UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
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 0-11419
Armitec, Inc.
-------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-4935595
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
4479 Atlanta Road
Smyrna, Georgia 30080
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
770-432-8140
------------------
(Telephone Number)
Not Applicable
----------------------------
(Former name, former address
and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 XX NO
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 41,688,629 shares of common
stock, $.00167 par value per share, issued and outstanding as of September 3,
2002.
Transitional Small Business Disclosure Format (check one): YES X NO
--
ARMITEC, INC
(A DEVELOPMENT STAGE COMPANY)
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet June 30, 2002 (unaudited)
and December 31, 2001 (audited) 2
Consolidated Statement of Operations for the three months
ended June 30, 2002 (unaudited) and 2001 (unaudited) 3
Consolidated Statements of Operations for the six months
ended June 30, 2002 (unadutied), and June 30, 2001
(unaudited) and cumulative from commencement of
development stage through June 30, 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 (unaudited), and June 30, 2001 (unaudited) and
cumulative from commencement of development stage through
June 30, 2002 (unaudited) 5
Consolidated Statements of Changes in Stockholders' Deficit
for the period from inception to June 30, 2002 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 12
Signatures 13
ARMITEC, INC.
(A Development stage company)
Consolidated Balance Sheet
June 30, 2002 December 31, 2001
(Unaudited) (Audited)
Assets ----------------- -----------------
------
Current assets:
Cash -- 7,557
Inventories $ 466,916 71,189
Accounts receivable (net of allowance for doubtful accounts of $10,000) 251,520 --
Other current assets 16,450 7,775
----------------- -----------------
Total current assets 734,886 86,521
----------------- -----------------
Non-current assets:
Furniture, fixtures and equipment, at cost 843,759 66,120
Accumulated depreciation (18,200) --
----------------- -----------------
Fixed assets, net 825,559 66,120
Goodwill 837,048 --
Other assets 15,500 15,500
----------------- -----------------
Total non-current assets 1,678,107 81,620
----------------- -----------------
Total assets $ 2,412,993 168,141
================= =================
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 954,941 138,918
Bank overdraft 22,259 --
Notes payable 377,133 --
Accrued taxes and expenses 596,388 --
----------------- -----------------
Total current liabilities 1,950,721 138,918
----------------- -----------------
Non-current liabilities:
Convertible debentures 450,000 --
Note payable 176,000 --
Related party obligations 603,350 479,600
----------------- -----------------
Total noncurrent liabilities 1,229,350 479,600
----------------- -----------------
Total liabilities 3,180,071 618,518
----------------- -----------------
Commitments and contingencies
Stockholders' deficit:
Common stock, par value $.00167; 300,000,000 shares authorized;
41,688,629 and 30,513,629 shares issued and outstanding 69,620 50,958
Paid-in capital 365,502 170,322
Accumulated deficit during the development stage (1,202,200) (671,657)
----------------- -----------------
Total stockholders' deficit (767,078) (450,377)
----------------- -----------------
$ 2,412,993 168,141
================= =================
See accompanying notes to financial statements
-2-
ARMITEC, INC.
(A Development stage company)
Consolidated Statements of Operations for the Three
Months Ended June 30, 2002 and 2001
(Unaudited)
Three Months Three Months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Sales $ 282,089 --
Cost of sales 128,530 --
------------- -------------
Gross margin 153,559 --
------------- -------------
Operating expenses
General and administrative 395,854 107,922
Interest 13,180 1,456
------------- -------------
Total expenses 409,034 109,378
------------- -------------
Net loss $ (255,475) (109,378)
============= =============
Net loss per share (.01) (.01)
============= =============
Weighted average number of common shares outstanding 35,101,129 18,808,632
============= =============
See accompanying notes to the financial statements.
-3-
ARMITEC, INC.
(A Development stage company)
Consolidated Statements of Operations for the Six
Months Ended June 30, 2002 and 2001
and for the Period Commencing July 24, 2000
to June 30, 2002
(Unaudited)
Cumulative from
July 24, 2000
(commencement
Six Months Six Months of development
Ended Ended stage) to
June 30, 2002 June 30, 2001 June 30, 2002
--------------- --------------- ---------------
Sales $ 284,165 -- 284,165
Cost of sales 129,653 -- 129,653
--------------- --------------- ---------------
Gross margin 154,512 -- 154,512
--------------- --------------- ---------------
Operating expenses
General and administrative 670,493 168,953 1,336,858
Interest 14,562 3,096 19,854
--------------- --------------- ---------------
Total expenses 685,055 172,049 1,356,712
--------------- --------------- ---------------
Net loss $ (530,543) (172,049) (1,202,200)
=============== =============== ===============
Net loss per share (.02) (.01)
=============== ===============
Weighted average number of common shares outstanding 35,101,129 18,808,632
=============== ===============
See accompanying notes to the financial statements.
-4-
ARMITEC, INC.
(A Development stage company)
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 and for the Period
Commencing July 24, 2000 to June 30, 2002
(Unaudited)
Cumulative from
July 24, 2000
(commencement
Six Months Six Months of development
Ended Ended stage) to
June 30, 2002 June 30, 2001 June 30, 2002
--------------- --------------- ---------------
Cash flows from operating activities, net of effects of acquisition:
Net loss $ (530,543) (172,049) (1,202,200)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 18,200 -- 18,200
Non-cash payment for consulting services 176,342 -- 242,865
Changes in:
Accounts receivable (43,088) -- (43,088)
Accounts payable and accrued expenses 89,143 38,910 253,577
Inventories (145,307) (14,264) (216,496)
Bank overdraft 22,259 8,688 22,259
Other assets (8,675) (82,619) (31,950)
--------------- --------------- ---------------
Net cash used by operating activities (421,669) (221,334) (956,833)
--------------- --------------- ---------------
Cash flows from investing activities, net of effects of acquisition:
Net proceeds used to acquire Pocono Knits, Inc. (102,158) -- (102,158)
Purchase of fixed assets (31,639) (6,000) (97,759)
--------------- --------------- ---------------
Net cash used by investing activities (133,797) (6,000) (199,917)
--------------- --------------- ---------------
Cash flows from financing activities, net of effects of acquisition:
Repayment of notes payable (63,341) -- (63,341)
Proceeds from convertible debt issuance 450,000 -- 450,000
Proceeds from the issuance of common stock -- -- 119,241
--------------- --------------- ---------------
Common stock subscription, net of receivable -- 106,741 --
Proceeds from exercise of warrants 37,500 -- 47,500
Change in related party obligations 123,750 120,493 603,350
--------------- --------------- ---------------
Net cash provided by financing activities 547,909 227,234 1,156,750
--------------- --------------- ---------------
Net decrease in cash (7,557) -- --
Cash at beginning of period 7,557 100 --
--------------- --------------- ---------------
Cash at end of period $ -- -- --
=============== =============== ===============
Supplemental information:
Interest paid $ 14,562 3,096 19,854
=============== =============== ===============
See accompanying notes to financial statements.
-5-
ARMITEC, INC.
(A Development stage company)
Consolidated Statement of Changes in Stockholders' Deficit
Accumulated
Deficit
Common Stock During
------------------------- Paid-In Development
Shares Amount Capital Stage Total
----------- ----------- ----------- ----------- -----------
Balances, at inception 15,947,542 25,516 -- (34,967) (9,451)
Common stock issued for compensation to
employees at $.01 per share 1,027,100 1,643 8,628 -- 10,271
Common stock issued to settle debt at $.01
per share 18,000 29 151 -- 180
Common stock issued for consulting
Services at $.01 per share 1,815,990 2,906 15,254 -- 18,160
Net (loss) for the period -- -- -- (222,746) (222,746)
----------- ----------- ----------- ----------- -----------
Balances, December 31, 2000 18,808,632 30,094 24,033 (257,713) (203,586)
Issuance of common stock
Net of offering costs of $21,251
at $.15 per share 849,997 1,360 105,381 -- 106,741
Common stock issued for
consulting services at par 720,000 1,152 -- -- 1,152
Proceeds from sale of common stock
at $.15 per share 35,000 56 4,944 -- 5,000
Common stock issued for consulting
services at par 7,350,000 11,760 -- -- 11,760
Common stock issued for consulting
services at $.01 per share 2,500,000 4,000 21,000 -- 25,000
Proceeds from sale of common stock
at $.15 per share 50,000 80 7,420 -- 7,500
Proceeds from exercise of
warrants at $.05 per share 200,000 320 9,680 -- 10,000
Change in par value to .000167 per share -- 2,136 (2,136) -- --
Net (loss) for the year -- -- -- (413,944) (413,944)
----------- ----------- ----------- ----------- -----------
Balances, December 31, 2001 30,513,629 50,958 170,322 (671,657) (450,377)
Common stock issued for
consulting services at $.02 per share 2,225,000 3,715 40,785 -- 44,500
Proceeds from exercise of
warrants at $.075 per share 500,000 835 36,665 -- 37,500
Common stock issued for consulting
services at $.02 per share 4,400,000 7,348 80,652 -- 88,000
Common stock issued for consulting
services at $.023 1,750,000 2,922 37,078 -- 40,000
Common stock (restricted) issued for
consulting services at par 2,300,000 3,842 -- -- 3,842
Net loss for period -- -- -- (530,543) (530,543)
----------- ----------- ----------- ----------- -----------
Balances, June 30, 2002 41,688,629 69,620 365,502 (1,202,200) (767,078)
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
-6-
ARMITEC, INC.
(A Development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's financial position as of June 30, 2002 and the results of its
operations and cash flows for the three and six months ended June 30, 2002.
Operating results for the three months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2002.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Form 10-KSB for the year
ended December 31, 2001.
(2) Acquisition of Pocono Knits, Inc.
On May 2, 2002, the Company acquired Pocono Knits, Inc. (Pocono) through its
wholly-owned subsidiary Jack Young Associates, Inc. The acquired company
manufactures uniforms and knitwear products. Pocono has been in business for
over forty years and has the same customer base the Company plans on serving.
The Company acquired the assets and liabilities of Pocono in exchange for
$102,158. As a result of the transaction, the Company recorded goodwill totaling
$837,048, which was primarily the result of the Pocono's stockholders' deficit
after consideration of adjustments to net assets to reflect their fair values at
the acquisition date.
The consolidated results of the Company include the results of the operations of
Pocono since the acquisition date. The following table details the significant
assets and liabilities acquired as a result of the acquisition:
Assets:
Inventories $ 250,402
Accounts receivable 208,432
Fixed assets 746,000
Liabilities:
Accounts payable $ 836,805
Accrued taxes payable and accrued expense 486,463
Notes payable 623,141
(3) Issuance of Convertible Notes
The Company entered into convertible debt financing agreements with Stonestreet
Limited Partnership and Filter International, Ltd. for an aggregate of $450,000.
The stated interest rate on the notes is 7% per annum and the unpaid principal
and interest balance is due in full by April 23, 2004 and June 5, 2004,
respectively. As defined by the note, the conversion price is the lesser of (a)
$.07 or (b) an amount equal to 70% of the average per share market price as
quoted on the OTC Bulletin Board, The Nasdaq Small-Cap Market, or the Nasdaq
National Market for the three days having the lowest per share market value
during the thirty trading days prior to the conversion date. In concert with the
issuance of the convertible notes, the Company issued 4,500,000 warrants to
purchase the common stock of the Company with an exercise price equal to 105% of
the market price at the date of closing.
-7-
ARMITEC, INC.
(A Development stage company)
Notes to Consolidated Financial Statements, continued
(4) Consulting Agreements
The Company entered into a Consulting Agreement with the former President of
Pocono Knits, Inc. which requires the payment of $127,200 per year for
consulting services and 2,000,000 shares of the Company's common stock. The
2,000,000 shares of the Company's stock is subject to a put agreement whereby
upon the five year anniversary of the put agreement, the consultant may put the
shares back to the Company for the sum of $550,000. If the consultant rejects a
call from the Company, the consultant's put option will terminate. The Company
also entered into an Employment Agreement with the former Vice President of
Pocono Knits, Inc. with compensation in the amount of $96,180 per year.
(5) Related Party
The Company has paid Galt, Inc. $20,000 per month for a total of $120,000 as of
June 30, 2002 for consulting services provided by the Chief Executive Officer
(CEO). Galt, Inc. is owned by the spouse of the CEO.
-8-
ARMITEC, INC.
(A Development stage company)
Notes to Consolidated Financial Statements, continued
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Plan of Operation
-----------------
For the near term, the Company continues to pursue its business plan, and the
Company is currently seeking additional acquisitions or in the alternative,
raising additional funds necessary to expand its retail and manufacturing
operations. During the second quarter of 2002, the Company raised $450,000 from
the sale of convertible notes; however, additional capital will be needed to
continue the Company's operations. The Company expects obtain additional capital
through the private sale of the Company's securities or from borrowings from
private lenders and/or financial institutions. There can be no assurance that
the Company will be successful in obtaining any additional capital which may be
needed.
On May 2, 2002, Jack Young Associates, Inc., a wholly-owned subsidiary of the
Company, purchased the assets of Pocono Knits, Inc., a New Jersey Corporation.
Pocono Kits, Inc. is a manufacturer of sweaters for the military, police,
postal, fire and security companies. The Company has been in business for over
40 years and services the same customer base as the Company intends to service.
This transaction is further discussed in Footnote 2 of the financial statements.
The Company will file the required pro forma financial information as soon as is
practical.
Financial Condition
-------------------
The Company continues to operate as a development stage entity. For the six
months ended June 30, 2002, the Company has funded its operations from the
issuance of debt and borrowings from related parties. To date the Company has
not generated positive cashflow from operations. During the second quarter, the
Company commenced operations with the acquisition of Pocono Knits, Inc.;
however, the bulk of the Company's resources continue to be devoted to
developmental activities. The ability of the Company to go on as a going concern
is contingent upon the generation of positive cash flow or additional
borrowings. At June 30, 2002, the Company reported total assets of $2,412,993,
total liabilities of $3,180,071 and a shareholders' deficit of $767,078.
Additionally, the Company reported negative working capital of $1,215,835.
Results of Operations
---------------------
Although the Company continues to focus significant resources on developmental
issues, the Company commenced operations in the second quarter as a result of
the purchase of Pocono Knits, Inc. Sales for the three months totaled $282,089
and the related cost of goods sold were $128,530 generating a gross margin of
$153,559. For the six month period, the gross margin reported was $154,512 on
total sales of $284,165. General and administrative expenses for the three month
and six month period were $395,854 and $670,493, respectively, principally due
to consulting and legal expenses of approximately $173,000 and $292,000,
respectively, primarily related to the issuance of the convertible notes and the
acquisition of Pocono Knits, Inc. Net loss reported for the six and three months
ended June 30, 2002 was $530,543 and $255,475. The accumulated deficit for the
period from inception, being July 24, 2000, through June 30, 2002, was
$1,202,200.
Liquidity and Capital
---------------------
At June 30, 2002, the Company reported a bank overdraft of $22,259 with overall
negative net working capital of $1,215,835. To date, liquidity needs have been
met with borrowings from the issuance of convertible notes and borrowings from
related parties. As noted above, the convertible notes mature on April 23, 2004.
The is no stated maturity with regard to amounts owed to related parties.
Management believes the Company will be able to satisfy its cash requirements
for the next 12 months. Fully executing the business plan beyond the present
stage however, will require the increase of the Company's cash needs and is
contingent on raising additional resources or the generation of cash flow
through greater sales.
-9-
ARMITEC, INC.
(A Development stage company)
Notes to Consolidated Financial Statements, continued
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations, continued
------------------------
Liquidity and Capital, continued
--------------------------------
During the second quarter of 2002, the Registrant entered into convertible note
agreements with the Stonestreet Limited Partnership and Filter International,
Ltd. for the issuance of a $350,000 and $100,000, respectively, 7% note maturing
April 23, 2004 and June 5, 2002, respectively. As defined by the note, the
conversion price is the lesser of (a) $.07 or (b) an amount equal to 70% of the
average per share market price as quoted on the OTC Bulletin Board, The Nasdaq
Small-Cap Market, or the Nasdaq National Market for the three days having the
lowest per share market value during the thirty trading days prior to the
conversion date. Under the Convertible Note Purchase Agreement the Registrant
convenanted that it would not declare or pay any dividends so long as the
Convertible Note remained outstanding. In concert with the issuance of the
convertible notes, the Company issued 4,500,000 warrants to purchase the common
stock of the Company with an exercise price equal to 105% of the market price at
the date of closing.
-10-
ARMITEC, INC.
(A Development stage company)
Notes to Consolidated Financial Statements, continued
Part II
Item 1. Legal Proceedings
In June, 2002, the Registrant received a Notice of Default from Mr. Julius
Waltzer under a Promissory Note between Mr. Waltzer and Pocono Knits, Inc. In
connection with the Asset Purchase Agreement by and between Jack Young
Associates, Inc. (a wholly owned subsidiary of the Registrant) and Pocono Knits,
Inc., Jack Young Associates, Inc. agreed to continue to make payments on behalf
of Pocono Knits, Inc. in connection with this promissory note. The Registrant is
currently in settlement discussions with Mr. Waltzer concerning the repayment
terms of the Note.
In August, 2002, the Registrant received a demand from Mr. Jack Young for
amounts allegedly owed under his Consulting Agreement, which was terminated by
the Registrant for cause on August 16, 2002, and other amounts allegedly
advanced to the Registrant. The Registrant believes that it has meritorious
defenses to the allegations listed above, including set-offs against Mr. Young.
However, in light of the nature of the litigation process, there can be no
assurance that we will not be motivated to consider reasonable settlement
opportunities or that we will not suffer an adverse result should the demand
proceed to litigation, either of which could have a material adverse impact on
us.
Item 2. Changes in Securities and Use of Proceeds
On April 23, 2002, the Registrant entered into a securities purchase agreement
with Stonestreet Limited Partnership for the issuance of a $350,000 7%
convertible note and 3,500,000 common stock purchase warrants in reliance on
Section 4(2) of the Act and Rule 506. Each warrant entitles the holder to
purchase one share of common stock at an exercise price of $0.042. The
commission for the transaction was 10% ($35,000) and a common stock purchase
warrant for 3,500,000 shares of our stock at an exercise price per share of
$.042. Net proceeds amounted to $315,000.
On May 2, 2002, the Registrant issued 2,000,000 shares of its common stock to
Jack Young for services to be provided pursuant to a Consulting Agreement of the
same date. The services were valued at $3,340 or $0.00167 per share. These
shares were sold pursuant to Section 4(2) of the Securities Act and have been
marked "restricted."
On May 22, 2002, the Registrant issued 50,000 shares of its common stock to Phil
Dubois for services to be provided. The services were valued at $83.50 or
$0.00167 per share. These shares were sold pursuant to Section 4(2) of the
Securities Act and have been marked "restricted."
On June 24, 2002, the Registrant issued 250,000 shares of its common stock to
Tony Anzovino for services to be provided. The services were valued at $417.50
or $0.00167 per share. These shares were sold pursuant to Section 4(2) of the
Securities Act and have been marked "restricted."
On June 5, 2002, the Registrant entered into a securities purchase agreement
with Filter International, Ltd. for the issuance of a $100,000 7% convertible
note and 1,000,000 common stock purchase warrants in reliance on Section 4(2) of
the Act and Rule 506. Each warrant entitles the holder to purchase one share of
common stock at an exercise price of $0.02625. The commission for the
transaction was 10% ($10,000) and a common stock purchase warrant for 1,000,000
shares of our stock at an exercise price per share of $0.02625. Net proceeds
amounted to $90,000.
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
On April 23, 2002, a majority of the Registrant's shareholders approved the
adoption of an amended and restated Certificate of Incorporation of the
Registrant by written consent to, among other things, increase the number of
shares of common stock of the Registrant from 50,000,000 to 300,000,000 shares,
and to create a class of blank check preferred stock, par value $0.001, with
10,000,000 authorized shares. On June 27, 2002, the Registrant filed a
definitive information statement with the Commission, which was mailed to the
Registrants shareholders in late July. On August 15, 2002, the Registrant filed
its Amended and Restated Certificate with the Delaware Secretary of State.
-11-
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation (1)
10.1 Convertible Note Purchase Agreement between Armitec, Inc. and Filter
International, Ltd.
10.2 Convertible Promissory Note with Filter International, Ltd.
10.3 Warrant Agreement with Filter International, Ltd.
10.4 Registration Rights Agreement with Filter International, Ltd.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 executed by Bruce R.
Davis, Chief Executive Officer, President and Chief Financial Officer
of Armitec, Inc.
(1) Incorporated by reference to the Definitive Information Statement on
Schedule 14C filed by the registrant on June 27, 2002.
(b) Reports on Form 8-K
On May 28, 2002, the Registrant filed a Current Report on Form 8-K
reporting the resignation of its independent public accountant.
-12-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARMITEC, INC.
/s/ Bruce R. Davis
--------------------------------------
Date: September 13, 2002 Bruce R. Davis
President, Chief Executive Officer,
Chief Financial and Accounting Officer
-13-