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 February 28, 2002
/ / 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.)
4695 MacArthur Court, Suite 1450 Newport Beach, CA 92660
---------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 475 6755
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 February 28, 2002, approximately 68,834,180 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.................................. 3
Airtech International Group, Inc.
Financial Statements, Unaudited:
Balance Sheet as of February 28, 2002....................... 4
Statement of Operations for the nine months
ended February 28, 2002 and 2001......................... 6
Statement of Operations for the three months
Ended February 28, 2002 and 2001...................... 7
Statement of Cash Flows for the three months
ended February 28, 2002 and 2001......................... 8
Notes to the Financial Statements........................... 9
2. Management's Discussion and Analysis............................. 18
PART II
OTHER INFORMATION
1. Legal Proceedings................................................ 21
2. Changes in Securities............................................ 22
3. Defaults upon Senior Securities.................................. 22
4. Submission of Matters to a Vote of Security Holders.............. 22
5. Other Information................................................ 22
6. Exhibits and Reports on Form 8-K................................. 23
Signature Page...................................................... 25
TURNER, STONE & COMPANY
12700 Park Central Drive
Suite 1610
Dallas, Texas 75251
INDEPENDENT ACCOUNTANTS' 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 February 28, 2002 and the
related consolidated statements of operations and cash flows for the three
months and nine 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 February 28, 2002 consolidated financial
statements for them to be in conformity with generally accepted accounting
principles.
/s/ Turner, Stone & Company, LLP
--------------------------------
Certified Public Accountants
May 22, 2002
Dallas, Texas
3
PART 1--Financial Information
Item I Financial Statements
Airtech International Group, Inc. and Subsidiaries
Consolidated Balance Sheets
February 28, 2002 and 2001
2002 2001
---------- ----------
ASSETS
CURRENT ASSETS
Cash $ 9,285 $ 53,368
Trade accounts receivables, net of allowance
for doubtful accounts of $150,000
and $40,000 respectively 521,527 731,315
Notes receivable, current portion 437,250 437,250
Inventory 0 1,305,559
Prepaid expenses and other assets 47,132 113,257
---------- ----------
Total current assets 1,015,194 2,640,749
---------- ----------
PROPERTY AND EQUIPMENT--net of accumulated
depreciation of $16,222
and $198,159 respectively 8,534 112,740
NOTES RECEIVABLE--net of current portion, net of
allowance for Doubtful accounts of $0
and $0, respectively 1,078,312 1,078,312
OTHER ASSETS
Investment in Joint Venture 0 0
Goodwill, net of $134,291 and $45,810 of
accumulated amortization, respectively 44,763 92,432
Intellectual properties, net of $337,095 and
$167,300 of acc. amortization, respectively 750,302 919,597
Other, Prepaid Royalties 0 294,988
---------- ----------
Total other assets 795,065 1,307,017
---------- ----------
$2,897,105 $5,138,818
========== ==========
The accompanying notes are an integral part of the financial statements.
4
Airtech International Group, Inc. and Subsidiaries
Consolidated Balance Sheets
February 28, 2002 and 2001
LIABILITIES AND STOCKHOLDERS' DEFICIT
2002 2001
------------- ------------
CURRENT LIABILITIES
Notes payable $ 829,044 $ 277,185
Accounts payable, trade 403,521 750,526
Note payable-officers 0 210,338
Accrued payroll and payroll taxes 4,194 507,753
Convertible debentures 2,305,284 0
Other accrued expenses 899,872 608,843
------------- ------------
Total current liabilities 4,441,915 2,354,645
------------- ------------
LONG-TERM LIABILITIES
Deferred revenue 340,000 340,000
Product Marketing Obligation 430,000
Convertible Debentures 0 2,350,000
------------- ------------
Total long-term liabilities 340,000 3,120,000
------------- ------------
Total liabilities 4,781,915 5,474,645
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Series M cumulative, convertible preferred,
990,625 Shares outstanding,
liquidation preference of $1.00 per share 991 991
Series B cumulative preferred, 5,000,000 shares
Authorized, 1,000,000 shares outstanding 10,000 0
Outstanding, liquidation preference of $2.00 per share
Common stock--$.05 par value, 100,000,000 shares
authorized; 68,834,180 and 27,958,641 shares
issued and outstanding, respectively 3,441,709 1,397,932
Additional paid-in capital 10,208,330 8,251,966
Retained deficit (15,545,840) (9,986,716)
------------- ------------
Total stockholders' deficit (1,884,810) (335,827)
------------- ------------
$ 2,897,105 $ 5,138,818
============= ============
The accompanying notes are an integral part of the financial statements.
5
Airtech International Group, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Nine Months Ended February 28, 2002 and 2001
2002 2001
------------ ------------
REVENUES
Product sales $ 961,426 $ 1,412,607
Other Revenue 25,000
------------ ------------
Total revenues 961,426 1,437,607
------------ ------------
COSTS AND EXPENSES
Salaries and wages 453,311 787,490
Research and Development 92,622 283,927
Cost of sales 652,775 780,235
Advertising 98,345 241,358
Depreciation and amortization 288,468 233,188
Other general & administrative
expense 3,089,388 639,544
------------ ------------
Total costs and expenses 4,674,909 2,965,742
------------ ------------
LOSS FROM OPERATIONS (3,713,483) (1,528,135)
Interest expense (445,572) (175,114)
------------ ------------
NET LOSS BEFORE INCOME TAXES (4,159,055) (1,703,249)
Income taxes
------------ ------------
NET LOSS $(4,159,055) $(1,703,249)
============ ============
LOSS PER COMMON SHARE--BASIC $ ( 0.06) $ ( 0.07)
========== ==========
LOSS PER COMMON SHARE--DILUTED $ ( 0.06) $ ( 0.07)
========== ==========
The accompanying notes are an integral part of the financial statements.
6
Airtech International Group, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended February 28, 2002 and 2001
2002 2001
------------ -----------
REVENUES
Product sales $ 8,845 $ 418,034
Other Revenue 15,000
------------ -----------
Total revenues 8,845 433,034
------------ -----------
COSTS AND EXPENSES
Salaries and wages 126,996 285,375
Research and Development 7,372 52,677
Cost of sales 7,674 220,845
Advertising 20,804 55,963
Depreciation and amortization 75,160 72,716
Other general & administrative expense 2,191,991 208,006
------------ -----------
Total costs and expenses 2,429,997 895,582
------------ -----------
LOSS FROM OPERATIONS (2,421,152) (462,548)
Interest expense (134,368) (62,404)
------------ -----------
NET LOSS BEFORE INCOME TAXES (2,555,520) (514,952)
Income taxes 0 0
----------- -----------
NET LOSS $(2,555,520) $ (514,952)
============ ===========
LOSS PER COMMON SHARE--BASIC $ ( 0.037) $ ( 0.02)
============ ===========
LOSS PER COMMON SHARE--DILUTED $ ( 0.037) $ ( 0.02)
============ ===========
The accompanying notes are an integral part of the financial statements.
7
Airtech International Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended February 28, 2002 and 2001
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(4,159,055) $(1,703,249)
Adjustments to reconcile net income to cash
Depreciation and amortization 288,468 233,188
Stock payments for interest on
convertible debentures, payroll etc 1,119,000 0
Changes in operating assets and liabilities
Accounts receivable 280,557 (461,344)
Inventory 983,148 (766,607)
Accounts payable 129,414 490,424
Accrued expenses and Prepaid Expenses (370,222) 294,436
Other receivables 0 (75,045)
------------ ------------
Net cash used in operating activities (1,728,690) (1,988,197)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for other assets, Equipment 161,948 (60,085)
Repayment of Note Payable (500,000)
Redemption of Marketable Securities 1,000,000
------------ ------------
Net cash provided by investing activities 161,948 560,685
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convert. debentures 172,000 0
Proceeds from issuance of Notes Payable 551,859 0
Proceeds from issuance of common stock 313,258 993,834
Conversion of Convertible Debentures to Stock 236,786 0
------------ ------------
Net cash provided by financing activities 1,273,303 993,834
------------ ------------
DECREASE IN CASH (293,439) (1,434,278)
CASH, BEGINNING OF PERIOD 302,724 1,487,646
------------ ------------
CASH, END OF PERIOD $ 9,285 $ 53,368
============ ============
The accompanying notes are an integral part of the financial statements.
8
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.
The Company sold its interest in its dormant wholly owned subsidiary,
Airsopure International Group, Inc. to Humitech, Inc. All the stock received
from Humitech, Inc. was disbursed as a stock dividend to the shareholders of
record November 30, 2001.
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. thru November 30, 2001 (dormant) and McCleskey Sales
and Service, Inc.(dormant) and the joint venture AirSecure, LLC (start up phase
company) 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.
9
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
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, was amortized using the
straight-line method over 24 months beginning January 2000 and ending December
2001.
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.
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 maturates of less
than three months.
10
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
None of the Company's cash is restricted.
Loss per share
The basic and diluted loss per share are based upon 68,834,180 and
25,269,142 respectively, weighted average shares of common stock outstanding.
over the three and nine month period ending February 28, 2002 and 2001. No
effect has been given to the assumed conversion of convertible preferred stock,
convertible debentures, product market obligation guarantees (for the quarter
ended February 28, 2001) 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 $277,185 contain no significant restrictions, bear
interest at rates from 10% to 18%. The notes are in default since May 1999.
The Company also entered into a note payable agreement with a private
placement group. The terms are for a two year repayment on a monthly basis of
principle and interest at 12%. The notes totaling $551,859 are in default as of
April 19, 2002.
3. Commitments and Contingencies
Operating Leases
The company is currently obligated under an operating leases for its Dallas
office and warehouse facility, which expires in September 2004. The Company is
no longer occupying the space.
Minimum future rental payments under the above operating lease is as
follows:
Year ending May 31
2002....................................... 21,600
2003....................................... 43,200
2004....................................... 47,500
--------
$112,300
4. Financial instruments
The Company's financial instruments consist of its cash, marketable
securities accounts and notes receivable, and trade payables.
11
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
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 February 28, 2002 and 2001, 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 May 2002 and January 2007 and are exercisable at prices
from $0.05 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 990,625 shares of Series "M" Convertible preferred stock
outstanding at February 28, 2002. Holders of 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 were to automatically converts to
shares of common stock on December 31, 2001. This has been extended monthly
since December. 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
to be 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. Airtech has
not paid dividends on the preferred stock and is in default under the stock
certificate.
AIRSOPURE 999 LIMITED PARTNERSHIP INTERESTS
We had $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 were entitled to receive
1.7% of the gross revenues generated from sales of our Model S-999
12
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
automobile air purification system. The limited partners were entitled to
receive distributions until December 31, 2003. 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.
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 February 28, 2001, we 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.
The interest due thru May 31, 2001 was paid by the issuance of common stock and
subsequent interest payments have not been made. Under the terms of the
debenture the Company is in default for the principle and interest amount of the
debenture. 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. Interest was paid through October 2001, through
the issuance of shares of common stock. As of February 22, 2002 the Company is
in default for failure to repay the note and interest when due. 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.
13
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
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. The 6% Convertible Debenture due 2002
was not paid at maturity and is in default.
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. The holders of the debentures made a
demand for conversion of a portion of the Debentures in November 2001, the
Company did not convert and the Debentures are in default at February 28, 2002.
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
14
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
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.
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
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
15
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
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.
See Litigation Section for description of claims of 12% debenture holders
that the debenture is in default.
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.
CONVERTIBLE PREERRED STOCK
The Company has authorized 5,000,000 shares of Series B Preferred Stock
that is senior to Common Stock and junior to Series M Preferred stock and
carries liquidation redemption of $2.00 per share. The shares have the same
voting rights as Common Stock shares on a twenty-for-one basis. The stock is
entitled to receive dividends when and if declared by the Directors of the
Company at the rate of $0.20 per share and can be converted to Common Stock at
the option of the holder into thirty two and 65/100th shares of Common per share
of Preferred. The Company has issued one million shares of Series B Preferred
Stock.
Joint Venture
The Company has entered into an Agreement with BioSecure Corp. to form
a joint venture. The joint venture is a Nevada limited liability corporation,
AirSecure, LLC. The Company has a 49% ownership in the venture with BioSecure
Corp. owning the remaining 51%. The joint venture will focus on the bioterrorism
protection market for various products and services, including the air cleaning
and air filtration products of the Company. The Company will account for its
investment in the Joint Venture using the Equity Method of
16
Airtech International Group, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
accounting. However, as of February 28, 2002, the joint venture did not have any
reportable activity, no assets or liabilities or company value.
Subsequent Event.
The Company was in default under a settlement agreement with a creditor,
Carlo Gavazzi Mupac , Inc. This creditor seized certain of the Company's assets
in March 2002. The effect of the seizure and subsequent creditor sale of assets
is reflected in the Financial Statements as of February 28, 2002.
17
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 THREE AND NINE MONTHS ENDED FEBRUARY 28, 2002
COMPARED TO THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2001
REVENUES
Our consolidated total revenues decreased $43,147 or 5.2% from $1,004,573
for the nine months ended February 28, 2002 compared to the nine months ended
February 28, 2001 of $1,004,573. This decrease in sales is due to the cessation
of sales from the consumer direct sale franchise group. In the first nine
months, starting in August 2000 the Company had opened four retail outlets for
sale of the portable unit. These stores were closed in March 2001. Similarly,
the revenue for the three months ended February 28, 2001 of $485,936 included
the direct sale program which is no longer in operation in the current quarter
ended February 28, 2002. Therefore the sales from on going operations decreased
$477,091 to $8,845 from $485,936 for the three month period in 2001. In
addition, there was an additional $300,000 in bulk sales for the nine months
ended February 28, 2002 from the sale of the auto unit at a near cost basis.
There were no similar bulk sales for the nine months ended February 28, 2001.
This bulk sale was reflected in the quarter ended November 30, 2002.
18
COSTS AND EXPENSES
Our consolidated total costs and expenses increased $1,709,167 or 157% from
$2,965,742 to $4,674,909 in the nine months ended February 28, 2002 and 2001,
respectively. The costs and expenses increased $1,534,415 or 271% from $895,582
for the three months ended February 28, 2001 to $2,429,997 for the three months
ended February 28, 2002. The major components of this $1,709,167 and $1,534,415
increase were:
Salaries and wages for the nine months decreased $334,179 or 42% from
$787,490 in 2001 to $453,311 for 2002. 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 decrease from the retail store group) by thirteen individuals.
The salaries decreased from $285,375 for the three months ended February 28,
2001 to $126,996 for the three months ended February 28, 2002. The reason for
the $158,379 decrease in expenses was the same as for the nine months
comparison.
Cost of sales decreased for the nine months by $127,460 or 16% to $652,775
for 2001 as compared to $780,235 for 2001. This decrease is due to the change in
product mix of units sold in the quarters. For the 2001 period the sales were in
the retail direct sale market where the margins were higher than the current
sales into the non retail market. In addition, in the nine months ended February
28, 2002 the Company sold $300,000 of the auto units at a cost of $300,000 in a
lump sum sale. Therefore, the percentage cost of sales are not comparable. For
the nine and three months ended February 28, 2001 and 2002 the percentage cost
of sales was 68% and 67% respectively. The $220,845 cost of sales or 53%
compares to $7,674 or 87% for the three months ended February 28, 2002. The
percentage for the three months due to the low volume of sales.
Depreciation and amortization increased $55,279 to $288,468 for the nine
months ended February 28, 2002 compared to $233,188 for the nine months of 2001.
This increase is primarily due to increased amortization of prepaid royalties.
The increased amortization of royalties is also the reason for the $2,444
increase in costs from $72,716 to $75,160 for the three month periods ended
February 28, 2002 and 2001
General and administrative expenses increased $2,449,844 to $3,089,388 for
the nine months ended February 28, 2002 from $639,544 in 2001. This 483%
increase is due to increases in litigation expenses of legal fees and expected
settlement costs. The increase is also due to a $700,000 write off of
receivables and the loss of $700,000 in inventory and equipment due to the
creditor seizure of assets. In addition, outside consultant fees and investment
bankers fees increased during 2001, due to the additional consultants used in
lieu of full time employees as a result of the decrease in salaries over the
period. The general and administrative costs increased, primarily due to the
seizure of assets, a total of $1,983,985, resulting in the $2,191,991 in
expenses for the quarter ended November 30, 2002 compared to $208,006 for the
three months ended November 30, 2001.
19
Interest expense of $445,572 for 2002 is $270,458 higher or 254% than the
$175,114 interest expense in 2001, due to the interest accrual on the
outstanding 6% debentures issued in February 2000, the 12% debentures issued in
March and the $500,000 issued in September 2001. In addition, the 12%
convertible debentures sold in March and July 2001 contained an imbedded
beneficial conversion feature, wherein an additional $142,115 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
$(4,159,055) or ($0.06) per share of common stock (basic and diluted)for the
nine months ended February 28, 2002 compared to a net loss of $(1,703,249) or
($0.07) per share of common stock for the nine months ended February 28, 2001.
This represents a $2,455,806 or 244% increase in our net loss and a $0.01
decrease in loss per share of our common stock compared to 2001. The average
number of shares of our common stock increased from 2001 to 2002 so the loss per
share on our common stock is not comparable. The net loss for the three months
ended February 28, 2002 of $2,555,520 is $2,040,568 or 496% higher than the loss
of $514,952 for the three months ended February 28, 2001. The loss per share
increased to $(0.037)for the three months ended February 28, 2002 despite the
increase in the number of shares outstanding compared to the three months in
2001.
CAPITAL EXPENDITURES
We do not have any large capital expenditures planned for fiscal year 2002.
Any minor capital expenditures will be met with cash on hand. In the event our
product sales increase beyond current out-sourced 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 $150,000. These capital
expenditures would also be offset by increased product sales which created the
need to increase our current out-sourced manufacturing capacities. The Company
will be outsourcing the assembly of the products to a number of vendors.
LIQUIDITY AND CAPITAL RESOURCES
In March 2002, a creditor Carlo Gavazzi Mupac, Inc. executed a writ of
execution based upon the failure to pay a settlement payment and seized certain
of the assets of the Company. The result of the seizure is reflected in the
Financial Statements. The loss of inventory and assets has resulted in a
decrease in the ability of the Company to manufacture and sell products.
The Company is in default with all of its creditors. The Company does not
have sufficient assets to either pay the creditors or to fund manufacturing and
sales activity. The only means to continue operations is for a third party to
negotiate workout settlements with the creditors and fund sales activities. The
Company entered into Agreements with various third parties to negotiate with the
creditors and to fund a downsized operations budget. As of this date the third
parties have not been successful with the creditors and have failed to support
operations. Therefore, unless the third parties perform, We do not expect to
have sufficient funds necessary to finance the production , by outside
manufacturers , distribution, by the Company and its Joint Venture and sale of
our products including management and advertising support for fiscal year 2002.
In addition, general and administrative expenses have been reduced during the
first nine months of fiscal 2002. We also expect that our cash balance and
operations are inadequate to sustain our continued operations during fiscal year
2002, on a lower basis and based on the venture and third party agreements.
20
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 lack of cash and lack of revenues from product sales and the
effects of the venture agreement are insufficient to fund our requirements, we
will rely on new external funding sources to provide liquidity, however, due to
the position of the Company the possibility of new external funding is not
likely and can not be assured.
If our current and new product sales, distributor/franchise sales, new areas of
distribution sales and funds from our external sources are not sufficient 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.
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.
21
We have been named as a defendant in a case Number 01 CV 1084 in the United
States District Court for the Southern District of New York alleging damages of
$1,500,000 to the holders of the 12% debentures due March 2003. The complaint
states that the Company is in default of the Debenture Agreements. The Company
will defend the allegations. The possible adverse result has been reserved in
the Company's liabilities. This action is in the early stages of litigation.
The Company settled a law suit titled H.A.A. Inc. v Airtech International
Group, Inc. during the first quarter 2002. The Company is in default under this
settlement agreement.
The Company has been found due and owing a former employee in a County
Court action in Michigan. The Company will negotiate a settlement with offset
amounts due the Company. The net liability of $25,000 has been reserved in the
Company's liabilities.
The Company settled a law suit Carlo Gavazzi Mupac, Inc. v Airtech
International Group, Inc. in 2000. The Company paid approximately $400,000 to
the plaintiff since that time. The Company was in default for approximately
$225,000 at February 28, 2002. The creditor seized certain of the Company's
assets in March 2002. The remaining amount due was not satisfied by the creditor
sale of these assets. The $225,000 due is reflected in the liabilities of the
Company.
We have been named as a defendant in a number of lawsuits arising
in the ordinary course of our business, generally from a failure to pay
creditors. There are approximately ten such lawsuits and numerous threatened
suits. 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 are in default with all creditors. We have fully reserved for these
claims and causes of action in our consolidated financial statements in the
aggregate amount of approximately $235,000.
The United States Securities and Exchange Commission is informally
investigating the Company's press releases in October and November 2001 and has
requested document production of various kinds from the Company. The Company has
produced some information for the SEC and is in the process of producing the
remaining requested information. The Company can not predict the outcome of the
investigation.
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 12,384,000 shares of
Common Stock, issued under SB-2 Registration Statements. The Company issued a
new Series B Preferred Stock in January 2002 and issued one million shares. The
company issued shares of stock to the Company employees for services performed
during this period, under a S-8 Registration Statement.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
The Company has been named in a cause citing a default of the 12%
Convertible Debentures, due March 2003. The Company is contesting this default
allegation and will answer the complaint. In addition, the Company is in default
under the 6% Convertible Debentures due 2002, is in default for failing to pay
interest to the 12% Convertible Debenture due 2003 and the monthly principal and
interest due the 12% Note holders.
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
22
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
November 28, 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 would be issuing a
dividend to shareholders of record November 30, 2001. This dividend was one
share of Humitech, Inc. common stock, for every ten shares of Airtech
International Group, Inc. common stock owned at November 30, 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 issued one hundred per cent of our ownership in Humitech
in the dividend to shareholders. This dividend has been substantially completed
as of this date.
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
23
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
A Form 8-K was filed to reflect the change in address of the Company to
Newport Beach California.
24
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: May 22, 2002
AIRTECH INTERNATIONAL GROUP, INC.
By: /s/ R. JOHN HARRIS
------------------------------------
R. John Harris,
Chief Executive Officer and Chairman
By: /s/ James R. Halter
------------------------------------
James R. Halter,
Chief Financial, Accounting Officer
and Director
25