UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
________________________
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2001
COMMISSION FILE NUMBER: 0-19796
________________________
AIRTECH INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in charter)
WYOMING 98-0120805
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
12561 Perimeter, DALLAS, TEXAS 75228
(Address of Principal Executive Offices)
________________________
(972) 960-9400
(Registrant's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Exchange Act: NONE
Securities Registered Under Section 12(g) of the Exchange Act: COMMON STOCK,
$0.05 PAR VALUE
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Registrant's operating revenues for its most recent fiscal year
were: $1,863,233.
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant, based on the average of the closing bid and
asked prices of the Registrant's Common Stock as reported on the OTC Electronic
Bulletin Board on July 24, 2001, was approximately $6,226,452. The shares
outstanding are reduced by shares of voting stock held by each officer and
director and by each person who owns 5% or more of the outstanding voting stock
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive.
As of May 31, 2001, approximately 32,770,804 shares of Common Stock, $0.05
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None. -
TABLE OF CONTENTS
ITEM PAGE
NUMBER
PART I
1. Description of Business............................... 3
2. Description of Properties............................. 17
3. Legal Proceedings..................................... 18
4. Submission of Matters to a Vote of Security Holders... 18
PART II
5. Market for Registrant's Common Equity and Related
Shareholder Matters........................... 18
6. Management's Discussion and Analysis.................. 25
7. Financial Statements.................................. F-1
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................... 30
PART III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the 30
Exchange Act....
10. Executive Compensation............................... 31
11. Security Ownership of Certain Beneficial Owners and
Management................................. 35
12. Certain Relationships and Related Transactions....... 36
PART IV
13. Exhibits and Reports on Form 8-K..................... 37
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATION AND DEVELOPMENT
Airtech International Group, Inc. was incorporated in the State of Wyoming
on August 8, 1991 under the name Interactive Technologies Corporation, Inc.
Until May, 1998, Interactive Technologies was principally engaged in developing
and producing interactive television and media programming for distribution
through cable, broadcast, direct satellite television and the Internet.
Interactive Technologies conducted this line of business through ownership of
proprietary software and a trademark known as Rebate TV. Rebate TV offered
network viewers rebates through an interactive program accessed by touch-tone
phones. In addition, Interactive Technologies owned licensed rights obtained
from the Federal Communications Commission to operate an interactive video and
data service system in the Melbourne-Titusville, Florida metropolitan area. A
second system owned by Interactive Technologies and located in the Charleston,
South Carolina metropolitan area was sold in 1997.
On May 31, 1998, we acquired all of the outstanding shares of common stock
of Airtech International Corporation, a Texas corporation. Airtech Corporation
was founded in 1994 as a distributor of air purification products for
Honeywell/Envirocaire. In January of 1996, Airtech Corporation outgrew the
distributorship business and began manufacturing two of its own air purification
products. The total purchase price of $22,937,760.00 for the stock acquisition
was paid through the issuance of 10,500,000 shares of Interactive Technologies'
common stock, 11,858,016 shares of Interactive Technologies' Series "A"
Convertible Preferred Stock and $9,000,000.00 in principal amount of Interactive
Technologies' convertible debentures. The shares of common stock and Series "A"
preferred stock were each valued at $0.625 per share. We accounted for the stock
acquisition using the purchase method of accounting, with Airtech Corporation
deemed the purchaser for purposes of our consolidated financial statements.
On July 31, 1998, the 11,858,016 shares of Series "A" preferred stock and
the $9,000,000 of convertible debentures, including accrued interest, were
converted into 11,858,016 and 13,071,429 shares of our common stock. After
conversion, the total number of outstanding shares of our common stock was
approximately 50,000,000 shares. On October 5, 1998, our shareholders approved a
one for five reverse split of our common stock which reduced the number of
outstanding shares of our common stock to approximately 10,000,000 shares and
increased the par value of our common stock from $0.01 to $0.05 per share. The
reverse stock split was effective as of November 9, 1998.
In February 1998, we discontinued the original line of business of
Interactive Technologies relating to interactive television and media
programming, including the Rebate TV product. The software, trademark and
license rights are the only assets of these discontinued lines of business.
These assets have no carrying value on our consolidated financial statements
because the products were discontinued prior to our acquisition of Airtech
Corporation. We discontinued these original lines of business to enable us to
concentrate on the development, manufacture, distribution and sale of the air
purification products offered by Airtech Corporation and its subsidiaries. We
are currently marketing the remaining assets for sale with no firm commitments
or agreements in place.
Since the discontinuation of our original lines of business, we have been
engaged with our wholly-owned subsidiaries, Airtech Corporation, Airsopure,
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Inc., and Airsopure International Group, Inc. in the development, marketing and
sale of air purification systems for commercial, residential and automobile use.
Airsopure was incorporated on March 5, 1997 in the State of Texas to implement
and operate a franchise program for the sale of commercial building air
purification products developed and manufactured by Airtech Corporation.
Airsopure International was incorporated on January 5, 2000 in the State of
Nevada to implement and operate a franchise program to facilitate the opening of
consumer direct sale retail stores for the sale of our residential air
purification products.
On November 30, 1995, we incorporated McCleskey Sales and Service, Inc. in
the State of Texas to integrate the distribution and sale of air purification
products by Airtech Corporation with the heating, ventilation and air
conditioning service business. Effective May 31, 1999, we discontinued the
operations of McCleskey Sales based upon the incompatibility of the heating and
air conditioning service business with Airtech Corporation's business of
manufacturing and distributing high quality air purification products. Our cash
expenses to discontinue the operations of McCleskey Sales were minimal.
In January 1999, we formed Airsopure 999, L.P., a Texas limited
partnership, for the purpose of developing, marketing and distributing our Model
S-999 automobile air purification system. Our wholly-owned subsidiary,
Airsopure, is the general partner of the limited partnership. In June 2001, we
issued shares of stock of Airtech to the Limited Partners for all their interest
in the partnership.
In October 1999, we applied to the Medicare administration for a Medicare
reimbursement code number for our Medicare Model 950. The reimbursement code
number allows Medicare recipients to receive reimbursement for the cost of our
Medicare Model 950. Our Medicare application is pending. We have not yet
received approval for a specific reimbursement code number, although Medicare
has allowed us to invoice Medicare using a non-assigned code number. The non-
assigned code number does not guarantee Medicare reimbursement to Medicare
recipients. In February 2001, we applied to the Health Care Financing
Administration for a health care product code system number for the portable
unit. This is commonly called a HCPCS Code. If a code is issued and a private
insurance carrier accepts the product, patients may receive reimbursement for
the purchase of the product. We can not guarantee the receipt of a HCPCS Code
number, nor if insurance companies will reimburse the cost of the product.
From February through June 2000, we opened four retail stores in Arlington,
Texas, Jackson, Tennessee, Addison, Texas and Kansas City, Missouri. We opened
these direct sale retail stores to facilitate the sale of our home consumer line
of air purification products. These retail stores serve as prototypes for future
franchise retail stores offered by Airsopure International. In February 2001, we
suspended the retail store concept. We continue to support the remaining stores.
On October 16, 1998, we changed our name from Interactive Technologies
Corporation, Inc. to Airtech International Group, Inc. Our address is 12561
Perimeter, Dallas, Texas 75248. Our telephone number is (972)960-9400 and our
web site can be accessed at www.airtechgroup.com. The web site of Airsopure can
be accessed at www.airsopure.com.
BUSINESS
We are engaged in the development, manufacturing, marketing and sale of
indoor air purification products for commercial and residential use. We also
manufacture and market an air purification system for use in automobiles. Our
4
strategy is to identify those markets which we believe are in need of solutions
to indoor air contamination problems. We propose to exploit these identified
markets through direct sales, franchising, licensing and strategic alliances
with manufacturing representatives.
Indoor air contamination exists in the form of particulates, gases or
viruses in the air we breathe, whether in an office building, retail or
commercial establishment, our transportation vehicle or in our homes. The public
is generally aware of the dangers of outside air pollution through "ozone alert
days" which suggest limited outdoor activities on those days. We believe,
however, that the general public is unaware that exposure to our immune systems
of unseen indoor air contaminants is normally six to seven times more hazardous
than outside air. These air contaminants include bacteria, pollen, dust mites,
smoke, plant spores, dust, solvents, glues, formaldehyde, carbon monoxide,
carbon dioxide, viruses, and diseases such as tuberculosis, meningitis, and
hepatitis. Indoor air contaminants also include volatile organic compounds or
"VOCs" which occur when airborne contaminants combine and become unstable.
Examples of these volatile compounds are benzene, styrene, arsenic and
polychlorinated biphenyls.
For millions of people, exposure to indoor air contaminants means
experiencing headaches, watery eyes, dizziness, lethargy, digestive problems,
nausea, nose and throat irritation. Statistics indicate that many legitimate
employee absences are "respiratory related" and that these absences have a
profoundly negative impact on productivity and profits. Historically, the
methods of addressing and treating indoor air contamination were to open windows
and doors to bring "fresh air" into an area or to use air cleaners such as ozone
generators or electro-static air "cleaners" to attempt to purify the existing
indoor air. We believe that these methods do not effectively handle the air
contamination problems which exist today. Although considered effective at the
time of conception, we regard these cleaners as obsolete in the current air
purification marketplace.
Our air purification products provide an inexpensive solution to air
contamination problems and concerns. Our products can be applied to various
commercial and residential uses and are ideally suited for a variety of users
that experience air contamination problems, including office buildings,
restaurants, bars, public buildings, nursing homes, hospitals, schools, dental
offices, waiting rooms, homes, airplanes, vehicles and residences. Our products
substantially remove or destroy microorganisms in the air, eliminate organic
odors and break down volatile compounds into harmless basic compounds.
FRANCHISE OPERATIONS
We operate a franchise program designed to leverage our air purification
expertise with the energies and investment of a franchise network. We see this
as a means of producing revenues for cash flow purposes from franchise fees,
sales of products to the market and royalty fees based upon the gross sales
generated by the franchisee. We currently have 18 franchisees who sell our
commercial products in various parts of the United States. These franchisees
market and sell our commercial building products through franchise agreements
with Airsopure, Inc., our wholly owned subsidiary. Each franchise agreement has
an initial term of five years and the franchisee may renew the franchise for
successive additional five year periods. Five of our current franchises expire
in fiscal year 2003 and thirteen in fiscal year 2004.
During fiscal year 2000, we elected to discontinue offering our commercial
franchises through Airsopure and began marketing our commercial products through
5
direct sales efforts from our corporate offices. We are also implementing a
program to pursue the marketing of our commercial products through manufacturing
representatives and recently employed an individual to coordinate this effort.
Based upon our estimate of approximately 260,000 manufacturing representatives
nationwide, we believe this marketing approach will provide us with broader
exposure of our commercial products. We also believe broader exposure will
increase the overall market penetration of our commercial products above the
levels previously recognized through our commercial franchise program.
During 2001, We also directed our franchise efforts and resources to our
new residential/retail franchise concept. To implement this new concept, we
formed Airsopure International Group, Inc., as a wholly owned subsidiary, to
commence a franchise program for the marketing and sale of our residential air
purification units. Airsopure International is qualified to offer our franchises
in 38 states. These franchises are direct sale consumer oriented and utilize a
retail store outlet concept. We provided a five day Indoor Air Quality
Certification program for each approved franchisee. Our franchise program
provided each franchisee with a protected territory. We believed hat the
exposure the franchisee would bring to our consumer residential products will
enhance and expand the overall market for our products. We commenced marketing
the residential/retail franchises in February 2000 and sold ten franchises
through May 31, 2001. In March, 2001 we discontinued the sale of franchises for
this direct sale concept. We continue to support the remaining four franchisees.
INDUSTRY OVERVIEW
The Environmental Protection Agency has identified indoor air pollution as
one of the five most urgent environmental concerns in the United States.
According to the EPA, poor air quality may affect one third to one half of the
commercial buildings in the United States. These affected commercial buildings
are referred to in the industry as "sick buildings" and represent a potentially
large market for our air purification systems. The term "sick building" can also
be applied to any commercial or private environment where airborne contaminants
pose a potential health hazard. The EPA asserts that the average American spends
roughly 90 percent of his or her time indoors (Consensus 1988; EPA 1988) and can
be breathing air more seriously polluted than outdoor air in even the largest
and most industrialized cities. Government statistics indicate that 10 to 25
million people working in 800,000 to 1.2 million commercial buildings have
developed respiratory symptoms related to indoor air pollution. These statistics
translate to a loss in business productivity that we believe could approach $60
billion a year.
People in "vulnerable categories" are particularly sensitive to indoor air
quality and indoor air pollution. These vulnerable categories include many older
individuals, those individuals who are susceptible to allergies, asthma and
other respiratory ailments, and young children. We estimate that more than 30
percent of the U.S. population falls within these categories. Of the people
within vulnerable categories, health experts have expressed special concern
about people with asthma. These people have very sensitive airways that react to
various irritants in the air which make breathing difficult. The number of
persons diagnosed with asthma has significantly increased in recent years. Since
1970, the number of asthmatics in the United States has increased 59 percent
which represents approximately 9.6 million people. There are approximately
seventeen million asthmatics in the United States. Asthmatics account for
500,000 hospitalizations and $6.2 billion in health care costs annually. Asthma
in children under 15 years of age has also increased 41 percent during the same
period representing a total of 2.6 million children. The number of deaths from
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asthma has increased 68 percent since 1979 (Source: Asthma and Allergy
Foundation of America).
The rising drug resistance within the U.S. population is also becoming a
major health issue. There are approximately 160 antibiotics available to fight
disease. Many of these antibiotics, however, are no longer effective on certain
virulent organisms, including tuberculosis and certain types of hospital-based
staphylococcus infections. Many viral and bacterial infections are airborne and
are primarily transmitted through the air. The first line of defense against
these diseases, is prevention through improvement of indoor air quality.
Bacteria, molds, pollen and viruses are types of biological contaminants.
These biological contaminants breed in stagnant water and accumulate in air
ducts, humidifiers, drain pans, and areas where water has condensed or collected
such as ceiling tiles, carpeting or insulation. Insect, bird and dust mite
droppings can also be a source of biological contaminants. Physical symptoms
related to biological contamination include fatigue, cough, chest tightness,
fever, chills, head and muscle aches, and allergic responses such as mucous
membrane irritation and upper respiratory congestion. One indoor bacteria,
Legionella, has caused both Legionnaire's Disease and Pontiac Fever (Source:
April 1991 Environmental Protection Agency Report [Air and Radiation]
Anr-445-W).
There is a growing awareness of the health hazards of airborne microbes,
also referred to as bioaerosols. Bioaerosols are extremely small living
organisms or fragments of organisms suspended in the air. Dust mites, molds,
fungi, spores, pollen, bacteria, viruses, amoebas, fragments of plant materials,
and human and pet dander are examples of bioaerosols. Bioaerosols are capable of
causing severe health problems. Some bioaerosols, such as viruses and bacteria,
cause infections, like a cold or pneumonia, and others cause allergic reactions.
An allergic reaction occurs when a substance provokes formation of antibodies in
a susceptible person. Bioaerosols may cause allergic reactions on the skin or in
the respiratory tract. Rashes, hay fever, asthma, breathing difficulties, and
runny noses are common allergic reactions.
Bioaerosols build up in closed indoor environments and are passed through
an entire building through central ventilation systems. The contamination of an
entire building through bioaerosols is commonly referred to as "sick building
syndrome." Bioaerosols are found in a variety of settings such as residences,
office buildings, medical and dental offices and hospitals, but cannot be seen
without a magnifying glass or microscope. Exposure to bioaerosols is much higher
in most enclosed locations where people congregate, such as schools, theaters,
airplanes, restaurants and shelters. Occurrences of sick building syndrome have
escalated largely because of the increased demand for reduced operating costs in
public buildings, particularly ventilation systems. The demand for reduced
operating costs led to the construction of "tight" buildings which are dependent
on mechanical air circulation systems rather than windows. These air circulation
systems recycle bioaerosols throughout the building creating sick building
syndrome.
Research has made it evident that air contaminants found in heating,
ventilation and air-conditioning systems and airtight buildings are responsible
to a large degree for sick building syndrome. The heating and air conditioning
community and the American Society of Heating, Refrigeration and Air
Conditioning Engineers have suggested that the use of higher ventilation rates
utilizing fresh outside air would dilute air contaminants and alleviate the sick
building syndrome to a great extent. In response to this suggestion and in an
effort to improve air quality, building operators have increased ventilation by
bringing in more fresh outside air. This process has resulted in increased
building costs
7
created by the need to heat or cool and dehumidify the outside air. The process
is also somewhat ineffective to the extent that polluted inside air is diluted
with polluted outside air.
PRODUCTS
Our product line consists of the following:
. Series 12: Our Series 12 is designed to fit into a 2 x 4-foot space
of a ceiling. This unit filters approximately 1200 cubic feet of air
each minute removing particulates, gases and odors. Markets for this
unit include the food and beverage industry, hospital and nursing
homes, print shops, office buildings and other industries with problems
involving cigarette or cigar smoke, odors and particulates. The retail
price of our Series 12 is $3,490.00. For the thirty three months ended
May 31, 2001, we sold 712 of these units to our franchisees and
national accounts.
. Series 14: Our Series 14 is designed to mount against a wall at the
joining point of the wall to the ceiling. The unit is approximately
36" x 14" x 14". The unit filters approximately 400 cubic feet of air
per minute. Markets for this unit include those users having problems
with any particulate, gas or odor found in rooms under 400 square feet,
such as hotel rooms, offices, classrooms, patient rooms and small
shops. Multiple units can be installed to accommodate larger rooms. The
retail price of our Series 14 is $990.00. For the thirty three one
months ended May 31, 2001, we sold 160 of these units to our
franchisees and national accounts.
. Series 18: Our Series-18 is a commercial unit which can service up to
five offices or rooms with inexpensive flex duct work. The unit is
installed above the ceiling and is out of view. The unit requires no
modifications to the existing heating and air conditioning system and
operates in a very quiet fashion. The retail price of our Series 18 is
$2,990.00. For the thirty three months ended May 31, 2001, we sold 66
of these units to our franchisees.
. Series 30: The Series 30 is a residential unit which is adaptable to
existing duct work used in existing heating, air conditioning and
ventilation systems. We are engaged in preliminary market discussions
with various users and expect to begin full scale production of the
Series 30 units on or about September 1, 2001. The retail price is
$1,000.00. For the six months ended May 31, 2001, we sold 190 of these
units to our franchisees and direct sales.
. Series 999: We developed our Series 999 as an automotive after market
product for mounting in the trunk of new and used cars. The unit was
designed to move 100 cubic feet of air per minute with complete air
changes in an automobile every 20 seconds. The retail price of our
Series 999 is $500. For the thirty three months ended May 31, 2001, we
sold 778 of these units. These sales were primarily to Airsopure 999,
L.P. of which Airsopure, Inc., our wholly owned subsidiary, was the
general partner.
Medicare Series 950: Our Medicare Series 950 is a free standing,
portable unit. In October 1999, our Medicare Series 950 unit was
submitted to Medicare for approval and issuance of a Medical
reimbursement code number. The Medicare reimbursement code number would
enable Medicare recipients to receive reimbursement for the cost of the
Medicare Series 950 unit. We have
8
proposed to offer our Medicare Series 950 to Medicare recipients for a
retail price of $795. As of June 30, 2001, we have not sold any
Medicare Series 950 units to the Medicare market.
. Consumer Series 950: Our Consumer Series 950 unit is similar to the
Medicare Series 950 with alterations for a larger array of filtration
for contaminants. The estimated retail price of the Consumer Series 950
is $1,495.00. As of May 31, 2001, we have sold 1078 of these units
since January 2001.
. Down Draft Tables: Our down draft tables were designed for the nail
manicure industry and first introduced in January 1996. The units have
largely been discontinued with our remaining inventory of approximately
5 units available for a retail price of $1,500.00. We discontinued our
down draft table line based upon a decline in market demand which
resulted in production and marketing expenses exceeding proposed sales.
. Replacement Filters: We manufacture our sorbent media filters by
purchasing pre-filter material in bulk and cutting the material in our
production facility to proper sizes to fit our units. Our hospital
grade HEPA filters are out-sourced for production. The tri-sorbent
filters are also outsourced for manufacture, but assembled at our
production facility. The life of the filters required by our air
purification units varies with the type of unit and the degree of
contamination; however, we estimate that each unit sold will require an
average of one to two complete filter changes per year. The filters
required by our ceiling units have a retail price of $268 to $462
depending on uses. The automobile unit requires approximately $100 in
replacement filters per year and the portable residential units
approximately $150 per year. The Model S-30 requires $100.00 in filters
per year
PRODUCT DEVELOPMENT AND REDESIGN
We do not anticipate any major costs during fiscal year 2002 to develop or
redesign our existing products or our products in the developmental stage which
will not be offset by estimated product sales. Instead, we intend to focus our
available capital resources on the marketing and distribution of our current
line of marketable air purification products. We will, however, adapt or
redesign our products to meet changing customer demands or to respond to
requests in the market for made-to-order products. Our decision to redesign or
develop a particular product will be based upon whether estimated sales to
respond to a particular product need will be sufficient to offset estimated
development or redesign costs.
We intend to evaluate the inclusion of photocatalytic oxidation
technology into both our existing and developmental products for the purpose of
increasing the air purification efficiency of these products. Photocatalytic
oxidation occurs when ultra violet light waves are passed through a titanium
screen creating a chemical reaction. The chemical reaction increases air
purification efficiency by eliminating volatile compounds within the unit.
OPERATIONS
We currently maintain a warehouse production facility of approximately
10,000 square feet in Dallas, Texas. In this facility, we are able to assemble a
combined total of approximately 1,000 of our Series S-12, S-14, and S-18 units.
We believe our warehouse facility is adequate for our current and estimated
future production needs for these units. Based upon our
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anticipated unit volume sales of the Series 999 automobile unit and the Medicare
and Consumer Series 950 units, management elected during fiscal year 2000 to
outsource production of these units. Component parts for the Model S-30 are
outsourced with final assembly at our manufacturing plant. We can assemble the
anticipated production needs at our facility.
COMPETING PRODUCTS AND TECHNOLOGIES
The current air filtration products and technologies available in the market
which compete with our products include the following:
. Activated carbon filters for use in heating, ventilation and air
conditioning units
. High Efficiency Particulate Air ("HEPA") filters
. Ozone generators
. Anti-microbial chemically treated filters
. High energy UV light
. Ionizers
. Electrostatic precipitators
. Media filtration
. Photocatalytic oxidation technology
. Various combinations of the above
These products and technologies are individually designed to provide various
levels of "air filtration" of air contaminants and not "air purification." We
believe a combination of several of these products and technologies must be
implemented to achieve effective air purification. The individual air
purification ineffectiveness of these products is the result of the following
factors:
Activated carbon filters absorb a number of volatile compounds and large
microorganisms such as dust mite droppings, which stick to dust particles in the
air, but do not remove other microorganisms from the air. The efficiency rate
declines over time as the carbon filters are clogged with pollutants. The
process alone is non-regenerating and the filters can be expensive to operate
due to increased power usage resulting from pressure drops. These pressure drops
occur when filters are clogged, thereby cutting the unit's capacity and ability
to deliver air to remote areas. We use activated carbon filters in our products
in combination with other air purification components. HEPA filter technology
reportedly removes up to 99.7% of air borne particles and is the dominant
technology used in portable room air cleaners over the past six years. HEPA
filters, however, are expensive to use in large applications such as multi-floor
office buildings. HEPA filters are also ineffective in removing extremely small
organic compounds, microorganisms and some viruses. HEPA filters are thick and
produce pressure drops when installed within heating and air conditioning
systems. These pressure drops increase maintenance and operating expenses
because the heating and air conditioning system must work continuously to
compensate for pressure drops. On its own, HEPA technology does not have the
ability to destroy
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bioaerosols or trap and breakdown volatile compounds or odors. Our products use
HEPA filtration combined with other components of air purification.
Ozone generation is a type of air cleaner that uses a high-voltage
electrical charge to change oxygen to ozone. A number of companies market ozone
generators as indoor air cleaners. These ozone-producing units break down
volatile compounds because ozone is highly oxidizing. To achieve the high
efficiency required, a very high level of ozone has to be released into the air.
Ozone itself, however, is a respiratory irritant. OSHA has established a limit
of workplace ozone levels over an eight-hour day. The FDA has also set a limit
for ozone levels of electronic air cleaners. We do not employ ozone in our
products.
Anti-microbial chemically treated filters can serve as a pre-filter to the
more effective and expensive HEPA filter, capturing the larger particles flowing
through the product and thereby prolonging the life of the HEPA filter, which
captures the very small particles. On its own, an anti-microbial pre-filter can
introduce additional contaminants into the air, such as volatile compounds,
toxins, endotoxins, and allergens, by degrading microbial organisms trapped on
the anti-microbial filter. We use these filters in our products in combination
with other air purification components.
High energy UV light has proven to be effective in killing microbial life
but is ineffective in destroying volatile compounds. High energy UV light,
however, can pose a danger to humans similar to staring directly into sunlight.
We use a level of UV light in several of our products which is not harmful to
humans in combination with other air purification components.
Air cleaners such as ionizers can be up to 90% efficient which means they
remove 90% of some types of pollutants. We are not aware of any medical evidence
which recommends the use of ionizers to improve air quality for people suffering
from asthma, allergies or upper respiratory problems. Most of these air cleaners
ionize the air and place electrical charges on particles but do not have any
charged collection plates. This means charged particles migrate through the air
and stick to the first surface they run into such as walls, furniture or lung
tissue. The charged particles remain on the surface until dislodged to re-enter
the air again. We do not use ionizers in our products.
Electrostatic methods have no effect on the destruction of volatile
compounds nor are they effective on small bioaerosols that are not attached to
particulate matter. When electrostatic methods trap bioaerosols, either the
bacteria will grow on the collection plates or if the bacteria is incapable of
growing because of the rushing air past the surface, the bacteria will die,
decompose and change to an organic compound and reenter the air stream.
Electrostatic methods have no effect on reducing organic compounds or odors. We
do not use electrostatic methods of air cleaning.
Charged media filters are made from an electric conducting material
stretched across a frame. Applying a high electric voltage to the material
creates an electrostatic field. However, these electrostatic fields are
generally not sufficiently strong to eliminate most particles, severely reducing
effectiveness. We do not use charged media filters in our products.
Photocatalytic oxidation creates a reduction in most volatile compounds.
Photocatalytic oxidation occurs when ultra violet light waves are passed through
a titanium screen creating a chemical reaction. The chemical reaction eliminates
the volatile compounds collected in the air purification unit by reducing them
to harmless components or carbon dioxide and water. We use photocatalytic
oxidation in our products in combination with other air purification components.
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COMPETITION
Our business is becoming increasingly competitive. Competition has increased
with society's growing awareness of air quality problems and the related demand
for air purification technology. We compete in both the commercial and
residential markets for air filtration and purification products.
The major competition for our products and markets is the domestic
commercial and residential heating, ventilation and air conditioning market.
This market is composed of a small number of large manufacturers. The two market
leaders are the Carrier division of United Technologies and Trane Corp., a unit
of American Standard. Trane is second in the industry. Like Carrier, Trane
competes in all segments of our industry including commercial, residential, air
conditioning, furnaces and heat pumps. Our other competitors include the
following companies:
Fedders, Inc. (NASDAQ:FJC) is a holding company which manufactures and sells
a full line of room air conditioners and dehumidifiers, principally for use in
domestic residential markets.
Trion Inc., a newly acquired subsidiary of Fedders, Inc., has air
purification operations which consist of two principal segments: engineered
products and consumer products. The engineered products group designs,
manufactures and sells commercial indoor air quality and dust collection
equipment. The consumer products division manufactures and markets appliance air
cleaners, including both table top and free standing console units.
Environmental Elements designs equipment and supplies systems and services
to the air pollution industry through the design of large scale systems to
control gaseous emissions. In addition, Environmental Elements designs
electrostatic precipitators, fabric filters and scrubbing systems.
Honeywell, Inc. (NYSE:HON) has both commercial and consumer divisions of air
filtration products with primary sales generated from the consumer division.
CECO Environmental Corp. (NASDAQ:CECE) has been in the air quality
technologies and services business for over 30 years. CECO has expanded the
applications for its technology to include water treatment. CECO provides a wide
spectrum of air quality and wastewater treatment products and services. These
products and services include industrial air filters, high performance filter
fabrics, environmental maintenance, monitoring and management services, waste
water treatment and air quality improvement systems. CECO is a full-service
provider to the steel, aluminum, automotive, aerospace, semiconductor, chemical
and metalworking industries.
United Air Specialists was established in 1966 to provide commercial and
industrial environmental air cleaning solutions worldwide through a diverse
product offering dust collection systems, industrial fluid coating systems and
industrial oil cleaning equipment. The United Air product line includes the
Smokeater, an electromatic precipitator cleaner. Designed to meet the needs of
each customer, United Air equipment is backed by strong performance guarantees,
technical support and years of experience.
Competition in the commercial indoor air quality market is very specialized
with no one company offering a complete line of air filtration equipment.
Commercial companies tend to specialize in very distinct market segments. In
most major metropolitan areas of the United States, there are also various small
commercial air filtration suppliers. We believe none of these suppliers has a
product line competitive with our commercial units. In the residential indoor
air
12
quality market, many suppliers and manufacturers have a variety of air
filtration products, generally in the lower retail price range of approximately
$250.
We are currently unaware of any company which manufactures or distributes a
highly efficient or trunk-mounted air purification unit for the automobile
comparable to our Series 999. We anticipate, however, that our proposed
penetration of the automobile market will generate significant interest with
competition coming from established automobile manufacturers.
We believe that the applications for our product lines will have broad
appeal, since the implementation costs of our products are small compared to the
cost benefits that typically accrue to the user. We also believe our
technological approach of combining several air purification components into a
single product is a superior method for removing and destroying pollutants in an
indoor air environment. Some of the advantages and benefits of our products are
as follows:
- Biological air contaminants are substantially destroyed and or removed
- The process cleans and purifies the air through multiple air changes
- The process is effective for microbes, endotoxins, toxins, allergens,
- and organic compounds
- No toxic chemicals are employed
- No ozone is generated or introduced into the air
- The process works well at room temperature
- The energy needs are low in stand alone systems outside of heating and
air conditioning systems
- Self-cleaning process does not reintroduce air contaminant residue into
the air stream
- After initial purchase, the products are very economical to operate,
including the price of filter replacements
MARKETS
Our market research has identified the following markets which may benefit
from our products:
Medical and specialty facilities such as hospitals, clinics, nursing
homes, laboratories, day care centers, and emergency rooms. These
facilities represent a large market for our products. Also, any facility
where indoor air quality is critical to the safety and health of the
patients/customers is a potential market.
- The commercial heating, ventilation and air conditioning market is a
market which generated billions in sales and which we believe will
experience continued sales growth in the future.
- The residential market consists of over 60 million homes with central
heating, ventilation and air conditioning systems occupied by individuals
with a need for better indoor air quality.
13
The industrial air quality market is estimated to have sales which exceed
$12 billion. Increased local, state, and federal regulations are
continuing to require cleaner indoor industrial air quality.
The transportation market includes automobiles, ambulances, buses,
limousines, railroads, aircraft, and cruise ships which have a specific
need for improved indoor air quality.
People who suffer from upper respiratory discomfort and allergic reactions
due to poor indoor air quality at home, at work and in transportation
vehicles.
- People in vulnerable categories including older individuals in nursing
homes and hospitals, individuals who are susceptible to allergies, asthma
and other respiratory ailments, and young children.
Our technology provides an inexpensive solution to many of the indoor air
quality problems which affect the daily lives of these individuals. Health
conscious consumers are also becoming more particular about the air quality in
their environments. We believe this trend will lead to an increase in demand for
better air purification systems. We also believe that our combined technology
approach will outrank the solutions provided by other air filtration systems
that use traditional single methods for indoor air filtration and purification.
BUSINESS PLAN AND MARKETING STRATEGY
Traditionally, air purification systems are marketed and sold through a
single distribution channel comprised of heating and air conditioning
contractors or repairmen. Our strategy is to approach the market through
multiple distribution channels. We are not aware of any of our competitors who
utilize a multiple channel approach. We have targeted several distribution
channels for direct exposure of our products to educate consumers about the
costs and solutions for indoor air contamination. We believe that this multiple
channel approach combined with the quality of our products will separate us from
our competition. For example, we currently utilize the following distribution
channels:
FRANCHISES. We currently have 18 commercial franchisees who market and sell
our commercial building air purification products in various parts of the United
States. In February 2000, we commenced a franchise program for the marketing and
sale of our residential air purification products utilizing a retail store
outlet concept. We provide a five day Indoor Air Quality Certification program
for all of our approved franchisees. Each of our franchisees have a protected
territory. We also coordinate an advertising program with our franchisees to
provide an unlimited number of leads and Future potential accounts to serve. Our
franchisees are not required to exclusively market our products and may combine
our products with competing products. We commenced marketing the residential/
retail franchises in February 2000 and sold ten franchises through May 31, 2001.
In March 2001, we discontinued sale of this residential franchise. We continue
to support The four franchises in operation.
INTERNATIONAL LICENSES. We have licensed the distribution rights to our
name and technology in the countries of Taiwan, the Philippines, Turkey, Canada
and Spain. Effective May 31, 2000, we entered into a development agreement with
Aurora Products, Ltd. (Shanghai) for the distribution of our products in the
Peoples Republic of China and other Pacific Rim countries. Aurora Products
14
executed a $1,000,000 demand promissory note in return for the distribution
rights. The note bears interest at 10% per annum with all principal and interest
due May 31, 2008. As of August 31, 2001, we have received payments of $92,281
under the note. Effective January 2001 , we entered into a distribution
agreement with Kee Technologies of Panama City, Republic of Panama. This
agreement covers Central and South America.
Our existing international licenses are with one licensee for the entire
country. We may in the future, however, divide a country into several licensed
territories with multiple licensees. We intend to aggressively pursue additional
international distribution relationships during fiscal year 2001. Our
international licenses sell for a minimum of $100,000 per country, depending on
population.
MANUFACTURER'S REPRESENTATIVES. We estimate that there are approximately
260,000 heating and air conditioning representatives in the United States. This
unconsolidated group of professionals accounts for a significant amount of the
current sales of air purification and cleaning units. We intend to make our
products available to these representatives and recently employee an individual
with expertise in this market to coordinate this channel of distribution. As of
May 31, 2001, we have entered into agreements with twelve local manufacturing
representatives. In February 2001, we entered into an agreement with W & B
Service Company for a national distribution of our commercial and automotive
purification products. We can not assure you that this new marketing approach
will be successful. If unsuccessful, we may not be able to increase sales from
our commercial or consumer products which could materially affect our future
profitability.
INTERNET SALES. Internet usage has increased over the last several years
and consumer purchasing is expected to continue to grow in accordance with this
usage. We estimate that 73% of website users search for information about
products and services and 7.4 million users have made at least one purchase over
the Internet. The demographics of website users also fit well with our products.
Most website users are well educated and earn significantly more income than the
national average. Our websites are www.airsopure.com or www.airtechgroup.com.
Since June of 1999, the Airsopure website was accessed 194,444 times and the
Airtech website 241,785 times.
We have made minor sales directly attributable to our websites. On these
sites, visitors can educate themselves about our products and order online. We
intend to spend additional funds to redesign and enlarge our websites in an
effort to direct more Internet traffic to our websites. Our proposed redesign
will include "hyper link" access to our products. Hyper link access will enable
website users to use generic words such as "air quality" or "air purification"
for immediate referral to our website. Our websites also provide quicker
advertising response times, direct feedback from customers and instantaneous
updating of information. We believe the keys to successful marketing on the
Internet will be exposure and association with other well-traveled websites,
security, a clean design, ease of use and product testimonials.
CORPORATE SALES. We currently make direct sales through our corporate
offices to national accounts such as TGI Fridays, Bennigan's and Sullivan"s, in
addition to other local, regional and national accounts involved in the food and
beverage industry. We also intend to employ the direct sales approach to school
systems and government facilities during fiscal year 2001.
15
RETAIL DISTRIBUTION. Since February 2000, we sold eight residential retail
franchises. We recently suspended our franchise program utilizing this concept.
We continue to support the five remaining franchises. We are currently marketing
our residential products through direct sales from corporate offices and print
and media advertising. We are also expanding the following additional
distribution channels for our products:
MEDICARE AND DURABLE MEDICAL EQUIPMENT DISTRIBUTORS. Our research indicates
that physicians regularly recommend the use of portable air filtration systems
for patients suffering from chronic and acute episodes of illness related to
allergies, asthma and general upper respiratory distress, many of whom are
Medicare enrollees. These medical conditions are frequently elevated from a
chronic status to acute episodes due to the inhaling by patients of various
airborne contaminants. In the absence of a Medicare reimbursement code, Medicare
patients are generally forced to incur the expense of such technology on a
non-reimbursable basis.
In October 1999, we applied for a Medicare reimbursement code number for
our Medicare Series 950. We have not yet received approval for a specific
reimbursement code number to date, although Medicare has allowed us to invoice
Medicare using a non-assigned code number. The use of the non- assigned code
number does not guarantee Medicare reimbursement to Medicare recipients.
Issuance of the Medicare reimbursement number is within the sole discretion of
the Medicare Administration and we can not predict if, or when, we will receive
Medicare approval. In February 2001, we applied to the Health Care Financing
Administration, for a health care product code system number for the portable
unit. This code is commonly referred to in the medical insurance industry as a
HCPCS Code. If a code is issued and a private insurance carrier accepts our
product, patients who purchase a portable unit may be entitled to receive
insurance reimbursement from their private insurance carrier. We expect a
decision on our HCPCS application by December 2001. We can not predict if, or
when, we will receive this approval.
We have identified a national distribution network composed of durable
medical equipment distributors that have existing sales forces and marketing
infrastructures. Association with these distributors creates an immediate
distribution network for our Medicare and Consumer Series 950 units. This
distribution network would eliminate management challenges of creating and
maintaining our own sales force or recreating the existing client bases of these
distributors. Medical equipment distributors currently interact with physicians
providing other medical devices such as walkers, wheelchairs, hospital beds and
electronic monitoring devices. If we do not receive approval from Medicare of
our Medicare Series 950 unit, we intend to continue our efforts to market the
Consumer Series 950 through direct sales to medical equipment distributors and
by pursuing insurance carriers and health care providers outside of the Medicare
system by use of the HCPCS code. We cannot predict or forecast the amount of any
future sales which may be generated from the Medicare or Consumer Series 950
units. In January 2001, we entered into an agreement with Southern Therapy, Inc.
a Texas based HME/DME for the national distribution of the Medicare Series 950
unit.
AUTOMOBILES AND PUBLIC TRANSPORTATION. Our research indicates that there
exists an increasing problem with abundant air contamination in automobiles and
public transportation vehicles across the United States. Our research also
indicates that no real technological solutions are being applied to remove the
harmful and irritating smells, gases and micro-particles that can cause and
exacerbate respiratory problems. We have concluded that solving these issues for
the public could provide tremendous economic rewards and auto resale values to a
wide variety of customers, such as car rental
16
companies, automobile dealers and government vehicles. One of the foremost
complaints in the car rental industry and the new and used car industry, are the
odors associated either with new material odors or with fabrics and materials in
the automobile cabin that have absorbed pollutants like cigarette smoke for
prolonged periods of time.
We believe that all of these vehicles represent potential installations for
our Series S-999. We propose to penetrate this market through agreements with
nationwide auto after-market companies. Our proposal is to wholesale our Series
999 automobile air purification unit for inclusion with other after-market
packages offered in the auto after-market such as automobile customizing
packages. We believe a very highly effective and affordable air purification
device like our Series S-999 will be accepted in the automobile after-market. We
are currently in preliminary negotiations with several auto after-market
companies, but have no final commitments or agreements.
PERMITS, PATENTS, TRADEMARKS, LICENSES AND COPYRIGHTS
We do not own any patents or copyrights for our products or promotional
materials. We do, however, have a registered trademark for the name "Airsopure"
and the related service mark "The Essence of Clean Air." In addition, we have
common law trademark protection for certain of our other trade names and service
marks. We also intend to pursue copyrights for certain of our promotional and
franchise training materials. While we believe our products are currently a
unique implementation of filter and air purification components in the current
market, our products are susceptible to duplication by utilizing current
technology and components. Therefore, we do not believe any of our products are
ultimately patentable and do not intend to apply for patent protection.
SUPPLIERS
We purchase the supplies and materials used in our business from a number of
vendors. As of June 30, 2001, our five principal suppliers who provided us with
materials used in our products were ADS, Inc., FiltersRx, Inc., UVDI, Inc., Love
Box and Standard Supply, Inc. We purchase motors, fans, filters packaging and
lamps from these suppliers. If we experience production difficulties from any of
our principal suppliers, alternative suppliers and vendors exist in the
marketplace. We may, however, experience production delays to enable an
alternative supplier sufficient time to produce supplies to our specifications.
We do not expect any delays to be material based upon our policy to maintain
inventory levels necessary to avoid production delays.
ESTIMATE OF RESEARCH AND DEVELOPMENT EXPENDITURES
We incurred various research and development expenditures of approximately
$184,579 for the fiscal year ended May 31, 2001 and $100,000 for the fiscal year
ended May 31, 2000. These expenditures included salaries, materials, finished
units, travel and correspondence.
EMPLOYEES
As of May 31, 2001, we had 15 employees including one part-time employee.
FISCAL YEAR
Our fiscal year is from June 1 to May 31 of each year.
ITEM 2. DESCRIPTION OF PROPERTIES
17
We maintain our executive offices at 12561 Perimeter, Dallas, Texas 75228.
We also maintain a warehouse facility at the same location in Dallas,
Texas. These facilities have a total of approximately 10,000 square feet and a
total rental cost for fiscal year 2001 of $115,775. We are committed to our
office lease until September 30, 2001. We are currently in negotiations with the
landlord on a lease extension. We consider our facilities sufficient for our
present and currently anticipated future operations and believe that all of our
properties are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
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.
On March 2, 2000, we were named as a defendant in a cause of action styled
H.A.A., Inc. v. Airtech International Group, Inc., Cause No. 00CV-1603 (KMW), in
the United States District Court for the Southern District of New York. The
plaintiff originally sought the specific performance of an alleged contract
providing for our sale to the plaintiff of 1,854,386 shares of our common stock
for a cash purchase price of $419,000. After the original filing, the plaintiffs
amended their original complaint to include alleged damages of approximately
$1,000,000 as an alternative remedy to specific performance. On July 6, 2001,
we entered into a settlement agreement with the plaintiff. The terms and
conditions of the settlement are subject to confidentiality agreement with the
plaintiff. We do not believe that the terms of the settlement will have a
material adverse effect on our financial condition or future operations.
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 $25,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 2001 at a Special Meeting of the stockholders, they approved an
amendment to the Restated Articles of Incorporation to increase the number of
authorized shares of our common stock $0.05 par value, from 50,000,000
authorized to 100,000,000 authorized shares.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
18
Our shares of common stock are traded in the "over-the-counter" or "Bulletin
Board" market under the symbol "AIRG." High and low sales prices of our shares
of common stock for the quarters of fiscal years 2001 and 2000 were:
HIGH LOW
-------- --------
Fiscal Year 2001
4th Quarter..................................... $0.27 $ 0.14
3rd Quarter..................................... 0.53 0.17
2nd Quarter..................................... 1.09 0.38
1st Quarter..................................... 1.53 0.75
Fiscal Year 2000
4th Quarter..................................... $2.59 $ 1.00
3rd Quarter..................................... 3.53 0.60
2nd Quarter..................................... 0.90 0.25
1st Quarter..................................... 0.75 0.125
NUMBER OF SHAREHOLDERS AND TOTAL OUTSTANDING SHARES
As of May 31, 2001, there were approximately 2,000 holders of record of our
common stock and we had approximately 32,770,804 shares issued and outstanding.
DIVIDENDS
We have paid no dividends on our shares of common stock and we have no
current intention to pay dividends on our shares of common stock in the future.
Holders of our Series "M" Convertible Preferred Stock have a preferred dividend
right to receive quarterly dividend distributions equal to 4.57% of the gross
revenues generated from sales of our Series 950 units until 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 May 31, 2000, no dividends have been paid on the Series "M" convertible
preferred stock. Any future determination to pay cash dividends on our common
stock will be at the discretion of our board of directors. Future dividends will
be dependent upon our financial condition, results of operations, capital
requirements and other relevant factors. As of January 1, 2000, we terminated
our offering of Series "M" convertible preferred stock and do not intend to
offer any additional shares in the future.
In August 2001, we announced that the Company will be issuing a dividend to
shareholders of record September 30, 2001. This dividend will be one share of
Humitech, Inc. common stock, for every ten shares of our common stock owned at
September 30, 2001. Humitech, Inc. purchased, in August, 2001, one hundred per
cent of the outstanding common stock of our 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.
RECENT SALES OF UNREGISTERED SECURITIES
PRINCIPAL
AMOUNT
OR PRICE
SHARES PER
DATE TITLE ISSUED SHARE NATURE of TRANSACTION
and ISSYED UNDER EXEMPTION
July 20, 2001 12% Convertible $200,000 N/A Private Placement
19
Debenture with 100,000 attached
Warrants Section 4(2) of the Securities Act
June 19, 2001 Common Stock 2,639,926 N/A Convert Airsopure 999
Limited Partners as
accredited investors per
Agreement Section 4(2)
Securities Act
March 30, 2001 12% Convertible $800,000 N/A Private Placement
Debentures with 500,000 attached
Warrants Section 4(2)of the
Securities Act
March 30, 2001 Common Stock 955,128 $0.19 Shares issued employees and
senior management
for services rendered
S-8 Registration Statement
March 30, 2001 Common Stock 105,000 $0.23 Shares issued NIR Group, LLC
for placement 12% debentures Section 4(2)
of Securities Act
February 28, 2001 Common Stock 500,000 $0.18 Shares issued employees and
senior management for services
rendered S-8 Registration
Statement
March 27, 2001 Common Stock 308,541 $0.24 Shares issued to
accredited investor in Conversion of
limited partnership interest in Airsopure
999 Section 4(2) of the Securities Act
January, 2001 Common Stock 2,800,000 $0.15 Shares issued to accredited investors Section 4(2) of the
Securities Act
January 8, 2001 Common Stock 200,000 $0.25 Shares issued to
accredited investors
Section 4(2) of the
Securities Act
June 30, 2000 Common Stock 400,000 $0.25 Shares issued to
accredited investor
in exchange of warrants held by holders of "M"
Preferred Stock
February 22, 2000. 6% Convertible $2,500,000 N/A Private Placement Section 4(2) of
Debentures with attached Warrants
the Securities Act
January 2000 thru March 2000. 12% Convertible $350,000 N/A Private Placement Section 4(2) of
Debentures with Warrants attached the Securities Act
January 2000 thru Common 200,000 $0.25 to $0.75 Private Placement Section 4(2) of
February 2000.... ............. the Securities Act
December 31, 1999. Common 300,000 $0.19 Shares issued to CEO and President S-8 registration for services
rendered
August 31, 1999...Common 358,591 $0.34 to $0.50 Shares issued to Investment Bankers S-8 registration statement
June 30, 1999...... Common 1,200,000 $0.10 Shares issued to accredited investors Section 4(2) of the Securities Act
Including 500,000 shares to CR Saulsbury, Sr.
May 31, 1999..... Common 700,000 $0.10 Shares issued to accredited investors Section 4(2) of
the Securities Act
February 28, 1999. Common 1,583,134 $0.50 Shares issued to CEO Section 4(2) of the Securities Act
consideration of
20
deferred wages from
June 1, 1997 through
December 31, 1998
December 31, 1998. Common 46,250 $0.50 Warrants exercised by holders of "M"Preferred Stock Section 4(2) of
the Securities Act
November 30, 1998 Common 828,000 $0.33 Shares issued to accredited investors Section 4(2) of
the Securities Act
November 30, 1998 Common 224,000 $0.48 to $0.69 Shares issued to Investment bankers and consultants for services
rendered
S-8 registration Statement
August 31, 1998.. Common 146,025 $1.25 to $1.56 Shares issued to consultants and employees for services rendered
S-8 registration statement
July 31, 1998.... Common 2,614,286 $0.70 Conversion of debentures issued in conjunction with the merger of
ITC and AIC
Section 4(2) of the Securities Act
July 31, 1998.... Common 2,371,603 One- Conversion of Series A preferred stock issued in conjunction with
the merger of ITC and AIC
March thru Sept. 1998 Series M 1,143,750 $1.14 Private Placement Section 4(2) of
the Securities Act
DESCRIPTION OF CONVERTIBLE SECURITIES
We have summarized below the material provisions of our securities which are
convertible into shares of our common stock.
SERIES "M" CONVERTIBLE PREFERRED STOCK AND RELATED WARRANTS
We have 1,143,750 shares of Series "M" Convertible preferred stock
outstanding. Holders of our Series "M" preferred have the right to convert their
shares into shares of our common stock on a one-for-one basis at any time. The
Series "M" preferred automatically converts to shares of our common stock on
December 31, 2001. The holders of Series "M" preferred are entitled to receive
quarterly dividend distributions equal to 4.57% of the gross revenues generated
from the sales of our Series 950 units until 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 993,750 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., our wholly-owned subsidiary
("Airsopure"), is the sole general partner of Airsopure LP. Under the limited
partnership agreement, the limited partners are entitled to receive 1.7% of the
gross revenues generated from sales of our Model S-999 automobile air
purification system with the remaining gross revenues paid to Airsopure. The
limited partners are entitled to receive distributions until December 31, 2003,
at which time 100% of gross revenues are paid to Airsopure. In addition,
Airsopure has guaranteed the limited partners a 150% return on their investment
by December 31, 2003. The guarantee, if payable, may at our election be in the
form of shares of our common stock. All limited partners were converted to
common stock in June 2001 by the issuance of 2,639,926 shares of our common
stock.
21
12% CONVERTIBLE DEBENTURES DUE 2004 AND ATTACHED WARRANTS
In January 2000, our board of directors authorized the issuance of up to
$5,000,000 of our 12% Convertible Debentures Due 2004 under a private placement
memorandum. As of May 31, 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 the following redemption prices
together with accrued interest to the date of redemption:
IF REDEEMED ON OR AFTER SEPTEMBER 1
OF THE FOLLOWING YEARS: % OF PRINCIPAL
2001 108%
2002 106%
2003 104%
2004 102%
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;
22
- 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.
6% 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 to 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 are obligated to purchase the
additional 12% debentures on the date the registration statement relating to the
common stock offered by this prospectus is declared effective by the SEC. 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
23
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
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
24
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
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical fact are
"forward-looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. The words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "believes," "estimates,"
"projects" or similar expressions are intended to identify these forward-looking
statements. These statements are subject to risks and uncertainties beyond our
reasonable control that could cause our actual business and results of
operations to differ materially from those reflected in our forward-looking
statements. The safe harbor provisions provided in the Securities Litigation
Reform Act do not apply to forward-looking statements we make in this report.
Forward-looking statements are not guarantees of future performance. Our
forward-looking statements are based on trends which we anticipate in our
industry and our good faith estimate of the effect on these trends of such
factors as industry capacity, product demand and product pricing. The inclusion
of projections and other forward-looking statements should not be regarded a
representation by us or any other person that we will realize our projections or
that any of the forward-looking statements contained in this prospectus will
prove to be accurate.
BACKGROUND AND GENERAL
On May 31, 1998, Interactive Technologies acquired all of the outstanding
shares of common stock of Airtech Corporation for a purchase price of
25
$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.
After the acquisition of Airtech Corporation, we discontinued the original
line of business of Interactive Technologies. We discontinued this original line
of business to enable us to concentrate on the development, manufacture,
distribution, and sale of the air purification products offered by Airtech
Corporation and its subsidiaries. Effective May 31, 1999, we also discontinued
the operations of our wholly owned subsidiary, McCleskey Sales and Service, Inc.
McCleskey Sales was originally formed to integrate the distribution and sale of
our air purification products with the heating, ventilation and air conditioning
service and repair business. We discontinued the operation of McCleskey Sales
based upon the incompatibility of the heating and air conditioning service and
repair business with our business of manufacturing and distributing high quality
air purification products. Our cash expenses to discontinue the operations of
McCleskey Sales were minimal.
On February 22, 2000, we entered into a securities purchase agreement with
PK Investors LLC to raise up to $5,000,000 through the sale to PK Investors of
up to $5,000,000 in principal amount of our 6% Convertible Debentures Due 2002
with attached warrants to purchase up to 500,000 shares of our common stock.
Upon execution of the securities purchase agreement, PK Investors purchased
$2,500,000 in principal amount of 6% debentures with attached warrants to
purchase 250,000 shares of common stock for a purchase price of $2,500,000.
Under the terms of the securities purchase agreement, we also issued to PK
Investors a conditional warrant to purchase the remaining $2,500,000 in
principal amount of 6% debentures and the remaining attached warrants to
purchase 250,000 shares of our common stock for a purchase price of $2,500,000.
The conditional warrant expires on December 22, 2000.
On March 30, 2001, we entered into a securities purchase agreement with
AJW Partners, LLC and New Millennium Capital Partners II, LLC to raise
$1,000,000 through the sale of $1,000,000 in principal amount of our 12%
Convertible Debentures Due March 30, 2003 with attached warrants to purchase up
to 600,000 shares of our common stock for a purchase price of $1,000,000.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MAY 31, 2001 COMPARED TO YEAR ENDED
MAY 31, 2000
REVENUES
Our consolidated total revenues increase $235,757 or 14.5% from $1,627,476
in 2000 to $1,863,233 in 2001. This 14.5% increase in sales is comprised of the
following: product sales of our air purification equipment increased 319% or
$1,192,286 from sales of $543,615 in 2000 to $1,735,901 in 2001. This increase
is due to increase sales of our commercial equipment and the sale of the
portable air purifier and the introduction and sale of the in-duct residential
air purifiers. The franchise fees decreased 97% from $1,047,500 in 2000 to
$25,000 in 2001. The sale of three franchises in 2000 compares to the sale of
one franchise in 2001. The 2000 sale was primarily a sale of foreign
distribution rights in China and the Pacific Rim. In 2001 we suspended the
franchise fees for sale of territories when the buyer had prior successful
26
operation of a similar franchise. There were no sales of foreign distribution
rights in 2001. The other revenue increased $90,971 or 900% from $11,361 in 2000
to $102,332 in 2001. This increase is primarily to the increase in sale of
replacement filters for units sold in prior years.
COSTS AND EXPENSES
Our consolidated total costs and expenses increased $640,709 or 16% from
$3,960,455 in 2000 to $4,601,164 in 2001. The major components of this $640,708
increase were:
Salaries and wages increased $358,190 or 36% from $987,763 in 2000 to
$1,345,953 for 2001. This increase is the result of many factors including
increased commissions on sales of our products which is approximately $75,000 of
the increase from 2000. In addition, we operated four retail stores during 2001
that represents $245,000 of the increased wages, with no comparable expense in
2000.
Cost of sales increased $376,090 or 72% to $895,693 for 2001 as compared to
$519,603 for 2000. This increase is due to the 319% increase in product sales.
The percentage cost of goods sold decreased from 96% of sales in 2000 to 51% of
sales for 2001.
- lower write off of obsolete inventory,
- lower gross sales of higher cost products and higher margins on units
sold. This was primarily due to sales in our company stores, and
- increased sales, thus more fully utilizing our manufacturing facility.
Advertising costs increased $28,997 to $136,213 for 2001 from $107,216 for
2000. This is a 27% increase in costs. The increase is due to the introduction
of two new products and the implementation of our new residential franchise
sales approach, which increased promotional costs, including brochures and
travel expenses.
Depreciation decreased $14,891 to $32,064 for the year 2001 compared to
$46,955 for 2000. This decrease is primarily due to less depreciation on those
items fully depreciated and not replaced.
Amortization increased $145,833 to $394,551 for the year 2001 from
$248,718 for the year 2000. The increase is due to a twelve months amortization
of the prepaid royalties during 2001 compared to six months amortization during
2000.
General and administrative expenses decreased $253,510 to $1,796,690 for the
year 2001 from $2,050,200 in 2000. This 12% decrease is due to increases in
litigation expenses of legal fees and settlement costs offset by a charge off of
$260,700 of a discontinued subsidiary, McCleskey Sales and Service, Inc. In
addition, outside consultant fees and investment bankers fees decreased during
2001.
Interest expense of $365,387 for 2001 is $256,772 higher than the $108,615
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 2001.
In addition, the 12% convertible debentures sold in March 2001 contained an
imbedded beneficial conversion feature, wherein an additional $117,000 in
interest was charged as interest expense and as a discount to the debentures.
27
The result of these revenues and costs and expenses is a net loss of
($3,103,318) or ($0.13) per share of common stock (basic and diluted)for the
year 2001 compared to a net loss of ($2,441,594) or ($0.14) per share of common
stock for 2000. This represents a 27% increase in our net loss and a $0.01
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 May 31, 2001, we had total current assets of $3,107,590 less current
liabilities of $4,465,246 which resulted in net current liabilities of
$1,357,656. When the current portion of the convertible debentures are
subtracted from total current liabilities the current assets exceed the adjusted
liabilities by $617,344. This is a decrease in net current assets of $1,202,196
at May 31, 2000. This 49% decrease in net current assets (as adjusted)is due to
the continuing losses incurred by the company. 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. We
also expect that our cash balance and operations are adequate to sustain our
continued operations during fiscal year 2002.
Our goal is to sign as distributors 100 industry companies during fiscal
year 2002. Although not generating any franchise fees these outlets should have
a positive impact on product sales. 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 2001. 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 an increase from
the sales year ended May 31, 1999 of $388,412. This trend indicates the sales of
our existing product line is increasing. Although we believe our sales represent
a positive trend, we cannot assure you that this positive trend will continue.
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
28
insufficient to fund our continued growth, we will rely on our external funding
sources to provide continued liquidity. For the year 2001, we increased cash
from financing activities by approximately $1,729,575. This amount includes
$632,093 (net) from the sale of our 12% debentures with attached warrants to a
New York City Group and stock payments to employees and consultants.
The $3,500,000 in principal amount of 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.
We are currently in negotiation with financial institutions for unsecured
operating lines of credit. We expect to have a $500,000 line available, if
needed, for operations.
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.
29
ITEM 7. FINANCIAL STATEMENTS
INDEX TO COMBINED FINANCIAL INFORMATION
AIRTECH INTERNATIONAL GROUP, INC.
ITEM PAGE
----- --------
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of May 31, 2001 and 2000..... F-3
Consolidated Statements of Operations for the Years Ended
May 31, 2001 and 2000...................................... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended May 31, 2001 and 2000.......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
May 31, 2001 and 2000...................................... F-7
Notes to Financial Statements for May 31, 2001 and 2000..... F-8
F-1
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Airtech International Group, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Airtech
International Group, Inc. and subsidiaries as of May 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Airtech International Group, Inc. and subsidiaries as of May 31, 2001 and 2000,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Turner, Stone & Company, LLP
----------------------------
TURNER, STONE & COMPANY, LLP
Certified Public Accountants
Dallas, Texas
August 30, 2001
F-2
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2001 AND 2000
ASSETS
2001 2000
--------------------- ----------------------
CURRENT ASSETS
Cash $ 302,724 $ 1,487,646
Trade and licensing fees receivables, net of allowance for doubtful
accounts of $150,000 and $20,000, respectively 802,084 269,971
Notes receivable, current portion 437,250 437,250
Inventory 983,148 538,952
Prepaid expenses 67,384 38,212
--------------------- ----------------------
Total current assets 2,592,590 2,772,031
PROPERTY AND EQUIPMENT - net of accumulated depreciation
of $198,653 and $166,589, respectively 170,432 156,288
NOTES RECEIVABLE - net of current portion, net of allowance
for doubtful accounts of $0 and $0, respectively 1,078,312 1,175,000
OTHER ASSETS
Goodwill, net of accumulated amortization of $107,432 and
$71,621, respectively 71,621 107,432
Intellectual properties, net of accumulated amortization
of $ 255,540 and $ 146,800, respectively 831,857 940,597
Prepaid royalties and other assets, net of accumulated
amortization of $ 354,167 and $ 104,167, respectively 156,055 412,381
--------------------- ----------------------
Total other assets 1,059,533 1,460,410
--------------------- ----------------------
$ 4,900,867 $ 5,563,729
===================== ======================
The accompanying notes are an integral part of the financial statements.
F-3
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2001 AND 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000
--------------------- ----------------------
CURRENT LIABILITIES
Accounts payable, trade $ 274,107 $ 260,102
Accrued payroll, other wages and related burden 422,117 407,134
Other accrued expenses 895,149 415,076
Advances payable to officers 106,688 210,338
Notes payable 277,185 277,185
Current portion of convertible debentures 1,975,000 -
--------------------- ----------------------
Total current liabilities 3,950,246 1,569,835
LONG-TERM LIABILITIES
Deferred revenue 340,000 340,000
Product marketing obligation 430,000 430,000
Convertible debentures, net of discount, less current portion 455,284 2,850,000
--------------------- ----------------------
Total long-term liabilities 1,225,284 3,620,000
Total liabilities 5,175,530 5,189,835
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - 5,000,000 shares authorized, $.005 par value
Series A cumulative, convertible preferred, no shares issued
and outstanding
liquidation preference of $1 per share - -
Series M cumulative, convertible preferred, 1,012,500 and 1,143,750
shares issued and outstanding, respectively, liquidation
preference of $1 per share 1,013 1,144
Common stock - $.05 par value, 100,000,000 shares authorized,
32,770,804 and 20,939,216 shares issued and outstanding,
respectively 1,638,540 1,046,961
Additional paid-in capital 9,472,569 7,609,256
Accumulated deficit (11,386,785) (8,283,467)
--------------------- ----------------------
Total stockholders' equity (deficit) (274,663) 373,894
--------------------- ----------------------
$ 4,900,867 $ 5,563,729
===================== ======================
The accompanying notes are an integral part of the financial statements
F-4
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 2001 AND 2000
2001 2000
--------------------- ----------------------
REVENUES
Product sales $ 1,735,901 $ 543,615
Franchisee fees 25,000 1,072,500
Other revenues 102,332 11,361
--------------------- ----------------------
Total revenues 1,863,233 1,627,476
--------------------- ----------------------
COSTS AND EXPENSES
Salaries, wages and other compensation 1,345,953 987,763
Cost of sales 895,693 519,603
Advertising 136,213 107,216
Depreciation 32,064 46,955
Amortization 394,551 248,718
Other general & administrative expenses 1,796,690 2,050,200
--------------------- ----------------------
Total costs and expenses 4,601,164 3,960,455
--------------------- ----------------------
LOSS FROM OPERATIONS (2,737,931) (2,332,979)
Interest expense (365,387) (108,615)
--------------------- ----------------------
LOSS BEFORE INCOME TAXES (3,103,318) (2,441,594)
Income tax benefit - -
--------------------- ----------------------
NET LOSS $ (3,103,318) $ (2,441,594)
===================== ======================
LOSS PER COMMON SHARE - BASIC $ (0.13) $ (0.14)
===================== ======================
LOSS PER COMMON SHARE - DILUTED $ (0.13) $ (0.14)
===================== ======================
The accompanying notes are an integral part of the financial statements.
F-5
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MAY 31, 2001 AND 2000
COMMON STOCK PREF. SERIES M PREF. SERIES A
------------ -------------- ----------------
DESCRIPTION SHARES $ SHARES $ SHARES $
------------------------------------------------------------------------------------------------------------------------------
BALANCE AT 5/31/99 13,207,532 $ 660,376 1,143,750 $ 1,144 - $ -
Issuance of common stock for cash 4,196,850 209,842
Issuance of common stock in
exchange for services 1,796,879 89,843
Issuance of common stock on
exercise of warrants 337,500 16,876
Issuance of common stock to
vendors for payment of trade
payables 1,400,455 70,024
Net loss during the year
-------------------------------------------------------------------------------------
BALANCE AT 5/31/00 20,939,216 1,046,961 1,143,750 1,144 - -
Issuance of common stock for cash 2,033,540 101,677
Issuance of common stock in
exchange for services 5,461,128 273,055
Issuance of common stock on
exercise of warrants 388,400 19,421
Issuance of common stock in
payment of officer notes and
accrued interest 1,500,000 75,000
Issuance of common stock upon
conversion of debentures and
accrued interest 2,317,260 115,863
Issuance of common stock upon
conversion of Series M shares 131,260 6,563 (131,250) (131)
Paid in capital attributalbe to
convertible debt warrants, less cost
of raising capital of $167,907
Net loss during the year
-------------------------------------------------------------------------------------
BALANCE AT 5/31/01 32,770,804 $ 1,638,540 1,012,500 $ 1,013 - $ -
=====================================================================================
PAID-IN ACCUMULATED
DESCRIPTION CAPITAL DEFICIT TOTAL
------------------------------------------------------------------------------------------------------------
BALANCE AT 5/31/99 $ 5,546,965 $ (5,841,873) 366,612
Issuance of common stock for cash 780,494 990,336
Issuance of common stock in
exchange for services 526,563 616,406
Issuance of common stock on
exercise of warrants 67,544 84,420
Issuance of common stock to
vendors for payment of trade
payables 687,690 757,714
Net loss during the year (2,441,594) (2,441,594)
---------------------------------------------------------------------
BALANCE AT 5/31/00 7,609,256 (8,283,467) 373,894
Issuance of common stock for cash 153,430 255,107
Issuance of common stock in
exchange for services 536,378 809,433
Issuance of common stock on
exercise of warrants 63,521 82,942
Issuance of common stock in
payment of officer notes and
accrued interest 52,500 127,500
Issuance of common stock upon
conversion of debentures and
accrued interest 431,823 547,686
Issuance of common stock upon
conversion of Series M shares (6,432) -
Paid in capital attributalbe to
convertible debt warrants, less cost
of raising capital of $167,907 6320,93 632,093
Net loss during the year (3,103,318) (3,103,318)
--------------------------------------------------------
BALANCE AT 5/31/01 $ 9,472,569 $ (11,386,785) $ (274,663)
========================================================
The accompanying notes are an integral part of the financial statements.
F-6
AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2001 AND 2000
2,001 2,000
---------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,103,318) $ (2,441,594)
Adjustments to reconcile net income to cash
Depreciation and amortization 426,615 295,673
Stock payments to employees and consultants 809,433 616,406
Allowances and write offs 130,000 20,000
Amortization of discount on convertible debentures 155,284 -
Changes in operating assets and liabilities
Accounts receivable (662,113) (116,020)
Inventory (444,196) (296,287)
Prepaid expenses and other assets (22,846) (40,552)
Notes receivable 96,688 (1,037,250)
Accounts payable 14,005 507,623
Accrued expenses 541,592 141,757
Deferred revenue - (60,000)
---------------------- ---------------------
Net cash used in operating activities (2,058,856) (2,410,244)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (46,208) (113,674)
---------------------- ---------------------
Net cash used in investing activities (46,208) (113,674)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 338,049 1,074,756
Reciepts from product marketing obligation - 25,000
Proceeds from convertible debentures, net 632,093 2,850,000
Repayments of convertible debentures (50,000) -
---------------------- ---------------------
Net cash provided by financing activites 920,142 3,949,756
Increase ( decrease ) in cash (1,184,922) 1,425,838
CASH, beginning of period 1,487,646 61,808
---------------------- ---------------------
CASH, end of period $ 302,724 $ 1,487,646
====================== =====================
SUPPLEMENTAL CASH FLOWS DISCLOSURES
Interest paid $ 112,229 $ 30,000
Income taxes paid $ - $ -
Non-cash investing and financing activities:
Common stock issued in settlement of accounts payable $ - $ 757,714
Common stock issued in exchange for services $ 809,433 $ 616,406
Common stock issued in payment of officer notes
and accrued interest payable $ 127,500 $ -
Common stock issued upon conversion of
convertible debentures and accrued interest $ 547,686 $ -
The accompanying notes are an integral part of the financial statements.
F-7
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and business
--------------------------
Airtech International Group, Inc. (the Company) was incorporated in the state of
Wyoming on August 8, 1991 under the name International Technologies Corporation.
Through its subsidiaries, the Company manufactures and sells a full line of air
purification products. The Company primarily markets, sells and distributes its
products through a network of franchisees, direct sales and industry
distributors.
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the general accounts
of the Company and its subsidiaries, Airtech International Corporation (AIC),
Airsopure, Inc.(ASP), Airsopure International Group, Inc.(AIG) and McCleskey
Sales and Service, Inc.(MSS), each of which have fiscal year ends of May 31.
All material intercompany accounts, balances and transactions have been
eliminated in the consolidation.
Impairment of long-lived assets
--------------------------------
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and long-lived assets and
certain identifiable intangibles to be disposed of. The Company periodically
evaluates, using independent appraisals and projected undiscounted cash flows,
the carrying value of its long-lived assets and certain identifiable intangibles
to be held and used whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In addition, long-lived
assets and identifiable intangibles to be disposed of are reported at the lower
of carrying value or fair value less cost to sell.
Amortization
-------------
Intellectual property is allocated to the Company's air filtration products
based on expected sales as a percent of total sales by product. The Company
records amortization using the straight-line method over 10 years beginning when
the product is initially inventoried for sale. For the years ended May 31, 2001
and 2000, amortization expense totaled $108,740 and $108,740, respectively.
Goodwill recorded in the acquisition of AIC in May 1998, is being amortized
using the straight-line method over 5 years. For the years ended May 31, 2001
and 2000, amortization expense totaled $35,811 and $35,811, respectively.
A prepaid royalty fee, paid pursuant to a December 1995 agreement and related to
the Company's portable medicare unit, is being amortized using the straight-line
method over 24 months beginning in January 2000. For the years ended May 31,
2001 and 2000, amortization expense totaled $250,000 and $104,167, respectively.
F-8
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
-----------
Inventories are carried at the lower of cost or net realizable value (market)
and include component parts used in the assembly of the Company's line of air
purification units and filters and finished goods comprised of completed
products. The costs of inventories are based upon specific identification of
direct costs and allocable costs of direct labor, packaging and other indirect
costs.
At May 31, 2001 and 2000, inventories consisted of the following:
2001 2000
-----------------------------
Finished goods $ 983,148 $ 356,916
Component parts - 182,036
-----------------------------
$ 983,148 $ 538,952
=============================
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.
Intellectual properties
-----------------------
Costs incurred by the Company in developing its products consisting primarily of
design, testing and completion of working prototypes, which are not considered
patentable, are capitalized and will be amortized over the estimated useful life
of the related patents once a unit has been placed in production.
Product marketing obligation
----------------------------
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 68, the
Company has recorded funds raised in an arrangement to develop, produce and
market its Model S-999 as a product marketing obligation ( Note 7 ).
Revenue recognition
--------------------
Revenues from the Company's operations are recognized at the time products are
shipped or services are provided. Revenues from franchise sales are recognized
at the time all material services relating to the sale of a franchise have been
performed by the Company and, in some instances, when the related notes
receivable have been collected. Revenues based on the collection of franchise
notes receivable are deferred until the time of collection.
F-9
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising
-----------
Advertising dollars are invested in trade journals, trade shows, travel and
franchise networking. All amounts are expensed as incurred. For the years
ended May 31, 2001 and 2000, advertising expenses totaled $183,278 and $130,597,
respectively.
Management estimates
--------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash flow
---------
For purposes of the statement of cash flows, cash includes demand deposits, time
deposits and short term cash equivalent investments with maturities of less
than three months. None of the Company's cash is restricted.
Earnings per share
------------------
Basic and diluted loss per share are based upon 24,741,471 and 17,368,684,
respectively, weighted average shares of common stock outstanding. No effect has
been given to the assumed conversion of convertible preferred stock and
convertible debentures and the assumed exercise of stock options and warrants as
the effect would be antidilutive.
Research and development
------------------------
The Company's research and development activities consist of retooling its
existing S12 model and the development of its S30 model and related products.
For the years ended May 31, 2001 and 2000, research and development costs
totaled $184,579 and $0, respectively, and were charged to expense when
incurred.
2. PREFERRED STOCK
Convertible preferred stock - Series A
---------------------------------------
In connection with the Company's acquisition of AIC (Note 1), the Company
established this equity class and authorized 15,000,000 shares. The shares have
a par value of $1.00, do not pay dividends and are convertible at the Company's
option at any time within 24 months after issuance for one share of the
Company's common stock for each share of preferred stock. Since July 1998, no
Series A preferred stock shares have been issued or outstanding
F-10
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. PREFERRED STOCK (Continued)
Convertible preferred stock - Series M
---------------------------------------
During the year ended May 31, 1998, the Company authorized 5,000,000 shares and
established this equity class to raise production funds for the Company's Model
S-950, Medicare air filtration unit. The Series M preferred shareholders
participate by receiving up to 20%, if totally subscribed, of the collected
gross proceeds from the Company's sales of its Model S-950 over a two year
period. Through May 31, 1999, 1,143,750 of these shares were issued for $1.00
cash, net of $203,379 of offering costs. The shares have a par value of $.001,
do not pay dividends and are convertible at the holder's option at any time
within 36 months after issuance for one share of the Company's common stock. In
addition, attached to each share is one warrant to purchase one share of common
stock at a price of $0.25 per share exercisable within two years after issuance.
As of May 31, 2000, the Company had sold 78 of these units and owes $ 5,364
under the participation plan.
3. NOTES RECEIVABLE
Notes receivable relate to AIC sales of geographic franchise licenses (Note 1),
bear interest at 6% to 12%, are payable in terms ranging from 12 to 48 months
and are secured by the area franchises. Credit is extended on evaluation of the
payee's financial condition and general credit information. During the years
ended May 31, 2001 and 2000, the Company did not strictly enforce collection
while it completed development of its product line of air purification products.
At May 31, 2001 and 2000, notes receivable are comprised of the following:
2001 2000
-------------------------------
Domestic franchise licenses $ 157,250 $ 157,250
International franchise licenses 1,358,312 1,455,000
-------------------------------
1,515,562 1,612,250
Less current portion (437,250) (437,250)
-------------------------------
$ 1,078,312 $ 1,175,000
==============================
4. NOTES PAYABLE
The Company's notes payable consist of loans from various corporations and
individuals provided for working capital purposes. The notes, which contain no
significant restrictions, bear interest at rates of 10.0% to 18.0%, are due
through May 1999 and are unsecured. At May 31, 2001 and 2000, these notes,
totaling $ 277,185, were in default.
F-11
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CONVERTIBLE DEBENTURES
Convertible debentures ( 12% )
------------------------------
On March 29, 2001, the Company issued $800,000 of convertible debentures
maturing in March 2004. Interest is payable at 12% semi-annually beginning
September 29, 2001. The debentures are convertible at the holder's option any
time, provided that at no time may a holder of a debenture and its affiliates
own more than 4.9% of the Company's outstanding common stock shares without
giving 61 days prior written notice of the debenture holder's intent to waive
the 4.9% limitation. The debentures are convertible at a conversion price equal
to 50% of the market value of the common stock at the date of conversion.
The debentures include warrants to purchase 500,000 common stock shares at a
conversion price which is the lesser of a fixed conversion price of $.25 or 50%
of the average of the lowest three trading prices of the Company's common stock
for the twenty trading days ending one trading day prior to the date a
conversion notice is received by the Company. The warrants expire March 29,
2004.
The above formula resulted in the debentures and warrants being issued with an
imbedded beneficial conversion feature. Accordingly, pursuant to EITF Abstracts
Issue No. 98-5, the Company has allocated $ 644,716 of the proceeds received to
additional paid in capital based on the intrinsic value of this imbedded
beneficial conversion feature. The intrinsic value was determined at the date
of issuance using the Black-Scholes option pricing model. The discount
resulting from this allocation will be recognized as interest expense from the
date of issuance through the earliest date of conversion, estimated to be March
29, 2004.
Convertible debentures ( 12% )
------------------------------
During the year ended May 31, 2000, the Company issued $ 350,000 of convertible
debentures maturing on September 1, 2004. Interest is payable at 12% semi-
annually beginning September 1, 2000. The debentures are convertible at the
holder's option any time beginning one year after issuance at a conversion price
of $ 1.00 per share. The Company, with the consent of the holder, may redeem
the debentures at a price ranging from 110% of the principal amount if redeemed
prior to September 1, 2001 to 100% of the principal amount at maturity of the
principal amount of the debentures.
The debentures include warrants to purchase 350,000 common stock shares at a
price of $ 2.00 per share. The warrants expire two years from the date of
issuance.
Convertible debentures ( 6% )
-----------------------------
During the year ended May 31, 2000, the Company issued $ 2,500,000 of
convertible debentures maturing on February 22, 2002. Interest accrues at 6%
and is payable in full at maturity. The debentures are convertible at the
holder's option at any time at a conversion price equal to the lesser of (a)
110% of the average closing bid price of the Company's common stock for the five
trading days prior to the date of initial payment or (b) 80% of the average of
the three lowest closing bid prices of the Company's common stock during the 30
trading days prior to the date a conversion notice is received from a holder.
In the event of a change in control of the Company, the holders' can require
redemption of the debentures at a price equal to 125% of the aggregate
outstanding principal and accrued interest.
F-12
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CONVERTIBLE DEBENTURES (continued)
The debentures include warrants to purchase 250,000 common stock shares at a
price of $ 2.61 per share. The warrants expire on February 22, 2005.
Additionally, the holders of these debentures had an option to acquire an
additional $ 2,500,000 of debentures under the same terms, which include
additional warrants to purchase 250,000 common stock shares at a price of $ 2.61
per share. This option expired December 22, 2000.
Summary of future principal payments
------------------------------------
At May 31, 2001, future principal payments required under the terms of the above
convertible debentures are as follows.
Year ending May 31, Amount
------
2002 $ 1,975,000
2003 -
2004 155,284
2005 300,000
-----------
$ 2,430,284
===========
6. LITIGATION
The Company is defendant, and it has filed counter claims, in a lawsuit filed by
the lessor of office space facilities in New Jersey. The Company never occupied
the space due to the lessor's failures to finish out the space to the Company's
specifications. The lessor seeks to recover remaining lease payments due under
the lease of $606,913 and the Company seeks to recover damages under a capital
lease obligation for equipment located in the New Jersey facilities and
contractually precluded from being removed from the facilities. Although the
Company anticipates a favorable settlement of this lawsuit the outcome of it is
uncertain. As of May 31, 2001 and 2000, a reserve totaling $200,000 has been
established in anticipation of settling this obligation.
The Company was also a defendant in a lawsuit filed by a corporation claiming
damages of up to $1 million for breach of a stock purchase agreement, which was
never consummated. On July 6, 2001, the Company entered into a settlement
agreement, the terms and conditions of which are subject to a confidentiality
agreement. At May 31, 2001, the amount to be paid under the terms of the
settlement agreement, which is not material, has been accrued as a liability in
the accompanying consolidated financial statements.
F-13
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
Operating leases
----------------
The Company is currently obligated under a noncancellable operating lease for
its Dallas office and warehouse facilities, which expires in September 2001.
The Company occupied these facilities when it moved out of its former lease
facilities, which it was obligated through December 2003. The lease also
provides for payment of the Company's share of operating costs and contains a
renewal option at prevailing market rates. Minimum future rental payments
required under the above operating lease totals $9,813.
During the years ended May 31, 2001 and 2000, rent expense totaled $115,775 and
$102,660, respectively.
Employment agreements
----------------------
The Company is currently obligated under employment agreements with its Chief
Executive Officer and its former President and now consultant for annual
compensation of $250,000 apiece and discretionary bonuses to be determined by
the Company's board of directors. The agreements expire in May 2008.
Compensation under such agreements was deferred during the period from June 1,
1997 through December 31, 1998. At January 31, 1999, the Board of Directors
authorized payment of the deferred amounts by issuing restricted common stock at
$0.50 per share, issuing a combined total of 1,583,334 shares. Starting in
January 1999, these two executives began receiving cash compensation at the rate
of $125,000 apiece with the remainder of the contracted amounts being accrued in
the accompanying consolidated financial statements. At May 31, 2001 and 2000,
$335,000 and $250,000 was accrued and payable under these agreements.
During the year ended May 31, 1999, the Company received a claim from a
stockholder and former officer and director in the amount of $ 250,000 related
to past employment services. However, during the year ended May 31, 2000, this
claim was settled with the Company issuing 100,000 common stock shares to this
stockholder at a fair value of $ 42,579.
The Company's current compensation benefits do not provide any other post-
retirement or post-employment benefits.
Airsopure 999 Limited Partnership
---------------------------------
In January 1999, the Company formed a limited partnership, Airsopure 999 Limited
Partnership ( LP ), to fund production of the Company's new automobile, trunk
mounted air filtration unit, the Model S-999. Airsopure, Inc., a subsidiary of
the Company, became the general partner, and the limited partnership was
authorized to sell up to $5 million of partnership interests. The limited
partners are entitled up to a maximum of 20% of the gross sales from the S-999
over a three year period. Additionally, the Company guaranteed the limited
partners a return of at most 150% of their investment at the end of the three
year term by authorizing conversion of their limited partnership interests into
shares of the Company's common stock. During the years ended May 31, 2000 and
1999, the LP raised $ 25,000 and $405,000, respectively, which amount is
recorded as product marketing obligation. In June 2001, the Company settled
this obligation to the partners through the issuance of 2,639,926 common stock
shares.
F-14
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
The Company used the accrual method of accounting for tax and financial
reporting purposes. At May 31, 2001 and 2000, the Company had net operating loss
carry forwards for financial and tax reporting purposes of approximately $
13,500,000 and $ 10,400,000, respectively. These carry forwards expire through
the year 2021, and are further subject to the provisions of Internal Revenue
Code Section 382.
Pursuant to Statement of Financial Accounting Standards No. 109, the Company has
recognized a $4,590,000 deferred tax asset attributable to the net operating
loss carryover, which has been fully offset by a valuation allowances in the
same amount, as follows:
2001 2000
-----------------------------
Beginning balance $ 3,536,000 $ 2,706,000
Increase during period 1,054,000 830,000
-----------------------------
Ending balance $ 4,590,000 $ 3,536,000
=============================
A reconciliation of income tax (expense) benefit at the statutory federal
rate to income tax (expense) benefit at the Company's effective tax rate for the
years ended May 31, 2001 and 2000 is as follows:
2001 2000
-----------------------------
Tax (expense) benefit
computed at statuatory
federal rate $ 1,054,000 $ 830,150
NOL carryover (1,054,000) (830,150)
-----------------------------
Income tax benefit $ - $ -
=============================
F-15
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. FINANCIAL INSTRUMENTS
The Company's financial instruments, which potentially subject the Company to
credit risks and none of which are held for trading purposes, consist of its
cash, accounts and notes receivable, notes payable and convertible debentures.
Cash
----
The Company maintains its cash in bank deposit and other cash equivalent
investment accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts, and does not believe it
is subject to any credit risks involving its cash. At May 31, 2001 and 2000,
$117,616 and $1,268,745 of the Company's cash, respectively, was in excess of
federally insured limits.
Accounts and notes receivable, trade
------------------------------------
The Company accounts and notes receivable ( Note 3 ) are unsecured and represent
sales not collected at the end of the year. Management believes these accounts
and notes receivable are fairly stated at estimated net realizable amounts.
Notes payable and convertible debentures
----------------------------------------
Management believes the carrying value of these notes ( Note 4 ) and convertible
debentures ( Note 5 ) represent the fair value of these financial instruments
because their terms are similar to those in the lending market for comparable
loans with comparable risks.
10. DISCONTINUED OPERATING SEGMENT
In May 1999, the Company discontinued its McCleskey Sales and Services ( MSS )
operations which were being conducted through its wholly owned subsidiary by the
same name. The net assets of this operating segment, consisting primarily of
unamortized goodwill relating to the Company's purchase of MSS in 1995 ( Note 1
), approximated $583,000 and was charged against continuing operations. During
the year ended May 31, 2001, uncollected accounts receivable of $130,740 and
unsaleable inventory of $129,960, related to MSS but transferred to the
Company's AIC subsidiary when MSS operations were discontinued, were charged to
expense.
11. STOCK OPTIONS AND WARRANTS
During the years ended May 31, 2001 and 2000, the Company issued various stock
options and warrants to employees and others and uses the intrinsic value method
of accounting for these stock options. For the years ended May 31, 2001 and
2000, compensation cost for options granted totaling $ 80,000 and $0,
respectively, has been recognized in the accompanying financial statements. The
options and warrants expire between May 2002 and February 2006 and are
exercisable at prices from $0.10 to $5.00 per option or warrant. Generally, the
Company sets exercise prices at or above the underlying common stock's fair
market value on the date of grant.
F-16
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS AND WARRANTS (Continued)
The following is a schedule of the activity relating to the Company's stock
options and warrants. Other than the 500,000 and 432,850 warrant identified
below as granted during the year ended May 31, 2001 and 2000, respectively (Note
4), all other amounts relate to stock options the Company has issued.
2001 2000
---- ----
Wgt. Ave. Wgt. Ave.
Shares Exercise Shares Exercise
(x1,000) Price (x1,000) Price
-------- ----- -------- -----
Options and warrants
outstanding at
beginning of year 2,011 $ 2.06 1,341 $ 2.06
Granted 2,800 $ 0.17 1,698 $ 0.86
Exercised (370) $ 0.22 -437 $ 0.85
Expired (301) $ 1.09 -591 $ 0.77
------ ------
Options and warrants
outstanding at
end of year 4,140 $ 0.75 2,011 $ 1.49
====== ======
Options and warrants
exerciseable at
end of year 4,140 $ 0.75 2,011 $ 1.49
====== ======
Weighted average fair
value of options and
warrants granted
during the year $ 0.14 $ 0.27
The following table summarizes information about the Company's stock options and
warrants outstanding at May 31, 2001, all of which are exercisable.
Number Weighted Ave. Weighted
Range of Outstanding Remaining Average
Exercise Prices (x1,000) Contractual Life Exercise Price
--------------- -------- ---------------- --------------
$ .10 - $ .20 2500 4.4 years $ .13
$ .50 - $ 1.00 800 1.1 years $ .50
$2.00 - $3.75 733 1.1 years $2.53
$4.00 - $5.00 107 1.0 years $4.69
F-17
AIRTECH INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS (Continued)
The following pro forma disclosures reflect the Company's net loss and net loss
per share amounts assuming the Company accounted for stock options granted using
the fair value method pursuant to Statement of Financial Accounting Standards
No. 123. The fair value of each option granted was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.6%; no expected dividends; expected
lives of 3 to 4 years; and expected volatility of 132.98%.
Year Ended Year Ended
May 31, 2001 May 31, 2000
------------ ------------
Pro forma net loss $ (3,411,318) $ (2,576,594)
Pro forma net loss per share $ (0.14) $ (0.15)
During the years ended May 31, 2001 and 2000, the Company also issued 5,461,128
and 1,796,879 common stock shares, respectively, in exchange for services.
These services were recorded at their fair value of $ 809,433 and $ 616,406,
respectively, and were charged to expense. In addition, during the year ended
May 31, 2000, the Company issued 1,400,455 common stock shares to vendors in
payment of trade payables, which were recorded at their fair value of $ 757,714.
12. RELATED PARTIES
During the years ended May 31, 2001 and 2000, the Company's chief executive
officer and former president made cash operating advances of $ 0 and $ 100,000
and received repayments of $0 and $127,000, respectively. The advances are to be
repaid as cash is available or by the issuance of common stock. These advances
are unsecured but bear interest at 15% per annum. During the year ended May 31,
2001, $52,312 of advances and $75,188 of accrued interest was repaid through the
issuance of common stock and during the year ended May 31, 2000, $ 30,000 of
accrued interest was paid to the above individuals. At May 31, 2001 and 2000,
advances payable to these officers totaled $106,688 and $210,338, respectively,
and included $ 0 and $51,338, respectively, of accrued interest.
13. LIQUIDITY ISSUES
The continued operating losses by the Company and its subsidiaries raise concern
about the Company's ability to generate profits from its operations. Management
is currently negotiating several large contracts for its air filtration
products, which are expected to increase the Company's cash flow and its ability
to generate profits. The Company has completed its air purification product line
and is expanding its franchise and distributorship network throughout the nation
and internationally. In addition, the Company is continuing efforts to raise
additional equity and debt capital to provide liquidity until cash can be
generated by operations.
F-18
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure:
None.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table includes the names, ages and positions of our
directors and executive officers as of May 31, 2001. A summary of the background
and experience of each of these individuals immediately follows the table.
Our directors are:
C J Comu 40 Chairman
James R. Halter 51 Director
Pierre Koshakji 39 Director
Robert Galvan 51 Director
Our executive officers are:
NAME AGE POSITION
C J Comu 40 Chief Executive Officer
James R. Halter 51 Chief Financial Officer and General
Counsel
C. J. COMU, our CEO, chairman and a director since May
1998. Mr. Comu was a co-founder, CEO and chairman of Airtech International
Corporation, our wholly-owned subsidiary, since its formation in 1995. In
January 1994, Mr. Comu co-founded Transworld Leasing Corporation which provided
financing and marketing expertise to the medical, computer and corporate sector
prior to the formation of Airtech International Corporation.
JAMES R. HALTER. Mr. Halter has served as our chief financial officer and
general counsel since October, 1999 and Director since November 2000. Mr. Halter
earned a Masters in Business Administration from the State University of New
York at Buffalo in 1977, and a Juris Doctorate from Case Western Reserve
University in 1999. Mr. Halter has been a Certified Public Accountant since
1975. From January 1990 to October 1999, Mr. Halter owned his own tax and
business consulting practice. Concurrently, from September 1996 to January 1999,
Mr. Halter attended and received his Juris doctor degree.
ROBERT GALVAN. Mr. Galvan has served as a director since November 1999.
Since November 1999, Mr. Galvan has also served as the Associate Dean of the
University of North Texas Health Science College, Fort Worth, Texas. From
30
November 1998 to November 1999, Mr. Galvan served as the Director of Health for
the City of Fort Worth, Texas. Mr. Galvan also served as the Director of Health
and Community Development for the City of Plano, Texas from 1992 to October
1998.
PIERRE KOSHAKJI. Mr. Koshakji has served as a Director since July 2001.
Since September 2000, Mr. Koshakji has served with Edge Technologies Inc. Prior
to this position he was with Odyssey Pictures Inc from February 1998 and until
that date with Entertainment Education Enterprises Corp., from 1995.
Our directors receive no cash compensation for their services as directors.
Our policy is to reimburse non-employee directors for expenses actually incurred
in connection with attending meetings of our board of directors. Directors and
executive officers are also eligible for stock and option grants under our stock
option plans as determined by our board of directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than 10% of a registered class of our equity securities, to
file reports of ownership and change in ownership with the SEC. Our officers,
directors and greater than 10% stockholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file. Except as noted
below, and based solely on our review of the copies of Section 16(a) forms
received by us, we believe that from June 1, 2000 through May 31, 2001, all
filing requirements applicable to our officers, directors and greater than 10%
stockholders were timely met.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation we paid
during the last three fiscal years to our chief executive officer, president and
other individuals who served as executive officers and whose total compensation
was $100,000 or more.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------------------------------------
OTHER ANNUAL RESTRICTED SECURITIES
FISCAL COMPENSATION
STOCK UNDERLYING
NAME AND POSITION YEAR SALARY BONUS (1) AWARDS($) OPTIONS(#)
------------------------- --- ------- ----- -------- ------------ -----------
C J Comu, CEO, Chairman. 2001 $82,500 $0 $ 0 $ 4,833(12)(13) 500,000
2000 $41,195 $0 $ 0 $ 83,825 (2) 250,000
1999 0 0 46,875 424,334 (3) 150,000
John Potter, President 2001 66,250 0 0
2000 40,986 0 0 13,425 (5) 250,000
1999 0 0 46,875 424,334 (6) 150,000
Darrell R. Jolley, CFO. 1999 0 0 58,333 12,500 (7) 45,000
Doug S. Keane, President of
Airsopure, Inc........ 2000 24,173 0 0 116,452 (8) 0
1999 0 0 77,500 12,500 (9) 100,000
R. John Harris, COO.. 2001 69,160 0 0 74,833(12)(13) 500,000
2000 27,917 0 0 21,875(10) 0
31
James R. Halter, CFO and General
Counsel............ 2001 77,500 0 0 74,833(12)(13) 500,000
2000 18,227 0 0 46,527(11) 0
(1) See terms of employment agreements for Mr. Comu and Mr. Potter under the
section titled "Employment Agreements."
(2) Mr. Comu received 249,986 shares of restricted common stock as additional
compensation. The fair market value of the shares was $83,825 in the aggregate
on the five dates of grant. All of these shares were fully vested on the dates
of grant and are not entitled to dividends. As of May 31, 2001, Mr. Comu owned
1,643,364 shares of our restricted common stock with a market value of
$263,018.
(3) Mr. Comu received 791,667 shares of restricted common stock for deferred
wages of $250,000 per year for the period from June 1, 1997 through December 31,
1998. The fair market value of the shares was $395,834 on the date of grant,
January 31, 1999. He also received 150,000 shares of common stock as additional
compensation. The fair market value of the shares was $28,500 on the date of
grant, December 31, 1998. All of these shares were fully vested on the date of
grant and are not entitled to dividends.
(4) not used.
(5) Mr. Potter received 250,464 shares of restricted common stock as additional
compensation. The fair market value of the shares was $79,028 in the aggregate
on the five dates of grant. All of these shares were fully vested on the dates
of grant and are not entitled to dividends. Effective November 2000, Mr. Potter
is no longer employed by us.
(6) Mr. Potter received 791,667 shares of restricted common stock for deferred
wages of $250,000 for the period from June 1, 1997 through December 31, 1998.
The fair market value of the shares was $395,834 on the date of grant, January
31, 1999. He also received 150,000 shares of common stock as additional
compensation. The fair market value of the shares was $28,500 on the date of
grant, December 31, 1998. All of these shares were fully vested on the date of
grant and are not entitled to dividends.
(7) Mr. Jolley received 25,000 shares of common stock as additional
compensation. The fair market value of the shares was $12,500 on the date of
grant, June 16, 1999. Effective September 1999, Mr. Jolley was no longer
employed by us.
(8) Mr. Keane received 100,000 shares of restricted common stock as additional
compensation. The fair market value of the shares was $75,000 on the date of
grant, May 1, 2000. Mr. Keane also received 154,259 shares of restricted common
stock as additional compensation. The fair market value of the shares was
$41,452 in the aggregate on the five dates of grant.
(9) Mr. Keane received 25,000 shares of common stock as additional
compensation. The fair market value of the shares was $12,500 at the date of
grant, June 16, 1999. Effective November 1999, Mr. Keane was no longer employed
by us.
(10) Mr. Harris received 100,000 shares of restricted common stock as additional
compensation. The fair market value of the shares was $21,875 on the date of
grant, December 15, 1999. All of these shares were fully vested on the date of
grant and are not entitled to dividends. Effective May 2001 Mr. Harris was no
longer employed by us. As of May 31, 2001, Mr. Harris owned 426,232 shares of
our restricted common stock with a fair market value of $68,205.
32
(11) Mr. Halter received 100,000 shares of restricted common stock as additional
compensation. The fair market value of the shares was $23,440 on the date of
grant, December 8, 1999. Mr. Halter also received 35,183 shares of restricted
common stock as additional compensation. The fair market value of the shares was
$23,087 on the date of grant, January 6, 2000. All of the shares issued to Mr.
Halter were fully vested and are not entitled to dividends. As of May 31, 2001,
Mr. Halter owned 461,475 shares of our restricted common stock with a fair
market value of $73,836.
(12)Mesrrs. Harris, Halter and Comu each received 125,000 shares of restricted
common stock as compensation. The total number of shares was 375,000. The fair
market value of the shares was $22,500 on the dates of grant, February 2001 All
of the shares were valued at $67,500 at the dates of grant. All of the shares
were fully vested and are not entitled to dividends.
(13) Mesrrs. Halter, Comu and Harris each received 201,282 shares of restricted
common stock as compensation. The total number of shares was 603,846. The fair
market value of the shares was $52,333 on the dates of grant, January 2001. All
of the shares were valued at $157,000 at the dates of grant. All of the shares
were fully vested and are not entitled to dividends.
OPTION GRANTS IN 2000
The following table lists those persons in the previous table who were
granted options to purchase shares of our common stock during fiscal year 2001.
% OF TOTAL OPTIONS/
NUMBER OF SECURITIES SARS GRANTED TO
UNDERLYING OPTIONS/ EMPLOYEES EXERCISE PRICE MARKET PRICE EXPIRATION
NAME SARS GRANTED IN FISCALYEAR ($/SHARE) of GRANT DATE
C J Comu...... 250,000 14% $0.15 $0.18 March 27, 2006
C J Comu 250,000 14% 0.10 0.26 Feb. 28, 2006
R. John Harris 250,000 14% 0.15 0.18 March 27, 2006
R. John Harris 250,000 14% 0.10 0.26 Feb. 28, 2006
James Halter 250,000 14% 0.15 0.18 March 27, 2006
James Halter 250,000 14% 0.10 0.26 Feb. 28, 2006
Robert Galvan 250,000 14% 0.15 0.18 March 27, 2006
2000 YEAR-END OPTION VALUES
Set forth in the following table is information, with respect to each named
executive officer, as to:
- the number of shares acquired during fiscal year 2000 upon each exercise
of options granted to each individual;
- the aggregate value realized upon each exercise which is the difference
between the market value of the shares at exercise and their exercise
price;
- the total number of unexercised options held on May 31, 2001, separately
identified between those exercisable and those not exercisable; and
- the aggregate value of in-the-money, unexercised options held on May 31,
2001, separately identified between those exercisable and those not
exercisable.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
33
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END EXERCISABLE/
NAME EXERCISE RECEIVED EXERCISABLE/UNEXERCISABLE UNEXERCISABLE(1)
-----------------------------------------------------------------------------------------------------------------
C J Comu........... -0- -0- 900,000/0 $15,000/$0
John Potter........ -0- -0- 400,000/0 $ 0/$0
James Halter....... -0- -0- 500,000/0 $15,000/$0
R. John Harris..... -0- -0- 500,000/0 $15,000/$0
Robert Galvan...... -0- -0- 250,000/0 $ 0/$0
(1) The value is calculated based upon the aggregate amount of the excess of
value over the relevant exercise prices.
EMPLOYMENT AGREEMENTS
We have a ten (10) year employment contract with C J Comu for annual
compensation of $250,000 each, terminating May 31, 2008. Under the terms of
these contracts and agreements between our board of directors, Mr. Comu, this
contract is funded on a cash basis at such time as we are in a financial
position to pay the salaries under these contracts. Unpaid compensation under
these contracts, dating from June 1, 1997 through December 31, 1998, was paid to
Mr. Comu effective January 31, 1999 through the issuance to him of 791,667
shares of our restricted common stock. Effective January 15, 1999, Mr. Comu
began receiving cash compensation under the agreement at an annual rate of
$125,000 each when cash was available. The remainder of the amounts due the
officer under the contract will be converted to our restricted common stock
during fiscal year 2002. Effective June 1, 1999, Mr. Comu has further agreed
with our Board of Directors to reduce compensation to $125,000.
COMPANY STOCK PLANS
EMPLOYEE STOCK PLANS. Our board of directors periodically establishes
employee stock grant plans under which unrestricted shares of our common stock
are issued and granted to certain employees, management and consultants for
performance rewards or services rendered. The terms and conditions of stock
grants under the stock plans are within the sole discretion of our board of
directors. We do not have formal written plans and all issuances of shares of
common stock under our stock plans are made pursuant to registration statements
on Form S-8 filed by us from time to time with the SEC.
On July 30, 1999, we filed a Form S-8 registration statement registering
900,000 shares of our common stock, all of which were issued as of March 23,
2000 under the stock plans. The shares of common stock were accounted for as
consulting services and employee wages.
2000 KEY EMPLOYEE OPTION PLAN. Effective May 31, 1999, our board of
directors adopted the Airtech International Group 2000 Key Employee Option Plan
in order to motivate our qualified employees to assist us in retaining employees
and to align the interest of key employees with those of our shareholders. The
2000 Option Plan is authorized for key employees including the chief executive
officer, president, chief financial officer, vice president franchising, vice
president production, and vice president finance. The 2000 Option Plan provides
for the grant of "incentive stock options" and "non-qualified stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986. The
approval authorized the issuance of a maximum of
- 1,000,000 shares of our common stock subject to the options,
- with a range of exercise prices from $0.25 to $2.50 per share,
34
- vesting over a two to three year period, and
- expiring ten (10) years from the date of grant.
Our board of directors expects to grant option agreements during fiscal year
2002 to the key employees specifying the respective number of options, vesting
periods, exercise prices and incentives, if any. On November 11, 1999, we filed
a Form S-8 registration statement for 900,000 shares of our common stock
issuable with respect to options granted under the 2000 Option Plan. As of July
31, 2001, no options had been granted under the 2000 Option Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July, 31, 2001, certain information
concerning the beneficial ownership of each class of our voting stock held by:
- each beneficial owner of 5% or more of our voting stock, based on reports
filed with the SEC and certain other information;
- each of our directors;
- each of our executive officers; and
- all of our executive officers and directors as a group.
AMOUNT AND NATURE OF
BENEFICIAL PERCENT OF COMMON STOCK
NAME AND ADDRESS(1) OWNERSHIP OF COMMON STOCK(2) OWNERSHIP(3)
--------------------- ---------------------------- -----------------------
C J Comu...................... 2,543,864(4) 7.51%
Robert Galvan................. 350,000(7) 1.06
James R. Halter............... 961,475(8) 2.89
Pierre Koshakji............... 25,000 *
R. John Harris................ 926,282(6) 2.78
Officers and Directors as a
Group (5 persons)........... 4,806,621(8) 13.76%
---------
John Potter................... 1,863,881(5) 5.62%
* Less than 1%
(1) The address of each director, officer and principal stockholder is c/o
Airtech International Group, Inc., 112561 Perimeter, Dallas, TX
75228.
(2) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities which may be acquired by such person within 60 days from the date on
which beneficial ownership is to be determined upon the exercise of options,
warrants or convertible securities.
35
(3) Each beneficial owner's percentage ownership is determined by assuming that
stock options and warrants that are held by that person (but not those held by
any other person) and which are exercisable within 60 days from the date on
which beneficial ownership is to be determined have been exercised.
(4) Represents 1,643,864 shares of common stock owned directly. Also represents
150,000 shares owned pursuant to warrants to purchase shares of common stock at
$0.50 per share, 250,000 shares owned pursuant to options to purchase shares of
common stock at $0.25 per share, 250,000 shares owned pursuant to options to
purchase shares of common stock at $0.10 and 250,000 shares owned pursuant to
options to purchase shares of common stock at $0.15, all of which are
exercisable within 60 days.
(5) Represents 1,213,881 shares of common stock owned directly. Also represents
150,000 shares owned pursuant to warrants to purchase shares of common stock at
$0.50 per share, 250,000 shares owned pursuant to options to purchase shares of
common stock at $0.25 per share and 250,000 shares owned pursuant to options to
purchase shares of common stock at $0.10 per share, all of which are exercisable
within 60 days.
(6) Represents 426,282 shares of common stock owned directly. Also represents
250,000 shares owned pursuant to warrants to purchase shares of common stock at
$0.10 per share and 250,000 shares owned pursuant to options to purchase shares
of common stock at $0.15 per share, all of which are exercisable within 60 days.
(7) Represents 100,000 shares of common stock owned directly. Also represents
250,000 shares owned pursuant to warrants to purchase shares of common stock at
$0.15 per share, all of which are exercisable within 60 days.
(8) Represents 461,475 shares of common stock owned directly. Also represents
250,000 shares owned pursuant to warrants to purchase shares of common stock at
$0.10 per share and 250,000 shares owned pursuant to options to purchase shares
of common stock at $0.15 per share, all of which are exercisable within 60 days.
(9) See notes 4,6,7 and 8.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of May 31, 2000, we owed $210,338 to our chief executive officer and
to our former president, on prior advances from each officer, including
accrued interest. We have agreed to repay these advances as cash is available or
by issuing our common stock. We have also agreed to pay interest at 15% per
annum on the outstanding balances. During fiscal year 2000, we paid our chief
executive officer and our president $15,000 each representing accrued interest
on the notes. During fiscal year 2001, we paid $52,312 of advances and $75,188
of accrued interest through the issuance of common stock to the owner of this
note payable.
Dr. Andrew Welch, M.D., one of our directors during the years 2000 and 2001,
is the managing partner of Aircare, LLC, a franchisee of our wholly-owned
subsidiary, Airsopure, Inc., for Las Vegas, Nevada. For the fiscal year ended
May 31, 2000, Aircare, LLC purchased from us, for cash, $91,793 of our air
purification products at the wholesale price available to our other
distributors.
We believe that the terms of the above described transactions are fair and
similar to or better than the terms we could have obtained from arms length
negotiations with third parties.
36
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT NUMBER DOCUMENT
------------------- ----------------------------------------------------------
3.1* Restated Articles of Incorporation filed December 27, 1991
of the Company's predecessor in name, Interactive
Technologies Corporation, Inc.
3.2* Articles of Amendment 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
37
[B 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
EXHIBIT NUMBER DOCUMENT
----------------------- ------------------------------------------------------
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
* 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.
(b) Reports on Form 8-K.
None.
38
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AIRTECH INTERNATIONAL GROUP, INC.
By: /s/ C. J. COMU
C. J. Comu, CHIEF EXECUTIVE
OFFICER
Date: September 14, 2001
` -------------------
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
/s/ C. J. COMU Director and Chief September 14, 2001
C. J. Comu Executive Officer
/s/ PIERRE KOSHAKJI Director September 14, 2001
Pierre Koshakji
/s/ ROBERT GALVAN Director September 14, 2001
Robert Galvan
/s/ JAMES R. HALTER Principal Accounting
Officer and Principal September 14, 2001
James R. Halter Financial Officer, Director
39