UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-SB/A-3 File No. 0-28353 GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS Under Section 12(b) or 12(g) of The Securities Exchange Act of 1934 INTEGRAL TECHNOLOGIES, INC. (Name of Small Business Issuer in its charter) NEVADA 98-0163519 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) #3 - 1070 West Pender St. Vancouver, British Columbia, Canada V6E 2N7 (Address, including postal code, of principal executive offices) (604) 685-9933 (Issuer's telephone number) Copy to: Futro & Trauernicht LLC Attorneys and Counselors at Law 1401 17th Street, Suite 1150 Denver, Colorado 80202 Securities to be registered under Section 12(b) of the Exchange Act: NONE Securities to be registered under Section 12(g) of the Exchange Act: COMMON STOCK
INTEGRAL TECHNOLOGIES, INC. FORM 10-SB/A-1 TABLE OF CONTENTS
Page PART I Cautionary Statement Concerning Forward Looking Statements.....................................................1 Item 1. Description of Business.............................................................................1 Item 2. Plan of Operation..................................................................................10 Item 3. Description of Property............................................................................11 Item 4. Security Ownership of Certain Beneficial Owners and Management.....................................12 Item 5. Directors and Executive Officers, Promoters and Control Persons....................................14 Item 6. Executive Compensation.............................................................................18 Item 7. Certain Relationships and Related Transactions.....................................................22 Item 8. Description of Securities..........................................................................23 PART II Item 1. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters....................................................................25 Item 2. Legal Proceedings..................................................................................25 Item 3. Changes in and Disagreements with Accountants......................................................26 Item 4. Recent Sales of Unregistered Securities............................................................26 Item 5. Indemnification of Directors and Officers..........................................................28 PART F/S Financial Statements.........................................................................................F-1 PART III Item 1. Index to Exhibits and Description..................................................................29 SIGNATURES....................................................................................................31
ii PART I CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS Readers of this document and any document incorporated by reference herein, are advised that this document and documents incorporated by reference into this document contain both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially for those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to: (i) projections of revenues, income or loss, earning or loss per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of the plans and objectives of the Company or its management of Board of Directors, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about the Company or its business. This document and any documents incorporated by reference herein also identify important factors which could cause actual results to differ materially from those indicated by forward looking statements. These risks and uncertainties include price competition, the decisions of customers, the actions of competitors, the effects of government regulation, possible delays in the introduction of new products, customer acceptance of products and services, and other factors which are described herein and/or in documents incorporated by reference herein. The cautionary statements made above and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company. Forward looking statements are beyond the ability of the Company to control and in many cases the Company cannot predict what factors would cause results to differ materially from those indicated by the forward looking statements. ITEM 1. DESCRIPTION OF BUSINESS (a) BUSINESS DEVELOPMENT Integral Technologies, Inc. (the "Company" or the "Registrant") is a development stage company, incorporated under the laws of the State of Nevada on February 12, 1996. The Registrant is in the business of researching, developing and commercializing various technologies directly and through its three subsidiaries, each of which is described later in this section. To date, the Registrant, directly and through its subsidiaries, has expended its resources on the research and development of four types of technologies: 1. Antennas; 2. Three Dimensional ("3D") Color Machine Vision; 3. Two Dimensional ("2D") Color Machine Vision (Counterfeit Currency/Document Detection); and 4. RF Plasma Injection System (New Spark Plug). Each of these technologies are described in detail later in this section. 1 Through two of its subsidiaries, NextAntennas.Com, Inc. ("NEXT") and Emergent Technologies Corp. ("Emergent"), the Registrant has been researching and developing six new antenna technologies. Through a third subsidiary, Integral Vision Systems, Inc. ("Integral Vision"), the Registrant has been researching and developing the 3D and 2D Color Machine Vision technology. The Registrant has directly been researching and developing the RF Plasma Injection System technology. Financial Condition As a development stage company, the Registrant has had no revenues from inception (February 12, 1996) through the end of the first quarter of its current fiscal year (September 30, 1999), and has incurred a net loss of approximately $3.7 million for that period. To date, the Registrant has relied on loans from management and management's ability to raise capital through debt and equity private placement financings to fund its operations. The current financial condition of the Registrant raises doubt as to its ability to continue as a going concern. In December 1999, NextAntennas.com, Inc. ("NEXT"), a subsidiary of the Registrant, received its first commercial, revenue-generating order for its GPS/LEOS antenna (a detailed description of NEXT and its antenna products is set forth below in the subsection entitled "NextAntennas.com, Inc.") from ARINC, Inc., an operator of communication and processing systems for the aviation and transportation industry. The Registrant expects that this order will be filled and revenue of approximately $180,000 will be recorded for this first time in the third fiscal quarter of the current fiscal year (the first calendar quarter of 2000). The terms of the order required a 35% deposit, which has been received, and the balance due within 15 days after delivery. Management has had approximately six meetings and multiple telephonic conversations with ARINC, and ARINC has indicated verbally that the pending order represents approximately one-fourth of the number of NEXT's GPS/LEOS antennas that ARINC anticipates ordering during the calendar year 2000. ARINC indicated that it anticipates ordering additional antennas in subsequent years, but did not discuss specific terms or requirements with management. Although there is currently no written contract with ARINC and no assurances can be given, in the opinion of management, based upon its discussions with ARINC, NEXT will receive orders for an additional $500,000 of antennas from ARINC during calendar 2000, on similar terms to the pending order. Although no assurances can be given, management believes that, based on the existing antenna order and potential future orders from ARINC as described above, revenues from the sales of NEXT antenna products will allow the Registrant to meet some of its projected cash needs of approximately $1.2 million over the next twelve months. However, unless additional sales are made and additional revenue is received on an ongoing basis, the Registrant will not be able to meet all of its cash needs during the next twelve months or thereafter, and the Registrant will need to continue to rely on management's ability to raise additional capital through debt or equity financings. Recent Developments As a result of the developments with NEXT and the commercial interest in its antenna products, specifically the first commercial order that will result in revenue, the Registrant presently intends to focus substantially all of its resources on the commercialization and sales of the NEXT antenna products. SUBSIDIARIES NEXTANTENNAS.COM, INC. Company Background NextAntennas.Com, Inc. ("NEXT"), a wholly-owned subsidiary of the Registrant, was incorporated in the State of Delaware on November 2, 1999, for the purpose of developing and commercializing new antenna technologies. The focus of NEXT will be to continue to develop and commercialize new antenna technologies which will meet the needs of the wireless telecommunications industry. 2 The Antenna Industry NEXT has developed six new antenna designs for use in different wireless technology markets. NEXT Antenna Technologies The Registrant's subsidiary, NEXT, has developed the following six new antennae designs: o the "GPS" antenna is used in radio receivers on the ground to receive 1.5 GHz signals from global positioning satellites orbiting the earth at an altitude of approximately 23,000 miles; o the "LEO" antenna is used for the VHF function in radio transmitters/receivers on the ground, to transmit/receive signals in the 145 MHz frequency range to Low Earth Orbit satellites, orbiting the earth at an approximate altitude of 450 miles; o the "GPS/LEO" antenna, as the name indicates is a dual purpose antenna; o the "CDPD" antenna is used in transmission/reception of signals in the 824-894MHz/1.5MHz range. The Cellular Digital Packet Data network is currently one technology on the market today which facilitates wireless internet access; and o the "GPS/CDPD" antenna, as the name indicates is a dual purpose antenna; o the "portable phone" antenna is used in cellular and cordless phones, transmitting and receiving signals in the 820 MHz to 960 MHz range as well as the 1.5 GHz frequency range. The research and development costs associated with the development of these new "antenna solutions" has been funded by the Registrant. The PGS antenna is for use with asset "tracking" and/or location identification technologies. The FCC has mandated that by 2002, US wireless carriers provide their subscribers with the technology that will enable the carrier to identify the subscriber's location in the event of an emergency such as a vehicle crash in which the occupant is injured and possibly rendered unconscious. The LEO antenna is for use with asset tracking systems which handles short bursts of data from such assets as shipping containers, tractor trailers and electricity meters. As opposed to the GPS technology which identifies location the LEO technology allows for the transmission of data. Such data would indicate such things as to whether a tractor trailer is full, the doors are open, or even that a refrigeration unit on a trailer is malfunctioning. The CDPD antenna is for use in wireless internet access technologies. The "portable phone" antenna is for use in digital cordless phones and cellular phones operating in the 920MHz and 820-890MHz frequency ranges respectively. 3 Patents on NEXT Antenna Products The Registrant has completed a patent review of each of these technologies and has commenced preparation of U.S. patent applications, three of which have been filed (two applications have been assigned U.S. Provisional Patent Application Serial Nos. 60/168,732 and 60/168,775, the third application has not yet been assigned a serial number). No assurances can be given that the Registrant will be granted any patents on its technologies; however, in the event that patents are not granted, NEXT will continue to attempt to commercialize these technologies without the protection of a patent. In the event that any patents are issued, NEXT will have the exclusive right to use in the U.S. the antenna design(s) described in each issued patent for the 20-year life of the patent. Product Manufacturing and Distribution NEXT is not in the manufacturing business. NEXT relies on third-party manufacturing companies to manufacture NEXT'S antenna products on a timely basis, while protecting the intellectual properties of NEXT'S products and providing the customer with a high quality product. NEXT antenna products will not be sold directly to the general public, but rather to businesses and manufacturers who will buy in large quantities and use the antennas in their products. Barriers to Entry into Market Segment In the antenna market, the Registrant will be competing with other established antenna providers that are much larger and better capitalized than the Registrant. In order to compete, management believes that the Registrant must demonstrate to potential users that the NEXT antenna products have an advantage over other antennas on the market in terms of performance and cost. EMERGENT TECHNOLOGIES CORP. Company Background Emergent Technologies Corp. ("Emergent") was incorporated in the State of West Virginia on September 29, 1995 for the purpose of developing the Contrawound Toroidal Helical Antenna ("CTHA") for commercialization to government and/or military applications worldwide. Emergent's rights to commercialize the CTHA technology is limited to these applications. The CTHA technology was created at the Center for Industrial Research Applications ("CIRA"), a research center run by West Virginia University Research Corporation ("WVURC"), which is a subsidiary of West Virginia University ("WVU"). The technology was developed by students at WVU under the direction of Dr. James Smith, who is a Director of CIRA and a professor at WVU and is also a co-founder of the Registrant. The exclusive rights to commercialize the CTHA technology were licensed by WVURC to a private company called Integral Concepts, Inc., which is wholly-owned by Dr. Smith. On January 2, 1996, Integral Concepts sublicensed the exclusive, worldwide rights to commercialize the CTHA technology for governmental and military applications to Emergent, which was at that time owned by Dr. Smith and Denzil Jack Parson, who is presently a director of the Registrant. Pursuant to the sublicense agreement, a modest annual minimum royalty payment is due from Emergent to Integral Concepts. On March 1, 1996, the Registrant acquired a 10% equity interest in Emergent from Emergent in exchange for $100,000. By an agreement dated December 10, 1997, the Registrant acquired an additional 70% equity interest in Emergent from Messrs. Smith and Parsons (which represented 100% of their ownership of Emergent) in exchange for 1,800,000 shares of common stock of the Registrant (see "Item 7. Certain Relationships and Related Transactions" below for additional details), which resulted in the Registrant owning 80% of Emergent. Presently, the Registrant owns 76.625% of Emergent, as a result of the conversion of promissory notes into shares of common stock of Emergent by non-affiliated minority shareholders of Emergent. 4 Product Development and Proprietary Rights The patented CTHA technology was initially developed and patented at WVU in 1994. The first antennae were made by hand from wood, plastic, rope, wires, and duct tape. Over time, the antenna took on different shapes and sizes and many different materials were used. The CTHA technology has received patent protection, with WVU as assignee, under US Patent numbers 5,654,723 dated August 5, 1997 and 5,442,369 dated August 15, 1995. Concurrent with the physical development, the research team at Emergent created a computer model to simulate and predict the behavior of the CTHA. This model offers a numerical benchmark against which observations can be weighed. In 1997, researchers at Emergent developed a circuit-board-based CTHA which can be printed directly onto radio printed circuit boards. Research over the past three years was conducted both within WVU and at the Emergent labs. Since the inception of Emergent in September of 1995, almost $2 million has been spent on CTHA research and development. Product Description The CTHA is a low profile antenna which has a toroidal (donut-shaped) surface and a cross-polarized field pattern. This is a radical change in design when compared to traditional antennas, and allows the CTHA to emit and receive a signal that is omni-directional, allowing it to operate with equal efficiency regardless of position or orientation. Competitive Comparison The CTHA will be competing with monopole and dipole antennae. Monopoles and dipoles are the long pieces of wire with which we are all familiar. The length of the wire depends on the frequency being used and the sensitivity required. Using conventional technology, cellular telephone antennae are about six inches long, AM/FM antennae are about two feet long, while HF (high frequency) antennae are up to 100 feet long. Since the CTHA is an omni-directional radiator, it will not be competing for the fixed-system point-to-point market dominated by highly-directional antennae. Emergent's rights to commercialize the CTHA technology are limited to government and/or military applications worldwide. While several U.S. governmental agencies and military contractors have been testing prototypes of the CTHA for various applications, the time delays caused by the requirement to comply with governmental and military specifications and procedures have been significant, and there is no way for the Registrant to predict when or if revenue will 5 be realized. There is also the possibility that additional research and development will be required. While the Registrant is waiting for further feedback from these agencies and contractors, the Registrant is directing only minimal resources on the commercialization of this technology. INTEGRAL VISION SYSTEMS INC. Company Background Integral Vision Systems Inc. ("Integral Vision") was incorporated in the State of West Virginia on January 20, 1994, for the purpose of researching, developing and commercializing Color Machine Vision technology, which is described below. The Color Machine Vision technology was created at the Center for Industrial Research Applications ("CIRA"), a research center run by West Virginia University Research Corporation ("WVURC"), which is a subsidiary of West Virginia University ("WVU"). This technology was developed by students at WVU under the direction of Dr. James Smith, who is a Director of CIRA and a professor at WVU and was also a co-founder of the Registrant. The exclusive rights to commercialize this technology was licensed by WVURC to a private company called Integral Concepts, Inc., which is wholly owned by Dr. Smith. On February 5, 1994, Integral Concepts sublicensed the exclusive, worldwide (excluding Canada) rights to commercialize this technology to Integral Vision, which was at that time owned by Mr. Smith and two other persons. Pursuant to the sublicense agreement, a modest annual minimum royalty payment is due from Integral Vision to Integral Concepts. In March 1997, the Registrant acquired a 100% equity interest in Integral Vision from Dr. Smith and two other persons in exchange for 100,000 shares of common stock of the Registrant (see "Item 7. Certain Relationships and Related Transactions" below for additional details). A. 3D Machine Vision Colorimetry (Ensures Color Quality Control in a Manufacturing Environment). Originally licensed to Integral Concepts from WVU on January 19, 1993, all worldwide (excluding Canada) commercialization rights to the 3D machine vision colorimetry technology were sub-licensed to Integral Vision on February 15, 1994. Development and Proprietary Rights The 3D Machine Vision Colorimetry technology is protected by US patent number 5,485,429 issued on February 27, 1996. Product Description The 3D Color Machine Vision is a system whereby computers can be given "eyesight" to look for specific physical events or characteristics. For instance, the system can be programmed to detect color inconsistencies, or to detect optical inconsistencies in glass and plastic manufacturing processes. In addition, the system uses extremely sophisticated pattern detection and analysis, which can be used to find camouflaged shapes and patterns. The unit is a combination of generic hardware (mini-lasers and computer processors) and proprietary software. The scanning and analysis process is patented. The Market This technology is intended to be used to ensure the color consistency of any product that comes off a production line. 6 Commercialization Objective Management believes that additional research and development will be required before the 3D Color Machine Vision Technology will be ready for commercialization. Currently the Registrant is directing minimal resources on this technology due to the Registrant's financial situation and limited resources, but is seeking strategic partners who would be interested in financing the commercialization of this technology. Competitive Comparison Examples of existing machine vision products include photoelectric counters, laser measurement systems, and product speed calibration systems. Management believes that none of these systems have the ability to perform qualitative analysis on the objects in real time. The color machine vision market is segmented along two lines: o Spectrophotometers - devices which measure the ratio of reflected light to incident light for one or many wavelengths in the visible spectrum; but work only on flat surfaces. o Human observers - still the preferred method despite obvious shortcomings. B. 2D Color Machine Vision (Counterfeit Currency/Document Detection) Development and Proprietary Rights Originally licensed to Integral Concepts from WVU, on January 19, 1993, all worldwide (excluding Canada) commercialization rights were sub-licensed to the Registrant on February 15, 1994. Product Description The 2D Color Machine Vision system is a small, laser-based computerized device which can be programmed to scan and validate printed documents, including currencies, passports, tickets, and other secure or valuable documents. The unique algorithms employed by the system make it possible to even allow for wear and tear and fading. The entire device can be produced in a package roughly the size of a credit card swipe unit. Scan rates of up to 1 per second have been achieved in early prototypes; speeds of 10 per second are thought possible within a year. The unit is a combination of generic hardware (mini-lasers and computer processors) and proprietary software. The Market This device employs spectral analysis and sophisticated numerical algorithms. As a digital device, the Registrant's counterfeit detector can be programmed and reprogrammed to change its processes. 7 Commercialization Objective Management believes that additional research and development will be required before the 2D Color Machine Vision Technology will be ready for commercialization. Currently the Registrant is directing minimal resources on this technology due to the Registrant's financial situation and limited resources, but is seeking strategic partners who would be interested in financing the commercialization of this technology. Competitive Comparison Currently available counterfeit detection instruments fall into these broad categories: o Chemical agents which react with the paper o Devices which identify specific ink taggants (additives), usually metallic o Devices which identify magnetic elements in the printed document The Registrant's device relies on patented sophisticated spectral analysis processes. The unit can be programmed to analyze any printed document. A multi-function system is planned which would allow a single scanner to be used for multiple currency and documents. Technology Under License Directly By The Registrant The Registrant has directly (rather than through subsidiaries) acquired the rights to commercialize the RF Plasma Ignition System technology, which is described below. This technology was created at the Center for Industrial Research Applications ("CIRA"), a research center run by West Virginia University Research Corporation ("WVURC"), which is a subsidiary of West Virginia University ("WVU"). This technology was developed by students at WVU under the direction of Dr. James Smith, who is a Director of CIRA and a professor at WVU and was also a co-founder of the Registrant. The exclusive rights to commercialize this technology were licensed by WVURC to a private company called Integral Concepts, Inc., which is wholly owned by Dr. Smith. On February 15, 1996, Integral Concepts sublicensed the exclusive, worldwide rights to commercialize these technologies to the Registrant. Pursuant to the sublicense agreements, a modest annual minimum royalty payment is due from Integral Vision to Integral Concepts. RF Plasma Ignition System (New Spark Plug) Originally licensed to Integral Concepts from WVU on April 12, 1994, all worldwide commercialization rights to the RF Plasma Injection System were sub-licensed to the Registrant on February 15, 1996. Development and Proprietary Rights The RF Plasma Injection System technology is protected by US patent number 5,361,737 issued on November 8, 1994. Product Description Using a patented process, microwave radio frequency emissions create a plasma at the end of the emitter. A plasma is a small cloud of ions. It appears to the eye as an electrical flame. The size of the plasma is in relation to the power applied and the size of the emitter. The plasma can be created instantaneously, or held for a sustained period and can be produced in mid-air, in a combustion cylinder, a smokestack, etc. 8 The Market In the opinion of management, the technology could offer an alternative to conventional sparkplugs used in combustion engines. The emitter would be manufactured to resemble the structure of a conventional spark plug. The conventional electronic ignition system would be modified to activate the RF-generation system, which would then send energy to the emitters. The technology can also be used to produce and sustain a large plasma area. Such large plasmas can be used for electronics cleaning, smokestack scrubbing operations, and other industrial applications. Commercialization Objective Management believes that additional research and development will be required before the RF Plasma Ignition System will be ready for commercialization. Currently the Registrant is directing minimal resources on this technology due to the Registrant's financial situation and limited resources, but is seeking strategic partners who would be interested in financing the commercialization of this technology. Employees The Registrant and its subsidiaries currently employ a total of nine people. Two of these employees are officers of the Registrant and are responsible for sales, marketing and business development, three of these people are responsible for general and administrative functions, and four of these employees are engaged in research and development activities. Research and development activities are conducted primarily by four employees. However, the Registrant also relies on the expertise of several technical advisors who are consulted as needed on a part-time, contract basis. Please see Item 5 below for additional information on each of the Registrant's officers and its significant employees, consultants and advisors. 9 ITEM 2. PLAN OF OPERATION As a development stage company, the Registrant has had no revenues from inception (February 12, 1996) through the end of the first quarter of its current fiscal year (September 30, 1999), and has incurred a net loss of approximately $3.7 million for that period. To date, the Registrant has relied on loans from management and management's ability to raise capital through debt and equity private placement financings to fund its operations. The current financial condition of the Registrant raises doubt as to its ability to continue as a going concern. In December 1999, NextAntennas.com, Inc. ("NEXT"), a subsidiary of the Registrant, received its first commercial, revenue-generating order for its GPS/LEOS antenna (a detailed description of NEXT and its antenna products is set forth in Item 1 under the subsection entitled "NextAntennas.com, Inc.") from ARINC, Inc., an operator of communication and processing systems for the aviation and transportation industry. The Registrant expects that this order will be filled and revenue of approximately $180,000 will be recorded for this first time in the third fiscal quarter of the current fiscal year (approximately February 2000). The terms of the order required a 35% deposit, which has been received, and the balance due within 15 days after delivery. Management has had approximately six meetings and multiple telephonic conversations with ARINC, and ARINC has indicated verbally that the pending order represents approximately one-fourth of the number of NEXT's GPS/LEOS antennas that ARINC anticipates ordering during the calendar year 2000. ARINC indicated that it anticipates ordering additional antennas in subsequent years, but did not discuss specific terms or requirements with management. Although there is currently no written contract with ARINC and no assurances can be given, in the opinion of management, based upon its discussions with ARINC, NEXT will receive orders for an additional $500,000 of antennas from ARINC during calendar 2000, on similar terms to the pending order. Presently, management projects that its cash requirements over the next twelve months will be approximately $100,000 per month. Management believes that it can satisfy its cash requirements until approximately May 2000 based on current cash reserves, after which time it will either need to raise additional funds or realize additional revenue from the sales of its products sufficient to meet these cash requirements. If it is necessary to raise additional funds sufficient to meet cash requirements after May 2000, management believes that it will be able to raise sufficient funds through a private placement of common stock with a few interested investors. Of course, no assurances can be given that management will in fact be successful in securing any such financing. Although no assurances can be given, management believes that, based on the existing antenna order and potential future orders from ARINC as described above, revenues from the sales of NEXT antenna products will allow the Registrant to meet some of its projected cash needs of approximately $1.2 million over the next twelve months. However, unless additional sales are made and additional revenue is received on an ongoing basis, the Registrant will not be able to meet all of its cash needs during the next twelve months or thereafter, and the Registrant will need to continue to rely on management's ability to raise additional capital through debt or equity financings. In anticipation of the possibility that more funds than originally projected will be required to enable the Registrant to fulfill future antenna orders on a timely basis, management has begun negotiating with a merchant banking institution for an equity line of credit that would allow the Registrant to sell shares of common stock to the investor from time to time, and the investor would be obligated to purchase the shares, up to a maximum amount. However, no firm agreement has been made and no assurances can be given that the Registrant will be able to secure this type of financing. As a result of the developments with NEXT and the commercial interest in its antenna products, specifically the first commercial order that will result in revenue, the Registrant presently intends to focus substantially all of its resources on the commercialization and sales of the NEXT antenna products. As a result, the Registrant will devote only a limited amount of its resources on the research, development and commercialization of its other technologies during the next twelve months. While management believes that each of the NEXT antenna products is ready to be commercialized, ongoing research and development will be necessary over the next twelve months and will be focused on adapting and "fine-tuning" the antenna products for different applications and uses. The Registrant anticipates spending approximately $500,000 over the next twelve months on this ongoing research and development. Also, the Registrant has filed three provisional patent applications with the U.S. patent 10 office for various NEXT antenna products, and anticipates filing additional provisional patent applications as warranted over the next twelve months. The Registrant is not in the manufacturing business and does not expect to make any capital purchases of a manufacturing plant or significant equipment in the next twelve months. The Registrant will be relying on contract manufacturers to produce the antenna products. During the next twelve months, the Registrant does not expect any significant changes in the number of employees, but may add one or two qualified sales people, if the Registrant is in a financial position to do so. The most significant current liabilities relate to salaries and consulting fees. In the event that the Registrant is not able to pay these current liabilities as they become due, the Registrant will be unable to retain key personnel who are responsible for research, development and marketing. These functions are critical to the operations of the Registrant. Various factors affecting the Registrant and its subsidiaries raise doubt as to their ability to continue as a going concern. There can be no assurance that the Company will be able to continue as a going concern, or achieve material revenues and profitable operations. As described above, the Registrant may require additional financing. If required, no assurances can be given that financing will be available to the Registrant in the amounts required, or that, if available, the financing will be available on terms satisfactory to the Registrant. ITEM 3. DESCRIPTION OF PROPERTY Neither the Registrant nor its subsidiaries own any real property. The Registrant and its subsidiaries lease office space in Vancouver, B.C., Canada, Bellingham, Washington, and Mt. Clare, West Virginia, respectively. 11 ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A. Common Stock The following table sets forth, as of January 24, 2000, the stock ownership of each person known by the Registrant to be the beneficial owner of five percent or more of the Registrant's common stock, each Officer and Director individually and all Directors and Officers of the Registrant as a group. Each person is believed to have sole voting and investment power over the shares except as noted.
Name and Address of Amount and Nature of Beneficial Owner (1) Beneficial Ownership(1)(2) Percent of Class (3) - -------------------- -------------------------- -------------------- William S. Robinson (4) #3 - 1070 West Pender St. Vancouver, B.C. V6E 2N7 1,958,533 8.5% William A. Ince (5) #3 - 1070 West Pender St. Vancouver, B.C. V6E 2N7 1,863,333 8.1% James Smith Route 4, Box E36 Bruceton Mills, WV 26330 1,857,140 8.2% Denzel Jack Parsons 209 Joy Lane Bridgeport, WV 26330 1,250,000 5.5% All officers and directors of the Registrant as a group (3 persons) 5,071,866 21.6%
(1) Unless otherwise indicated, all shares are directly beneficially owned and investing power is held by the persons named. (2) Includes vested options beneficially owned but not yet exercised and outstanding. The table does not include the effects of conversion by Mr. Robinson and Mr. Ince of their shares of Series A Convertible Preferred Stock, which are convertible into shares of common stock at a conversion rate that varies with the market price of the common stock at the time of conversion. The conversion rate is determined by dividing the number of shares of Series A being converted by the average of the high and low bid prices of the Registrant's common stock reported by the OTC Bulletin Board over the ten trading days preceding the date of conversion. As of January 24, 2000, the conversion rate was $.9928, so the 442,197 shares of Series A owned by Mr. Robinson were convertible into 445,404 shares of common stock, and the 212,213 shares of Series A owned by Mr. Ince were convertible into 213,752 shares of common stock. The actual number of shares of common stock receivable by Messrs. Robinson and Ince upon conversion would depend on the actual conversion rate in effect at the time of conversion. (3) Based upon 22,542,062 shares issued and outstanding, plus the amount of shares each person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. (4) Mr. Robinson is an officer and director of the Registrant and each of its subsidiaries. Beneficial ownership figure includes 450,000 shares underlying options granted but not yet exercised. (5) Mr. Ince is an officer and director of the Registrant and each of its subsidiaries. Beneficial ownership figure includes 450,000 shares underlying options granted but not yet exercised. 12 B. Series A Convertible Preferred Stock The following table sets forth, as of January 24, 2000, the stock ownership of each person known by the Registrant to be the beneficial owner of five percent or more of the Registrant's Series A Convertible Preferred Stock, each Officer and Director individually and all Directors and Officers of the Registrant as a group. Each person is believed to have sole voting and investment power over the shares except as noted.
Name and Address of Amount and Nature of Beneficial Owner (1) Beneficial Ownership(1) Percent of Class (2) - -------------------- ----------------------- -------------------- William S. Robinson (3) #3 - 1070 West Pender St. Vancouver, B.C. V6E 2N7 442,197 67.6% William A. Ince (4) #3 - 1070 West Pender St. Vancouver, B.C. V6E 2N7 212,213 32.4% All officers and directors of the Registrant as a group (2 persons) 654,410 100%
(1) Unless otherwise indicated, all shares are directly beneficially owned and investing power is held by the persons named. (2) Based upon 654,410 Series A Convertible Preferred shares issued and outstanding. (3) Mr. Robinson is an officer and director of the Registrant and each of its subsidiaries. (4) Mr. Ince is an officer and director of the Registrant and each of its subsidiaries. 13 ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS (a) Directors and Executive Officers of Registrant. The Registrant has a Board of Directors which is currently comprised of three members. Each director holds office until the next annual meeting of shareholders or until a successor is elected or appointed. The members of the Board and the executive officers of the Registrant and their respective age and position are as follows:
Director of Name Age Position with Registrant Registrant Since - ---- --- ------------------------ ---------------- William S. Robinson 43 Chairman, CEO and Treasurer February 1996 William A. Ince 49 Director, President, Secretary and Chief February 1996 Financial Officer Denzel Jack Parsons 53 Director October 4, 1999
(b) Directors and Executive Officers of NEXT. The Registrant's subsidiary, NEXT, has a Board of Directors which is comprised of two members who hold office until the next annual meeting of shareholders or until a successor is elected or appointed. The members of the Board and the executive officers of NEXT and their respective age and position are as follows:
Director of Name Age Position with NEXT NEXT Since - ---- --- ------------------ ------------- William S. Robinson 43 Chairman, CEO and Treasurer November 1999 William A. Ince 49 Director, President, Secretary and Chief November 1999 Financial Officer
(c) Directors and Executive Officers of Emergent. The Registrant's subsidiary, Emergent, has a Board of Directors which is comprised of three members. Each director holds office until the next annual meeting of shareholders or until a successor is elected or appointed. The members of the Board and the executive officers of Emergent and their respective age and position are as follows:
Director of Name Age Position with Emergent Emergent Since - ---- --- ---------------------- -------------- Denzel Jack Parsons 53 Director and President October 1995 William S. Robinson 43 Director and Treasurer December 1997 William A. Ince 49 Director and Secretary December 1997
14 (d) Directors and Executive Officers of Integral Vision. The Registrant's subsidiary, Integral Vision, has a Board of Directors which is comprised of two members. Each director holds office until the next annual meeting of shareholders or until a successor is elected or appointed. The members of the Board and the executive officers of Integral Vision and their respective age and position are as follows:
Director of Integral Vision Name Age Position with Integral Vision Since - ---- --- ----------------------------- --------------- William S. Robinson 43 Chairman, CEO and Treasurer March 11, 1997 William A. Ince 49 Director, President, Secretary and Chief March 11, 1997 Financial Officer
(b) Family Relationships. None. (c) Involvement in Certain Legal Proceedings. None. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT WILLIAM ROBINSON: (CHAIRMAN AND CEO): As a co-founder, and significant shareholder of the Registrant, Mr. Robinson has been responsible since the inception of the Registrant of securing funding, including the commitment of personal funds, in order to ensure the ongoing operations of the Registrant and its subsidiaries. Together with Mr. Ince, he has been responsible for the development and implementation of corporate strategies. During the period 1988 to 1996, Mr. Robinson was President of Achieva Development Corporation. Achieva is a mining company with properties located in various counties throughout the world. Mr. Robinson brings many years of management experience in finance, banking and corporate development. Previously, he acted as a director of a number of private and public companies involved in natural resources, sales and marketing, and computer technologies. WILLIAM A. INCE: (DIRECTOR, PRESIDENT, SECRETARY AND CHIEF FINANCIAL OFFICER): Mr. Ince, a co-founder and significant shareholder of the Registrant, is responsible, along with Mr. Robinson for the development and implementation of corporate strategies. He is responsible for cash management of the Registrant and its subsidiaries. Prior to his engagement with the Registrant, Mr. Ince was a self-employed management consultant for a period of five years. Mr. Ince brings with him a background as a professional accountant and experience from management positions in finance and operations in several private companies. He has held significant equity positions in companies in various industries. He has consulted to both private and public companies in the areas of marketing and finance, as well as turn-around situations. Mr. Ince has been responsible for "team building" efforts to ensure that each project is brought to fruition on a timely basis. JACK PARSONS (DIRECTOR): Mr. Parsons' career began as a member of the US Army Special Forces from 1967-1981, serving in multiple countries, including Vietnam. From 1981 to 1987, Mr. Parsons served in numerous leadership roles with the Joint Communications Unit, including Requirements Manager for the Communications Enhancement Program for Joint Special Operations Forces. Following military retirement, as a program manager for Tracor Inc., Mr. Parsons established and managed the Field Technical Unit for the direct support to US Joint Special Operations Forces. In his role with Tracor, Mr. Parsons was responsible for the development and fielding of Light Weight Deployable Communications 15 and Table Top Base Station for Special Forces' use. Mr. Parsons led the deployment of these systems in support of Operation Desert Storm. In 1991, Mr. Parsons established Wintec, Inc. to provide engineering development services to the government base, relying on his knowledge of government contract and procurement procedures. Wintec has secured, and continues to secure, multi-million dollar, multi-year contracts with the Department of Defense. In 1995, Mr. Parsons left Wintec and has since served as President of the Registrant's subsidiary, Emergent. SIGNIFICANT EMPLOYEES, CONSULTANTS AND ADVISORS ROBERT M. CALIS (GENERAL MANAGER; INTEGRAL, VICE PRESIDENT, SALES AND MARKETING NEXT): The Company has retained Mr. Calis as General Manager to Integral and as Vice President, Sales and Marketing of Integral's subsidiary, NEXT. Mr. Calis will assist Mr. Robinson and Mr. Ince in their efforts to move the Company forward through the commercialization of the technologies in which it has an interest. Mr. Calis' background includes over 12 years of successful experience in the telecommunications industry in the areas of invisioneering, business development, marketing, operations, product management, sales and financial management. Most recently, Mr. Calis was President and CEO of Inevitable Technologies Inc., a leading supplier and developer of collaborative Video Conferencing Systems. In his role of General Manager and Managing Director, Mr. Calis will initially develop and assist in the execution of a cohesive marketing effort for the commercialization of NEXT's antenna products and technologies. Mr. Calis will also assist the Company in the identification of potential strategic partners and licensees for its other technologies. DANIEL HARRELL (VICE PRESIDENT PRODUCT DEVELOPMENT AND OPERATIONS, NEXT): Mr. Harrell is responsible for directing the daily activities of the development team, in its research and development activities, in order to meet the market needs. In addition, he is responsible for identification of new products, and subsequently moving them from the conceptual to production stage. Mr. Harrell enjoyed a 17 year career with the US Army. In his 8 year engagement with HQ US Southcom, he was stationed in Panama. During his engagement as Site Commander, Project Officer and Intelligence Collector, he received the Joint Merious Service medal for outstanding performance during "Operation Just Cause" in Panama. During his last 4 years in the military, Mr. Harrell was Director of Operations/Program Manager at HQ USA INSCOM, Ft. Belvoir, Virginia. In his capacity, he planned, executed and managed a $4 million annual budget to include a $1 million operational budget. He significantly improved resource utilization during a period of fiscal reduction and reduced manpower. THOR LARSEN: (VICE PRESIDENT INTELLECTUAL PROPERTY INTEGRAL AND NEXT): Mr. Larsen brings to Integral and specifically, its new antenna technologies, valuable insight into the potential role of these antennas in the telecommunications industry and the possibilities for its technological marriage with other evolving wireless technologies. Another role for Mr. Larsen will be to protect the proprietary nature of the new antenna technologies developed by Integral and its subsidiaries. He will assist the Registrant in drafting documents for patent applications. Mr. Larsen's career with IBM began in 1962 after his graduation from Columbia University with a Masters of Science in Electrical Engineering. During his career with IBM, he has been involved in a variety of projects with the focus being on developing and implementing leading edge technologies which provide for advancements in the data communication industry. He has been granted eleven US patents. Since 1986, Mr. Larsen held the position of Senior Technical Staff Member at IBM. From 1995 until his 16 retirement from IBM on February 28, 1999, he has been responsible for developing new application for IBM's silicon germanium technology in wireless and wired communications. ABRAHAM WEI: Mr. Wei serves as an advisor to the Registrant on a variety of issues relating to market opportunities, product manufacturing and ongoing corporate development of the company. As the CEO and founder of V-Packet.Com, Inc., Mr. Wei brings 15 years of diverse business experience in engineering, manufacturing and sales in the networking industry. Mr. Wei has held various positions with increasing scope and responsibility over the past 7 years at Ascend Communications, Inc. most recently as Vice President, Worldwide Sales Operations. Prior to this, Mr. Wei held the position of Vice President of Manufacturing Operations for Ascend in which he managed Ascend's manufacturing operations throughout the Company's astronomical growth from $40.0 million in sales in 1994 to $1.2 billion in sales in 1997. As a former Director of Ascend Communications, Mr. Wei maintains a personal and professional relationship with the executive management of Ascend. Mr. Wei holds an MBA from Pepperdine University and Bachelor of Science degree in Computer Science University of California, Berkley. Mr. Wei participated in Ascend's successful initial public offering in 1994. RICHARD SLEZAK: Mr. Slezak continues to advise the Registrant on a variety of issues relating to market opportunities and ongoing corporate development of the Company. Mr. Slezak manages the Enterprise Networking Unit product portfolio including routers, ATM, VPN and Enterprise Network Switch products worldwide for Lucent Technologies, Inc. Prior to his engagement at Lucent, Mr. Slezak spent over twenty years at AT&T. In his last position there he had managed the Advanced Intelligent Networks business with annual revenues of over $600 million. Mr. Slezak holds an MBA in International Business from the University of Pittsburgh and is an Advisory Board Member of Telecommunications Magazine. 17 ITEM 6. EXECUTIVE COMPENSATION (a) General The following information discloses all plan and non-plan compensation awarded to, earned by, or paid to the executive officers of the Registrant for all services rendered in all capacities to the Registrant and its subsidiaries. No executive officer of the Registrant or its subsidiaries received a total annual salary and bonus exceeding $100,000 for the fiscal year ended June 30, 1999, or otherwise meets the reporting requirements of Item 402 of Regulation S-B. (b) Summary Compensation Table The following table The following table sets forth all compensation, including bonuses, stock option awards and other payments, paid or accrued by the Registrant and/or its subsidiaries, during the fiscal years ended June 30, 1999, 1998 and 1997 to or for the Registrant's Chief Executive Officer and each of the other executive officers of the Registrant.
Annual Compensation ----------------------------------------------- (a) (b) (c) (d) (e) Name Other And Year Annual Principal Ended Salary Bonus Compensation Position June 30 ($) ($) ($) --------- ------- -------- ----- ------------ William S. Robinson, 1999 $105,000 -0- -0- Director, Chairman, 1998 $ 90,000 -0- -0- CEO, Treasurer (n1) 1997 -0- -0- -0- William A. Ince, 1999 $105,000 -0- -0- Director, President, 1998 $ 90,000 -0- -0- Secretary, (n2) 1997 $ 32,476 -0- -0-
(n1) Pursuant to an employment agreement entered into between the Registrant and William Robinson, accrued salary for the fiscal year end June 30, 1999 was $105,000, of which no payments were made; and accrued salary for the fiscal year end June 30, 1998 was $90,000, of which no payments were made. Portions of Mr. Robinson's accrued salary were converted into shares common stock of the Registrant. In April 1999, Mr. Robinson received 333,333 shares of common stock in lieu of $50,000 salaries accrued in fiscal year ending June 30, 1998. Subsequent to fiscal year end, the balance of Mr. Robinson's accrued salary was converted into shares of Series A Convertible Preferred Stock. In September 1999, Mr. Robinson received 175,000 shares of Series A in lieu of $175,000 in accrued salaries. See, Item 4, Sales of Unregistered Securities, subparagraph (n). (n2) Pursuant to an employment agreement entered into between the Registrant and William Ince, accrued salary for the fiscal year end June 30, 1999 was $105,000, of which no payments were made; and accrued salary for the fiscal year end June 30, 1998 was $90,000, of which payments of $9,100 were made and $89,900 was accrued. Portions of Mr. Ince's accrued salary were converted into shares common stock of the Registrant. In April 1999, Mr. Ince received 333,333 shares of common stock in lieu of $50,000 salaries accrued in fiscal year ending June 30, 1998. Subsequent to fiscal year end, the balance of Mr. Ince's accrued salary was converted into shares of Series A Convertible Preferred Stock. In September 1999, Mr. Ince received 175,000 shares of Series A in lieu of $175,000 in accrued salaries. See, Item 4, Sales of Unregistered Securities, subparagraph (n). 18
Long Term Compensation -------------------------------------------- Awards Payouts ----------------------------- ------- (a) (b) (f) (g) (h) (i) Name Restricted And Year Stock Shares LTIP All Other Principal Ended Award(s) Underlying Payouts Compensation Position June 30 ($) Options ($) ($) --------- ------- ---------- ----------- ------- ------------ William S. Robinson, 1999 -0- 230,000(n1) -0- -0- Chairman, CEO, Treasurer 1998 -0- -0- -0- -0- 1997 -0- 230,000 -0- -0- William A. Ince, 1999 -0- 230,000(n1) -0- -0- Director, President, 1998 -0- -0- -0- -0- Secretary, 1997 -0- 230,000 -0- -0-
(n1) 1999 option figures include repriced options previously granted in 1997 and not yet exercised. See details in notes to the following table for Option/SAR Grants In Last Fiscal Year. (c) Option/SAR Grants in Last Fiscal Year The information provided in the table below provides information with respect to individual grants of stock options for the year ended June 30, 1999 to each of the executive officers named in the Summary Compensation Table above. The Registrant did not grant any stock appreciation rights for the year ended June 30, 1999. OPTION/SAR GRANTS IN LAST FISCAL YEAR Individual Grants
(a) (b) (c) (d) (e) % of Total Number of Options/SARS Securities Granted to Underlying Employees Exercise or Options/SARs in Fiscal Base Price Expiration Name Granted (#) Year (n1) ($/Sh) Date ---- ------------ ------------ ----------- ---------- William S. Robinson, 230,000(n2) 10.1% $.15 01/30/01 Chairman, CEO, Treasurer William A. Ince, 230,000(n3) 10.1% $.15 01/30/01 Director, President, Secretary
(n1) The percentage of total options granted (1,635,000) and repriced (630,000) in the fiscal year is based upon all options granted to eligible participants, which includes officers, directors, employees, consultants and advisors, under the Registrant's employee stock option plan in fiscal 1999. (n2) William S. Robinson: Reflects repricing of 230,000 options granted on January 31, 1997, with an original exercise price of $.50 per share, repriced to $.15 per share on January 13, 1999. The options are fully vested. Subsequent to fiscal year end, on August 10, 1999, Mr. 19 Robinson was granted 120,000 options under Registrant's employee stock option plan at an exercise price of $.23, expiring on January 30, 2001, which options are not reflected in the above chart. (n3) William A. Ince: Reflects repricing of 230,000 options granted on January 31, 1997, with an original exercise price of $.50 per share, repriced to $.15 per share on January 13, 1999. The options are fully vested. Subsequent to fiscal year end, on August 10, 1999, Mr. Ince was granted 120,000 options under Registrant's employee stock option plan at an exercise price of $.23, expiring on January 30, 2001, which options are not reflected in the above chart. (d) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values The information provided in the table below provides information with respect to each exercise of stock options during most recent fiscal year by the executive officers named in the Summary Compensation Table and the fiscal year end value of unexercised options.
(a) (b) (c) (d) (e) Number of Value of Securities Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at Shares Value FY-End (#) FY-End($) Acquired on Realized Exercisable/ Exercisable/ Name Exercise (#) ($)(n1) Unexercisable Unexercisable(n1) ---- ------------ -------- --------------------- ----------------- William S. Robinson -0- -0- 230,000/-0- $25,300/-0- Director, Chairman, CEO, Treasurer William A. Ince -0- -0- 230,000/-0- $25,300/-0- Director, President, Secretary,
(n1) The aggregate dollar values in columns (c) and (e) are calculated by determining the difference between the fair market value of the common stock underlying the options and the exercise price of the options at exercise or fiscal year end, respectively. In calculating the dollar value realized upon exercise, the value of any payment of the exercise price is not included. (e) Long-Term Incentive Plans ("LTIP") - Awards in Last Fiscal Year This table has been omitted, as no executive officers named in the Summary Compensation Table above received any awards pursuant to any LTIP during fiscal 1999. (f) Compensation of Directors No compensation was paid by the Registrant to its Directors for any service provided as a Director during the fiscal year ended June 30, 1999. There are no other formal or informal understandings or arrangements relating to compensation; however, Directors may be reimbursed for all reasonable expenses incurred by them in conducting the Registrant's business. These expenses would include out-of-pocket expenses for such items as travel, telephone, and postage. 20 (g) Employment Contracts and Termination of Employment and Change-in-Control Arrangements The Registrant has entered into employment agreements with William S. Robinson and William A. Ince. The term of both employment contracts is for five years beginning July 1, 1997 and ending June 30, 2002. Pursuant to each agreement, annual salary to each of William Robinson and William Ince is as follows: July 1, 1997 to June 30, 1998 $ 90,000 July 1, 1998 to June 30, 1999 $105,000 July 1, 1999 to June 30, 2000 $120,000 July 1, 2000 to June 30, 2001 $120,000 July 1, 2001 to June 30, 2002 $120,000 Pursuant to the employment agreements, in the event the Registrant terminates the employment of the executive without cause, then the executive shall be entitled to severance pay equal to twelve month's base salary based on the base salary then in effect at the termination. In addition, the employment agreements provide that in the event the Registrant is indebted to the executive for a minimum of three months salary, the executive shall have the option to convert such unpaid salary into shares of common stock of the Registrant at market price (average daily closing over the previous month). The Registrant's Board of Directors has complete discretion as to the appropriateness of (a) key-man life insurance, (b) obtaining officer and director liability insurance, (c) employment contracts with and compensation of executive officers and directors, (d) indemnification contracts, and (e) incentive plan to award executive officers and key employees. The Registrant's Board of Directors is responsible for reviewing and determining the annual salary and other compensation of the executive officers and key employees of the Registrant. The goals of the Registrant are to align compensation with business objectives and performance and to enable the Registrant to attract, retain and reward executive officers and other key employees who contribute to the long-term success of the Registrant. The Registrant intends to provide base salaries to its executive officers and key employees sufficient to provide motivation to achieve certain operating goals. Although salaries are not specifically tied into performance, incentive bonuses may be available to certain executive officers and key employees. In the future, executive compensation may include without limitation cash bonuses, stock option grants and stock reward grants. (h) Employee Benefit and Consulting Services Compensation Plan On February 20, 1997, the Registrant adopted an employee benefit and consulting services compensation plan (the "Plan"), which, as amended, covers up to 15% of the shares of the Registrant's outstanding common stock on any given date. Under the Plan, the Registrant may issue common stock and/or options to purchase common stock to certain officers, directors and employees and consultants of the Registrant and its subsidiaries. The purpose of the Plan is to promote the best interests of the Registrant and its shareholders by providing a means of non-cash remuneration to eligible participants who contribute to operating progress and earning power of the Registrant. The Plan is administered by the Registrant's Board of Directors or a committee thereof which has the discretion to determine from time to time the eligible participants to receive an award; the number of shares of stock issuable directly or to be granted pursuant to option; the price at which the option may be exercised or the price per share in cash or cancellation of fees or other payment which the Registrant or its subsidiaries is liable if a direct issue of stock and all other terms on which each option shall be granted. As of the fiscal year ended June 30, 1999, options to acquire 3,300,000 shares covered by the Plan were outstanding, all at exercise prices ranging from $.15 to $2.00 per share, and are fully vested, including grants to the following Officers and Directors of the Registrant to acquire the number of shares indicated: William S. Robinson, 230,000 options at $0.15 per share; and William A. Ince, 230,000 options at $0.15 per share. Shares of common stock issued pursuant to the Plan are deemed to be issued pursuant to Rule 701 of the Securities Act of 1933 and are restricted securities as defined in Rule 144(a)(3) of the Securities Act of 21 1933. Ninety days after the effective date of this registration statement, participants in the Plan, including affiliates, may sell their shares in accordance with the exemption provided by Rule 701 without being bound by the one year holding period under Rule 144(d). ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) On February 16, 1996, in connection with the formation of the Registrant, the following affiliates were issued shares of common stock.
Name Shares Consideration Received ---- ------ ---------------------- William A. Ince 1,500,000 services valued at $15,000 William S. Robinson 1,500,000 cash of $10,000 and services valued at $5,000 Dr. James E. Smith 1,500,000 services valued at $15,000
(b) Between July 1996 and October 1996, the Registrant issued 175,000 shares to each of Dr. James Smith and Denzel Jack Parsons, each being affiliates of the Registrant. These shares were issued for cash at a price of approximately $.11 per share. These transactions were exempt from Registration under Section 504 of Regulation D of the Securities Act of 1933, as amended. (c) Pursuant to an agreement and plan of reorganization between the Registrant and Integral Vision, pursuant to which Integral Vision became a wholly-owned subsidiary of the Registrant, Dr. James Smith was issued 57,140 shares of common stock of the Registrant in exchange for his 57.14% interest in Integral Vision. (d) In February 1997, in anticipation of the Registrant acquiring a controlling interest in Emergent, the Registrant issued 1,800,000 shares of Common Stock, all of which were held in escrow. Prior to closing, the Registrant agreed to release to Denzel Jack Parsons 300,000 shares. Upon closing of the acquisition in April 1999, 300,000 shares were delivered to Dr. James E. Smith, and 1,200,000 shares were delivered to Denzil Jack Parsons. (e) Dr. James E. Smith is a significant shareholder of the Registrant. He is a professor of West Virginia University ("WVU"). Dr. Smith is also the sole shareholder of Integral Concepts. The Registrant is a party to various agreements with Integral Concepts, WVU and the West Virginia University Research Corporation ("WVURC"). On April 12, 1994, WVURC granted an exclusive license to Integral Concepts: (1) to manufacture CTHAs and to license others to do so; and (2) to sublicense others to manufacture, market, sell copies of, license and distribute CTHAs. The consideration for the license was: (1) $1.00 and (2) a royalty of $3,000 per year or 10% of the net revenues received by Integral Concepts whichever is greater. On January 2, 1996, Integral Concepts entered into a sublicense with Registrant's subsidiary, Emergent, wherein Integral Concepts granted to Emergent the exclusive worldwide right to manufacture, sell copies of, sublicense to and distribute the process and equipment related to the design, construction and operation of the CTHA and to further sublicense to others the rights to manufacture, sell copies of, license and distribute the same, to military and government applications worldwide. The term of the license agreement granted by Integral Concepts is perpetual and requires the payment of a minimum annual royalty of $3,000. Further, Emergent will pay a minimum annual royalty of 10% of the net royalties derived from sales, licenses or sublicenses of the CTHA technology with a credit for the minimum royalty. 22 ITEM 8. DESCRIPTION OF SECURITIES (a) Capital Stock The Registrant is presently authorized to issue 50,000,000 shares of its common stock, with a par value of $0.001 per share, and 20,000,000 shares of Preferred Stock, $.001 par value, of which 1,000,000 have been designated as Series A Convertible Preferred. At January 24, 2000, 22,542,062 shares of common stock are issued and outstanding, and 654,410 Series A Convertible Preferred shares are issued and outstanding. (b) Common Stock The holders of the common stock are entitled to one vote per share on each matter submitted to a vote at any meeting of shareholders. Shares of common stock do not carry cumulative voting rights and, therefore, a majority of the outstanding shares of common stock will be able to elect the entire Board of Directors and, if they do so, minority shareholders would not be able to elect any members to the Board of Directors. Shareholders of the Registrant have no preemptive rights to acquire additional shares of common stock or other securities. The common stock is not subject to redemption and carries no subscription or conversion rights. In the event of liquidation of the Registrant, the shares of common stock are entitled to share equally in corporate assets after satisfaction of all liabilities. The outstanding shares of common stock are fully paid and non-assessable. There are no outstanding options, warrants or rights to purchase shares of the Registrant's common stock, other than disclosed in this Registration Statement. (c) Preferred Stock The Registrant's Articles of Incorporation authorize the Registrant to issue 20,000,000 shares of preferred stock, $.001 par value. The preferred stock may be divided into and issued in one or more series as may be determined by resolution of the board of directors. The board of directors is authorized, without any further action by the shareholders, to determine dividend rates, liquidation preferences, redemption provisions, sinking fund provisions, conversion rights, voting rights, and other rights, preferences, privileges and restrictions of any wholly unissued series of preferred stock and the number of shares constituting any such series. In addition, such preferred stock could have other rights, including voting and economic rights senior to the common stock so that the issuance of such preferred stock could adversely affect the market value of the common stock. The creation of one or more series of preferred stock also may have the effect of delaying, deferring or preventing a change in control of the Registrant without any action by shareholders. The Registrant has designated 1,000,000 of the shares of preferred stock as Series A Convertible Preferred Stock, of which 654,410 shares have been issued. Each share of Series A: o has a stated value and liquidation preference of $1.00; o has a 5% annual dividend, payable in cash or shares of common stock; o may be converted into shares of common stock (determined by dividing the number of shares of Series A being converted by the average of the high and low bid prices of the Registrant's common stock reported by the OTC Bulletin Board over the ten trading days preceding the date of conversion); o may be redeemed by the Registrant within one year after issue at $1.50, after one year but less than two years at $2.00, after two years but less than three years at $2.50, after three years but less than four years at $3.00, and after four years but less than five years at $3.50; 23 o may be voted on all matters on an as-converted basis; and o may be voted as a class on any merger, share exchange, recapitalization, dissolution, liquidation or change in control of the Registrant. The details of the dividend rates, liquidation preferences, redemption provisions, conversion rights, voting rights, and other rights, preferences, privileges and restrictions are set forth in the "Designation of Rights and Preferences of Series A Convertible Preferred Stock," that was filed as an amendment to the Registrant's Articles of Incorporation on November 8, 1999. 24 PART II ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is a limited public market for the common stock of the Registrant which historically has traded on the NASD OTC Bulletin Board under the symbol "ITKG" where it has been traded since February 27, 1997. Presently, the common stock of the Registrant is quoted on the NASD "Pink Sheets," but is expected to resume trading on the OTC Bulletin Board after this registration statement has cleared the review of the SEC. The following table sets forth the range of high and low bid quotations for the Company's Common Stock on the OTC Bulletin Board for each quarter of 1998 and 1999.
Low Bid High Bid --------- -------- 1st Qtr. 1998 $ 0.422 $1.422 2nd Qtr. 1998 $ 0.625 $1.313 3rd Qtr. 1998 $ 0.25 $0.906 4th Qtr. 1998 $ 0.125 $0.688 1st Qtr. 1999 $ 0.141 $0.438 2nd Qtr. 1999 $ 0.25 $0.484 3rd Qtr. 1999 $ 0.234 $0.438 4th Qtr 1999 $ 0.34 $1.47
The source of this information is America Online quotation services and broker-dealers making a market in the Company's Common Stock. These prices reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions. As of January 24, 2000, there were approximately 99 holders of record of the Company's Common Stock (this number does not include beneficial owners who hold shares at broker/dealers in "street-name"). To date, the Registrant has not paid any dividends on its common stock and does not expect to declare or pay any dividends on such common stock in the foreseeable future. Payment of any dividends will be dependent upon future earnings, if any, the financial condition of the Registrant, and other factors as deemed relevant by the Registrant's Board of Directors. ITEM 2. LEGAL PROCEEDINGS The Company is not a party to any pending material legal proceeding. Although no litigation is pending, a dispute exists between WVU and the Registrant with respect to the development work performed by WVU on the Plasma Ignition System and Counterfeit Detection Technology. The dispute in the amount of $354,244 relates to the following: o WVU advised the Registrant that development work had been halted as of August 1, 1997, but continued to bill the Registrant for $127,442 in costs for the period August 1, 1997 to December 31, 1999; o WVU billed the Registrant $226,802 for equipment related to the development work done for the Registrant. WVU claims that it is entitled to retain ownership of the equipment while the Registrant believes that title to the equipment should be transferred to the Registrant if the Registrant is to pay for the equipment; and 25 o To date the Registrant has paid $398,434 for development work to WVU, but WVU has failed to deliver required prototypes. Included in current liabilities is the amount of $397,296 owing to WVU for the development of the Plasma Ignition System and the Counterfeit Detection Technology. For the reasons described above, it is the opinion of management of the Registrant that the balance owing to West Virginia University as reflected in these financial statements of $397,296 should be reduced by $354,244 (the amount in dispute), down to $43,052. The effect of this write down of the amount owing to WVU on the Balance Sheet of the Company as at June 30, 1999, would be to reduce current liabilities from $1,009,020 to $654,776, thereby decreasing Stockholders' Deficit from $(547,492) to $(193,248). ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS None. ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES Set forth below is information regarding the issuance and sales of securities of the Registrant without registration since formation of the Registrant. (a) On February 16, 1996 the Registrant issued a total of 6,000,000 shares of Common Stock to four persons who were founders of the Registrant. Of the 6,000,000 shares issued: 1,000,000 shares were issued for $10,000 cash; 1,500,000 were issued for property and equipment valued at $15,000; and 3,500,000 were issued for services valued at $35,000. This transaction did not involve any public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes that issuance of the shares of Common Stock was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. (b) Between July 1996 and October 1996, the Registrant made a private placement of 5,650,000 shares of Common Stock at prices ranging from $.11 to $1.13 per share. Of the 5,650,000 shares issued: 559,000 shares were issued in consideration of services valued at $61,605 ($.11 per share); 5,091,000 shares were issued in consideration of $906,381 in cash. All investors were non-affiliates of the Registrant. This transaction did not involve any public offering and the offering was conducted in accordance with Regulation D of the Securities Act of 1933, as amended. No sales commissions were paid. The Registrant believes that this transaction was exempt from registration under Section 504 of Regulation D of the Securities Act of 1933, as amended. (c) Pursuant to an agreement and plan of reorganization between the Registrant and Integral Vision dated March 11, 1997, pursuant to which Integral Vision became a wholly-owned subsidiary of the Registrant, three persons owning 100% of Integral Vision were issued a total of 100,000 shares of Common Stock of the Registrant (valued at $275,000) in exchange for their interest in Integral Vision. This transaction did not involve any public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes that the transaction was consummated in reliance on Section 4(2) and/or Section 506 of Regulation D of the Securities Act of 1933. (d) In October 1997, the Registrant issued a total of 825,396 shares of its common stock at $0.7875 per share to one person who was not an affiliate of the Registrant, resulting in gross proceeds of $650,000. Commissions of 12% of the gross proceeds ($78,000) were paid to a placement agent. This transaction did not involve any public offering and the offering was conducted in accordance with Regulation D of the Securities Act of 1933, as amended. The Registrant believes that this transaction was exempt from registration under Section 504 of Regulation D. (e) Pursuant to an agreement and plan of reorganization between the Registrant and Emergent dated 26 December 10, 1997, pursuant to which Emergent became a controlled subsidiary of the Registrant, two persons owning 100% of Emergent were issued a total of 1,800,000 shares of Common Stock of the Registrant (valued at $619,200) in exchange for their interest in Emergent. This transaction did not involve any public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes that the transaction was consummated in reliance on Section 4(2) and/or Section 506 of Regulation D of the Securities Act of 1933. (f) In August 1998, the Registrant issued 50,000 shares of its common stock to one person who was not an affiliate of the Registrant for consulting services rendered to the Registrant and valued at $10,000. This transaction did not involve any public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes this transaction was exempt from registration pursuant to Section 4(2) of the Securities Act. (g) In November 1998, the Registrant issued 200,000 shares to two persons who were not affiliates of the Registrant as compensation for services rendered, valued at $39,000. This transaction did not involve any public offering and the offering was conducted in accordance with Regulation D of the Securities Act of 1933, as amended. No sales commissions were paid. The Registrant believes that this transaction was exempt from registration under Section 504 of Regulation D. (h) In December 1998, the Registrant sold 200,000 shares to one person who was not an affiliate of the Registrant for $50,000 cash. This transaction did not involve any public offering and the offering was conducted in accordance with Regulation D of the Securities Act of 1933, as amended. No sales commissions were paid. The Registrant believes that this transaction was exempt from registration under Section 504 of Regulation D. (i) In January 1999, the Registrant issued and sold 1,683,788 shares of common stock to one person in consideration of a $250,000 promissory note. The promissory note was fully-secured, paid interest at the rate of 6% per annum, and was due in two years. By December 1999 the note had been pre-paid in full. This transaction did not involve any public offering and the offering was conducted in accordance with Regulation D of the Securities Act of 1933, as amended. No sales commissions were paid. The Registrant believes that this transaction was exempt from registration under Section 504 of Regulation D. (j) Between January 1999 and March 1999, the Registrant issued and sold Convertible Debentures totaling $600,000. A management fee of 6% ($36,000) was paid in connection with the sale of the Debentures. By July of 1999, the Debentures and all accrued interest had been converted into 4,316,212 shares of common stock. This transaction did not involve any public offering and the offering was conducted in accordance with Regulation D of the Securities Act of 1933, as amended. The Registrant believes that this transaction was exempt from registration under Section 504 of Regulation D. (k) In April 1999, the Registrant issued a total of 666,666 shares of its common stock, 333,333 to each of William S. Robinson and William A. Ince in consideration of management fees owing in the amount of $50,000 to each of William S. Robinson and William A. Ince. Messrs. Robinson and Ince are officers and directors of the Registrant and are therefore considered accredited investors under applicable securities laws. This transaction did not involve any public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes this transaction was exempt from registration pursuant to Section 4(2) of the Securities Act. (l) In April 1999, the Registrant issued a total of 150,000 shares of its common stock (valued at $15,000) jointly to two persons who were not affiliates of the Registrant in settlement of a litigation matter. This transaction did not involve any public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes this transaction was exempt from registration pursuant to Section 4(2) of the Securities Act. (m) In May 1999, the Registrant issued a total of 445,000 shares of its common stock to members of the Registrant's employee benefit and consulting services plan who exercised in April their options previously granted under the plan. The exercise price of the shares issued was between $.15 and $.25 27 per share, and each person paid the exercise price in cash (an aggregate of $80,500). This transaction did not involve any public offering, the securities were issued under a Plan structured in compliance with Rule 701 of the Securities Act, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes that transaction was exempt from registration pursuant to Rule 701 of the Securities Act. (n) In July 1999, the Registrant issued 50,000 shares of its common stock to one person for consulting services rendered to the Registrant and value at $12,500. This transaction did not involve any public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes this transaction was exempt from registration pursuant to Section 4(2) of the Securities Act. (o) In September 1999, the Registrant issued an aggregate 654,401 shares of its Series A Convertible Preferred Stock to officers and directors of the Registrant. William S. Robinson received 175,000 shares of Series A in lieu of $175,000 in accrued salaries through September 30, 1999 and 267,197 shares of Series A in repayment of $267,197 in loans made to the Registrant. William A. Ince received 175,000 shares of Series A in lieu of $175,000 in accrued salaries through September 30, 1999 and 47,213 shares of Series A in repayment of $47,213 in loans made to the Registrant. Messrs. Robinson and Ince are officers and directors of the Registrant and are therefore considered accredited investors under applicable securities laws. This transaction did not involve any public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes this transaction was exempt from registration pursuant to Section 4(2) of the Securities Act. (p) In November 1999, the Registrant issued a total of 405,000 shares of its common stock to members of the Registrant's employee benefit and consulting services plan who exercised in July and September 1999 their options previously granted under the plan. The exercise price of the shares issued ranged between $.15 and $.20 per share, and each person paid the exercise price in cash (an aggregate of $80,750). This transaction did not involve any public offering, the securities were issued under a Plan structured in compliance with Rule 701 of the Securities Act, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Registrant believes that transaction was exempt from registration pursuant to Rule 701 of the Securities Act. ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's Articles of Incorporation and Bylaws provided the Registrant may indemnify a controlling person, officer or director from liability for acting in such capacities, to the full extent permitted by the law of the State of Nevada. The Articles of Incorporation further provide that, to the full extent permitted by the Nevada Corporation Code, as the same exists or may hereafter be amended, a director or officer of the Registrant shall not be liable to the Registrant or its shareholders for monetary damages for breach of fiduciary duty as a director or officer. 28 PART F/S
INDEX PAGE - ----- ---- 1. Audited Consolidated Financial Statements June 30, 1999 and 1998 F-2 2. Unaudited Consolidated Financial Statements September 30, 1999 and 1998 F-18
F-1 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 AND 1998 (U.S. DOLLARS)
INDEX PAGE ----- ---- Report of Independent Accountants F-3 Financial Statements Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Stockholders' Equity (Deficiency) F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-17
F-2 REPORT OF INDEPENDENT ACCOUNTANTS TO THE DIRECTORS AND SHAREHOLDERS OF INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) We have audited the accompanying consolidated balance sheets of Integral Technologies, Inc. (A Development Stage Company) as of June 30, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for each of the years ended June 30, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at June 30, 1999 and 1998 and the consolidated results of their operations and cash flows for each of the years ended June 30, 1999, 1998 and 1997 in conformity with generally accepted accounting principles in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has minimal capital resources available and has incurred substantial losses to June 30, 1999. The Company must obtain additional financing to meet its cash flow requirements. These matters raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that may result from the outcome of these uncertainties. The financial statements of the Company for the period from February 12, 1996 (inception) through June 30, 1996 were audited by other auditors. We have compiled the cumulative amounts for the period from February 12, 1996 (inception) to June 30, 1999 from audited financial statements for the period from February 12, 1996 (inception) to June 30, 1996 and the audited consolidated financial statements for the years ended June 30, 1999, 1998 and 1997. /s/ Pannell Kerr Forster Chartered Accountants Vancouver, Canada November 4, 1999 F-3 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND 1998 (U.S. DOLLARS)
1999 1998 ------------ ------------ ASSETS CURRENT Cash $ 647 $ 480 Due from affiliated company 0 116,000 ------------ ------------ TOTAL CURRENT ASSETS 647 116,480 PROPERTY AND EQUIPMENT (note 6) 42,238 21,796 INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANY 0 750,000 LICENSE AGREEMENTS AND INTANGIBLES (notes 5 and 7) 1,622,928 8,254 ------------ ------------ TOTAL ASSETS $ 1,665,813 $ 896,530 ============ ============ LIABILITIES CURRENT Accounts payable and accruals (note 10) $ 544,511 $ 326,544 Due to West Virginia University Research Corporation (note 14) 397,296 397,296 Due to officers and directors 0 33,229 Due to minority interest (note 5) 79,412 0 Liability to stockholder 0 25,000 ------------ ------------ TOTAL CURRENT LIABILITIES 1,021,219 782,069 LONG-TERM DEBT (note 8) 376,170 396,029 ------------ ------------ TOTAL LIABILITIES 1,397,389 1,178,098 ------------ ------------ CONTINGENCY (note 14) STOCKHOLDERS' EQUITY (DEFICIENCY) (note 9) PREFERRED STOCK, $0.001 Par Value, 20,000,000 shares authorized, no shares issued and outstanding COMMON STOCK AND PAID IN CAPITAL IN EXCESS OF $0.001 PAR VALUE 50,000,000 Shares authorized 22,087,062 (1998 - 14,375,396) issued and outstanding 4,016,267 1,786,630 PROMISSORY NOTES RECEIVABLE (note 9) (284,068) 0 OTHER COMPREHENSIVE INCOME 44,679 36,235 DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (3,508,454) (2,104,433) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 268,424 (281,568) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 1,665,813 $ 896,530 ============ ============
See notes to consolidated financial statements. F-4 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS)
PERIOD FROM FEBRUARY 12, 1996 YEAR ENDED YEAR ENDED YEAR ENDED (INCEPTION) JUNE 30, JUNE 30, JUNE 30, THROUGH 1999 1998 1997 JUNE 30, 1999 ------------ ------------ ------------ ------------- EXPENSES Interest on beneficial conversion feature (note 12) $ 566,456 0 $ 0 $ 566,456 Consulting 214,068 233,317 97,434 612,995 Salaries 280,600 233,759 0 514,359 Legal and accounting 106,051 79,091 59,391 247,901 Research and development 64,521 258,384 356,118 908,114 Bank charges and interest, net 55,760 41,385 39,726 136,343 Travel and entertainment 34,085 93,043 118,372 267,390 Telephone 26,341 42,319 35,269 103,929 General and administrative 20,656 54,284 51,505 141,337 Rent 18,905 26,095 17,631 69,354 Advertising 7,615 39,885 36,631 84,131 Write-down of license and operating assets (note 5(a)) 0 424,654 0 424,654 Depreciation and amortization 8,963 14,000 10,140 34,334 ------------ ------------ ------------ ------------ LOSS BEFORE EXTRAORDINARY ITEM (1,404,021) (1,540,216) (822,217) (4,111,297) EXTRAORDINARY ITEM Cancellation of debt (note 8) 0 602,843 0 602,843 ------------ ------------ ------------ ------------ NET LOSS FOR PERIOD $ (1,404,021) $ (937,373) $ (822,217) $ (3,508,454) ============ ============ ============ ============ LOSS PER COMMON SHARES BEFORE EXTRAORDINARY ITEM $ (0.08) $ (0.12) $ (0.09) EXTRAORDINARY ITEM PER COMMON SHARE 0.00 0.05 0.0 ------------ ------------ ------------ NET LOSS PER COMMON SHARE $ (0.08) $ (0.07) $ (0.09) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 17,285,785 12,343,346 8,894,110 ============ ============ ============
See notes to consolidated financial statements. F-5 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1996 (U.S. DOLLARS)
PERIOD FROM FEBRUARY 12, 1996 YEAR ENDED YEAR ENDED YEAR ENDED (INCEPTION) JUNE 30, JUNE 30, JUNE 30, THROUGH 1999 1998 1997 JUNE 30, 1996 ------------ ------------ ------------ ------------- SHARES OF COMMON STOCK ISSUED Balance, beginning of year 12,575,396 11,750,000 6,000,000 0 Issued for Cash 200,000 825,396 5,086,000 1,000,000 Exercise of stock options 445,000 0 0 0 Promissory note 1,683,789 0 0 0 Settlement of lawsuit 150,000 0 0 0 Property and equipment (to officers and directors) 0 0 0 1,500,000 Services (provided by officers and directors) 666,666 0 0 2,000,000 Services 250,000 0 564,000 1,500,000 Conversion of convertible debenture 3,869,120 0 0 0 Acquisition of subsidiary 1,800,000 0 100,000 0 Held in escrow 447,091 0 0 0 ------------ ------------ ------------ ------------ Balance, end of year 22,087,062 12,575,396 11,750,000 6,000,000 ============ ============ ============ ============ COMMON STOCK AND PAID-IN CAPITAL IN EXCESS OF PAR Balance, beginning of year $ 1,786,630 $ 1,214,630 $ 60,000 $ 0 Issued for Cash 50,000 650,000 865,514 10,000 Exercise of stock options 80,500 0 0 0 Promissory notes receivable 252,568 0 0 0 Settlement of lawsuit 15,000 0 0 0 Property and equipment (to officers and directors 0 0 0 15,000 Services (provided by officers and directors) 100,000 0 0 20,000 Share issue costs (100,500) (78,000) (48,920) 0 Services 50,000 0 63,036 15,000 Conversion of convertible debenture 525,813 0 0 0 Acquisition of subsidiary 619,200 0 275,000 0 Stock option compensation benefit 70,600 0 0 0 Interest on beneficial conversion 566,456 0 0 0 ------------ ------------ ------------ ------------ Balance, end of year $ 4,016,267 $ 1,786,630 $ 1,214,630 $ 60,000 ============ ============ ============ ============ PROMISSORY NOTES RECEIVABLE Balance, beginning of year $ 0 $ 0 $ 0 $ 0 Issued during year (284,068) 0 0 0 ------------ ------------ ------------ ------------ Balance, end of year $ (284,068) $ 0 $ 0 $ 0 ============ ============ ============ ============ OTHER COMPREHENSIVE INCOME Balance, beginning of year $ 36,235 $ 11,375 $ (1,226) $ 0 Foreign currency translation 8,444 24,860 12,601 (1,226) ------------ ------------ ------------ ------------ Balance, end of year $ 44,679 $ 36,235 $ 11,375 $ (1,226) ============ ============ ============ ============ DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE Balance, beginning of year $ (2,104,433) $ (1,167,060) $ (344,843) $ 0 Net loss for year (1,404,021) (937,373) (822,217) (3,508,454) ------------ ------------ ------------ ------------ Balance, end of year $ (3,508,454) $ (2,104,433) $ (1,167,060) $ (3,508,454) ============ ============ ============ ============ TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) $ 268,424 $ (281,568) $ 58,945 $ (3,449,680) ============ ============ ============ ============
See notes to consolidated financial statements. F-6 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS)
PERIOD FROM FEBRUARY 12, 1996 YEAR ENDED YEAR ENDED YEAR ENDED (INCEPTION) JUNE 30, JUNE 30, JUNE 30, THROUGH 1999 1998 1997 JUNE 30, 1999 ------------ ------------ ------------ ------------- OPERATING ACTIVITIES Net loss $ (1,404,021) $ (937,373) $ (822,217) $ (3,508,454) Adjustments to reconcile net loss to net cash used in operating activities Extraordinary item 0 (602,843) 0 (602,843) Consulting services and financing fees 150,000 0 63,036 248,036 Depreciation and amortization 13,466 14,000 10,140 38,837 Stock option compensation benefit 70,600 0 0 70,600 Interest on beneficial conversion 566,456 0 0 566,456 Settlement of lawsuit 15,000 0 0 15,000 Write-down of license and operating assets 0 424,654 0 424,654 Changes in non-cash working capital Due from affiliated company 0 (112,922) (3,078) (116,000) Promissory notes receivable (284,068) 0 0 (284,068) Other 0 757 (1,173) (2,612) Accounts payable and accruals 217,967 208,737 110,919 544,511 Due to West Virginia University Research Corporation 0 157,384 22,821 397,296 Due to affiliated companies 0 (50,000) 41,749 3 Due to officers and directors (33,229) 23,229 7,186 0 ------------ ------------ ------------ ------------ NET CASH USED BY OPERATING ACTIVITIES (687,829) (874,377) (570,617) (2,208,584) ------------ ------------ ------------ ------------ INVESTING ACTIVITIES Purchase of property, equipment and intangibles assets (33,908) 0 (56,568) (111,539) Assets acquired and liabilities assumed on purchase of subsidiary (129,474) 0 0 (129,474) Investment in and advances to affiliated companies 0 0 (660,000) (750,000) License agreements 0 0 (116,581) (124,835) ------------ ------------ ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (163,382) 0 (833,149) (1,115,848) ------------ ------------ ------------ ------------ FINANCING ACTIVITIES Advances from stockholders 79,412 240,705 758,167 1,078,284 Repayments to stockholders (94,046) 0 0 (94,046) Liability to issue common stock (25,000) 25,000 (249,429) 0 Proceeds from issuance of common stock 383,068 650,000 865,514 1,923,582 Proceeds from convertible debentures 600,000 0 0 600,000 Share issue costs (100,500) (78,000) 0 (227,420) ------------ ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 842,934 837,705 1,374,252 3,280,400 ------------ ------------ ------------ ------------ EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH 8,444 24,860 12,601 44,679 ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN CASH 167 (11,812) (16,913) 647 CASH, BEGINNING OF PERIOD 480 12,292 29,205 0 ------------ ------------ ------------ ------------ CASH, END OF PERIOD $ 647 $ 480 $ 12,292 $ 647 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Issue of common stock For property and equipment $ 0 $ 0 $ 0 $ 15,000 For services (provided by officers and directors) 100,000 0 0 120,000 For settlement of lawsuit 15,000 0 0 15,000 For services 50,000 0 63,036 148,036 For acquisition of subsidiary 619,200 0 275,000 894,200 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid 0 41,385 39,726 81,111 Income tax paid 0 0 0 0 ============ ============ ============ ============
See notes to consolidated financial statements. F-7 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 1. INCORPORATION AND NATURE OF OPERATIONS The Company was incorporated under the laws of the State of Nevada on February 12, 1996. The Company is in the development stage as more fully defined in Statement No. 7 of the Financial Accounting Standards Board. Planned principal operations of the Company have not yet commenced. The Company intends to capitalize on new, patented or patent pending technologies or advancements in technologies. Pursuant to an agreement dated November 8, 1995 between three individuals, including two officers and directors of the Company, and Integral Concepts Inc. ("ICI"), a company 100% controlled by a significant shareholder of the Company and an employee of West Virginia University Research Corporation ("WVURC"), the Company has been assigned the rights of the three individuals which include the first right of refusal to acquire the marketing and manufacturing rights to all technologies assigned to ICI by WVURC. ICI obtains the manufacturing and marketing rights to all technologies developed by WVURC pursuant to an exclusive agreement, however, West Virginia University retains all proprietary rights to the technologies. To June 30, 1999, the Company has acquired or is in the process of acquiring certain rights to further develop, manufacture and market worldwide four new technologies originally assigned to ICI: a) Contrawound Toroidal Helical Antenna - government and military applications (note 7(a)) b) Plasma Ignition System (note 7(b)) c) 2D Machine Vision Colorimetry (note 7(c)) d) 3D Machine Vision Colorimetry (note 7(d)) The Company's head office is located in Vancouver, Canada. However, all further development of the above technologies is being done either directly by the Company or WVURC at West Virginia University. 2. GOING CONCERN These financial statements have been prepared by management in accordance with generally accepted accounting principles on a going concern basis. This presumes funds will be available to finance on-going development, operations and capital expenditures and the realization of assets and the payment of liabilities in the normal course of operations for the foreseeable future. The Company has minimal capital resources presently available to meet obligations which normally can be expected to be incurred by similar companies and has an accumulated deficit during the development stage of $3,508,454; (1998 - $2,104,433). These factors raise substantial doubt about the Company's ability to continue as a going concern and is dependent on its ability to obtain and maintain an appropriate level of financing on a timely basis and to achieve sufficient cash flows to cover obligations and expenses (note 12). The outcome of these matters cannot be predicted. These financial statements do not give effect to any adjustments to the amounts and classification of assets and liabilities which might be necessary should the Company be unable to continue its operations as a going concern. F-8 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 3. SIGNIFICANT ACCOUNTING POLICIES (a) Principles of consolidation These financial statements include the accounts of Integral Technologies, Inc. (a development stage company), its wholly-owned subsidiary, Integral Vision Systems, Inc. ("IVSI") (a development stage company) and in 1999, its 80% owned subsidiary Emergent Technology Corporation ("ETC") (a development stage company). All intercompany balances and transactions have been eliminated. (b) Depreciation and amortization Depreciation and amortization are provided using the straight-line method based on the following estimated useful lives: Machinery, furniture and equipment - 5 Years Computer hardware and software - 5 Years Leasehold improvements - 3 Years
The Company reviews long-term assets to determine if the carrying amount is recoverable based on the estimate of future cash flow expected to result from the use of the asset and its eventual disposition. If in this determination there is an apparent shortfall, the loss will be recognized as a current charge to operations. (c) Loss per share Loss per share computations are based on the weighted average number of common shares outstanding during the period. Common share equivalents consisting of stock options are not considered in the computation because their effect would be anti-dilutive. (d) Shares issued in exchange for services The valuation of the common shares issued in exchange for services is valued at an estimated fair market value as determined by officers and directors of the Company based upon other sales and issuances of the Company's common shares within the same general time period. (e) Revenue recognition As the Company is continuing to develop its technologies, no revenues have been earned to date. Once sales have been earned by the Company, the Company will recognize such revenues at the time of delivery of the product to the customers. (f) Foreign currency translation Amounts recorded in foreign currency are translated into United States dollars as follows: (i) Monetary assets and liabilities are translated at the rate of exchange in effect at the balance sheet date; and, (ii) Revenues and expenses, at the average rate of exchange for the year. Gains and losses arising from this translation of foreign currency are excluded from net loss for the period and accumulated as a separate component of shareholder's equity (deficiency). F-9 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) (g) License agreements and intangibles The Company is in the development stage with respect to the technologies acquired pursuant to the license agreements. At such time as commercial production commences, those costs will be charged to operations on a unit-of-production method based on estimated future sales. When there is little prospect of further development of the technology by the Company, the costs of that license agreement will be charged to operations. (h) Research and development Research and development expenditures are charged to operations as incurred. (i) Use of 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 disclosures 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 and would impact future results of operations and cash flows. (j) Financial instruments The Company's financial instruments include cash, amounts due from/to affiliated company, note receivable, investment in and advances to affiliated company, accounts payable and accruals, due to West Virginia University Research Corporation, long-term debt and minority interest. Unless otherwise noted, in the opinion of management, the carrying value of these financial instruments approximates their fair market values and the Company is not exposed to significant credit, interest or currency risk. (k) Income taxes The Company uses the asset and liability approach in its method of accounting for income taxes which requires the recognition of deferred tax liabilities and assets for expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance against deferred tax assets is recorded if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. (l) Stock based compensation The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Compensation expense is recorded when options are granted to management at discounts to market. (m) Interest on beneficial conversion The beneficial conversion features relating to the 2% convertible debenture (note 8) and promissory note are accounted for as interest. This policy conforms to the accounting for these transactions announced by the SEC staff in March, 1997. F-10 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 4. COMPARATIVE FIGURES Certain of the comparative figures were reclassified to conform with the current year's presentation. 5. ACQUISITIONS (a) By agreement dated March 11, 1997 (the effective date of acquisition), the Company acquired a 100% interest in Integral Vision Systems, Inc. ("IVSI") (a development stage company) for 100,000 common shares of the Company at a deemed value of $2.75 per share (equal to one-half the closing market trading price of the Company's shares on the NASD market on March 11, 1997). The shares were issued pursuant to an exemption from registration under the Securities Act of 1933 and are "restricted securities" as that term is defined in Rule 144. The Company advanced $158,000 to IVSI prior to the acquisition date. The acquisition has been accounted for by the purchase method. The cost of the acquisition has been allocated in these financial statements as follows: Purchase price - 100,000 common shares $275,000 Funds advanced to IVSI prior to acquisition 158,000 -------- 433,000 Fair market value of net assets acquired 41,419 -------- Purchase price discrepancy allocated to license agreement (note 7(d)) $391,581 ========
IVSI's net loss from operations for the year ended June 30, 1998 amounted to $83,853 (1997 loss of $137,601) and these operating results are included in the consolidated statement of operations. The operations of IVSI have ceased while management seeks a new technology partner. Accordingly, the Company's investment in the license agreement of $391,581 has been written off and the net operating assets of IVSI amounting to $33,073 have been written off. (b) In September 1996, the Company entered into a letter agreement to acquire a 10% interest in ETC (a development stage company) from two related parties of the Company for consideration of $100,000 (as at June 30, 1998 this investment was accounted for at cost). The Company had an option to acquire the remaining 90% interest in ETC by issuing 1,800,000 common shares of the Company and by funding ETC's research and development of the Contrawound Toroidal Helical Antenna for government and military applications (note 1) to a minimum of $1,200,000 (of which the Company advanced a total of $650,000). The Company issued 1,800,000 shares which at the 1998 year-end were held by ETC's attorney in escrow subject to the closing of the final agreement (which was closed March 11, 1999). The shares were released from escrow and are recorded in these financial statements at $0.344 per share, the closing market trading price of the Company's shares on the NASD market on March 11, 1999. The 1,800,000 shares and the $650,000 advanced entitles the Company to a further 70% interest in ETC. During the year, a third party investor contributed $470,588 in cash for a 20% interest in ETC. The same investor contributed a further $79,412 which they intend to convert into shares of ETC. This will dilute the Company's ownership interest in ETC to 76.625%. F-11 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 5. ACQUISITIONS (Continued) The cost of the acquisition has been allocated in these financial statements as follows: Purchase price (1,800,000 shares) $ 619,200 10% investment acquired in prior year 100,000 ---------- 719,200 Net assets (liabilities) acquired (895,474) ---------- Purchase price discrepancy allocated to license agreement (note 7(a)) $1,614,674 ==========
6. PROPERTY AND EQUIPMENT
1999 1998 ------------ ---- ACCUMULATED AMORTIZATION AND COST DEPRECIATION NET NET ---------- ------------ ---------- ---------- Machinery, furniture and equipment $ 56,583 $ 22,634 $ 33,949 $ 11,263 Computer hardware and software 20,825 12,536 8,289 9,311 Leasehold improvements 3,667 3,667 0 1,222 ---------- ---------- ---------- ---------- $ 81,075 $ 38,837 $ 42,238 $ 21,796 ========== ========== ========== ==========
7. LICENSE AGREEMENTS (a) Toroidal Helical Antenna ETC was formed to develop, commercialize, market and manufacture certain proprietary Toroidal Helical Antenna Technology ("the Technology") (note 1). The Company obtained an exclusive sub-license to the technology from Integral Concepts, Inc. ("ICI"), a company 100% controlled by a former shareholder of ETC, a significant shareholder of the Company, and an employee of WVURC of its right, title and interest in and to all worldwide government and military applications and resulting procurement interests in the Technology. ICI obtained the license to the Technology from WVURC. WVURC has the proprietary interest in and holds the patents to the technology. All development of the Technology is being done by the Company or WVURC at West Virginia University. Pursuant to an agreement dated January 2, 1996 with ICI, ETC acquired the right to manufacture and market the Toroidal Helical Antenna Technology. The Company is obligated to pay a $3,000 minimum annual royalty to WVURC to maintain the license in good standing. In addition, a further 10% royalty of any net revenues is payable to WVURC on behalf of ICI, such royalties to be reduced by the $3,000 minimum annual royalty payment. To date there have been no net revenues. F-12 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 7. LICENSE AGREEMENTS (Continued) The license is automatically renewed for one year periods each December 31 as long as the required minimum royalty payments described above are paid to WVURC on behalf of ICI. Either party may terminate this agreement upon 90 days written notice. The Company is responsible for the reimbursement of project development costs incurred by WVURC. (b) Plasma Ignition System Pursuant to an agreement dated February 15, 1996 with ICI, the Company acquired the rights to manufacture and market the Plasma Ignition System (note 1), an ignition system for internal combustion engines, for a license fee of $8,251. The Company is obligated to pay a $3,000 minimum annual royalty to WVURC on behalf of ICI to maintain the license in good standing. In addition, a further 10% royalty of any net revenues is payable to WVURC on behalf of ICI and a 1% royalty of any gross revenues is payable to ICI. Such royalties are to be reduced by the $3,000 minimum annual royalty. To date there have been no net revenues. The license is automatically renewed for one-year periods each December 31 as long as the required minimum royalty payments described above are paid to WVURC on behalf of ICI. Pursuant to an agreement dated February 9, 1996 with WVURC, the Company is responsible for the reimbursement of project development costs which are incurred by WVURC. To June 30, 1999, $445,570 of project development costs has been paid or is payable to WVURC (note 14). Either party may terminate this agreement upon 90 days written notice. (c) 2D Machine Vision Colorimetry Pursuant to an agreement dated February 9, 1996 with ICI, the Company acquired the right to manufacture and market the 2D Machine Vision Colorimetry (note 1), a counterfeit currency determination software. The Company is obligated to pay a $3,000 minimum annual royalty to WVURC to maintain the license in good standing. In addition, a further 10% royalty of any net revenues is payable to WVURC on behalf of ICI, such royalties to be reduced by the $3,000 minimum annual royalty payment. To date there have been no net revenues The license is automatically renewed for one year periods each December 31 as long as the required minimum royalty payments described above are paid to WVURC on behalf of ICI. Pursuant to an agreement dated February 9, 1996 with WVURC, the Company is responsible for the reimbursement of project development costs incurred by WVURC. To June 30, 1999, $350,151 of project development costs has been paid or is payable to WVURC (note 14). Either party may terminate this agreement upon 90 days written notice. F-13 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 7. LICENSE AGREEMENTS (Continued) (d) 3D Machine Vision Colorimetry The Company's subsidiary, IVSI, acquired the right to manufacture and market the 3D Machine Vision Colorimetry (note 1), a color quality control software. IVSI is obligated to pay a $3,000 minimum annual royalty to WVURC to maintain the license in good standing. In addition, a further 10% royalty of any net revenues is payable to WVURC on behalf of ICI, such royalties to be reduced by the $3,000 minimum annual royalty payment. To date there have been no net revenues The license is automatically renewed for one year periods each December 31 as long as the required minimum royalty payments described above are paid to WVURC on behalf of ICI. Either party may terminate this agreement upon 90 days written notice. On June 10, 1995, IVSI entered into an "Exclusive Limited Sublicense Agreement" with REGI U.S., INC. ("REGI"), whereby REGI obtained an exclusive sublicense to market and distribute the 3D Machine Vision Colorimetry in Canada. The sublicense requires REGI to pay to IVSI 2% of the "Net Revenues" (as defined in the sublicense) that REGI derives from the technology. Minimum royalty payments are as follows: ==================================================================== 1997 $3,000 1998 4,500 1999 6,000 Every year thereafter 6,000 ====================================================================
REGI shall have the option to renew the sublicense for successive one year periods so long as REGI is not in default of the terms of the sublicense and the Company's license is renewed by its licensor. As described in note 5(a), IVSI has ceased operations while it seeks a new technology partner. 8. LONG-TERM DEBT
1999 1998 -------- -------- 2% convertible debenture, due January 2004 convertible at the holder's option into common stock of the Company $ 75,000 $ 0 10% Loan repayable on demand with one year's notice to two officers and directors of the Company 301,170 396,029 -------- -------- $376,170 $396,029 ======== ========
During the year ended June 30, 1999, the Company issued $600,000, 2% convertible debentures. Of this amount $525,000 was converted to 3,869,120 common shares (note 13(a)(ii)). During the year ended June 30, 1998, all rights, title and interest in a revolving line of credit, due to an officer and director of the Company was conveyed to the Company for $1 and the loan was cancelled. The line of credit balance of $563,843 and accrued interest of $39,000 is recorded as an extraordinary item in the consolidated statement of operations for the year ended June 30, 1998. F-14 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 9. STOCKHOLDERS' EQUITY (DEFICIENCY) (a) Authorized preferred shares The preferred shares may be issued in one or more series. The distinguishing features of each series including preference, rights and restrictions are to be determined by the Company's Board of Directors upon the establishment of each such series (note 13). (b) Stock options Pursuant to the Company's 1996 Incentive Compensation Plan as subsequently amended in 1997, the Company may issue stock options and stock bonuses for shares in the capital stock of the Company to provide incentives to officers, directors, key employees and other persons who contribute to the success of the Company. The exercise price of the Incentive Options (employees of the Company or its subsidiaries) is no less than the fair market value of the stock at the date of the grant and for non-employees the exercise price is no less than 80% of the fair value (defined as the most recent closing sale price reported by NASDAQ) on the date of the grant. The following table summarizes the Company's stock option activity for the years ended June 30, 1999, 1998 and 1997.
WEIGHTED EXERCISE AVERAGE NUMBER PRICE EXERCISE OF SHARES PER SHARE PRICE ----------- ---------------- -------- BALANCE, JUNE 30, 1996 $ 0 $ $ 0.00 Granted during year ended June 30, 1997 1,990,000 $ 0.15 - $ 0.25 $ 0.24 ------------ ---------------- ------ BALANCE JUNE 30, 1998 AND 1997 1,990,000 $ 0.15 to $ 2.00 $ 0.24 Granted during year ended June 30, 1999 1,635,000 $ 0.15 to $ 0.25 $ 0.17 Cancelled (1,260,000) $ 0.15 $ 0.15 Exercised (445,000) $ 0.15 to $ 0.25 $ 0.20 ------------ ---------------- ------ BALANCE JUNE 30, 1999 1,920,000 $ 0.15 to $ 2.00 $ 0.26 ============ ================ ======
The exercise price per share at June 30, 1998 and 1997 were $0.50 to $2.00. During the year ended June 30, 1999, 1,260,000 of the 1,990,000 stock options were cancelled, and 630,000 stock options were repriced to $0.15 to $0.25. These changes have been retroactively adjusted above. Subsequent to June 30, 1999, 87,500 and 665,000 additional share options were issued under the plan for exercise prices of $0.40 and $0.23 respectively. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan, and accordingly, compensation expense of $70,600 was recognized as salaries expense during the year ended June 30, 1999. F-15 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 9. STOCKHOLDERS' EQUITY (DEFICIENCY) (Continued) (c) Included in promissory notes receivable are: (i) $31,500 on exercise of 210,000 stock options, interest at 10% per annum, due November 1, 1999; and, (ii) $252,568 for issue of 1,683,789 common shares, interest at 6% per annum, due January 17, 2001. 10. RELATED PARTY TRANSACTIONS (a) The Company's acquisition of IVSI and ETC as described in notes 5(a) and 5(b) respectively were acquired from two significant shareholders of the Company. (b) Accounts payable at June 30, 1999 includes $383,500 (1998 - $220,000) due to two directors and officers of the Company. This amount includes $290,000 (1998 - $180,000) of accrued management salaries which bears interest at 10% per annum, due based on normal commercial terms. The remaining balance of $93,500 (1998 - $40,000) represents accrued interest on the accrued management salaries and long-term debt (note 8). See note 13(b) for settlement of debt subsequent to the year ended June 30, 1999. (c) Long-term debt includes $301,170 (1998 - $396,029) due to officers and two directors of the Company (notes 8 and 13(b)). (d) The Company accrued salaries and interest payable of $263,500 (1998 - $220,000; 1997 - $Nil) due to two directors and officers of the Company. Of the 1999 amount, $100,000 was settled by issue of 666,666 common shares. (e) The Company paid $23,670 (1998 - $9,100; 1997 - $23,707) to two officers and directors for consulting fees. (f) The Company advanced $6,000 (1998 - $6,000, 1997 - $3,000) to ICI for royalties and was charged $Nil (1998 - $257,384; 1997 - $313,026) by WVURC for reimbursement of research and development expenditures. 11. INCOME TAXES A deferred tax asset stemming from the Company's net operating loss carry forward, has been reduced by a valuation account to zero due to uncertainties regarding the utilization of the deferred assets. At June 30, 1999 the Company has available a net operating loss carry forward of approximately $2,448,000 which it may use to offset future federal taxable income. The net operating loss carry forward if not utilized, will begin to expire in 2011. 12. INTEREST ON BENEFICIAL CONVERSION The difference between the market value of the Company's shares on the date of conversion and the conversion rate pursuant to $525,000 of the convertible debenture issued during the year was $398,077. The difference between the market value of the Company's shares and the issue price of 1,683,789 common shares for a promissory note in the amount of $252,568 was $168,379. These amounts have been recorded as interest expense in the statement of operations. F-16 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 AND PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) THROUGH JUNE 30, 1999 (U.S. DOLLARS) 13. SUBSEQUENT EVENTS (a) Share issuances subsequent to June 30, 1999 were as follows: (i) 405,000 shares on exercise of stock options for a total value of $87,500. (ii) 447,091 shares released from escrow on conversion of convertible debenture of $75,000 (note 8). (iii) 50,000 shares in lieu of services at an ascribed value of $13,000. (b) Subsequent to June 30, 1999, the Company designated 1,000,000 of its authorized 20,000,000 preferred shares as Series A Convertible Preferred Stock with a par value of $0.001 each, and a stated value of $1.00 each. Cumulative dividends are accrued at the rate of 5% annually, payable at the option of the Company. The shares may be converted to restricted common shares at the average trading price ten days prior to conversion, and entitled to votes equal to the number of common shares into which each series of preferred stock may be converted. Each Series A Convertible Preferred Stock may be redeemed by the Company for $1.50 each within one year after the date of issue, or $2.00, $2.50, $3.00 and $3.50 in each of the subsequent four years after date of issue. The Company intends to settle $383,229 included in accounts payable and $281,182 included in long-term debt, both amounts due to two officers and directors of the Company, by issue of $664,411 Series A Convertible Preferred Stock subsequent to June 30, 1999. 14. CONTINGENCY A dispute exists between WVURC and the Company with respect to the development work performed by WVURC on the Plasma Ignition System and the Counterfeit Detection Technology. The Company has included in its accounts the amount owing to WVURC of $397,296, however, it is the opinion of management that this amount should be reduced to $43,052. Management intends to defend this position. As the actual outcome cannot be determined at this time, any adjustments required will be recorded by the Company when settlement occurs. 15. COMPREHENSIVE LOSS
PERIOD FROM FEBRUARY 12, 1996 (INCEPTION) YEAR ENDED YEAR ENDED YEAR ENDED THROUGH JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1999 1998 1997 1999 ------------ ------------ ------------ ------------ Net loss $ (1,404,021) $ (937,373) $ (822,217) $ (3,508,454) Other comprehensive income 8,444 24,860 12,601 44,679 ------------ ------------ ------------ ------------ Comprehensive loss $ (1,395,577) $ (912,513) $ (809,616) $ (3,463,775) ============ ============ ============ ============
F-17 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 AND 1998 (U.S. DOLLARS)
INDEX PAGE ---- FINANCIAL STATEMENTS Consolidated Balance Sheets F-19 Consolidated Statements of Loss F-20 Consolidated Statements of Cash Flow Position F-21 Consolidated Statements of Changes in Stockholders' Equity F-22 Notes to Consolidated Financial Statements F-23 - F-31
F-18 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 (UNAUDITED)
AS AT AS AT SEPT 30/99 SEPT 30/98 ------------ ------------ ASSETS CURRENT Cash $ 3,334 $ (450) Advances to Emergent Technologies Corp. 0 113,000 ------------ ------------ TOTAL CURRENT ASSETS 3,334 112,550 ------------ ------------ FIXED Fixed assets, cost 81,073 39,392 Less: accumulated depreciation (40,835) (19,596) ------------ ------------ TOTAL FIXED ASSETS (40,238) 19,796 ------------ ------------ OTHER Investment in and advances to Emergent Technologies Corp. 750,000 License agreement 1,622,929 399,832 Intangibles (net) 1 1 ------------ ------------ TOTAL OTHER ASSETS 1,622,930 1,149,833 ------------ ------------ TOTAL ASSETS (1,666,502) 1,282,179 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) CURRENT Accounts payable 304,527 514,180 Due to West Virginia University 397,296 397,296 Due to minority interest 79,412 0 ------------ ------------ TOTAL CURRENT LIABILITIES 781,235 911,466 ------------ ------------ LONG TERM Liability to Issue Common Stock 60,000 0 Loans Payable 0 351,579 ------------ ------------ TOTAL LONG TERM LIABILITIES 60,000 351,579 ------------ ------------ SHAREHOLDERS' EQUITY (DEFICIENCY) PREFERRED SHARES AND PAID IN CAPITAL IN EXCESS OF $0.001 PAR VALUE $0.001 par value; 20,000,000 shares authorized 664,410 (1998-none issued and outstanding) 664,410 0 COMMON SHARES AND PAID IN CAPITAL IN EXCESS OF $0.001 PAR VALUE 50,000,000 shares authorized 22,137,062 (1998-12,576,000) issued and outstanding 4,147,698 2,428,374 PROMISSORY NOTES RECEIVABLE (284,068) 0 OTHER COMPREHENSIVE INCOME 44,679 42,540 DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (3,747,452) (2,451,780) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 825,267 19,134 ------------ ------------ TOTAL LIABILITIES & SHAREHOLDERS EQUITY (DEFICIENCY) (1,666,502) 1,282,179 ------------ ------------
F-19 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) CONSOLIDATED STATEMENTS OF LOSS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED)
PERIOD FROM QUARTER QUARTER INCEPTION TO ENDED ENDED (FEBRUARY 16/96) SEPT 30/99 SEPT 30/98 TO SEPTEMBER 30/99 ------------ ------------ ------------------ REVENUE $ 21,797 $ 21,797 ------------ ------------------ EXPENSES Interest on beneficial conversion feature 12,500 566,456 Write-down of license and Operating assets 424,654 Research and development 908,113 Travel and entertainment 13,858 281,248 Consulting 50,700 9,550 663,695 Salaries and benefits 24,412 328,771 Management fees 60,000 52,500 270,000 Legal and accounting 7,000 247,901 Bank charges and interest, net 84,150 215 220,493 Advertising (385) 84,131 Telephone 3,062 8,016 106,991 General and administrative 13,528 3,983 154,866 Rent 9,085 1,707 78,439 Depreciation and Amortization 2,000 2,000 36,334 ------------ ------------ ------------------ Total expenses 260,795 97,086 4,372,092 ------------ ------------ ------------------ Loss before Extraordinary item 4,350,295 Extraordinary item Cancellation of debt (602,843) ------------------ NET LOSS FOR THE PERIOD 238,998 97,086 3,747,452 ------------------ DEFICIT, BEG OF PERIOD 3,508,454 2,354,694 ------------ ------------ DEFICIT END OF PERIOD 3,747,452 2,451,780 ------------ ------------ NET LOSS PER COMMON SHARE $ .01 $ .01 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 22,076,306 12,576,000
F-20 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) CONSOLIDATED STATEMENTS OF CASH FLOW POSITION SEPTEMBER 30, 1999 (UNAUDITED)
AS AT AS AT SEPT 30/99 SEPT 30/98 ---------- ---------- OPERATING ACTIVITIES Net loss $ (238,998) $ (90,781) Item not involving cash Depreciation and amortization 2,000 2,000 ---------- ---------- (236,998) (88,781) ---------- ---------- CHANGES IN NON-CASH WORKING CAPITAL Accounts payable (239,982) 57,088 Advances to Emergent Technologies Corp. 3,000 Short term loans 31,100 27,763 Loans payable (376,170) 0 ---------- ---------- (616,152) 87,851 ---------- ---------- (853,150) (930) ---------- ---------- FINANCING ACTIVITIES Liability to issue common shares 60,000 0 Issuance of common shares 131,428 0 Issuance of preference shares 664,410 0 ---------- ---------- 855,841 0 ---------- ---------- INCREASE (DECREASE) IN CASH 2,691 (930) CASH, BEGINNING OF PERIOD 643 480 ---------- ---------- CASH, END OF PERIOD 3,334 (450) ---------- ----------
F-21 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED)
Series A Convertible Preferred Stock Common Stock Other Total --------------------------- --------------------------- Promissory Comprehensive Acc. Stockholders Shares Amount Shares Amount Note Income Deficit Equity' ------------ ------------ ------------ ------------ ------------ ------------- ------------ ------------ BALANCE BEGINNING 0 0 22,087,062 $ 4,016,267 $ (284,068) $ 44,679 $ (3,508,454) $ 268,424 COMMON SHARES ISSUES For cash 50,000 12,500 12,500 Conversion Of debenture 118,931 118,931 Net loss for the period (238,998) (238,998) PREFERRED SHARE ISSUES Conversion of Debt 281,182 $ 281,182 281,182 Conversion of Accounts Payable 383,228 $ 383,228 383,228 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, END OF PERIOD 664,410 $ 664,410 22,137,062 $ 4,147,698 $ (284,068) $ 44,679 $ (3,747,452) $ 825,267 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
F-22 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED) 1. INCORPORATION AND NATURE OF OPERATIONS The Company was incorporated under the laws of the State of Nevada on February 12, 1996. The Company is in the development stage as more fully defined in Statement No. 7 of the Financial Accounting Standards Board. Planned principal operations of the Company have not yet commenced. The Company intends to capitalize on new, patented technologies or advancements in technologies. Pursuant to an agreement dated November 8, 1995 between three individuals, including officers and directors of the Company, and Integral Concepts Inc. ("ICI"), a company 100% controlled by a significant shareholder of the Company and an employee of West Virginia University Research Corporation ("WVRUC"), the Company has been assigned the rights of the three individuals which include the first right of refusal to acquire the marketing and manufacturing rights to all technologies assigned to ICI by WVRUC pursuant to an exclusive agreement, however, West Virginia University retains all proprietary rights to the technologies. To September 30, 1999, the Company has acquired or is in the process of acquiring certain rights to further develop, manufacture and market worldwide four new technologies originally assigned to ICI. a) Contrawound Toroidal Helical Antenna-government and military applications (note 7(a) b) Plasma Ignition System (note 7 (b)) c) 2D Machine Vision Colorimetry (note (c)) d) 3D Machine Vision Colorimetry (note 7(d)) The Company's head office is located in Vancouver, Canada. However, all further development of the above technologies is being done either directly by the Company or WVRUC at West Virginia University. 2. GOING CONCERN These financial statements have been prepared by management in accordance with generally accepted accounting principles on a going concern basis. This presumes funds will be available to finance on-going development, operations and capital expenditures and the realization of assets and the payment of liabilities in the normal course of operations for the foreseeable future. The Company has minimal capital resources presently available to meet obligations which normally can be expected to be incurred by similar companies and has an accumulated deficit of $3,745,452; (1998-$2,451,780). These factors raise substantial doubt about the Company's ability to continue as a going concern and is dependent on its ability to obtain and maintain an appropriate level of financing on a timely basis, and to achieve sufficient cash flows to cover obligations and expenses. The outcome of these matters cannot be predicted. These financial statements do not give effect to any adjustments to the amounts and classification of assets and liabilities which might be necessary should the Company be unable to continue its operations as a going concern. F-23 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED) 3. SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation These financial statements include the accounts of Integral Technologies, Inc. (a development stage company), its wholly-owned subsidiary, Integral Vision Systems, Inc ("IVSI") ( a development stage company) and its 80% owned subsidiary Emergent Technologies Corp. ("ETC") (a development stage company). All inter-company balances and transactions have been eliminated. (b) Depreciation and amortization Depreciation and amortization are provided using the straight-line method based on the following estimated useful lives: Machinery, furniture and equipment -5years Computer hardware and software -5years Leasehold improvements -3years
The Company reviews long-term assets to determine if the carrying amount is recoverable based on the estimate of future cash flow expected to result form the use of the asset and its eventual disposition. If in this determination there is an apparent shortfall, the loss will be recognized as a current charge to operations. (c) Loss per share Loss per share computations are based on the weighted average number of common shares outstanding during the period. Common share equivalents consisting of stock options are not considered in the computation because their effect would be anti-dilutive. (d) Shares issued in exchange for services The valuation of the common shares issued in exchange for services is valued at an estimated fair market value as determined by the officers and directors of the Company based upon other sales and issuances of the Company's common shares within the same general time period. (e) Foreign currency translation Amounts recorded in foreign currency are translated into United States dollars as follows: (i) Monetary assets and liabilities are translated at the rate of exchange in effect at the balance sheet date; and, (ii) Revenues and expenses, at the average rate of exchange for the year. Gains and losses arising from this translation of foreign currency are excluded from the net loss for the period and accumulated as a separate component of shareholders' equity (deficiency). F-24 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED) (f) License agreements and intangibles The Company is in the development stage with respect to the technologies acquired pursuant to the license agreements. At such time as commercial production commences, these costs will be charged to operations on a unit-of-production method based on estimated future sales. When there is little prospect of further development of the technology by the Company, the costs of that license agreement will be charged to operations. (g) Research and development Research and development expenditures are charged to operations as incurred. (h) Use of 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates and would impact future results of operations and cash flows. (i) Financial instruments The Company's financial instruments include cash, investment in and advances to affiliated company, accounts payable and accruals, due to West Virginia University Research Corporation, long term debt and minority interest. Unless otherwise noted, in the opinion of management, the carrying value of these financial instruments approximates their fair market values and the Company is not exposed to significant credit, interest or currency risk. (j) Income taxes The Company uses asset and liability approach in its method of accounting for income taxes which requires the recognition of deferred tax liabilities and assets for expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets is recorded if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. (k) Stock based compensation The Company applies APB Opinion No. 25 and related interpretation in accounting for its stock option plans. Compensation expense is recorded when options are granted to management at discounts to market. (l) Interest on Beneficial Conversion The beneficial conversion features relating to the 2% convertible debenture and promissory notes are accounted for as interest. This policy conforms to the accounting for these transactions announced by the SEC staff in March 1997. F-25 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED) 4. COMPARATIVE FIGURES Certain of comparative figures were reclassified to conform with the current year's presentation. 5. ACQUISITIONS (a) By agreement dated March 11, 1997 (the effective date of acquisition), the Company acquired a 100% interest in Integral Visions Systems, Inc. ("IVSI" (a development stage company) for 100,000 common shares of the Company at a deemed value of $2.75 per share (equal to one-half) the closing market trading price of the Company's shares on the NASD market on March 11, 1997). The shares were issued pursuant to an exemption from registration under the Securities Act of 1933 and are "restricted securities" as that term is defined in Rule 144. The Company advanced $158,000 to IVSI prior to the acquisition date. The acquisition has been accounted for by the purchase method. The cost of the acquisition has been allocated in these financial statements as follows: Purchase price-100,000 common shares $275,000 Funds advanced to IVSI prior to acquisition 158,000 --------- 433,000 Fair market value 41,419 --------- Purchase price discrepancy allocated to license agreement (note 7(d)) $ 391,581 ---------
IVSI's net loss from operations for the year ended June 30, 1998 amounted to $83,853 (1997 loss of $137,601) and these operating results are included in the consolidated statements of operations. The operations of IVSI have ceased while management seeks a new technology partner. Accordingly the Company's investment in the license agreement of $391,581 has been written down to a nominal amount of $1 and the net operating assets of IVSI amounting to $33,073 have been written off. (b) In September 1996, the Company entered into a letter agreement to acquire a 10% interest in ETC (a development stage company) from two related parties of the Company for consideration of $100,000. The Company had an option to acquire the remaining 90% interest in ETC by issuing 1,800,000 common shares of the Company and by funding ETC's research and development of the Contrawound Toroidal Helical Antenna for government and military applications (note 1) to a minimum of $1,200,000. The Company issued 1,800,000 shares which at the 1998 year-end were held by ETC's attorney in escrow subject to the closing of the final agreement (which was closed on March 11, 1999). These shares were released from escrow and are recorded in these financial statements at $.34 per share, the closing market trading price of the Company's shares in the NASD market on March 11, 1999. The 1,800,000 shares and the $650,000 advanced entitles the Company to a further 70% interest in ETC. F-26 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED) During the year ended June 30, 1998, a third party investor contributed $470,588 for a 20% interest in ETC. The same investor contributed a further $79,412 which they intend to convert into shares in ETC. This will dilute ITI's ownership interest to 76.625%. The cost of the acquisition has been allocated in these financial statements as follows: Purchase price (1,800,000 shares) $ 619,200 10% investment acquired in prior year 100,000 ---------- 719,200 Net assets acquired 895,474 ---------- Purchase price discrepancy allocated to license agreement (note 7(a)) $1,614,674 ----------
6. FIXED ASSETS
1999 1998 ------------ ------------ ACCUMULATED AMORTIZATION AND COST DEPRECIATION NET NET ------------ ------------ ------------ ------------ Machinery, furniture and equipment 56,581 23,632 32,949 9,263 Computer hardware and software 20,825 13,536 7,289 9,311 Leasehold improvements 3,667 3,667 0 1,222 ------------ ------------ ------------ ------------ 81,073 40,835 42,238 19,796 ------------ ------------ ------------ ------------
7. LICENSE AGREEMENTS (a) Toroidal Helical Antenna ETC was formed to develop, commercialize, market and manufacture certain proprietary Toroidal Helical Antenna Technology ("the Technology") (note 1). The Company obtained an exclusive sub-license to the technology from Integral Concepts, Inc. ("ICI"), a company 100% controlled by a shareholder of ETC, a significant shareholder of the Company, and an employee of West Virginia Research Corporation ("WVRUC") of its right title and interest in and to all worldwide government and military applications and resulting procurement interests in the Technology. ICI obtained the license to the Technology from WVRUC. WVRUC has the proprietary interest in and holds the patents to the technology. All development of the Technology is being done by the Company or WVRUC at West Virginia University. Pursuant to an agreement dated January 2, 1996 with ICI, the Company acquired the right to manufacture and market the Toroidal Helical Antenna Technology. The Company is obligated to pay a $3,000 minimum annual royalty to WVRUC to maintain the license in good standing. In addition a further 10% royalty of any net revenues is payable to WVRUC on behalf of ICI, such royalties to be reduced by the $3,000 minimum annual royalty payment. To date there have been no net revenues. F-27 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED) The license is automatically renewed for one year periods each December 31 as long as the required minimum royalty payments described above are paid to WVRUC on behalf of ICI. Either party may terminate this agreement upon 90 days written notice. The Company is responsible for the reimbursement of project costs incurred by WVRUC. (b) Plasma Ignition System Pursuant to an agreement dated February 15, 1996 with ICI, the Company acquired the rights to manufacture and market the Plasma Ignition System (note 1), an ignition system for internal combustion engines, for a license fee of $8,251. The Company is obligated to pay a $3,000 minimum annual royalty to WVRUC on behalf of ICI to maintain the license in good standing. In addition, a further 10% royalty of any net revenues is payable to WVRUC on behalf of ICI and a 1% royalty of any gross revenues is payable to ICI. Such royalties are to be reduced by the $3,000 minimum annual royalty. To date there have been no net revenues. The license is automatically renewed for one year periods each December 31 as long as the required minimum royalty payments described above are paid to WVRUC on behalf of ICI Pursuant to an agreement dated February 9, 1996 with WVRUC, the Company is responsible for reimbursement of project development costs incurred by WVRUC. To June 30, 1998, $445,570 of project development costs has been paid or is payable to WVRUC (note 13). Either party may terminate this agreement upon 90 days written notice. (c) 2D Machine Vision Colorimetry Pursuant to an agreement dated February 9, 1996 with ICI, the Company acquired the right to manufacture and market the 2D Machine Vision Colorimetry (note 1), a counterfeit currency determination software. The Company is obligated to pay a $3,000 minimum annual royalty to WVRUC to maintain the license in good standing. In addition, a further 10% royalty of any net revenues is payable to WVRUC on behalf of ICI, such royalties to be reduced by the $3,000 minimum annual royalty payment. To date there have been no net revenues. The license is automatically renewed for one year periods each December 31 as long as the required minimum royalty payments described above are paid to WVRUC on behalf of ICI. Pursuant to an agreement dated February 9, 1996 with WVRUC, the Company is responsible for reimbursement of project development costs incurred by WVRUC. To June 30, 1999, $350,151 of project development costs has been paid or is payable to WVRUC (note 13). Either party may terminate this agreement upon 90 days written notice. (d) 3D Machine Vision Colorimetry The Company's subsidiary, IVSI acquired the right to manufacture and market the 3D Machine Vision Colorimetry (note 1), a color quality control software. IVSI is obligated to pay a $3,000 minimum annual royalty to WVRUC to maintain the license in good standing. In addition, a further 10% royalty of any net revenues is payable to WVRUC on behalf of ICI, such royalties to be reduced by the $3,000 minimum annual royalty payment. To date there have been no net revenues. F-28 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED) The license is automatically renewed for one year periods each December 31 as long as the required minimum royalty payments described above are paid to WVRUC on behalf of ICI. Either party may terminate this agreement upon 90 days written notice. On June 10, 1995 IVSI entered into an "Exclusive Limited Sublicense Agreement" with REGI U.S., Inc. ("REGI") whereby REGI obtained an exclusive sublicense to market and distribute the 3D Machine Vision Colorimetry in Canada. The sublicense requires REGI to pay to IVSI 2% of the "Net Revenues" (as defined in the sublicense) that REGI derives from the technology. Minimum royalty payments are as follows: 1997 $3,000 1998 4,500 1999 6,000 Every year thereafter 6,000
REGI shall have the option to renew the sublicense for successive one year periods so long as REGI is not in default of the terms of the sublicense and the Company's license is renewed by its licensor. As described in note 5(a), IVSI has ceased operations while it seeks a new technology partner. 8. LONG TERM DEBT (a)
1999 1998 -------- -------- 10% Loan repayable on demand with one year's notice to two officers and directors of the Company 0 351,579 -------- --------
During the year ended June 30,1998, all rights, title and interest in a revolving line of credit, due to an officer and director of the Company was conveyed to the Company for $1 and the loan was cancelled. The line of credit balance of $563,843 and accrued interest of $39,000 is recorded as an extraordinary item in the consolidated statement of operations for the year ended June 30, 1998. (b) During the quarter ended September 30, 1999, principal and accrued interest due on a convertible debenture in the face amount of $75,000 were converted into 447,091 shares of common stock. 9. STOCKHOLDERS' EQUITY (a) Authorized preferred shares Subsequent to quarter ended September 30, 1999, the Company designated 1,000,000 of its authorized 20,000,000 preferred shares as Series A Convertible Preferred Stock with a par value of $0.001 each, and a stated value of $1.00 each. F-29 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED) (a) Authorized preferred shares -- continued Cumulative dividends are accrued at the rate of 5% annually, payable at the option of the Company. The shares may be converted to restricted common shares at the average trading price ten days prior to conversion, and entitled to votes equal to the number of common shares into which each series of preferred stock may be converted. Each Series A Convertible Preferred Stock may be redeemed by the Company for $1.50 each within one year after the date of issue, or $2.00, $2.50, $3.00 and $3.50 in each of the subsequent four years after date of issue. During the quarter ended September 30, 1999, the Company settled $383,229 included in accounts payable and $281,182 included in long-term debt (an aggregate of $664,411), both amounts due to two officers and directors of the Company, by issuing 664,411 shares of Series A Convertible Preferred Stock. (b) Stock options Pursuant to the Company's 1996 Incentive Compensation Plan as subsequently amended in 1997, the Company may issue stock options and stock bonuses for shares in the capital stock of the Company to provide incentives to officers, directors, key employees and other such persons who contribute to the success of the Company. The exercise price of the Incentive Options (employees of the Company or its subsidiaries) is no less than the fair market value of the stock at the date of the grant and for non-employees the exercise price is no less than 80% of the fair value (defined as the most recent closing sale price reported by NASDAQ on the date of the grant). The following table summarizes the Company's stock activity for the years ended June 30, 1999, 1998, and 1997.
WEIGHTED EXERCISE AVERAGE NUMBER PRICE EXERCISE OF SHARES PER SHARE PRICE ------------ -------------- ---------- Balance June 30, 1998 and 1997 1,990,000 $0.15 to $2.00 $ 0.24 Granted during the year 1,635,000 $ 0.15 to $.25 $ 0.17 Cancelled (1,260,000) $ .15 $ .15 Exercised (445,000) $0.15 to $0.25 $ 0.25 ------------ -------------- ---------- Balance June 30, 1999 1,920,000 $0.15 to $2.00 $ 0.25 ------------ -------------- ----------
The exercise price per share at June 30, 1998 and 1997 was $0.50 to $2.00. During the year ended June 30, 1999, 1,260,000 of the 1,990,000 stock options were cancelled and 630,000 stock options were re-priced to $0.15 to $0.25. These changes have been retroactively adjusted above. F-30 INTEGRAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE CO.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED) (b) Stock options -- continued During the quarter-ended September 30,1999, 87,500 and 665,000 additional share options were issued under the plan for an exercise prices of $0.40 and $.23 respectively. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan and accordingly, compensation expense of $70,600 was recognized as salaries expense during the year ended June 30, 1999. (c) Included in promissory notes receivable are: (i) $31,500 on exercise of 210,000 stock options, interest of 10% per annum, due November 1, 1999; and (ii) $252,568 for issue of 1,683,789 common shares, interest at 6% per annum, due January 17, 2001. 10. INCOME TAXES A deferred tax assessment stemming from the Company's net loss carry forward, has been reduced by a valuation account to zero due to uncertainties regarding the utilization of deferred assets. At June 30, 1999 the Company has available a net operating loss carry forward of approximately $2,448,000 which it may use to offset federal taxable income. The net operating loss carry forward if not utilized, will begin to expire in 2011. 11. INTEREST ON BENEFICIAL CONVERSION The differences between the market value of the Company's shares on the date of conversion and the conversion rate pursuant to $525,000 of the convertible debenture issued during the year ended June 30, 1999 was $398,077. The difference between the market value of the Company's shares and the issue price of 1,683,789 common shares for a promissory note in the amount of $252,568 was $168,379. These amounts have been recorded as interest expenses in the statement of operations. 12. CONTINGENCY A dispute exists between WVRUC and the Company with respect to the development work performed by WVURC on the Plasma Ignition System and the Counterfeit Detection Technology. The Company has included in its accounts the amount owing to WVU of $397,296, however, it is the opinion of management that this amount should be reduced to $43,052, Management intends to defend this position. As the actual outcome cannot be determined at this time, any adjustments required will be recorded by the Company when settlement occurs. F-31 PART III ITEM 1. INDEX TO AND DESCRIPTION OF EXHIBITS
Number Description ------ ----------- 2.1 Agreement and Plan of Reorganization between the Registrant and Integral Vision Systems, Inc. dated March 11, 1997. (Incorporated by reference to Exhibit 2.1 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 2.2 Agreement and Plan of Reorganization between the Registrant and Emergent Technologies Corporation dated December 10, 1997. (Incorporated by reference to Exhibit 2.2 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 3.1 Articles of Incorporation, as amended and currently in effect. (Incorporated by reference to Exhibit 3.1 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 3.2 Bylaws, as amended and restated on December 31, 1997. (Incorporated by reference to Exhibit 3.2 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 10.1 Sublicense Agreement between the Registrant's subsidiary, Emergent Technologies Corporation, and Integral Concepts, Inc., dated January 2, 1996, relating to the Toroidal Helical Antenna. (Incorporated by reference to Exhibit 10.1 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 10.2 Agreement between the Registrant and West Virginia University Research Corporation on Behalf of West Virginia University dated February 9, 1996, relating to RF Quarter-Wave Coaxial Cavity Resonator. (Incorporated by reference to Exhibit 10.2 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 10.3 Agreement between the Registrant and West Virginia University Research Corporation on Behalf of West Virginia University dated February 9, 1996, relating to Counterfeit Currency Determination Prototype. (Incorporated by reference to Exhibit 10.3 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 10.4 Sublicense Agreement between Integral Concepts, Inc. and the Registrant dated February 15th, 1996, relating to the design, construction and operation of a Plasma Ignition System. (Incorporated by reference to Exhibit 10.4 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 10.5 Employment Agreement between the Registrant and William S. Robinson dated October 1, 1997 and Addendum dated March 15, 1999. (Incorporated by reference to Exhibit 10.5 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 10.6 Employment Agreement between the Registrant and William A. Ince dated October 1, 1997 and Addendum dated March 15, 1999. (Incorporated by reference to Exhibit 10.6 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.)
29 EXHIBIT INDEX
EXHIBIT NO DESCRIPTION ------- ----------- 10.7 Employee Benefit and Consulting Services Compensation Plan, as restated January 10, 1999. (Incorporated by reference to Exhibit 10.7 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 10.8 Sublicense Agreement between the Registrant's subsidiary, Integral Vision Systems, Inc., and Integral Concepts, Inc., dated February 15, 1994, relating to vision system technologies. (Incorporated by reference to Exhibit 10.8 of the Registrant's registration statement on Form 10-SB/A-1 filed February 8, 2000.) 21.1 List of Subsidiaries. (Incorporated by reference to Exhibit 21.1 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 27 Financial Data Schedule. (Incorporated by reference to Exhibit 27 of the Registrant's registration statement on Form 10-SB (file no. 0-28353) filed December 2, 1999.) 99.1 Form 10-QSB for the period ended December 31, 1999. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the period ended December 31, 1999, filed February 11, 2000.)
30 SIGNATURES Pursuant to the requirements Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this report or amendment to be signed on its behalf by the undersigned, thereunto duly authorized. INTEGRAL TECHNOLOGIES, INC. By: /s/ William S. Robinson ------------------------------------------------- William S. Robinson, Chairman, Chief Executive Officer, Treasurer and Director By: /s/ William A. Ince ------------------------------------------------- William A. Ince, President, Secretary, Chief Financial Officer and Director By: /s/ Denzel Jack Parsons ------------------------------------------------- Denzel Jack Parsons, Director Dated: March 9, 2000 31