UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended June 30, 2001
[_] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from _______ to _______
Commission File Number: 33-22169 C
STRANDTEK INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
34-1573330
(I.R.S. Employer Identification No.)
455 N. INDIAN ROCKS ROAD, BELLEAIR BLUFFS, FLORIDA 33770
(Address of principal executive offices)
(727) 585-6333
(Issuer's telephone number)
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 [_] No [X]
Shares of Common Stock, $.0001 par value, outstanding at March 31, 2002:
182,025,174
Transitional Small Business Disclosure Format (Check one): [_] Yes [X] No
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
- ------- ---------------------------------
StrandTek International, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
Assets
------
June 30, September 30,
2001 2000
------------- -------------
(unaudited)
Current assets:
Cash $ 751 $ 97,900
Accounts receivable, trade, net of allowance for doubtful
accounts of $364,944 at June 30, 2001 and $67,050 at
September 30, 2000 752,796 1,313,360
Other accounts receivable 123,685 56,295
Inventory:
Raw materials 1,184,189 414,327
Work in process 21,354 -
Finished goods 420,562 326,912
Prepaid expenses 466,450 23,149
------------- -------------
Total current assets 2,969,787 2,231,943
Equipment and leasehold improvements:
Manufacturing equipment 9,376,609 8,296,226
Plant equipment 1,289,794 881,250
Office equipment 338,735 299,774
Leasehold improvements 1,891,958 1,840,258
------------- -------------
12,897,096 11,317,508
Less accumulated depreciation 1,232,968 734,009
------------- -------------
Net equipment 11,664,128 10,583,499
Other assets:
Manufacturing equipment - idle 168,293 168,293
Deposits 78,752 70,882
Note receivable 45,000 45,000
Loan costs net of accumulated amortization of $110,151
at June 30, 2001 and $63,757 at September 30, 2000 42,519 76,413
------------- -------------
Total other assets 334,564 360,588
------------- -------------
Total assets $ 14,968,479 $ 13,176,030
============= =============
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated condensed balance sheets
2
StrandTek International, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
Liabilities and Capital Deficiency
----------------------------------
June 30 September 30,
. 2001 . . 2000 .
--------------- ---------------
(unaudited)
Current liabilities:
Accounts payable $ 4,736,921 $ 3,708,782
Accrued payroll and related liabilities 273,552 270,303
Accrued expenses 147,212 52,911
Interest payable - stockholders - 389,928
Interest payable - other 62,400 84,090
Revolving line of credit 2,500,000 1,030,131
Advances from stockholders 1,080,458 -
Stockholders' lines of credit 18,985,324 10,129,797
Current portion of long-term debt with bank 2,239,900 1,991,069
Current portion of long-term notes payable to stockholders - 12,506
--------------- ---------------
Total current liabilities 30,025,777 17,669,517
Interest payable - stockholders 1,433,011 -
Long-term debt with bank, net of current portion 6,716,276 7,007,014
--------------- ---------------
Total liabilities 38,175,054 24,676,531
Capital deficiency:
Common stock, $.0001 par value,
200,000,000 shares authorized, 144,020,071 at June 30, 2001
and 128,681,942 at September 30, 2000 issued and
outstanding 14,402 12,867
Additional paid-in capital 9,666,323 9,575,829
Accumulated deficit (32,887,300) (21,089,197)
--------------- ---------------
Total capital deficiency (23,206,575) (11,500,501)
Total liabilities and capital deficiency $ 14,968,479 $ 13,176,030
=============== ===============
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated condensed balance sheets
3
StrandTek International, Inc. and Subsidiaries
Consolidated Condensed Statements of Loss (unaudited)
For the three months ended
June 30,
. 2001 . . 2000 .
--------------- ---------------
Net sales $ 1,616,204 $ 938,288
Cost of sales 2,294,475 1,004,077
--------------- ---------------
Gross loss 678,271 65,789
Operating expenses:
General and administrative 1,670,670 1,377,165
Selling expenses 279,714 96,011
Research and development 265,090 490,387
Depreciation and amortization 348,936 138,871
Interest expense 593,474 315,185
Loss on disposition of manufacturing equipment - 11,212
--------------- ---------------
Total operating expenses 3,157,884 2,428,831
--------------- ---------------
Net loss $ 3,836,155 $ 2,494,620
=============== ===============
Basic and diluted loss per share $ 0.03 $ 0.02
=============== ===============
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated condensed statements of loss
4
StrandTek International, Inc. and Subsidiaries
Consolidated Condensed Statements of Loss (unaudited)
For the nine months ended
June 30,
2001 2000
---------- ---------
Net sales $ 4,349,554 $ 2,470,947
Cost of sales 6,904,743 2,713,384
---------- ----------
Gross loss 2,555,189 242,437
Operating expenses:
General and administrative 4,497,161 3,912,864
Selling expenses 701,137 262,030
Research and development 966,477 1,321,745
Depreciation and amortization 768,256 365,755
Interest expense 1,484,910 926,705
Loss on disposition of manufacturing equipment 824,973 11,212
---------- ----------
Total operating expenses 9,242,914 6,800,311
---------- ---------
Net loss $ 11,798,103 $ 7,042,748
========== =========
Basic and diluted loss per share $ 0.08 $ 0.08
========== =========
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated condensed statements of loss
5
StrandTek International, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (unaudited)
For the nine months ended
June 30,
2001 2000
------------ ----------
Cash flows from operating activities:
Net loss $ (11,798,103) $ (7,042,748)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization 768,256 365,755
Loss on disposition of assets 824,973 11,212
Provision for bad debts 297,893 -
Write off technology purchased - 50,000
Stock issued for compensation 92,029 190,832
Cash provided (used) due to changes in assets
and liabilities:
Decrease (increase) in accounts receivable 262,671 (430,725)
Decrease (increase) in other accounts receivable (67,390) 185,188
Increase in prepaid assets (443,301) (39,093)
Decrease (increase) in inventory (884,866) 14,303
Increase in notes receivable - (45,000)
Increase in deposits (7,870) (4,278)
Increase in accounts payable 1,028,137 1,018,668
Increase in payroll related liabilities 3,249 120,171
Increase in interest payable 1,021,393 154,048
Increase in accrued expenses 94,301 75,777
----------- ----------
Total cash used by operating activities (8,808,628) (5,375,890)
Cash flows from investing activities:
Purchase of equipment (2,657,462) (5,739,282)
Proceeds on fixed asset disposal 30,000 6,500
----------- ----------
Total cash used for investing activities (2,627,462) (5,732,782)
Cash flows from financing activities:
Repayments of long-term debt with bank (1,291,907) (659,950)
Costs to obtain financing (12,500) (65,000)
Net addition to revolving note 1,469,869 350,369
Proceeds from long-term bank debt 1,250,000 5,623,589
Net proceeds on stockholders' lines of credit 8,843,021 4,983,485
Advances from stockholders 1,080,458 -
Proceeds from warrant exercises - 1,588,925
----------- ----------
Total cash provided by financing activities 11,338,941 11,821,418
----------- ----------
Net (decrease) increase in cash (97,149) 712,746
Cash, beginning of period 97,900 19,620
----------- ----------
Cash, end of period $ 751 $ 732,366
=========== ==========
Supplemental cash flow disclosures
Interest paid $ 691,842 $ 725,265
=========== ==========
Stockholder debt converted to common stock $ - $ 5,535,361
=========== ==========
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated condensed statements of cash flows
6
StrandTek International, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
June 30, 2001
(unaudited)
Basis of Presentation
- ---------------------
The accompanying consolidated condensed balance sheet as of June 30, 2001
and the related consolidated condensed statements of loss for the three and nine
month periods ended June 30, 2001 and 2000 and the statements of cash flows for
the nine month periods ended June 30, 2001 and 2000 have been prepared without
audit by StrandTek International Inc. and its subsidiaries (the "Company") in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). The information furnished herein, in the
opinion of management, reflects all adjustments necessary for a fair
presentation of the Company's consolidated financial position, results of
operations and cash flows for the periods presented. These adjustments consist
of normal, recurring items, except for non-recurring items in the nine months
ended June 30, 2001 consisting of the loss on the disposition of the original
equipment line and the discontinuance of operations of StrandTek West, Inc. (a
subsidiary). The results of operations for any interim period are not
necessarily indicative of results for a full year. The interim consolidated
financial statements and notes thereto are presented as permitted by the
requirements for Quarterly Reports on Form 10-QSB, and do not contain certain
information included in the Company's annual audited consolidated financial
statements and notes.
This Form 10-QSB is being filed late. Except as otherwise indicated in the
text of this filing, the information in this filing is from a perspective as of
the quarter ended June 30, 2001. Readers are cautioned to review the Company's
reports filed with SEC for later periods for more current information. This
Quarterly Report on Form 10-QSB should be read in conjunction with the Company's
audited consolidated financial statements and notes included in its fiscal year
2001 Annual Report on Form 10-KSB/A (Amendment No. 1) and the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2001 (the
"December 2001 Form 10-QSB"), as well as the text of those reports and the
Company's Form 8-K with a cover date of January 7, 2002, filed the SEC on
January 14, 2002 (the "January 2002 Form 8-K"). These and later reports may be
inspected without charge at the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549. Copies of the reports may
be obtained from the SEC at prescribed rates, and also may be obtained from the
SEC's EDGAR web site at http://www.sec.gov/cgo-bin/srch-edgar.
-------------------------------------
Summary of Business
- -------------------
The Company's primary business is the manufacture, using the meltblown
technology developed by the Company, and sale of meltblown webs and engineered
parts made therefrom as acoustical and thermal insulation. Meltblown fibers are
a type of synthetic fiber manufactured by employing a stream of high-speed hot
air to gradually taper thermoplastic strands and transform them into fibers.
The Company manufactures its meltblown fibers from both virgin and recycled
polypropylene and PET (polyethylene terephthalate) resins. All of the Company's
products are 100% recyclable, and some are also manufactured from recycled
materials. Automobile manufacturers are currently using these products for
acoustic insulation in vehicles
7
in several different applications, and appliance manufacturers are using these
products for insulation in several types of major household appliances. The
thermal and acoustical insulating media and parts manufactured by the Company
are sold for original equipment manufacturer applications by appliance and
automotive manufacturers, and for use in the building and do-it-yourself
building supply markets as thermal insulating and gasket media.
Accounting Policies
- -------------------
There were no changes during the quarter ended June 30, 2001 in accounting
policies used by the Company.
Customer Concentration
- ----------------------
In the quarter ended June 30, 2001, 95% of sales and 83% of trade
receivables were with three customers. In the quarter ended June 30, 2000, 79%
of sales and 53% of trade receivables were with three customers. The
percentages applicable to the respective nine-month periods ended on those dates
were not significantly different than the quarter end percentages.
Loss on Disposition of Manufacturing Equipment
- ----------------------------------------------
The Company dismantled its original equipment line in East Chicago, Indiana
in October 2000, when operations were relocated to Chicago, Illinois, with the
intent of reassembling the production line at the new plant. However, during
the early part of the nine months ended June 30, 2001, the Company determined
that the original production line was obsolete due to the Company's improved
technology in building production lines, and abandoned the production line and
recognized a loss of the net book value of $824,973.
Liquidity and Debt Issuance
- ---------------------------
The Company has incurred operating losses since production began in 1997
and has negative working capital. During the quarter ended June 30, 2001, the
Company funded its capital requirements and business operations, including
research and product development, with funds provided by invested capital and
advances from stockholders. The Company received $3,135,670 from stockholder
loans during the June 30, 2001 quarter. These loans are due on demand, with
interest payable annually at the rate of prime (6.75% as of June 30, 2001) plus
1%. During this quarter the Company also received $1,080,458 of advances from
stockholders for planned exercise of warrants (see Subsequent Events).
A member of management has committed to provide necessary loans to the
Company and to provide his personal guarantee for any additional bank loans to
the Company, at least through fiscal year 2002, to complete the meltblown
technology development, construction of production lines for increased capacity,
acquisition of other manufacturing equipment and to fund all reasonable working
capital requirements.
Loss Per Share
- --------------
Basic loss per share of common stock was calculated by dividing the net
loss for the quarter by the weighted average number of shares of common stock
outstanding during the
8
quarter. The following table reconciles the number of shares utilized in the
loss per share calculations for the quarters ended June 30, 2001 and 2000.
2001 2000
---- ----
Net loss $ 3,836,155 $ 2,494,620
Basic and diluted loss per share of common stock $ 0.03 $ 0.02
Weighted average number of shares of common
stock 144,020,071 118,585,108
Warrants that could potentially dilute basic loss per share at June 30,
2001 and 2000 were not included in the computation of diluted loss per share
because to do so would have been antidilutive for the periods presented.
Related Party Transactions
- --------------------------
The Company continues to rely on certain services provided by related
parties, and on continued loans from, and personal guarantees of bank loans to
the Company by, a member of management.
Shares of Common Stock and Warrants
- -----------------------------------
There were no changes in the number of shares of common stock outstanding
or the number of warrants outstanding during the quarter ended June 30, 2001.
However, during the nine months ended June 30, 2001 the Company issued: (i) an
aggregate of 14,822,500 shares of common stock and an equal number of "A"
warrants to purchase the Company's common stock at $.41 per share to a member of
management under the Company's historical share and warrant issuance program for
loans made by stockholders to the Company or the stockholders' personal
guarantee of bank loans to the Company; (ii) 500,000 shares of common stock and
an equal number of "A" warrants in connection with consulting services performed
for the Company; and (iii) 15,625 shares as part of the compensation of an
executive officer for services performed.
During the quarter ended June 30, 2000, an aggregate of 10,173,750 shares
of common stock and an equal number of "A" warrants to purchase the Company's
common stock at $.41 per share were issued to members of management under the
Company's historical share and warrant issuance program referred to above. For
the nine months ended June 30, 2000, an aggregate of 31,805,512 shares of common
stock and the same number of "A" warrants were issued under this program. Also
in this nine-month period, an additional 50,887,758 shares of common stock were
issued upon exercise of "A" warrants at the reduced exercise price of $.14 per
share.
The common stock and warrants issued by the Company for services and in
connection with loans to the Company and personal guarantees of bank loans to
the Company had values assigned to them by the Board of Directors of $.0059 per
share of common stock and $.0001 per warrant.
See the tables below for changes in shares of common stock and warrants
issued and outstanding for the quarter ended June 30, 2000, and for the nine-
month periods ended June 30, 2001 and 2000:
9
For the quarter ended June 30, 2000
Common Stock "A" Warrants "B" Warrants "C" Warrants "D" Warrants
------------ ------------ ------------ ------------ ------------
Issued and outstanding April 1, 2000 111,360,941 8,214,727 1,703,625 1,001,812 233,937
Issued for stockholder loans and/or
bank loan guarantees 10,173,750 10,173,750 - - -
----------------------------------------------------------------------
Issued and outstanding June 30, 2000 121,534,691 18,388,477 1,703,625 1,001,812 233,937
======================================================================
Stated Conversion Price of
Warrants to Common Stock $ 0.41 $ 0.81 $ 1.22 $ 1.62
========================================================
For the nine months ended June 30, 2001
Common Stock "A" Warrants "B" Warrants "C" Warrants "D" Warrants
------------ ------------ ------------ ------------ ------------
Issued and outstanding October 1, 2000 128,681,946 25,535,728 1,703,625 1,001,812 233,937
Issued for stockholder loans and/or
bank loan guarantees 14,822,500 14,822,500 - - -
Issued in connection with compensation 515,625 500,000
----------------------------------------------------------------------
Issued and outstanding June 30, 2001 144,020,071 40,858,228 1,703,625 1,001,812 233,937
======================================================================
Stated Conversion Price of
Warrants to Common Stock $ 0.41 $ 0.81 $ 1.22 $ 1.62
========================================================
For the nine months ended June 30, 2000
Common Stock "A" Warrants "B" Warrants "C" Warrants "D" Warrants
------------ ------------- ------------ ------------ ------------
Issued and outstanding October 1, 1999 38,841,421 37,470,723 1,703,625 1,001,812 233,937
Issued for stockholder loans and/or
bank loan guarantees 31,805,512 31,805,512 - - -
Issued for exercise of "A" warrants 50,887,758 (50,887,758) - - -
-----------------------------------------------------------------------
Issued and outstanding June 30, 2000 121,534,691 18,388,477 1,703,625 1,001,812 233,937
=======================================================================
Stated Conversion Price of
Warrants to Common Stock $ 0.41 $ 0.81 $ 1.22 $ 1.62
=========================================================
StrandTek West, Inc.
- --------------------
The Company owned 51% of StrandTek West, Inc. ("STI West"). STI West ceased
operations early in the nine months ended June 30, 2001. During the nine months
ended June 30, 2001, STI West generated revenue of approximately $80,000, with
cost of sales of approximately $96,000, and total net income of approximately
$208,000 due primarily to the write-off of accounts payable due to the Company.
The Company (at the consolidated level) recognized a loss of approximately
$62,000 on the discontinuance of operations of STI West.
10
Subsequent Events
- -----------------
In August 2001, the Company extended the same offer as in its earlier
private placement memorandum of January 2000 (the "PPM") to its "A" warrant
holders to allow them the opportunity to purchase a share of common stock for
$.14 plus surrender of the related "A" warrant otherwise convertible to common
stock at $.41 per share. The reduced exercise price of $.14 was continued from
the PPM without using a formal valuation study to determine the market value for
the common stock. The Company extended the offer to allow its "A" warrants
holders a final opportunity to exercise their "A" warrants at the reduced
exercise price before the December 31, 2001 expiration date of the warrants, and
to raise additional working capital. There were 38,005,103 "A" warrants
surrendered and 38,005,103 shares of common stock issued under the 2001
offering, for a total exercise amount of $5,320,715. The Company received cash
proceeds of $5,053,108, of which 99% came from management of the Company. Five
Directors of the Company elected to convert a portion of the "A" warrants held
by them to shares of common stock by the reduction of $255,607 of obligations
owed to them by the Company. In addition, the Company recognized $12,000 as
compensation for one consultant to exercise his warrants.
See also the January 2002 Form 8-K (filed with the SEC on January 14, 2002)
for a description of the proposed transaction with Corniche Group Incorporated
and the update to that description contained in the December 2001 Form 10-QSB
(filed on February 15, 2002 with the SEC).
Item 2. Management's Discussion and Analysis or Plan of Operation.
- ------- ----------------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Net Sales
Net sales increased $677,916 (72%) for the third fiscal quarter, from
$938,288 for the same quarter last fiscal year to $1,616,204. These overall
sales increases resulted from expanded sales efforts directed to new and present
appliance and automotive product customers, and development and
commercialization of new products. Sorbent sales declined as the product line
was phased out and efforts were directed to the more profitable product lines of
automotive and appliance. The Company anticipates sales to increases in the
fourth quarter of fiscal year 2001 and beyond as a result of these expanded
sales efforts, increased capacity, and research and product development efforts.
Gross Loss
Cost of sales was calculated to be 142% in the third fiscal quarter,
compared to cost of sales of 107% for the same quarter last year. The increase
in cost of sales was mainly attributable to production line inefficiencies, as
new automotive and appliance products were introduced into production. and
inefficiencies in the start up of a new production line.
11
General and Administrative
General and administrative expenses were $1,670,670 in the third fiscal
quarter, an increase of $293,505 (21%) over the same quarter last year. The
increase was due primarily to the Company's increase in staffing and increased
infrastructure expenses. The Company anticipates incurring additional general
and administrative expenses throughout fiscal year 2001 to hire qualified
personnel to manage the growth and complexity of the Company's anticipated
increased production volume.
Selling
Selling expenses were $279,714 in the third fiscal quarter, an increase of
$183,703 (191%) from the same quarter last year. This increase in expenses was
due to a concerted effort to accelerate the Company's entrance into the
appliance and automotive markets. Sales efforts included marketing, samples and
acquisition of technical knowledge, and resulted in additional sales in the
appliance and automotive markets. There is no assurance that further
anticipated increases in sales related expenses will result in additional sales.
Research and Product Development
Research and product development expenses were $265,090 in the third fiscal
quarter, a decrease of $225,297 (44%) from the same quarter last year. Even
though these expenses for the third quarter have decreased from the same quarter
last year, the Company continues investment in this area to develop new products
in the Company's existing markets, and to develop products to expand into new
markets. The Company expects to continue to spend considerable amounts for the
foreseeable future for additional research and product development. However,
there can be no assurance that additional research and product development
expenses will result in additional sales or the Company's profitability.
Depreciation and Amortization
Depreciation and amortization expense was $348,936 for the third fiscal
quarter, an increase of $210,065 (151%) from the same quarter last year. This
increase is mainly due to the addition of two production lines; additional costs
incurred for modifications to the production process, and increased loan costs.
Interest Expense
Interest expense was $593,474 for the third fiscal quarter, an increase of
$278,289 (88%) from the same quarter last year. This increase is due to the
increase in the Company's long-term bank debt and stockholder debt obtained in
order to meet the Company's working capital requirements and to fund the
acquisition of manufacturing equipment, to increase production capacity, to
increase production line efficiency and modify the production process.
NINE MONTHS ENDED JUNE 30, 2001 AND 2000
Net Sales
Net sales increased $1,878,607 (76%) for the nine months ended June 30,
2001, from $2,470,947 for the same period in fiscal year 2000 to $4,349,554.
Sales efforts were directed to increasing the automotive market volumes and to
expanding the appliance markets. These
12
efforts were successful as automotive sales increased, and appliance sales
increased due to two new major customers. Sorbent sales declined as the product
line was phased out and efforts were directed to the more profitable product
lines of automotive and appliance. The Company anticipates sales to increases in
the fourth quarter of fiscal year 2001 and beyond as a result of these expanded
sales efforts, increased capacity, and research and product development efforts.
Gross Loss
Cost of sales was calculated to be 159% for the nine months ended June 30,
2001, compared to cost of sales of 110% for the same period in fiscal year 2000.
The increase in cost of sales was mainly attributable to production line
inefficiencies, as new automotive and appliance products were introduced into
production, and inefficiencies in the start up of two additional production
lines. Also, higher than anticipated costs were incurred for samples for
potential and current customers.
General and Administrative
General and administrative expenses were $4,497,161 for the nine months
ended June 30, 2001, an increase of $584,297 (15%) over the same period in
fiscal year 2000. The increase was due primarily to the Company's increase in
staffing and increased infrastructure expenses, including inventory and
accounting information systems to support the Company's anticipated growth. The
Company anticipates incurring additional general and administrative expenses
throughout fiscal year 2001 to hire qualified personnel to manage the growth and
complexity of the Company's anticipated increased production volume.
Selling
Selling expenses were $701,137 for the nine months ended June 30, 2001, an
increase of $439,107 (168%) from the same period in fiscal year 2000. Sales
efforts were redirected from the sorbent market to expanding sales volumes in
the automotive market, and accelerating penetration in the appliance market.
These efforts were successful in obtaining two major appliance customers.
Selling expenses increased as the Company also directed sales efforts into the
building materials market. Sales efforts included marketing, samples and
acquisition of technical knowledge, and resulted in additional sales in the
appliance and automotive markets. There is no assurance that further
anticipated increases in sales related expenses will result in additional sales.
Research and Product Development
Research and product development expenses were $966,477 for the nine months
ended June 30, 2001, an decrease of $355,268 (27%) from the same period in
fiscal year 2000. Even though these expenses for the current period have
decreased from the same period last fiscal year, the Company continues
investment in this area to develop new products in the Company's existing
markets, and to develop products to expand into new markets. The expenses for
the same period in fiscal 2000 were so much higher than the just-ended period
because the Company incurred significant expenses in fiscal 2000 developing new
products to attract two significant new customers in the appliance market. The
Company expects to continue to spend considerable amounts for the foreseeable
future for additional research and product development. However,
13
there can be no assurance that additional research and product development
expenses will result in additional sales or the Company's profitability.
Depreciation and Amortization
Depreciation and amortization expense was $768,256 for the nine months
ended June 30, 2001, an increase of $402,501 (110%) from the same period in
fiscal year 2000. This increase is mainly due to the addition of two production
lines; costs incurred for modifications to the production process, and increased
loan costs.
Interest Expense
Interest expense was $1,484,910 for the nine months ended June 30, 2001, an
increase of $558,204 (60%) from the same period in fiscal year 2000. This
increase is due to the increase in the Company's long-term bank debt and
stockholder debt obtained in order to meet the Company's working capital
requirements and to fund the acquisition of manufacturing equipment, to increase
production capacity, to increase production line efficiency and modify the
production process.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended June 30, 2001, the Company continued to experience
operating losses, negative cash provided by operations, negative operating
capital, and increases in stockholders' deficit. The Company's working capital
and stockholders' deficit as of June 30, 2001 were $(27,055,990) and
$(23,206,575), respectively, as compared to $(15,437,574) and $(11,500,501),
respectively, at September 30, 2000. During the quarter ended June 30, 2001,
the Company funded its capital requirements and business operations, including
research and product development, with funds provided by invested capital and
advances from stockholders for planned exercises by them of warrants. The
Company received proceeds of $3,135,670 from stockholder loans and $1,080,458
from advances from stockholders during the June 30, 2001 quarter.
During the quarter ended June 30, 2001, the Company incurred costs of
approximately $90,000 for the completion of production Line 3. This line began
production in May 2001 and joined production Line 4, which began production in
December 2000. During the quarter ended June 30, 2001, the Company incurred
costs of approximately $280,000 for additional manufacturing and plant equipment
for planned modifications to the production process to allow a significant
portion of the Company's product to be generated from its own feed stock scrap,
and to acquire a portion of the necessary equipment to die cut the Company's
products at the Company's plant. The die cut process has been historically
completed by off-line manufacturers.
The Company has committed to an additional production line designated Line
5. The capitalized costs of Line 5 are estimated to be about $2.0 million. This
production line is anticipated to have a production range of 850 to 1,200 pounds
of product per hour. As of June 30, 2001, the Company had incurred costs of
$220,000 relating to the construction of this line.
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A member of management has committed to provide necessary loans to the
Company and to provide his personal guarantee for any additional bank loans to
the Company, at least through fiscal year 2002, to complete the meltblown
technology development, construction of production lines for increased capacity,
acquisition of other manufacturing equipment and to fund all reasonable working
capital requirements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, regarding future events and the future performance of the
Company that involve risks and uncertainties that may cause the Company's actual
results in future periods to be materially different from any future performance
suggested herein. Future results may vary from anticipated results due to
competitive factors, general economic conditions, the Company's ability to
develop, manufacture, and sell both new and existing products at a profit,
patent issues, other factors identified from time to time in other periodic
reports filed by the Company with the SEC, and other risks and circumstances
that management is unable to predict. The Company undertakes no obligation to
publicly update or to revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
Many of the manufacturers and distributors producing and selling products
competitive with the Company's products are far better established and have
significantly greater assets and better-established distribution channels than
does the Company. The Company believes its meltblown technology and its
superior products afford it a competitive advantage in competing with other
meltblown manufacturers where the product required is thermal or acoustical
insulating media and/or parts, and certain types of padding. The Company also
believes its meltblown technology enables it to produce insulation products that
compete successfully against products manufactured from traditional insulating
materials such as fiberglass and cotton shoddy. Nevertheless, there can be no
assurance the Company will be able to penetrate existing markets to the degree
necessary to give it a sufficiently significant market share to be profitable.
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
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There were no securities issuances by the Company in the quarter ended June
30, 2001. However, during the nine months ended on that date the Company
issued: (i) an aggregate of 14,822,500 shares of common stock and an equal
number of "A" warrants to purchase the Company's common stock at $.41 per share
to a member of management under the Company's historical share and warrant
issuance program for loans made by stockholders to the Company or the
stockholders' personal guarantee of bank loans to the Company; (ii) 500,000
shares of common stock and an equal number of "A" warrants in connection with
consulting services performed for the Company; and (iii) 15,625 shares as part
of the compensation for services perform. In each of these issuances, the Board
of Directors assigned a value of $.0059 per share of common stock issued, and a
value of $.0001 per warrant issued.
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The Company entered into these non-public transactions directly with two
directors and an executive officer of the Company, each of whom is accordingly
an accredited investor within the meaning of Regulation D as adopted by the SEC
under the Securities Act of 1933. Under all of the relevant facts and
circumstances, these securities were sold without registration under that act in
reliance on exemptions provided under Sections 4(2) and/or 4(6) of the
Securities Act of 1933 and/or Rule 506 thereunder.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits.
None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the quarter
ended June 30, 2001. See, however, the January 2002 Form 8-K (filed with
the SEC on January 14, 2002) for a description of the proposed transaction
with Corniche Group Incorporated and the update to that description
contained in the December 2001 Form 10-QSB (filed on February 15, 2002 with
the SEC).
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: April 12, 2002
STRANDTEK INTERNATIONAL, INC.
By: /s/ JEROME BAUMAN
--------------------------------------
Jerome Bauman, Chairman and President
By: /s/ WILLIAM G. BUCKLES, JR.
--------------------------------------
William G. Buckles, Jr., Vice President
and Chief Financial Officer
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