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 March 31, 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
------
March 31, September 30,
2001 2000
------------- -------------
(unaudited)
Current assets:
Cash $ 45,603 $ 97,900
Accounts receivable, trade, net of allowance for doubtful
accounts of $539,435 at March 31, 2001 and $67,050
at September 30, 2000 1,091,200 1,313,360
Other accounts receivable 218,127 56,295
Inventory:
Raw materials 786,847 414,327
Work in process 74,055 -
Finished goods 88,229 326,912
Prepaid expenses 324,786 23,149
------------- -------------
Total current assets 2,628,847 2,231,943
Equipment and leasehold improvements:
Manufacturing equipment 9,288,570 8,296,226
Plant equipment 1,013,390 881,250
Office equipment 332,802 299,774
Leasehold improvements 1,881,531 1,840,258
------------- -------------
12,516,293 11,317,508
Less accumulated depreciation 899,706 734,009
------------- -------------
Net equipment 11,616,587 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 $94,478 at
March 31, 2001 and $63,757 at September 30, 2000 58,192 76,413
------------- -------------
Total other assets 350,237 360,588
------------- -------------
Total assets $ 14,595,671 $ 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
----------------------------------
March 31 September 30,
2001 2000
--------- ------------
(unaudited)
Current liabilities:
Accounts payable $ 4,508,680 $ 3,708,782
Accrued payroll and related liabilities 282,403 270,303
Accrued expenses 119,097 52,911
Interest payable - stockholders - 389,928
Interest payable - other 96,400 84,090
Revolving line of credit 2,500,000 1,030,131
Stockholders' lines of credit 15,849,654 10,129,797
Current portion of long-term debt with bank 2,131,855 1,991,069
Current portion of long-term notes payable to stockholders - 12,506
------------ ------------
Total current liabilities 25,488,089 17,669,517
Interest payable - stockholders 1,055,156 -
Long-term debt with bank, net of current portion 7,422,846 7,007,014
------------ ------------
Total liabilities 33,966,091 24,676,531
Capital deficiency:
Common stock, $.0001 par value,
200,000,000 shares authorized, 144,020,071 at March 31,
2001 and 128,681,942 at year ended September 30, 2000
issued and outstanding 14,402 12,867
Additional paid-in capital 9,666,323 9,575,829
Accumulated deficit (29,051,145) (21,089,197)
------------ ------------
Total capital deficiency (19,370,420) (11,500,501)
Total liabilities and capital deficiency $ 14,595,671 $ 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
March 31,
2001 2000
----------- -----------
Net sales $ 1,663,321 $ 835,050
Cost of sales 2,639,090 787,459
----------- -----------
Gross profit (loss) (975,769) 47,592
Operating expenses:
General and administrative 1,504,010 1,372,276
Selling expenses 270,195 93,727
Research and development 251,522 470,411
Depreciation and amortization 241,217 135,369
Interest expense 567,258 312,229
----------- -----------
Total operating expenses 2,834,202 2,384,012
----------- -----------
Net loss $ 3,809,971 $ 2,336,420
=========== ===========
Basic and diluted loss per share $ 0.03 $ 0.03
=========== ===========
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 six months ended
March 31,
2001 2000
------------- -------------
Net sales $ 2,733,350 $ 1,532,659
Cost of sales 4,610,268 1,709,307
------------- -------------
Gross loss 1,876,918 176,648
Operating expenses:
General and administrative 2,826,491 2,535,699
Selling expenses 421,423 166,019
Research and development 701,387 831,358
Depreciation and amortization 419,320 226,884
Interest expense 891,436 611,520
Loss on disposition of manufacturing equipment 824,973 -
------------- -------------
Total operating expenses 6,085,030 4,371,480
------------- -------------
Net loss $ 7,961,948 $ 4,548,128
============= =============
Basic and diluted loss per share $ 0.06 $ 0.06
============= =============
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 six months ended
March 31,
2001 2000
-------------- --------------
Cash flows from operating activities:
Net loss $ (7,961,948) $ (4,548,128)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization 419,320 226,884
Loss on disposition of assets 824,973 -
Provision for bad debts 472,385 -
Write off of technology purchased - 50,000
Stock issued for compensation 92,029 129,789
Cash provided (used) due to changes in assets
and liabilities:
Increase in accounts receivable (250,225) (102,378)
Decrease (increase) in other accounts receivable (161,832) 175,000
Increase in prepaid assets (301,637) (27,549)
Increase in inventory (207,892) (151,827)
Increase in notes receivable - (45,000)
Increase in deposits (7,870) (3,601)
Increase in accounts payable 799,897 865,636
Increase in payroll related liabilities 12,100 54,353
Increase in interest payable 677,538 12,946
Increase in accrued expenses 66,186 43,852
-------------- --------------
Total cash used by operating activities (5,526,976) (3,320,023)
Cash flows from investing activities:
Purchase of equipment (2,276,659) (4,190,819)
Proceeds on fixed asset disposal 30,000 -
-------------- --------------
Total cash used for investing activities (2,246,659) (4,190,819)
Cash flows from financing activities:
Repayments of long-term debt with bank (693,382) (417,604)
Costs to obtain financing (12,500) (35,000)
Net addition to revolving note 1,469,869 287,971
Proceeds from long-term bank debt 1,250,000 2,623,589
Net proceeds on stockholders' lines of credit 5,707,351 3,913,984
Proceeds from warrants exercised - 1,588,925
-------------- --------------
Total cash provided by financing activities 7,721,338 7,961,865
-------------- --------------
Net (decrease) increase in cash (52,297) 451,023
Cash, beginning of period 97,900 19,620
-------------- --------------
Cash, end of period $ 45,603 $ 470,643
============== ==============
Supplemental cash flow disclosures
Interest paid $ 477,460 $ 471,782
============== ==============
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
March 31, 2001
(unaudited)
Basis of Presentation
- ---------------------
The accompanying consolidated condensed balance sheet as of March 31, 2001
and the related consolidated condensed statements of loss for the three and six
month periods ended March 31, 2001 and 2000 and statements of cash flows for the
six month periods ended March 31, 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 the Company's management, reflects all adjustments necessary for a
fair presentation of the 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 six months ended March
31, 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 March 31, 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 March 31, 2001 in accounting
policies used by the Company.
Customer Concentration
- ----------------------
In the quarter ended March 31, 2001, 88% of sales and 66% of trade
receivables were with four customers. In the quarter ended March 31, 2000, 83%
of sales and 57% of trade receivables were with three customers. The percentages
applicable to the respective six-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 six months ended March 31, 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 March 31, 2001, the
Company funded its capital requirements and business operations, including
research and product development, with funds provided by invested capital and
borrowings. The Company received $1,250,000 of proceeds from a bank term loan
during this quarter with a variable interest rate based on the 30-day LIBOR
(5.29% as of March 31, 2001) plus 1.85%. Monthly interest payments began
February 1, 2001, and the loan balance is due in equal monthly installments from
February 1, 2002 to January 1, 2006. During this quarter the Company also
received $1,469,869 of proceeds from net additions to a revolving note. This
note is due on demand and interest payments are due monthly. The interest rate
is variable and is based on the 30 day LIBOR (5.29% as of March 31, 2001) plus
1.85%. In addition, the Company received $2,390,500 from stockholder loans
during this quarter. These loans are due on demand, with interest payable
annually at the rate of prime (6.75% as of March 31, 2001) plus 1%.
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.
8
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 quarter. The following table reconciles the number of
shares utilized in the loss per share calculations for the quarters ended March
31, 2001 and 2000.
2001 2000
---- ----
Net loss $ 3,809,971 $ 2,336,420
Basic and diluted loss per share of common stock $ 0.03 $ 0.03
Weighted average number of shares of common stock 144,020,071 90,083,576
Warrants that could potentially dilute basic loss per share at March 31,
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
- -----------------------------------
During the quarter ended March 31, 2001, the Company issued: (i) 500,000
shares of common stock and an equal number of "A" warrants to purchase the
Company's common stock at $.41 per share in connection with consulting services
performed for the Company; and (ii) 15,625 shares as part of the compensation of
an executive officer for services performed. In addition to these shares and
warrants, during the six months ended March 31, 2001 the Company issued an
aggregate of 14,822,500 shares of common stock and an equal number of "A"
warrants 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.
During the quarter ended March 31, 2000, an aggregate of 7,562,500 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 six months ended March 31, 2000, an aggregate of 21,631,762 shares of common
stock and the same number of "A" warrants were issued under this program. Also
in this six-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.
9
See the tables below for changes in shares of common stock and warrants
issued and outstanding for the quarters ended March 31, 2001 and 2000, and for
the six-month periods ended March 31, 2001 and 2000:
For the quarter ended March 31, 2001
Common Stock "A" Warrants "B" Warrants "C" Warrants "D" Warrants
------------ ------------ ------------ ------------ ------------
Issued and outstanding January 1, 2001 143,504,446 40,358,228 1,703,625 1,001,812 233,937
Issued in connection with compensation 515,625 500,000 - - -
--------------------------------------------------------------------
Issued and outstanding March 31, 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 quarter ended March 31, 2000
Common Stock "A" Warrants "B" Warrants "C" Warrants "D" Warrants
------------ ------------ ------------ ------------ ------------
Issued and outstanding January 1, 2000 52,910,683 51,539,985 1,703,625 1,001,812 233,937
Issued for stockholder loans and/or
bank loan guarantees 7,562,500 7,562,500 - - -
Issued on exercise of "A" warrants 50,887,758 (50,887,758)
--------------------------------------------------------------------
Issued and outstanding March 31, 2000 111,360,941 8,214,727 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 six months ended March 31, 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 March 31, 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 six months ended March 31, 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 21,631,762 21,631,762 - - -
Issued for exercise of "A" warrants 50,887,758 (50,887,758) - - -
--------------------------------------------------------------------
Issued and outstanding March 31, 2000 111,360,941 8,214,727 1,703,625 1,001,812 233,937
====================================================================
Stated Conversion Price of
Warrants to Common Stock $ 0.41 $ 0.81 $ 1.22 $ 1.62
======================================================
10
StrandTek West, Inc.
- --------------------
The Company owned 51% of StrandTek West, Inc. ("STI West"). STI West
ceased operations early in the six months ended March 31, 2001. During the six
months ended March 31, 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.
Subsequent Event
- ----------------
See 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 MARCH 31, 2001 AND 2000
Net Sales
Net sales increased $828,271 (99%) for the second fiscal quarter, from
$835,050 for the same quarter last fiscal year to $1,663,321. These overall
sales increases resulted from expanded sales efforts directed to our present
automotive product customers, new appliance 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
third quarter of fiscal year 2001 and beyond as a result of these expanded sales
efforts, increased capacity, and research and product development efforts.
Gross Profit (Loss)
Cost of sales was calculated to be 159% in the second fiscal quarter,
compared to cost of sales of 94% 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.
General and Administrative
General and administrative expenses were $1,504,010 in the second fiscal
quarter, an increase of $131,734 (10%) 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.
11
Selling
Selling expenses were $270,195 in the second fiscal quarter, an increase of
$176,468 (188%) 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, resulting in additional sales in the
appliance and automotive markets. There is no assurance that anticipated sales
related expenses will result in additional sales.
Research and Product Development
Research and product development expenses were $251,522 in the second
fiscal quarter, a decrease of $218,889 (47%) from the same quarter last year.
Even though these expenses for the second 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 $241,217 in the second fiscal
quarter, an increase of $105,848 (78%) 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 $567,258 in the second fiscal quarter, an increase of
$255,029 (82%) 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 to modify the production process.
SIX MONTHS ENDED MARCH 31, 2001 AND 2000
Net Sales
Net sales increased $1,200,691 (78%) for the six months ended March 31,
2001 from $1,532,659 for the same period in fiscal year 2000 to $2,733,350.
Sales efforts were directed to increasing the automotive market volumes and
expanding the appliance markets. These efforts were successful as automotive
sales increased and appliance sales increased due to two new major appliance
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 increase in the third quarter of fiscal year
2001 and beyond as a result of these expanded sales efforts, increased capacity,
and research and product development efforts.
12
Gross Loss
Cost of sales was calculated to be 168% for the six months ended March 31,
2001, compared to cost of sales of 112% 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 a new production line. Also,
higher than anticipated costs were incurred for samples for potential and
current customers.
General and Administrative
General and administrative expenses were $2,826,491 for the six months
ended March 31, 2001, an increase of $290,792 (11%) over the same period in
fiscal year 2000. 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 $421,423 for the six months ended March 31, 2001, an
increase of $255,404 (154%) 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 in the
building materials market. Sales efforts included marketing, samples, and
acquisition of technical knowledge, resulting in additional sales in the
appliance and automotive markets. There is no assurance that anticipated sales
related expenses will result in additional sales.
Research and Product Development
Research and product development expenses were $701,387 for the six months
ended March 31, 2001, a decrease of $129,971 (24%) from the same period in
fiscal year 2000. Even though these expenses for the period have decreased from
the same period 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 expenses for the same period last year were so
much higher than the March 31, 2001 period because last year the Company
incurred significant expenses 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, 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 $419,320 for the six months ended
March 31, 2001, an increase of $192,436 (84%) 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.
13
Interest Expense
Interest expense was $891,436 for the six months ended March 31, 2001, an
increase of $279,916 (46%) 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 to modify the
production process.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 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 March 31, 2001 were $(22,859,242) and
$(19,370,420), respectively, as compared to $(15,437,574) and $(11,500,501),
respectively, at September 30, 2000. During the quarter ended March 31, 2001,
the Company funded its capital requirements and business operations, including
research and product development, with funds provided by borrowings, net
additions to a revolving note and invested capital. The Company received
proceeds of $1,250,000 from a term bank loan, $1,469,869 net additions to a
revolving note and $2,390,500 from stockholder loans during the March 31, 2001
quarter.
During the quarter ended March 31, 2001, the Company incurred cost of
approximately $390,000 for additional manufacturing and plant equipment to
increase the production capacity and efficiency on the production lines and for
planned modifications in the production process to allow a significant portion
of the Company's product to be generated from its own feed stock scrap.
The Company has committed to two additional production line designated Line
3 and Line 5 (Line 4 is already in production). During the quarter ended March
31, 2001, the Company incurred costs of approximately $610,000 towards the
construction of these production lines. The capitalized costs of Line 3 are
estimated to be about $3.2 million. This production line is estimated to have a
production range of 750-850 pounds of product per hour. As of March 31, 2001,
the Company had incurred costs of approximately $3,100,000 relating to the
construction of this line. 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 March 31, 2001, the
Company had incurred costs of $220,000 relating to the construction of this
line.
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.
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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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During the quarter ended March 31, 2001, the Company issued: (i) 500,000
shares of common stock and an equal number of "A" warrants to purchase the
Company's common stock at $.41 per share in connection with consulting services
performed for the Company; and (ii) 15,625 shares as part of the compensation of
an executive officer for services performed. In addition to these shares and
warrants, during the six months ended March 31, 2001 the Company issued an
aggregate of 14,822,500 shares of common stock and an equal number of "A"
warrants 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. 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.
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.
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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 March 31, 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 17, 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
16