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 November 30, 1997 Number 0-19796 INTERACTIVE TECHNOLOGIES CORPORATION, INC. (Exact name of registrant as specified in charter) Wyoming 98-0120805 (State or other (IRS Employer jurisdiction of Identification No.) incorporation) 102 South Harbor City Boulevard Melbourne, Florida 32901 (address of Principal Executive Offices) 407-953-4811 (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 14,773,024 shares of common stock, par value $0.01 per share issued and outstanding as of November 30, 1997. 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. Financial Statements Balance Sheet as of November 30, 1997 and 1996 Statement of Operations for the three months ended November 30, 1997 and 1996 Consolidated Statement of Stockholders' Equity Statement of Cash Flows for the six months ended November 30, 1997 and 1996 Notes to Financial Statements Item 2. Management's Discussion and Analysis and PART II - OTHER INFORMATION Item 1. Legal Proceedings 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 Interactive Technologies/Airtech International Pro Forma Financial Information Item 6. Exhibits and Reports on Form 8-K Airtech International Financial Statements SIGNATURE PAGE Part 1-Financial Information Item 1 Financial Statements ----------------------------- INTERACTIVE TECHNOLOGIES CORPORATION, INC. CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 1997 and 1996 (unaudited) Assets 1997 1996 ---- ---- Current assets: Cash $133,210 $12,579 Accounts and note receivable, trade, 35,235 net of $25,000, of allowance for uncollectible amounts 41,945 - Notes receivable - 150,000 Prepaid expenses and other assets 111,368 8,810 --------- -------- Total current assets 286,523 206,624 --------- -------- Property and equipment, at cost, net of $39,684 and $18,541, respectively of accumulated depreciation 75,457 96,289 --------- -------- Other assets: Organizational costs, net of $2,734 and $1,934, respectively of accumulated amortization 1,266 2,066 Investment in Subsidiary - SNT - 296,608 License rights, net of $371,250 and $236,250, respectively of accumulated amortization 303,750 438,750 Proprietary software and trademark, net of $1,257,028 and 483,129, respectively of accumulated amortization 4,154,015 4,927,914 Investment & Joint Venture 284,766 - --------- --------- 4,743,797 5,665,338 --------- --------- $5,105,777 $5,968,251 ========== ========== The accompanying notes are an integral part of the financial statements. 1 INTERACTIVE TECHNOLOGIES CORPORATION, INC. CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 1997 AND 1996 (unaudited) Liabilities and Stockholders' Equity 1997 1996 ---- ---- Current liabilities: Accounts payable, trade $ 99,408 $ 135,509 Accrued expenses 80,126 80,382 Contract of sale deposit - - Loans Payable Related Parties - - Others 277,185 144,200 Current portion of long-term liabilities 210,077 171,227 --------- -------- Total current liabilities 666,796 531,318 --------- ---------- 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 14,773,024 and 12,159,863, respectively, shares issued and outstanding 147,730 121,397 Preferred Stock, $.01 par value 20,000,000 and -0- shares authorized, respectively 5,000,000 and -0- designated as Series M 350,000 and -0- respectively, shares issued and outstanding 350 - Series M - PPM Cost (36,159) - Paid in capital in excess of par 11,741,227 9,492,845 Accumulated deficit ( 7,744,090) (5,476,882) ------------ ----------- 4,109,058 4,137,360 ------------ ----------- $ 5,105,777 $ 5,968,251 ============ ============ The accompanying notes are an integral part of the financial statements. 2 Interactive Technologies Corporation, Incorporated Statements of Operations For the Three Months Ended November 30, 1997 and 1996 (unaudited) 1997 1996 ------------- ----------- Revenue $ (3,328) $ 177,736 ------------- ----------- Operating expenses: Depreciation 5,414 5,403 Amortization 227,202 236,868 Production costs 9,463 - General and administrative 122,163 513,069 Interest expense: Stockholder - - Other 12,264 34,635 ------------- ----------- 376,506 789,975 ------------- ----------- Loss from operations (379,834) (612,239) Gain on sale of 90% of Charleston license - 311,500 Income/(loss) before income taxes (379,834) (300,739) ------------- ------------ Net income/(loss) $ (379,834) $ (300,739) ============= ============ 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 INTERACTIVE TECHNOLOGIES CORPORATION, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED NOVEMBER 30, 1997 Common Stock Preferred Add'l Pd Accumulated Shares Amount Shares Amount In Capital Deficit Total ------ ------ ------ ------ ------- ----- 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 The accompanying notes are an integral part of the financial statements. 4 Interactive Technologies Corporation, Incorporated Statement of Cash Flows For the Six Months Ended November 30, 1997 and 1996 1997 1996 ------------ ----------- Cash received from customers $ 109,766 $ 79,731 Interest received 797 - Cash paid to employees ( 57,036) ( 390,659) Cash paid to suppliers ( 235,997) ( 745,977) Interest paid: Stockholder - - Others - ( 34,635) ------------ ----------- Net cash used in operating activities $ ( 182,470) $(1,091,540) ------------ ----------- Cash flows from investing activities: Purchase of property and equipment ( 665) Capitalized software development reduction 50,000 Decrease in subsidiary investment - 104,719 License rights payment - (232,000) Joint Interest Investment 29,075 - ------------ ----------- Net cash used in investing activities 29,075 $ (77,946) ------------ ----------- Cash flows from financing activities: Issuance of convertible debentures - 300,000 Proceeds from note payable 273,000 - Common stock issued for cash - 576,852 Promissory notes isssued for cash 144,000 Contract of sale deposits received 98,099 License rights payment - (232,000) ------------ ----------- Net cash provided by financing activities 273,000 1,118,951 ------------ ----------- Net change in cash 119,605 (50,535) Cash at beginning of period 13,605 63,114 ------------ ----------- Cash at end of period $ 133,210 $ 12,579 ============ =========== Accompanying notes are an integral part of the financial statements. 5 Interactive Technologies Corporation, Inc. Statement of Cash Flows For the Six Months Ended November 30, 1997 and 1996 Reconciliation of Net Income to Net Cash Used in Operating Activities (unaudited) 1997 1996 ------------- ----------- Net income/loss $ ( 727,261) $(1,192,420) Adjustments to reconcile net income/loss to net cash used in operating activities: Amortization 477,297 477,677 Depreciation 10,829 10,806 Increase/Decrease in accounts receivable 108,711 ( 11,906) Increase in notes receivable - (150,000) Decrease in accounts payable ( 10,896) (227,293) Increase in prepaid expenses ( 96,578) ( 14,550) Increase/Decrease in accrued expenses ( 11,448) ( 39,288) Stock issued for supplies and services 66,876 366,934 Gain on sale of Charleston license (311,500) ------------ ---------- Total adjustments $ 544,791 $ 100,880 ------------ ---------- Net cash used in operating activities $ ( 182,470) $(1,091,540) ============ =========== Accompanying notes are an integral part of the financial statements. 6 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. 7 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 14,773,024 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 8 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. CONVERTIBLE DEBENTURES NONE 5. NOTES PAYABLE The Company's notes payable consist of loans from various corporations and individuals provided for working capital purposes. The notes, which contain no significant restrictions, bear interest at rates of 10.0% to 18.0%, are due through March 1998 and are unsecured. 6. INCOME TAXES The Company used the accrual method of accounting for tax and financial reporting purposes. At November 30, 1997, the Company had net operating loss carryforwards for financial and tax reporting purposes of approximately $7,800,000. This carryforwards expire through the year 2011, and are further subject to the provisions of Internal Revenue Code Section 382. 7. SUBSEQUENT EVENT Subsequent to May 1997, the Company entered into an agreement to acquire Airtech International Corporation (AIC), a Texas corporation, through the issuance of its common stock shares in a transaction to be accounted as an acquisition by ITC. The transaction is subject to final AIC stockholder approval upon the effective date of a Form S-4 Registration Statement, which has been filed. 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 November 30, 1997 350,000 shares of the PPM Series M Perferred stock had been completed. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS INTERIM PERIOD FROM JUNE 1, 1996 THROUGH NOVEMBER 30, 1997. During the quarter, the Company's efforts were directed at program development involving the next RebateTV program and the initiation of program development of "Assualt on the Liberty" a DocuDrama about the sinking of the United States Ship "Liberty" during the Seven Day War. The Company has contracted for creative work on the Development and Prep phases for the "Liberty" project as well as for development work by Bottomline, Inc. of Atlanta, Georgia. Both the "Liberty" project and the newest RebateTV program are under creative direction by Michael Hamilton who has designed, directed and produced such television series as "Magnum P.I., "Simon & Simon", "Wings" and "The Twilight Zone". His commercial experience includes such clients as Cadillac, Texaco, Coca Cola, Heineken, American Airlines, Donna Karan, Elizabeth Arden, QVC, Business Technology Management and the Family Channel. The computer development efforts related to Rebate TV were done at the Company's engineering offices in Melbourne, Florida, where the hardware and software designs and specifications were developed, tested and implemented during the current fiscal year, to: (*) manage the large amounts of data and transactions involved in collecting and verifying sales information from the Rebate TV retailers; (*) calculate the rebates, record the credits, and issue the checks to the consumer; (*) accommodate and record the telephone rebate requests, and provide automated participation information to the public. Internet Access. ITC's Internet home pages for use with Rebate TV allow viewers to access the program's data base through the Internet. It allows them to view the status of their accounts, enter vendor rebate claims, and later will allow viewers to access a variety of products and services associated with Rebate TV which the Company expects to include. Rebate TV is located at http://www.rebatetv.com. Interactive Video and Data Services. As part of ITC's commitment to the evolution of interactive television, its Federal Communications Commission Interactive Video and Data Services (IVDS) radio station license in the Melbourne-Titusville-Palm Bay, FL and a 10% interest in Charleston-North Charleston, SC service areas represent an additional enhancement to the Company's programming distribution. These licenses have a duration of an initial five years, and are renewable if all conditions of the license are met. IVDS, a two way communications system, will allow viewers to take an active role in systems delivered through broadcast television, cable television, wireless cable, direct broadcast satellite or other future television delivery methods. IVDS is regulated as a personal radio service under the rules of the FCC which has allocated spectrum in the 218-219 MHz range for its use. IVDS systems are designed to operate with a hand-held remote control device that controls the interactive set top device on the subscriber's television set. A viewer would interact with the TV station through a radio signal using an IVDS frequency. The Company is reviewing alternative uses and equipment proposals for its Melbourne-Titusville-Palm Bay, FL license and expects to proceed to install a system for this license within the next 24 - 36 months. Although ITC will run its Rebate TV and other programs on its own service area systems, the programs it develops are intended for use on various interactive delivery systems and are not specific to Interactive Video and Data Services systems. They are marketed to all of these various delivery systems. For broadcast of Rebate TV programming the Company currently uses and plans to use standard video media distribution methods such as cable, broadcast stations, wireless cable and direct broadcast satellite. Although the Company has designed its programs to utilize an IVDS return link (a "return link" is the method by which data is sent from the consumer or viewer back to the originator of the program), they are also designed to accommodate other return links such as the telephone. The Company has purchased equipment and software to provide a telephone return link as an interim return link for its own license areas as well as other areas where it is providing programming, to be utilized where IVDS is not available; until the installation an operation of the IVDS equipment as a return link is completed as well as for use with non subscribers to IVDS. 10 FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Revenues from operations for the Quarter reported were $(3,328), down from $177,736 for the same period for the previous year. The Company has concluded its beta test period for Rebate TV and continues to prepare for network operations. Operating expenses for the Quarter reported decreased to $376,506 from $789,975 the previous year. The Company's computer operations were developed to operate at a level to service a national market and those operations will make up a significant portion of the operating expenses which will proportionately decrease as the Company adds markets for its productions. The Company expects its expenses to expand at a decreasing percentag as it expands into additional markets. During the six months of the current fiscal year, the Company received $210,500 net of cost from the private sale of its common stock and an dditional $52,500 in loans. The Company does not expect to receive significant revenues from projects other that Rebate TV during the next quarter. The Company expects to require additional funds over the next 12 months for the expansion and addition of market for its products and operations. PART II Other Information 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 Item 5. Other Information The purchase of the outstanding stock of Airtech International Corporation has not been completed as of November 30, 1997. This transaction will be completed upon the effective notice of the registration statement filed with the Securities and Exchange Commission. The Company is electing to report current Proforma Combined Financial Statements of the Company and Airtech as if the transaction had been completed on November 30, 1997. And is providing under Item 6 as an Exhibit the November 30, 1997 unaudited Financial Statements of Airtech. On August 1, 1997 the Company and Airtech International Corporation (AIC) entered into a Manufacture and Distribution Agreement or Joint Venture for the Production of the Airtech Model 950 air filtration unit. As a result of this agreement the Company began a Private Placement of its designated Series M Preferred Stock, with the maximum placement being 5,000,000 shares at a price of $1.00 per share with one convertible warrants attached to each Preferred share. If this Private Placement is completed the Company will contribute 75% of the net proceeds to the Joint Venture or such lesser amount if the total shares of Preferred Stock are not sold. 11 INTERACTIVE TECHNOLOGIES CORPORATION INC. PROFORMA COMBINED BALANCE SHEETS NOVEMBER 30, 1997 (Unaudited) Historical -------------------------------- Acquired Interactive Technologies Airtech Adjustments Corporation International For Inc. Corporation Acquisition Combined -------------- ------------- ------------ ----------- ASSETS Current Assets $286,523 $721,690 $1,008,213 Property and equipment net of depreciation 75,457 235,489 310,946 Notes receivable 899,833 899,833 Intellectual properties net of Amortization 4,457,765(2) 1,204,895(3) 12,250,000(4) 17,912,660 Investment in subsidiary 650,000 650,000 Investment in Joint Venture 284,766 (137,824) 146,942 Goodwill 1,329,252(4) 1,329,252 Other assets 1,266 527,918 529,184 ------------- ------------ -------------- ------------ Total Assets $5,105,777 $4,102,001 $13,579,252 $22,787,030 ============= ============ ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities $666,796 $874,942 $1,541,738 Deferred Revenue 400,000 400,000 Long-term liabilities 329,923 45,749 375,672 9,000,000(4) 9,000,000 ------------- ------------ -------------- ----------- Total Liabilities 996,719 1,320,691 11,317,410 Commitments and contingencies (5) Stockholders' Equity Paid in Capital 11,853,148 3,825,571 4,579,252(4) 20,257,971 Retained Earning (Deficit) (7,744,090) (1,044,261) (8,788,351) --------------- ------------- -------------- ------------ 4,109,058 2,781,310 4,579,252 11,469,620 --------------- ------------- -------------- ------------ Total Liabilities and Stockholders' Equity $5,105,777 $4,102,001 $13,579,252 $22,787,030 =============== ============= ============== ============= See notes to Pro-Forma Combined Financial Statements 12 INTERACTIVE TECHNOLOGIES CORPORATION, INC. PROFORMA COMBINED STATEMENTS OF INCOME For the Six Months Ended November 30, 1997 (Unaudited) Historical Adjustments ------------------------------- ------------- Acquired -------- Interactive Technologies Airtech Adjustments Corporation International For Inc. Corporation Acquisition Combined ------------- -------------- ------------- ---------- 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) See notes to Pro-Forma Combined Financial Statements 13 INTERACTIVE TECHNOLOGIES CORPORATION, INC. NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS November 30, 1997 (Unaudited) 1. Basis of Presentation The accompanying Pro-Forma Combined balance sheet at August 31, 1997 and related combined statement of operations for the nine months then ended have been prepared as if the business combination had occurred on June 1, 1997 the start of the current fiscal year of Interactive. The purchase of the outstanding stock of Airtech by Interactive is being reflected in these Pro-Forma Combined Financial Statements using the purchase method for recording the transaction. The excess of cost over book value has been reclassified to other assets of Airtech based on managements estimates and outside valuation based on projected cash flows and revenues from the revalued assets. No provision for amortization of these revalued assets or goodwill are reflected in these combined financial statements. There have been no changes in generally accepted accounting principals in the presentation of the combined financial statements from the historical audited financial statements included herein by reference as previously filed or in the audited financial statements of Airtech for its fiscal year ended May 31, 1997. Earnings per Share (EPS) is reflected as primary earning per share and fully dilluted earnings per share set forth in the following table used for EPS computation: Historical ------------------------------ ITC Airtech Weighted average number of shares 12,139,865 17,485,000 Less shares cancelled ( 3,400,000) Add shares issued for debentures 1,144,444 Adjustment for combined presentation (17,485,000) Common shares issued for acquired 8,000,000 ----------- Primary shares outstanding 17,884,309 Assuming conversion of convertable preferred issued for acquired 8,850,000 Assuming conversion of convertable Debentures issued for acquired 12,857,143 ----------- Fully diluted shares outstanding 39,591,452 Notes to Historical Financial Statements 1. Intellectual properties reflected on the balance sheet of Interactive consist of the following: License rights net of accumulated amortization of $371,250 $ 303,750 Proprietary software and trademark, net of accumulated amortization of $1,257,028 4,154,015 ----------- $4,457,765 14 INTERACTIVE TECHNOLOGIES CORPORATION, INC. NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS November 30, 1997 (Unaudited) License rights consist of ITC's Federal Communications Commission Interactive Video and Data Services (IVDS) radio station license in the Melbourne-Titusville-Palm Bay, Florida and the retained 10% interest in IVDS license in the Charleston-North Charleston, South Carolina service areas representing an additional enhancement to ITC=s programming distribution. These licenses have a duration of an initial five years, and are renewable if all conditions of the license are met. IVDS, a two way communications system , will allow viewer to take an active role in systems delivered through broadcast television, cable television, wireless cable, direct broadcast satellite or other future television delivery methods. IVDS is regulated as a personal radio service under the rules of the FCC which has allocated spectrum in the 218-219 MHZ range for its use. IVDS systems are designed to operate with a hand-held remote control device that controls the interactive set top[ device on the subscriber's television set. A viewer would interact with the TV station through a radio signal using an IVDS frequency. Proprietary software and trademarks consist of software developed for integration into the rebate television market and a trademark known as Rebate TV (TM) purchased in October 1995. This proprietary software allows ITC to be a developer and producer of television, interactive television and interactive digital media programming. These programs can be developed in various interactive formats for cable, broadcast and direct broadcast satellite television as well as for Internet distribution. Rebate TV is a television program which incorporates interactive media and computer data management allowing retail vendors to communicate their message to consumers, the allow the consumer to verify his or her purchase, with the consumer receiving a cash rebate from ITC for their purchases. Retailers represent a broad spectrum of the business community including grocer chains, furniture stores, tire service stores, banks, restaurants, car dealers and a variety of other specialty businesses. 2. Intellectual properties reflected on the balance of Airtech consist of the cost incurred to date for the development of a full line of air purification products for commercial, consumer, automobile and medical use. Several of the products will be eligible for a US and foreign patents with patent applications currently in process or planned . Adjustments for Acquisition 3. Per the stock purchase agreement entered into on May 8, 1997 between Interactive Technologies Corporation, Inc. and Airtech International Corporation the following presents the securities and the related valuation of the purchase of 100% of the issued and outstanding common stock of Airtech: Value Description of Securities Per Share Total 8,000,000 shares of Interactive Common Stock, registered $0.56(a) $4,480,000 8,850,000 shares of Interactive Preferred Stock, registered and convertible into Common Stock $0.45(b) 3,982,500 $9,000,000 in Convertible Debentures At Face 9,000,000 ---------- Total value of purchase of 100% of Airtech Common Stock $ 17,462,500 15 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 May 8, 1997 was $1.125, for valuation of a private placement type transaction of registered shares of common stock Interactive has discounted the price per share by 50%. (b) The Preferred Stock is convertible into one (1) share of Common Stock after 24 months or can be called by the Company during that time, for valuation purposes the assigned value of the common shares was reduced by 20%. The following represents the allocation of the purchase price: Book value of Airtech common stock $ 3,804,026 Intellectual properties 12,250,000 Excess of purchase price over cost 1,408,474 ------------- Total Purchase Price $17,462,500 4. Interactive Technologies has the following litigation pending: The Company is a defendant in a proceeding filed in the United States District Court for the Southern District of New York. It accepted service April 5, 1997 in an action brought by Studiolink Corporation and Steven Campus for damages arising out of an equipment lease agreement. The Company expects to assert counterclaims against the Plaintiffs for losses suffered as a result of their failure to perform. Settlement discussions have been ongoing and the Company expects this matter to be settled in a manner not unfavorable to the Company. In addition, in related matters, the Company is in litigation with LLB Realty, L.L.C. which has filed a claim alleging claims under an office lease agreement in Superior Court of New Jersey, Mercer County. The Company has asserted claims against L.L.B. Realty, L.L.C. for failure to perform under the conditions of the agreement. Settlement negotiations have been ongoing and the Company expects this matter to be settled in a manner not unfavorable to the Company. . The Company is not a party to any other pending legal proceedings except for claims and lawsuits arising in the normal course of business. The Company does not believe that these claims or lawsuits will have a material effect on ITC=s financial condition or results of operations. Accordingly no provision or accrual for potential losses are reflected in the Pro-Forma Combined Financial Statements. Airtech International Corporation has the following litigation pending: Airtech International Corporation, McCleskey Sales and Service, Inc., C.J. Comu and John Potter, plaintiffs vs Honeywell, Inc., Honeywell Environmental Air Control, Inc. And Suzanne Haas, defendants; No. 3:96CV-1855-D, United States District Court for the Northern District of Texas, Dallas Division. In this case, Airtech, a subsidiary and two of its officers filed suit against Honeywell, Inc. And a Honeywell subsidiary and an employee asserting several causes of action. These causes of action include breach of contract relating to termination of the Company=s Full Service Distributorship agreements, for defamation and tortious interference with contract relating to a merger agreement between the Company and DCX, Inc., for unfair competition regarding claims made by Honeywell about it air purification products, for negligent misrepresentation regarding representations made to the Company and its subsidiary regarding the exclusivity of certain arrangements with the defendants, and for declaratory relief and attorney=s fees. Honeywell filed a counterclaim against the Company, McCleskey, Comu and Potter. Honeywell alleges that the Company and McCleskey owe Honeywell money for past purchases, and that Comu and Potter interfered with the relationship between McCleskey and Honeywell. Honeywell seeks $71,000 in actual damages and unspecified punitive damages and attorney=s fees. The Company has denied all of the material allegations of Honeywell=s counterclaim. The Company plans to vigorously defend the counterclaim and believes the counterclaim to be without merit. Honeywell, Inc., plaintiff, vs Airtech International Corporation, AirSoPure, Inc. And Richard Allegrati, defendants: No. WMN 97-238 United States District Court for the District of Maryland, Baltimore Division. 16 INTERACTIVE TECHNOLOGIES CORPORATION, INC. NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS November 30, 1997 (Unaudited) Honeywell filed suit against the Company, a subsidiary and an employee, alleging violations of the Lanham Act and the Maryland Uniform Trade Secrets Act and the common law. The suit alleges that certain Airtech and AirSoPure products were sold in violation of the Honeywell=s trademarks, and that the cover design of certain products of Airtech/AirSoPure was wrongfully obtained. The suit seeks an injunction and unspecified damages. Rather than incur substantial additional attorney=s fees, the Company agreed to the entry of a preliminary injunction regarding the sale of a very small number of modified Honeywell products, immaterial to the Company=s business. The Company denies all of the material allegations of Honeywell=s claims, is vigorously defending this case. The Company believes Honeywell=s claims to be without merit. Accordingly no reserve or accrual has been reflected in these Combined Pro-Forma Financial Statements for this pending litigation. 17 Item 6. Exhibits AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET November 30, 1997 (Unaudited) 1997 1996 ------------- ------------- Assets Current Assets: Cash and cash equivalents $ 21,509 $ 345,570 Accounts Receivable 247,185 369,361 Inventories 274,042 198,922 Other Currents Assets 178,954 12,240 ------------- ------------- Total Current Assets 721,690 926,093 Property, Plant and Equipment Net of Accumulated Depreciation 235,489 153,710 Property held for Resale 400,000 Intellectual Properties 1,204,895 161,387 Notes Receivable-Long Term 899,833 - Investment in Subsidiaries 650,000 650,000 Other Assets 527,918 519,050 ------------- ------------- Total Assets $ 4,239,825 $ 2,810,240 ================ ============= Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt $ 24,253 $ 10,391 Accounts Payable-trade 339,493 94,004 Accrued Payroll and employee benefits 415,196 1,772 Joint Venture Advances 137,824 Loans from Officers 96,000 - ---------------- ------------- Total Current Liabilities 1,012,766 106,167 Long-Term Debt 45,749 18,129 Deferred Revenue 400,000 - Commitments and Contingent Liabilities Stockholders' Equity Common Stock, issued 16,223,642 shares in 1997 and 14,917,342 shares in 1996 164 149 Series C Preferred Stock, issued 1,000 shares in 1997 and 1,000 shares in 1996 1,000 1,000 Paid-in Capital 3,824,407 3,410,363 Retained Earnings (Deficit) (1,044,261) (725,568) ---------------- ------------- Total Stockholders' Equity 2,781,310 2,685,944 ---------------- ------------- Total Liabilities and Stockholders' Equity $ 4,239,825 $ 2,810,240 ================ ============= See Notes to Consolidated Financial Statements 18 AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME For the Three Months Ended November 30, 1997 and 1996 (Unaudited) 1997 1996 -------------- -------------- Sales $ 242,768 $ 214,111 Cost of Sales 158,142 110,987 --------------- ------------- Gross Income 84,626 103,124 General and Administrative expenses 319,091 351,152 --------------- ------------- Net Income ( Loss) $ (234,465) $ (248,028) ================ ============= Primary Income ( Loss) per share $ (0.01) $ (0.02) Dulited Income ( Loss) per share $ (0.01) $ (0.02) See Notes to Consolidated Financial Statements 19 AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME For the Six Months Ended November 30, 1997 and 1996 (Unaudited) 1997 1996 --------------- --------------- Sales $ 510,692 $ 540,131 Cost of Sales 342,350 228,296 --------------- --------------- Gross Income 168,342 311,835 General and Administrative expenses 609,907 557,717 --------------- --------------- Net Income ( Loss) $ (441,565) $ (245,882) =============== =============== Primary Income ( Loss) per share $ ( 0.03) $ ( 0.02) Dulited Income ( Loss) per share $ ( 0.03) $ ( 0.02) See Notes to Consolidated Financial Statements 20 AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements November 30, 1997 and 1996 (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. Sales. Income is recognized in the financial statements (and the customer billed) either when materials are shipped from stock or when the vendor bills the Company for the order. Net sales are arrived at by deducting discounts, freight, and sales tax from gross sales. Franchise Fees. Franchise fees are recognized in the financial statements when all material services relating to the sale of a franchise have been performed by the Company and there is no obligation to refund any cash received or forgive any unpaid notes or receivables. 21 AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements November 30, 1997 and 1996 (Unaudited) 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. Uses of this technology include, restaurants, medical facilities, public buildings, schools, gaming and bingo facilities. Note 2: Other Current Assets At November 30, 1997 and 1996 other assets are comprised of the following: 1997 1996 ------- --------- Prepaid expenses $ 49,836 $ Prepaid legal 122,401 Other 6,721 12,240 ---------- --------- Total $ 178,954 $ 12,240 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. 22 AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements November 30, 1997 and 1996 (Unaudited) Note 3: Property, Plant and Equipment At November 30, 1997 and 1996, property plant and equipment comprised of the following: 1997 1996 --------- ---------- Furniture and fixtures $ 17,750 $ 17,750 Computers and equipment 139,412 124,184 Vehicles 127,783 77,686 Leasehold improvements 9,388 1,202 Assembly equipment 65,266 3,560 --------- ---------- Total 359,599 224,382 Less: Accumulated depreciation 124,110 70,672 --------- ---------- Net $ 235,489 $ 153,710 Note 4: Property Held for Resale In 1995 the Company purchased the exclusive rights to Honeywell Enviracaire products for the county of Turkey for $250,000 and for the country of Taiwan for $150,000. Note 5: Intellectual Properties Prior to the cancellation of the Company's Full Service Distributorship in the U.S. by Honeywell in May of 1996 the Company had received notification of approval within 90 days of its Medicare Part B application for a portable air filtration system manufactured by Honeywell. Subsequent to this cancellation the Company withdrew it Medicare Part B application. While the Company is pursuing the development of a full line of commercial air filtration systems, its primary focus has been on the development of a portable air filtration system that will qualify for Medicare Part B and a portable air filtration unit for vehicles. The Company has incurred costs totaling $1,204,895 at November 30, 1997 and $161,387 at November 30, 1996 in its design and testing of these products. The Company currently has in production one commercial model and anticipates its complete line of commercial air filtration products to be in production during the 1998 fiscal year. The portable air filtration unit for vehicle use is scheduled for production by the end of 1997. The air filtration system being designed for Medicare Part B applications should be in a working proto-type by the end of 1997 and the application submitted during the first quarter of 1998. The Company forecast additional cost of approximately $1 million dollars for completion of the vehicle and Medicare Part B units. The Company has and will continue to apply for patents on its products. Note 6: Notes Receivable At November 30, 1997 and 1996, notes receivable is comprised of the following: 1997 1996 --------- -------- Domestic notes receivable $ 300,000 $ 0 Foreign notes receivable 666,500 0 --------- -------- Total 966,500 0 Less: Current Maturities 66,667 --------- -------- Long Term Notes Receivable $ 899,833 $ 0 23 AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements November 30, 1997 and 1996 (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: Other Assets At November 30, 1997 and 1996, other assets is comprised of the following: 1997 1996 ----------- -------- Deposits $ 16,739 $ 16,279 Prepaid royalties 500,000 500,000 Other 11,179 2,771 ----------- -------- Total $ 527,918 $ 519,050 Note 8 Notes Payable At November 30, 1997 and 1996, notes payable is comprised of the following: 1997 1996 ------------ --------- Nations Bank $ 21,413 $ 28,520 Compass Bank 11,597 Resource One 37,019 ------------ --------- Total 70,002 28,520 Less: Current maturities 24,253 10,391 ------------ --------- Long-Term Debt $ 45,749 $ 18,129 Note 9: Earnings Per Common Share Earnings per common share are computed by dividing net income by the average number of Common shares outstanding during the period. The weighted average number of Common shares outstanding at November 30, 1997 were approximately 16,100,000 and approximately 9,200,000 at November 30, 1996. Note 10: Income Taxes The Company uses the accrual method of accounting for tax and financial reporting purposes. At November 30, 1997 and 1996, the Company had net operating loss carryforwards for financial and tax reporting purposes. These carryforwards expire through the year 2011, and are further subject to the provisions of the Internal Revenue Code Section 382. Note 11: Operating Leases The Company presently leases its facilities in Texas under non-cancelable operating lease agreements expiring through September 1999. These leased facilities total approximately 13,000 square feet of office and warehouse space. Minimum future rental payments under the above operating leases are as follows: Amount 1998 $ 78,000 1999 37,680 ---------- Total $ 15,680 24 AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements November 30, 1997 and 1996 (Unaudited) Note 12: Commitments and Contingencies An original petition was filed in State District Court, Dallas, Texas in August 1995 by Kristen S. Venable naming McCleskey Sales and Service, Inc., and Trane, Inc., Defendants, alleging breach of contract, breach of warranty and negligence relating to the installation of Trane air conditioning equipment. The complaint seeks damages in excess of the minimum, jurisdictional limits of the Court, plus punitive and exemplary damages. McCleskey and Trane have filed answers denying all claims. The matter is currently awaiting a trial date. The claims against McCleskey are covered by insurance which coverage amount is believed by management to be sufficient to cover the claims in the event of an adverse judgement. Airtech International Corporation, McCleskey Sales and Service, Inc., C.J. Comu and John Potter, plaintiffs, vs Honeywell Environmental Air Control, Inc., and Suzanne Haas, defendants; No. 3:96CV-1855-D, United States District Court for the Northern District of Texas, Dallas Division. In this case, Airtech, a subsidiary and two of its officers filed suit against Honeywell, Inc. and a Honeywell subsidiary and an employee asserting several causes of action. These causes of action include breach of Contract relating to the termination of the Company's Full Service Distributorship agreements, for defamation and tortious interference with a contract relating to a merger agreement, for unfair competition regarding claims made by Honeywell about its air purification products, for negligent misrepresentation regarding representations made to the Company and its subsidiary regarding the exclusivity of certain arrangements with the defendants, and for declaratory relief and attorney's fees. Honeywell filed a counter claim against the Company, McCleskey, Comu and Potter. Honeywell alleges that the Company and McCleskey owe Honeywell money for past purchases, and that Comu and Potter interfered with the relationship between McCleskey and Honeywell. Honeywell seeks $71,000 in actual damages and unspecified punitive damages and attorney's fees. The Company has denied all of the material allegations of Honeywell's counterclaim. The Company plans to vigorously defend the counterclaim and believes the counterclaim to be without merit. Honeywell, Inc., plaintiff, vs Airtech International Corporation, AirSoPure, Inc. and Richard Allegrati, defendants: No. WMN 97-238 United States District Court for the District of Maryland, Baltimore Division. Honeywell filed suit against the Company, a subsidiary and an employee, alleging violations of the Lanham Act and the Maryland Uniform Trade Secrets Act and the common law. The suit alleges that certain Airtech and AirSoPure products were sold in violation of the Honeywell trademarks, and that the cover design of certain products of Airtech/AirSoPure was wrongfully obtained. The suit seeks an injunction and unspecified damages. The venue of this suit has been changed to United States District Court for the Northern District of Texas, Dallas Division, without injunctive relief and will be included in the other action pending before this court. The Company denies all of the material allegations of Honeywell's claims, and is vigorously defending this case. Note 19: Subsequent Events On May 8, 1997 the Company entered into a Stock Purchase Agreement with Interactive Technologies Corporation, Inc (ITC). Under the terms of this agreement ITC will purchase a minimum of 81% of the outstanding common stock of the Company in exchange for 8,000,000 shares of ITC Common stock, 8,850,000 shares of ITC convertible Preferred Stock and $9,000,000 in ITC 8% convertible Debentures. This transaction will be closed at such time as registration statement filed with the Securities and Exchange. At November 30, 1997 a registration statement had been filed and was pending action by the Securities and Exchange Commission. On notification by the Commission that the registration is effective and a minimum of 81% of the shares tendered have been offered for exchange. 25 AIRTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements November 30, 1997 and 1996 (Unaudited) On August 1, 1997, Airtech entered into a Manufacture and Distribution Agreement withi Interactive. This agreement relating to the Medicare madel 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 November 30, 1997 350,000 shares of the PPM Series M Perferred stock had been completed. The Joint Venture is not consolidated in these Financial Statements only, the transactions directly effecting Airtech have been reflected. 26 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/ Perry Douglas West --------------------------- Perry Douglas West, Chief Executive Officer 27