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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Quarter Ended April 30, 2005, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Transition Period from _______to_______
Commission File Number 1-14503
DECTRON INTERNATIONALE INC.
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(Exact name of registrant as specified in its charter)
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Quebec, Canada N/A
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(State of Incorporation or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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4300 Poirier Blvd., Montreal H4R 2C5
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (514) 334 9609
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ].
APPLICABLE ONLY TO CORPORATE ISSUERS
As of June 14, 2005, there were 3,155,000 shares of common stock outstanding.
DECTRON INTERNATIONALE INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements...................................................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................ 8
Item 4. Controls and Procedures................................................................................... 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................... 10
Item 2. Changes in Securities and Use of Proceeds.................................................................. 10
Item 3. Defaults Upon Senior Securities............................................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders........................................................ 10
Item 5. Other Information.......................................................................................... 10
Item 6. Exhibits and Reports on Form 8-K........................................................................... 10
SIGNATURES......................................................................................................... 11
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 the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations." 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.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See Pages F-1 through F-15.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussions and Analysis of Financial Conditions and Results of
Operations ("MD&A") should be read in conjunction with the unaudited interim
consolidated financial statements for the three months ended April 30, 2005 and
the audited consolidated financial statements and MD&A for the year ended
January 31, 2005. This MD&A is based on reported earnings in accordance with
United States generally accepted accounting principles (GAAP).
Dectron's interim consolidated financial statements have been prepared using the
same accounting policies as described in note 1 of Dectron's audited
consolidated financial statements for the year ended January 31, 2005. Please
refer to Note 2 of the interim consolidated financial statements for the three
months ended April 30, 2005 for further information.
Quarterly reports, the annual report and supplementary information filed with
the U.S. Securities and Exchange commission, including the annual report on form
10-K and the quarterly report on form10-Q and with the Canadian Securities
regulatory authorities, can be found on-line at www.sedar.com and www.sec.gov
respectively, as well as on our corporate Web site at www.dectron.com.
FORWARD-LOOKING INFORMATION
Certain statements contained in this MD&A constitute 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. Forward-looking statements include, but
are not limited to, Dectron Internationale's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward-looking statements included in this MD&A are based on information
available to Dectron Internationale on the date hereof, and Dectron
Internationale assumes no obligation to update any such forward-looking
statement. Dectron Internationale's actual results could differ materially from
those in such forward-looking statements.
CRITICAL ACCOUNTING POLICIES
Dectron's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States (GAAP). These
accounting principles require us to make certain estimates, judgments and
assumptions. We believe that the estimates, judgments and assumptions upon which
we rely are reasonable based upon information available to us at the time that
these estimates, judgments and assumptions are made. These estimates, judgments
and assumptions can affect the reported amounts of assets and liabilities as of
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the periods presented. To the extent there are
material differences between these estimates, judgments or assumptions and
actual results, our financial statements will be affected. The significant
accounting policies that we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
3
o Revenue Recognition
o Deferred Revenue
o Intangible Assets and Goodwill
o Foreign currency translation
o Accounting for Income Taxes
REVENUE RECOGNITION
Dectron recognizes revenue for finished products when the goods are shipped and
title passes to the customer, provided that there are no uncertainties regarding
customer acceptance, persuasive evidence of an arrangement exist, the sales
price is fixed or determinable, and collectibility is deemed probable.
DEFERRED REVENUE
Dectron 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.
INTANGIBLE ASSETS AND GOODWILL
Dectron 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 Dectron on February 1, 2002 in accordance with
that statement, goodwill and intangible assets with indefinite lives are no
longer amortized, but rather tested for impairment at least annually. Goodwill
represents the excess of purchase price over the fair value of identifiable
assets acquired in a purchase business combination. 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 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.
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.
4
FOREIGN CURRENCY TRANSLATION
Dectron 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.
INCOME TAXES
As part of the process of preparing our financial statements, we will be
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process will involve estimates of our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as depreciation and amortization, for tax and accounting
purposes.
SELECTED FINANCIAL INFORMATION
April 30, 2005 January 31, 2005
FINANCIAL POSITION
Cash and cash equivalents 1,269,646 1,075,220
Total Assets 37,293,910 35,687,918
Total Debt 4,431,017 4,719,783
Shareholder's equity 11,201,706 11,317,367
- - per common share
3.55 3.59
Working capital 4,137,658 4,417,339
Working capital ratio
1.2:1 1.2:1
Weighted average number of common shares outstanding 3,155,000 3,066,851
(basic and diluted)
Common shares outstanding 3,155,000 3,155,000
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months period ended April 30, 2005 compared to Three months period ended
April 30, 2004.
5
Revenues for the three months period ended April 30, 2005 were $
10,910,643, a 6.66% increase over prior year revenues of $ 10,229,096. Dectron's
sales growth reflects revenues arising primarily from its stronger presence in
the Canadian market for commercial HVAC products and related services.
Gross profit decreased by $ 274,626 to $ 2,995,813 over the same
period. As a percentage of revenues, gross profit decreased from 31.97% to
27.46%. Despite certain productivity gains, the gross profit margin was
adversely affected by higher raw material costs and aggressive pricing
strategies in certain HVAC markets.
Selling expenses increased by $ 108,091 in the three months period
ended April 30, 2005 compared to $ 1,216,521 for the period ended April 30,
2004. As a percentage of revenues, selling and marketing expenses increased from
11.89 to 12.14%.
General and administrative expenses increased by $ 149,554 to $
1,004,576 compared to $ 854,962 for the period ended April 30, 2004. As a
percentage of revenues, general and administrative increased from 8.36% to
9.21%.
6
Amortization expenses slightly increased to $ 323,362 in the three
months period ending April 30, 2005 compared to $ 314,578 in 2004 following the
acquisition of new machinery and equipment during the last fiscal year. As a
percentage of revenues, amortization expenses decreased from 3.08% to 2.96%.
Financing expenses decreased from $ 383,476 to $ 233,650, a decrease of
$ 149,826. As a percentage of revenues, financing expenses decreased from 3.75%
to 2.14%. The lower interest expense is due primarily to repayments of
short-term debt and long-term debt during the last fiscal year.
Provisions for Income tax as a percentage of taxable income decreased
from 35.80% for the three months ended April 30, 2004 to 31.02% for 2004. Tax
expenses have decreased by $145,298 due to a decrease in taxable revenue.
Mostly as a result of a lower margin and higher selling and
administration expenses, net earnings before discontinued operation was $ 75,653
compared to $ 321,584 for the three months period ending April 30, 2004. As a
percentage of sales, net earnings before discontinued operations decrease from
3.14% to 0.69%.
Losses from discontinued operations net of taxes for the three months
period ending April 30, 2005 was $ 98,327 compared to $ 270,577 in the
corresponding period in 2004, both resulting from the discontinued operations of
Liberty Drive Property, Inc.
Gain on disposal of discontinued operations was $ 63,576 for the three
months period ending April 30, 2005 compared to $ 71,646 for the comparative
period in 2004.
As a result of the above factors, net earnings in the three months
period ending April 30, 2005 was $ 40,902 compared to earnings of $ 112,653 in
the corresponding period in 2004. .
LIQUIDITY AND CAPITAL RESOURCES
Dectron had a positive net change in cash of $ 194,426 for the three months
period ended April 30, 2005. The principal source of cash was from accounts
payables in the amount of $ 1,876,172. The principal uses of cash were an
increase in accounts receivables of $ 770,999 and an increase in inventory of $
596,886.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our significant contractual obligations as of April 30, 2005 are for debt and
operating leases. Debt by year of maturity and future rental payments under
operating lease agreements are presented below. As of April 30, 2005, we had an
outstanding balance on our line of credit of $ 11,860,201 and do not have any
purchase obligations. We have not engaged in off-balance sheet financing,
commodity contract trading or significant related party transactions.
7
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CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
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Total Less than 1 year 1-3 years 4-5 years After 5 years
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Balance of Sale 119,189 119,189 - - -
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Other long term debt 4,311,828 2,157,994 1,510,110 327,737 315,987
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Total Long term debt 4,431,017 2,277,183 1,510,110 327,737 315,987
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Operating lease 5,969,658 896,563 1,537,222 1,546,456 1,989,417
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Management believes that these commitments will be satisfied with current
operating cash flow.
OUTLOOK
While the demand for its products has held steady due to a favorable economic
environment in recent years, the Company has nevertheless faced fierce
competition in the North American HVAC industry, a significant appreciation in
the Canadian dollar and a sharp rise in raw material costs. What's more, the
initially established manufacturing capacity based on greater demand notably
from the high-technology sector had to be reduced. Dectron's results have
therefore been adversely affected by several divestitures in recent years.
Management believes that the Canadian dollar and raw material prices have
stabilized and that progress has been made in regard to productivity. In fact,
various manufacturing operations have been consolidated and certain
non-strategic low-yielding assets have been sold and others will be sold
shortly. Accordingly, the Company does not expect to incur any significant
losses from discontinued operations for the current fiscal year.
Based on selective price increases and further improvements in efficiency,
management is confident that the Company will increase profit margins to
historical levels as of the current fiscal year (from 27.46% currently to
approximately 30%). In addition, Dectron's growth avenues, namely indoor air
security and water generation, are expected to bring substantial sales, which
would have a direct impact on the Company's overall profitability. All in all,
management feels that Dectron now benefits from a stronger foundation to drive
sustained growth and profitability.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Risk Management
Dectron is exposed to fluctuations in foreign currency exchange rates and
interest rates. To manage certain of those exposures, we use futures, options
and swaps. The instruments we utilize in our hedging activities are viewed as
risk management tools, involve little complexity and are not used for trading or
speculative purposes. Management believes that we satisfactorily diversify the
counterparts used and monitor the concentration of risk to limit our counterpart
exposure.
8
Interest Rate Risk
Dectron is exposed to market risk related to fluctuations in interest rates on
its debt. Increases in prevailing interest rates could increase our interest
payment obligations relating to variable rate debt. For example, a 100 basis
point increase in interest rates would increase annual interest expense by
$125,000.
ITEM 4. CONTROLS AND PROCEDURES
We believe it is critical to provide investors and other users of our financial
statements with information that is relevant, objective, understandable and
timely, so that they can make informed decisions. As a result, we have
established and we maintain accounting systems and practices and internal
control processes designed to provide reasonable assurance that transactions are
properly executed and recorded and that our policies and procedures are carried
out appropriately.
Our management team is committed to providing high-quality, relevant and timely
information about our businesses. Management performs reviews of each of our
businesses throughout the year, addressing issues ranging from financial
performance and strategy to personnel and compliance.
Management is responsible for implementing and maintaining adequate systems of
internal and disclosure controls and procedures and for monitoring their
effectiveness.
We evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" ("Disclosure Controls") pursuant to Rules 13a-14(c) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and our
"internal controls and procedures for financial reporting" (Internal Controls)
as of the end of the period covered by this Quarterly Report on Form 10-Q. This
evaluation was done under the supervision and with the participation of
management.
o Disclosure Controls are procedures that are designed with the
objective of ensuring that information required to be disclosed in
our reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure Controls are also designed with
the objective of ensuring that such information is accumulated and
communicated to our management, including the Chief Executive
Officer to allow timely decisions regarding required disclosure.
o Internal Controls are procedures which are designed with the
objective of providing reasonable assurance that (1) our
transactions are properly authorized; (2) our assets are
safeguarded against unauthorized or improper use; and (3) our
transactions are properly recorded and reported, all to permit the
preparation of our financial statements in conformity with
generally accepted accounting principles in the United States Of
America.
There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives
Based upon our management's evaluation, our chief executive officer and chief
financial officer have concluded that, as of October 31, 2004, the disclosure
and internal accounting controls provide reasonable assurance that information
required to be disclosed in the reports that we file under the Exchange Act is
recorded, processed, summarized and reported as and when required, including
with specific reference that our assets are safeguarded, transactions are
executed in accordance with management's authorizations and the financial
records are reliable for the purpose of preparing financial statements.
9
There were no significant changes in our internal and disclosure controls or in
other factors that could significantly affect such internal and disclosure
controls subsequent to the date of their evaluation.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer filed herewith pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer filed herewith pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of the Chief Executive Officer and Chief Financial
Officer furnished herewith pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
10
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.
June 14, 2005 By: /s/ Mauro Parissi
-----------------------------------------
Mauro Parissi
Chief Financial Officer
11
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005
TABLE OF CONTENTS
Interim Consolidated Balance Sheets F-2 - F-3
Interim Consolidated Statements of Earnings F-4 - F-5
Interim Consolidated Statements of Cash Flows F-6 - F-8
Interim Consolidated Statements of Stockholders' Equity F-9
Notes to Interim Consolidated Financial Statements F-10 - F-15
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS AT APRIL 30, 2005 AND JANUARY 31, 2005
(Amounts Expressed in United States Dollars) PAGE 2
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APRIL 30, 2005 JANUARY 31, 2005
---------------- ----------------
ASSETS
CURRENT
Cash $ 1,269,646 $ 1,075,220
Accounts receivable 10,451,249 9,680,250
Income taxes receivable 124,541 87,805
Inventory 10,641,080 10,044,194
Prepaid expenses and sundry assets 797,399 568,976
Loans receivable 68,577 68,836
Current assets held by discontinued operations 3,301,987 3,414,543
---------------- ----------------
26,654,479 24,939,824
LOANS RECEIVABLE 1,450,404 1,210,989
PROPERTY, PLANT AND EQUIPMENT 7,222,055 7,541,579
INTANGIBLES 75,060 79,963
GOODWILL 1,638,308 1,661,144
DEFERRED INCOME TAXES 253,604 254,419
---------------- ----------------
$ 37,293,910 $ 35,687,918
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS AT APRIL 30, 2005 AND JANUARY 31, 2005
(Amounts Expressed in United States Dollars) PAGE 3
- --------------------------------------------------------------------------------
APRIL 30, 2005 JANUARY 31, 2005
------------------ ------------------
LIABILITIES
CURRENT
Bank loans $ 11,860,201 $ 11,642,981
Accounts payable and accrued expenses 8,060,342 6,184,170
Current portion of long-term debt 2,277,183 2,348,870
Deferred revenue 4,580 4,580
Current liabilities held by discontinued operations 314,515 341,884
------------------ ------------------
22,516,821 20,522,485
LONG-TERM DEBT 2,153,834 2,370,913
DEFERRED REVENUE 1,421,549 1,477,153
------------------ ------------------
26,092,204 24,370,551
------------------ ------------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (NOTE 3) 6,873,335 6,873,335
TREASURY STOCK (88,780) (88,780)
ACCUMULATED OTHER COMPREHENSIVE INCOME 2,147,932 2,304,495
RETAINED EARNINGS 2,269,219 2,228,317
------------------ ------------------
11,201,706 11,317,367
------------------ ------------------
$ 37,293,910 $ 35,687,918
================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTH PERIOD ENDED APRIL 30, 2005 AND 2004
(Amounts Expressed in United States Dollars) PAGE 4
- --------------------------------------------------------------------------------
THREE MONTH THREE MONTH
ENDED APRIL 30, ENDED APRIL 30,
2005 2004
---------------- ----------------
SALES $ 10,910,643 $ 10,229,096
Cost of sales 7,914,830 6,958,657
--------------- ---------------
GROSS PROFIT 2,995,813 3,270,439
--------------- ---------------
OPERATING EXPENSES
Selling 1,324,612 1,216,521
General and administrative 1,004,516 854,962
Depreciation and amortization 323,362 314,578
Interest expense 233,650 383,476
--------------- ---------------
2,886,140 2,769,537
--------------- ---------------
EARNING BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 109,673 500,902
Income taxes 34,020 179,318
--------------- ---------------
EARNINGS BEFORE DISCONTINUED OPERATIONS 75,653 321,584
Loss from discontinued operations, net of tax (98,327) (270,577)
Gain on disposal of discontinued operations,
net of tax 63,576 61,646
--------------- ---------------
NET EARNINGS $ 40,902 $ 112,653
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)
FOR THE THREE MONTH PERIOD ENDED APRIL 30, 2005 AND 2004
(Amounts Expressed in United States Dollars) PAGE 5
- --------------------------------------------------------------------------------
THREE MONTH THREE MONTH
ENDED APRIL 30, ENDED APRIL 30,
2005 2004
----------------- -----------------
NET EARNINGS (LOSS) PER COMMON SHARE, BASIC AND DILUTED
Continuing operations $ 0.02 $ 0.11
Discontinued operations (0.03) (0.09)
Disposal of discontinued operations 0.02
0.02
----------------- -----------------
$ 0.01 $ 0.04
================= =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic 3,155,000 2,973,750
Diluted 3,155,000 2,973,750
The accompanying notes are an integral part of these consolidated financial
statements.
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED APRIL 30, 2005 AND 2004
(Amounts Expressed in United States Dollars) PAGE 6
- --------------------------------------------------------------------------------
THREE MONTH THREE MONTH
ENDED APRIL 30, ENDED APRIL 30,
2005 2004
----------------- -----------------
OPERATING ACTIVITIES
Net earnings from continuing operations $ 75,653 $ 321,584
Adjustments to reconcile net earnings to net cash used
in operating activities:
Depreciation and amortization 323,362 314,578
Decrease (increase) in accounts receivable (770,999) 840,683
Increase in inventory (596,886) (256,776)
Increase in prepaid expenses and sundry assets (228,423) (395,412)
Decrease in deferred income taxes 815 90,956
Increase in accounts payable and accrued expenses 1,876,172 1,534,862
Decrease (increase) in income taxes receivable (36,736) -
Increase (decrease) in income taxes payable - 51,639
Increase (decrease) in deferred revenue (55,604) (53,195)
----------------- -----------------
Net cash provided by operating activities 587,354 2,448,919
----------------- -----------------
The accompanying notes are an integral part of these consolidated financial
statements.
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTH PERIOD ENDED APRIL 30, 2005 AND 2004
(Amounts Expressed in United States Dollars) PAGE 7
- --------------------------------------------------------------------------------
THREE MONTH THREE MONTH
ENDED APRIL 30, ENDED APRIL 30,
2005 2004
------------------ ------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (38,131) (2,493)
------------------ ------------------
Net cash used in investing activities (38,131) (2,493)
------------------ ------------------
FINANCING ACTIVITIES
Advances to loans receivable (239,156) (53,637)
Advances from (repayments of) bank loans 217,220 (906,943)
Net advances from (repayments of) long-term debt (288,766) (243,753)
------------------ ------------------
Net cash provided by (used in) financing activities (310,702) (1,204,333)
------------------ ------------------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE ON CASH AND CASH
EQUIVALENTS (94,531) (569,582)
------------------ ------------------
EFFECT OF DISCONTINUED OPERATIONS 50,436 512,808
------------------ ------------------
The accompanying notes are an integral part of these consolidated financial
statements.
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTH PERIOD ENDED APRIL 30, 2005 AND 2004
(Amounts Expressed in United States Dollars) PAGE 8
- --------------------------------------------------------------------------------
THREE MONTH THREE MONTH
ENDED APRIL 30, ENDED APRIL 30,
2005 2004
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 194,426 1,185,319
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,075,220 2,457,346
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,269,646 $ 3,642,665
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
INTEREST PAID $ 211,243 $ 288,168
================== ==================
INCOME TAXES PAID $ 179,390 $ 94,016
================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
DECTRON INTERNATIONALE INC.
INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED APRIL 30, 2005
(Amounts Expressed in United States Dollars) PAGE 9
- --------------------------------------------------------------------------------
CUMULATIVE OTHER
RETAINED COMPREHENSIVE TREASURY
NUMBER AMOUNT EARNINGS INCOME STOCK
---------------- --------------- ----------------- ------------------ ----------------
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)
================ =============== ================= ================== ================
Share purchase plan
receivable - $ (170,819) $ - $ - $ -
Issuance of shares 54,250 162,750 - - -
Foreign currency translation - - - 1,692,836 -
Net earnings for the year - - (1,697,504) - -
---------------- --------------- ----------------- ------------------ ----------------
Balance January 31, 2004 2,973,750 $ 7,128,154 $ 3,216,723 $ 1,564,072 $ (88,780)
================ =============== ================= ================== ================
Share purchase plan
receivable - $ (798,569) $ - $ - $ -
Issuance of shares 181,250 543,750 - - -
Foreign currency translation - - - 740,423 -
Net loss for the year - - (988,406) - -
---------------- --------------- ----------------- ------------------ ----------------
Balance, January 31, 2005 3,155,000 $ 6,873,335 $ 2,228,317 $ 2,304,495 $ (88,780)
================ =============== ================= ================== ================
Share purchase plan
receivable - $ - $ - $ - $ -
Issuance of shares - - - - -
Foreign currency translation - - - (156,563) -
Net earnings for the period - - 40,902 - -
---------------- --------------- ----------------- ------------------ ----------------
Balance, April 30, 2005 3,155,000 $ 6,873,335 $ 2,269,219 $ 2,147,932 $ (88,780)
================ =============== ================= ================== ================
The accompanying notes are an integral part of these consolidated financial
statements.
DECTRON INTERNATIONALE INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 AND JANUARY 31, 2005
(Amounts Expressed in United States Dollars) PAGE 10
- --------------------------------------------------------------------------------
1. NOTICE OF NO AUDITOR REVIEW OF THE INTERIM CONSOLIDATED FINANCIAL
The interim consolidated financial statements are the responsibility of
the Company's management and have been approved by its Board of Directors.
The Company's independent auditor has not performed a review of these
Interim financial statements in accordance with the standards established
by the Canadian Institute of Chartered Accountants for a review of interim
financial statements by an entity's auditor.
2. SIGNIFICANT ACCOUNTING POLICIES
These unaudited interim consolidated financial statements have been
prepared in accordance with United State generally accepted accounting
principles, using the same accounting principles as those mentioned in
Note 1 to the consolidated financial statements for the year ended January
31, 2005. The unaudited interim consolidated financial statements should
be read in conjunction with the consolidated financial statements and the
notes thereto for the year ended January 31, 2005. These consolidated
financial statements require management to make estimates and assumptions
that affect the reported amounts in the consolidated financial statements
and the notes thereto. Actual results could differ from these estimates.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS PRESENTATION
These consolidated financial statements include the accounts of Dectron
Internationale Inc., Dectron Inc. Consolidated, Circul-aire Group and
International Water Makers Inc.
Dectron Inc. Consolidated is comprised of Dectron Inc. and of its
wholly-owned subsidiaries, Refplus Inc., Thermoplus Air Inc., Dectron
U.S.A. Inc. and Liberty Drive Property, Inc. (formely Ipac 2000 Inc).
Circul-aire Group is comprised of Cascade Technologies Inc., and of its
wholly-owned subsidiaries, Purafil Canada Inc. and Circul-aire Inc. and
its wholly-owned subsidiary Tranzmetal Inc.
All inter-company profits, transactions and account balances have been
eliminated.
FOREIGN CURRENCY TRANSLATION
The company maintains its books and records in Canadian dollars. The
operation of the company's subsidiary in the United States is an
integrated corporation. As a result, monetary assets and liabilities in
foreign currency are translated into Canadian dollars at exchange rates in
effect at the balance sheet date, whereas non-monetary assets and
liabilities are translated at the average exchange rates in effect at
transaction dates. Income and expenses in foreign currency are translated
at the average rate effective during the year with the exception of
depreciation and amortization, which is translated at the historical rate.
Gains and losses resulting from the translation of foreign currency
transactions are included in earnings.
DECTRON INTERNATIONALE INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 AND JANUARY 31, 2005
(Amounts Expressed in United States Dollars) PAGE 11
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION (CONTINUED)
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.
RECENT ACCOUNTING CHANGES
a) On December 16, 2004, the FASB issued SFAS 123 (R), "Share-Based
Payment," which is a revision of SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. SFAS 123(R) must be adopted no
later than August 1, 2005. Early adoption is permitted. The Company
expects to adopt SFAS 123(R) on August 1, 2005, utilizing the modified
retrospective method. The modified retrospective method requires
compensation costs to be recognized beginning with the effective date
based on the requirements of SFAS 123(R) for all (a) share-based
payments granted after the effective date and (b) awards granted to
employees prior to the effective date of SFAS 123(R) that remain
unvested on the effective date. Amounts for prior years will be
restated based on the amounts previously recognized under SFAS 123 for
purposes of pro forma disclosures. As permitted by SFAS 123, the
Company currently accounts for share-based payments to employees using
APB Opinion 25's intrinsic value method and, as such, generally
recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have
a significant impact on the Company's results of operations, although
it will have no impact on the Company's overall financial position. The
impact of the adoption of SFAS 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the
future.
b) In November 2004, the FASB issued SFAS 151, "Inventory Costs - an
amendment of ARB No.43, Chapter 4," which requires companies to expense
abnormal freight, handling costs, or spoilage in the period incurred
and to allocate fixed overhead based on normal capacity, with
adjustment if production is abnormally high. This standard becomes
effective for the Company on August 1, 2005, with early adoption
permitted. The Company currently accounts for abnormal freight,
handling costs, and spoilage consistent with the standard. The Company
plans to adopt the provisions early, on a prospective basis, as they
relate to capitalization of fixed overhead expenses in the first
quarter of 2006. The Company is currently evaluating the effects of
implementing this standard. Based on a preliminary analysis, the
Company does not expect that there will be a material effect on 2006
total Company results. There may be an impact on the results of certain
quarters at the segment or total Company level.
DECTRON INTERNATIONALE INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 AND JANUARY 31, 2005
(Amounts Expressed in United States Dollars) PAGE 12
- --------------------------------------------------------------------------------
3. CAPITAL STOCK
Authorized
An unlimited number of preferred shares, cumulative, voting,
no par value
An unlimited number of common shares, voting, no par value
Issued
APRIL 30, JANUARY 31,
2005 2005
---------------- ----------------
3,155,000 Common shares $ 6,873,335 $ 6,873,335
================ ================
During the fiscal year ended January 31, 2005, certain employees have
exercised their options under the 1999 Stock Option Plan. Consequently,
181,250 common shares were issued for a total consideration of $543,750.
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, no options are currently issued and outstanding since the plan
expired in November 2004.
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 were 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, 108,500 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, 2011. 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.
DECTRON INTERNATIONALE INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 AND JANUARY 31, 2005
(Amounts Expressed in United States Dollars) PAGE 13
- --------------------------------------------------------------------------------
3. 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.
DECTRON INTERNATIONALE INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 AND JANUARY 31, 2005
(Amounts Expressed in United States Dollars) PAGE 14
- --------------------------------------------------------------------------------
3. CAPITAL STOCK (CONTINUED)
EMPLOYEE STOCK OPTION PLAN (CONTINUED)
A summary of the status of the company's stock option plans are as
follows:
APRIL 30, 2005 JANUARY 31, 2005 JANUARY 31, 2004
----------------------------- ----------------------------- ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------- ------------ ------------- ------------- ------------- -----------------
Outstanding, 108,500 $ 4.20 295,750 $ 3.44 357,000 $ 3.39
beginning of year
Granted - - - - - -
Exercised - - (181,250) 3.00 (54,250) 3.00
Cancelled - - (6,000) 3.00 (7,000) 4.20
------------- ------------ ------------- ------------- ------------- -----------------
Outstanding, end of
year 108,500 $ 4.20 108,500 $ 4.20 295,750 $ 3.44
============= ============ ============= ============= ============= =================
Options, exercisable,
end of year 81,375 81,375 235,250
============= ============= =============
The following table summarizes information about fixed stock options
outstanding:
APRIL 30, 2005
----------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------------
Exercisable price WEIGHTED
----------------- AVERAGE
REMAINING WEIGHTED
YEARS OF AVERAGE WEIGHTED AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
OPTIONS LIFE PRICE OPTIONS PRICE
--------------- ------------- ------------- ------------- ------------------
$ 3.00 - - - - -
4.20 108,500 5.9 4.20 81,375 4.20
--------------- ------------- ------------- -------------- ----------------
108,500 5.9 $ 4.20 81,375 $ 4.20
=============== ============= ============= ============== ================
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, stockholders' equity has
been reduced by $798,569 at January 31, 2005 (reduced by $170,819 - 2004),
to reflect the loans due from certain employees and officers, which relate
to the purchase of common shares of the company.
DECTRON INTERNATIONALE INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 AND JANUARY 31, 2005
(Amounts Expressed in United States Dollars) PAGE 15
- --------------------------------------------------------------------------------
4. SEGMENTED INFORMATION
APRIL 30, JANUARY 31,
2005 2005
------------------- ------------------
a) The breakdown of sales by geographic area is as follows:
Canada $ 6,375,626 $ 21,453,215
United States of America 4,168,253 18,180,705
International 366,764 1,276,681
------------------- ------------------
$ 10,910,643 $ 40,910,601
=================== ==================
b) The breakdown of identifiable assets by geographic area are as
follows:
Canada $ 33,772,805 $ 31,644,024
United States 3,521,105 4,043,894
------------------- ------------------
$ 37,293,910 $ 35,687,918
=================== ==================