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 August 31, 2000 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 200 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 22,367,740 shares of common stock, par value $0.05 per share issued and outstanding as of August 31, 2000. Traditional Small Business Disclosure Format Yes X No --- --- Airtech International Group, Inc. Table of Contents PART I - FINANCIAL INFORMATION Page No. Item 1. Airtech International Group, Inc. Financial Statements (Unaudited) Balance Sheet as of August 31, 2000 and 1999 3 Statement of Operations for the three months ended August 31, 2000 and 1999 5 Statement of Cash Flows for the three months ended August 31, 2000 and 1999 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings 13 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 14 [LETTERHEAD OF TURNER, STONE & COMPANY] INDEPENDENT ACCOUNTANT'S REPORT Board of Directors and Stockholders Airtech International Group, Inc. and subsidiaries Dallas, Texas We have reviewed the accompanying consolidated balance sheet of Airtech International Group, Inc. and subsidiaries as of August 31, 2000 and the related statement of operations stockholders' equity and cash flows for the three months then ended. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying August 31, 2000 consolidated financial statements for them to be in conformity with generally accepted accounting principles. /s/ Turner, Stone & Company, LLP Certified Public Accountants October 20, 2000 Part 1-Financial Information Item 1 Financial Statements AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS August 31, 2000 AND AUGUST 31, 1999 ASSETS CURRENT ASSETS 2000 1999 ---- ---- Cash $302,169 $20,106 Trade accounts receivables, net of allowance for doubtful accounts of $20,000 and $20,000 540,096 292,139 Other 87,135 Notes receivable, current portion 437,250 - Inventory 1,330,198 242,665 Prepaid expenses and other assets 82,823 - --------- ------- Total current assets 2,692,536 785,795 PROPERTY AND EQUIPMENT - net of accumulated deprec- iation of $182,374 and $219,758 respectively 176,290 80,327 NOTES RECEIVABLE - net of current portion, net of Allowance for doubtful accounts of $0 and $0, respectively 1,125,000 431,250 OTHER ASSETS Goodwill, net of $40,810 and $81,621 of accum- ulated amortization,respectively 102,432 162,155 Intellectual properties, net of $153,300 and 933,597 1,010,195 $45,060 of accumulated amortization, respectively Other, Prepaid Royalties 361,981 515,208 --------- --------- Total other assets 1,398,010 1,687,558 --------- --------- $5,391,836 $2,984,930 ========== ========== The accompanying notes are an integral part of the financial statements. AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AUGUST 31, 2000 AND AUGUST 31, 1999 LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 ---- ---- CURRENT LIABILITIES Notes payable - current portion $ 277,185 $ 277,185 Accounts payable, trade 554,990 704,209 Advances from officers 210,338 216,488 Accrued payroll and payroll taxes 457,134 357,644 Other accrued expenses 488,938 373,622 ----------- ----------- Total current liabilities 1,988,585 1,929,148 LONG-TERM LIABILITIES Notes payable Deferred revenue 340,000 400,000 Product Marketing Obligation 430,000 405,000 Convertible Debenture 2,600,000 - ----------- ----------- Total long-term liabilities 3,370,000 805,000 Total liabilities 5,358,585 2,734,148 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Series M cumulative, convertible preferred, 990,625 and 1,143,750 respectively; outstanding,liquidation preference of $1.00 per share 991 1,144 Common stock - $.05 par value, 50,000,000 shares authorized, 22,367,740 and 14,654,332 shares issued and outstanding,respectively 1,118,387 732,716 Additional paid-in capital 7,893,981 5,686,575 Retained deficit (8,980,108) (6,169,653) ----------- ----------- Total stockholders' equity 33,251 250,782 ----------- ----------- $ 5,391,836 $ 2,984,930 =========== =========== The accompanying notes are an integral part of the financial statements. AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31,2000 AND AUGUST 31,1999 REVENUES 2000 1999 ---- ---- Product sales $ 518,637 $ 345,441 Franchisee fees - 15,000 ----------- ----------- Total revenues 518,637 360,441 COSTS AND EXPENSES Salaries and wages 340,650 169,295 Research and Development 75,250 46,875 Cost of sales 284,472 322,549 Advertising 123,604 24,640 Depreciation and amortization 78,187 38,473 Other general & administrative expense 250,505 67,793 ----------- ----------- Total costs and expenses 1,152,668 669,625 ----------- ----------- LOSS FROM OPERATIONS (634,031) (309,184) Interest expense (62,610) (18,596) ----------- ----------- NET LOSS BEFORE INCOME TAXES (696,641) (327,780) Income taxes _ _ ----------- ----------- NET LOSS $ (696,641) $ (327,780) =========== =========== LOSS PER COMMON SHARE - BASIC $ (0.03) $ (0.02) =========== =========== LOSS PER COMMON SHARE - DILUTED $ (0.03) $ (0.02) =========== =========== The accompanying notes are an integral part of the financial statements. AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 2000 AND AUGUST 31, 1999 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (696,641) $ (327,780) Adjustments to reconcile net income to cash Depreciation and amortization 78,187 38,473 Stock payments to employees and consults 211,950 Changes in operating assets and liabilities Accounts receivable (270,125) (195,324) Inventory (791,246) - Accounts payable 294,880 194,016 Accrued expenses 80,045 56,963 Other Receivables 50,000 (20,000) ----------- ----------- Net cash used in operating activities (1,254,900) (286,078) CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for other assets (35,789) - ----------- ----------- Net cash used in investing activities (35,789) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 106,798 - ----------- ----------- Net cash provided by financing activities (106,798) DECREASE IN CASH (1,185,477) (41,702) ----------- ----------- CASH, BEGINNING OF PERIOD 1,487,646 61,808 =========== =========== CASH, END OF PERIOD $ 302,169 $ 20,106 =========== =========== The accompanying notes are an integral part of the financial statements. AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Airtech International Group, Inc. (the Company), formerly Interactive Technologies Corporation (ITC), was incorporated in the state of Wyoming on August 8,1991. As of May 31, 1998, in connection with the acquisition discussed below, the Company manufactures and sells a full line of air purification products. On May 31, 1998, the Company acquired all of the outstanding common stock shares of Airtech International Corporation (AIC), which through its subsidiaries manufactures and sells various air filtration and purification products. The total purchase price of $22,937,760 was funded through the issuance of 10,500,000 shares of common stock valued at $.625 per share, the issuance of 11,858,016 shares of Series A convertible preferred stock shares valued at $.625 per share and the issuance of $9,000,000 of convertible debentures. However, because these convertible securities were converted into common stock within two months following acquisition, the shareholders of AIC obtained control of the company. As a result, AIC became the acquiror for financial reporting purposes. The transaction was accounted for using the purchase method of accounting with AIC for accounting and reporting purposes the acquiror. Accordingly, the purchase price of the net assets acquired has been allocated among the net assets based on their relative fair value of zero. Principles of consolidation The accompanying consolidated financial statements include the general accounts of the Company and its subsidiaries, AIC, Airsopure, Inc., Airsopure International Group, Inc. and McCleskey Sales and Service, Inc.,(dormant) each of which has a fiscal year ended May 31, and AIC's investment in Airsopure 999LP, a Texas Limited Partnership with a December 31 year end. All material intercompany accounts and balances have been eliminated in the consolidation. Turner, Stone & Company, the Company's independent accountants, have performed limited reviews of the interim financial information included herein. Their report on such reviews accompanies this filing. Amortization Intellectual property is allocated to the Company's air filtration products based on expected sales as a percent of total sales by product. The Company records amortization beginning when the product is initially inventoried for sale. Amortization is recorded ratably over a ten-year term. Goodwill recorded in the financial acquisition of ITC, is being amortized under the straight-line method over 50 years. A prepaid royalty fee, paid pursuant to a December 1995 agreement and related to the Company's portable medical unit, is being amortized using the straight-line method over 24 months beginning January 2000. Inventories Inventories are carried at the lower of cost or net realizable value (market) and include component parts used in the assembly of the Company's line of air purification units, filters and finished goods comprised of completed products. The costs of inventories are based upon specific identification of direct costs and allocable costs of direct labor, packaging and other indirect costs. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is currently being provided by straight line and accelerated methods for financial and tax reporting purposes, respectively, over estimated useful lives of five years. Product marketing obligation Product marketing obligations pursuant to Statement of Financial Accounting Standards, "SFAS" No. 68, the Company has recorded funds raised in an arrangement to develop, produce and market the Model S-999 as a product marketing obligation. Revenue recognition Revenues from the Company's operations are recognized at the time products are shipped or services are provided. Revenue from franchise sales are recognized at the time all material services relating to the sale of a franchise have been performed by the Company. Management estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash flow For purposes of the statement of cash flows, cash includes demand deposits, short term cash equivalent investments and time deposits with maturities of less than three months. None of the Company's cash is restricted. Loss per share The basic and diluted loss per share are based upon 21,647,192 and 14,654,332, respectively, weighted average shares of common stock outstanding over the three month period ending August 31, 2000 and 1999. No effect has been given to the assumed conversion of convertible preferred stock, convertible debentures and the assumed exercise of stock options and warrants as the effect would be antidilutive. Convertible debentures (6%) On February 22, 2000, we entered into a securities purchase agreement with PK Investors LLC ("PKI") to raise up to $5,000,000 through the sale to PKI of up to $5,000,000 in principal amount of our 6% Convertible Debentures ("Debentures") and Warrants to purchase up to 500,000 shares of our Common Stock ("Warrants"). Upon execution of the securities purchase agreement, PKI purchased $2,500,000 in principal amount of the Debentures and 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, the Company also issued to PKI a Conditional Warrant to purchase the remaining $2,500,000 in principal amount of Debentures and the remaining Warrants to purchase 250,000 shares of our Common Stock. The Debentures, Warrants, and Conditional Warrant were sold and issued to PKI in a private transaction exempt from registration under Section 4 (2) of the Securities Act of 1933. 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. The debentures are convertible at the holder's option at any time beginning one year after issuance at a conversion price of $1.00 per share. The debentures include warrants to purchase 350,000 common shares at a price of $2.00 per share. The warrants expire two years from the date of issuance. Convertible Preferred Stock During the year ended May 31, 1998, the Company, from the 5,000,000 shares, authorized, issued 1,143,750 of convertible preferred stock for $1 per share. The shares have a par value of $.001, do not pay dividends, are convertible at the holder's option for one share of the Company's common stock, and receive up to 20%, if totally subscribed, of the gross proceeds from the Company's sales of its portable individual air purifier for a two-year period. As of August 31, 2000 and 1999, there were 990,625 and 1,143,750 shares of preferred stock outstanding, respectively. COMMITMENTS AND CONTINGENCIES Operating Leases The Company is currently obligated under noncancellable operating leases for its Dallas office and warehouse facilities which expire in December 2003. Minimum future rental payments required under the above operating lease is as follows. Year ending May 31 2001 $ 106,275 2002 73,566 2003 16,080 2004 9,380 ------------------ $ 205,301 ================== Financial instruments The Company's financial instruments consist of its cash, accounts and notes receivable, and trade payables. Cash The Company maintains its cash in bank deposit and other accounts, which, at times, may exceed federally insured limits. The Company invests excess cash not required for operations in US Treasury repurchase agreements in connection with its cash management account with its primary bank. The Company has not experienced any losses in such accounts, and does not believes it is subject to any credit risks involving its cash. Accounts and notes receivable, trade The Company accounts and notes receivables are unsecured and represent sales not collected to date. Management believes these accounts and notes receivables are fairly stated at estimated net realizable amounts. Stock options and warrants Through the quarter ended August 31,2000 and 1999, the Company has issued various stock options and warrants to employees and others and uses the intrinsic value method of accounting for these stock options. Compensation cost for options granted has not been recognized in the accompanying financial statements because the amounts are not material and its exercise price exceeded the common stock fair market value at the date of option. The options and warrants expire between September 2000 and February 2003 and are exercisable at prices from $0.20 to $10.00 per option or warrant. Exercise prices were set at or above the underlying common stock's fair market value on the date of grant. Part I. Item 2. MANAGEMENT DISCUSSION AND ANALYSIS The Company restated and re-filed its Financial Statements for the year ended May 31, 1999 and the comparable period ending May 31, 1998 in conformance with the reverse merger with ITC. The Company originally filed the May 31, 2000 10-K/SB and August 31, 2000 financial statements incorporating this reverse merger. The August 31, 1999 comparable period financial statements were also restated to reflect the reverse merger. 1. Results of Operations Revenues The Company's Revenues increased forty-four per cent or $158,196 to total $518,637 for the three months ended August 31, 2000 as compared to $360,441 for the three months ended August 31, 1999. Included in the revenue number are the sales of air purification products through the Company's franchise consumer stores. The total product sales increased $173,196 over the comparable period. Sale of franchise fee revenue decreased $15,000 over the comparable three-month period. The sale of franchises increased by eight in number, however, the sale of franchise territories were made with no fee income to jump start the new franchise sales. Costs and Expenses The Cost of sales decreased $38,077 to $284,472 even though sales of product increased $173,196. This is a decrease of cost of sales as a percentage of product sales from 93% to 55% for the three months ended August 31, 1999 and August 31, 2000 respectively. As a result of the Company operating four franchise stores during the three months ended August 31, 2000, the salaries and wages expense and other general and administrative expenses increased compared to the comparable three months ended August 31, 1999 where there were no Company operated franchise stores. As of September 1, 2000 the Company has sold two of the four Company stores to third parties and consolidated the two stores located in Dallas, Texas. Salaries and wages increased $171,355 to $340,650 for the three months ended August 31, 2000 compared to the three months ended August 31, 1999. The wages increased due to additional corporate personnel in the franchise sales support area and the staff expenses for the Company owned stores. Other general and administrative expenses also increased $182,712 to $250,505 for the three months ended August 31, 2000 compared to the three months ended August 31, 1999. The increase is attributable to the costs of the Company owned store overhead costs as well as general corporate legal and accounting increased expenses. Research and development increased $28,375 to $75,250 for the three months ended August 31, 2000 compared to the three months ended August 31, 1999. This increase was due to the development and testing of the Company's new in-line product the Model S-30. Likewise, the increase in advertising and promotional expenses increased $98,964 to $123,604 for the three months ended August 31, 2000 as compared to the similar three months in 1999. The increase is due to the advertising for the franchise consumer products and the new Model S-30. Depreciation and amortization increased $39,714 to $78,187 for the three months ended August 31, 2000 compared to the $38,473 in expense for the three months ended August 31, 1999. This increase is due to the amortization of the Prepaid Royalties that was not required in 1999. Interest Expense Interest expense increased $44,014 to $62,610 for the three months ended August 31, 2000 as compared to the $18,596 in interest expense for the three months ended August 31, 1999. This increase is due to the interest expense for the Convertible Debentures of $2,600,000 outstanding during this three-month period compared to no debenture interest for 1999. In total, the net loss for the three months ended August 31, 2000 of $696,641, or $.03 per share is 112%, or $.01 per share greater than the $327,780, or $.02 per share net loss for the three months ended August 31, 1999. 2. Liquidity and Capital Resources During the three months ended August 31, 2000, the Company continued to finance operations with the proceeds of private placements of securities completed and received in February 2000, and long term vendor payout schedules. During February 2000, the Company consummated a $5,0000 Convertible Debenture sale with $2,500,000 invested to date, to a New York City investment company. The debenture holder may exercise the conditional warrant at any time prior to December 22, 2000. We can not assure you that the holders will exercise the conditional warrant. The Company also has sold privately $350,000 of 12% Convertible Debentures during the previous fiscal year. The Company has invested the proceeds in inventory, trade receivables and cash. The Company expects to sell up to $5,000,000 in similar Private sale convertible debentures and consummate an additional $2,500,000 to $10,000,000 in convertible debentures or common stock based long-term lines of credit, whichever is the most advantageous to the Company. The Company has also started the sale of franchises for its consumer products. The sale of the projected 50 to 100 franchises over the next 12 months could result in up to $1,875,000 in franchise fees for the Company. A total of eight franchises have been sold as of August 31, 2000 along with the one Company store. The Company feels that these resources along with increased sales of products, will enable the Company to aggressively pursue the indoor air purification market with adequate funding. The Company does not have any plans for major capital outlays over the next 12 months. Any increased expenditure will be based on customer demand or made to order products thereby resulting in predictable payoff periods. Certain statements in this Form 10-QSB constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Act"). The words "believe," "expect," "anticipate," "intend," "estimate," and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements and to note that they speak only as of the date hereof. Although forward-looking statements reflect management's good faith beliefs, reliance should not be placed on uncertainties and other factors, which may cause the actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance, or achievements expressed or implied by such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. PART II - OTHER INFORMATION ITEM 1 Legal Proceedings The company has been named as a defendant in a number of lawsuits arising in the ordinary course of business. In some of these cases a judgment was rendered against the Company. The Company has answered these routine causes of action where appropriate, negotiated settlements where appropriate negotiated settlements where appropriate and agreed to a payment schedule with respect to others. The Company has fully reserved for these claims and causes of action in our consolidated financial statements in the aggregate amount of $28,000. In 1997, the Company was also named as a defendant in a cause of action styled LLB REALTY, L.L.C. V INTERACTIVE TECHNOLOGIES, CORP., Cause No. MER-L-1534-97, in the Superior Court of New Jersey, Mercer County. The complaint alleges damages relating to a lease agreement entered into by the Company for office facilities in New Jersey. The Company never occupied the space based upon the plaintiff (lessor) failing to finish out the space pursuant to the Company's specifications. The complaint alleges damages of approximately $607,000 for remaining lease payments, finish-out costs and lost revenues. Although the Company is currently in negotiations for a favorable settlement relating to the complaint, the outcome of these negotiations is uncertain. The Company established a reserve in our consolidated financial statements in the amount of $200,000 in anticipation of a settlement. The Company is also a defendant in a lawsuit filed March 2, 2000 called H.A.A. INC. V. AIRTECH INTERNATIONAL GROUP, INC., Cause No. oo CV-1603 (KMW) in the United States District Court for the Southern District of New York. The plaintiff is seeking 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. The case is in the later stages of discovery and we intend to vigorously defend against the plaintiff's claims. We have not established any reserves for this action. ITEM 2 Changes in Securities, None ITEM 3 Defaults upon Senior Securities, None ITEM 4 Submission of Matters To Vote of Security Holders During the three months ended August 31, 2000 there were no submissions of matters for shareholders' vote. ITEM 5 Other Information,None ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K, None Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, and in the capacity as the Registrant's Chief Executive Officer and Chief Financial Officer, respectively. Dated: October 20,2000 AIRTECH INTERNATIONAL GROUP, INC. by: /s/ CJ Comu ---------------------------------------------- Chairman and Chief Executive Officer by: /s/ James R. Halter ---------------------------------------------- Chief Financial and Accounting Officer