $( 317,163) $( 347,426)
============= ===============
Net loss per share:
Basic $( .01) $( .03)
Diluted $( .01) $( .03)
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
<TABLE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Preferred Stock
Common Stock (Series M) (Series A) Add'l Paid Accumulated
Shares Amount Shares Amount Shares Amount In Capital Deficit Total
--------------------- ------------------ --------------------- ----------- ----------- -----------
Balance at May 31, 1997 13,479,613 134,796 - - - - 10,836,034 ( 7,016,829) 3,954,001
Issuance of common stock
for cash 421,000 4,210 - - - - 206,290 - 210,500
Issuance of common stock in
exchange for services 294,558 2,945 - - - - 166,530 - 169,475
Issuance of common stock in
settlement of capital
lease 675,000 6,750 - - - - 212,000 - 218,750
Issuance of preferred stock
for cash - - 1,029,750 1,030 - - 840,337 - 841,367
Issuance of common and
preferred stock in
acquisition of AIC 10,500,000 105,000 - - 11,856,016 11,858,016 2,010,744 - 13,973,760
Net loss - - - - - - ( 1,539,595) (1,539,595)
---------- -------- --------- -------- ---------- ---------- ----------- -------------- -----------
Balance at May 31, 1998 25,370,171 $ 253,701 1,029,750 $ 1,030 11,858,016 $11,858,016 $14,271,935 $( 8,556,424) $17,828,258
Issuance of common stock
for cash 530,000 5,300 100,700 106,000
Issue preferred stock
for cash 112,500 113 112,387 112,500
Issue common stock in
exchange for services 750,000 7,500 107,500 115,000
Issue common stock in
settlement of debts 50,000 500 15,950 16,450
Issue common stock for
conversion of convertible
debentures plus interest 13,071,429 130,714 9,019,286 9,150,000
Issue common stock from
acquisition of AIC for
conversion of Series A 11,858,016 118,580 11,858,016 (11,858,016) 11,739,436 -
Cancel common stock
from Perry West` ( 3,400,000) ( 34,000) 34,000 -
Adjustment for costs ( 655,895) ( 655,895)
Net loss for period (317,163) ( 317,163)
----------- -------- -------- ------- ---------- ----------- ---------- --------- ------------
Balance at 8/31/98 48,229,616 $ 482,295 1,142,500 $ 1,143 - - $34,745,299 (8,873,587) $26,355,150
========== ========= ======== ======== ========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
1998 1997
---- ----
Cash flows from operating activities:
Cash received from customers $ 398,577 $ 111,561
Cash paid to employees ( 145,957) ( 43,056)
Cash paid to suppliers ( 301,066) ( 108,837)
Taxes paid - -
------------ ------------
Net cash used in operating activities ( 170,925) ( 52,596)
------------ ------------
Cash flows from investing activities:
Advances to Subsidiaries ( 132,395) -
Proceeds from issuance of preferred
stock, net offering costs 112,500 -
Proceeds from notes payable - 50,000
Repayments of notes payable ( 20,668) -
Proceeds from issuance of common stock 106,000 -
------------ ------------
Net cash provided by financing activities 65,437 50,000
------------ ------------
Net increase (decrease) in cash ( 105,448) ( 2,596)
Cash at beginning of period 145,844 13,605
------------ ------------
Cash at end of period $ 40,356 $ 11,009
============ ============
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
Reconciliation of Net Income to Net Cash
Used in Operating Activities
1998 1997
---- ----
Net loss $( 317,163) $( 347,426)
------------- -------------
Adjustments to reconcile
net loss to net cash
used in operating activities:
Amortization 154,772 227,202
Depreciation 15,181 5,414
Common stock issued for services 71,450 -
(Increase) decrease in accounts receivable ( 73,788) 108,491
(Increase) decrease in prepaid expenses 15,000 ( 616)
Increase (decrease) accounts payable 69,520 ( 44,845)
Increase (decrease) in accrued expenses ( 105,897) -
------------- ------------
Total adjustments 146,238 294,830
------------- ------------
Net cash used in operating activities $ ( 170,925) $( 52,596)
============= ============
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
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. The Company owns 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
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 in April 1996 serving customers in the eastern United States but was
temporarily discontinued subject to the sale of the show to a national media
market buyer.
The Company also owns license rights obtained from the Federal
Communications Commission to operate an interactive and data service system in
the Charleston - North Charleston, South Carolina. Another system in the
Melbourne - Titusville, Florida metropolitan area was sold during the year ended
May 31, 1997(Note 6). Management expects exploitation of these license rights to
commence in 1999.
Acquisition of Airtech International Corporation (AIC)
On May 31, 1998, the Company acquired all of the outstanding common stock
shares of AIC, which through its subsidiaries manufacture and sell various air
filtration and purification products. The total purchase price of $22,937,760
was funded through the issuance of 10,500,000 of its common stock shares valued
at $.625 per share, the issuance of 11,858,016 of its Series A convertible
preferred stock shares valued at $.625 per share (Note 7) and the issuance of
$9,000,000 of convertible debentures (Note 5).
The transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price of the net assets acquired has been allocated
among the net assets based on their relative fair values with $22,297,684 of the
purchase price allocated to intellectual properties based on an independent
asset appraisal.
On July, the Board of Directors of the Company exercise its option and
converted the convertible debentures and Series A preferred stock by issuing
24,929,445 shares of its unissued common stock.
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 3 and 4), 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 ceased and management does not anticipate them
to resume.
The accompanying consolidated financial statements include the general
accounts of the Company, SNT and AIC and its subsidiaries for the three months
ended August 31, 1998. All material intercompany accounts and balances have been
eliminated in the consolidation.
7
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Impairment of long-lived assets
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used, and long-lived assets and certain identifiable intangibles to be
disposed of. The Company periodically evaluates, using independent appraisals
and projected undiscounted cash flows, the carrying value of its long-lived
assets and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In addition, long-lived assets and identifiable intangibles
to be disposed of are reported at the lower of carrying value or fair value less
cost to sell.
Amortization
Organizational costs are being amortized using the straight line method
over five years.
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. At fiscal year ended May 31,
1998 these assets were reclassified as assets of discontinued operations, held
for resale. For the three months ended August 31, 1998 no additional
amortization was booked.
Inventories
Inventories are carried at the lower of cost or net realizable value
(market) and include component parts used in the assembly of the Company's line
of air purification units and filters and finished goods comprised of completed
products. The costs of inventories are based upon specific identification of
direct costs and allocable costs of direct labor, packaging and other indirect
costs.
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.
Capitalized software expenditures
Software and trademark costs are amortized, pursuant to Statement of
Financial Accounting Standards No. 86, 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. At May 31, 1998 these assets were reclassified as assets of
discontinued operations, held for resale. No amortization was booked for the
three months ended August 31, 1998.
Intellectual properties
In its acquisition of AIC the Company purchased certain intellectual
properties. Costs incurred by the Company in developing its products consisting
primarily of design, testing and completion of working prototypes, which are
considered patentable, are capitalized and will be amortized over the estimated
useful life of the related patents once a unit has been placed in production.
Accordingly, the Company amortized intellectual properties by $150,509 during
the three months ended August 31, 1998 for units placed in production.
8
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Revenue recognition
Revenues from the Company's RebateTV operations are recognized at the time
production and related services are provided.
Advertising
The Company's advertising costs, which consist of radio airtime for the
Rebate TV operations, are charged to expense when incurred.
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
Basic and diluted earnings per share amounts are based upon 48,229,616 and
13,479,613, respectively, for periods ended August 31, 1998 and 1997, 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 as
the effect would be antidilutive.
Basis of financial presentation
The accompanying unaudited consolidated financial statements have been
prepared by Interactive Technologies Corporation, Inc. (the "Company") pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although management
believes that the disclosures are adequate to make the information presented not
misleading, it is suggested that these interim consolidated financial statements
be read in conjunction with the Company's most recent audited consolidated
financial statements and notes thereto. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the interim periods presented have been made. Operating results for
the interim periods presented are not necessarily indicative of the results that
may be expected for the year ending May 31, 1999.
2. PREFERRED STOCK
Convertible preferred stock - Series A
In connection with the Company's acquisition of AIC (Note 1), the Company
established this equity class and authorized 15,000,000 shares. The shares have
a par value of $1.00, do not pay dividends and are convertible at the Company's
option at any time within 24 months after issuance for one share of the
Company's common stock.
9
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Convertible preferred stock - Series M
During the year ended May 31, 1998, the Company established this equity
class and authorized 5,000,000 shares. During the period ended August 31, 1998,
112,500 of these shares were issued for $1.00 cash, or $112,500 net of costs.
The shares have a par value of $.001, do not pay dividends and are convertible
at the Company's option at any time within 36 months after issuance for one
share of the Company's common stock. In addition, attached to each share is one
warrant to purchase one share of common stock at a price of $2.00 per share
exercisable within two years after issuance. This offering was ended as of July
31, 1998.
3. NOTES RECEIVABLE
Notes receivable relate to AIC sales of area franchises (Note 1), bear
interest at 6% to 8%, are payable in terms ranging from 12 to 36 months and
secured by the area franchises. Credit is extended on evaluation of the payee's
financial condition and general credit information.
At August 31, 1998, notes receivable are comprised of the following:
Domestic notes receivable $ 300,000
Foreign notes receivable 666,500
966,500
Less: Current maturities ( 66,667)
$ 899,833
4. 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 May 1999 and are unsecured.
5. CONVERTIBLE DEBENTURES
In connection with the Company's acquisition of AIC, the Company also
issued $9,000,000 of convertible debentures secured by the shares of AIC
acquired. The debentures bear interest at 10% payable annually on May 31 of each
year, are due on May 31, 2000 and are convertible at the Company's option at any
time within the two years into shares of the Company's common stock at a
conversion price of $.70. These convertible debentures were converted into
common stock as of July 31, 1998.
6. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company is currently obligated under a noncancellable operating lease
for its Dallas office facilities which expires in May 2000. The Company also
leased facilities in Florida under a non-cancelable operating lease agreement
which expired in April 1998. From May 1996 through August 1996, the Company
leased facilities in New Jersey in connection with its SNT operations (Notes 1
and 3).
Minimum future rental payments required under the above operating lease is
as follows.
Year Ending
May 31, Amount
1999 $ 47,748
2000 47,748
------------
$ 95,496
10
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 7) 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. On November 30, 1997, in settlement of the lawsuit,
the Company issued 675,000 shares of its common stock at $.32 per share in
complete satisfaction of this remaining capital lease obligation.
License fees payable
The Company 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. An extension of time until December
1998 for making payments has been granted by the FCC.
Future principal payments under the remaining Titusville, FL license right
obligation are as follows:
Year Ending
May 31, Amount
1999 $ 210,077
2000 183,113
2001 146,810
$ 540,000
Contract of sale deposit
In October 1994, the Company entered an agreement with a Nevada corporation
to sell its Charleston, South Carolina license rights (Note 1), net of the
related obligation assumed, for $500,000 cash. The Company also retained 10% of
the gross profits derived from the operations under the license rights.
Through May 31, 1996, $401,901 was advanced to the Company pursuant to the
terms of this agreement and was reflected as a liability until the sale was
effective, pending approval by the FCC.
During the year ended May 31, 1997, FCC approval was granted and the sale
was completed. The difference between the $500,000 sales price, the net carrying
value of the license rights and the remaining license rights obligation assumed
are reflected in the accompanying consolidated financial statements as a gain.
11
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Employment agreement
The Company is currently obligated under employment agreements with two
members of executive management for annual compensation totaling $500,000 and
discretionary bonuses determined by the Company's board of directors. This
agreement was amended effective June 1, 1998 reducing the annual compensation to
$240,000 for years beginning after this amendment.
The Company's current compensation benefits do not provide any other
post-retirement or post-employment benefits.
Year 2000 computer compliance
The Company is currently using computer hardware and software that is not
in compliance with the year 2000 dating issues. However, new software and
hardware components have been ordered that will enable the Company to be in
compliance prior to December 31, 1998. During the year ended May 31, 1998, the
Company incurred approximately $15,000 of costs related to this effort.
Management does not believe any additional significant cost will be incurred and
the accompanying consolidated financial statements do not contain any reserve
for this contingency.
7. 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 6). 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 6) 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 consolidated 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 6).
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 consolidated financial
statements by reducing the carrying value of the capital lease obligation at May
31, 1997 to $218,750. On November 30, 1997, in settlement of the lawsuit, the
Company issued 675,000 shares of its common stock at $.32 per share in complete
satisfaction of this remaining capital lease obligation.
12
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES
The Company used the accrual method of accounting for tax and financial
reporting purposes. At May 31, 1998 and 1997, the Company had net operating loss
carryforwards for financial and tax reporting purposes of approximately
$8,500,000 and $7,000,000, respectively. These carryforwards expire through the
year 2012, 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 $2,909,184 deferred tax asset attributable to the net
operating loss carryover, net of a $105,129 deferred tax liability related to
amortization timing differences, in the amount of $2,804,055 which have been
fully offset by a valuation allowances in the same amount, as follows:
1998 1997
Beginning balance $ 2,267,331 $ 1,469,703
Increase during period 536,724 797,628
Ending balance $ 2,804,055 $ 2,267,331
The Company has also recognized a deferred tax liability of $6,487,072 for
the differences between the assigned values and the tax bases of assets
recognized in the acquisition of AIC (Note 1).
A reconciliation of income tax expense at the statutory federal rate to
income tax expense at the Company's effective tax rate for the years ended May
31, 1998 and 1997 is as follows:
1998 1997
Tax benefit computed at statutory
federal rate $( 523,462) $( 902,757)
NOL carryover 523,462 902,757
Income tax expense $ - $ -
13
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
9. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of its cash, accounts and notes
receivable, trade and its notes, license rights and 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.
Notes payable and license rights payable
Management believes the carrying value of their notes payable and license
rights 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.
10 DISCONTINUED OPERATIONS
In February 1998, the Company formally discontinued its Rebate TV
operations and adopted a plan to dispose of the only asset of this business
segment, the proprietary software and trademark. The Company also adopted a plan
to dispose of its FCC license rights, the only asset of its interactive video
and data services business segment, which never operational. Management expects
to sell these assets by May 31, 1999.
The accompanying consolidated statement of operations reflects the revenues
and expenses of the Company's Rebate TV business segment, the only segment
operated during the periods presented.
At May 31, 1998, net assets of these discontinued operating segments,
stated at the lower of cost or net realizable value, were comprised of the
following:
1998 1997
License rights, net of $438,760 and $303,750,
respectively of accumulated amortization and
net of license rights payable of $540,000 $( 303,750) $( 168,750)
Proprietary software and trademark, net of
$1,643,531 and $870,525, respectively,
of accumulated amortization 3,767,512 4,540,518
------------ -----------
Total $ 3,463,762 $ 4,371,768
14
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
11. SUBSEQUENT EVENT
On August 31, 1998, the Board of Directors authorized a five for one
reverse stock split of the Company's common stock shares. This matter was
submitted to the stockholders for vote and approval on October 5, 1998.
Additionally, on October 5, 1998, the stockholders voted to change the Company's
name to Airtech International Group, Inc. The NASDAQ trading symbol was changed
to "AIRG" following the votes by stockholders.
12. STOCK OPTIONS AND WARRANTS
During the years ended May 31, 1998 and 1997, 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 option or
warrant. Exercise prices were set at or above the underlying common stock's fair
market value on the date of grant.
The following is a schedule of the activity relating to the Company's stock
options and warrants. Other than the 1,029,500 and 1,200,000 warrant identified
below as granted during the year ended May 31, 1998 and 1997, respectively (Note
4), all other amounts relate to stock options the Company has issued.
May 31, 1998 May 31, 1997
------------ -------------
Weighted Avg. Weighted Avg.
Shares Exercise Shares Exercise
(x 1,000) Price (x 1,000) Price
--------- ----------- --------- --------
Options and warrants
outstanding at
beginning of year 1,369 $ 1.08 169 $ 2.79
Granted 1,030 $ 2.00 1,200 $ .83
Exercised - -
Expired - -
Options and warrants
outstanding and
exercisable at year end 2,399 $ 1.47 1,369 $ 1.08
===== =====
Weighted average fair value
of options and warrants
granted during the year $ .60 $ .13
The following table summarizes information about the Company's stock
options and warrants outstanding at May 31, 1998, 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 4.0 years $ .83
$2.00 1145 2.1 years $ 2.00
$4.50 54 2.0 years $ 4.50
The following pro forma disclosures reflect the Company's net loss and net
loss 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. The fair value of each option granted was estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.6%; no expected dividends; expected
lives of 3 to 6 years; and expected volatility of 153.4%.
May 31, 1998 May 31, 1997
Net loss $( 1,552,736) $( 2,811,167)
Net loss per share $( .11) $( .23)
During the year ended May 31, 1998 and 1997, the Company also issued
294,558 and 248,021 common stock shares, respectively, in exchange for services.
These services were recorded at their fair value of $169,475 and $545,520,
respectively, and were charged to expense.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The Company's operations for the three months ended August 31, 1998,
resulted in a net loss of $166,654, or $.01 basic loss per share, compared to a
net loss of $347,426, or $.22 basic earnings per share, for the comparable
period in 1997.
The Company, entirely through its wholly-owned subsidiary, Airtech
International Group, Inc. ("Airtech") had sales of $472,365 for the quarter
ended August 31, 1998 primarily composed of approximately $100,000 of sales of
air purification equipment and approximately $350,000 of HVAC contracting and
installation and replacement of air filters, compared to Company sales of $3,070
for the comparable quarter of 1997, an increase of $469,295. The Company also
sold three new franchises in 1998.
Airtech sales of air purification equipment reflect initial market
penetration and acceptance of newly introduced units. The Company has had
success selling equipment into businesses with existing or pending bans on
smoking, such as hotels and restaurants. The Company continues to expect its
Model 950 being developed as a Class II Medical Device for Medicare recipients
will be approved and ready for sale into that market during calendar year 1999.
Production of the Series 999 automobile unit for pre-sales customer testing is
expected in the fall of 1998 with orders beginning before calendar year end.
Since its inception and during the research and development phase, the Company
shipped air purification units to more than one-hundred customers. The Company's
products continue to have a high rate of acceptance among the commercial
accounts to which the Company markets and while beta testing its new models.
Cost of Goods Sold was $261,876 compared to $0, for the quarters ended
August 31, 1998 and 1997, respectively. Representing 55% of sales during 1998,
Management believes cost of goods sold as a percent of sales will decrease to
approximately 40% in the future as sales of air purification equipment comprises
a larger percent of the Company's sales.
Operating expenses increased $177,158, or 50.5% for the quarter ended
August 31, 1998 compared to the same quarter in 1997. The increase is
attributable to an approximately $223,000 decrease in amortization related to
assets now being held for resale; an increase of approximately $150,000
amortization of intellectual properties; an approximately $110,000 increase in
interest expense payable to holders of debentures issued in the Airtech merger
and approximately $139,000 increase in general and administrative expenses. The
increase in G&A was attributable to the increased size of wages, advertising and
consulting expenses incurred by the Airtech subsidiary.
Liquidity and Capital Resources
During the quarter ended August 31, 1998, the Company continued to fund
operations through revenues, private sales of securities and paying certain
debts and business services in Company common stock. As of August 31, 1998, the
Company had invested $539,652 in accounts receivable and inventory, an increase
of $497,487 over August 31, 1997. Likewise, trade accounts payable increased
$264,663 between the two periods.
In June, the Company sold 530,000 shares of its common stock for $106,000.
Another 750,000 and 50,000 shares were issued for business services and in
settlement of debts, respectively. The Company plans to offer $5,000,000 in
convertible debentures prior to December 31, 1998. On November 4, 1998, the
Company signed an investment banking relationship with Lloyd Wade Securities of
Dallas, Texas.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 Statements contained in this document which are not historical fact are
forward-looking statements based upon management's current expectations that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
These risks are described in the Company's Form 10-KSB for the fiscal year ended
May 31, 1998 filed with the Securities and Exchange Commission.
16
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on December 2, 1998.
Interactive Technologies Corporation, Inc.
by: /s/ CJ Comu
---------------------------
CJ Comu, Chief Executive Officer
17
<PAGE>
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