QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/x/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 2001
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
0-19796
-------
Commission File No.
AIRTECH INTERNATIONAL GROUP, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
WYOMING 98-0120805
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12561 Perimeter, Dallas, Texas 75228
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 960-9400
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 [ ]
As of August 31, 2001, approximately 39,998,669 shares of Common Stock,
$0.05 par value, were outstanding.
Traditional Small Business Disclosure Format
Yes [ X ] No [ ]
TABLE OF CONTENTS
ITEM PAGE
NUMBER
PART I FINANCIAL
INFORMATION
1. Independent Accountants' Report................................ 2
Airtech International Group, Inc.
Financial Statements, Unaudited:
Balance Sheet as of August 31, 2001....................... 3
Statement of Operations for the three months
ended August 31, 2001 and 2000......................... 5
Statement of Cash Flows for the three months
ended August 31, 2001 and 2000......................... 6
Notes to the Financial Statements......................... 7
2. Managements' Discussion and Analysis........................... 13
PART II OTHER INFORMATION
1. Legal Proceedings.............................................. 16
2. Changes in Securities.......................................... 16
3. Defaults upon Senior Securities................................ 16
4. Submission of Matters to a Vote of Security Holders............ 16
5. Other Information.............................................. 16
6. Exhibits and Reports on Form 8-K............................... 17
Signature Page.................................................... 18
1
TURNER, STONE & COMPANY
12700 Park Central Drive
Suite 1610
Dallas, Texas 75251
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors and Stockholders
Airtech International Group, Inc. and subsidiaries
Dallas, Texas
We have reviewed the accompanying consolidated balance sheet of Airtech
International Group, Inc. and subsidiaries as of August 31, 2001 and the related
statement of operations, stockholders' equity and cash flows for the three
months then ended. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statement taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying August 31, 2001 consolidated financial
statements for them to be in conformity with generally accepted accounting
principles.
/s/ Turner, Stone & Company, LLP
--------------------------------
Certified Public Accountants
October 14, 2001
Dallas, Texas
2
PART 1--Financial Information
Item I Financial Statements
Airtech International Group, Inc. and Subsidiaries
Consolidated Balance Sheets
August 31, 2001 and 2000
ASSETS
CURRENT ASSETS 2001 2000
-------------- ------------
Cash $ 240,819 $ 302,169
Trade accounts receivables, net of allowance for doubtful accounts of
$150,000 and $20,000 respectively 957,152 540,096
Notes receivable, current portion 437,250 437,250
Inventory 1,005,829 1,330,198
Prepaid expenses and other assets 76,178 82,823
-------------- ------------
Total current assets 2,717,228 2,692,536
-------------- ------------
PROPERTY AND EQUIPMENT--net of accumulated depreciation of
$206,669 and $182,374 respectively 169,520 176,290
NOTES RECEIVABLE--net of current portion, net of allowance for
Doubtful accounts of $0 and $0, respectively 1,078,312 1,125,000
OTHER ASSETS
Goodwill, net of $116,385 and $40,810 of accumulated amortization,
respectively 62,668 102,432
Intellectual properties, net of $282,725 and $153,300 of accumulated
amortization, respectively 804,672 933,597
Other, Prepaid Royalties 93,556 361,981
-------------- ------------
Total other assets 960,896 1,398,010
-------------- ------------
$ 4,925,956 $ 5,391,836
============== ============
The accompanying notes are an integral part of the financial statements.
3
Airtech International Group, Inc. and Subsidiaries
Consolidated Balance Sheets
August 31, 2001 and 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 2001 2000
----------- ------------
Notes payable--current portion $ 277,185 $ 277,185
Accounts payable, trade 355,080 554,990
Note payable-officers 106,688 210,338
Accrued payroll and payroll taxes 419,788 457,134
Current portion of convertible debentures 1,900,000 -
Other accrued expenses 957,786 488,938
----------- ------------
Total current liabilities 4,016,527 1,988,585
----------- ------------
LONG-TERM LIABILITIES
Deferred revenue 340,000 340,000
Product Marketing Obligation - 430,000
Convertible Debentures 547,399 2,600,000
----------- ------------
Total long-term liabilities 887,399 3,370,000
----------- ------------
Total liabilities 4,903,926 5,358,585
----------- ------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Series M cumulative, convertible preferred, 1,013,000 and 990,625
Shares outstanding respectively; liquidation preference of $1.00
per share 1013 991
Common stock--$.05 par value, 100,000,000 shares authorized;
39,998,669 and 22,367,740 shares issued and outstanding, respectively 1,999,933 1,118,387
Additional paid-in capital 9,794,175 7,893,981
Retained deficit (11,773,091) (8,980,108)
----------- ------------
Total stockholders' equity 22,030 33,251
----------- ------------
$ 4,925,956 $ 5,391,836
=========== ============
The accompanying notes are an integral part of the financial statements.
4
Airtech International Group, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended August 31, 2001 and 2000
REVENUES 2001 2000
-------------- --------------
Product sales $ 413,625 $ 518,637
-------------- --------------
Total revenues 413,625 518,637
-------------- --------------
COSTS AND EXPENSES
Salaries and wages 104,182 340,650
Research and Development 31,001 75,250
Cost of sales 228,766 284,472
Advertising 30,855 123,604
Depreciation and amortization 106,654 78,187
Other general & administrative expense 126,858 250,505
-------------- --------------
Total costs and expenses 628,316 1,152,668
-------------- --------------
LOSS FROM OPERATIONS (214,691) (634,031)
Interest expense (171,615) (62,610)
-------------- --------------
NET LOSS BEFORE INCOME TAXES (386,306) (696,641)
Income taxes - -
-------------- --------------
NET LOSS $ (386,306) $ (696,641)
============== ==============
LOSS PER COMMON SHARE--BASIC $ ( 0.01) $ ( 0.03)
============== ==============
LOSS PER COMMON SHARE--DILUTED $ ( 0.01) $ ( 0.03)
============== ==============
The accompanying notes are an integral part of the financial statements.
5
Airtech International Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended August 31, 2001 and 2000
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000
-------------- --------------
Net Loss $ (386,306) $ (696,641)
Adjustments to reconcile net income to cash
Depreciation and amortization 106,654 78,187
Stock payments for interest on convertible debentures 99,113 -
Changes in operating assets and liabilities
Accounts receivable (155,068) (270,125)
Inventory (22,681) (791,246)
Accounts payable 80,973 294,880
Accrued expenses 60,308 78,459
Other receivables (8,794) 50,000
-------------- --------------
Net cash used in operating activities (225,801) (1,256,486)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for other assets (8,104) (35,789)
-------------- --------------
Net cash used in investing activities (8104) (35,789)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 172,000 -
Proceeds from issuance of common stock - 106,798
-------------- --------------
Net cash provided by financing activities 172,000 106,798
-------------- --------------
INCREASE (DECREASE) IN CASH (61,905) (1,185,477)
CASH, BEGINNING OF PERIOD 302,724 1,487,646
-------------- --------------
CASH, END OF PERIOD $ 240,819 $ 302,169
============== ==============
The accompanying notes are an integral part of the financial statements.
6
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization
Airtech International Group, Inc. (the Company), formerly Interactive
Technologies Corporation (ITC), was incorporated in the state of Wyoming on
August 8, 1991. As of May 31, 1998, in connection with the acquisition discussed
below, the Company manufactures and sells air purification products.
On May 31, 1998, the Company acquired all of the outstanding common stock
shares of Airtech International Corporation (AIC), which through its
subsidiaries, manufactures and sells various air filtration and purification
products. The total purchase price of $22,937,760 was funded through the
issuance of 10,500,000 shares of common stock valued at $.625 per share, the
issuance of 11,858,016 shares of Series A convertible preferred stock shares
valued at $.625 per share and the issuance of $9,000,000 of convertible
debentures.
However, because these convertible securities were converted into common
stock within two months following acquisition, the shareholders of AIC obtained
control of the company. As a result, AIC became the acquirer for financial
reporting purposes.
The transaction was accounted for using the purchase method of accounting
with AIC for accounting and reporting purposes the acquirer. Accordingly, the
purchase price of the net assets acquired has been allocated among the net
assets based on their relative fair value of zero.
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. (dormant) and McCleskey Sales and Service, Inc.
(dormant) each of which has a fiscal year ended May 31. All material
intercompany accounts and balances have been eliminated in the consolidation.
Turner, Stone & Company, the Company's independent accountants, has performed
limited reviews of the interim financial information included herein. Their
report on such reviews accompanies this filing.
Amortization
Intellectual property is allocated to the Company's air filtration products
based on expected sales as a percent of total sales by product. The Company
records amortization beginning when the product is initially inventoried for
sale. Amortization is recorded ratably over a ten-year term.
Goodwill acquired and recorded in the financial acquisition of ITC, is
being amortized under the straight line method over 5 years.
A prepaid royalty fee, paid pursuant to a December 1995 agreement and
related to the Company's portable medical unit, is being amortized using the
straight-line method over 24 months beginning January 2000.
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, filters and finished goods comprised of completed
products. The costs of inventories are based upon specific identification of
direct costs and allocable costs of direct labor, packaging and other indirect
costs.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is currently being provided by straight
line and accelerated methods for financial and tax reporting purposes,
respectively, over estimated useful lives of five to seven years.
Product marketing obligation
Property marketing obligations pursuant to Statement of Financial
Accounting Standards, "SFAS" No. 68, the Company has recorded funds raised in an
arrangement to develop, produce and market the Model S-999 as a product
marketing obligation. As of June 2001, the partnership has been dissolved with
the conversion of all limited partners into common stock of the Company.
7
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Revenue recognition
Revenues from the Company's operations are recognized at the time products
are shipped or services are provided. Revenue from franchise sales are
recognized at the time all material services relating to the sale of a franchise
have been performed by the Company.
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,
short term cash equivalent investments and time deposits with maturities of less
than three months. None of the Company's cash is restricted.
Loss per share
The basic and diluted loss per share are based upon 36,384,736 and
21,647,192 respectively, weighted average shares of common stock outstanding
over the three month period ending August 31, 2001 and 2000. No effect has been
given to the assumed conversion of convertible preferred stock, convertible
debentures, product market obligation guarantees (for the quarter ended August
31, 2000) and the assumed exercise of stock options and warrants, as the effect
would be antidilutive.
Research and Development
The Company's research and development activities consists of retooling and
developing its Model S-12 and S-30 products, including applying the Company's
technology in photo-catalytic conversion to the other air purification products.
The costs of research and development are charged to expense when incurred.
2. Liabilities
The Company's notes payable consist of loans from various corporations and
individuals. The notes contain no significant restrictions bear interest at
rates from 10% to 18%. The notes are in default since May 1999.
3. Commitments and Contingencies
Operating Leases
The company is currently obligated under noncancellable operating leases
for its Dallas office and warehouse facility, which expires in September 2004.
Minimum future rental payments required under the above operating lease is
as follows:
Year ending May 31
2002....................................... 21,600
2003....................................... 43,200
2004....................................... 47,500
----------
$112,300
8
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
4. Financial instruments
The Company's financial instruments consist of its cash, marketable
securities accounts and notes receivable, and trade payables.
Cash and Marketable Securities
The Company maintains its cash in bank deposit and other accounts, which,
at times, may exceed federally insured limits. The Company invests excess cash
not required for operations in US Treasury repurchase agreements in connection
with its cash management account with its primary bank. 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 receivables are unsecured and represent
sales not collected to date. Management believes these accounts and notes
receivables are fairly stated at estimated net realizable amounts.
5. Stock options and warrants
Through the quarter ended August 31, 2001 and 2000, the Company has 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 and its exercise price exceeded
the common stock fair market value at the date of option. The options and
warrants expire between September 2001 and February 2006 and are exercisable at
prices from $0.10 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.
6. 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 1,013,000 shares of Series "M" Convertible preferred stock
outstanding at August 31, 2001. 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 January 31,
2002. 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 990,625 shares of our common stock. 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., at May 31, 2001 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. All limited partners
were converted to common stock in June 2001 by the issuance of 2,639,926 shares
of our common stock. The Limited Partnership was dissolved at May 31, 2001.
9
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
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 August 31, May 31, 2001, we have sold $300,000 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 consent of the debenture
holder, redeem our 12% debentures in cash at a premium together with accrued
interest to date.
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.
10
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
12% CONVERTIBLE DEBENTURES DUE MARCH 30, 2003 and ATTACHED WARRANTS
On March 29, 2001, we entered into a securities purchase agreement with AJW
Partners, LLC and New Millennium Partners II, LLC to raise up to $1,000,000
through the sale to these investors of our 12% Convertible Debentures Due 2003
with attached warrants to purchase up to 600,000 shares of our common stock.
Upon execution of the securities purchase agreement, the investors purchased
$800,000 in principal amount of 12% debentures with attached warrants to
purchase 500,000 shares of our common stock. The purchase price paid by the
investors for our 12% debentures and attached warrants was $800,000 which
represents the total amount we have received under the purchase agreement
through April 30, 2001. Under the terms of our purchase agreement, the investors
are obligated and did purchase the remaining $200,000 in principal amount of our
12% debentures with attached warrants to purchase 100,000 shares of common stock
for a purchase price of $200,000. The investors purchased $200,000 of the
convertible debentures July 20, 2001.
Description of 12% Debentures
Our 12% debentures have a maturity date of March 30, 2003 at which time the
principal amount and all accrued interest on the 12% debentures is due and
payable. Interest payments on the 12% debentures are due and payable quarterly
commencing June 1, 2001 or at the option of the debenture holder upon conversion
of the 12% debentures into shares of our common stock. If the debenture holder
elects, we will pay any accrued interest on conversion 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. The 12% debentures are secured by a
security agreement under which we pledged substantially all of our assets,
including our goods, fixtures, equipment, inventory, contract rights, and
receivables.
The 12% debentures are convertible at any time at the option of the holder
into shares of our common stock, provided at no time may a holder of our 12%
debentures and its affiliates own more than 4.9% of our outstanding common stock
without giving us 30 days prior written notice of the debenture holder's intent
to waive the 4.9% ownership limitation. The conversion price of our common stock
used in calculating the number of shares issuable upon conversion, or in payment
of interest on the 12% debentures, is the lesser of 50% of the average of the
lowest three trading prices of our common stock for the twenty trading days
ending one trading day prior to the date we receive a conversion notice from a
debenture holder; and a fixed conversion price of $0.25.
Also, under the terms of the 12% debentures, if we at any time distribute
any shares of our common stock in a consolidation, exchange of shares,
re-capitalization or reorganization, the 12% debenture holders are entitled to
participate in the distribution as if the debenture holders had converted the
12% debentures; distribute any of our assets to our stockholders as a dividend,
stock repurchase, return of capital, or otherwise, the 12% debenture holders are
entitled to participate in the distribution as if the debenture holder had
converted the 12% debentures; or issue or sell any shares of our common stock
for no consideration or at a price less than $0.25 per share, then the fixed
conversion price of $0.25 described above shall be reduced to the price per
share we receive on the issuance or sale.
11
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Our 12% debentures have an imbedded beneficial conversion feature which
enables the debenture holders to convert the 12% debentures at the lesser of a
50% discount to the market price of our common stock and $0.25 per share. As of
the date of sale of the 12% debentures, the imbedded discount attributable to
the 12% debentures was $900,000. We have reflected this discount in our
financial statements by writing off $146,700 of the discount as of the date of
each sale of the 12% debentures. We will amortize the remaining $753,300 of the
discount over the three year term of the 12% debentures. If a 12% debenture is
converted prior to the expiration of the three year term, we will write off to
interest expense any remaining discount attributable to the converted 12%
debenture.
Description of Warrants
The warrants purchased by the investors on March 29, 2001 entitle the
investors to purchase 500,000 shares of our common stock at an exercise price
equal to the lesser of 90% of the average of the lowest three trading prices of
our common stock for the twenty trading days ending one trading day prior to the
date of exercise of the warrant; and $0.102 per share.
The warrants expire on March 29, 2004. The warrants are subject to exercise
price adjustments upon the occurrence of certain events including stock
dividends, stock splits, mergers, reclassifications of stock or our
re-capitalization. The exercise price of the warrants is also subject to
reduction if we issue any rights, options or warrants to purchase shares of our
common stock at a price less than the market price of our shares as quoted on
the OTC Bulletin Board. Also, if at any time, we declare a distribution or
dividend to the holders of our common stock in the form of cash, indebtedness,
warrants, rights or other securities, the holders of the warrants are entitled
to receive the distribution or dividend as if the holder had exercised the
warrant.
The warrants attached to our 12% debentures have an imbedded beneficial
exercise feature which enables the warrant holders to exercise the warrants at
the lesser of a 10% discount to the market price of our common stock and $0.102
per share. As of the date of sale of the warrants, the imbedded discount
allocable to the warrants was $100,000. The discount was determined from the
Black-Scholes option pricing method. In our financial statements, we will
amortize and write-off to interest expense the $100,000 discount over the three
year term of the warrants. If a warrant is exercised prior to the expiration of
the three year term, we will write off to interest expense any remaining
discount attributable to the exercised warrant.
Consent and Standstill Agreement of 6% Debenture Holders
Our 6% debenture holders consented to the sale of our 12% debentures. The
6% debenture holders also agreed that neither they nor their affiliates would
for a period beginning March 29, 2001 and ending 8 months from the date the
registration statement relating to the securities offered by this prospectus is
declared effective by the SEC offer to sell, contract to sell, pledge, grant any
rights or otherwise dispose of any shares of our common stock held by the 6%
debenture holders without the prior consent of the 12% debenture holders; or
engage in any hedging transactions which are designed or reasonably expected to
lead to or result in a disposition of the shares of our common stock held by the
6% debenture holders.
The 6% debenture holders may however; convert the 6% debentures into a
maximum of 200,000 shares of our common stock per month on a non-cumulative
basis; and sell up to 100,000 shares per month of common stock converted after
March 29, 2001 or 200,000 shares if the selling price is at least $0.75 per
share, with any unsold converted shares held in escrow by our legal counsel
12
ITEM 2. 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
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. The financial statements reflect 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. 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 financial statements.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED AUGUST 31, 2001 COMPARED TO THE
QUARTER ENDED AUGUST 31, 2000
REVENUES
Our consolidated total revenues decreased $105,012 or 20.2% from $518,637
for the three months ended August 31, 2000 compared to the three months ended
August 31, 2001 of $413,,625. This decrease in sales is due to the cessation of
sales from the consumer direct sale franchise group. In the first quarter,
August 31, 2000 the Company opened four retail outlets for sale of the portable
unit. These stores were closed in March 2001.
COSTS AND EXPENSES
Our consolidated total costs and expenses decreased $524,352 or 45% from
$1,152,668 in 2000 to $628,316 in 2001. The major components of this $524,352
decrease were:
Salaries and wages decreased $236,468 or 69% from $340,650 in 2000 to
$104,182 for 2001. This decrease is the result of many factors including
decreased commissions on sales of our products through the retail direct sale
stores. Also, we have decreased the total number of employees (outside of the
retail store group) by seven individuals. In addition, management has reduced
and/or eliminated their personal salaries.
Cost of sales decreased $55,706 or 19% to $228,766 for 2001 as compared to
$284,766 for 2000. This decrease is due to the 20% decrease in product sales.
The percentage cost of goods sold remained constant at 55% of sales in 2000 and
2001. The higher gross margins of the retail direct sale stores sales were
replaced by higher margin sales of the Company's newest product, the Model S-30.
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Research and development costs decreased $44,249 from $75,250 in August 31,
2000 to $31,001 in costs for August 31, 2001. This decrease of 59% is due to the
reduction of costs associated with the completion of the Model S-30 for sale.
Advertising costs decreased $92,749 to $30,855 for 2001 from $123,604 for
2000. This is a 75% decrease in costs. The decrease is due to the introduction
of new products and the implementation of our new residential franchise sales
approach, which increased promotional costs, including brochures and travel
expenses for the August 31, 2000 quarter and no similar costs in 2001.
Depreciation and amortization increased $28,467 to $106,654 for the three
months ended August 31, 2001 compared to $78,187 for 2000. This increase is
primarily due to increased amortization of prepaid royalties.
General and administrative expenses decreased $123,647 to $126,858 for the
three months ended August 31, 2001 from $250,505 in 2000. This 49% decrease is
due to decreases in litigation expenses of legal fees and settlement costs. The
decrease in facilities costs after combining the office and warehouse functions
in one location. In addition, outside consultant fees and investment bankers
fees decreased during 2001.
Interest expense of $171,615 for 2001 is $109,005 higher or 174% than the
$62,610 interest expense in 2000, due to the interest accrual on the outstanding
6% debentures issued in February 2000 and the 12% debentures issued in March and
July 2001. In addition, the 12% convertible debentures sold in March and July
2001 contained an imbedded beneficial conversion feature, wherein an additional
$92,115 in interest was charged as interest expense and as a discount to the
debentures.
The result of these revenues and costs and expenses is a net loss of
$(386,306) or ($0.01) per share of common stock (basic and diluted)for the three
months ended August 31, 2001 compared to a net loss of $(696,641) or ($0.03) per
share of common stock for the three months ended August 31, 2000. This
represents a 45% decrease in our net loss and a $0.02 decrease in loss per share
of our common stock compared to 2000. The average number of shares of our common
stock increased from 2000 to 2001 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 2002.
We are considering product design changes 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 created the need to increase our current
manufacturing capacities.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2001, we had total current assets of $2,717,228 less
current liabilities of $4,016,527 which resulted in net current liabilities of
$1,299,299. When the current portion of the convertible debentures that we
expect to be converted into common stock are subtracted from total current
liabilities the current assets exceed the adjusted liabilities by $600,701. 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 2002. Additional general and administrative expenses
have been reduced during the first quarter 2002. We also expect that our cash
balance and operations are adequate to sustain our continued operations during
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fiscal year 2002. After reducing the net loss for the quarter ending August 31,
2001 by the non cash items of Depreciation, amortization and interest expense
paid by common stock in accordance with the convertible debenture agreements,
the net cash used is reduced to $108,037 for the three months ended August 31,
2001.
We expect to sell four international franchises during 2002 for up to
$250,000 per license. 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 or distributorship sales will meet our
goals.
We also expect sales of our products to increase in fiscal year 2002. For
the year 2001, our product sales were $1,735,901 in comparison in 2000, our
product sales were approximately $543,615. This 2000 sales were in turn an
increase from the sales year ended May 31, 1999 of $388,412. This trend
indicates the sales of our products are increasing. Although the results of
sales for the first quarter were less than expected and less than the comparable
quarter for 2000, the sales mix of our new Model S-30 through our distributors,
direct sales and franchisees we believe represent a positive trend, we cannot
assure you that this positive trend will continue.
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 2002.
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 quarter ended August 31, 2001,
we increased cash from financing activities by the sale of convertible
debentures of $200,000.
The 6% and 12% debentures held by Investors includes attached warrants to
purchase 1,150,000 shares of our common stock. If the investors exercise all
1,150,000 warrants to purchase our common stock, we could receive up to $656,000
in cash from the exercise. The warrants currently held by Investors expire from
2003 through 2005. We cannot assure you that the Investors will exercise any
warrants in the future.
During fiscal year 2002, 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. For this reason, we do not project significant expenditures during
fiscal year 2002 on our products which are in production and sale. 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, even without a HCPCS code number.
We do not have a large capital expenditures program planned for fiscal year
2002. 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.
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Part II- Other Information
ITEM 1. LEGAL PROCEEDINGS
In 1997, we were named as a defendant in a cause of action styled LLB
Realty, L.L.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 $250,000 for remaining lease
payments, finish-out costs and lost revenues. The Court ruled in favor of the
plaintiffs and will hold a hearing to determine damages. Although we are in
negotiations for a 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.
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 $65,000.
ITEM 2 CHANGES IN SECURITIES
On July 20, 2001, issuance of $200,000 in 12% Convertible Debentures in a
Private Placement. On June 10, 2001, issued a Private Placement of 2,639,926
shares of Common Stock to convert the limited partners in the Airsopure 999
L.P., reflected in the Financial Statements as Product Marketing Obligation of
$430,000. Issued in a Private Placement in June 2001 335,000 shares of Common
Stock to the 12% Convertible Debenture holders (Private Placement) for interest
owed under the Debenture. Partial conversion of 6% and 12% Convertible
Debentures and payment of accrued interest owing into 4,252,939 shares of Common
Stock, issued under a SB-2 Registration Statement.
ITEM 3 DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
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 dividend distributions equal to 4.57% of the gross revenues
generated from sales of our Series 950 units until January 31, 2002. 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
August 31, 2001, no dividends have been paid on the Series "M" convertible
preferred stock. Future dividends will be dependent upon our financial
condition, results of operations, capital requirements and other relevant
factors. In August 2001, we announced that the Company will be issuing a
dividend to shareholders of record October 31, 2001. This dividend will be one
share of Humitech, Inc. common stock, for every ten shares of Airtech
International Group, Inc. common stock owned at October 31, 2001. Humitech, Inc.
purchased, in August, 2001, one hundred per cent of the outstanding common stock
of our dormant subsidiary, Airsopure International Group, Inc. in a stock
exchange whereby we received approximately ten percent of the combined company
stock in Humitech. We are issuing one hundred per cent of our ownership in
Humitech in the dividend to shareholders.
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ITEM 6. (a) EXHIBITS AND (b) REPORTS ON FORM 8-K.
(a) Exhibits
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
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
o Incorporated by reference to the Company's Registration Statement on
Form SB-2 filed on May 8, 2000, Registration No. 333-36554.
** Incorporated by reference to the Company's Form 10-K/SB filed
September 14, 2000.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Securities Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized and in the capacity as the registrant's Chief
Executive officer and Chief Financial and Accounting Officer, respectively.
Dated: October 15, 2001
AIRTECH INTERNATIONAL GROUP, INC.
By: /s/ C. J. COMU
------------------------------------
C. J. Comu,
Chief Executive Officer and Chairman
By: /s/ James R. Halter
-----------------------------------
James R. Halter,
Chief Financial, Accounting Officer
and Director
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