FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
_______________.
STRATFORD ACQUISITION CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 0-26112 41-1759882
(State of Jurisdiction) (Commission (IRS Employer
File Number) Identification No.)
67 Wall Street, Suite 2411, c/o Daniel W. Dowe, Esq.
New York, New York 10005
(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code 212-825-9292
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 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 filing requirements for the
past 90 days. Yes _X_ No ___.
The Company had 12,243,145 shares of its $.001 par value common stock issued and
outstanding on August 28, 1998. On a fully diluted basis, assuming all
outstanding stock options and warrants to purchase common are in the money and
will be exercised, the Company would have 16,037,921 shares of common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-Q Incorporated Document
- - --------------------- ---------------------
None
<PAGE>
STRATFORD ACQUISITION CORPORATION
Index
Page No.
--------
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheet - dated
August 31, 1998 and May 31, 1998...............................F-1
Statement of Operations - for the
three months ended August 31, 1998 and
August 31, 1997................................................F-2
Statement of Cash Flows - for the three
months ended August 31, 1998 and
August 31, 1997................................................F-3
Notes to Financial Statements..................................F-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................1
Part II Other Information
Item 1. Legal Proceedings................................................3
Item 2. Changes in Securities............................................4
Item 3. Defaults Upon Senior Securities..................................6
Item 4. Submission of Matters to a Vote of Security Holders..............6
Item 5. Other Information................................................6
Item 6. Exhibits and Reports on Form 8-K.................................7
ii
<PAGE>
PART I
Item 1. Financial Statements Page
----
Balance Sheet - dated
August 31, 1998 and May 31, 1998...............................F-1
Statement of Operations - for the
three months ended August 31, 1998 and
August 31, 1997................................................F-2
Statement of Cash Flows - for the three
months ended August 31, 1998 and
August 31, 1997................................................F-3
Notes to Financial Statements..................................F-5
<PAGE>
STRATFORD ACQUISITION CORP. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
August 31, May 31,
1998 1998
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 49,108
Accounts receivable 10,027 9,250
Other receivables 4,877 17,367
Inventory 144,776 122,134
Prepaid assets 18,050 2,801
---------- ----------
Total Current Assets 177,730 200,660
PROPERTY, PLANT, AND EQUIPMENT, net of
accumulated depreciation and amortization 96,019 106,598
OTHER ASSETS 12,808 11,282
---------- ----------
$ 286,557 $ 318,540
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash deficit $ 9,555 $ --
Accounts payable and accrued expenses 237,028 162,115
Advances from shareholder -- 37,000
Notes payable 632,111 520,470
---------- ----------
Total Current Liabilities 878,694 719,585
SHAREHOLDERS' EQUITY:
Common stock - $0.001 par value
50,000,000 shares authorized
12,243,145 and 11,965,646 shares
issued and outstanding, respectively 12,243 11,966
Additional paid-in capital 3,654,296 3,519,673
Deficit accumulated during the
development stage (4,258,676) (3,932,684)
---------- ----------
Shareholders' Equity (Deficit) (592,137) (401,045)
---------- ----------
$ 286,557 $ 318,540
========== ==========
See notes to financial statements.
F-1
<PAGE>
STRATFORD ACQUISITION CORP. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUE
Sale of cementitious products $ 9,677 $ --
Technology license fees -- --
----------- -----------
9,677 --
OPERATING EXPENSES
Cost of goods sold 4,155 --
General and administrative costs 258,744 220,871
Non-Cash imputed stock compensation 18,750 --
----------- -----------
TOTAL OPERATING EXPENSES 281,649 220,871
----------- -----------
LOSS FROM OPERATIONS (271,972) (220,871)
----------- -----------
OTHER INCOME (EXPENSES)
Interest income -- 34
Interest expense (15,264) --
Amortization of debt discount (26,074) --
Foreign exchange gain (loss) (12,682) 1,007
----------- -----------
(54,020) 1,041
----------- -----------
NET LOSS $ (325,992) $ (219,830)
=========== ===========
Basic loss per weighted-average share of
common stock outstanding $ (0.03) $ (0.02)
=========== ===========
Weighted-average share of common stock outstanding 12,150,849 10,655,092
=========== ===========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
STRATFORD ACQUISITION CORP. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(325,992) $(219,831)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,593 438
Common stock issued as compensation 36,900 47,700
Amortization of debt discount 26,641 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivables (777) --
(Increase) decrease in other receivables 12,490 29,067
(Increase) decrease in inventory (22,642) (486)
(Increase) decrease in prepaid assets (15,249) --
(Increase) decrease in other assets (1,526) (2,430)
Increase (decrease) in accounts payable and accrued expenses 74,913 48,383
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (209,649) (97,159)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment 4,986 (1,013)
Proceeds from sale of marketable securities -- 13,831
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 4,986 12,818
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash deficit 9,555 --
Decrease in advance from shareholder (37,000) --
Proceeds from issuance of debentures 85,000 --
Proceeds from sale of common stock 98,000 117,500
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 155,555 117,500
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (49,108) 33,159
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 49,108 10,098
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 43,257
======== ========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
STRATFORD ACQUISITION CORP. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, May 31, 1998 11,965,646 $ 11,966 $ 3,519,673 $(3,932,684) $ (401,045)
Sale of common stock 300,000 300 97,700 -- 98,000
Issuance of common stock
for compensation 97,499 97 36,803 -- 36,900
Redemption of common stock (120,000) (120) 120 -- --
Net loss -- -- -- (325,992) (325,992)
----------- ----------- ----------- ----------- -----------
BALANCE, August 31, 1998 12,243,145 $ 12,243 $ 3,654,296 $(4,258,676) $ (592,137)
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
STRATFORD ACQUISITION CORP. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1998
(Unaudited)
Reference is made to the financial statements included in the Company's Annual
Report (Form 10-K) filed with the Securities and Exchange Commission for the
year ended May 31, 1998.
The financial statements for the periods ended August 31, 1998 are unaudited and
include all adjustments which, in the opinion of management, are necessary to a
fair statement of the results of operations for the periods then ended. All such
adjustments are of a normal recurring nature. The results of the Company's
operations for any interim period are not necessarily indicative of the results
of the Company's operations for a full fiscal year.
F-5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following financial information should be read in conjunction with the
Company's financial statements and footnotes, which are annexed hereto. Forward
looking statements made in this section are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying consolidated financial
statements.
The Financial Statements for the period ended August 28, 1998 included in this
Form 10-Q are unaudited; however, such information reflects all adjustments
(consists solely of normal recurring adjustments), which are, in the opinion of
management, necessary to present a fair statement of the results for the interim
period.
Results of Operations
Three months ending August 31, 1998 vs. August 31, 1997.
The Company has undergone material changes during the last six months of the
1997 fiscal year and because of this the three month period ending August 31,
1998 was significantly different than the corresponding three month period in
1997. Although gross revenues from the sale of the Company's products in the
current three month period were only $9,677 the Company has substantially
advanced the completion of its Novacrete line of pre-packaged concrete repair
products and has worked toward the closing of its first acquisition, ARM PRO,
Inc., the manufacturer of the FIBERFORCE line of polypropylene fibres. (See
Subsequent Events). However, the significance of the sales in this quarter
derives from the customer which was a large distributor of construction products
in North Carolina that had purchased a truckload quantity of pre-packaged
Novacrete products.
To support the development of its Novacrete products and further research and
development of the Company's proprietary Novacrete admixture product the Company
hired a cement chemist that has over twenty-five years of research and
development experience with cementitious products.
On August 31, 1998, the Company has $144,776 in inventory. Of this amount,
$88,036 consisted of raw materials and $56,740 consisted of finished goods -- 55
lb. bags of Novacrete pre-packaged products and large containers of the
Novacrete Admixture. In the period ending August 31, 1997 the Company had
$143,799 in inventory which consisted of Novacrete admixture that was blended
and packaged by an outside toll blender and stored at the Company's Mississauga,
Ontario plant. A substantial majority of this inventory was hauled to a
commercial dumping facility by the Company after the new
<PAGE>
management determined that the material was improperly blended and would not
meet the Company's current quality control standards on manufactured product.
Liquidity and Financial Resources at August 31, 1998
In the three month period ending August 31, 1998, the Company's
operations were funded by the sale of $98,000 of common stock and
the sale of notes totalling $85,000. (See Changes in Securities and
Subsequent Events)
In this period the Company had a monthly operating budget of approximately
$65,000 to cover all its selling, general and administrative expenses. On an
annual basis this translates into $780,000. Although the Company has in the past
and during this quarter relied on sales of its securities to fund its operating
expenses the Company is expecting to have its operations funded by the sales of
product for the three month period ending November 30, 1998.
In the three month period ending August 31, 1998 the company had $237,028 in
accounts payable versus $162,115 in the prior period. This increase was largely
attributable to larger operating costs that the company is incurring to
manufacture products and for professional fees attributable to the acquisition
of ARM PRO Inc. and for litigation that was settled during the period.
Although the Company cannot provide any assurance that sale of its products will
be substantial enough to cover its entire operating budget the Company intends
to implement a sales and marketing program to increase sales of its Novacrete
line of products. In addition, on September 16, 1998, the Company closed the
acquisition of ARM PRO Inc. which is a privately-held manufacturer of
polypropylene fibers. ARM PRO has been in business for over ten years and will
provide immediate working capital to the Company. With the ARM PRO acquisition,
the Company has hired ARM PRO's salesperson and its manufacturer's
representative that oversee sales of ARM PRO's products in New York State. In
addition, the Company has hired a salesperson to oversee its sales of
polypropylene fibres in the United States. This sales person will be based out
of Tennessee and was formerly the director of sales for the entire United States
territory for the largest manufacturer and marketer of polypropylene fibres for
the construction industry.
If the Company cannot meet its financial obligations as they come due from cash
generated through sales of its products it will need to sell its debt and equity
securities to fund its operations. Although the Company has historically sold
securities to funds it operations, there can be assurances that it will be able
to continue this course of action or that the terms of any future sales of
securities will be materially adverse to the Company.
2
<PAGE>
Subsequent Events
On September 4, 1998 the Company sold a 10% $800,000 debenture and a warrant to
purchase 1,500,000 shares of common stock for a two year period commencing on
the issuance thereof and for an exercise price of $.45 per share. Of the
$800,000 proceeds, $610,000 was used to purchase all the issued and outstanding
common stock of ARM PRO Inc. the manufacturer and marketer of the FIBERFORCE
line of polypropylene fibres. The acquisition of ARM PRO Inc. closed on
September 16, 1998.
The remaining balance of $190,000 of the debenture proceeds will be reserved for
working capital.
Inflation and Changing Prices
The Company does not foresee any risks associated with inflation or price
increases in the near future. In addition the raw materials that are used by the
Company in the manufacturing of its products are available locally through many
sources and are for the most part commodity items. The one raw material that the
Company uses in all its products that cannot be classified as a pure commodity
is currently in sufficient supply although the Company presently owns
approximately 600,000 lbs of this product. Because the Company's operations are
in Canada the devaluation of the Canadian dollar against the U.S. dollar has
allowed the Company to manufacture its products less costly than if manufactured
in the United States and that any funds raised from the sale of securities to
fund its operations are U.S. dollar denominated and then transferred to the
Canadian subsidiary at favorable exchange rates. As such, while the Company has
exposure to inflation, it does not believe that inflation will not have any
materially significant impact on its operations in the near future.
Part II Other Information
Item 1. Legal Proceedings
On July 17, 1998, the Company and all defendants in the lawsuit Stratford
Acquisition Corporation v. Jan Sulkiewicz, et. al., Ontario Court (General
Division), Index No. 97-CV-126925 entered into a global settlement and exchanged
mutual releases. Part of the settlement agreement provided for the cancellation
of 120,000 shares of common stock.
In August, 1997, a shareholder, Mel Greenspoon, commenced an action against the
Company and its former President, Mr. A. Roy MacMillan, to enjoin the Company
and Mr. MacMillan from taking any action that would restrict the sale of common
stock that he allegedly owns. Mr. Greenspoon is one of the shareholders that are
subject to the following lawsuit. The Company has raised several defenses to
this
3
<PAGE>
action and believes the lawsuit is without merit. Mel Greenspoon v. Stratford
Acquisition Corporation, et. al., Ontario Court (General Division), Index No.
97-CV-126814.
On August 26, 1997, the Company filed a lawsuit in Federal District Court in
Minnepin County, Minnesota against 49 separate shareholders seeking,
principally, to cancel approximately 1,800,000 shares of common stock and
certain stock options which it alleges were unlawfully issued. Stratford
Acquisition Corporation v. 10222 Investments, et. al., United States District
Court, District of Minnesota, Index No. 97-1954. In addition, the Company has
asserted additional claims in this litigation against certain defendants, who
were former directors and officers of the Company, for breach of their fiduciary
duties of care and loyalty to the Company. From the filing of the lawsuit until
August 12, 1998 the Company entered into settlement agreements whereby it was
able to cancel 613,750 shares of common stock.
On August 12, 1998 the court dismissed the lawsuit for lack of jurisdiction. The
Company may join the remaining defendants in the lawsuit Mel Greenspoon v.
Stratford Acquisition Corporation, et. al., Ontario Court (General Division),
Index No. 97-CV-126814 to avoid future challenges by the defendants on
jurisdictional grounds.
A former director and officer of the Company, Barbara Robinson, filed a lawsuit
Barbara Robinson v. The Canadian Bar Insurance, et.al. v. Stratford Acquisition
Corporation and Arthur Smith, Ontario Court (General Division), Index No.
97-CV-129642A to seek payment for employment disability insurance that she
alleges was due to her under two disability insurance policies. The defendant
insurance companies have denied any wrongdoing and, in fact, have filed a
third-party complaint against the Company and its former director and President,
Arthur Smith, alleging that the application for insurance was improperly
prepared and therefore they are not liable for the claim. The defendant and the
Company believe that the claim is frivolous and that it is unlikely to result in
a materially adverse judgment against the Company.
Item 2. Changes in Securities
In the three month period ended August 31, 1998, the Company issued a total of
397,499 shares of its common stock.
Of this amount 100,000 shares were issued for a purchase of common stock that
was paid for in May, 1998. The stock was sold to two investment funds managed by
a director, Douglas Friedenberg, for a price of $.37 per share which was the
average between the closing bid and ask prices for the stock on the date
previous to the day the stock was sold, even though the investor received
restricted stock.
On June 18, 1998 the Company sold 100,000 shares of common stock to two
investment funds managed by a director, Douglas Friedenberg,
4
<PAGE>
for a price of $.32 per share which was the average between the closing bid and
ask prices for the stock on the date previous to the day the stock was sold,
even though the investor received restricted stock.
On June 22, 1998, the Company issued 6,250 shares of common stock to its three
non-employee directors, Douglas Friedenberg, William K. Lavin and Edward J.
Malloy for a total of 18,750 shares as payment for services rendered as a
director for the first calendar quarter. On July 1, 1998, the Company issued
8,333 shares of common stock to its three non-employee directors, Douglas
Friedenberg, William K. Lavin and Edward J. Malloy for a total of 24,999 shares
as payment for services rendered as a director for the second calendar quarter.
Each non-employee director is paid a quarterly fee of $2,500 (USD) in restricted
stock based on the average bid and closing prices of the Company's common stock
on the last trading day for the months ending March, June, September and
December.
On July 1, 1998 the Company issued 12,500 shares of common stock to four
non-management employees of its Canadian subsidiary.
On July 6, 1998 the Company sold 100,000 shares of common stock to two
investment funds managed by a director, Douglas Friedenberg, for a price of $.29
per share which was the average between the closing bid and ask prices for the
stock on the date previous to the day the stock was sold, even though the
investor received restricted stock.
In exchange for the annual cash equivalent of a fringe benefit that was owed to
an employee who agreed to accept stock in lieu of the cash payment the Company
issued 11,250 shares of common stock to this employee and has reserved the
additional 30,000 shares of common stock which shall be issued in 1999 and 2000
in equal installments under the same terms. The different amounts for the stock
grants in 1999 and 2000 payments, versus in 1998 is attributable to the employee
having been employed by the Company for less than the full year in 1998.
In addition, on July 31, 1998 the Company canceled 120,000 shares of common
stock as part of a settlement agreement that it reached with a former employee
who received common stock, among other compensation, for entering into a
consulting agreement with the Company which the Company alleged was subsequently
breached. All claims between the defendant/shareholder and the Company have been
resolved and the parties have entered into mutual releases.
On July 13, 1998, the Company issued a stock option to purchase 32,500 shares of
its common stock at an exercise price of $.35 per share for a period commencing
on June 13, 1998 and terminating on June 13, 2001. This stock option grant was
to Mr. John Bellocchio as part of his compensation package for joining the
Company in April, 1998 as U.S. Regional Sales Manager.
5
<PAGE>
To meet its working capital requirements during the three month period ending
August 31, 1998, the Company sold notes totalling $85,000 to investment funds
controlled by a director, Douglas Friedenberg. The notes mature on ninety (90)
days from issuance and have a ten percent (10%) interest of which all interest
is paid in common stock based on a price of $.40 per share. If the notes are not
paid at maturity the Company is obligated to issue a warrant to purchase one (1)
share of common stock at the exercise price of $.40 per share for every two
dollar ($2.00) increment of the outstanding principal amount of the note for a
two year period. If the note is still outstanding on the sixtieth (60) day from
the maturity date the holder shall be entitled to receive an additional warrant
to purchase common stock under the same terms and conditions. The issuance dates
for the notes are July 29, 1998, August 12, 1998, August 20, 1998 and August 27,
1998.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None. The Company has delayed the previously scheduled annual meeting of
shareholders that was set for May, 1998 due to time constraints relating to the
then impending acquisition of ARM PRO, Inc. which closed on September 16, 1998
and will have its board of Directors convene in early November to establish a
new date for the meeting.
Item 5. Other Information
Not Applicable.
6
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Definitive Agreement between Novacrete Technology, (Canada) Inc. and
ARM PRO, Inc.
Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Stratford Acquisition Corporation has duly caused this
report to be signed on its behalf by the undersigned person who is duly
authorized to sign on behalf of the Registrant and as chief accounting officer.
STRATFORD ACQUISITION CORPORATION
By: /s/ Daniel W. Dowe
-----------------------------
Daniel W. Dowe
President and Chief Executive
Officer
Date: October 20, 1998
7
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,027
<ALLOWANCES> 0
<INVENTORY> 144,776
<CURRENT-ASSETS> 177,730
<PP&E> 114,840
<DEPRECIATION> 18,821
<TOTAL-ASSETS> 286,557
<CURRENT-LIABILITIES> 878,694
<BONDS> 0
12,243
0
<COMMON> 0
<OTHER-SE> (604,380)
<TOTAL-LIABILITY-AND-EQUITY> 286,557
<SALES> 9,677
<TOTAL-REVENUES> 9,677
<CGS> 9,155
<TOTAL-COSTS> 9,155
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,338
<INCOME-PRETAX> (325,992)
<INCOME-TAX> 0
<INCOME-CONTINUING> (325,992)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (325,992)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
