-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DBcXIEKjSfSGAdKlfb6d5SmrwLOoSEVwD5Cfnaf6qU/9RQ/NJ3SX3Dslkyi4vkfe V5OZHy2xcN/Ftmllr7LsWQ== 0000883041-98-000019.txt : 19981203 0000883041-98-000019.hdr.sgml : 19981203 ACCESSION NUMBER: 0000883041-98-000019 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980830 FILED AS OF DATE: 19981202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRTECH INTERNATIONAL GROUP INC CENTRAL INDEX KEY: 0000883041 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ALLIED TO MOTION PICTURE PRODUCTION [7819] IRS NUMBER: 980120805 STATE OF INCORPORATION: WY FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: SEC FILE NUMBER: 000-19796 FILM NUMBER: 98762644 BUSINESS ADDRESS: STREET 1: 15400 KNOLL TRAIL # 106 CITY: DALLAS STATE: TX ZIP: 75248 BUSINESS PHONE: 9729609400 MAIL ADDRESS: STREET 1: 15400 KNOLL TRAIL # 106 CITY: DALLAS STATE: TX ZIP: 75248 FORMER COMPANY: FORMER CONFORMED NAME: INTERACTIVE TECHNOLOGIES CORP INC DATE OF NAME CHANGE: 19930328 10QSB/A 1 10QSB/A 8/30/98 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 __________ 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 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 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 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 INTERACTIVE TECHNOLOGIES CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
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 ========== ========= ======== ======== ========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements. 4 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 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 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 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 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 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 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 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 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 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 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 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 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 EX-27 2 ARTICLE 5 FDS 8/98 10QSB/A
5 3-MOS 3-MOS MAY-31-1999 MAY-31-1998 JUN-01-1998 JUN-01-1997 AUG-31-1998 AUG-31-1997 40,356 11,009 0 0 245,925 42,165 10,000 25,000 293,727 0 698,892 68,580 412,607 115,140 219,758 34,270 34,425,339 4,835,683 853,194 680,436 0 0 1,143 0 0 0 482,295 134,796 25,872,855 3,471,778 34,425,339 4,835,683 0 0 472,365 3,070 261,489 0 527,654 350,496 0 0 0 0 122,479 12,264 (317,163) (347,426) 0 0 (317,163) (347,426) 0 0 0 0 0 0 (317,163) (347,426) (.01) (.03) (.01) (.03)
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