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 September 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.
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(Exact name of registrant as specified in its charter)
Delaware 22-4935595
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(State of Incorporation) (I.R.S. Employer Identification No.)
4479 Atlanta Road
Smyrna, Georgia 30080
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(Address of principal executive offices) (Zip Code)
770-432-8140
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(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 NO X
--- ---
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: 53,752,212 shares of common
stock, $.00167 par value per share, issued and outstanding as of January 23,
2003.
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
ARMITEC, INC
(A DEVELOPMENT STAGE COMPANY)
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 2002 (unaudited)
and December 31, 2001 (audited) 2
Consolidated Statements of Operations for the three months
ended September 30, 2002 (unaudited) and September 39, 2001
(unaudited) 3
Consolidated Statements of Operations for the nine months
ended September 30, 2002 (unadutied) and September 30, 2001
(unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 (unaudited), and September30, 2001
(unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. 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 11
Signatures 12
ARMITEC, INC.
Consolidated Balance Sheet
September 30, 2002 December 31, 2001
(Unaudited) (Audited)
------------------ ------------------
Assets
------
Current assets:
Cash $ -- $ 7,557
Inventories 517,307 71,189
Accounts receivable (net of allowance for doubtful accounts of $40,000) 233,884 --
Other current assets 7,003 7,775
------------------ ------------------
Total current assets 758,194 86,521
------------------ ------------------
Property and equipment:
Furniture, fixtures and equipment, at cost 849,762 66,120
Accumulated depreciation (44,900) --
------------------ ------------------
Property and equipment, net 804,862 66,120
------------------ ------------------
Other assets:
Goodwill 247,048 --
Other assets 38,500 15,500
------------------ ------------------
Total assets 285,548 15,500
------------------ ------------------
Total assets $ 1,848,603 $ 168,141
================== ==================
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 265,637 $ 138,918
Bank overdraft 39,420 --
Notes payable 249,130 --
Accrued expenses 297,470 --
------------------ ------------------
Total current liabilities 851,657 138,918
------------------ ------------------
Non-current liabilities:
Convertible debentures 708,000 --
Note payable 193,333 --
Accrued expenses 345,748 --
Related party obligations 629,388 479,600
------------------ ------------------
Total non-current liabilities 1,876,469 479,600
------------------ ------------------
Total liabilities 2,728,126 618,518
------------------ ------------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.00167; 300,000,000 shares authorized;
53,752,212 and 30,513,629 shares issued and outstanding 89,766 50,958
Paid-in capital 701,707 170,322
Accumulated deficit (1,670,996) (671,657)
------------------ ------------------
Total stockholders' deficit (879,523) (450,377)
------------------ ------------------
Total stockholders' deficit and liabilities $ 1,848,603 $ 168,141
================== ==================
See accompanying notes to financial statements.
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ARMITEC, INC.
Consolidated Statements of Operations for the Three
Months Ended September 30, 2002 and 2001
(Unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2002 2001
------------- -------------
Sales $ 426,957 $ --
Cost of sales 185,172 --
------------- -------------
Gross margin 241,785 --
------------- -------------
Operating expenses:
General and administrative
Consulting fees paid with common
stock and warrants 239,158 --
Other 225,537 139,318
Interest 16,659 248
------------- -------------
Total operating expenses 481,354 139,566
------------- -------------
Net Loss $ (239,479) $ (139,666)
============= =============
Basic and diluted net loss per share $ (.01) $ (.01)
============= =============
Weighted average number of
commons shares outstanding 47,719,421 20,413,629
============= =============
See accompanying notes to the financial statements.
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ARMITEC, INC.
Consolidated Statements of Operations for the Nine
Months Ended September 30, 2002 and 2001
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
------------- -------------
Sales $ 711,122 $ --
Cost of sales 559,155 --
------------- -------------
Gross margin 151,967 --
------------- -------------
Operating expenses:
General and administrative:
Consulting fees paid with common
stock and warrants 239,158 --
Other 868,158 308,271
Interest 26,049 3,344
------------- -------------
Total operating expenses 1,133,392 311,615
------------- -------------
Net loss $ (981,425) $ (311,615)
============= =============
Basic and diluted net loss per share $ (.02) $ (.02)
============= =============
Weighted average number of common shares outstanding 47,719,421 19,343,623
============= =============
See accompanying notes to the financial statements.
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ARMITEC, INC.
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss $ (981,425) $ (311,615)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 44,900 --
Common stock issued for consulting services 446,429 1,152
Net of effects of acquisition
Accounts receivable (25,452) --
Accounts payable and accrued expenses 112,788 109,879
Inventories (136,118) (44,200)
Bank overdraft 39,419 --
Other assets (22,228) --
------------- -------------
Net cash used by operating activities (521,685) (244,784)
------------- -------------
Cash flows from investing activities:
Net cash used to acquire Pocono Knits, Inc. (102,158) --
Purchase of fixed assets (166,674) (18,085)
------------- -------------
Net cash used by investing activities (268,832) (18,085)
------------- -------------
Cash flows from financing activities
Repayment of notes payable (63,341) --
Proceeds from convertible debt issuance 616,701 --
Proceeds from the issuance of common stock -- 132,992
Proceeds from exercise of warrants 105,850 --
Increase in paid in capital 1,000
Proceeds from related party loans 123,750 110,249
------------- -------------
Net cash provided by financing activities 782,960 243,241
------------- -------------
Net decrease in cash (7,557) (19,628)
Cash at beginning of period 7,557 100
------------- -------------
Cash at end of period $ -- $ (19,528)
============= =============
Supplemental information:
Interest paid $ 15,886 $ 3,344
============= =============
See accompanying notes to financial statements.
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ARMITEC, INC.
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 September 30, 2002 and the results of its
operations and cash flows for the three and nine months ended September 30,
2002. Operating results for the three and nine months ended September 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 certain liabilities of Pocono in exchange
for $102,158. As a result of the transaction, the Company recorded goodwill
totaling $247,048, 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 $ 400,402
Accounts receivable 208,432
Property and equipment 746,000
Liabilities:
Accounts payable $ 273,333
Accrued expenses 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 $750,000.
The stated interest rate on the notes is 7% per annum and the unpaid principal
and interest balance is due in full April 23, 2004. 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 connection with the issuance of the convertible notes, the
Company issued 4,500,000 warrants to purchase common stock of the Company with
an exercise price equal to 105% of the market price at the date of closing.
-6-
ARMITEC, INC.
Notes to Consolidated Financial Statements, continued
(4) Consulting Agreements
The Company terminated a Consulting Agreement with the former President of
Pocono Knits, Inc. which had required 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 former
President kept the 2,000,000 shares of the Company's stock. 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. In addition,
the Company granted the Vice President 250,000 shares of the Company's common
stock.
(5) Related Party
The Company received working advances and has accrued consulting fees to Galt,
Inc. in the amount of $20,000 per month for a total of $180,000 as of September
30, 2002 for consulting services provided by the Chief Executive Officer (CEO)
of the Company. Galt, Inc. is owned by the spouse of the CEO.
-7-
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 third quarter of 2002, the Company raised $300,000 from
the sale of convertible notes; however, additional capital will be needed to
continue the Company's operations. The Company expects to 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 Knits, 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 ceased to operate as a development stage entity. For the nine months
ended September 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 cash flow from operations. During the second quarter of
2002, the Company commenced operations with the acquisition of Pocono Knits,
Inc. and in September, 2002 the Company opened its retail/wholesale distribution
center in Atlanta, Georgia. The ability of the Company to continue on as a going
concern is contingent upon the generation of positive cash flow or additional
borrowings. At September 30, 2002, the Company reported total assets of
$1,848,603, total liabilities of $2,728,125 and a shareholders' deficit of
$879,523. Additionally, the Company reported negative working capital of
$93,459.
Results of Operations
---------------------
The Company commenced operations in the second quarter of 2002 as a result of
the purchase of Pocono Knits, Inc. and in September 2002 opened the Atlanta
retail/warehouse showroom. Sales for the nine months ended September 2002
totaled $711,122 and the related cost of goods sold were $559,155 generating a
gross margin of $151,967. General and administrative expenses for the nine month
and three month period of 2002 were $868,195 and $225,557 respectively. The
Company incurred developmental stage expenses of $538,685 incurred prior to the
beginning of operations. Net loss reported for the nine and three months ended
September 30, 2002 was $981,425 and $239,479. The accumulated deficit for the
period from inception, being July 24, 2000, through September 30, 2002, was
$1,670,996. Jack Young Associates, Inc. a wholly-owned subsidiary, the
manufacturer arising from the purchase of the assets of Pocono Knits, Inc.
incurred a loss of $27,725 for the quarter, of which $18,200 was depreciation.
Liquidity and Capital Resources
-------------------------------
At September 30, 2002, the Company reported a bank overdraft of $39,420 with
overall negative net working capital of $93,463. 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. There is no stated maturity with regard to amounts owed to related
parties. Management does not believe the Company will be able to satisfy its
cash requirements for the next 12 months. Fully executing the business plan
beyond the present stage will require an increase in the Company's capital and
is contingent on raising additional capital or the generation of cash flow
through increased sales.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Liquidity and Capital, continued
--------------------------------
During the second and third 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, 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. Under the Convertible Note Purchase Agreement the
Registrant convenanted that it would not declare or pay any dividends as 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.
Item 3. Controls and Procedures
-------------------------------
Disclosure controls ands procedures. Within 90 days before filing this report,
the Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures. The Company's disclosure controls and
procedures are the controls and other procedures that the Company has designed
to ensure that it records, processes, summarizes and reports in a timely manner
the information the Company must disclose in its reports filed under the
Securities and Exchange Act. Bruce R. Davis, Chairman and Chief Executive
Officer reviewed and participated in this evaluation.
Based on this evaluation, Mr. Davis concluded that, as of the date of his
evaluation, the Company's disclosure controls and procedures were effective.
Internal controls. Since the date of the evaluation described above, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect those controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Certain statements in this quarterly report on Form 10-QSB contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements can generally be identified by
use of forward-looking terminology, such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "target," "plan," "project," or "continue" or the
negatives thereof or other variations thereon or similar terminology, and are
made on the basis of management's plans and current analyses of the Company, its
business and the industry as a whole. These forward-looking statements are
subject to risks and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and in
the future could affect, the Company's financial performance and could cause
actual results for 2002 and beyond to differ materially from those expressed or
implied in such forward-looking statements, even if experience or future changes
make it clear that any projected results expressed or implied therein will not
be realized.
-9-
Part II
Item 1. Legal Proceedings
On or about October 17, 2002, a complaint was filed against the Company in the
United States District Court Middle District of Pennsylvania by Mr. Julius
Waltzer. Mr. Waltzer is seeking in excess of $250,000 for monies allegedly owed
pursuant to a Settlement Agreement between Mr. Waltzer and Pocono Knits, Inc and
Mr. Jack Young. As previously reported, the Company, through its wholly owned
subsidiary, Jack Young Associates, Inc. purchased all of the assets of Pocono
Knits, Inc. on or about May 2, 2002. The Company believes that it has
meritorious legal and factual arguments in this matter.
The Company is engaged in various other litigation matters from time to time in
the ordinary course of business. The Company will vigorously defend its position
and believes the outcome of any litigation will not have a material effect on
the Company.
Item 2. Changes in Securities and Use of Proceeds
On August 12, 2002, the Company issued a two-year warrant to purchase
2,500,000 shares of its common stock to George Furlo. This warrant was issued
pursuant to Section 4(2) of the Securities Act and has been marked "restricted."
On August 12, 2002, the Company issued a two-year warrant to purchase 2,500,000
shares of its common stock to Michael Rudolph. This warrant was issued pursuant
to Section 4(2) of the Securities Act and has been marked "restricted."
On August 12, 2002, Stonestreet Limited Partnership converted $42,000 of its
convertible note into 3,063,583 shares of the Company's common stock, or $0.137
per share. These shares were issued pursuant to Section 4(2) of theSecurities
Act and have been marked "restricted."
On August 12, 2002, George Furlo and Michael Rudolph exercised warrants for an
aggregate of 5,000,000 shares of the Company's common stock at an aggregate
exercise price of $68,350, or $0.137. These shares were sold pursuant to Section
4(2) of the Securities Act and have been marked "restricted."
On August 14, 2002, the Company issued 4,000,000 shares of its common stock to
Peter Benz for consulting services. The services were valued at $120,000 or
$0.03 per share. These shares were sold pursuant to Section 4(2) of the
Securities Act and have been marked "restricted."
Item 3. Defaults Upon Senior Securities
The Company has defaulted under the terms of the Company's Convertible Notes
with Stonestreet Limited Partnership ("Stonestreet") and Filter International,
Ltd. ("Filter), as a result of the Company's failure to file a registration
statement on the common stock issuable under the note or warrant by certain
dates, and as a result of the failure of the Company's common stock to be
eligible for quotation on the OTC Bulletin Board for a period of more than five
days. To date, no default has been declared by either Stonestreet or Filter.
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
-10-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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.
(b) Reports on Form 8-K
On July 9, 2002, the Company filed a Current Report on Form 8-K reporting the
acquisition of the assets of Pocono Knits, Inc.
On August 23, 2002, the Company filed a Current Report on Form 8-K reporting the
engagement of Porter Keadle Moore, LLP as its principal accountants.
-11-
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.
Date: January 27, 2003 /s/ Bruce R. Davis
--------------------------------------
Bruce R. Davis
President, Chief Executive Officer,
Chief Financial and Accounting Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-QSB of Armitec, Inc.
for the period ending September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof, I, Bruce R. Davis, Chief Executive
Officer, President and Chief Financial Officer of registrant, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 302 of the Sarbanes-Oxley Act
of 2002, that:
(1) I have reviewed this quarterly report on Form 10-QSB of Armitec,
Inc.;
(2) Based on my knowledge, this quarterly 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
quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in al
material respects the financial condition, results of operations and cash flows
of registrant as of, and for, the periods presented in this quarterly report;
and
(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 quarterly 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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 the registrant's board of directors (or persons performing the
equivalent function):
-12-
(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 any 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 quarterly report whether or not there were significant changes in internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: January 27, 2003 By: /s/ Bruce R. Davis
----------------------------------
Bruce R. Davis
Chief Executive Officer, President
& Chief Financial Officer
This certification accompanies this Quarterly Report on Form 10-QSB pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
-13-