UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended January 31, 2003
Commission File Number 001-14503
DECTRON INTERNATIONALE INC.
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(Exact name of registrant as specified in its charter)
Quebec, Canada N/A
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(State of Incorporation or other (I.R.S. Employer Identification No.)
Jurisdiction of Incorporation or
Organization)
4300 Poirier Blvd., Montreal, Quebec, Canada H4R 2C5
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(Address of principal executive offices) (Zip Code)
(514) 334-9609
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
Redeemable Common Stock Purchase Warrants
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X | No | |
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes X No __
The issuer's revenues for the most recent fiscal year were $ 36,883,064
The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the closing price on April 28, 2003 of $4.01 was
approximately $ 4,128,524
As of April 28, 2003, there were 2,919,500 shares of Common Stock, no
par value per share, outstanding.
Documents incorporated by reference: None.
DECTRON INTERNATIONALE INC.
2003 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PART I
Item 1. Business........................................................................................4
Item 2. Properties......................................................................................9
Item 3. Legal Proceedings..............................................................................10
Item 4. Submission of Matters to Vote of Security Holders..............................................10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matter ..........................11
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................................12
Item 7. Financial Statements...........................................................................17
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures...................................................................................17
PART III
Item 9. Directors and Executive Officers of the Registrant.............................................18
Item 10. Executive Compensation.........................................................................21
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................25
Item 12. Certain Relationships and Related Transactions.................................................26
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................28
Item 14. Controls and Procedures........................................................................28
Signatures..................................................................................................29
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein including, without limitation,
those concerning (i) the strategy of Dectron Internationale Inc. ("Dectron"),
(ii) Dectron's expansion plans and (iii) Dectron's capital expenditures, contain
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") concerning Dectron's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Business." Dectron undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
EXCHANGE RATE DATA
Dectron maintains its books of account in Canadian dollars, but has
provided the financial data in this Form 10-KSB in United States dollars and on
the basis of generally accepted accounting principles as applied in the United
States, and Dectron's audit has been conducted in accordance with generally
accepted auditing standards in the United States. All references to dollar
amounts in this Form 10-KSB, unless otherwise indicated, are to United States
dollars.
The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On April 28, 2003, the exchange rate was Cdn$
0.6904 per US$ 1.00.
Year Ended December 31, 1998 1999 2000 2001 2002
---------------------- ---- ---- ---- ---- ----
Rate at end of period $0.6532 $0.6929 $0.6669 $0.6267 $0.6572
Average rate during period 0.6745 0.6730 0.6733 0.6444 0.6388
High 0.7061 0.6929 0.6984 0.6697 0.6596
Low 0.6376 0.6582 0.6410 0.6241 0.6206
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Unless otherwise indicated, all reference to "Dectron," "us," "our" and
"we" refer to Dectron Internationale Inc. and its wholly-owned subsidiaries:
Dectron Inc. ("Dectron Inc."), Dectron USA, Inc. ("Dectron USA"), Refplus Inc.
("Refplus"), Thermoplus Air Inc. ("Thermoplus"), Circul-Aire Inc.
("Circul-Aire"), IPAC 2000, Inc., ("IPAC") and International Water Maker's Inc
("IWM").
Overview
Dectron is located primarily in and around Montreal, Quebec, Canada.
Through our operating subsidiaries, Dectron Inc., Refplus, Thermoplus,
Circul-Aire, IPAC and IWM, we manufacture and supply an array of products for
the dehumidification, refrigeration, air conditioning and indoor air quality
("IAQ") markets. The products manufactured and supplied include mechanical
dehumidifiers and energy recovery systems through Dectron Inc., and
refrigeration and air conditioning systems through Refplus and Thermoplus.
Thermoplus also has a line of air filtration products. Circul-aire specializes
in air, gas, dust and fume filtration, IAQ and heat recovery. IPAC specializes
in precision cooling products, air conditioning products and compressed air
products. IWM owns a patented process to extract significant amounts of moisture
from the Air. IWM's products provide filtered, de-mineralized water to a variety
of applications.
We believe that we have structured Dectron in such a way that, other
than with respect to the raw materials required to make the components for our
products and certain specialty products, we are not dependent on outside
suppliers for fabricated parts for our products. We have invested significant
resources in our manufacturing equipment and as a result we can manufacture the
most important components for any of our fabricated products, regardless of
whether the product is standard or a custom design.
Dectron Inc.
Dectron Inc., the largest of the subsidiaries, was incorporated in 1977
to develop, manufacture and market standard and custom design dehumidification
equipment. After extensive research and development, Dectron Inc. introduced a
line of indoor pool and commercial dehumidifiers under its DRY-O-TRON TM
trademark. This product line has experienced tremendous success in North America
and as a result has allowed us to become, in our opinion, the leader in North
America's indoor pool dehumidification business. We believe that Dectron is now
one of North America's leading manufacturers of dehumidification and closed
looped energy recyclers.
Dectron Inc.'s standard products are now primarily manufactured by
Thermoplus. As a result, Dectron Inc. focuses its own manufacturing operations
on the manufacture of its customized dehumidification systems. We believe that
the customized product market is where our competitive advantage is most
evident. Ordinarily, with a customized product, it is often very difficult to
commit to an aggressive delivery date for the finished product. However, since
we manufacture many of the component parts in-house, we are able to commit to an
aggressive delivery schedule. We have taken the necessary steps to align
ourselves with several suppliers of our raw materials so that we are not
dependent on any one supplier. In addition, we store a sufficient inventory of
raw material to supply our immediate needs. Some of our customized product
customers include Celebration City, Walt Disney World in Florida and the
Goodwill Games.
4
Dectron Inc., through its subsidiary Dectron USA, operates a sales
office in the United States located in Roswell, Georgia. This office supports
the efforts of Dectron Inc.'s network of trained manufacturer's representatives
who sell Dectron Inc.'s products throughout the United States. Dectron Inc. also
has sales representatives throughout Canada and overseas. We invite our
independent sales representatives and their technicians to be trained and
certified by Dectron Inc.'s own technical staff at no cost to the attendees at a
training school run by Dectron. We also use the training school to both market
our products and demonstrate to potential buyers, first hand, the technical
excellence our employees have to offer as a service to our customers. We believe
that customer service and technical expertise are a large part of what sets us
apart from our competitors. We also market our products in trade magazines,
through industry associations and by attending trade shows where we display and
demonstrate many of our products.
Refplus
Refplus was incorporated in 1993 to manufacture high quality modular
commercial and industrial refrigeration and air conditioning equipment for
commercial and special applications. Its products include refrigeration systems,
condensers, coils, walk-in storage coolers and freezers. In addition, Refplus
manufactures all of the heat transfer coils used by Dectron Inc. Refplus'
primary customers are supermarkets and convenience or grocery stores. Refplus'
product line, is designed around hydrofluorocarbon refrigerants ("HFC"), and
features high quality products intended to meet the needs of a broad range of
customers. See "Industry Background."
Since inception, Refplus has manufactured some complex products for
application in fruit storage facilities, industrial baking facilities and blast
chillers for meat processing plants. We believe that our Refplus product lines
offer an excellent opportunity for future expansion. See "Expansion Plans."
Refplus has a network of sales representatives in Canada, however, the
majority of its sales are conducted through a network of independent
wholesalers. See "Sales and Marketing."
Thermoplus
In 1987, Keepkool Transfer de Chaleur Inc. ("Keepkool"), the former
parent company of Thermoplus, purchased the manufacturing facilities of York
International in St-Jerome, Quebec. Keepkool was owned by a group of investors
active in the heating, ventilation and air-conditioning ("HVAC") industry, which
group included Ness Lakdawala, our President and CEO, to manufacture air
conditioning systems. Since inception, Thermoplus has introduced and sold a
variety of HVAC product lines through a network of Canadian wholesalers. In
1995, Thermoplus introduced specialized product lines in the field of
dehumidification and specialized air conditioning.
Thermoplus' present product lines include dehumidification equipment,
water source air conditioners and heat pumps, portable or mobile air
conditioning equipment, industrial air handlers, air to fluid heat exchangers
and IAQ filtration products. These product lines are sold through a network of
Canadian wholesalers and HVAC representatives. Although Thermoplus' products are
sold throughout North America, with some exports outside of North America, the
majority of its revenues are derived from sales to Dectron Inc. We believe that
Thermoplus' product lines have growth potential, estimating that the present
potential for growth in both sales and manufacturing output is roughly 3 times
its present output. See "Expansion Plans."
Circul-Aire
In 1998, Dectron acquired the Circul-aire Group, consisting of Cascade
Technologies Inc. 9048-3140 Quebec, Inc. and its subsidiaries, and P.M. Wright
Ltd. (collectively referred to as "Circul-aire"). Circul-aire is considered one
of the pioneers of the air treatment industry and is a worldwide recognized
leader in the advanced technologies of gas-phase filtration and energy recovery.
Circul-aire's reputation has been built on years of research and development and
growing numbers of worldwide satisfied customers. Circul-aire's in house
laboratory and team of experienced engineers offer a systematic integrated
approach in solving ever changing and difficult environmental control problems.
Unique systems are designed and manufactured in Circul-aire's facilities to suit
specific applications. Equipment efficiency and filter media life is optimized
with Circul-aire's preventive maintenance program.
5
Circul-aire's Multi-Mix TM media and integrated systems are used to
reduce the odor and corrosion potential of commercial, institutional, sewage
treatment and industrial environments. Combined with air-to-air heat exchanger
options, Circul-aire's systems recuperate valuable energy from various
airstreams. All Circul-aire systems are engineered and manufactured to withstand
the most severe industrial environments, including those containing corrosive
gases.
IPAC
IPAC was acquired by Dectron in September 1999. IPAC specializes in the
business of precision cooling products, air conditioning products and compressed
air products, and manufactures industrial products, heat transfer products,
compressed air products, engineered systems sheet metal fabrication and painting
products. We believe that IPAC's products, such as steam traps for steam coils
in HVAC systems, complement and complete our existing product lines. IPAC also
provides us with a manufacturing facility in the United States and opens a new
market to Dectron, the compressed air market, in which we believe IPAC to be
well established.
INTERNATIONAL WATER MAKER'S INC.
In July 2002, Dectron acquired International Water Maker's Inc. IWM
owns a patented process to extract significant amounts of moisture from the air.
Dectron believes this unique technology surpasses any other water-generation
technology currently on the market, given that using minimal energy, it provides
filtered, de-mineralized water to a variety of applications.
IWM has products designed specifically for residential, commercial,
institutional, agricultural, military and specialized industrial applications.
For instance, its MRU product line - which has been deemed "Best Practice" by
one of the top three oil production companies - provides a unique system of
on-line cleaning for gas turbine blades that results in sustained high
operating-efficiency and cost-savings for offshore and onshore oil platforms.
IWM complements Dectron's line of products by adding a water filtration
process to our extensive line of air filtration products thereby placing Dectron
in a unique position of filtering both air and water contaminates.
Industry Background; Product Application
Dectron is aware of an increased public movement to encourage healthy
environments in all public places and the resulting market potential for its
products. For example, the hazards of second hand smoke have led to the ban of
cigarette smoking in most public areas. The public's demands have also been
focused on finding engineered solutions to ensure a healthy and comfortable
environment in schools and in the workplace. The theme has become much wider in
scope and has gained recognition as IAQ.
The American Society of Heating, Refrigeration and Air Conditioning
Engineers ("ASHRAE") is the organization that sets ventilation standards in the
heating, refrigeration and air-conditioning industries for the United States and
Canada. ASHRAE has revised and re-drafted virtually all of the previous
ventilation standards with the objective to meet the public demand for healthier
indoor environments and to eliminate potential health hazards such as the
much-publicized "Sick Building Syndrome." These standards are found in Article
62-1989R "Standard for Acceptable Ventilation Rates" ("62-1989R") and have
gained the acceptance and support of many important and related institutions
such as the International Society for Indoor Air Quality ("ISIAQ") and other
worldwide environmental associations.
6
We believe that the standards in 62-1989R will have a far-reaching
effect on the fresh air requirements for all new and existing public buildings
in Canada and the United States. These standards specify, among other things,
that 5 to 20 cubic feet per minute (CFM) per person of fresh air should be
introduced into all public places. The exact amount depends on the level of
activity and the capacity of the space in question.
As a result, a market has been created by these new fresh air
requirements. HVAC experts agree that the biggest challenge and key to avoid
"Sick Building Syndrome" is to introduce fresh air and to remove humidity from
the air. Moisture and humidity has been identified as one of the main causes of
health hazards such as Legionnaire's Disease.
Heightened IAQ awareness has created a niche market for new product
development. Dectron has developed a product line of "Make-Up Air Dehumidifiers"
that we believe can solve what we perceive as the two main problems in IAQ:
moisture and humidity. Dectron's products are capable of bringing the required
amounts of outdoor air into public areas while at the same time dehumidifying
the air, thus addressing the problems of moisture and humidity.
Our engineers have designed our products for the IAQ market with a
reversible Water Source Heat Pump, a commonly used heating system that can be
easily connected to the popular water loop systems found today in almost every
building in every major North American city. We believe that Dectron's Make-Up
Air Dehumidifiers represent the most economical solution to meet the new
standards for healthy buildings, and have the potential to become one of our
most important and fastest growing products lines, along with our swimming pool
dehumidifiers.
In addition, we intend to aggressively market Thermoplus' Air
Filtration & Purification product line that we believe offers a comprehensive
solution to IAQ in industrial and non-industrial applications.
Our goal is to aggressively expand into the IAQ market, while
continuing to maintain and expand the individual markets we currently serve.
Business Strategy
Our objective is to become North America's leading supplier of
dehumidification, refrigeration and other IAQ products, and to develop a strong
international sales network. As we intensify our marketing efforts, we will
continue to attempt to increase our market share for our various products. We
intend to place special emphasis in the short term on our Refplus products in
the United States to address the need for HFC refrigeration, and on Thermoplus'
Make-Up Air and Air Filtration & Purification products for the IAQ market.
Sales and Marketing
Our current sales and marketing efforts take place at the subsidiary
level, with each subsidiary taking its own approach with respect to its
products.
Dectron Inc. markets its products on several levels. Dectron Inc.
markets its products directly through trade magazines and industry associations,
as well as by attending and demonstrating its products at numerous trade shows
throughout North America. Regionally, Dectron Inc. markets its products through
non-employee sales representatives who enjoy exclusive rights to their
respective sales regions. At present, Dectron Inc. has approximately 120
regional representatives throughout North America, and expects to add more in
2004. Internationally, Dectron Inc. has sales coverage in England, Portugal,
Israel, Kuwait and Taiwan. We believe that while the international markets
provide tremendous growth opportunities for us, it is important to first develop
a strong support network.
Thermoplus' advertising and marketing is limited because the majority
of its revenues are derived from sales made to Dectron Inc. and Refplus.
Thermoplus primarily sells its products through wholesalers in Canada, and
through manufacturing representatives, one based in Canada and the other based
in the United States. However, we also market Thermoplus' products, including
its Air Filtration & Purification product line for the IAQ market, through
Dectron Inc.'s sales representatives.
7
Refplus' marketing and advertising is currently done almost exclusively
through trade magazines. Most of its sales are through wholesalers and original
equipment manufacturers. Generally, Refplus does not sell directly to the end
user. Its sales force currently consists of service personnel who are based at
Dectron's headquarters, outside sales people based in Canada and in the United
States, and two sales agencies covering Canada and the United States with
approximately 22 representatives. We believe that with the phasing out of
hydrochlorofluorocarbons ("HCFC") refrigeration products and the legislative
push towards HFC refrigeration products (such as Refplus products), Refplus'
product line is well suited for an aggressive growth commitment.
Circul-aire markets its products on several levels. In Canada, its
products are sold through a network of sales agents that cover every province
and major market area. In the United States, Circul-aire's products (air
filtration and energy recuperation) are sold through a network of core
representation organizations. We are presently looking for additional
representatives to more fully cover the United States market.
In Asia and Europe, Circul-aire's market is extended through agents
located in each major market. Circul-aire has also opened branch offices staffed
with sales, engineering and service personnel in Jakarta, Indonesia, Bangalore,
India and Vancouver, Canada.
Circul-aire advertises in industry journals, magazines, and its website
where prospective customers can obtain information on its products and also
actively participates in trade associations and tradeshows.
IPAC markets its products through regional representatives in the
United States and Canada.
IMW markets its products through its internal sales force.
Expansion
We have grown from a single product and single-market company into a
group of companies that cover a full range of humidity control, IAQ control,
energy recycling and refrigeration products and air purification, and have the
production potential for both custom engineered and mass-produced products. We
believe that the introduction of a complete line of products to penetrate all
segments of the IAQ market will put us in the unique position of being one of
the only fully integrated companies of our kind. We expect that with a strong
sales and marketing strategy to promote these and other subsequent products, we
will experience a period of substantial growth, although there can be no
assurance thereof. We plan to continuously inform our current and new targeted
customers about our products through technical seminars, product exhibitions and
publication of major events in industry journals.
We intend to strengthen our position in the United States by
establishing multiple regional sales and distribution offices. We believe that
our active presence in the United States with Dectron products will allow us to
closely track the performance of our products in the market and will help
solidify alternate distribution networks for our Refplus product. We also intend
to aggressively pursue other international markets, starting with South America,
followed by the Caribbean and Mexico.
The present need for specialized IAQ equipment in North America
represents a market, estimated by our management to be in the multi-million
dollar range, in which only a limited number of companies have presently taken
the lead. We believe that with our team of engineering and design specialists,
Dectron can be on the leading edge as a manufacturer and supplier of specialized
IAQ equipment into the next century.
8
Competition
The industries in which we compete are highly competitive. We compete
against a number of local, regional and national manufacturers in each of our
business segments, many of these competitors have been in existence longer than
us and some of which have substantially greater financial resources than us. We
believe that competition from new entrants, especially in the IAQ markets will
come, if at all, from large corporations which may be able to compete with us on
the basis of price, and as a result may have a material adverse affect on our
results of operations. In addition, there can be no assurance that other
companies will not develop new or enhanced products that are either more
effective than our products, or would render our products non-competitive or
obsolete.
Employees
As of April 28, 2003, Dectron (including our subsidiaries) employed a
total of approximately 486 full-time employees, 5 of which are in executive
positions, 58 of whom are engaged in engineering and research and development,
63 of whom are engaged in sales and related services, 24 of whom are in
administration, and the remainder of which are in production. An in-house union
represents 41 of our employees, all of which work at Thermoplus. Certain terms
of their employment are part of a collective bargaining agreement that expires
in 2005. Management considers its relations with its employees to be
satisfactory.
Patents and Trademarks
We have three United States and two Canadian patents. The patents
expire between 2007 and 2015. Three of the patents relate to swimming pool
dehumidifiers. One relates to the Method and Apparatus for Controlling Heat
Rejection in a Refrigeration System, and the other to the Extraction of Moisture
from Air.
We have trademarked the names "Dectron" and "Dry-O-Tron" in both the
United States and Canada. The trademarks come up for renewal between 2007 and
2015. We also hold the trademark in "MultiMix" and "MM Multi-Mix" in the United
States and Canada. The MultiMix and MMMulti-Mix trademarks will be due for
renewal in the year 2014. In addition, we hold the trademark in "CIRCUL-AIRE" in
the United States and Canada, which was renewed in 1999.
ITEM 2. PROPERTIES
We maintain our executive office at leased premises located at 4300
Poirier Blvd., Montreal, Quebec H4R 2C5. This lease expires January 31, 2005. We
also have eight manufacturing facilities, of which five are leased and three are
owned. Seven of our manufacturing facilities are located in or near Montreal,
Quebec, and one is located in Niagara Falls, New York. The manufacturing
facilities, which we own, are located in St. Jerome, Quebec, Boucherville,
Quebec, and Niagara Falls, New York. The facilities are in good condition and do
not require any significant capital expenditure. We maintain property insurance
on the three owned manufacturing facilities in an amount that we believe to be
sufficient. Of the five leased facilities, two of the leases expire on January
31, 2005, one June 30, 2010, one October 31, 2016 and one December 31, 2006. We
also lease, for a monthly rent of $946, a 1,000 square foot sales facility in
Roswell, Georgia. In addition, we lease, for a monthly rent of approximately
$1,418 a 3,700 square foot sales and warehousing facility in Toronto, Ontario.
And also, we lease a 1,000 square foot facility in Pompano Beach Florida, for
approximately $ 1,400. Our facilities have an aggregate of approximately 471,000
square feet. We pay an aggregate of approximately $42,044 rent per month. We
believe that suitable additional space will be available in the future on
commercially reasonable terms.
We are seeking International Quality Standard ISO-9001 certification
for our Dectron Inc. facility and International Quality Standard ISO-9002
certification for our Thermoplus facility. ISO 9001 and ISO 9002 require the
facility to meet certain stringent requirements established in Europe but
adopted throughout the world, which ensure that facilities' manufacturing
processes, equipment and associated quality control systems will satisfy
specific customer requirements. We believe that ISO certification will benefit
us in the markets in which we compete. There is no assurance that ISO
certification will be obtained in the near future, if at all.
9
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings now pending or threatened
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of the security holders.
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock and warrants are traded on the Nasdaq SmallCap Market
and the Boston Stock Exchange and have been so traded since the completion of
our initial public offering on October 5, 1998. Our common stock is listed on
the Nasdaq SmallCap Market under the symbol "DECT" and on the Boston Stock
Exchange under the Symbol "DRN." Our warrants are listed on the Nasdaq SmallCap
Market under the symbol "DECT W" and on the Boston Stock Exchange under the
Symbol "DRN&W." As of April 28, 2003, we had 2,919,500 shares of common stock
and 1,210,000 warrants outstanding. The following table sets forth the high and
low sales prices for our common stock and warrants as reported on the Nasdaq
SmallCap Market.
COMMON STOCK WARRANTS
---------------------- ----------------------
High Low High Low
Fiscal year ended January 31, 2003: $7.400 $3.200 $1.150 $0.070
First quarter (2/1/02 thru 4/30/02) $7.400 $5.500 $1.150 $0.690
Second quarter (5/1/02 thru 7/31/02) $5.600 $4.100 $0.990 $0.300
Third quarter (8/1/02 thru 10/31/02) $5.120 $3.200 $0.820 $0.210
Fourth quarter (11/1/02 thru 1/31/03) $5.550 $4.700 $0.540 $0.070
Fiscal year ended January 31, 2002: $7.450 $2.770 $1.120 $0.110
First quarter (2/1/01 thru 4/30/01) $4.125 $3.250 $0.500 $0.130
Second quarter (5/1/01 thru 7/31/01) $3.950 $2.770 $0.500 $0.120
Third quarter (8/1/01 thru 10/31/01) $7.450 $3.050 $1.120 $0.110
Fourth quarter (11/1/01 thru 1/31/02) $6.400 $4.280 $0.850 $0.500
As of April 28, 2003 there were 32 shareholders of record and
approximately 500 beneficial owners.
On April 28, 2003, the last sale price of our common stock and warrants
as reported on the Nasdaq SmallCap Market was $4.01 and $0.13 respectively.
Dividend Policy
We have never paid or declared dividends on our common stock. The
payment of cash dividends, if any, in the future, is within the discretion of
our Board of Directors and will depend on our earnings, capital requirements,
financial condition and other relevant factors. We intend to retain future
earning for use in our business.
11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the selected historical financial data, financial statements and notes
thereto and the other historical financial information of Dectron contained
elsewhere in this Annual Report on Form 10-KSB. The statements contained in this
Annual Report on Form 10-KSB that are not historical are forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act of 1934, including statements
regarding Dectron's expectations, intentions, beliefs or strategies regarding
the future. Forward-looking statements include Dectron's statements regarding
liquidity, anticipated cash needs and availability and anticipated expense
levels. All forward-looking statements included in this prospectus are based on
information available to Dectron on the date hereof, and Dectron assumes no
obligation to update any such forward-looking statement. It is important to note
that Dectron's actual results could differ materially from those in such
forward-looking statements.
Overview
Dectron has been in operation since June 1977 and has grown from a
single product and single market company into a group of manufacturers in order
to address the three most important factors affecting indoor air conditions:
temperature, humidity and contaminant control. We secure our contracts through a
network of representatives. We are not dependent upon any major customer for a
significant portion of its revenues.
Dectron's objective is to become a leading force in the IAQ market by
addressing combined technology niche applications and by providing superior
engineering services and product quality. Dectron intends to devote significant
efforts to the development of equipment for the IAQ market. Management
anticipates that the IAQ market will have enormous growth in the next 25 years.
We believe that there is a need in the North American market for specialized IAQ
equipment and this represents a tremendous opportunity. Notwithstanding the
present economic slowdown, Management foresees a stable market demand,
particularly in the humidity and temperature control side of the business.
Dectron has two subsidiaries that each specialize on a particular
market segment of the IAQ market, Circul-aire, a manufacturer of contaminant
control solutions, and IPAC, a manufacturer of precision air conditioning
equipment.
Results of Operations
Fiscal year ended January 31, 2003 ("Fiscal 2003") compared to fiscal year ended
January 31, 2002 ("Fiscal 2002")
Revenues for the year ended January 31, 2003 were $36,883,064, a 15.5%
increase over prior year revenues of $31,939,002.
Gross profit increased by $630,147 to $11,723,537 over the same period.
In comparison to the 15.5% increase in revenue gross profit increased by 5.7%.
Operating expenses decreased by $414,975 during Fiscal 2003.
Selling and marketing expenses decreased $475,394 in Fiscal 2003. As a
percentage of revenues, selling and marketing expenses decreased to 12.3% from
16.8%.
12
General and administrative expenses increased by $562,808 to
$3,655,127. As a percentage of revenues, general and administrative increased to
9.9% from 9.7% of sales.
Depreciation decreased by $211,701 to $1,356,364. As a percentage of
sales, depreciation decreased to 3.7% from 4.9%.
Financing expenses decreased by $290,688 from $1,341,308 to $1,050,620.
As a percentage of revenues, financing expenses decreased from 4.2% to 2.8%.
Earnings from operations increased by $1,045,122 from a loss of
$278,144 to earnings of $766,978.
Earnings before income taxes and discontinued operations increased to
$634,636 compared to a loss of $278,144 for fiscal 2002.
Tax expenses increased by $424,265 because mainly of an increase in
taxable income.
Earnings before discontinued operations in Fiscal 2003 was $440,250, an
increase of $488,515 from Fiscal 2002 loss of $48,265
Earnings from discontinued operations net of taxes in Fiscal 2003 was
$105,276, an increase of $9,946 from Fiscal 2002.
Gain on discontinued operations, net of taxes in Fiscal 2003 was
$590,686, compared to none in Fiscal 2002
As a result, Dectron reported net income of $1,136,212
Fiscal year ended January 31, 2002 ("Fiscal 2002") compared to fiscal year ended
January 31, 2001 ("Fiscal 2001")
Revenues for the year ended January 31, 2002 were $31,939,002, a 5.9%
decrease over prior year revenues of $33,958,558.
Gross profit decreased by $927,882 to $11,093,390 over the same period.
In comparison to the 5.9% decrease in revenue gross profit decreased by 7.7%.
Operating expenses increase by $62,004 in 2002.
Selling and marketing expenses increased $51,378 in Fiscal 2002. As a
percentage of revenues, selling and marketing expenses increased to 16.8% from
15.6%.
General and administrative expenses increased by $56,999 to $3,092,319.
As a percentage of revenues, general and administrative increased to 9.7% from
8.9% of sales.
Depreciation increased by $46,907 to $1,568,065 due to the addition of
capital assets. As a percentage of sales, depreciation increased to 4.9% from
4.5%.
Financing expenses decreased by $93,280 from $1,434,588 to $1,341,308.
As a percentage of revenues, financing expenses remained stable at 4.2%.
13
Loss before income taxes and discontinued operations was $278,144 for
2003 compared to earnings of $711,722 in fiscal 2001.
Tax expenses decreased by $312,382 mainly because of the decrease in
taxable income and loss carry forwards.
Loss before discontinued operations in fiscal 2002 was $48,265, a
decrease of $677,504 from earnings of $629,239 in fiscal 2001.
Earnings from discontinued operations net of taxes in fiscal 2002 was
$95,330, a decrease of $132,957 from fiscal 2001.
As a result, Dectron reported net income of $47,065.
Liquidity and Capital Resources
In Fiscal 2003, the Company generated a positive cash flow from
operating activities of $208,028 due mainly to depreciation and amortization. In
Fiscal 2002, the Company generated a positive cash flow from operating
activities of $2,056,741 due mainly to lower accounts receivable and inventory
level
The principal sources of cash were depreciation and amortization in the
amount of $1,356,364 and income tax payable in the amount of $684,578. The
principal uses of cash were an increase in account receivable of $1,860,796.
Cash flow from investing activities increased by $329,585 mainly as a
result of the proceeds from the sale of a division in the amount of $961,640.
The principal use of cash was for the acquisition of equipment for a total of
$565,828.
Financing activities provided net cash flow in the amount of $190,366.
The principal source of cash was from bank loans in the amount of $861,368 and
issuance of shares in the amount of $502,300. The principal uses of cash flow
from financing were repayments of long-term debt in the amount of $884,960.
Net cash flow provided after all activities was $751,746
In Fiscal 2003, the Company's secured credit arrangement with National
Bank of Canada remained in place as follows. This facility included an
aggregated credit line of Cdn $16,500,000 of which Cdn $8,250,000 can be
financed through Bankers Acceptance. The amount available to the Company is
equal to 75% of "eligible accounts receivable" as defined in the Line of Credit
Agreement, plus 50% of the inventory values, net of work in process, up to a
maximum advance against inventory of approximately Cdn $7,500,000. Dectron's
borrowings under the Line of credit bears interest at Canadian prime plus .25%,
which at January 31, 2003 amounted to 4.5%. Interest on any borrowings is
payable monthly. The Company is in full compliance with all of the banking
covenants (including financial covenants and ratios) and is required to report
to its bankers on a monthly basis. The Company finances its operations mainly
through the use of Bankers Acceptance bearing an average lending rate of prime.
All borrowings are collateralized by the assets of the Company.
In April 2002, the company renegotiated a mortgage note and an
equipment note and replaced them with a new loan of $1,983,330 with National
Bank of Canada bearing interest at 7.18%.
14
In June 2002, the Company entered into a financial lease for an amount
of $ 400,000 bearing interest at 6.989%.
In August 2002, the Company entered into a financial lease for an
amount of $ 97,925 bearing interest at 6.025%.
In October 2002, the Company entered into a financial lease for an
amount of $ 267,896 bearing interest at 6.275%.
Fiscal 2002
In Fiscal 2002, the Company renewed a secured credit arrangement with
National Bank of Canada. This new facility included an aggregated credit line of
Cdn $ 16,500,000 of which Cdn $8,250,000 can be financed through Bankers
Acceptance. The amount available to the Company is equal to 75% of "eligible
accounts receivable" as defined in the Line of Credit Agreement, plus 50% of the
inventory values, net of work in process, up to a maximum advance against
inventory of approximately Cdn $ 7,500,000. Dectron's borrowings under the Line
of credit bears interest at Canadian prime plus .25%, which at January 31, 2003
amounted to 3.25%. Interest on any borrowings is payable monthly. The Company is
in full compliance with all of the banking covenants (including financial
covenants and ratios) and is required to report to its bankers on a monthly
basis. The Company finances its operations mainly through the use of Bankers
Acceptance bearing an average lending rate of prime. All borrowings are
collateralized by the assets of the Company.
Fiscal 2001
In Fiscal 2001, the Company renewed a secured credit arrangement with
National Bank of Canada. This new facility included an aggregated credit line of
Cdn $ 13,000,000 of which Cdn $6,000,000 can be financed through bankers
acceptance. The amount available to the Company is equal to 75% of "eligible
accounts receivable" as defined in the Line of Credit Agreement, plus 50% of the
inventory values, net of work in process, up to a maximum advance against
inventory of approximately $ 5,000,000. Dectron's borrowings under the Line of
credit bears interest at Canadian prime plus .25%, which at January 31, 2001
amounted to 7.25%. Interest on any borrowings is payable monthly. The Company is
in full compliance with all of the banking covenants (including financial
covenants and ratios) and is required to report to its bankers on a monthly
basis. The Company finances its operations mainly through the use of Bankers
Acceptance bearing an average lending rate of prime. All borrowings are
collateralized by the assets of the Company.
In Fiscal 2001, the Company also secured credit arrangement with
National Bank of Canada in New York. This new facility included an aggregated
credit line of US $ 1,250,000. The amount available to the Company is equal to
80% of "eligible accounts receivable" as defined in the Line of Credit
Agreement, plus 60% of the inventory values, net of work in process, up to a
maximum advance against inventory of approximately $ 625,000. Dectron's
borrowings under the Line of credit bears interest at American prime plus .5%.
Interest on any borrowings is payable monthly.
In February 2000, Dectron renegotiated a bank loan and replaced it with
a term loan in the amount of $2,527,000 USD bearing interest at the Bank's
American Prime Rate plus 1% for a term of 5 years and a mezzanine loan in the
amount of $ 1,000,000 USD bearing interest at the Bank's American Prime Rate
plus 3% for a term of three years.
In February 2000, the Company entered into a mortgage note in the
amount US$1,652,000 and equipment note in the amount of US$406,000 with the
National Bank of Canada both bearing interest a American prime plus .75%.
15
In August 2000, the Company entered into a note agreement with National
Bank of Canada for the purchase of new equipment bearing interest at the
American prime rate plus .75%
In August 2000, the Company entered into two financial leases for a
total amount of Cdn $951,420 to finance equipment, both bearing interest at
8.48%
In November 2000, the Company entered into two term loans for a total
of $ 700,000 to finance capital acquisitions bearing interest at prime plus .75%
Foreign Exchange
The Company is a Canadian company with U.S. sales amounting to
approximately 55% of it's total sales while the majority of Dectron's expenses
are incurred in Cdn $. Due to the relatively high proportion of sales in U.S.$,
Dectron's results could be adversely affected by upward variations in the value
of the Canadian dollar. As of January 31, 2003, the Company did not have a
formal foreign exchange policy in effect.
16
ITEM 7. FINANCIAL STATEMENTS
The financial statements are included at the end of this Annual Report
on Form 10-KSB at the pages included below.
Page
Financial Statements: Number
------
Report of Independent Auditors....................................................................... F - 1
Consolidated Balance Sheets for the years ended January 31, 2003 and January 31, 2002 ............... F - 2 to F - 3
Consolidated Statements of Earnings for the
years ended January 31, 2003, 2002 and 2001........................................................ F - 4 to F - 5
Consolidated Statements of Cash Flows
for the years ended January 31, 2003, 2002 and 2001................................................ F - 6 to F - 8
Consolidated Statements of Stockholders' Equity
for the years ended January 31, 2003, 2002 and 2001................................................ F - 9
Notes to Consolidated Financial Statements........................................................... F - 10 to F - 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no changes in or disagreements with its
Accountants.
17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
The officers and directors of Dectron, and further information
concerning them, are as follows:
Name Age Position
---- --- --------
Ness Lakdawala 69 Chairman of the Board of Directors,
President and Chief Executive Officer
Roshan Katrak 59 Vice President of Human Relations and
Director
Mauro Parissi 37 Chief Financial Officer, Secretary and
Director
Michel Lecompte 53 Vice President of Operations of Refplus
Leena Lakdawala 35 Executive Vice President and Director
Liam Cheung 33 Director
Gilles Richard 64 Director
_________
Each director is elected for a period of one year at our annual meeting
of stockholders and serves until the next such meeting and until his or her
successor is duly elected and qualified. Directors may be re-elected annually
without limitation. Officers are appointed by, and serve at the discretion of,
our Board of Directors (the "Board"). The board of directors met 3 times during
the year ended January 31, 2003.
Set forth below is a biographical description of each of our directors
and executive officers based on information supplied by each of them.
Ness Lakdawala has served as the President, Chief Executive Officer and
Chairman of Dectron since our inception, and has also served as the President
and Chief Executive Officer of Dectron Inc. since 1994. Prior to joining Dectron
Inc., Mr. Lakdawala was President of Blanchard Ness Limited, a company which he
founded in 1976. From 1987 to present, Mr. Lakdawala has served as the President
of Thermoplus. In January 1996, Thermoplus filed a proposal under the provisions
of the Bankruptcy Act which gave full payment to secured creditors who filed a
proof of claim. From 1987-1988, Mr. Lakdawala was Chairman of the Heating
Refrigeration Air Conditioning Institute of Canada. Mr. Lakdawala has also
served as the Governor of the American Society of Heating, Refrigeration and Air
Conditioning Engineers, Inc. ("ASHRAE"), the organization that sets ventilation
standards in Canada and the United States. Mr. Lakdawala is currently a member
of ASHRAE and the Refrigeration Service Engineers Society. Ness Lakdawala is the
husband of Roshan Katrak and the father of Leena Lakdawala.
18
Roshan Katrak has served as Vice President of Human Relations of
Dectron since our inception, and has served in the same capacity with Dectron
Inc. since 1994. She has also served as a Director of Dectron since 1998. From
1976 to 1994, she was a Director of Blanchard Ness Limited, and from 1987 to
present has been Vice President of Human Relations for Thermoplus. In January
1996, Thermoplus filed a proposal under the provisions of the Bankruptcy Act
which gave full payment to secured creditors who filed a proof of claim. Mrs.
Katrak received her Honors Degree in Psychology in 1964. Roshan Katrak is the
wife of Ness Lakdawala and the mother of Leena Lakdawala.
Mauro Parissi, C.A. has served as the Chief Financial Officer,
Secretary and a Director of Dectron since our inception, and has also served as
the Controller of Dectron Inc. since 1996. From 1995-1996, Mr. Parissi was an
auditor with the firm of Mizgala & Cie. From 1990-1995, Mr. Parissi was an
auditor with the firm of Hart, David Lloyd, F.C.A., C.I.P. Mr. Parissi is
currently a member of The Canadian Institute of Chartered Accountants and The
Order of Chartered Accountants of Quebec. Mr. Parissi received his graduate
diploma in Public Accountancy from McGill University in 1995.
Michel Lecompte has served as the Vice President of Operations since
our inception and President of Refplus since 1994. From 1977 to 1994, Mr.
Lecompte was with Blanchard Ness as both Chief Engineer and Estimator. Mr.
Lecompte was involved in estimating commercial and industrial HVAC systems as
well as updating operating and maintenance procedures to improve existing
equipment efficiency. Mr. Lecompte also provided technical guidance to
construction departments and identified evaluated and resolved problems. Mr.
Lecompte is a member of ASHRAE and is a voting member of ASHRAE's Technical
Committee which establishes worldwide acceptance of HVAC standards. In addition,
Mr. Lecompte conducts many HVAC seminars focusing on refrigeration and heat
recovery. Mr. Lecompte is also a member of the Refrigeration Service Engineers
Society.
Leena Lakdawala has served as Executive Vice President and a Director
of Dectron since our inception, and has also served as Vice President of
Production and Administration for Dectron Inc. since 1994. She is currently a
member of the Heating Refrigeration and Air Conditioning Institute. Mrs.
Lakdawala received her B.A from Concordia University in 1993. Leena Lakdawala is
the daughter of Ness Lakdawala and Roshan Katrak.
Liam Cheung has served as a Director of Dectron since 2001. Since 2002,
Mr. Cheung is the Executive Vice-President and Chief Operating Officer for
Penson Financial Services Canada Inc., a firm offering technical and operational
services to investment dealers in Canada. From 1997 to 2002, Mr. Cheung was the
President and Founder of IC Education, a new economy e-learning company
delivering leading edge technology through a unique combination of business,
education and technology. From 1992 to 1997, he served as Executive
Vice-President, Fixed Income of Marleau, Lemire Securities Inc. From 1990 to
1992, Mr. Cheung was an actuarial specialist for Towers Perrin. Mr. Cheung
received a Bachelor of Mathematics with Distinction from the University of
Waterloo in 1990, is an Associate of the Society of Actuaries and also holds
Certified Financial Analyst Designation.
Gilles Richard has served as a Director of Dectron since 2001. Mr.
Richard is a semi-retired businessman who was previously the President of Le
Circuit Lincoln Mercury, the sixth largest dealership in Canada. Mr. Richard was
also involved with partner in a distributorship of lift-truck (Mitsubishi's
M-Lift), two computer companies which created software applications car
dealership, and most recently the construction of commercial and residential
buildings. Over the years, Mr. Richard was a director or officer of various
organizations such as the Nada (National Automobile Association) and CADA
(Canadian Automobile Association).
AUDIT COMMITTEE
The Company's board of directors has an audit committee comprised of Mauro
Parissi, Liam Cheung and Gilles Richard. The audit committee makes
recommendations to the board of directors regarding the independent auditors for
the Company, approves the scope of the annual audit activities of the Company's
independent auditors, review audit results and will have general responsibility
for all of the Company's auditing related matters.
19
Indemnification of Officers and Directors
Our Bylaws provide that we shall indemnify to the fullest extent
permitted by Canadian law our directors and officers (and former officers and
directors). Such indemnification includes all costs and expenses and charges
reasonably incurred in connection with the defense of any civil, criminal or
administrative action or proceeding to which such person is made a party by
reason of being or having been our officer or director if such person was
substantially successful on the merits in his or her defense of the action and
he or she acted honestly and in good faith with a view to our best interests,
and if a criminal or administrative action that is enforced by a monetary
penalty, such person had reasonable grounds to believe his or her conduct was
lawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted our directors, officers and
controlling persons and our underwriters pursuant to the foregoing provisions,
or otherwise, we have been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses, incurred or paid by one of our directors,
officers or controlling persons in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person or by
our underwriters in connection with the securities being registered, we will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Exchange Act requires Dectron's officers and
directors, and persons who own more than 10 percent of the registered class of
Dectron's equity securities to file reports of ownership on Forms 3, 4 and 5
with the SEC. Officers, directors and greater than 10 percent shareholders are
required by SEC regulation to furnish Dectron with copies of all Forms 3, 4 and
5 they file. Based solely upon its review of any such reports furnished to
Dectron, Dectron believes that during the fiscal year ended January 31, 2003,
such persons made all required filings.
20
Item 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid
by Dectron during each of the last three fiscal years to our Chief Executive
Officer and to each of our executive officers who earned in excess of $100,000
during the year ended January 31, 2003.
Summary Compensation Table
Name and Restricted Other
Principal Annual Stock Com-
Position Year Salary (1) Bonus Awards Options/SARs Pensation
-------- ---- ---------- ----- ------ ------------ ---------
Ness Lakdawala 2003 $142,380 -0- -0- -0- -0-
Chairman of the Board of 2002 $142,380 -0- -0- -0- -0-
Directors, President, and 2001 $140,647 -0- -0- -0- -0-
Chief Executive Officer
(1) This reflects the aggregate salaries paid to Mr. Lakdawala during the fiscal
years presented by Dectron, Refplus and Thermoplus.
Employment Agreements
We entered into an employment agreement with Mr. Ness Lakdawala, our
Chief Executive Officer on October 5, 1998, the effective date of our initial
public offering. The employment agreement is for a term of two years, renewable
for additional one-year periods. The employment agreement entitled Mr. Lakdawala
to an annual salary of $200,000, adjusted annually for increases in the Consumer
Price Index. In the event that we are subject to a takeover or a change of
control event, Mr. Lakdawala is entitled to a bonus equal, on an after tax
basis, to five times his then current annual base salary. Mr. Lakdawala's
employment agreement contains a non-competition provision, which forbids him
from engaging in a competitive business during his employment and for a period
of one year thereafter. Mr. Lakdawala's employment agreement was extended for an
additional two years on the same conditions as above in October 2000 and for an
additional two years on the same conditions in October 2002.
We do not currently have employment agreements with any of our other
officers or directors.
Board Compensation Report
Executive Compensation Policy
Dectron's executive compensation policy is designed to attract,
motivate, reward and retain the key executive talent necessary to achieve our
business objectives and contribute to our long-term success. In order to meet
these goals, Dectron's compensation policy for our executive officers focuses
primarily on determining appropriate salary levels and providing long-term
stock-based incentives. To a lesser extent, the Dectron's compensation policy
also contemplates performance-based cash bonuses. Dectron's compensation
principles for the Chief Executive Officer are identical to those of Dectron's
other executive officers.
21
Cash Compensation. In determining its recommendations for adjustments
to officers' base salaries for Fiscal 2003, we focused primarily on the scope of
each officer's responsibilities, each officer's contributions to Dectron's
success in moving toward its long-term goals during the fiscal year, the
accomplishment of goals set by the officer and approved by the Board for that
year, our assessment of the quality of services rendered by the officer,
comparison with compensation for officers of comparable companies and an
appraisal of our financial position. In certain situations, relating primarily
to the completion of important transactions or developments, we may also pay
cash bonuses, the amount of which will be determined based on the contribution
of the officer and the benefit to Dectron of the transaction or development.
Equity Compensation. The grant of stock options to executive officers
constitutes an important element of long-term compensation for the executive
officers. The grant of stock options increases management's equity ownership in
us with the goal of ensuring that the interests of management remain closely
aligned with those of our stockholders. The Board believes that stock options in
Dectron provide a direct link between executive compensation and stockholder
value. By attaching vesting requirements, stock options also create an incentive
for executive officers to remain with us for the long term.
Chief Executive Officer Compensation
As indicated above, the factors and criteria upon which the
compensation of Ness Lakdawala, our Chief Executive Officer, is based are
identical to the criteria used in evaluating the compensation packages of the
other executive officers of Dectron. The Chief Executive Officer's individual
contributions to Dectron include his leadership role in establishing and
retaining a strong management team, developing and implementing our business
plans and attracting investment capital to Dectron. In addition, we have
reviewed compensation levels of chief executive officers at comparable companies
within our industry.
Other Compensation
Outside directors may be paid an honorarium for attending meetings of
the Board of Directors of Dectron, in an amount that management anticipates will
not exceed $500 per meeting.
Stock Option Plans
1999 Stock Option Plan
We have adopted a Stock Option Plan (the "1999 Plan") pursuant to which
650,000 shares of Common Stock are reserved for issuance, 241,500 options are
currently issued and outstanding.
On September 2, 1999, the Board granted options under our 1999 Stock
Option Plan to certain members of our Board and certain employees. Leena
Lakdawala, Roshan Katrak, Mauro Parissi, and Richard Ness were granted 60,000,
60,000, 18,000 and 8,000 options, respectively. Subject to certain limitations,
the options granted are exercisable one year after issuance. Subsequent to the
one-year anniversary date of the grant, the option holders may exercise the
option up to 25% per year of the total options granted for the following four
years. Each of the options will be fully exercisable on November 4, 2003, and
expire on November 4, 2004. The exercise price of the options is $3.00
The 1999 Plan is administered by the Board of Directors, who will
determine, among other things, those individuals who shall receive options, the
time period during which the options may be partially or fully exercised, the
number of shares of Common Stock issuable upon the exercise of the options and
the option exercise price.
The 1999 Plan is effective for a period of five years, expiring in
2003. Options may be granted to officers, directors, consultants, key employees,
advisors and similar parties who provide us with their skills and expertise. The
1999 Plan is designed to enable management to attract and retain qualified and
competent directors, employees, consultants and independent contractors. Options
granted under the 1999 Plan may be exercisable for up to five years, and shall
be at an exercise price all as determined by the Board. Options are
non-transferable except by the laws of descent and distribution or a change in
control of Dectron, as defined in the 1999 Plan, and are exercisable only by the
participant during his or her lifetime. Change in control includes (i) the sale
of substantially all of the assets of Dectron and merger or consolidation with
another company, or (ii) a majority of the Board changes other than by election
by the stockholders pursuant to Board solicitation or by vacancies filled by the
Board caused by death or resignation of such person.
22
If a participant ceases affiliation with Dectron by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other types of termination allow the participant three months
to exercise, except for termination for cause, which results in immediate
termination of the option.
The exercise price of an option may not be less than the fair market
value per share of Common Stock on the date that the option is granted in order
to receive certain tax benefits under the Income Tax Act of Canada (the "ITA").
The ITA requires that the exercise price of all future options will be at least
85% of the fair market value of the Common Stock on the date of grant of the
options. A benefit equal to the amount by which the fair market value of the
shares at the time the employee acquires them exceeds the total of the amount
paid for the shares or the amount paid for the right to acquire the shares shall
be deemed to be received by the employee in the year the shares are acquired
pursuant to paragraph 7(1) of the ITA. Where the exercise price of the option is
equal to the fair market value of the shares at the time the option is granted,
paragraph 110(1)(d) of the ITA allows a deduction from income equal to one
quarter of the benefit as calculated above. If the exercise price of the option
is less than the fair market value at the time it is granted, no deduction under
paragraph 110(1)(d) is permitted. Options granted to any non-employees, whether
directors or consultants or otherwise will confer a tax benefit in contemplation
of the person becoming a stockholder pursuant to subsection 15(1) of the ITA.
Options under the 1999 Plan must be issued within five years from the
effective date of the 1999 Plan.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by Dectron become available again for issuance
under the 1999 Plan.
The 1999 Plan may be terminated or amended at any time by the Board of
Directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 1999 Plan may not be
increased without the consent of our stockholders.
2001 Stock Option Plan
We also adopted the 2001 Stock Option Plan (the "2001 Plan") pursuant
to which 500,000 shares of Common Stock are reserved for issuance, 115,500
options are currently issued and outstanding.
On January 4, 2002, the Board granted options under our 2001 Stock
Option Plan to certain members of our Board and certain employees. Leena
Lakdawala, Roshan Katrak, Mauro Parissi, Liam Cheung, and Gilles Richard were
granted 15,000, 15,000, 5,000, 3,000 and 3,000 options, respectively. Subject to
certain limitations, the options granted are exercisable one year after
issuance. Subsequent to the one-year anniversary date of the grant, the option
holders may exercise the option up to 25% per year of the total options granted
for the following four years. Each of the options will be fully exercisable on
January 4, 2006, and expire on January 4, 2007. The exercise price of the
options is $4.20
The 2001 Plan is administered by the Board of Directors, who will
determine, among other things, those individuals who shall receive options, the
time period during which the options may be partially or fully exercised, the
number of shares of Common Stock issuable upon the exercise of the options and
the option exercise price.
The 2001 Plan is effective for a period of ten years, expiring in 2011.
Options may be granted to officers, directors, consultants, key employees,
advisors and similar parties who provide us with their skills and expertise. The
2001 Plan is designed to enable management to attract and retain qualified and
competent directors, employees, consultants and independent contractors. Options
granted under the 2001 Plan may be exercisable for up to ten years, and shall be
at an exercise price all as determined by the Board. Options are
non-transferable except by the laws of descent and distribution or a change in
control of Dectron, as defined in the 2001 Plan, and are exercisable only by the
participant during his or her lifetime. Change in control includes (i) the sale
of substantially all of the assets of Dectron and merger or consolidation with
another company, or (ii) a majority of the Board changes other than by election
by the stockholders pursuant to Board solicitation or by vacancies filled by the
Board caused by death or resignation of such person.
23
If a participant ceases affiliation with Dectron by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other types of termination allow the participant three months
to exercise, except for termination for cause, which results in immediate
termination of the option.
The exercise price of an option may not be less than the fair market
value per share of Common Stock on the date that the option is granted in order
to receive certain tax benefits under the Income Tax Act of Canada (the "ITA").
The ITA requires that the exercise price of all future options will be at least
85% of the fair market value of the Common Stock on the date of grant of the
options. A benefit equal to the amount by which the fair market value of the
shares at the time the employee acquires them exceeds the total of the amount
paid for the shares or the amount paid for the right to acquire the shares shall
be deemed to be received by the employee in the year the shares are acquired
pursuant to paragraph 7(1) of the ITA. Where the exercise price of the option is
equal to the fair market value of the shares at the time the option is granted,
paragraph 110(1)(d) of the ITA allows a deduction from income equal to one
quarter of the benefit as calculated above. If the exercise price of the option
is less than the fair market value at the time it is granted, no deduction under
paragraph 110(1)(d) is permitted. Options granted to any non-employees, whether
directors or consultants or otherwise will confer a tax benefit in contemplation
of the person becoming a stockholder pursuant to subsection 15(1) of the ITA.
Options under the 2001 Plan must be issued within ten years from the
effective date of the 2001 Plan.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by Dectron become available again for issuance
under the 2001 Plan.
The 2001 Plan may be terminated or amended at any time by the Board of
Directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 2001 Plan may not be
increased without the consent of our stockholders.
24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 28, 2003
with respect to each beneficial owner of 5% or more of the outstanding shares of
our common stock, each of our officers and directors, and all of our officers
and directors as a group:
Names and Address of Beneficial Amount and Nature of Percentage of Shares
Owner (1) Beneficial Ownership(2) Outstanding
--------- ----------------------- -----------
Ness Lakdawala 1,722,269 (3) 58%
Roshan Katrak 1,722,269 (4) 58%
Mauro Parissi 44,850 (5) 1.5%
Leena Lakdawala 100,050 (6) 3.4%
Michel Lecompte 18,974 (7) *
Liam Cheung 2,750 (8) *
Gilles Richard 1,050 (9) *
All directors and officers
As a group (7 persons)
(3)-(9) 1,889,943 65.3%
* Less than one %.
(1) The address of each individual is c/o Dectron Internationale Inc., 4300
Poirier Blvd., Montreal, Quebec, Canada H4R 2C5.
(2) Based upon information furnished to us by the directors and executive
officers or obtained from our stock transfer books. We are informed that
these persons hold the sole voting and dispositive power with respect to the
common stock except as noted herein. For purposes of computing "beneficial
ownership" and the percentage of outstanding common stock held by each
person or group of persons named above as of the date of this annual report,
any security which such person or group of persons has the right to acquire
within sixty (60) days after such date is deemed to be outstanding for the
purpose of computing beneficial ownership and the percentage ownership of
such person or persons, but is not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person.
(3) Represents (i) 43,561 shares of Common Stock directly owned, (ii) 67,395
shares of Common Stock and 48,750 options to purchase Common Stock owned by
Roshan Katrak, Mr. Lakdawala's wife, (iii) 69,684 shares of Common Stock
owned by Roshaness Inc., a company owned by Mr. Lakdawala, and (iv)
1,492,879 owned by 3103-7195 Quebec Inc., a company owned by Mr. Lakdawala's
spouse and children.
25
(4) Represents (i) 67,395 shares of Common Stock and 48,750 options to purchase
Common Stock directly owned, (ii) 43,561 shares of Common Stock owned by
Ness Lakdawala, Ms. Katrak's husband, (iii) 69,684 shares of Common Stock
owned by Roshaness Inc., a Company owned by Ness Lakdawala, and (iv)
1,492,879 shares owned by 3103-7195 Quebec Inc., a company owned by Ms.
Katrak and her children.
(5) Includes 5,750 options to purchase Common Stock.
(6) Includes 40,250 options to purchase Common Stock.
(7) Includes 2,500 options to purchase Common Stock
(8) Includes 750 options to purchase Common Stock.
(9) Includes 750 options to purchase Common Stock
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We lease our St. Hubert, Quebec manufacturing facility from Roshan
Katrak, our Vice President of Human Relations and the wife of Ness Lakdawala,
our President, Chairman and CEO, for a monthly rent of $3,069 per month. We
believe that the lease was made on terms no less favorable than could be
obtained from unaffiliated third parties.
We lease our Grande Allee manufacturing facilities from Investiness
Inc., a company owned by Ness Lakdawala's spouse and children, for an aggregate
monthly lease payment of $14,788. We believe that the lease was made on terms no
less favorable than could be obtained from unaffiliated third parties.
Immediately prior to the effective date of the Registration Statement
for our initial public offering (the "Offering"), we restructured our corporate
structure ("Restructuring"). In order to complete the Restructuring, (i) Dectron
Inc., which prior to the Restructuring owned a majority interest in Refplus,
acquired the minority interests in Refplus, which included both common stock and
preferred stock (and assumed Refplus' loan payables of approximately
Cdn$125,000) which is included in the Cdn$1,149,050 number mentioned below) in
exchange for 62,500 shares of Dectron's Common Stock and Cdn$102,503; (ii)
Dectron Inc. acquired all of the outstanding securities of Thermoplus, which
included both Common Stock and preferred stock, and assumed Thermoplus' parent
company's loan payables (approximately Cdn$497,000, which amount is included in
the Cdn$1,149,050 number mentioned below) in exchange for 194,621 shares of
Dectron's Common Stock and Cdn$423,738, and (iii) Dectron acquired all of the
issued and outstanding securities of Dectron Inc. in exchange for 1,492,879
shares of the Dectron's Common Stock. The shares of Dectron Inc. were owned by
159653 Canada, Inc. which was a holding company beneficially owned by Mr.
Lakdawala. The Refplus and Thermoplus' parent company loans payable represent
the repayment of loans made to such companies. In connection with the
Restructuring, we issued 1,750,000 shares of Common Stock and promissory notes
in the aggregate amount of Cdn$1,149,050. Of this amount, Cdn$557,050 (or
approximately U.S.$400,000) were repaid out of the proceeds of the Offering. Of
these amounts, an aggregate amount of 1,674,059 shares of Common Stock and
promissory notes in the aggregate amount of Cdn$592,000 were issued to Ness
Lakdawala, and his affiliates. The Cdn$592,000 was repaid out of Dectron's cash
flow, without interest, in 12 equal monthly installments which repayment
commenced three months after the Offering.
Mr. Lakdawala and his affiliates received their 1,674,059 shares of
Dectron for contributing their interest in Dectron's subsidiaries. Specifically,
Mr. Lakdawala's affiliate received 1,492,879 shares in exchange for 100% of
159653 Canada Inc., which owned 100% of Dectron Inc. prior to the Restructuring;
156,808 shares for a portion of their shares of KeepKool which represented 86%
of KeepKool (KeepKool owned 94% of Thermoplus prior to the Restructuring); and
24,372 share for his shares of 3294242 Canada Inc. which represented 61% of
3294242 (3294242 owned 49.99% of Refplus, Inc. prior to the Restructuring).
Dectron Inc. owned 50.01% of Refplus Inc. prior to the Restructuring. The two
promissory notes totaling Cdn$592,000 were issued to Mr. Lakdawala and his
affiliates in exchange for Cdn$222,000 of debt owed to Mr. Lakdalawa by KeepKool
and Cdn$370,000 for a portion of his shares of KeepKool.
26
The terms of the Restructuring were negotiated between Mr. Lakdawala
and the other owners of the minority interest in Refplus and Thermoplus. Mr.
Lakdawala and his affiliates held a majority interest in Thermoplus prior to the
Restructuring. Dectron owned a majority interest in Refplus prior to the
Restructuring and Mr. Lakdawala owned a majority of the 49.99% interest in
Refplus purchased by Dectron in the Restructuring. The value was arrived at
based on negotiations between Dectron and the sellers (other than Mr. Lakdawala
and his affiliates). Dectron did not have two independent disinterested
directors to ratify the transactions. There can be no assurance that such
transaction was on terms no less favorable than Dectron could have obtained from
other third parties, although management believes that they were as favorable.
Between March and June 2000, we made loans of $152,441 to Mauro
Parissi, our Chief Financial Officer, and $162,109 to Leena Lakdawala, our
Executive Vice-President. The loans were used to finance purchase of the
Dectron's stock and bore interest at the Canadian prescribed interest rate of
five percent (5%). As of Jan. 31, 2003, the loan balances of Mr. Parissi and Ms
Lakdadawala are $128,701 and, $195,932 respectively.
All future material transactions, including any loans, between Dectron
and its officers, directors, principal stockholders or affiliates of any of them
have been and will be on terms no less favorable to Dectron than those that can
be obtained from unaffiliated third parties, and will be approved in advance by
a majority of the independent and disinterested directors who had access, at
Dectron's expense, to Dectron's or independent legal counsel.
27
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements.
Report of Independent Auditors........................................................... F - 1
Consolidated Balance Sheets for the years ended January 31, 2003 and 2002................ F- 2 to F - 3
Consolidated Statements of Earnings
for the years ended January 31, 2003, 2002 and 2001.................................. F- 4 to F - 5
Consolidated Statements of Cash Flows
for the years ended January 31, 2003, 2002 and 2001.................................. F- 6 to F - 8
Consolidated Statements of Stockholders' Equity
for the years ended January 31, 2003, 2002 and 2001.................................. F - 9
Notes to Consolidated Financial Statements...............................................F- 10 to F - 26
(b) Reports on Form 8-K.
None.
(c) Exhibits.
99.1 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by Ness Lakdawala, Chairman, President and CEO.
99.2 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by Mauro Parissi, Chief Financial Officer
Item 14. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation within 90 days of the filing date of this report, that our
disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DECTRON INTERNATIONALE INC
By: /s/ Ness Lakdawala
-----------------------------
Ness Lakdawala
Chairman and Chief Executive Officer
Dated: May 1, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Ness Lakdawala Chairman, President, Chief Executive May 1, 2003
--------------------- Officer
Ness Lakdawala
/s/ Roshan Katrak Vice President of Human Relations May 1, 2003
--------------------- and Director
Roshan Katrak
/s/ Mauro Parissi Chief Financial Officer, Secretary May 1, 2003
--------------------- and Director
Mauro Parissi
/s/ Michel Lecompte Vice President of Operations of Refplus May 1, 2003
---------------------
Michel Lecompte
/s/ Leena Lakdawala Executive Vice President and Director May 1, 2003
---------------------
Leena Lakdawala
/s/ Liam Cheung Director May 1, 2003
---------------------
Liam Cheung
/s/ Gilles Richard Director May 1, 2003
---------------------
Gilles Richard
29
CERTIFICATIONS
I, Ness Lakdawala, certify that:
1. I have reviewed this annual report on Form 10-KSB of Dectron Internationale
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors and material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 1, 2003
/s/ Ness Lakdawala
----------------------------------------
Ness Lakdawala
Chairman, President and Chief Executive Officer
30
CERTIFICATIONS
I, Mauro Parissi, certify that:
1. I have reviewed this annual report on Form 10-KSB of Dectron Internationale
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors and material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 1, 2003
/s/ Mauro Parissi
----------------------------------------
Mauro Parissi
Chief Financial Officer
31
DECTRON INTERNATIONALE INC.
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2003
DECTRON INTERNATIONALE INC.
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2003
TABLE OF CONTENTS
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Earnings F-4 - F-5
Consolidated Statements of Cash Flows F-6 - F-8
Consolidated Statements of Stockholders' Equity F-9
Notes to Consolidated Financial Statements F-10 - F-26
[Letterhead of Schwartz Levitsky Feldman SRL]
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
Dectron Internationale Inc.
We have audited the consolidated balance sheets of Dectron Internationale Inc.
as at January 31, 2003 and 2002 and the related consolidated statements of
earnings, cash flows and changes in stockholders' equity for each of the years
ended January 31, 2003, 2002 and 2001. These consolidated financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatements. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dectron
Internationale Inc. as at January 31, 2003 and 2002 and the results of its
operations and its cash flows for each of the years ended January 31, 2003, 2002
and 2001, in conformity with generally accepted accounting principles in the
United States of America.
Since the accompanying financial statements have not been prepared and audited
in accordance with generally accepted accounting principles and generally
accepted auditing standards in Canada, they may not satisfy the reporting
requirements of Canadian statutes and regulations.
Montreal, Quebec
April 17, 2003 Chartered Accountants
F-1
DECTRON INTERNATIONALE INC.
Consolidated Balance Sheets
As at January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 2
-------------------------------------------------------------------------------
2003 2002
----------- -----------
Assets
Current
Cash $ 838,473 $ 86,727
Accounts receivable (note 4) 9,917,100 8,056,304
Inventory (note 5) 9,525,297 9,186,114
Income taxes receivable -- 58,313
Prepaid expenses and sundry assets 538,145 555,327
Loans receivable (note 6) 21,164 --
Deferred income taxes 36,539 46,546
----------- -----------
20,876,718 17,989,331
Loans receivable (note 6) 472,977 517,164
Property, plant and equipment (note 7) 10,229,880 9,804,587
Intangibles (note 8) 169,000 139,048
Goodwill (note 9) 1,355,117 1,298,942
Deferred income taxes 1,297,745 811,566
----------- -----------
$34,401,437 $30,560,638
=========== ===========
Approved on behalf of the board:
Director
--------------------------------------------
Director
--------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
DECTRON INTERNATIONALE INC.
Consolidated Balance Sheets
As at January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 3
--------------------------------------------------------------------------------
2003 2002
------------ ------------
Liabilities
Current
Bank loans (note 10) $ 9,187,534 $ 8,326,166
Accounts payable and accrued expenses (note 11) 4,835,993 4,341,533
Income taxes payable 684,578 --
Current portion of long-term debt (note 12) 1,090,576 1,336,058
Deferred revenue 4,732 --
------------ ------------
15,803,413 14,003,757
Long-term debt (note 12) 5,322,309 5,170,364
Loan payable -- 192,355
Deferred revenue 1,442,809 1,343,816
------------ ------------
22,568,531 20,710,292
------------ ------------
Stockholders' equity
Capital stock (note 13) 7,136,223 6,752,933
Treasury stock (88,780) (88,780)
Accumulated other comprehensive loss (128,764) (591,822)
Retained earnings 4,914,227 3,778,015
------------ ------------
11,832,906 9,850,346
------------ ------------
$ 34,401,437 $ 30,560,638
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DECTRON INTERNATIONALE INC.
Consolidated Statements of Earnings
For the Years Ending January 31
(Amounts Expressed in United States Dollars) Page 4
--------------------------------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Sales $ 36,883,064 $ 31,939,002 $ 33,958,558
Cost of sales 25,159,527 20,845,612 21,937,386
------------ ------------ ------------
Gross profit 11,723,537 11,093,390 12,021,172
------------ ------------ ------------
Operating expenses
Selling 4,894,448 5,369,842 5,318,464
General and administrative 3,655,127 3,092,319 3,035,320
Depreciation and amortization 1,356,364 1,568,065 1,521,158
Interest expense 1,050,620 1,341,308 1,434,588
------------ ------------ ------------
10,956,559 11,371,534 11,309,530
------------ ------------ ------------
Earnings (loss) from operations 766,978 (278,144) 711,642
Write-off of loans receivable 132,342 -- --
------------ ------------ ------------
Earnings (loss) before income taxes and
discontinued operations 634,636 (278,144) 711,642
Income taxes (recovery) (note 14) 194,386 (229,879) 82,503
------------ ------------ ------------
Earnings (loss) before discontinued operations 440,250 (48,265) 629,139
Earnings from discontinued operations,
net of tax 105,276 95,330 228,287
Gain on disposal of discontinued operations,
net of tax 590,686 -- --
------------ ------------ ------------
Net earnings $ 1,136,212 $ 47,065 $ 857,426
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DECTRON INTERNATIONALE INC.
Consolidated Statements of Earnings (Continued)
For the Years Ending January 31
(Amounts Expressed in United States Dollars) Page 5
--------------------------------------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net earnings per common share, basic and diluted
Continuing operations 0.15 (0.02) 0.23
Discontinued operations 0.04 0.04 0.08
Disposal of discontinued operations 0.21 -- --
------------- ------------- -------------
0.40 0.02 0.31
============= ============= =============
Adjusted net earnings, assuming the adoption
of SFAS 142 for 2002 and 2001 $ 1,136,212 $ 248,710 $ 1,068,139
============= ============= =============
Adjusted net earnings per common share,
assuming the adoption of SFAS 142 for 2002
and 2001
Basic and diluted 0.40 0.09 0.38
============= ============= =============
Weighted average number of common shares outstanding
Basic 2,816,181 2,795,000 2,795,000
Diluted 2,848,729 2,795,000 2,795,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DECTRON INTERNATIONALE INC.
Consolidated Statements of Cash Flows
For the Years Ending January 31
(Amounts Expressed in United States Dollars) Page 6
--------------------------------------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Operating activities:
Net earnings $ 1,136,212 $ 47,065 $ 857,426
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 1,356,364 1,568,065 1,521,158
Decrease (increase) in accounts receivable (1,860,796) 1,489,912 (1,919,376)
Decrease (increase) in income taxes receivable 58,313 294,010 (352,323)
Decrease (increase) in inventory (516,484) 1,513,212 (2,529,719)
Decrease in prepaid expenses and sundry assets 17,182 210,991 296,655
Increase in deferred income taxes (476,172) (370,642) (294,619)
Increase (decrease) in accounts payable and accrued
expenses 494,460 (2,830,779) 2,075,335
Increase (decrease) in income taxes payable 684,578 -- (140,361)
Increase in deferred revenue 103,725 134,907 248,672
Gain from discontinued operations, before taxes (789,354) -- --
------------- ------------- -------------
Net cash provided by (used in) operating activities 208,028 2,056,741 (237,152)
------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
DECTRON INTERNATIONALE INC.
Consolidated Statements of Cash Flows
For the Years Ending January 31
(Amounts Expressed in United States Dollars) Page 7
--------------------------------------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Investing activities:
Acquisition of property, plant and equipment (565,828) (670,224) (4,844,995)
Government grant received -- -- 200,000
Deposit on building -- -- 1,000,000
Acquisition of intangibles (66,227) (47,250) (27,335)
Acquisition of goodwill -- -- (91,134)
Proceeds from sale of division 961,640 -- --
------------- ------------- -------------
Net cash provided by (used in) investing activities 329,585 (717,474) (3,763,464)
------------- ------------- -------------
Financing activities
Repayments from (advances to) loans receivable 23,023 (128,903) (208,322)
Advances from (repayments of) bank loans 861,368 (7,503) 2,717,502
Note payable -- (83,394) 83,394
Advances from (repayments of) long-term debt (884,960) (1,296,591) 1,882,102
Advances from (repayments of) due to directors -- (14,020) (37,885)
Repayments of loans payable (192,355) (6,368) (76,334)
Issuance of shares 502,300 -- --
Repayments of (advances for) share purchase plan
receivable (119,010) 34,423 (131,099)
------------- ------------- -------------
Net cash provided by (used in) financing activities 190,366 (1,502,356) 4,229,358
------------- ------------- -------------
Effect of foreign currency exchange rate on
cash and cash equivalents 23,767 104,368 (303,856)
------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DECTRON INTERNATIONALE INC.
Consolidated Statements of Cash Flows
For the Years Ending January 31
(Amounts Expressed in United States Dollars) Page 8
--------------------------------------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 751,746 (58,721) (75,114)
Cash and cash equivalents, beginning of year 86,727 145,448 220,562
------------- ------------- -------------
Cash and cash equivalents, end of year $ 838,473 $ 86,727 $ 145,448
============= ============= =============
Supplemental disclosure of cash flow information
Interest paid $ 928,851 $ 1,166,984 $ 1,299,423
============= ============= =============
Income taxes paid $ 309,386 $ 705,811 $ 959,492
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
DECTRON INTERNATIONALE INC.
Consolidated Statements of Stockholders' Equity
For the Years Ending January 31
(Amounts Expressed in United States Dollars) Page 9
--------------------------------------------------------------------------------
Cumulative Other
Retained Comprehensive Treasury
Number Amount Earnings Income Stock
------------- ------------- ------------- ------------- -------------
Balance January 31, 2000 2,795,000 $ 6,849,609 $ 2,873,524 $ 289,121 $ (88,780)
============= ============= ============= ============= =============
Share purchase plan receivable -- $ (131,099) $ -- $ -- $ --
Foreign currency translation -- -- -- (303,856) --
Net earnings for the year -- -- 857,426 -- --
------------- ------------- ------------- ------------- -------------
Balance January 31, 2001 2,795,000 $ 6,718,510 $ 3,730,950 $ (14,735) $ (88,780)
============= ============= ============= ============= =============
Share purchase plan receivable -- $ 34,423 $ -- $ -- $ --
Foreign currency translation -- -- -- (577,087) --
Net earnings for the year -- -- 47,065 -- --
------------- ------------- ------------- ------------- -------------
Balance January 31, 2002 2,795,000 $ 6,752,933 $ 3,778,015 $ (591,822) $ (88,780)
============= ============= ============= ============= =============
Share purchase plan receivable -- $ (119,010) $ -- $ -- $ --
Issuance of shares 124,500 502,300 -- -- --
Foreign currency translation -- -- -- 463,058 --
Net earnings for the year -- -- 1,136,212 -- --
------------- ------------- ------------- ------------- -------------
Balance January 31, 2003 2,919,500 $ 7,136,223 $ 4,914,227 $ (128,764) $ (88,780)
============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 10
--------------------------------------------------------------------------------
1. Summary of significant accounting policies
Basis of consolidated financial statements presentation
These consolidated financial statements include the accounts of Dectron
Internationale Inc., International Water Maker's Inc., Dectron Inc.
Consolidated and Circul-Aire Group.
Dectron Inc. Consolidated is comprised of Dectron Inc. and of its
wholly-owned subsidiaries, Refplus Inc., Thermoplus Air Inc., Fiber Mobile
Ltd., Dectron U.S.A. Inc., IPAC 2000 Inc. and Le Groupe Prodapec (2000) Inc.
Circul-Aire Group is comprised of 9048-3140 Quebec Inc. and Cascade
Technologies Inc., and of its wholly-owned subsidiaries, Circul-Aire Inc.,
Purafil Canada Inc. and 122248 Canada Inc.
On February 1, 2002 Fiber Mobile Ltd. and Le Groupe Prodapec (2000) Inc. were
wound-up into Dectron Inc., 9048-3140 Quebec Inc. into Dectron Internationale
Inc. and 122248 Canada Inc. into Circul-Aire Inc.
All inter-company profits, transactions and account balances have been
eliminated.
Principal activities
The company Dectron Internationale Inc., was incorporated on March 30, 1998.
These companies are principally engaged in the production of
dehumidification, refrigeration, indoor air quality (IAQ), ventilation, air
conditioning and air purification systems in Canada and its distribution
world-wide. The activities of Dectron Internationale Inc. and Cascade
Technologies Inc., are immaterial in the aggregate, as their only activity is
to hold the investments in the operating companies.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect certain reported amounts of assets
and liabilities and disclosures 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 and cash equivalents
Cash and cash equivalents include cash on hand, amounts due to banks and any
other highly liquid investments purchased with a maturity of three months or
less. The carrying amounts approximate fair value because of the short
maturity of these instruments.
Inventory
Inventory of raw materials is valued at the lower of cost and replacement
cost and inventory of work-in-process and finished goods at the lower of cost
and net realizable value. Cost is determined on the first-in, first-out
basis.
F-10
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 11
--------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued)
Property, plant and equipment
Property, plant and equipment are recorded at cost and are depreciated or
amortized on the basis of their estimated useful lives at the undernoted
rates and methods:
Building 4 or 5% Straight line
Machinery and equipment 10% Straight line or 20% declining balance
Furniture and fixtures 15 or 20% Straight line or 20% declining balance
Computer equipment 15 or 30% Straight line or 20% declining balance
Rolling stock 30% Straight line or 20% declining balance
Leasehold improvements Straight line over term of the lease
Depreciation and amortization for assets acquired during the year are
recorded at one-half of the indicated rates.
Intangible assets and goodwill
The company accounts for intangible assets and goodwill in accordance with
Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other
Intangible Assets", which was adopted by the Company on February 1, 2003 in
accordance with that statement, goodwill and intangible assets with
indefinite lives are no longer amortized, but rather tested for impairment at
least annually. Intangible assets with estimable useful lives, consisting of
patents, trademarks, and rights, are amortized on a straight-line basis over
the estimated useful lives of 5 to 15 years, and are reviewed for impairment
in accordance with SFAS 144, "Accounting for the Impairment of Long-Lived
Assets".
Goodwill represents the excess of purchase price over the fair value of
identifiable assets acquired in a purchase business combination. For the
years 2002 and 2001, goodwill was amortized using the straight-line method,
over a period of 10 years.
Impairment of goodwill and long-lived assets
Goodwill and intangible assets with definite lives are tested annually for
impairment in accordance with the provisions of SFAS 142.
Impairment of goodwill is tested at the reporting unit level by comparing the
reporting unit's carrying amount, including goodwill, to the fair value of
the reporting unit. The fair values of the reporting units are estimated
using a combination of the income or discounted cash flows approach and the
market approach, which utilizes comparable companies' data. If the carrying
amount of the reporting unit exceeds its fair value, then a second step is
performed to measure the amount of impairment loss, if any. Any impairment
loss would be expensed in the consolidated statements of earnings. The
impairment test for intangibles with indefinite useful lives consists of a
comparison of the fair value of the intangible assets with its carrying
amount. When the carrying amount of the intangible assets exceeds its fair
value, an impairment loss would be recognized for the difference.
F-11
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 12
--------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued)
Impairment of goodwill and long-lived assets (continued)
Intangible assets with estimable lives and other long-lived assets are
reviewed for impairment when events or changes in circumstances indicate that
the carrying amount of an asset or assets group may not be recoverable in
accordance with SFAS 144. Recoverability of intangible assets with estimable
lives and other long- lived assets is measured by a comparison of the
carrying amount of an assets or asset group to future net undiscounted pretax
cash flows expected to be generated by the assets or asset group. If these
comparisons indicated that an asset is not recoverable, the impairment loss
recognized is the amount by which the carrying amount of the asset or the
asset group exceeds the related estimated fair value.
Deferred revenue
The company has sold extended warranty contracts covering a period of four to
nine years beyond the one year basic guarantee. The deferred revenue is
recognized as income over the four to nine year period on a straight-line
basis commencing one year from the sale of the contracts.
Research and development costs
Research and development costs are charged to earnings in the year in which
they are incurred, net of investment tax credits.
Deferred income taxes
The company maintains its books and records in Canadian dollars. Foreign
currency transactions are translated using the temporal method. Under this
method, all monetary items are translated into Canadian funds at the rate of
exchange prevailing at balance sheet date. Non-monetary items are translated
at historical rates. Income and expenses are translated at the rate in effect
on the transaction dates. Transaction gains and losses are included in the
determination of earnings for the year.
The translation of the financial statements from Canadian dollars into United
States dollars is performed for the convenience of the reader. Balance sheet
accounts are translated using closing exchange rates in effect at the balance
sheet date and income and expense accounts are translated using an average
exchange rate prevailing during each reporting period. No representation is
made that the Canadian dollar amounts could have been, or could be, converted
into United States dollars at the rates on the respective dates and or at any
other certain rates. Adjustments resulting from the translation are included
in the accumulated other comprehensive income in stockholder's equity.
Foreign currency transactions
The company uses the temporal method to translate its foreign currency
transactions. Monetary assets and liabilities are translated at the rate of
exchange in effect at year-end. Other assets and liabilities are translated
at their historic rates. Items appearing in the statement of earnings, except
for cost of inventory and depreciation and amortization are translated at
average year rates. Exchange gains and losses are included in the statement
of earnings.
F-12
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 13
--------------------------------------------------------------------------------
1. Summary of significant accounting policies (continued)
Earnings per share
The company has adopted FAS No. 128, "Earnings per Share" which requires
disclosure on the financial statements of "basic" and "diluted" earnings per
share. Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding for the year. Diluted
earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding plus common stock equivalents (if
dilutive) related to warrants for each year.
2. Changes in accounting policies
In July 2001, SFAS No. 142, "Goodwill and Other Intangible Asset" was issued.
The company adopted the provisions of SFAS 142 on February 1, 2002. SFAS 142
requires that goodwill and other intangible assets with indefinite lives no
longer be amortized, but instead be tested for impairment, at least annually,
in accordance with the new impairment testing provisions of SFAS 142.
Statement also requires that intangible assets with estimated useful lives be
amortized over their respective useful lives to their estimated residual
values, and be reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". The net
impact of the adoption of SFAS 142 was a reduction of annual amortization
expense of $200,154 in 2003. No impairment losses were recognized due to the
change in accounting principle.
The following table presents a reconciliation of net earnings, earnings per
share and comprehensive income, as reported, to adjusted amounts that include
the impact of the adoption of SFAS 142 for all periods presented.
2003 2002 2001
---------- --------- ----------
Net earnings
Net earnings, as reported $1,136,212 $ 47,065 $ 857,426
Add: Goodwill amortization, net of tax -- 201,645 210,713
---------- --------- ----------
Adjusted net earnings $1,136,212 $ 248,710 $1,068,139
========== ========= ==========
Net earnings per common share
Basic and diluted as reported 0.40 0.02 0.31
Add: Goodwill amortization, net of tax -- 0.07 0.07
---------- --------- ----------
Basic and diluted, adjusted 0.40 0.09 0.38
========== ========= ==========
Comprehensive income (loss)
Comprehensive income (loss), as reported $1,599,270 $(530,022) $ 553,570
Add: Goodwill amortization, net of tax -- 201,645 210,713
---------- --------- ----------
Adjusted comprehensive income (loss) $1,599,270 $(328,377) $ 764,283
========== ========= ==========
F-13
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 14
--------------------------------------------------------------------------------
3. Comprehensive income
The company has adopted FAS No. 130 "Reporting Comprehensive Income" which
requires new standards for reporting and display of comprehensive income and
its components in the financial statements. However, it does not affect net
income or total stockholders' equity. The components of comprehensive income
are as follows:
2003 2002 2001
---------- ---------- ----------
Net income $1,136,212 $ 47,065 $ 857,426
Other comprehensive income (loss)
Foreign currency translation 463,058 (577,087) (303,856)
---------- ---------- ----------
Comprehensive income (loss) $1,599,270 $ (530,022) $ 553,570
========== ========== ==========
4. Accounts receivable
2003 2002
----------- -----------
Trade $10,645,155 $ 8,455,426
Allowance for doubtful accounts (728,055) (399,122)
----------- -----------
$ 9,917,100 $ 8,056,304
=========== ===========
5. Inventory
2003 2002
----------- -----------
Raw materials $ 6,125,967 $ 5,688,706
Work-in-process 1,427,982 1,269,579
Finished goods 1,971,348 2,227,829
----------- -----------
$ 9,525,297 $ 9,186,114
=========== ===========
F-14
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 15
--------------------------------------------------------------------------------
6. Loans receivable
2003 2002
------------ ------------
Private companies $ 464,141 $ 487,290
Corporate shareholder 30,000 29,874
------------ ------------
494,141 517,164
Current portion 21,164 --
------------ ------------
$ 472,977 $ 517,164
============ ============
Loan receivable from a private company in the amount of $73,336 is secured by
equipment, repayable in monthly instalments of $21,164 plus interest at 6%
per annum, maturing in April 2002.
The other loans receivable from private companies and the loan to a corporate
shareholder are non-interest bearing and are not expected to be repaid prior
to February 1, 2004.
7. Property, plant and equipment
2003 2002
------------ ------------
Cost
Land $ 472,772 $ 453,173
Building 4,940,392 4,735,592
Machinery and equipment 10,263,530 8,879,849
Furniture and fixtures 793,274 715,182
Computer equipment 1,784,836 1,656,999
Rolling stock 151,448 140,319
Leasehold improvements 1,032,666 775,256
------------ ------------
19,438,918 17,356,370
------------ ------------
Accumulated depreciation and amortization
Building 835,780 640,652
Machinery and equipment 5,858,206 4,643,758
Furniture and fixtures 574,702 536,998
Computer equipment 1,336,276 1,219,883
Rolling stock 117,905 89,332
Leasehold improvements 486,169 421,160
------------ ------------
9,209,038 7,551,783
------------ ------------
Net $ 10,229,880 $ 9,804,587
============ ============
Capital leases included above $ 1,224,593 $ 548,540
============ ============
F-15
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 16
--------------------------------------------------------------------------------
7. Property, plant and equipment (continued)
Depreciation and amortization of property, plant and equipment for fiscal
year 2003 amounted to $1,336,819 ($1,348,707 in 2002).
8. Intangibles
2003 2002
------------ ------------
Patents, trademarks and rights costs $ 239,511 $ 166,101
Accumulated amortization (70,511) (27,053)
------------ ------------
$ 169,000 $ 139,048
============ ============
Amortization of intangibles for fiscal year 2003 amounted to $19,545
($17,713 in 2002).
9. Goodwill
2003 2002
------------ ------------
Cost $ 2,045,408 $ 1,977,830
Accumulated amortization (690,291) (678,888)
------------ ------------
$ 1,355,117 $ 1,298,942
============ ============
Amortization of goodwill for fiscal year 2003 amounted to $ Nil ($201,645 in
2002)
10. Bank loans
The company has an available line of credit of $10,800,000 bearing interest
at the Canadian prime lending rate plus 0.25% per annum of which $1,600,000
remained unused as at January 31, 2003 and it is renegotiated annually.
Bank loans are secured by a first ranking moveable hypothec on accounts
receivable, inventory and a first ranking universal hypothec in the amount
of $39,400,000 on the universality of the borrower's property, movable and
immovable, present and future, corporeal and incorporeal. The company also
provided a rider designating the Bank as loss payee of the proceeds of
all-risk insurance on the property charged as security.
The average cost of financing for fiscal year 2003 is 6.90% (8.84% in 2002).
F-16
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 17
--------------------------------------------------------------------------------
11. Accounts payable and accrued expenses
2003 2002
------------ ------------
Trade payables $ 2,830,173 $ 2,760,644
Accrued expenses 2,005,820 1,580,889
------------ ------------
$ 4,835,993 $ 4,341,533
============ ============
12. Long-term debt
2003 2002
------------ ------------
a) Government loans, without guarantee nor interest, repayable 15
years after their date of receipt, the first portion of $30,233 is
repayable in August 2002 and the second portion of $30,233 is
repayable in July 2004 $ 30,233 $ 57,960
b) Immigration loans secured by a first ranking universal hypothec,
bearing interest at variable rates from 5.21% to 5.59% per annum, due
on various dates between November 2002 and May 2004. The loans are
net of sinking funds since all amounts paid into them must be used to
repay the loans. As at January 31, 2003, from the total immigration
loans, $291,611 was in process of being refinanced 667,770 789,970
c) Bank term loans secured by a first ranking universal hypothec,
bearing interest at variable rates from prime plus 0.75% and from
6.51% to 7.99% per annum, due on various dates from May 2005 to
June 2014 4,088,595 4,462,132
d) Mezzanine loan bearing interest at the bank's American prime rate
plus 3% per annum, repayable in monthly capital repayments of
$17,213, due on May 2003 472,000 670,000
e) Obligations under capital leases for machinery and equipment and
rolling stock subject to various monthly repayments including imputed
interest at variable rates between 6.03% to 8.48% per
annum, up to various dates between April 2005 and October 2007 1,128,176 515,212
------------ ------------
Balance carried forward 6,386,774 6,495,274
------------ ------------
F-17
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 18
--------------------------------------------------------------------------------
12. Long-term debt (Continued)
2003 2002
------------ ------------
Balance brought forward $ 6,386,774 6,495,274
f) Others 26,111 11,148
------------ ------------
6,412,885 6,506,422
Current portion 1,090,576 1,336,058
------------ ------------
$ 5,322,309 $ 5,170,364
============ ============
Future payment obligations are as follows:
Future minimal Interest
Future principal lease payments included in Total
payment under capital future minimal principal
obligations leases lease payments repayments
---------------- ------------------- ---------------- -------------
2004 $ 815,916 $ 345,797 $ 71,137 $ 1,090,576
2005 1,165,009 342,875 50,170 1,457,714
2006 1,791,937 272,559 28,672 2,035,824
2007 280,684 180,240 16,043 444,881
2008 1,129,073 159,943 4,301 1,284,715
thereafter 99,175 -- -- 99,175
------------ ------------ ------------ ------------
$ 5,281,794 $ 1,301,414 $ 170,323 $ 6,412,885
============ ============ ============ ============
F-18
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 19
--------------------------------------------------------------------------------
13. Capital stock
Authorized
An unlimited number of preferred shares, non-cumulative, voting, no par
value
An unlimited number of common shares, voting, no par value
Issued
2003 2002
---------- ----------
2,795,000 Common shares $7,136,223 $6,752,933
========== ==========
During the fiscal year ended January 31, 2003, certain employees have
exercised their options under the 1999 Stock Option Plan. Consequently,
74,500 common shares were issued for a total consideration of $223,500 of
which $133,500 was receivable as at January 31, 2003.
On July 15, 2002 the company has issued 50,000 common shares with a value of
$235,000 and 60,000 warrants with a value of $43,800 in consideration for
the purchase of the assets of International Water Maker's Inc., see note 17.
The rights represented by the Warrants are exercisable until July 15, 2003
at a purchase price of $3.61 per share. As at January 31, 2003, none of them
have been exercised.
Purchase warrants
During the fiscal year 1999, Purchase Warrants ("Warrants") were issued
pursuant to a Warrant Agreement between the company and J.P. Turner &
Company, L.L.C. and Klein Maus and Shire Incorporated. Each Warrant entitles
its holders to purchase, during the four year period commencing on October
5, 1999, one share of common stock at an exercise price of $9.00 per share,
subject to adjustment in accordance with the anti-dilution and other
provision referred to below.
The Warrants may be redeemed by the company at any time commencing one year
from October 5, 1999 (or earlier with the consent of the representatives)
and prior to their expiration, at a redemption price of $0.125 per Warrant,
on not less than 30 days prior written notice to the holders of such
Warrants, provided that the closing bid price of the common stock, if traded
on the Nasdaq SmallCap Market, or the last sale price of the common stock,
if listed on the Nasdaq National Market or on a national exchange, is at
least 133% ($12.00 per share, subject to adjustment) of the exercise price
of the Warrants for a period of 30 consecutive trading days ending on the
third day prior to the date the notice of redemption is given. Holders of
Warrants shall have exercise rights until the close of the business day
preceding the date fixed for redemption.
The exercise price and the number of shares of common stock purchasable upon
the exercise of the Warrants are subject to adjustment upon the occurrence
of certain events, including stock dividends, stock splits, combinations or
classification of the common stock. The Warrants do not confer upon holders
any voting or any other rights of shareholders of the company.
F-19
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 20
--------------------------------------------------------------------------------
13. Capital stock (continued)
Purchase warrants (continued)
No Warrant will be exercisable unless at the time of exercise the company
has filed with the Commission a current prospectus covering the issuance of
common stock issuable upon the exercise of the Warrant and the issuance of
shares has been registered or qualified or is deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of the Warrant. The company has undertaken to use
its best efforts to maintain a current prospectus relating to the issuance
of shares of common stock upon the exercise of the Warrants until the
expiration of the Warrants, subject to the terms of the Warrant Agreement.
While it is the company's intention to maintain a current prospectus, there
is no assurance that it will be able to do so.
Employee stock option plan
In 1999, the Company adopted a Stock Option Plan (the "1999 Plan") pursuant
to which 650,000 shares of Common Stock are reserved for issuance, 241,500
options are currently issued and outstanding.
On September 2, 1999, the Board granted options under the Stock Option Plan
to certain members of the Board and certain employees. Subject to certain
limitations, the options granted are exercisable one year after issuance.
Subsequent to the one-year anniversary date of the grant, the option holders
may exercise the option up to 25% of the total options per year for the
following four years. Each of the options will be fully exercisable on
November 4, 2003, and expire on November 4, 2004. The exercise price of the
option is $3.00.
In 2001, the Company also adopted the 2001 Stock Option Plan (the "2001
Plan") pursuant to which 500,000 shares of Common stock are reserved for
issuance, 115,500 options are currently issued and outstanding.
On January 4, 2002, the Board granted options under the 2001 Plan to certain
members of the Board and certain employees. Subject to certain limitations,
the options granted are exercisable one year after issuance. Subsequent to
the one-year anniversary date of the grant, the option holders may exercise
the option up to 25% per year of the total options granted for the following
four years. Each of the options will be fully exercisable on January 4, 2006
and expire on January 4, 2007. The exercise price of the option is $4.20.
The Plans are administered by the Board of Directors, who will determine,
among other things, those individuals who shall receive options, the time
period during which the options may be partially or fully exercised, the
number of shares of Common Stock issuable upon the exercise of the options
and the option exercise price.
F-20
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 21
--------------------------------------------------------------------------------
13. Capital stock (continued)
Employee stock option plan (continued)
The 1999 Plan is effective for a period of five years expiring in 2004 and
the 2001 Plan is effective for a period of ten years expiring in 2011.
Options may be granted to officers, directors, consultants, key employees,
advisors and similar parties who provide the company with their skills and
expertise. Options granted under the 1999 Plan may be exercisable for up to
five years, and ten years for the 2001 Plan, and shall be at an exercise
price as determined by the Board. Options are non-transferable except by the
laws of descent and distribution or a change in control of Dectron, as
defined in the Plans, and are exercisable only by the participant during his
or her lifetime. Change in control include (i) the sale of substantially all
of the assets of Dectron and merger or consolidation with another company,
or (ii) a majority of the Board changes other than by election by the
stockholders pursuant to Board solicitation or by vacancies filled by the
Board caused by death or resignation of such person.
If a participant ceases affiliation with Dectron by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other types of termination allow the participant three
months to exercise, except for termination for cause, which results in
immediate termination of the option.
Option under the Plans must be issued within five years from the effective
date of the 1999 Plan and ten years from the effective date of the 2001
Plan.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the company become available again for issuance
under the Plans.
The Plans may be terminated or amended at any time by the Board of
Directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the Plans may not be
increased without consent of the stockholders.
Share purchase plan receivable
The SEC staff Accounting Bulletins require that accounts or notes receivable
arising from transactions involving capital stock should be presented as
deductions from shareholders' equity and not as assets. Accordingly, in
order to comply with U.S. GAAP shareholders' equity has been reduced by
$119,010 at January 31, 2003 (increased by $34,423 - 2002), to reflect the
loans due from certain employees and officers, which relate to the purchase
of common shares of the company.
F-21
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 22
--------------------------------------------------------------------------------
14. Income taxes
2003 2002 2001
------------ ------------ ------------
a) Current $ 564,555 $ 188,340 $ 458,385
Deferred (370,169) (418,219) (375,882)
------------ ------------ ------------
$ 194,386 $ (229,879) $ 82,503
============ ============ ============
b) Income taxes at Canadian statutory rates: $ 197,753 $ (96,007) $ 270,906
Increase (decrease) resulting from:
Large corporation tax 13,635 12,838 10,452
Manufacturing and processing deduction (164,161) (70,459) (132,375)
Non-deductible expenses 61,183 44,102 31,113
Temporary differences 108,587 (642,097) (166,255)
Application of losses carried forward -- (64,921) (302,094)
Difference between Canadian statutory rates and
those applicable to foreign subsidiaries 100,950 437,329 200,544
Adjustment for prior year's taxes (51,334) 126,124 65,112
Other (72,227) 23,212 105,100
------------ ------------ ------------
Effective income taxes $ 194,386 $ (229,879) $ 82,503
============ ============ ============
c) Deferred income taxes represent the tax charges derived from temporary
differences between amortization of property, plant and equipment and
recognition of deferred revenue, and the actual amounts deducted from
or added to the taxable income.
d) The company has operating losses of $720,000, which can be used to
reduce future taxable income. The potential tax benefits of $220,000
relating to the losses have been recognized in the company's accounts.
The deductibility of these losses expires in 2007.
e) The company has unused investment tax credits of $336,500 which are
deductible from the income taxes payable in future years. No deferred
income tax asset regarding these investment tax credits has been
accounted for.
15. Statement of cash flows
During the year, the company acquired capital assets for a total amount of
$1,357,251, including capital assets acquired for an amount of $791,423 by
means of capital leases. Cash payments of $565,828 were made to purchase the
capital assets.
F-22
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 23
--------------------------------------------------------------------------------
16. Discontinued operations
On November 29, 2002, the company completed the sale of the Electric Heat
Products Division for a total cash consideration of $961,640 plus a balance
of sale of $440,979. Consequently, one of the subsidiaries's name changed
from P.M. Wright Ltd. to Circul-Aire Inc. The sale resulted in a net gain of
$590,686 (net of tax of $198,668).
The balance of sale bears interest at the bank's prime rate plus 1%,
repayable in 11 monthly instalments of $5,313 followed by 24 monthly
instalments of $15,939. Due to the uncertainty of the collectibility, a
reserve for the full balance of sale has been accounted for.
The results from discontinued operations for the period ended January 31
were as follows:
2003 2002 2001
----------- ----------- -----------
Net sales $ 1,139,072 $ 1,346,956 $ 1,103,345
Earnings before income taxes 140,668 152,042 258,244
Income taxes 35,392 56,712 29,955
Net earnings 105,276 95,330 228,287
17. Acquisition
On July 15, 2002, the company acquired the assets of International Water
Maker's Inc. The net assets acquired and the purchase price are as follows:
Current assets $ 310,109
Property and equipment 11,200
Patents and trademards 63,658
Current liabilities assumed 14,694
Long-term debt assumed 24,938
------------
Net assets acquired $ 345,335
============
Purchase price
Cash $ 66,535
50,000 common shares 235,000
60,000 warrants 43,800
------------
$ 345,335
============
The acquisition was accounted for by the purchase method. The accompanying
consolidated financial statements include the operations of the
International Water Maker business from the date of acquisition.
F-23
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 24
--------------------------------------------------------------------------------
18. Commitments
a) The company is committed to payments under operating leases for its
premises totaling $2,896,829. Annual payments for the next five years
are as follows:
2004 $ 632,105
2005 632,105
2006 524,099
2007 541,075
2008 567,445
-----------
$ 2,896,829
===========
b) The company is committed to make monthly payments of $7,379 into
sinking funds, which are given as security against the immigration
loans. The annual payments for the next two years are as follows:
2004 $ 88,552
2005 10,253
------------
$ 98,805
============
c) As at January 31, 2003 the company had outstanding letters of credit
totaling $15,600.
These letters of credit were incurred in the normal course of business.
19. Segmented information
2003 2002 2001
------------ ------------ ------------
a) The breakdown of sales by geographic
area is as follows:
Canada $ 14,235,583 $ 6,223,981 $ 8,207,435
United States of America 20,623,100 23,456,911 23,449,133
International 2,024,381 2,259,010 2,301,990
------------ ------------ ------------
$ 36,883,064 $ 31,939,902 $ 33,958,558
============ ============ ============
b) The breakdown of identifiable assets by
geographic area is as follows:
Canada $ 26,391,369 $ 1,435,449 $ 26,337,494
United States 8,010,068 9,125,189 8,822,491
------------ ------------ ------------
$ 34,401,437 $ 30,560,638 $ 35,159,985
============ ============ ============
F-24
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 25
--------------------------------------------------------------------------------
20. Financial instruments and credit risk
Fair value of financial instruments
The fair value of cash, accounts receivable, bank loans and accounts payable
approximately correspond to their book value given their short-term
maturity. The carrying amount of long-term debt approximates fair value
because interest rates are close to market value.
Credit risk
The company is exposed to credit risk on the accounts receivable from its
customers. In order to reduce its credit risk, the company has adopted
credit policies, which include the analysis of the financial position of its
customers and the regular review of their credit limits. In some cases, the
company may require bank letters of credit.
21. Selected quarterly financial data (unaudited)
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter Total
--------------------------------------------------------------------------
Sales $ 9,049,105 $ 10,496,214 $ 10,193,297 $ 7,144,448 $ 36,883,064
Gross Profit 2,811,149 2,644,532 3,022,773 3,245,083 11,723,537
Operating earnings 600,291 486,281 547,342 183,684 1,817,598
Earnings from continuing
operations before taxes 499,466 221,667 281,641 (368,138) 634,636
Discontinued operations, net of tax -- -- -- 105,276 105,276
Gain on disposal of discontinued
operations, net of tax -- -- -- 590,686 590,686
Net earnings (loss) 226,447 159,601 202,781 547,383 1,136,212
Net earnings (loss) per common
share, basic and diluted:
Continuing operations 0.08 0.06 0.07 (0.06) 0.15
Discontinued operations -- -- -- 0.04 0.04
Disposal of discontinued
operations -- -- -- 0.21 0.21
Net earnings 0.08 0.06 0.07 0.19 0.40
Average number of common shares
outstanding 2,795,000 2,799,167 2,814,444 2,816,181 2,816,181
F-25
DECTRON INTERNATIONALE INC.
Notes to Consolidated Financial Statements
January 31, 2003 and January 31, 2002
(Amounts Expressed in United States Dollars) Page 26
--------------------------------------------------------------------------------
21. Selected quarterly financial data (unaudited) (continued)
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter Total
--------------------------------------------------------------------------
Sales $ 9,639,831 $ 8,693,307 $ 9,965,921 $ 3,639,943 $ 31,939,002
Gross Profit 3,361,825 3,178,350 3,599,576 953,639 11,093,390
Operating earnings 886,766 846,399 953,196 (1,623,197) 1,063,164
Net earnings (loss) 408,761 389,216 528,123 (1,279,035) 47,065
Earnings (loss) per common
shares, bais and diluted 0.15 0.14 0.19 (0.46) 0.02
Average number of common shares
outstanding 2,795,000 2,795,000 2,795,000 2,795,000 2,795,000
22. Subsequent event
On February 1, 2003, the company acquired 100% interest in Tranzmetal Inc.
for a total cash consideration of $295,800. As at January 31, 2003, the
company had the following balance with Tranzmetal Inc., which have arisen
from the normal course of business:
Accounts receivable $ 155,000
Loan receivable 22,000
Accounts payable 14,000
23. Comparative figures
Certain figures in the 2002 and 2001 financial statements have been
reclassified to conform with the basis of presentation used in 2003.
F-26