SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
Pursuant to Section 13 or 15(d) of
the Securities Act of 1934
For the Quarter Ended Commission File
November 30, 1998 Number 0-19796
AIRTECH INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in charter)
Wyoming 98-0120805
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
15400 Knoll Trail, Ste 106
Dallas, Texas 75248
(address of Principal Executive Offices)
972-960-9400
(Registrant's telephone number including area code)
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes_____X____ No __________
The Registrant has 9,579,923 shares of common stock, par value $0.01 per
share issued and outstanding as of November 30, 1998.
Traditional Small Business Disclosure Format
Yes _____X_____ No __________
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Interactive Technologies Corporation, Inc.
Table of Contents
PART I - FINANCIAL INFORMATION Page No.
Item 1. Airtech International Group, Inc. 1 - 9
Financial Statements (Unaudited)
Balance Sheet as of November 30, 1998
Statement of Operations for the six
months ended November 30, 1998 and 1997
Statement of Operations for the three
months ended November 30, 1998 and 1997
Statement of Cash Flows for the six months
ended November 30, 1998 and 1997
Notes to Financial Statements
Item 2. Management's Discussion and Analysis 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K None
SIGNATURE PAGE 12
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Part 1-Financial Information
Item 1 Financial Statements
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1998
UNAUDITED
Assets
Current assets:
Cash $ 127,400
Accounts and note receivable, trade,
net of $10,080 of allowance for
uncollectible amounts 163,131
Inventories 323,489
Prepaid expenses and other assets 61,996
-----------
Total current assets 676,016
-----------
Property and equipment, at cost, net of
$250,338 of accumulated
depreciation 170,252
-----------
Other assets:
Organizational costs, net of $3,334
and $2,534, respectively of
accumulated amortization 4,047
Net assets of discontinued operations,
Held for resale 3,463,762
Intellectual properties, net of $305,281
of accumulated amortization 21,996,603
Notes receivable, net of $0 of allowance
for uncollectible amounts 899,833
Other 531,772
Goodwill 6,487,072
--------------
33,383,089
--------------
Total Assets $ 34,229,357
==============
The accompanying notes are an integral part of the financial statements.
1
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AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1998
UNAUDITED
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade $ 403,318
Accrued expenses 170,812
Notes payable 66,748
Advances from officers 48,900
Current portion of license rights
payable 210,077
------------
Total current liabilities 899,855
------------
Long-term liabilities:
License rights payable 329,923
Notes payable 277,185
Deferred revenue 400,000
Deferred income tax payable 6,487,072
------------
7,494,180
------------
Commitments and contingencies: -
Stockholders' equity:
Preferred stock Series M, $.001
par value, 5,000,000 shares
authorized, 1,143,000, shares
issued and outstanding 1,143
Common stock, $.01 par value
50,000,000 shares authorized,
9,579,923 shares issued
and outstanding 531,869
Paid in capital in excess of par 36,691,618
Accumulated deficit (11,389,309)
------------
25,835,322
------------
$ 34,229,357
============
The accompanying notes are an integral part of the financial statements.
2
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AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED NOVEMBER 31, 1998 AND 1997
UNAUDITED
1998 1997
Revenue $ 640,601 $ (3,328)
Cost of Goods Sold 346,230 -
------------ ------------
Gross income from operations 294,371 (3,328)
------------ ------------
Operating expenses:
Depreciation 32,079 5,414
Amortization 305,281 227,202
Advertising 21,234
General and administrative 691,947 131,626
Interest expense 170,817 12,264
----------- ------------
527,652 376,506
----------- ------------
Loss from operations ( 926,987) ( 379,834)
Estimated income taxes - -
----------- ------------
Net loss $( 926,987) $( 379,834)
============ ============
Net loss per share:
Basic $( .09) $( .02)
Diluted $( .09) $( .02)
The accompanying notes are an integral part of the financial statements.
3
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AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
UNAUDITED
1998 1997
Revenue $ 168,236 $ (6,398)
Cost of Goods Sold 84,354 -
------------ ------------
Gross income from operations 83,882 (6,398)
------------ ------------
Operating expenses:
Depreciation 16,898 0
Amortization 150,509 0
Production costs -
General and administrative 235,220 26,010
Interest expense 122,479 0
------------ ------------
693,706 26,010
------------ ------------
Loss from operations ( 609,824) ( 32,408)
Estimated income taxes 0 0
------------ ------------
Net loss $( 609,824) $( 32,408)
============ =============
Net loss per share:
Basic $( .06) $( .00)
Diluted $( .06) $( .00)
The accompanying notes are an integral part of the financial statements.
4
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AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS
Organization
Airtech International Group, Inc. (the Company) was incorporated in the
state of Wyoming on August 8, 1991 as Interactive Technologies Corporation, Inc.
On May 31, 1998, the Company acquired all of the outstanding common stock shares
of Airtech International Corporation, Inc. ("AIC"), which through its
subsidiaries manufacture and sell various air filtration and purification
products. The total purchase price of $22,937,760 was funded through the
issuance of 10,500,000 of its common stock shares valued at $.625 per share, the
issuance of 11,858,016 of its Series A convertible preferred stock shares valued
at $.625 per share and the issuance of $9,000,000 of convertible debentures.
The transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price of the net assets acquired has been allocated
among the net assets based on their relative fair values with $22,297,684 of the
purchase price allocated to intellectual properties based on an independent
asset appraisal.
On July 31, 1998 the Board of Directors of the Company exercised its option
and converted the convertible debentures and Series A preferred stock by issuing
24,929,445 shares of its unissued common stock. On October 5, 1998, the
Company's shareholders approved a 5 for 1 reverse split of the Company's common
stock.
Consolidated principles
The accompanying consolidated financial statements include the general
accounts of the Company, SNT and AIC and its subsidiaries for the six months and
three months ended November 30, 1998. All material intercompany accounts and
balances have been eliminated in the consolidation.
Impairment of long-lived assets
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used, and long-lived assets and certain identifiable intangibles to be
disposed of. The Company periodically evaluates, using independent appraisals
and projected undiscounted cash flows, the carrying value of its long-lived
assets and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In addition, long-lived assets and identifiable intangibles
to be disposed of are reported at the lower of carrying value or fair value less
cost to sell.
Amortization
Organizational costs are being amortized using the straight-line method
over five years.
License rights are being amortized over the initial five-year term of the
licenses. Although they are renewable at no additional consideration, there is
no guarantee the Company will renew these licenses. At fiscal year ended May 31,
1998 these assets were reclassified as assets of discontinued operations, held
for resale. For the six months ended November 30, 1998 no additional
amortization was booked.
5
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AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS (continued)
Inventories
Inventories are carried at the lower of cost or net realizable value
(market) and include component parts used in the assembly of the Company's line
of air purification units and filters and finished goods comprised of completed
products. The costs of inventories are based upon specific identification of
direct costs and allocable costs of direct labor, packaging and other indirect
costs.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is currently being provided by straight
line and accelerated methods for financial and tax reporting purposes,
respectively, over estimated useful lives of five years.
Capitalized software expenditures
Software and trademark costs are amortized, pursuant to Statement of
Financial Accounting Standards No. 86, at an annual amount equal to the greater
of the amount computed using (a) the ratio that current gross revenues bear to
the total of current and anticipated future gross revenues or (b) the
straight-line method over a seven year estimated economic life beginning April
18, 1996. At May 31, 1998 these assets were reclassified as assets of
discontinued operations, held for resale. No amortization was booked for the
three months ended November 30, 1998.
Intellectual properties
In its acquisition of AIC the Company purchased certain intellectual
properties. Costs incurred by the Company in developing its products consisting
primarily of design, testing and completion of working prototypes, which are
considered patentable, are capitalized and will be amortized over the estimated
useful life of the related patents once a unit has been placed in production.
Accordingly, the Company amortized intellectual properties by $301,018 during
the six months ended November 30, 1998 for units placed in production.
Revenue recognition
Sales are recorded at point and time of shipment
Advertising
The Company's advertising costs, which consist of radio airtime for the
Rebate TV operations, are charged to expense when incurred.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash flow
For purposes of the statement of cash flows, cash includes demand deposits
and time deposits with maturities of less than three months. None of the
Company's cash is restricted.
6
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AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS (continued)
Basis of financial presentation
Basic and diluted earnings per share amounts are based upon 10,325,000 and
18,992,000, respectively, for six months ended November 30, 1998 and 1997,
weighted average shares of common stock and common stock equivalents
outstanding. No effect has been given to the assumed exercise of stock options
and warrants as the effect would be antidilutive.
The accompanying unaudited consolidated financial statements have been
prepared by Airtech International Group, Inc. (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although management
believes that the disclosures are adequate to make the information presented not
misleading, it is suggested that these interim consolidated financial statements
be read in conjunction with the Company's most recent audited consolidated
financial statements and notes thereto. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the interim periods presented have been made. Operating results for
the interim periods presented are not necessarily indicative of the results that
may be expected for the year ending May 31, 1999.
Stock Based Compensation
The Company measures compensation cost for its stock based compensation plans
under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." The difference, if any, between the
fair value of the stock on the date of grant over the exercise price for the
stock is accrued over the related vesting period. SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires companies electing to continue
to use APB 25 to account for its stock-based compensation plan to make pro forma
disclosures of net income and earnings per share as if SFAS 123 had been applied
(see Note J).
Earnings Per Share
Effective December 15, 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." Statement No. 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Under the new requirements for calculating earnings
per share, the dilutive effect of stock options and other dilutive instruments
will be excluded from basic earnings per share but included in the computation
of diluted earnings per share. All earnings per share amounts have been restated
so as to comply with Statement No. 128.
Accounting Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management must make estimates based on future
events that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements, and revenues and expenses during the
reporting period. Actual results could vary from the estimates that were used.
In particular, management continually reviews the allowance for doubtful
accounts. In considering the total allowance for doubtful accounts, management
considers the payment history, underlying collateral value, and ability of the
optical practices to support the required payments to the Company.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
7
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AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS (continued)
Adoption of New Accounting Standards
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, in the first quarter of 1998. If
applicable, the Company will present a new Consolidated Statement of
Comprehensive Income which will report all changes in the Company's
stockholders' equity other than transactions with stockholders. Comprehensive
income pursuant to SFAS No. 130 would include the Company's consolidated net
income, as reported in the Consolidated Statement of Operations, plus the net
changes in the marketable securities, foreign currency translation and pension
liabilities components of stockholders' equity. Management does not believe this
statement will have an impact on its consolidated financial statements.
The Company will adopt SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, for the purposes of its annual financial statements
effective for the year ending December 31, 1998. SFAS No. 131 will supersede the
business segment disclosure requirements currently in effect under SFAS No. 14.
SFAS No. 131, among other things, establishes standards regarding the
information a company is required to disclose about its operating segments. SFAS
No. 131 also provides guidance regarding what constitutes a reportable operating
segment. The Company is currently evaluating the required segment disclosures
pursuant to SFAS No. 131.
The Company will adopt the disclosure requirements of SFAS No. 132, Employer's
Disclosures about Pensions and Other Post-retirement Benefits, in the fourth
quarter of 1998. SFAS No. 132 revises disclosure requirements for such pension
and post-retirement benefit plans to, among other things, standardize certain
disclosures and eliminate certain other disclosures no longer deemed useful.
SFAS No. 132 does not change the measurement or recognition criteria for such
plans. Management does not believe this statement will have an impact on its
consolidated financial statements.
NOTE 2 - PREFERRED STOCK
Convertible preferred stock - Series A
In connection with the Company's acquisition of AIC (Note 1), the Company
established this equity class and authorized 15,000,000 shares. The shares have
a par value of $1.00, do not pay dividends and are convertible at the Company's
option at any time within 24 months after issuance for one share of the
Company's common stock.
Convertible preferred stock - Series M
During the year ended May 31, 1998, the Company established this equity
class and authorized 5,000,000 shares. During the period ended August 31, 1998,
112,500 of these shares were issued for $1.00 cash, or $112,500 net of costs.
The shares have a par value of $.001, do not pay dividends and are convertible
at the Company's option at any time within 36 months after issuance for one
share of the Company's common stock. In addition, attached to each share is one
warrant to purchase one share of common stock at a price of $2.00 per share
exercisable within two years after issuance. This offering was ended as of July
31, 1998.
8
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AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 3 - YEAR 2000
The Company believes all of its current computer systems and applications are
Year 2000 compliant. In 1998, the Company plans to add point-of-sale software
throughout its managed and owned stores, and this software will be Year 2000
compliant. The Company is currently investigating for compliance other
significant systems upon which it relies. Management does not believe that its
cost of complying for the significant systems will be material to the financial
condition of the Company.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The Company's operations for the six months ended November 30, 1998,
resulted in a net loss of $926,987, or $.09 basic loss per share, compared to a
net loss of $379,834, or $.02 basic earnings per share, for the comparable
period in 1997.
The Company, entirely through its wholly-owned subsidiary, Airtech
International Corporation, Inc. ("AIC") had sales of $640,601 for the six months
ended November 30, 1998 primarily composed of approximately $200,000 of sales of
air purification equipment and approximately $400,000 of HVAC contracting and
installation and replacement of air filters, compared to Company sales of
$(3,328) for the comparable six months of 1997, an increase of $643,929. The
Company also sold three new franchises in 1998.
Airtech sales of air purification equipment reflect initial market
penetration and acceptance of newly introduced units. The Company has had
success selling equipment into businesses with existing or pending bans on
smoking, such as hotels and restaurants. The Company continues to expect its
Model 950 being developed as a Class II Medical Device for Medicare recipients
will be approved and ready for sale into that market during calendar year 1999.
Production of the Series 999 automobile unit for pre-sales customer testing is
expected in the fall of 1998 with orders beginning before calendar year end.
Since its inception and during the research and development phase, the Company
shipped air purification units to more than one-hundred customers. The Company's
products continue to have a high rate of acceptance among the commercial
accounts to which the Company markets and while beta testing its new models.
Cost of Goods Sold was $346,230 compared to $0, for the six months ended
November 30, 1998 and 1997, respectively. Representing 54% of sales during 1998,
Management believes cost of goods sold as a percent of sales will decrease to
approximately 40% in the future as sales of air purification equipment comprises
a larger percent of the Company's sales.
Operating expenses increased $844,852, or 224% for the six months ended
November 30, 1998 compared to the same quarter in 1997. The increase is
attributable to an approximately $80,000 increase in amortization primarily
related to amortization of intellectual property; an approximately $160,000
increase in interest expense payable to holders of debentures issued in the
Airtech merger and approximately $595,000 increase in general and administrative
expenses. The increase in G&A was attributable to the increased size of wages,
advertising and consulting expenses incurred by the AIC subsidiary.
The results of operations for the three months ended November 30, 1998
compared to November 30, 1997 are largely comparable to the results of
operations for the six months ended November 30, except in relation to the
Company's subsidiary, McCleskey Sales and Service ("MSS") and also as
corrections of certain amounts from the period ending August 31, 1998. As of
November 30, 1998, the Company was considering various business plans on moving
forward with MSS or modifying the subsidiary as part of the Company's overall
business plan. As a result, and due to historical losses at the subsidiary, the
Company terminated the positions of the president and staff of MSS with plans to
replace these individuals as part of the reevaluation.
Liquidity and Capital Resources
During the six months ended November 30, 1998, the Company continued to
fund operations through revenues, private sales of securities and paying certain
debts and business services in Company common stock. As of November 30, 1998,
the Company had invested $486,620 in accounts receivable and inventory, an
increase of $444,675 over November 30, 1997. Likewise, trade accounts payable
increased $303,910 between the two periods.
In June, the Company sold 530,000 shares of its common stock for $106,000.
Another 750,000 and 50,000 shares were issued for business services and in
settlement of debts, respectively. The Company plans to offer $5,000,000 in
convertible debentures in early 1999. On November 4, 1998, the Company signed an
investment banking relationship with Lloyd Wade Securities of Dallas, Texas.
10
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 Statements contained in this document which are not historical fact are
forward-looking statements based upon management's current expectations that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
These risks are described in the Company's Form 10-KSB for the fiscal year ended
May 31, 1998 filed with the Securities and Exchange Commission.
11
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Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on December 2, 1998.
AIRTECH INTERNATIONAL GROUP, INC.
by: /s/ CJ Comu
--------------------------------
CJ Comu, Chief Executive Officer
12
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