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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2000
COMMISSION FILE NUMBER: 0-19796
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AIRTECH INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in charter)
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WYOMING 98-0120805
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
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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: $1,627,476.
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant, based on the average of the closing bid and
asked prices of the Registrant's Common Stock as reported on the OTC Electronic
Bulletin Board on July 31, 2000, was approximately $14,623,546. 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 July 31, 2000, approximately 21,116,942 shares of Common Stock, $0.05
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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ITEM PAGE
NUMBER NUMBER
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PART I
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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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 Interactive Technologies Corporation, Inc.
Until May, 1998, Interactive Technologies was principally engaged in developing
and producing interactive television and media programming for distribution
through cable, broadcast, direct satellite television and the Internet.
Interactive Technologies 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 touch-tone
phones. In addition, Interactive Technologies owned licensed rights obtained
from the Federal Communications Commission to operate an interactive video and
data service system in the Melbourne-Titusville, Florida metropolitan area. A
second system owned by Interactive Technologies and located in the Charleston,
South Carolina metropolitan area was sold in 1997.
On May 31, 1998, we acquired all of the outstanding shares of common stock
of Airtech International Corporation, a Texas corporation. Airtech Corporation
was founded in 1994 as a distributor of air purification products for
Honeywell/Envirocaire. In January of 1996, Airtech Corporation outgrew the
distributorship business and began manufacturing two of its own air purification
products. The total purchase price of $22,937,760.00 for the stock acquisition
was paid through the issuance of 10,500,000 shares of Interactive Technologies'
common stock, 11,858,016 shares of Interactive Technologies' Series "A"
Convertible Preferred Stock and $9,000,000.00 in principal amount of Interactive
Technologies' convertible debentures. The shares of common stock and Series "A"
preferred stock were each valued at $0.625 per share. We accounted for the stock
acquisition using the purchase method of accounting, with Airtech Corporation
deemed the purchaser for purposes of our consolidated financial statements.
On July 31, 1998, the 11,858,016 shares of Series "A" preferred stock and
the $9,000,000 of convertible debentures, including accrued interest, were
converted into 11,858,016 and 13,071,429 shares of our common stock. After
conversion, the total number of outstanding shares of our common stock was
approximately 50,000,000 shares. On October 5, 1998, our shareholders approved a
one for five reverse split of our common stock which reduced the number of
outstanding shares of our common stock to approximately 10,000,000 shares and
increased the par value of our common stock from $0.01 to $0.05 per share. The
reverse stock split was effective as of November 9, 1998.
In February 1998, we discontinued the original line of business of
Interactive Technologies relating to interactive television and media
programming, including the Rebate TV product. The software, trademark and
license rights are the only assets of these discontinued lines of business.
These assets have no carrying value on our consolidated financial statements
because the products were discontinued prior to our acquisition of Airtech
Corporation. We discontinued these original lines of business to enable us to
concentrate on the development, manufacture, distribution and sale of the air
purification products offered by Airtech Corporation and its subsidiaries. We
are currently marketing the remaining assets for sale with no firm commitments
or agreements in place.
Since the discontinuation of our original lines of business, we have been
engaged with our wholly-owned subsidiaries, Airtech Corporation, Airsopure,
Inc., and Airsopure International Group, Inc. 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 Airtech Corporation.
Airsopure International was incorporated on January 5, 2000 in the State of
Nevada to implement and operate a franchise program to facilitate the opening of
consumer retail stores for the sale of our residential air purification
products.
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On November 30, 1995, we incorporated McCleskey Sales and Service, Inc. in
the State of Texas to integrate the distribution and sale of air purification
products by Airtech Corporation with the heating, ventilation and air
conditioning service business. Effective May 31, 1999, we discontinued the
operations of McCleskey Sales based upon the incompatibility of the heating and
air conditioning service business with Airtech Corporation's business of
manufacturing and distributing high quality air purification products. Our cash
expenses to discontinue the operations of McCleskey Sales were minimal.
In January 1999, we formed Airsopure 999, L.P., a Texas limited partnership,
for the purpose of developing, marketing and distributing our Model S-999
automobile air purification system. Our wholly-owned subsidiary, Airsopure, is
the general partner of the limited partnership.
In October 1999, we applied to the Medicare administration for a Medicare
reimbursement code number for our Medicare Model 950. The reimbursement code
number allows Medicare recipients to receive reimbursement for the cost of our
Medicare Model 950. Our Medicare application is pending. We have not yet
received approval for a specific reimbursement code number, although Medicare
has allowed us to invoice Medicare using a non-assigned code number. The
non-assigned code number does not guarantee Medicare reimbursement to Medicare
recipients.
From February through June 2000, we opened four retail stores in Arlington,
Texas, Jackson, Tennessee, Addison, Texas and Kansas City, Missouri. We opened
these retail stores to facilitate the sale of our home consumer line of air
purification products. These retail stores serve as prototypes for future
franchise retail stores offered by Airsopure International.
On October 16, 1998, we changed our name from Interactive Technologies
Corporation, Inc. to Airtech International Group, Inc. Our address is 15400
Knoll Trail, Suite 200, Dallas, Texas 75248. Our telephone number is (972)
960-9400 and our web site can be accessed at www.airtechgroup.com. The web site
of Airsopure can be accessed at www.airsopure.com.
BUSINESS
We are engaged in the development, manufacturing, marketing and sale of
indoor air purification products for commercial and residential use. We also
manufacture and market an air purification system for use in automobiles. Our
strategy is to identify those markets which we believe are in need of solutions
to indoor air contamination problems. We propose to exploit these identified
markets through direct sales, franchising, licensing and strategic alliances
with manufacturing representatives.
Indoor air contamination exists in the form of particulates, gases or
viruses in the air we breathe, whether in an office building, retail or
commercial establishment or our homes. The public is generally aware of the
dangers of outside air pollution through "ozone alert days" which suggest
limited outdoor activities on those days. We believe, however, that the general
public is unaware that exposure to our immune systems of unseen indoor air
contaminants is normally six to seven times more hazardous than outside air.
These air contaminants include bacteria, pollen, dust mites, smoke, plant
spores, dust, solvents, glues, formaldehyde, carbon monoxide, carbon dioxide,
viruses, and diseases such as tuberculosis, meningitis, and hepatitis. Indoor
air contaminants also include volatile organic compounds or "VOCs" which occur
when airborne contaminants combine and become unstable. Examples of these
volatile compounds are benzene, styrene, arsenic and polychlorinated biphenyls.
For millions of people, exposure to indoor air contaminants means
experiencing headaches, watery eyes, dizziness, lethargy, digestive problems,
nausea, nose and throat irritation. Statistics indicate that many legitimate
employee absences are "respiratory related" and that these absences have a
profoundly negative impact on productivity and profits. Historically, the
methods of addressing and treating indoor air contamination were to open windows
and doors to bring "fresh air" into an area or to use air cleaners such as ozone
generators or electro-static air "cleaners" to attempt to purify the existing
indoor air. We believe that these methods do not effectively handle the air
contamination problems which exist today. Although
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considered effective at the time of conception, we regard these cleaners as
obsolete in the current air purification marketplace.
Our air purification products provide an inexpensive solution to air
contamination problems and concerns. Our 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, vehicles and residences. Our products
substantially remove or destroy microorganisms in the air, eliminate organic
odors and break down volatile compounds into harmless basic compounds.
FRANCHISE OPERATIONS
We operate a franchise program designed to leverage our air purification
expertise with the energies and investment of a franchise network. We see this
as a means of producing revenues for cash flow purposes from franchise fees,
sales of products to the market and royalty fees based upon the gross sales
generated by the franchisee. We currently have 18 franchisees who sell our
commercial products in various parts of the United States. These franchisees
market and sell our commercial building products through franchise agreements
with Airsopure, Inc., our wholly owned subsidiary. Each franchise agreement has
an initial term of five years and the franchisee may renew the franchise for
successive additional five year periods. Five of our current franchises expire
in fiscal year 2003 and thirteen in fiscal year 2004.
During fiscal year 2000, we elected to discontinue offering our commercial
franchises through Airsopure and began marketing our commercial products through
direct sales efforts from our corporate offices. We are also implementing a
program to pursue the marketing of our commercial products through manufacturing
representatives and recently employed an individual to coordinate this effort.
Based upon our estimate of approximately 260,000 manufacturing representatives
nationwide, we believe this marketing approach will provide us with broader
exposure of our commercial products. We also believe broader exposure will
increase the overall market penetration of our commercial products above the
levels previously recognized through our commercial franchise program.
We are also directing our franchise efforts and resources to our new
residential/retail franchise concept. To implement this new concept, we formed
Airsopure International Group, Inc., as a wholly owned subsidiary, to commence a
franchise program for the marketing and sale of our residential air purification
units. Airsopure International is qualified to offer our franchises in 38
states. These franchises are consumer oriented and utilize a retail store outlet
concept. We provide a five day Indoor Air Quality Certification program for each
approved franchisee. Our franchise program provides each franchisee with a
protected territory. We also coordinate an advertising program with our
franchisees to provide an unlimited number of leads and future potential
accounts to serve. The start-up costs for purchasing and establishing a retail
store franchise range from $90,000 to $100,000, which includes up to a $25,000
franchise fee to us. The remainder of the costs are estimates for the purchase
of inventory, furniture and fixtures and minimum required working capital. We
are also entitled to receive a monthly royalty fee equal to 5% of the gross
sales generated by each franchisee for the immediately preceding month. We
believe the exposure the franchisee will bring to our consumer residential
products will enhance and expand the overall market for our products. We
commenced marketing the residential/retail franchises in February 2000 and have
sold two franchises through June 30, 2000.
INDUSTRY OVERVIEW
The Environmental Protection Agency has identified indoor air pollution as
one of the five most urgent environmental concerns in the United States.
According to the EPA, poor air quality may affect one third to one half of the
commercial buildings in the United States. These affected commercial buildings
are referred to in the industry as "sick buildings" and represent a potentially
large market for our air
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purification systems. The term "sick building" can also be applied to any
commercial or private environment where airborne contaminants pose a potential
health hazard. The EPA asserts that the average American spends roughly 90
percent of his or her time indoors (Consensus 1988; EPA 1988) and can be
breathing air more seriously polluted than outdoor air in even the largest and
most industrialized cities. Government statistics indicate that 10 to 25 million
people working in 800,000 to 1.2 million commercial buildings have developed
respiratory symptoms related to indoor air pollution. These statistics translate
to a loss in business productivity that we believe could approach $60 billion a
year.
People in "vulnerable categories" are particularly sensitive to indoor air
quality and indoor air pollution. These vulnerable categories include many older
individuals, those individuals who are susceptible to allergies, asthma and
other respiratory ailments, and young children. We estimate that more than 30
percent of the U.S. population falls within these categories. Of the people
within vulnerable categories, health experts have expressed special concern
about people with asthma. These people have very sensitive airways that react to
various irritants in the air which make breathing difficult. The number of
people diagnosed with asthma has significantly increased in recent years. Since
1970, the number of asthmatics in the United States has increased 59 percent
which represents approximately 9.6 million people. There are approximately
seventeen million asthmatics in the United States. Asthmatics account for
500,000 hospitalizations and $6.2 billion in health care costs annually. Asthma
in children under 15 years of age has also increased 41 percent during the same
period representing a total of 2.6 million children. The number of deaths from
asthma has increased 68 percent since 1979 (Source: Asthma and Allergy
Foundation of America).
The rising drug resistance within the U.S. population is also becoming a
major health issue. There are approximately 160 antibiotics available to fight
disease. Many of these antibiotics, however, are no longer effective on certain
virulent organisms, including tuberculosis and certain types of hospital-based
staphylococcus infections. Many viral and bacterial infections are airborne and
are primarily transmitted through the air. The first line of defense against
these diseases is prevention through improvement of indoor air quality.
Bacteria, molds, pollen and viruses are types of biological contaminants.
These biological contaminants breed in stagnant water and accumulate in air
ducts, humidifiers, drain pans, and areas where water has condensed or collected
such as 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 bacteria,
Legionella, has caused both Legionnaire's Disease and Pontiac Fever (Source:
April 1991 Environmental Protection Agency Report [Air and Radiation]
Anr-445-W).
There is a growing awareness of the health hazards of airborne microbes,
also referred to as bioaerosols. Bioaerosols are extremely small living
organisms or fragments of organisms suspended in the air. Dust mites, molds,
fungi, spores, pollen, bacteria, viruses, amoebas, fragments of plant materials,
and human and pet dander are examples of bioaersols. Bioaersols are capable of
causing severe health problems. Some bioaersols, such as viruses and bacteria,
cause infections, like a cold or pneumonia, and others cause allergic reactions.
An allergic reaction occurs when a substance provokes formation of antibodies in
a susceptible person. Bioaerosols may cause allergic reactions on the skin or in
the respiratory tract. Rashes, hay fever, asthma, breathing difficulties, and
runny noses are common allergic reactions.
Bioaerosols build up in closed indoor environments and are passed through an
entire building through central ventilation systems. The contamination of an
entire building through bioaerosols is commonly referred to as "sick building
syndrome." Bioaerosols are found in a variety of settings such as residences,
office buildings, medical and dental offices and hospitals, but cannot be seen
without a magnifying glass or microscope. Exposure to bioaerosols is much higher
in most enclosed locations where people congregate,
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such as schools, theaters, airplanes, restaurants and shelters. Occurrences of
sick building syndrome have escalated largely because of the increased demand
for reduced operating costs in public buildings, particularly ventilation
systems. The demand for reduced operating costs led to the construction of
"tight" buildings which are dependent on mechanical air circulation systems
rather than windows. These air circulation systems recycle bioaerosols
throughout the building creating sick building syndrome.
Research has made it evident that air contaminants found in heating,
ventilation and air-conditioning systems and airtight buildings are responsible
to a large degree for sick building syndrome. The heating and air conditioning
community and the American Society of Heating, Refrigeration and Air
Conditioning Engineers have suggested that the use of higher ventilation rates
utilizing fresh outside air would dilute air contaminants and alleviate the sick
building syndrome to a great extent. In response to this suggestion and in an
effort to improve air quality, building operators have increased ventilation by
bringing in more fresh outside air. This process has resulted in increased
building costs created by the need to heat or cool and dehumidify the outside
air. The process is also somewhat ineffective to the extent that polluted inside
air is diluted with polluted outside air.
PRODUCTS
Our product line consists of the following:
- Series 12: Our Series 12 is designed to fit into a 2 x 4-foot space of a
ceiling. This unit filters approximately 1200 cubic feet of air each
minute removing particulates, gases and odors. Markets for this unit
include the food and beverage industry, hospital and nursing homes, print
shops, office buildings and other industries with problems involving
cigarette or cigar smoke, odors and particulates. The retail price of our
Series 12 is $3,490.00. For the twenty one months ended May 31, 2000, we
sold 308 of these units to our franchisees and national accounts.
- Series 14: Our Series 14 is designed to mount against a wall at the
joining point of the wall to the ceiling. The unit is approximately 36" x
14" x 14". The unit filters approximately 400 cubic feet of air per
minute. Markets for this unit include those users having problems with any
particulate, gas or odor found in rooms under 400 square feet, such as
hotel rooms, offices, classrooms, patient rooms and small shops. Multiple
units can be installed to accommodate larger rooms. The retail price of
our Series 14 is $990.00. For the twenty one months ended May 31, 2000, we
sold 116 of these units to our franchisees and national accounts.
- Series 18: Our Series-18 is a commercial unit which can service up to five
offices or rooms with inexpensive flex duct work. The unit is installed
above the ceiling and is out of view. The unit requires no modifications
to the existing heating and air conditioning system and operates in a very
quiet fashion. The retail price of our Series 18 is $2,990.00. For the
twenty one months ended May 31, 2000, we sold 48 of these units to our
franchisees.
- Series 30: Our Series 30 is in the laboratory test stage. The Series 30 is
a residential unit which is adaptable to existing duct work used in
existing heating, air conditioning and ventilation systems. We have built
prototype units for our sales models. We are engaged in preliminary market
discussions with various users and expect to begin production of the
Series 30 units on or about September 1, 2000.
- Series 999: We developed our Series 999 as an automotive after market
product for mounting 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 retail price of our
Series 999 is $600. For the twenty one months ended May 31, 2000, we sold
655 of these units. These sales were primarily to Airsopure 999, L.P. of
which Airsopure, Inc., our wholly owned subsidiary, is the general
partner.
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- Medicare Series 950: Our Medicare Series 950 is a free standing, portable
unit. In October 1999, our Medicare Series 950 unit was submitted to
Medicare for approval and issuance of a Medical reimbursement code number.
The Medicare reimbursement code number would enable Medicare recipients to
receive reimbursement for the cost of the Medicare Series 950 unit. We
have proposed to offer our Medicare Series 950 to Medicare recipients for
a retail price of $795. As of June 30, 2000, we have not sold any Medicare
Series 950 units to the Medicare market.
- Consumer Series 950: Our Consumer Series 950 unit is similar to the
Medicare Series 950 with alterations for a larger array of filtration for
contaminants. The estimated retail price of the Consumer Series 950 is
$1,495.00. As of May 31, 2000, we have sold 78 of these units since
January 2000.
- Down Draft Tables: Our down draft tables were designed for the nail
manicure industry and first introduced in January 1996. The units have
largely been discontinued with our remaining inventory of approximately 10
units available for a retail price of $2,000.00. We discontinued our down
draft table line based upon a decline in market demand which resulted in
production and marketing expenses exceeding proposed sales.
- Replacement Filters: We manufacture our sorbent media filters by
purchasing pre-filter material in bulk and cutting the material in our
production facility to proper sizes to fit our units. Our hospital grade
HEPA filters are out-sourced for production. The trisorbent filters are
also outsourced for manufacture, but assembled at our production facility.
The life of the filters required by our air purification units varies with
the type of unit 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 required by our ceiling units have a retail
price of $268 to $462 depending on uses. The automobile unit requires
approximately $100 in replacement filters per year and the portable
residential units approximately $150 per year.
PRODUCT DEVELOPMENT AND REDESIGN
We do not anticipate any major costs during fiscal year 2001 to develop or
redesign our existing products or our products in the developmental stage which
will not be offset by estimated product sales. Instead, we intend to focus our
available capital resources on the marketing and distribution of our current
line of marketable air purification products. We will, however, adapt or
redesign our products to meet changing customer demands or to respond to
requests in the market for made-to-order products. Our decision to redesign or
develop a particular product will be based upon whether estimated sales to
respond to a particular product need will be sufficient to offset estimated
development or redesign costs.
We anticipate start up costs during fiscal year 2001 on our Medicare and
Consumer Series 950 units and redesign costs on our Series S-14 unit. The
product cases for these units utilize a hardened plastic case which requires
injection molding. We estimate the engineering and mold tooling costs for these
units to be in the range of $500,000. We will not commit to these costs unless
our estimated sales of these units are sufficient to offset the costs.
We also intend to evaluate the inclusion of photocatalytic oxidation
technology into both our existing and developmental products for the purpose of
increasing the air purification efficiency of these products. Photocatalytic
oxidation occurs when ultra violet light waves are passed through a titanium
screen creating a chemical reaction. The chemical reaction increases air
purification efficiency by eliminating volatile compounds within the unit.
OPERATIONS
We currently maintain a warehouse production facility of approximately
10,000 square feet in Dallas, Texas. In this facility, we are able to assemble a
combined total of approximately 1,000 of our Series S-12,
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S-14, and S-18 units. We believe our warehouse facility is adequate for our
current and estimated future production needs for these units. Based upon our
anticipated unit volume sales of the Series 999 automobile unit and the Medicare
and Consumer Series 950 units, management elected during fiscal year 2000 to
outsource production of these units.
COMPETING PRODUCTS AND TECHNOLOGIES
The current air filtration products and technologies available in the market
which compete with our products include the following:
- Activated carbon filters for use in heating, ventilation and air
conditioning units
- High Efficiency Particulate Air ("HEPA") filters
- Ozone generators
- Anti-microbial chemically treated filters
- High energy UV light
- Ionizers
- Electrostatic precipitators
- Media filtration
- Photocatalytic oxidation technology
- Various combinations of the above
These products and technologies are individually designed to provide various
levels of "air filtration" of air contaminants and not "air purification." We
believe a combination of several of these products and technologies must be
implemented to achieve effective air purification. The individual air
purification ineffectiveness of these products is the result of the following
factors:
Activated carbon filters absorb a number of volatile compounds and large
microorganisms such as dust mite droppings, which stick to dust particles in the
air, but do not remove other microorganisms from the air. The efficiency rate
declines over time as the carbon filters are clogged with pollutants. The
process alone is non-regenerating and the filters can be expensive to operate
due to increased power usage resulting from pressure drops. These pressure drops
occur when filters are clogged, thereby cutting the unit's capacity and ability
to deliver air to remote areas. We use activated carbon filters in our products
in combination with other air purification components.
HEPA filter technology reportedly removes up to 99.7% of air borne particles
and is the dominant technology used 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 also ineffective in
removing extremely small organic compounds, microorganisms and some viruses.
HEPA filters are thick and produce pressure drops when installed within heating
and air conditioning systems. These pressure drops increase maintenance and
operating expenses because the heating and air conditioning system must work
continuously to compensate for pressure drops. On its own, HEPA technology does
not have the ability to destroy bioaerosols or trap and breakdown volatile
compounds or odors. Our products use HEPA filtration combined with 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
volatile compounds because ozone is highly oxidizing. To achieve the high
efficiency required, a very high level of ozone has to be released into the air.
Ozone itself, however, is a respiratory
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irritant. OSHA has established a limit of workplace ozone levels over an
eight-hour day. The FDA has also set a limit for ozone levels of electronic air
cleaners. We do not employ ozone in our products.
Anti-microbial chemically treated filters can serve as a pre-filter to the
more effective and expensive HEPA filter, capturing the larger particles flowing
through the product and thereby prolonging the life of the HEPA filter, which
captures the very small particles. On its own, an anti-microbial pre-filter can
introduce additional contaminants into the air, such as volatile compounds,
toxins, endotoxins, and allergens, by degrading microbial organisms trapped on
the anti-microbial filter. We use these filters in our products in combination
with other air purification components.
High energy UV light has proven to be effective in killing microbial life
but is ineffective in destroying volatile compounds. High energy UV light,
however, can pose a danger to humans similar to staring directly into sunlight.
We use a level of UV light in several of our products which is not harmful to
humans in combination with other air purification components.
Air cleaners such as ionizers can be up to 90% efficient which means they
remove 90% of some types of pollutants. We are not aware of any 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. This means charged particles migrate through the air
and stick to the first surface they run into such as walls, furniture or lung
tissue. The charged particles remain on the surface until dislodged to re-enter
the air again. We do not use ionizers in our products.
Electrostatic methods have no effect on the destruction of volatile
compounds nor are they effective on small bioaerosols that are not attached to
particulate matter. When electrostatic methods trap bioaerosols, either the
bacteria 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 an organic compound and reenter the air stream.
Electrostatic methods have no effect on reducing organic compounds or odors. We
do not use electrostatic methods of air cleaning.
Charged media filters are made from an electric conducting material
stretched across a frame. Applying a high electric voltage to the material
creates an electrostatic field. However, these electrostatic fields are
generally not sufficiently strong to eliminate most particles, severely reducing
effectiveness. We do not use charged media filters in our products.
Photocatalytic oxidation creates a reduction in most volatile compounds.
Photocatalytic oxidation occurs when ultra violet light waves are passed through
a titanium screen creating a chemical reaction. The chemical reaction eliminates
the volatile compounds collected in the air purification unit by reducing them
to harmless components or carbon dioxide and water. We use photocatalytic
oxidation in our products in combination with other air purification components.
COMPETITION
Our business is becoming increasingly competitive. Competition has increased
with society's growing awareness of air quality problems and the related demand
for air purification technology. We compete in both the commercial and
residential markets for air filtration and purification products.
The major competition for our products and markets is the domestic
commercial and residential heating, ventilation and air conditioning market.
This 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 sales were approximately $3.9 billion in 1999.
Trane is second in the industry with approximately $7.3 million in sales in
1999. Like Carrier, Trane competes in all segments of our industry including
commercial, residential, air conditioning, furnaces and heat pumps. Our other
competitors include the following companies:
10
<PAGE>
Fedders, Inc. (NASDAQ:FJC) is a holding company which manufactures and sells
a full line of room air conditioners and dehumidifiers, principally for use in
domestic residential markets. Annual sales for 1999 were $356 million.
Trion Inc., a newly acquired subsidiary of Fedders, Inc., has air
purification operations which consist of two principal segments: engineered
products and consumer products. The engineered products group designs,
manufactures and sells commercial indoor air quality and dust collection
equipment. The consumer products division manufactures and markets appliance air
cleaners, including both table top and free standing console units.
Environmental Elements designs equipment and supplies systems and services
to the air pollution industry through the design of large scale systems to
control gaseous emissions. In addition, Environmental Elements designs
electrostatic precipitators, fabric filters and scrubbing systems.
Honeywell, Inc. (NYSE:HON) has both commercial and consumer divisions of air
filtration products with primary sales generated from the consumer division.
Combined sales for these divisions during 1999 were $3.5 billion.
CECO Environmental Corp. (NASDAQ:CECE) has been in the air quality
technologies and services business for over 30 years. Annual sales for 1999 were
$40 million. CECO 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
products and services include industrial air filters, high performance filter
fabrics, environmental maintenance, monitoring and management services, waste
water treatment and air quality improvement systems. CECO is a full-service
provider to the steel, aluminum, automotive, aerospace, semiconductor, chemical
and metalworking industries.
United Air Specialists was established in 1966 to provide commercial and
industrial environmental air cleaning solutions worldwide through a diverse
product offering dust collection systems, industrial fluid coating systems and
industrial oil cleaning equipment. The United Air product line includes the
Smokeater, an electromatic precipitator cleaner. Designed to meet the needs of
each customer, United Air equipment is backed by strong performance guarantees,
technical support and years of experience.
Competition in the commercial indoor air quality market is very specialized
with no one company offering a complete line of air filtration equipment.
Commercial companies tend to specialize in very distinct market segments. In
most major metropolitan areas of the United States, there are also various small
commercial air filtration suppliers. We believe none of these suppliers has a
product line competitive with our commercial units. In the residential indoor
air quality market, many suppliers and manufacturers have a variety of air
filtration products, generally in the lower retail price range of approximately
$250.
We are currently unaware of any company which manufactures or distributes a
highly efficient or trunk-mounted air purification unit for the automobile
comparable to our Series 999. We anticipate, however, that our proposed
penetration of the automobile market will generate significant interest with
competition coming from established automobile manufacturers.
We believe that the applications for our product lines will have broad
appeal, since the implementation costs of our products are small compared to the
cost benefits that typically accrue to the user. We also believe our
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. Some of the advantages and benefits of our products are
as follows:
- Biological air contaminants are substantially destroyed and or removed
- The process cleans and purifies the air through multiple air changes
- The process is effective for microbes, endotoxins, toxins, allergens, and
organic compounds
11
<PAGE>
- No toxic chemicals are employed
- No ozone is generated or introduced into the air
- The process works well at room temperature
- The energy needs are low in stand alone systems outside of heating and air
conditioning systems
- Self-cleaning process does not reintroduce air contaminant residue into
the air stream
- After initial purchase, the products are very economical to operate,
including the price of filter replacements
MARKETS
Our market research has identified the following markets which may benefit
from our products:
- Medical and specialty facilities such as hospitals, clinics, nursing
homes, laboratories, day care centers, and emergency rooms. These
facilities represent a large market for our products. Also, any facility
where indoor air quality is critical to the safety and health of the
patients/customers is a potential market.
- The commercial heating, ventilation and air conditioning market is a
market which generated approximately $9 billion in sales during 1999 and
which we believe will experience continued sales growth in the future.
- The residential market consists of over 60 million homes with central
heating, ventilation and 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 industrial air quality.
- The transportation market includes automobiles, ambulances, buses,
limousines, railroads, aircraft, and cruise ships which have a specific
need for improved indoor air quality.
- People who suffer from upper respiratory discomfort and allergic reactions
due to poor indoor air quality at home, at work and in transportation
vehicles.
- People in vulnerable categories including older individuals in nursing
homes and hospitals, individuals who are susceptible to allergies, asthma
and other respiratory ailments, and young children.
Our technology provides an inexpensive solution to many of the indoor air
quality problems which affect the daily lives of these individuals. Health
conscious consumers are also becoming more particular about the air quality in
their environments. We believe this trend will lead to an increase in demand for
better air purification systems. We also believe that our combined technology
approach will outrank the solutions provided by other air filtration systems
that use traditional single methods for indoor air filtration and purification.
BUSINESS PLAN AND MARKETING STRATEGY
Traditionally, air purification systems are marketed and sold through a
single distribution channel comprised of heating and air conditioning
contractors or repairmen. Our strategy is to approach the market through
multiple distribution channels. We are not aware of any of our competitors who
utilize a multiple channel approach. We have targeted several distribution
channels for direct exposure of our products to educate consumers about the
costs and solutions for indoor air contamination. We believe that
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<PAGE>
this multiple channel approach combined with the quality of our products will
separate us from our competition. For example, we currently utilize the
following distribution channels:
FRANCHISES. We currently have 18 commercial franchisees who market and sell
our commercial building air purification products in various parts of the
United States. In February 2000, we commenced a franchise program for the
marketing and sale of our residential air purification products utilizing a
retail store outlet concept. We provide a five day Indoor Air Quality
Certification program for all of our approved franchisees. Each of our
franchisees has a protected territory. We also coordinate an advertising
program with our franchisees to provide an unlimited number of leads and
future potential accounts to serve. Our franchisees are not required to
exclusively market our products and may combine our products with competing
products. We commenced marketing the residential/ retail franchises in
February 2000 and have sold two franchises through June 30, 2000.
INTERNATIONAL LICENSES. We have licensed the distribution rights to our name
and technology in the countries of Taiwan, the Philippines, Turkey, Canada
and Spain. Effective May 31, 2000, we entered into a development agreement
with Aurora Products, Ltd. (Shanghai) for the distribution of our products
in the Peoples Republic of China. Aurora Products executed a $1,000,000
demand promissory note in return for the distribution rights. The note bears
interest at 12% per annum with all principal and interest due May 31, 2000.
As of August 31, 2000, we have received payments of $20,000 under the note.
Our existing international licenses are with one licensee for the entire
country. We may in the future, however, divide a country into several
licensed territories with multiple licensees. We intend to aggressively
pursue additional international distribution relationships during fiscal
year 2001. Our international licenses sell for a minimum of $100,000 per
country, depending on population.
MANUFACTURER'S REPRESENTATIVES. We estimate that there are approximately
260,000 heating and air conditioning representatives in the United States.
This unconsolidated group of professionals accounts for a significant amount
of the current sales of air purification and cleaning units. We intend to
make our products available to these representatives and recently employed
an individual with expertise in this market to coordinate this channel of
distribution. As of May 31, 2000, we have entered into agreements with six
local manufacturing representatives. In August 2000, we also entered into an
exclusive distribution agreement with Trinity Resources, Inc., our Oklahoma
distributor. The agreement provides for distribution of our products through
AES of Oklahoma (Carrier Corporation) in the State of Oklahoma.
INTERNET SALES. Internet usage has increased over the last several years and
consumer purchasing is expected to continue to grow in accordance with this
usage. Approximately 73% of website 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 website users also fit well with our
products. Most website users are well educated and earn significantly more
income than the national average. Our websites are www.airsopure.com or
www.airtechgroup.com. Since June of 1999, the Airsopure website was accessed
14,215 times and the Airtech website 19,365 times.
We have not made any sales directly attributable to our websites. On these
sites, visitors can educate themselves about our products and order online.
We intend 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. 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.
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<PAGE>
DIRECT SALES. We currently make direct sales through our corporate offices
to national accounts such as TGI Fridays, Bennigan's and Sullivans, in
addition to other local, regional and national accounts involved in the food
and beverage industry. We also intend to employ the direct sales approach to
school systems and government facilities during fiscal year 2001.
RETAIL DISTRIBUTION. In February 2000, we opened our first company retail
outlet in Dallas, Texas to facilitate the retail sale of our home consumer
products. Since February 2000, we have opened three additional retail
outlets in Arlington, Texas, Jackson, Tennessee and Kansas City, Missouri.
We intend to pursue the retail distribution of our products through
additional company and franchise operated retail outlets. These retail
outlets serve as prototype stores for our retail franchise program.
We are also exploring the following additional distribution channels for our
products:
MEDICARE AND DURABLE MEDICAL EQUIPMENT DISTRIBUTORS. Our research indicates
that physicians regularly recommend the use of portable air filtration
systems for patients suffering from chronic and acute episodes of illness
related to allergies, asthma and general upper respiratory distress, many of
whom are Medicare enrollees. These medical conditions are frequently
elevated from a chronic status to acute episodes due to the inhaling by
patients of various airborne contaminants. In the absence of a Medicare
reimbursement code, Medicare patients are generally forced to incur the
expense of such technology on a non-reimbursable basis.
In October 1999, we applied for a Medicare reimbursement code number for our
Medicare Series 950. We have not yet received approval for a specific
reimbursement code number to date, although Medicare has allowed us 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. We intend 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 Series 950 for direct cost reimbursement. We believe, however, that
the time necessary to duplicate or invent the technology included in the
Medicare Series 950, to create and test a prototype and to submit an
application to Medicare gives us a competitive lead time advantage over our
competitors in this market.
The Medicare reimbursement code is awarded through a review process
conducted under the direction of the Health Care Financing Administration
and its agencies that include the Statistical Agency for Durable Medical
Equipment Regional Council and the Durable Medical Equipment Regional
Council. Once awarded a Medicare reimbursement code, Medicare patients
suffering from respiratory problems are able to secure through a variety of
durable medical equipment providers, medical technology prescribed by their
attending physicians that will be paid for by Medicare or their insurance
carrier of record. Our research also indicates that third party payors such
as managed care and indemnity insurance plans will more readily reimburse
patients for our Medicare Series 950 after the product receives a Medicare
code. We estimate that approximately 31 million Medicare enrollees suffer
from some sort of upper-respiratory problem. Although the number of Medicare
enrollees has not changed significantly in the past three years, we believe
that the number of enrollees will increase significantly in the future with
the aging of the "baby boomers." These individuals represent the end-user
market for our Medicare Series 950. We have also developed the Consumer
Series 950 unit which is similar to our Medicare Series 950 unit with
alterations for a larger array of filtration for contaminants.
We have identified a national distribution network composed of durable
medical equipment distributors that have existing sales forces and marketing
infrastructures. Association with these distributors creates an immediate
distribution network for our Medicare and Consumer Series 950 units. This
distribution network would eliminate management challenges of creating and
maintaining our own
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<PAGE>
sales force or recreating the existing client bases of these distributors.
Medical equipment distributors currently interact with physicians providing
other medical devices such as walkers, wheelchairs, hospital beds and
electronic monitoring devices. Our Medicare and Consumer Series 950 units
will be a new product for medical equipment distributors within an industry
where the introduction of new products is not common. If we do not receive
approval from Medicare of our Medicare Series 950 unit, we intend to
continue our efforts to market the Consumer Series 950 through direct sales
to medical equipment distributors and by pursuing insurance carriers and
health care providers outside of the Medicare system. We cannot predict or
forecast the amount of any future sales which may be generated from the
Medicare or Consumer Series 950 units. Negotiations are in the early process
with several medical equipment distributors and we do not have any firm
commitments or final written agreements.
AUTOMOBILES AND PUBLIC TRANSPORTATION. Our research indicates that there
exists an increasing problem with abundant air contamination in automobiles
and public transportation vehicles across the United States. Our research
also indicates that no real technological solutions are being applied to
remove the harmful and irritating smells, gases and micro-particles that can
cause and exacerbate respiratory problems. We have 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 and the new and used car industry, are
the odors associated either with new material odors or with fabrics and
materials in the automobile cabin that have absorbed pollutants like
cigarette smoke for prolonged periods of time. 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 air conditioner's
evaporator. These fungi and spores can trigger allergic reactions and upper
respiratory problems for car passengers.
Nearly 200 million vehicles are in use across the United States. Of these,
approximately 150 million are passenger vehicles. Approximately 2 million
cars in the United States are owned by the major car rental companies and
approximately 3 million vehicles are government owned and used. Each year in
the United States, approximately 12 million new vehicles are sold by
automobile dealers. The majority of automobiles fall into the category of
used or more than one year old. The average American spends many 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. There are approximately
24,000 franchised new car dealers in the United States. Some auto makers,
such as Mercedes Benz and BMW, are experimenting with various air cleaning
systems.
We believe that all of these vehicles represent potential installations for
our Series S-999. We propose to initially penetrate this market through
agreements with nationwide auto after-market companies. Our proposal is to
wholesale our Series 999 automobile air purification unit for inclusion with
other after-market packages offered in the auto after-market such as
automobile customizing packages (custom pinstripping, gold ornamentation and
custom wheel coverings), fabric sealants and window tints. We believe a very
highly effective and affordable air purification device like our
Series S-999 will be widely accepted in the automobile after-market. We are
currently in preliminary negotiations with several national auto
after-market companies, but have no final commitments or agreements. In
addition, we are in the process of formulating a marketing strategy to
approach the rental car, government vehicle, and automobile dealer markets.
GOVERNMENT REGULATION
We operate under the disclosure document guidelines set forth by the Federal
Trade Commission under an FTC Rule which became effective October 21, 1979.
Under this FTC Rule, we are required to
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<PAGE>
comply with the FTC disclosure format or issue a Uniform Franchise Offering
Circular to all potential purchasers of a franchise. The uniform circular format
is a standard form disclosure document which is accepted by the FTC and most
states as an alternative to the FTC disclosure format. Our current uniform
circular is compliant in 37 states. In addition to this format, fourteen states
require additional information to be contained within the uniform circular for
sales of new franchises within their states. We recently received approval from
the State of California to offer our franchises, one of the additional
information states. Although we intend to seek approval of our franchise in
other additional information states in the future, we do not have any pending
applications. 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, we formed wholly-owned
subsidiaries, Airsopure, Inc., and Airsopure International Group, Inc., and
registered each entity as a franchisor. Each entity is in compliance with the
FTC Rules regarding its uniform circular.
PERMITS, PATENTS, TRADEMARKS, LICENSES AND COPYRIGHTS
We do not own any patents or copyrights for our products or promotional
materials. We do, however, have a registered trademark for the name "Airsopure"
and the related service mark "The Essence of Clean Air." In addition, we have
common law trademark protection for certain of our other trade names and service
marks. We also intend to pursue copyrights for certain of our promotional and
franchise training materials. While we believe our products are currently a
unique implementation of filter and air purification components in the current
market, our products are susceptible to duplication by utilizing current
technology and components. Therefore, we do not believe any of our products are
ultimately patentable and do not intend to apply for patent protection.
SUPPLIERS
We purchase the supplies and materials used in our business from a number of
vendors. As of June 30, 2000, our five principal suppliers who provided us with
materials used in our products were Revcor, Glasfloss, Tela Tool, Lesson Motor
and RSE, Inc. We purchase motors, fans, filters and plastic casings from these
suppliers. If we experience production difficulties from any of our principal
suppliers, alternative suppliers and vendors exist in the marketplace. We may,
however, experience production delays to enable an alternative supplier
sufficient time to produce supplies to our specifications. We do not expect any
delays to be material based upon our policy to maintain inventory levels
necessary to avoid production delays.
ESTIMATE OF RESEARCH AND DEVELOPMENT EXPENDITURES
We incurred various research and development expenditures of approximately
$50,000 for the fiscal year ended May 31, 2000 and $100,000 for the fiscal year
ended May 31, 1999. These expenditures included salaries, materials, finished
units, travel and correspondence.
EMPLOYEES
As of May 31, 2000, we had 24 employees including one part-time employee.
FISCAL YEAR
Our fiscal year is from June 1 to May 31 of each year.
ITEM 2. DESCRIPTION OF PROPERTIES
We maintain our executive offices at 15400 Knoll Trail, Suite 200, Dallas,
Texas. We also maintain a warehouse facility located at 12561 Perimeter, Dallas,
Texas. These facilities have a total of approximately 14,400 square feet and a
total rental cost for fiscal year 2000 of $89,250. We are committed to our
executive
16
<PAGE>
office lease until January 31, 2002 and our warehouse lease until May 15, 2001.
As of July 31, 2000, we also leased four retail facilities for aggregate annual
rentals of $62,900. We consider our facilities sufficient for our present and
currently anticipated future operations and believe that all of our properties
are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
On October 26, 1999, we were named as a defendant in a cause of action
styled Carlo Gavazzi Inc. v. Airtech International Corporation and Airtech
International Group, Inc., Cause No. 99-11101-D, County Court No. 4, Dallas
County, Texas. The complaint alleges damages for our failure to pay invoices for
goods shipped to us, goods not shipped to us and for raw materials. The
plaintiffs sought damages of approximately $1,600,000. We answered the complaint
with affirmative defenses and denied all of the plaintiff's allegations. In
addition, we filed a cross-claim against the plaintiffs for damages of
approximately $1,000,000. In July, 2000, we entered into a mutual settlement
agreement with the plaintiffs. The terms and conditions of the settlement
agreement are subject to a confidentiality agreement with the plaintiffs. The
terms of the settlement, however, will not have a material adverse affect on our
financial condition.
In 1997, we were 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 with the plaintiff's for office
facilities in New Jersey. We never occupied the space based upon the plaintiff
(lessor) failing to finish-out the space pursuant to our specifications. The
complaint alleges damages of approximately $607,000 for remaining lease
payments, finish-out costs and lost revenues. We 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 we are currently
in negotiations for a favorable settlement relating to the complaint, the
outcome of these negotiations is uncertain. We have established a reserve in our
consolidated financial statements in the amount of $200,000 in anticipation of a
settlement.
On March 2, 2000, we were named as a defendant in a cause of action styled
H.A.A., Inc. v. Airtech International Group, Inc., Cause No. 00CV-1603 (KMW), in
the United States District Court for the Southern District of New York. The
plaintiff originally sought the specific performance of an alleged contract
providing for our sale to the plaintiff of 1,854,386 shares of our common stock
for a cash purchase price of $419,000. After the original filing, the plaintiffs
amended their original complaint to include alleged damages of approximately
$1,000,000 as an alternative remedy to specific performance. The case is in the
latter stages of discovery and we intend to vigorously defend against the
plaintiff's claims.
We have been named as a defendant in a number of routine lawsuits arising in
the ordinary course of our business. In some of these cases a judgment was
rendered against us. We have answered these routine causes of action where
appropriate, negotiated settlements where appropriate and agreed to a payment
schedule with respect to others. We have fully reserved for these claims and
causes of action in our consolidated financial statements in the aggregate
amount of $62,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our shares of common stock are traded in the "over-the-counter" or "Bulletin
Board" market under the symbol "AIRG." High and low sales prices of our shares
of common stock for the quarters of fiscal years 2000 and 1999 were:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal Year 2000
4th Quarter........................................... $2.59 $ 1.00
3rd Quarter........................................... 3.53 0.60
2nd Quarter........................................... 0.90 0.25
1st Quarter........................................... 0.75 0.125
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
</TABLE>
NUMBER OF SHAREHOLDERS AND TOTAL OUTSTANDING SHARES
As of July 31, 2000, there were approximately 1,191 holders of record of our
common stock and we had approximately 21,116,942 shares issued and outstanding.
DIVIDENDS
We have paid no dividends on our shares of common stock and we have no
current intention to pay dividends on our shares of common stock in the future.
Holders of our Series "M" Convertible Preferred Stock have a preferred dividend
right to receive quarterly dividend distributions equal to 4.57% of the gross
revenues generated from sales of our Series 950 units until May 31, 2001. Except
for required dividend payments on the Series "M" convertible preferred stock, we
intend to retain any future earnings for reinvestment in our business. As of
May 31, 2000, no dividends have been paid on the Series "M" convertible
preferred stock. Any future determination to pay cash dividends on our common
stock will be at the discretion of our board of directors. Future dividends will
be dependent upon our financial condition, results of operations, capital
requirements and other relevant factors. As of January 1, 2000, we terminated
our offering of Series "M" convertible preferred stock and do not intend to
offer any additional shares in the future.
RECENT SALES OF UNREGISTERED SECURITIES
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR PRICE
SHARES PER ISSUED UNDER
DATE TITLE ISSUED SHARE NATURE OF TRANSACTION EXEMPTION
---- --------------- ---------- -------- ------------------------ ------------------
<S> <C> <C> <C> <C> <C>
February 22, 2000............... 6% Convertible $2,500,000 N/A Private Placement Section 4(2) of
Debentures with the Securities Act
attached
Warrants
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR PRICE
SHARES PER ISSUED UNDER
DATE TITLE ISSUED SHARE NATURE OF TRANSACTION EXEMPTION
---- --------------- ---------- -------- ------------------------ ------------------
<S> <C> <C> <C> <C> <C>
January 2000 thru March 2000.... 12% Convertible 350,000 N/A Private Placement Section 4(2) of
Debentures with the Securities Act
attached
Warrants
January 2000 thru Common 200,000 $0.25 to Private Placement Section 4(2) of
February 2000................. $0.75 the Securities Act
December 31, 1999............... Common 300,000 $0.19 Shares issued to CEO S-8 registration
and President for statement
services rendered
August 31, 1999................. Common 358,591 $0.34 to Shares issued to S-8 registration
$0.50 investment bankers, statement
consultants,
management, CEO and
President for services
rendered or to be
rendered.
June 30, 1999................... Common 1,200,000 $0.10 Shares issued to Section 4(2) of
accredited investors, the Securities Act
including
500,000 shares
to CR Saulsbury, Sr.
Warrants attached are
exercisable at $0.20
and expire on
May 31, 2000
May 31, 1999.................... Common 700,000 $0.10 Shares issued to Section 4(2) of
accredited investors, the Securities Act
including
500,000 shares
to Peter Kertes.
Warrants attached are
exercisable at $0.20
and expire on
May 31, 2000
February 28, 1999............... Common 1,583,134 $0.50 Shares issued to CEO Section 4(2) of
and President in the Securities Act
consideration of
deferred wages from
June 1, 1997 through
December 31, 1998
December 31, 1998............... Common 46,250 $0.50 Warrants exercised by Section 4(2) of
holders of Series M the Securities Act
Preferred Stock
November 30, 1998............... Common 828,000 $0.33 Shares issued to Section 4(2) of
accredited investors the Securities Act
including CR
Saulsbury, Sr.
November 30, 1998............... Common 224,000 $0.48 to Shares issued to S-8 registration
$0.69 investment bankers and statement
consultants for services
rendered
August 31, 1998................. Common 146,025 $1.25 to Shares issued to S-8 registration
$1.56 consultants and statement
employees for services
rendered
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR PRICE
SHARES PER ISSUED UNDER
DATE TITLE ISSUED SHARE NATURE OF TRANSACTION EXEMPTION
---- --------------- ---------- -------- ------------------------ ------------------
<S> <C> <C> <C> <C> <C>
July 31, 1998................... Common 2,614,286 $0.70 Conversion of Section 4(2) of
debentures issued in the Securities Act
conjunction with the
merger of ITC and AIC
July 31, 1998................... Common 2,371,603 One- Conversion of Series A Section 4(2) of
for- preferred stock issued the Securities Act
one in conjunction with the
merger of ITC and AIC
March 1998 thru Series M 1,143,750 $1.14 Private Placement Section 4(2) of
September 1998................ Preferred the Securities Act
</TABLE>
DESCRIPTION OF CONVERTIBLE SECURITIES
We have summarized below the material provisions of our securities which are
convertible into shares of our common stock.
SERIES "M" CONVERTIBLE PREFERRED STOCK AND RELATED WARRANTS
We have 1,143,750 shares of Series "M" Convertible preferred stock
outstanding. Holders of our Series "M" preferred have the right to convert their
shares into shares of our common stock on a one-for-one basis at any time. The
Series "M" preferred automatically converts to shares of our common stock on
December 31, 2001. The holders of Series "M" preferred are entitled to receive
quarterly dividend distributions equal to 4.57% of the gross revenues generated
from the sales of our Series 950 units until May 31, 2001. The dividends are
paid on or before the sixtieth day of each calendar quarter based upon the gross
revenues from our Series 950 unit from the previous quarter. The holders of
Series "M" preferred were also issued warrants to purchase 993,750 shares of our
common stock at an exercise price of $2.00 per share. These warrants expired on
May 31, 2000.
AIRSOPURE 999 LIMITED PARTNERSHIP INTERESTS
We have $430,000 of limited partnership interests outstanding in Airsopure
999, L.P. ("Airsopure LP"). Airsopure, Inc., our wholly-owned subsidiary
("Airsopure"), is the sole general partner of Airsopure LP. Under the limited
partnership agreement, the limited partners are entitled to receive 1.7% of the
gross revenues generated from sales of our Model S-999 automobile air
purification system with the remaining gross revenues paid to Airsopure. The
limited partners are entitled to receive distributions until December 31, 2003,
at which time 100% of gross revenues are paid to Airsopure. In addition,
Airsopure has guaranteed the limited partners a 150% return on their investment
by December 31, 2003. The guarantee, if payable, may at our election be in the
form of shares of our common stock.
12% CONVERTIBLE DEBENTURES DUE 2004 AND ATTACHED WARRANTS
In January 2000, our board of directors authorized the issuance of up to
$5,000,000 of our 12% Convertible Debentures Due 2004 under a private placement
memorandum. As of May 31, 2000, we have sold $350,000 in principal amount of our
12% debentures. At any time after one year from the date of issuance, holders of
our 12% debentures are entitled to convert our 12% debentures on a dollar for
dollar basis into shares of our common stock. Semi-annual interest payments are
due and payable on our 12% debentures commencing September 1, 2000. Each 12%
debenture in the principal amount of $25,000 includes a warrant to purchase
shares of our common stock at an exercise price of $2.00 per share. The warrants
expire two years from the date of issuance.
At our option, our 12% debentures may be converted on a dollar for dollar
basis into shares of our common stock or paid in cash at face value on the
maturity date. Prior to maturity, we may with the
20
<PAGE>
consent of the debenture holder, redeem our 12% debentures in cash at the
following redemption prices together with accrued interest to the date of
redemption:
<TABLE>
<CAPTION>
IF REDEEMED ON OR AFTER SEPTEMBER 1
OF THE FOLLOWING YEARS: % OF PRINCIPAL AMOUNT
----------------------------------- ---------------------
<S> <C>
2000 110%
2001 108%
2002 106%
2003 104%
2004 102%
</TABLE>
6% CONVERTIBLE DEBENTURES DUE 2002 AND ATTACHED WARRANTS
On February 22, 2000, we sold $2,500,000 in principal amount of our 6%
Convertible Debentures Due 2002 to PK Investors LLC. Our 6% debentures have a
maturity date of February 22, 2002 at which time the principal amount and all
accrued interest is due and payable. No interest payments are due prior to
maturity of the 6% debentures. We may, at our option, pay the accrued interest
at maturity by issuing shares of our common stock to the debenture holder at a
price equal to the conversion price of our common stock as described below. Our
6% debentures are convertible at any time at the option of the holder into
shares of our common stock. The conversion price of our common stock used in
calculating the number of shares issuable upon conversion (or in payment of
interest) is the lesser of:
- 110% of the average closing bid price of our common stock for the five
trading days prior to the date of initial payment; and
- the product obtained by multiplying 0.80 by the average of the three
lowest closing bid prices of our common stock during the thirty trading
days prior to the date we receive a conversion notice from a debenture
holder.
In the event we have a "change of control", the holders of our 6% debentures
may require us to redeem the 6% debentures at a redemption price equal to 125%
of the aggregate outstanding principal and accrued interest on the 6%
debentures. A "change of control" includes:
- acquisition by an entity or group of more than 50% of our voting stock;
- merger or consolidation;
- a change in a majority of our existing board of directors; or
- a sale of substantially all of our assets.
The holders of our 6% debentures also have attached warrants to purchase
250,000 shares of our common stock at an exercise price of $2.6124 per share.
The warrants expire on February 22, 2005.
CONDITIONAL WARRANT TO PURCHASE ADDITIONAL 6% DEBENTURES AND ATTACHED WARRANTS
On February 22, 2000, we issued to PK Investors LLC, a conditional warrant
to purchase up to an additional $2,500,000 in principal amount of our 6%
debentures with related attached warrants to purchase 250,000 shares of our
common stock. The conditional warrant expires on December 22, 2000. The
conditional warrant may be exercised by PK Investors in whole or in part at any
time prior to expiration. The terms and conditions of the 6% debentures and
warrants issuable upon exercise of the conditional warrant are the same as
described above, except that the exercise price of the warrants is equal to 110%
of the average closing bid price of our common stock on the over-the-counter
bulletin board market for the five trading days prior to the date of exercise of
the conditional warrant.
21
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical fact are
"forward-looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. The words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "believes," "estimates,"
"projects" or similar expressions are intended to identify these forward-looking
statements. These statements are subject to risks and uncertainties beyond our
reasonable control that could cause our actual business and results of
operations to differ materially from those reflected in our forward-looking
statements. The safe harbor provisions provided in the Securities Litigation
Reform Act do not apply to forward-looking statements we make in this report.
Forward-looking statements are not guarantees of future performance. Our
forward-looking statements are based on trends which we anticipate in our
industry and our good faith estimate of the effect on these trends of such
factors as industry capacity, product demand and product pricing. The inclusion
of projections and other forward-looking statements should not be regarded a
representation by us or any other person that we will realize our projections or
that any of the forward-looking statements contained in this prospectus will
prove to be accurate.
BACKGROUND AND GENERAL
Based upon a review of our financial statements for the year ended May 31,
1999 and the recommendations of the SEC, we restated and refiled our financial
statements for the year ended May 31, 1999 and the comparative period ended May
31, 1998. The reason for the restatement of our 1999 financial statements was to
reflect the acquisition by Interactive Technologies Corporation, Inc., our
predecessor in name, of all of the outstanding shares of common stock of Airtech
International Corporation as a reverse merger as described below.
On May 31, 1998, Interactive Technologies acquired all of the outstanding
shares of common stock of Airtech Corporation for a purchase price of
$22,937,760. Our prior 1999 financial statements reflected the combination
between Interactive Technologies and Airtech Corporation as a merger using the
purchase method of accounting with Interactive Technologies as the acquiring
entity for legal and financial accounting and reporting purposes. This treatment
resulted in reflecting the combination of Interactive Technologies' assets and
the purchase of the goodwill and intellectual properties of Airtech Corporation
at the appraised fair market value.
Our restated 1999 financial statements also reflected the merger between
Interactive Technologies and Airtech Corporation utilizing the purchase method
of accounting. Our 1999 restated financial statements, however, reflected the
combination as a reverse merger with Airtech Corporation as the acquiring entity
for accounting and reporting purposes and Interactive Technologies as the
surviving entity for legal purposes. This reverse merger treatment follows the
SEC recommendation. As a result, Interactive Technologies effectively issued
shares of common stock for the outstanding shares of Airtech Corporation, with
the stockholders of Airtech Corporation ultimately acquiring control of
Interactive Technologies. For this reason, Airtech Corporation is considered the
acquiring entity for purposes of our 1999 restated financial statements.
After the acquisition of Airtech Corporation, we discontinued the original
line of business of Interactive Technologies. We discontinued this original line
of business to enable us to concentrate on the development, manufacture,
distribution, and sale of the air purification products offered by Airtech
Corporation and its subsidiaries. Effective May 31, 1999, we also discontinued
the operations of our wholly owned subsidiary, McCleskey Sales and
Service, Inc. McCleskey Sales was originally formed to integrate the
distribution and sale of our air purification products with the heating,
ventilation and air conditioning service and repair business. We discontinued
the operation of McCleskey Sales based upon the incompatibility of the heating
and air conditioning service and repair business with our business of
manufacturing and distributing high quality air purification products. Our cash
expenses to discontinue the operations of McCleskey Sales were minimal.
22
<PAGE>
On February 22, 2000, we entered into a securities purchase agreement with
PK Investors LLC to raise up to $5,000,000 through the sale to PK Investors of
up to $5,000,000 in principal amount of our 6% Convertible Debentures Due 2002
with attached warrants to purchase up to 500,000 shares of our common stock.
Upon execution of the securities purchase agreement, PK Investors purchased
$2,500,000 in principal amount of 6% debentures with attached 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 PK
Investors 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.
The conditional warrant expires on December 22, 2000.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MAY 31, 2000 COMPARED TO YEAR ENDED
MAY 31, 1999
Our consolidated results of operations for the fiscal year ended May 31,
1999 represent the first year of operations after the reverse merger with
Airtech Corporation. As described above, the combination of Interactive
Technologies, our predecessor in name, and Airtech Corporation was accounted for
as a reverse merger with Airtech Corporation treated as the acquiring entity for
financial reporting purposes and Interactive Technologies as the surviving legal
entity. As a result of the reverse merger between Interactive Technologies and
Airtech Corporation, we are the surviving legal entity under the name Airtech
International Group, Inc.
REVENUES
Our consolidated total revenues increased approximately $597,007.00 or 58%
from $1,030,469 in 1999 to $1,627,476 in 2000. This 58% increase in sales is
comprised of the following: product sales of the discontinued service line of
our subsidiary McCleskey Sales decreased $412,027 from $412,027 in 1998 to $0 in
2000 due to the cessation of that business; and product sales from our air
purification products increased $155,203 or 40% in 2000 to $543,615 from
$388,412 in 1999. The combined effect of these first two components of our
product sales resulted in a $101,621 reduction in total product sales. The
decrease in our product sales was offset by increased franchise fees from the
sale of twenty local franchises in 1999 compared to three larger geographic
franchises in 2000. The sale of the larger geographic franchises resulted in the
$945,121 or 468% increase in franchise fees in 2000 from the $229,000 in
franchise fees for 1999. We discontinued the service and repair line of
McCleskey Sales 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
Our consolidated total costs and expenses decreased $1,246,185 or 76% from
$5,206,640 in 1999 to $3,960,455 in 2000. The major components of this
$1,246,185 decrease were:
Salaries and wages decreased $329,313 or 25% from $1,317,076 in 1999 to
$987,763 for 2000. This decrease is the result of many factors including lower
commissions on sales of our products, franchises, and internal financing
activities and lower incentive stock bonuses to key personnel. The combination
of these items represented approximately $329,313 of the decrease in 2000 from
1999 in salaries and wages. The decrease in deferred officer wages of $791,667
for 2000 is also due to a one time accrual of an additional 18 months or
$791,667 in unpaid wages to our president and chief executive officer in 1999
for prior years. The two officers waived the wage payments under their
respective employment agreements during prior periods. In January 1999, our
board of directors elected to accrue the full amount of the prior service cost
wages in 1999. The total accrued for the period in deferred officer wages
totaled $791,667 in 1999 compared to $0 in 2000. Our board of directors also
elected to issue in 1999 restricted common stock of 1,583,334 shares as full
compensation for the 18 months of deferred wages.
Cost of sales decreased $144,753 or 22% to $519,603 for 2000 as compared to
$664,356 for 1999. This decrease is due to two primary reasons. First, the
discontinuance of the McClesky Sales line of business, for which we recognized
additional close out expenses due to this discontinuance. The discontinuance
23
<PAGE>
resulted in cost of sales for McCleskey Sales of more than 100% of revenues or
$420,000 for 1999. Second, the cost of sales for continuing operations revenues
of $388,412 for 1999 increased from $244,356 or 62% of sales for 1999 to
$366,603 or 67% of sales of $543,615 for 2000. This increase in percentage cost
of sales was due to
- outsourcing the manufacturing at a higher cost of many components which we
previously manufactured,
- lower gross sales prices than anticipated due to our desire to increase
market share,
- fewer sales thus not fully utilizing our manufacturing facility, and
- lower production runs with consequential higher costs.
The difference in the cost of sales of $519,603 for 2000 and the $366,603
discussed above is due to a reduction of cost of sales to reflect a write-off of
receivables and inventories of $153,000 for the year 2000.
Advertising costs increased $65,134 to $107,216 for 2000. This is a 255%
increase in costs. The increase is due to the introduction of two new products
and the implementation of our new residential franchise sales approach, which
increased promotional costs, including brochures and travel expenses.
Depreciation and amortization increased $165,739 to $295,673 for the year
2000 compared to $129,934 for 1999. This increase is primarily due to greater
amortization of our prepaid royalties of $104,167 for 2000 compared to $0 in
1999.
General and administrative expenses increased $371,445 to $2,050,200 for the
year 2000 from $1,678,775 in 1999. This 22% increase is due to higher legal fees
from continuing litigation and an increase of over $300,000 from prior years for
outside consultant fees and investment bankers fees on the sale of our
debentures.
Interest expense of $108,615 for 2000 is lower than the $135,288 interest
expense in 1999 primarily due to the interest accrual on the outstanding
debentures issued in the reverse merger with Interactive Technologies which were
outstanding in 1999. This interest accrual in 1999 is less than the accrual for
the year 2000 on our outstanding 6% and 12% debentures.
We also wrote off the asset investment in the discontinued subsidiary,
McCleskey Sales, of $582,750 in 1999 as a loss on impairment of goodwill. There
was no comparable write-off in 2000.
The result of these revenues and costs and expenses is a net loss of
($2,441,594) or ($0.14) per share of common stock (basic and diluted)for the
year 2000 compared to a net loss of ($4,311,459) or ($0.50) per share of common
stock for 1999. This represents a 57% decrease in our net loss and a 28%
decrease in loss per share of our common stock compared to 1999. The average
number of shares of our common stock increased from 1999 to 2000 so the loss per
share on our common stock is not comparable.
CAPITAL EXPENDITURES
We do not have any large capital expenditures planned for fiscal year 2001.
We are proposing a product design change to include a plastic casing 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 us 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. These capital expenditures would also be
offset by increased product sales which would create the need to increase our
current manufacturing capacities.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We reflected a continued liquidity problem during the nine months ended
February 29, 2000. Purchases from our material vendors were predominantly on a
cash basis, however, our vendors did not force payment on past due bills. Our
primary available means of liquidity during the nine month period was the
increased use of our common stock as payments for services. In February 2000, we
sold $2,500,000 in principal amount of our 6% debentures which increased our
liquidity to meet our cash needs for inventory and product sales.
As of May 31, 2000, we had total current assets of $2,772,031 less current
liabilities of $1,569,835 which resulted in net current assets of $1,202,196.
This increase in net current assets exceeded the ($1,055,995) of net current
liabilities at May 31, 1999 and increased our current asset liquidity by
$2,258,191. This increase in current asset liquidity is the result of the
proceeds from the sale of our 6% debentures in February 2000 which allowed us to
increase cash, accounts receivables and inventory while reducing accounts
payable. We expect to have sufficient funds necessary to finance the
manufacture, distribution and sale of our products including management and
advertising support for fiscal year 2001. We also expect that our cash balance
and operations are adequate to sustain our continued operations during fiscal
year 2001.
Our goal is to sell 50 to 100 franchises to qualified entities and
individuals during fiscal year 2001. We expect to sell these franchises for up
to $25,000 per sale plus up to $25,000 in inventory per sale. As of August 31,
2000, we have sold eight franchises, however, our sale efforts are only four
months in process. Our estimated franchise sales are based upon our good faith
estimate of the market for our franchises and our products. We cannot assure you
that our franchise sales will meet our goals. If we sell 75 new franchises,
which is the average of our projected goal, we will generate approximately
$1,875,000 in franchise sales.
We also expect sales of our products to increase in fiscal year 2001. For
the year 2000, our product sales were approximately $543,615 compared to sales
of our products for the year ended May 31, 1999 of $388,412. This trend
indicates the sales of our existing product line is increasing. Although we
believe our sales represent a positive trend, we cannot assure you that this
positive trend will continue. We have forecasted that fiscal year 2001 sales
will be $30,000,000. This estimate is based on the following:
- Continued market acceptance of our existing commercial product line and an
estimated increase of twenty new heating, ventilation and air conditioning
or indoor air quality distributorships resulting in $2,000,000 in sales;
- Estimated sales of $4,000,000 of our new in-line, ducted Model S-30 which
is an air-sanitizer for the entire home;
- Sales to our residential franchisees are expected to be over $6,000,000 in
product sales and franchise revenues;
- International sales, especially to our Pacific Rim distributors (and other
existing international distributors), are expected to reach $2,000,000;
- We are engaged in merger/acquisition discussions with several entities
that could result in combined product sales of $6,000,000. For example, we
entered into a letter of intent on August 25, 2000 to purchase two indoor
air quality distribution companies in Chicago, Illinois and Detroit,
Michigan; and
- If we receive Medicare approval for the Medical 950 we expect to sell
$10,000,000 to the governmental, private and supplemental insurance and
medical industries.
Our sales projections are based upon our good faith estimates of the
marketability of our products and we cannot assure you that we will achieve
these results during fiscal year 2001.
We have forecasted that our net after tax income will be $10,000,000 for the
year 2001. This estimate is based upon our projected sales discussed above. Due
to our $18,500,000 of net operating loss carry
25
<PAGE>
forwards resulting from our losses in prior years, we are not projecting any
federal tax liability for fiscal year 2001.
If our current cash and revenues from franchise and product sales are
insufficient to fund our continued growth, we will rely on our external funding
sources to provide continued liquidity. For the year 2000, we increased cash
from financing activities by approximately $3,949,756. This amount includes
$2,500,000 from the sale of our 6% debentures with 250,000 attached warrants to
PK Investors LLC, approximately $350,000 in sales of our 12% debentures to
private investors and approximately $1,100,000 from private placements of our
common stock. Under our agreement with PK Investors, they may exercise a
conditional warrant to purchase an additional $2,500,000 in principal amount of
our 6% debentures with 250,000 attached warrants. PK Investors may exercise the
conditional warrant at any time prior to December 22, 2000. Although we believe
PK Investors is committed to providing additional funds to us by exercising the
conditional warrant, we cannot assure you that PK Investors will exercise the
warrant.
The $2,500,000 in principal amount of 6% debentures held by PK Investors
includes attached warrants to purchase 250,000 shares of our common stock. In
addition, if PK Investors exercises its conditional warrant to purchase an
additional $2,500,000 in principal amount of our 6% debentures they will receive
additional warrants to purchase 250,000 shares of our common stock. If PK
Investors exercises all 500,000 warrants to purchase our common stock, we could
receive up to $1,300,000 in cash from the exercise. The warrants currently held
by PK Investors and any additional warrants acquired by PK Investors through
additional purchases of our 6% debentures expire on February 22, 2005. We cannot
assure you that PK Investors will exercise any warrants in the future.
We are currently in negotiations with a group of private investors to
purchase up to $650,000 in principal amount of our 12% debentures. As of March
31, 2000, we had previously sold $350,000 in principal amount of 12% Debentures
to private investors. We cannot assure you that we will be successful in our
efforts to sell our 12% Debentures. These Debentures have attached warrants
allowing them to exercise a like amount of warrants for up to $2,000,000 in
exercise proceeds to us. We cannot assure you that these debenture holders will
exercise any warrants in the future.
During fiscal year 2001, we intend to focus on the production, marketing and
sale of our existing line of air purification products, our new in line Model
S-30 and increased promotion of our franchise and distributorship program. For
this reason, we do not project significant expenditures during fiscal year 2001
on our products which are in the research and development stage. We believe our
existing product line is sufficient to sustain our future sales growth. If we do
not receive Medicare approval of our Medicare 950, we intend to actively pursue
the marketing of this unit through private health insurance companies and health
care providers.
We do not have a large capital expenditures program planned for fiscal year
2001. Therefore, we believe our projected increase in franchise and product
sales combined with funds generated from external financing sources will be
sufficient to offset any cash losses from operations. If our current and new
product sales, distributor/franchise sales, new areas of distribution sales and
funds from our external sources are insufficient to maintain operations, the
resulting lack of capital could force us to substantially curtail or cease our
operations. Any curtailment of operations would have a material adverse effect
on our ability to manufacture and distribute our products and our profitability.
26
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO COMBINED FINANCIAL INFORMATION
AIRTECH INTERNATIONAL GROUP, INC.
<TABLE>
<CAPTION>
ITEM PAGE
---- --------
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of May 31, 2000 and 1999..... F-3
Consolidated Statements of Operations for the Years Ended
May 31, 2000 and 1999..................................... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended May 31, 2000 and 1999......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
May 31, 2000 and 1999..................................... F-7
Notes to Financial Statements for May 31, 2000 and 1999..... F-8
</TABLE>
27
<PAGE>
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, 2000 and 1999, 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, 2000 and 1999,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
TURNER, STONE & COMPANY, LLP
Certified Public Accountants
August 31, 2000
28
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $1,487,646 $ 61,808
Trade and licensing fees receivables, net of allowance for
doubtful accounts of $20,000 and $0, respectively....... 269,971 173,951
Notes receivable, current portion......................... 437,250 143,750
Inventory................................................. 538,952 242,665
Prepaid expenses.......................................... 38,212 --
---------- ----------
Total current assets.................................. 2,772,031 622,174
PROPERTY AND EQUIPMENT--net of accumulated depreciation of
$166,589 and $119,634, respectively....................... 156,288 89,569
NOTES RECEIVABLE--net of current portion, net of allowance
for doubtful accounts of $0 and $0, respectively.......... 1,175,000 431,250
OTHER ASSETS
Goodwill, net of accumulated amortization of $35,810 and
$71,621, respectively................................... 107,432 143,243
Intellectual properties, net of accumulated amortization
of $146,800 and $38,060, respectively................... 940,597 1,049,337
Prepaid royalties and other assets, net of accumulated
amortization of $104,167 and $0, respectively........... 412,381 514,208
---------- ----------
Total other assets.................................... 1,460,410 1,706,788
---------- ----------
$5,563,729 $2,849,781
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable, trade................................... $ 260,102 $ 510,193
Accrued payroll, other wages and related burden........... 407,134 301,769
Other accrued expenses.................................... 415,076 372,534
Advances payable to officers.............................. 210,338 216,488
Notes payable............................................. 277,185 277,185
----------- -----------
Total current liabilities............................. 1,569,835 1,678,169
LONG-TERM LIABILITIES
Deferred revenue.......................................... 340,000 400,000
Product marketing obligation.............................. 430,000 405,000
Convertible debentures.................................... 2,850,000 --
----------- -----------
Total long-term liabilities........................... 3,620,000 805,000
Total liabilities..................................... 5,189,835 2,483,169
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY
Preferred stock--5,000,000 shares authorized, $.005 par
value
Series A cumulative, convertible preferred, no shares
issued and outstanding liquidation preference of $1
per share............................................. -- --
Series M cumulative, convertible preferred, 1,143,750
and 1,143,750 shares issued and outstanding,
respectively; liquidation preference of $1 per share,
aggregating $ and $ respectively.................. 1,144 1,144
Common stock--$.05 par value, 50,000,000 shares
authorized, 20,939,216 and 13,207,532 shares issued and
outstanding, respectively............................... 1,046,961 660,376
Additional paid-in capital................................ 7,609,256 5,546,965
Retained deficit.......................................... (8,283,467) (5,841,873)
----------- -----------
Total stockholders' equity............................ 373,894 366,612
----------- -----------
$ 5,563,729 $ 2,849,781
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
REVENUES
Product sales............................................. $ 543,615 $ 800,439
Franchisee fees........................................... 1,072,500 229,000
Other revenues............................................ 11,361 1,030
----------- -----------
Total revenues.......................................... 1,627,476 1,030,469
COSTS AND EXPENSES
Salaries, wages and other compensation.................... 987,763 1,317,076
Deferred officer wages.................................... -- 791,667
Cost of sales............................................. 519,603 664,356
Advertising............................................... 107,216 42,082
Depreciation.............................................. 46,955 38,564
Amortization.............................................. 248,718 91,370
Loss on impairment of goodwill............................ -- 582,750
Other general & administrative expenses................... 2,050,200 1,678,775
----------- -----------
Total costs and expenses................................ 3,960,455 5,206,640
----------- -----------
LOSS FROM OPERATIONS........................................ (2,332,979) (4,176,171)
Interest expense............................................ (108,615) (135,288)
----------- -----------
LOSS BEFORE INCOME TAXES.................................... (2,441,594) (4,311,459)
Income tax benefit.......................................... -- --
----------- -----------
NET LOSS.................................................... $(2,441,594) $(4,311,459)
=========== ===========
LOSS PER COMMON SHARE--BASIC................................ $ (0.14) $ (0.50)
=========== ===========
LOSS PER COMMON SHARE--DILUTED.............................. $ (0.14) $ (0.50)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK PREF. SERIES M PREF. SERIES A
----------------------- -------------------- -------------------
DESCRIPTION SHARES $ SHARES $ SHARES $
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT 5/31/98................................... 10,059,923 $ 502,996 1,029,750 $1,030 -- $--
Issuance of Series M preferred stock, net of offering
costs.............................................. 114,000 114
Cancel shares in July................................ (680,000) (34,000) -- -- -- --
Issuance of common stock according to S-8
registration....................................... 670,025 33,500 -- -- -- --
Issuance of common stock for cash.................... 828,000 41,400
Issuance of common stock on exercise of warrants..... 46,250 2,313
Issuance of common stock for deferred wages to
officers........................................... 1,583,334 79,167
Issuance of common stock in May...................... 700,000 35,000
Net loss during the year............................. -- -- -- -- -- --
--------------------------------------------------------------------
BALANCE AT 5/31/99................................... 13,207,532 660,376 1,143,750 1,144 0 0
Issuance of common stock for cash.................... 4,196,850 209,842
Issuance of common stock in exchange for services.... 1,796,879 89,843
Issuance of common stock on exercise of warrants..... 337,500 16,876
Issuance of common stock to vendors for payment of
trade payables..................................... 1,400,455 70,024
Net loss during the year.............................
--------------------------------------------------------------------
BALANCE AT 5/31/00................................... 20,939,216 $1,046,961 1,143,750 $1,144 0 $--
====================================================================
<CAPTION>
PAID-IN RETAINED
DESCRIPTION CAPITAL EARNINGS TOTAL
----------------------------------------------------- --------------------------------------
<S> <C> <C> <C>
BALANCE AT 5/31/98................................... $4,049,736 $(1,530,414) $ 3,023,348
Issuance of Series M preferred stock, net of offering
costs.............................................. 98,890 99,004
Cancel shares in July................................ 34,000 -- --
Issuance of common stock according to S-8
registration....................................... 361,427 -- 394,927
Issuance of common stock for cash.................... 234,600 276,000
Issuance of common stock on exercise of warrants..... 20,812 23,125
Issuance of common stock for deferred wages to
officers........................................... 712,500 791,667
Issuance of common stock in May...................... 35,000 70,000
Net loss during the year............................. -- (4,311,459) (4,311,459)
--------------------------------------
BALANCE AT 5/31/99................................... 5,546,965 (5,841,873) 366,612
Issuance of common stock for cash.................... 780,494 990,336
Issuance of common stock in exchange for services.... 526,563 616,406
Issuance of common stock on exercise of warrants..... 67,544 84,420
Issuance of common stock to vendors for payment of
trade payables..................................... 687,690 757,714
Net loss during the year............................. (2,441,594) (2,441,594)
--------------------------------------
BALANCE AT 5/31/00................................... $7,609,256 $(8,283,467) $ 373,894
======================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(2,441,594) $(4,311,459)
Adjustments to reconcile net income to cash
Depreciation and amortization........................... 295,673 129,934
Impairment of goodwill -- 582,750
Net (gain) loss on disposition of assets................ -- (51,672)
Stock payments to employees and consultants............. 616,406 1,129,593
Allowances and write offs............................... 20,000 411,000
Changes in operating assets and liabilities
Accounts receivable..................................... (116,020) (21,814)
Inventory............................................... (296,287) 41,667
Prepaid expenses and other assets....................... (40,552) 67,214
Notes receivable........................................ (1,037,250) --
Accounts payable........................................ 507,623 373,238
Accrued expenses........................................ 141,757 716,163
Deferred revenue........................................ (60,000) --
----------- -----------
Net cash used in operating activities................. (2,410,244) (933,386)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment..................... (113,674) --
Disposals of fixed assets................................. -- 66,058
Expenditures for other assets............................. -- (89,837)
----------- -----------
Net cash used in investing activities................. (113,674) (23,779)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net of offering
costs................................................... -- 99,004
Proceeds from issuance of common stock.................... 1,074,756 369,125
Reciepts from product marketing obligation................ 25,000 405,000
Proceeds from convertible debentures...................... 2,850,000 --
----------- -----------
Net cash provided by financing activities............. 3,949,756 873,129
INCREASE (DECREASE) IN CASH................................. 1,425,838 (84,036)
CASH. BEGINNING OF PERIOD................................... 61,808 145,844
----------- -----------
CASH, END OF PERIOD......................................... $ 1,487,646 $ 61,808
=========== ===========
SUPPLEMENTAL CASH FLOWS DISCLOSURES
Interest paid............................................. $ 30,000 $ 8,319
Income taxes paid......................................... $ -- $ --
Non-cash investing and financing activities:
Common stock issued in settlement of accounts payable... $ 757,714 $ --
Common stock issued in exchange for services............ $ 616,406 $ 1,129,593
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Airtech International Group, Inc. (the Company), (formerly Interactive
Technologies Corporation, Inc.), 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 2,100,000 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 2) 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 is being
amortized using the straight-line method over 5 years.
Results of operations of Interactive Technologies Corporation are included
in the accompanying consolidated statements of operations beginning June 1,
1998.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the general
accounts of the Company and its subsidiaries, AIC, Airsopure, Inc., Airsopure
International Group, Inc. and McCleskey Sales and Service, Inc., each of which
have fiscal year ends of May 31. All material intercompany accounts, balances
and transactions have been eliminated in the consolidation.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and long-lived assets and
certain identifiable intangibles to be disposed of. The Company periodically
evaluates, using independent appraisals and projected undiscounted cash flows,
the carrying value of its long-lived assets and certain identifiable intangibles
to be held and used whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In addition, long-lived
assets and identifiable intangibles to be disposed of are reported at the lower
of carrying value or fair value less cost to sell.
AMORTIZATION
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 using the straight-line method over 10 years beginning when
the product is initially inventoried for sale. For the years ended May 31, 2000
and 1999, amortization expense totaled $108,740 and $38,060, 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, 2000 and 1999,
amortization expense totaled $35,811 and $35,810, respectively.
Goodwill relating to the Company's purchase of its McClesky Sales and
Services subsidiary in 1995 was 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.
34
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A prepaid royalty fee, paid pursuant to a December 1995 agreement and
related to the Company's portable medicare unit, is being amortized using the
straight-line method over 24 months beginning in January 2000. For the years
ended May 31, 2000 and 1999, amortization expense totaled $104,167 and $0,
respectively.
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, 2000 and 1999, inventories consisted of the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Finished goods.............................................. $356,916 $200,506
Component parts............................................. 182,036 42,159
-------- --------
$538,952 $242,665
======== ========
</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.
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 7).
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.
35
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
time deposits and short term cash equivalent investments 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 17,368,684 and 10,583,635,
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.
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 the AIC acquisition and, therefore, are not shown as
outstanding at May 31, 1998 in the accompanying consolidated statements of
stockholders' equity.
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. Through May 31, 1999, 1,143,750 of these shares were issued for $1.00
cash, net of $203,379 of offering costs. 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
36
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PREFERRED STOCK (CONTINUED)
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. As of May 31, 2000, the
Company had sold 78 of these units and owes $5,364 under the participation plan.
3. NOTES RECEIVABLE
Notes receivable relate to AIC sales of geographic franchise licenses
(Note 1), bear interest at 6% to 12%, are payable in terms ranging from 12 to
48 months and are secured by the area franchises. Credit is extended on
evaluation of the payee's financial condition and general credit information.
Prior to May 31, 2000, the Company did not strictly enforce collection while it
completed development of its product line of air purification products.
At May 31, 2000 and 1999, notes receivable are comprised of the following:
<TABLE>
<CAPTION>
2000 1999
---------- ---------
<S> <C> <C>
Domestic franchise licenses................................. $ 157,250 $ 300,000
International franchise licenses............................ 1,455,000 275,000
---------- ---------
1,612,250 575,000
Less current portion........................................ (437,250) (143,750)
---------- ---------
$1,175,000 $ 431,250
========== =========
</TABLE>
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, 2000 and 1999, all of these
notes, totaling $277,185, were in default.
5. CONVERTIBLE DEBENTURES
AIC ACQUISITION DEBENTURES
In connection with the Company's acquisition of AIC (Note 1), the Company
also issued $9,000,000 of convertible debentures secured by the AIC shares
acquired. The debentures bear interest at 10%, are 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 the
AIC acquisition and, therefore, are not shown as outstanding at May 31, 1998 but
included in additional paid in capital in the accompanying consolidated
statements of stockholders' equity.
CONVERTIBLE DEBENTURES (12%)
During the year ended May 31, 2000, the Company issued $350,000 of
convertible debentures maturing on September 1, 2004. Interest is payable at 12%
semi-annually beginning September 1, 2000. The debentures are convertible at the
holder's option any time beginning one year after issuance at a conversion price
of $1.00 per share. The Company, with the consent of the holder, may redeem the
debentures at a price ranging from 110% of the principal amount if redeemed
prior to September 1, 2001 to 100% of the principal amount at maturity of the
principal amount of the debentures.
37
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CONVERTIBLE DEBENTURES (CONTINUED)
The debentures include warrants to purchase 350,000 common stock shares at a
price of $2.00 per share. The warrants expire two years from the date of
issuance.
CONVERTIBLE DEBENTURES (6%)
During the year ended May 31, 2000, the Company issued $2,500,000 of
convertible debentures maturing on February 22, 2002. Interest accrues at 6% and
is payable in full at maturity. The debentures are convertible at the holder's
option at any time at a conversion price equal to the lesser of (a) 110% of the
average closing bid price of the Company's common stock for the five trading
days prior to the date of initial payment or (b) 80% of the average of the three
lowest closing bid prices of the Company's common stock during the 30 trading
days prior to the date a conversion notice is received from a holder. In the
event of a change in control of the Company, the holders' can require redemption
of the debentures at a price equal to 125% of the aggregate outstanding
principal and accrued interest.
The debentures include warrants to purchase 250,000 common stock shares at a
price of $2.61 per share. The warrants expire on February 22, 2005.
Additionally, the holders of these debentures have an option to acquire an
additional $2,500,000 of debentures under the same terms, which include
additional warrants to purchase 250,000 common stock shares at a price of $2.61
per share. This option expires December 22, 2000.
6. 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. 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 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. As of May 31, 2000 and 1999, a reserve totaling $200,000 has been
established in anticipation of settling this obligation.
The Company is also defendant in a lawsuit filed by a corporation claiming
damages of up to $1 million for breach of a stock purchase agreement, which was
never consummated. Management believes its defenses are strong and plans on
vigorously defending this lawsuit. Although the Company anticipates a favorable
settlement of this lawsuit the outcome of it is uncertain. The Company has not
accrued a loss for this contingency in the accompanying consolidated financial
statements.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is currently obligated under noncancellable operating leases for
its Dallas office and warehouse facilities, which expire through December 2003.
The leases also provide for payment of the Company's share of operating costs
and contain renewal options at prevailing market rates.
38
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum future rental payments required under the above operating lease is
as follows.
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
-------------------
<S> <C>
2001........................................................ $106,275
2002........................................................ 73,566
2003........................................................ 16,080
2004........................................................ 9,380
--------
$205,301
========
</TABLE>
During the years ended May 31, 2000 and 1999, rent expense totaled $102,660
and $80,670, 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 with the remainder of
the contracted amounts being accrued in the accompanying consolidated financial
statements.
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. However, during the year ended May 31, 2000, this
claim was settled with the Company issuing 100,000 common stock shares to this
stockholder at a fair value of $42,579.
The Company's current compensation benefits do not provide any other
post-retirement or post-employment benefits.
AIRSOPURE 999 LIMITED PARTNERSHIP
In January 1999, the Company formed a limited partnership, Airsopure 999
Limited Partnership (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 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. During the years ended May 31, 2000
and 1999, the LP raised $25,000 and $405,000, respectively, which amount is
recorded as product marketing obligation.
8. INCOME TAXES
The Company used the accrual method of accounting for tax and financial
reporting purposes. At May 31, 2000 and 1999, the Company had net operating loss
carry forwards for financial and tax reporting purposes of approximately
$18,500,000 and $16,100,000, respectively. These carry forwards expire through
the year 2012, and are further subject to the provisions of Internal Revenue
Code Section 382.
39
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Pursuant to Statement of Financial Accounting Standards No. 109, the Company
has recognized a $5,510,440 deferred tax asset attributable to the net operating
loss carryover, which has been fully offset by a valuation allowances in the
same amount, as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Beginning balance........................................... $4,680,290 $2,804,055
Increase during period...................................... 830,150 1,876,235
---------- ----------
Ending balance.............................................. $5,510,440 $4,680,290
========== ==========
</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, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
--------- -----------
<S> <C> <C>
Tax (expense) benefit computed at statuatory federal rate... $ 830,150 $ 1,465,896
NOL carryover............................................... (830,150) (1,465,896)
--------- -----------
Income tax benefit.......................................... $ -- $ --
========= ===========
</TABLE>
9. FINANCIAL INSTRUMENTS
The Company's financial instruments, which potentially subject the Company
to credit risks and none of which are held for trading purposes, consist of its
cash, accounts and notes receivable, notes payable and convertible debentures.
CASH
The Company maintains its cash in bank deposit and other cash equivalent
investment accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts, and does not believe it
is subject to any credit risks involving its cash.
ACCOUNTS AND NOTES RECEIVABLE, TRADE
The Company accounts and notes receivable (Note 3) 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.
NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Management believes the carrying value of these notes (Note 4) and
convertible debentures (Note 5) represent the fair value of these financial
instruments because their terms are similar to those in the lending market for
comparable loans with comparable risks.
10. DISCONTINUED OPERATING SEGMENT
In May 1999, the Company discontinued its McCleskey 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 $583,000 and was charged against continuing operations.
40
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS
During the years ended May 31, 2000 and 1999, 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 September
2000 and February 2003 and are exercisable at prices from $0.20 to $10.00 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, 2000 and 1999, respectively
(Note 4), all other amounts relate to stock options the Company has issued.
<TABLE>
<CAPTION>
2000 1999
-------------------- --------------------
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....... 1,341 $2.06 480 $ 3.93
Granted..................................................... 1,698 $0.86 917 $ 0.61
Exercised................................................... (437) $0.85 (46) $ 2.00
Expired..................................................... (591) $0.77 (10) $10.00
----- -----
Options and warrants outstanding at end of year............. 2,011 $1.49 1,341 $ 2.06
===== =====
Options and warrants exerciseable at end of year............ 2,011 $1.49 1,101 $ 2.06
===== =====
Weighted average fair value of options and warrants granted
during the year........................................... $0.27 $ 0.60
</TABLE>
The following table summarizes information about the Company's stock options
and warrants outstanding at May 31, 2000, 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>
$.15 - $.60 1098 0.9 years $ .34
$2.00 - $2.61 660 1.1 years $ 2.28
$3.75 - $5.00 240 2.0 years $ 4.17
$10.00 13 1.0 years $10.00
</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 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, 2000 MAY 31, 1999
------------- -------------
<S> <C> <C>
Net loss.................................................... $(2,576,594) $(4,364,880)
Net loss per share.......................................... $ (0.15) $ (0.41)
</TABLE>
During the years ended May 31, 2000 and 1999, the Company also issued
1,796,879 and 1,583,334 common stock shares, respectively, in exchange for
services. These services were recorded at their fair value of $616,406 and $
791,667, respectively, and were charged to expense. In
41
<PAGE>
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
addition, during the year ended May 31, 2000, the Company issued 1,400,455
common stock shares to vendors in payment of trade payables, which were recorded
at their fair value of $757,714.
12. RELATED PARTIES
During the years ended May 31, 2000 and 1999, the Company's chief executive
officer and president made cash operating advances of $0 and $100,000 and
received repayments of $0 and $127,000, 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, 2000 and 1999,
advances payable to these officers totaled $210,338 and $216,488, respectively,
and included $51,338 and $57,488, respectively, of accrued interest. During the
year ended May 31, 2000, $30,000 of accrued interest was paid to the above
individuals.
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 and distributorship 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 years ended May 31, 2000 and 1999, the Company conducted its
operations through two reportable operating segments, each of which was
conducted through separate subsidiaries. Those reportable operating 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.
The following table reflects certain information about the Company's
reportable operating segments for the year ended May 31, 1999. For the year
ended May 31, 2000, the accompanying consolidated financial statements reflect
operating activities for its remaining reportable operating segment. There are
no inter-segment revenue or expense transactions.
<TABLE>
<CAPTION>
AIR HVAC
PRODUCTS SERVICES TOTAL
----------- --------- -----------
<S> <C> <C> <C>
Revenues.................................................... $ 618,442 $ 412,027 $ 1,030,469
Net operating loss.......................................... $(4,153,265) $(158,194) $(4,311,459)
Interest expense............................................ $ 126,969 $ 8,319 $ 135,288
Depreciation and amortization............................... $ 107,637 $ 22,297 $ 129,934
Consulting services, non cash............................... $ 309,854 $ -- $ 309,854
Expenditures for long-lived assets.......................... $ -- $ -- $ --
Total long-lived assets, net of accumulated depreciation.... $ 89,569 $ -- $ 89,569
</TABLE>
42
<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 includes the names, ages and positions of our directors
and executive officers as of May 31, 2000. A summary of the background and
experience of each of these individuals immediately follows the table.
Our directors are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- -------------------------------------------
<S> <C> <C>
C J Comu 39 Chairman
John Potter 58 Director
R. John Harris 50 Director
Dr. Andrew Welch, M.D. 55 Director
Robert Galvan 52 Director
</TABLE>
Our executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- -------------------------------------------
<S> <C> <C>
C J Comu 39 Chief Executive Officer
John Potter 58 President
James R. Halter 50 Chief Financial Officer and General Counsel
R. John Harris 50 Chief Operating Officer
</TABLE>
C J COMU. Mr. Comu has served as our CEO, chairman and a director since May
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, which provided financing and
marketing expertise to the medical, computer and corporate sector prior to the
formation of Airtech International Corporation.
JOHN POTTER. Mr. Potter has served as our president and a director since
February 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, which
provided financing and marketing expertise to the medical, computer and
corporate sector prior to the formation of Airtech International Corporation.
Prior to beginning his business career, Mr. Potter was an officer in the US
Army.
JAMES R. HALTER. Mr. Halter has served as our chief financial officer and
general counsel since October, 1999. Mr. Halter earned a Masters in Business
Administration from the State University of New York at Buffalo in 1977, and a
Juris Doctorate from Case Western Reserve University in 1999. Mr. Halter has
been a Certified Public Accountant since 1975. From January 1990 to October
1999, Mr. Halter owned his own tax and business consulting practice.
Concurrently, from September 1996 to January 1999, Mr. Halter attended and
received his juris doctor degree from Case Western Reserve University School of
Law in Cleveland, Ohio.
45
<PAGE>
R. JOHN HARRIS. Mr. Harris has served as our chief operating officer since
February 2000 and as a director since November 1999. Mr. Harris served as Chief
Administrative Officer of Integrated Concepts, Inc. from June 1998 to October
1999 and as Chief Executive Officer of PreventCo Inc. from June 1996 to May
1998. Mr. Harris also served as Vice President and Medical Director of Airtech
International Corporation from May 1994 to May 1996. Prior to 1994, Mr. Harris
spent twenty years in various senior management capacities, and as an
international consultant, in the field of acute medical/surgical hospital
administration for leading hospital management companies such as Hospital
Corporation of America and Hospital Management Professionals. Mr. Harris holds a
Bachelors of Science degree from Oregon State University and a Masters of
Hospital Administration from the University of Alabama.
DR. ANDREW WELCH, M.D. Dr. Welch has served as a director since November
1999. From 1979 to the present, Dr. Welch has practiced orthopedic surgery for
the Southwest Orthopedic and Sports Medicine Clinic located in Las Vegas, Nevada
of which he is the president and owner.
ROBERT GALVAN. Mr. Galvan has served as a director since November 1999.
Since November 1999, Mr. Galvan has also served as the Associate Dean of the
University of North Texas Health Science College, Fort Worth, Texas. From
November 1998 to November 1999, Mr. Galvan served as the Director of Health for
the City of Fort Worth, Texas. Mr. Galvan also served as the Director of Health
and Community Development for the City of Plano, Texas from 1992 to October
1998.
Our directors receive no cash compensation for their services as directors.
Our policy is to reimburse non-employee directors for expenses actually incurred
in connection with attending meetings of our board of directors. Directors and
executive officers are also eligible for stock and option grants under our stock
option plans as determined by our board of directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than 10% of a registered class of our equity securities, to
file reports of ownership and change in ownership with the SEC. Our officers,
directors and greater than 10% stockholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file. Except as noted
below, and based solely on our review of the copies of Section 16(a) forms
received by us, we believe that from June 1, 1999 through May 31, 2000, all
filing requirements applicable to our officers, directors and greater than 10%
stockholders were timely met, excluding Messrs. CJ Comu and John Potter.
Mr. Comu, our chief executive officer and director, and Mr. Potter, our
president and director, each filed a Statement of Changes in Beneficial
Ownership on Form 4 four days after the required filing date. The due date for
the forms was March 10, 2000 and the forms were filed by Mssrs. Comu and Potter
on March 14, 2000.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation we paid
during the last three fiscal years to our chief executive officer, president and
other individuals who served as executive officers and whose total compensation
was $100,000 or more.
46
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------- -----------------------
OTHER ANNUAL RESTRICTED SECURITIES
FISCAL COMPENSATION STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) AWARDS($) OPTIONS(#)
--------------------------- -------- -------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
C J Comu, CEO, Chairman.............. 2000 $41,195 $0 $ 0 $ 83,825(2) 250,000
1999 0 0 46,875 424,334(3) 150,000
1998(4) 0 0 0 0 0
John Potter, President............... 2000 40,986 0 0 13,425(5) 250,000
1999 0 0 46,875 424,334(6) 150,000
1998(4) 0 0 0 0 0
Darrell R. Jolley, CFO............... 1999 0 0 58,333 12,500(7) 45,000
Doug S. Keane, President of
Airsopure, Inc..................... 2000 24,173 0 0 116,452(8) 0
1999 0 0 77,500 12,500(9) 100,000
1998 0 0 62,917 0 0
R. John Harris, COO.................. 2000 27,917 0 0 21,875(10) 0
James R. Halter, CFO and General
Counsel............................ 2000 18,227 0 0 46,527(11) 0
</TABLE>
(1) See terms of employment agreements for Mr. Comu and Mr. Potter under the
section titled "Employment Agreements."
(2) Mr. Comu received 249,986 shares of restricted common stock as additional
compensation. The fair market value of the shares was $83,825 in the
aggregate on the five dates of grant. All of these shares were fully vested
on the dates of grant and are not entitled to dividends. As of May 31, 2000,
Mr. Comu owned 1,368,864 shares of our restricted common stock with a market
value of $1,753,789.
(3) Mr. Comu received 791,667 shares of restricted common stock for deferred
wages of $250,000 per year for the period from June 1, 1997 through
December 31, 1998. The fair market value of the shares was $395,834 on the
date of grant, January 31, 1999. He also received 150,000 shares of common
stock as additional compensation. The fair market value of the shares was
$28,500 on the date of grant, December 31, 1998. All of these shares were
fully vested on the date of grant and are not entitled to dividends.
(4) Disclosure is made of named executive officers of our subsidiary, Airtech
International Corporation, for fiscal year 1998 for positions substantially
similar to positions held in employment by us for fiscal years 1999 and
2000.
(5) Mr. Potter received 250,464 shares of restricted common stock as additional
compensation. The fair market value of the shares was $79,028 in the
aggregate on the five dates of grant. All of these shares were fully vested
on the dates of grant and are not entitled to dividends. As of May 31, 2000,
Mr. Potter owned 1,213,881 shares of our restricted common stock with a
market value of $1,555,224.
(6) Mr. Potter received 791,667 shares of restricted common stock for deferred
wages of $250,000 for the period from June 1, 1997 through December 31,
1998. The fair market value of the shares was
47
<PAGE>
$395,834 on the date of grant, January 31, 1999. He also received 150,000
shares of common stock as additional compensation. The fair market value of
the shares was $28,500 on the date of grant, December 31, 1998. All of these
shares were fully vested on the date of grant and are not entitled to
dividends.
(7) Mr. Jolley received 25,000 shares of common stock as additional
compensation. The fair market value of the shares was $12,500 on the date of
grant, June 16, 1999. Effective September 1999, Mr. Jolley was no longer
employed by us.
(8) Mr. Keane received 100,000 shares of restricted common stock as additional
compensation. The fair market value of the shares was $75,000 on the date of
grant, May 1, 2000. Mr. Keane also received 154,259 shares of restricted
common stock as additional compensation. The fair market value of the shares
was $41,452 in the aggregate on the five dates of grant.
(9) Mr. Keane received 25,000 shares of common stock as additional compensation.
The fair market value of the shares was $12,500 at the date of grant,
June 16, 1999. Effective November 1999, Mr. Keane was no longer employed by
us.
(10) Mr. Harris received 100,000 shares of restricted common stock as additional
compensation. The fair market value of the shares was $21,875 on the date of
grant, December 15, 1999. All of these shares were fully vested on the date
of grant and are not entitled to dividends. As of May 31, 2000, Mr. Harris
owned 100,000 shares of our restricted common stock with a fair market value
of $128,120.
(11) Mr. Halter received 100,000 shares of restricted common stock as additional
compensation. The fair market value of the shares was $23,440 on the date of
grant, December 8, 1999. Mr. Halter also received 35,183 shares of
restricted common stock as additional compensation. The fair market value of
the shares was $23,087 on the date of grant, January 6, 2000. All of the
shares issued to Mr. Halter were fully vested and are not entitled to
dividends. As of May 31, 2000, Mr. Halter owned 135,193 shares of our
restricted common stock with a fair market value of $173,209.
48
<PAGE>
OPTION GRANTS IN 2000
The following table lists those persons in the previous table who were
granted options to purchase shares of our common stock during fiscal year 2000.
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS/
NUMBER OF SECURITIES SARS GRANTED TO
UNDERLYING OPTIONS/ EMPLOYEES EXERCISE PRICE MARKET PRICE ON DATE EXPIRATION
NAME SARS GRANTED IN FISCAL YEAR ($/SHARE) OF GRANT DATE
---- -------------------- ------------------- -------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
C J Comu............. 250,000 50% $0.25 $0.44 December 17, 2004
John Potter.......... 250,000 50% $0.25 $0.44 December 17, 2004
</TABLE>
2000 YEAR-END OPTION VALUES
Set forth in the following table is information, with respect to each named
executive officer, as to:
- the number of shares acquired during fiscal year 2000 upon each exercise
of options granted to each individual;
- the aggregate value realized upon each exercise which is the difference
between the market value of the shares at exercise and their exercise
price;
- the total number of unexercised options held on May 31, 2000, separately
identified between those exercisable and those not exercisable; and
- the aggregate value of in-the-money, unexercised options held on May 31,
2000, separately identified between those exercisable and those not
exercisable.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END EXERCISABLE/
NAME EXERCISE RECEIVED EXERCISABLE/UNEXERCISABLE UNEXERCISABLE(1)
---- ----------- -------- -------------------------- --------------------------------------------
<S> <C> <C> <C> <C>
C J Comu............. -0- -0- 400,000/0 $374,980/$0
John Potter.......... -0- -0- 400,000/0 $374,980/$0
</TABLE>
(1) The value is calculated based upon the aggregate amount of the excess of
$ over the relevant exercise prices.
EMPLOYMENT AGREEMENTS
We have ten (10) year employment contracts with C J Comu and John Potter for
annual compensation of $250,000 each, terminating May 31, 2008. Under the terms
of these contracts and agreements between our board of directors, Mr. Comu and
Mr. Potter, these contracts are funded on a cash basis at such time as we are in
a financial position to pay the salaries under these contracts. Unpaid
compensation under these contracts, dating from June 1, 1997 through
December 31, 1998, was paid to Mr. Comu and Mr. Potter effective January 31,
1999 through the issuance to each of them of 791,667 shares of our restricted
common stock. Effective January 15, 1999, Mr. Comu and Mr. Potter began
receiving cash compensation under the agreements at an annual rate of $125,000
each when cash was available. The remainder of the amounts due each officer
under their contracts will be converted to our restricted common stock during
fiscal year 2001. Effective June 1, 1999, Mr. Comu and Mr. Potter have further
agreed with our Board of Directors to reduce compensation to $125,000.
49
<PAGE>
COMPANY STOCK PLANS
EMPLOYEE STOCK PLANS. Our board of directors periodically establishes
employee stock grant plans under which unrestricted shares of our common stock
are issued and granted to certain employees, management and consultants for
performance rewards or services rendered. The terms and conditions of stock
grants under the stock plans are within the sole discretion of our board of
directors. We do not have formal written plans and all issuances of shares of
common stock under our stock plans are made pursuant to registration statements
on Form S-8 filed by us from time to time with the SEC.
On June 9, 1998, we filed a Form S-8 registration statement registering
160,000 shares of our common stock. Through July 30, 1998, we issued 56,002
shares of common stock to consultants and 103,998 shares to employees. The
shares of common stock issued were accounted for as consulting services and
employee wages. As of March 23, 2000, all of the shares registered under the
Form S-8 registration statement were issued under the stock plans.
On November 12, 1998, we filed a Form S-8 registration statement registering
800,000 shares of our common stock. Through July 30, 1999, we issued 261,009
shares of common stock to consultants and 538,991 shares to employees. The
shares of common stock issued were accounted for as consulting services and
employee wages. As of March 23, 2000, all of the shares registered under the
Form S-8 registration statement were issued under the stock plans.
On July 30, 1999, we filed a Form S-8 registration statement registering
900,000 shares of our common stock, all of which were issued as of March 23,
2000 under the stock plans. The shares of common stock were accounted for as
consulting services and employee wages.
2000 KEY EMPLOYEE OPTION PLAN. Effective May 31, 1999, our board of
directors adopted the Airtech International Group 2000 Key Employee Option Plan
in order to motivate our qualified employees to assist us in retaining employees
and to align the interest of key employees with those of our shareholders. The
2000 Option Plan is authorized for key employees including the chief executive
officer, president, chief financial officer, vice president franchising, vice
president production, and vice president finance. The 2000 Option Plan provides
for the grant of "incentive stock options" and "non-qualified stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986. The
approval authorized the issuance of a maximum of
- 1,000,000 shares of our common stock subject to the options,
- with a range of exercise prices from $0.25 to $2.50 per share,
- vesting over a two to three year period, and
- expiring ten (10) years from the date of grant.
Our board of directors expects to grant option agreements during fiscal year
2001 to the key employees specifying the respective number of options, vesting
periods, exercise prices and incentives, if any. On November 11, 1999, we filed
a Form S-8 registration statement for 900,000 shares of our common stock
issuable with respect to options granted under the 2000 Option Plan. As of
July 31, 2000, no options had been granted under the 2000 Option Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July, 31, 2000, certain information
concerning the beneficial ownership of each class of our voting stock held by:
- each beneficial owner of 5% or more of our voting stock, based on reports
filed with the SEC and certain other information;
- each of our directors;
50
<PAGE>
- each of our executive officers; and
- all of our executive officers and directors 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>
C J Comu...................... 1,768,864(4) 8.22%
John Potter................... 1,613,881(5) 7.50%
Robert Galvan................. 100,000 *
James R. Halter............... 135,193 *
Dr. Andrew Welch, M.D......... 240,382(6) 1.14%
R. John Harris................ 100,000 *
Officers and Directors as a
Group (6 persons)........... 3,958,320(7) 18.06%
</TABLE>
* Less than 1%
(1) The address of each director, officer and principal stockholder is c/o
Airtech International Group, Inc., 15400 Knoll Trail, Suite 200, Dallas, TX
75248.
(2) Unless otherwise indicated, we believe 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 that 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.
(4) Represents 1,368,864 shares of common stock owned directly. Also represents
150,000 shares owned pursuant to warrants to purchase shares of common stock
at $0.50 per share and 250,000 shares owned pursuant to options to purchase
shares of common stock at $0.25 per share, all of which are exercisable
within 60 days. Does not include 211,340 shares of common stock owned by
Mr. Comu's relatives, Sevim Comu and Cem Comu, of which Mr. Comu disclaims
beneficial ownership.
(5) Represents 1,213,881 shares of common stock owned directly. Also represents
150,000 shares owned pursuant to warrants to purchase shares of common stock
at $0.50 per share and 250,000 shares owned pursuant to options to purchase
shares of common stock at $0.25 per share, all of which are exercisable
within 60 days. Does not include 432,492 shares of common stock owned by
Mr. Potter's relatives, Susan Potter and John Garth Potter, of which
Mr. Potter disclaims beneficial ownership.
(6) Represents 100,000 shares of common stock owned directly and 140,382 shares
owned by the Welch Family Partnership, L.P. of which Dr. Welch may be deemed
the beneficial owner.
(7) See notes 4, 5 and 6.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal year 1999, our president advanced cash to us totaling
$100,000. As of May 31, 2000, we owed $210,338 to our chief executive officer
and $216,488 to our president, on prior advances from each officer, including
accrued interest. We have agreed to repay these advances as cash is available or
by issuing our common stock. We have also agreed to pay interest at 15% per
annum on the outstanding
51
<PAGE>
balances. During fiscal year 2000, we paid our chief executive officer and our
president $15,000 each representing accrued interest on the notes.
Peter Kertes, one of our principal stockholders during fiscal year 1999, is
the President of EquitNet.Com, a weekly investor newsletter. Mr. Kertes provided
us with a market research analysis dated July 6, 1999 of our common stock for
which he was compensated $3,500 in cash and issued 17,500 shares of common
stock. The fair market value of the shares of common stock on the date of
issuance was $2,734. We also signed an agreement with Mr. Kertes to provide
investment banking services to us. Mr Kertes was compensated by the issuance of
29,600 shares of our common stock. The fair market value of the shares of common
stock on the date of issuance was $4,625. In March 2000, the agreement with
Mr. Kertes was renewed and extended to August 31, 2001. As of May 31, 2000,
Mr. Kertes owned 2.9% of our outstanding shares of our common stock.
Dr. Andrew Welch, M.D., one of our directors, is the managing partner of
Aircare, LLC, a franchisee of our wholly-owned subsidiary, Airsopure, Inc., for
Las Vegas, Nevada. For the fiscal year ended May 31, 2000, Aircare, LLC
purchased from us, for cash, $91,793 of our air purification products at the
wholesale price available to our other distributors.
We believe that the terms of the above described transactions are fair and
similar to or better than the terms we could have obtained from arms length
negotiations with third parties.
On April 4, 2000, the Insider, Inc. and The Insider Review published a
research report relating to our business and the market for our common stock.
Mr. Patrick Comer is the president of The Insider and The Insider Review. The
Insider publishes various research reports emphasizing micro-cap companies with
high growth potential. The Insider Review is an Internet-based weekly newsletter
which may be accessed at theinsiderreview.com. We paid The Insider $3,000 in
cash and issued The Insider 10,000 shares of our common stock for its efforts in
researching and presenting the information contained in the research report. The
fair market value of the shares of common stock on the date of issuance was
$15,000. Our payments to The Insider are disclosed at the end of the research
report in compliance with Section 17(b) of the Securities Act. Section
17(b) requires disclosure of the consideration received by any person from an
issuer for communications describing the securities of the issuer. We are not
now, nor have we been in the past, an affiliate of Mr. Comer, The Insider or The
Insider Review. Except for the payments paid to The Insider in April for the
research report, we have not paid any consideration for any other services
provided by Mr. Comer, The Insider, The Insider Review or their affiliates.
52
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
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 dated 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
4.2* Specimen Series "M" Preferred Stock Certificate
4.3* Form of Warrant to purchase shares of Common Stock granted
to holders of Series "M" Convertible Preferred Stock
4.4* Form of Securities Purchase Agreement dated February 22,
2000 by and between the Company and PK Investors LLC
4.5* Form of 6% Convertible Debenture Due 2002
4.6* Form of Warrant to purchase shares of Common Stock granted
to holders of 6% Convertible Debentures Due 2002
4.7* Registration Rights Agreement dated February 22, 2000 by and
between the Company and PK Investors LLC relating to the
registration of the Common Stock and Warrants related to
Exhibits 4.4 and 4.5
4.8* Form of Conditional Warrant to Purchase 6% Convertible
Debentures and Warrants to Purchase Common Stock
4.9 Form of 12% Convertible Debenture Due 2005
4.10 Form of Warrant to purchase shares of Common Stock granted
to holders of 12% Convertible Debentures Due 2005
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
10.4* Form of Franchise Agreement relating to franchises offered
by Airsopure International Group, Inc., a wholly-owned
subsidiary of the Company
10.5* Form of Development Agreement offered to franchisees by
Airsopure International Group, Inc., a wholly-owned
subsidiary of the Company
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
10.6* Form of Offering Circular presented to franchisees by
Airsopure International Group, Inc., a wholly-owned
subsidiary of the Company
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
------------------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed on May 8, 2000, Registration No. 333-36554.
(b) Reports on Form 8-K.
None.
54
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C> <C>
AIRTECH INTERNATIONAL GROUP, INC.
By: /s/ C. J. COMU
---------------------------------------
C. J. Comu
CHIEF EXECUTIVE OFFICER
Date: September 7, 2000
---------------------------------------
</TABLE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ C. J. COMU
------------------------------------------- Director and Chief September 7, 2000
C. J. Comu Executive Officer
/s/ JOHN POTTER
------------------------------------------- President and Director September 7, 2000
John Potter
/s/ R. JOHN HARRIS
------------------------------------------- Director September 7, 2000
R. John Harris
/s/ DR. ANDREW WELCH, M.D.
------------------------------------------- Director September 7, 2000
Dr. Andrew Welch, M.D.
/s/ ROBERT GALVAN
------------------------------------------- Director September 7, 2000
Robert Galvan
/s/ JAMES R. HALTER Principal Accounting
------------------------------------------- Officer and Principal September 7, 2000
James R. Halter Financial Officer
</TABLE>
55
