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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended January 31, 2000
Commission File Number 001-14503
DECTRON INTERNATIONALE INC.
--------------------------
(Exact name of registrant as specified in its charter)
QUEBEC, CANADA N/A
-------------- -----------
(State of Incorporation or other (I.R.S. Employer Identification No.)
Jurisdiction of Incorporation or
Organization)
4300 POIRIER BLVD., MONTREAL, QUEBEC, CANADA H4R 2C5
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(Address of principal executive offices) (Zip Code)
(514) 334-9609
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes | | No |X|
The issuer's revenues for the most recent fiscal year were
$31,402,954.
The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the closing price on April 26, 2000 of $3.00 was
approximately $ 2,950,323
As of April 26, 2000, there were 2,795,000 shares of Common Stock, no
par value per share, outstanding.
Documents incorporated by reference: None.
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DECTRON INTERNATIONALE INC.
2000ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PART I
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Item 1. Business........................................................................... 4
Item 2. Properties......................................................................... 9
Item 3. Legal Proceedings.................................................................. 10
Item 4. Submission of Matters to Vote of Security Holders.................................. 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matter .............. 11
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 12
Item 7. Financial Statements............................................................... 16
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures....................................................................... 16
PART III
Item 9. Directors and Executive Officers of the Registrant................................. 17
Item 10. Executive Compensation............................................................. 20
Item 11. Security Ownership of Certain Beneficial Owners and Management..................... 23
Item 12. Certain Relationships and Related Transactions..................................... 24
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 26
Signatures.................................................................................... II-1
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein including, without limitation,
those concerning (i) the strategy of Dectron Internationale Inc. ("Dectron"),
(ii) Dectron's expansion plans and (iii) Dectron's capital expenditures, contain
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) concerning Dectron's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Business." Dectron undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
EXCHANGE RATE DATA
Dectron maintains its books of account in Canadian dollars, but has
provided the financial data in this Form 10-KSB in United States dollars and on
the basis of generally accepted accounting principles as applied in the United
States, and Dectron's audit has been conducted in accordance with generally
accepted auditing standards in the United States. All references to dollar
amounts in this Form 10-KSB, unless otherwise indicated, are to United States
dollars.
The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On April 26, 2000, the exchange rate was Cdn$
0.6776 per US$1.00.
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YEAR ENDED DECEMBER 31, 1994 1995 1996 1997 1998 1999
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<S> <C> <C> <C> <C> <C> <C>
Rate at end of period $0.7143 $0.7353 $0.7299 $0.6991 $0.6532 $0.6929
Average rate during period 0.7299 0.7299 0.7353 0.7223 0.6745 0.6730
High 0.7092 0.7009 0.7212 0.6945 0.7061 0.6929
Low 0.7642 0.7533 0.7526 0.7467 0.6376 0.6582
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Unless otherwise indicated, all reference to "Dectron," "us," "our" and
"we" refer to Dectron Internationale Inc. and its wholly-owned subsidiaries:
Dectron Inc. ("Dectron Inc."), Dectron USA, Inc. ("Dectron USA"), Refplus Inc.
("Refplus"), Thermoplus Air Inc. ("Thermoplus"), Klaasco ("Klaasco"),
Circul-aire ("Circul-aire") and IPAC 2000, Inc., ("IPAC").
OVERVIEW
Dectron is located primarily in and around Montreal, Quebec, Canada.
Through our operating subsidiaries, Dectron Inc., Refplus, Thermoplus, Klaasco,
Circul-aire and IPAC, we manufacture and supply an array of products for the
dehumidification, refrigeration, air conditioning and indoor air quality ("IAQ")
markets. The products manufactured and supplied include mechanical dehumidifiers
and energy recovery systems through Dectron Inc., and refrigeration and air
conditioning systems through Refplus and Thermoplus. Thermoplus also has a line
of air filtration products. Circul-aire specializes in air, gas, dust and fume
filtration, IAQ and heat recovery. IPAC specializes in precision cooling
products, air conditioning products and compressed air products. Klaasco is
responsible for producing the bulk of our special steel enclosures, electrical
control panels, and other steel products. However, each of our manufacturing
subsidiaries have the capability of doing their own sheet metal work.
We believe that we have structured Dectron in such a way that, other
than with respect to the raw materials required to make the components for our
products and certain specialty products, we are not dependent on outside
suppliers for fabricated parts for our products. We have invested significant
resources in our manufacturing equipment and as a result we can manufacture the
most important components for any of our fabricated products, regardless of
whether the product is standard or a custom design.
DECTRON INC.
Dectron Inc., the largest of the subsidiaries, was incorporated in 1977
to develop, manufacture and market standard and custom design dehumidification
equipment. After extensive research and development, Dectron Inc. introduced a
line of indoor pool and commercial dehumidifiers under its DRY-O-TRON -TM-
trademark. This product line has experienced tremendous success in North America
and as a result has allowed us to become, in our opinion, the leader in North
America's indoor pool dehumidification business. We believe that Dectron is now
one of North America's leading manufacturers of dehumidification and closed
looped energy recyclers.
Dectron Inc.'s standard products are now primarily manufactured by
Thermoplus. As a result, Dectron Inc. focuses its own manufacturing operations
on the manufacture of its customized dehumidification systems. We believe that
the customized product market is where our competitive advantage is most
evident. Ordinarily, with a customized product, it is often very difficult to
commit to an aggressive delivery date for the finished product. However, since
we manufacture many of the component parts in-house, we are able to commit to an
aggressive delivery schedule. We have taken the necessary steps to align
ourselves with several suppliers of our raw materials so that we are not
dependent on any one supplier. In addition, we store a sufficient inventory of
raw material to supply our immediate needs. Some of our customized product
customers include Celebration City, Walt Disney World in Florida and the
Goodwill Games which were held in Atlanta, Georgia.
Dectron Inc., through its subsidiary Dectron USA, operates a sales
office in the United States located in Roswell, Georgia. This office supports
the efforts of Dectron Inc.'s network of trained manufacturer's
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representatives who sell Dectron Inc.'s products throughout the United States.
Dectron Inc. also has sales representatives throughout Canada and overseas. We
invite our independent sales representatives and their technicians to be trained
and certified by Dectron Inc.'s own technical staff at no cost to the attendees
at a training school run by Dectron. We also use the training school to both
market our products and demonstrate to potential buyers, first hand, the
technical excellence our employees have to offer as a service to our customers.
We believe that customer service and technical expertise are a large part of
what sets us apart from our competitors. We also market our products in trade
magazines, through industry associations and by attending trade shows where we
display and demonstrate many of our products.
REFPLUS
Refplus was incorporated in 1993 to manufacture high quality modular
commercial and industrial refrigeration and air conditioning equipment for
commercial and special applications. Its products include refrigeration systems,
condensers, coils, walk-in storage coolers and freezers. In addition, Refplus
manufactures all of the heat transfer coils used by Dectron Inc. Refplus'
primary customers are supermarkets and convenience or grocery stores. Refplus'
product line, is designed around hydrofluorocarbon refrigerants ("HFC"), and
features high quality products intended to meet the needs of a broad range of
customers. See "Industry Background."
Since inception, Refplus has manufactured some complex products for
application in fruit storage facilities, industrial baking facilities and blast
chillers for meat processing plants. We believe that our Refplus product lines
offer an excellent opportunity for future expansion. See "Expansion Plans."
Refplus has a small network of sales representatives in Canada,
however, the majority of its sales are conducted through a network of
independent wholesalers.
THERMOPLUS
In 1987, Keepkool Transfer de Chaleur Inc. ("Keepkool"), the former
parent company of Thermoplus, purchased the manufacturing facilities of York
International in St-Jerome, Quebec. Keepkool was owned by a group of
investors active in the heating, ventilation and air-conditioning ("HVAC")
industry, which group included Ness Lakdawala, our President and CEO, to
manufacture air conditioning systems. Since inception, Thermoplus has
introduced and sold a variety of HVAC product lines through a network of
Canadian wholesalers. In 1995, Thermoplus introduced specialized product
lines in the field of dehumidification and specialized air conditioning.
Thermoplus' present product lines include dehumidification
equipment, water source air conditioners and heat pumps, portable or mobile
air conditioning equipment, industrial air handlers, air to fluid heat
exchangers and IAQ filtration products. These product lines are sold through
a network of Canadian wholesalers and HVAC representatives. Although
Thermoplus' products are sold throughout North America, with some exports
outside of North America, the majority of its revenues are derived from sales
to Dectron Inc. We believe that Thermoplus' product lines have growth
potential, estimating that the present potential for growth in both sales and
manufacturing output is roughly 3 times its present output. See "Expansion
Plans."
CIRCUL-AIRE
In 1998, Dectron acquired the Circul-aire Group, consisting of Cascade
Technologies, Inc. 9048-3140 Quebec, Inc. and its subsidiaries, and P.M. Wright
Ltd. (collectively referred to as "Circul-aire"). Circul-aire is considered one
of the pioneers of the air treatment industry and is a worldwide recognized
leader in the advanced technologies of gas-phase filtration and energy recovery.
Circul-aire's reputation has been built on years of research and development and
growing numbers of worldwide satisfied customers. Circul-aire's in house
laboratory and team of experienced engineers offer a systematic integrated
approach in solving ever changing and difficult environmental control problems.
Unique systems are designed and manufactured in Circul-aire's facilities to suit
specific applications. Equipment efficiency and filter media life is optimized
with Circul-aire's preventive maintenance program.
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Circul-aire's Multi-Mix -TM- media and integrated systems are used to
reduce the odor and corrosion potential of commercial, institutional, sewage
treatment and industrial environments. Combined with air-to-air heat exchanger
options, Circul-aire's systems recuperate valuable energy from various
airstreams. All Circul-aire systems are engineered and manufactured to withstand
the most severe industrial environments, including those containing corrosive
gases.
KLAASCO
In 1989, Dectron acquired Klaasco, which has been an in-house
manufacturer of a wide range of metal products for more than 20 years. Most of
Klaasco's product demand has been special enclosures, electrical control panels,
control room consoles, shelters and busbars. Although most of Klaasco's products
are manufactured for Dectron Inc., it does manufacture some metal products for
sales to unaffiliated companies. We believe that the acquisition of Klaasco was
an important strategic decision and it has given us the quality assurance,
product control and a significantly greater ability to meet aggressive delivery
deadlines.
IPAC
IPAC was acquired by Dectron in September 1999. IPAC specializes in the
business of precision cooling products, air conditioning products and compressed
air products, and manufactures industrial products, heat transfer products,
compressed air products, engineered systems sheet metal fabrication and painting
products. We believe that IPAC's products, such as steam traps for steam coils
in HVAC systems, complement and complete our existing product lines. IPAC also
provides us with a manufacturing facility in the United States and opens a new
market to Dectron, the compressed air market, in which we believe IPAC to be
well established.
INDUSTRY BACKGROUND; PRODUCT APPLICATION
Dectron is aware of an increased public movement to encourage healthy
environments in all public places and the resulting market potential for its
products. For example, the hazards of second hand smoke have led to the ban of
cigarette smoking in most public areas. The public's demands have also been
focused on finding engineered solutions to ensure a healthy and comfortable
environment in schools and in the workplace. The theme has become much wider in
scope and has gained recognition as IAQ.
The American Society of Heating, Refrigeration and Air Conditioning
Engineers ("ASHRAE") is the organization that sets ventilation standards in the
heating, refrigeration and air-conditioning industries for the United States and
Canada. ASHRAE has revised and re-drafted virtually all of the previous
ventilation standards with the objective to meet the public demand for healthier
indoor environments and to eliminate potential health hazards such as the
much-publicized "Sick Building Syndrome." These standards are found in Article
62-1989R "Standard for Acceptable Ventilation Rates" ("62-1989R") and have
gained the acceptance and support of many important and related institutions
such as the International Society for Indoor Air Quality ("ISIAQ") and other
worldwide environmental associations.
We believe that the standards in 62-1989R will have a far-reaching
effect on the fresh air requirements for all new and existing public buildings
in Canada and the United States. These standards specify, among other things,
that 5 to 20 cubic feet per minute (CFM) per person of fresh air should be
introduced into all public places. The exact amount depends on the level of
activity and the capacity of the space in question.
As a result, a new market has been created by these new fresh air
requirements. HVAC experts agree that the biggest challenge and key to avoid
"Sick Building Syndrome" is to introduce fresh air and to remove humidity from
the air. Moisture and humidity has been identified as one of the main causes of
health hazards such as Legionnaire's Disease.
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Heightened IAQ awareness has created a niche market for new product
development. Dectron has developed a product line of "Make-Up Air Dehumidifiers"
that we believe can solve what we perceive as the two main problems in IAQ:
moisture and humidity. Dectron's products are capable of bringing the required
amounts of outdoor air into public areas while at the same time dehumidifying
the air, thus addressing the problems of moisture and humidity.
Our engineers have designed our products for the IAQ market with a
reversible Water Source Heat Pump, a commonly used heating system that can be
easily connected to the popular water loop systems found today in almost every
building in every major North American city. We believe that Dectron's Make-Up
Air Dehumidifiers represent the most economical solution to meet the new
standards for healthy buildings, and have the potential to become one of our
most important and fastest growing product lines, along with our swimming pool
dehumidifiers.
In addition, we intend to aggressively market Thermoplus' Air
Filtration & Purification product line that we believe offers a comprehensive
solution to IAQ in industrial and non-industrial applications.
Our goal is to aggressively expand into the IAQ market, while
continuing to maintain and expand the individual markets we currently serve.
BUSINESS STRATEGY
Our objective is to become North America's leading supplier of
dehumidification, refrigeration and other IAQ products, and to develop a strong
international sales network. As we intensify our marketing efforts, we will
continue to attempt to increase our market share for our various products. We
intend to place special emphasis in the short term on our Refplus products in
the United States to address the need for HFC refrigeration, and on Thermoplus'
Make-Up Air and Air Filtration & Purification products for the IAQ market.
SALES AND MARKETING
Our current sales and marketing efforts take place at the subsidiary
level, with each subsidiary taking its own approach with respect to its
products.
Dectron Inc. markets its products on several levels. Dectron Inc.
markets its products directly through trade magazines and industry associations,
as well as by attending and demonstrating its products at numerous trade shows
throughout North America. Regionally, Dectron Inc. markets its products through
non-employee sales representatives who enjoy exclusive rights to their
respective sales regions. At present, Dectron Inc. has approximately 120
regional representatives throughout North America, and expects to add more in
2000. Internationally, Dectron Inc. has sales coverage in England, Portugal,
Israel, Kuwait and Taiwan. We believe that while the international markets
provide tremendous growth opportunities for us, it is important to first develop
a strong support network.
Thermoplus' advertising and marketing is limited because the majority
of its revenues are derived from sales made to Dectron Inc. and Refplus.
Thermoplus primarily sells its products through wholesalers in Canada, and
through manufacturing representatives, one based in Canada and the other based
in the United States. However, we also market Thermoplus' products, including
its Air Filtration & Purification product line for the IAQ market, through
Dectron Inc.'s sales representatives.
Refplus' marketing and advertising is currently done almost exclusively
through trade magazines. Most of its sales are through wholesalers and original
equipment manufacturers. Generally, Refplus does not sell directly to the end
user. Its sales force currently consists of service personnel who are based at
Dectron's headquarters, outside sales people based in Canada and in the United
States, and two sales agencies covering Canada and the United States with
approximately 22 representatives. We believe that with the phasing out of
hydrochlorofluorocarbons ("HCFC") refrigeration products and the legislative
push towards HFC refrigeration products (such as Refplus products), Refplus'
product line is well suited for an aggressive growth commitment.
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Circul-aire markets its products on several levels. In Canada, its
products are sold through a network of sales agents that cover every province
and major market area. In the United States, Circul-aire's products (air
filtration and energy recuperation) are sold through a network of core
representation organizations. We are presently looking for additional
representatives to more fully cover the United States market.
In Asia and Europe, Circul-aire's market is extended through agents
located in each major market. Circul-aire has also opened branch offices staffed
with sales, engineering and service personnel in Jakarta, Indonesia, Bangalore,
India and Vancouver, Canada.
Circul-aire advertises in industry journals, magazines, and its website
where prospective customers can obtain information on its products and also
actively participates in trade associations and tradeshows.
Klaasco does not currently market a significant amount of its products
to outside purchasers. The majority of Klaasco's revenues are derived from sales
to Dectron Inc.
IPAC markets its products through regional representatives in the
United States and Canada.
EXPANSION
We have grown from a single product and single-market company into a
group of companies that cover a full range of humidity control, IAQ control,
energy recycling and refrigeration products and air purification, and have the
production potential for both custom engineered and mass-produced products. We
believe that the introduction of a complete line of products to penetrate all
segments of the IAQ market will put us in the unique position of being one of
the only fully integrated companies of our kind. We expect that with a strong
sales and marketing strategy to promote these and other subsequent products, we
will experience a period of substantial growth, although there can be no
assurance thereof. We plan to continuously inform our current and new targeted
customers about our products through technical seminars, product exhibitions and
publication of major events in industry journals.
We intend to strengthen our position in the United States by
establishing multiple regional sales and distribution offices. We believe that
our active presence in the United States with Dectron products will allow us to
closely track the performance of our products in the market and will help
solidify alternate distribution networks for our Refplus product. We also intend
to aggressively pursue other international markets, starting with South America,
followed by the Caribbean and Mexico.
The present need for specialized IAQ equipment in North America
represents a market, estimated by our management to be in the multi-million
dollar range, in which only a limited number of companies have presently taken
the lead. We believe that with our team of engineering and design specialists,
Dectron can be on the leading edge as a manufacturer and supplier of specialized
IAQ equipment into the next century.
COMPETITION
The industries in which we compete are highly competitive. We compete
against a number of local, regional and national manufacturers in each of our
business segments, many of these competitors have been in existence longer than
us and some of which have substantially greater financial resources than us. We
compete on various basis, including price, quality and ability to meet delivery
schedules. Dectron Inc. competes with, among others, DesertAire and Engineered
Air, and Refplus and Thermoplus compete with, among others, Cancoil and
Keeprite. Circul-aire competes with, among others, Purafil and Unisob. IPAC
competes with, among others, Pomona and Canatal. We believe that competition
from new entrants, especially in the IAQ markets will come, if at all, from
large corporations which may be able to compete with us on the basis of price,
and as a result may have a material adverse affect on our results of operations.
In addition, there can be no assurance that other companies will not develop new
or enhanced products that are either more effective than our products, or would
render our
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products non-competitive or obsolete.
EMPLOYEES
As of April 1, 2000, Dectron (including our subsidiaries) employed a
total of approximately 409 full-time employees, 7 of which are in executive
positions, 39 of whom are engaged in engineering and research and development,
52 of whom are engaged in sales and related services, 33 of whom are in
administration, and the remainder of which are in production. 43 of our
employees, all of which work at Thermoplus, are represented by an in-house
union. Certain terms of their employment are part of a collective bargaining
agreement that expires in 2001. Management considers its relations with its
employees to be satisfactory.
PATENTS AND TRADEMARKS
We have two United States and two Canadian patents. The patents expire
between 2000 and 2011. Three of the patents relate to swimming pool
dehumidifiers and the other relates to the Method and Apparatus for Controlling
Heat Rejection in a Refrigeration System.
We have trademarked the names "Dectron" and "Dry-O-Tron" in both the
United States and Canada. The trademarks come up for renewal between 2000 and
2010. We also hold the trademark in "MultiMix" and "MM Multi-Mix" in the United
States and Canada. The MultiMix and MM Multi-Mix trademarks will be due for
renewal in the year 2014. In addition, we hold the trademark in "CIRCUL-AIRE" in
the United States and Canada, which was renewed in 1999.
RECENT EVENTS
On February 28, 2000, we purchased IPAC's manufacturing facility in
Niagara Falls, New York, for a approximately $2.8 million dollars. The facility
includes a 125,000 square foot manufacturing plant on 17 acres of land. We also
assumed the lease of IPAC's sales and warehouse facility in Toronto, Ontario,
Canada. The lease for the 3,700 square foot sales and warehouse facility expires
in 2003 and calls for a monthly rent of approximatley $1,250.
We have entered into negotiations to acquire a company in the United
States, which has developed a line of IAQ products with its own patented
technology. No assurance can be given that these negotiations will be successful
or result in our acquisition of said company.
ITEM 2. PROPERTIES
We maintain our executive office at leased premises located at 4300
Poirier Blvd., Montreal, Quebec H4R 2C5. This lease expires January 31,
2005. We also have eight additional manufacturing facilities, of which five
are leased and three are owned. Seven of our manufacturing facilities are
located in or near Montreal, Quebec, and one is located in Niagara Falls, New
York. The manufacturing facilities, which we own are located in St. Jerome,
Quebec Boucherville, Quebec, and Niagara Falls, New York. The facilities are
in good condition and do not require any significant capital expenditure. We
maintain property insurance on the three owned manufacturing facilities in an
amount that we believe to be sufficient. Of the five leased facilities, three
of the leases expire on January 31, 2005. Of the other two leases one expires
on August 31, 2000 and the other expires March 2001 but may be renewed for an
additional five-year term. We also lease, for a monthly rent of $2,324, a
4,000 square foot sales and training facility in Roswell, Georgia. In
addition, we lease, for a monthly rent of approximately $1,250, a 3,700
square foot sales and warehousing facility in Toronto, Ontario. Our
facilities have an aggregate of approximately 343,000 square feet. We pay an
aggregate of approximately $21,720 rent per month. We believe that suitable
additional space will be available in the future on commercially reasonable
terms.
We are seeking International Quality Standard ISO-9001 certification
for our Dectron Inc. facility and
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International Quality Standard ISO-9002 certification for our Thermoplus
facility. ISO 9001 and ISO 9002 require the facility to meet certain stringent
requirements established in Europe but adopted throughout the world which ensure
that facilities' manufacturing processes, equipment and associated quality
control systems will satisfy specific customer requirements. We believe that ISO
certification will benefit us in the markets in which we compete. There is no
assurance that ISO certification will be obtained in the near future, if at all.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings now pending or threatened
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of the security holders.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock and warrants are traded on the Nasdaq SmallCap Market
and the Boston Stock Exchange and have been so traded since the completion of
our initial public offering on October 5, 1998. Our common stock is listed on
the Nasdaq SmallCap Market under the symbol "DECT" and on the Boston Stock
Exchange under the Symbol "DEC." Our warrants are listed on the Nasdaq SmallCap
Market under the symbol "DECT W" and on the Boston Stock Exchange under the
Symbol "DEC W." As of April 26, 2000, we had 2,975,000 shares of common stock
and 1,150,000 warrants outstanding. The following table sets forth the high and
low sales prices for our common stock and warrants as reported on the Nasdaq
SmallCap Market.
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COMMON STOCK WARRANTS
High Low High Low
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Fiscal year ended January 31, 2000: $5.25 $2.250 $0.938 $0.188
First quarter (2/1/99 thru 4/30/99) $5.25 $2.250 $0.938 $0.188
Second quarter (5/1/99 thru 7/31/99) $2.938 $2.281 $0.500 $0.250
Third quarter ( 8/1/99 thru 10/31/99) $4.688 $2.875 $0.625 $0.313
Fourth quarter ( 11/1/99 thru 1/31/00) $3.938 $2.531 $0.625 $0.313
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As of April 26, 2000, there were 38 shareholders of record and
approximately 475 beneficial owners.
On April 26, 2000, the last sale price of our common stock and warrants
as reported on the Nasdaq SmallCap Market was $3.00 and $ 0.4375, respectively.
DIVIDEND POLICY
We have never paid or declared dividends on our common stock. The
payment of cash dividends, if any, in the future, is within the discretion of
our Board of Directors and will depend on our earnings, capital requirements,
financial condition and other relevant factors. We intend to retain future
earning for use in our business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE SELECTED HISTORICAL FINANCIAL DATA, FINANCIAL STATEMENTS AND NOTES
THERETO AND THE OTHER HISTORICAL FINANCIAL INFORMATION OF DECTRON CONTAINED
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-KSB. THE STATEMENTS CONTAINED IN THIS
ANNUAL REPORT ON FORM 10-KSB THAT ARE NOT HISTORICAL ARE FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE EXCHANGE ACT OF 1934, INCLUDING STATEMENTS
REGARDING DECTRON'S EXPECTATIONS, INTENTIONS, BELIEFS OR STRATEGIES REGARDING
THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE DECTRON'S STATEMENTS REGARDING
LIQUIDITY, ANTICIPATED CASH NEEDS AND AVAILABILITY AND ANTICIPATED EXPENSE
LEVELS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS ARE BASED ON
INFORMATION AVAILABLE TO DECTRON ON THE DATE HEREOF, AND DECTRON ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENT. IT IS IMPORTANT TO NOTE
THAT DECTRON'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.
OVERVIEW
We have been in operation since June 1977 and have grown from a single
product and single market company into a group of companies that cover a full
range of humidity control, IAQ control, energy recycling, air purification and
refrigeration products which are marketed worldwide. We secure our contracts
through a network of representatives. We are not dependent upon any major
customer for a significant portion of our revenues.
Our goal is to aggressively seek a leading position in the IAQ market
through lateral growth and acquisitions. We intend to devote significant efforts
to the development of equipment for the IAQ market. We anticipate that the IAQ
market will have enormous growth in the next 25 years. We believe that there is
a need in the North American market for specialized IAQ equipment and this
represents a tremendous opportunity. We expect a period of substantial growth,
which will be supported by a strong marketing strategy to promote these and
other subsequent new products.
On November 27, 1998, we acquired a 100% interest in the Circul-aire
Group ("Circul-aire") for cash consideration of $ 2,377,895. Circul-aire, based
in Montreal, with clients throughout the world, specializes in air, gas dust and
fume filtration, IAQ and heat recovery. The acquisition of Circul-aire, having a
similar corporate culture, similar operating methods, compatible customer
support philosophies and lines of products, consistent with those used in the
HVAC/air filtration industry, further widens our base of business and provides
opportunities for cross selling various products and services within Dectron.
On September 1999, we acquired specified assets from Ipac Inc. and Ipac
Canada Inc. for a cash consideration of US$ 3,700,000. Ipac 2000 Inc. ("IPAC")
was formed to hold the newly acquired assets. IPAC, based in Niagara Falls, New
York specialize in precision air conditioning products, heat transfer systems,
industrial heat exchangers, fluid cooling systems, and compressed air treatment
products. On a pro-forma basis, this transaction will result in an increase of
approximately $ 4 million dollars in revenues, and approximately $ 250,000 in
net income. Net profits will increase on a pro-forma basis to over $ 1.3 million
dollars. Since the transaction has not resulted in the issuance of any
additional common stock, it is anticipated that this transaction will have a
positive and immediate impact our earnings per share. With this acquisition, we
intend to increases our market reach in a rapidly growing segment of the IAQ
sector while expanding our manufacturing base.
12
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 31, 2000 ("FISCAL 2000") COMPARED TO THE YEAR ENDED JANUARY
31, 1999 ("FISCAL 1999")
Revenues for the year ended January 31, 2000 were $ 31,402,954, a 53.2%
increase over prior year revenues of $ 10,907,614. This increase was in part due
to very good economic conditions in Dectron's principal market, the United
States and good economic conditions in Canada, Dectron's secondary market and
contributions from Dectron's newly acquired division IPAC and 12 months of
results of Circul-aire.
Gross profit increased by $4,436,318 to $11,234,298 over the same
period. This represents an increase of 2.6%, expressed in relation to sales.
Compared to the increase in sales of 53.2%, the gross profit increased by 65.3%
due to improve control over costs
Selling and marketing expenses increased $2,535,511 in Fiscal 2000.
This increase reflects the costs of additional personnel and marketing
expenses necessitated by sales growth. Also, it reflects the integration of
Circul-aire's and IPAC's personnel and our concerted effort to increase our
visibility by participating in a record amount of industrial shows. As a
percentage of revenues, selling and marketing expenses increased to 16.7%
from 13.3%.
General and administrative expenses increased by $735,729 to
$2,065,155. As a percentage of revenues, general and administrative expenses
increased to 6.5% from 6.4% of sales. Both percentage and dollar amount
increases were due partly to the integration of both Circul-aire's and IPAC's
personnel.
Depreciation increased by $453,918 to $1,187,662 due to the acquisition
of Circul-aire's and IPAC's assets. As a percentage of sales, depreciation
increase from 3.5% to 3.7% in fiscal 2000.
Financing expenses increased by $315,013 from $359,274 to $674,287. As
a percentage of revenues, financing expenses increased from 1.7% to 2.1%
Income before income taxes was $2,036,538 an increase of $396,147 over
the comparative period. Relative to sales, income before income taxes decreased
from 8.0% in Fiscal 1999 to 6.5% in Fiscal 2000.
Income tax expenses as a percentage of taxable income increased from
31.2% for 1999 to 44.6% for 2000. Tax expenses increased by $398,565 mainly
because of the increase in taxable income.
As a result of the above factors, Dectron's net income decreased from $
1,129,181 to $ 1,126,763, a decrease of 0.2%.
FISCAL 1999 COMPARED TO THE YEAR ENDED JANUARY 31, 1998 ("FISCAL 1998")
Revenues for the year ended January 31, 1999 were $20,495,340, a 25.2%
increase over prior year revenues. This increase was in part due to very good
economic conditions in Dectron's principal market, the United States of America,
good economic conditions also in Canada, Dectron's secondary market and a
contribution of $ 1,002,775 from Dectron's newly acquired division, Circul-aire.
Gross profit increased by $1,204,491 to $ 6,797,980 over the same
period. This represents a decrease of 1.0%, expressed in relation to sales.
Compared to the increase in sales of 25.2%, the gross profit increased by 21.5%
due to a slightly higher cost of sales.
Selling and marketing expenses increased by $463,092 to $1,329,426 in
Fiscal 1999. This increase reflects
13
<PAGE>
the costs of additional personnel and marketing expenses necessitated by sales
growth. As a percentage of revenues, selling and marketing expenses decreased
from 13.8% to 13.3%.
General and administrative expenses increased by $25,412 from
$1,304,014 to $1,329,426. As a percentage of revenues, general and
administrative decreased from 7.9% to 6.5%.
Depreciation increased by $272,644 to $733,744 due to the acquisition
of Circul-aire's assets. As a percentage of sales, depreciation increased from
2.8% to 3.5% in Fiscal 2000.
Financing expenses increased by $71,597 from $ 287,677 to $ 395,274. As
a percentage of revenues, financing expenses remained stable at 1.7%.
Income before income taxes was $ 1,640,391 an increase of $ 371,746
over the comparative period. Relative to sales, income before income taxes
slightly increased from 7.7% in Fiscal 1998 to 8.0% in Fiscal 1999.
Income tax expenses as a percentage of taxable income decreased from
32.0% for 1998 to 31.1% for 1999. Income Tax expenses increased by $105,896 as a
result of the increase in taxable income.
As a result of the above factors, Dectron's net income increased from $
863,331 to $ 1,129,181, an increase of 30.8%.
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 2000, we generated a negative cash flow from operating
activities of $1,606,430 due mainly to higher accounts receivable and the
implementation of a stocking program, following consolidation of our
acquisitions of Circul-aire and IPAC. In Fiscal 1999, we generated a negative
cash flow from operating activities of $608,022 due mainly to higher accounts
receivable and the implementation of a stocking program, following consolidation
of our acquisition of Circul-aire.
The principal source of cash was an increase in accounts payable of
$1,283,078, net income of $1,126,763, and non-cash items in the amount of
$1,187,662. Accounts payable increased because of the increased volume in
business. Non-cash items increased due to investment in capital assets. The
principal uses of cash were an increase in accounts receivable of $2,007,191 and
increase in inventory of $3,031,453. Increases in accounts payable, accounts
receivable, inventory and non-cash items are also affected by the consolidation
of our new acquisitions, Circul-aire and IPAC. Cash flow from investing
activities was reduced by $4,425,284 mainly as a result of the acquisition of
new machinery and equipment for a total of $3,323,520, and a deposit on a
building of $1,000,000. Financing activities provided net cash flow in the
amount of $5,389,945. The principal sources of cash flow were from advances from
long-term debt in the amount of $3,948,516 and advances from bank loans in the
amount of $2,669,311. The principal uses of cash flow from financing were
repayment of bank loans payable in the amount of $533,199 and advances for share
purchase plan receivable of $499,946. Net cash flow used after all activities
was $284,981.
FISCAL 2000
In Fiscal 2000, we renewed a secured credit arrangement with National
Bank of Canada. This new facility included an aggregated credit line of Cdn
$9,500,000 of which Cdn $4,700,000 can be financed through bankers acceptance.
The amount available to Dectron is equal to 75% of "eligible accounts
receivable" as defined in the Line of Credit Agreement, plus 50% of the
inventory values, net of work in process, up to a maximum advance against
inventory of approximately $4,000,000. Dectron's borrowing under the Line of
Credit bears interest at Canadian prime plus .25%, which at January 31, 2000
amounted to 6.5%. Interest on any borrowings is payable monthly. Dectron is in
full compliance with all of the banking covenants (included financial covenants
and ratios) and is required to report to its bankers on a monthly basis. Dectron
finances its operations mainly through the use of Bankers Acceptance bearing an
average lending rate of prime. All borrowings are collateralized by Dectron's
assets.
14
<PAGE>
In September 1999, Dectron secured a short-term bank financing in the
amount of $4,000,000 in order to finance the acquisition of the specified assets
from IPAC at U.S. prime plus 3%. On February 23, 2000, we replaced this
short-term loan by five-year term loan in the amount of $2,527,000 bearing
interest at U.S. prime rate plus 1%. We also negotiated a mezzanine loan in the
amount of $1,000,000 bearing interest at U.S. prime rate plus 3% for a
three-year term.
In May 1999, we also secured a five year financing in the amount of Cdn
$700,000 through the Immigrant Investors Program at an annual rate of 5.55%. The
Immigrant Investors Program is a program in Canada through which persons seeking
Canadian Citizenship pool monies for investment in companies that meet
established criteria. Interest is paid monthly and Dectron is committed to make
monthly payments of Cdn $3,900 in a sinking fund which is given as security
against the Immigrant Loan. The sinking fund proceeds will be applied to the
outstanding balance which is due in May 2004. We intend to re-negotiate a new
loan to replace the immigrant loan prior or the Immigrant Loan's repayment date.
Through the acquisition of Circul-aire, Dectron also acquired
Circul-aire's existing credit facilities with Royal Bank of Canada consisting of
a Line of Credit in the amount of Cdn $3,000,000. The amount available to the
Dectron is equal to 75% of "eligible accounts receivable" as defined in the Line
of Credit Agreement, plus 50% of the inventory values, net of work in process,
up to a maximum advance against inventory of approximately $1,000,000. Our
borrowing under the Line of Credit bears interest at an average of Canadian
prime plus .5%, which at January 31, 2000 amounted to 6.5%. Interest on any
borrowings is payable monthly. Subsequent to year-end, Dectron has signed a new
bank agreement which made available an additional operating line of credit of
Cdn $500,000 bearing interest at Canadian prime plus 0.25%.
FISCAL 1999
In fiscal 1999, Dectron renewed a secured credit arrangement with
National Bank of Canada. This new facility included an aggregated credit line of
Cdn $7,000,000 of which Cdn $3,500,000 can be financed through bankers
acceptance. The amount available to Dectron is equal to 75% of "eligible
accounts receivable" as defined in the Line of Credit Agreement, plus 50% of the
inventory values, net of work in process, up to a maximum advance against
inventory of approximately $2,700,000. Dectron's borrowing under the Line of
Credit bears interest at Canadian prime plus .25%, which on January 31, 1999
amounted to 6.75%. Interest on any borrowings is payable monthly. Dectron is in
full compliance with all of the banking covenants (including financial covenants
and ratios) and is required to report to its bankers on a monthly basis. Dectron
finances its operations mainly through the use of Bankers Acceptance bearing an
average lending rate of prime. All borrowings are collateralized by the assets
of Dectron.
In November 1998, Dectron also secured a five year financing in the
amount of Cdn $700,000 through the Immigrant Investors Program at an annual rate
of 5.59%. The Immigrant Investors Program is a program in Canada through which
persons seeking Canadian Citizenship pool monies for investment in companies
that meet established criteria. Interest is paid monthly and Dectron is
committed to make monthly payments of Cdn $11,666 in a sinking fund which is
given as security against the immigrant loan. The sinking fund proceeds will be
applied to the outstanding balance, which is due in September 2003. Dectron
intends to re-negotiate a new loan to replace the immigrant loan prior to the
immigrant loan's repayment date.
Through the acquisition of Circul-aire, Dectron also acquired existing
credit facilities with Royal Bank of Canada consisting of a Line of Credit in
the amount of Cdn $3,000,000. The amount available to Dectron is equal to 75% of
"eligible accounts receivable" as defined in the Line of Credit Agreement, plus
50% of the inventory values, net of work in process, up to a maximum advance
against inventory of approximately $1,000,000. Dectron's borrowings under the
Line of Credit bears interest at an average of Canadian prime plus .5%, which at
January 31, 1999 amounted to 6.75%. Interest on any borrowings is payable
monthly. Dectron is in full compliance with all of the banking covenants
(including financial covenants and ratios) and is required to report to its
bankers on a monthly basis. All borrowings are collateralized by the assets of
Dectron.
15
<PAGE>
In Fiscal 1999, the principal source of cash were from net income of $
1,129,181, and from increases in accounts payable in the amount of $1,849,619.
The principal use of cash was the increase in inventory of $ 1,320,706 and the
increase in accounts receivable of $2,975,820. Accounts receivable and inventory
increased because of the increase in the volume of business. Cash flow from
investing activities was reduced by $ 3,872,826 as a result of the purchase of a
production facilities and equipment in the amount of $1,941,188. Financing
activities provided cash flow in the amount of $ 4,931,126. The principal
sources of cash flow from financing come from the issuance of capital stock in
the amount of $4,932,834. The principal use of cash flow from investing is
repayment of loan payable in the amount of $180,484. Net cash flow generated
after all activities was positive in the amount of $ 477,388.
THE YEAR 2000 PROBLEM
It was anticipated that many computer systems and software products
worldwide and throughout all industries would not function properly, unless
upgraded, in the year 2000, due to a once common programming standard that
represents years using two-digits. We believe that we adequately assessed the
year 2000 problem as it relates to our business and operations and believe that
we are year 2000 compliant. To date, we have not experienced any year 2000
related problems.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are included at the end of this Annual Report
on Form 10-KSB at the pages included below.
<TABLE>
<CAPTION>
Page
Financial Statements: Number
------
<S> <C>
Report of Independent Auditors................................................................................F - 1
Consolidated Balance Sheets for the years ended January 31, 2000 and January 31, 1999 ...............F - 2 to F - 3
Consolidated Statements of Earnings for the
years ended January 31, 2000, 1999 and 1998..........................................................F - 4
Consolidated Statements of Cash Flows
for the years ended January 31, 2000, 1999 and 1998.............................................F - 5 to F - 7
Consolidated Statements of Stockholders' Equity
for the years ended January 31, 2000, 1999 and 1998......................................................F - 8
Notes to Consolidated Financial Statements..........................................................F - 9 to F - 28
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no changes in or disagreements with its
Accountants.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT
THE OFFICERS AND DIRECTORS OF DECTRON, AND FURTHER INFORMATION
CONCERNING THEM, ARE AS FOLLOWS:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ness Lakdawala 65 Chairman of the Board of Directors, President and
Chief Executive Officer
Reinhold Kittler 61 Executive Vice President and Director
Roshan Katrak 55 Vice President of Human Relations and Director
Mauro Parissi 33 Chief Financial Officer, Secretary and Director
Michel Lecompte 49 Vice President of Operations of Refplus
David Lucas 39 Vice President of Dectron Inc.
Leena Lakdawala 31 Executive Vice President and Director
Richard Ness 35 Director
Guy Houle 59 Director (1)
</TABLE>
- ---------
(1) Guy Houle resigned from our Board of Directors on October 21, 1999. The
vacancy in the Board of Directors created by his resignation has not been filled
as of the date of this Annual Report. However, we are currently searching for a
qualified replacement and expect to fill the vacancy in the near future.
Each director is elected for a period of one year at our annual meeting
of stockholders and serves until the next such meeting and until his or her
successor is duly elected and qualified. Directors may be re-elected annually
without limitation. Officers are appointed by, and serve at the discretion of,
our Board of Directors (the "Board").
Set forth below is a biographical description of each of our directors
and executive officers based on information supplied by each of them.
NESS LAKDAWALA has served as the President, Chief Executive Officer and
Chairman of Dectron since our inception, and has also served as the President
and Chief Executive Officer of Dectron Inc. since 1994. Prior to joining Dectron
Inc., Mr. Lakdawala was President of Blanchard Ness Limited, a company which he
founded in 1976. From 1987 to present, Mr. Lakdawala has served as the President
of Thermoplus. In January 1996, Thermoplus filed a proposal under the provisions
of the Bankruptcy Act which gave full payment to secured creditors who filed a
proof of claim. From 1987-1988, Mr. Lakdawala was Chairman of the Heating
Refrigeration Air Conditioning Institute of Canada. Mr. Lakdawala has also
served as the Governor of the American Society of Heating, Refrigeration and Air
Conditioning Engineers, Inc. ("ASHRAE"), the organization that sets ventilation
standards in Canada and the United States. Mr. Lakdawala is currently a member
of ASHRAE and the Refrigeration Service Engineers Society. Ness Lakdawala is the
husband of Roshan Katrak and the father of Leena Lakdawala.
17
<PAGE>
REINHOLD KITTLER has served as Executive Vice President and a Director
of Dectron since our inception, and has also served as the Chairman of Dectron
Inc. since 1994. From 1985 to 1993, Mr. Kittler was President of Dectron Inc. He
currently teaches refrigeration engineering at Vanier College in Montreal,
Quebec. Mr. Kittler has contributed extensively to the ASHRAE Handbook. Mr.
Kittler is a member of numerous industry related societies, including the Order
of Engineers of Quebec (since 1973), the International Institute of Ammonia
Refrigeration (since 1992), the Air Conditioning and Refrigeration Institute
(since 1996), the Refrigeration Services Engineers Society (since 1979) and
ASHRAE (since 1974). Mr. Kittler is frequently a guest speaker at industry
related symposiums.
ROSHAN KATRAK has served as Vice President of Human Relations of
Dectron since our inception, and has served in the same capacity with Dectron
Inc. since 1994. She has also served as a Director of Dectron since 1998. From
1976 to 1994, she was a Director of Blanchard Ness Limited, and from 1987 to
present has been Vice President of Human Relations for Thermoplus. In January
1996, Thermoplus filed a proposal under the provisions of the Bankruptcy Act
which gave full payment to secured creditors who filed a proof of claim. Mrs.
Katrak received her Honors Degree in Psychology in 1964. Roshan Katrak is the
wife of Ness Lakdawala and the mother of Leena Lakdawala.
MAURO PARISSI, C.A. has served as the Chief Financial Officer,
Secretary and a Director of Dectron since our inception, and has also served as
the Controller of Dectron Inc. since 1996. From 1995-1996, Mr. Parissi was an
auditor with the firm of Mizgala & Cie. From 1990-1995, Mr. Parissi was an
auditor with the firm of Hart, David Lloyd, F.C.A., C.I.P. Mr. Parissi is
currently a member of The Canadian Institute of Chartered Accountants and The
Order of Chartered Accountants of Quebec. Mr. Parissi received his graduate
diploma in Public Accountancy from McGill University in 1995.
MICHEL LECOMPTE has served as the Vice President of Operations since
our inception and President of Refplus since 1994. From 1977 to 1994, Mr.
Lecompte was with Blanchard Ness as both Chief Engineer and Estimator. Mr.
Lecompte was involved in estimating commercial and industrial HVAC systems as
well as updating operating and maintenance procedures to improve existing
equipment efficiency. Mr. Lecompte also provided technical guidance to
construction departments and identified evaluated and resolved problems. Mr.
Lecompte is a member of ASHRAE and is a voting member of ASHRAE's Technical
Committee which establishes worldwide acceptance of HVAC standards. In addition,
Mr. Lecompte conducts many HVAC seminars focusing on refrigeration and heat
recovery. Mr. Lecompte is also a member of the Refrigeration Service Engineers
Society.
DAVID LUCAS has served as the Vice President of Dectron Inc. since
1996. From 1993 to 1996, Mr. Lucas was a management consultant for the Federal
Cooperative Housing Stabilization Fund, where he managed loan portfolios and
provided management consulting services. From 1991 to 1993, Mr. Lucas was
Director of Marketing for Dectron Inc. He received his Bachelor of Science in
Engineering Physics from Queen's University in Kingston Ontario in 1981, and his
MBA from the University of Western Ontario in 1988.
LEENA LAKDAWALA has served as Executive Vice President and a Director
of Dectron since our inception, and has also served as Vice President of
Production and Administration for Dectron Inc. since 1994. She is currently a
member of the Heating Refrigeration and Air Conditioning Institute. Mrs.
Lakdawala received her B.A from Concordia University in 1993. Leena Lakdawala is
the daughter of Ness Lakdawala and Roshan Katrak.
RICHARD NESS has served as a Director of Dectron since 1998. Mr. Ness
is president and chief operating officer of ECE Electronic Clearing, Inc., a
firm offering technical and operational services to investment dealers in
Canada. Previously, he was vice president client services and member seat holder
of the Toronto Stock Exchange with Le Groupe Option Retraite, Inc. and
investment dealer with memberships on the Montreal and Toronto stock exchanges.
Prior to joining Option Retraite, he was vice president of operations at Marleau
Lemire Securities and chief financial officer of Marleau Lemire U.S.A., an
N.A.S.D. member firm.
GUY HOULE served as a Director of the Company from our inception until
October 21, 1999, the date of his resignation. He is currently a partner in the
intellectual property firm of Swabey Ogilvy Renault of Montreal, Quebec.
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<PAGE>
He is also the President of Homart Ventures Inc., a product development
consulting company. Mr. Houle specializes in the field of technology transfer
and intellectual property licensing and has written articles and given lectures
on this topic. From 1984 to 1991 he was a member of the board of the Licensing
Executives Society (USA and Canada), Inc. ("LES"), during which time he also
served as vice-president, treasurer and member of the executive committee and
chairman of the audit committee. Mr. Houle is a member of several professional
associations, including the Institute of Electrical and Electronics Engineers,
Licensing Executives Society, Patent and Trademark Institute of Canada,
Institute of Electrical and Electronic Engineers and International Association
of Intellectual Property Practitioners.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Bylaws provide that we shall indemnify to the fullest extent
permitted by Canadian law our directors and officers (and former officers and
directors). Such indemnification includes all costs and expenses and charges
reasonably incurred in connection with the defense of any civil, criminal or
administrative action or proceeding to which such person is made a party by
reason of being or having been our officer or director if such person was
substantially successful on the merits in his or her defense of the action and
he or she acted honestly and in good faith with a view to our best interests,
and if a criminal or administrative action that is enforced by a monetary
penalty, such person had reasonable grounds to believe his or her conduct was
lawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted our directors, officers and
controlling persons and our underwriters pursuant to the foregoing provisions,
or otherwise, we have been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses, incurred or paid by one of our directors,
officers or controlling persons in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person or by
our underwriters in connection with the securities being registered, we will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
19
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by Dectron during each of the last three fiscal years to our
Chief Executive Officer and to each of our executive officers who earned in
excess of $100,000 during the year ended January 31, 2000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND RESTRICTED OTHER
PRINCIPAL ANNUAL STOCK COM-
POSITION YEAR SALARY (1) BONUS AWARDS OPTIONS/SARS PENSATION
-------- ---- ---------- ----- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Ness Lakdawala 2000 $140,647 -0- -0- -0- -0-
Chairman of the Board of 1999 $140,647 -0- -0- -0- -0-
Directors, President, and 1998 $140,647 -0- -0- -0- -0-
Chief Executive Officer
</TABLE>
(1) This reflects the aggregate salaries paid to Mr. Lakdawala during the fiscal
years presented by Dectron, Refplus and Thermoplus.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Mr. Ness Lakdawala, our
Chief Executive Officer on October 5, 1998, the effective date of our initial
public offering. The employment agreement is for a term of two years, renewable
for additional one-year periods. The employment agreement entitled Mr. Lakdawala
to an annual salary of $200,000, adjusted annually for increases in the Consumer
Price Index. In the event that we are subject to a takeover or a change of
control event, Mr. Lakdawala is entitled to a bonus equal, on an after tax
basis, to five times his then current annual base salary. Mr. Lakdawala's
employment agreement contains a non-competition provision which forbids him from
engaging in a competitive business during his employment and for a period of one
year thereafter.
We do not currently have employment agreements with any of our other
officers or directors.
BOARD COMPENSATION REPORT
EXECUTIVE COMPENSATION POLICY
Dectron's executive compensation policy is designed to attract,
motivate, reward and retain the key executive talent necessary to achieve our
business objectives and contribute to our long-term success. In order to meet
these goals, Dectron's compensation policy for our executive officers focuses
primarily on determining appropriate salary levels and providing long-term
stock-based incentives. To a lesser extent, the Dectron's compensation policy
also contemplates performance-based cash bonuses. Dectron's compensation
principles for the Chief Executive Officer are identical to those of Dectron's
other executive officers.
20
<PAGE>
CASH COMPENSATION. In determining its recommendations for adjustments
to officers' base salaries for fiscal 2000, we focused primarily on the scope of
each officer's responsibilities, each officer's contributions to Dectron's
success in moving toward its long-term goals during the fiscal year, the
accomplishment of goals set by the officer and approved by the Board for that
year, our assessment of the quality of services rendered by the officer,
comparison with compensation for officers of comparable companies and an
appraisal of our financial position. In certain situations, relating primarily
to the completion of important transactions or developments, we may also pay
cash bonuses, the amount of which will be determined based on the contribution
of the officer and the benefit to Dectron of the transaction or development.
EQUITY COMPENSATION. The grant of stock options to executive officers
constitutes an important element of long-term compensation for the executive
officers. The grant of stock options increases management's equity ownership in
us with the goal of ensuring that the interests of management remain closely
aligned with those of our stockholders. The Board believes that stock options in
Dectron provide a direct link between executive compensation and stockholder
value. By attaching vesting requirements, stock options also create an incentive
for executive officers to remain with us for the long term.
CHIEF EXECUTIVE OFFICER COMPENSATION
As indicated above, the factors and criteria upon which the
compensation of Ness Lakdawala, our Chief Executive Officer, is based are
identical to the criteria used in evaluating the compensation packages of the
other executive officers of Dectron. The Chief Executive Officer's individual
contributions to Dectron include his leadership role in establishing and
retaining a strong management team, developing and implementing our business
plans and attracting investment capital to Dectron. In addition, we have
reviewed compensation levels of chief executive officers at comparable companies
within our industry.
OTHER COMPENSATION
Outside directors may be paid an honorarium for attending meetings of
the Board of Directors of Dectron, in an amount that management anticipates will
not exceed $500 per meeting.
STOCK OPTION PLAN
We have adopted a Stock Option Plan (the "Plan") pursuant to which
650,000 shares of Common Stock are reserved for issuance, 349,000 options are
currently issued and outstanding.
On September 2, 1999, the Board granted options under our Stock Option
Plan to certain members of our Board and certain employees. Leena Lakdawala,
Roshan Katrak, Mauro Parissi, and Richard Ness were granted 60,000, 60,000,
18,000 and 8,000 options, respectively. Subject to certain limitations, the
options granted are exercisable one year after issuance. Subsequent to the
one-year anniversary date of the grant, the option holders may exercise the
option up to 25% per year of the total options granted for the following four
years. Each of the options will be fully exercisable on November 4, 2003, and
expire on November 4, 2004. The exercise price of the options is $3.00
The Plan is administered by the Board of Directors, who will determine,
among other things, those individuals who shall receive options, the time period
during which the options may be partially or fully exercised, the number of
shares of Common Stock issuable upon the exercise of the options and the option
exercise price.
The Plan is effective for a period of five years, expiring in 2003.
Options may be granted to officers, directors, consultants, key employees,
advisors and similar parties who provide us with their skills and expertise. The
Plan is designed to enable management to attract and retain qualified and
competent directors, employees, consultants and independent contractors. Options
granted under the Plan may be exercisable for up to five years, and shall be at
an exercise price all as determined by the Board. Options are non-transferable
except by the laws of descent and distribution or a change in control of
Dectron, as defined in the Plan, and are exercisable only by the participant
during
21
<PAGE>
his or her lifetime. Change in control includes (i) the sale of substantially
all of the assets of Dectron and merger or consolidation with another company,
or (ii) a majority of the Board changes other than by election by the
stockholders pursuant to Board solicitation or by vacancies filled by the Board
caused by death or resignation of such person.
If a participant ceases affiliation with Dectron by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other types of termination allow the participant three months
to exercise, except for termination for cause, which results in immediate
termination of the option.
The exercise price of an option may not be less than the fair market
value per share of Common Stock on the date that the option is granted in order
to receive certain tax benefits under the Income Tax Act of Canada (the "ITA").
The ITA requires that the exercise price of all future options will be at least
85% of the fair market value of the Common Stock on the date of grant of the
options. A benefit equal to the amount by which the fair market value of the
shares at the time the employee acquires them exceeds the total of the amount
paid for the shares or the amount paid for the right to acquire the shares shall
be deemed to be received by the employee in the year the shares are acquired
pursuant to paragraph 7(1) of the ITA. Where the exercise price of the option is
equal to the fair market value of the shares at the time the option is granted,
paragraph 110(1)(d) of the ITA allows a deduction from income equal to one
quarter of the benefit as calculated above. If the exercise price of the option
is less than the fair market value at the time it is granted, no deduction under
paragraph 110(1)(d) is permitted. Options granted to any non-employees, whether
directors or consultants or otherwise will confer a tax benefit in contemplation
of the person becoming a stockholder pursuant to subsection 15(1) of the ITA.
Options under the Plan must be issued within five years from the
effective date of the Plan.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by Dectron become available again for issuance
under the Plan.
The Plan may be terminated or amended at any time by the Board of
Directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the Plan may not be
increased without the consent of our stockholders.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 26, 2000
with respect to each beneficial owner of 5% or more of the outstanding shares
of our common stock, each of our officers and directors, and all of our
officers and directors as a group:
<TABLE>
<CAPTION>
NAMES AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENTAGE OF SHARES
OWNER (1) BENEFICIAL OWNERSHIP(2) OUTSTANDING
--------- ----------------------- -----------
<S> <C> <C>
Ness Lakdawala 1,674,059(3) 59.89%
Roshan Katrak 1,674,059(4) 59.89%
Reinhold Kittler 0 *
Mauro Parissi 45,000 1.6%
Guy Houle 0 *
Ralph Kittler 40,000(5) 1.7%
Dave Lucas 48,500 1.7%
Richard Ness 4,000 *
Leena Lakdawala 0 *
All directors and officers 1,811,559 64.81%
As a group (9 persons)
(3)(4)(5)
</TABLE>
* Less than one %.
(1) The address of each individual is c/o Dectron Internationale Inc., 4300
Poirier Blvd., Montreal, Quebec, Canada H4R 2C5.
(2) Based upon information furnished to us by the directors and executive
officers or obtained from our stock transfer books. We are informed that
these persons hold the sole voting and dispositive power with respect to
the common stock except as noted herein. For purposes of computing
"beneficial ownership" and the percentage of outstanding common stock held
by each person or group of persons named above as of the date of this
annual report, any security which such person or group of persons has the
right to acquire within sixty (60) days after such date is deemed to be
outstanding for the purpose of computing beneficial ownership and the
percentage ownership of such person or persons, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.
(3) Represents (i) 43,561 shares of Common Stock directly owned, (ii) 67,395
shares of Common Stock owned by Roshan Katrak, Mr. Lakdawala's wife, (iii)
69,684 shares of Common Stock owned by Roshaness Inc., a company owned by
Mr. Lakdawala, and (iv) 1,492,879 owned by 3103-7195 Quebec Inc., a company
owned by Mr. Lakdawala's spouse and children.
23
<PAGE>
(4) Represents (i) 67,395 shares of Common Stock directly owned, (ii) 43,561
shares of Common Stock owned by Ness Lakdawala, Ms. Katrak's husband, (iii)
69,684 shares of Common Stock owned by Roshaness Inc., a Company owned by
Ness Lakdawala, and (iv) 1,492,879 shares owned by 3103-7195 Quebec Inc., a
company owned by Mrs. Katrak and her children.
(5) Ralph Kittler is the son of Reinhold Kittler, a director.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We lease our St. Hubert, Quebec manufacturing facility from Roshan
Katrak, our Vice President of Human Relations and the wife of Ness Lakdawala,
our President, Chairman and CEO, for a monthly rent of $3,094 per month. We
believe that the lease was made on terms no less favorable than could be
obtained from unaffiliated third parties.
We lease our Montreal, Quebec manufacturing facilities from Roshaness
Inc., a company owned by Ness Lakdawala, for a monthly rent of $3,220 per month.
We believe that the lease was made on terms no less favorable than could be
obtained from unaffiliated third parties.
We lease one commercial truck from Investiness Inc., a company owned
equally by Ness Lakdawala's children, for an aggregate monthly lease payment of
Cdn$590.97 Upon expiration of the lease in 2001, ownership of the truck will
transfer from Investiness Inc. to Refplus. We believe that these leases were
made on terms no less favorable than could be obtained from unaffiliated third
parties.
Immediately prior to the effective date of the Registration Statement
for our initial public offering (the "Offering"), we restructured our corporate
structure ("Restructuring"). In order to complete the Restructuring, (i) Dectron
Inc., which prior to the Restructuring owned a majority interest in Refplus,
acquired the minority interests in Refplus, which included both common stock and
preferred stock (and assumed Refplus' loan payables of approximately
Cdn$125,000) which is included in the Cdn$1,149,050 number mentioned below) in
exchange for 62,500 shares of Dectron's Common Stock and Cdn$102,503; (ii)
Dectron Inc. acquired all of the outstanding securities of Thermoplus, which
included both Common Stock and preferred stock, and assumed Thermoplus' parent
company's loan payables (approximately Cdn$497,000, which amount is included in
the Cdn$1,149,050 number mentioned below) in exchange for 194,621 shares of
Dectron's Common Stock and Cdn$423,738, and (iii) Dectron acquired all of the
issued and outstanding securities of Dectron Inc. in exchange for 1,492,879
shares of the Dectron's Common Stock. The shares of Dectron Inc. were owned by
159653 Canada, Inc. which was a holding company beneficially owned by Mr.
Lakdawala. The Refplus and Thermoplus' parent company loans payable represent
the repayment of loans made to such companies. In connection with the
Restructuring, we issued 1,750,000 shares of Common Stock and promissory notes
in the aggregate amount of Cdn$1,149,050. Of this amount, Cdn$557,050 (or
approximately U.S.$400,000) were repaid out of the proceeds of the Offering. Of
these amounts, an aggregate amount of 1,674,059 shares of Common Stock and
promissory notes in the aggregate amount of Cdn$592,000 were issued to Ness
Lakdawala, and his affiliates. The Cdn$592,000 was repaid out of Dectron's cash
flow, without interest, in 12 equal monthly installments which repayment
commenced three months after the Offering.
Mr. Lakdawala and his affiliates received their 1,674,059 shares of
Dectron for contributing their interest in Dectron's subsidiaries. Specifically,
Mr. Lakdawala's affiliate received 1,492,879 shares in exchange for 100% of
159653 Canada Inc., which owned 100% of Dectron Inc. prior to the Restructuring;
156,808 shares for a portion of their shares of KeepKool which represented 86%
of KeepKool (KeepKool owned 94% of Thermoplus prior to the Restructuring); and
24,372 share for his shares of 3294242 Canada Inc. which represented 61% of
3294242 (3294242 owned 49.99% of Refplus, Inc. prior to the Restructuring).
Dectron Inc. owned 50.01% of Refplus Inc. prior to the Restructuring. The two
promissory notes totaling Cdn$592,000 were issued to Mr. Lakdawala and his
affiliates in exchange for Cdn$222,000 of debt owed to Mr. Lakdalawa by KeepKool
and Cdn$370,000 for a portion of his shares of KeepKool.
24
<PAGE>
The terms of the Restructuring were negotiated between Mr. Lakdawala
and the other owners of the minority interest in Refplus and Thermoplus. Mr.
Lakdawala and his affiliates held a majority interest in Thermoplus prior to the
Restructuring. Dectron owned a majority interest in Refplus prior to the
Restructuring and Mr. Lakdawala owned a majority of the 49.99% interest in
Refplus purchased by Dectron in the Restructuring. The value was arrived at
based on negotiations between Dectron and the sellers (other than Mr. Lakdawala
and his affiliates). Dectron did not have two independent disinterested
directors to ratify the transactions. There can be no assurance that such
transaction was on terms no less favorable than Dectron could have obtained from
other third parties, although management believes that they were as favorable.
Between March and May 1999, we made loans of $123,061.31 to Mauro
Parissi, our Chief Financial Officer, $108,569.95 to Ralph Kittler, the son of
Reinhold Kittler, a Director, $134,064.48 to Dave Lucas, our Vice President. The
loans were used to finance purchase of the Dectron's stock and bore interest at
the Canadian prescribed interest rate of five percent (5%). The borrowers plan
to repay the loan through credit facilities they expect to take from the
National Bank of Canada.
All future material transactions, including any loans, between Dectron
and its officers, directors, principal stockholders or affiliates of any of them
have been and will be on terms no less favorable to Dectron than those that can
be obtained from unaffiliated third parties, and will be approved in advance by
a majority of the independent and disinterested directors who had access, at
Dectron's expense, to Dectron's or independent legal counsel.
25
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Financial Statements.
Report of Independent Auditors....................................................................F- 1
Consolidated Balance Sheets for the years ended January 31, 2000 and 1999................F- 2 to F - 3
Consolidated Statements of Earnings
for the years ended January 31, 2000, 1999 and 1998...........................................F- 4
Consolidated Statements of Cash Flows
for the years ended January 31, 2000, 1999 and 1998..................................F- 5 to F - 7
Consolidated Statements of Stockholders' Equity
for the years ended January 31, 2000, 1999 and 1998...........................................F- 8
Notes to Consolidated Financial Statements..............................................F- 9 to F - 28
(b) Reports on Form 8-K.
On September 29, 1999, the Company filed a report on Form 8-K to
disclose the acquisition of IPAC, Inc.
(c) Exhibits.
27. Financial Data Schedule
</TABLE>
26
<PAGE>
DECTRON INTERNATIONALE INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS AT JANUARY 31, 2000
<PAGE>
DECTRON INTERNATIONALE INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS AT JANUARY 31, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2 to F-3
Consolidated Statements of Earnings F-4
Consolidated Statements of Cash Flows F-5 to F-7
Consolidated Statements of Stockholders' Equity F-8
Notes to Consolidated Financial Statements F-9 to F-28
</TABLE>
<PAGE>
Schwartz Levitsky Feldman LLP
COMPTABLES AGREES
CHARTERED ACCOUNTANTS
MONTREAL, TORONTO, OTTAWA
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
Dectron Internationale Inc.
We have audited the consolidated balance sheets of Dectron Internationale
Inc. as at January 31, 2000 and 1999 and the related consolidated statements
of earnings, cash flows and changes in stockholders' equity for each of the
years ended January 31, 2000, 1999 and 1998. These consolidated financial
statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatements. 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dectron
Internationale Inc. as at January 31, 2000 and 1999 and the results of its
operations and its cash flows for each of the years ended January 31, 2000,
1999 and 1998, in conformity with generally accepted accounting principles in
the United States of America.
Since the accompanying financial statements have not been prepared and
audited in accordance with generally accepted accounting principles and
generally accepted auditing standards in Canada, they may not satisfy the
reporting requirements of Canadian statutes and regulations.
Montreal, Quebec
March 14, 2000 Chartered Accountants
F-1
<PAGE>
DECTRON INTERNATIONALE INC.
CONSOLIDATED BALANCE SHEETS
AS AT JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
A S S E T S
CURRENT
Cash 220,562 505,543
Accounts receivable (note 3) 7,626,840 5,619,649
Income taxes receivable - 71,522
Inventory (note 4) 8,169,607 5,138,154
Prepaid expenses and sundry assets 1,062,973 629,260
Current portion of loans receivable (note 5) - 43,018
Deferred income taxes 85,699 -
--------------- --------------
17,165,681 12,007,146
LOANS RECEIVABLE (note 5) 179,939 79,246
PROPERTY, PLANT AND EQUIPMENT (note 6) 7,673,802 5,406,295
DEPOSIT ON BUILDING 1,000,000 -
INTANGIBLES (note 7) 99,218 -
GOODWILL (note 8) 1,759,297 1,888,400
DEFERRED INCOME TAXES 107,152 -
--------------- --------------
27,985,089 19,381,087
=============== ==============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
<PAGE>
DECTRON INTERNATIONALE INC.
CONSOLIDATED BALANCE SHEETS
AS AT JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
L I A B I L I T I E S
CURRENT
Bank loans (note 9) 5,616,167 2,946,856
Accounts payable and accrued expenses (note 10) 5,096,977 3,813,899
Income taxes payable 140,361 -
Current portion of long-term debt (note 11) 1,263,073 440,523
Notes payable - 533,199
Other loan payable - 64,553
Current portion of deferred revenue (note 14) 228,079 161,226
--------------- ---------------
12,344,657 7,960,256
LONG-TERM DEBT (note 11) 4,657,838 1,531,872
DUE TO DIRECTOR (note 12) 51,905 51,639
LOAN PAYABLE (note 13) 275,057 259,052
DEFERRED REVENUE (note 14) 732,158 605,345
DEFERRED INCOME TAXES - 426,300
--------------- ---------------
18,061,615 10,834,464
--------------- ---------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 15) 6,849,609 6,867,529
TREASURY STOCK (88,780) -
ACCUMULATED OTHER COMPREHENSIVE INCOME 289,121 (67,667)
RETAINED EARNINGS 2,873,524 1,746,761
--------------- ---------------
9,923,474 8,546,623
--------------- ---------------
27,985,089 19,381,087
=============== ===============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE>
DECTRON INTERNATIONALE INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED JANUARY 31
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
2000 1999 1998
$ $ $
<S> <C> <C> <C>
Net sales 31,402,954 20,495,340 16,370,849
Cost of sales 20,168,656 13,697,360 10,777,360
--------------- --------------- ---------------
Gross profit 11,234,298 6,797,980 5,593,489
--------------- --------------- ---------------
Operating expenses
Selling 5,270,656 2,735,145 2,272,053
General and administrative 2,065,155 1,329,426 1,304,014
Depreciation and amortization 1,187,662 733,744 461,100
Interest expense 674,287 359,274 287,677
--------------- --------------- ---------------
9,197,760 5,157,589 4,324,844
--------------- --------------- ---------------
Earnings before income taxes 2,036,538 1,640,391 1,268,645
Income taxes (note 16) 909,775 511,210 405,314
--------------- --------------- ---------------
Net earnings 1,126,763 1,129,181 863,331
=============== =============== ===============
Net earnings per common share, basic and diluted 0.40 0.54 0.49
=============== =============== ===============
Weighted average number of common shares
outstanding 2,795,000 2,082,781 1,750,000
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
DECTRON INTERNATIONALE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
2000 1999 1998
$ $ $
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings 1,126,763 1,129,181 863,331
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,187,662 733,744 461,100
Increase in accounts receivable (2,007,191) (2,575,820) (385,013)
Increase in income taxes receivable - (272,024) -
Increase in inventory (3,031,453) (1,320,706) (1,311,838)
Increase in prepaid expenses and sundry assets (433,713) (336,329) (116,901)
Increase in accounts payable and accrued expenses 1,283,078 1,849,619 309,169
Increase in income taxes payable 211,883 - 299,641
Increase in deferred revenue 193,666 168,656 110,279
Increase (decrease) in deferred income taxes (137,125) 15,657 (164,587)
--------------- --------------- ---------------
Net cash (used in) provided by operating activities (1,606,430) (608,022) 65,181
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
DECTRON INTERNATIONALE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
2000 1999 1998
$ $ $
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (3,323,520) (1,941,188) (1,978,811)
Proceeds from disposal of property, plant
and equipment - - 233,428
Deposit on building (1,000,000) - -
Acquisition of intangibles (101,764) - -
Acquisition of goodwill - (1,931,638) -
--------------- --------------- ---------------
Net cash used in investing activities (4,425,284) (3,872,826) (1,745,383)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of minority interest in equity
consolidated entity - (352,469) -
Proceeds from grant receivable - - 25,019
(Advances to) repayments from directors 266 (15,706) (29,996)
(Advances to) repayments from corporate
shareholders (1,113) 56,550 (110,089)
(Advances to) repayments from loan receivable (56,562) - 47,950
Advances from (repayments of) bank loans 2,669,311 (180,484) 1,504,150
Advances from (repayments of) notes payable (533,199) 533,199 -
Advances from (repayments of) other loan payable (64,553) 64,553 -
Advances from (repayment of) long-term debt 3,948,516 (11,067) 445,308
Advances from (repayment of) loan payable 16,005 (96,284) (320,320)
Issuance of capital stock - 4,932,834 -
Purchase of treasury stock (88,780) - -
Advances for share purchase plan receivable (499,946) - -
--------------- --------------- ---------------
Net cash provided by financing activities 5,389,945 4,931,126 1,562,022
--------------- --------------- ---------------
Effect of foreign currency exchange rate changes 356,788 27,110 94,334
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE>
DECTRON INTERNATIONALE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
2000 1999 1998
$ $ $
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (284,981) 477,388 (23,846)
Cash and cash equivalents, beginning of year 505,543 28,155 52,001
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR 220,562 505,543 28,155
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid 522,558 450,324 317,784
=============== =============== ===============
Income taxes paid 706,339 398,091 358,315
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
<PAGE>
DECTRON INTERNATIONALE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
CUMULATIVE OTHER
RETAINED COMPREHENSIVE TREASURY
NUMBER AMOUNT EARNINGS INCOME STOCK
-------------- -------------- -------------- --------------- -------------
$ $ $ $
<S> <C> <C> <C> <C> <C>
Balance January 31, 1998 91,267 1,934,695 617,580 (94,777) -
Redemption of shares (91,267) (1,934,695) - - -
Issuance of common
Shares 2,795,000 8,421,450 - - -
Cost of issuance - (1,553,921) - - -
Foreign currency
Translation - - - 27,110 -
Net income for the year - - 1,129,181 - -
-------------- -------------- -------------- --------------- -------------
Balance January 31, 1999 2,795,000 6,867,529 1,746,761 (67,667) -
-------------- -------------- -------------- --------------- -------------
Purchase of 20,000
common shares - - - - (88,780)
Share purchase plan
receivable - (499,946) - - -
Deferred tax benefit - 482,026 - - -
Foreign currency
translation - - - 356,788 -
Net income for the year - - 1,126,763 - -
-------------- -------------- -------------- --------------- -------------
Balance, January 31, 2000 2,795,000 6,849,609 2,873,524 289,121 (88,780)
============== ============== ============== =============== =============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-8
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Consolidated Financial Statements Presentation
These consolidated financial statements include the accounts of
Dectron Internationale Inc., Dectron Inc. Consolidated and
Circul-aire Group.
Dectron Inc. Consolidated is comprised of Dectron Inc. and of its
wholly-owned subsidiaries, Refplus Inc., Thermoplus Air Inc., Fiber
Mobile Ltd., Dectron U.S.A. Inc. and IPAC 2000 Inc.
Circul-aire Group is comprised of 9048-3140 Quebec Inc. and Cascade
Technologies Inc., and of its wholly-owned subsidiaries, PM Wright
Ltd., Purafil Canada Inc. and 122248 Canada Inc.
All inter-company profits, transactions and account balances have
been eliminated.
b) Principal Activities
The company Dectron Internationale Inc. was incorporated on March
30, 1998. These companies are principally engaged in the production
of dehumidification, refrigeration, indoor air quality (IAQ),
ventilation, air conditioning and air purification systems in Canada
and its distribution world wide. The activities of Dectron
Internationale Inc., Cascade Technologies Inc., 9048-3140 Quebec
Inc. are immaterial in the aggregate, as their only activity is to
hold the investments in the operating companies.
c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from
banks and any other highly liquid investments purchased with a
maturity of three months or less. The carrying amounts approximate
fair value because of the short maturity of these instruments.
d) Revenue Recognition
Contract revenue is accounted for under the percentage of completion
method prorated on units produced. When a terminal loss on a
contract can be reasonably estimated, the total estimated amount of
the loss is charged to income for the year.
e) Inventory
Inventory of raw materials is valued at the lower of cost and
replacement cost and inventory of work-in-process and finished goods
at the lower of cost and net realizable value. Cost is determined on
the first-in, first-out basis.
F-9
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are
depreciated or amortized on the basis of their estimated useful
lives at the undernoted rates and methods:
<TABLE>
<S> <C> <C>
Building 4 or 5% Straight-line
Machinery and equipment 10% Straight-line or 20% declining balance
Furniture and fixtures 15 or 20% Straight-line or 20% declining balance
Computer equipment 15 or 30% Straight-line 0r 30% declining balance
Rolling stock 30% Straight-line or 30% declining balance
Equipment under capital leases 20 or 30% Declining balance
Leasehold improvements Straight-line over term of the lease
</TABLE>
Depreciation and amortization for assets acquired during the year
are recorded at one-half of the indicated rates.
g) Intangibles
Intangibles represent patents and trademarks costs. These
intangibles are being amortized on the straight-line basis over a
fifteen year period.
h) Goodwill
Goodwill is the excess of cost over the value of net assets
acquired. It is amortized on the straight-line basis over ten years.
i) Deferred Revenue
The company has sold extended warranty contracts covering a period
of four years beyond the one year basic guarantee. The deferred
revenue is recognized as income over the four year period on a
straight-line basis commencing one year from the sale of the
contracts.
j) Income Taxes
The company accounts for income taxes under the provisions of
statement of FAS No. 109, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements and tax
returns. Deferred income taxes are provided using the liability
method. Under the liability method, deferred income taxes are
recognized for all significant temporary differences between the tax
and financial statements basis of assets and liabilities.
F-10
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k) Foreign Currency Translation
The company maintains its books and records in Canadian dollars. The
operations of the company's subsidiary in the United States is an
integrated corporation. As a result, monetary assets and liabilities
in foreign currency are translated into Canadian dollars at exchange
rates in effect at the balance sheet date, whereas non-monetary
assets and liabilities are translated at the average exchange rates
in effect at transaction dates. Revenues and expenses in foreign
currency are translated at the average rate effective during the
year with the exception of depreciation, which is translated at the
historical rate. Gains and losses resulting from the translation of
foreign currency transactions are included in earnings.
The translation of the financial statements from Canadian dollars
("CDN $") into United States dollars is performed for the
convenience of the reader. Balance sheet accounts are translated
using closing exchange rates in effect at the balance sheet date and
income and expense accounts are translated using an average exchange
rate prevailing during each reporting period. No representation is
made that the Canadian dollar amounts could have been, or could be,
converted into United States dollars at the rates on the respective
dates and or at any other certain rates. Adjustments resulting from
the translation are included in the accumulated other comprehensive
income in stockholder's equity.
l) Earnings Per Share
The company has adopted FAS No. 128, "Earnings per Share" which
requires disclosure on the financial statements of "basic" and
"diluted" earnings per share. Basic earnings per share is computed
by dividing net earnings by the weighted average number of common
shares outstanding for the year. Diluted earnings per share is
computed by dividing net earnings by the weighted average number of
common shares outstanding plus common stock equivalents (if
dilutive) related to Warrants for each year. The "basic" and
"diluted" earnings per share are the same because the exercise price
is greater than the average stock price for the year.
m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America
requires management to make estimates and assumptions that effect
certain 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.
F-11
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
n) Long-lived Assets
The company adopted the provisions of FAS No. 121, Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of. FAS No. 121 requires that long-lived assets held and
used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Management used its best estimate of
the undiscounted cash flows to evaluate the carrying amount and have
determined that no impairment has occurred.
o) Recently Issued Accounting Standard
In June 1998, FAS No. 133 was issued with respect to Accounting for
Derivative Instruments and Hedging activities. The requirements of
FAS No. 133 was extended to fiscal years beginning January 1, 2001
by FAS No. 137. The company anticipates that adoption of FAS No. 137
will initially affect comprehensive income.
2. COMPREHENSIVE INCOME
The company has adopted FAS No. 130 "Reporting Comprehensive Income" which
requires new standards for reporting and display of comprehensive income
and its components in the financial statements. However, it does not
affect net earnings or total stockholders' equity. The components of
comprehensive income are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
$ $ $
<S> <C> <C> <C>
NET EARNINGS 1,126,763 1,129,181 863,331
OTHER COMPREHENSIVE INCOME
Foreign currency translation 356,788 27,110 (168,499)
--------------- --------------- ---------------
COMPREHENSIVE INCOME 1,483,551 1,156,291 694,832
=============== =============== ===============
</TABLE>
F-12
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Accounts receivable 7,786,400 5,694,435
Less: Allowance for doubtful accounts 159,560 74,786
--------------- ---------------
Accounts receivable - net 7,626,840 5,619,649
=============== ===============
</TABLE>
4. INVENTORY
Inventory is comprised of the following:
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Raw materials 4,995,391 3,228,825
Work-in-process 1,676,899 856,308
Finished goods 1,497,317 1,053,021
--------------- ---------------
8,169,607 5,138,154
=============== ===============
</TABLE>
5. LOANS RECEIVABLE
The loans receivable consist of the following:
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Loan receivable - private companies 151,813 95,251
Loan receivable - corporate shareholder 28,126 27,013
--------------- ---------------
179,939 122,264
Current portion - 43,018
--------------- ---------------
179,939 79,246
=============== ===============
</TABLE>
F-13
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Land 239,457 229,980
Building 2,556,424 1,977,700
Machinery and equipment 7,055,701 4,788,949
Furniture and fixtures 650,993 513,720
Computer equipment 1,452,354 1,175,318
Rolling stock 106,629 91,831
Equipment under capital leases 542,239 520,779
Leasehold improvements 564,159 424,463
--------------- ---------------
Cost 13,167,956 9,722,740
--------------- ---------------
Less accumulated depreciation and amortization:
Building 354,986 244,168
Machinery and equipment 2,997,693 2,309,951
Furniture and fixtures 447,258 390,403
Computer equipment 1,032,455 854,833
Rolling stock 49,967 24,760
Equipment under capital leases 251,508 171,748
Leasehold improvements 360,287 320,582
--------------- ---------------
5,494,154 4,316,445
--------------- ---------------
Net 7,673,802 5,406,295
=============== ===============
</TABLE>
Depreciation and amortization of property, plant and equipment for fiscal
year 2000 amounted to $982,210 ($643,128 in 1999).
7. INTANGIBLES
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Patents and trademarks costs 101,764 -
Less: Accumulated amortization 2,546
--------------- ---------------
Net 99,218 -
=============== ===============
</TABLE>
Amortization of intangibles for fiscal year 2000 amounted to $2,546 (Nil
in 1999).
F-14
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
8. GOODWILL
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Cost 2,069,190 1,987,298
Less: Accumulated amortization 309,893 98,898
--------------- ---------------
Net 1,759,297 1,888,400
=============== ===============
</TABLE>
Amortization of goodwill for fiscal year 2000 amounted to $202,906
($90,616 in 1999).
9. BANK LOANS
The company has an available line of credit of $7,924,476 bearing interest
between 0.25% and 0.5% per annum over the prime lending rate and it is
renegotiated annually.
Bank loans are secured by a moveable hypothec on accounts receivable,
inventory and commercial equipment, by a $4,134,509 hypothec on all assets
of the company, including a first ranking hypothec in the amount of
$4,134,509 on the proceeds of all risks insurance on the property and by a
solitary guarantee in the amount of $3,445,424 bearing interest between
0.5% and 1% per annum over the prime lending rate with interest payable on
a monthly basis. The bank loans are renegotiated annually.
The company finances its operations mainly through the use of Banker's
Acceptance bearing an average lending rate of less than prime.
The average cost of financing for fiscal year 2000 is 8.19% (7.16% in
1999).
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Accounts payable and accrued expenses are comprised of the following:
Trade payable 3,469,390 2,723,859
Accrued expenses 1,627,587 1,090,040
--------------- ---------------
5,096,977 3,813,899
=============== ===============
</TABLE>
F-15
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
a) Government loans, without guarantee nor interest, repayable 15 years
after their date of receipt, the first portion of $31,698 is
repayable in August 2002 and the second portion of $31,698 is
repayable in July 2004. 63,396 60,887
b) Immigration loans secured by a first ranking universal hypothec on
the universality of the property, moveable and immovable, present
and future, corporeal and incorporeal, bearing interest at variable
rates from 5.21% to 5.59% per annum, due on different dates between
November 2002 and May 2004. The loans are net of sinking funds
since all amounts paid into them must be used to repay the loans. 1,213,966 852,463
c) Obligation under capital lease for rolling stock subject to blended
monthly payments of $437, up to August 2003. 18,783 -
d) Bank term loan secured by a first ranking universal hypothec on the
universality of the property, moveable and immovable, present and
future and corporeal and incorporeal, bearing interest at 7.99% per
annum repayable in monthly capital repayments of $575 plus a final
repayment of $69,415 in December 2002. 88,978 92,088
e) Bank term loan bearing interest at 7% per annum, repayable in
monthly capital repayments of $383, maturing April 2002. 65,843 -
--------------- ---------------
Balance carried forward 1,450,966 1,005,438
--------------- ---------------
</TABLE>
F-16
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
11. LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Balance brought forward 1,450,966 1,005,438
f) Bank loan, bearing interest at prime plus 1% per annum repayable in
monthly capital repayments of $1,544, maturing April 2002. 41,685 57,833
g) Bank loan, bearing interest at prime rate plus 1% per annum,
repayable in monthly capital repayments of $5,240 and a final
repayment of $5,245 plus interest, maturing November 2001. 115,281 171,107
h) Loan from Societe Developpement Industriel du Quebec bearing
interest at a rate of approximately prime plus 1.50% which is
deferred and capitalized for the minimum of either 12 months or when
the accumulated interest is greater than 10% of the loan advance,
repayable in annual payments commencing June 30, 1997 at a rate of
15% of the prior year's net income to a maximum of $34,454 per annum. 45,421 82,229
i) Obligation under capital leases for machinery and equipment with
carrying value of $290,731 repayable by 2 remaining equal payments
of $8,172 and 14 remaining equal payments of $5,903 including
imputed interest of 7.64% and 7.24% respectively plus a purchase
option of $62,757 and $45,691 maturing April 2000 and April 2001
respectively. 198,536 332,966
j) Government loan of an original amount of $213,534, without guarantee
nor interest, repayable in 4 equal annual installments starting at
the latest on December 1, 1997, maturing in December 2000. 53,383 102,541
k) Small business investment loan, secured by machinery and equipment,
repayable in monthly installments of $2,550 and a final repayment of
$1,171, bearing interest at prime plus 1.75%, maturing March 2000. 3,721 35,407
--------------- ---------------
Balance carried forward 1,908,993 1,787,521
--------------- ---------------
</TABLE>
F-17
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
11. LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Balance brought forward 1,908,993 1,787,521
l) Bridge loan secured by a first ranking hypothec with delivery of all
shares of its wholly-owned subsidiaries and an unconditional letter
of guarantee, bearing interest at the Banker's American base rate
plus 3%, renegotiated subsequent to year-end. 4,000,000 -
m) Other 11,918 19,420
n) Long-term debt repaid during the year - 165,454
-------------- ---------------
5,920,911 1,972,395
Less: Current portion 1,263,073 440,523
-------------- ---------------
4,657,838 1,531,872
============== ===============
</TABLE>
Future principal payment obligations are as follows:
<TABLE>
<S> <C>
2001 $ 1,263,073
2002 607,170
2003 908,239
2004 1,049,323
2005 and thereafter 2,093,106
----------------
$ 5,920,911
================
</TABLE>
On February 23, 2000 the bank loan (see note 11-l) was renegotiated and a
term loan in the amount of $2,527,000 bearing interest at the Banker's
American Prime Rate plus 1%, was granted for a term of five years. A
mezzanine loan in the amount of $1,000,000 bearing interest at the Bank's
American Prime Rate plus 3% was also granted for a term of three years.
These loans are secured by a first and second ranking universal hypothec
in the amount of $4,134,509 on all the moveable and immoveable, present
and future of two of its wholly-0wned subsidiaries and an unconditional
letter of guarantee in the amount of $3,527,000.
F-18
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
12. DUE TO DIRECTOR
The amount due to director is unsecured, non-interest bearing and is due
on April 15, 2002.
13. LOAN PAYABLE
This loan payable is non-interest bearing and is owed to private
companies, due on April 15, 2002.
14. DEFERRED REVENUE
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Deferred revenue 960,237 766,571
Current portion 228,079 161,226
--------------- ---------------
732,158 605,345
=============== ===============
</TABLE>
Deferred revenue will be recognized as income as follows:
<TABLE>
<S> <C>
2001 $ 228,079
2002 267,272
2003 223,891
2004 161,825
2005 79,170
---------------
$ 960,237
===============
</TABLE>
F-19
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
15. CAPITAL STOCK
a) Authorized
An unlimited number of preferred shares, non-cumulative, voting, no
par value
An unlimited number of common shares, voting, no par value
b) Issued
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
2,795,000 common shares 6,849,609 6,867,529
=============== ===============
</TABLE>
c) On October 5, 1998 the company issued 1,000,000 common shares in an
Initial Public Offering (the "IPO") for gross proceeds of $6,000,000
and 1,000,000 Warrants for $125,000 less underwriting commission and
other expenses of $1,516,521 ($866,120 net of income taxes
recoverable).
On November 15, 1998 the company issued and additional 45,000 common
shares for gross proceeds of $270,000 and 150,000 Warrants for
$18,750 less underwriting commission and other expenses of $37,400.
Immediately prior to the "IPO" the company issued 1,750,000 common
shares for a share for share exchange valued at $1,596,433.
d) Purchase Warrants
During the fiscal year 1999, Purchase Warrants ("Warrants") were
issued pursuant to a Warrant Agreement between the company and J.P.
Turner & Company, L.L.C. and Klein Maus and Shire Incorporated. Each
Warrant entitles its holders to purchase, during the four year
period commencing on October 5, 1999, one share of common stock at
an exercise price of $9.00 per share, subject to adjustment in
accordance with the anti-dilution and other provision referred to
below.
The Warrants may be redeemed by the company at any time commencing
one year from October 5, 1999 (or earlier with the consent of the
representatives) and prior to their expiration, at a redemption
price of $0.125 per Warrant, on not less that 30 days prior written
notice to the holders of such Warrants, provided that the closing
bid price of the common stock, if traded on the Nasdaq SmallCap
Market, or the last sale price of the common stock, if listed on the
Nasdaq National Market or on a national exchange, is at least 133%
($12.00 per share, subject to adjustment) of the exercise price of
the Warrants for a period of 30 consecutive trading days ending on
the third day prior to the date the notice of redemption is given.
Holders of Warrants shall have exercise rights until the close of
the business day preceding the date fixed for redemption.
F-20
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
15. CAPITAL STOCK (continued)
d) Purchase Warrants (continued)
The exercise price and the number of shares of common stock
purchasable upon the exercise of the Warrants are subject to
adjustment upon the occurrence of certain events, including stock
dividends, stock splits, combinations or classification of the
common stock. The Warrants do not confer upon holders any voting or
any other rights of shareholders of the company.
No Warrant will be exercisable unless at the time of exercise the
company has filed with the Commission a current prospectus covering
the issuance of common stock issuable upon the exercise of the
Warrant and the issuance of shares has been registered or qualified
or is deemed to be exempt from registration or qualification under
the securities laws of the state of residence of the holder of the
Warrant. The company has undertaken to use its best efforts to
maintain a current prospectus relating to the issuance of shares of
common stock upon the exercise of the Warrants until the expiration
of the Warrants, subject to the terms of the Warrant Agreement.
While it is the company's intention to maintain a current
prospectus, there is no assurance that it will be able to do so.
e) Employee Stock Option Plan
The company has adopted a Stock Option Plan (the "Plan") pursuant to
which 650,000 shares of Common Stock are reserved for issuance,
349,000 options are currently issued and outstanding.
On September 2, 1999, the Board granted options under a Stock Option
Plan to certain members of the Board and certain employees. Subject
to certain limitations, the options granted are exercisable one year
after issuance. Subsequent to the one-year anniversary date of the
grant, the option holders may exercise the option up to 25% of the
total options per year for the following four years. Each of the
options will be fully exercisable on November 4, 2003, and expire on
November 4, 2004. The exercise price of the option is $3.00.
The Plan is administered by the Board of Directors, who will
determine, among other things, those individuals who shall receive
options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock issuable
upon the exercise of the options and the option exercise price.
The Plan is effective for a period of five years, expiring in 2003.
Options may be granted to officers, directors, consultants, key
employees, advisors and similar parties who provide Dectron with
their skills and expertise. Options granted under the Plan may be
exercisable for up to five year, and shall be at an exercise price
all as determined by the Board. Options are non-transferable except
by the laws of descent and distribution or a change in control of
Dectron, as defined in the Plan, and are exercisable only by the
participant during his or her lifetime. Change in control includes
(i) the sale of substantially all of the assets of Dectron and
merger or consolidation with another company, or (ii) a majority of
the Board changes other than by election by the stockholders
pursuant to Board solicitation or by vacancies filled by the Board
caused by death or resignation of such person.
F-21
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
15. CAPITAL STOCK (continued)
e) Employee Stock Option Plan (continued)
If a participant ceases affiliation with Dectron by reason of death,
permanent disability or retirement at or after age 70, the option
remains exercisable for one year from such occurrence but not beyond
the option's expiration date. Other types of termination allow the
participant three months to exercise, except for termination for
cause, which results in immediate termination of the option.
Option under the Plan must be issued within five years from the
effective date of the Plan.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by Dectron become available again
for issuance under the Plan.
The Plan may be terminated or amended at any time by the Board of
Directors, except that the number of shares of Common Stock reserved
for issuance upon the exercise of options granted under the Plan may
not be increased without consent of our stockholders.
f) Share Purchase Plan Receivable
The SEC staff Accounting Bulletins require that accounts or notes
receivable arising from transactions involving capital stock should
be presented as deductions from shareholders' equity and not as
assets. Accordingly, in order to comply with U.S. GAAP shareholders'
equity has been reduced by $499,946 at January 31, 2000, to reflect
the loans due from certain employees and officers which relate to
the purchase of common shares of the company.
g) During the year, the company purchased 20,000 common shares as
treasury stock for $88,780.
F-22
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
16. INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
a) Current 1,075,111 480,064
Deferred (recovered) (165,336) 31,146
--------------- --------------
909,775 511,210
=============== ==============
</TABLE>
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
b) Income taxes at Canadian statutory rates: 631,733 480,065
Increase (decrease) resulting from:
Large corporations tax 7,878 -
Manufacturing and processing deduction (105,547) (114,828)
Non-deductible expenses 51,740 -
Temporary differences 332,638 145,973
Application of losses carried forward (16,307) -
Difference between Canadian statutory rates and those applicable to
foreign subsidiary (14,056) -
Other 21,696 -
--------------- --------------
Effective income taxes 909,775 511,210
=============== ==============
</TABLE>
c) Deferred income taxes represent the tax charges derived from temporary
differences between amortization of property, plant and equipment and
recognition of deferred revenue, and the actual amounts deducted from
or added to the taxable income.
F-23
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
17. COMMITMENTS
a) The company is committed to payments under operating leases for its
premises totalling $1,012,820. Annual payments for the next five
years are as follows:
<TABLE>
<S> <C>
2001 $ 357,184
2002 197,473
2003 184,201
2004 139,019
2005 134,943
----------------
$ 1,012,820
================
</TABLE>
b) The company is committed to make monthly payments of $13,414 into
sinking funds which are given as security against the immigration
loans. The annual payments for the next five years are as follows:
<TABLE>
<S> <C>
2001 $ 160,970
2002 160,970
2003 155,595
2004 92,842
2005 10,750
</TABLE>
c) As at January 31, 2000, the company has outstanding letters of
credit totaling $77,436.
These letters of credit were incurred in the normal course of
business.
d) The company has signed purchase orders for machinery and equipment
totaling $389,333. The equipment is expected to be delivered within
the next year. A deposit of $38,933 has been paid.
F-24
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
18. SEGMENTED INFORMATION
<TABLE>
<CAPTION>
2000 1999 1998
$ $ $
<S> <C> <C> <C>
a) The breakdown of sales by geographic area is as follows:
Canada 10,615,226 9,662,901 5,698,411
United States of America 16,387,614 10,332,442 10,672,438
International 4,400,114 499,997 -
--------------- --------------- ---------------
31,402,954 20,495,340 16,370,849
=============== =============== ===============
</TABLE>
b) The breakdown of identifiable assets by geographic area is as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
$ $ $
<S> <C> <C> <C>
Canada 23,217,699 19,381,087 11,524,828
United States 4,767,390 - -
--------------- --------------- ---------------
27,985,089 19,381,087 11,524,828
=============== =============== ===============
</TABLE>
19. ACQUISTIONS
On September 13, 1999 the company acquired the assets of IPAC, Inc. for
$3,700,000. The allocation of the purchase price is summarized as follows:
<TABLE>
<S> <C>
Current assets $ 1,000,000
Property and equipment 1,600,000
Deposit on building 1,000,000
Patents and trademarks 100,000
-----------------
$ 3,700,000
=================
</TABLE>
The purchase method was used to account for the acquisition. The
accompanying financial statements include the operations of the IPAC
business for the period from September 14, 1999 to January 31, 2000.
The purchase of the IPAC business was executed in two steps. The operating
assets were purchased on September 13, 1999 and the building was purchased
February 29, 2000. In order to properly reflect the substance of the two
transactions, $1,000,000 of the initial asset purchase price has been
allocated to the building purchase price based on an appraisal of the
building at the time of the acquisition.
F-25
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
20. FINANCIAL INSTRUMENTS
a) The fair value of cash, accounts receivable and accounts payable
approximately correspond to their book value given their short-term
maturity. The carrying amount of long-term debt approximates fair
value because interest rates are close to market value.
b) The company has borrowed $1,447,078 in order to finance capital
acquisitions (see note 11-b). Concurrently with these borrowings the
company acquired an additional $1,653,804 of financing, for which it
issued commercial paper of $1,653,804 with similar maturity and
terms, as collateral. Since this commercial paper fully satisfies
the required principal repayments of the additional financing, they
have been offset and neither the asset nor the liability appears on
the company's balance sheet.
21. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
2000
-----------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------- ------------- -------------- ------------- -------------
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
Net sales 7,316,795 6,966,199 8,620,718 8,499,242 31,402,954
Gross profit 2,160,009 2,325,663 2,661,602 4,087,024 11,234,298
Operating earnings 641,815 791,363 730,062 547,585 2,710,825
Net earnings (loss) 368,548 485,335 380,089 (107,209) 1,126,763
Earnings (loss) per common
share 0.13 0.17 0.14 (0,04) 0.40
Average number of common
shares outstanding 2,795,000 2,795,000 2,795,000 2,795,000 2,795,000
<CAPTION>
1999
-----------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------- ------------- -------------- ------------- -------------
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
Net sales 5,133,744 4,768,847 5,169,840 5,422,909 20,495,340
Gross profit 1,423,440 1,675,471 1,678,698 2,020,371 6,797,980
Operating earnings 510,041 592,856 659,808 236,960 1,999,665
Net earnings 298,270 309,082 327,877 193,952 1,129,181
Earnings per common shares 0.14 0.15 0.16 0.09 0.54
Average number of common
shares outstanding 2,082,781 2,082,781 2,082,781 2,082,781 2,082,781
</TABLE>
F-26
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
22. SUBSEQUENT EVENTS
Subsequent to year-end, the company signed a new bank agreement which made
available an additional operating line of credit of $344,542 bearing
interest at prime rate plus 0.25%, renegotiated annually.
On February 29, 2000, the company purchased the building they were
currently leasing for an adjusted price of $1,850,000. In connection with
the purchase, the company entered into a mortgage note in the amount of
$1,652,000 and an equipment note in the amount of $406,000.
The mortgage note is payable in monthly principal installments of $9,178
commencing April 1, 2000 until February 1, 2005 followed by a final
installment on March 1, 2005 in the amount of $1,110,511. The note bears
interest at the prime rate plus .75%.
The equipment note is payable in monthly principal installments of $6,767
commencing on April 1, 2000 until March 1, 2005. The note bears interest
at the prime rate plus .75%.
In addition to the above credit facilities, the company also entered into
a revolving credit note agreement. This credit facility is available to
provide working capital as required up to $1,250,000. The note bears
interest at the prime rate plus .5%.
Future principal payment obligations under the above note agreements are
as follows:
<TABLE>
<S> <C>
2001 $ 159,444
2002 191,333
2003 191,333
2004 191,333
2005 and thereafter 1,324,557
-----------------
$ 2,058,000
=================
</TABLE>
F-27
<PAGE>
DECTRON INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 AND JANUARY 31, 1999
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
23. COMPARATIVE FIGURES
Certain figures in the 1999 and 1998 financial statements have been
reclassified to conform with the basis of presentation used in 2000.
24. Uncertainty due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year 2000
Issue that may affect the entity, including those related to customers,
suppliers, or other third parties, have been fully resolved.
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DECTRON INTERNATIONALE INC
By: /s/ Ness Lakdawala
---------------------------------------
Ness Lakdawala
Chairman and Chief Executive Officer
Dated: May 1, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Ness Lakdawala Chairman, President, Chief Executive May 1, 2000
- ----------------------------- Officer
Ness Lakdawala
Executive Vice President and Director May 1, 2000
- -----------------------------
Reinhold Kittler
/s/ Roshan Katrak Vice President of Human Relations May 1, 2000
- ----------------------------- and Director
Roshan Katrak
/s/ Mauro Parissi Chief Financial Officer, Secretary May 1, 2000
- ----------------------------- and Director
Mauro Parissi
Vice President of Operations of Refplus May 1, 2000
- -----------------------------
Michel Lecompte
Vice President of Dectron Inc. May 1, 2000
- -----------------------------
David Lucas
/s/ Leena Lakdawala Executive Vice President and Director May 1, 2000
- -----------------------------
Leena Lakdawala
Director May 1, 2000
- -----------------------------
Richard Ness
</TABLE>
II-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2001
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 220,562
<SECURITIES> 0
<RECEIVABLES> 7,786,400
<ALLOWANCES> 159,560
<INVENTORY> 8,169,607
<CURRENT-ASSETS> 17,165,681
<PP&E> 13,167,956
<DEPRECIATION> 5,494,154
<TOTAL-ASSETS> 27,985,089
<CURRENT-LIABILITIES> 12,344,657
<BONDS> 4,657,838
0
0
<COMMON> 6,849,609
<OTHER-SE> 3,073,865
<TOTAL-LIABILITY-AND-EQUITY> 27,985,089
<SALES> 31,402,954
<TOTAL-REVENUES> 31,402,954
<CGS> 20,168,656
<TOTAL-COSTS> 25,439,312
<OTHER-EXPENSES> 3,252,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 674,287
<INCOME-PRETAX> 2,036,538
<INCOME-TAX> 909,775
<INCOME-CONTINUING> 1,126,763
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,126,763
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.40
</TABLE>
