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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
--------------------------
AMENDMENT NO. 2
TO
FORM 10-KSB/A
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
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AIRTECH INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in charter)
WYOMING 98-0120805
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
15400 KNOLL TRAIL SUITE 200, DALLAS, TEXAS 75248
(Address of Principal Executive Offices)
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(972) 960-9400
(Registrant's Telephone Number, Including Area Code)
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. The 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 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 on page 48 of this Annual
Report.
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TABLE OF CONTENTS
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ITEM PAGE
NUMBER NUMBER
PART I
<S> <C>
1. Description of Business..............................................................
2. Description of Properties............................................................
3. Legal Proceedings....................................................................
4. Submission of Matters to a Vote of Security Holders..................................
PART II
5. Market for Registrant's Common Equity and Related
Shareholder Matters..................................................................
6. Management's Discussion and Analysis ................................................
7. Financial Statements ................................................................
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................................
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act............................................................
10. Executive Compensation...............................................................
11. Security Ownership of Certain Beneficial Owners and Management.......................
12. Certain Relationships and Related Transactions.......................................
PART IV
13. Exhibits and Reports on Form 8-K.....................................................
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UNLESS OTHERWISE INDICATED IN THE TEXT, THE INFORMATION DISCLOSED IN THIS
AMENDMENT NO. 2 TO FORM 10-KSB/A IS AS OF AUGUST 31, 1999, THE ORIGINAL FILING
DATE OF THE COMPANY'S FORM 10-KSB/A WITH THE SECURITIES AND EXCHANGE COMMISSION,
FILE NO. 0-19796. THIS AMENDMENT NO. 2 TO FORM 10-KSB/A ALSO INCLUDES THE
COMPANY'S RESTATED AND AMENDED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL
YEAR ENDED MAY 31,1999. THE RESTATED AND AMENDED CONSOLIDATED FINANCIAL
STATEMENTS ALSO RESTATE AND AMEND THE COMPARATIVE NUMBERS FOR THE FISCAL YEAR
ENDED MAY 31, 1998.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATION AND DEVELOPMENT
Airtech International Group, Inc. was incorporated in the State of
Wyoming on August 8, 1991 under the name International Technologies Corporation,
Inc. ("ITC"). Until May, 1998, ITC was principally engaged in developing and
producing interactive television and interactive media programming for
distribution through cable, broadcast, direct satellite television and the
Internet. ITC conducted this line of business through ownership of proprietary
software and a trademark known as Rebate TV. Rebate TV offered network viewers
rebates through an interactive program accessed by touchtone phones. In
addition, ITC owned license rights obtained from the Federal Communications
Commissions to operate an interactive video and data service system in the
Charleston, South Carolina metropolitan area. A second system owned by ITC and
located in the Melbourne - Titusville, Florida metropolitan area was sold in
1997.
On May 31, 1998, the Company acquired all of the outstanding shares of
Common Stock of Airtech International Corporation, a Texas corporation ("AIC").
The total purchase price of $22,937,760.00 for the stock acquisition was paid
through the issuance of 10,500,000 shares of Common Stock, 11,858,016 shares of
Series "A" Convertible Preferred Stock and $9,000,000.00 in principal amount of
convertible debentures. The shares of common stock and preferred stock were each
valued at $0.625 per share. The Company accounted for the stock acquisition as a
reverse merger using the purchase method of accounting with AIC deemed the
purchaser for purposes of the consolidated financial statements for the fiscal
year ended May 31, 1999 included in this Amendment No. 2 to Form 10-KSB/A.
On July 31, 1998, the 11,858,016 shares of Series "A" Convertible Stock
and the $9,000,000 of convertible debentures were converted into 11,858,016 and
13,071,429 shares of Common Stock, respectively. After conversion, the total
number of outstanding shares of Common Stock of the Company was approximately
50,300,000. On October 5, 1998, the shareholders of the Company approved a one
for five reverse split of the Common Stock which reduced the number of
outstanding shares of Common Stock to approximately 10,000,000 shares and
increased the par value of the
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Common Stock from $0.01 to $0.05 per share. The reverse stock split was
effective as of November 9, 1998.
AIC was founded in 1994 as a distributor of air purification products
for Honeywell/Envirocaire. In January of 1996, AIC outgrew the distributorship
business and began manufacturing two of its own air purification products. AIC
remains a wholly-owned subsidiary of the Company and together with AIC's
wholly-owned subsidiaries, Airsopure, Inc. ("Airsopure") and McClesky Sales and
Service, Inc. ("MSS"), is engaged in the development, marketing and sale of air
purification systems for commercial, residential and automobile use. Airsopure
was incorporated on March 5, 1997 in the State of Texas to implement and operate
a franchise program for the sale of commercial building air purification
products developed and manufactured by AIC. MSS was incorporated on November 30,
1995 in the State of Texas to integrate the distribution and sale of air
purification products by AIC with the heating, ventilation and air conditioning
("HVAC") service business. Effective May 31, 1999, the Company discontinued the
operations of MSS based upon the incompatibility of the HVAC service business
with AIC's business of manufacturing and distributing high quality air
purification products. The cost to discontinue the operations of MSS were
minimal to the Company.
In February, 1998, the Company also discontinued the Company's original
line of business relating to television and interactive media programming,
including the Rebate TV product. The Company has adopted a plan to dispose of
the proprietary software and trademark rights relating to this line of business
and certain FCC license rights. The software, trademark and license rights are
the only assets of these discontinued lines of business. These assets have no
carrying value on the consolidated financial statements of the Company for the
fiscal year ended May 31, 1999 included with this Amendment No. 2 to Form
10-KSB/A. The zero carrying value is related to the fact that the products were
discontinued prior to the acquisition of AIC. The Company discontinued these
original lines of business to enable the Company to concentrate on the
development, manufacture, distribution and sale of the air purification products
offered by AIC and its subsidiaries. The Company continues to market the
remaining assets for sale, but as of February 29, 2000 no firm commitments or
agreements are in place.
In January 1999, the Company formed Airsopure 999, L.P., a Texas
limited partnership, for the purpose of developing, marketing and distributing
the Model S-999 automobile air purification system. The Company's wholly-owned
subsidiary, Airsopure, is the general partner of the limited partnership.
In October 1999, the Company applied to the Medicare administration for
a Medicare reimbursement code number for the Medicare Model 950. The
reimbursement code number allows Medicare recipients to receive reimbursement
for the cost of the Medicare Model 950. As of February 29, 2000, the Medicare
application was pending. The Company has not yet received approval for a
specific reimbursement code number, although Medicare has allowed the Company to
invoice Medicare using a non-assigned code number. The non-assigned code number
does not guarantee Medicare reimbursement to Medicare recipients.
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In October 1999, the Company also opened one retail store in Dallas,
Texas to facilitate the sale of the Company's home consumer line of products.
This retail store is also a prototype for future franchise retail stores offered
by Airsopure International.
On October 16, 1998, the name of the Company was changed from
International Technologies Corporation to Airtech International Group, Inc. The
Company address is 15400 Knoll Trail, Suite 200, Dallas, Texas 75248. The
Company telephone number is (972) 960-9400 and the web site can be accessed at
www.airtech.com. The web site of Airsopure can be accessed at www.airsopure.com.
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.
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.
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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
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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.
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:
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- 30 million lost school days due to Indoor Air Quality (IAQ)
problems.
- 13.5 million workdays lost due to IAQ problems.
- Lost worker productivity is estimated to cost U.S. businesses
approximately $60 billion annually
- An additional $15 billion in related health care costs.
- 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.
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; its 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.
PRODUCTS
As of February 29, 2000, the Company's product line, including those
products in product redesign, were as set forth below. Prior to the end of
calendar year 1999, the Company postponed further efforts on the products
described below which are in the redesign stage to focus on the Company's line
of marketable air purification products. The Company's decision to postpone
redesign efforts was based on the Company's current cash position available for
redesign or
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development and the need to evaluate the inclusion of photocatalytic oxidation
("PCO") technology into products in the redesign stage. PCO technology creates a
reduction in Volatile Organic Compounds ("VOCs") when passed through a chamber
which activates a chemical reaction between ultra violet light waves and a
titanium screen. The reaction is similar to the reaction which occurs in
automobile catalytic converters.
- 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. The Company markets this unit to 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 0.3 microns. The
retail price of the Series 12 is $3,490.00. For the 18 months ended
February 29, 2000, the Company had sold 295 of these units to our
franchisees and national accounts.
- 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 Company markets this product to
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. The retail price of the Series 14 is $990.00.
For the 18 months ended February 29, 2000, the Company had sold 60 of
these units to our franchisees and national accounts.
- Series 15: The Series 15 is in the redesign stage. 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 being more attractive. The initial prototype is (45"
x 12" x 14") and weighs approximately 44 pounds. The prototype unit is
being evaluated as a product for use in the hotel sector. As of
February 29, 2000, the Company has postponed the redesign of the Series
15 and is evaluating the possible inclusion of PCO technology into the
Series 15. There is no projected market date for the Series 15.
- Series 16: The Series 16 is in the redesign stage. The Series 16 is a
flush mounted unit that 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" x 24"x 18" and installs flush in any room. As of February 29,
2000, the Company has postponed the redesign of the Series 16 and is
evaluating the possible inclusion of PCO technology into the Series 16.
The Company has no projected market date for the Series 16.
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- Series 18: The Series 18 is marketed by the Company for commercial
uses. The Series 18 can service up to five offices or rooms with
inexpensive flex duct work. The unit is installed above the ceiling
where it is out of view. The unit requires no HVAC modifications and
operates in a very quiet fashion. The retail price of the Series 18 is
$2,990.00. For the 18 months ended February 29, 2000, the Company had
sold 48 of these units to our franchisees.
- Series 22: The Series 22 is in the redesign stage. The Series 22 is a
hidden unit for both commercial and light industrial applications which
is adaptable to duct work used in traditional heating, air conditioning
and ventilation systems. 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. The air cleaning
capacity is approximately 1800 cubic feet per minute. The target market
for the Series 22 is the upscale residential market for both new
construction and retrofit. As of February 29, 2000, the Company has
postponed the redesign of the Series 22 and is evaluating the possible
inclusion of PCO technology into the Series 22. There is no projected
market date for the Series 22.
- Series 900: The Series 900 is in the redesign stage. The Series 900 is
a very unique portable auto air purification system that is designed to
be plugged into a cigarette lighter and be fully transported. Designed
around a "Frisbee" look, this ergonomic unit is a 8" x 3" circumference
product that processes up to 20 air changes each hour. The unit has
completed all engineering tests and is ready for production into an ABS
plastic mold. Possible markets for distribution will include retail
stores as well as infomercial and network marketing organizations. As
of February 29,2000, the Company has postponed the redesign of the
Series 900. There is no projected market date for the Series 900.
- Series 999: This unit 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 complete air
changes in an automobile every 20 seconds. The unit will retail for
under $600. We expect that the Series 999 will be a leader in the
automotive after-market family of products. Our intentions are to
wholesale the product to nationwide companies specializing in
after-market sales to automobile dealers. For the 18 months ended
February 29, 2000, the Company had sold 645 of these units. These sales
were primarily to Airsopure 999, L.P. of which, Airsopure, Inc., the
Company's wholly owned subsidiary, is the general partner.
- Medicare Series 950: The Company has completed a working proto-type of
this unit. In October 1999, the Company applied for a Medicare
reimbursement code number for the Medicare Model 950 version of the
Series 950. The Company has not yet received a reimbursement code
number from Medicare, although Medicare has allowed the Company to
invoice Medicare using a non-assigned code number. The use of the
non-assigned code number does not guarantee Medicare reimbursement to
Medicare recipients. The Company intends to continue to pursue the
pending Medicare application by collecting additional information
required by Medicare for submission. The submission of additional
information
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will allow Medicare to take additional time to evaluate our
application. As of February 29, 2000, the Company cannot predict if, or
when, Medicare will approve the Medicare Model 950 for direct cost
reimbursement. The Company believes, however, that the time necessary
to duplicate the photocatalytic oxidation technology included in the
Medicare Model 950, to create and test a prototype and to submit an
application to Medicare gives the Company a competitive lead time
advantage over competing products in this market. The Company expects
the unit to retail for $795. The product incorporates a highly
efficient filtration system which includes the following:
- Antimicrobial pre-filter
- Hospital grade 99.97% HEPA filter - for removal of particles
- Trisorbent filter - for removal of gases
- PCO (Photocatalytic Oxidation) - destroys VOCs
- Ultra-Violet Bulb
- Ionization - negative ions and activated oxygen
Down Draft Tables: The series 220 and 230 were designed for the nail
manicure industry and first introduced in January 1996. The units have largely
been discontinued by the Company with our remaining inventory of units retailing
for $2,000. The Company elected to discontinue this product line based upon a
decline in market demand which resulted in production and marketing expenses
exceeding sales potential. The unit 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. The series has a single speed 450 CFM blower with a sorbent media filter
designed for the special needs of this industry. We have developed in the Dallas
market 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: We manufacture our sorbent media filters by
purchasing pre-filter material in bulk and cutting the material to proper sizes
to fit our units. The HEPA type filters are out-sourced for production. The
trisorbent filters are also outsourced for manufacture, but assembled at the
Company's plant. The life of the filters will vary on the application and the
degree of contamination; however, we estimate that each unit sold will require
an average of one to two complete filter changes per year. The filters used in
our ceiling units have a retail price of $350 to $500 depending on uses. The
automobile unit will require approximately $100 in replacement filters per year
and the portable units approximately $150 per year. The down draft tables
require filter replacements of approximately $600 per year depending on
application.
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COMPETITION
The current available air purification products and technologies
available in the market include:
- Activated carbon filters
- HEPA (High Efficiency Particulate Air) filters
- Ozone Generators
- Anti-Microbial chemically treated filters
- High Energy UV light
- Ionizers
- Electrostatic Precipitators
- Media Filtration
- Photocatalytic oxidation ("PCO") technology
Individually, none of these products or technologies has proven to be
an all-around effective air purification system. The Company's air purification
products, however, combine several technologies and components. The Company
believes that this combination of technologies and components achieves more
effective air purification than the application of a single product or
technology. The individual ineffectiveness of the currently available products
and technologies is attributable to the following factors:
Activated carbon absorbs a number of VOCs and large microorganisms such
as dust mite 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. The Company uses activated carbon filters in its products in
combination with other air purification components.
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. The Company 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,
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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.
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. The Company uses these filters in its products in
combination with other air purification components.
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. The Company uses safe UV light in several of
our products in combination with other air purification components.
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. The
Company does not use ionizers in its products.
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 use
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. The Company does not use charged media filters in its products.
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Photocatalytic oxidation creates a reduction in most VOCs when passed
through a chamber which activates a chemical reaction between ultra violet waves
and a titanium screen. The reaction is similar to the reaction which occurs in
automobile catalytic converters. The Company uses photocatalytic oxidation
technology in our products in combination with other air purification
components.
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 commercial 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.
CECO Environmental Corp. (NASDAQ:CECE), has been in the air quality
technologies and services business 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.
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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 Smokeater.
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 commercial 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 commercial air filtration suppliers but not with a product
line competitive with AIRTECH'S commercial 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 Model 950 air purification unit. In October 1999, the
Company applied for a Medicare reimbursement code number for the Medicare Model
950. The Medicare application is pending and the Company cannot predict if or
when the Medicare Model 950 will be accepted by Medicare. The Company believes,
however, that the Medicare Model 950 will be without competition for some period
of time. This belief is based upon the fact that the research and development
time necessary for a competitor to duplicate the photocatalytic oxidation
technology included in the Medicare Model 950, to build a prototype unit and to
submit the required test data to Medicare gives the Company a distinct
competitive time advantage. The Company also intends to pursue the private label
licensing of a version of the Medicare Model 950 for distribution to
non-Medicare individual consumers. 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 which do not offer the
technological innovations of AIRTECH's Series 950 product line. The Company is
unable to forecast the amount of any future revenues which may be generated from
sales of the Medicare Model 950, if any, or the proposed private label version.
As of February 29, 2000, no Medicare Model 950 units have been sold through
Medicare. If Medicare Model 950 is not accepted for reimbursement by Medicare,
the Company cannot forecast the affect on sales. Non-acceptance of the Medicare
Model 950 would limit future sales which would otherwise be reimbursed by
Medicare. As a result, future sales of the Series 950 would be dependent upon
the acceptance of the private label version of the Medicare Model 950 which
cannot be estimated by the Company.
The Company is currently 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.
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<PAGE>
The Company believes that its technological approach of combining
several air purification components into a single product is 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:
- Biological air contaminants are destroyed and or removed
- The process cleans and purifies the air through multiple air
changes
- The process is effective for microbes, endotoxins, toxins,
allergens, VOCs
- No toxic chemicals are employed
- No ozone is generated or introduced into the air
- The process is regenerating
- The process works well at room temperature
- The required pressure drop and energy needs are low
- Self-cleaning process does not reintroduce toxic post process
residue into air stream
- The products are very economical to operate
- Industry guidelines met re: single-pass contaminant removal
efficiency and particulate filtration
Additionally, the Company seeks to compete in this growing marketplace with its
industry franchisee network concept as well as other strategic marketing efforts
discussed under Sales and Marketing Strategy.
OPERATIONS
The Company currently maintains a warehouse facility of approximately
10,000 square feet in Dallas, Texas. As of February 29, 2000, the Company
produces and assembles the Series S-12, S-14, and S-18 with an 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 automobile
unit and the Series 950 Medicare unit during fiscal years 1999 and 2000 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.
As of August 31, 1999, the Company anticipated design start up costs
during fiscal 2000 on its Series 999 and Series 950 units. The product cases for
these units utilize ABA plastic requiring
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injection molding. The engineering and mold tooling cost for these products were
estimated to be in the range of $400,000 for the Series 999 and $500,000 for the
Series 950. As of August 31, 1999, the Company also anticipated redesign costs
for the Series 14/15 units to include ABA plastic molding. Prior to the end of
calendar year 1999, the Company postponed the redesign of the Series 14/15
pending an evaluation of whether PCO technology may be utilized in the design of
the Series 14/15. Once the engineering and mold tooling has been completed for
the Series 950 and the Series 999, 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.
MARKET RESEARCH
- 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.
- The Commercial and Residential HVAC market is estimated to
exceed $9 billion.
- 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.
- 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.
- The Transportation sector including automobiles, buses,
railroads, aircraft, and cruise ships have a specific need for
improved indoor air quality.
- 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.
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Health conscious consumers are becoming more particular about the air
quality in their environments which will lead to an increase in demand for
better air purification systems. The Company believes that its approach of
combining various components of traditional air purification technology will
outrank other provider's products which use the traditional single method
approach for indoor air purification.
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 - As of February 29, 1999, the Company had 18 franchisees
that are selling products 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.
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 Representatives - 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. As of February 29,
2000, the Company was involved in final negotiations with several
manufacturer's representatives but had no final agreements. The Company
also recently employed an individual in February 2000 with marketing
expertise in this market to coordinate this channel of distribution.
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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.
As of February 29, 2000, the Company's website is www.airtechgroup.com
and the Airsopure website is www.airsopure.com. Since June of 1999,
these websites have been accessed 12,010 and 16,106 times,
respectively. As of February 29, 2000, no sales have been directly
attributable to our websites. On these sites, visitors can educate
themselves about our products and order online. During fiscal year
2000, the Company intends to spend additional funds to redesign and
enlarge our websites in an effort to direct more Internet traffic to
our websites. Our proposed redesign will include "hyper link" access to
our products. Hyper link access will enable website users to use
generic words such as "air quality" or "air purification" for immediate
referral to our website. We believe our websites will enable the
Company to access 60 million people worldwide and reduce distribution
costs. Our websites also provide quicker advertising response times,
direct feedback from customers and instantaneous updating of
information. We believe the keys to successful marketing on the
internet will be exposure and association with other well-traveled
websites, security, a clean design, ease of use and product
testimonials. 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 of August 31, 1999, the Company was involved in discussions with a
third party to utilize Shabang!.com as a method to expand the Company's
Internet traffic. In the early part of fiscal year 2000, the Company
terminated negotiations with the third party and abandoned the
Shabang!.com concept to pursue expansion of the Company's existing
website capabilities through "hyper link."
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 950, 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 950.
Potential New Market:
6. Home Shopping/Infomercial - As of August 31, 1999 the Company proposed
to distribute the Series 900 and 950 through 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
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purchased products through a home shopping medium, and some 400 new
products get introduced to television viewers each week. As of February
29, 2000, the Company has postponed development of the Series 900 to
evaluate the possible inclusion of PCO technology. For fiscal year
2000, the Company also elected to market the Series 950 through the
established distribution channels of durable medical equipment
providers as opposed to the home shopping/infomercial market. As of
February 29, 2000, the Company did not have any firm commitments or
agreements in place with home-shopping or infomercial companies to
market its products.
Potential New Market:
7. Joint Venture - As of August 31, 1999, the Company was engaged in
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 such as Chile, Brazil and Mexico. As of
February 29, 2000, none of these discussions has resulted in a final
commitment or agreement.
Potential New Market:
8. Network Marketing - One of AIRTECH's target markets is the "Portable
Room Air Cleaner" market. The Company proposes to gain entry into this
market through relationships with both retail organizations and large
network marketing firms. Although several firms have indicated an
interest in the Company's products, as of February 29, 2000, the
Company does not have any network marketing agreements in place. 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.
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.
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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.
As of August 31, 1999, the Company estimates there are approximately
38.8 million enrollees in the Medicare system of which approximately 31
million individuals suffer from some sort of upper-respiratory problem.
Although the number of Medicare enrollees has not changed significantly
in the past three years, the Company believes that the number of
enrollees will increase significantly with the aging of the "baby
boomers." These present and future Medicare enrollees represent the
end-user market for AIRTECH's Medicare Model 950. A 1% market
penetration would represent to the Company approximately $100 million
in total revenues. 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 Medicare 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.
In October 1999, the Company applied for the Medicare reimbursement
code number for the Medicare Model 950. The Company has not yet
received approval for a specific reimbursement code number to date,
although Medicare has allowed the Company to invoice Medicare using a
non-assigned code number. The use of the non-assigned code number does
not guarantee Medicare reimbursement to Medicare recipients. The
Company intends to
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continue the pursuit of the pending Medicare application by collecting
and submitting additional information recently required by Medicare.
The date of a final decision on the Company's Medicare application
cannot be determined at this time. The submission of additional
information will allow Medicare to take additional time to evaluate our
application. The Company cannot predict if, or when, Medicare will
approve the Medicare Model 950 for direct cost reimbursement. The
Company believes, however, that the time necessary to duplicate or
invent the photocatalytic oxidation technology included in the Medicare
Model 950, to create and test a prototype and to submit an application
to Medicare gives the Company a competitive lead time advantage over
competing products in this market.
Potential New Market:
10. Automobile Dealers - There are approximately 24,000 franchised new car
dealers in the United States. Some of these auto makers, such as
Mercedes Benz and BMW, are experimenting with various air cleaning
systems. The Automotive Clean Air Council was formed upon public
disclosure of the results of research conducted by a leading
educational institution that air quality in many automobile air
conditioners is poor due to contamination with unhealthy fungi and
spores. The first indication that a problem exists is the odor
detectable when the air conditioning 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. These fungi
and spores can trigger allergic reactions and upper respiratory
problems for car passengers.
The Company proposes to tap this multimillion dollar market by securing
an agreement with a nationwide automobile after-market company to
include the Series 999 automobile air purification unit with other
after-market packages offered in the automobile after-market. The
after-market packages currently offered include customizing packages
(custom pinstriping, gold ornamentation, and custom wheel coverings),
fabric sealants and window tints. We believe a very highly effective
and affordable air purification device like our Model 999 will be
widely accepted in the automobile after-market in the year 2000. In
addition to the automobile after-market, the Company proposes to offer
the Series 999 for direct sale to large auto dealerships across the
United States. As of February 29, 2000, the Company was involved in
preliminary negotiations with several national after-market companies,
but has no firm commitments or final agreements. The national
after-market companies do not sell through car dealers.
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
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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 odor 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. Allowing smoking to occur in the automobile
exposes drivers and passengers to second-hand carcinogenic cigarette smoke which
can lead to cancer. Filtering this second-hand smoke out of the automobile air
reduces exposure to smoke and the associated health risks. Purifying the
automobile air also benefits the smoker by eliminating the re-inhaling of
secondary smoke.
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 technology and design which can totally remove
microscopic particles, gases and odors inside the automobile. The technology
incorporates a three-part filtration system in removing up to 99.97% of most
microscopic particles and gases. As of August 31, 1999, the Company initially
believed the technology incorporated into the S-999 was unique in the market and
commenced the patent application process for the S-999. Upon further research
and development, the Company has determined that although the S-999 is unique to
the market, the design and components may be duplicated by utilizing currently
available technology and components and does not warrant further pursuit of a
patent application.
Our business plan and marketing strategy for the S-999 during the
remainder of calendar year 1999 is to continue our efforts to establish
significant penetration into two primary markets, the rental car companies and
government vehicles. In these markets, we believe we can commence wide scale
distribution at profit levels which will enable the Company to self sustain
internal growth in years 2000 and 2001 into other identified target markets such
as auto dealers and manufacturers.
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RENTAL CAR COMPANIES
The rental car market in the U.S. is comprised of the following
companies:
<TABLE>
<CAPTION>
Total Worldwide Fleet Total Worldwide Fleet
--------------------- ---------------------
<S> <C> <S> <C>
Avis 200,000 Budget 265,000
Dollar 75,000 Enterprise 389,000
Hertz 500,000 National 250,000
Thrifty 250,000 Alamo 300,000
</TABLE>
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 wide scale installation of the S-999, it would clearly have a hold on the
first real differentiation 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:
<TABLE>
<S> <C>
Local police State highway patrol
Sheriff Immigration
FBI Fire
Customs State officers
County officers City officers
City workers Health Dept
</TABLE>
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:
24
<PAGE>
<TABLE>
<CAPTION>
Passenger Cars Cars per 1000 population
<S> <C> <C>
United States 149,120,000 563
Japan 45,000,000 360
Germany 40,449,442 495
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
</TABLE>
With Airtech's sub-manufacturing companies, international expansion is expected
to proceed without much delay and with significant economies of scale.
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. As of February
29, 2000, the Company is continuing its market research and has not yet
commenced negotiations with auto dealers. As of February 29, 2000, the Company
does not have any firm commitments or final agreements with an auto dealer.
The following is a list of the top U.S. auto manufacturers' production
of vehicles:
<TABLE>
<S> <C> <S> <C>
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
</TABLE>
RETAIL STORES
25
<PAGE>
The Company believes that by the fiscal year 2001, it can achieve,
limited distribution of the Series S-999 although 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 six months ended May 31, 1999 have
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.
(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.
26
<PAGE>
(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 additional information to be contained within
the UFOC for sales of new franchises within their 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, 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 trade name Airsopure
both domestically and abroad. The Company is
27
<PAGE>
pursuing copyrights for certain of its promotional and franchise training
materials. While the Company's products are currently a unique implementation of
air purification technology and filter components, the Company believes that its
products may be duplicated with available technology and components and are not
ultimately patentable.
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
In 1997, the Company was named as a defendant in a cause of action
styled LLB Realty, L.P.C. v. Interactive Technologies Corp., Cause No.
MER-L-1535-97, in the Superior Court of New Jersey, Mercer County. The complaint
alleges damages relating to a lease agreement entered into by the Company for
office facilities in New Jersey. The Company never occupied the space based upon
the plaintiff (lessor) failing to finish-out the space pursuant to the Company's
specifications.
28
<PAGE>
The complaint alleges damages of approximately $607,000 for remaining lease
payments, finish-out costs and lost revenues. The Company has filed a
counterclaim seeking damages in the amount of $400,000 under a capital lease
obligation for equipment located in the New Jersey facility and contractually
precluded from being removed from the facilities by the plaintiff (lessor).
Although the Company is currently in negotiations for a favorable settlement
relating to the complaint, the outcome of these negotiations is uncertain. The
Company has established a reserve in the Company's consolidated financial
statements in the amount of $200,000 in anticipation of a settlement.
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
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,
29
<PAGE>
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:
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
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
</TABLE>
HOLDERS
As of July 30, 1999, there were approximately 1219 holders of record of
the Company's Common Stock.
SERIES "M" CONVERTIBLE PREFERRED STOCK AND RELATED WARRANTS
As of February 29, 2000, the Company had 1,143,750 shares of Series "M"
Convertible Preferred Stock ("Series "M" Preferred") outstanding. Holders of
Series "M" Preferred Stock have the right to convert their shares into shares of
Common Stock on a one-for-one basis at any time. The Series "M" Preferred
automatically converts to shares of Common Stock on December 31, 2001. The
holders of Series "M" Preferred are entitle to receive quarterly dividend
distributions equal to 20% of the gross revenues generated from the sales of the
Company's Model 950 Air Purification Unit until May 31, 2001. The dividends are
paid on or before the sixtieth day of each calendar quarter based upon the gross
revenues from the Model 950 from the previous quarter. The holders of Series "M"
Preferred also have related Warrants to purchase 993,750 shares of Common Stock
at and exercise price of $2.00 per share. The Warrants expire on May 31, 2000.
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.
Holders of the Series "M" Preferred Stock have a preferred dividend right to
receive quarterly dividend distributions equal to 4.57% of the gross revenues
generated from sales of the Series 950 unit until May 31, 2001. 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
30
<PAGE>
be dependent upon the company's financial condition, results of operations,
capital requirements and other relevant factors.
RECENT SALES OF UNREGISTERED SECURITIES
<TABLE>
<CAPTION>
PRICE
SHARES PER ISSUED UNDER
DATE TITLE ISSUED SHARE NATURE OF TRANSACTION EXEMPTION
<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, Statement
management, CEO and President
for services rendered or to be
rendered.
June 30, 1999 Common 1,200,000 $0.10 Shares issued to accredited S-8 Registration
investors, including 500,000 Statement
shares to CR Saulsbury, Sr.
Warrants attached are
exercisable at $0.20 and
expire on May 31, 2000
December 31, 1999 Common 300,000 $0.19 Shares issued to CEO and Private Placement
President for services rendered under Section 4 (2)
of the Securities
Act
May 31, 1999 Common 700,000 $0.10 Shares issued to accredited Private Placement
investors, including 500,000 under Section 4 (2)
shares to Peter Kertes. of the Securities
Warrants attached are Act
exercisable at $0.20 and
expire on May 31, 2000
February 28, 1999 Common 1,583,134 $0.50 Shares issued to CEO and Private Placement
President in consideration under Section 4 (2)
of deferred wages from of the Securities
June 1, 1997 through Act
December 31, 1998
December 31, 1998 Common 46,250 $0.50 Warrants exercised by holders Private Placement
of Series M Preferred Stock under Section 4 (2)
of the Securities
Act
November 30, 1998 Common 828,000 $0.33 Shares issued to accredited Private Placement
investors including CR under Section 4 (2)
Saulsbury, Sr. of the Securities
Act
31
<PAGE>
November 30, 1998 Common 224,000 $0.48 Shares issued to investment S-8 Registration
to bankers and consultants for Statement
$0.69 services rendered
August 31, 1998 Common 146,025 $1.25 Shares issued to consultants S-8 Registration
to and employees for services Statement
$1.56 rendered
July 31, 1998 Common 2,614,286 $0.70 Conversion of debentures S-8 Registration
issued in conjunction with the Statement
merger of ITC and AIC
July 31, 1998 Common 2,371,603 .One- Conversion of Series A Private Placement
for- preferred stock issued in under Section 4 (2)
one conjunction with the merger of of the Securities
ITC and AIC Act
March 1998 Series M 1,143,750 $2.00 Private Placement Private Placement
thru Preferred under Section 4 (2)
September 1998 of the Securities
Act
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
BACKGROUND AND RESTATEMENT OF FINANCIAL STATEMENTS
Based upon a review of the Company's Financial Statement for the year
ended May 31, 1999 (the "Original Financial Statements") and the recommendations
of the Securities and Exchange Commission (the "SEC"), the Company restated its
Original Financial Statements for the year ended May 31, 1999 and the
comparative period ended May 31, 1998 (the "Restated Financial Statements"). The
Original Financial Statements were included with the Company's Form 10-KSB/A
filed with the SEC on August 31, 1999. The reason for the restatement of the
Original Financial Statements was to reflect the Company's acquisition of all of
the outstanding shares of Common Stock of Airtech International Corporation
("AIC") as a reverse merger as described below. The Restated Financial
Statements are included with this Amendment No. 2 to Form 10-KSB/A.
On May 31, 1998, the Company acquired all of the outstanding shares of
Common Stock of AIC, which through its subsidiaries develops, manufactures and
sells air purification products for commercial and individual use. The total
purchase price of $22,937,760.00 for the stock acquisition was paid through the
issuance of 10,500,000 shares of the Company's Common Stock, 11,858,016
32
<PAGE>
shares of the Company's Series "A" Convertible Preferred Stock and $9,000,000.00
in principal amount of the Company's Convertible 10% Debentures. The shares of
Common Stock and Preferred Stock were valued at $0.625 per share. The Original
Financial Statements reflected the combination of the Company and AIC as a
merger using the purchase method of accounting with the Company as the acquiring
entity for legal and financial accounting and reporting purposes. This treatment
resulted in reflecting the combination of the assets of the Company and the
purchase of the goodwill and intellectual properties of AIC at the appraised
fair market value of $22,937,960 (the purchase price) with corresponding
adjustments of shareholders' equity.
The Restated Financial Statements included with this Amendment No. 2 to
Form 10-KSB/A also reflect the combination of the Company and AIC utilizing the
purchase method of accounting. The Restated Financial Statements, however,
reflect the combination of the Company and AIC as a reverse merger with AIC as
the acquiring entity for accounting and reporting purposes and the Company as
the surviving entity for legal purposes. This reverse merger treatment follows
the SEC recommendation and was required because all of the convertible
securities issued in the acquisition of AIC were converted into shares of the
Company's Common Stock within two months following the acquisition. As a result,
the Company effectively issued shares of Common Stock for the outstanding shares
of AIC, with the stockholders of AIC ultimately acquiring control of the
Company. For this reason, AIC is considered the acquiring entity for purposes of
the Restated Financial Statements included with this Amendment No. 2 to Form
10-KSB/A.
The reverse merger treatment required the Company to account for the
purchased assets of the Company for accounting purposes at fair market value as
apposed to appraised value. The result is a decrease of previously reported
assets in the Original Financial Statements of approximately $23,000,000 and a
decrease in net losses due to lower amortization costs, depreciation costs due
to lower cost basis of assets and a lower write-off of discontinued assets, all
of which were not capitalized in the Restated Financial Statements.
After conversion of our convertible securities issued in the
acquisition of AIC, the total number of outstanding shares of our Common Stock
increased to approximately 50,000,000 shares. On October 5, 1998, our
shareholders approved a one for five reverse stock split of our Common Stock
which reduced the number of outstanding shares of Common Stock to approximately
10,000,000 shares. The reverse stock split was effective as of November 9, 1998.
For purposes of our consolidated financial statements accompanying this
Amendment No. 2 to Form KSB/A and the following discussion and analysis,
shareholders' equity has been restated to give pro forma recognition to the
reverse stock split for the presented periods. This means that all references in
the consolidated financial statements and the following discussion and analysis
to number of shares, per share amounts, par values and stock option information
are restated to give effect to the reverse stock split.
After the acquisition of AIC, we discontinued our original line of
business relating to television and interactive media programming, including our
Rebate TV product. We discontinued these original lines of business to enable us
to concentrate on the development, manufacture,
33
<PAGE>
distribution, and sale of the air purification products offered by AIC and its
subsidiaries. Effective May 31, 1999, we also discontinued the operation of our
wholly owned subsidiary, McClesky Sales and Service, Inc. ("MSS"). MSS was
originally formed to integrate the distribution and sale of our air purification
products with the heating, ventilation and air conditioning ("HVAC") service
business. We discontinued the operation of MSS based upon the incompatibility of
the HVAC service business with our business of manufacturing and distributing
high quality air purification products. The cost to discontinue the operations
of MSS were minimal to the Company.
On February 22, 2000, we entered into a securities purchase agreement
with PK Investors LLC ("PKI") to raise up to $5,000,000 through the sale to PKI
of up to $5,000,000 in principal amount of our 6% Convertible Debentures Due
2002 (the " 6% Debentures") and attached Warrants to purchase up to 500,000
shares of our Common Stock (the "Warrants"). Upon execution of the securities
purchase agreement, PKI purchased $2,500,000 in principal amount of 6%
Debentures and Warrants to purchase 250,000 shares of Common Stock for a
purchase price of $2,500,000. Under the terms of the securities purchase
agreement, we also issued to PKI a Conditional Warrant to purchase the remaining
$2,500,000 in principal amount of 6% Debentures and the remaining attached
Warrants to purchase 250,000 shares of our Common Stock for a purchase price of
$2,500,000.
BUSINESS DEVELOPMENT AND PLAN OF OPERATION
The market for air purification products and technology has expanded
into both residential and commercial markets with society's growing awareness of
air quality problems. During fiscal year 1999 the Company addressed the
expanding market for air quality products by introducing a full air purification
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's products can be applied to various
commercial and residential uses and are ideally suited for a variety of users
that experience air contamination problems, including office buildings,
restaurants, bars, public buildings, nursing homes, hospitals, schools, dental
offices, waiting rooms, homes, airplanes and vehicles.
The Company initially penetrated the air purification market with its
S-12, ceiling mounted air filtration unit which was designed for the tobacco
smoke filtration segment of the market. Impacting and changing city smoking
ordinances to specifically allow restaurants to install the S-12 and avoid "no
smoking" legislation, enabled the Company to achieve success and name
recognition from this unit in the market place. Other air quality markets such
as residential homes and commercial buildings require different filtration
needs, esthetics and air flow patterns. These other needs are now met by the
Company's full product line. Primarily through increased sales of the S-14, wall
mounted unit, and the S-18, ducted/inset ceiling unit, the Company also achieved
market interest 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
34
<PAGE>
to indoor air quality. 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. As of
May 31, 1999, Airtech was in the early stages of developing a unit that combines
the cooling, de-humidifying and heating of the standard HVAC equipment found in
most residential homes and commercial buildings 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 or a definitive market date. As of February 29, 2000, the Company had
no firm commitments or written agreements.
Other such product partnerships are also anticipated in the restaurant
supply industry. Restaurants and bars continue to face decreased revenues based
upon the anti-tobacco legislation being 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 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 problems outside
the automobile. Airtech has achieved growing acceptance
35
<PAGE>
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 newest and most promising product in the Company's product line is
the now developed Medicare Model 950. In October 1999, the Company applied for a
Medicare reimbursement code number for the Medicare Model 950. The Company has
not yet received approval for a specific reimbursement code number to date,
although Medicare has allowed the Company to invoice Medicare using a
non-assigned code number. The use of the non-assigned code number does not
guarantee Medicare reimbursement to Medicare recipients. The Company intends to
continue the pursuit of the pending Medicare application by collecting and
submitting additional information recently required by Medicare. The date of a
final decision on our Medicare application cannot be determined at this time.
The submission of additional information will allow Medicare to take additional
time to evaluate our application. We cannot predict if, or when, Medicare will
approve the Medicare Model 950 for direct cost reimbursement. We believe,
however, that the time necessary to duplicate or invent the photocatalytic
oxidation technology included in the Medicare Model 950, to create and test a
prototype and to submit an application to Medicare gives the Company a
competitive lead time advantage over our competitors in this market. The Company
has also developed the Consumer Series 950, a private label version of the
Medicare Model 950, with a larger array of filtration for contaminants. The
Company believes the Medicare Model 950 and the Consumer Series 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.
The Company has identified a national distribution network composed of
DME distributors that have existing sales forces and marketing infrastructures.
Association with the DME distributors creates an immediate distribution network
for the Medicare Model 950 and the Consumer Series 950 without forcing the
Company to incur the management challenges of creating and maintaining our own
sales force or recreating the existing client bases of DME distributors. The DME
distributors currently interact with physicians providing other medical devices
such as walkers, wheelchairs, hospital beds and electronic monitoring devices.
The Medicare Model 950 and the Consumer Series 950 unit will be a new product
for DME distributors within an industry where the introduction of new products
is not common. If the Company does not receive approval from Medicare of the
Medicare Model 950, the Company intends to continue its efforts to market the
Consumer Series 950 through DME distributors. The Company will pursue insurance
carriers and health care providers outside of the Medicare system to accept the
Consumer Series 950 for cost reimbursement to consumers. The Company cannot
predict if the Consumer Series 950 will be accepted by the health care insurance
industry and has no firm commitments in the industry as of February 29, 1999.
The Company also cannot forecast the amount of any future revenues which may be
generated from Medicare or non-Medicare sales of the Medicare Model 950 or the
Consumer Series 950.
RESULTS OF OPERATIONS
36
<PAGE>
The Company's consolidated results of operations for the fiscal year
ended May 31, 1999 represents the first year of operations after the reverse
merger with AIC. As described above, the combination of Interactive
Technologies, Inc., our predecessor in name, and AIC was accounted for as a
reverse merger with AIC treated as the acquiring entity for financial reporting
purposes. Therefore, the results of operations are a comparison of our combined
consolidated operations, including AIC and its subsidiaries, for fiscal year
1999 to only the results of operations of AIC and its subsidiaries for the
fiscal year 1998. As a result of the reverse merger with AIC, the Company is the
surviving legal entity under the name Airtech International Group, Inc.
REVENUES
Our consolidated total revenues decreased approximately $96,030.00 from
$1,126,499 in 1998 to $1,030,467 in 1999. This 8.5% decrease is comprised of the
following: product sales of the discontinued service line of our subsidiary
McCleskey Sales & Service, Inc. ("MSS") decreased $420,000 from $832,027 in 1998
to $412,027 in 1999 primarily due to the cessation of that business; and product
sales from our air purification products increased $179,963 in 1999 to $389,442.
The combined effect of these two components of our product sales resulted in a
$241,560 reduction in total sales. Franchise fees increased from the sale of 8
franchises in 1998 to 20 franchises in 1999, which accounted for the $144,500
increase in franchise fees in 1999 from the $84,500 in franchise fees for 1998.
As explained in Footnote 1, Summary of Significant Accounting Policies; Revenue
Recognition, of the Notes to Financial Statements, the Company has recorded
cumulative deferred franchise fee income of $400,000, as Current (portion) and
Notes Receivable for the year ended May 31, 1999. We discontinued the service
line of MSS due to sustained losses and low sales margins, limited geographical
service reach and our desire to focus exclusively on the air filtration and
purification business.
COSTS AND EXPENSES
Cost of sales increased $95,542 or 17% to $664,356 for 1999 as compared
to $568,814 for 1998. This increase is due to two primary reasons. First, the
discontinuance of the MSS line of business, for which we recognized additional
close out expenses due to this discontinuance. The discontinuance resulted in
cost of sales for MSS of more than 100% of sales or $420,000 for 1999, compared
to 55% of sales or $465,000 for 1998. Second, the cost of sales for the
continuing operations increased from $103,814 or 50% of sales in 1998 to
$244,356 or 62% of sales for 1999. This increase in percentage cost of sales was
due to outsourcing the manufacturing at a higher cost of many components
previously manufactured by the Company, lower gross sales prices than
anticipated due to the Company's desire to increase market share, fewer sales
thus not fully utilizing the manufacturing facility and lower production runs
with consequential higher costs.
Salaries and wages increased $802,342 from $514,734 in 1998 to
$1,317,076 in 1999. This increase is the result of many factors including higher
commissions on sales of our products, franchises, and financing activities of
$873,000, including incentive stock bonuses to key personnel. The combination of
these items represented approximately $300,000 of the increase in 1999 from
37
<PAGE>
1998 in salaries and wages. We also employed additional personnel in 1999 due to
the merger with AIC and the discontinued MSS division which accounted for
$364,667 of the increase in salaries and wages in 1999. The increase is also due
to an additional $208,333 in accrued but unpaid wages to the President and Chief
Executive Officer in 1999 as compared to 1998. As explained below, the two
officers waived the wage payments under their respective employment agreements
during 1998. In January 1999, the Company's Board of Directors elected to accrue
the full amount of the wages in 1999. The total accrued for this period in
salaries and wages of $208,333 and in deferred officer wages of $791,667 totaled
$1,000,000 for 1999 compared to $0 in 1998. The deferred officer wages increased
from $0 in 1998 to $791,667 in 1999. The Company did not accrue the deferred
wages of the President and Chief Executive Officer in 1998 of $500,000 and for
the first six months of 1999 of $291,667. The Company did not pay these accrued
wages in cash in 1999. Instead, the Board of Directors of the Company issued
1,583,334 shares of restricted common stock as compensation for the 18 months of
deferred wages. The Company did not accrue the wages in 1998 because the
officers waived their right to be paid. The Board of Directors decided in
January 1999 to pay the wage previously waived by issuing restricted common
stock for that amount. In summary, the total increase in expenses for salaries
and wages of $802,342 and the increase in deferred officer wages of $791,667 in
aggregate totaling $1,594,009 is due primarily to the officer wage accruals of
$1,000,000.
Advertising costs decreased $34,358 to $42,082 for 1999. This is a 55%
decrease in costs. The Company measures advertising as a percentage of product
sales. The goal is an advertising cost of approximately 4% to 6% of product
sales. For 1998, the expense ratio was 36% and 11% for 1999. The percentages are
higher for 1998 due to start up advertising costs in 1998 and lower sales for
1999. This fluctuation is also due to the cash deficit the Company experienced
in 1999.
Depreciation and Amortization increased $26,191 for the year 1999
compared to $103,743 for 1998. The increase is due to greater amortization of
our discontinued product lines offset by the decrease in depreciation of the
discontinued assets.
General and administrative expenses increased $951,195 for the year
1999 from $727,580 in 1998. This increase is due to the $250,000 increase from
prior years in legal contingencies. Also, this expense increased due to an
additional $300,000 in services of outside consultants, such as investment
banking firms. An increase in facilities expenses of $50,000 along withe a
$400,000 write-off of licensing fees of $50,000 resulted in the $951,195
increase in general and administrative expenses.
Interest expense of $135,288 in 1999 is $129,429 higher than 1998
primarily due to the $112,500 in interest expense for the two months that the
10% Debentures issued in the reverse merger with AIC were outstanding which were
not outstanding in 1998.
The Company also wrote off the asset investment in the discontinued
subsidiary, MSS, of $582,750 in 1999 as a loss on impairment of goodwill. There
was no comparable write-off in 1998.
38
<PAGE>
The net result is that the loss per share of Common Stock (basic and
diluted) was ($0.32) for 1998 and ($0.41) for 1999. This is a 28% increase in
loss per share. The average number of shares of Common Stock increased over the
period such that the losses per share are not comparable. Overall the net loss
increased from ($870,671) in 1998 to a loss of ($4,311,459) in 1999.
CAPITAL EXPENDITURES
The Company does not have any large capital expenditures planned for
fiscal years 2000 or 2001. We are proposing a product design change to include
an ABS plastic design for two of our products which will require approximately
$400,000 in capital expenditures. The final decision, however, to change the
product design will be based on estimated sales of the products which will
enable the Company to recover the capital expenditures within nine to twelve
months. Any minor capital expenditures will be met with cash on hand. In the
event our product sales increase beyond current manufacturing capacities, then
additional capital expenditures will be required to increase production
capacity. We anticipate, however, that any additional capital expenditures to
increase production capacity would not exceed $500,000 and would be offset by
increased product sales, since increased sales would create the need for
additional capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal year 1998, we increased our cash position by $125,967. This
increase was due to cash adjustments to losses from operations of $870,671,
including, depreciation and amortization of $103,743, stock payments of $169,475
to employees and consultants, and a reduction in receivables of $18,866. These
cash adjustments were further offset by the cash received from our financing
activities totaling $620,630. For fiscal year 1999, this trend continued at a
high level. The loss from operations decreased cash by $84,036. This decrease
originated from the operational loss of $4,311,459 and was reduced by cash
adjustments, including, depreciation and amortization and impairment (write-off)
of goodwill added $1,123,684 back as non-cash expenses; our employees,
consultants and especially our vendors through the increase in payables and
accrued expenses increased cash by $2,305,000; the proceeds from financing
activities added an additional $873,139 in cash to the Company during fiscal
year 1999. In summary, the cash needs of the Company were met in fiscal years
1998 and 1999 by means other than operations. For fiscal year 2000, we are
seeking to reverse this trend because increasing payables and accrued expenses
have reduced the Company's purchasing capabilities to cash purchases. Decreases
in our cash also results in lower gross margins as the cost of reduced
production increases marginal costs. During fiscal year 2000, we intend to focus
on the production, marketing and sale of our existing line of air purification
products, including the pursuit of Medicare acceptance of our Medicare Model 950
Unit and increased promotion of our franchise program. For this reason, we have
temporarily postponed further significant expenditures during fiscal year 2000
on our products which are in the redesign and development stage.
39
<PAGE>
As of February 29, 2000, the Company has increased cash from financing
activities by approximately $3,500,000. The Company also expects to sell 50 to
100 franchises to qualified entities and individuals during fiscal years 2000
and 2001. We expect these franchise sales to net the Company $25,000 per sale.
As of March 23, 2000, the Company has not sold a franchise, however, our sales
efforts are only one month in the process. Included in franchise sales is an
additional purchase of up to $25,000 in inventory per franchise. The Company
expects sales of its products to increase in fiscal years 2000 and 2001. For the
six months ended February 29, 2000, the sales of products were approximately
$631,867 compared to sales of products for the year ended May 31, 1999 of
$618,442. We expect to receive the additional $2,500,000 from the exercise of
the Conditional Warrant by PKI to purchase additional 6% Debentures and Warrants
in December 2000.
The Company expects to have sufficient funds necessary to finance the
manufacture, distribution and sale of our products with required advertising
support during fiscal year 2000. Our expectations are based upon our March 23,
2000 cash balance of $2,300,000, anticipated cash from franchising activities of
$1,875,000, the sale of an additional $2,500,000 in 6% Debentures and Warrants
to PKI, conversion of outstanding warrants to yield $1,300,000 and sales of
miscellaneous equities of $700,000 for a total of $8,675,000. As described
above, the Company does not have a large capital expenditures program planned
for fiscal years 2000 and 2001. Therefore, the forecasted increase in sales of
our products combined with the $8,675,000 in cash from sales of our equities
should be sufficient to offset any cash losses from operations.
40
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Airtech International Group, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Airtech
International Group, Inc. and subsidiaries as of May 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the years 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 audits 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 significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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 consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ TURNER, STONE & COMPANY, LLP
Certified Public Accountants
September 10, 1999
41
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $ 61,808 $ 145,844
Trade and licensing fees 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 $35,810 and
$89,750, respectively................................... 143,243 779,302
Intellectual properties, net of accumulated amortization
of $38,060 and $0, respectively......................... 1,049,337 1,087,397
Prepaid royalties and other............................... 514,208 535,100
---------- ----------
Total other assets.................................... 1,706,788 2,401,799
---------- ----------
$2,849,781 $4,243,700
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable, trade................................... $ 510,193 $ 136,955
Accrued payroll and other wages........................... 216,223 --
Accrued payroll taxes..................................... 85,546 --
Other accrued expenses.................................... 372,534 156,857
Advances payable to officers.............................. 216,488 186,000
Notes payable............................................. 277,185 340,540
----------- -----------
Total current liabilities............................. 1,678,169 820,352
LONG-TERM LIABILITIES
Deferred revenue.......................................... 400,000 400,000
Product marketing obligation.............................. 405,000 --
----------- -----------
Total long-term liabilities........................... 805,000 400,000
Total liabilities..................................... 2,483,169 1,220,352
COMMITMENTS AND CONTINGENCIES............................... -- --
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................................................. -- --
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 10,059,923 shares issued and
outstanding, respectively............................... 660,376 502,996
Additional paid-in capital................................ 5,546,965 4,049,736
Retained deficit.......................................... (5,841,873) (1,530,414)
----------- -----------
Total stockholders' equity............................ 366,612 3,023,348
----------- -----------
$ 2,849,781 $ 4,243,700
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
REVENUES
Product sales............................................. $ 800,439 $1,041,999
Franchisee fees........................................... 229,000 84,500
Other revenues............................................ 1,030 --
----------- ----------
Total revenues.......................................... 1,030,469 1,126,499
COSTS AND EXPENSES
Salaries and wages........................................ 1,317,076 514,734
Deferred officer wages.................................... 791,667 --
Cost of sales............................................. 664,356 568,814
Advertising............................................... 42,082 76,440
Depreciation.............................................. 38,564 86,493
Amortization.............................................. 91,370 17,250
Loss on impairment of goodwill............................ 582,750 --
Other general & administrative expenses................... 1,678,775 727,580
----------- ----------
Total costs and expenses................................ 5,206,640 1,991,311
----------- ----------
LOSS FROM OPERATIONS........................................ (4,176,171) (864,812)
Interest expense............................................ (135,288) (5,859)
----------- ----------
LOSS BEFORE INCOME TAXES.................................... (4,311,459) (870,671)
Income tax benefit.......................................... -- --
----------- ----------
NET LOSS.................................................... $(4,311,459) $ (870,671)
=========== ==========
LOSS PER COMMON SHARE--BASIC................................ $ (0.41) $ (0.32)
=========== ==========
LOSS PER COMMON SHARE--DILUTED.............................. $ (0.41) $ (0.32)
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK PREF. SERIES M PREF. SERIES A
---------------------- --------------------- -------------------------- PAID-IN
DESCRIPTION SHARES $ SHARES $ SHARES $ CAPITAL
----------- ----------- -------- ---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 5/31/97................... 2,695,923 $134,796 0 $ -- 0 $ -- $ 3,789,477
Issuance of common stock for cash.... 120 6 -- -- -- -- 126,624
Issuance of common and preferred
stock in acquisition of AIC........ 2,100,000 105,000 -- -- 2,371,603 11,858,016 2,010,744
Adjustment of equity accounts to give
effect to reverse merger accounting
of acquisition..................... 5,263,880 263,194 1,029,750 1,030 (2,371,603) (11,856,016) (1,877,109)
Net loss during the year............. -- -- -- -- -- -- --
----------- -------- ---------- ------ ----------- ------------ -----------
BALANCE AT 5/31/98................... $10,059,923 $502,998 $1,029,750 $1,030 $ -- $ -- $ 4,049,736
Issuance of Series M preferred stock
in June, net of offering costs..... -- -- 114,000 114 -- -- 98,890
Convert Debentures to common in
July............................... -- -- -- --
Cancel shares in July................ (680,000) (34,000) -- -- -- -- 34,000
Issuance of common stock according to
S-8 registration in August......... 146,025 7,300 -- -- -- -- 213,067
Issuance of common stock according to
S-8 registration in November....... 524,000 26,200 -- -- -- -- 148,360
Issuance of common stock for cash in
November........................... 828,000 41,400 -- -- -- -- 234,600
Issuance of common stock on exercise
of warrants in December............ 46,250 2,313 -- -- -- -- 20,812
Issue common stock for deferred wages
to officers in January............. 1,563,334 79,167 -- -- -- -- 712,500
Issuance of common stock in May...... 700,000 35,000 -- -- -- -- 35,000
Net loss during the year............. -- -- -- -- -- -- --
----------- -------- ---------- ------ ----------- ------------ -----------
BALANCE AT 5/31/99................... 13,207,532 660,376 1,143,750 1,144 0 0 5,546,965
=========== ======== ========== ====== =========== ============ ===========
<CAPTION>
RETAINED
DESCRIPTION EARNINGS TOTAL
----------- ----------- ------------
<S> <C> <C>
BALANCE AT 5/31/97................... $ (659,743) $ 3,264,530
Issuance of common stock for cash.... -- 126,630
Issuance of common and preferred
stock in acquisition of AIC........ -- 13,973,760
Adjustment of equity accounts to give
effect to reverse merger accounting
of acquisition..................... -- (13,470,901)
Net loss during the year............. (870,671) (870,671)
----------- ------------
BALANCE AT 5/31/98................... $(1,530,414) $ 3,023,348
Issuance of Series M preferred stock
in June, net of offering costs..... -- 99,004
Convert Debentures to common in
July............................... --
Cancel shares in July................ -- --
Issuance of common stock according to
S-8 registration in August......... -- 220,367
Issuance of common stock according to
S-8 registration in November....... -- 174,560
Issuance of common stock for cash in
November........................... -- 276,000
Issuance of common stock on exercise
of warrants in December............ -- 23,125
Issue common stock for deferred wages
to officers in January............. -- 791,667
Issuance of common stock in May...... -- 70,000
Net loss during the year............. (4,311,459) (4,311,459)
----------- ------------
BALANCE AT 5/31/99................... (5,841,873) 366,612
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(4,311,459) $(870,671)
Adjustments to reconcile net income to cash
Depreciation and amortization........................... 129,934 103,743
Impairment of goodwill.................................. 582,750 --
Net (gain) loss on disposition of assets................ (51,672) --
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) (18,866)
Inventory............................................... 41,667 (422)
Prepaid expenses........................................ 67,214 (228,074)
Accounts payable........................................ 373,238 70,380
Accrued expenses........................................ 716,163 169,591
----------- ---------
Net cash used in operating activities................. (933,386) (604,844)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment..................... -- (11,369)
Disposals of fixed assets................................. 66,058 --
Expenditures for other assets............................. (89,837) --
Cash acquired in ITC acquisition.......................... -- 121,550
----------- ---------
Net cash used in investing activities................... (23,779) 110,181
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net of offering
costs................................................... 99,004 --
Proceeds from issuance of common stock.................... 369,125 127,630
Receipts from product marketing obligation................ 405,000
Advances from ITC prior to acquisition.................... -- 493,000
----------- ---------
Net cash provided by financing activites................ 873,129 620,630
INCREASE (DECREASE) IN CASH................................. (84,036) 125,967
CASH, BEGINNING OF PERIOD................................... 145,844 19,877
----------- ---------
CASH, END OF PERIOD......................................... $ 61,808 $ 145,844
=========== =========
SUPPLEMENTAL CASH FLOWS DISCLOSURES
Interest paid............................................. $ 8,319 $ --
Income taxes paid......................................... $ -- $ --
Non-cash investing and financing activities:
Issuance of common stock, preferred stock and debentures
for purchase of ITC net assets, net of cash received... $ -- $ 324,806
Common stock issued in settlement of capital lease
obligation............................................. $ -- $ 218,750
Common stock issued in exchange for services............ $ 1,129,593 $ 169,475
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Airtech International Group, Inc. (the Company), (formerly Interactive
Technologies Corporation), was incorporated in the state of Wyoming on
August 8, 1991. The Company manufactures and sells a full line of air
purification products. The Company primarily markets, sells and distributes its
products through a network of franchisees.
On May 31, 1998, the Company acquired all of the outstanding common stock
shares of Airtech International Corporation (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). However, because these convertible securities were
converted into common stock within two months following the acquisition, the
Company effectively issued common stock for the outstanding common stock of AIC
and the stockholders of AIC obtained control of the combined company. As a
result, AIC became the acquirer for financial reporting purposes.
Therefore, 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 $179,053
of the purchase price allocated to goodwill. The acquired goodwill will be
amortized using the straight-line method over 5 years.
Results of operations of ITC 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:
<TABLE>
<S> <C>
Revenues.................................................... $2,126,489
Net loss.................................................... $ (670,671)
</TABLE>
PRINCIPLES OF CONSOLIDATION
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 have 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
47
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
identifiable intangibles to be disposed of are reported at the lower of carrying
value or fair value less cost to sell.
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 $38,060 and $0,
respectively.
Goodwill recorded in the acquisition of AIC, is being amortized using the
straight-line method over 5 years. For the years ended May 31, 1999 and 1998,
amortization expense totaled $35,810 and $0, respectively.
Goodwill relating to the Company's purchase of its McClesky Sales and
Services subsidiary in 1995 is being amortized over 40 years. In May 1999, this
operating segment was discontinued (Note 10) and the remaining unamortized
carrying value was charged to expense.
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:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Finished goods.......................................... $200,506 $ 22,102
Component parts......................................... 42,159 262,230
-------- --------
$242,665 $284,332
======== ========
</TABLE>
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
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.
48
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT MARKETING OBLIGATION
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 68, the
Company has recorded funds raised in an arrangement to develop, produce and
market its Model S-999 as a product marketing obligation (Note 6).
REVENUE RECOGNITION
Revenues from the Company's operations are recognized at the time products
are shipped or services are provided. Revenues from franchise sales are
recognized at the time all material services relating to the sale of a franchise
have been performed by the Company and, in some instances, when the related
notes receivable have been collected. Revenues based on the collection of
franchise notes receivable are deferred until the time of collection.
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
Basic and diluted loss per share are based upon 10,583,635 and 2,716,198,
respectively, weighted average shares of common stock outstanding. 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 an increase in the Company's authorized common shares to 50,000,000.
49
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 for each five shares of preferred 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. As described in Note 1, relating to the reverse merger
accounting recognition, the conversion of the preferred stock shares has been
recorded in the accompanying consolidated financial statements as occurring on
May 31, 1998, the date of acquisition.
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 years ended May 31, 1999 and 1998, 114,000 and 1,029,750 of
these shares were issued for $1.00 cash, net of $14,996 and $188,383,
respectively, 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 has 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:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
50
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 were 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. As described in Note 1,
relating to the reverse merger accounting recognition, the conversion of the
convertible debentures has been recorded in the accompanying consolidated
financial statements as occurring on May 31, 1998, the date of acquisition.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is currently obligated under a noncancellable operating lease
for its Dallas office facilities which expire in September 2000.
Minimum future rental payments required under the above operating lease is
as follows.
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
-------------------
<S> <C>
2000........................................................ $ 77,184
2001........................................................ 29,436
2002........................................................ 9,812
--------
$116,432
========
</TABLE>
During the years ended May 31, 1999 and 1998, rent expense totaled $80,670
and $6,776, respectively.
EMPLOYMENT AGREEMENTS
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
51
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
reached with these executives, the Company is no longer accruing the difference
as such is considered to not be due until further notice.
During the year ended May 31, 1999, the Company received a claim from a
stockholder and former officer and director in the amount of $250,000 related to
past employment services. Discussions between the Company and this former
officer are in the early stages. The Company has not accrued any loss
contingency relating to this claim.
The Company's current compensation benefits do not provide any other
post-retirement or post-employment benefits.
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 and the Company anticipates it will be in
compliance prior to December 31, 1999. During the year ended May 31, 1999, 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.
Because of the unprecedented nature of the year 2000 issue, its effects and
the success of related remediation efforts will not be fully determinable until
the year 2000 and thereafter. Management cannot assure that the Company is or
will be year 2000 ready, that the Company's remediation efforts will be
successful in whole or in part, or that parties with whom the Company does
business will be year 2000 ready.
7. LITIGATION
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.
52
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
carry forwards for financial and tax reporting purposes of approximately
$16,100,000 and $8,500,000, respectively. These carry forwards 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 $800,002 deferred tax liability related to amortization
timing differences, in the amount of $4,680,290 which have been fully offset by
a valuation allowances in the same amount, as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Beginning balance.................................... $2,804,055 $2,267,331
Increase during period............................... 1,876,235 536,724
---------- ----------
Ending balance....................................... $4,680,290 $2,804,055
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Tax (expense) benefits computed at statutory federal
rate............................................... $ 1,465,896 $ 296,028
NOL carryover........................................ (1,465,896) (296,028)
----------- ---------
Income tax benefit................................... $ -- $ --
=========== =========
</TABLE>
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 receivable are unsecured and represent sales
not collected at the end of the year. Management believes these accounts and
notes receivable are fairly stated at estimated net realizable amounts.
10. DISCONTINUED OPERATING SEGMENT
In May 1999, the Company discontinued its McClesky Sales and Services (MSS)
operations which were being conducted through its wholly owned subsidiary by the
same name. The net assets of this operating segment, consisting primarily of
unamortized goodwill relating to the Company's purchase of MSS in 1995
(Note 1), approximated $527,000 and was charged against continuing operations.
53
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
WGT. AVE. WGT. AVE.
SHARES EXERCISE SHARES EXERCISE
(X1,000) PRICE (X1,000) 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 $2.00
Exercised................................. (46) $ 2.00 0
Expired................................... (10) $10.00 0
--- ---
Options and warrants outstanding at end of
year.................................... 991 $ 2.06 480 $3.93
=== ===
Options and warrants exerciseable at end
of year................................. 901 $ 2.06 480 $3.93
=== ===
Weighted average fair value of options and
warrants granted during the year........ $ 0.60 $0.45
</TABLE>
The following table summarizes information about the Company's stock options
and warrants outstanding at May 31, 1999, all of which are exercisable.
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVE. WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE
EXERCISE PRICES (X1,000) CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$.20 - $.60 485 3.3 years $ .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
</TABLE>
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
54
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
interest rate of 5.6%; no expected dividends; expected lives of 3 to 10 years;
and expected volatility of 220.51%.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1999 MAY 31, 1998
------------ ------------
<S> <C> <C>
Net loss............................................ $(4,364,880) $(883,812)
Net loss per share.................................. $ (0.41) $ (0.33)
</TABLE>
During the years 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.
12. RELATED PARTIES
During the years ended May 31, 1999 and 1998, the Company's chief executive
officer and president made cash operating advances of $100,000 and $186,000 and
received repayments of $127,000 and $0, respectively. The advances are to be
repaid as cash is available or by the issuance of common stock. These advances
are unsecured but bear interest at 15% per annum. At May 31, 1999 and 1998,
advances payable to these officers totaled $216,488 and $186,000, respectively,
and included $57,488 and $0, respectively, of accrued interest.
13. LIQUIDITY ISSUES
The continued operating losses by the Company and its subsidiaries raise
concern about the Company's ability to generate profits from its operations.
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 is expanding 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.
14. SEGMENT INFORMATION
During the year ended May 31, 1999, the Company conducted its operations
through two reportable segments, each of which was conducted through separate
subsidiaries. Those reportable segments were its manufacture and sale of air
purification products and franchises and its commercial and residential heating
and air conditioning services, which was terminated in May 1999.
55
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT INFORMATION (CONTINUED)
The following table reflects certain information about the Company's
reportable operating segments for the year ended May 31, 1999. There are no
inter-segment revenue or expense transactions.
<TABLE>
<CAPTION>
AIR HVAC AIR HVAC
PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL
----------- --------- ----------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $ 618,442 $ 412,027 $ 1,030,469 $ 293,979 $832,520 $1,126,499
Net operating loss....... $(4,153,265) $(158,194) $(4,311,459) $(862,670) $ (8,001) $ (870,671)
Interest expense......... $ 126,969 $ 8,319 $ 135,288 $ -- $ 5,859 $ 5,859
Depreciation and
amortization........... $ 107,637 $ 22,297 $ 129,934 $ 48,377 $ 55,366 $ 103,743
Consulting services, non
cash................... $ 309,854 $ -- $ 309,854 $ -- $ -- $ --
Expenditures for
long-lived assets...... $ -- $ -- $ -- $ 11,369 $ -- $ 11,369
Total long-lived assets,
net of accumulated
depreciation........... $ 89,569 $ -- $ 89,569 $ 148,956 $ 56,918 $ 205,874
</TABLE>
56
<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, 1999. A summary of
the background and experience of each of these individuals is set forth after
the table.
The directors are:
57
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
C.J. Comu 38 Chairman
John Potter 57 Director
</TABLE>
The executive officer and other officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
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
</TABLE>
C.J. Comu, C.J. Comu has served as CEO, chairman and a director of the
Company since May 31, 1998. Mr. Comu was a co-founder, CEO and Chairman of
Airtech International Corporation, our wholly-owned subsidiary since its
formation in 1995. In January 1994, Mr. Comu co-founded Transworld Leasing
Corporation with Mr. John Potter, also a director and executive officer of the
Company, which provided financing and marketing expertise to the medical,
computer and corporate sectors prior to the formation of Airtech International
Corporation.
John Potter, Mr. Potter has served as President and a director of the
Company since February 11, 1998. Mr. Potter was the co-founder, President and a
director of Airtech International Corporation, our wholly-owned subsidiary,
since its formation in 1995. In January 1994, Mr. Potter co-founded Transworld
Leasing Corporation with Mr. C.J. Comu, also a director and executive officer of
the Company, which provided financing and marketing expertise to the medical,
computer and corporate sectors prior to the formation of Airtech International
Corporation. 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
58
<PAGE>
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 became Vice President of Franchising of Airtech
International Corporation in January 1997 and President of Airsopure, Inc. in
March 1997, which he helped organize. Mr. Keane also became Vice President of
Franchising of the Company in May 1998. 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 became Vice President of Research & Development of the
Company in August 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 became Vice President of Finance of the Company in
November 1998. 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
59
<PAGE>
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 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 $100,000 or more (each, a "Named Executive Officer").
LONG TERM COMPENSATION AWARDS
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
RESTRICTED
OTHER STOCK
NAME AND PRINCIPAL POSITION FISCAL BONUS ANNUAL AWARDS
YEAR SALARY (7) ($) COMPENSATION ($)
<S> <C> <C> <C> <C> <C> <C> <C>
CJ Comu, CEO, Chairman 1999 $ 46,875 $ 0 $ 0 $395,834 (2)
(1) 1998 0 0 0 28,500 (2)
1997 297,072 0 0
Perry West, (former) CEO, 1998 24,000 0 250,000 0
Chairman
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
RESTRICTED
OTHER STOCK
FISCAL BONUS ANNUAL AWARDS
NAME AND PRINCIPAL POSITION YEAR SALARY (7) ($) COMPENSATION ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Potter, President 1999 46,875 0 0 395,834 (3)
(1) 1998 0 0 0 28,500 (3)
1997 294,178 0 0
Darrell R. Jolley, CEO 1999 58,333 0 0 12,500 (4)
Bobby Cox, (former) CEO 1998 0 (6) 0 0 0
(1) 1997 26,667 (6)
Douglas S. Keane, President 1999 77,500 0 0 12,500 (5)
of Airsopure, Inc. (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.
(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.
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<PAGE>
(6) Per Board resolution of January 31, 1996 (within fiscal year 1997), Mr.
Cox' salary was authorized as $100,000 and in fact had been compensated
at least at that level in the prior year. Mr. Cox separated from the
Company in October 1997.
(7) See terms of employment agreements for Mr. Comu, Mr. Potter, Mr. Jolley
and Mr. Keane under the section titled "Employment Agreements." Except
for Mr. Keane, all amounts for fiscal 1999 represent payments for only
part of the year.
The Following table sets forth (a) the number of shares underlying
options granted to each name Executive officer during fiscal 1999, (b) the
percentage the grant represents of the total number of options granted to all
Company employees during fiscal 1999, (c) the per share exercise price of each
option and (d) the expiration date of each option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS / SAR'S
UNDERLYING OPTIONS / SAR'S GRANTED TO EMPLOYEES IN FISCAL EXERCISE PRICE
NAME GRANTED (#) YEAR ($/SHARES)
<S> <C> <C> <C>
CJ Comu 150,000 21.9% $ 0.50
John Potter 150,000 21.9% $ 0.50
Darrell R. Jolley 135,000 (1) 19.7% $ 0.60
Douglas S. Keane 250,000 (2) 36.5% (3)
</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 $0.11 per share.
Set forth in the table is information, with respect to each Named
Executive Officer, as to the (a) number of shares acquired during fiscal 1999
upon each exercise of options granted to such individuals, (b) the aggregate
value realized upon each exercise (i.e. the difference between the market value
of the shares at exercise and their exercise price), (c) the total number of
unexercised options held on May 31, 1999, separately identified between those
exercisable and those not exercisable and (d) the aggregate value of
in-the-money, unexercised options held on May 31, 1999, separately identified
between those exercisable and those not exercisable.
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF EXERCISED OPTIONS
SHARES UNEXERCISED OPTIONS AT FISCAL AT FISCAL YEAR-END ($)
ACQUIRED ON VALUE YEAR-END (#) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) RECEIVED ($) UNEXERCISABLE UNEXERCISABLE (1)
<S> <C> <C> <C> <C>
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
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<PAGE>
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.
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.
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<PAGE>
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.
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>
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF COMMON STOCK
NAME AND ADDRESS (1) OWNERSHIP OF COMMON STOCK (2) OWNERSHIP (3)
<S> <C> <C>
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%
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<PAGE>
CR Saulsbury, Sr., 1,116,533 (8) 7.5%
5308 Andrews Highway
Odessa, Texas 79762
Peter Kertes, 784,600 (9) 5.3%
16400 N.E. 31st
N. Miami Beach, Florida 33160
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.
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<PAGE>
(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 shares 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.
(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 pursuant 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 $100,000 and $186,000,
respectively. 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, a principal stockholder of the Company, is the President
of EquitNet.Com, a weekly investor newsletter. Mr. Kertes provided the Company
with a market analysis of the Company's Common Stock for which he was
compensated $3,500 in cash and issued 17,500 shares of Common Stock. The Company
has also signed an agreement with Mr. Kertes to provide
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<PAGE>
investment banking services for which he was compensated by the issuance of
29,600 common shares. As of March 31, 2000, Mr. Kertes owned 2.9% of the
outstanding shares of Common Stock of the Company.
ITEM 13. Exhibits and Reports on Form 8-K.
EXHIBIT INDEX
(a.) Exhibits
EXHIBIT NUMBER DOCUMENT
3.1 Restated Articles of Incorporation filed
December 27, 1991 of the Company's
predecessor in name, Interactive
Technologies Corporation, Inc.
3.2 Articles of Amendment filed May 14, 1997
of the Company's predecessor in name
Interactive Technologies Corporation,
Inc.
3.3 Articles of Amendment of the Company
filed October 16, 1998
3.4 Bylaws of the Company's predecessor in
name, Interactive Technologies
Corporation, Inc. (incorporated by
reference to the Company's Form 10 filed
on January 14, 1992)
4.1 Specimen Common Stock Certificate
(incorporated by reference to the
Company's Form 10 filed on January 14,
1992)
4.2 Specimen Series "M" Convertible
Preferred Stock Certificate
4.3 Form of Warrant to purchase shares of
Common Stock granted to holders of
Series "M" Convertible Preferred Stock
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<PAGE>
10.1 Stock Purchase Agreement dated May 5,
1997 by and between Interactive
Technologies Corporation, Inc. and
Airtech International Corporation
(incorporated by reference to Exhibit
10.5 to Company's Annual Report filed on
August 28, 1997 for the year ended May
31, 1997, file No. 19796)
10.2 Employment Agreement dated May 1, 1997
between the Company and C.J. Comu
10.3 Employment Agreement dated May 1, 1997
between the Company and John Potter
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b.) Reports on Form 8-K.
Form 8-K dated June 16, 1999 setting out the discontinuation of the
Company's product line under the operations of its subsidiary McCleskey Sales
and Service.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on June 5, 2000. This
Amendment No. 2 to Form 10-KSB/A amends and restates the report on Form 10-KSB/A
filed by Registrant on August 31, 1999, File No. 0-19796.
Airtech International Group, Inc.
By: /s/ C. J. Comu
-----------------------------------------
C. J. Comu, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the indicated capacities and dates. This Amendment No. 2 to
Form 10-KSB/A amends and restates the report on Form 10-KSB/A filed by
Registrant on August 31, 1999, File No. 0-19796.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ C. J. Comu Director and Chief June 5, 2000
---------------------------------- Executive Officer
C. J. Comu
/s/ John Potter President and Director June 5, 2000
----------------------------------
John Potter
/s/ R. John Harris Director June 5, 2000
----------------------------------
R. John Harris
/s/Dr. Andrew Welch, M.D. Director June 5, 2000
----------------------------------
Dr. Andrew Welch, M.D.
/s/ Robert Galvan Director June 5, 2000
----------------------------------
Robert Galvan
/s/ James R. Halter Principal Accounting
---------------------------------- Officer and Principal June 5, 2000
James R. Halter Financial Officer
</TABLE>
70
