SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
Pursuant to Section 13 or 15(d) of
the Securities Act of 1934
For the Quarter Ended Commission File
February 28, 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 14,870,171 shares of common stock, par value $0.01 per
share issued and outstanding as of February 28, 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 - 10
Financial Statements
Balance Sheet as of February 28, 1998 and 1997
Statement of Operations for the three
months ended February 28, 1998 and 1997
Statement of Operations for the nine
months ended February 28, 1998 and 1997
Consolidated Statement of Stockholders' Equity
Statement of Cash Flows for the nine months
ended February 28, 1998 and 1997
Notes to Financial Statements
Item 2. Management's Discussion and Analysis 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
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 12-18
Interactive Technologies/Airtech International
Pro Forma Financial Information
Item 6. Exhibits and Reports on Form 8-K
Airtech International Financial Statements 19-28
SIGNATURE PAGE 29
<PAGE>
Part 1-Financial Information
Item 1 Financial Statements
-----------------------------
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1998 AND 1997
(unaudited)
Assets
1998 1997
---- ----
Current assets:
Cash $ 66,244 $12,579
Accounts and note receivable, trade, 35,235
net of $25,000, of allowance for
uncollectible amounts 39,650 -
Notes receivable - 150,000
Prepaid expenses and other assets 146,316 8,813
--------- --------
Total current assets 252,210 206,627
--------- --------
Property and equipment, at cost, net of
$45,098 and $18,541, respectively of
accumulated depreciation 68,042 96,289
--------- --------
Other assets:
Organizational costs, net of $2,934
and $2,134, respectively of
accumulated amortization 1,066 1,866
License rights, net of $405,000
and $270,000, respectively of
accumulated amortization 270,000 408,050
Proprietary software and trademark,
net of $1,450,279 and 676,380,
respectively of accumulated
amortization 3,960,763 4,734,662
Investment & Joint Venture 456,278 -
--------- ---------
4,688,107 5,144,578
--------- ---------
$5,008,359 $5,447,494
========== ==========
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1998 AND 1997
(unaudited)
Liabilities and Stockholders' Equity
1998 1997
---- ----
Current liabilities:
Accounts payable, trade $ 78,262 $ 140,624
Accrued expenses 91,123 80,380
Contract of sale deposit - -
Loans Payable
Related Parties - -
Others 277,185 144,200
Current portion of long-term
liabilities 210,077 171,228
--------- --------
Total current liabilities 656,647 536,432
--------- ----------
Long-term liabilities:
License rights payable 329,923 499,573
Convertible debentures payable - 800,000
--------- ---------
329,923 1,299,573
Commitments and contingencies:
Stockholders' equity:
Common stock, $.01 par value
50,000,000 and 12,500,000 shares
authorized, respectively
14,870,171 and 12,159,863,
respectively, shares issued
and outstanding 148,702 121,399
Preferred Stock, $.01 par value
20,000,000 and -0- shares
authorized, respectively
5,000,000 and -0- designated
as Series M
656,250 and -0- respectively,
shares issued and outstanding 656 -
Series M - PPM Cost (112,471) -
Paid in capital in excess of par 12,076,448 9,492,845
Accumulated deficit ( 8,091,547) (6,002,755)
------------ -----------
4,021,788 3,611,489
------------ -----------
$ 5,008,359 $ 5,447,494
============ ============
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Interactive Technologies Corporation, Incorporated
Statements of Operations
For the Three Months Ended February 28, 1998 and 1997
(unaudited)
1998 1997
------------- -----------
Revenue $ - $ 7,233
Other Income 357 -
------------- -----------
Operating expenses:
Depreciation 5,414 5,403
Amortization 227,202 227,202
Production costs 8,252 -
General and administrative 94,682 140,110
Interest expense:
Stockholder - -
Other 12,264 10,408
------------- -----------
347,814 383,123
------------- -----------
Loss from operations (347,457) (375,890)
Income/(loss) before income taxes (347,457) (375,890)
------------- ------------
Net income/(loss) $ (347,457) $ (375,890)
============= ============
Net income/(loss) per share
Primary $ (0.02) $ (0.03)
Diluted $ (0.02) $ (0.03)
Accompanying notes are an integral part of the financial statements.
3
<PAGE>
Interactive Technologies Corporation, Incorporated
Statements of Operations
For the Nine Months Ended February 28, 1998 and 1997
(unaudited)
1998 1997
------------- -----------
Revenue $ (1,055) $ 197,675
Other Income 1,154 129
------------- -----------
Operating expenses:
Depreciation 16,242 16,209
Amortization 681,605 704,879
Production costs 18,629 -
General and administrative 321,547 1,311,354
Interest expense:
Stockholder - -
Other 36,793 45,043
------------- -----------
1,074,816 2,077,485
------------- -----------
Loss from operations (1,074,717) (1,879,681)
Gain on sale of 90% of
Charleston license - 311,500
Income/(loss) before income taxes (1,074,717) (1,568,181)
------------- ------------
Net income/(loss) $ (1,074,717) $(1,568,181)
============= ============
Net income/(loss) per share
Primary $ (0.07) $ (0.13)
Diluted $ (0.07) $ (0.13)
Accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED FEBRUARY 28, 1998
<CAPTION>
Common Stock Preferred Add'l Pd Accumulated
Shares Amount Shares Amount In Capital Deficit Total
------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Bal at 5/31/97 13,479,613 $134,796 10,836,034 $(7,016,829) 3,954,001
Net Loss ( 347,426) (347,426)
========== ======== ======= ======= ========== =========== =========
Bal at 8/31/97 13,479,613 $134,796 $10,836,034 $(7,364,255) $3,606,575
Issuance of common
stock for cash 421,000 4,210 206,290 - 210,500
Issuance of common
stock in exchange
for services 125,443 1,254 75,621 - 76,875
Issuance of common
stock upon
conversion of debt 746,968 7,470 273,632 - 281,102
Issuance of
Preferred Stock,
Series M 350,000 350 349,650 313,841
($36,159 PPM cost)
Net loss ( 379,835) (379,835)
--------- ------- -------- ---- ---------- ---------- ---------
Bal at 11/30/97 14,773,024 $147,730 350,000 350 $11,741,227 $(7,744,090) $4,109,058
Issuance of common
stock upon
conversion of debt 97,147 971 29,277 30,249
Issuance of
Preferred Stock,
Series M 306,250 306 305,944 229,938
($76,312 PPM cost)
Net loss ( 347,457) (347,457)
--------- ------- -------- ---- ---------- ---------- ----------
14,870,171 $148,701 656,250 656 $12,076,448 $(8,091,547) $4,021,788
The accompanying notes are an integral part of the financial statements.
</TABLE>
5
<PAGE>
Interactive Technologies Corporation, Incorporated
Statement of Cash Flows
For the Nine Months Ended February 28, 1998 and 1997
1998 1997
------------ -----------
Cash received from customers $ 102,446
Interest received -
Cash paid to employees ( 427,489)
Cash paid to suppliers ( 850,831)
Interest paid:
Stockholder - -
Others - ( 32,252)
------------ -----------
Net cash used in operating activities $ $(1,208,126)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment ( 4,260)
Capitalized software development reduction 50,000
Subsidiary investment - SNT - 147,690
License rights payment - (232,000)
Joint Interest Investment -
------------ -----------
Net cash used in investing activities $ (38,570)
------------ -----------
Cash flows from financing activities:
Issuance of convertible debentures - 300,000
Proceeds from note payable -
Common stock issued for cash - 576,862
Promissory notes isssued for cash 221,200
Contract of sale deposits received 98,099
------------ -----------
Net cash provided by financing activities 1,196,161
------------ -----------
Net change in cash (50,535)
Cash at beginning of period 63,114
------------ -----------
Cash at end of period $ 12,579
============ ===========
Accompanying notes are an integral part of the financial statements.
6
<PAGE>
Interactive Technologies Corporation, Inc.
Statement of Cash Flows
For the Nine Months Ended February 28, 1998 and 1997
Reconciliation of Net Income to Net Cash
Used in Operating Activities
(unaudited)
1998 1997
------------- -----------
Net income/loss $ $(1,568,181)
Adjustments to reconcile net
income/loss to net cash used in
operating activities:
Amortization 704,879
Depreciation 16,209
Increase/Decrease in accounts receivable 19,917
Increase in notes receivable - (150,000)
Decrease in accounts payable (225,178)
Increase in prepaid expenses ( 21,918)
Increase/Decrease in accrued expenses ( 39,288)
Stock issued for supplies and services 366,934
Gain on sale of Charleston license (311,500)
------------ ----------
Total adjustments $ $ 360,055
------------ ----------
Net cash used in operating activities $ $(1,208,126)
============ ===========
Accompanying notes are an integral part of the financial statements.
7
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
Interactive Technologies Corporation, Inc. (the Company) was incorporated
in the state of Wyoming on August 8, 1991. On October 20, 1995, the Company
entered into a reverse acquisition transaction, described below, with
Syneractive, Inc. (SI). SI was incorporated in the state of Florida on August
31, 1995. Prior to October 20, 1995, the Company was engaged primarily in the
business of exploiting its rights under a license granted by CST Entertainment
Imaging, Inc. The license gave the Company the exclusive right to colorize
black-and-white film and videotape, including black-and-white theatrical films
and television programs, which were originally produced for distribution
primarily within European countries. However, the Company abandoned the business
of exploiting the license (see Note 3) on October 18, 1995 as a result of being
unable to realize any revenue from the license. SI, which was acquired in a
reverse acquisition, obtained license rights from the Federal Communications
Commission to operate interactive and data service systems in the Charleston -
North Charleston, SC and Melbourne - Titusville, Florida metropolitan areas.
Syneractive, Inc. also acquired proprietary software and a trademark known
as Rebate TV, which is a marketing and sales medium for a wide variety of
products and services. Advertisers on Rebate TV will offer substantial rebates
to the network's viewers through a unique interactive rebate program. Touch-tone
phones will initially interact the network to secured earned rebates, and later
the network will be accessed via wireless digital communications networks
currently under development. The Rebate TV operations commenced April 15, 1996
and serve customers in the eastern United States. Management expects
exploitation of the FCC licenses to commence in 1997. They intend to hire the
necessary management personnel, raise addition capital and generate profitable
operations needed to continue its existence.
Syneractive, Inc. was dissolved on October 30, 1995.
Reverse acquisition
- -------------------
On October 1, 1995, the Company issued 5,700,000 shares of common stock to
its current sole director and officer in exchange for the net assets of SI.
After the issuance of such stock, the current director and officer effectively
controlled the Company, holding approximately 50.1% of the outstanding common
stock.
Prior to the reverse acquisition, the current sole director and officer of
the Company owned all of the outstanding common stock of SI. Accordingly, the
reverse acquisition has been accounted for at the historical cost of the assets
acquired.
Basis of Presentation
- ---------------------
The financial information presented as of any date other than May 31 has
been prepared from the books and records without audit. The accompanying
financial statements have been prepared in accordance with the instructions to
Form 10QSB and do not include all of the information and the footnotes required
by generally accepted accounting principals for complete statements. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such financial statements,
have been included.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended May 31,
1996 contained in the Company's 10KSB Annual Report.
8
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
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.
Earnings per share
- ------------------
Primary and fully diluted earnings per share amounts are based upon
14,870,171 and 12,159,863, respectively, weighted average shares of common stock
and common stock equivalents outstanding. No effect has been given to the
assumed exercise of stock options and warrants and convertible debentures as the
effect would be antidilutive.
In February 1997, the Financial Standards Accounting Board (FASB) issued
Statement of Financial Accounting Standards No. 128 Earnings Per Share effective
for financial statement periods ending after December 15, 1997. Earlier
application is not permitted. For pro forma disclosure purposes, there is no
difference in the amounts of net loss per share and weighted average shares of
common stock outstanding computed using FASB 128 and those reflected in the
accompanying financial statements.
2. COMMITMENTS AND CONTINGENCIES
Operating leases
- ----------------
Through October 31, 1995, the Company used office space provided free of
charge by its stockholder, the value of which was not material. The Company
presently leases its facilities in Florida under non-cancelable operating lease
agreements expiring through April 1998.
Minimum future rental payments required under the above operating leases
are as follows.
Year Ending
May 31, Amount
1998 $ 4,820
=========
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 license were formally issued.
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
9
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
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 result of this lawsuit
the outcome of it is uncertain. The accompanying financial statements do not
contain any reserve for this contingency.
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 March 1998 and are unsecured.
5. INCOME TAXES
The Company used the accrual method of accounting for tax and financial
reporting purposes. At February 28, 1998, the Company had net operating loss
carryforwards for financial and tax reporting purposes of approximately
$8,100.00. This carryforwards expire through the year 2011, and are further
subject to the provisions of Internal Revenue Code Section 382.
6. SUBSEQUENT EVENT
Subsequent to May 1997, the Company entered into an agreement to acquire
Airtech International Corporation (AIC), a Texas corporation, through the
issuance of its common stock shares in a transaction to be accounted as an
acquisition by ITC. The transaction is subject to final AIC stockholder approval
upon the effective date of a Form S-1.
On August 1, 1997, ITC entered into a Manufacture and Distribution
Agreement with Airtech. This agreement relating to the Medicare madel 950 air
filtration unit, has been used by ITC for the Private Placement of additional
Securities. This agreement and the working arrangements are being treated as a
Joint Venture between ITC and Airtech until such time as the merger of the two
companies is complete. Accordingly all receipts from the sales of securities and
disbursement of funds are accounted for as a Joint Venture. At February 28, 1998
656,250 shares of the PPM Series M Perferred stock had been completed.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTERIM PERIOD FROM JUNE 1, 1997 THROUGH FEBRUARY 28, 1998.
ITC's operations for the nine months year ended February 28, 1998 consisted
of primarily of 1)completion of the development and preparation phases of it's
"Liberty" project; 2) completion of Rebate TV program which is airing in the
central Florida market; 3) the move of its facilities to new offices in Dallas,
Texas; and 4) completion of merger activities with Airtech International
Corporation. Net revenues for this period were $(1,055) down from $197,781 from
the previous fiscal year due to the extended period which Rebate TV had been off
the air. ITC has developed and operates a computer system and communications
system to support its Rebate TV program on a national basis even though Rebate
TV was showing in one market. The operation of these systems and the development
of a national marketing program during this period resulted in General and
Administrative Expenses of $321,547 and a net loss from operations of $1,074,717
down from $1,879,681 for the previous fiscal year. Development of ITC's computer
system and communications link are substantially complete and now available for
access on a national basis.
During the nine months ended February 28, 1998 gross revenues were $933,311
down from $1,451,074 for the previous year. Gross profit percentages decreased
to 32.02% for 1998 compared to 33.65% in 1997. This decrease is attributable to
the sale of the Turkey Honeywell full service distributorship in January 1997
for $350,000 and the reduction in price of some of the older models of Airtech
air filtration units. The decrease in gross profit percentages during this
period after adjusting for the sale of the Turkey contract in 1997 and the
recognization of $200,000 of deferred income was negligable. Once all lines are
in production anticipates average gross profit percentage in the 50% range.
During this quarter general and administrative expenses increased by $174,715 to
$367,495 for the quarter ended February 28, 1998 compared to $201,780 for 1997.
This increase resulted from the re-assignment of individuals from product design
to operations.
Material Changes in Operations and Financial Condition
ITC's Rebate TV was off the air for most of the nine months reported.
Operation of Rebate TV 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). Rebate TV is
currently airing in a limited Florida market until operations are completely up
and running in Dallas, Texas.
Liquidity and Capital Resources
During the nine months period ended February 28, 1998, ITC continued to
fund operations and expansions through revenues and private sales of equity,
securities and debt. ITC received $1,487,740 from financing activities in 1997,
up from $1,172,150 for fiscal year 1996. ITC expects to raise additional funds
through such sales, however has no commitment to do so and has no assurance that
such funds can be raised.
In addition, ITC has agreed to issue $5,000,000 in Series M Preferred Stock
(the Series M Stock) on a private basis to accredited investors in the form of
200 units consisting of 25,000 shares of convertible preferred stock convertible
into common at the rate of one share for one share of preferred and 25,000
warrants convertible into common stock at a price of $2.00 per share. The
preference for this series is to a pro rata portion of 20% of the Gross Profits
from the sales of the AIRTECH Model 950 Air Purification and Filtration System
being developed as a Class II Medical Device for Medicare Recipients with
Respiratory Conditions. This preference is for a period of three years from the
date production begins. AIRTECH has agreed to assign a 25% interest in this
revenue stream to ITC out of which this 20% will be set aside for this
preference. The Series M Stock will be offered pursuant to Rule 506 of
Regulation D of the Securities Act of 1933. Twenty-five percent (25%) of the net
proceeds of the sale of the Series M Stock will be used for market expansion and
distribution of the Rebate TV 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. PART II Other Information.
11
<PAGE>
The net operating losses suffered by Airtech during the first nine months
of this fiscal year have reduced the working capital of the Company by
approximately $500,000. The success of the franchise program has been less that
anticipated. While there has been great interest in the franchises being offered
few sales have been consummated during the first nine months of this fiscal
year. As the franchise sales are closed the market for the Airtech products will
increase and the Company anticipates realizing increased franchise sales during
the next six months. During March 1998, the Company close eight new franchise
sales, ending the trend of the first three quarters, with an additional 15 to 20
franchise's anticipated by May 31, 1998. Also during February and March of 1998,
the Company entered into final negiotions for two major contracts for its auto
filtration unit that will provide in excess of $6 million in revenues during the
next several months and will receive in May 1998, a purchase order for the unit
developed for the hotel industry for 100,000 units that after shipping will
provide approximately $40 million in revenues. The shipping should start before
the end of this fiscal year and be completed by the end of calander 1998. While
additional working capital will be required for this large increase in revenues,
the Company is confident that it has sources avaliable to supple this capital
requirement. The Company anticipates gross profits from these sale in the range
of $15 to $18 million.
On August 1, 1997 Airtech and Interactive entered into a joint venture and
manufacturing agreement for the Airtech Model 950 portable air filtration unit.
This joint venture allowed Interactive to offer a private placement of Series M
Preferred Stock totaling $5,000,000. The proceeds from this private placement
will be shared 25% for Interactive and 75% for Airtech. These net proceeds will
be used to complete development of the Airtech Model 950 as a Class II medical
device and for working capital for each Company. The Companies anticipate the
completion of this private placement during the fiscal year ending May 31, 1998
and believes these additional funds will offset future deficits in working
capital.
For the quarter ended February 28, 1998, 306,250 shares of the Series M
Preferred Stock were sold with 75% of the net proceeds being available to
Airtech for working capital and completion of the Airtech Model 950 unit. The
sales of additional shares of the Series M Preferred Stock, sales of franchises
and increased sales of commercial air filtration units should provide the
liquidity required.
Item l. Legal Proceedings
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 no 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
12
<PAGE>
<TABLE>
INTERACTIVE TECHNOLOGIES CORPORATION INC.
PROFORMA COMBINED BALANCE SHEETS
February 28, 1998 and 1997
(Unaudited)
<CAPTION>
Historical
--------------------------------
Acquired
Interactive
Technologies Airtech Adjustments
Corporation International For
Inc. Corporation Acquisition Combined
-------------- ------------- ------------ -----------
ASSETS
<S> <C> <C> <C> <C>
Current Assets $250,940 $1,258,450 $1,509,390
Property and equipment net
of depreciation 68,042 240,676 308,718
Notes receivable 899,833 899,833
Intellectual properties net of
Amortization 4,230,763(2) 1,205,737(3) 12,250,000(4) 17,686,500
Investment in Joint Venture 456,278 (472,687) (16,409)
Goodwill 605,313 848,307(4) 1,453,620
Other assets 2,336 524,918 527,254
------------- ------------ -------------- ------------
Total Assets $5,008,359 $4,262,240 $13,098,307 $22,368,906
============= ============ ============== ============
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
<S> <C> <C> <C> <C>
Current Liabilities $656,648 $936,601 $1,593,249
Deferred Revenue 200,000 200,000
Long-term liabilities 329,923 39,381 369,304
Debentures 9,000,000(4) 9,000,000
------------- ------------ -------------- -----------
Total Liabilities 986,571 1,175,982 11,162,553
Commitments and contingencies (5)
Stockholders' Equity
Paid in Capital 12,113,335 4,236,590 4,098,307(4) 20,448,232
Retained Earning (Deficit)
(8,091,547) (1,150,332) (9,241,879)
--------------- ------------- -------------- ------------
4,021,788 3,086,258 4,098,307 11,206,353
--------------- ------------- -------------- ------------
Total Liabilities and
Stockholders' Equity $5,008,359 $4,262,240 $13,098,307 $22,368,906
=============== ============= ============== =============
</TABLE>
See notes to Pro-Forma Combined Financial Statements
13
<PAGE>
<TABLE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
PROFORMA COMBINED STATEMENTS OF INCOME
For the Six Months Ended November 30, 1997
(Unaudited)
<CAPTION>
Historical Adjustments
------------------------------- -------------
Acquired
--------
Interactive
Technologies Airtech Adjustments
Corporation International For
Inc. Corporation Acquisition Combined
------------- -------------- ------------- ----------
<S> <C> <C> <C> <C>
Net revenues $ (3,325) $ 242,768 $ 239,443
Cost of Sales
- 158,142 158,142
------------- -------------- ------------
Gross income
(3,325) 84,626 81,301
General and Administrative
143,893 310,841 454,734
------------ --------------- ------------
Net income from operations
Before depreciation,
Amortization and taxes
(147,218) (226,215) (373,433)
Depreciation and amortization 232,616 8,250 240,866
----------- --------------- ------------
Net income (loss)
From operations
(379,834) (234,465) (614,299)
Income taxes
- - -
----------- --------------- -------------
Net Income (Loss) $(379,834) $ (234,465) $ (614,299)
=========== =============== =============
Primary (loss) per share $ (0.02)(1) $ (0.01)(1) $ (0.03)
Diluted (loss) per share $ (0.02)(1) $ (0.01)(1) $ (0.03)
</TABLE>
See notes to Pro-Forma Combined Financial Statements
14
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
February 28, 1998
(Unaudited)
1. Basis of Presentation
The accompanying Pro-Forma Combined balance sheet at August 31, 1997 and
related combined statement of operations for the nine months then ended have
been prepared as if the business combination had occurred on June 1, 1997 the
start of the current fiscal year of Interactive.
The purchase of the outstanding stock of Airtech by Interactive is being
reflected in these Pro-Forma Combined Financial Statements using the purchase
method for recording the transaction. The excess of cost over book value has
been reclassified to other assets of Airtech based on managements estimates and
outside valuation based on projected cash flows and revenues from the revalued
assets. No provision for amortization of these revalued assets or goodwill are
reflected in these combined financial statements.
There have been no changes in generally accepted accounting principals in
the presentation of the combined financial statements from the historical
audited financial statements included herein by reference as previously filed or
in the audited financial statements of Airtech for its fiscal year ended May 31,
1997.
Earnings per Share (EPS) is reflected as primary earning per share and
fully dilluted earnings per share set forth in the following table used for EPS
computation:
Historical
------------------------------
ITC Airtech
Weighted average number of shares 12,139,865 17,485,000
Less shares cancelled ( 3,400,000)
Add shares issued for debentures 1,144,444
Adjustment for combined presentation (17,485,000)
Common shares issued for acquired 8,000,000
-----------
Primary shares outstanding 17,884,309
Assuming conversion of convertable
preferred issued for acquired 8,850,000
Assuming conversion of convertable
Debentures issued for acquired 12,857,143
-----------
Fully diluted shares outstanding 39,591,452
Notes to Historical Financial Statements
1. Intellectual properties reflected on the balance sheet of Interactive
consist of the following:
License rights net of accumulated amortization
of $405,000 $ 270,000
Proprietary software and trademark, net of accumulated
amortization of $1,450,279 3,960,763
-----------
$4,230,763
License rights consist of ITC's Federal Communications Commission
Interactive Video and Data Services (IVDS) radio station license in the
Melbourne-Titusville-Palm Bay, Florida and the retained 10% interest in IVDS
license in the Charleston-North Charleston, South Carolina service areas
representing an additional enhancement to ITC's programming distribution. These
licenses have a duration of an initial five years, and are renewable if all
conditions of the license are met. IVDS, a two way communications system , will
allow viewer to take an active role in systems delivered through broadcast
television, cable television, wireless cable, direct broadcast satellite or
other future television delivery methods. IVDS is regulated as a personal radio
15
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
February 28, 1998
(Unaudited)
service under the rules of the FCC which has allocated spectrum in the 218-219
MHZ range for its use. IVDS systems are designed to operate with a hand-held
remote control device that controls the interactive set top[ device on the
subscriber's television set. A viewer would interact with the TV station through
a radio signal using an IVDS frequency.
Proprietary software and trademarks consist of software developed for
integration into the rebate television market and a trademark known as Rebate TV
(TM) purchased in October 1995. This proprietary software allows ITC to be a
developer and producer of television, interactive television and interactive
digital media programming. These programs can be developed in various
interactive formats for cable, broadcast and direct broadcast satellite
television as well as for Internet distribution. Rebate TV is a television
program which incorporates interactive media and computer data management
allowing retail vendors to communicate their message to consumers, the allow the
consumer to verify his or her purchase, with the consumer receiving a cash
rebate from ITC for their purchases. Retailers represent a broad spectrum of the
business community including grocer chains, furniture stores, tire service
stores, banks, restaurants, car dealers and a variety of other specialty
businesses.
2. Intellectual properties reflected on the balance of Airtech consist of
the cost incurred to date for the development of a full line of air purification
products for commercial, consumer, automobile and medical use. Several of the
products will be eligible for a US and foreign patents with patent applications
currently in process or planned .
Adjustments for Acquisition
3. Per the stock purchase agreement entered into on May 8, 1997 between
Interactive Technologies Corporation, Inc. and Airtech International Corporation
the following presents the securities and the related valuation of the purchase
of 100% of the issued and outstanding common stock of Airtech:
Value
Description of Securities Per Share Total
------------------------- ---------- -------
8,000,000 shares of Interactive
Common Stock, registered $0.32(a) $2,560,000
8,850,000 shares of Interactive
Preferred Stock, registered and
convertible into Common Stock $0.32(b) 3,982,500
$9,000,000 in Convertible
Debentures At Face 9,000,000
Additional shres due Airtech
Stockholders because if increase
in Interactive common stock
from May 31, 1997 $0.032(a) 1,762,565
----------
Total value of purchase of 100% of
Airtech Common Stock $ 16,154,565
16
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
November 30, 1997
(Unaudited)
(a) The closing of bid price of Interactive common stock on February 28,
1998 was $0.32 per share. This price per share will be adjusted to the price per
share on the closing date.
The following represents the allocation of the purchase price:
Book value of Airtech common stock $ 3,086,258
Intellectual properties 12,250,000
Excess of purchase price over cost 818,307
-------------
Total Purchase Price $16,154,565
4. Interactive Technologies has the following litigation pending:
The Company is in litigation with LLB Realty, L.L.C. which has filed a
claim alleging claims under an office lease agreement in Superior Court of New
Jersey, Mercer County. The Company has asserted claims against L.L.B. Realty,
L.L.C. for failure to perform under the conditions of the agreement. Settlement
negotiations have been ongoing and the Company expects this matter to be settled
in a manner not unfavorable to the Company. .
The Company is not a party to any other pending legal proceedings except
for claims and lawsuits arising in the normal course of business. The Company
does not believe that these claims or lawsuits will have a material effect on
ITC=s financial condition or results of operations. Accordingly no provision or
accrual for potential losses are reflected in the Pro-Forma Combined Financial
Statements.
Airtech International Corporation has the following litigation pending:
Airtech International Corporation, McCleskey Sales and Service, Inc., C.J.
Comu and John Potter, plaintiffs vs Honeywell, Inc., Honeywell Environmental Air
Control, Inc. And Suzanne Haas, defendants; No. 3:96CV-1855-D, United States
District Court for the Northern District of Texas, Dallas Division.
In this case, Airtech, a subsidiary and two of its officers filed suit
against Honeywell, Inc. And a Honeywell subsidiary and an employee asserting
several causes of action. These causes of action include breach of contract
relating to termination of the Company=s Full Service Distributorship
agreements, for defamation and tortious interference with contract relating to a
merger agreement between the Company and DCX, Inc., for unfair competition
regarding claims made by Honeywell about it air purification products, for
negligent misrepresentation regarding representations made to the Company and
its subsidiary regarding the exclusivity of certain arrangements with the
defendants, and for declaratory relief and attorney=s fees. Honeywell filed a
counterclaim against the Company, McCleskey, Comu and Potter. Honeywell alleges
that the Company and McCleskey owe Honeywell money for past purchases, and that
Comu and Potter interfered with the relationship between McCleskey and
Honeywell. Honeywell seeks $71,000 in actual damages and unspecified punitive
damages and attorney's fees. The Company has denied all of the material
allegations of Honeywell=s counterclaim. The Company plans to vigorously defend
the counterclaim and believes the counterclaim to be without merit.
Honeywell,Inc., plaintiff, vs Airtech International Corporation, AirSoPure,
Inc. And Richard Allegrati, defendants: No. WMN 97-238 United States District
Court for the District of Maryland, Baltimore Division.
17
<PAGE>
INTERACTIVE TECHNOLOGIES CORPORATION, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
February 28, 1998
(Unaudited)
Honeywell filed suit against the Company, a subsidiary and an employee,
alleging violations of the Lanham Act and the Maryland Uniform Trade Secrets Act
and the common law. The suit alleges that certain Airtech and AirSoPure products
were sold in violation of the Honeywell=s trademarks, and that the cover design
of certain products of Airtech/AirSoPure was wrongfully obtained. The suit seeks
an injunction and unspecified damages. Rather than incur substantial additional
attorney=s fees, the Company agreed to the entry of a preliminary injunction
regarding the sale of a very small number of modified Honeywell products,
immaterial to the Company's business. The Company denies all of the material
allegations of Honeywell's claims, is vigorously defending this case. The
Company believes Honeywell's claims to be without merit.
Accordingly no reserve or accrual has been reflected in these Combined
Pro-Forma Financial Statements for this pending litigation.
A motion for dismissal was entered into as settlement of the Honeywell
litigation in March 1998.
18
<PAGE>
Item 6. Exhibits
AIRTECH INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
February 28, 1998 and 1997
(Unaudited)
1998 1997
------------- -------------
Assets
Current Assets:
Cash and cash equivalents $ 39,094 $ 34,946
Accounts Receivable 285,288 789,621
Inventories 297,620 274,361
Other Currents Assets 636,448 252,329
------------- -------------
Total Current Assets 1,258,450 1,351,257
Property, Plant and Equipment Net of
Accumulated Depreciation 240,676 214,485
Property held for Resale 150,000
Intellectual Properties 1,205,737 336,977
Notes Receivable-Long Term 899,833 350,000
Investment in Subsidiaries 605,313 621,567
Other Assets 524,918 519,050
------------- -------------
Total Assets $ 4,734,927 $ 3,543,336
================ =============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 24,560 $ 10,391
Accounts Payable-trade 113,006 202,123
Accrued Payroll and employee benefits 196,113 46,082
Joint Venture Advances 472,687
Notes Payable-Other 126,922
Notes Payable-Officers 476,000 -
---------------- -------------
Total Current Liabilities 1,409,288 258,596
Long-Term Debt 39,381 15,725
Deferred Revenue 200,000 -
Commitments and Contingent Liabilities
Stockholders' Equity
Common Stock, issued 16,223,642 shares
in 1997 and 14,917,342 shares in 1996 165 163
Series C Preferred Stock, issued 1,000
shares in 1997 and 1,000 shares in 1996 1,000 1,000
Paid-in Capital 4,235,425 3,945,062
Retained Earnings (Deficit) (1,150,332) (677,210)
---------------- -------------
Total Stockholders' Equity 3,086,258 3,269,015
---------------- -------------
Total Liabilities and Stockholders' Equity $ 4,734,927 $ 3,543,336
================ =============
See Notes to Consolidated Financial Statements
19
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended February 29, 1998 and 1997
(Unaudited)
1998 1997
-------------- --------------
Sales $ 422,619 $ 910,943
Cost of Sales 86,524 372,191
--------------- -------------
Gross Income 336,095 538,752
General and Administrative expenses 367,495 201,780
--------------- -------------
Net Income ( Loss) $ ( 31,400) $ 336,972
================ =============
Primary Income ( Loss) per share $ - $ 0.02
Dulited Income ( Loss) per share $ - $ 0.02
See Notes to Consolidated Financial Statements
20
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Nine Months Ended February 28, 1998 and 1997
(Unaudited)
1998 1997
--------------- ---------------
Sales $ 933,311 $ 1,451,074
Cost of Sales 428,873 600,487
--------------- ---------------
Gross Income 504,438 850,587
General and Administrative expenses
995,027 777,497
--------------- ---------------
Net Income ( Loss) $ (490,589) $ 73,090
=============== ===============
Primary Income ( Loss) per share $ ( 0.02) $ -
Dulited Income ( Loss) per share $ ( 0.02) $ -
See Notes to Consolidated Financial Statements
21
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
February 28, 1998 and 1997
(Unaudited)
Note 1: Summary of Significant Accounting Policies
Organization. Airtech International Corporation (the Company) was
incorporated in the state of Texas in March of 1995. In August of 1995, the
Company became a Full Service Distributor for Honeywell Enviracaire, a
manufacturer of commercial air filtration systems, and began marketing and sales
of these products. In August of 1995, the Company determined that the
Enviracaire model 13000 could be eligible for Medicare Part B Code and began the
pursuit of an application for such code, receiving notification of a pending
issuance of a Medicare Part B Code in April of 1996. In May of 1996, Honeywell
Enviracaire cancelled the Company's Full Service Distributorship and the Company
withdrew its Medicare application.
In December 1995, the Company acquired 100% of McCleskey Sales and Service,
Inc., (MSS) a Texas corporation, in exchange for 165,000 shares of common stock.
MSS is engaged in the sales and service of heating and air conditioning
equipment. MSS was also a Honeywell Enviracaire Full Service Distributor with
prior knowledge of the installation and service of this air filtration
equipment.
In September 1996, the Company initiated a design program to create a
complete line of air filtration and purification products. This line of products
includes commercial ceiling mounted units, wall mounted units, ductable units
and a down draft salon table for the nail industry as well as a portable
automobile unit and a portable unit for Medicare. The technology being developed
by the Company will combine ozone generation with air filtration, a new concept.
In March 1996, the Company incorporated AirSoPure, Incorporated (ASP) in
the state of Texas as a wholly-owned subsidiary. ASP was formed to establish a
franchise program for the Airtech products. The franchisees will be the primary
source for the marketing, sales and distribution of the Company's commercial
technology.
Basis of Financial Statement Presentation. The consolidated financial
statements include the accounts of the Company and its subsidiaries.
Intercompany transactions and accounts have been eliminated. Subsidiaries
purchased are recorded at cost using the equity method of accounting for
acquisitions.
Cash Equivalents. Holdings of highly liquid investments with maturities of
three months or less when purchased are considered to be cash equivalents.
Inventories. Inventories are valued at the lower of the first-in, first-out
(FIFO) cost or market. Assembled units are valued at the cost of components plus
allocated labor.
Property, Plant, and Equipment. Property, plant, and equipment are recorded
at cost less depreciation and amortization. Depreciation and amortization are
primarily accounted for on the straight line method based on estimated useful
lives. The amortization of leasehold improvements is based on the shorter of the
lease term or the life of the improvement. Betterments and large renewals which
extend the life of the asset are capitalized whereas maintenance and repairs and
small renewals are expended as incurred.
Amortization. Goodwill and other intangable assets are amortized over
useful lives ranging from 5 years to 20 years, using the straight line method of
computing amortization.
Sales. Income is recognized in the financial statements (and the customer
billed) either when materials are shipped from stock or when the vendor bills
the Company for the order. Net sales are arrived at by deducting discounts,
freight, and sales tax from gross sales.
22
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
February 28, 1998 and 1997
(Unaudited)
Franchise Fees. Franchise fees are recognized in the financial statements
when all material services relating to the sale of a franchise have been
performed by the Company and there is no obligation to refund any cash received
or forgive any unpaid notes or receivables.
Intellectual Properties. Cost incurred by the Company in developing its
products which are considered patentable are capitalized and will be amortized
over the estimated useful life of the related patents. The technical
requirements for the design, testing and completion of working proto-types are
the primary cost capitalized. Amortization will be recorded after a unit has
been placed in production.
Income Taxes. The Company uses the asset and liability method as identified
in SFAS 109, Accounting for Income Taxes.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-Based Compensation. The Company follows the intrinsic value based
method of accounting as prescribed by APB 25, Accounting for Stock Issued to
Employees, for its stock-base compensation.
Principals of Consolidation. The Company acquired McCleskey Sales and
Service, Inc. in November 1995 electing the equity purchase method for
accounting for this purchase. The Company incorporated AirSoPure Incorporated in
March 1997. The accompanying consolidated financial statements include the
general accounts of the Company and these wholly owned subsidiaries. All
material intercompany accounts and balances have been eliminated in the
consolidation except for cash advances to a subsidiary.
Nature of Operations. The Company's primary business is the manufacture,
sales and distribution of air filtration equipment. The technology utilized in
the Company's air filtration equipment will remove odors, gases, viruses,
pollen, mold spores and other airborne particulates. Users of this technology
include, restaurants, medical facilities, public buildings, schools, gaming and
bingo facilities.
Note 2: Other Current Assets
At February 28, 1998 and 1997 other assets are comprised of the following:
1998 1997
Prepaid expenses $ 54,015 $
Prepaid legal 163,212 11,651
Prepaid merger cost 412,500 228,438
Other 6,721 12,240
Total $ 636,448 $ 252,329
The Company has entered into a contingent fee agreement with the law firm
representing its interest in the Honeywell law suit. Under the terms of this
agreement the Company will pay certain out-of-pocket expenses incurred during
the litigation, to date these expenses have totaled $118,841.
23
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
February 28, 1998 and 1997
(Unaudited)
Note 3: Property, Plant and Equipment
At February 28, 1998 and 1997, property plant and equipment comprised of
the following:
1998 1997
Furniture and fixtures $ 18,168 $ 17,750
Computers and equipment 152,430 124,184
Vehicles 127,783 77,686
Leasehold improvements 9,388 9,388
Assembly equipment 65,266 56,150
Total 373,035 285,158
Less: Accumulated depreciation 132,359 77,686
Net $ 240,676 $ 214,485
Note 4: Property Held for Resale
In 1995 the Company purchased the exclusive rights to Honeywell Enviracaire
products for the county of Turkey for $250,000 and for the country of Taiwan for
$150,000. In January 1997 the Company sold the rights to Turkey for $350,000.
Note 5: Intellectual Properties
Prior to the cancellation of the Company's Full Service Distributorship in
the U.S. by Honeywell in May of 1996 the Company had received notification of
approval within 90 days of its Medicare Part B application for a portable air
filtration system manufactured by Honeywell. Subsequent to this cancellation the
Company withdrew it Medicare Part B application. While the Company is pursuing
the development of a full line of commercial air filtration systems, its primary
focus has been on the development of a portable air filtration system that will
qualify for Medicare Part B and a portable air filtration unit for vehicles.
The Company has incurred costs totaling $1,205,737 at February 28, 1998 and
$336,977 at February 28, 1997 in its design and testing of these products. The
Company currently has in production one commercial model and anticipates its
complete line of commercial air filtration products to be in production during
the 1998 fiscal year. The portable air filtration unit for vehicle use is
scheduled for production by the end of 1998. The air filtration system being
designed for Medicare Part B applications should be in a working proto-type by
the end of 1997 and the application submitted during the first quarter of 1998.
The Company forecast additional cost of approximately $1 million dollars for
completion of the vehicle and Medicare Part B units. The Company has and will
continue to apply for patents on its products.
Note 6: Notes Receivable
At February 28, 1998 and 1997, notes receivable is comprised of the
following:
1997 1996
Domestic notes receivable $ 300,000 $ 0
Foreign notes receivable 666,500 350,000
Total 966,500 350,000
Less: Current Maturities 66,667
---------- -----------
Long Term Notes Receivable $ 899,833 $ 350,000
24
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
February 28, 1998 and 1997
(Unaudited)
These notes receivable bear interest at 8% and are payable in terms ranging
from 12 months to 36 months. Credit is extended on a evaluation of the payee's
financial condition and general credit information. If the note is for a
franchise fee or for equipment, these will serve as collateral.
Note 7: Goodwill
The Auditor's for the Company made a change in accounting principles in the
audited financial statements for the Fiscal Years Ended May 31,1997 and 1996.
This accounting change recorded the full purchase price of McCleskey Sales and
Service, Inc., purchase by Airtech on November 30, 1995, as goodwill rather than
investment in subsidiary as carried on the audited financial statements for the
Fiscal Year Ended February 29, 1996. While management does not necessarialy
disagree with this accounting change, management does feel that the Auditor's
should have recorded as goodwill the difference between cost and fair market
value of the assets acquired. The Auditor's in their adjustment did not record
the fair market values of cash, accounts receivable, inventories, accounts
payable, notes payable or the retained earnings of McCleskey Sales and Service,
Inc., after adjusting the accounting method of this acquired subsidiary from
cash method to accrual method. The adjustments required to the books and records
of Airtech to effect this accounting change were not provided to the Company
until April of 1998 nor were restated audited financial statements for the
Fiscal Years Ended May 31, 1997 and May 31, 1996 provided to the Company until
April of 1998. Management anticipates reviewing this accounting change and the
valuations used during the audit of its financial statements for the Fiscal Year
Ending May 31, 1998.
Note 8: Other Assets
At February 28, 1998 and 1997, other assets is comprised of the following:
1998 1997
Deposits $ 16,739 $ 16,279
Prepaid royalties 500,000 500,000
Other 8,179 2,771
Total $ 524,918 $ 519,050
25
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
February 28, 1998 and 1997
(Unaudited)
Note 9: Notes Payable
At February 28, 1998 and 1997, notes payable is comprised of the following:
1998 1997
Nations Bank $ 18,980 $ 26,116
Compass Bank 10,479
Resource One 34,482
------------ ------------
Total 63,941 26,116
Less: Current maturities 24,560 10,391
Long-Term Debt $ 39,381 $ 15,735
These installment notes payable are secured by vehicles purchase by
McCleskey Sales and Service, Inc., and have interest rates ranging from 7% to 9%
payable over terms of 36 months to 60 months.
Note 10: Notes Payable-Other
On January 7, 1998 Airtech into a Promissory Note with the law firm of
Friedman & Associates, P.C. and Friedman, Driegert & Hsueh, L.L.C. collectively
as settlement of outstanding legal fees for the ligitation pending between the
Company and Honeywell and the Company and Compton etal in the principal amout of
$102,921.74 with interest at eight percent (8%) per annum. Under the terms of
this note, the note shall become payable only from the proceeds upon conclusion
of either or both cases referenced above (See Subsequant Events Note).
On December 31, 1997 the Company entered into a promissory note with a
former employee as payment in full of accrued but unpaid salaries. Under the
terms of this agreement the Company agreed to a cash payment of $6,400. and a
promissory note for 24,000. payable in monthly installments of $2000. per month
with interest at eight (8%) per annum. The cash payment is scheduled on or
before April 15, 1998 with interest accrueing from May1, 1998.
Note 11: Related Party Transactions
From June 1, 1997 thru February 28, 1998 John Potter, President of the
Company and C. J. Comu, C.E.O. of the Company have made cash advances to provide
liquidity for the Company totalling $ 216,000. The Company has entered into a
promissory note for $108,000 each to Mr. Potter and Comu subject to shareholder
ratification at the next scheduled shareholders meeting on April 20, 1998. The
interest rate will be in accordance with the ratification of the notes. In
addition to these cash advances no salaries were paid to either John Potter or
C. J. Comu during the calander year 1997 because of the lack of liquidity of
Airtech during this period. On December 31, 1997 the Company entered into a
promissory note with Mr. Potter and Comu in the principal amount of $130,000
each with interest at eight percent (8%) per annum. The interest on these notes
will begin accrueing on May 1, 1998.
26
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
February 28, 1998 and 1997
(Unaudited)
Note 12: Earnings Per Common Share
Earnings per common share are computed by dividing net income by the
average number of Common shares outstanding during the period. The weighted
average number of Common shares outstanding at February 28, 1998 were
approximately 16,100,000 and approximately 12,200,000 at February 28, 1997.
Note 13: Income Taxes
The Company uses the accrual method of accounting for tax and financial
reporting purposes. At February 28, 1998 and 1997, the Company had net operating
loss carryforwards for financial and tax reporting purposes. These carryforwards
expire through the year 2011, and are further subject to the provisions of the
Internal Revenue Code Section 382.
Note 14: Operating Leases
The Company presently leases its facilities in Texas under non-cancelable
operating lease agreements expiring through September 1999. These leased
facilities total approximately 13,000 square feet of office and warehouse space.
Minimum future rental payments under the above operating leases are as follows:
Amount
1998 $ 78,000
1999 37,680
Total $ 15,680
Note 15: Commitments and Contingencies
An original petition was filed in State District Court, Dallas, Texas in
August 1995 by Kristen S. Venable naming McCleskey Sales and Service, Inc., and
Trane, Inc., Defendants, alleging breach of contract, breach of warranty and
negligence relating to the installation of Trane air conditioning equipment. The
complaint seeks damages in excess of the minimum, jurisdictional limits of the
Court, plus punitive and exemplary damages. McCleskey and Trane have filed
answers denying all claims. The matter is currently awaiting a trial date. The
claims against McCleskey are covered by insurance which coverage amount is
believed by management to be sufficient to cover the claims in the event of an
adverse judgement.
Airtech International Corporation, McCleskey Sales and Service, Inc., C.J.
Comu and John Potter, plaintiffs, vs Honeywell Environmental Air Control, Inc.,
and Suzanne Haas, defendants; No. 3:96CV-1855-D, United States District Court
for the Northern District of Texas, Dallas Division.
In this case, Airtech, a subsidiary and two of its officers filed suit
against Honeywell, Inc. and a Honeywell subsidiary and an employee asserting
several causes of action. These causes of action include breach of Contract
relating to the termination of the Company's Full Service Distributorship
agreements, for defamation and tortious interference with a contract relating to
a merger agreement, for unfair competition regarding claims made by Honeywell
about its air purification products, for negligent misrepresentation regarding
representations made to the Company and its subsidiary regarding the exclusivity
of certain arrangements with the defendants, and for declaratory relief and
attorney's fees. Honeywell filed a counter claim against the Company, McCleskey,
Comu and Potter. Honeywell alleges that the Company and McCleskey owe Honeywell
money for past purchases, and that Comu and Potter interfered with the
relationship between McCleskey and Honeywell. Honeywell seeks $71,000 in actual
damages and unspecified punitive damages and attorney's fees. The Company has
denied all of the material allegations of Honeywell's counterclaim. The Company
plans to vigorously defend the counterclaim and believes the counterclaim to be
without merit.
27
<PAGE>
AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
February 28, 1998 and 1997
(Unaudited)
Honeywell, Inc., plaintiff, vs Airtech International Corporation,
AirSoPure, Inc. and Richard Allegrati, defendants: No. WMN 97-238 United States
District Court for the District of Maryland, Baltimore Division.
Honeywell filed suit against the Company, a subsidiary and an employee,
alleging violations of the Lanham Act and the Maryland Uniform Trade Secrets Act
and the common law. The suit alleges that certain Airtech and AirSoPure products
were sold in violation of the Honeywell trademarks, and that the cover design of
certain products of Airtech/AirSoPure was wrongfully obtained. The suit seeks an
injunction and unspecified damages. The venue of this suit has been changed to
United States District Court for the Northern District of Texas, Dallas
Division, without injunctive relief and will be included in the other action
pending before this court. The Company denies all of the material allegations of
Honeywell's claims, and is vigorously defending this case.
Note 16: Subsequent Events
On May 8, 1997 the Company entered into a Stock Purchase Agreement with
Interactive Technologies Corporation, Inc (ITC). Under the terms of this
agreement ITC will purchase a minimum of 81% of the outstanding common stock of
the Company in exchange for 8,000,000 shares of ITC Common stock, 8,850,000
shares of ITC convertible Preferred Stock and $9,000,000 in ITC 8% convertible
Debentures.
This transaction will be closed at such time as a registration statement
filed with the Securities and Exchange. At February 28, 1998 a registration
statement had been filed and was pending action by the Securities and Exchange
Commission. This transaction will be closed when a minimum of 81% of the shares
tendered have been offered for exchange.
On August 1, 1997, Airtech entered into a Manufacture and Distribution
Agreement with Interactive. This agreement relating to the Medicare Model 950
air filtration unit, has been used by Interactive for the Private Placement of
additional securities. This agreement and the working arrangements are being
treated as a Joint Venture between Airtech and Interactive until such time as
the merger of the two companies is complete. Accordingly all receipts from the
sales of securities and disbursement of funds are accounted for as a Joint
Venture. At February 28, 1998, 656,250 shares of the PPM Series M Preferred
Stock had been completed. The Joint Venture is not consolidated in these
Financial Statements only, the transactions directly effecting Airtech have been
reflected. Under the terms of this Agreement, Airtech would be advanced 75% of
the net proceeds from the sale of these securities. AIRTECH INTERNATIONAL
CORPORATION AND SUBSIDIARIES
On March 27, 1998 Airtech International Corporation, McCleskey Sales &
Service, Inc. and AirSoPure, Inc. agreed to a Motion to Dismiss with Prejudice
all ligitation with Honeywell, Inc., et al and the Compton Group et al. As a
result of this Motion to Dismiss the note payable to for legal service in Note
10 above is paid in full. The Company received no monies as a result of these
actions and therefore has no further obligation under the terms of this
promissory note date January 7, 1998.
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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 Melbourne, State of Florida, on January 14, 1998.
Interactive Technologies Corporation, Inc.
by: /s/ CJ Comu
---------------------------
CJ Comu, Chief Executive Officer
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