-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gk3tje2N9oz8hwbTE6wvdBe4vmG1CFdjRjjxJsZBDS+T4xhpfYHeroJ5VG8GOmmi eFaJikwr0fbRjQptC5jmkg== 0000930661-01-500611.txt : 20010516 0000930661-01-500611.hdr.sgml : 20010516 ACCESSION NUMBER: 0000930661-01-500611 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRTECH INTERNATIONAL GROUP INC CENTRAL INDEX KEY: 0000883041 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ALLIED TO MOTION PICTURE PRODUCTION [7819] IRS NUMBER: 980120805 STATE OF INCORPORATION: WY FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-60908 FILM NUMBER: 1634477 BUSINESS ADDRESS: STREET 1: 15400 KNOLL TRAIL # 106 CITY: DALLAS STATE: TX ZIP: 75248 BUSINESS PHONE: 9729609400 MAIL ADDRESS: STREET 1: 15400 KNOLL TRAIL # 106 CITY: DALLAS STATE: TX ZIP: 75248 FORMER COMPANY: FORMER CONFORMED NAME: INTERACTIVE TECHNOLOGIES CORP INC DATE OF NAME CHANGE: 19930328 SB-2 1 dsb2.txt FORM SB-2 As filed with the Securities and Exchange Commission on May 14, 2001 Registration No. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- Airtech International Group, Inc. (Exact name of Registrant as specified in its charter) Wyoming 3564 98-0120805 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) Number) -------------- 12561 Perimeter, Dallas, Texas 75228 (972) 960-9400 (Address and telephone number of Registrant's principal executive offices) James R. Halter Chief Financial Officer and General Counsel Airtech International Group, Inc. 12561 Perimeter Dallas, Texas 75228 (972) 960-9400 -------------- Copies to: John G. Rebensdorf, Esq. 6116 N. Central Expressway Suite 1313 Dallas, Texas 75206 (214) 696-9388 (Name, address and telephone number of agent for service) -------------- Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement in light of market conditions and other factors. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Maximum Proposed Title of Each Class of Offering Price Maximum Amount of Securities To Be Amount To Be Per Aggregate Registration Registered Registered(2) Unit Offering Price Fee(3) - --------------------------------------------------------------------------------- Common Stock, $0.05 Par Value(1)............... 19,000,000 $0.175 $3,325,000 $831 - ---------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) Includes shares of Common Stock which may be issued upon exercise of Common Stock Warrants and upon conversion of the Company's 12% Convertible Debentures or in payment of interest on the 12% Convertible Debentures by the Company. For purposes of estimating the number of shares of Common Stock to be included in this registration statement, the Company calculated 200% of the number of shares of Common Stock issuable upon conversion of the 12% Convertible Debentures and upon exercise of the Common Stock Warrants. (2) Also includes an indeterminate number of shares of Common Stock which may be issued with respect to such shares by way of a stock dividend, stock split, stock combination, recapitalization, merger, consolidation or otherwise in accordance with Rule 416. (3) The registration fee has been calculated in accordance with Rule 457(c) under the Securities Act of 1933, as amended, based upon the average of the closing bid and asked prices for the Registrant's Common Stock as reported on the OTC Bulletin Board on May 7, 2001. -------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +Information contained in this prospectus is subject to completion or + +amendment. A registration statement relating to these securities has been + +filed with the Securities and Exchange Commission on Form SB-2. These + +securities may not be sold nor may an offer to buy be accepted prior to the + +time the registration statement becomes effective. This prospectus shall not + +constitute an offer to sell or the solicitation of an offer to buy nor shall + +there be any sale of these securities in any state in which such offer, + +solicitation or sale would be unlawful prior to registration or qualification + +under the securities laws of any state. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 14, 2001 19,000,000 COMMON SHARES AIRTECH INTERNATIONAL GROUP, INC. ----------- Our common shares are traded on the over-the-counter Electronic Bulletin Board under the symbol "AIRG." There is no public market for our warrants and we do not intend to list our warrants on any exchange. This prospectus relates to the resale from time to time by the selling stockholders identified in this prospectus of up to: . 1,200,000 shares of our common stock issuable upon exercise of the warrants; . 17,800,000 shares of our common stock issuable upon conversion of up to $1,000,000 in principal amount of our 12% Convertible Debentures Due 2003. We will receive no proceeds from the sale of our warrants or common stock by the selling stockholders identified in this prospectus. We will, however, receive proceeds from the sale of our common stock upon the exercise, if any, of the warrants. You should read this prospectus and any supplement carefully before you invest in Airtech. This prospectus may not be used to make sales of our common stock or warrants unless accompanied by a prospectus supplement. Investing in our common stock involves risks. Risk factors begin on page 5. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this Prospectus is May , 2001. The following table of contents has been designed to help you find important information contained in this prospectus. TABLE OF CONTENTS
Section Page ------- ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 5 Description of Securities Purchase Agreement.............................. 10 Plan of Distribution...................................................... 13 Use of Proceeds........................................................... 13 Information on Selling Stockholders....................................... 14 The Company............................................................... 15 Company Properties........................................................ 29 Litigation................................................................ 29 Management's Discussion and Analysis...................................... 30 Directors, Executive Officers, Promoters and Control Persons.............. 35 Executive Compensation.................................................... 37 Summary Compensation Table................................................ 37 Security Ownership of Certain Beneficial Owners and Management............ 40 Certain Relationships and Related Transactions............................ 41 Market for Registrant's Common Equity and Related Stockholder Matters..... 42 Description of Securities................................................. 42 Legal Matters............................................................. 46 Experts................................................................... 46 Where To Find Additional Information...................................... 46 Index to Combined Financial Information................................... F-1
2 PROSPECTUS SUMMARY This prospectus summary highlights selected information from this prospectus and does not contain all of the information that may be important to you. For a more complete description of this offering, you should read this entire prospectus as well as the additional documents we refer to under the heading "Where To Find Additional Information." Our Company Our principal business is the development, manufacturing, distribution and sale of air purification products for commercial and individual use. We currently manufacture and distribute a product line of purification units for commercial applications such as hotels, restaurants, bars, offices, print shops and casinos and residential purification units for individual use. We also manufacture and distribute a purification unit for use in automobiles, trucks and public transportation vehicles. Our Products and Market Our air purification products and technology can be applied to various commercial, residential, and medical markets. We market our air purification products through direct sales efforts from our principal offices, a distribution network with heating, ventilation and air conditioning companies and various industry distributors. We also market our products through our existing franchisees. We have also licensed the distribution rights to use our name and technology in the countries of Taiwan, the Philippines, Turkey, Canada, Spain ,the Peoples Republic of China and countries in Central and South America. Our strategy is to identify national and international market niches which we believe are in need of air purification solutions and to exploit those markets through franchising, direct sales, licensing and strategic alliances with manufacturing representatives. The market for our products has grown based upon the increased public awareness of indoor air contamination. The Environmental Protection Agency has identified indoor air pollution as one of the five most urgent environmental crises in the United States. Air contamination includes bacteria, pollen, dust mites, smoke, plant and mold spores, dust, solvents, glues, formaldehyde, carbon monoxide and dioxide and various viruses. Summary Financial and Other Data We are providing the following summary financial information to aid you in your analysis of the financial aspects of an investment in us. The table includes summary historical financial data for Airtech for the years ended May 31, 1999 and 2000 and the nine months ended February 28, 2001. We believe that this presentation is informative to you.
Year Ended Year Ended May 31, May 31, Nine Months Ended 1999 2000 February 28, 2001 ----------- ----------- ----------------- Assets.............................. $ 2,849,781 $ 5,563,729 $ 5,138,818 Revenues............................ $ 1,030,469 $ 1,627,476 $ 1,437,617 Net Loss............................ $(4,311,459) $(2,441,594) $(1,705,247) Loss Per Share...................... $ (0.41) $ (0.14) $ (0.09)
3 Our Securities Purchase Agreement On March 29, 2001, we entered into a securities purchase agreement with an investment group to raise up to $1,000,000 through the sale to the investors of our 12% convertible debentures 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 our 12% debentures with attached warrants to purchase 500,000 shares of our common stock. The purchase price paid by the investors for the 12% debentures and attached warrants was $800,000. Under the terms of the securities 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 our common stock on the date the registration statement relating to the common stock offered by this prospectus is declared effective by the SEC. This prospectus relates to the resale of our common stock by the selling stockholders identified in this prospectus either in the open market or pursuant to negotiated transactions. 4 RISK FACTORS Because we have a limited history of operations we may not be able to successfully implement our business plan. We have only six years of operational history in our industry. Accordingly, our operations are subject to the risks inherent in the establishment of a new business enterprise, including access to capital, acceptance of our products in the market and limited revenue from operations. We cannot assure you that our intended activities or plan of operation will be successful or result in revenue or profit to us. We have a history of losses and expect future losses. We have incurred operating losses for our fiscal years ended May 31, 1999 and 2000 and the nine months ended February 28, 2001, and expect to sustain additional operating losses in the future. Our operating losses are attributable to the developing nature of our business and have resulted primarily from: . significant costs associated with the development of our products . marketing and distribution of our products . interest charges and expenses related to our current and previous debt and equity financings . minimal sales history of our recently developed products Our business requires significant expenditures which we must pay before realizing any revenues. The development of our business and the development, sale and delivery of our products and services requires significant expenditures. A substantial portion of these expenditures must be made before we realize any revenues. Certain of our expenditures, including marketing, sales and general and administrative costs are expensed as they are incurred. Other expenditures, including product design, network design and costs to obtain regulatory approval, are deferred until the network or product is completed and operational. We will continue to incur significant expenditures in connection with the construction, acquisition, development and expansion of our products, services and customer base. Although we believe the net proceeds from our recent debt and equity sales are sufficient to implement our plan of operation, we may require additional financing in the future. We cannot assure you that any required additional financing will be available to us or that any additional financing will not materially dilute the ownership of our shareholders. We may not have enough authorized but unissued shares of our common stock to issue upon conversion of our 12% debentures which would obligate us to pay a conversion penalty to the debenture holders. Under the terms of the 12% debentures, we are required to use our best efforts to reserve for issuance at all times a number of shares of our common stock equal to no less than two times the number of shares actually issuable at any time upon conversion of all of the 12% debentures and exercise of all of the attached warrants. As of April 13, 2001, we have reserved 16,800,000 shares of common stock for issuance upon conversion of the 12% debentures and exercise of the warrants. The conversion price of the 12% debentures and the exercise price of the warrants is dependent upon the trading price of our shares of common stock on the OTC Bulletin Board. Depending upon the trading price of our shares of common stock, we may not have a sufficient number of authorized shares of common stock in the future to reserve for issuance upon conversion of the 12% debentures and exercise of the warrants or upon actual conversion and exercise. We have called a special meeting of our stockholders for May 18, 2001 to approve a proposed amendment to our Articles of Incorporation to increase our number of authorized shares of common stock from 50,000,000 shares to 100,000,000 shares. The purpose of the meeting and the amendment is to ensure that we will have an adequate number of authorized shares, if necessary, for reservation or upon conversion of the 12% debentures and exercise of the warrants. 5 We cannot assure you that our stockholders will approve the proposed increase in our authorized shares or that the trading price of our common stock will be sufficient to enable us to comply with our reservation and conversion obligations under the 12% debentures and warrants. If, at any time, we do not have sufficient authorized but unissued shares of common stock to effect a requested conversion of the 12% debentures, we are required to pay to the 12% debenture holders a conversion penalty equal to the remaining principal amount of the 12% debentures not converted plus accrued interest multiplied by 0.24 and then multiplied by the number of days divided by 365 that the 12% debentures remain unconverted because of an insufficient amount of authorized shares. Also, our failure at any time to reserve two times the number of shares of our common stock for issuance upon conversion of the 12% debentures and exercise of the warrants is an event of default under the terms of the 12% debentures and warrants. Our payment of any required conversion penalty or our breach of the terms of the 12% debentures or warrants could have a material adverse affect on our business. Conversion of the 12% debentures could dilute the value of a stockholder's investment in Airtech. As of April 30, 2001, $800,000 in principal amount of 12% debentures were issued and outstanding. The 12% debentures are convertible into a number of shares of common stock determined by dividing the principal amount converted by the conversion price in effect. If converted on April 30, 2001, the 12% debentures would have converted into approximately 9,411,764 shares of our common stock. This number of shares, however, could be significantly greater in the event of a decrease in the trading price of our common stock. Purchasers of our common stock could therefore experience substantial dilution of their investment upon conversion of the 12% debentures. The 12% debentures are not registered and may be sold only if registered under the Securities Act or sold under an applicable exemption from registration. The shares of common stock into which the 12% debentures may be converted are being registered pursuant to the registration statement relating to this prospectus. As of April 30, 2001, warrants to purchase 500,000 shares of common stock issued to the purchasers of the 12% debentures were outstanding. The warrants are exercisable over the next ten years at a price equal to the lesser of $0.25 per share or a variable exercise price based upon the trading price of our common stock at the time of exercise. The exercise price of the warrants may be adjusted from time to time under certain antidilution provisions. The shares of common stock issuable upon exercise of the warrants are being registered pursuant to the registration statement relating to this prospectus. In the absence of a proportionate increase in our earnings and book value, an increase in the aggregate number of our outstanding shares of common stock caused by a conversion of the 12% debentures or exercise of the warrants would dilute the earnings per share and book value of all of our outstanding shares of common stock. If these factors were reflected in the trading price of our common stock, the potential realizable value of a stockholder's investment in Airtech could be adversely affected. As of April 30, 2001, we have reserved 5,800,00 shares of our common stock for issuance upon exercise of our outstanding warrants and options other than those issued in connection with the 12% debentures. We have reserved an additional 16,800,000 shares of common stock for issuance upon conversion of the 12% debentures and exercise of the attached warrants. As of April 30, 2001, the holders of our 6% debentures also have the right to convert the 6% debentures with attached warrants into approximately 13,800,000 shares of common stock. Increased competition from our competitors could prevent us from penetrating new markets. 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 products. We believe competition will continue to increase with the identification of new markets, such as: . the food and beverage industry where smoking problems among smoking and non-smoking customers exist or local ordinances impose smoking restrictions 6 . the growth of cigar bars . the creation of smoking lounges in airports, office buildings, medical buildings and other public buildings . other smoking and non-smoking environmental demands . air contamination within hospitals and other medical facilities . air contamination within office buildings and other public buildings and facilities . air contamination within vehicle air conditioning systems . air contamination within homes As competition increases, we will compete with numerous companies in our market which have greater financial and technical resources than those available to us. Our inferior competitive position could have a material adverse affect on our ability to penetrate a new market and ultimately our profitability. Increased technological developments in air purification products could render our products obsolete. Our air purification products could be rendered noncompetitive or obsolete by future technological developments in our industry. We expect these technological developments to significantly increase competition in our industry. Many of the companies with which we compete and expect to compete have greater capital resources and more significant research and development staffs and marketing and distribution programs and facilities. Our ability to compete effectively may be adversely affected by the ability of these competitors to devote greater resources to technological developments and the sale and marketing of their products than us. Also, one or more of our competitors may succeed or may have already succeeded in developing technologies and products of which we are unaware and which may be more effective than the air purification products we are currently developing or marketing. We may not receive approval codes for reimbursement of the cost of our Medicare Series 950 Unit which could significantly affect our future results of operations and profitability. In October 1999, we applied to the Medicare administration for a Medicare reimbursement code number for our Medicare Series 950 air purification unit. The reimbursement code number would provide us with access to the large Medicare market by allowing Medicare recipients to receive reimbursement for the cost of our Medicare Series 950. In February 2001, we also applied to the Alpha Numeric Committee of the Health Care Financing Administration for a health care product code system number. The code number is commonly referred to in the medical insurance industry as an HCPCS Code. Although not as large a market as the Medicare market, the HCPCS Code would enable us to market our Medicare Series 950 directly to the private medical insurance industry. If a private insurance carrier accepts our Medicare Series 950 with the HCPCS Code, patients who purchase a Medicare Series 950 would be entitled to receive insurance reimbursement for the cost of the Medicare Series 950. If we receive a Medicare reimbursement code, we would automatically receive an HCPCS Code. If we obtain an HCPCS Code, however, we would not automatically receive a Medicare reimbursement code. Approval of our Medicare Series 950 by either Medicare or the Health Care Financing Administration could significantly increase our profitability. We have not yet received approval of either of our applications and we cannot assure you that either application will be approved by the appropriate agency. If we do not receive Medicare approval or an HCPCS Code, we will continue to market our Medicare Series 950 through direct sales efforts and our existing distribution channels. To stimulate these sales efforts, we entered into an agreement with Southern Therapy, Inc. in April 2000 to market our Medicare Series 950 to home and durable medical equipment providers. We cannot assure you that our current marketing efforts will achieve the same 7 sales results as we could achieve through Medicare approval or an HCPCS Code which could adversely affect our business and results of operations. Our stock is traded on the OTC Bulletin Board and the tradability in our stock may be limited under the penny stock regulations. Our common stock is traded on the OTC Bulletin Board under the symbol "AIRG". The OTC Bulletin Board is not a recognized national securities exchange. If the trading price of our common stock is less than $5.00 per share, trading in our common stock would also be subject to the requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction. SEC regulations also require additional disclosure in connection with any trades involving a "penny stock", including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and our associated risks. Such requirements may severely limit the liquidity of our common stock in the secondary market because few brokers or dealers are likely to undertake such compliance activities. Generally, the term "penny stock" refers to a stock with a market price of less than $5.00 per share which is not traded on a national securities exchange or quoted on NASDAQ. An active trading market in our common stock may never develop because of these restrictions. There is a limited public market for our common stock and warrants and any future trading price of our common stock may decline, making it difficult for you to sell your stock. Currently, there are a limited number of market makers for our common stock and there can be no assurance that a market for our shares will continue with any consistency. An illiquid market for our common stock may result in price volatility and poor execution of buy and sell orders for our investors. There is no public market for our warrants and we cannot assure you that one will develop. We do not intend to list our warrants on any exchange. We depend on our key personnel for our future success including our founder, C J Comu. Our future success depends to a significant extent upon the continued employment of our founder C J Comu. Competition for qualified personnel is intense in our industry, and we cannot assure you that we will be successful in attracting and retaining qualified, top-level personnel. The limited availability of qualified individuals could become an issue of increasing concern in the future. We do not maintain insurance on the lives of any of our officers or key employees. Our future success largely depends on the ability of our qualified personnel to manage and conduct our operations and implement our business plan. The loss of services of our founders or other key officers and directors could adversely affect our prospects for success. We recently suspended our franchise program and instituted a new program to market our residential products through distributors which may adversely affect our future sales. We recently suspended our franchise program to market and sell our residential air purification products utilizing a retail store outlet concept. Since February 2000, we have sold 8 residential retail franchises of which 5 continue to operate. We suspended our retail franchise program to analyze whether the retail sale of our residential units is cost effective when compared to other direct sale distribution channels. We are currently marketing our residential products through direct sales from our corporate offices, manufacturing representatives and national distributors. We are also marketing our Medicare Series 950 to home and durable medical equipment providers through our agreement with Southern Therapy. We cannot assure you that these marketing efforts will be successful or that it will be economically feasible to reinstate our retail franchise 8 program in the future. Either of these events could negatively impact our future residential product sales and thus our profitability. We discontinued offering franchises to sell our commercial products and instituted a new program to sell these products through distributors which may adversely affect our future sales. As of May 31, 2000, we had 18 franchisees who market our commercial products. During fiscal year 2000, we elected to discontinue offering additional commercial franchises. We elected to discontinue our commercial franchise program to enable us to pursue marketing our commercial products through manufacturing representatives and direct sales efforts from our corporate offices. In February 2001, we entered into an agreement with W&B Service Company for the exclusive national distribution of our commercial and automobile purification products. We cannot assure you that this new marketing approach for our commercial products will be successful. If unsuccessful, we may not be able to increase sales from our commercial products which could materially affect our future profitability. We have not paid any dividends in the past and do not anticipate paying dividends in the future. We anticipate using the proceeds received from our recent debt and equity sales and any future earnings to promote and increase our business and for other working capital uses. We have not paid or declared any dividends in the past. Based upon our present financial status and our contemplated financial requirements, we do not anticipate paying any dividends upon the shares offered by this Prospectus for the foreseeable future. While we may declare dividends at some time in the future, we cannot assure you of the timing of future dividends, if any. FORWARD LOOKING STATEMENTS The statements we make in this prospectus 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 prospectus. 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. In addition, our forward-looking statements are subject to our ability to reverse the current negative trend in our financial results. The inclusion of projections and other forward-looking statements should not be regarded as a representation by us or any other person that we will realize our projections or that any of our forward-looking statements contained in this prospectus will prove to be accurate. We will not update any forward-looking statements other than as required by law. 9 DESCRIPTION OF SECURITIES PURCHASE AGREEMENT Our Agreement On March 29, 2001, we entered into a securities purchase agreement with an investment group to raise up to $1,000,000 through the sale to the 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. If the registration statement is not declared effective, the investors have no obligation to purchase the additional 12% debentures or the attached warrants. 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. See "Limitation on Stock Ownership of Debenture Holder" on page 11 of this prospectus. The conversion price of our common stock used in calculating the number of shares issuable upon conversion, or in payment of interest on the 12% debentures, is the lesser of . 50% of the average of the lowest three trading prices of our common stock for the twenty trading days ending one trading day prior to the date we receive a conversion notice from a debenture holder; and . a fixed conversion price of $0.25. Also, under the terms of the 12% debentures, if we at any time . distribute any shares of our common stock in a consolidation, exchange of shares, recapitalization 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. 10 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 recapitalization. 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. Our Covenants with the 12% Debenture Holders We may not, without the prior written consent of our 12% debenture holders, do any of the following: . pay, declare or set apart for payment any dividend or other distribution on shares of our capital stock other than shares issued in the form of a stock dividend; . redeem, repurchase or otherwise acquire any shares of our capital stock or any warrants, rights or options to purchase or acquire our shares of capital stock; . incur any indebtedness, except to trade creditors or financial institutions incurred in the ordinary course of our business or to pay the 12% debentures; . sell, lease or otherwise dispose of any significant portion of our assets outside of the ordinary course of our business; . lend money, give credit or make advances to any person or entity except in the ordinary course of our business; . negotiate with any party to obtain additional equity financing that involves the issuance of our common stock or securities convertible into our common stock for a period of 180 days from the date the registration statement relating to the securities offered by this prospectus is declared effective by the SEC; . conduct any equity financing during the period ending March 29, 2003 without providing the 12% debenture holders with the opportunity to participate in the equity financing on the same terms and conditions offered to the potential investors. Limitation on Ownership of our Shares of Common Stock by a 12% Debenture Holder Our securities purchase agreement with the investors provides that at no time may a 12% debenture holder, together with its affiliates, maintain ownership of more than 4.9% of our outstanding common stock, unless the debenture holder gives us at least 30 days prior notice of their intent to waive the 4.9% ownership limitation. Registration Rights Agreement with the Investors Simultaneously with the execution of the securities purchase agreement, we entered into a registration rights agreement with the investors. The securities offered by this prospectus are in compliance with our obligations under the registration rights agreement. The holders of the 12% debentures and attached warrants 11 are also entitled under the registration rights agreement to certain "piggy- back" registration rights if we file a registration statement relating to the sale of securities for our own account. This means the holders of the warrants and 12% debentures may participate and sell shares in our public offering, except for shares registered by us for issuance under our employee stock option plans or in a merger or exchange in which our shares are issued in exchange for other securities. Under the registration rights agreement, if the registration statement relating to the securities offered by this prospectus is not declared effective by the SEC on or before July 13, 2001, we are obligated to pay a registration default fee to the 12% debenture holders equal to $2,000 for each $100,000 in principal amount of outstanding 12% debentures. We are obligated to pay the default fee for each 30 day period, prorated for partial periods, that the registration statement is not declared effective. The default fee is due on the date the registration statement is declared effective and is payable in cash or at the option of the 12% debenture holder in shares of our common stock. Payments in shares of our common stock will be based upon the lowest three trading prices of our common stock for the twenty trading days prior to the payment date. 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 Events of Default If we commit an event of default under our agreements with the 12% debenture holders, the 12% debentures are immediately due and payable and we must pay to the 12% debenture holders an amount equal to the greater of . 120% of the outstanding principal amount plus accrued interest on the 12% debentures; . or the value of the number of shares of our common stock into which the 12% debentures are convertible based upon the trading price of our common stock on the day preceding the date of payment. The 12% debenture holders would also have the right to exercise their rights under the security agreement securing the 12% debentures which could lead to control of substantially all of our assets. Events of default include: . our failure to pay timely any principal and interest due on the 12% debentures; . our failure or inability to issue shares of our common stock upon conversion of the 12% debentures or exercise of the attached warrants; 12 . our breach of any of the material covenants, representations or warranties included in the 12% debentures or the related securities purchase agreement; or . we file bankruptcy or a receiver or trustee is appointed for a substantial part of our business or assets. PLAN OF DISTRIBUTION The selling stockholders named in this prospectus or their pledgees, donees, transferees or other successors-in-interest are free to offer and sell their warrants and common stock at such times, in such manner and at such prices as they may determine. The types of transactions in which the warrants or common stock are sold may include transactions in the over-the-counter bulletin board market (including block transactions), negotiated transactions, the settlement of short sales of common stock, or a combination of these methods of sale. The sales will be at market prices prevailing at the time of sale or at negotiated prices. The transactions may or may not involve brokers or dealers. The selling stockholders have advised us that they do not have any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their securities. The selling stockholders may effect transactions by selling our warrants or common stock directly to purchasers or to or through broker-dealers, which may act as agents or principals. Broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders. Broker-dealers may also receive compensation from the purchasers of our warrants or common stock for whom they act as agents or to whom they sell as principal, or both. The compensation to a particular broker-dealer might be in excess of customary commissions. The selling stockholders and any broker-dealer that acts in connection with the sale of warrants or common stock may be deemed to be an "underwriter" within the meaning of Section 2(11) of the Securities Act. Any commissions received by broker-dealers and any profit on the resale of our warrants or common stock sold by them while acting as a principal may be deemed to be underwriting discounts or commissions. The selling stockholders may agree to indemnify any agent or broker-dealer that participates in a transaction involving sales of our warrants or common stock against certain liabilities. Because the selling stockholders may be deemed "underwriters" within the meaning of Section 2(11) of the Securities Act, the selling stockholders will be subject to prospectus delivery requirements. We have informed the selling stockholders that the anti-manipulation rules of the SEC, including Regulation M under the Exchange Act, may apply to sales by the selling stockholders in the market and have provided the selling stockholders with a copy of these rules and regulations. USE OF PROCEEDS We are registering our warrants and shares of common stock offered by this prospectus to satisfy our contractual obligation to the investors. We will not receive any of the proceeds from the sale of our warrants or common stock by the selling stockholders under this prospectus. We will, however, receive proceeds from the issuance of our common stock upon the exercise, if any, of our warrants. On March 29, 2001, the investors purchased $800,000 in principal amount of our 12% debentures with attached warrants to purchase 500,000 shares of our common stock. The purchase price for the 12% debentures and warrants was $800,000. We intend to use the proceeds received from the sale of the 12% debentures as follows: Reduction of payables.............................................. $150,000 Inventory purchases................................................ 200,000 Product testing.................................................... 110,000 Commissions and expenses on sale of 12% debentures................. 90,000 General corporate purposes......................................... 250,000 -------- TOTAL............................................................ $800,000 ========
13 INFORMATION ON SELLING STOCKHOLDERS The following table includes certain information with respect to the selling stockholders as of April 30, 2001. The selling stockholders are not an affiliate of ours and have not had a material relationship with us or any of our predecessors during the past three years. The selling stockholders are not registered broker-dealers or affiliates of any registered broker-dealers.
Approximate Maximum Number Percentage of Shares of of Common Beneficial Ownership Common Stock Stock to be of Common Stock as Offered for Owned After of April 30, 2001 Sale Offering Name -------------------- -------------- ----------- AJW Partners, LLC............. 6,377,647 12,350,000 0% New Millennium Partners II, LLC.......................... 3,714,118 6,650,000 0%
The number of shares included in the above table represents an estimate of the number of shares of common stock to be offered by the selling stockholders. The actual number of shares of common stock offered by the selling stockholders is indeterminate, is subject to adjustment and could be materially less or more than the estimated number. The actual number of shares issuable upon conversion of the 12% debentures and exercise of the related warrants is dependent on the future market price of our common stock which we cannot predict. The actual number of shares of common stock offered in this prospectus, and included in the registration statement relating to this prospectus, includes an additional number of shares of our common stock which may be issued or issuable upon conversion of the 12% debentures and exercise of the related warrants because of any stock split, stock dividend or similar transaction involving our common stock, pursuant to Rule 416 of the Securities Act. Under the terms of the 12% debentures, if the 12% debentures were converted on April 30, 2001, the conversion price would have been $0.085. Under the terms of the warrants, if the warrants were exercised on April 30, 2001, the exercise price would have been $0.102 per share. Under the terms of the 12% debentures and the related warrants, the 12% debentures are convertible and the warrants are exercisable by any holder only to the extent that the number of shares of our common stock issuable on conversion or exercise, together with the number of shares of our common stock owned by the holder and its affiliates (but not including shares of common stock underlying unconverted shares of 12% debentures or unexercised portions of the warrants) would not exceed 4.9% of our shares of outstanding common stock as determined in accordance with Section 13(d) of the Securities Exchange Act. Therefore, the number of shares of our common stock included in the above table exceeds the number of shares of common stock that a selling stockholder could own beneficially at any given time through its ownership of the 12% debentures and the warrants. For this reason, the beneficial ownership of our common stock by a selling stockholder included in the above table is not determined in accordance with Rule 13d-3 under the Securities Exchange Act. 14 AIRTECH INTERNATIONAL GROUP 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 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, 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 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, 15 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 October 1999, we applied to the Medicare administration for a Medicare reimbursement code number for our Medicare Series 950. The reimbursement code number allows Medicare recipients to receive reimbursement for the cost of our Medicare Series 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. From February 2000 through June 2000, we opened four company owned retail stores in Addison, Texas, Arlington, Texas, Jackson, Tennessee and Kansas City, Missouri. During 2000, we sold the two stores located in Jackson, Tennessee and Kansas City, Missouri to the managers of those stores. We also consolidated the store located in Arlington, Texas with the store located in Addison, Texas. We opened these retail stores to facilitate the sale of our home consumer line of air purification products. We sold the store located in Addison, Texas in March 2001. As of April 30, 2001, we do not own any retail stores and do not intend to open any company owned stores in fiscal year 2002. In February 2001, we applied to the Alpha Numeric Committee of the Health Care Financing Administration for a health care product code system number. The code number is commonly referred to in the medical insurance industry as an HCPCS Code. The HCPCS Code would enable us to market our Medicare Series 950 directly to the private medical insurance industry. If a private insurance carrier accepts our Medicare Series 950 with the HCPCS Code, patients who purchase a Medicare Series 950 would be entitled to receive insurance reimbursement for the cost of the Medicare Series 950. Our application is pending and we have not received an HCPCS Code. 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 75228. 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 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 or 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 and mold 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 16 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. Commercial Franchise Operations We operate a franchise program designed to leverage our expertise with the energies and investment of a franchise network. We see this as a means of supplementing our 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 direct sales efforts from our corporate office. We also implemented a program to pursue the marketing of our commercial products through manufacturing representatives. 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 this broader exposure will increase the overall market of our commercial products above the levels previously recognized through our commercial franchise program. Residential Franchise Operations We also operate a franchise program designed to market our residential air purification units utilizing a retail store outlet concept. We operate this franchise program through Airsopure International Group, Inc., our wholly owned subsidiary. Airsopure International is qualified to offer our franchises in 38 states. The start-up costs for purchasing and establishing a retail store franchise range from $90,000 to $100,000, which includes up to a $25,000 franchise fee to us. The remainder of the costs are estimates for the purchase of inventory, furniture and fixtures and minimum required working capital. Since February 2000, we have sold 8 residential retail franchises of which 5 are still operational. We recently suspended our franchise program to market and sell our residential retail franchises. We suspended our retail franchise program to analyze whether the retail sale of our residential units is cost effective when compared to other direct sale distribution channels. We are currently marketing our residential products through direct sales from our corporate offices, manufacturing representatives, existing franchisees and 17 national distributors. We are also marketing our Medicare Series 950 to home and durable medical equipment providers through our agreement with Southern Therapy. 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. 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. 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 people diagnosed with asthma has significantly increased in recent years. From 1970 to 2000, the number of asthmatics in the United States has increased 59 percent representing approximately 9.6 million people. We estimate that as of the year ended 2000, 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 asthma has increased 68 percent since 1979 (Source: Asthma and Allergy Foundation of America). 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 on 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. 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. 18 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 created 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 created by having 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 $2,475.00. For the 30 months ended February 28, 2001, we have sold 314 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 $1,090.00. For the 30 months ended February 28, 2001, we have sold 117 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 $1,850.00. For the 30 months ended February 28, 2001, we have sold 50 of these units to our franchisees. Series 30: Our Series 30 is in the preliminary marketing stage. The Series 30 is a residential unit which is adaptable to existing duct work used in existing heating, air conditioning and ventilation systems. The retail price of our Series 30 is $970. For the two months ended February 28, 2001, we have sold 50 of these units. 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 $354. For the 30 months ended February 28, 2001, we have sold 600 of these units. These sales were primarily to 19 Airsopure 999, L.P. of which Airsopure, Inc., the Company's wholly owned subsidiary, is 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. In February 2001, we also applied to the Health Care Financing Administration for an HCPCS Code. The HCPCS Code would allow us to market our Medicare Series 950 directly to private medical insurance carriers. We propose to offer our Medicare Series 950 to Medicare and private insurance recipients for a retail price of $795. As of February 28, 2001, we have not sold any of our Medicare Series 950 units to either the Medicare or private insurance markets. 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 $950.00. As of February 28, 2001, we have sold 438 of these units. 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 10 units available for a retail price of $2,000.00. 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 trisorbent 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 will require approximately $100 in replacement filters per year and the portable residential units approximately $150 per year. Product Development and Redesign We do not anticipate any major expenditures during fiscal year 2001 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 anticipate redesign costs on our Series 14 units and possibly our other units which utilize a hardened plastic case requiring injection molding. We estimate the engineering and mold tooling costs for these units to be in the range of $500,000. We will not commit to these costs unless our estimated sales of these units are sufficient to offset the related development and design costs. We also 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. 20 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. The anticipated unit volume sales of the Series 999 automobile unit, the Series 950 unit and the S-30 unit during fiscal year 2001 caused management to select out-sourcing for production of these units. 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. The increased expenses occur 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 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 21 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. 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. Carrier's sales were approximately $8.4 billion in 2000. Trane is second in the industry with 22 approximately $7,600,000 in sales in 2000. 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. Annual sales for 2000 were $410 million. 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. Combined sales for these divisions during 2000 were $7.4 billion. CECO Environmental Corp. (NASDAQ:CECE) has been in the air quality technologies and services business for over 30 years. Annual sales for 2000 were $325 million. CECO has expanded the applications for its technology to include wastewater treatment. CECO, through its four subsidiaries, 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 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 23 . 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 approximately $9 billion in sales during 1999 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. . 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 24 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. We also have 5 residential retail franchisees who market and sell our residential air purification products. We provide a five day Indoor Air Quality Certification program for all of our approved franchisees. Each of our franchisees has 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. International Licenses. We have licensed the distribution rights to our name and technology in Turkey, Canada, Spain and Central and South America. Effective May 31, 2000, we entered into a development agreement with Aurora Products, Ltd. (Shanghai) for the distribution of our products in portions of Asia and the Pacific Rim through two subsidiaries of Aurora Products. Aurora Airsopure (China) markets our products in Hong Kong and the Peoples Republic of China. Aurora Airsopure (Asia) markets our products in Taiwan and the Phillippines. Aurora Airsopure (China) and Aurora Airsopure (Asia) each executed a $500,000 demand promissory note payable to us in exchange for the distribution rights. The notes bear interest at 10% per annum with all principal and interest due May 31, 2008. As of April 30, 2001, we have received initial cash payments under each of the notes of $40,200. Under the terms of the notes, the remaining principle balances are reduced based upon an allocation of 20% of purchase orders from us and 80% of gross sales by each distributor. As of April 30, 2001, we have allocated $18,000 in principle reduction to the Aurora Airsopure (Asia) note. 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 or a formula derived from guaranteed projected sales based upon the population of the licensed territory or country. 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 through direct marketing efforts from our principal offices. As of April 30, 2001, we have entered into agreements with 30 local manufacturing representatives. These agreements include distribution agreements with Trinity Resources, Inc. for the exclusive distribution of our products through AES of Oklahoma (Carrier Corporation) in the State of Oklahoma and W&B Service Company for the exclusive national distribution of our commercial and automobile products in the United States and Canada. 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. Approximately 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 104,994 times and the Airtech website 191,390 times. On these sites, visitors can educate themselves about our products, but cannot order our products on line. 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 and the ability to order online. 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 25 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. Direct Sales. We currently make direct sales through our corporate offices to national accounts such as TGI Fridays, Bennigan's and Sullivans, 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. Retail Distribution. In February 2000, we opened our first company retail outlet in Addison, Texas to facilitate the retail sale of our home consumer products. Since February 2000, we also opened three additional retail outlets in Arlington, Texas, Jackson, Tennessee and Kansas City, Missouri. During August 2000, we sold the two stores located in Jackson, Tennessee and Kansas City, Missouri to the managers of those stores and consolidated the store located in Arlington, Texas with the Addison, Texas store. The purchase price for each of the Jackson and Kansas City stores was $15,000. The purchase price represents the purchase of existing inventory at the stores and the assumption by each purchaser of all lease and utility obligations. The purchase price is payable by each purchaser paying a premium for each unit of inventory purchased from us above the initial inventory. The inventory premium for the Jackson store is $100 per unit and the Kansas City store is $50 per unit. As of April 30, 2001, we have received $2,600 on the sale of the Jackson store and $2,500 on the Kansas City store. In March 2001, we sold the store located in Addison, Texas for a purchase price of $20,000. The purchase price was paid in $4,000 cash and the assumption by the purchaser of all lease and utility obligations. We are also actively pursuing 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. We intend to continue the pursuit of the pending Medicare application by collecting and submitting additional information required by Medicare. The date of a final decision on our Medicare application cannot be determined at this time. The submission of additional information will allow Medicare to take additional time to evaluate our application. We cannot predict if, or when, Medicare will approve the Medicare Series 950 for direct cost reimbursement. We believe, however, that the time necessary to duplicate or invent the technology included in the Medicare Series 950, to create and test a prototype and to submit an application to Medicare gives us a competitive lead time advantage over our competitors in this market. The Medicare reimbursement code is awarded through a review process conducted under the direction of the Health Care Financing Administration and its agencies that include the Statistical Agency for Durable Medical Equipment Regional Council and the Durable Medical Equipment Regional Council. Once awarded a Medicare reimbursement code, Medicare patients suffering from respiratory problems are able to secure through a variety of durable medical equipment providers, medical technology prescribed by their attending physicians that will be paid for by Medicare or their insurance carrier of record. Our research also indicates that third party payors such as managed care and indemnity insurance plans will 26 more readily reimburse patients for our Medicare Series 950 after the product receives a Medicare code. We estimate that approximately 31 million Medicare enrollees suffer from some sort of upper-respiratory problem. Although the number of Medicare enrollees has not changed significantly in the past three years, we believe that the number of enrollees will increase significantly in the future with the aging of the "baby boomers." These individuals represent the end-user market for our Medicare Series 950. We have also developed the Consumer Series 950 unit which is similar to the Medicare Series 950 unit with alterations for a larger array of filtration for contaminants. In February 2001, we also applied to the Alpha Numeric Committee of the Health Care Financing Administration for a health care product code system number. The code number is commonly referred to in the medical insurance industry as an HCPCS Code. Although not as large a market as the Medicare market, the HCPCS Code would enable us to market our Medicare Series 950 directly to the private medical insurance industry. If a private insurance carrier accepts our Medicare Series 950 with the HCPCS Code, patients who purchase a Medicare Series 950 would be entitled to receive insurance reimbursement for the cost of the Medicare Series 950. 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 the 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. The medical equipment distributors currently interact with physicians providing other medical devices such as walkers, wheelchairs, hospital beds and electronic monitoring devices. The Medicare and Consumer Series 950 units will be a new product for medical equipment distributors within an industry where the introduction of new products is not common. If we do not receive approval from Medicare of the Medicare Series 950, 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. To implement this marketing approach, we entered into an agreement with Southern Therapy, Inc. in April 2000 to market our Medicare Series 950 to home and durable medical equipment providers. We cannot predict or forecast the amount of any future sales which may be generated from the Medicare or Consumer Series 950. 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 not only is automobile air contamination immense and growing, but also 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 higher auto resale values to a wide variety of customers, such as car rental 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. The first indication that a problem exists is the odor detectable when the air conditioning unit or the air circulation system is activated. It is important, however, to note that the bacteria might be present before the odor is detected. This condition is caused by buildup of mold and bacteria in the air conditioner's evaporator. These fungi and spores can trigger allergic reactions and upper respiratory problems for car passengers. Nearly 200 million vehicles are in use across the United States. Of these vehicles, . approximately 150 million are passenger vehicles, . approximately 2 million are owned by the major car rental companies, and . approximately 3 million vehicles are government owned and used. 27 Each year in the United States, approximately 12 million new vehicles are sold by automobile dealers. The majority of automobiles fall into the category of used or more than one year old. The average American spends many hours per day in his vehicle. This much exposure, when added to outside contaminants such as road pitch, microscopic tire dust, allergens and hazardous gases and odors, leaves many car drivers with recurring headaches, eye irritation, nausea and even central nervous system problems. There are approximately 24,000 franchised new car dealers in the United States. Some auto makers, such as Mercedes Benz and BMW, are experimenting with various air cleaning systems. We believe that all of these vehicles represent potential installations for our Series S-999. We propose to initially 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 (custom pinstripping, gold ornamentation and custom wheel coverings), fabric sealants and window tints. We believe a very highly effective and affordable air purification device like our Series S-999 will be widely accepted in the automobile after-market. To implement our marketing strategy for the Series S-999, we are currently developing a marketing strategy with W&B Service Company, our North American distributor, to market the Series S-999 to auto after-market companies and the rental car, government vehicle, and automobile dealer markets. Government Regulation We operate under the disclosure document guidelines set forth by the Federal Trade Commission under an FTC Rule which became effective October 21, 1979. Under this FTC Rule, we are required to comply with the FTC disclosure format or issue a Uniform Franchise Offering Circular to all potential purchasers of a franchise. The uniform circular format is a standard form disclosure document which is accepted by the FTC and most states as an alternative to the FTC disclosure format. Our current uniform circular is compliant in 37 states. In addition to this format, fourteen states require additional information to be contained within the uniform circular for sales of new franchises within their states. We are approved in the State of California to offer our franchises, one of the additional information states. Although we intend to seek approval of our franchise in other additional information states in the future, we do not have any pending applications. Any violations under the FTC Rule are considered unfair or deceptive acts or practices within the meaning of Section 5 of the Federal Trade Commission Act. In response to the FTC Rule requirements, we formed wholly-owned subsidiaries, Airsopure, Inc., and Airsopure International Group, Inc., and registered each entity as a franchisor. Each entity is in compliance with the FTC Rules regarding its uniform circular. 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 suppliers. As of February 28, 2001, our five principal suppliers who provide us with materials used in our products were Revcor, Glasfloss, Tela Tool, Lesson Motor and RSE, Inc. We purchase motors, fans, filters and plastic casings 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. 28 Estimate of Research and Development Expenditures We incurred various research and development expenditures of approximately $15,000 for the fiscal year ended May 31, 2000 and $283,000 for the nine months ended February 28, 2001. These expenditures included salaries, materials, finished units, travel and correspondence. Employees As of April 30, 2001, we had 14 employees including one part-time employee. Fiscal Year Our fiscal year is from June 1 to May 31 of each year. COMPANY PROPERTIES We maintain our executive offices and a warehouse facility at 12561 Perimeter, Dallas, Texas. This facility has a total of approximately 10,400 square feet and a total rental cost for fiscal year 2000 of $89,250. We are committed to our executive office and warehouse lease until August 15, 2001. We consider our facilities sufficient for our present and currently anticipated future operations and believe that these properties are adequately covered by insurance. LITIGATION In 1997, we were named as a defendant in a cause of action styled LLB Realty, L.P.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. The court ruled in favor of the plaintiffs and set a hearing in June 2001 to determine damages. Although we are currently in negotiations for a favorable 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 is seeking 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. The case is in the latter stages of discovery and we intend to vigorously defend against the plaintiff's claims. 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 $45,000. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS Background and General In May 2000, we restated and refiled our financial statements for the year ended May 31, 1999 and the comparative period ended May 31, 1998. The reason for the restatement of our 1999 financial statements was to reflect the acquisition by Interactive Technologies Corporation, Inc., our predecessor in name, of all of the outstanding shares of common stock of Airtech International Corporation as a reverse merger as described below. On May 31, 1998, Interactive Technologies acquired all of the outstanding shares of common stock of Airtech Corporation for a purchase price of $22,937,760. Our prior 1999 financial statements reflected the combination between Interactive Technologies and Airtech Corporation as a merger using the purchase method of accounting with Interactive Technologies as the acquiring entity for legal and financial accounting and reporting purposes. This treatment resulted in reflecting the combination of Interactive Technologies' assets and the purchase of the goodwill and intellectual properties of Airtech Corporation at the appraised fair market value. Our restated 1999 financial statements also reflected the merger between Interactive Technologies and Airtech Corporation utilizing the purchase method of accounting for Interactive's assets. Our 1999 restated financial statements, however, reflected the combination and purchase method 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. As a result, 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 1999 restated financial statements. On March 29, 2001, we entered into a securities purchase agreement with an investment group to raise up to $1,000,000 through the sale to the 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 warrants and common stock offered by this prospectus is declared effective by the SEC. If the registration statement is not declared effective, the investors have no obligation to purchase the additional 12% debentures or the attached warrants. Our current distributorship contractual agreement with Southern Therapy Inc. should result in additional sales to the medical market. In addition, our application for approval HCPCS Code for Series S-950 is in process. The actual granting of an HCPCS Code will not increase sales. We and our distributors, however, will be in a better position to market the Series S-950 to the larger medical insurance companies in the United States. The medical market, even without an HCPCS Code, could result in substantial sales. Our agreement with Southern Therapy calls for purchases of $1,000,000 in the first year and substantial increases thereafter, however, Southern Therapy is under no obligation to purchase that amount. We have also entered into a distributorship agreement with W & B Service, Inc. to serve as the commercial distributor for our commercial products in the United States and Canada. We cannot assure you that there will be additional sales for these markets, however, our contract requires W & B Service to purchase a minimum $4,000,000 of our products during the first year, with increases in years two and three. 30 We believe that our recently completed financing resources along with increased sales of our products through industry distributors, increased foreign sales through in country distributors and increasing market acceptance of our new Model S-30 will enable us to aggressively pursue the indoor air purification market with adequate funding. As the result of our distributorship agreements with Southern Therapy and W & B Services, we have decreased as of April 1, 2001 our corporate overhead by approximately $75,000 per month. This represents a 40% decrease in our overhead expenses compared to August 2000. Our sales and marketing expenses will be absorbed by these new distributors. The lower profit margins on the sales through the distributors are expected to be mitigated by the increase in sales. Results of Operations for Nine Months Ended February 28, 2001 Compared to the Nine Months Ended February 29, 2000 Revenues Our consolidated total revenues for the nine months ended February 28, 2001 increased 84% or $658,133 to total $1,437,607 as compared to $779,474 for the nine months ended February 29, 2000. This increase is due to sales of our products exceeding the prior period by $808,133. The increase in sales was partially offset by a decrease of $150,000 in franchise fee revenues and other income compared to the prior comparable nine-month period. We waived during the period franchise fees for prospective franchisees that possess direct marketing skills and indoor air quality experience. The waiver is in lieu of extensive training and start-up time lags which may exceed the waived franchise fee. We sold two new franchises for fees during the period as compared to one in the prior comparable nine month period. Costs and Expenses Our total costs and expenses increased $575,195 or 24% to $2,965,742 for the nine month period ended February 28, 2001 compared to $2,390,547 for the prior comparable nine month period. Our costs and expenses are as follows: Cost of sales increased $265,108 to $780,235 compared to $515,127 for the prior comparable nine-month period. The increase, however, is related to additional product sales, our cost of sales as a percentage of product sales decreased from 85% for the nine months ended February 29, 2000 to 55% for the nine months ended February 28, 2001. As the result of our operating four franchise retail stores during the nine months ended February 28, 2001, the salaries and wages expense decreased compared to the comparable nine months ended February 29, 2000 during which we operated only one franchise store. The decrease was also related to our officers electing to take shares of our common stock in lieu of wages during the nine month period ended February 28, 2001. In addition, we allocated more salaries and wages to research and development as discussed below. Salaries and wages decreased $114,239 or 13% to $787,490 for the nine months ended February 28, 2001 compared to the nine months ended February 29, 2000. Research and development costs increased 183% or $183,927 to $283,927 for the nine months ended February 28, 2001 compared to the nine months ended February 29, 2000. This increase was primarily due to increased development and testing of our new in-line Model S-30 unit, testing our portable Series 950 Unit and upgrading our commercial S-12 unit. Other general and administrative expenses also decreased $5,529 or 1% to $639,544 for the nine months ended February 28, 2001 compared to the nine months ended February 29, 2000. This decrease is attributable to the added overhead costs of our company franchise stores and offset by decreased general corporate, legal and accounting expenses during the current period. 31 Also, advertising and promotional expenses which includes design and development of brochures increased 51% or $265,108 to $241,358 for the nine months ended February 28, 2001 as compared to the nine months ended February 29, 2000. This increase is due to additional advertising for our franchise consumer products and marketing expenses for our new Model S-30 unit and our portable Series 950 unit. Depreciation and amortization expenses increased $105,767 to $233,188 for the nine months ended February 28, 2001 compared to $127,421 for the nine months ended February 29, 2000. This increase is due to the amortization of the prepaid royalties during the period ended February 28, 2001 which was not required during the period ended February 29, 2000. Interest Expense Interest expense increased $133,652 to $175,114 for the nine months ended February 28, 2001 as compared to $41,462 in interest expense for the nine months ended February 29, 2000. This increase is due to the interest expense relating to our 12% and 6% convertible debentures which were outstanding during the nine-month period February 28, 2001 which were not outstanding during the entire period ended February 29, 2000. In total, the net loss for the nine months ended February 28, 2001 of $1,703,249, or $0.07 per share, is 3% greater than, or $0.01 per share less than the $1,652,535, or $0.08 per share, net loss for the nine months ended February 29, 2000. Liquidity and Capital Resources We reflected a continued liquidity problem during the first nine months of our fiscal year. Purchases from our material vendors were predominantly on a cash basis, however, our vendors did not force payment on past due bills. Our primary available means of liquidity during the nine month period was the increased use of our common stock as payments for services. During the calendar year 2000 and the first quarter 2001, the overall financial markets eroded as exemplified by the NASDAQ Composite Index falling over 68% during that period. In this environment, we were in discussion with several investment companies for additional capital. These discussions included our request that the investment group which purchased $2,500,000 of our 6% convertible debentures extend the funding date to purchase an additional $2,500,000 in principal amount of 6% debentures under a conditional warrant which expired on December 22, 2000. The investment group did not agree to extend the funding date and the conditional warrant expired under its terms on December 22, 2000. To replace the conditional warrant, we completed a $5,000,000 equity agreement with a private investment company to purchase our 12% convertible debentures. On March 29, 2001, the investment group purchased $800,000 in principle amount of 12% debentures and agreed to purchase an additional $200,000 upon SEC approval of the registration statement relating to the securities offered by this prospectus. The remaining $4,000,000 will be negotiated at a future time. We cannot assure that the SEC will approve the registration statement or that the terms of the remaining $4,000,000 will be acceptable to us or the investor. As of February 28, 2001 and prior to the recent sale of our 12% debentures, we had total current assets of $2,640,749 less current liabilities of $2,354,645 which resulted in net current assets of $286,104. This is a decrease in current asset liquidity resulting from the use of the proceeds from the sale of our 6% debentures during the nine month period. 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. 32 We estimate our sales will be approximately $2,500,000 for fiscal year 2001 which is a decrease from our original forecast of $30,000,000. Our lower than forecasted sales are the result of the following: . We estimate our existing commercial product line sales to be $1,300,000 as opposed to forecasted sales of $2,000,000. The lower sales are due to lower sales for our tobacco abatement products; . We estimate our Model S-30 sales to be $150,000 as opposed to forecasted sales of $4,000,000. The lower sales are due to a delay in the introduction of the Model S-30; . We estimate our sales to our residential franchisees to be $425,000 as opposed to forecasted sales of $6,000,000. The lower than forecasted sales are due to lower than expected sales of franchises to existing direct sale entrepreneurs. We have temporarily suspended our sale of residential franchises pending new market awareness and interest; . We estimate our international sales to be $250,000 as opposed to forecasted sales of $2,000,000. The lower than forecasted sales are due to lower than forecasted sales through our Pacific Rim distributors; . We will not consummate any mergers or acquisitions during fiscal year 2001 because our low stock price made the cost prohibitive to us. Therefore we did not achieve our forecasted combined product sales of $6,000,000. We do not anticipate any mergers for fiscal year 2002. We have, however, entered into strategic alliances with various companies to market our products or to manufacture our products and component parts; and . We did not receive Medicare approval for our Medicare Series 950. Therefore sales to the medical industry are estimated to be $500,000 as opposed to forecasted sales of $10,000,000. In February 2001, we applied to the Health Care Financing Administration for a health care product code system number. The code number is commonly referred to in the medical insurance industry as an HCPCS Code. The HCPCS Code would enable us to market our Medicare Series 950 directly to the private medical insurance industry. If a private insurance carrier accepts our Medicare Series 950 with the HCPCS Code, patients who purchase a Medicare Series 950 would be entitled to receive insurance reimbursement for the cost of the Medicare Series 950 to the governmental, private and supplemental insurance and medical industries. We cannot assure that we will receive a HCPCS Code. We will continue to pursue Medicare approval of Medicare Series 950. We expect sales of our products to increase in fiscal year 2001. For the year 2000, our product sales were approximately $543,615 compared to sales of our products for the year ended May 31, 1999 of $388,412. Our product sales for the nine month period ended February 28, 2001 were $1,412,607. 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. We have forecasted that fiscal year 2002 sales will be $17,000,000. This estimate is based on the following: . Estimated sales of $4,000,000 from our existing commercial product line. We expect these sales due to the continued acceptance of our commercial products in office buildings and sales from our automobile units; . Estimated sales of $8,000,000 of our new in-line Model S-30. The Model S- 30 is now in the full production and marketing stage; . Estimated product sales to our residential franchisees of $1,000,000; . Estimated international sales of $2,000,000, especially to our Pacific Rim distributors and our Central and South American distributors; . Estimated sales of our Medicare Series 950 of $2,000,000 pending approval of this unit by either Medicare or through the granting of an HCPCS Code. 33 Our sales projections are based upon our good faith estimates of the acceptance and marketability of our products and we cannot assure you that we will achieve these results during fiscal year 2002. Due to our $18,500,000 of net operating loss carry forwards resulting from our losses in prior years, we are not projecting any federal tax liability for fiscal year 2001. If our current cash and revenues from franchise and product sales are insufficient to fund our continued growth, we will rely on our external funding sources to provide continued liquidity. During fiscal year 2001, 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 and increased promotion of our distributorship program. For this reason, we do not project significant expenditures during fiscal year 2001 on our products which are in the research and development stage. We believe our existing product line is sufficient to sustain our future sales growth. If we do not receive Medicare approval of, our an HCPCS Code for our Medicare 950, we intend to actively pursue the marketing of this unit through private health insurance companies and health care providers outside of the Medicare system. If we are not successful in these marketing efforts, our failure to obtain Medicare approval of, or an HCPCS Code for, our Medicare 950 could significantly affect our future liquidity. We do not have a large capital expenditures program planned for fiscal year 2002. Therefore, we believe our projected increase in 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. 34 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS Directors and Executive Officers The following table includes the names, ages and positions of our directors and executive officers as of April 30, 2001. A summary of the background and experience of each of these individuals immediately follows the table. Our directors are:
Name Age Position - ---- --- -------- C J Comu........................ 40 Chairman James R. Halter................. 51 Director R. John Harris.................. 51 Director Samuel S. McKenney, III......... 63 Director Robert Galvan................... 53 Director Our executive officer and other officers are: Name Age Position - ---- --- -------- C J Comu........................ 40 Chief Executive Officer R. John Harris.................. 51 President James R. Halter................. 51 Chief Financial Officer and General Counsel
C J Comu. Mr. Comu has served as 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 a 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 from Case Western Reserve University School of Law in Cleveland, Ohio. R. John Harris. Mr. Harris has served as our president since October 30, 2000 and as a director since November 1999. Prior to his appointment as president, Mr. Harris served as our Chief Operating Officer from February 2000 to October 30, 2000. Mr. Harris served as Chief Administrative Officer of Integrated Concepts, Inc. from June 1998 to October 1999 and as Chief Executive Officer of PreventCo Inc. from June 1996 to May 1998. Mr. Harris also served as Vice President and Medical Director of Airtech International Corporation from May 1994 to May 1996. Prior to 1994, Mr. Harris spent twenty years in various senior management capacities, and as an international consultant, in the field of acute medical/surgical hospital administration for leading hospital management companies such as Hospital Corporation of America and Hospital Management Professionals. Mr. Harris holds a Bachelors of Science degree from Oregon State University and a Masters of Hospital Administration from the University of Alabama. Samuel S. McKenney, III. Mr. McKenney has served as a director since April 2001. From 1989 to the present he has served as the president and chief executive officer of W&B Services Company, Inc., a diversified company primarily serving the heating, ventilation and air conditioning industry. 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 November 1998 to November 1999, Mr. Galvan served as the Director of Health for the 35 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. 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. 36 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 $100,000 or more. SUMMARY COMPENSATION TABLE
Long Term Annual Compensation Compensation Awards -------------------------- ------------------------ Other Annual Restricted Securities Name and Principal Fiscal Compensation Stock Underlying Position Year Salary Bonus (1) Awards($) Options(#) - ------------------ ------ ------- ----- ------------ ---------- ---------- C J Comu, CEO, Chairman............... 2000 $41,195 $ 0 $ 0 $ 83,825(2) 250,000 1999 0 0 46,875 424,334(3) 150,000 1998(4) 0 0 0 0 0 John Potter, President.. 2000 40,986 0 0 13,425(5) 250,000 1999 0 0 46,875 424,334(6) 150,000 1998(4) 0 0 0 0 0 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 1998 0 0 62,917 0 0 R. John Harris, COO..... 2000 27,917 0 0 21,875(10) 0 James R. Halter, CFO and General Counsel........ 2000 18,227 0 0 46,527(11) 0
- -------- (1) See terms of employment agreement for Mr. Comu 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, 2000, Mr. Comu owned 1,368,864 shares of our restricted common stock with a market value of $1,753,789. (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) Disclosure is made of named executive officers of our subsidiary, Airtech International Corporation, for fiscal year 1998 for positions substantially similar to positions held in employment by us for fiscal years 1999 and 2000. (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. As of May 31, 2000, Mr. Potter owned 1,213,881 shares of our restricted common stock with a market value of $1,555,224. Effective November 22, 2000, Mr. Potter resigned as a director and officer and currently serves as our independent consultant. (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. Effective November 22, 2000, Mr. Potter resigned as a director and officer and currently serves as an independent consultant. 37 (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. As of May 31, 2000, Mr. Harris owned 100,000 shares of our restricted common stock with a fair market value of $128,120. (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, 2000, Mr. Halter owned 135,193 shares of our restricted common stock with a fair market value of $173,209. OPTION GRANTS IN 2000 The following table lists those persons in the previous table who were granted options to purchase shares of our common stock during fiscal year 2000.
% of Total Options/ Number of Securities SAR's Granted to Underlying Options/ Employees in Fiscal Exercise Price Marked Price on Name SAR's Granted Year ($/Share) Date of Grant Expiration Date - ---- -------------------- ------------------- -------------- --------------- ----------------- C J Comu................ 250,000 50% $0.25 $0.44 December 17, 2004 John Potter............. 250,000 50% $0.25 $0.44 December 17, 2004
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, 2000, separately identified between those exercisable and those not exercisable and . the aggregate value of in-the-money, unexercised options held on May 31, 2000, separately identified between those exercisable and those not exercisable.
Number of Securities Underlying Value of unexercised Shares Unexercised Options In-the-Money Options Acquired on Value at Fiscal Year-End at Fiscal Year-End Name Exercise Received Exercisable/Unexercisable Exercisable/Unexercisable(1) - ---- ----------- -------- ------------------------- ---------------------------- C J Comu................ 0 0 400,000/0 $374,980/$0 John Potter............. 0 0 400,000/0 $374,980/$0
- -------- (1) The value is calculated based on the aggregate amount of the excess of $1.2182 which is the closing sale price per share for the common stock on May 31, 2000 over the relevant exercise price(s). 38 Employment Agreements We have a ten (10) year employment contract with C J Comu, our Chief Executive Officer, for annual compensation of $250,000, terminating May 31, 2008. Under the terms of this contract and by agreements between our board of directors and Mr. Comu, the contract is funded on a cash basis at such time as we are in a financial position to pay the salary under the contract. Unpaid compensation under the contract, dating from June 1, 1997 through December 31, 1998, was paid to Mr. Comu effective January 31, 1999 through the issuance to Mr. Comu 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 when cash was available. The remainder of the amounts due Mr. Comu under the contract will be converted to our restricted common stock during fiscal year 2001. Effective June 1, 1999, Mr. Comu 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 June 9, 1998, we filed a Form S-8 registration statement registering 160,000 shares of our common stock. Through July 30, 1998, we issued 56,002 shares of common stock to consultants and 103,998 shares to employees. The shares of common stock issued were accounted for as consulting services and employee wages. As of March 23, 2000, all of the shares registered under the Form S-8 registration statement were issued under our stock plans. On November 12, 1998, we filed a Form S-8 registration statement registering 800,000 shares of our common stock. Through July 30, 1999, we issued 261,009 shares of common stock to consultants and 538,991 shares to employees. The shares of common stock issued were accounted for as consulting services and employee wages. As of March 23, 2000, all of the shares registered under the Form S-8 registration statement were issued under our stock plans. 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 our stock plans. The shares of common stock were accounted for as consulting services and employee wages. On November 19, 2000, we filed a Form S-8 registration statement registering 900,000 shares of our common stock. As of April 30, 2001, all of the shares registered under the Form S-8 registration statement were issued under our stock plans. 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, . vesting over a two to three year period, and . expiring ten (10) years from the date of grant. 39 Our board of directors expects to grant option agreements during fiscal year 2000 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 April 30, 2001, we have granted options to purchase all shares under the 2000 option plan. Indemnification The Wyoming Business Corporation Act provides that we may indemnify our directors, officers, employees and other agents, and persons who serve at our request as directors, officers, employees or other agents of another corporation. Subject to Wyoming law, our officers and directors are not personally liable for monetary damages resulting from breaches of their fiduciary duty unless: . the officer or director has breached his fiduciary duty of loyalty to us or our shareholders; . the breach or failure to perform constitutes an act or omission not in good faith or which involves intentional misconduct or a knowing violation of law; or . for any transaction from which the director or officer derived an improper personal benefit. Our By-Laws also provide indemnification to our directors, officers, employees and agents, including claims brought under state or Federal Securities laws, to the full extent allowable under Wyoming law. We have also entered into indemnification agreements with our directors and executive officer providing, among other things, that we will provide defense cost against any such claims, subject to reimbursement in certain events. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of February 28, 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 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................. 2,220,146(4) 7.02% John Potter.............. 2,065,630(5) 6.53% Robert Galvan............ 100,000 * James R. Halter.......... 586,475(6) 1.88% R. John Harris........... 551,282(7) 1.76% Officers and Directors as a Group (4 persons)..... 3,457,903(8) 10.55%
- -------- * Less than 1% (1) The address of each director, officer and principal stockholder is c/o Airtech International Group, Inc., 12561 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 40 which beneficial ownership is to be determined upon the exercise of options, warrants or convertible securities. (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 1,570,146 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. Does not include 211,340 shares of common stock owned by Mr. Comu's relatives, Sevim Comu and Cem Comu, of which Mr. Comu disclaims beneficial ownership. (5) Represents 1,415,630 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. Does not include 432,492 shares of common stock owned by Mr. Potter's relatives, Susan Potter and John Garth Potter, of which Mr. Potter disclaims beneficial ownership. (6) Represents 336,475 shares of common stock owned directly. Also represents 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. (7) Represents 301,282 shares of common stock owned directly. Also represents 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. (8) See notes 4, 5, 6 and 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During fiscal 1999, our president advanced cash to us totaling $100,000. As of May 31, 2000, we owed $210,338 to our chief executive officer and $216,488 to our president, on 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. Our director, Samuel S. McKenney, III, is the president and chief executive officer of W&B Services Company, Inc., a distributor of our commercial products in Canada and the United States. As of April 30, 2001, we have not shipped any of our products to W&B Services. Commencing May 8, 2001, we began shipping our products to W&B Services based upon outstanding purchase orders in the amount of $95,000. W&B Services will purchase our products at the wholesale price for our products 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. 41 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information 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 for the quarters of fiscal years 2001, 2000 and 1999 were:
High Low ----- ----- Fiscal Year 2001 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 Fiscal Year 1999 4th Quarter.................................................... $0.56 $0.12 3rd Quarter.................................................... 1.03 0.14 2nd Quarter.................................................... 1.50 0.47 1st Quarter.................................................... 3.28 0.63
Number of Shareholders and Total Outstanding Shares As of April 16, 2001, there were approximately 4,127 holders of record of our common stock and approximately 30,981,573 shares issued and outstanding. Dividends We have paid no dividends on our shares of common stock and we have no current intentions 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 3.96% of the gross revenues generated from sales of our Series 950 unit until January 1, 2003. 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 February 28, 2001, we have paid no dividends on the Series "M" convertible preferred stock. Any future determination to pay cash dividends on our shares of common stock will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and other relevant factors. DESCRIPTION OF SECURITIES We have summarized below the material provisions of our Articles of Incorporation, Bylaws and other instruments defining the rights of our securities holders. Our summary may not contain all of the information that is important to you. See "Where To Find Additional Information" for information about how to obtain a copy of the documents we refer to in this section. Authorized Capital Stock Under our Articles of Incorporation, we are authorized to issue up to 70 million shares of stock consisting of the following: . 50 million shares of common stock 42 . 20 million shares of preferred stock We have set a special meeting of our stockholders for May 18, 2001 to approve a proposed amendment to our Articles of Incorporation to increase our number of authorized shares from 50,000,000 shares to 100,000,000 shares. Common Stock Shares of our common stock are not redeemable, do not have any conversion rights and are not subject to call. Holders of shares of our common stock have no preemptive, redemption, conversion or other subscription rights and are entitled to one vote per share on any matter submitted to a vote of our shareholders. Cumulative voting is prohibited in the election of directors. This means that the holders of a majority of the outstanding shares of common stock, voting for the election of directors, can elect all of our directors. In such event, the holders of the remaining shares will not be able to elect any of our directors. The holders of shares of common stock are entitled to receive dividends, if any, as and when declared from time to time by our board of directors, out of legally available funds, but subject to the prior payment of dividends to the holders of any outstanding shares of preferred stock. Subject to the rights of the holders of preferred stock, if any, upon liquidation dissolution or winding up of our affairs, the holders of shares of our common stock will be entitled to participate equally and ratably, in proportion to the number of shares held, in our net assets available for distribution to holders of all shares of our common stock. The shares of our common stock currently outstanding are validly issued, fully paid and nonassessable. Preferred Stock Our Articles of Incorporation authorize our board of directors to issue up to 20,000,000 shares of preferred stock, $0.01 par value per share. We may issue the preferred stock in one or more classes or series. Each class or series will have the voting rights, designations, preferences and relative rights as fixed by resolution of our board of directors, without the consent of our shareholders. Our preferred stock may rank senior to our common stock as to dividend rights, liquidation preferences, or both. Our preferred stock may also have extraordinary or limited voting rights. Series "M" Convertible Preferred Stock and Attached Warrants We have 990,625 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, 2002. The holders of Series "M" preferred are entitled to receive quarterly dividend distributions equal to 3.96% of the gross revenues generated from the sales of our Series 950 unit until January 1, 2003. The dividends are paid on or before the sixtieth day of each calendar quarter based upon the gross revenues from our Series 950 air purification units from the previous quarter. The holders of Series "M" preferred were also issued related warrants to purchase 993,750 shares of our Common Stock at an exercise price of $2.00 per share. The warrants expired on May 31, 2000. As of January 1, 2000, we terminated our offering of Series "M" preferred and do not intend to offer any additional shares in the future. As of March 31, 2001, no dividends have been paid to the holders of Series "M" preferred. Airsopure 999 Limited Partnership Interests We have $405,000 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 1.62% 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 be in the form of shares of our common stock. 43 12% Convertible Debentures Due 2005 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 pursuant to a private placement memorandum. Effective as of June 2000 , we terminated the offering of these 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 or paid in cash at face value on the maturity date. Prior to maturity, we may with the consent of the holder of our 12% debenture, 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 Amount ----------------------------------- --------------------- 2000............................................... 110% 2001............................................... 108% 2002............................................... 106% 2003............................................... 104% 2004............................................... 102%
As of February 28, 2001, we had $300,000 in principal amount of our 12% debentures outstanding. 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. As of April 30, 2001, we had $2,000,000 in principal amount of 6% debentures issued and outstanding. 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 the 6% debentures may require us to redeem the 6% debentures at a redemption price equal to 125% of the aggregate outstanding principal and accrued interest on the 6% debentures. A "change of control" includes: . acquisition by an entity or group of more than 50% of our voting stock; . merger or consolidation; . a change in a majority of our existing board of directors; or . a sale of substantially all of our assets. 44 The holders of our 6% debentures also have attached warrants to purchase 250,000 shares of our common stock at an exercise price of $2.6124 per share. The warrants expire on February 22, 2005. The warrants are subject to exercise price adjustments upon the occurrence of certain events including stock dividends, stock splits, mergers, reclassifications of stock or our recapitalization. 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. Our 6% debenture holders consented to the sale of our 12% debentures. The 6% debenture holders also agreed that neither they nor their affiliates would for a period beginning March 29, 2001 and ending 8 months from the date the registration statement relating to the securities offered by this prospectus is declared effective by the SEC . offer to sell, contract to sell, pledge, grant any rights or otherwise dispose of any shares of our common stock held by the 6% debenture holders without the prior consent of the 12% debenture holders; or . engage in any hedging transactions which are designed or reasonably expected to lead to or result in a disposition of the shares of our common stock held by the 6% debenture holders. The 6% debenture holders may however . convert the 6% debentures into a maximum of 200,000 shares of our common stock per month on a non-cumulative basis; and . sell up to 100,000 shares per month of common stock converted after March 29, 2001 or 200,000 shares if the selling price is at least $0.75 per share, with any unsold converted shares held in escrow by our legal counsel 12% Convertible Debentures Due 2003 and Attached Warrants On March 29, 2001, we sold $800,000 in principal amount of our 12% Convertible Debentures Due 2003. Our 12% debentures have a maturity date of March 30, 2003 at which time the principal amount and all accrued interest is due and payable. Interest payments 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. As of April 30, 2001, we had $800,000 in principal amount of 12% debentures issued and outstanding. The 12% 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 on the 12% debentures, is the lesser of . 50% of the average of the lowest three trading prices of our common stock for the twenty trading days ending one trading day prior to the date we receive a conversion notice from a debenture holder; and . a fixed conversion price of $0.25. Also, under the terms of the 12% debentures, if we at any time . distribute any shares of our common stock in a consolidation, exchange of shares, recapitalization or reorganization, the 12% debenture holders are entitled to participate in the distribution as if the debenture holders had converted the 12% debentures; 45 . 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. The holders of our 12% debentures also have attached warrants 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 recapitalization. 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. LEGAL MATTERS The validity of the issuance of the warrants and common stock offered pursuant to this prospectus is being passed upon for us by John G. Rebensdorf, P.C. EXPERTS Our consolidated financial statements for the year ended May 31, 2000 included in this prospectus and in the registration statement were audited by Turner, Stone & Company LLP, independent certified public accountants, as set forth in their report appearing elsewhere in this prospectus and in the registration statement. Our consolidated financial statements for the nine months ended February 28, 2001 were also reviewed by Turner, Stone & Company as set forth in their report appearing elsewhere in this prospectus and in the registration statement. Our consolidated financial statements are included in this prospectus in reliance upon such reports given upon the authority of Turner, Stone & Company as experts in auditing and accounting. WHERE TO FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form SB-2 in connection with the securities offered under this prospectus. As permitted by SEC rules, this prospectus does not contain all of the information contained in the registration statement or in the exhibits to the registration statement. For further information you may read and copy documents at the public reference room of the SEC at 450 5th Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC at 7 World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC charges a fee for copies. Copies of this material should also be available through the Internet at the SEC EDGAR Archive, the address of which is http://www.sec.gov. 46 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, 2000 and 1999.................. F-3 Consolidated Statements of Operations for the Years Ended May 31, 2000 and 1999................................................................ F-5 Consolidated Statements of Stockholders' Equity for the Years Ended May 31, 2000 and 1999....................................................... F-6 Consolidated Statements of Cash Flows for the Years Ended May 31, 2000 and 1999................................................................ F-7 Notes to Financial Statements for May 31, 2000 and 1999.................. F-8 Report of Independent Certified Public Accountants....................... F-18 Consolidated Balance Sheets as of February 28, 2001 and 2000............. F-19 Consolidated Statements of Operations for the Nine Months Ended February 28, 2001 and 2000....................................................... F-21 Consolidated Statements of Operations for the Three Months Ended February 28, 2001 and 2000....................................................... F-22 Consolidated Statements of Cash Flows for the Nine Months Ended February 28, 2001 and 2000....................................................... F-23 Notes to Financial Statements for February 28, 2001 and 2000............. F-24
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, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Turner, Stone & Company, LLP Certified Public Accountants August 31, 2000 F-2 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MAY 31, 2000 AND 1999
2000 1999 ---------- ---------- ASSETS Current Assets Cash................................................... $1,487,646 $ 61,808 Trade and licensing fees receivables, net of allowance for doubtful accounts of $20,000 and $0, respectively.......................................... 269,971 173,951 Notes receivable, current portion...................... 437,250 143,750 Inventory.............................................. 538,952 242,665 Prepaid expenses....................................... 38,212 -- ---------- ---------- Total current assets................................. 2,772,031 622,174 Property and Equipment--net of accumulated depreciation of $166,589 and $119,634, respectively.................. 156,288 89,569 Notes Receivable--net of current portion, net of allowance for doubtful accounts of $0 and $0, respectively............................................ 1,175,000 431,250 Other Assets Goodwill, net of accumulated amortization of $35,810 and $71,621, respectively............................. 107,432 143,243 Intellectual properties, net of accumulated amortization of $146,800 and $38,060, respectively.... 940,597 1,049,337 Prepaid royalties and other assets, net of accumulated amortization of $104,167 and $0, respectively......... 412,381 514,208 ---------- ---------- Total other assets................................... 1,460,410 1,706,788 ---------- ---------- $5,563,729 $2,849,781 ========== ==========
The accompanying notes are an integral part of the financial statements. F-3 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MAY 31, 2000 AND 1999
2000 1999 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable, trade............................ $ 260,102 $ 510,193 Accrued payroll, other wages and related burden.... 407,134 301,769 Other accrued expenses............................. 415,076 372,534 Advances payable to officers....................... 210,338 216,488 Notes payable...................................... 277,185 277,185 ----------- ----------- Total current liabilities........................ 1,569,835 1,678,169 Long-Term Liabilities Deferred revenue................................... 340,000 400,000 Product marketing obligation....................... 430,000 405,000 Convertible debentures............................. 2,850,000 -- ----------- ----------- Total long-term liabilities...................... 3,620,000 805,000 Total liabilities................................ 5,189,835 2,483,169 Commitments and Contingencies........................ -- -- Stockholders' equity 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, 1,143,750 and 1,143,750 shares issued and outstanding, respectively; liquidation preference of $1 per share, aggregating $ and $ respectively...................................... 1,144 1,144 Common stock--$.05 par value, 50,000,000 shares authorized, 20,939,216 and 13,207,532 shares issued and outstanding, respectively.............. 1,046,961 660,376 Additional paid-in capital......................... 7,609,256 5,546,965 Retained deficit................................... (8,283,467) (5,841,873) ----------- ----------- Total stockholders' equity....................... 373,894 366,612 ----------- ----------- $ 5,563,729 $ 2,849,781 =========== ===========
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, 2000 AND 1999
2000 1999 ----------- ----------- Revenues Product sales...................................... $ 543,615 $ 800,439 Franchisee fees.................................... 1,072,500 229,000 Other revenues..................................... 11,361 1,030 ----------- ----------- Total revenues................................... 1,627,476 1,030,469 Costs and Expenses Salaries, wages and other compensation............. 987,763 1,317,076 Deferred officer wages............................. -- 791,667 Cost of sales...................................... 519,603 664,356 Advertising........................................ 107,216 42,082 Depreciation....................................... 46,955 38,564 Amortization....................................... 248,718 91,370 Loss on impairment of goodwill..................... -- 582,750 Other general & administrative expenses............ 2,050,200 1,678,775 ----------- ----------- Total costs and expenses......................... 3,960,455 5,206,640 ----------- ----------- Loss From Operations................................. (2,332,979) (4,176,171) Interest expense..................................... (108,615) (135,288) ----------- ----------- Loss Before Income Taxes............................. (2,441,594) (4,311,459) Income tax benefit................................... -- -- ----------- ----------- Net Loss............................................. $(2,441,594) $(4,311,459) =========== =========== Loss Per Common Share--Basic......................... $ (0.14) $ (0.50) =========== =========== Loss Per Common Share--Diluted....................... $ (0.14) $ (0.50) =========== ===========
The accompanying notes are an integral part of the financial statements. F-5 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED MAY 31, 2000 AND 1999
Pref. Common Stock Pref. Series M Series A ---------------------- ---------------- ----------- Paid-in Retained Description Shares $ Shares $ Shares $ Capital Earnings Total ----------- ---------- ---------- --------- ------ ------ ---- ---------- ----------- ----------- BALANCE AT 5/31/98...... 10,059,923 $ 502,996 1,029,750 $1,030 -- $-- $4,049,736 $(1,530,414) $ 3,023,348 Issuance of Series M preferred stock, net of offering costs.......... 114,000 114 98,890 99,004 Cancel shares in July... (680,000) (34,000) -- -- -- -- 34,000 -- -- Issuance of common stock according to S-8 registration............ 670,025 33,500 -- -- -- -- 361,427 -- 394,927 Issuance of common stock for cash................ 828,000 41,400 234,600 276,000 Issuance of common stock on exercise of warrants................ 46,250 2,313 20,812 23,125 Issuance of common stock for deferred wages to officers................ 1,583,334 79,167 712,500 791,667 Issuance of common stock in May.................. 700,000 35,000 35,000 70,000 Net loss during the year.................... -- -- -- -- -- -- -- (4,311,459) (4,311,459) ---------- ---------- --------- ------ --- ---- ---------- ----------- ----------- BALANCE AT 5/31/99...... 13,207,532 660,376 1,143,750 1,144 0 0 5,546,965 (5,841,873) 366,612 Issuance of common stock for cash................ 4,196,850 209,842 780,494 990,336 Issuance of common stock in exchange for services................ 1,796,879 89,843 526,563 616,406 Issuance of common stock on exercise of warrants................ 337,500 16,876 67,544 84,420 Issuance of common stock to vendors for payment of trade payables....... 1,400,455 70,024 687,690 757,714 Net loss during the year.................... (2,441,594) (2,441,594) ---------- ---------- --------- ------ --- ---- ---------- ----------- ----------- BALANCE AT 5/31/00...... 20,939,216 $1,046,961 1,143,750 $1,144 0 $-- $7,609,256 $(8,283,467) $ 373,894 ========== ========== ========= ====== === ==== ========== =========== ===========
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, 2000 AND 1999
2000 1999 ----------- ----------- Cash Flows from Operating Activities Net loss............................................ $(2,441,594) $(4,311,459) Adjustments to reconcile net income to cash Depreciation and amortization...................... 295,673 129,934 Impairment of goodwill............................. -- 582,750 Net (gain) loss on disposition of assets........... -- (51,672) Stock payments to employees and consultants........ 616,406 1,129,593 Allowances and write offs.......................... 20,000 411,000 Changes in operating assets and liabilities Accounts receivable................................ (116,020) (21,814) Inventory.......................................... (296,287) 41,667 Prepaid expenses and other assets.................. (40,552) 67,214 Notes receivable................................... (1,037,250) -- Accounts payable................................... 507,623 373,238 Accrued expenses................................... 141,757 716,163 Deferred revenue................................... (60,000) -- ----------- ----------- Net cash used in operating activities............. (2,410,244) (933,386) Cash Flows from Investing Activities Acquisition of property and equipment............... (113,674) -- Disposals of fixed assets........................... -- 66,058 Expenditures for other assets....................... -- (89,837) ----------- ----------- Net cash used in investing activities............. (113,674) (23,779) Cash Flows from Financing Activities Proceeds from issuance of preferred stock, net of offering costs..................................... -- 99,004 Proceeds from issuance of common stock.............. 1,074,756 369,125 Reciepts from product marketing obligation.......... 25,000 405,000 Proceeds from convertible debentures................ 2,850,000 -- ----------- ----------- Net cash provided by financing activities......... 3,949,756 873,129 Increase (decrease) in cash.......................... 1,425,838 (84,036) Cash, beginning of period............................ 61,808 145,844 ----------- ----------- Cash, end of period.................................. $ 1,487,646 $ 61,808 =========== =========== Supplemental Cash Flows Disclosures Interest paid....................................... $ 30,000 $ 8,319 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...... $ 616,406 $ 1,129,593
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), (formerly Interactive Technologies Corporation, Inc.), was incorporated in the state of Wyoming on August 8, 1991. 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. On May 31, 1998, the Company acquired all of the outstanding common stock shares of Airtech International Corporation (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 2,100,000 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 (Note 2) and the issuance of $9,000,000 of convertible debentures (Note 5). However, because these convertible securities were converted into common stock within two months following the acquisition, the Company effectively issued common stock for the outstanding common stock of AIC and the stockholders of AIC obtained control of the combined company. As a result, AIC became the acquirer for financial reporting purposes. Therefore, 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 $179,053 of the purchase price allocated to goodwill. The acquired goodwill is being amortized using the straight-line method over 5 years. Results of operations of Interactive Technologies Corporation are included in the accompanying consolidated statements of operations beginning June 1, 1998. 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., 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 F-8 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10 years beginning when the product is initially inventoried for sale. For the years ended May 31, 2000 and 1999, amortization expense totaled $ 108,740 and $ 38,060, respectively. Goodwill recorded in the acquisition of AIC, is being amortized using the straight-line method over 5 years. For the years ended May 31, 2000 and 1999, amortization expense totaled $35,811 and $35,810, respectively. Goodwill relating to the Company's purchase of its McClesky Sales and Services subsidiary in 1995 was being amortized over 40 years. In May 1999, this operating segment was discontinued (Note 10) and the remaining unamortized carrying value was charged to expense. 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, 2000 and 1999, amortization expense totaled $104,167 and $0, respectively. 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, 2000 and 1999, inventories consisted of the following:
2000 1999 -------- -------- Finished goods............................................. $356,916 $200,506 Component parts............................................ 182,036 42,159 -------- -------- $538,952 $242,665 ======== ========
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. 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). F-9 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. Advertising Advertising dollars are invested in trade journals, trade shows, travel and franchise networking. All amounts are expensed as 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, 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 17,368,684 and 10,583,635, 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. Stock split On October 5, 1998, the shareholders authorized a one for five reverse split of the Company's common stock. The reverse split was made effective November 9, 1998. Shareholders equity has been restated to give retroactive recognition to the stock split for all periods presented, such that all references in the financial statements to number of shares, per share amounts, par values and stock option data for common shares have been restated. The shareholders also approved an increase in the Company's authorized common shares to 50,000,000. 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 five shares of preferred stock. F-10 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Effective July 31, 1998, the Company's Board of Directors voted to convert the Series A Preferred Stock to Common Stock on the basis of one share of Preferred to one share of Common, as per the merger agreement. To effect the conversion of 11,858,016 of Series A preferred, the Company issued 2,371,603 shares of common stock. As described in Note 1, relating to the reverse merger accounting recognition, the conversion of the preferred stock shares has been recorded in the accompanying consolidated financial statements as occurring on May 31, 1998, the date of the AIC acquisition and, therefore, are not shown as outstanding at May 31, 1998 in the accompanying consolidated statements of stockholders' equity. 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, 1999, the Company had not sold any S-950 units thus has made no payments under the participation plan. 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. Prior to May 31, 2000, the Company did not strictly enforce collection while it completed development of its product line of air purification products. At May 31, 2000 and 1999, notes receivable are comprised of the following:
2000 1999 ---------- --------- Domestic franchise licenses........................... $ 157,250 $ 300,000 International franchise licenses...................... 1,455,000 275,000 ---------- --------- 1,612,250 575,000 Less current portion.................................. (437,250) (143,750) ---------- --------- $1,175,000 $ 431,250 ========== =========
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, 2000 and 1999, all of these notes, totaling $277,185, were in default. F-11 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. CONVERTIBLE DEBENTURES AIC acquisition debentures In connection with the Company's acquisition of AIC (Note 1), the Company also issued $9,000,000 of convertible debentures secured by the AIC shares acquired. The debentures bear interest at 10%, are payable annually on May 31 of each year, are due on May 31, 2000 and are convertible at the Company's option at any time within the two years into shares of the Company's common stock at a conversion price of $.70. As of July 31, 1998, the Company's Board of Directors voted to convert the debentures and $150,000 of related accrued interest into common stock. The Company issued 2,614,286 common shares on conversion. As described in Note 1, relating to the reverse merger accounting recognition, the conversion of the convertible debentures has been recorded in the accompanying consolidated financial statements as occurring on May 31, 1998, the date of the AIC acquisition and, therefore, are not shown as outstanding at May 31, 1998 but included in additional paid in capital in the accompanying consolidated statements of stockholders' equity. 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. 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 have 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 expires December 22, 2000. 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 F-12 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 2000 and 1999, a reserve totaling $200,000 has been established in anticipation of settling this obligation. The Company is also 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. Management believes its defenses are strong and plans on vigorously defending this lawsuit. Although the Company anticipates a favorable settlement of this lawsuit the outcome of it is uncertain. The Company has not accrued a loss for this contingency in the accompanying consolidated financial statements. 7. COMMITMENTS AND CONTINGENCIES Operating leases The Company is currently obligated under noncancellable operating leases for its Dallas office and warehouse facilities, which expire through December 2003. The leases also provide for payment of the Company's share of operating costs and contain renewal options at prevailing market rates. 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 ========
During the years ended May 31, 2000 and 1999, rent expense totaled $102,660 and $80,670, respectively. Employment agreements The Company is currently obligated under employment agreements with its Chief Executive Officer and its President 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 amount 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. 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. F-13 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 8. INCOME TAXES The Company used the accrual method of accounting for tax and financial reporting purposes. At May 31, 2000 and 1999, the Company had net operating loss carry forwards for financial and tax reporting purposes of approximately $18,500,000 and $16,100,000, respectively. These carry forwards expire through the year 2012, 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 $5,510,440 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:
2000 1999 ---------- ---------- Beginning balance..................................... $4,680,290 $2,804,055 Increase during period................................ 830,150 1,876,235 ---------- ---------- Ending balance........................................ $5,510,440 $4,680,290 ========== ==========
A reconciliation of income tax expense at the statutory federal rate to income tax expense at the Company's effective tax rate for the years ended May 31, 2000 and 1999 is as follows:
2000 1999 --------- ----------- Tax (expense) benefit computed at statutory federal rate..................................... $ 830,150 $ 1,465,896 NOL carryover..................................... (830,150) (1,465,896) --------- ----------- Income tax benefit................................ $ -- $ -- ========= ===========
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. F-14 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 11. STOCK OPTIONS AND WARRANTS During the years ended May 31, 2000 and 1999, the Company 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. 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. The following is a schedule of the activity relating to the Company's stock options and warrants. Other than the 432,850 and 205,900 warrant identified below as granted during the year ended May 31, 2000 and 1999, respectively (Note 4), all other amounts relate to stock options the Company has issued.
2000 1999 ----------------- ----------------- Wgt. Wgt. Ave. Ave. Shares Exercise Shares Exercise (x1,000) Price (x1,000) Price -------- -------- -------- -------- Options and warrants outstanding at beginning of year..................... 1,341 $2.06 480 $ 3.93 Granted................................ 1,698 $0.86 917 $ 0.61 Exercised.............................. (437) $0.85 (46) $ 2.00 Expired................................ (591) $0.77 (10) $10.00 ----- ----- ----- ------ Options and warrants outstanding at end of year............................... 2,011 $1.49 1,341 $ 2.06 ===== ===== ===== ====== Options and warrants exerciseable at end of year........................... 2,011 $1.49 1,101 $ 2.06 ===== ===== ===== ====== Weighted average fair value of options and warrants granted during the year.. $0.27 $ 0.60
F-15 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about the Company's stock options and warrants outstanding at May 31, 2000, all of which are exercisable.
Range of Number Weighted Ave. Exercise Outstanding Remaining Weighted Average Prices (x1,000) Contractual Life Exercise Price -------- ----------- ---------------- ---------------- $.15--$.60 1098 0.9 years $ .34 $2.00--$2.61 660 1.1 years $ 2.28 $3.75--$5.00 240 2.0 years $ 4.17 $10.00 13 1.0 years $10.00
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 10 years; and expected volatility of 220.51%.
Year Ended Year Ended May 31, May 31, 2000 1999 ----------- ----------- Net loss........................................... $(2,576,594) $(4,364,880) Net loss per share................................. $ (0.15) $ (0.41)
During the years ended May 31, 2000 and 1999, the Company also issued 1,796,879 and 1,583,334 common stock shares, respectively, in exchange for services. These services were recorded at their fair value of $616,406 and $791,667, 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, 2000 and 1999, the Company's chief executive officer and 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. At May 31, 2000 and 1999, advances payable to these officers totaled $210,338 and $216,488, respectively, and included $51,338 and $57,488, respectively, of accrued interest. During the year ended May 31, 2000, $30,000 of accrued interest was paid to the above individuals. 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 will 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 capital to provide liquidity until cash can be generated by operations. 14. SEGMENT INFORMATION During the years ended May 31, 2000 and 1999, the Company conducted its operations through two reportable operating segments, each of which was conducted through separate subsidiaries. Those reportable operating segments were its manufacture and sale of air purification products and franchises and its commercial and residential heating and air conditioning services, which was terminated in May 1999. F-16 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table reflects certain information about the Company's reportable operating segments for the year ended May 31, 1999. For the year ended May 31, 2000, the accompanying consolidated financial statements reflect operating activities for its remaining reportable operating segment. There are no inter-segment revenue or expense transactions.
Air HVAC Products Services Total ----------- --------- ----------- Revenues.............................. $ 618,442 $ 412,027 $ 1,030,469 Net operating loss.................... $(4,153,265) $(158,194) $(4,311,459) Interest expense...................... $ 126,969 $ 8,319 $ 135,288 Depreciation and amortization......... $ 107,637 $ 22,297 $ 129,934 Consulting services, non cash......... $ 309,854 $ -- $ 309,854 Expenditures for long-lived assets.... $ -- $ -- $ -- Total long-lived assets, net of accumulated depreciation............. $ 89,569 $ -- $ 89,569
F-17 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 February 28, 2001 and the related statement of operations, stockholders' equity and cash flows for the three months and nine months then ended. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statement taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying February 28, 2001 consolidated financial statements for them to be in conformity with generally accepted accounting principles. /s/ Turner, Stone & Company, LLP Certified Public Accountants April 13, 2001 F-18 Airtech International Group, Inc. and Subsidiaries Consolidated Balance Sheets February 28, 2001 and 2000
2001 2000 ---------- ---------- ASSETS CURRENT ASSETS Cash................................................... $ 53,368 $ 559,385 Marketable Securities.................................. 0 2,000,000 Trade accounts receivables, net of allowance for doubtful accounts of $60,000 and $20,000 respectively.......................................... 731,315 225,352 Notes receivable, current portion...................... 437,250 75,000 Inventory.............................................. 1,305,559 317,665 Prepaid expenses and other assets...................... 113,257 204,524 ---------- ---------- Total current assets................................. 2,640,749 3,381,926 ---------- ---------- PROPERTY AND EQUIPMENT--net of accumulated depreciation of $198,159 and $149,123 respectively................... 112,740 116,875 NOTES RECEIVABLE--net of current portion, net of allowance for Doubtful accounts of $0 and $0, respectively............................................ 1,078,312 575,000 OTHER ASSETS Goodwill, net of $45,810 and $84,763 of accumulated amortization, respectively............................ 92,432 94,291 Intellectual properties, net of $167,300 and $58,060 of accumulated amortization, respectively................ 919,597 968,112 Other, Prepaid Royalties............................... 294,988 519,688 ---------- ---------- Total other assets................................... 1,307,017 1,582,091 ---------- ---------- $5,138,818 $5,655,892 ========== ==========
The accompanying notes are an integral part of the financial statements. F-19 Airtech International Group, Inc. and Subsidiaries Consolidated Balance Sheets February 28, 2001 and 2000
2001 2000 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable--current portion..................... $ 277,185 $ 277,185 Accounts payable, trade............................ 750,526 608,850 Note payable--officers............................. 210,338 216,488 Accrued payroll and payroll taxes.................. 507,753 323,692 Other accrued expenses............................. 608,843 417,511 ----------- ----------- Total current liabilities........................ 2,354,645 1,843,726 ----------- ----------- LONG-TERM LIABILITIES Deferred revenue................................... 340,000 400,000 Product Marketing Obligation....................... 430,000 405,000 Convertible Debentures............................. 2,350,000 2,800,000 ----------- ----------- Total long-term liabilities...................... 3,120,000 3,605,000 ----------- ----------- Total liabilities.............................. 5,474,645 5,448,726 COMMITMENTS AND CONTINGENCIES........................ -- -- STOCKHOLDERS' EQUITY Series M cumulative, convertible preferred, 990,625 and 1,143,750 outstanding respectively; liquidation preference of $1.00 per share......... 991 1,143 Common stock--$.05 par value, 50,000,000 shares authorized; 27,958,641 and 20,364,417 shares issued and outstanding, respectively.............. 1,397,932 1,018,220 Additional paid--in capital........................ 8,251,966 6,682,210 ----------- Retained deficit................................... (9,986,716) (7,494,407) ----------- ----------- Total stockholders' equity (335,827) 207,166 ----------- ----------- $ 5,138,818 $ 5,655,892 =========== ===========
The accompanying notes are an integral part of the financial statements. F-20 Airtech International Group, Inc. and Subsidiaries Consolidated Statements of Operations For the Nine Months Ended February 28, 2001 and 2000
2001 2000 ----------- ----------- REVENUES Product sales...................................... $ 1,412,607 $ 604,474 Franchisee fees and other revenues................. 25,000 175,000 ----------- ----------- Total revenues................................... 1,437,607 779,474 ----------- ----------- COSTS AND EXPENSES Salaries and wages................................. 787,490 901,729 Research and Development........................... 283,927 100,000 Cost of sales...................................... 780,235 515,127 Advertising........................................ 241,358 101,197 Depreciation and amortization...................... 233,188 127,421 Other general & administrative expense............. 639,544 645,073 ----------- ----------- Total costs and expenses......................... 2,965,742 2,390,547 ----------- ----------- LOSS FROM OPERATIONS................................. (1,528,135) (1,611,073) Interest expense..................................... (175,114) (41,462) ----------- ----------- NET LOSS BEFORE INCOME TAXES......................... (1,703,249) (1,652,535) Income taxes......................................... -- -- ----------- ----------- NET LOSS............................................. $(1,703,249) $(1,652,535) =========== =========== LOSS PER COMMON SHARE--BASIC......................... $ (0.07) $ (0.08) =========== =========== LOSS PER COMMON SHARE--DILUTED....................... $ (0.07) $ (0.08) =========== ===========
The accompanying notes are an integral part of the financial statements. F-21 Airtech International Group, Inc. and Subsidiaries Consolidated Statements of Operations For the Three Months Ended February 28, 2001 and 2000
2001 2000 --------- --------- REVENUES Product sales.......................................... $ 418,034 $ 186,136 Franchisee fees and other revenues..................... 15,000 60,000 --------- --------- Total revenues....................................... 433,034 246,136 --------- --------- COSTS AND EXPENSES Salaries and wages..................................... 285,375 516,591 Research and Development............................... 52,677 50,000 Costs of sales......................................... 220,845 99,478 Advertising............................................ 55,963 51,002 Depreciation and amortization.......................... 72,716 54,665 Other general and administrative expense............... 208,006 318,560 --------- --------- Total costs and expenses............................. 895,582 1,090,296 --------- --------- LOSS FROM OPERATIONS..................................... (462,548) (844,160) Interest expense......................................... ( 52,404) (4,185) --------- --------- NET LOSS BEFORE INCOME TAXES............................. (514,952) (848,345) Income taxes NET LOSS................................................. $(514,952) $(848,345) ========= ========= LOSS PER COMMON SHARE--BASIC............................. $ (0.02) $ (0.04) ========= ========= LOSS PER COMMON SHARE--DILUTED........................... $ (0.02) $ (0.04) ========= =========
The accompanying notes are an integral part of the financial statements. F-22 Airtech International Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Nine Months Ended February 28, 2001 and 2000
2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss............................................. $(1,703,249) $(1,652,534) Adjustments to reconcile net income to cash Depreciation and amortization....................... 233,188 127,421 Stock payments to employees and consultants......... -- 486,189 Changes in operating assets and liabilities Accounts receivable................................. (461,344) ( 51,401) Inventory........................................... (766,607) (75,000) Accounts payable.................................... 490,424 98,657 Accrued expenses.................................... 294,436 88,823 Other Receivables................................... (75,045) (347,955) ----------- ----------- Net cash used in operating activities.............. (1,988,197) (1,325,800) CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for other assets........................ 60,085 (57,212) (Expenditure for) Redemption Marketable Securities... 1,000,000 (2,000,000) Repayment of Notes Payable........................... (500,000) ----------- ----------- Net cash used in investing activities.............. 560,685 (2,057,212) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of convertible debentures..... 2,800,000 Proceeds from issuance of common stock............... 993,834 1,080,589 Net cash provided by financing activities.......... 993,834 3,880,589 ----------- ----------- INCREASE (DECREASE) IN CASH........................... (1,434,278) 497,577 CASH, BEGINNING OF PERIOD............................. 1,487,646 61,808 ----------- ----------- CASH, END OF PERIOD................................... $ 53,368 $ 559,385 =========== ===========
The accompanying notes are an integral part of the financial statements. F-23 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, has performed limited reviews of the interim financial information included herein. Their report on such reviews accompanies this filing. Amortization Intellectual property is allocated to the Company's air filtration products based on expected sales as a percent of total sales by product. The Company records amortization beginning when the product is initially inventoried for sale. Amortization is recorded ratably over a ten-year term. Goodwill acquired and recorded in the financial acquisition of ITC, is being amortized under the straight line method over 5 years. A prepaid royalty fee, paid pursuant to a December 1995 agreement and related to the Company's portable medical unit, is being amortized using the straight-line method over 24 months beginning January 2000. Inventories Inventories are carried at the lower of cost or net realizable value (market) and include component parts used in the assembly of the Company's line of air purification units, filters and finished goods comprised of completed products. The costs of inventories are based upon specific identification of direct costs and allocable costs of direct labor, packaging and other indirect costs. F-24 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) 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 Property marketing obligations pursuant to Statement of Financial Accounting Standards, "SFAS" No. 68, the Company has recorded funds raised in an arrangement to develop, produce and market the Model S-999 as a product marketing obligation. 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 25,269,142 and 24,479,321 respectively, weighted average shares of common stock outstanding over the three and nine month period ending February 28, 2001. No effect has been given to the assumed conversion of convertible preferred stock, convertible debentures, product market obligation guarantees and the assumed exercise of stock options and warrants, as the effect would be antidilutive. Convertible debentures (6%) On February 22, 2000, the Company 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 the Company's 6% Convertible Debentures (Debentures') and Warrants to purchase up to 500,000 shares of the Company's 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. The Company was responsible and paid legal, investment banker commissions, accounting and SEC filing fees totaling $427,000. 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 F-25 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) principal amount of Debentures and the remaining Warrants to purchase 250,000 shares of the Company's Common Stock. The Conditional Warrants expired on December 22, 2000. 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. Interest has been deferred until May 2001. 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 February 28, 2001 and 2000, 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 2001 and January 2004, respectively. Minimum future rental payments required under the above operating lease is as follows:
Year ending May 31 ------------------ 2001................................................................ $100,275 2002................................................................ 73,566 2003................................................................ 16,080 2004................................................................ 9,380 -------- $199,301 ========
Financial instruments The Company's financial instruments consist of its cash, marketable securities accounts and notes receivable, and trade payables. Cash and Marketable Securities The Company maintains its cash in bank deposit and other accounts, which, at times, may exceed federally insured limits. The Company invests excess cash not required for operations in U.S. Treasury repurchase agreements in connection with its cash management account with its primary bank. The Company has not experienced any losses in such accounts, and does not believe it is subject to any credit risks involving its cash. F-26 AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) 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 February 28, 2001 and 2000, the Company has issued various stock options and warrants to employees and others and uses the intrinsic value method of accounting for these stock options. Compensation cost for options granted has not been recognized in the accompanying financial statements because the amounts are not material and its exercise price exceeded the common stock fair market value at the date of option. The options and warrants expire between September 2000 and February 2006 and are exercisable at prices from $0.10 to $10.00 per option or warrant. Exercise prices were set at or above the underlying common stock's fair market value on the date of grant. Subsequent event On November 2, 2000, the Company and its subsidiary entered into a Stock Purchase Agreement with Southern Therapy, Inc. and its principal shareholders ("STI") to purchase the majority of shares of STI. At this time the Parties have agreed not to consummate this merger. Under the terms of the Stock Purchase Agreement, the Company would swap stock for the purchase price. Due to the decreasing market price of the underlying shares of Company Common Stock since the Agreement was reached, the Company has decided that the cost of the transaction has exceeded the number of shares of stock that prudently should be issued based upon the stock price of the Company Common Stock. However, recognizing the strengths of STI, the Company has entered into a Distribution Agreement with STI. STI will exclusively represent the Company in marketing and selling the portable air-purification unit to the U.S. medical industry. F-27 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Officers and Directors The Wyoming Business Corporation Act provides that indemnification of directors, officers, employees and other agents of a corporation, and persons who serve at its request as directors, officers, employees or other agents of another corporation may be provided by the Company. Subject to Wyoming law, our officers and directors are not personally liable for personal damages resulting from breaches of their fiduciary duty unless (i) the officer or director has breached his fiduciary duty of loyalty to the Company or its stockholders, (ii) the breach or failure to perform constitutes an act or omission not in good faith or which involves intentional misconduct or a knowing violation of law; or for any transaction from which the officer or director derived an improper personal benefit. The Company's By-Laws provide indemnification to directors, officers, employees and agents, including claims brought under state or Federal Securities laws, to the full extent allowable under Wyoming law. The Company also has entered into indemnification agreements with its directors and executive officer providing, among other things, that the Company will provide defense cost against any such claim, subject to reimbursement in certain events. Item 25. Other Expenses of Issuance and Distribution The estimated expenses in connection with the offering are as follows: Securities and Exchange Commission registration fee................. $ 831 Accounting fees and expenses........................................ $ 1,000 Blue Sky fees and expenses.......................................... $ 2,500 Legal fees and expenses............................................. $15,000 Printing............................................................ $ 5,000 Miscellaneous....................................................... $ 5,000 ------- Total............................................................. $29,331 =======
Item 26. Recent Sales of Unregistered Securities
Principal Price Amount or per Nature of Issued under Date Title Shares Issued Share Transaction Exemption ---- ----- ------------- ----- ----------- ------------ March 30, 2001 12% Convertible $800,000 N/A Private Section 4(2) Debentures with Placement of the 500,000 attached Securities Act Warrants March 30, 2001 Common Stock 955,128 $0.19 Shares issued to S-8 employees and Registration senior Statement management for services rendered March 30, 2001 Common Stock 105,000 $0.23 Shares issued to Section 4(2) NIR Group, LLC of the for placement of Securities Act 12% debentures February 28, 2001 Common Stock 500,000 $0.18 Shares issued to S-8 employees and Registration senior Statement management for services rendered March 27, 2001 Common Stock 308,541 $0.24 Shares issued to Section 4(2) an accredited of the investor in Securities Act conversion of limited partnership interests in Airsopure 999, LP
II-1
Principal Price Amount or per Nature of Issued under Date Title Shares Issued Share Transaction Exemption ---- ----- ------------- ----- ----------- ------------ January 2001 Common Stock 2,800,000 $0.15 Shares issued to Section 4(2) accredited of the investors Securities Act January 8, 2001 Common Stock 200,000 $0.25 Shares issued to Section 4(2) accredited of the investor Securities Act June 30, 2000 Common Stock 400,000 $0.25 Shares issued in Section 4(2) exchange of of the warrants held by Securities Act holders of Series M Preferred Stock February 22, 2000 6% Convertible $2,500,000 N/A Private Section 4(2) Debentures with Placement of the 250,000 attached Securities Act Warrants January 2000 thru March 12% Convertible $ 350,000 N/A Private Section 4(2) 2000 Debentures Placement of the Securities Act January 2000 thru Common 200,000 $0.25 to Private Section 4(2) February 2000 $0.75 Placement of the Securities Act December 31, 1999 Common 300,000 $0.19 Shares issued to S-8 CEO and Registration President for Statement services rendered August 31, 1999 Common 358,591 $0.34 to Shares issued to S-8 $0.50 investment Registration bankers, Statement consultants, management, CEO and President for services rendered or to be rendered. June 30, 1999 Common 1,200,000 $0.10 Shares issued to Section 4(2) accredited of the investors, Securities Act including 500,000 shares to CR Saulsbury, Sr. Warrants attached are exercisable at $0.20 and expire on May 31, 2000 May 31, 1999 Common 700,000 $0.10 Shares issued to Section 4(2) accredited of the investors, Securities Act including 500,000 shares to Peter Kertes. Warrants attached are exercisable at $0.20 and expire on May 31, 2000 February 28, 1999 Common 1,583,134 $0.50 Shares issued to Section 4(2) CEO and of the President in Securities Act consideration of deferred wages from June 1, 1997 through December 31, 1998 December 31, 1998 Common 46,250 $0.50 Warrants Section 4(2) exercised by of the holders of Securities Act Series M Preferred Stock November 30, 1998 Common 828,000 $0.33 Shares issued to Section 4(2) accredited of the investors Securities Act including C.R. Saulsbury, Sr.
II-2
Principal Amount or Price per Nature of Issued under Date Title Shares Issued Share Transaction Exemption ---- ----- ------------- --------- ----------- ------------ November 30, 1998 Common 224,000 $0.48 to Shares issued to S-8 $0.69 investment Registration bankers and Statement consultants for services rendered August 31, 1998 Common 146,025 $1.25 to Shares issued to S-8 $1.56 consultants and Registration employees for Statement services rendered July 31, 1998 Common 2,614,286 $0.70 Conversion of Section 4(2) debentures of the issued in Securities Act conjunction with the acquisition of AIC July 31, 1998 Common 2,371,603 One-for-one Conversion of Section 4(2) Series A of the preferred stock Securities Act issued in conjunction with the acquisition of AIC March 1998 thru Series M 1,143,750 $1.14 Private Section 4(2) September 1998 Preferred Placement of the Securities Act
Item 27. 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. (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 3.2 Articles of Amendment dated filed May 14, 1997 of the Company's predecessor in name Interactive Technologies Corporation, Inc. (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 3.3 Articles of Amendment of the Company filed October 16, 1998 (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 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 Series "M" Preferred Stock Certificate (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.2 Specimen Common Stock Certificate (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.3 Form of Warrant to purchase shares of Common Stock granted to holders of Series "M" Convertible Preferred Stock (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.4 Form of 6% Convertible Debenture Due 2002 (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.5 Form of Warrant to purchase shares of Common Stock granted to holders of 6% Convertible Debentures Due 2002 (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554)
II-3
Exhibit Number Document ------- -------- 4.6 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 (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.7 Form of 12% Convertible Debenture Due 2005 (incorporated by reference to the Company's Form 10-KSB filed on September 7, 2000) 4.8 Form of Warrant to purchase shares of Common Stock granted to holders of 12% Convertible Debentures Due 2005 (incorporated by reference to the Company's Form 10-KSB filed on September 7, 2000) 5.1 Legal Opinion of John G. Rebensdorf, P.C. (to be filed) 10.1 Employment Agreement dated May 1, 1997 between the Company and C.J. Comu (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 10.2 Form of Franchise Agreement relating to franchises offered by Airsopure International Group, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 10.3 Form of Development Agreement offered to franchisees by Airsopure International Group, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 10.4 Form of Offering Circular presented to franchisees by Airsopure International Group, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 10.5 Securities Purchase Agreement dated March 29, 2001 relating to the sale of 12% convertible debentures (filed herewith) 10.6 Security Agreement dated March 29, 2001 securing the 12% debentures (filed herewith) 10.7 Form of 12% Secured Convertible Debenture Due 2003 (filed herewith) 10.8 Form of Stock Purchase Warrant to purchase shares of Common Stock granted to holders of 12% Debentures Due 2003 (filed herewith) 10.9 Registration Rights Agreement dated March 29, 2001 relating to the registration of the Common Stock related to Exhibit 10.7 (filed herewith) 10.10 Lock-up Agreement dated March 30, 2001 between the Company and PKI Investors, LLC (filed herewith) 10.11 Distributor Agreement dated February 19, 2001 by and between the Company and W&B Service Company (filed herewith) 10.12 Distributor Agreement dated March 15, 2001 by and between the Company and Southern Therapy, Inc. (filed herewith) 21 Subsidiaries of the Registrant (filed herewith) 23.1 Consent of Turner, Stone & Company (filed herewith) 23.2 Consent of John G. Rebensdorf, P.C. (to be filed) 24.1 Power of Attorney (included in Part II of the Registration Statement)
II-4 Item 28. Undertakings The undersigned registrant hereby undertakes: 1. To file, during any period in which offers or sales are being made of the securities registered hereby, a post-effective amendment to this registration statement (i) to include any prospectus required by Section 10(a) (3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; and (iii) to include any additional or changed material information on the plan of distribution. 2. That, for the purpose of determining any liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. 3. To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant 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 the 14th day of May, 2001. Airtech International Group, Inc., a Wyoming corporation (Registrant) /s/ C J Comu By: _________________________________ C J Comu Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints C.J. Comu and James R. Halter, and each or either of them, his true and lawful attorney-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any registration statement that is to be effective upon filing pursuant to Rule 462 under the Securities Act of 1933, as amended, and to cause the same to be filed with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby granting to said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite or desirable to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things that said attorneys-in-fact and agents, or either of them, or their substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below on the 14th day of May, 2001 by the following persons in the capacities indicated.
Signature Title --------- ----- /s/ C J Comu Director and Chief Executive ______________________________________ Officer C J Comu /s/ Samuel S. McKenney, III Director ______________________________________ Samuel S. McKenney, III /s/ James R. Halter Director, Chief Financial ______________________________________ Officer and General Counsel James R. Halter (Principal Financial and Accounting Officer) /s/ R. John Harris Director and President ______________________________________ R. John Harris /s/ Robert Galvan Director ______________________________________ Robert Galvan
II-6 EXHIBIT INDEX
Exhibit Number Document ------- -------- 3.1 Restated Articles of Incorporation filed December 27, 1991 of the Company's predecessor in name, Interactive Technologies Corporation, Inc. (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 3.2 Articles of Amendment dated filed May 14, 1997 of the Company's predecessor in name Interactive Technologies Corporation, Inc. (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 3.3 Articles of Amendment of the Company filed October 16, 1998 (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 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 Series "M" Preferred Stock Certificate (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.2 Specimen Common Stock Certificate (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.3 Form of Warrant to purchase shares of Common Stock granted to holders of Series "M" Convertible Preferred Stock (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.4 Form of 6% Convertible Debenture Due 2002 (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.5 Form of Warrant to purchase shares of Common Stock granted to holders of 6% Convertible Debentures Due 2002 (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.6 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 (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 4.7 Form of 12% Convertible Debenture Due 2005 (incorporated by reference to the Company's Form 10-KSB filed on September 7, 2000). 4.8 Form of Warrant to purchase shares of Common Stock granted to holders of 12% Convertible Debentures Due 2005 (incorporated by reference to the Company's Form 10-KSB filed on September 7, 2000). 5.1 Legal Opinion of John G. Rebensdorf, P.C. (to be filed) 10.1 Employment Agreement dated May 1, 1997 between the Company and C.J. Comu (previously filed) 10.2 Form of Franchise Agreement relating to franchises offered by Airsopure International Group, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 10.3 Form of Development Agreement offered to franchisees by Airsopure International Group, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554)
Exhibit Number Document ------- -------- 10.4 Form of Offering Circular presented to franchisees by Airsopure International Group, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554) 10.5 Securities Purchase Agreement dated March 29, 2001 relating to the sale of 12% convertible debentures (filed herewith) 10.6 Security Agreement dated March 29, 2001 securing the 12% debentures (filed herewith) 10.7 Form of 12% Secured Convertible Debenture Due 2003 (filed herewith) 10.8 Form of Stock Purchase Warrant to purchase shares of Common Stock granted to holders of 12% Debentures Due 2003 (filed herewith) 10.9 Registration Rights Agreement dated March 29, 2001 relating to the registration of the Common Stock related to Exhibit 10.7 (filed herewith) 10.10 Lock-up Agreement dated March 30, 2001 between the Company and PKI Investors, LLC (filed herewith) 10.11 Distributor Agreement dated February 19, 2001 by and between the Company and W&B Service Company (filed herewith) 10.12 Distributor Agreement dated March 15, 2001 by and between the Company and Southern Therapy, Inc. (filed herewith) 21 Subsidiaries of the Registrant (filed herewith) 23.1 Consent of Turner, Stone & Company (filed herewith) 23.2 Consent of John G. Rebensdorf, P.C. (to be filed) 24.1 Power of Attorney (included in Part II of the Registration Statement)
EX-10.5 2 dex105.txt SECURITIES PURCHASE AGREEMENT EXHIBIT 10.5 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of March 30, 2001, by and among Airtech International Group, Inc., a Wyoming corporation, with headquarters located at 15400 Knoll Trail, Suite 2000, Dallas, Texas 75248 (the "Company"), and each of the purchasers set forth on the signature pages hereto (the "Buyers"). WHEREAS: A. The Company and the Buyers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 under Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"); B. Buyers desire to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement (i) 12% secured convertible debentures of the Company, in the form attached hereto as Exhibit "A", in the aggregate principal amount of up to One Million Dollars ($1,000,000) (together with any debenture(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the "Debentures"), convertible into shares of common stock, $0.05 par value per share, of the Company (the "Common Stock"), upon the terms and subject to the limitations and conditions set forth in such Debentures and (ii) warrants, in the form attached hereto as Exhibit "B", to purchase up to Five Hundred Thousand (500,000) shares of Common Stock (the "Warrants"); C. Each Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, such principal amount of Debentures and number of Warrants as is set forth immediately below its name on the signature pages hereto; and D. Contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, in the form attached hereto as Exhibit "C" (the "Registration Rights Agreement"), pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws. NOW THEREFORE, the Company and each of the Buyers severally (and not jointly) hereby agree as follows: 1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS. -------------------------------------------- a. Purchase of Debentures and Warrants. On the Closing Date (as ----------------------------------- defined below), the Company shall issue and sell to each Buyer and each Buyer severally and not jointly agrees to purchase from the Company such principal amount of Debentures and number of Warrants as is set forth immediately below such Buyer's name on the signature pages hereto. b. Form of Payment. On the Closing Date (as defined below), (i) --------------- each Buyer shall pay the purchase price for the Debentures and the Warrants to be issued and sold to it at the Closing (as defined below) (the "Purchase Price") by wire transfer of immediately available funds to the Company, in accordance with the Company's written wiring instructions, against delivery of the Debentures in the principal amount equal to the Purchase Price and the number of Warrants as is set forth immediately below such Buyer's name on the signature pages hereto, and (ii) the Company shall deliver such Debentures and Warrants duly executed on behalf of the Company, to such Buyer, against delivery of such Purchase Price. c. Closing Date. Subject to the satisfaction (or waiver) of the ------------ conditions thereto set forth in Section 6 and Section 7 below, the date and time of the issuance and sale of the Debentures and the Warrants pursuant to this Agreement (the "Closing Date") shall be 10:00 a.m. Eastern Standard Time on March 30, 2001 or such other mutually agreed upon time. The closing of the transactions contemplated by this Agreement (the "Closing") shall occur on the Closing Date at the offices of Ballard Spahr Andrews & Ingersoll, LLP, 1735 Market Street, 51st Floor, Philadelphia, Pennsylvania 19103-7599 or at such other location as may be agreed to by the parties. 2. BUYERS' REPRESENTATIONS AND WARRANTIES. Each Buyer severally (and not jointly) represents and warrants to the Company solely as to such Buyer that: a. Investment Purpose. As of the date hereof, the Buyer is ------------------ purchasing the Debentures and the shares of Common Stock issuable upon conversion of or otherwise pursuant to the Debentures (including, without limitation, such additional shares of Common Stock, if any, as are issuable as a result of the events described in Sections 1.3 and 1.4(g) of the Debentures and Section 2(c) of the Registration Rights Agreement, such shares of Common Stock being referred to herein as the "Conversion Shares") and the Warrants and the shares of Common Stock issuable upon exercise thereof (the "Warrant Shares" and, collectively with the Debentures, Warrants and Conversion Shares, the "Securities") for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the 1933 Act; provided, however, that by making the -------- ------- representations herein, the Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act. b. Accredited Investor Status. The Buyer is an "accredited -------------------------- investor" as that term is defined in Rule 501(a) of Regulation D (an "Accredited Investor"). c. Reliance on Exemptions. The Buyer understands that the ---------------------- Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities. -2- d. Information. The Buyer and its advisors, if any, have been ----------- furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer or its advisors. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Notwithstanding the foregoing, the Company has not disclosed to the Buyer any material nonpublic information and will not disclose such information unless such information is disclosed to the public prior to or promptly following such disclosure to the Buyer. Neither such inquiries nor any other due diligence investigation conducted by Buyer or any of its advisors or representatives shall modify, amend or affect Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. The Buyer understands that its investment in the Securities involves a significant degree of risk. e. Governmental Review. The Buyer understands that no United ------------------- States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities. f. Transfer or Re-sale. The Buyer understands that (i) except ------------------- as provided in the Registration Rights Agreement, the sale or re-sale of the Securities has not been and is not being registered under the 1933 Act or any applicable state securities laws, and the Securities may not be transferred unless (a) the Securities are sold pursuant to an effective registration statement under the 1933 Act, (b) the Buyer shall have delivered to the Company an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, (c) the Securities are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated under the 1933 Act (or a successor rule) ("Rule 144")) of the Buyer who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor, or (d) the Securities are sold pursuant to Rule 144; (ii) any sale of such Securities made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any re-sale of such Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case, other than pursuant to the Registration Rights Agreement). Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin account or other lending arrangement. - ---- ---- g. Legends. The Buyer understands that the Debentures and the ------- Warrants and, until such time as the Conversion Shares and Warrant Shares have been registered under the 1933 Act as contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Conversion Shares and Warrant Shares may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities): -3- "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The securities may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under said Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, that registration is not required under said Act or unless sold pursuant to Rule 144 under said Act." The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for sale under an effective registration statement filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Security may be made without registration under the 1933 Act and such sale or transfer is effected or (c) such holder provides the Company with reasonable assurances that such Security can be sold pursuant to Rule 144. The Buyer agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any. h. Authorization; Enforcement. This Agreement and the -------------------------- Registration Rights Agreement have been duly and validly authorized. This Agreement has been duly executed and delivered on behalf of the Buyer, and this Agreement constitutes, and upon execution and delivery by the Buyer of the Registration Rights Agreement, such agreement will constitute, valid and binding agreements of the Buyer enforceable in accordance with their terms. i. Residency. The Buyer is a resident of the jurisdiction set --------- forth immediately below such Buyer's name on the signature pages hereto. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company --------------------------------------------- represents and warrants to each Buyer that: a. Organization and Qualification. The Company and each of its ------------------------------ Subsidiaries (as defined below), if any, is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. Schedule 3(a) sets forth a list of all of the Subsidiaries of the Company and the jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect on the business, operations, assets, financial condition or prospects of the Company or its Subsidiaries, if any, -4- taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. "Subsidiaries" means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly, any equity or other ownership interest. b. Authorization; Enforcement. (i) The Company has all -------------------------- requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, the Debentures and the Warrants and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement, the Debentures and the Warrants by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Debentures and the Warrants and the issuance and reservation for issuance of the Conversion Shares and Warrant Shares issuable upon conversion or exercise thereof) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required, except for any required shareholder approval to increase the number of authorized shares of Common Stock; provided that the -------- Buyers agree to vote in favor of such increase, (iii) this Agreement has been duly executed and delivered by the Company, and (iv) this Agreement constitutes, and upon execution and delivery by the Company of the Registration Rights Agreement, the Debentures and the Warrants, each of such instruments will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. c. Capitalization. As of the date hereof, the authorized -------------- capital stock of the Company consists of (i) 50,000,000 shares of Common Stock, of which 30,786,573 shares are issued and outstanding, 5,230,000 shares are reserved for issuance pursuant to the Company's stock option plans, 19,881,000 shares are reserved for issuance pursuant to securities (other than the Debentures, the Additional Debentures (as defined in Section 4(l)), the Warrants and the Additional Warrants (as defined in Section 4(l))) exercisable for, or convertible into or exchangeable for shares of Common Stock and 22,000,000 shares are reserved for issuance upon conversion of the Debentures and the Additional Debentures and exercise of the Warrants and the Additional Warrants (subject to adjustment pursuant to the Company's covenant set forth in Section 4(h) below); and (ii) 20,000,000 shares of preferred stock, of which 990,625 shares are issued and outstanding, of which (a) 990,625 shares have been designated as Series M Preferred Stock, 990,625 of which are issued and outstanding. All of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable. No shares of capital stock of the Company are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company. Except as disclosed in Schedule 3(c), as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries, (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to -5- register the sale of any of its or their securities under the 1933 Act (except the Registration Rights Agreement) and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Debentures, the Warrants, the Conversion Shares or Warrant Shares. The Company has furnished to the Buyer true and correct copies of the Company's Certificate of Incorporation as in effect on the date hereof ("Certificate of Incorporation"), the Company's By-laws, as in effect on the date hereof (the "By-laws"), and the terms of all securities convertible into or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect thereto. The Company shall provide the Buyer with a written update of this representation signed by the Company's Chief Executive or Chief Financial Officer on behalf of the Company as of the Closing Date. d. Issuance of Shares. The Conversion Shares and Warrant Shares ------------------ are duly authorized and reserved for issuance and, upon conversion of the Debentures and exercise of the Warrants in accordance with their respective terms, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof. e. Acknowledgment of Dilution. The Company understands and -------------------------- acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares and Warrant Shares upon conversion of the Debenture, or exercise of the Warrants. The Company further acknowledges that its obligation to issue Conversion Shares and Warrant Shares upon conversion of the Debentures or exercise of the Warrants in accordance with this Agreement, the Debentures and the Warrants is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. f. No Conflicts. The execution, delivery and performance of ------------ this Agreement, the Registration Rights Agreement, the Debentures and the Warrants by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance of the Conversion Shares and Warrant Shares) will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or By-laws or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Certificate of Incorporation, By-laws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice or lapse of time or both could put the -6- Company or any of its Subsidiaries in default) under, and neither the Company nor any of its Subsidiaries has taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its Subsidiaries, if any, are not being conducted, and shall not be conducted so long as a Buyer owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self regulatory organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement, the Registration Rights Agreement, the Debentures or the Warrants in accordance with the terms hereof or thereof or to issue and sell the Debentures and Warrants in accordance with the terms hereof and to issue the Conversion Shares upon conversion of the Debentures and the Warrant Shares upon exercise of the Warrants. Except as disclosed in Schedule 3(f), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is not in violation of the listing requirements of the Over-the-Counter Bulletin Board (the "OTCBB") and does not reasonably anticipate that the Common Stock will be delisted by the OTCBB in the foreseeable future. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. g. SEC Documents; Financial Statements. Since May 31, 1998, the ----------------------------------- Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements, amended financial statements and schedules thereto and documents (other than exhibits to such documents) incorporated by reference therein, being hereinafter referred to herein as the "SEC Documents"). The Company has delivered, through filings with the EDGAR system of the SEC, to each Buyer true and complete copies of the SEC Documents, except for such exhibits and incorporated documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the statements made in any such SEC Documents is, or has been, required to be amended or updated under applicable law (except for such statements as have been amended or updated in subsequent filings prior the date hereof). As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise -7- indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the financial statements of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to May 31, 2000 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. h. Absence of Certain Changes. Since May 31, 2000, there has -------------------------- been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations, financial condition, results of operations or prospects of the Company or any of its Subsidiaries. i. Absence of Litigation. There is no action, suit, claim, --------------------- proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries, or their officers or directors in their capacity as such, that could have a Material Adverse Effect. Schedule 3(i) contains a complete list and summary description of any pending or threatened proceeding against or affecting the Company or any of its Subsidiaries, without regard to whether it would have a Material Adverse Effect. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. j. Patents, Copyrights, etc. ------------------------ (i) The Company and each of its Subsidiaries owns or possesses the requisite licenses or rights to use all patents, patent applications, patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service names, trade names and copyrights ("Intellectual Property") necessary to enable it to conduct its business as now operated (and, except as set forth in Schedule 3(j) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future); there is no claim or action by any person pertaining to, or proceeding pending, or to the Company's knowledge threatened, which challenges the right of the Company or of a Subsidiary with respect to any Intellectual Property necessary to enable it to conduct its business as now operated (and, except as set forth in Schedule 3(j) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future); to the best of the Company's knowledge, the Company's or its Subsidiaries' current and intended products, services and processes do not infringe on any Intellectual Property or other rights held by any person; and the Company is unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and each of its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their Intellectual Property. -8- (ii) All of the Company's computer software and computer hardware, and other similar or related items of automated, computerized or software systems that are used or relied on by the Company in the conduct of its business or that were, or currently are being, sold or licensed by the Company to customers (collectively, "Information Technology"), are Year 2000 Compliant. For purposes of this Agreement, the term "Year 2000 Compliant" means, with respect to the Company's Information Technology, that the Information Technology is designed to be used prior to, during and after the calendar Year 2000 A.D., and the Information Technology used during each such time period will accurately receive, provide and process date and time data (including, but not limited to, calculating, comparing and sequencing) from, into and between the 20th and 21st centuries, including the years 1999 and 2000, and leap-year calculations, and will not malfunction, cease to function, or provide invalid or incorrect results as a result of the date or time data, to the extent that other information technology, used in combination with the Information Technology, properly exchanges date and time data with it. k. No Materially Adverse Contracts, Etc. Neither the Company nor ------------------------------------ any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company's officers has or is expected to have a Material Adverse Effect. l. Tax Status. Except as set forth on Schedule 3(l), the ---------- Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, statue or local tax. Except as set forth on Schedule 3(l), none of the Company's tax returns is presently being audited by any taxing authority. m. Certain Transactions. Except as set forth on Schedule 3(m) -------------------- and except for arm's length transactions pursuant to which the Company or any of its Subsidiaries makes payments in the ordinary course of business upon terms no less favorable than the Company or any of its Subsidiaries could obtain from third parties and other than the grant of stock options disclosed on Schedule 3(c), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or -9- other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. n. Disclosure. All information relating to or concerning the ---------- Company or any of its Subsidiaries set forth in this Agreement and provided to the Buyers pursuant to Section 2(d) hereof and otherwise in connection with the transactions contemplated hereby is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed (assuming for this purpose that the Company's reports filed under the 1934 Act are being incorporated into an effective registration statement filed by the Company under the 1933 Act). o. Acknowledgment Regarding Buyers' Purchase of Securities. The ------------------------------------------------------- Company acknowledges and agrees that the Buyers are acting solely in the capacity of arm's length purchasers with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by any Buyer or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Buyers' purchase of the Securities. The Company further represents to each Buyer that the Company's decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives. p. No Integrated Offering. Neither the Company, nor any of its ---------------------- affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance of the Securities to the Buyers. The issuance of the Securities to the Buyers will not be integrated with any other issuance of the Company's securities (past, current or future) for purposes of any stockholder approval provisions applicable to the Company or its securities. q. No Brokers. The Company has taken no action which would give ---------- rise to any claim by any person for brokerage commissions, transaction fees or similar payments relating to this Agreement or the transactions contemplated hereby. r. Permits; Compliance. The Company and each of its ------------------- Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "Company Permits"), and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company -10- Permits. Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Since May 31, 2000, neither the Company nor any of its Subsidiaries has received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect. s. Environmental Matters. --------------------- (i) Except as set forth in Schedule 3(s), there are, to the Company's knowledge, with respect to the Company or any of its Subsidiaries or any predecessor of the Company, no past or present violations of Environmental Laws (as defined below), releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental liability or any liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and neither the Company nor any of its Subsidiaries has received any notice with respect to any of the foregoing, nor is any action pending or, to the Company's knowledge, threatened in connection with any of the foregoing. The term "Environmental Laws" means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes (collectively, "Hazardous Materials") into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder. (ii) Other than those that are or were stored, used or disposed of in compliance with applicable law, no Hazardous Materials are contained on or about any real property currently owned, leased or used by the Company or any of its Subsidiaries, and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company or any of its Subsidiaries during the period the property was owned, leased or used by the Company or any of its Subsidiaries, except in the normal course of the Company's or any of its Subsidiaries' business. (iii) Except as set forth in Schedule 3(s), there are no underground storage tanks on or under any real property owned, leased or used by the Company or any of its Subsidiaries that are not in compliance with applicable law. t. Title to Property. The Company and its Subsidiaries have ----------------- good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 3(t) or such as would not have a Material Adverse Effect. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, -11- subsisting and enforceable leases with such exceptions as would not have a Material Adverse Effect. u. Insurance. The Company and each of its Subsidiaries are --------- insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. v. Internal Accounting Controls. The Company and each of its ---------------------------- Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company's board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. w. Foreign Corrupt Practices. Neither the Company, nor any of ------------------------- its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary has, in the course of his actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. x. Solvency. The Company (after giving effect to the -------- transactions contemplated by this Agreement) is solvent (i.e., its assets have a --- fair market value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute and matured) and currently the Company has no information that would lead it to reasonably conclude that the Company would not have the ability to, nor does it intend to take any action that would impair its ability to, pay its debts from time to time incurred in connection therewith as such debts mature. The Company did not receive a qualified opinion from its auditors with respect to its most recent fiscal year end and does not anticipate or know of any basis upon which its auditors might issue a qualified opinion in respect of its current fiscal year. y. No Investment Company. The Company is not, and upon the --------------------- issuance and sale of the Securities as contemplated by this Agreement will not be an "investment company" required to be registered under the Investment Company Act of 1940 (an "Investment Company"). The Company is not controlled by an Investment Company. -12- 4. COVENANTS. --------- a. Best Efforts. The parties shall use their best efforts to ------------ satisfy timely each of the conditions described in Section 6 and 7 of this Agreement. b. Form D; Blue Sky Laws. The Company agrees to file a Form D --------------------- with respect to the Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to the Buyers at the applicable closing pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to each Buyer on or prior to the Closing Date. c. Reporting Status; Eligibility to Use Form SB-2 or Form S-1. ---------------------------------------------------------- The Company's Common Stock is registered under Section 12(g) of the 1934 Act. The Company represents and warrants that it meets the requirements for the use of Form SB-2 or Form S-1 for registration of the sale by the Buyer of the Registrable Securities (as defined in the Registration Rights Agreement). So long as the Buyer beneficially owns any of the Securities, the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. The Company further agrees to file all reports required to be filed by the Company with the SEC in a timely manner so as to become eligible, and thereafter to maintain its eligibility, for the use of Form S-3. The Company, upon review and approval of the Buyers, shall issue a press release describing the materials terms of the transaction contemplated hereby as soon as practicable following the Closing Date but in no event more than two (2) business days of the Closing Date, and shall file with the SEC a Current Report on Form 8-K describing the material terms of the transaction contemplated hereby within five (5) business days of the Closing Date, which press release and Form 8-K shall be subject to prior review by the Buyers. d. Use of Proceeds. The Company shall use the proceeds from the --------------- sale of the Debentures and the Warrants in the manner set forth in Schedule 4(d) attached hereto and made a part hereof and shall not, directly or indirectly, use such proceeds for any loan to or investment in any other corporation, partnership, enterprise or other person (except in connection with its currently existing direct or indirect Subsidiaries). e. Future Offerings. Subject to the exceptions described below, ---------------- the Company will not, without the prior written consent of a majority-in- interest of the Buyers, negotiate or contract with any party to obtain additional equity financing (including debt financing with an equity component) that involves (A) the issuance of Common Stock or (B) the issuance of convertible securities that are convertible into an indeterminate number of shares of Common Stock or (C) the issuance of warrants during the period (the "Lock-up Period") beginning on the Closing Date and ending one hundred eighty (180) days from the date the Registration Statement (as defined in the Registration Rights Agreement) is declared effective (plus any days in which sales cannot be made thereunder). In addition, subject to the exceptions described below, the Company will not conduct any equity financing (including debt with an -13- equity component) ("Future Offerings") during the period beginning on the Closing Date and ending two (2) years after the end of the Lock-up Period unless it shall have first delivered to each Buyer, at least fifteen (15) business days prior to the closing of such Future Offering, written notice describing the proposed Future Offering, including the terms and conditions thereof and proposed definitive documentation to be entered into in connection therewith, and providing each Buyer an option during the ten (10) day period following delivery of such notice to purchase its pro rata share (based on the ratio that the aggregate principal amount of Debentures purchased by it hereunder bears to the aggregate principal amount of Debentures purchased hereunder) of the securities being offered in the Future Offering on the same terms as contemplated by such Future Offering (the limitations referred to in this sentence and the preceding sentence are collectively referred to as the "Capital Raising Limitations"). In the event the terms and conditions of a proposed Future Offering are amended in any respect after delivery of the notice to the Buyers concerning the proposed Future Offering, the Company shall deliver a new notice to each Buyer describing the amended terms and conditions of the proposed Future Offering and each Buyer thereafter shall have an option during the ten (10) day period following delivery of such new notice to purchase its pro rata share of the securities being offered on the same terms as contemplated by such proposed Future Offering, as amended. The foregoing sentence shall apply to successive amendments to the terms and conditions of any proposed Future Offering. The Capital Raising Limitations shall not apply to the issuance of securities upon exercise or conversion of the Company's options, warrants or other convertible securities outstanding as of the date hereof or to the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or restricted stock plan approved by the Stockholders of the Company. In the event that the Company completes a Future Offering on terms more favorable than the transaction contemplated hereby, the terms of the Debentures, the Additional Debentures, the Warrants and the Additional Warrants will be amended to reflect such more favorable terms. f. Expenses. At the Closing, the Company shall reimburse Buyers -------- for expenses incurred by it in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the other agreements to be executed in connection herewith, including, without limitation, attorneys' and consultants' fees and expenses. g. Financial Information. The Company agrees to send the --------------------- following reports to each Buyer until such Buyer transfers, assigns, or sells all of the Securities: (i) within ten (10) days after the filing with the SEC, a copy of its Annual Report on Form 10-KSB, its Quarterly Reports on Form 10-QSB and any Current Reports on Form 8-K; (ii) within one (1) day after release, copies of all press releases issued by the Company or any of its Subsidiaries; and (iii) contemporaneously with the making available or giving to the stockholders of the Company, copies of any notices or other information the Company makes available or gives to such stockholders. Information contemplated to be sent pursuant to the Section 4(g) may be sent electronically. h. Reservation of Shares. The Company shall at all times have --------------------- authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full conversion or exercise of the outstanding Debentures and Additional Debentures (including all accrued unpaid interest thereon) and the Warrants and Additional Warrants and issuance of the Conversion Shares and Warrant Shares in connection therewith -14- (based on the Conversion Price or Exercise Price in effect from time to time) and as otherwise required by the Debentures. The Company shall not reduce the number of shares of Common Stock reserved for issuance upon conversion of Debentures and Additional Debentures and exercise of the Warrants and Additional Warrants without the consent of each Buyer. The Company shall use its best efforts at all times to maintain the number of shares of Common Stock so reserved for issuance at no less than two (2) times the number that is then actually issuable upon full conversion of the Debentures and Additional Debentures and upon exercise of the Warrants and Additional Warrants (based on the Conversion Price or the Exercise Price in effect from time to time and including all accrued and unpaid interest on the Debentures). If at any time the number of shares of Common Stock authorized and reserved for issuance is below the number of Conversion Shares and Warrant Shares issued and issuable upon conversion of the Debentures and Additional Debentures and exercise of the Warrants and Additional Warrants (based on the Conversion Price or the Exercise Price then in effect and including all accrued and unpaid interest on the Debentures), the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company's obligations under this Section 4(h), in the case of an insufficient number of authorized shares, and using its best efforts to obtain stockholder approval of an increase in such authorized number of shares. i. Listing. The Company shall promptly secure the listing of ------- the Conversion Shares and Warrant Shares upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and, so long as any Buyer owns any of the Securities, shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares and Warrant Shares from time to time issuable upon conversion of the Debentures or exercise of the Warrants. The Company will obtain and, so long as any Buyer owns any of the Securities, maintain the listing and trading of its Common Stock on the OTCBB, the Nasdaq National Market ("Nasdaq"), the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the New York Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX") and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. The Company shall promptly provide to each Buyer copies of any notices it receives from the OTCBB and any other exchanges or quotation systems on which the Common Stock is then listed regarding the continued eligibility of the Common Stock for listing on such exchanges and quotation systems. j. Corporate Existence. So long as a Buyer beneficially owns any ------------------- Debentures or Warrants, the Company shall maintain its corporate existence and shall not sell all or substantially all of the Company's assets, except in the event of a merger or consolidation or sale of all or substantially all of the Company's assets, where the surviving or successor entity in such transaction (i) assumes the Company's obligations hereunder and under the agreements and instruments entered into in connection herewith and (ii) is a publicly traded corporation whose Common Stock is listed for trading on the OTCBB, Nasdaq, Nasdaq SmallCap, NYSE or AMEX. -15- k. No Integration. The Company shall not make any future offers -------------- or sales of any security (other than the Securities) under circumstances that would require registration of the Securities being offered or sold hereunder under the 1933 Act or cause the offering of the Securities to be integrated with any other offering of securities by the Company for the purpose of any stockholder approval provision applicable to the Company or its securities. l. Subsequent Investment. The Company and the Buyers agree --------------------- that, upon the declaration of effectiveness of the Registration Statement to be filed pursuant to the Registration Rights Agreement (the "Effective Date"), the Buyers shall purchase additional debentures ("Additional Debentures") in the aggregate principal amount of Two Hundred Thousand Dollars ($200,000) and receive additional warrants ("Additional Warrants") to purchase (under terms identical to the Warrants) an aggregate of 100,000 shares of Common Stock, for an aggregate purchase price of Two Hundred Thousand Dollars ($200,000), with the closing of such purchase to occur within thirty (30) days of the Effective Date; provided, however, that the obligation of each Buyer to purchase the Additional - -------- ------- Debentures and the Additional Warrants is subject to the satisfaction, at or before the closing of such purchase and sale, of the conditions set forth in Section 7. The terms of the Additional Debentures and the Additional Warrants shall be identical to the terms of the Debentures and Warrants to be issued on the Closing Date. The Common Stock underlying the Additional Debentures and the Additional Warrants shall be Registrable Securities (as defined in the Registration Rights Agreement) and shall be included in the Registration Statement to be filed pursuant to the Registration Rights Agreement. 5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable --------------------------- instructions to its transfer agent to issue certificates, registered in the name of each Buyer or its nominee, for the Conversion Shares and Warrant Shares in such amounts as specified from time to time by each Buyer to the Company upon conversion of the Debentures or exercise of the Warrants in accordance with the terms thereof (the "Irrevocable Transfer Agent Instructions"). Prior to registration of the Conversion Shares and Warrant Shares under the 1933 Act or the date on which the Conversion Shares and Warrant Shares may be sold pursuant to Rule 144 without any restriction as to the number of Securities as of a particular date that can then be immediately sold, all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(f) hereof (in the case of the Conversion Shares and Warrant Shares, prior to registration of the Conversion Shares and Warrant Shares under the 1933 Act or the date on which the Conversion Shares and Warrant Shares may be sold pursuant to Rule 144 without any restriction as to the number of Securities as of a particular date that can then be immediately sold), will be given by the Company to its transfer agent and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section shall affect in any way the Buyer's obligations and agreement set forth in Section 2(g) hereof to comply with all applicable prospectus delivery requirements, if any, upon re-sale of the Securities. If a Buyer provides the Company with (i) an opinion of counsel in form, substance and scope customary for opinions in comparable transactions, to the effect that a public sale or -16- transfer of such Securities may be made without registration under the 1933 Act and such sale or transfer is effected or (ii) the Buyer provides reasonable assurances that the Securities can be sold pursuant to Rule 144, the Company shall permit the transfer, and, in the case of the Conversion Shares and Warrant Shares, promptly instruct its transfer agent to issue one or more certificates, free from restrictive legend, in such name and in such denominations as specified by such Buyer. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyers, by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section, that the Buyers shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate transfer, without the necessity of showing economic loss and without any bond or other security being required. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of ---------------------------------------------- the Company hereunder to issue and sell the Debentures and Warrants to a Buyer at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: a. The applicable Buyer shall have executed this Agreement and the Registration Rights Agreement, and delivered the same to the Company. b. The applicable Buyer shall have delivered the Purchase Price in accordance with Section 1(b) above. c. The representations and warranties of the applicable Buyer shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the applicable Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the applicable Buyer at or prior to the Closing Date. d. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement. 7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. The obligation ------------------------------------------------- of each Buyer hereunder to purchase the Debentures and Warrants at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions, provided that these conditions are for such Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion: -17- a. The Company shall have executed this Agreement and the Registration Rights Agreement, and delivered the same to the Buyer. b. The Company shall have delivered to such Buyer duly executed Debentures (in such denominations as the Buyer shall request) and Warrants in accordance with Section 1(b) above or duly executed Additional Debentures (in such denominations as the Buyer shall request) and Additional Warrants, as the case may be. c. The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to a majority-in-interest of the Buyers, shall have been delivered to and acknowledged in writing by the Company's Transfer Agent. d. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Buyer shall have received a certificate or certificates, executed by the chief executive officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, but not limited to certificates with respect to the Company's Certificate of Incorporation, By-laws and Board of Directors' resolutions relating to the transactions contemplated hereby. e. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement. f. The Conversion Shares and Warrant Shares shall have been authorized for quotation on the OTCBB and trading in the Common Stock on the OTCBB shall not have been suspended by the SEC or the OTCBB. g. The Buyer shall have received an opinion of the Company's counsel, dated as of the Closing Date, in form, scope and substance reasonably satisfactory to the Buyer and in substantially the same form as Exhibit "D" attached hereto. h. The Buyer shall have received an officer's certificate described in Section 3(c) above, dated as of the Closing Date. 8. GOVERNING LAW; MISCELLANEOUS. ---------------------------- a. Governing Law. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY ------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITH SUCH STATE, WITHOUT REGARD TO THE -18- PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON- APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE. b. Counterparts; Signatures by Facsimile. This Agreement may be ------------------------------------- executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. c. Headings. The headings of this Agreement are for convenience -------- of reference only and shall not form part of, or affect the interpretation of, this Agreement. d. Severability. In the event that any provision of this ------------ Agreement is invalid or enforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. e. Entire Agreement; Amendments. This Agreement and the ---------------------------- instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. f. Notices. Any notices required or permitted to be given under ------- the terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular -19- United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Airtech International Group, Inc. 15400 Knoll Trail, Suite 200 Dallas, Texas 75248 Attention: C. J. Comu, Chairman and Chief Executive Officer Facsimile (972) 960-9395 With copy to: John Rebensdorf, Esquire 6116 North Central Expressway, Suite 1313 Dallas, Texas 75206 Facsimile: (214) 696-9430 If to a Buyer: To the address set forth immediately below such Buyer's name on the signature pages hereto. With copy to: The N.I.R. Group, LLC 155 First Street, Suite B Mineola, New York 11501 Attention: Corey Ribotsky Telephone: (516) 739-7110 Facsimile: (516) 739-7115 Each party shall provide notice to the other party of any change in address. g. Successors and Assigns. This Agreement shall be binding upon ---------------------- and inure to the benefit of the parties and their successors and assigns. Neither the Company nor any Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing, subject to Section 2(f), any Buyer may assign its rights hereunder to any person that purchases Securities in a private transaction from a Buyer or to any of its "affiliates," as that term is defined under the 1934 Act, without the consent of the Company. h. Third Party Beneficiaries. This Agreement is intended for ------------------------- the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. -20- i. Survival. The representations and warranties of the Company -------- and the agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive the closing hereunder notwithstanding any due diligence investigation conducted by or on behalf of the Buyers. The Company agrees to indemnify and hold harmless each of the Buyers and all their officers, directors, employees and agents for loss or damage arising as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants set forth in Sections 3 and 4 hereof or any of its covenants and obligations under this Agreement or the Registration Rights Agreement, including advancement of expenses as they are incurred. j. Publicity. The Company and each of the Buyers shall have the --------- right to review a reasonable period of time before issuance of any press releases, SEC, OTCBB or NASD filings, or any other public statements with respect to the transactions contemplated hereby; provided, however, that (i) the -------- ------- Company shall be entitled, without the prior approval of each of the Buyers, to make any press release or SEC, OTCBB (or other applicable trading market) or NASD filings with respect to such transactions as is required by applicable law and regulations (although each of the Buyers shall be consulted by the Company in connection with any such press release prior to its release and shall be provided with a copy thereof and be given an opportunity to comment thereon) and (ii) the Company will not disclose any material nonpublic information to any of Buyers unless such information is disclosed to the public prior to or promptly following such disclosure to any of the Buyers. k. Further Assurances. Each party shall do and perform, or ------------------ cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. l. No Strict Construction. The language used in this Agreement ---------------------- will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. m. Remedies. The Company acknowledges that a breach by it of -------- its obligations hereunder will cause irreparable harm to the Buyers by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, that the Buyers shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -21- IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused this Agreement to be duly executed as of the date first above written. AIRTECH INTERNATIONAL GROUP, INC. By: ______________________________ C. J. Comu Chairman and Chief Executive Officer AJW PARTNERS, LLC By: SMS Group, LLC ______________________________________ Corey S. Ribotsky Manager RESIDENCE: ADDRESS: Facsimile: 516-739-7115 Telephone: 516-739-7110 AGGREGATE SUBSCRIPTION AMOUNT: Aggregate Principal Amount of Debentures: $520,000 Number of Warrants: 260,000 Aggregate Purchase Price: $520,000 -22- NEW MILLENNIUM CAPITAL PARTNERS II, LLC By: First Street Manager II, LLC ______________________________________ Glenn A. Arbeitman Manager RESIDENCE: ADDRESS: Facsimile: 516-739-7115 Telephone: 516-739-7110 AGGREGATE SUBSCRIPTION AMOUNT: Aggregate Principal Amount of Debentures: $280,000 Number of Warrants: 140,000 Aggregate Purchase Price: $280,000 -23- EX-10.6 3 dex106.txt SECURITY AGREEMENT EXHIBIT 10.6 SECURITY AGREEMENT SECURITY AGREEMENT (this "Agreement"), dated as of March 30, 2001, by and --------- among Airtech International Group, Inc., a Wyoming corporation ("Company"), and ------- the secured parties signatory hereto and their respective endorsees, transferees and assigns (collectively, the "Secured Party"). ------------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to a Securities Purchase Agreement, dated the date hereof between Company and the Secured Party (the "Purchase Agreement"), Company has ------------------ agreed to issue to the Secured Party and the Secured Party has agreed to purchase from Company certain of Company's 12% Secured Convertible Debentures, due one year from the date of issue (the "Debentures"), which are convertible ----------- into shares of Company's Common Stock, $ 0.05 par value (the "Common Stock"). ------------- In connection therewith, Company shall issue the Secured Party certain Common Stock purchase warrants dated as of the date hereof to purchase the number of shares of Common Stock indicated below each Secured Party's name on the Purchase Agreement (the "Warrants"); and -------- WHEREAS, in order to induce the Secured Party to purchase the Debentures, Company has agreed to execute and deliver to the Secured Party this Agreement for the benefit of the Secured Party and to grant to it a first priority security interest in certain property of Company to secure the prompt payment, performance and discharge in full of all of Company's obligations under the Debentures and exercise and discharge in full of Company's obligations under the Warrants. NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as "general intangibles" and "proceeds") shall have the respective -------------------- -------- meanings given such terms in Article 9 of the UCC. (a) "Collateral" means the collateral in which the Secured Party is ---------- granted a security interest by this Agreement and which shall include the following, whether presently owned or existing or hereafter acquired or coming into existence, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith: (i) All Goods of the Company, including, without limitations, all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with the Company's businesses and all improvements thereto (collectively, the "Equipment"); and --------- (ii) All Inventory of the Company; and (iii) All of the Company's contract rights and general intangibles, including, without limitation, all partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit accounts, and income tax refunds (collectively, the "General Intangibles"); and ------------------- (iv) All Receivables of the Company including all insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each Receivable, including any right of stoppage in transit; and (v) All of the Company's documents, instruments and chattel paper, files, records, books of account, business papers, computer programs and the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(iv) above. (b) "Company" shall mean, collectively, Company and all of the ------- subsidiaries of Company, a list of which is contained in Schedule A, attached ---------- hereto. (c) "Obligations" means all of the Company's obligations under this ----------- Agreement and the Debentures, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later decreased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. (d) "UCC" means the Uniform Commercial Code, as currently in effect --- in the State of New York. 2 2. Grant of Security Interest. As an inducement for the Secured Party to -------------------------- purchase the Debentures and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Company hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the Secured Party, a continuing security interest in, a continuing first lien upon, an unqualified right to possession and disposition of and a right of set-off against, in each case to the fullest extent permitted by law, all of the Company's right, title and interest of whatsoever kind and nature in and to the Collateral (the "Security Interest"). ----------------- 3. Representations, Warranties, Covenants and Agreements of the Company. -------------------------------------------------------------------- The Company represents and warrants to, and covenants and agrees with, the Secured Party as follows: (a) The Company has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations thereunder. The execution, delivery and performance by the Company of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. This Agreement constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creidtor's rights generally. (b) The Company represents and warrants that it has no place of business or offices where its respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on Schedule A ---------- attached hereto; (c) The Company is the sole owner of the Collateral (except for non- exclusive licenses granted by the Company in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and is fully authorized to grant the Security Interest in and to pledge the Collateral. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that have been filed in favor of the Secured Party pursuant to this Agreement) covering or affecting any of the Collateral. So long as this Agreement shall be in effect, the Company shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement). (d) No part of the Collateral has been judged invalid or unenforceable. No written claim has been received that any Collateral or the Company's use of any Collateral violates the rights of any third party. There has been no adverse decision to the Company's claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to the Company's right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the best knowledge of the Company, threatened 3 before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority. (e) The Company shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on Schedule A attached hereto and may ---------- not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Party at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interest to create in favor of the Secured Party valid, perfected and continuing first priority liens in the Collateral. (f) This Agreement creates in favor of the Secured Party a valid security interest in the Collateral securing the payment and performance of the Obligations and, upon making the filings described in the immediately following sentence, a perfected first priority security interest in such Collateral. Except for the filing of financing statements on Form-1 under the UCC with the jurisdictions indicated on Schedule B, attached hereto, no authorization or ---------- approval of or filing with or notice to any governmental authority or regulatory body is required either (i) for the grant by the Company of, or the effectiveness of, the Security Interest granted hereby or for the execution, delivery and performance of this Agreement by the Company or (ii) for the perfection of or exercise by the Secured Party of its rights and remedies hereunder. (g) On the date of execution of this Agreement, the Company will deliver to the Secured Party one or more executed UCC financing statements on Form-1 with respect to the Security Interest for filing with the jurisdictions indicated on Schedule B, attached hereto and in such other jurisdictions as ---------- may be requested by the Secured Party. (h) The execution, delivery and performance of this Agreement does not conflict with or cause a breach or default, or an event that with or without the passage of time or notice, shall constitute a breach or default, under any agreement to which the Company is a party or by the Company is bound. No consent (including, without limitation, from stock holders or creditors of the Company) is required for the Company to enter into and perform its obligations hereunder. (i) The Company shall at all times maintain the liens and Security Interest provided for hereunder as valid and perfected first priority liens and security interests in the Collateral in favor of the Secured Party until this Agreement and the Security Interest hereunder shall terminated pursuant to Section 11. The Company hereby agrees to defend the same against any and all persons. The Company shall safeguard and protect all Collateral for the account of the Secured Party. At the request of the Secured Party, the Company will sign and deliver to the Secured Party at any time or from time to time one or more financing statements pursuant to the UCC (or any other applicable statute) in form reasonably satisfactory to the Secured Party and 4 will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Secured Party to be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, the Company shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interest hereunder, and the Company shall obtain and furnish to the Secured Party from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interest hereunder. (j) The Company will not transfer, pledge, hypothecate, encumber, license (except for non-exclusive licenses granted by the Company in the ordinary course of business), sell or otherwise dispose of any of the Collateral without the prior written consent of the Secured Party. (k) The Company shall keep and preserve its Equipment, Inventory and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage. (l) The Company shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party's security interest therein. (m) The Company shall promptly execute and deliver to the Secured Party such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Secured Party may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce its security interest in the Collateral including, without limitation, the execution and delivery of a separate security agreement with respect to the Company's intellectual property ("Intellectual Property Security Agreement") in which the ---------------------------------------- Secured Party has been granted a security interest hereunder, substantially in a form acceptable to the Secured Party, which Intellectual Property Security Agreement, other than as stated therein, shall be subject to all of the terms and conditions hereof. (n) The Company shall permit the Secured Party and its representatives and agents to inspect the Collateral at any time, and to make copies of records pertaining to the Collateral as may be requested by the Secured Party from time to time. (o) The Company will take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral. (p) The Company shall promptly notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Company that may materially 5 affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Party hereunder. (q) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Company with respect to the Collateral is accurate and complete in all material respects as of the date furnished. (r) Schedule A, attached hereto contains a list of all of the ---------- subsidiaries of Company. 4. Defaults. The following events shall be "Events of Default": -------- ----------------- (a) The occurrence of an Event of Default (as defined in the Debentures) under the Debentures; (b) Any representation or warranty of the Company in this Agreement or in the Intellectual Property Security Agreement shall prove to have been incorrect in any material respect when made; (c) The failure by the Company to observe or perform any of its obligations hereunder or in the Intellectual Property Security Agreement for ten (10) days after receipt by the Company of notice of such failure from the Secured Party; and (d) Any breach of, or default under, the Warrants. 5. Duty To Hold In Trust. Upon the occurrence of any Event of Default --------------------- and at any time thereafter, the Company shall, upon receipt by it of any revenue, income or other sums subject to the Security Interest, whether payable pursuant to the Debentures or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party for application to the satisfaction of the Obligations. 6. Rights and Remedies Upon Default. Upon occurrence of any Event of -------------------------------- Default and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder and under the Debentures, and the Secured Party shall have all the rights and remedies of a secured party under the UCC and/or any other applicable law (including the Uniform Commercial Code of any jurisdiction in which any Collateral is then located). Without limitation, the Secured Party shall have the following rights and powers: (a) The Secured Party shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Company shall assemble the Collateral and make it available to the Secured Party at places which the Secured 6 Party shall reasonably select, whether at the Company's premises or elsewhere, and make available to the Secured Party, without rent, all of the Company's respective premises and facilities for the purpose of the Secured Party taking possession of, removing or putting the Collateral in saleable or disposable form. (b) The Secured Party shall have the right to operate the business of the Company using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Company or right of redemption of the Company, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Secured Party may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Company, which are hereby waived and released. 7. Applications of Proceeds. The proceeds of any such sale, lease or ------------------------ other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys' fees and expenses incurred by the Secured Party in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the Company any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, the Company will be liable for the deficiency, together with interest thereon, at the rate of 15% per annum (the "Default Rate"), and the reasonable fees of any attorneys ------------ employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of the Secured Party. 8. Costs and Expenses. The Company agrees to pay all out-of-pocket ------------------- fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Party. The Company shall also pay all other claims and charges which in the reasonable opinion of the Secured Party might prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. The Company will also, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, 7 or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Debentures. Until so paid, any fees payable hereunder shall be added to the principal amount of the Debentures and shall bear interest at the Default Rate. 9. Responsibility for Collateral. The Company assumes all liabilities ----------------------------- and responsibility in connection with all Collateral, and the obligations of the Company hereunder or under the Debentures and the Warrants shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. 10. Security Interest Absolute. All rights of the Secured Party and all -------------------------- Obligations of the Company hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debentures, the Warrants or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debentures, the Warrants or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured Party to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to the Company, or a discharge of all or any part of the Security Interest granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. The Company expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Party, then, in any such event, the Company's obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Company waives all right to require the Secured Party to proceed against any other person or to apply any Collateral which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy. The Company waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby. 11. Term of Agreement. This Agreement and the Security Interest shall ----------------- terminate on the date on which all payments under the Debentures have been made in full and all other Obligations have been paid or discharged. Upon such termination, the Secured Party, at the request and at the expense of the Company, will join in executing any termination statement with respect to any financing statement executed and filed pursuant to this Agreement. 8 12. Power of Attorney; Further Assurances. ------------------------------------- (a) The Company authorizes the Secured Party, and does hereby make, constitute and appoint it, and its respective officers, agents, successors or assigns with full power of substitution, as the Company's true and lawful attorney-in-fact, with power, in its own name or in the name of the Company, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any notes, checks, drafts, money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Party; (ii) to sign and endorse any UCC financing statement or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; and (v) generally, to do, at the option of the Secured Party, and at the Company's expense, at any time, or from time to time, all acts and things which the Secured Party deems necessary to protect, preserve and realize upon the Collateral and the Security Interest granted therein in order to effect the intent of this Agreement, the Debentures and the Warrants, all as fully and effectually as the Company might or could do; and the Company hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding. (b) On a continuing basis, the Company will make, execute, acknowledge, deliver, file and record, as the case may be, in the proper filing and recording places in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule B, attached hereto, all such instruments, ---------- and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interest granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a security interest in all the Collateral. (c) The Company hereby irrevocably appoints the Secured Party as the Company's attorney-in-fact, with full authority in the place and stead of the Company and in the name of the Company, from time to time in the Secured Party's discretion, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Company where permitted by law. 13. Notices. All notices, requests, demands and other communications ------- hereunder shall be in writing, with copies to all the other parties hereto, and shall be deemed to have been duly given when (i) if delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of 9 proof of sending thereof, (iii) if sent by nationally recognized overnight delivery service (receipt requested), the next business day or (iv) if mailed by first-class registered or certified mail, return receipt requested, postage prepaid, four days after posting in the U.S. mails, in each case if delivered to the following addresses: If to the Company: Airtech International Group, Inc. 15400 Knoll Trail, Suite 200 Dallas, Texas 75248 Attention: C.J. Comu, Chairman & Chief Executive Officer Facsimile: (972) 960-9395 With copies to: John Rebensdorf, Esquire 6116 North Central Expressway, Suite 1313 Dallas, Texas 75206 Facsimile: (214) 696-9430 If to the Secured Party: AJW Partners, LLC 155 First Street, Suite B Mineola, NY 11501 Attention: Corey S. Ribotsky Facsimile: (516) 739-7115 and New Millennium Capital Partners II, LLC 155 First Street, Suite B Mineola, NY 11501 Attention: Glenn A. Arbeitman Facsimile: (516) 739-7115 With copies to: Ballard Spahr Andrews & Ingersoll, LLP 1735 Market Street 51st Floor Philadelphia, PA 19103 Attention: Gerald J. Guarcini, Esq. Facsimile: (215) 864-8999 14. Other Security. To the extent that the Obligations are now or -------------- hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Secured Party shall have the right, in its sole 10 discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party's rights and remedies hereunder. 15. Miscellaneous. ------------- (a) No course of dealing between the Company and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Debentures shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (b) All of the rights and remedies of the Secured Party with respect to the Collateral, whether established hereby or by the Debentures or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently. (c) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement specifically referring to this Agreement and signed by the parties hereto. (d) In the event that any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction. (e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise. (f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns. 11 (g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement. (h) This Agreement shall be construed in accordance with the laws of the State of New York, except to the extent the validity, perfection or enforcement of a security interest hereunder in respect of any particular Collateral which are governed by a jurisdiction other than the State of New York in which case such law shall govern. Each of the parties hereto irrevocably submit to the exclusive jurisdiction of any New York State or United States Federal court sitting in Manhattan county over any action or proceeding arising out of or relating to this Agreement, and the parties hereto hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such New York State or Federal court. The parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The parties hereto further waive any objection to venue in the State of New York and any objection to an action or proceeding in the State of New York on the basis of forum non convenient. (i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRAIL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. (j) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on 12 whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 13 IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. AIRTECH INTERNATIONAL GROUP, INC. By: ------------------------------------- C.J. Comu Chairman and Chief Executive Officer AJW PARTNERS, LLC By: SMS Group, LLC By: ------------------------------------- Corey S. Ribotsky Manager NEW MILLENNIUM CAPITAL PARTNERS II, LLC By: First Street Manager II, LLC By: ------------------------------------- Glenn A. Arbeitman Manager 14 Schedules A and B to Security Agreement --------------------------------------- Principal Place of Business of the Company: ------------------------------------------- 15400 Knoll Trail, Suite 200 Dallas, Texas 75248 County of Dallas, Texas Locations where Collateral is Located or Stored: ------------------------------------------------ 15400 Knoll Trail, Suite 200 Dallas, Texas 75248 and 12561 Perimerter Dallas, Texas 75228 Both County of Dallas, Texas. List of Subsidiaries of the Company: ------------------------------------ Airtech International Corporation, a Texas Corporation; Airsopure Inc., a Texas Corporation Airsopure International Group, Inc. a Nevada Corporation; Watersopure, Inc., a shelf-non-operating, Texas Corporation; McCleskey Sales and Services, Inc., a dormant Texas Corporation And, Airsopure, Inc. is a General Partner in "Airsopure 999, LP", a Texas Limited Partnership Jurisdictions: -------------- Texas 15 EX-10.7 4 dex107.txt FORM OF 12% SECURED CONVERTIBLE DEBENTURE EXHIBIT 10.7 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. SECURED CONVERTIBLE DEBENTURE Dallas, Texas March 30, 2001 $________ FOR VALUE RECEIVED, AIRTECH INTERNATIONAL GROUP, INC., a Wyoming corporation (hereinafter called the "Borrower"), hereby promises to pay to the order of _____________________________or registered assigns (the "Holder") the sum of ___________________________Dollars ($_______), on March __, 2003 (the "Maturity Date"), and to pay interest on the unpaid principal balance hereof at the rate of twelve percent (12%) per annum from March __, 2001 (the "Issue Date") until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. Any amount of principal or interest on this Debenture which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date thereof until the same is paid ("Default Interest"). Interest shall commence accruing on the issue date, shall be computed on the basis of a 365-day year and the actual number of days elapsed and shall be payable, at the option of the Holder, either quarterly on March 31, June 30, September 30 and December 31 of each year beginning on March 31, 2001, or at the time of conversion of the principal to which such interest relates in accordance with Article I below. All payments due hereunder (to the extent not converted into common stock, par value $0.05 per share, of the Borrower (the "Common Stock") in accordance with the terms hereof) shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Debenture. Whenever any amount expressed to be due by the terms of this Debenture is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this Debenture is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. As used in this Debenture, the term "business day" shall mean any day other than a Saturday, Sunday or a day on which commercial banks in New York City, New York are authorized or required by law or executive order to remain closed. This Debenture shall be secured pursuant to the terms of that certain Security Agreement by and between the Borrower and the Holder of even date herewith. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Securities Purchase Agreement, dated March 30, 2001, pursuant to which this Debenture was originally issued (the "Purchase Agreement"). The following terms shall apply to this Debenture: ARTICLE I. CONVERSION RIGHTS 1.1 Conversion Right. The Holder shall have the right from time to ---------------- time, and at any time on or prior to the earlier of (i) the Maturity Date and (ii) the date of payment of the Default Amount (as defined in Article III) pursuant to Section 1.6(a) or Article III, the Optional Prepayment Amount (as defined in Section 5.1) or any payments pursuant to Section 1.7, each in respect of the remaining outstanding principal amount of this Debenture, to convert all or any part of the outstanding and unpaid principal amount of this Debenture into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion price (the "Conversion Price") determined as provided herein (a "Conversion"); provided, however, that in no event shall the -------- ------- Holder be entitled to convert any portion of this Debenture) in excess of that portion of this Debenture upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Debentures or the unexercised or unconverted portion of any other security of the Borrower (including, without limitation, the warrants issued by the Borrower pursuant to the Purchase Agreement) subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Debenture with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso. The Holder of this Debenture may waive the limitations set forth herein by thirty (30) days prior written notice to the Company. The number of shares of Common Stock to be issued upon each conversion of this Debenture shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form attached hereto as Exhibit A (the "Notice of Conversion"), delivered to the Borrower by the Holder in accordance with Section 1.4 below; provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 9:00 p.m., New York City, New York time on such conversion date (the "Conversion Date"). The term "Conversion Amount" means, with respect to any conversion 2 of this Debenture, the sum of (1) the principal amount of this Debenture to be converted in such conversion plus (2) accrued and unpaid interest, if any, on ---- such principal amount at the interest rates provided in this Debenture to the Conversion Date plus (3) Default Interest, if any, on the amounts referred to in ---- the immediately preceding clauses (1) and/or (2) plus (4) at the Holder's ---- option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of that certain Registration Rights Agreement, dated as of March 30, 2001, executed in connection with the initial issuance of this Debenture and the other Debentures issued on the Issue Date (the "Registration Rights Agreement"). 1.2 Conversion Price. ---------------- (a) Calculation of Conversion Price. The Conversion Price shall be ------------------------------- the lesser of (i) the Variable Conversion Price (as defined herein) and (ii) the Fixed Conversion Price (as defined herein) (subject, in each case, to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower's securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The "Variable Conversion Price" shall mean the Applicable Percentage (as defined herein) multiplied by the Market Price (as defined herein). "Market Price" means the average of the lowest three (3) Trading Prices (as defined below) for the Common Stock during the twenty (20) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent by the Holder to the Borrower via facsimile (the "Conversion Date"). "Trading Price" means, for any security as of any date, the inter-day trading price on the Over-the-Counter Bulletin Board (the "OTCBB") as reported by a reliable reporting service mutually acceptable to and hereafter designated by Holders of a majority in interest of the Debentures (the "Reporting Service") or, if the OTCBB is not the principal trading market for such security, the inter-day trading price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by the Reporting Service or, if no inter-day trading price of such security is available in any of the foregoing manners, the average of the inter- day trading prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrower and the Holders of a majority in interest of the Debentures being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Debentures. "Trading Day" shall mean any day on which the Common Stock is traded for any period on the OTCBB, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. "Applicable Percentage" shall mean 50.0%. The "Fixed Conversion Price" shall mean $0.25. (b) Conversion Price During Major Announcements. Notwithstanding ------------------------------------------- anything contained in Section 1.2(a) to the contrary, in the event the Borrower (i) makes a public announcement that it intends to consolidate or merge with any other corporation (other than a merger in which the Borrower is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Borrower or (ii) any person, group or entity (including the Borrower) publicly announces a tender offer to purchase 50% or more of the Borrower's Common Stock (or any 3 other takeover scheme) (the date of the announcement referred to in clause (i) or (ii) is hereinafter referred to as the "Announcement Date"), then the Conversion Price shall, effective upon the Announcement Date and continuing through the Adjusted Conversion Price Termination Date (as defined below), be equal to the lower of (x) the Conversion Price which would have been applicable for a Conversion occurring on the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From and after the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as set forth in this Section 1.2(a). For purposes hereof, "Adjusted Conversion Price Termination Date" shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for which a public announcement as contemplated by this Section 1.2(b) has been made, the date upon which the Borrower (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) consummates or publicly announces the termination or abandonment of the proposed transaction or tender offer (or takeover scheme) which caused this Section 1.2(b) to become operative. 1.3 Authorized Shares. The Borrower covenants that during the period ----------------- the conversion right exists, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Debenture and the other Debentures issued pursuant to the Purchase Agreement. As of the date of issuance of this Debenture, ______ (2x currently required) authorized and unissued shares of Common Stock have been duly reserved for issuance upon conversion of this Debenture and the other Debentures issued pursuant to the Purchase Agreement (the "Reserved Amount"). The Reserved Amount shall be increased from time to time in accordance with the Borrower's obligations pursuant to Section 4(h) of the Purchase Agreement. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Debentures shall be convertible at the then current Conversion Price, the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Debentures. The Borrower (i) acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Debenture, and (ii) agrees that its issuance of this Debenture shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Debenture. If, at any time a Holder of this Debenture submits a Notice of Conversion, and the Borrower does not have sufficient authorized but unissued shares of Common Stock available to effect such conversion in accordance with the provisions of this Article I (a "Conversion Default"), subject to Section 4.8, the Borrower shall issue to the Holder all of the shares of Common Stock which are then available to effect such conversion. The portion of this Debenture which the Holder included in its Conversion Notice and which exceeds the amount which is then convertible into available shares of Common Stock (the "Excess Amount") shall, notwithstanding anything to the contrary contained herein, not be convertible into Common Stock in accordance with the terms hereof until (and at the Holder's option at any time after) the 4 date additional shares of Common Stock are authorized by the Borrower to permit such conversion, at which time the Conversion Price in respect thereof shall be the lesser of (i) the Conversion Price on the Conversion Default Date (as defined below) and (ii) the Conversion Price on the Conversion Date thereafter elected by the Holder in respect thereof. In addition, the Borrower shall pay to the Holder payments ("Conversion Default Payments") for a Conversion Default in the amount of (x) the sum of (1) the then outstanding principal amount of this ------ Debenture plus (2) accrued and unpaid interest on the unpaid principal amount of ---- this Debenture through the Authorization Date (as defined below) plus (3) ---- Default Interest, if any, on the amounts referred to in clauses (1) and/or (2), multiplied by (y) .24, multiplied by (z) (N/365), where N = the number of days - ------------- ------------- from the day the holder submits a Notice of Conversion giving rise to a Conversion Default (the "Conversion Default Date") to the date (the "Authorization Date") that the Borrower authorizes a sufficient number of shares of Common Stock to effect conversion of the full outstanding principal balance of this Debenture. The Borrower shall use its best efforts to authorize a sufficient number of shares of Common Stock as soon as practicable following the earlier of (i) such time that the Holder notifies the Borrower or that the Borrower otherwise becomes aware that there are or likely will be insufficient authorized and unissued shares to allow full conversion thereof and (ii) a Conversion Default. The Borrower shall send notice to the Holder of the authorization of additional shares of Common Stock, the Authorization Date and the amount of Holder's accrued Conversion Default Payments. The accrued Conversion Default Payments for each calendar month shall be paid in cash or shall be convertible into Common Stock (at such time as there are sufficient authorized shares of Common Stock) at the applicable Conversion Price, at the Company's option, as follows: (a) In the event Company elects to make such payment in cash, cash payment shall be made to Holder by the fifth (5th) day of the month following the month in which it has accrued; and (b) In the event Company elects to make such payment in Common Stock, the Holder may convert such payment amount into Common Stock at the Conversion Price (as in effect at the time of conversion) at any time after the fifth day of the month following the month in which it has accrued in accordance with the terms of this Article I (so long as there is then a sufficient number of authorized shares of Common Stock). The Holder's election shall be made in writing to the Borrower at any time prior to 9:00 p.m., New York City, New York time, on the third day of the month following the month in which Conversion Default payments have accrued. If no election is made, the Holder shall be deemed to have elected to receive cash. Nothing herein shall limit the Holder's right to pursue actual damages (to the extent in excess of the Conversion Default Payments) for the Borrower's failure to maintain a sufficient number of authorized shares of Common Stock, and each holder shall have the right to pursue all remedies available at law or in equity (including degree of specific performance and/or injunctive relief). 5 1.4 Method of Conversion. -------------------- (a) Mechanics of Conversion. Subject to Section 1.1, this Debenture ----------------------- may be converted by the Holder in whole or in part (together with accrued and unpaid interest thereon) at any time from time to time after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile or other reasonable means of communication dispatched on the Conversion Date prior to 9:00 p.m., New York City, New York time) and (B) subject to Section 1.4(b), surrendering this Debenture at the principal office of the Borrower. (b) Surrender of Debenture Upon Conversion. Notwithstanding anything -------------------------------------- to the contrary set forth herein, upon conversion of this Debenture in accordance with the terms hereof, the Holder shall not be required to physically surrender this Debenture to the Borrower unless the entire unpaid principal amount of this Debenture is so converted. The Holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Debenture upon each such conversion. In the event of any dispute or discrepancy, such records of the Borrower shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Debenture is converted as aforesaid, the Holder may not transfer this Debenture unless the Holder first physically surrenders this Debenture to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of the Holder a new Debenture of like tenor, registered as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid principal amount of this Debenture. The Holder and any assignee, by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Debenture, the unpaid and unconverted principal amount of this Debenture represented by this Debenture may be less than the amount stated on the face hereof. (c) Payment of Taxes. The Borrower shall not be required to pay any ---------------- tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Debenture in a name other than that of the Holder (or in street name), and the Borrower shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are to be held for the Holder's account) requesting the issuance thereof shall have paid to the Borrower the amount of any such tax or shall have established to the satisfaction of the Borrower that such tax has been paid. (d) Delivery of Common Stock Upon Conversion. Upon receipt by the ---------------------------------------- Borrower from the Holder of a facsimile transmission (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 1.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Debenture) (such third business day being hereinafter referred to as the "Deadline") in accordance with the terms hereof and the 6 Purchase Agreement (including, without limitation, in accordance with the requirements of Section 2(g) of the Purchase Agreement that certificates for shares of Common Stock issued on or after the effective date of the Registration Statement upon conversion of this Debenture shall not bear any restrictive legend). (e) Obligation of Borrower to Deliver Common Stock. Upon receipt by ---------------------------------------------- the Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Debenture shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Debenture being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower's obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 9:00 p.m., New York City, New York time, on such date. (f) Delivery of Common Stock by Electronic Transfer. In lieu of ----------------------------------------------- delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the Holder and its compliance with the provisions contained in Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. (g) Failure to Deliver Common Stock Prior to Deadline. Without in any ------------------------------------------------- way limiting the Holder's right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Debenture is more than three (3) days after the Deadline (other than a failure due to the circumstances described in Section 1.3 above, which failure shall be governed by such Section) the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline that the Borrower fails to deliver such Common Stock. Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written notice to the Borrower by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Debenture, in which event interest shall accrue thereon in accordance with the terms of this Debenture and 7 such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Debenture. 1.5 Concerning the Shares. The shares of Common Stock issuable upon --------------------- conversion of this Debenture may not be sold or transferred unless (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) ("Rule 144") or (iv) such shares are transferred to an "affiliate" (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited Investor (as defined in the Purchase Agreement). Except as otherwise provided in the Purchase Agreement (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of this Debenture have been registered under the Act as contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Debenture that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT." The legend set forth above shall be removed and the Borrower shall issue to the Holder a new certificate therefor free of any transfer legend if (i) the Borrower or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Act and the shares are so sold or transferred, (ii) such Holder provides the Borrower or its transfer agent with reasonable assurances that the Common Stock issuable upon conversion of this Debenture (to the extent such securities are deemed to have been acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case of the Common Stock issuable upon conversion of this Debenture, such security is registered for sale by the Holder under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold. Nothing in this Debenture shall (i) limit the Borrower's obligation under the Registration Rights Agreement or (ii) affect in 8 any way the Holder's obligations to comply with applicable prospectus delivery requirements upon the resale of the securities referred to herein. 1.6 Effect of Certain Events. ------------------------ (a) Effect of Merger, Consolidation, Etc. At the option of the ------------------------------------- Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions in which more than 33% of the voting power of the Borrower is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor shall either: (i) be deemed to be an Event of Default (as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof. "Person" shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization. (b) Adjustment Due to Merger, Consolidation, Etc. If, at any time --------------------------------------------- when this Debenture is issued and outstanding and prior to conversion of all of the Debentures, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder of this Debenture shall thereafter have the right to receive upon conversion of this Debenture, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had this Debenture been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this Debenture to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Debenture) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof. The Borrower shall not effect any transaction described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of stockholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Debenture) and (b) the resulting successor or acquiring entity (if not the Borrower) assumes by written instrument the obligations of this Section 1.6(b). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges. 9 (c) Adjustment Due to Distribution. If the Borrower shall declare or ------------------------------ make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Borrower's shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a "Distribution"), then the Holder of this Debenture shall be entitled, upon any conversion of this Debenture after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution. (d) Adjustment Due to Dilutive Issuance. If, at any time when any ----------------------------------- Debentures are issued and outstanding, the Borrower issues or sells, or in accordance with this Section 1.6(d) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Fixed Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a "Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Fixed Conversion Price will be reduced to the amount of the consideration per share received by the Borrower in such Dilutive Issuance; provided that only one adjustment will be made for each Dilutive Issuance. - -------- The Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or grants any warrants, rights or options (except for options granted pursuant to an employee stock option plan existing on the date of issuance of this Debenture), whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock ("Convertible Securities") (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "Options") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Fixed Conversion Price then in effect, then the Fixed Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Options" is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options. Additionally, the Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or sells any Convertible 10 Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options), and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Fixed Conversion Price then in effect, then the Fixed Conversion Price shall be equal to such price per share. For the purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Fixed Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. (e) Purchase Rights. If, at any time when any Debentures are issued --------------- and outstanding, the Borrower issues any convertible securities or rights to purchase stock, warrants, securities or other property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock, then the Holder of this Debenture will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Debenture (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. (f) Notice of Adjustments. Upon the occurrence of each adjustment --------------------- or readjustment of the Conversion Price as a result of the events described in this Section 1.6, the Borrower, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the Holder of a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of the Debenture. 1.7 Trading Market Limitations. Unless permitted by the applicable -------------------------- rules and regulations of the principal securities market on which the Common Stock is then listed or traded, in no event shall the Borrower issue upon conversion of or otherwise pursuant to this Debenture and the other Debentures issued pursuant to the Purchase Agreement more than the maximum number of shares of Common Stock that the Borrower can issue pursuant to any rule of the principal United States securities market on which the Common Stock is then traded (the "Maximum Share Amount"), which, as of the Issue Date shall be 5,830,762 shares (19.99% of the total shares outstanding on the Issue Date), subject to equitable adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating 11 to the Common Stock occurring after the date hereof. Once the Maximum Share Amount has been issued (the date of which is hereinafter referred to as the "Maximum Conversion Date"), if the Borrower fails to eliminate any prohibitions under applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Borrower or any of its securities on the Borrower's ability to issue shares of Common Stock in excess of the Maximum Share Amount (a "Trading Market Prepayment Event"), in lieu of any further right to convert this Debenture, and in full satisfaction of the Borrower's obligations under this Debenture, the Borrower shall pay to the Holder, within fifteen (15) business days of the Maximum Conversion Date (the "Trading Market Prepayment Date"), an amount equal to 120% times the sum of (a) the then outstanding principal amount ----- --- of this Debenture immediately following the Maximum Conversion Date, plus (b) ---- accrued and unpaid interest on the unpaid principal amount of this Debenture to the Trading Market Prepayment Date, plus (c) Default Interest, if any, on the ---- amounts referred to in clause (a) and/or (b) above, plus (d) any optional ---- amounts that may be added thereto at the Maximum Conversion Date by the Holder in accordance with the terms hereof (the then outstanding principal amount of this Debenture immediately following the Maximum Conversion Date, plus the ---- amounts referred to in clauses (b), (c) and (d) above shall collectively be referred to as the "Remaining Convertible Amount"). With respect to each Holder of Debentures, the Maximum Share Amount shall refer to such Holder's pro rata --- ---- share thereof determined in accordance with Section 4.8 below. In the event that the sum of (x) the aggregate number of shares of Common Stock issued upon conversion of this Debenture and the other Debentures issued pursuant to the Purchase Agreement plus (y) the aggregate number of shares of Common Stock that ---- remain issuable upon conversion of this Debenture and the other Debentures issued pursuant to the Purchase Agreement, represents at least one hundred percent (100%) of the Maximum Share Amount (the "Triggering Event"), the Borrower will use its best efforts to seek and obtain Stockholder Approval (or obtain such other relief as will allow conversions hereunder in excess of the Maximum Share Amount) as soon as practicable following the Triggering Event and before the Maximum Conversion Date. As used herein, "Stockholder Approval" means approval by the stockholders of the Borrower to authorize the issuance of the full number of shares of Common Stock which would be issuable upon full conversion of the then outstanding Debentures but for the Maximum Share Amount. 1.8 Status as Stockholder. Upon submission of a Notice of Conversion --------------------- by a Holder, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such Holder's allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder's rights as a Holder of such converted portion of this Debenture shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Borrower to comply with the terms of this Debenture. Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Deadline with respect to a conversion of any portion of this Debenture for any reason, then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Borrower) the Holder shall regain the rights of a Holder of this Debenture with respect to such unconverted portions of this Debenture and the Borrower shall, as soon as practicable, return such unconverted 12 Debenture to the Holder or, if the Debenture has not been surrendered, adjust its records to reflect that such portion of this Debenture has not been converted. In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Section 1.3) for the Borrower's failure to convert this Debenture. ARTICLE II. CERTAIN COVENANTS 2.1 Distributions on Capital Stock. So long as the Borrower shall ------------------------------ have any obligation under this Debenture, the Borrower shall not without the Holder's written consent (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock except for distributions pursuant to any shareholders' rights plan which is approved by a majority of the Borrower's disinterested directors. 2.2 Restriction on Stock Repurchases. So long as the Borrower shall -------------------------------- have any obligation under this Debenture, the Borrower shall not without the Holder's written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Borrower or any warrants, rights or options to purchase or acquire any such shares. 2.3 Borrowings. So long as the Borrower shall have any obligation ---------- under this Debenture, the Borrower shall not, without the Holder's written consent, create, incur, assume or suffer to exist any liability for borrowed money, except (a) borrowings in existence or committed on the date hereof and of which the Borrower has informed Holder in writing prior to the date hereof, (b) indebtedness to trade creditors or financial institutions incurred in the ordinary course of business, including, but not limited to, lines of credit, or (c) borrowings, the proceeds of which shall be used to repay this Debenture. 2.4 Sale of Assets. So long as the Borrower shall have any -------------- obligation under this Debenture, the Borrower shall not, without the Holder's written consent, sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition. 2.5 Advances and Loans. So long as the Borrower shall have any ------------------ obligation under this Debenture, the Borrower shall not, without the Holder's written consent, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates of the Borrower, except loans, credits or advances (a) in existence or committed on the date hereof and which the 13 Borrower has informed Holder in writing prior to the date hereof or (b) made in the ordinary course of business. 2.6 Contingent Liabilities. So long as the Borrower shall have any ---------------------- obligation under this Debenture, the Borrower shall not, without the Holder's written consent, assume, guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement of negotiable instruments for deposit or collection and except assumptions, guarantees, endorsements and contingencies (a) in existence or committed on the date hereof and which the Borrower has informed Holder in writing prior to the date hereof, and (b) similar transactions in the ordinary course of business. ARTICLE III. EVENTS OF DEFAULT If any of the following events of default (each, an "Event of Default") shall occur: 3.1 Failure to Pay Principal or Interest. The Borrower fails to pay ------------------------------------ the principal hereof or interest thereon when due on this Debenture, whether at maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7, upon acceleration or otherwise. 3.2 Conversion and the Shares. The Borrower fails to issue shares of ------------------------- Common Stock to the Holder (or announces or threatens that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Debenture (for a period of at least sixty (60) days, if such failure is solely as a result of the circumstances governed by Section 1.3 and the Borrower is using its best efforts to authorize a sufficient number of shares of Common Stock as soon as practicable), fails to transfer or cause its transfer agent to transfer (electronically or in certificated form) any certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Debenture as and when required by this Debenture or the Registration Rights Agreement, or fails to remove any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Debenture as and when required by this Debenture or the Registration Rights Agreement (or makes any announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for ten (10) days after the Borrower shall have been notified thereof in writing by the Holder. 3.3 Failure to Effect Registration. The Borrower fails to obtain ------------------------------ effectiveness with the Securities and Exchange Commission of the Registration Statement prior to one hundred and five (105) days from the Closing Date or such Registration Statement lapses in effect (or sales cannot otherwise be made thereunder effective, whether by reason of the Borrower's failure to amend or supplement the prospectus included therein in accordance with 14 the Registration Rights Agreement or otherwise) for more than ten (10) consecutive days or fifteen (15) days in any twelve month period after the Registration Statement becomes effective; 3.4 Breach of Covenants. The Borrower breaches any material covenant ------------------- or other material term or condition contained in Sections 1.3, 1.6 or 1.7 of this Debenture, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase Agreement and such breach continues for a period of ten (10) days after written notice thereof to the Borrower from the Holder; 3.5 Breach of Representations and Warranties. Any representation or ---------------------------------------- warranty of the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement and the Registration Rights Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Debenture, the Purchase Agreement or the Registration Rights Agreement; 3.6 Receiver or Trustee. The Borrower or any subsidiary of the ------------------- Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed; 3.7 Judgments. Any money judgment, writ or similar process shall be --------- entered or filed against the Borrower or any subsidiary of the Borrower or any of its property or other assets for more than $25,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld; 3.8 Bankruptcy. Bankruptcy, insolvency, reorganization or ---------- liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower; or 3.9 Delisting of Common Stock. The Borrower shall fail to maintain ------------------------- the listing of the Common Stock on at least one of the OTCBB, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock Exchange; 3.10 Default Under Other Debentures. An Event of Default has ------------------------------ occurred and is continuing under any of the other Debentures issued pursuant to the Purchase Agreement. then, upon the occurrence and during the continuation of any Event of Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option of the Holders of a majority of the aggregate principal amount of the outstanding Debentures issued pursuant to the Purchase Agreement exercisable through the delivery of written notice to the Borrower by such Holders (the "Default Notice"), and upon the occurrence of an Event of Default specified in Section 3.6 or 3.8, the Debentures shall become immediately due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the greater of (i) 120% times the sum of (w) the ----- --- then outstanding principal amount of this Debenture plus (x) ---- 15 accrued and unpaid interest on the unpaid principal amount of this Debenture to the date of payment (the "Mandatory Prepayment Date") plus (y) Default Interest, ---- if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any ---- amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of the Registration Rights Agreement (the then outstanding principal amount of this Debenture to the date of payment plus the ---- amounts referred to in clauses (x), (y) and (z) shall collectively be known as the "Default Sum") or (ii) the "Parity Value" of the Default Sum to be prepaid, where Parity Value means (a) the highest number of shares of Common Stock issuable upon conversion of or otherwise pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediately preceding the Mandatory Prepayment Date as the "Conversion Date" for purposes of determining the lowest applicable Conversion Price, unless the Default Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion Date shall be the Conversion Date), multiplied by (b) the highest ------------- Closing Price for the Common Stock during the period beginning on the date of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment Date (the "Default Amount") and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity. If the Borrower fails to pay the Default Amount within five (5) business days of written notice that such amount is due and payable, then the Holder shall have the right at any time, so long as the Borrower remains in default (and so long and to the extent that there are sufficient authorized shares), to require the Borrower, upon written notice, to immediately issue, in lieu of the Default Amount, the number of shares of Common Stock of the Borrower equal to the Default Amount divided by the Conversion Price then in effect. ARTICLE IV. MISCELLANEOUS 4.1 Failure or Indulgence Not Waiver. No failure or delay on the -------------------------------- part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 4.2 Notices. Any notice herein required or permitted to be given ------- shall be in writing and may be personally served or delivered by courier or sent by United States mail and shall be deemed to have been given upon receipt if personally served (which shall include telephone line facsimile transmission) or sent by courier or three (3) days after being deposited in the United States mail, certified, with postage pre-paid and properly addressed, if sent by mail. For the purposes hereof, the address of the Holder shall be as shown on the records of the Borrower; and the address of the Borrower shall be 15400 Knoll Trail, Suite 200, Dallas, Texas 75248, (facsimile number: (972) 960-9395). Both the Holder and the Borrower may change the address for service by service of written notice to the other as herein provided. 16 4.3 Amendments. This Debenture and any provision hereof may only be ---------- amended by an instrument in writing signed by the Borrower and the Holder. The term "Debenture" and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Debentures issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented. 4.4 Assignability. This Debenture shall be binding upon the Borrower ------------- and its successors and assigns, and shall inure to be the benefit of the Holder and its successors and assigns. Each transferee of this Debenture must be an "accredited investor" (as defined in Rule 501(a) of the 1933 Act). Notwithstanding anything in this Debenture to the contrary, this Debenture may be pledged as collateral in connection with a bona fide margin account or other ---- ---- lending arrangement. 4.5 Cost of Collection. If default is made in the payment of this ------------------ Debenture, the Borrower shall pay the Holder hereof costs of collection, including reasonable attorneys' fees. 4.6 Governing Law. THIS DEBENTURE SHALL BE ENFORCED, GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS DEBENTURE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON- APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS DEBENTURE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE. 4.7 Certain Amounts. Whenever pursuant to this Debenture the --------------- Borrower is required to pay an amount in excess of the outstanding principal amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest, the Borrower and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Debenture may be difficult to determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty and is intended to 17 compensate the Holder in part for loss of the opportunity to convert this Debenture and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Debenture at a price in excess of the price paid for such shares pursuant to this Debenture. The Borrower and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Debenture into shares of Common Stock. 4.8 Allocations of Maximum Share Amount and Reserved Amount. The ------------------------------------------------------- Maximum Share Amount and Reserved Amount shall be allocated pro rata among the Holders of Debentures based on the principal amount of such Debentures issued to each Holder. Each increase to the Maximum Share Amount and Reserved Amount shall be allocated pro rata among the Holders of Debentures based on the principal amount of such Debentures held by each Holder at the time of the increase in the Maximum Share Amount or Reserved Amount. In the event a Holder shall sell or otherwise transfer any of such Holder's Debentures, each transferee shall be allocated a pro rata portion of such transferor's Maximum Share Amount and Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount which remains allocated to any person or entity which does not hold any Debentures shall be allocated to the remaining Holders of Debentures, pro rata based on the principal amount of such Debentures then held by such Holders. 4.9 Damages Shares. The shares of Common Stock that may be issuable -------------- to the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to Section 2(c) of the Registration Rights Agreement ("Damages Shares") shall be treated as Common Stock issuable upon conversion of this Debenture for all purposes hereof and shall be subject to all of the limitations and afforded all of the rights of the other shares of Common Stock issuable hereunder, including without limitation, the right to be included in the Registration Statement filed pursuant to the Registration Rights Agreement. For purposes of calculating interest payable on the outstanding principal amount hereof, except as otherwise provided herein, amounts convertible into Damages Shares ("Damages Amounts") shall not bear interest but must be converted prior to the conversion of any outstanding principal amount hereof, until the outstanding Damages Amounts is zero. 4.10 Denominations. At the request of the Holder, upon surrender of ------------- this Debenture, the Borrower shall promptly issue new Debentures in the aggregate outstanding principal amount hereof, in the form hereof, in such denominations of at least $50,000 as the Holder shall request. 4.11 Purchase Agreement. By its acceptance of this Debenture, each ------------------ Holder agrees to be bound by the applicable terms of the Purchase Agreement. 4.12 Notice of Corporate Events. Except as otherwise provided below, -------------------------- the Holder of this Debenture shall have no rights as a Holder of Common Stock unless and only to the extent that it converts this Debenture into Common Stock. The Borrower shall provide the Holder with prior notification, simultaneous with notification to other shareholders of the Company, of any meeting of the Borrower's shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Borrower of a record 18 of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Borrower or any proposed liquidation, dissolution or winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. The Borrower shall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this Section 4.12. 4.13 Remedies. The Company acknowledges that a breach by it of its -------- obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Debenture will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Debenture, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Debenture and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required. ARTICLE V. OPTIONAL PREPAYMENT 5.1. Optional Prepayment. Notwithstanding anything to the contrary ------------------- contained in this Article V, for not more than thirty (30) days from the date hereof, so long as (i) no Event of Default or Trading Market Prepayment Event shall have occurred and be continuing, and (ii) the Borrower has a sufficient number of authorized shares of Common Stock reserved for issuance upon full conversion of the Debentures, then at any time after the Issue Date, the Borrower shall have the right, exercisable on not less than ten (10) Trading Days prior written notice to the Holders of the Debentures (which notice may not be sent to the Holders of the Debentures until the Borrower is permitted to prepay the Debentures pursuant to this Section 5.1), to prepay all of the outstanding Debentures in accordance with this Section 5.1. Any notice of prepayment hereunder (an "Optional Prepayment") shall be delivered to the Holders of the Debentures at their registered addresses appearing on the books and records of the Borrower and shall state (1) that the Borrower is exercising its right to prepay all of the Debentures issued on the Issue Date and (2) the date of prepayment (the "Optional Prepayment Notice"). On the date fixed for prepayment (the "Optional Prepayment Date"), the Borrower shall make payment of the Optional Prepayment Amount (as defined below) to or upon the order of the Holders as specified by the Holders in writing to the Borrower at least one (1) business day prior to the Optional Prepayment Date. If the Borrower exercises its right to prepay the Debentures, 19 the Borrower shall make payment to the holders of an amount in cash (the "Optional Prepayment Amount") equal to 120% multiplied by the sum of (w) the then outstanding principal amount of this Debenture plus (x) accrued and unpaid ---- interest on the unpaid principal amount of this Debenture to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in ---- clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections ---- 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of the Registration Rights Agreement (the then outstanding principal amount of this Debenture to the date of payment plus the amounts referred to in clauses (x), (y) and (z) shall ---- collectively be known as the "Optional Prepayment Sum"). Notwithstanding notice of an Optional Prepayment, the Holders shall at all times prior to the Optional Prepayment Date maintain the right to convert all or any portion of the Debentures in accordance with Article I and any portion of Debentures so converted after receipt of an Optional Prepayment Notice and prior to the Optional Prepayment Date set forth in such notice and payment of the aggregate Optional Prepayment Amount shall be deducted from the principal amount of Debentures which are otherwise subject to prepayment pursuant to such notice. If the Borrower delivers an Optional Prepayment Notice and fails to pay the Optional Prepayment Amount due to the Holders of the Debentures within two (2) business days following the Optional Prepayment Date, the Borrower shall forever forfeit its right to redeem the Debentures pursuant to this Section 5.1. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 20 IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in its name by its duly authorized officer this 30th day of March, 2001. AIRTECH INTERNATIONAL GROUP, INC. By: ______________________________ C. J. Comu Chairman and Chief Executive Officer 21 EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debentures) The undersigned hereby irrevocably elects to convert $_____________ principal amount of the Debenture (defined below) into shares of common stock, par value $0.05 per share ("Common Stock"), of Airtech International Group, Inc., a Wyoming corporation (the "Borrower") according to the conditions of the convertible debentures of the Borrower dated as of March __, 2001 (the "Debentures"), as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any. A copy of each Debenture is attached hereto (or evidence of loss, theft or destruction thereof). The Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system ( "DWAC Transfer"). Name of DTC Prime Broker:_________________________________________ Account Number:___________________________________________________ In lieu of receiving shares of Common Stock issuable pursuant to this Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder's calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: Name:_____________________________________________________________ Address:__________________________________________________________ The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of the Debentures shall be made pursuant to registration of the securities under the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption from registration under the Act. Date of Conversion:__________________________________________ Applicable Conversion Price:_________________________________ Number of Shares of Common Stock to be Issued Pursuant to Conversion of the Debentures:____________________ Signature:___________________________________________________ Name:________________________________________________________ Address:_____________________________________________________ The Borrower shall issue and deliver shares of Common Stock to an overnight courier not later than three business days following receipt of the original Debenture(s) to be converted, and shall make payments pursuant to the Debentures for the number of business days such issuance and delivery is late. A-1 EX-10.8 5 dex108.txt FORM OF STOCK PURCHASE WARRANT EXHIBIT 10.8 THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EXCEPT AS OTHERWISE SET FORTH HEREIN OR IN A SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH 30, 2001, NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR, AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE, CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. Right to Purchase _________ Shares of Common Stock, par value $0.05 per share STOCK PURCHASE WARRANT THIS CERTIFIES THAT, for value received, ___________________________ or its registered assigns, is entitled to purchase from Airtech International Group, Inc., a Wyoming corporation (the "Company"), at any time or from time to time during the period specified in Paragraph 2 hereof, ______________________ (_________) fully paid and nonassessable shares of the Company's Common Stock, par value $0.05 per share (the "Common Stock"), at an exercise price per share equal to the lesser of (i) $_______ [the lesser of (a) $0.25 and (b) the average of the lowest three (3) Trading Prices during the twenty (20) Trading Days immediately prior to the closing date, discounted by 40.0%] and (ii) ninety percent (90%) of the average of lowest three (3) Trading Prices (as defined below) during the twenty (20) Trading Days (as defined below) immediately prior to the exercise (the "Exercise Price"). The term "Warrant Shares," as used herein, refers to the shares of Common Stock purchasable hereunder. The Warrant Shares and the Exercise Price are subject to adjustment as provided in Paragraph 4 hereof. The term "Warrants" means this Warrant and the other warrants issued pursuant to that certain Securities Purchase Agreement, dated March 30, 2001, by and among the Company and the Buyers listed on the execution page thereof (the "Securities Purchase Agreement"). "Trading Price" means, for any security as of any date, the inter-day trading price on the Over-the-Counter Bulletin Board (the "OTCBB") as reported by Bloomberg Financial Markets or an equivalent, reliable reporting service mutually acceptable to and hereafter designated by Holders of a majority in interest of the Debentures ("Bloomberg") or, if the OTCBB is not the principal trading market for such security, the inter-day trading price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg or, if no inter-day trading price of such security is available in any of the foregoing manners, the average of the inter-day trading prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Corporation and the holders of a majority in interest of the Debentures being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Debentures. "Trading Day" shall mean any day on which the Common Sock is traded for any period on the OTCBB, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. This Warrant is subject to the following terms, provisions, and conditions: 1. Manner of Exercise; Issuance of Certificates; Payment for Shares. ---------------------------------------------------------------- Subject to the provisions hereof, this Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant, together with a completed exercise agreement in the form attached hereto (the "Exercise Agreement"), to the Company during normal business hours on any business day at the Company's principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), and upon (i) payment to the Company in cash, by certified or official bank check or by wire transfer for the account of the Company of the Exercise Price for the Warrant Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant Shares by the holder is not then registered pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), delivery to the Company of a written notice of an election to effect a "Cashless Exercise" (as defined in Section 11(c) below) for the Warrant Shares specified in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to be issued to the holder hereof or such holder's designee, as the record owner of such shares, as of the close of business on the date on which this Warrant shall have been surrendered, the completed Exercise Agreement shall have been delivered, and payment shall have been made for such shares as set forth above. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the holder hereof within a reasonable time, not exceeding three (3) business days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of such holder or such other name as shall be designated by such holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of such certificates, deliver to the holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. In addition to all other available remedies at law or in equity, if the Company fails to deliver certificates for the Warrant Shares within three (3) business days after this Warrant is exercised, then the Company shall pay to the holder in cash a penalty (the "Penalty") equal to 2% of the number of Warrant Shares that the Holder is entitled to multiplied by the Market Price for each day that the Company fails to deliver certificates for the Warrant -2- Shares. For example, if the Holder is entitled to 100,000 Warrant Shares and the Market Price is $2.00, then the Company shall pay to the Holder $4,000 for each day that the Company fails to deliver certificates for the Warrant Shares. The Penalty shall be paid to the Holder by the fifth day of the month following the month in which it has accrued. Notwithstanding anything in this Warrant to the contrary, in no event shall the holder of this Warrant be entitled to exercise a number of Warrants (or portions thereof) in excess of the number of Warrants (or portions thereof) upon exercise of which the sum of (i) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised Warrants and the unexercised or unconverted portion of any other securities of the Company (including the Debentures (as defined in the Securities Purchase Agreement)) subject to a limitation on conversion or exercise analogous to the limitation contained herein) and (ii) the number of shares of Common Stock issuable upon exercise of the Warrants (or portions thereof) with respect to which the determination described herein is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock. For purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided in clause (i) of the preceding sentence. Notwithstanding anything to the contrary contained herein, the limitation on exercise of this Warrant set forth herein may not be amended without (i) the written consent of the holder hereof and the Company and (ii) the approval of a majority of shareholders of the Company. 2. Period of Exercise. This Warrant is exercisable at any time or from ------------------ time to time on or after the date on which this Warrant is issued and delivered pursuant to the terms of the Securities Purchase Agreement and before 5:00 p.m., New York City, New York time, on the third (3rd) anniversary of the date of issuance (the "Exercise Period"). 3. Certain Agreements of the Company. The Company hereby covenants and --------------------------------- agrees as follows: (a) Shares to be Fully Paid. All Warrant Shares will, upon issuance ----------------------- in accordance with the terms of this Warrant, be validly issued, fully paid, and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof. (b) Reservation of Shares. During the Exercise Period, the Company --------------------- shall at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant. (c) Listing. The Company shall promptly secure the listing of the ------- shares of Common Stock issuable upon exercise of the Warrant upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance upon exercise of this Warrant) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant; and the Company shall so list on -3- each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system. (d) Certain Actions Prohibited. The Company will not, by amendment -------------------------- of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. (e) Successors and Assigns. This Warrant will be binding upon any ---------------------- entity succeeding to the Company by merger, consolidation, or acquisition of all or substantially all the Company's assets. 4. Antidilution Provisions. During the Exercise Period, the Exercise ----------------------- Price and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Paragraph 4. In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up to the nearest cent. (a) Adjustment of Exercise Price and Number of Shares upon Issuance --------------------------------------------------------------- of Common Stock. Except as otherwise provided in Paragraphs 4(c) and 4(e) - --------------- hereof, if and whenever on or after the date of issuance of this Warrant and through the end of the Exercise Period or the date of exercise of this Warrant, the Company issues or sells, or in accordance with Paragraph 4(b) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Market Price (as hereinafter defined) on the date of issuance (a "Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Exercise Price will be reduced to a price determined by multiplying the Exercise Price in effect immediately prior to the Dilutive Issuance by a fraction, (i) the numerator of which is an amount equal to the sum of (x) the number of shares of Common Stock actually outstanding immediately prior to the Dilutive Issuance, plus (y) the quotient of the aggregate consideration, calculated as set forth in Paragraph 4(b) hereof, received by the Company upon such Dilutive Issuance divided by the Market Price in effect immediately prior to the Dilutive Issuance, and (ii) the denominator of which is the total number of shares of Common Stock Deemed Outstanding (as defined below) immediately after the Dilutive Issuance. -4- (b) Effect on Exercise Price of Certain Events. For purposes of ------------------------------------------ determining the adjusted Exercise Price under Paragraph 4(a) hereof, the following will be applicable: (i) Issuance of Rights or Options. If the Company in any ----------------------------- manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock ("Convertible Securities") (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "Options") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Market Price on the date of issuance or grant of such Options, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Options will, as of the date of the issuance or grant of such Options, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Options" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options. (ii) Issuance of Convertible Securities. If the Company in any ---------------------------------- manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Market Price on the date of issuance, then the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities will, as of the date of the issuance of such Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For the purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. -5- (iii) Change in Option Price or Conversion Rate. If there is ----------------------------------------- a change at any time in (i) the amount of additional consideration payable to the Company upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Company upon the conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (other than under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such change will be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (iv) Treatment of Expired Options and Unexercised Convertible -------------------------------------------------------- Securities. If, in any case, the total number of shares of Common Stock issuable - ---------- upon exercise of any Option or upon conversion or exchange of any Convertible Securities is not, in fact, issued and the rights to exercise such Option or to convert or exchange such Convertible Securities shall have expired or terminated, the Exercise Price then in effect will be readjusted to the Exercise Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination (other than in respect of the actual number of shares of Common Stock issued upon exercise or conversion thereof), never been issued. (v) Calculation of Consideration Received. If any Common ------------------------------------- Stock, Options or Convertible Securities are issued, granted or sold for cash, the consideration received therefor for purposes of this Warrant will be the amount received by the Company therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Company in connection with such issuance, grant or sale. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Market Price thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued in connection with any acquisition, merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors of the Company. (vi) Exceptions to Adjustment of Exercise Price. No adjustment ------------------------------------------ to the Exercise Price will be made (i) upon the exercise of any warrants, options or convertible securities granted, issued and outstanding on the date of issuance of this Warrant; (ii) upon the grant or exercise of any stock or options which may hereafter be granted or exercised under any employee benefit plan, stock option plan or restricted stock plan of the Company now existing or to be implemented in the future, so long as the issuance of such stock or options is approved by a majority of the independent members of the Board of Directors of the Company or a majority of -6- the members of a committee of independent directors established for such purpose; or (iii) upon the exercise of the Warrants. (c) Subdivision or Combination of Common Stock. If the Company at ------------------------------------------ any time subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a greater number of shares, then, after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a smaller number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionately increased. (d) Adjustment in Number of Shares. Upon each adjustment of the ------------------------------ Exercise Price pursuant to the provisions of this Paragraph 4, the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. (e) Consolidation, Merger or Sale. In case of any consolidation of ----------------------------- the Company with, or merger of the Company into any other corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then as a condition of such consolidation, merger or sale or conveyance, adequate provision will be made whereby the holder of this Warrant will have the right to acquire and receive upon exercise of this Warrant in lieu of the shares of Common Stock immediately theretofore acquirable upon the exercise of this Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon exercise of this Warrant had such consolidation, merger or sale or conveyance not taken place. In any such case, the Company will make appropriate provision to insure that the provisions of this Paragraph 4 hereof will thereafter be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise of this Warrant. The Company will not effect any consolidation, merger or sale or conveyance unless prior to the consummation thereof, the successor corporation (if other than the Company) assumes by written instrument the obligations under this Paragraph 4 and the obligations to deliver to the holder of this Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, the holder may be entitled to acquire. (f) Distribution of Assets. In case the Company shall declare or ---------------------- make any distribution of its assets (including cash) to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise, then, after the date of record for determining stockholders entitled to such distribution, but prior to the date of distribution, the holder of this Warrant shall be entitled upon exercise of this Warrant for the purchase of any or all of the shares of Common Stock subject hereto, to receive the amount of such assets which would have -7- been payable to the holder had such holder been the holder of such shares of Common Stock on the record date for the determination of stockholders entitled to such distribution. (g) Notice of Adjustment. Upon the occurrence of any event which -------------------- requires any adjustment of the Exercise Price, then, and in each such case, the Company shall give notice thereof to the holder of this Warrant, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Such calculation shall be certified by the Chief Financial Officer of the Company. (h) Minimum Adjustment of Exercise Price. No adjustment of the ------------------------------------ Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. (i) No Fractional Shares. No fractional shares of Common Stock are -------------------- to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the Market Price of a share of Common Stock on the date of such exercise. (j) Other Notices. In case at any time: ------------- (i) the Company shall declare any dividend upon the Common Stock payable in shares of stock of any class or make any other distribution (including dividends or distributions payable in cash out of retained earnings) to the holders of the Common Stock; (ii) the Company shall offer for subscription pro rata to the holders of the Common Stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization of the Company, or reclassification of the Common Stock, or consolidation or merger of the Company with or into, or sale of all or substantially all its assets to, another corporation or entity; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in each such case, the Company shall give to the holder of this Warrant (a) notice of the date on which the books of the Company shall close or a record shall be taken for determining the holders of Common Stock entitled to receive any such dividend, distribution, or subscription rights or for determining the holders of Common Stock entitled to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, notice of the date (or, if not then known, a reasonable -8- approximation thereof by the Company) when the same shall take place. Such notice shall also specify the date on which the holders of Common Stock shall be entitled to receive such dividend, distribution, or subscription rights or to exchange their Common Stock for stock or other securities or property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding-up, as the case may be. Such notice shall be given at least 30 days prior to the record date or the date on which the Company's books are closed in respect thereto. Failure to give any such notice or any defect therein shall not affect the validity of the proceedings referred to in clauses (i), (ii), (iii) and (iv) above. (k) Certain Events. If any event occurs of the type contemplated -------------- by the adjustment provisions of this Paragraph 4 but not expressly provided for by such provisions, the Company will give notice of such event as provided in Paragraph 4(g) hereof, and the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the number of shares of Common Stock acquirable upon exercise of this Warrant so that the rights of the holder shall be neither enhanced nor diminished by such event. (l) Certain Definitions. ------------------- (i) "Common Stock Deemed Outstanding" shall mean the number of ------------------------------- shares of Common Stock actually outstanding (not including shares of Common Stock held in the treasury of the Company), plus (x) pursuant to Paragraph 4(b)(i) hereof, the maximum total number of shares of Common Stock issuable upon the exercise of Options, as of the date of such issuance or grant of such Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the maximum total number of shares of Common Stock issuable upon conversion or exchange of Convertible Securities, as of the date of issuance of such Convertible Securities, if any. (ii) "Market Price," as of any date, (i) means the average of ------------ the last reported sale prices for the shares of Common Stock on the OTCBB for the five (5) Trading Days immediately preceding such date as reported by Bloomberg, or (ii) if the OTCBB is not the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the fair market value as reasonably determined in good faith by (a) the Board of Directors of the Corporation or, at the option of a majority-in-interest of the holders of the outstanding Warrants by (b) an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the corporation. The manner of determining the Market Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder. (iii) "Common Stock," for purposes of this Paragraph 4, includes ------------ the Common Stock, par value $0.05 per share, and any additional class of stock of the Company having no preference as to dividends or distributions on liquidation, provided that the shares purchasable pursuant to this Warrant shall include only shares of Common Stock, par value $0.05 per share, in respect of which this Warrant is exercisable, or shares resulting from any subdivision or combination of such Common Stock, or in the case of any reorganization, -9- reclassification, consolidation, merger, or sale of the character referred to in Paragraph 4(e) hereof, the stock or other securities or property provided for in such Paragraph. 5. Issue Tax. The issuance of certificates for Warrant Shares upon the --------- exercise of this Warrant shall be made without charge to the holder of this Warrant or such shares for any issuance tax or other costs in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the holder of this Warrant. 6. No Rights or Liabilities as a Shareholder. This Warrant shall not ----------------------------------------- entitle the holder hereof to any voting rights or other rights as a shareholder of the Company. No provision of this Warrant, in the absence of affirmative action by the holder hereof to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 7. Transfer, Exchange, and Replacement of Warrant. ---------------------------------------------- (a) Restriction on Transfer. This Warrant and the rights granted ----------------------- to the holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed assignment in the form attached hereto, at the office or agency of the Company referred to in Paragraph 7(e) below, provided, however, that any transfer or assignment shall be subject to the conditions set forth in Paragraph 7(f) hereof and to the applicable provisions of the Securities Purchase Agreement. Until due presentment for registration of transfer on the books of the Company, the Company may treat the registered holder hereof as the owner and holder hereof for all purposes, and the Company shall not be affected by any notice to the contrary. Notwithstanding anything to the contrary contained herein, the registration rights described in Paragraph 8 are assignable only in accordance with the provisions of that certain Registration Rights Agreement, dated as of March __, 2001, by and among the Company and the other signatories thereto (the "Registration Rights Agreement"). (b) Warrant Exchangeable for Different Denominations. This Warrant ------------------------------------------------ is exchangeable, upon the surrender hereof by the holder hereof at the office or agency of the Company referred to in Paragraph 7(e) below, for new Warrants of like tenor representing in the aggregate the right to purchase the number of shares of Common Stock which may be purchased hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by the holder hereof at the time of such surrender. (c) Replacement of Warrant. Upon receipt of evidence reasonably ---------------------- satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor. -10- (d) Cancellation; Payment of Expenses. Upon the surrender of this --------------------------------- Warrant in connection with any transfer, exchange, or replacement as provided in this Paragraph 7, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses (other than legal expenses, if any, incurred by the holder or transferees) and charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Paragraph 7. (e) Register. The Company shall maintain, at its principal -------- executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of this Warrant. (f) Exercise or Transfer Without Registration. If, at the time of ----------------------------------------- the surrender of this Warrant in connection with any exercise, transfer, or exchange of this Warrant, this Warrant (or, in the case of any exercise, the Warrant Shares issuable hereunder), shall not be registered under the Securities Act of 1933, as amended (the "Securities Act") and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such exercise, transfer, or exchange, (i) that the holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel, which opinion and counsel are acceptable to the Company, to the effect that such exercise, transfer, or exchange may be made without registration under said Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act; provided that no such opinion, letter or status as an "accredited investor" shall be required in connection with a transfer pursuant to Rule 144 under the Securities Act. The first holder of this Warrant, by taking and holding the same, represents to the Company that such holder is acquiring this Warrant for investment and not with a view to the distribution thereof. 8. Registration Rights. The initial holder of this Warrant (and certain ------------------- assignees thereof) is entitled to the benefit of such registration rights in respect of the Warrant Shares as are set forth in Section 2 of the Registration Rights Agreement. 9. Notices. All notices, requests, and other communications required or ------- permitted to be given or delivered hereunder to the holder of this Warrant shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to such holder at the address shown for such holder on the books of the Company, or at such other address as shall have been furnished to the Company by notice from such holder. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Company shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to the office of the Company at 15400 Knoll Trail, Suite 200, Dallas, Texas 75248, Attention: C.J. Comu, Chairman and Chief Executive Officer, or at such other address as shall have been furnished to the holder of this Warrant by notice from the Company. Any such notice, request, or other communication may be sent by facsimile, but -11- shall in such case be subsequently confirmed by a writing personally delivered or sent by certified or registered mail or by recognized overnight mail courier as provided above. All notices, requests, and other communications shall be deemed to have been given either at the time of the receipt thereof by the person entitled to receive such notice at the address of such person for purposes of this Paragraph 9, or, if mailed by registered or certified mail or with a recognized overnight mail courier upon deposit with the United States Post Office or such overnight mail courier, if postage is prepaid and the mailing is properly addressed, as the case may be. 10. Governing Law. THIS WARRANT SHALL BE ENFORCED, GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITH SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS WARRANT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON- APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS WARRANT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE. 11. Miscellaneous. ------------- (a) Amendments. This Warrant and any provision hereof may only be ---------- amended by an instrument in writing signed by the Company and the holder hereof. (b) Descriptive Headings. The descriptive headings of the several -------------------- paragraphs of this Warrant are inserted for purposes of reference only, and shall not affect the meaning or construction of any of the provisions hereof. (c) Cashless Exercise. Notwithstanding anything to the contrary ----------------- contained in this Warrant, if the resale of the Warrant Shares by the holder is not then registered pursuant to an effective registration statement under the Securities Act, this Warrant may be exercised by presentation and surrender of this Warrant to the Company at its principal executive offices with a written notice of the holder's intention to effect a cashless exercise, including a calculation of -12- the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof (a "Cashless Exercise"). In the event of a Cashless Exercise, in lieu of paying the Exercise Price in cash, the holder shall surrender this Warrant for that number of shares of Common Stock determined by multiplying the number of Warrant Shares to which it would otherwise be entitled by a fraction, the numerator of which shall be the difference between the then current Market Price per share of the Common Stock and the Exercise Price, and the denominator of which shall be the then current Market Price per share of Common Stock. For example, if the holder is exercising 100,000 Warrants with a per Warrant exercise price of $0.75 per share through a cashless exercise when the Common Stock's current Market Price per share is $2.00 per share, then upon such Cashless Exercise the holder will receive 62,500 shares of Common Stock. (d) Remedies. The Company acknowledges that a breach by it of its -------- obligations hereunder will cause irreparable harm to the holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Warrant will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Warrant, that the holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Warrant and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -13- IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. AIRTECH INTERNATIONAL GROUP, INC. By: ___________________________________ C.J. Comu Chairman and Chief Executive Officer Dated as of March 30, 2001 -14- FORM OF EXERCISE AGREEMENT Dated: __________, 200_ To: Airtech International Group, Inc. The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to purchase ________ shares of Common Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by such Warrant in cash or by certified or official bank check in the amount of, or, if the resale of such Common Stock by the undersigned is not currently registered pursuant to an effective registration statement under the Securities Act of 1933, as amended, by surrender of securities issued by the Company (including a portion of the Warrant) having a market value (in the case of a portion of this Warrant, determined in accordance with Section 11(c) of the Warrant) equal to $_________. Please issue a certificate or certificates for such shares of Common Stock in the name of and pay any cash for any fractional share to: Name: _______________________________ Signature: Address:_______________________________ _______________________________ Note: The above signature should correspond exactly with the name on the face of the within Warrant, if applicable. and, if said number of shares of Common Stock shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned covering the balance of the shares purchasable thereunder less any fraction of a share paid in cash. FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers all the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered thereby set forth hereinbelow, to: Name of Assignee Address No of Shares - ---------------- ------- ------------ , and hereby irrevocably constitutes and appoints _________________________ as agent and attorney-in-fact to transfer said Warrant on the books of the within- named corporation, with full power of substitution in the premises. Dated:_____________, 200_ In the presence of: ______________________________ Name: _______________________________ Signature: _________________________ Title of Signing Officer or Agent (if any): _________________________ Address: _________________________ _________________________ Note: The above signature should correspond exactly with the name on the face of the within Warrant, if applicable. EX-10.9 6 dex109.txt REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.9 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of March 30, 2001, by and among Airtech International Group, Inc., a Wyoming corporation, with its headquarters located at 15400 Knoll Trail, Suite 200, Dallas, Texas 75248 (the "Company"), and each of the undersigned (together with their respective affiliates and any assignee or transferee of all of their respective rights hereunder, the "Initial Investors"). WHEREAS: A. In connection with the Securities Purchase Agreement by and among the parties hereto of even date herewith (the "Securities Purchase Agreement"), the Company has agreed, upon the terms and subject to the conditions contained therein, to issue and sell to the Initial Investors (i) convertible debentures in the aggregate principal amount up to One Million Dollars ($1,000,000) (the "Debentures") that are convertible into shares of the Company's common stock (the "Common Stock"), upon the terms and subject to the limitations and conditions set forth in such Debentures and (ii) warrants (the "Warrants") to acquire up to Five Hundred Thousand (500,000) shares of Common Stock, upon the terms and conditions and subject to the limitations and conditions set forth in the Warrants dated March 30, 2001; and B. To induce the Initial Investors to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Initial Investors hereby agree as follows: 1. DEFINITIONS. ----------- a. As used in this Agreement, the following terms shall have the following meanings: (i) "Investors" means the Initial Investors and any transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof. (ii) "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC"). (iii) "Registrable Securities" means the Conversion Shares issued or issuable upon conversion or otherwise pursuant to the Debentures and the Additional Debentures (as defined in the Securities Purchase Agreement) (including, without limitation, Damage Shares (as defined in the Debenture) issued or issuable and shares of Common Stock issued or issuable in respect of interest or in redemption of the Debentures (in accordance with the terms thereof) and Warrant Shares issued or issuable upon exercise or otherwise pursuant to the Warrants and the Additional Warrants (as defined in the Securities Purchase Agreement) issued or issuable and any shares of capital stock issued or issuable as a dividend on or in exchange for or otherwise with respect to any of the foregoing. (iv) "Registration Statement" means a registration statement of the Company under the 1933 Act. b. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement or Convertible Debenture. 2. REGISTRATION. ------------ a. Mandatory Registration. The Company shall prepare, and, on or ---------------------- prior to forty-five (45) days from the date of Closing (as defined in the Securities Purchase Agreement) (the "Filing Date"), file with the SEC a Registration Statement on Form S-3 (or, if Form S-3 is not then available, on such form of Registration Statement as is then available to effect a registration of the Registrable Securities, subject to the consent of the Initial Investors, which consent will not be unreasonably withheld) covering the resale of the Registrable Securities underlying the Debentures and Warrants issued or issuable pursuant to the Securities Purchase Agreement, which Registration Statement, to the extent allowable under the 1933 Act and the rules and regulations promulgated thereunder (including Rule 416), shall state that such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of or otherwise pursuant to the Debentures and exercise of the Warrants to prevent dilution resulting from stock splits, stock dividends or similar transactions. The number of shares of Common Stock initially included in such Registration Statement shall be no less than two (2) times the sum of (i) the number of Conversion Shares that are then issuable upon conversion of the Debentures and Additional Debentures (based on the Variable Conversion Price as would then be in effect and assuming the Variable Conversion Price is the Conversion Price at such time) plus (ii) the number of Warrant Shares that are then issuable upon exercise of the Warrants and the Additional Warrants, without regard to any limitation on the Investor's ability to convert the Debentures and the Additional Debentures or exercise the Warrants and the Additional Warrants. The Company acknowledges that the number of shares initially included in the Registration Statement represents a good faith estimate of the maximum number of shares issuable upon conversion of the Debentures and the Additional Warrants and upon exercise of the Warrants and the Additional Warrants. b. Underwritten Offering. If any offering pursuant to a --------------------- Registration Statement pursuant to Section 2(a) hereof involves an underwritten offering, the Investors who hold a majority in interest of the Registrable Securities subject to such underwritten offering, with the consent of a majority-in-interest of the Initial Investors, shall have the right to select one legal counsel and an investment banker or bankers and manager or managers to administer the offering, which investment banker or bankers or manager or managers shall be reasonably satisfactory to the Company. -2- c. Payments by the Company. The Company shall use its best efforts ----------------------- to obtain effectiveness of the Registration Statement as soon as practicable. If (i) the Registration Statement(s) covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not filed by the Filing Date or declared effective by the SEC on or prior to one hundred five (105) days from the date of Closing, or (ii) after the Registration Statement has been declared effective by the SEC, sales of all of the Registrable Securities cannot be made pursuant to the Registration Statement, or (iii) the Common Stock is not listed or included for quotation on the Nasdaq National Market ("Nasdaq"), the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the New York Stock Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") after being so listed or included for quotation, or (iv) the Common Stock ceases to be traded on the Over-the-Counter Bulletin Board (the "OTCBB") prior to being listed or included for quotation on one of the aforementioned markets, then the Company will make payments to the Investors in such amounts and at such times as shall be determined pursuant to this Section 2(c) as partial relief for the damages to the Investors by reason of any such delay in or reduction of their ability to sell the Registrable Securities (which remedy shall not be exclusive of any other remedies available at law or in equity). The Company shall pay to each holder of the Debentures or Registrable Securities an amount equal to the then outstanding principal amount of the Debentures (and, in the case of holders of Registrable Securities, the principal amount of Debentures from which such Registrable Securities were converted) ("Outstanding Principal Amount") multiplied by the Applicable Percentage (as defined below) times the sum of: (i) the number of months (prorated for partial months) after the Filing Date or the end of the aforementioned one hundred five (105) day period and prior to the date the Registration Statement is declared effective by the SEC, provided, however, that there shall be excluded from such period any delays which are solely attributable to changes required by the Investors in the Registration Statement with respect to information relating to the Investors, including, without limitation, changes to the plan of distribution, or to the failure of the Investors to conduct their review of the Registration Statement pursuant to Section 3(h) below in a reasonably prompt manner; (ii) the number of months (prorated for partial months) that sales of all of the Registrable Securities cannot be made pursuant to the Registration Statement after the Registration Statement has been declared effective (including, without limitation, when sales cannot be made by reason of the Company's failure to properly supplement or amend the prospectus included therein in accordance with the terms of this Agreement, but excluding any days during an Allowed Delay (as defined in Section 3(f)); and (iii) the number of months (prorated for partial months) that the Common Stock is not listed or included for quotation on the OTCBB, Nasdaq, Nasdaq SmallCap, NYSE or AMEX or that trading thereon is halted after the Registration Statement has been declared effective. The term "Applicable Percentage" means two hundredths (.02). (For example, if the Registration Statement becomes effective one (1) month after the end of such thirty-day period, the Company would pay $2,000 for each $100,000 of Outstanding Principal Amount. If thereafter, sales could not be made pursuant to the Registration Statement for an additional period of one (1) month, the Company would pay an additional $2,000 for each $100,000 of Outstanding Principal Amount.) Such amounts shall be paid in cash or, at each Investor's option, in shares of Common Stock priced at the average of the lowest three (3) Trading Prices (as defined in the Debentures) during the twenty (20) trading days prior to the payment date. d. Piggy-Back Registrations. Subject to the last sentence of this ------------------------ Section 2(d), if at any time prior to the expiration of the Registration Period (as hereinafter defined) the -3- Company shall determine to file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the 1933 Act of any of its equity securities (other than on Form S-4 or Form S-8 or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans), the Company shall send to each Investor who is entitled to registration rights under this Section 2(d) written notice of such determination and, if within fifteen (15) days after the effective date of such notice, such Investor shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registrable Securities such Investor requests to be registered, except that if, in connection with any underwritten public offering for the account of the Company the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock which may be included in the Registration Statement because, in such underwriter(s)' judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which such Investor has requested inclusion hereunder as the underwriter shall permit. Any exclusion of Registrable Securities shall be made pro rata among the Investors seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Investors; provided, -------- however, that the Company shall not exclude any Registrable Securities unless - ------- the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities; and provided, further, however, that, after giving effect to the immediately - -------- ------- ------- preceding proviso, any exclusion of Registrable Securities shall be made pro rata with holders of other securities having the right to include such securities in the Registration Statement other than holders of securities entitled to inclusion of their securities in such Registration Statement by reason of demand registration rights. No right to registration of Registrable Securities under this Section 2(d) shall be construed to limit any registration required under Section 2(a) hereof. If an offering in connection with which an Investor is entitled to registration under this Section 2(d) is an underwritten offering, then each Investor whose Registrable Securities are included in such Registration Statement shall, unless otherwise agreed by the Company, offer and sell such Registrable Securities in an underwritten offering using the same underwriter or underwriters and, subject to the provisions of this Agreement, on the same terms and conditions as other shares of Common Stock included in such underwritten offering. Notwithstanding anything to the contrary set forth herein, the registration rights of the Investors pursuant to this Section 2(d) shall only be available in the event the Company fails to timely file, obtain effectiveness or maintain effectiveness of any Registration Statement to be filed pursuant to Section 2(a) in accordance with the terms of this Agreement. e. Eligibility for Form SB-2 or Form S-1: Conversion to Form S-3. ------------------------------------------------------------- The Company represents and warrants that it meets the requirements for the use of Form SB-2 or Form S-1 for registration of the sale by the Initial Investors and any other Investors of the Registrable Securities. The Company agrees to file all reports required to be filed by the Company with the SEC in a timely manner so as to become eligible, and thereafter to maintain its eligibility, for the use of Form S-3. Not later than five (5) business days after the Company first meets the registration eligibility and transaction requirements for the use of Form S-3 (or any successor form) for registration of the offer and sale by the Initial Investors and any other Investors of Registrable Securities, the Company shall file a Registration Statement on Form S-3 -4- (or such successor form) with respect to the Registrable Securities covered by the Registration Statement on Form SB-2 or Form S-1, whichever is applicable, filed pursuant to Section 2(a) (and include in such Registration Statement on Form S-3 the information required by Rule 429 under the 1933 Act) or convert the Registration Statement on Form SB-2 or Form S-1, whichever is applicable, filed pursuant to Section 2(a) to a Form S-3 pursuant to Rule 429 under the 1933 Act and use its best efforts to have such Registration Statement (or such amendment) declared effective as soon as reasonably practicable thereafter. 3. OBLIGATIONS OF THE COMPANY. -------------------------- In connection with the registration of the Registrable Securities, the Company shall have the following obligations: a. The Company shall prepare promptly, and file with the SEC not later than the Filing Date, a Registration Statement with respect to the number of Registrable Securities provided in Section 2(a), and thereafter use its best efforts to cause such Registration Statement relating to Registrable Securities to become effective as soon as possible after such filing but in no event later than one hundred five (105) days from the date of Closing), and keep the Registration Statement effective pursuant to Rule 415 at all times until such date as is the earlier of (i) the date on which all of the Registrable Securities have been sold and (ii) the date on which the Registrable Securities (in the opinion of counsel to the Initial Investors) may be immediately sold to the public without registration or restriction (including without limitation as to volume by each holder thereof) under the 1933 Act (the "Registration Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein not misleading. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statements and the prospectus used in connection with the Registration Statements as may be necessary to keep the Registration Statements effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statements until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statements. In the event the number of shares available under a Registration Statement filed pursuant to this Agreement is insufficient to cover all of the Registrable Securities issued or issuable upon conversion of the Debentures and exercise of the Warrants, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefore, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within twenty (20) business days after the necessity therefor arises (based on the market price of the Common Stock and other relevant factors on which the Company reasonably elects to rely). The Company shall use its best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof, but in any event within sixty (60) days after the date on which the Company reasonably first determines (or reasonably should have determined) the need therefor. The provisions of Section 2(c) above shall be applicable with respect to such obligation, with the -5- one hundred five (105) days running from the day the Company reasonably first determines (or reasonably should have determined) the need therefor. c. The Company shall furnish to each Investor whose Registrable Securities are included in a Registration Statement and its legal counsel (i) promptly (but in no event less than five (5) business days) before the same is filed with the SEC, one copy of each Registration Statement and any amendment thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto, and, in the case of the Registration Statement referred to in Section 2(a), each letter written by or on behalf of the Company to the SEC or the staff of the SEC, and each item of correspondence from the SEC or the staff of the SEC, in each case relating to such Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment), and (ii) such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor. The Company will immediately notify each Investor by facsimile of the effectiveness of each Registration Statement or any post- effective amendment. The Company will promptly respond to any and all comments received from the SEC (which comments shall promptly be made available to the Investors upon request), with a view towards causing each Registration Statement or any amendment thereto to be declared effective by the SEC as soon as practicable, shall promptly file an acceleration request as soon as practicable (but in no event more than two (2) business days) following the resolution or clearance of all SEC comments or, if applicable, following notification by the SEC that any such Registration Statement or any amendment thereto will not be subject to review and shall promptly file with the SEC a final prospectus as soon as practicable (but in no event more than two (2) business days) following receipt by the Company from the SEC of an order declaring the Registration Statement effective. In the event of a breach by the Company of the provisions of this Section 3(c), the Company will be required to make payments pursuant to Section 2(c) hereof. d. The Company shall use reasonable efforts to (i) register and qualify the Registrable Securities covered by the Registration Statements under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investors who hold a majority in interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that -------- ------- the Company shall not be required in connection therewith or as a condition thereto to (a) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (b) subject itself to general taxation in any such jurisdiction, (c) file a general consent to service of process in any such jurisdiction, (d) provide any undertakings that cause the Company undue expense or burden, or (e) make any change in its charter or bylaws, which in each case the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders. -6- e. In the event Investors who hold a majority-in-interest of the Registrable Securities being offered in the offering (with the approval of a majority-in-interest of the Initial Investors) select underwriters for the offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering. f. As promptly as practicable after becoming aware of such event, the Company shall notify each Investor of the happening of any event, of which the Company has knowledge, as a result of which the prospectus included in any Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and use its best efforts promptly to prepare a supplement or amendment to any Registration Statement to correct such untrue statement or omission, and deliver such number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; provided that, for not more than ten (10) consecutive trading days (or a total of not more than fifteen (15) trading days in any twelve (12) month period), the Company may delay the disclosure of material non- public information concerning the Company (as well as prospectus or Registration Statement updating) the disclosure of which at the time is not, in the good faith opinion of the Company, in the best interests of the Company (an "Allowed Delay"); provided, further, that the Company shall promptly (i) notify the Investors in writing of the existence of (but in no event, without the prior written consent of an Investor, shall the Company disclose to such investor any of the facts or circumstances regarding) material non-public information giving rise to an Allowed Delay and (ii) advise the Investors in writing to cease all sales under such Registration Statement until the end of the Allowed Delay. Upon expiration of the Allowed Delay, the Company shall again be bound by the first sentence of this Section 3(f) with respect to the information giving rise thereto. g. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of any Registration Statement, and, if such an order is issued, to obtain the withdrawal of such order at the earliest possible moment and to notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof. h. At least five (5) days prior to their filing with the SEC the Company shall permit a single firm of counsel designated by the Initial Investors to review such Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration or effectiveness thereof), and not file any document in a form to which such counsel reasonably objects and will not request acceleration of such Registration Statement without prior notice to such counsel. The sections of such Registration Statement covering information with respect to the Investors, the Investor's beneficial ownership of securities of the Company or the Investors intended method of disposition of Registrable Securities shall conform to the information provided to the Company by each of the Investors. i. The Company shall make generally available to its security holders as soon as practicable, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. -7- j. At the request of any Investor, the Company shall furnish, on the date that Registrable Securities are delivered to an underwriter, if any, for sale in connection with any Registration Statement or, if such securities are not being sold by an underwriter, on the date of effectiveness thereof (i) an opinion, dated as of such date, from counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the underwriters, if any, and the Investors and (ii) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and the Investors. k. The Company shall make available for inspection by (i) any Investor, (ii) any underwriter participating in any disposition pursuant to a Registration Statement, (iii) one firm of attorneys and one firm of accountants or other agents retained by the Initial Investors, (iv) one firm of attorneys and one firm of accountants or other agents retained by all other Investors, and (v) one firm of attorneys retained by all such underwriters (collectively, the "Inspectors") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably deemed necessary by each Inspector to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that -------- ------- each Inspector shall hold in confidence and shall not make any disclosure (except to an Investor) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (b) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance satisfactory to the Company) with the Company with respect thereto, substantially in the form of this Section 3(k). Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and any Investor) shall be deemed to limit the Investor's ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations. l. The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other -8- agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to such Investor prior to making such disclosure, and allow the Investor, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. m. The Company shall (i) cause all the Registrable Securities covered by the Registration Statement to be listed on each national securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) to the extent the securities of the same class or series are not then listed on a national securities exchange, secure the designation and quotation, of all the Registrable Securities covered by the Registration Statement on Nasdaq or, if not eligible for Nasdaq, on Nasdaq SmallCap or, if not eligible for Nasdaq or Nasdaq SmallCap, on the OTCBB and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities. n. The Company shall provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement. o. The Company shall cooperate with the Investors who hold Registrable Securities being offered and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or the Investors may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Investors may request, and, within three (3) business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an instruction in the form attached hereto as Exhibit 1 and an opinion of such counsel in the form attached hereto as Exhibit 2. p. At the request of the holders of a majority-in-interest of the Registrable Securities, the Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and any prospectus used in connection with the Registration Statement as may be necessary in order to change the plan of distribution set forth in such Registration Statement. q. From and after the date of this Agreement, the Company shall not, and shall not agree to, allow the holders of any securities of the Company to include any of their securities in any Registration Statement under Section 2(a) hereof or any amendment or supplement thereto under Section 3(b) hereof without the consent of the holders of a majority-in-interest of the Registrable Securities. -9- r. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement. 4. OBLIGATIONS OF THE INVESTORS. ---------------------------- In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: a. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least three (3) business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor. b. Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statements hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statements. c. In the event Investors holding a majority-in-interest of the Registrable Securities being registered (with the approval of the Initial Investors) determine to engage the services of an underwriter, each Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement. d. Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. e. No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided -10- in any underwriting arrangements in usual and customary form entered into by the Company, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and any expenses in excess of those payable by the Company pursuant to Section 5 below. 5. EXPENSES OF REGISTRATION. ------------------------ All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualification fees, printers and accounting fees, the fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel selected by the Initial Investors pursuant to Sections 2(b) and 3(h) hereof shall be borne by the Company. 6. INDEMNIFICATION. --------------- In the event any Registrable Securities are included in a Registration Statement under this Agreement: a. To the extent permitted by law, the Company will indemnify, hold harmless and defend (i) each Investor who holds such Registrable Securities, (ii) the directors, officers, partners, employees, agents and each person who controls any Investor within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), if any, (iii) any underwriter (as defined in the 1933 Act) for the Investors, and (iv) the directors, officers, partners, employees and each person who controls any such underwriter within the meaning of the 1933 Act or the 1934 Act, if any (each, an "Indemnified Person"), against any joint or several losses, claims, damages, liabilities or expenses (collectively, together with actions, proceedings or inquiries by any regulatory or self-regulatory organization, whether commenced or threatened, in respect thereof, "Claims") to which any of them may become subject insofar as such Claims arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or the omission or alleged omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Indemnified Person, promptly as such expenses are incurred and are due and payable, for any reasonable legal -11- fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of such Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) hereof; (ii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld; and (iii) with respect to any preliminary prospectus, shall not inure to the benefit of any Indemnified Person if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented, such corrected prospectus was timely made available by the Company pursuant to Section 3(c) hereof, and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a Violation and such Indemnified Person, notwithstanding such advice, used it. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. b. In connection with any Registration Statement in which an Investor is participating, each such Investor agrees severally and not jointly to indemnify, hold harmless and defend, to the same extent and in the same manner set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such stockholder or underwriter within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out of or is based upon any Violation by such Investor, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and subject to Section 6(c) such Investor will reimburse any legal or other expenses (promptly as such expenses are incurred and are due and payable) reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the -------- ------- indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under -------- ------- ------- this Agreement (including this Section 6(b) and Section 7) for only that amount as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if -12- the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party -------- ------- shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such legal counsel shall be selected by Investors holding a majority-in-interest of the Registrable Securities included in the Registration Statement to which the Claim relates (with the approval of a majority-in- interest of the Initial Investors), if the Investors are entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is actually prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. CONTRIBUTION. ------------ To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (i) no -------- ------- contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6, (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (iii) contribution (together with any indemnification or other obligations under this Agreement) by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. -13- 8. REPORTS UNDER THE 1934 ACT. -------------------------- With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 4(c) of the Securities Purchase Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF REGISTRATION RIGHTS. --------------------------------- The rights under this Agreement shall be automatically assignable by the Investors to any transferee of all or any portion of Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment, the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein, (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement, and (vi) such transferee shall be an "accredited investor" as that term defined in Rule 501 of Regulation D promulgated under the 1933 Act. -14- 10. AMENDMENT OF REGISTRATION RIGHTS. -------------------------------- Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with written consent of the Company, each of the Initial Investors (to the extent such Initial Investor still owns Registrable Securities) and Investors who hold a majority interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. MISCELLANEOUS. ------------- a. A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Airtech International Group, Inc. 15400 Knoll Trail, Suite 200 Dallas, Texas 75248 Attention: C.J. Comu, Chairman & Chief Executive Officer Facsimile: (972) 960-9395 With copy to: John Rebensdorf, Esquire 6116 North Central Expressway, Suite 1313 Dallas, Texas 75206 Facsimile: (516) 739-7115 If to an Investor: to the address set forth immediately below such Investor's name on the signature pages to the Securities Purchase Agreement. -15- With a copy to: The N.I.R. Group, LLC 155 First Street, Suite B Mineola, New York 11501 Attention: Corey Ribotsky Telephone: 516-739-7110 Facsimile: 516-739-7115 c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON- APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE. e. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. f. This Agreement, the Warrants and the Securities Purchase Agreement (including all schedules and exhibits thereto) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This -16- Agreement and the Securities Purchase Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. g. Subject to the requirements of Section 9 hereof, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. h. The headings in this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement. i. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. j. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. k. Except as otherwise provided herein, all consents and other determinations to be made by the Investors pursuant to this Agreement shall be made by Investors holding a majority of the Registrable Securities, determined as if the all of the Debentures then outstanding have been converted into for Registrable Securities. l. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to each Investor by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of any of the provisions under this Agreement, that each Investor shall be entitled, in addition to all other available remedies in law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required. m. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -17- IN WITNESS WHEREOF, the Company and the undersigned Initial Investors have caused this Agreement to be duly executed as of the date first above written. AIRTECH INTERNATIONAL GROUP, INC. ______________________________________ C.J. Comu Chairman and Chief Executive Officer AJW PARTNERS, LLC By: SMS Group, LLC ______________________________________ Corey S. Ribotsky Manager NEW MILLENNIUM CAPITAL PARTNERS II, LLC By: First Street Manager II, LLC ______________________________________ Glenn A. Arbeitman Manager -18- EX-10.10 7 dex1010.txt LOCK-UP AGREEMENT EXHIBIT 10.10 LOCK-UP AGREEMENT ----------------- March 30, 2001 Airtech International Group, Inc. 15400 Knoll Trail, Suite 200 Dallas, Texas 75248 AJW Partners, LLC New Millenium Capital Partners II, LLC c/o The N.I.R. Group, LLC 155 First Street, Suite B Mineola, New York 11501 Ladies and Gentlemen: The undersigned is the beneficial owner of shares of common stock, par value $.05 per share ("Common Stock"), of Airtech International Group, Inc., a Wyoming corporation (the "Company"). We understand that you will be investing in a private placement of 12% Secured Convertible Debentures (the "Debentures") and Warrants of the Company (the "Private Placement"). In order to induce the Company and you to proceed with the Private Placement, the undersigned agrees, for the benefit of the Company and you, that the undersigned will not, and will cause its affiliates to not, for a period beginning on the date hereof and ending eight (8) months from the date of effectiveness (the "Effective Date") of the registration statement to be filed in connection with the Private Placement (the "Lock-Up Period"), offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities"), now owned or hereafter acquired directly by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee -------- or donees thereof agree to be bound by this Lock-Up Agreement, or (ii) with your prior written consent. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-Up Period even if such Securities would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include without limitation any short sale or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to any Securities or with respect to any security that includes, relates to or derives any significant part of its value from Securities. Notwithstanding the foregoing, during the term of this agreement, the undersigned (i) may convert any securities convertible into Common Stock held by it into up to 200,000 shares of Common Stock per month (on a non-cumulative basis), provided that the undersigned may sell up to -------- 100,000 shares of Common Stock per month or, in the event that the sale price is at least $.75 per share, the undersigned may sell up to 200,000 shares of Common Stock per month, provided, further, that any shares of Common Stock issued -------- ------- pursuant to such conversion that are not sold in accordance with the foregoing proviso will be held in escrow by the Company's counsel and (ii) may, prior to the Effective Date, sell some or all of the 423,280 shares of Common Stock held by the undersigned on the date hereof, provided that any of such shares not sold -------- prior to Effective Date will be subject to the restrictions contained in this paragraph. The undersigned confirms that he, she or it understands that you and the Company will rely upon the representations set forth in this agreement in proceeding with the Private Placement. This agreement shall be binding on the undersigned and his, her or its respective successors, heirs, personal representatives and assigns. The undersigned agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of Common Stock or other securities of the Company held by the undersigned except in compliance with this agreement. This letter will also confirm our understanding that you agree that, in the event that the Company has operating cash flows in excess of $1,000,000, such excess cash flows may be used by the Company to repay amounts owed to the undersigned pursuant to outstanding convertible debentures. Very truly yours, PK INVESTORS, LLC By:___________________________ Title:__________________________ 2 EX-10.11 8 dex1011.txt DISTRIBUTOR AGREEMENT EXHIBIT 10.11 AIRTECH INTERNATIONAL GROUP, INC. Distributor Agreement This Agreement made on this date of February 19, 2001, by and between Airtech International Group, Inc., having its principal place of business at 15400 Knoll Trail, Suite 200, Dallas, Texas, 75248, ("AIRTECH INTERNATIONAL GROUP, INC." or "Airtech") herein, and W & B Service Co. Inc. having its principal place of business in Dallas Texas, ("Distributor") herein, individually a "Party" and collectively the "Parties" herein, mutually agree as follows: 1. Relationship AIRTECH INTERNATIONAL GROUP, INC. grants and the Distributor accepts: 1.1. The right to purchase AIRTECH INTERNATIONAL GROUP, INC's. Commercial Products brand name labeled as "Airsopure" to include Model S-999, Model S-12, Model S-14, Model S-18 and Model "Titan III" directly from AIRTECH INTERNATIONAL GROUP, INC., at the price and terms outlined in the most current published AIRTECH INTERNATIONAL GROUP, INC. Distributor price pages a current copy attached as Exhibit "A". 1.2 The right to stock, display, promote and aggressively sell the Products to customers who are within the distributor's normal marketing area. Subject to existing agreements as shown in attachment "Exhibit B". 2. Distributor Duties and Obligations The Distributor shall: 2.1. Arrange for Airtech training for Distributor owners, sales managers, sales staff, sales associates and technical staff to occur within 45 days of signing this Agreement. 2.2. Develop and implement a proactive business plan, which Distributor and Airtech International Group, Inc. will agree upon. This plan will involve exposing the opportunity to the 5,000 client base of Distributor. 2.3. Sign up sub-distributors and manufacturers representatives to sell Products, using Airtech approved agreements.. 2.4. Actively promote the Products to potential customers through periodic mailings, promotions or other accepted marketing practices. 2.5. Represent and sell Airsopure air-filtration and purification products in your territory 2.6. Assign the responsibility for the success of the Products to at least one sales person who will be the specialist and champion for these products. 2.7. Maintain a reasonable inventory of the Products including replacement filters, to facilitate customer satisfaction. 2.8. Not sell products for shipment outside of the United States or designated territory without prior approval of Airtech. 2.9. Comply with all federal, state, and local laws, regulations, statues, etc., affecting the performance of business and this Agreement. 2.10. Follow up all leads to the disposition phase. This includes any and all leads referred by Airtech International Group, Inc. 2.11. Keep copies of lead dispositions for review by Airtech International Group, Inc. 3. AIRTECH INTERNATIONAL GROUP, INC. Duties and Responsibilities AIRTECH INTERNATIONAL GROUP, INC. shall: 3.1. Support the distributor efforts through various marketing initiatives, Product brochures, Product trend and technology correspondence, in-house training and other efforts deemed beneficial to the growth of the distributor business. 3.2. Furnish reasonable quantities of brochures and other support and marketing materials at cost. 3.3. Provide technical and sales training and field sales support as required. 3.4. Maintain reasonable levels of standard Product stock to facilitate prompt deliveries. 3.5. Keep abreast of market and Product trends and inform the distributor of new opportunities. 3.6. Notify Distributor of policy, pricing and other changes or practices that may affect business, markets and the customer, etc., sixty (60) days prior to the change, whenever practical. 3.7. Comply with all applicable federal, state and local laws, regulations, statute, etc., affecting the performance of business and this Agreement. 4. Cost and Expenses Each party shall be solely responsible for all costs and expenses incurred by it in performing its duties under this Agreement, including, but not limited to, salaries, employee commissions, advertisements, promotions, travel, delays, etc., unless otherwise stated and agreed to by all parties involved. 5. Patents and Trademarks Distributor agrees not to contest the validity of any licenses, patents, trademarks and/or rights thereto now or hereafter used or claimed by AIRTECH INTERNATIONAL GROUP, INC. and to notify AIRTECH INTERNATIONAL GROUP, INC. promptly of any infringement thereof by others whenever such acts come to the attention of the Distributor. Distributor agrees that all information concerning the products and marketing tools of Airtech are the Confidential Information of Airtech and they agree to treat them as Confidential Information and used only for sales/marketing purposes. Distributor also agrees to disclose Confidential Information only to those employees, agents and sales contacts reasonably requiring same and only for the above described purpose. The Distributor will apprise such persons of their duty to protect such Confidential Information to the same extent the Distributor is bound hereunder 6. Indemnification Distributor shall defend, indemnify and hold harmless AIRTECH INTERNATIONAL GROUP, INC., its representatives, agents and employees from and against all claims, damages, losses and expenses arising out of the Distributor's sale or use of the Products. 7. Sales Territory 7.1. The Distributor may market the Products within the geographical area considered to be the Distributor's normal marketing area, ("Sales Territory") including branch operations, unless otherwise indicated as an appendix or note to this Agreement. 7.2. The exclusive Sales Territory is the United States and Canada. 7.3 The Distributor understands and accepts that other channels of distribution including the Internet or catalogues may be utilized by Airtech International Group, Inc. for the sale of Products within the same Sales Territory, The sales territory will be the exclusive territories of the Distributor, Airtech may engage additional distributors for this Territory only as sub-distributors under the direction of Distributor. 7.4 Airtech International Group, Inc. may expand Distributor's Sales Territory based on area potentials, previous agreements, marketing policy, and the effectiveness of current distributors. The Distributor will not participate in the sales efforts of other channels of distribution, or receive commission or payments of any kind from sales to or by other channels of distribution. 7.5 The Distributor may sell Airtech Products through the Internet, and may not use catalogues or direct sales efforts outside of the Sales Territory. The sub-distributors set up by Distributor may not sell Airtech Products through Internet web sites, within sub distributor territory, nor use catalogues or direct sales, outside their sub- territory. 8. Performance Expectations 8.1. A three year goal for net purchases of these Products, expected of and agreed to by the Distributor, is as follows, the Parties agree that the goals are for the sales territory, the Parties further agree that these goals are subject to adjustment if surrounding or similar territories are selling more than the goals herein (on a per-capita basis) and/or other distribution channels have exceeded the goals. The Parties agree that any increase in goals is due to the territory granted to the Distributor. If the Parties do not agree on adjusted goals, then the Parties agree to an average of the three (3) goals decided by (1) a Airtech distributor chosen by mutual agreement and (2) one each of Airtech distributors chosen by each Party. Further, these revised goals may be different for each separate sub-sales territory, and/or each product group (consumer or commercial) and/or by individual product. Total 12 months ended -------------------------------------------------------- Purchases of $4,000,000 March 31, 2002 Purchases of $6,000,000 March 31, 2003 Purchases of $8,000,000 March 31, 2004 8.2 The Distributor understands and accepts that if these agreed upon goals or revised goals and/or sub goals by sub-sales territory are not achieved, and it is determined by Airtech at its sole discretion that the Distributor has not implemented the actions required to achieve these goals, the following actions may be taken: a) This Agreement as to the non performing Sales Territory may be terminated by Airtech International Group, Inc. (see 9.2, c.). b) This Agreement will continue and additional distributors or distribution channels may be established within the Sales Territory. c) Taking any action or failure to take any action allowed under this Agreement does not restrict Airtech from taking or not taking any action in the future. It is not required for the three years to conclude in order to invoke this paragraph. 9. Term and Termination 9.1. This Agreement shall be binding for a period of three years from the date of execution and shall automatically renew and extend for consecutive one year terms if notification to the contrary is not given thirty (30) days before the anniversary date. 9.2. This Agreement may be terminated or modified as follows: a) Prior to the end of the three-year period by either party without cause, and without time to cure, upon ninety (90) days written notice to the other party. b) Immediately by AIRTECH INTERNATIONAL GROUP, INC. upon written notice to Distributor in the event Distributor is adjudicated as bankrupt, becomes insolvent or makes an assignment for the benefit of creditors or if a principal owner is convicted of a felony that would adversely reflect on Airtech. c) By either party upon sixty (60) days written notice if the other party is in material breach of any of the terms of this Agreement or any joint business plans or Distributor's failure to reach agreed upon market penetration goals measured by annual purchases of AIRTECH INTERNATIONAL GROUP, INC. products. d) In the event of termination of this Agreement by either party, AIRTECH INTERNATIONAL GROUP, INC. shall have the option to repurchase all Products purchased hereunder of current design, unused and in saleable condition, which are in Distributor's inventory at the time of termination. If the termination is by AIRTECH INTERNATIONAL GROUP, INC., AIRTECH INTERNATIONAL GROUP, INC. shall pay the original purchase price as substantiated by the invoice or, if an invoice is unavailable, the published price prevailing at the time of manufacture. If the termination is by the Distributor, a handling charge of fifteen percent (15%) shall be deducted from the purchase price. e) Upon termination, Distributor shall return all books and records of Airtech International Group, Inc. to Dallas headquarters via prepaid freight. 10. Additional Provisions 10.1. Changes in Design. AIRTECH INTERNATIONAL GROUP, INC. may make ----------------- reasonable changes of any kind without notice and deliver revised designs or models of the Products against any order accepted by AIRTECH INTERNATIONAL GROUP, INC. AIRTECH INTERNATIONAL GROUP, INC. will not be responsible to the Distributor in any way for any inventory in the Distributor's possession of prior models of the Product or manufactured under prior design or specifications. 10.2. Force Majeure. AIRTECH INTERNATIONAL GROUP, INC.and Distributor ------------- shall not be liable for any delay in the delivery or sale of any Products if such delay is due to any cause beyond the reasonable control of AIRTECH INTERNATIONAL GROUP, INC. or Distributor. In the event of any such delay, the dates for performance by AIRTECH INTERNATIONAL GROUP, INC. or Distributor shall be extended for a period equal to the time lost by reason of such delay. 10.3. Distributor Not Agent. Distributor is an independent contractor and --------------------- shall not be considered in any respect an agent or representative of AIRTECH INTERNATIONAL GROUP, INC. and the Distributor shall not represent or hold out itself or its agents or representatives as the agents or representatives of AIRTECH INTERNATIONAL GROUP, INC., nor shall it allow others to do so. 10.4. Assignability. This Agreement may not be assigned or otherwise ------------- transferred by the Distributor without prior written consent by AIRTECH INTERNATIONAL GROUP, INC. Any purported attempt to assign or transfer this Agreement without AIRTECH INTERNATIONAL GROUP, INC.'s prior written consent shall be null and void and shall, at Airtech International Group, Inc.'s option immediately terminate this Agreement. 10.5. Confidentiality. The Parties agree to concurrently enter into a --------------- binding Confidentiality Agreement. 10.6. Change in Control. Transfer of a controlling interest in ----------------- Distributor to a party not in control at the time of execution of this Agreement shall be deemed an assignment without Airtech International Group, Inc.'s consent. 10.7. Use of Trade Name. The Distributor shall not use in it's corporate, ----------------- firm or individual name, or allow to be used by others in their corporate, firm or individual names, insofar as the Distributor has any power to prevent such use, the words Airtech International Group, Inc., Airsopure, and/or any other name, logo or trademark adopted by AIRTECH INTERNATIONAL GROUP, INC. for products or service or any words or names or combinations of words or names closely resembling any of them, without Airtech permission, which is hereby given. Airtech reserves the right to request that the words AIRSOPURE be removed from the Distributor's trade name at its sole discretion. 10.8. Warranty. The warranty for the Products is set forth in the Product -------- Literature and Installation, Operation and Maintenance manuals. THE WARRANTY SET FORTH IN THE PRODUCT LITERATURE AND INSTALLATION, OPERATION AND MAINTENANCE MANUALS CONSTITUTES THE ENTIRE WARRANTY OF AIRTECH INTERNATIONAL GROUP, INC. WITH RESPECT TO THE PRODUCTS SOLD HEREUNDER AND IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR ANY WARRANTY AGAINST INFRINGEMENT, ALL OF WHICH ARE HEREBY EXPRESSLY DISCLAIMED. DISTRIBUTOR SHALL NOT CHARGE AIRTECH INTERNATIONAL GROUP, INC. FOR ANY WARRANTY LABOR. 10.9. Disclaimers. IN NO EVENT SHALL AIRTECH INTERNATIONAL GROUP, INC. BE ----------- LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES RESULTING FROM ANY PERFORMANCE OR FAILURE TO PERFORM UNDER THIS AGREEMENT, OR ANY PURCHASE ORDER ISSUED HEREUNDER, OR THE USE OR PERFORMANCE OF THE PRODUCTS SOLD HEREUNDER, WHETHER DUE TO BREACH OF CONTRACT, BREACH OF WARRANTY, NEGLIGENCE OR OTHERWISE. 10.10. Notices. Any notice required or permitted hereunder shall be ------- sufficient if sent by first-class mail, postage prepaid to the other party at the address specified herein, except that any notice of termination or other pertinent responsibilities, may be by certified mail, return receipt requested. Either party may designate a new address for the purposes of notice by certified mail, return receipt requested. 10.11. Governing Law. This Agreement shall be construed and the relations ------------- between the parties determined in accordance with the laws of the State of Texas in the County of Dallas. 10.12. Entire Agreement. This Agreement contains the entire agreement ---------------- between the parties and supersedes all prior agreements, representations, promises and understandings, whether written or oral, which have been made in connection with the subject matter hereof. Any terms and conditions on any purchase order or other document issued by the Distributor shall be inapplicable to any sale of Products pursuant to this Agreement. 10.13. Binding Effect. This Agreement shall be binding upon, inure to the -------------- benefit of, and be enforceable by and against the parties hereto and their respective heirs, successors, personal representatives, legal representatives and assigns. 10.14. Captions. The headings used in this Agreement are for illustrative -------- purposes only, the wording in the paragraphs will control. 10.15. Arbitration. The Parties agree to submit any disputes arising from ----------- this Agreement to binding Arbitration in lieu of other legal means of resolutions. The Parties agree that the Arbitration will be held in Dallas Texas under the control of the American Arbitration Association or equivalent, if not available. ACCEPTED BY: (DISTRIBUTOR) on date first written above. W & B Service Co. Inc. Mr. Samuel S. McKenney - ------------------------------------------------- Print or Type Name Title /s/ Steve McKenney 2-19-01 - ------------------------------------------------- Signature, President Date Notice to: APPROVED BY: AIRTECH INTERNATIONAL GROUP, INC. on date first written above. C. J. Comu, Address for notice: CEO 15400 Knoll Trail, Suite 200 Dallas, Texas 75248 /s/ C.J. Comu 2-19-01 - --------------------------------------- Signature Date EX-10.12 9 dex1012.txt DISTRIBUTOR AGREEMENT EXHIBIT 10.12 AIRTECH INTERNATIONAL GROUP, INC. Distributor Agreement This Agreement made on this date of March 15, 2001 by and between Airtech International Group, Inc., having its principal place of business at 15400 Knoll Trail, Suite 200, Dallas, Texas, 75248, ("AIRTECH INTERNATIONAL GROUP, INC.") herein, and Southern Therapy, Inc., having its principal place of business at Austin Texas, ("Distributor") herein, collectively the "Parties" herein, mutually agree as follows: 1. Relationship AIRTECH INTERNATIONAL GROUP, INC. grants and the Distributor accepts: 1.1. The right to purchase AIRTECH INTERNATIONAL GROUP, INC's. Product Model 950 brand name labeled as "Airsopure" directly from AIRTECH INTERNATIONAL GROUP, INC., at the price and terms outlined in the most current published AIRTECH INTERNATIONAL GROUP, INC. distributor price pages. 1.2. The right to stock, display, promote and aggressively sell the Products to customers who are within the distributor's normal marketing area. 2. Distributor Duties and Obligations The Distributor shall: 2.1. Arrange for Airtech training for Distributor owners, sales managers, sales staff, sales associates and technical staff to occur within 45 days of signing this Agreement. 2.2. Develop and implement a proactive business plan, which Distributor and Airtech International Group, Inc. will agree upon. 2.3. Actively promote the Product to potential customers through periodic mailings, promotions or other accepted marketing practices. Product marketing and support from Airtech when requested. 2.4. Assign the responsibility for the success of the Product to at least one sales person who will be the specialist and champion for these products. Airtech to assist as needed. 2.5. Maintain a reasonable inventory of the Product including replacement filters, to facilitate customer satisfaction. Services and support to be handled through Airtech. 2.6. Not sell Product for shipment out of the United States of America without first written approval of Airtech International Group, Inc. 2.7. Comply with all federal, state, and local laws, regulations, statues, etc., affecting the performance of business and this Agreement. 2.8. Follow up all leads to the disposition phase. This includes any and all leads referred by Airtech International Group, Inc. 2.9. Keep copies of lead dispositions for review by Airtech International Group, Inc. Weekly sales reports and lead sheet reviews to be delivered to Airtech. 2.10. Distributor shall pay for all Airtech invoices when they are paid by purchaser. Distributor shall use all means available to accelerate payments. Ultimate collection lies with Distributor and they will be responsible for payment. 3. AIRTECH INTERNATIONAL GROUP, INC. Duties and Responsibilities AIRTECH INTERNATIONAL GROUP, INC. shall: 3.1. Support the distributor efforts through various marketing initiatives, Product brochures, Product trend and technology correspondence, in-house training and other efforts deemed beneficial to the growth of the distributor business. 3.2. Ship direct from plant based upon sales orders approved by STI, Distributor. 3.3. Furnish reasonable quantities of brochures and other support and marketing materials as needed, Distributor shall be responsible for prudent dissemination of support materials. 3.4. Provide technical and sales training and field sales support as required. 3.5. Maintain reasonable levels of standard Product stock to facilitate prompt deliveries. 3.6. Keep abreast of market and Product trends and inform the distributor of new opportunities. 3.7. Notify Distributor of policy, pricing and other changes or practices that may affect business, markets and the customer, etc., sixty (60) days prior to the change, whenever practical. 3.8. Comply with all applicable federal, state and local laws, regulations, statute, etc., affecting the performance of business and this Agreement. 4. Cost and Expenses Each party shall be solely responsible for all costs and expenses incurred by it in performing its duties under this Agreement, including, but not limited to, salaries, employee commissions, advertisements, promotions, travel, delays, etc., unless otherwise stated and agreed to by all parties involved. Airtech has agreed under separate cover to supplement Distributor costs and expenses. 5. Patents and Trademarks Distributor agrees not to contest the validity of any licenses, patents, trademarks and/or rights thereto now or hereafter used or claimed by AIRTECH INTERNATIONAL GROUP, INC. and to notify AIRTECH INTERNATIONAL GROUP, INC. promptly of any infringement thereof by others whenever such acts come to the attention of the Distributor. - -------------------------------------------------------------------------------- 2 6. Indemnification Distributor shall defend, indemnify and hold harmless AIRTECH INTERNATIONAL GROUP, INC., its representatives, agents and employees from and against all claims, damages, losses and expenses arising out of the Distributor's sale or use of the Product, except gross negligence of Airtech International Group, Inc. Airtech International Group, Inc. shall defend, indemnify and hold harmless Distributor, its representatives, agents and employees from and against all claims, damages, loses, and expenses arising out of the sale of Airtech International Group, Inc. Product, except gross negligence of Distributor. 7. Sales Territory 7.1. The Distributor may market the Product within the geographical area considered to be the Distributor's normal marketing area, ("Sales Territory") including branch operations, The Sales Territory is the United States market for medical equipment (Medical Market). The Medical Market is but not limited to the DMEs, HMEs and medical equipment distributors that carry other medical supplies for sale to persons with a physician's prescription. The Sales Territory will be exclusive to the Distributor. Any land areas not included will be expressly noted in an appendix attached to this Agreement. This Agreement assumes that a HCPCS Code application will be submitted and pursued with best efforts (Airtech International Group, Inc. does not guarantee that a code will be received) and that the Medicare Code for the Product will be pursued at the sole discretion of Airtech International Group, Inc. 7.2. The Distributor understands and accepts that other wholesalers, distributors, retail merchandiser or other channels of distribution including the Internet or catalogues may be utilized by Airtech International Group, Inc. for the sale of Product and other Airtech International Group, Inc. products within the same geographic Sales Territory. These other means of distribution will not target the Medical Market of Distributor. 7.3. Airtech International Group, Inc. may expand Distributor's Sales Territory based on area potentials, previous agreements, marketing policy, and the effectiveness of current distributors. The Distributor will not participate in the sales efforts of other channels of distribution, or receive commission or payments of any kind from sales to or by other channels of distribution. 7.4. The Distributor may not sell Airtech Product through the Internet, catalogues or direct sales efforts outside of the Sales Territory without written consent of Airtech International Group, Inc. 8. Performance Expectations 8.1. A three year goal for net purchases of these Product, expected of and agreed to by the distributor, is as follows: Net Purchases of $1,000,000 from 04/01/2001 to 03/31/2002 Net Purchases of $2,000,000 from 04/01/2002 to 03/31/2003 Net Purchases of $3,000,000 from 04/01/2003 to 03/31/2004 Terms of purchase are ninety (90) days payment is due in full. - -------------------------------------------------------------------------------- 3 8.2. The Distributor understands and accepts that if these agreed upon goals are not achieved, and it is determined that the Distributor has not implemented the actions required to achieve these goals, the following actions may be taken: a) This Agreement may be terminated by Airtech International Group, Inc. (see 9.2, c.) b) This Agreement will continue and additional distribution channels may be established. (This statement is not intended to imply that the distributor has an exclusive agreement or sales territory). c) Taking any action or failure to take any action allowed under this Agreement does not restrict Airtech from taking or not taking any action in the future. It is not required for the three years to occur in order to invoke this paragraph. 9. Term and Termination 9.1. This Agreement shall be binding for a period of three years from the date of execution and shall automatically renew and extend for consecutive one year terms if notification to the contrary is not given thirty (30) days before the anniversary date. 9.2. This Agreement may be terminated or modified as follows: a) Prior to the end of the three-year period by either party without cause, and without time to cure, upon ninety (90) days written notice to the other party. b) Immediately by AIRTECH INTERNATIONAL GROUP, INC. upon written notice to Distributor in the event Distributor is adjudicated as bankrupt, becomes insolvent or makes an assignment for the benefit of creditors. c) By either party upon ninety (90) days written notice if the other party is in material breach of any of the terms of this Agreement or any joint business plans or Distributor's failure to reach agreed upon market penetration goals measured by annual purchases of AIRTECH INTERNATIONAL GROUP, INC. products. d) In the event of termination of this Agreement by either party, AIRTECH INTERNATIONAL GROUP, INC. shall have the option to repurchase all Products purchased hereunder of current design, unused and in saleable condition, which are in Distributor's inventory at the time of termination. If the termination is by AIRTECH INTERNATIONAL GROUP, INC., AIRTECH INTERNATIONAL GROUP, INC. shall pay the original purchase price as substantiated by the invoice or, if an invoice is unavailable, the published price prevailing at the time of manufacture. If the termination is by the Distributor, a handling charge of fifteen percent (15%) shall be deducted from the purchase price. e) Upon termination, Distributor shall return all books and records of Airtech International Group, Inc. to Dallas headquarters via prepaid freight. - -------------------------------------------------------------------------------- 4 10. Additional Provisions 10.1. Changes in Design. AIRTECH INTERNATIONAL GROUP, INC. may make ------------------ reasonable changes of any kind without notice and deliver revised designs or models of the Products against any order accepted by AIRTECH INTERNATIONAL GROUP, INC. AIRTECH INTERNATIONAL GROUP, INC. will not be responsible to the Distributor in any way for any inventory in the Distributor's possession of prior models of the Product or manufactured under prior design or specifications. 10.2. Force Majeure. AIRTECH INTERNATIONAL GROUP, INC. shall not be -------------- liable for any delay in the delivery of any Products if such delay is due to any cause beyond the reasonable control of AIRTECH INTERNATIONAL GROUP, INC. In the event of any such delay, the dates for performance by AIRTECH INTERNATIONAL GROUP, INC. shall be extended for a period equal to the time lost by reason of such delay. 10.3. Distributor Not Agent. Distributor is an independent ---------------------- contractor and shall not be considered in any respect an agent or representative of AIRTECH INTERNATIONAL GROUP, INC. and the Distributor shall not represent or hold out itself or its agents or representatives as the agents or representatives of AIRTECH INTERNATIONAL GROUP, INC., nor shall it allow others to do so. 10.4. Assignability. This Agreement may not be assigned or otherwise -------------- transferred by the Distributor without prior written consent by AIRTECH INTERNATIONAL GROUP, INC. Any purported attempt to assign or transfer this Agreement without AIRTECH INTERNATIONAL GROUP, INC.'s prior written consent shall be null and void and shall, at Airtech International Group, Inc.'s option immediately terminate this Agreement. 10.5. Change in Control. Transfer of a controlling interest in ----------------- Distributor to a party not in control at the time of execution of this Agreement shall be deemed an assignment without Airtech International Group, Inc.'s consent. 10.6. Use of Trade Name. The Distributor shall not use in it's ------------------ corporate, firm or individual name, or allow to be used by others in their corporate, firm or individual names, insofar as the Distributor has any power to prevent such use, the words Airtech International Group, Inc., Airsopure, and/or any other name, logo or trademark adopted by AIRTECH INTERNATIONAL GROUP, INC. for products or service or any words or names or combinations of words or names closely resembling any of them. 10.7. Warranty. The warranty for the Products is set forth in the -------- Product Literature and Installation, Operation and Maintenance manuals. THE WARRANTY SET FORTH IN THE PRODUCT LITERATURE AND INSTALLATION, OPERATION AND MAINTENANCE MANUALS CONSTITUTES THE ENTIRE WARRANTY OF AIRTECH INTERNATIONAL GROUP, INC. WITH RESPECT TO THE PRODUCTS SOLD HEREUNDER AND IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR ANY WARRANTY AGAINST INFRINGEMENT, ALL OF WHICH ARE HEREBY - -------------------------------------------------------------------------------- 5 EXPRESSLY DISCLAIMED. DISTRIBUTOR SHALL NOT CHARGE AIRTECH INTERNATIONAL GROUP, INC. FOR ANY WARRANTY LABOR. 10.8. Disclaimers. IN NO EVENT SHALL AIRTECH INTERNATIONAL GROUP, ------------ INC. BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES RESULTING FROM ANY PERFORMANCE OR FAILURE TO PERFORM UNDER THIS AGREEMENT, OR ANY PURCHASE ORDER ISSUED HEREUNDER, OR THE USE OR PERFORMANCE OF THE PRODUCTS SOLD HEREUNDER, WHETHER DUE TO BREACH OF CONTRACT, BREACH OF WARRANTY, NEGLIGENCE OR OTHERWISE. 10.9. Notices. Any notice required or permitted hereunder shall be -------- sufficient if sent by first-class mail, postage prepaid to the other party at the address specified herein, except that any notice of termination or other pertinent responsibilities, may be by certified mail, return receipt requested. Either party may designate a new address for the purposes of notice by certified mail, return receipt requested. 10.10. Governing Law. This Agreement shall be construed and the -------------- relations between the parties determined in accordance with the laws of the State of Texas. 10.11. Entire Agreement. This Agreement contains the entire agreement ----------------- between the parties and supersedes all prior agreements, representations, promises and understandings, whether written or oral, which have been made in connection with the subject matter hereof. Any terms and conditions on any purchase order or other document issued by the Distributor shall be inapplicable to any sale of Products pursuant to this Agreement. 10.12. Binding Effect. This Agreement shall be binding upon, inure to --------------- the benefit of, and be enforceable by and against the parties hereto and their respective heirs, successors, personal representatives, legal representatives and assigns. 10.13. Captions. The headings used in this Agreement are for --------- illustrative purposes only, the wording in the paragraphs will control. 10.14. Arbitration. The Parties agree to submit any disputes arising ------------ from this Agreement to binding Arbitration in lieu of other legal means of resolutions. The Parties agree that the Arbitration will be held in Dallas Texas under the control of the American Arbitration Association or equivalent, if not available. 10.15. Confidentiality Agreement. The Parties agree to enter into a ------------------------- Mutual Confidentiality Agreement that is incorporated by reference herein. 10.16. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. - -------------------------------------------------------------------------------- 6 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. ACCEPTED BY: (DISTRIBUTOR) - -------------------------------- -------------------------------- Print or Type Name Title Print or Type Name Title - -------------------------------- -------------------------------- Signature Date Signature Date Notice to: Southern Therapy, Inc. Austin TX Additional notice to: ACCEPTED BY: AIRTECH INTERNATIONAL GROUP, INC. C.J. Comu Address for notice: Chief Executive Officer 15400 Knoll Trail, Suite 200 Dallas, Texas 75248 - ------------------------------- Signature Date - -------------------------------------------------------------------------------- 7 EX-21 10 dex21.txt SUBSIDIARIES OF REGISTRANT Exhibit 21 ---------- List of Subsidiaries for : -------------------------- Airtech International Group, Inc. a Wyoming Corporation; ------------------------------------------------------- Airtech International Corporation, A Texas Corporation; Airsopure Inc., a Texas Corporation Airsopure International Group, Inc. a Nevada Corporation; Watersopure, Inc., a shelf-non-operating, Texas Corporation; McCleskey Sales and Services, Inc., a dormant Texas Corporation And, Airsopure, Inc. is a General Partner in "Airsopure 999, LP", a Texas Limited Partnership EX-23.1 11 dex231.txt CONSENT OF TURNER, STONE & COMPANY EXHIBIT 23.1 Independent Auditors' Consent ----------------------------- The Board of Directors and Stockholders Airtech International Group, Inc. Dallas, Texas We consent to the use and inclusion in this Form SB-2 Registration Statement and the Prospectus, which is part of this Registration Statement, of our report dated August 31, 2000 on our audit of the consolidated financial statements of Airtech International Group, Inc. and subsidiaries at May 31, 2000 and 1999 and for the two year period ended May 31, 2000. We also consent to the use and inclusion of our report dated April 13, 2001 on our review of the consolidated financial statements at February 28, 2001 and for the fiscal quarter then ended. We also consent to the reference of our Firm under the caption "Experts" in the Registration Statement and Prospectus. Turner, Stone & Company, L.L.P. Certified Public Accountants Dallas, Texas May 14, 2001 -----END PRIVACY-ENHANCED MESSAGE-----