UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB/A
AMENDMENT NO.1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES ACT OF 1934 FOR THE FISCAL YEAR ENDED
May 31, 1999
COMMISSION FILE 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)
Registrant's telephone number including area code: 972-960-9400
Securities Registered Under Section 12(b) of the Exchange Act: NONE
Securities Registered Under Section 12(g) of the Exchange Act: COMMON STOCK,
$0.05 PAR VALUE
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will 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. [__]
The Registrant's operating revenues for its most recent fiscal year
were: $1,030,469.
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the average of the closing bid and asked prices of the
Registrant's Common Stock in the NASDAQ market as reported by NASDAQ on May 31,
1999, was approximately 3,929,000, shares outstanding are reduced by shares of
voting stock held by each officer and director and by each person who owns 5% or
more of the outstanding voting stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive.
As of May 31, 1999, 13,232,532 shares of Common Stock, $0.05 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in PART IV, Item 13 herein on page 48.
<PAGE>
TABLE OF CONTENTS
Page
----
PART I:
Item 1 Description of Business 2
Item 2 Description of Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of
Security Holders 17
PART II:
Item 5 Market for Registrant'c Common Equity
and Related Stockholder Matters 18
Item 6 Management's Discussion and Analysis 20
Item 7 Financial Statements 24
Item 8 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III:
Item 9 Directors, Executive Officers, Promoters
And Control Persons; Compliance With
Section 16(a) of the Exchange Act 40
Item 10 Executive Compensation 42
Item 11 Security Ownership of Certain Beneficial
Owners and Management 46
Item 12 Certain Relationships and Related Transactions 47
PART IV:
Item 13 Exhibits and Reports on Form 8-K 48
SIGNATURES 49
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Airtech International Group, Inc. (hereinafter referred to as "the Company"
and/or "AIRTECH"), web site www.airtechgroup.com, was incorporated under the
name Interactive Technologies Corporation in the state of Wyoming on August 8,
1991. At various times through February 18, 1998, the Company was engaged in
various film and television media businesses. On May 31, 1998, the Company
completed the purchase of 95.502% of the issued and outstanding shares of
Airtech International Corporation (AIC) and it's subsidiaries. Under the terms
of the Stock Purchase Agreement entered into in May of 1997 and amended in
August 1997 the Company tendered to purchase 100% of the issued and outstanding
stock AIC by issuing 10,500,000 shares of its Common Stock, $9,000,000 of 10%
Debentures and 11,858,016 shares of its Series A Preferred Stock (all amounts
are calculated as before the 1:5 Reverse Split of November 9, 1998).
Founded in 1994 as a distributor for Honeywell/Enviracaire air purification
products, AIC outgrew its distributorship and in January of 1996, started
manufacturing two of its own air purification products. Today the company is
positioned as a leader in the industry, especially for high-end or quality
commercial products. AIC manufactures and distributes a full product line of
ceiling-mounted units for restaurants, offices, print shops, cigar bars and
casinos, wall-mounted units for schools and hotels and portable units for home
and auto.
In March of 1997, AIC formed a wholly owned subsidiary, Airsopure, Inc.,
for the implementation and operation of a franchise program. Airsopure provides
exclusive marketing for several of the company's indoor air purification
products. In creating this division, a new marketing format was introduced to
the industry. Airsopure became the first home-based franchise organization to
offer individuals from all walks of life an opportunity to join a team that
would train and certify them as "Indoor Air Quality Specialists" and authorize
them to exclusively represent Airsopure products.
Business
AIRTECH is concentrating on the indoor air contamination markets developed
by AIC and its subsidiaries. "Indoor air contamination" exists in the form of
particulates and/or gases in virtually every cubic inch of air breathed, whether
in an office building, home or retail establishment. Everyone is aware of the
dangers of outside air pollution. Most have participated in numerous "ozone
alerts" and know they are supposed to limit their outdoor activities on those
days. What most people do not know is that indoor air quality is normally six to
seven times more hazardous than outside air. Inside, our immune systems are
being attacked repeatedly by contaminants we cannot see. For millions of people,
this exposure means waking up every day with headaches, watery eyes, dizziness,
lethargy, digestive problems, nausea, nose and throat irritation. Statistics
indicate that 60% of legitimate employee absenteeism is "respiratory related"
and that such absenteeism has a profoundly negative impact on a companies
productivity and profits. Until now, the job of fixing indoor air quality
problems has been left to the local heating and air-conditioning repairmen.
Armed with a technical brochure, these individuals do their best to assist, but
understanding air pollution and its effects is not their specialty.
Air contamination encompasses bacteria, pollen, dust mites, smoke, plant
spores, dust, solvents, glues, formaldehyde, carbon monoxide, carbon dioxide,
viruses, and also includes diseases such as tuberculosis, meningitis, and
hepatitis. It also includes Volatile Organic Compounds (VOC's) which are a
combination of two different but recognizable molecules that when combined,
become unstable and potentially fatal.
2
<PAGE>
Historically, the only known methods of addressing and treating indoor air
contamination were (1) to open windows and doors to bring "fresh" air into an
area, and (2) to use technology like ozone generators or electro-static air
"cleaners" to attempt to purify the existing indoor air. These methods have
proven to be insufficient in handling air contamination problems of any
significance. Electro-static air cleaners, originally designed in the 1950's,
utilize a method of positive/negative charges that "zap" particles out of the
air, dropping them to the floor. Although considered effective at the time of
their conception, they are regarded as the "8-track" in today's "CD" AIRTECH air
purifier marketplace.
The Environmental Protection Agency has identified Indoor Air Pollution
(IAP) as one of the five most urgent environmental crises in the U.S. According
to the EPA, poor air quality may affect one third to one half of the commercial
buildings in the U.S. The affected "sick buildings" represent a potentially huge
market. The term "sick building" can also be applied to any environment in which
airborne matter poses a particular health hazard. The EPA asserts that the
average American--spending roughly 90 percent of his/her time indoors (Consensus
1988; EPA 1988) "can be breathing air more seriously polluted than outdoor air
in even the largest and most industrialized cities". Government agencies say 10
million to 25 million people working in 800,000 to 1.2 million U.S. commercial
buildings have developed respiratory symptoms related to poor indoor air
quality. That translates to an average 3 percent loss in business productivity -
roughly $60 billion a year. People in vulnerable categories are particularly
sensitive to indoor air quality. These include many older people and those
people who are susceptible to allergies, asthma and other respiratory ailments,
in addition to young children. More than 30 percent of the US population falls
within these categories. Medical research has linked IAP to numerous allergies,
asthma, emphysema, bronchitis, heart disease and cancer.
There are approximately 160 antibiotics available to fight disease. But
drug resistance is becoming a major issue, for example, in tuberculosis or
certain types of hospital-based staphylococcus infections. Many antibiotics no
longer have much effect on these virulent organisms. Many viral and bacterial
infections are airborne and are primarily transmitted through the air. The first
line of defense against these diseases must be prevention, improving indoor air
quality.
Health experts are especially concerned about people with asthma. These
people have very sensitive airways that react to various irritants, making
breathing difficult. The number of people who have asthma has greatly increased
in recent years. Since 1970, the U.S. has seen an increase of 59 percent
representing 9.6 million people. Asthma in children under 15 years of age has
increased 41 percent during the same period, to a total of 2.6 million children.
The number of deaths from asthma is up 68 percent since 1979 (Source: Asthma and
Allergy Foundation of America).
Researchers at Johns Hopkins University are studying the reasons why so
many elderly people are dying of asthma, whose incidences are reaching alarming
rates. Recent studies done on SIDS (Sudden Infant Death Syndrome) both here in
the U.S. and in Sweden indicate a link between indoor air pollution (e.g.
cigarette smoke) and a 40 percent increase in infant death rate. A recent study
conducted in England has linked air pollution with increased incidences of heart
attack. Every week new information from studies conducted worldwide is being
published, alerting the public of the health hazards associated with indoor air
pollution. Bacteria, molds, pollen and viruses are types of biological
contaminants. They may breed in stagnant water accumulating in ducts,
humidifiers and drain pans, or where water has condensed or collected on ceiling
tiles, carpeting or insulation. Insect, bird and dust mite droppings can also be
a source of biological contaminants. Physical symptoms related to biological
contamination include fatigue, cough, chest tightness, fever, chills, head and
muscle aches, and allergic responses such as mucous membrane irritation and
upper respiratory congestion. One indoor bacterium, Legionella, has caused both
Legionnaire's Disease and Pontiac Fever [Source Material: April 1991
Environmental Protection Agency Report (Air and Radiation) Anr-445-W]. With the
emergence of sick building syndrome, scientists have discovered that people are
becoming sick because of their indoor environments. Sick building syndrome has
been of enormous concern to many people, especially since the alarming discovery
of Legionnaire's Disease.
3
<PAGE>
Scientists rarely agree on the scope of Sick Building Syndrome. For
example, researchers normally count bacteria cells as they grow and become
visible in petri dishes. But in September 1998, scientists for the EPA and the
University of Maryland published a paper claiming the traditional method
produced serious undercounts because it failed to account for live, aerosolized
bacteria that cannot grow in petri dishes. Using fluorescent dye to tag live
bacteria, investigators found 100 to 1,000 times more bacteria than the petri
dish method. Later in 1999, the EPA expects to complete an evacuation of 100
office-building ventilation systems across the nation.
There is growing awareness of the health hazards of airborne microbes, also
referred to as bioaerosols. These bioaerosols build up in central ventilation
systems and indoor environments. Bioaerosols are extremely small living
organisms or fragments thereof suspended in the air. Dust mites, molds, fungi,
spores, pollen, bacteria, viruses, amoebas, fragments of plant materials, and
human and pet dander (skin which has been shed) are some examples. These
microbes can be found in a variety of settings such as in residences, office
buildings, medical and dental offices and hospitals but cannot be seen without a
magnifying glass or microscope. Exposure to such microbes is much higher in most
enclosed locations where people congregate, such as schools, theaters,
airplanes, restaurants and shelters.
Any of these microbes can cause severe health problems. Some, such as
viruses and bacteria, cause infections (like a cold or pneumonia). Others cause
allergies. An allergic reaction occurs when a substance provokes formation of
antibodies in a susceptible person. We call substances which cause allergic
reactions in some people antigens or allergens. Bioaerosols may cause allergic
reactions on the skin or in the respiratory tract. Rashes, hay fever, asthma
(tightness in the chest, difficulty in breathing), and runny noses are common
allergic reactions. Both allergic responses and infections may be serious or
sometimes even fatal.
It is estimated that each year in the U.S., the exposure of young children
to environmental tobacco smoke causes 150,000 to 300,000 lower respiratory tract
infections, such as bronchitis and pneumonia. Fifteen million Asthmatics, with
their 500,000 hospitalizations and $6.2 billion annual U.S. health care costs,
are triggered by poor indoor air quality. Indoor environment also affects the
transmission rates of infectious diseases such as influenza, tuberculosis, and
the common cold. More than 20 million cases of influenza occur annually in the
U.S. According to a report published by the EPA, people are indoors about 90% of
the time, and indoor air pollutant concentrations often substantially exceed
outdoor levels -creating staggering health care costs for the 35 million allergy
sufferers. Asthma, allergies and exposure to indoor air pollutants are
conservatively estimated in the U.S. to be responsible for the following:
o 130 million lost school days due to Indoor Air Quality (IAQ) problems.
o 13.5 million workdays lost due to IAQ problems.
o Lost worker productivity is estimated to cost U.S. businesses
approximately $60 billion annually
o An additional $15 billion in related health care costs.
o In the past 20 years, an estimated 1.25 million tight buildings have
been built, many of which have to be retrofitted to improve their
indoor air quality.
Current technology has been ineffective in achieving its goal to purify
indoor air. It has become quite evident that HVAC (heating, ventilation and
air-conditioning) systems and airtight buildings are responsible to a large
degree for the sick building problems. The HVAC community and ASHRAE (American
Society of Heating, Refrigeration and Air Conditioning Engineers) were of the
opinion that Volatile Organic Compounds (VOCs) in the air were the reason for
the sick building syndrome. The engineers suggested much higher ventilation
rates, which would dilute the VOCs in the air, expecting to alleviate the
problem to a great extent. In their efforts to improve air quality, building
operators have increased ventilation bringing in more fresh outside air, thus
increasing costs by having to heat or cool and dehumidify the air which is
brought in. The polluted inside air is then diluted with polluted outside air.
Even if the outside air were perfectly sterile, the resulting mixture would not
be clean.
4
<PAGE>
The problem of sick building syndrome has escalated largely because of the
increased demand for reduced operation costs, particularly within ventilation
systems. Construction of "tight" buildings which are dependent on mechanical air
circulation systems rather than windows has provided for a considerable energy
use reduction. In the past 20 years, an estimated 1.25 million tight buildings
have been built in the U.S. alone. "Sick building" is not just a term; it's
literally a condition
AIRTECH's technology provides an inexpensive solution to these problems and
concerns. The Company's technology can be applied to various commercial,
residential and industrial locations and spaces. It is ideally suited for a
variety of markets that have bioaerosol air contamination problems, such as
nursing homes, hospitals, schools, dental offices, waiting rooms, homes, offices
and airplanes. This technology will provide relief for allergy sufferers and
persons with symptoms stemming from sick building syndrome. The technology
removes or destroys microorganisms (bioaerosols) in the air, eliminates organic
odors and breaks down VOCs into harmless basic compounds.
Competition
Currently available air purification technologies to clean indoor air include:
o Activated carbon filters
o HEPA (High Efficiency Particulate Air) filters
o Ozone Generators
o Anti-Microbial chemically treated filters
o High Energy UV light
o Ionizers
o Electrostatic Precipitators
o Media Filtration
On their own, none of these technologies have proven to be completely effective.
To achieve acceptable results, a combination of several of these technologies
must be implemented.
Activated carbon absorbs a number of VOCs and large microorganisms such as
dust mites' droppings, which stick to dust particles in the air, but does not
remove other microorganisms from the air. The efficiency rate declines over time
as the media bed builds up pollutants. The process alone is non-regenerating and
the filters can be expensive to operate due to the pressure drop and filter
exchanges.
HEPA technology removes 99.7% of 0.3-micron particles and has become
dominant in portable room air cleaners over the past six years. HEPA filters,
however, are expensive to use in large applications such as multi-floor office
buildings. HEPA filters are ineffective in removing VOCs, smaller than 0.3
micron microorganisms and some viruses. HEPA filters produce pressure drops and,
therefore, increase maintenance and operating expenses within HVAC systems. On
its own, HEPA does not have the ability to destroy bioaerosols, or to trap and
breakdown VOCs or organic odors. AIRTECH uses HEPA filtration, but not without
other components of air purification.
Ozone generation is a type of air cleaner that uses a high-voltage
electrical charge to change oxygen to ozone. A number of companies market ozone
generators as indoor air cleaners. These ozone-producing units break down VOCs
because ozone is highly oxidizing. To achieve the high efficiency required, a
very high level of ozone has to be released into the air. Ozone itself, however,
is a respiratory irritant. OSHA has established a limit of workplace ozone
levels of 100 ppb over an eight-hour day. The FDA has set a limit of 50 ppb for
the ozone from electronic air cleaners. Consumer Reports tested several ozone
air cleaners and concluded that ozone generators have limited value in
unoccupied spaces yet ozone air cleaners cannot be used in places where people
have to breathe. According to Consumer Reports Magazine (April 1996) "ozone air
cleaners that generate ozone at sufficient levels can irritate the eyes, dry the
throat, and stress the lungs." Other medical side effects of this technology
won't be known until further studies have been conducted. However, ozone is
indiscriminate and will attack non-pollutant organic materials, like oil
paintings, as well. The U.S. EPA, the North Carolina Department of
Environmental, Health, and Natural Resources and many other well-respected
organizations recommend that this type of cleaner NOT be used. AIRTECH's Board
has committed never to employ ozone in its products.
5
<PAGE>
Anti-microbial chemically treated filters can serve as a pre-filter to the
more effective and expensive HEPA filter, capturing the larger particles
introduced to the product and thereby prolonging the life of the HEPA, which
captures the very small particles. On its own, an anti-microbial pre-filter can
introduce additional contaminants into the air, such as VOCs, toxins,
endotoxins, and allergens from degrading microbial life trapped on the
anti-microbial filter.
High energy UV light has been proven to be effective on microbial life but
is ineffective in destroying VOCs. High energy or low wavelength UV light can
pose a danger to humans if exposed. "Single pass" efficiency is rather low due
to the lack of residency time.
Air cleaners such as Ionizers can be up to 90% efficient. That is to say
that they will remove 90% of some types of pollutants. There is no medical
evidence which recommends the use of ionizers to improve air quality for people
suffering from asthma, allergies or upper respiratory problems. Most of these
air cleaners ionize the air and place electrical charges on particles but do not
have any charged collection plates. Rather, charged particles migrate through
the air and stick to the first surface they run into: walls, furniture or lung
tissue. They remain there until dislodged and re-enter the air again.
Electrostatic methods have no effect on the destruction of VOCs nor are
they very effective on small bioaerosols that are not attached to particulate
matter. When electrostatic methods do trap bioaerosols, either the colonies will
grow on the collection plates or if the bacteria is incapable of growing because
of the rushing air past the surface, the bacteria will die, decompose and change
to a VOC (toxin or allergen) and reenter the air stream. Electrostatic methods
have no effect on reducing VOCs or organic odors. The Company does not endorse
the use of electrostatic methods of air cleaning.
Charged media filters are made from a dielectric material stretched across
a frame. Applying a high DC voltage to the dielectric creates an electrostatic
field. However, these electrostatic fields are not generally sufficiently strong
enough to polarize most particles, severely reducing effectiveness.
Competition from Commercial and Residential HVAC Market:
The domestic commercial and residential HVAC market is composed of a small
number of large manufacturers. The two market leaders are the Carrier division
of United Technologies and Trane Corp., a unit of American Standard. Carrier's
1995 revenues were $5.1 billion. Trane Corp. is number two in the industry with
$1.9 billion in sales. Like Carrier, Trane competes in all segments of the HVAC
industry including commercial, residential, air conditioning, furnaces and heat
pumps. Other companies include Honeywell Inc., (NYSE:HON) and Trion Inc.,
(NASDAQ:TRON).
Trion Inc., a publicly traded company in air purification operations
consist of two principal segments: engineered products and consumer products
(sales of $56 million). The engineered products group designs, manufactures and
sells commercial indoor air quality and dust collection equipment and accounted
for 70% of the company's total sales in 1997. The consumer products division
manufactures and markets appliance air cleaners, including both table top and
free standing console units Ceco Environmental manufactures and sells industrial
air filters and filter fabric, as well as supplies air quality improvement
systems. Environmental Elements designs equipment and supplies systems and
services to the air pollution industry and designs large scale systems to
control gaseous emissions. In addition, Environmental Elements designs
electrostatic precipitators, fabric filters and scrubbing systems.
Honeywell/Enviracaire has both commerical and consumer divisions with primary
sales being from the consumer division.
Fedders, Inc. ( NASDAQ:FJC) Corporation is a holding company which
manufactures and sells a full line of room air conditioners and dehumidifiers,
principally for use in U.S. residential markets. Annual sales are $351 million.
Fedders has recently completed a tender offer to purchase the outstanding stock
of Trion.
6
<PAGE>
CECO Environmental Corp. (NASDAQ:CECE), has been in the air quality
technologies and services budiness for over 30 years. Current annual sales $24.5
million. Recently the Company has expanded the applications for its technology
to include wastewater treatment. CECO, through its four subsidiaries, provides a
wide spectrum of air quality and wastewater treatment products and services.
These include: industrial air filters, high performance filter fabrics,
environmental maintenance, monitoring and management services, waste water
treatment and air quality improvement systems. CECO is a full-service provider
to the steel, aluminum, automotive, aerospace, semiconductor, chemical and
metalworking industries.
United Air Specialists was established in 1966 to provide commercial and
industrial environmental air cleaning solutions worldwide through a diverse
product offering, dust collection systems, industrial fluid coating systems and
industrial oil cleaning equipment. UAS product line includes the Smokeeter.
Designed to meet the needs of each customer, UAS equipment is backed by strong
performance guarantees, technical support and years of experience. UAS is an ISO
9001 certified company.
Competition in the commerical market is very specialized with no one
company offering a complete line of air filtration equipment but rather
specialized in very destinct markets. In most major areas in the US there will
also be various small commerical air filtration suppliers but not with a product
line competitive with AIRTECH'S commerical units. In the consumer market many
suppliers and manufacturers have a varity of air filtration products. AIRTECH'S
entrance into the consumer market will be through its Medicare code product
which will have no competition for some period of time. The private label
licensing of this product to network marketing organizations will also be
outside of direct competition with the many retail products current available
with none of these products offering the technological innovations of AIRTECH
consumer products line. AIRTECH expects to file for product patents or
trademarks on certain of its air filtrationo units.
As of the date of this memorandum, the Company is unaware of another
company manufacturing or distributing a highly efficient or trunk-mounted air
purification unit for the automobile. In fact, according to the Company's
research, no product yet resembles a competitive obstacle. To be sure, however,
the rapid fashion of the Company's anticipated market penetration will generate
interest. Most likely, significant competition will come from established
companies in the auto industry.
Overall, the applications for the Company's products are seemingly
limitless, since the cost to implement any of AIRTECH's products is small
compared to the benefits that typically accrue to the user.
AIRTECH's technology represents a superior method for removing and
destroying pollutants in an indoor air environment, including microorganisms
such as tuberculosis, viruses, fungi, bacteria and dust mites, in addition to
VOC's and organic odors. The scope of the technology positions AIRTECH as the
next generation air purification method for the 21st century. Some advantages of
AIRTECH's products are:
o Biological air contaminants are destroyed and or removed .
o The process cleans and purifies the air through multiple air changes.
o The process is effective for microbes, endotoxins, toxins, allergens,
VOCs .
o No toxic chemicals are employed
o No ozone is generated or introduced into the air
o The process is regenerating
o The process works well at room temperature
o The required pressure drop and energy needs are low
o Self-cleaning process does not reintroduce toxic post process residue
into air stream
o The products are very economical to operate
o Industry guidelines met re: single-pass contaminant removal efficiency
and particulate filtration
Additionally, the Company seeks to compete in this growing marketplace with its
unique to the industry franchisee network as well as other strategic marketing
efforts discussed under Sales and Marketing Strategy.
7
<PAGE>
Operations
The Company currently maintains a warehouse facility of approximately
10,000 square feet in Dallas, Texas. In this facility the Series S-12, S-14,
S-18 and S-22 have a current assembly capacity of 1000 units per month. This
space is adequate for increased production with increased personnel. The
anticipated unit volume of the Series 999, the automobile unit and Series 950,
the Medicare unit during fiscal 1999 has caused management to select
out-sourcing of these units for production.
The Company has been seeking outsourcing agreements with local and
international metal and plastics fabricators and assemblers. Under the Company's
proposed business plan these outsourced entities would assemble, warehouse and
ship the Company Series 999 and Series 950 units. Management believes using
outsourced manufacturing will greatly reduce its initial startup production cost
and the resulting operating cost while providing strong controls on product
quality and inventories. The Company plans to shift assembly of its other units
to an outsource manufacturer before fiscal end 2000.
The Company will incur design start up cost during fiscal 2000 on its
Series 999, Series 950 and redesign of Series S-14. These products cases will in
ABA plastic requiring injection molding. The engineering and mold tooling cost
for these products should be in the range of $400,000 for the Series 900,
$400,000 for the Series 999, $500,000 for the Series 950 and $500,000 for the
Series S-14/15. Once the engineering and mold tooling has been completed the
Company plans to out-source the actual injection molding required for these
units.
The Company's management feels that the out-sourcing indicated above will
reduce the start up production cost by eliminating the necessity for an
additional large facility for production and warehousing, the hiring and
training of a large employee base and the related insurance and payroll cost.
This will also reduce the start up time required to begin production thus
allowing the Company to have available products for sale to meet the anticipated
volume requirements.
The AIRTECH Product Line consists of:
Series 12: The Series 12 is designed to fit into a 2 x 4-foot space of a
ceiling. When installed in a ceiling opening, 5.5 inches of the unit's
decorative ABS plastic lid protrudes from the ceiling. This unit filters
approximately 1200 cubic feet of air each minute removing particulates, gases
and odors. Markets for this unit include the food and beverage industry,
hospital and nursing homes, print shops, office buildings and other industries
with problems involving cigarette or cigar smoke, odors and particulates larger
than .3 microns.
Series 14: The series 14 is designed to mount against a wall at the joining
point of wall to ceiling. The unit is approximately 36" x 14" x 14" with the
visible portion being 20 gauge sheet metal, having a sculptured geometric
appeal. The unit filters approximately 400 cubic feet of air per minute. The
markets for this product are those having problems with any particulate, gas or
odor found in rooms under 400-sq. ft. such as hotel and motel rooms, offices,
classrooms, patient rooms and small shops. Multiple units can be installed to
accommodate larger rooms.
Series 15: The series 15 is a unique room unit designed to complete 12 air
changes in a room approximately 150-300 square feet unlike the Series 14, the
Series 15 is built incorporating a three dimensional look to fit in the corner
of a room as well as be more attractive. The initial prototype is (45*12*14), it
weighs approximately 44 pounds an dis the prototype unit being used in the
evaluation of products for the hotel sector.
Series 16: The Series 16 is a flush mounted unit tht is "invisible" in a small
room approximately the size of the area treated by the Series 14 and Series 15.
The Series 16 is 24*24*18 and installs flush in ny room. The prototypes have
been installed, but with design enhancements around sound and bypass issues will
be re-engineered for a future launch date.
8
<PAGE>
Series 18: The S-18 is a commercial unit which can service up to five offices or
rooms with inexpensive flex ducting. It is installed above the ceiling where it
is out of view. The unit requires no HVAC modifications and operates in a very
quiet fashion.
Series 22: The series 22 is a ductable, hidden unit for both commercial and
light industrial applications. This unit allows remote positioning (i.e. on the
roof) and collection of contaminants from distant zones. The clean air discharge
can be directed to zones as needed. This unit permits creation of negative and
positive pressure zones providing maximum control of airborne contaminant
movement. The air cleaning capacity is approximately 1800 cubic feet per minute.
This unit will also soon be available for the upscale residential market for
both new construction and retrofit.
Series 900: The Series 900 is avery unique portable auto air purification system
that is designed to be plugged into a cigarette lighter and be fully
transported. Designed arouind a "Frisbee" look, this ergonomic unit is a 8*3
circumference product that can do up to 20 air changes each hour. Thus unit has
completed all the engineering and is ready to be made into an ABS plastic mold,
ideal markets for distribution will include retail stores as well as
infomercials and network marketing organizations.
Series 999: Was developed as an automotive after market product to be mounted in
the trunk of new and used cars. The unit was designed to move 100 cubic feet of
air per minute with a complete air changes in an automobile every 20 seconds.
This product will retail for under $600. The Company expects that the 999 will
be a leader in the automotive after market family of products. Intentions are to
wholesale the product to a nationwide company specializing in after-market sales
to automobile dealers.
Series 950: A working proto-type of this unit is finished. This is the unit
being submitted for approval under Medicare with related charges. It will retail
for $795. The product incorporates a highly efficient filtration system which
includes the following:
(1) Antimicrobial pre-filter
(2) Hospital grade 99.97% HEPA filter - for removal of particles
(3) Trisorbent filter - for removal of gases
(4) PCO (Photocatalytic Oxidation) - destroys VOC's
(5) Ultra-Violet Bulb
(6) Ionization - negative ions and activated oxygen
Down Draft Tables: The series 220 and 230, designed for the nail manicure
industry and was first introduced in January 1996, have largely been
discontinued by the Company. It was modified from the original design to reduce
manufacturing cost and ease of servicing while improving gas, odor and
particulate filtration efficiency and extending the life of the sorbent media
filter. This series has a single speed 450 CFM blower with a sorbent media
filter designed for the special needs of this industry. The Company, in the
Dallas market, has developed a lease program requiring a deposit and first
months rent, which recovers the cost of the table in approximately 3 months. The
Company applies one half of the monthly lease payment to the full retail
purchase price thus allowing the manicurist to own the table in 12 to 18 months.
Replacement Filters: The Company manufactures its sorbent media filters;
pre-filter material is purchased in bulk and cut to proper sizes, and the HEPA
type filters are out-sourced. The life of the filters will vary on the
application and the degree of contamination; however, the Company anticipates
each unit sold will require an average of one to two complete filter changes per
year. The filters in the ceiling units will be standardized with a set of new
filters having a retail price of $350 to $500 depending on uses. The automobile
unit will require approximately $50 in replacement filters per year; the
portable unit approximately $100 per year, and the down draft tables $600 per
year depending on application. The Company will realize in excess of 300%
average gross profit on filter sales at current pricing levels.
9
<PAGE>
Market Research
o Medical and Specialty facilities such as hospitals, clinics,
nursing homes, laboratories, day care centers, emergency rooms,
etc. represent a large market to AIRTECH. In fact, any facility
where indoor air quality is critical to the safety and health of
the patients/customers is a potential market.
o The Commercial and Residential HVAC market is estimated to exceed
$9 billion.
o In the United States alone, there are over 60 million residential
homes with central air conditioning systems occupied by
individuals with a need for better indoor air quality.
o The Industrial air quality market is estimated to have sales
which exceed $12 billion. Increased local, state, and federal
regulations are continuing to require cleaner indoor air quality.
o The Transportation sector including automobiles, buses,
railroads, aircraft, and cruise ships have a specific need for
improved indoor air quality.
o Approximately 75 million people suffer from upper respiratory
discomfort and allergic reactions due to poor indoor air quality.
People in vulnerable categories are particularly sensitive to indoor air
quality. These include older people in nursing homes and hospitals, those people
who are susceptible to allergies, asthma and other respiratory ailments, and
young children. More than 30% of the U.S. population falls within these
categories. AIRTECH's technology provides an inexpensive solution to the indoor
air quality problems.
Consumers are becoming more particular about the air quality in their
environments. Specifically, this trend will lead to an increase in the demand
for better filtration systems. AIRTECH is bringing this new revolutionary
technology to the marketplace. AIRTECH's technology will outrank other
providers' air purification systems that use traditional methods for indoor air
purification. These other technologies are less effective in safely removing
bacteria and VOCs from the air.
The economic benefit of implementing AIRTECH technology is compelling as
operating costs in tight buildings are reduced while worker productivity is
improved. The economic pay back should be very rapid through energy savings and
reduced absenteeism.
Marketing and Sales Strategy
AIRTECH's marketing strategy, perhaps as much as any other factor, will be
the reason for growth in sales. Most of the time in this industry, the sales and
marketing job is left to an HVAC contractor or repairman armed with little more
than a product installation guide. AIRTECH's approach is vastly different. The
Company is targeting several distribution channels for direct exposure of its
products and teaching consumers about the costs and solutions for indoor air
contamination. Management is using a carefully mapped multi-channel approach to
market its product line, and believes this differentiator, in addition to its
superior products, will yield substantial growth for the next several years. For
example, the following channels are or plan to be utilized:
1. Franchises - The company currently has 22 franchisees that are selling
product in various parts of the country. The Company provides a three day
Indoor Air Quality Certification program for all the franchise graduates.
The franchise program is a unique combination of a "home based" business
whereby each franchisee has a protected territory and unlimited number of
leads and future potential accounts to serve.
10
<PAGE>
2. International Licenses - AIRTECH has already licensed the distribution
rights to its name and technology in the countries of Taiwan, the
Philippines, Turkey, Canada and Spain. The Company is also working with the
UK, Mexico, Venezuela, Belgium and Germany. The Company, now that it has a
full product line to offer, intends to more aggressively pursue
international distribution relationships. All sales are made in U.S.
dollars, FOB Dallas. Entire countries sell for a minimum of $100,000.
3. Manufacturer's Reps - There are approximately 260,000 HVAC Contractors in
the U.S. alone. This unconsolidated group of professionals accounts for a
significant amount of the current sales of air purification and cleaning
units. The Company will make certain products available to them, such as
the Series 12.
4. Internet - Internet usage has doubled over the last 12 months and consumer
purchasing will continue to grow in accordance. 73% of web users search for
information about products and services, and 7.4 million users have made at
least one purchase over the internet. The demographics of web users also
fit well with the Company's products. Most are well educated and earn
significantly more income than average.
The Company's Airsopure website is www.airsopure.com, www.airsopure.net or
www.airtechgroup.com. On these sites, visitors can educate themselves about
the Company's products and order online. The Company intends to spend
additional funds in an effort to direct more internet traffic to its
websites as well as Shabang!.com, a _____. AIRTECH's website is
www.airtechgroup.com. These websites give the Company several additional
advantages: access to 60 million people worldwide, reduction in
distribution costs, quicker advertising response times, direct feedback
from customers and instantaneous updating of information.
The keys to successful marketing on the internet will be exposure and
association with other well-traveled websites, security, a clean design and
ease of use and product testimonials which will also be included.
Potential New Market:
5. Retail Distribution - the Company has developed several important products
which it believes suitable for retail distribution. Most notable are the
portable Series 900 and the Series 850, both of which have low price points
and appeal to the broad market of consumers. The Company is in discussions
already with one of the largest retailers in the world for distribution of
both the Series 900 and 850.
Potential New Market:
6. Home Shopping/Infomercial - The Series 900 and 850 will also be distributed
via a powerful home-shopping medium such as QVC or the Home Shopping
Network. In this well established marketplace, over 80% of all U.S. cable
homes can be reached through the television or computer. Over 40 million
Americans have purchased products through a home shopping medium, and some
400 new products get introduced to television viewers each week.
Potential New Market:
7. Joint Venture - the Company has begun discussions with several possible
joint venture partners for international manufacturing, outsourcing,
marketing and distribution. In some countries, the air quality is
dramatically worse than it is in the U.S. and the Company feels that its
products would be highly marketable in these areas. Just a few examples are
Chile, Brazil and Mexico.
Potential New Market:
8. Network Marketing - One of AIRTECH's target markets is the "Portable Room
Air Cleaner" market, particularly to introduce the S-900. Entry for this
product will be gained through relationships with both retail organizations
and large network marketing firms. Several such firms have indicated
interest in the Company's products, representing they could sell a very
high quantity of machines. The worldwide market for portable room air
cleaners based on particulate filtration technology is approximately $750
million. Growth is estimated between 10-15% annually. Due to its
technology, competitive pricing and economical operation, AIRTECH is
confident that it can capture a significant share of this market. The
advantage of this channel is that the Company will be able to private label
product and drop ship large trucks of finished manufactured goods straight
to the network marketing company's warehouse, not acting as the final
distribution point or returns center.
11
<PAGE>
Potential New Market::
9. Medicare - DME's - AIRTECH knows that physicians regularly recommend the
use of portable air filtration systems for their patients suffering from
chronic and acute episodes of illness related to allergies, asthma and
general upper respiratory distress. In the absence of a Medicare "code" and
insurance billing, patients are generally forced to incur the expense of
such technology on a non-reimbursable basis. These medical conditions are
frequently elevated from a chronic status to acute episodes due to the
inhaling by patients of various airborne contaminants.
The Medicare code and charge are awarded through a review process conducted
under the auspices of the Health Care Financing Administration (HCFA) and
its agencies that include the Statistical Agency for Durable Medical
Equipment Regional Council (SADMERC) and the Durable Medical Equipment
Regional Council (DMERC). Once awarded a Medicare code and charge, patients
suffering from respiratory problems are able to secure through a variety of
durable medical equipment (DME) providers, medical technology prescribed by
their attending physicians that will be paid for by Medicare or their
insurance carrier of record. AIRTECH also knows that third party payers
such as managed care and indemnity insurance plans will more readily
reimburse the patient for the AIRTECH 950 after the technology receives a
Medicare code. Clearly, the successful acquisition of the code will
precipitate substantial and ongoing revenues for the 950 that will accrue
to the benefit of the company and its stockholders.
AIRTECH has identified a national distribution network composed of highly
successful durable medical equipment (DME) distributors that have existing
sales forces and marketing infrastructures. Association with the DME's
creates an immediate distribution network for the Model 950 without forcing
AIRTECH to incur the management challenges of creating and maintaining its
own sales force or recreating the DMEs' existing client bases. The DME's
already work with physicians providing other medical devices such as
walkers, wheelchairs, hospital beds and electronic monitoring devices. The
Model 950 becomes a new product for the DME's within an industry where new
products are not common. AIRTECH has initiated the steps necessary to
secure the Medicare code and expects to receive final approval for the
product by the end of calendar 1999.
Thereare approximately 38.8 million enrollees in the Medicare system. Of
these, approximately 31 million individuals suffer from some sort of
upper-respiratory problem. This represents the end-user market for
AIRTECH's Model 950. A 1% market penetration would represent to the Company
approximately $100 million in totalrevenues. The channel to tap this market
is the already-established DME channel, of which there are approximately
10,000 DME suppliers in the U.S. These DME's already sell millions of
dollars of highly competitive products, and with the Model 950, will be
able to sell a product at comparably high margins with essentially no
supplier competition. With the distribution strategy of utilizing the
existing DME's, the Company will only incur very limited sales and
marketing expenses.
Potential New Market:
10. Automobile Dealers - There are approximately 24,000 franchised new car
dealers in the U.S. Some of the auto makers have begun to experiment with
various air cleaning systems, such as Mercedes Benz and BMW. The Automotive
Clean Air Council was formed after the disclosure of research conducted by
a leading educational institution: that the quality of air in many
automobile air conditioners may be poor due to contamination with fungi and
spores which are unhealthy, and which can trigger allergic reactions.
The first indication that this problem exists is an odor detectable when
the AC unit or the air circulation system is activated. It is important,
however, to note that the bacteria might be present without and before the
odor is detected. This condition is caused by buildup of mold and bacteria
in the evaporator. The infecting of the AC Unit causes allergic reactions
and other symptoms by breathing in the waste products of these unwanted and
growing microbes.
12
<PAGE>
AIRTECH will tap into this multimillion dollar market through an agreement
it has with a nationwide auto after-market company, by wholesaling product
to it. Other after-market products such as the "gold" package, fabric
sealant and window tints will continue to sell; however, the Company
believes a very highly effective and affordable air purification device
like the Model 999 will explode onto the market in 1999.
To hit the forecasted sales goal for FYE 1999, the Company's minimum
objective this year is to sell the 999 through at least 60 large auto
dealers in the U.S., each dealer selling at least 100 units per month, at a
wholesale price to the Company of approximately $300.
Series 999 Market Strategy
The Company initially observed the ever-growing problem with abundant air
contamination in automobiles and transport vehicles across the nation. The
Company recognized that not only is the contamination immense and growing, but
also that no real technological solutions were being applied to remove the
harmful and irritating smells, gases and micro-particles that can cause and
exacerbate respiratory problems. Clearly, flowing additional fresh air from the
outside not only is an impossibility during the winter and summer months, it is
responsible in large part for a number of the respiratory problems experienced
by individuals. The Company concluded that solving these issues for the public
could provide tremendous economic rewards and higher auto resale values to a
wide variety of customers, such as car rental companies, automobile dealers and
government vehicles. One of the foremost complaints in the car rental industry,
shared with that of both the new and used car industry, is the stingy smells
associated either with new material off-gassing or with fabrics and materials in
the automobile cabin that have absorbed pollutants like cigarette smoke for
prolonged periods of time.
Nearly 200 million vehicles are in use across the country. Of these,
approximately 150 million are passenger vehicles. Approximately 2 million cars
in the U.S. are owned by the major car rental companies. Approximately 3 million
vehicles are government owned and used. Each year in the U.S., 12 million new
vehicles are sold and become potential installations for the S-999. The majority
of automobiles fall into the category of used or more than one year old. There
are a number of other categories which represent significant portions of the
overall market as well, including taxis, limousines and eighteen-wheeler trucks
or transport vehicles. The average American spends 3 1/2 hours per day in his
vehicle. This much exposure, when added to outside contaminants such as road
pitch, microscopic tire dust, allergens and hazardous gases and odors, leaves
many car drivers with recurring headaches, eye irritation, nausea and even
central nervous system problems. Of course, allowing smoking to occur in the
automobile exposes drivers and passengers to carcinogenic cigarette smoke which
can lead to cancer if not filtered out of the air.
Management researched the problems, economics and technology required to remove
airborne contamination inside vehicles. It then created an exclusive product,
called the S-999, with a patented technology and design which can totally remove
microscopic particles, gases and odors inside the automobile. The patent pending
technology incorporates a three-part patented filtration system in removing up
to 99.97% of most all microscopic particles and gases.
The Company's marketing strategy in year one is to establish significant
penetration into two primary markets, the rental car companies and government
vehicles. In these markets, the Company believes it can commence wide scale
distribution while maintaining the highest level of profits in order to self
sustain maximum internal growth in years two and three into the other identified
target markets.
13
<PAGE>
Rental Car Companies
The rental car market in the U.S. is comprised of the following companies:
Total Worldwide Fleet Total Worldwide Fleet
--------------------- ---------------------
Avis 200,000 Budget 265,000
Dollar 75,000 Enterprise 389,000
Hertz 500,000 National 250,000
Thrifty 250,000 Alamo 300,000
As of the date of the writing of this memorandum, the Company has entered into
preliminary conversations, testing, and preliminary negotiations on the S-999
with one of the major rental car companies for a significant distribution
contract, and expects to negotiate with several other rental car companies prior
to selecting its first customer in this market. Should a rental car company
choose widescale installation of the S-999, it would clearly have a hold on the
first real differentiator between it and its rental car competitors.
Government Vehicles
The government vehicle market, with an estimated total "fleet" of 3 million
vehicles, is sub-divided into the following areas:
Local police State highway patrol
Sheriff Immigration
FBI Fire
Customs State officers
County officers City officers
City workers Health Dept.
The Company is working with several key government officials in identifying the
health benefits and cost savings in installing the S-999 in government issued
vehicles. Working through the proper channels, Airsopure believes the S-999 will
receive highly favorable, government-controlled lab and field test results which
may be published and widely read. Passenger cars used by police and immigration
officials are subject to a wide variety of additional air contaminant risks such
as tuberculosis.
International Market
The company anticipates more significant expansion into several international
markets in year two and especially in year three. Those countries with more than
3 million passenger vehicles, ranked from top to bottom, is listed below:
Passenger Cars Cars per 1000 population
United States 149,120,000 563
Japan 45,000,000 360
Germany 40,499,442 495
Italy 31,700,000 551
France 25,100,000 433
United Kingdom 20,780,000 366
Canada 14,280,000 467
Spain 14,212,259 351
Russia 13,550,000 91
Brazil 13,030,000 84
All Other 74,084,889
With Airtech's sub-manufacturing companies, international expansion is expected
to proceed without much delay and with significant economies of scale.
14
<PAGE>
Auto Dealers
In the U.S. each year, the major auto manufacturers produce and sell some 6
million new passenger cars. They build and sell an additional 6 million trucks.
These sales occur primarily through some 24,000 franchised automobile dealers.
Literally every vehicle produced is a potential target for the Airsopure S-999,
because no vehicle or its passengers is protected from the dozens of airborne
contaminants that constantly circulate through a vehicle. The average automobile
dealership experiences limited return visits from customers who buy new cars,
with exception to those times when warranty service work is needed. There has
never been a product before which gives the car buyer another reason to return
to the dealership with some regularity. With the S-999, and the filters that
need to be replaced once or twice per year, the dealers capture a new level of
repeat business. For this reason, the Company believes the S-999 is marketable
in wide measure to the 24,000 dealerships in the U.S.
The following is a list of the top U.S. auto manufacturers' production of
vehicles:
Daimler Chrysler 2,671,366 Ford Motor Co. 4,380,920
General Motors 5,410,560 Mazda 100,455
BMW 61,726 Honda 806,666
Mitsubishi 187,531 Nissan 561,358
Subaru-Isuzu 185,927 Toyota 541,524
Volkswagon 249,274
Retail Stores
The Company believes that by year three of the S-999 rollout, limited
distribution will occur various retail stores such as Sams and Walmart, Home
Depot, Kmart, Sears, Chief Auto Parts, and various tire retailers and stereo
retailers. Portable room air cleaners manufactured by companies such as
Honeywell and Sunbeam have become a staple on the retail store-shelf. The S-999
would become the first auto air cleaner to be distributed via retail outlets.
S-999 Activities:
To date, the Company's activities on the S-999 have been focused on (1)
surveying the needs of the automobile driver, (2) beta site testing the S-999
under various operating conditions (3) identifying, prioritizing and working
with maximum impact channels of customers and distributors to assure nationwide
and worldwide distribution of the S-999 and (4) applying state of the art and
exclusive technology to produce the highest quality air purification device in
existence for the automobile.
The Company's efforts over the last six months has successfully rendered the
following:
(1) All market outlets have been identified and prioritized. This
includes known automotive after-market product companies and
distributors, new-automobile dealers, used-automobile dealers,
regional and national car rental companies, national transport
companies, taxi services, limousine services and all government
agencies or departments that control issuance of government
vehicles to government employees. Demand for a product like the
S-999 has been continually verified.
(2) The S-999 has been developed and engineered for easy installation
and easy filter replacement.
(3) Lines of communication with federal, state and local governments
have been opened and the demand for the S-999 has been verified.
(4) A long-term, high volume, and repeat customer base for the S-999
replaceable filters has been designed into the S-999. Access to
the proprietary replacement filters is controlled by Airsopure,
Inc.
15
<PAGE>
(5) Initial distribution points for the first year of production have
been contracted with at arm's length to provide immediate
distribution.
(6) Three sub-manufacturing companies have been contracted with to
ensure supply coverage on the anticipated first year's demand.
(7) Lab facilities have performed favorable scientific testing and
efficacy reports on the S-999.
(8) A Public Relations strategy has been written for each high
profile target market in order to assist in the creation
of market and consumer awareness.
Immediate Goals and Objectives for S-999.
(1) Direct mail campaign to 1300 police departments in the State of
Texas
(2) Contact supply companies providing product specific to police
departments
(3) Contact national auto rental companies
(4) Contact national auto parts and retail stores
(5) Contact car dealers in the Dallas-Fort Worth, Texas area
(6) Contact regional car stereo and installation companies
(7) Exhibit product in Europe at the International Automobile
Association trade show in Frankfurt, Germany
(8) Continue work to get air purification and the S-999 in print and
other media
(9) Make the S-999 available to internet electronic shopping
Government Regulation
The Company operates under the guidelines set forth by the Federal Trade
Commission under the FTC Rule which became effective October 21, 1979. Under
this rule, the company is required to issue a Uniform Franchise Offering
Circular (UFOC) to all potential purchasers of a franchise. The UFOC format is
an alternate format allowed in lieu of the more common FTC disclosure format.
The Company's current UFOC is compliant in 36 states. In addition to this
format, fourteen states require additonal information to be contained within the
UFOC for sales of new franchises within their respective states. The company
currently is registered in one of those states, Michigan. Any violations under
the FTC Rule are considered unfair or deceptive acts or practices within the
meaning of Section 5 of the Federal Trade Commission Act. In response to the FTC
Rule requirements, the Company formed a subsidiary, Airsopure, Inc., and
registered it as a franchisor in April of 1997. Airsopure is in compliance with
the FTC Rules regarding its UFOC.
Permits and licenses, Patents, Trademarks, Licenses and Copyrights
The Company does not own any patents or registered trademarks or trade names.
The Company has common law trademark protection for certain of its trade names
and service marks and is seeking protection for its tradename Airsopure both
domestically and abroad. The Company is pursuing copyrights for certain of its
promotional and franchise training materials. While the Company's products and
marketing strategy are currently a unique implementation of filter media, it
does not believe that its products are ultimately patentable.
16
<PAGE>
Suppliers
The Company purchases its supplies and materials used in its business from a
number of vendors. As of May 31, 1999, one of these vendors, Carlo Gavazzi,
accounted for 42% of the balance owed, while four others, Revcor, Geotex, Matrix
Metals and Glasfloss combined accounted for 20%.
Estimate of R&D Expenditures
During fiscal years ending May 31, 1999 and 1998, AIRTECH incurred various
research and development expenditures. Such expenditures are not separately
identifiable by the Company but are estimated at approximately $200,000. The
Company's costs included salaries, materials, finished units and travel and
correspondence.
Employees
As of August 1, 1999 AIRTECH had 15 full-time employees
The Company's fiscal year runs June 1 to May 31 of each year.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company maintains its executive offices at 15400 Knoll Trail, Suite
106, Dallas, Texas and a warehouse facility located at 12561 Perimeter, Dallas,
Texas. These facilities having a total of approximately 14,000 square feet and a
total rental cost for fiscal 1999 of $86,794. The Company is committed to the
facility leases at these locations until May 31, 2000 and September 30, 1999,
respectively.
Management considers the Company's facilities sufficient for its present and
currently anticipated future operations and believes that these properties are
adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is in litigation with LLB Realty, L.L.C. which has filed a
claim in Superior Court of New Jersey, Mercer County alleging claims under an
office lease agreement. The Plaintiff, LLB Realty, asserts damages involving
finish out for subsequent tenants and lost billings. Settlement negotiations
have been ongoing and the Company expects this matter to be settled with an
issue of the Company's Common Stock (See notes to audited financial statements).
This litigation stems from a lease contract obligation incurred by the former
media based enterprise of Interactive Technologies Corp.
The Company is not a party to any other legal proceedings except for claims
and lawsuits arising in the normal course of business. While the results of such
litigation and claims cannot be predicted with certainty, management believes
that the final outcome of such matters are adequately reserved for in the
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an annual shareholders' meeting on October 5, 1998 wherein
the shareholders were asked to vote for a number of issues (1) approval of a
change in the Company's name from Interactive Technologies, Inc. to Airtech
International Group and (2) for approval of a 1:5 Reverse Split of the Company's
Common Stock. Based on proxies and votes of shareholders attending the annual
meeting, 14 million shares (93%) voted approving both resolutions with 1 million
shares (7%) voting against or abstaining. The 15 million shares voting
represented 60% of the 25 million common shares issued and outstanding as of the
notification date for the meeting. Greater than 75% of the holders of the 14
million shares approving both shareholder resolutions were also holders of
Series A Preferred Stock and 10% Debentures which were issued in conjunction
17
<PAGE>
with the merger of Interactive Technologies Inc. and Airtech International
Corporation. Effective July 31, 1998, the Board of Directors, according to the
provisions of the Preferred shares and Debentures, approved the conversion of
the Preferred and Debenture holdings to the Company's common stock. The Company
considered that counting votes from Preferred and Debentures would not provide a
significant difference in outcome to warrant increasing the quorum.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
AIRTECH common shares were traded on the National Association of Securities
Dealers Automated Quotation Systems (NASDAQ) SmallCapMarket under the symbol
"ITNL" until October 23, 1997. Following a rule change by NASDAQ for qualifying
for a SmallCapMarket listing it was determined that the Company was no longer
eligible for a listing. Since October 23, 1997 the Company's shares have been
traded in the "over-the-counter" or "Bulletin Board" market. High and low sales
prices for the quarters of fiscal year 1998 and 1999 were:
High Low
Fiscal Year 1999
4th Quarter $ 0.56 $ 0.12
3rd Quarter 1.03 0.14
2nd Quarter 1.50 0.47
1st Quarter 3.28 0.63
Fiscal Year 1998
4th Quarter $ 3.13 $ 1.09
3rd Quarter 3.13 1.25 Bulletin Board
2nd Quarter 5.16 1.25
1st Quarter 6.41 3.75 Small Cap Mkt
Holders
As of July 30, 1999, there were approximately 1219 holders of record of the
Company's Common Stock.
Dividends
There have been no dividends declared or paid on the Common Stock and the
Company has no current intentions to declare or pay dividends on the Common
Stock. The Series "A" Preferred Stock does not bear a preferential dividend. The
Series "M" Preferred Stock has a preferred dividend right that are tied to the
income from the Medicare Series 950 unit. (See Series "M" for details.) Subject
to the foregoing, the Company currently intends to retain any future earnings
for reinvestment in its business. Any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
the company's financial condition, results of operations, capital requirements
and other relevant factors.
18
<PAGE>
Recent Sales of Unregistered Securities
<TABLE>
<CAPTION>
Shares Issued Price per Issued under Exemption
Date Title Share Nature of Transaction
<S> <C> <C> <C> <C> <C>
August 31, 1999 Common 358,591 $0.34 to Shares issued to investment S-8 Registration
$0.50 bankers, consultants,
management, CEO and
President for services
rendered or to be rendered.
June 30, 1999 Common 1,200,000 $0.10 Shares issued to accredited Private placement issued
investors, including 500,000 in accordance to Section
shares to CR Saulsbury, 4(2) of the Exchange Act
Sr.. Warrants attached are of 1934
exercisable at $0.20 and
expire on May 31, 2000
December 31, Common 300,000 $0.19 Shares issued to CEO and S-8 Registration
1999 President for services
rendered
May 31, 1999 Common 700,000 $0.10 Shares issued to accredited Private placement issued in
investors, including 500,000 accordance to Section 4(2)
shares to Peter Kertes. of the Exchange Act of 1934
Warrants attached are
exercisable at $0.20 and
expire on May 31, 2000
February 28, Common 1,583,134 $0.50 Shares issued to CEO and Private placement issued in
1999 President in consideration accordance to Section 4(2)
of deferred wages from June of the Exchange Act of 1934
1, 1997 through December 31,
1998
December 31, Common 46,250 $0.50 Warrants exercised by Private placement issued in
1998 holders of Series M accordance to Section 4(2)
Preferred Stock of the Exchange Act of 1934
November 30, Common 828,000 $0.33 Shares issued to accredited Private placement issued in
1998 investors including CR accordance to Section 4(2)
Saulsbury, Sr. of the Exchange Act of 1934
November 30, Common 224,000 $0.48 to Shares issued to investment S-8 Registration
1998 $0.69 bankers and consultants
for services rendered
August 31, 1998 Common 146,025 $1.25 to Shares issued to consultants S-8 Registration
$1.56 and employees for services
rendered
July 31, 1998 Common 2,614,286 $0.70 Conversion of debentures Private placement issued in
issued in conjunction with accordance to Section 4(2)
the merger of ITC and AIC of the Exchange Act of 1934
July 31, 1998 Common 2,371,603 One-for-one Conversion of Series A Private placement issued in
preferred stock issued in accordance to Section 4(2)
conjunction with the merger of the Exchange Act of 1934
of ITC and AIC
</TABLE>
19
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
General
Fiscal year 1999 marked a breakthrough year for the Company as it
implemented a full air filtration product line including a unique automobile,
trunk mounted air filtration unit, opened new markets in office suites, hotels,
casinos and country clubs, renewed international sales efforts and progressed
further in developing a product for the Medicare industry.
The Company has long had an impact in restaurants with its S-12, ceiling
mounted air filtration unit. Impacting and changing city smoking ordinances to
specifically allow restaurants to install the S-12 and avoid "no smoking"
legislation, the Company has achieved success and name recognition from this
unit alone. Other markets require different filtration needs, esthetics and air
flow patterns. These other needs are now met by the Company's full product line.
Primarily increasing sales of the S-14, wall mounted unit, and the S-18,
ducted/inset ceiling unit, the Company achieved success at national hotel,
restaurant and country club trade shows. In the past, such trade shows provided
a wide range of products and services to these respective markets, yet little to
no attention to indoor air quality, even though all suffer problems. Airtech's
entrance and growing name recognition under the Airsopure brand name peaked
conference interest and resulted in increased sales to these markets.
Unexpected interest at the trade shows has also come from significant HVAC
companies seeking to expand their own air handling equipment into indoor air
quality as well as large restaurant and bar supply companies and product
manufacturers seeking a proactive measure against threatened tobacco legislation
in their municipalities and countries.
HVAC company interest is well defined and would be a major introduction to
residential air purification. This industry, with a small number of very large
players, has begun looking at the validity of combining their HVAC products with
air filtration in a manner that does not merely protect the HVAC equipment from
pollutants but significantly reduces airborne particles. Airtech has already
been developing a unit that combines the cooling, de-humidifying and heating of
the standard HVAC equipment with its existing successful air filtration
products. The Company is aware of no other company in the country that can claim
this development. The Company believes more than $500,000 must be spent to
complete this product development. However, the Company anticipates developing
product development partnerships or some other investment relationship with at
least one large HVAC company during fiscal 2000 to move development of this
product to a saleable unit in fiscal year 2001. It is anticipated that the unit
will be sold through the existing sales and marketing channels of the HVAC
partner. The Company is unable to yet forecast revenues of this unit.
Other such product partnerships are also anticipated in the restaurant
supply industry. Restaurants and bars continue to face decreased revenues after
anti-tobacco legislation is implemented across the country. Companies that
supply restaurants and bars, as well as the producers of supplies to this market
are all investigating proactive steps to lengthen patron stays at the various
establishments and thus increase consumption. Air filtration was an idea that
these suppliers have identified and they have recently been seeking out Airtech
to discuss possible product partnerships. The Company's S-12, ceiling mounted
unit, is the most likely entrant to this vast marketplace. The Company has
already been speaking to such suppliers with the goal of identifying
geographical exclusive sales opportunities to broaden everyone's sales. The
Company anticipates that sales through just one supplier entity in this manner
would result in annual sales ranging from $5 to $20 million.
During the fourth quarter of fiscal 1999, the Company completed an
outsourcing agreement for the S-999 automobile filtration unit and produced and
had delivered to Company warehouses approximately 1500 units. The Company has
been actively pursuing to open markets to this product in state and local
governments, car rental, new and used car dealers and others international
markets. These markets have yet to fully understand their need for the product;
however, weekly, news print and other media reports funnel out describing the
increased air quality problems within automobiles, even greater than the
20
<PAGE>
problems outside the automobile. Airtech has achieved growing acceptance in
these markets by enlisting independent or government based testing facilities
and medical departments and has the purchasing decision makers realizing the
benefits to reducing employee sick leave by purifying the air they breath. The
Company's target for fiscal 2000 is to sell 11,500 units of the S-999 with sales
totaling $3.5 million.
The brightest jewel in the Company's product line is the now developed
S-950. The S-950 will be submitted to Medicare along with clinical trials now
underway and an application for a Part B Code to be approved for Medicare
billing. Introducing new technology, photo-catalytic oxydation, the S-950
provides light weight, portable, high efficacy air filtration. No other company
has yet submitted an air purification device for Medicare billing. The Company
has trained and experienced personnel filing the application and following up
with the administration to help assure success. The Company anticipates
receiving the Medicare billing code by calendar year end and expects to
immediately begin selling the unit. Fiscal 2000 sales are expected to be $56
million based on selling 125,000 units. Management believes annual sales could
be as high as $136 million, achieving only 1% of the potential market share. The
Company believes the S-950 will formally transform it from a tobacco smoke
filtration business to a healthcare entity thus further enforcing use of the
Company's other products into many other non-tobacco related environments,
simply because of the increased health benefits.
Prior to and in the process of developing the completed product line, the
Company has sustained operations through raising equity capital. To help
facilitate this approach, the Shareholders approved a 5:1 Reverse Split made
effective November 9, 1998. The split reduced the shares issued and outstanding
from 50,000,000 to approximately 10,000,000 (after considering conversion of all
Preferred Series A and Debentures issued in the merger with AIC), up from
approximately 5,000,000 (post-split) at fiscal year end 1998. The Company has
continued to use its common stock to support production and overhead needs by
both selling shares for cash and issuing stock for negotiated relationships with
investment bankers and other outside services. Still, as of fiscal year end
1999, the Company continues to have cashflow needs and expects to continue to
sell common shares, debentures or other securities in private placements to
facilitate the Company's implementation of its budgets for fiscal 2000 and
beyond.
Results of Operations
The Company's consolidated operations for the fiscal year ending May 31,
1999 represented the first year of operations after the merger with Airtech
International Corporation and the focus on sales of air purification units. The
Company had no sales from its interactive media business segment during either
1998 or 1999. As such the $1 million increase from $0 in 1998 represents
Airtech's business. Comparing the Airtech revenues of $1 million in 1999 to the
subsidiary's $1.2 million in 1998 identifies a 17% decrease. While sales of air
filtration units increased from $300,000 to $400,000 in 1999 and while sales of
new franchises and licenses increased from 8 to 20 in 1999, the net decrease is
attributable to the Company's discontinuing its service product line. 1998
Service revenues, contributed by the Company's subsidiary McCleskey Sales &
Service, Inc., totaled $800,000 while only recording $600,000 in 1999.
Management discontinued the service product line due to: (1) sustained losses
and sales with low margins, (2) limited geographical service reach while the
Company increases air filtration unit sales both nationally and internationally,
and (3) Management's desire to focus exclusively on the air filtration business.
Cost of product sales increased from $0 to $664,356 as per above. Costs of
air filtration units currently average approximately 50% of wholesale.
Management believes that cost of product will average 40% of sales during fiscal
2000.
21
<PAGE>
Franchise and licensing revenues increased $310,000 or 440% primarily
because of the sale of the licensing agreement for Spain, $100,000. This sale
represents a major breakthrough for the Company because of the related product
sales to Spain, fully revised for electric wiring and approval requirements in
Europe. As a result, the Company expects to turn $575,000 of notes receivable
currently recorded as deferred revenues into earned licensing fees in fiscal
2000. Also, expanding the Company's domestic franchise network from 8 at May 31,
1998 to 20 at May 31, 1999 continues to build a unique marketing channel
strength, otherwise unknown in the indoor air quality industry. The Company
sells at wholesale to the franchisees who in turn mark up the units for resale
to the end users. Generally, franchisees maintain a geographical territory, but
some have begun developing national accounts with certain restaurant chains and
property management companies. In areas where the Company has no franchisee, the
Company has been able to obtain full retail product sales to end users. While
these sales can certainly improve product gross margins, the Company is
committed to developing its franchise network and growing it faster and further
through co-branding relationships with other similarly situated environmental
and cleaning franchisors.
Salaries and wages increased $1.8 million from 1998 to 1999, 780%,
primarily as a result of the overhead built into the Airtech subsidiary. Monthly
payrolls account for $80,000 or $950,000 annually, thus $700,000 of the
difference between the two years. The company also recorded $800,000 of deferred
wages owed to its Chief Executive Officer and its President related to
contractual salaries for the period of June 1, 1997 through December 31, 1998.
These officers had not been otherwise compensated during this time period, and
further, the Company had not accrued the applicable liability at fiscal year end
1998 because the Company was not expected to be able to soon meet this cash
obligation. As a result, the Board of Directors authorized issuance of 1,583,334
shares of restricted common stock on January 31, 1999 at $0.50 per share as
compensation in full for this deferral period. The remaining $300,000 of the
wage increase from 1998 relates to sales commissions and other stock bonuses to
employees and management.
Advertising expense for 1999 was consistent with the Company's planned
future expenditures at approximately 4 to 6% of sales. The amount spent in 1999
was low based on the reduced cash available throughout the year and reserving
1999 cashflow for product development. The Company has over the years and
expects to more strongly in the future develop editorial promotions through
various trade publications and other forms of media to further mature the
marketplace to the needs of indoor air quality. The Company anticipates
increased public exposure and knowledge to have an exponential result on Company
sales in fiscal 2000 and beyond, even with increased competition.
Depreciation and amortization expense increased $200,000 or 21% from 1998
to 1999. Amortization expense was primarily comprised of amortizing Rebate TV
and other interactive media assets during fiscal 1998. Those assets were
discontinued in 1999. The primary amortization in 1999 related to intellectual
properties. Approximately $800,000 was amortized in 1999 from the intellectual
properties balance of approximately $22 million at fiscal year end 1998. The
Company records amortization of intellectual properties based on making its
various products available for sale, having allocated the $22 million to its
various products on the basis of expected future sales. The Company also
recorded approximately $200,000 of amortization of goodwill in 1999.
The Company recorded a loss on impairment of assets held for resale at
fiscal year end 1999 of $2,623,762, recording no such loss in fiscal 1998.
Assets held for resale relate primarily to Rebate TV. Based on the Company's
increased focus during 1999 to its air filtration business, Management spent
little time seeking a buyer for these assets. However, as of fiscal year end
1998, the Company had obtained an independent appraisal which valued the assets
at $4.2 million. According to FAS 121, Impairment of Assets, the Company
considered to write down the value of these assets to 20% of the appraised value
at fiscal year end 1999, $840,000.
22
<PAGE>
General and administrative expenses increased $1,420,000 or 480% from 1998
to 1999. The increase is attributable to approximately $250,000 in contingent
legal reserves, primarily for the New Jersey real estate issue undertaken by the
Company's prior management; approximately $300,000 in outside services from
stock grants to investment banking firms and other consultants; approximately
$100,000 in legal and accounting fees for various audits, merger discussions and
handling the reverse stock split; approximately $50,000 in increased facilities
expenses; approximately $400,000 in write offs of licensing fee notes receivable
which were recorded in fiscal 1997; and finally approximately $320,000 in
1998.
The Company incurred interest expense totaling $285,288 in fiscal 1999, up
from $73,435 in 1998, an increase of 390%. The increase is primarily
attributable to $150,000 of interest payable to holders of the $9 million of
debentures issued in conjunction with the merger with AIC. These debentures were
converted to common stock as July 31, 1998 thus earned for two months at an
annual rate of 10%. The company also recorded interest expense related to its
liabilities on its FCC licenses, short term notes payable and other business
reasons.
The Company reported a net loss from operations of approximately $2.5
million in its quarterly filing with the Securities and Exchange Commission
under 10Q-SB for its third quarter ended February 28, 1999. The increased net
loss from operations to approximately $7.5 million at fiscal year end May 31,
1999 is attributable to the approximately $2.5 million loss on impairment of
assets, approximately $1 million of write offs of notes receivable and various
expenses paid via negotiated stock grants, approximately $750,000 in additional
amortization expense recorded for the fourth quarter related to intellectual
properties and goodwill and approximately $750,000 in other accruals and ongoing
business expenses.
Liquidity and Capital Resources
The Company used cash in its operations of $1,105,526 and $500,590 during
the years ended May 31, 1999 and 1998, respectively. During 1999, the Company
has attempted to maintain low or reduce corporate overhead expenses (mainly
salaried employees), raise money through issuing securities and increase sales
to fund the operations needs. The Company anticipates that it will continue to
reduce costs and various cash outflows by eliminating or converting such
payments to stock grants in fiscal 2000. The Company's fiscal 2000 budget
forecasts net earnings after taxes of $1,397,000 and another $8,595,000 for
fiscal 2001. Achieving these forecasts is critical to the Company's market
penetration and staying ahead of the competition in developing products and
opening new market channels; however, achievement is also contingent upon the
Company's continued ability to raise funds through private placement sales of
its equity securities.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
TURNER, STONE & COMPANY
Certified Public Accountants
12700 Park Central Dr., Suite 1610
Dallas, Texas 75251
Telephone (972) 239-1660
Facsimilie (972) 239-1665
Independent Auditor's Report
The Board of Directors and Stockholders
Airtech International Group, Inc.
We have audited the accompanying balance sheets of Airtech International Group,
Inc. and subsidiaries as of May 31, 1999 and 1998, and the related statements of
operations, stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
mangement, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Airtech
International Group, Inc. and subsidiaries as of May 31, 1999 and 1998, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/S/ Turner, Stone & Company
- ---------------------------
Certified Public Accountants
September 10, 1999
24
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND 1998
ASSETS
<S> <C> <C>
1999 1998
---- ----
CURRENT ASSETS
Cash $61,808 $145,844
Trade and licensing fee receivables, net of allowance for
doubtful accounts of $20,000 and $0, respectively 173,951 172,137
Notes receivable, current portion 143,750 66,667
Inventory 242,665 284,332
Prepaid expenses - 67,214
----------- -----------
Total current assets 622,174 736,194
PROPERTY AND EQUIPMENT - net of accumulated depreciation
of $119,634 and $206,734, respectively 89,569 205,874
NOTES RECEIVABLE - net of current portion, net of allowance
for doubtful accounts of $0 and $0, respectively 431,250 899,833
OTHER ASSETS
Goodwill, net of accumulated amortization of $324,354 and
$0, respectively 6,162,718 6,487,072
Net assets of discontinued operations, held for resale 840,000 3,373,925
Intellectual properties, net of $785,993 and $0 of accumulated
amortization, respectively 21,511,691 22,297,684
Prepaid royalties and other 514,208 535,100
----------- -----------
Total other assets 29,028,617 32,693,781
----------- -----------
$30,171,610 $34,535,682
=========== ===========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
1999 1998
---- ----
CURRENT LIABILITIES
Notes payable - current $277,185 $340,540
Accounts payable, trade 510,193 322,955
Accrued payroll and other wages 216,223 -
Accrued payroll taxes 85,546 -
Other accrued expenses 372,534 156,857
Advances payable to officers 216,488 -
----------- -----------
Total current liabilities 1,678,169 820,352
LONG-TERM LIABILITIES
Convertible debentures - 9,000,000
Deferred revenue 400,000 400,000
Product marketing obligation 405,000 -
Deferred tax liability 6,219,834 6,487,072
----------- -----------
Total long-term liabilities 7,024,834 15,887,072
----------- -----------
Total liabilities 8,703,003 16,707,424
COMMITMENTS AND CONTINGENCIES (Notes) - -
STOCKHOLDERS' EQUITY
Preferred stock - 5,000,000 shares authorized, $.005 par value
Series A cumulative, convertible preferred, none and
11,868,016 shares issued and outstanding,
respectively; liquidation preference of $1 per share - 11,858,016
Series M cumulative, convertible preferred, 1,143,750 and
1,029,750 shares issued and outstanding, respectively;
liquidation preference of $1 per share, aggregating
$ and $ resp 1,144 1,030
Common stock - $.05 par value, 50,000,000 shares authorized,
13,207,532 and 5,074,034 shares issued and outstanding,
respectively 660,376 253,701
Additional paid-in capital 36,527,885 14,271,935
Retained deficit (15,720,798) (8,556,424)
----------- -----------
Total stockholders' equity 21,468,607 17,828,258
----------- -----------
$30,171,610 $34,535,682
=========== ===========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1999 AND 1998
<S> <C> <C>
1999 1998
---- ----
REVENUES
Product sales $800,439 $ -
Franchisee fees 229,000 -
Other revenues 1,030 -
----------- -----------
Total revenues 1,030,469 -
COSTS AND EXPENSES
Salaries and wages 1,317,076 241,280
Deferred officer wages 791,667 -
Cost of sales 664,356 -
Advertising 42,082 -
Depreciation 38,564 19,835
Amortization 1,113,238 908,806
Loss on impairment of assets held for resale 2,533,925 -
Other general & administrative expenses 1,675,886 296,239
----------- -----------
Total costs and expenses 8,176,794 1,466,160
----------- -----------
LOSS FROM OPERATIONS (7,146,325) (1,466,160)
Interest expense (285,288) (73,435)
----------- -----------
NET LOSS BEFORE INCOME TAXES (7,431,613) (1,539,595)
Income tax benefit 267,238 -
----------- -----------
NET LOSS ($7,164,375) ($1,539,595)
=========== ===========
LOSS PER COMMON SHARE - BASIC $ ( 0.71) $ ( 0.54)
=========== ===========
LOSS PER COMMON SHARE - DILUTED $ ( 0.71) $ ( 0.54)
=========== ===========
Shares used in the calculation of per share amounts:
Basic earnings per common share 10,137,256 2,838,631
Dilutive impact of stock options - -
----------- -----------
Diluted earnings per common share 10,137,256 2,838,631
----------- -----------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION> AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1999 AND 1998
COMMON STOCK PREF. SERIES M PREF. SERIES A PAID-IN RETAINED
DESCRIPTION SHARES $ SHARES $ SHARES $ CAPITAL EARNINGS TOTAL
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 5/31/97 2,695,923 $ 134,796 0 $ - 0 $ - $ 10,836,034 $(7,016,829) $ 3,954,001
Issuance of common
stock for cash 84,200 4,210 - - - - 206,290 - 210,500
Issuance of common
stock in exchange
for services 58,912 2,945 - - - - 166,530 - 169,475
Issuance of common
stock in settlement
of capital 135,000 6,750 - - - - 212,000 - 218,750
Issuance of preferred
stock for cash, net
of offering c-sts - 1,029,750 1,030 - - 840,337 - 841,367
Issuance of common and
preferred stock in
acquisition of AIC 2,100,000 105,000 - - 2,371,603 11,858,016 2,010,744 - 13,973,760
Net loss - - - - - - - (1,539,595) (1,539,595)
----------- --------- --------- ------ --------- ----------- ----------- ------------ ------------
BALANCE AT 5/31/98 5,074,034 $ 253,701 1,029,750 $1,030 2,371,603 $11,858,016 $14,271,935 $(8,556,424) $17,828,258
Issuance of Series M
preferred stock in June
net offering costs - - 114,000 114 - - 98,890 - 99,004
Convert Preferred Series
A to common in July 2,371,603 118,580 - - (2,371,603) (11,858,016) 11,739,436 - -
Convert Debentures to
common in July 2,614,286 130,714 - - - - 9,019,286 - 9,150,000
Cancel shares in July (680,000) (34,000) - - - - 34,000 - -
Issuance of common stock
according to S-8
registration in August 146,025 7,301 - - - - 213,065 - 220,366
Issuance of common stock
according to S-8 regis-
tration in November 524,000 26,200 - - - - 148,360 - 174,560
Issuance of common stock
for cash in November 828,000 41,400 - - - - 234,600 - 276,000
Issuance of common stock
on exercise of warrants
in December 46,250 2,313 - - - - 20,812 - 23,125
Issue common stock for
deferred wages to
officers in January 1,583,334 79,167 - - - - 712,500 - 791,667
Issuance of common
stock in May 700,000 35,000 - - - - 35,000 - 70,000
Net loss - - - - - - - (7,164,375) (7,164,375)
----------- ---------- --------- ------- -------- ---------- ------------ ------------- ------------
BALANCE AT 5/31/98 13,207,532 $ 660,376 1,143,750 $1,144 - $ - $ 36,527,884 $(15,720,799) $21,468,605
=========== ========== ========= ======= ======== ========== ============ ============= ============
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASHFLOWS
YEARS ENDED MAY 31, 1999 AND 1998
<S> <C> <C>
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $(7,164,373) $(1,539,595)
Adjustments to reconcile net income to cash
Depreciation and amortization 1,151,802 928,641
Deferred income tax provision (267,238) -
Impairment of assets held for resale 2,623,762 -
Net (gain) loss on disposition of assets (51,672) 34,748
Stock payments to employees and consults 1,129,593 169,475
Allowances and write offs 411,000 -
Changes in operating assets and liabilities
Accounts Receivable (21,814) 136,006
Inventory 41,667 -
Prepaid Expenses 85,715 (5,240)
Accounts Payable 187,238 (160,074)
Accrued expenses 940,934 (64,551)
---------- ----------
Net cash provided by operating activities (933,386) (500,590)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment - (4,834)
Changes in fixed assets 66,058 24,294
Expenditures for other assets (89,837) 2,000
Advances to AIC prior to acquisition - (493,000)
---------- ----------
Net cash used in financing activities (23,779) (471,540)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock,
net of offering costs 99,004 841,367
Proceeds from issuance of common stock 369,125 210,500
Reciepts from product marketing obligation 405,000 -
New Short Term Debt - 52,500
---------- ----------
Net cash provided by financing activites 873,129 1,104,367
CASH. beginning of period 145,844 13,605
---------- ----------
CASH, end of period $61,808 $145,842
========== ==========
</TABLE>
29
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Airtech International Group, Inc. (the Company), (formerly Interactive
Technologies Corporation, was incorporated in the state of Wyoming on August 8,
1991. As of May 31, 1998, in connection with the acquisition discussed below,
the Company manufactures and sells a full line of air purification products.
On May 31, 1998, the Company acquired all of the outstanding common stock shares
of AIC, which through its subsidiaries manufacture and sell various air
filtration and purification products. The total purchase price of $22,937,760
was funded through the issuance of 10,500,000 of its common stock shares valued
at $.625 per share, the issuance of 11,858,016 of its Series A convertible
preferred stock shares valued at $.625 per share (Note 7) and the issuance of
$9,000,000 of convertible debentures (Note 5).
The transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price of the net assets acquired has been allocated
among the net assets based on their relative fair values with $22,297,684 of the
purchase price allocated to intellectual properties based on an independent
asset appraisal and $6,487,072 allocated to goodwill. The acquired goodwill will
be amortized using the straight-line method over 20 years.
Results of operations of AIC and its subsidiaries are included in the
accompanying consolidated statements of operations beginning June 1, 1998.
Results of operations on a pro forma basis for the year ended may 31, 1998,
assuming the acquisition had occurred as of June 1, 1997, are as follows:
1998
------------
Revenues $ 1,126,499
Net loss $ (870,671)
Consolidated principles
The accompanying consolidated financial statements include the general accounts
of the Company and its subsidiaries, AIC, Airsopure, Inc. and McCleskey Sales
and Service, Inc., each of which has fiscal year ends of May 31. 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.
30
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amortization
Intellectual property is allocated to the Company's air filtration products
based on expected sales as a percent of total sales by product. The Company
records amortization beginning when the product is initially inventoried for
sale. Amortization is recorded over a ten-year term. For the years ended May 31,
1999 and 1998, amortization expense totaled $785,993 and $0, respectively.
Goodwill recorded in the acquisition of AIC, is being amortized under the
straight-line method over 20 years.
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.
At May 31, inventories consisted of the following:
1999 1998
-------------------------------
Finished Goods $ 200,506 $ 22,102
Component parts 42,159 262,230
--------------------------------
$ 242,665 $ 284,332
================================
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.
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 not 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.
31
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Product marketing obligation
According to FAS 68, the Company recorded funds raised in a research and
development agreement to develop, produce and market its Model S-999 as a
product marketing obligation.
Revenue recognition
Revenues from the Company's operations are recognized at the time products are
shipped or services are rendered.
Advertising
Advertising dollars are invested in trade journals, trade shows, travel and
franchise networking. All amounts are expensed as incurred.
Management estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash flow
For purposes of the statement of cash flows, cash includes demand deposits and
time deposits with maturities of less than three months. None of the Company's
cash is restricted.
Earnings per share
No effect has been given to the assumed conversion of convertible preferred
stock and convertible debentures and the assumed exercise of stock options and
warrants as the effect would be antidilutive.
Stock split
On October 5, 1998, the shareholders authorized a one for five reverse split of
the Company's common stock. The reverse split was made effective November 9,
1998. Shareholders equity has been restated to give retroactive recognition to
the stock split for all periods presented, such that all references in the
financial statements to number of shares, per share amounts, par values and
stock option data for common shares have been restated. The shareholders also
approved the Company's authorized common shares to be 50,000,000.
32
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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.
Effective July 31, 1998, the Company's Board of Directors voted to convert the
Series A Preferred Stock to Common Stock on the basis of one share of Preferred
to one share of Common, as per the merger agreement. To effect the conversion of
11,858,016 of Series A preferred, the Company issued 2,371,603 shares of common
stock.
Convertible preferred stock - Series M
During the year ended May 31, 1998, the Company authorized 5,000,000 shares and
established this equity class to raise production funds for the Company's Model
S-950, Medicare air filtration unit. The Series M preferred shareholders
participate by receiving up to 20%, if totally subscribed, of the collected
gross proceeds from the Company's sales of its Model S-950 over a two year
period. During the twelve months ended, 1,029,750 of these shares were issued
for $1.00 cash, net of $188,383 of offering costs. Prior to June 30, 1998,
another 114,000 of these shares were issued for cash, net of offering costs of
$14,996. The shares have a par value of $.001, do not pay dividends and are
convertible at the holder'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 $0.25 per
share exercisable within two years after issuance. As of May 31, 1999, the
Company had not sold any S-950 units thus have made no payments under the
participation plan.
3. NOTES RECEIVABLE
Notes receivable relate to AIC sales of geographic franchise licenses (Note 1),
bear interest at 6% to 8%, are payable in terms ranging from 12 to 36 months and
secured by the area franchises. Credit is extended on evaluation of the payee's
financial condition and general credit information. Prior to May 31, 1999, the
Company did not enforce collection while it completed development of its product
line of air purification products.
At May 31, 1998, notes receivable are comprised of the following:
1999 1998
-------------------------------
Domestic franchise licenses $ 300,000 $ 300,000
International franchise licenses 275,000 666,500
-------------------------------
575,000 966,500
Less current portion (143,750) (66,667)
-------------------------------
$ 431,250 $ 899,833
===============================
33
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
4. NOTES PAYABLE
The Company's notes payable consist of loans from various corporations and
individuals provided for working capital purposes. The notes, which contain no
significant restrictions, bear interest at rates of 10.0% to 18.0%, are due
through May 1999 and are unsecured. At May 31, 1999, $277,183 of these notes
payable was in default.
5. CONVERTIBLE DEBENTURES
In connection with the Company's acquisition of AIC, the Company also issued
$9,000,000 of convertible debentures secured by the shares of AIC acquired. The
debentures bear interest at 10% payable annually on May 31 of each year, are due
on May 31, 2000 and are convertible at the Company's option at any time within
the two years into shares of the Company's common stock at a conversion price of
$.70. As of July 31, 1998, the Company's Board of Directors voted to convert the
debentures and $150,000 of related accrued interest into common stock. The
Company issued 2,614,286 common shares on conversion.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is currently obligated under a noncancellable operating lease for
its Dallas office facilities which expire in May and September 2000.
Minimum future rental payments required under the above operating lease is as
follows.
Year ending May 31
2000 $ 77,184
2001 29,436
2002 9,812
------------------
$ 116,432
==================
Rent expense was $80,670 and $6,776, respectively for the years ending May 31,
1999 and 1998.
Employment agreement
The Company is currently obligated under employment agreements with its Chief
Executive Officer and its President for annual compensation of $250,000 apiece
and discretionary bonuses to be determined by the Company's board of directors.
The agreements expire in May 2008. Compensation under such agreements was
deferred during the period from June 1, 1997 through December 31, 1998. At
January 31, 1999, the Board of Directors authorized payment of the deferred
amount by issuing restricted common stock at $0.50 per share, issuing a combined
total of 1,583,334 shares. Starting in January 1999, these two executives began
receiving cash compensation at the rate of $125,000 apiece. The remainder of the
contracted amounts has been accrued as of May 31, 1999. Effective June 1, 1999,
these executives continued to receive cash compensation at the rate of $125,000
per year; however, based on agreements reached with these executives, the
Company is no longer accruing the difference as such is considered to not be due
until further notice.
The Company's current compensation benefits do not provide any other
post-retirement or post-employment benefits.
34
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
S-999 Limited Partnership
In January 1999, the Company formed a limited partnership, S-999 LP, to fund
production of the Company's new automobile, trunk mounted air filtration unit,
the Model S-999. Airsopure, Inc., a subsidiary of the Company, became the
general partner, and the limited partnership was authorized to sell up to $5
million of partnership interests. The limited partners are entitled to up to a
maximum of 20% of the gross sales from the S-999 over a three-year period.
Additionally, the Company guaranteed the limited partners a return of at most
150% of their investment at the end of the three year term by authorizing
conversion of their limited partnership interests into shares of the Company's
common stock. Through May 31, 1999, the LP raised $405,000 which amount is
recorded as Product Marketing Obligation.
Year 2000 computer compliance
The Company is currently using computer hardware and software that is not in
compliance with the year 2000 dating issues. However, new software and hardware
components have been ordered, therefore the Company anticipates to be in
compliance prior to December 31, 1999. During the year ended May 31, 1998, the
Company incurred approximately $15,000 of costs related to this effort.
Management does not believe any additional significant cost will be incurred and
the accompanying consolidated financial statements do not contain any reserve
for this contingency.
7. LITIGATION
Rental operating lease
The Company is defendant, and it has filed counter claims, in a lawsuit filed by
the lessor of office space facilities in New Jersey (Note 6). The Company never
occupied the space due to the lessor's failures to finish out the space to the
Company's specifications. The lessor seeks to recover remaining lease payments
due under the lease of $606,913 and the Company seeks to recover damages under a
capital lease obligation (Note 6) for equipment located in the New Jersey
facilities and contractually precluded from being removed from the facilities.
Although the Company anticipates a favorable settlement of this lawsuit the
outcome of it is uncertain. A reserve for $200,000 has been established in
anticipation of settling this obligation.
35
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES
The Company used the accrual method of accounting for tax and financial
reporting purposes. At May 31, 1999 and 1998, the Company had net operating loss
carryforwards for financial and tax reporting purposes of approximately
$16,100,000 and $8,500,000, respectively. These carryforwards expire through the
year 2012, and are further subject to the provisions of Internal Revenue Code
Section 382.
Pursuant to Statement of Financial Accounting Standards No. 109, the Company has
recognized a $5,480,292 deferred tax asset attributable to the net operating
loss carryover, net of a $891,122 deferred tax liability related to amortization
timing differences, in the amount of $4,589,170 which have been fully offset by
a valuation allowances in the same amount, as follows:
1999 1998
--------------------------------
Beginning Balance $ 2,804,055 $ 2,267,331
Increase during period 1,785,115 536,724
--------------------------------
Ending balance $ 4,589,170 $ 2,804,055
================================
The Company has also recognized a deferred tax liability of $6,219,834 and
$6,487,072 as of May 31, 1999 and 1998, respectively, for the differences
between the assigned values and the tax bases of assets, net of accumulated
amortization, recognized in its acquisition of AIC (Note 1).
A reconciliation of income tax expense at the statutory federal rate to income
tax expense at the Company's effective tax rate for the years ended May 31, 1999
and 1998 is as follows:
1999 1998
----------------------------
Tax (expense) benefit
computed at statutory
federal rate $ 267,238 $ (523,462)
NOL carryover - 523,462
----------------------------
Income tax benefit $ 267,238 $ -
============================
9. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of its cash, accounts and notes
receivable, trade payable.
Cash
The Company maintains its cash in bank deposit and other accounts , which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts, and does not believes it is subject to any credit risks
involving its cash.
Accounts and notes receivable, trade
The Company accounts and notes receivables are unsecured and represent sales not
collected at the end of the year. Management believes these accounts and notes
receivables are fairly stated at estimated net realizable amounts.
36
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
10. ASSETS HELD FOR SALE
In February 1998, the Company formally discontinued its Rebate TV operations and
adopted a plan to dispose of the only asset of this business segment, the
proprietary software and trademark. The Company also adopted a plan to dispose
of its FCC license rights, the only asset of its interactive video and data
services business segment, which were never operational. Management expects to
sell these assets by May 31, 2000.
The accompanying consolidated statement of operations for 1998 reflects the
revenues and expenses of the Company's Rebate TV business segment, the only
segment operated during the fiscal year.
At May 31, 1999 and 1998, net assets of these discontinued operating segments,
stated at the lower of cost or net realizable value, were comprised of the
following:
1999 1998
---------------------------------
License rights, net of $438,760
and $438,760, respectively, of
of accumulted amortization and
net of license rights payable
of $540,000 $ (303,750) $ (303,750)
Proprietary software and trademark
net of $0 and $1,643,53, respectively
of accumulated amortization 1,143,750 3,677,675
---------------------------------
$ 840,000 $ 3,373,925
=================================
11. STOCK OPTIONS AND WARRANTS
During the years ended May 31, 1999 and 1998, the Company issued various stock
options and warrants to employees and others and uses the intrinsic value method
of accounting for these stock options. Compensation cost for options granted has
not been recognized in the accompanying financial statements because the amounts
are not material. The options and warrants expire between January 1999 and
December 2008 and are exercisable at prices from $0.20 to $22.50 per option or
warrant. Exercise prices were set at or above the underlying common stock's fair
market value on the date of grant.
The following is a schedule of the activity relating to the Company's stock
options and warrants. Other than the 432,850 and 205,900 warrant identified
below as granted during the year ended May 31, 1999 and 1998, respectively (Note
4), all other amounts relate to stock options the Company has issued.
37
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
11. STOCK OPTIONS AND WARRANTS (continued)
<TABLE>
<CAPTION>
May 31, 1999 May 31, 1998
Shares Weighted Avg Shares Weighted Avg
(x 1000) Exercise Price (x 1000) Exercise Price
----------------------------------------------------------
<S> <C> <C> <C> <C>
Options and warrants
outstanding at beginning of
year 480 $ 3.93 274 $ 5.20
Granted 567 $ 0.61 206
Exercised (46) $ 2.00
Expired (10) $10.00
-------------------------- --------------------------
Options and warrants
outstanding at year end 991 $ 2.06 480 $ 3.93
========================== ==========================
Options and warrants
exercisable at year end
of accumulated amortization 901 $ 2.06 480 $ 3.93
========================== ==========================
Weighted average fair value
of options and warrants
granted during the year $ 0.45 $ 0.60
</TABLE>
The following table summarizes information about the Company's stock options and
warrants outstanding at May 31, 1999, all of which are exercisable.
Number Weighted Avg.
Range of Outstanding Remaining Weighted Avg
Exercise Prices (x 1000) Contractual Life Exercise Price
- ---------------------------------------------------------------------------
$0.20 - 0.60 485 3.3 years $ 0.31
$2.00 - 2.50 243 1.1 years $ 2.12
$3.75 - 5.00 240 3.0 years $ 4.17
$10.00 -22.50 23 1.6 years $15.62
The following pro forma disclosures reflect the Company's net loss and net loss
per share amounts assuming the Company accounted for stock options granted using
the fair value method pursuant to Statement of Financial Accounting Standards
No. 123. The fair value of each option granted was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.6%; no expected dividends; expected
lives of 3 to 10 years; and expected volatility of 220%.
1999 1998
---------------------------
Net loss $(7,164,375) $ (1,552,736)
Net loss per share $(.71) $ (0.55)
During the year ended May 31, 1999 and 1998, the Company also issued 1,583,334
and 58,912 common stock shares, respectively, in exchange for services. These
services were recorded at their fair value of $791,667 and $169,475,
respectively, and were charged to expense.
38
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
12. RELATED PARTIES
During the year ended May 31, 1999, the Chief Executive Officer and the
President advanced $162,100 to the company of which $159,000 plus $57,488 in
accrued interest was owed at May 31, 1999.
During fiscal 1999 and 1998, the Company's Chief Executive Officer and its
President advanced cash to the Company totaling $416,000. The Company agreed to
repay these advances as cash was available or by issuing its common stock at
various times as well as to pay 15% interest on the outstanding balance. As of
May 31, 1999 and 1998, the Company owed $216,488 and $123,900, respectively, on
advances to officers, including accrued interest.
13. GOING CONCERN ISSUES
The continued operating losses by the Company and its subsidiaries raise concern
about the Company's ability to continue as a going concern. Management is
currently negotiating several large contracts for its air filtration products,
which will increase the Company's cash flow and its ability to generate profits.
The Company has completed its air purification product line and has expanded its
franchise network throughout the nation and internationally. In addition, the
Company is continuing efforts to raise additional equity capital to provide
liquidity until cash can be generated by operations.
39
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company as of May 31, 1998. A summary of
the background and experience of each of these individuals is set forth after
the table.
The directors are:
NAME AGE POSITION
C. J. Comu 38 Chairman
John Potter 57 Director
The executive officer and other officers are:
NAME AGE POSITION
C. J. Comu 38 Chief Executive Officer
John Potter 57 President
Darrell R. Jolley 36 Chief Financial Officer
Douglas S. Keane 50 Vice President of Franchising
President, Airsopure, Inc.
(subsidiary of the Company)
Roger Thurmond 54 Vice President of Research and
Development
Scott W. Pollock 29 Vice President of Finance
C.J. Comu, Chief Executive Officer Mr. Comu has served as CEO and Chairman
since May 31, 1998, serving as Director for the greater of one year or the next
annual shareholders' meeting. Mr. Comu was a co-founder, CEO and Chairman of
Airtech International Corporation (AIC), since its formation in 1995. Mr. Comu
began his career in the stock and commodities industry as a specialist in
precious metals and currencies for Conti Commodities Group. He co-founded MBA
Corporate Group, one of the largest financial application software companies in
the country. Mr. Comu has been a successful entrepreneur, financier and
turnaround professional to several start ups and operating companies during his
term as President of Credit America Holdings Group, a privately held and managed
investment banking and consulting firm. Mr. Comu founded Transworld Leasing
Corporation prior to forming AIRTECH.
John Potter, President and Director of Govt. Accounts Mr. Potter has served
as President and a Director since February 11, 1998, serving as Director for the
greater of one year or the next annual shareholders' meeting. Mr. Potter was a
co-founder, President and a Director of Airtech International Corporation (AIC)
since its formation in 1995. Mr. Potter began his business career with Xerox
Corporation and later moved into the world of finance with Wells Fargo &
Company, handling their national leasing division. Mr. Potter was the founder of
Alpha Leasing, which grew into one of the largest leasing companies in the
40
<PAGE>
Southwest. Mr. Potter co-founded Transworld Leasing Corporation with Mr. Comu,
providing financing and marketing expertise to the medical, computer and
corporate sector prior to the formation and launch of AIRTECH. Prior to
beginning his business career, Mr. Potter was an officer in the US Army.
Darrell R. Jolley, CPA Chief Financial Officer Mr. Jolley has served as CFO
since November 1, 1998. Mr. Jolley started his career at the firm of Deloitte
and Touche. After five years with this firm, he was the Controller of Douglas
Packaging, a manufacturing company, before he served the same function at Harris
Adacom Systems, a computer distribution company. From 1994 to prior to joining
the Company, Mr. Jolley was the Chief Financial Officer of Eyemakers, Inc., a
Nasdaq/OTCBB optometry practice management company. Mr. Jolley has handled
mergers and acquisitions, strategic planning and SEC financial reporting. His
expertise lies in working within start-up and fast growing companies.
Douglas S. Keane, VP of Franchising and President of Airsopure, Inc. Mr.
Keane has served the Company since March 1997. Mr. Keane has twenty-seven years
of diverse franchise experience. He joined AIRTECH in January of 1997 and helped
create Airsopure, Inc. in March. Prior to joining the Company, Mr. Keane had
been a franchise consultant since 1980, operating under the name Keane Ideas,
Inc. He was the founder of Beauty Secrets International, featuring Victoria
Jackson Cosmetics, National Pet Care Centers and Nutra First Corporation with
entertainer Pat Boone. Mr. Keane has owned and operated successful franchised
regions for Realty World Corporation, Vidtron International and American Home
Shield.
Roger Thurmond, Vice President of Research & Development Mr. Thurmond
joined the Company in June 1998. Mr. Thurmond handles Airsopure products from
the design and conception stage to prototype and the merchandising stage. He has
over twenty-five years experience in real estate development and over 15 years
experience in Indoor Air Quality design and manufacturing. With his own company
during the 80's, he developed the first integrated heating/cooling air-cleaning
system available in the industry. Mr. Thurmond has been active for many years in
The American Society of Heating, Refrigeration and Air Conditioning Engineers
(ASHRAE), The National Association of Homebuilders and The Building Owners and
Managers Association.
Scott W. Pollock, Vice President of Finance Mr. Pollock joined the Company
in August 1997. Mr. Pollock began his career in operations and finance, for
NYSE-traded Inacom Corporation, now the country's largest corporate computer
aggregator ($7 billion '98 revenue). Within 3 years, he had become Inacom's
Director of International Operations and Finance. During his stay, the
international division grew profitably from zero to over $60 million in revenue
within a period of two years. Mr. Pollock also became proficient in turnaround
management and mergers and acquisitions during this time. He subsequently
entered the investment banking and corporate finance business in Dallas, Texas,
and joined Airsopure in mid 97. Mr. Pollock heads up financing efforts,
broker-dealer management, mergers & acquisitions, and investor relations for the
Company.
Directors receive no cash compensation for their services as directors. However,
Company policy is to reimburse non-employee directors for expenses actually
incurred in connection with attending meetings of the Board of Directors. The
Company is also considering stock and option grants for outside directors.
The Company's Board of Directors currently has no subcommittees.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and person who own more than ten percent of a registered class of the
Company's equity securities ("Reporting Persons") to file reports of ownership
and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange
Commission (the"SEC") and the National Association of Securities Dealers (the
"NASD"). These Reporting Persons are required by SEC regulation to furnish the
Company with copies of all Forms 3, 4 and 5 that they file with the SEC and the
NASD. Based solely on the Company's review of the copies of the forms it has
41
<PAGE>
received, the Company believes that all Reporting Persons failed to timely file
Forms 3, 4 and 5. John Potter, Darrell Jolley and Douglas Keane filed Form 3's
effective July 29, 1999. John Potter, Darrell Jolley and Douglas Keane filed
Form 4's for stock grants and other transactions during and subsequent to fiscal
year end 1999 on August 23 and 30, 1999. CJ Comu filed Forms 3, 4 and 5, for
activity and balances through May 31, 1999, on August 30, 1999. John Potter
filed an amended Form 3 on August 30, 1999. John Potter, Darrell Jolley and
Douglas Keane filed Form 5's on August 30, 1999 for the Company's fiscal year
ended May 31, 1999. John Potter, Darrell Jolley and Douglas Keane filed Form 4's
for stock grants and other transactions during and subsequent to fiscal year end
1999 on August 23, 27 and 30, 1999. In prior years, the Company, based on a
review of filings with the SEC, has determined that no other officer or director
or 10% beneficial owner filed Forms 3, 4 or 5. The Company has determined by the
available records that there are no other beneficial owners of 10% or more of
the Company's Common Stock.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid by the
Company during the last three fiscal years to the Company's Chief Executive
Officer, President and other individuals who served as executive officers whose
total compensation was $100,000 or more (each, a "Named Executive Officer").
<TABLE>
<CAPTION>
Long Term Compensation Awards
Annual Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
Securities
Name and Principal Position Fiscal Year Salary (8) Bonus ($) Other Annual Restricted Stock Underlying
Compensation (6) Awards ($) Options
CJ Comu, CEO, Chairman 1999 $ 46,875 $ 0 $ 0 $ 395,834 791,667 (2)
(1) 1998 0 0 0 28,500 150,000
1997 297,072 0 0
Perry West, (former) CEO, Chairman
1998 24,000 0 250,000 0 0
John Potter, President 1999 46,875 0 0 395,834 791,667 (3)
(1) 1998 0 0 0 28,500 150,000
1997 294,178 0 0
Darrell R. Jolley, CFO 1999 58,333 0 0 12,500 25,000 (4)
Bobby Cox, (former) CFO 1998 0 (7) 0 0 0 0
(1) 1997 26,667 (7)
Douglas S. Keane, President of
Airsopure, Inc.
1999 77,500 0 0 12,500 25,000 (5)
(1) 1998 62,917
1997 18,750
</TABLE>
(1) Disclosure is made of Named Executive Officers of the Company's subsidiary,
Airtech International Corporation for fiscal years 1998 and 1997 for
positions substantially similar to positions held in employ by the Company
for fiscal year 1999.
(2) Mr. Comu received 791,667 shares of restricted Common Stock in fiscal 1999
for deferred wages for the period from June 1, 1997 through December 31,
1998, the fair value of which shares was $395,834 on the date of grant,
January 31, 1999. He received 150,000 shares of Common Stock under S-8
registration in additional compensation in fiscal 1999, the fair value of
which was $28,500 at the date of grant, December 31, 1998. All of these
shares were fully vested on the date of grant. None of the shares are
entitled to dividends.
42
<PAGE>
(3) Mr. Potter received 791,667 shares of restricted Common Stock in fiscal
1999 for deferred wages for the period from June 1, 1997 through December
31, 1998, the fair value of which shares was $395,834 on the date of grant,
January 31, 1999. He received 150,000 shares of Common Stock under S-8
registration in additional compensation in fiscal 1999, the fair value of
which was $28,500 at the date of grant, December 31, 1998. All of these
shares were fully vested on the date of grant. None of the shares are
entitled to dividends.
(4) Mr. Jolley received 25,000 shares of Common Stock under S-8 registration in
additional compensation earned in fiscal 1999, the fair value of which was
$12,500 at the date of grant, June 16, 1999.
(5) Mr. Keane received 25,000 shares of Common Stock under S-8 registration in
additional compensation earned in fiscal 1999, the fair value of which was
$12,500 at the date of grant, June 16, 1999.
(6) Mr. West
(7) Per Board resolution of January 31, 1996 (within fiscal year 1997), Mr.
Cox' salary was authorized as $100,000 and in fact had been compensated at
least at that level in the prior year. Mr. Cox separated from the Company
in October 1997.
(8) See terms of employment agreements for Mr. Comu, Mr. Potter, Mr. Jolley and
Mr. Keane under the section titled "Employment Agreements." Except for Mr.
Keane, all amounts for fiscal 1999 represent payments for only part of the
year.
The Following table sets forth (a) the number of shares underlying options
granted to each name Executive officer during fiscal 1999, (b) the percentage
the grant represents of the total number of options granted to all Company
employees during fiscal 1999, (c) the per share exercise price of each option
and (d) the expiration date of each option.
<TABLE>
<CAPTION>
Number of Securities % of Total Options/SAR's Granted to
Name Underlying Options / SAR's Employees in Fiscal Year Exercise Price Expiration Date
Granted (#) ($/Shares)
<S> <C> <C> <C> <C>
CJ Comu 150,000 21.9% $ 0.50 October 31, 2001
John Potter 150,000 21.9% $ 0.50 October 31, 2001
Darrell R. Jolley 135,000 (1) 19.7% $ 0.60 October 31, 2008
Douglas S. Keane 250,000 (2) 36.5% (3) December 31, 2008
</TABLE>
(1) Options granted to Mr. Jolley vest as follows: 45,000 on November 1, 1998;
45,000 on November 1, 1999; and 45,000 on November 1, 2000.
(2) Options granted to Mr. Keane vest as follows: 100,000 on January 1, 1999;
100,000 on January 1, 2000; and 50,000 on January 1, 2001.
(3) Options granted to Mr. Keane will be exercised at a price equal to market
less a 20% discount at the respective vesting date. Options which vested on
January 1, 1999 may be exercised at $0.11 per share.
43
<PAGE>
Set forth in the table below is information, with respect to each Named
Executive Officer, as to the (a) number of shares acquired during fiscal 1999
upon each exercise of options granted to such individuals, (b) the aggregate
value realized upon each exercise (i.e. the difference between the market value
of the shares at exercise and their exercise price), (c) the totalnumber of
unexercised options held on May 31, 1999, separately identified between those
exercisable and those not exercisable and (d) the aggregate value of
in-the-money, unexercised options held on May 31, 1999, separately identified
between those exercisable and those not exercisable.
<TABLE>
<S> <C> <C> <C> <C>
Number of Securities Underlying Value of exersized In-the-Money
Shares Acquired Value Unexercised Options at Fiscal Year-end (#) Options at Fiscal Year-End ($)
Name on Exercise (#) Received ($) Exercisable/Unexercisable Exercisable/Unexercisable (1)
CJ Comu - 0 - - 0 - 150,000 / 0 $ 0 / $0
John Potter - 0 - - 0 - 150,000 / 0 $ 0 / $0
Darrell R. Jolley - 0 - - 0 - 45,000 / 90,000 $ 0 / $0
Douglas S. Keane - 0 - - 0 - 100,000 / 150,000 $11,000 / $0
</TABLE>
(1) The value is calculated based on the aggregate amount of the excess of $0.39
(the closing sale price per share for the Common Stock on May 31, 1999) over the
relevant exercise price(s).
Employment Agreements
C. J. Comu and John Potter have ten (10) year employment contracts with the
Company for annual compensation of $250,000 each, terminating May 31, 2008.
Under the terms of these contracts and agreements between the Board of
Directors, Mr. Comu and Mr. Potter, these contracts will only be funded on a
cash basis at such time as the Company is in a financial position to pay the
salaries under these contracts. Unpaid compensation relating to these contracts,
dating from June 1, 1997 through December 31, 1998, was compensated to Mr. Comu
and Mr. Potter effective January 31, 1999 through the issue of 791,667 and
791,667 shares of restricted Common Stock, respectively. Effective January 15,
1999, Mr. Comu and Mr. Potter began receiving cash compensation under the
agreements at an annual rate of $125,000 each. The remainder of the amounts due
each officer under respective contracts will be converted to restricted Common
Stock during fiscal year 2000. Effective June 1, 1999, Mr. Comu and Mr. Potter
have further agreed with the Board of Directors to reduce compensation to
$125,000 each until further notification so that the Company will not be
obligated for any difference during the period until notification is made.
Darrell R. Jolley has a one (1) year, renewable employment agreement to pay
$100,000 annually for services as the Chief Financial Officer for the Company.
Terms of the agreement specify options on 135,000 shares of the Company's Common
Stock as well as an annual bonus.
Douglas S. Keane has a one (1) year, renewable employment agreement to pay
$100,000 annually for services as the President of Airsopure, Inc. and as the
Vice President of Franchising for the Company. Terms of the agreement specify
options on 350,000 shares of the Company's Common Stock as well as an annual
bonus and commissions earned from the sale of new franchisees.
Perry Douglas West had no employment contract with the Company and any
compensation for his prior services will be determined by the Board of Directors
at such time as the Company is in a financial position to be able to do so.
44
<PAGE>
Company Stock Plans
1999 Employee Stock Plan: The Company periodically establishes employee stock
grant plans whereby unrestricted Common Stock is granted to certain employees,
management and consultants for performance rewards or services rendered. On June
9, 1998, the Company filed an S-8 registration for 160,000 Common shares (amount
is considered as if filed after the 1:5 Reverse Split of November 9, 1998).
Through July 30, 1998, the Company issued Common shares to consultants and
employees of 56,002 shares and 90,023 shares, respectively. As of July 30, 1999,
the Company had not issued the remaining 13,975 Common shares. The shares issued
were accounted for as outside services and employee wages.
On November 12, 1999, the Company filed an S-8 registration for 800,000 Common
shares. Through July 30, 1999, the Company issued Common shares to consultants
and employees of 257,600 shares and 538,991 shares, respectively. As of July 30,
1999, the Company had not issued the remaining 3,409 Common shares. The shares
issued were accounted for as outside services and employee wages.
On July 23, 1999, the Company filed an S-8 registration for 900,000 Common
shares, none of which were issued as of July 30, 1999.
2000 Key Employee Option Plan: Effective May 31, 1999, the Board of Directors
adopted the Company's Key Employee Option Plan in order to motivate qualified
employees to assist the Company in retaining employees and to align the interest
of such persons with those of the Company's shareholders. The Option Plan is
authorized for key employees including the: CEO, President, CFO, VP Franchising,
VP Production, VP Finance. The Option Plan will provide for the grant of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, "non-qualified stock options." The approval
authorized the issuance of a maximum of 1,000,000 shares subject to the option,
with a range of exercise prices from a low of $0.25 to $2.50, vesting over a two
to three year period and expiring ten (10) years from grant date. The Board of
Directors expects to grant option agreements during fiscal year 2000 to the key
employees specifying respective numbers of options, vesting periods, exercise
prices and incentives, if any. As of July 30, 1999, no options had been granted
to any key employee under the Option Plan. The Board further anticipates that
the S-8 filed on July 23, 1999 will be used significantly for the Key Employee
Option Plan.
For further information regarding stock options and stock grants, refer to the
Notes to the Consolidated Financial Statements.
Indemnification
Wyoming Corporation Law provides that indemnification of directors, officers,
employees and other agents of a corporation, and persons who serve at its
request as directors, officers, employees or other agents of another corporation
may be provided by such corporation.
The Company's Certificate of Incorporation includes provisions eliminating the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty except, pursuant to the limitations of the Wyoming
Corporation Law, ( I) for any breach of their fiduciary duty except, pursuant to
the limitations of its directors for monetary damages resulting from breaches of
their fiduciary duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section of the Wyoming Corporation
law, or any amendatory or successor provisions thereto, or (iv) with respect to
any transaction from which the director derived an improper personal benefit.
The Company's By-Laws provide indemnification to directors, officers, employees
and agents, including against claims brought under state or Federal Securities
laws, to the full extent allowable under Wyoming law. The Company also has
entered into indemnification agreements with its directors and executive officer
providing, among other things, that the Company will provide defense cost
against any such claim, subject to reimbursement in certain events.
45
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 31, 1999, certain information
concerning the beneficial ownership of each class of the Company's voting stock
by (i) each beneficial owner of 5% or more of the Company's voting stock, based
on reports filed with the Securities and Exchange Commission and certain other
information; (ii) each of the Company's executive officers and (iii) all
executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
<S> <C> <C>
Amount and Nature of Beneficial Percent of Common Stock
Name and Address (1) Ownership of Common Stock (2) Ownership (3)
CJ Comu 1,932,281 (4) 13.1%
John Potter 1,679,612 (5) 11.3%
Darrell R. Jolley 70,000 (6) *
Douglas S. Keane 256,703 (7) 1.7%
CR Saulsbury, Sr., Texas 1,116,533 (8) 7.5%
Peter Kertes, Florida 784,600 (9) 5.3%
Officers and Directors as a
Group (4 persons) 3,938,596 (10) 26.6%
</TABLE>
* Less than 1%
(1) Unless otherwise indicated. the address of each director and officer is c/o
Airtech International Group, Inc., 15400 Knoll Trail, Ste #106, Dallas, TX
75248.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within
60 days from the date on which beneficial ownership is to be determined
upon the exercise of options, warrants or convertible securities.
(3) Each beneficial owner's percentage ownership is determined by assuming that
stock options and warrants that are held by such person (but not those held
by any other person) and which are exercisable within 60 days from the date
on which beneficial ownership is to be determined have been exercised. 25
(4) Represents 1,421,318 shares of Common Stock owned directly, 150,000 shares
beneficially owned as held by Sunset Pacific, 211,339 shares beneficially
owned and held by Alphatronics and 150,000 shares owned pursuant to
warrants to purchase shares of Common Stock at $0.50 per share exercisable
within 60 days. Does not include 136,987 shares and 74,353 shares of Common
Stock owned by Mr. Comu's relatives, Sevim and Cem Comu, respectively, for
which Mr. Comu disclaims beneficial ownership.
(5) Represents 1,318,281 shares of Common Stock owned directly, 211,339 shares
beneficially owned and held by Alphatronics and 150,000 shares owned
pursuant to warrants to purchase shares of Common Stock at $0.50 per share
exercisable within 60 days. Does not include 193,356 shares and 239,136
shares of Common Stock owned by Mr. Potter's relatives, Susan and John
Garth Potter, respectively, for which Mr. Potter disclaims beneficial
ownership.
(6) Represents 25,000 shares of Common Stock owned directly and 45,000 shares
owned pursuant to options to purchase shares of Common Stock at $0.60 per
share exercisable within 60 days. Excludes a 90,000 share option not yet
vested.
(7) Represents 56,703 shars of Common Stock owned directly, 100,000 shares
owned pursuant to options to purchase shares of Common Stock at $0.11 per
share exercisable within 60 days and 100,000 shares owned pursuant to
options to purchase shares of Common Stock at $0 per share for past
performance, exercisable within 60 days. Excludes a 150,000 share option
not yet vested.
46
<PAGE>
(8) Represents 566,533 shares of Common stock owned directly, 300,000 shares
beneficially owned as held by Saulsbury Electric Co. Inc. and 250,000
shares owned pursuant to warrants to purchase shares of Common Stock at
$0.20 per share exercisable within 60 days. Also includes 20,000 warrants
to purchase Common Stock at $0.25 per share exercisable within 60 days.
Excludes 100,000 shares of Series M Preferred Stock convertible to Common
Stock.
(9) Represents 534,600 shares of Common Stock owned directly and 250,000 shares
owned pusuant to warrants to purchase shares of Common Stock at $0.20 per
share exercisable within 60 days.
(10) See notes 4, 5, 6 and 7.
Changes in Control.
Control of the registrant prior to the purchase of Airtech International
Corporation, Inc. was in the hands of Perry Douglas West who previously owned
approximately 46% of the outstanding common stock. Under terms of the Stock
Purchase Agreement with Airtech by July 31, 1999, Mr. West surrendered 3,400,000
reducing his ownership to 2,300,000 shares of the issued and outstanding stock
of the registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1999 and 1998, the Company's Chief Executive Officer and its
President advanced cash to the Company totaling $416,000. The Company agreed to
repay these advances as cash was available or by issuing its common stock at
various times as well as to pay 15% interest on the outstanding balance. As of
May 31, 1999 and 1998, the Company owed $216,488 and $123,900, respectively, on
advances to officers, including accrued interest.
Peter Kertes is the President of EquitNet.Com, a weekly investor
newsletter. Mr. Kertes provided the Company with a research report for which he
was compensated in cash and stock. The Company has also signed an agreement with
Mr. Kertes to provide investment banking services for which he was compensated
by the issuance of 29,600 common shares.
47
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
EXHIBIT INDEX
(a.) Exhibit Page
3.0 Charter and By-Laws (1)
4.1 Form S-4 Registration Statement filed 8-22-97 defining
rights of securities to be acquired by Airtech
International Corporation shareholders (2)
10.5 Stock Purchase Agreement dated May 5, 1997 with
Airtech International Corporation (3)
(1) This exhibit was previously filed as an exhibit to the Registrant's Form 10
filed January 14, 1992 and is herein incorporated by reference.
(2) Filed form S-3 August 22, 1997
(3) This exhibit was previously filed with Registrants For 10KSB for year ended
May 31, 1997.
(b.) Reports on Form 8-K.
Form 8-K dated June , 1999 setting out the discontinuation of the Company's
product line under the operations of its subsidiary McCleskey Sales and Service.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Airtech International Group, Inc.
by: /s/ C. J. Comu
-----------------------------------
C. J. Comu, Chief Executive Officer,
Chief Financial Officer, Chairman
by: /s/ John Potter
-----------------------------------
John Potter, President, Director
DATED: September 10, 1999
49
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAY-31-1999 MAY-31-1998
<PERIOD-START> JUN-01-1998 JUN-01-1997
<PERIOD-END> MAY-31-1999 MAY-31-1998
<CASH> 61,808 145,844
<SECURITIES> 0 0
<RECEIVABLES> 173,951 172,137
<ALLOWANCES> 20,000 0
<INVENTORY> 242,665 284,332
<CURRENT-ASSETS> 622,174 736,194
<PP&E> 209,203 412,608
<DEPRECIATION> 119,634 206,734
<TOTAL-ASSETS> 30,171,610 34,535,682
<CURRENT-LIABILITIES> 1,678,169 820,352
<BONDS> 0 9,000,000
1,144 1,030
0 11,858,016
<COMMON> 660,376 253,701
<OTHER-SE> 20,807,087 17,573,527
<TOTAL-LIABILITY-AND-EQUITY> 30,171,610 34,535,682
<SALES> 0 0
<TOTAL-REVENUES> 1,030,469 0
<CGS> 664,356 0
<TOTAL-COSTS> 8,176,794 1,466,160
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 285,288 73,435
<INCOME-PRETAX> (7,431,613) (1,539,595)
<INCOME-TAX> (7,164,375) 0
<INCOME-CONTINUING> (7,164,375) (1,539,595)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,164,375) (1,539,595)
<EPS-BASIC> (.71) (.54)
<EPS-DILUTED> (.71) (.54)
</TABLE>
