SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-QSB Pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the Quarter Ended Commission File November 30, 1998 Number 0-19796 AIRTECH INTERNATIONAL GROUP, INC. (Exact name of registrant as specified in charter) Wyoming 98-0120805 (State or other (IRS Employer jurisdiction of Identification No.) incorporation) 15400 Knoll Trail, Ste 106 Dallas, Texas 75248 (address of Principal Executive Offices) 972-960-9400 (Registrant's telephone number including area code) Check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the exchange Act during the preceding 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 __________ The Registrant has 9,579,923 shares of common stock, par value $0.01 per share issued and outstanding as of November 30, 1998. Traditional Small Business Disclosure Format Yes _____X_____ No __________ Interactive Technologies Corporation, Inc. Table of Contents PART I - FINANCIAL INFORMATION Page No. Item 1. Airtech International Group, Inc. 1 - 9 Financial Statements (Unaudited) Balance Sheet as of November 30, 1998 Statement of Operations for the six months ended November 30, 1998 and 1997 Statement of Operations for the three months ended November 30, 1998 and 1997 Statement of Cash Flows for the six months ended November 30, 1998 and 1997 Notes to Financial Statements Item 2. Management's Discussion and Analysis 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None SIGNATURE PAGE 12 Part 1-Financial Information Item 1 Financial Statements AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET NOVEMBER 30, 1998 UNAUDITED Assets Current assets: Cash $ 127,400 Accounts and note receivable, trade, net of $10,080 of allowance for uncollectible amounts 163,131 Inventories 323,489 Prepaid expenses and other assets 61,996 ----------- Total current assets 676,016 ----------- Property and equipment, at cost, net of $250,338 of accumulated depreciation 170,252 ----------- Other assets: Organizational costs, net of $3,334 and $2,534, respectively of accumulated amortization 4,047 Net assets of discontinued operations, Held for resale 3,463,762 Intellectual properties, net of $305,281 of accumulated amortization 21,996,603 Notes receivable, net of $0 of allowance for uncollectible amounts 899,833 Other 531,772 Goodwill 6,487,072 -------------- 33,383,089 -------------- Total Assets $ 34,229,357 ============== The accompanying notes are an integral part of the financial statements. 1 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET NOVEMBER 30, 1998 UNAUDITED Liabilities and Stockholders' Equity Current liabilities: Accounts payable, trade $ 403,318 Accrued expenses 170,812 Notes payable 66,748 Advances from officers 48,900 Current portion of license rights payable 210,077 ------------ Total current liabilities 899,855 ------------ Long-term liabilities: License rights payable 329,923 Notes payable 277,185 Deferred revenue 400,000 Deferred income tax payable 6,487,072 ------------ 7,494,180 ------------ Commitments and contingencies: - Stockholders' equity: Preferred stock Series M, $.001 par value, 5,000,000 shares authorized, 1,143,000, shares issued and outstanding 1,143 Common stock, $.01 par value 50,000,000 shares authorized, 9,579,923 shares issued and outstanding 531,869 Paid in capital in excess of par 36,691,618 Accumulated deficit (11,389,309) ------------ 25,835,322 ------------ $ 34,229,357 ============ The accompanying notes are an integral part of the financial statements. 2 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED NOVEMBER 31, 1998 AND 1997 UNAUDITED 1998 1997 Revenue $ 640,601 $ (3,328) Cost of Goods Sold 346,230 - ------------ ------------ Gross income from operations 294,371 (3,328) ------------ ------------ Operating expenses: Depreciation 32,079 5,414 Amortization 305,281 227,202 Advertising 21,234 General and administrative 691,947 131,626 Interest expense 170,817 12,264 ----------- ------------ 527,652 376,506 ----------- ------------ Loss from operations ( 926,987) ( 379,834) Estimated income taxes - - ----------- ------------ Net loss $( 926,987) $( 379,834) ============ ============ Net loss per share: Basic $( .09) $( .02) Diluted $( .09) $( .02) The accompanying notes are an integral part of the financial statements. 3 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997 UNAUDITED 1998 1997 Revenue $ 168,236 $ (6,398) Cost of Goods Sold 84,354 - ------------ ------------ Gross income from operations 83,882 (6,398) ------------ ------------ Operating expenses: Depreciation 16,898 0 Amortization 150,509 0 Production costs - General and administrative 235,220 26,010 Interest expense 122,479 0 ------------ ------------ 693,706 26,010 ------------ ------------ Loss from operations ( 609,824) ( 32,408) Estimated income taxes 0 0 ------------ ------------ Net loss $( 609,824) $( 32,408) ============ ============= Net loss per share: Basic $( .06) $( .00) Diluted $( .06) $( .00) The accompanying notes are an integral part of the financial statements. 4 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS UNAUDITED NOTE 1 - NATURE OF OPERATIONS Organization Airtech International Group, Inc. (the Company) was incorporated in the state of Wyoming on August 8, 1991 as Interactive Technologies Corporation, Inc. On May 31, 1998, the Company acquired all of the outstanding common stock shares of Airtech International Corporation, Inc. ("AIC"), which through its subsidiaries manufacture and sell various air filtration and purification products. The total purchase price of $22,937,760 was funded through the issuance of 10,500,000 of its common stock shares valued at $.625 per share, the issuance of 11,858,016 of its Series A convertible preferred stock shares valued at $.625 per share and the issuance of $9,000,000 of convertible debentures. The transaction was accounted for using the purchase method of accounting. Accordingly, the purchase price of the net assets acquired has been allocated among the net assets based on their relative fair values with $22,297,684 of the purchase price allocated to intellectual properties based on an independent asset appraisal. On July 31, 1998 the Board of Directors of the Company exercised its option and converted the convertible debentures and Series A preferred stock by issuing 24,929,445 shares of its unissued common stock. On October 5, 1998, the Company's shareholders approved a 5 for 1 reverse split of the Company's common stock. Consolidated principles The accompanying consolidated financial statements include the general accounts of the Company, SNT and AIC and its subsidiaries for the six months and three months ended November 30, 1998. All material intercompany accounts and balances have been eliminated in the consolidation. Impairment of long-lived assets Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, and long-lived assets and certain identifiable intangibles to be disposed of. The Company periodically evaluates, using independent appraisals and projected undiscounted cash flows, the carrying value of its long-lived assets and certain identifiable intangibles to be held and used whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, long-lived assets and identifiable intangibles to be disposed of are reported at the lower of carrying value or fair value less cost to sell. Amortization Organizational costs are being amortized using the straight-line method over five years. License rights are being amortized over the initial five-year term of the licenses. Although they are renewable at no additional consideration, there is no guarantee the Company will renew these licenses. At fiscal year ended May 31, 1998 these assets were reclassified as assets of discontinued operations, held for resale. For the six months ended November 30, 1998 no additional amortization was booked. 5 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS UNAUDITED NOTE 1 - NATURE OF OPERATIONS (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. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is currently being provided by straight line and accelerated methods for financial and tax reporting purposes, respectively, over estimated useful lives of five years. Capitalized software expenditures Software and trademark costs are amortized, pursuant to Statement of Financial Accounting Standards No. 86, at an annual amount equal to the greater of the amount computed using (a) the ratio that current gross revenues bear to the total of current and anticipated future gross revenues or (b) the straight-line method over a seven year estimated economic life beginning April 18, 1996. At May 31, 1998 these assets were reclassified as assets of discontinued operations, held for resale. No amortization was booked for the three months ended November 30, 1998. Intellectual properties In its acquisition of AIC the Company purchased certain intellectual properties. Costs incurred by the Company in developing its products consisting primarily of design, testing and completion of working prototypes, which are 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. Accordingly, the Company amortized intellectual properties by $301,018 during the six months ended November 30, 1998 for units placed in production. Revenue recognition Sales are recorded at point and time of shipment Advertising The Company's advertising costs, which consist of radio airtime for the Rebate TV operations, are charged to expense when incurred. Management estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash flow For purposes of the statement of cash flows, cash includes demand deposits and time deposits with maturities of less than three months. None of the Company's cash is restricted. 6 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS UNAUDITED NOTE 1 - NATURE OF OPERATIONS (continued) Basis of financial presentation Basic and diluted earnings per share amounts are based upon 10,325,000 and 18,992,000, respectively, for six months ended November 30, 1998 and 1997, weighted average shares of common stock and common stock equivalents outstanding. No effect has been given to the assumed exercise of stock options and warrants as the effect would be antidilutive. The accompanying unaudited consolidated financial statements have been prepared by Airtech International Group, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's most recent audited consolidated financial statements and notes thereto. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods presented have been made. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending May 31, 1999. Stock Based Compensation The Company measures compensation cost for its stock based compensation plans under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." The difference, if any, between the fair value of the stock on the date of grant over the exercise price for the stock is accrued over the related vesting period. SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") requires companies electing to continue to use APB 25 to account for its stock-based compensation plan to make pro forma disclosures of net income and earnings per share as if SFAS 123 had been applied (see Note J). Earnings Per Share Effective December 15, 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Under the new requirements for calculating earnings per share, the dilutive effect of stock options and other dilutive instruments will be excluded from basic earnings per share but included in the computation of diluted earnings per share. All earnings per share amounts have been restated so as to comply with Statement No. 128. Accounting Estimates In preparing consolidated financial statements in conformity with generally accepted accounting principles, management must make estimates based on future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could vary from the estimates that were used. In particular, management continually reviews the allowance for doubtful accounts. In considering the total allowance for doubtful accounts, management considers the payment history, underlying collateral value, and ability of the optical practices to support the required payments to the Company. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 7 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS UNAUDITED NOTE 1 - NATURE OF OPERATIONS (continued) Adoption of New Accounting Standards The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, in the first quarter of 1998. If applicable, the Company will present a new Consolidated Statement of Comprehensive Income which will report all changes in the Company's stockholders' equity other than transactions with stockholders. Comprehensive income pursuant to SFAS No. 130 would include the Company's consolidated net income, as reported in the Consolidated Statement of Operations, plus the net changes in the marketable securities, foreign currency translation and pension liabilities components of stockholders' equity. Management does not believe this statement will have an impact on its consolidated financial statements. The Company will adopt SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, for the purposes of its annual financial statements effective for the year ending December 31, 1998. SFAS No. 131 will supersede the business segment disclosure requirements currently in effect under SFAS No. 14. SFAS No. 131, among other things, establishes standards regarding the information a company is required to disclose about its operating segments. SFAS No. 131 also provides guidance regarding what constitutes a reportable operating segment. The Company is currently evaluating the required segment disclosures pursuant to SFAS No. 131. The Company will adopt the disclosure requirements of SFAS No. 132, Employer's Disclosures about Pensions and Other Post-retirement Benefits, in the fourth quarter of 1998. SFAS No. 132 revises disclosure requirements for such pension and post-retirement benefit plans to, among other things, standardize certain disclosures and eliminate certain other disclosures no longer deemed useful. SFAS No. 132 does not change the measurement or recognition criteria for such plans. Management does not believe this statement will have an impact on its consolidated financial statements. NOTE 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. Convertible preferred stock - Series M During the year ended May 31, 1998, the Company established this equity class and authorized 5,000,000 shares. During the period ended August 31, 1998, 112,500 of these shares were issued for $1.00 cash, or $112,500 net of costs. The shares have a par value of $.001, do not pay dividends and are convertible at the Company'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 $2.00 per share exercisable within two years after issuance. This offering was ended as of July 31, 1998. 8 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS UNAUDITED NOTE 3 - YEAR 2000 The Company believes all of its current computer systems and applications are Year 2000 compliant. In 1998, the Company plans to add point-of-sale software throughout its managed and owned stores, and this software will be Year 2000 compliant. The Company is currently investigating for compliance other significant systems upon which it relies. Management does not believe that its cost of complying for the significant systems will be material to the financial condition of the Company. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations The Company's operations for the six months ended November 30, 1998, resulted in a net loss of $926,987, or $.09 basic loss per share, compared to a net loss of $379,834, or $.02 basic earnings per share, for the comparable period in 1997. The Company, entirely through its wholly-owned subsidiary, Airtech International Corporation, Inc. ("AIC") had sales of $640,601 for the six months ended November 30, 1998 primarily composed of approximately $200,000 of sales of air purification equipment and approximately $400,000 of HVAC contracting and installation and replacement of air filters, compared to Company sales of $(3,328) for the comparable six months of 1997, an increase of $643,929. The Company also sold three new franchises in 1998. Airtech sales of air purification equipment reflect initial market penetration and acceptance of newly introduced units. The Company has had success selling equipment into businesses with existing or pending bans on smoking, such as hotels and restaurants. The Company continues to expect its Model 950 being developed as a Class II Medical Device for Medicare recipients will be approved and ready for sale into that market during calendar year 1999. Production of the Series 999 automobile unit for pre-sales customer testing is expected in the fall of 1998 with orders beginning before calendar year end. Since its inception and during the research and development phase, the Company shipped air purification units to more than one-hundred customers. The Company's products continue to have a high rate of acceptance among the commercial accounts to which the Company markets and while beta testing its new models. Cost of Goods Sold was $346,230 compared to $0, for the six months ended November 30, 1998 and 1997, respectively. Representing 54% of sales during 1998, Management believes cost of goods sold as a percent of sales will decrease to approximately 40% in the future as sales of air purification equipment comprises a larger percent of the Company's sales. Operating expenses increased $844,852, or 224% for the six months ended November 30, 1998 compared to the same quarter in 1997. The increase is attributable to an approximately $80,000 increase in amortization primarily related to amortization of intellectual property; an approximately $160,000 increase in interest expense payable to holders of debentures issued in the Airtech merger and approximately $595,000 increase in general and administrative expenses. The increase in G&A was attributable to the increased size of wages, advertising and consulting expenses incurred by the AIC subsidiary. The results of operations for the three months ended November 30, 1998 compared to November 30, 1997 are largely comparable to the results of operations for the six months ended November 30, except in relation to the Company's subsidiary, McCleskey Sales and Service ("MSS") and also as corrections of certain amounts from the period ending August 31, 1998. As of November 30, 1998, the Company was considering various business plans on moving forward with MSS or modifying the subsidiary as part of the Company's overall business plan. As a result, and due to historical losses at the subsidiary, the Company terminated the positions of the president and staff of MSS with plans to replace these individuals as part of the reevaluation. Liquidity and Capital Resources During the six months ended November 30, 1998, the Company continued to fund operations through revenues, private sales of securities and paying certain debts and business services in Company common stock. As of November 30, 1998, the Company had invested $486,620 in accounts receivable and inventory, an increase of $444,675 over November 30, 1997. Likewise, trade accounts payable increased $303,910 between the two periods. In June, the Company sold 530,000 shares of its common stock for $106,000. Another 750,000 and 50,000 shares were issued for business services and in settlement of debts, respectively. The Company plans to offer $5,000,000 in convertible debentures in early 1999. On November 4, 1998, the Company signed an investment banking relationship with Lloyd Wade Securities of Dallas, Texas. 10 "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements contained in this document which are not historical fact are forward-looking statements based upon management's current expectations that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks are described in the Company's Form 10-KSB for the fiscal year ended May 31, 1998 filed with the Securities and Exchange Commission. 11 Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on December 2, 1998. AIRTECH INTERNATIONAL GROUP, INC. by: /s/ CJ Comu -------------------------------- CJ Comu, Chief Executive Officer 12