<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
_______________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 000-28909
GreyStone Digital Technology, Inc.
(Exact Name of Registrant as Specified in its Charter)
_______________
Delaware 84-1107140
(State or other jurisdiction (IRS Employer
incorporated or organization) Identification No.)
4950 Murphy Canyon Road, San Diego, CA 92123
(Address of Principal Executive Offices) (Zip Code)
(858) 874-7000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OUTSTANDING AT JUNE 30, 2000
------------------- ----------------------------
<S> <C>
Common Stock, $.001 par value 16,284,475
Series A Convertible Preferred Stock, $.001 par value 5,000
</TABLE>
<PAGE> 2
Page 2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GreyStone Digital Technology, Inc.
/s/ MARSHALL GELLER
--------------------------------------------
Marshall Geller
Chief Financial Officer
Dated: August 14, 2000
<PAGE> 3
Page 3
INDEX
GreyStone Digital Technology, Inc.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION FOR GREYSTONE DIGITAL TECHNOLOGY AND SUBSIDIARY 4
Item 1. FINANCIAL STATEMENTS 4
Condensed Consolidated Balance Sheets at June 30, 2000 (Unaudited) and March 31, 2000 4
Condensed Consolidated Statements of Operations (unaudited) for the three
months ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Stockholders' Equity (unaudited)
for the three months ended June 30, 2000 6
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended June 30, 2000 and 1999 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II. OTHER INFORMATION 15
Item 1. LEGAL PROCEEDINGS 15
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
Item 3. DEFAULTS UPON SENIOR SECURITIES 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
Item 5. OTHER INFORMATION 16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16
EXHIBIT INDEX 17
</TABLE>
<PAGE> 4
Page 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,858,050 $ 167,299
Accounts receivable, net of allowance for doubtful accounts of $40,000 201,246 372,981
Other current assets 39,115 54,235
------------ ------------
Total current assets 3,098,411 594,515
Notes receivable, including accrued interest of $29,540 and $16,077 629,540 616,077
Forensic vehicle 330,000
Equipment and furniture, net of accumulated depreciation
and amortization of $2,338,649 and $2,302,999 293,296 278,075
Contract receivable for forensic equipment 135,000
Deposits 87,678 87,678
Related party notes receivable, including accrued interest
of $22,227 and $21,137 72,227 71,137
------------ ------------
Totals $ 4,646,152 $ 1,647,482
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 528,296 $ 970,092
Notes payable to principal stockholder -- 20,000
------------ ------------
Total current liabilities 528,296 990,092
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value; 3,000,000 shares authorized;
5,000 shares, Series A Convertible issued and outstanding 5
Additional paid in capital - Preferred stock 4,449,348
Common stock, $.001 par value; 30,000,000 shares authorized;
16,284,475 and 16,278,179 shares issued and outstanding 16,284 16,278
Additional paid in capital - Common stock 40,471,851 39,816,415
Subscriptions receivable from equity transactions (1,510,792) (1,510,792)
Accumulated deficit (39,308,840) (37,664,511)
------------ ------------
Total stockholders' equity 4,117,856 657,390
------------ ------------
Totals $ 4,646,152 $ 1,647,482
============ ============
</TABLE>
See Notes to Condensed Consolidated Unaudited Financial Statements.
<PAGE> 5
Page 5
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 540,044 $ 459,570
------------ ------------
Expenses:
Cost of revenues 423,502 226,844
Marketing and sales 258,732 166,511
Research and development 340,358 237,302
General and administrative 1,189,188 515,968
------------ ------------
Totals 2,211,780 1,146,625
------------ ------------
Loss from operations (1,671,736) (687,055)
------------ ------------
Other income (expense):
Interest income, including $14,553 from related parties 27,407
Interest expense on loans from principal stockholder (7,182)
------------ ------------
Totals 27,407 (7,182)
------------ ------------
Net loss $ (1,644,329) $ (694,237)
============ ============
Basic net loss per share $ (0.10) $ (0.05)
============ ============
Basic weighted average number of shares outstanding 16,284,406 14,880,743
============ ============
</TABLE>
See Notes to Condensed Consolidated Unaudited Financial Statements.
<PAGE> 6
Page 6
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Three months ended June 30, 2000
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------------------------- -----------------------------------------
Additional Additional
Amount Paid-In Amount Paid-In
Shares At Par Capital Shares At Par Capital
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 2000 16,278,179 $ 16,278 $ 39,816,415
Preferred stock sold for cash,
net of expenses of $550,647 5,000 $ 5 $ 4,449,348
Common stock issued upon
conversion of notes payable
to principal stockholder 4,444 6 19,994
Common stock issued to pay
accrued interest upon conversion
of notes payable to principal stockholder 1,852 8,329
Warrants issued to purchase
common stock 614,513
Stock options to purchase
common stock granted to non-employees 12,600
Net loss
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 5,000 $ 5 $ 4,449,348 16,284,475 $ 16,284 $ 40,471,851
============ ============ ============ ============ ============ ============
<CAPTION>
Subscriptions
Receivable
from Equity Accumulated
Transactions Deficit Total
-------------- ------------ ------------
<S> <C> <C> <C>
Balance, April 1, 2000 $ (1,510,792) $(37,664,511) $ 657,390
Preferred stock sold for cash,
net of expenses of $550,647 4,449,353
Common stock issued upon
conversion of notes payable
to principal stockholder 20,000
Common stock issued to pay
accrued interest upon conversion
of notes payable to principal stockholder 8,329
Warrants issued to purchase
common stock 614,513
Stock options to purchase
common stock granted to non-employees 12,600
Net loss (1,644,329) (1,644,329)
------------ ------------ ------------
Balance, June 30, 2000 $ (1,510,792) $(39,308,840) $ 4,117,856
============ ============ ============
</TABLE>
See Notes to Condensed Consolidated Unaudited Financial Statements.
<PAGE> 7
Page 7
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(1,644,329) $ (694,237)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 35,650 40,877
Compensation expense recorded upon issuance of warrants
and compensatory stock options 627,113 93,000
Changes in operating assets and liabilities:
Notes receivable interest (14,553)
Accounts receivable 171,735 (7,507)
Other assets 15,120 (27,341)
Accounts payable and accrued expenses (433,467) (666,100)
----------- -----------
Net cash used in operating activities (1,242,731) (1,261,308)
----------- -----------
Investing activities
Purchase of forensic vehicle (330,000)
Purchase of contract receivable for forensic equipment (135,000)
Purchases of software licenses and equipment (50,871) (33,646)
----------- -----------
Net cash used in investing activities (515,871) (33,646)
----------- -----------
Financing activities:
Repayments of notes payable to principal stockholder (50,000)
Repayments of loans payable to officers (140,810)
Repayment of short-term notes payable (402,000)
Sale of common stock 2,752,525
Sale of preferred stock, net of selling expense 4,449,353
----------- -----------
Net cash provided by financing activities 4,449,353 2,159,715
----------- -----------
Net increase in cash and cash equivalents 2,690,751 864,761
Cash and cash equivalents, beginning of period 167,299 795,480
----------- -----------
Cash and cash equivalents, end of period $ 2,858,050 $ 1,660,241
=========== ===========
Supplemental disclosure of cash flow data:
Interest paid $ 93,425
===========
Supplemental disclosure of noncash investing and financing activities:
Common stock issued as payment for:
Notes payable to principal stockholder $ 20,000 $ 50,000
=========== ===========
Accrued interest payable $ 8,329 $ 19,332
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Unaudited Financial Statements.
<PAGE> 8
Page 8
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited interim financial statements:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended June 30,
2000 are not necessarily indicative of the results that may be expected
for the year ended March 31, 2001. The unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the company's
annual report on Form 10-K for the year ended March 31, 2000.
The results of operations and cash flows for the three months ended June
30, 1999 occurred before the merger and are for GreyStone Technology,
Inc. only.
Note 2 - The merger and other matters:
On December 27, 1999 a merger between a subsidiary of Express Capital
Concepts, Inc. and GreyStone Technology, Inc. was completed, whereupon
Express Capital Concepts also underwent a 1-for-41.66667 reverse stock
split (which reduced its issued and outstanding common stock to 480,000
shares), changed the par value of the stock from $0.0001 to $0.001 per
share, reduced the total authorized common stock from 500,000,000 shares
to 30,000,000 shares, and was renamed GreyStone Digital Technology,
Inc.. Simultaneously, 15,211,627 shares of common stock of GreyStone
Digital Technology, Inc. were issued to GreyStone Technology, Inc.
common stock holders. The transaction has been accounted for as a
reverse acquisition, wherein GreyStone Technology, Inc., the operating
company, is treated as the acquirer for reporting purposes. The balance
sheets, statements of operations, stockholders' equity and cash flows
are consolidated between GreyStone Digital Technology, Inc, and
GreyStone Technology, Inc. as of June 30, 2000. All significant
inter-company accounts and transactions are eliminated in consolidation.
Note 3 - Notes receivable and accrued interest:
Notes receivable at June 30, 2000 consists of two notes from an
individual. The notes were originally due February 20, 2000, accrue
interest at 9% and are collateralized by common stock in a company owned
by the individual. The maturity date of the notes was extended to May
20, 2000 and subsequently further extended to August 20, 2000.
Note 4 - Earnings (loss) per share:
Effective March 31, 1998, the company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings per Share,
which requires the presentation of "basic" and "fully-diluted" earnings
(loss) per common share, as further explained in Note 1 of the notes to
the audited financial statements of the company, included in Form 10-K
for the fiscal year ended March 31, 2000.
Since the company had losses applicable to common stock in the three
month period ended June 30, 2000 and 1999, the assumed effects of the
exercise of outstanding stock options, warrants and convertible
preferred stock were anti-dilutive and, accordingly, dilutive per share
amounts have not been presented in the accompanying condensed
consolidated unaudited statements of operations. Such options, warrants
and convertible preferred stock could potentially dilute basic earnings
per share in the future.
<PAGE> 9
Page 9
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Segment reporting:
Effective March 31, 1999, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
established standards for the way that public enterprises report
financial and descriptive information about reportable operating
segments in annual financial statements and interim financial statements
issued to stockholders. SFAS 131 supersedes SFAS 14, Financial Reporting
for Segments of a Business Enterprise, but retains the requirement to
report information about major customers.
Information on industry segments are scheduled below:
<TABLE>
<CAPTION>
Government Commercial Common/Corporate Total
----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Three months ended June 30, 2000:
Revenue $ 540,044 $ 0 $ 0 $ 540,044
=========== =========== =========== ===========
Net Loss $ (252,103) $ (230,445) $(1,161,781) $(1,644,329)
=========== =========== =========== ===========
Three months ended June 30, 1999:
Revenue $ 448,541 $ 148 $ 10,881 $ 459,570
=========== =========== =========== ===========
Net Loss $ (56,740) $ (125,228) $ (512,269) $ (694,237)
=========== =========== =========== ===========
</TABLE>
<PAGE> 10
Page 10
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Warrants:
The Company has issued warrants in conjunction with the sale of
convertible notes payable, assisting the Company in acquiring capital,
the extending of loans, as an incentive to equity investors and as part
of the consideration paid to various consultants. Based on the
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") using the
Black-Scholes option pricing model and assuming a risk-free interest
rate of 6%, expected warrant lives of one to ten years, expected
volatility of 5% to 60% and dividends of 0%, the compensation expense
relating to the warrants issued was $614,513 and $88,800 for the three
months ended June 30, 2000 and 1999, respectively. Each warrant entitles
the holder to purchase one share of common stock upon exercise. The
warrants expire at various dates from 2002 through 2010. Additional
information regarding warrants outstanding at June 30, 2000 and changes
in outstanding warrants during the three months then ended follows:
<TABLE>
<CAPTION>
Number of Exercise
Warrants Price
--------- -----------------
<S> <C> <C>
Outstanding at April 1, 2000 7,209,096 $4.95 to $12.00
Granted 1,550,000 $5.38 and $12.00
Outstanding at June 30, 2000 8,759,096 $4.95 to $12.00
---------
Exercisable at June 30, 2000 7,741,097 $4.95 to $12.00
=========
Weighted average fair value of warrants
granted during the period $2.61
================
</TABLE>
Note 7 - Income taxes:
The Company had net operating loss carry forwards at June 30, 2000 of
approximately $34,100,000 available to reduce future Federal taxable
income and approximately $10,400,000 available to reduce state taxable
income, if any. The net operating loss carryforwards expire between 2006
and 2020 for Federal tax purposes and 2001 and 2005 for state tax
purposes. The related deferred tax assets were fully reserved through
valuation allowances at June 30, 2000 and March 31, 2000 and,
accordingly, there was no provision or credit for income taxes.
The expected Federal income tax benefit, computed based on the Company's
pre-tax loss and the statutory Federal income tax rate, was
approximately $559,000 for the three months ended June 30, 2000. The
potential benefits were eliminated through equivalent increases in the
Company's valuation allowance primarily for deferred tax assets arising
from net operating loss carryforwards (see Note 11 of the notes to the
audited financial statements of the Company which are included in the
Form 10-K for the fiscal year ended March 31, 2000).
<PAGE> 11
Page 11
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Stock option plans:
As further explained in Note 13 of the notes to the audited financial
statements, which are included in the Form 10-K for the fiscal year
ended March 31, 2000, the Company has two stock option plans - the "1991
Plan" and the "1994 Plan". In addition to incentive stock options (ISOs)
issued under the plans, the Company issued nonqualified stock options
(NSOs) outside of the plans in 1994, 1995, 1997 and 1998. Information
related to the plans and other options granted follows:
<TABLE>
<CAPTION>
Options Outstanding
Year Type Authorized at 06/30/00
--------- ---- ---------- -----------
<S> <C> <C> <C>
1991 Plan ISO 1,000,000 550,000
1994 Plan ISO 2,000,000 1,753,762
1994 NSO 200,000 200,000
1995 NSO 200,000 200,000
1997 NSO 640,000 640,000
1998 NSO 750,000 750,000
--------- ---------
4,790,000 4,093,762
========= =========
</TABLE>
The amount of compensation expense recognized for the three months ended
June 30, 2000 and 1999 relating to the granting of NSO stock options
under the provisions of SFAS No. 123 was $12,600 and $4,200 for the
three months ended June 30, 2000 and 1999, respectively.
In the opinion of management, if compensation cost for the stock options
granted to employees had been determined based on the fair value of the
options at the grant date under the provisions of SFAS No. 123 using the
Black-Scholes option pricing model and assuming a risk-free interest
rate of 6%, expected option lives of one to ten years, expected
volatility of 5% to 60% and dividends of 0%, the Company's pro forma net
loss arising from such computations would have been increased by
approximately $132,640 and $177,000 for the three months ended June 30,
2000 and 1999, respectively.
Additional information regarding options outstanding under the Company's
stock option plans at June 30, 2000 and changes in outstanding options
during the three months then ended follows:
<TABLE>
<CAPTION>
Shares or Price Weighted Average
Per Share Exercise Price
--------------- ----------------
<S> <C> <C>
Outstanding at April 1, 2000 4,106,762 $ 4.31
Granted 9,000 $ 5.00
Cancelled (22,000) $ 5.10
--------------
Outstanding at June 30, 2000 4,093,762 $ 4.43
==============
Price Range at June 30, 2000 $.275 to $6.80
==============
Exercisable at June 30, 2000 3,672,248 $ 4.36
==============
Available for grant at June 30, 2000 696,238
==============
Weighted average fair value
of options granted during period $ 2.86
</TABLE>
<PAGE> 12
Page 12
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Stock option plans (concluded):
The following table summarizes information about stock options
outstanding at June 30, 2000, all of which are at fixed prices:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Contractual Life
Number of of Options Number of
Options Outstanding in Options
Exercise Price Outstanding Years Exercisable
-------------- ----------- ----------------- -----------
<S> <C> <C> <C>
$0.275 200,000 1.12 200,000
$1.000 200,000 4.01 200,000
$3.825 1,054,762 3.16 1,037,562
$4.950 1,050,000 4.13 966,666
$5.000 9,000 9.90 0
$5.100 1,002,000 8.98 703,020
$6.000 553,000 9.68 550,000
$6.800 25,000 7.90 15,000
----------- ------------
4,093,762 3,672,248
============ ============
</TABLE>
Note 9 - Related party transactions and balances:
In July 1999, a professional services agreement was made between the
company and The Pointe-Force Company, Inc. ("Pointe-Force"), an entity
controlled by the spouse of a director of GreyStone. Pointe-Force
supports the company in the areas of mergers and acquisitions, strategic
planning, corporate financing and relations with the investment
community. Under this one-year advisory services agreement, Pointe-Force
is compensated in the amount of $11,000 per month, not including
expenses. Additionally, the company loaned $20,000 on August 6, 1999,
$10,000 on September 22, 1999 and $20,000 on November 17, 1999 to
Pointe-Force and GreyStone's director. All loans are for a one-year term
and bear interest at a rate of 8.75% per year. The maturity date of the
loan that was due on August 6, 2000, is currently being extended.
<PAGE> 13
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This report contains statements that are not purely historical, and as such are
forward-looking statements under the federal securities laws. These include
forward-looking statements regarding management's intentions, plans, hopes,
beliefs, expectations or projections of the future. These forward-looking
statements involve risks and uncertainties, including without limitation,
acceptance of the company's products and services: additional financing
requirements within the next 12 months; the ability to recover or collect from
its investment activities and loans; the impact of competitive products or
pricing; technological changes; the effect of economic conditions; the ability
to successfully commercialize the company's entertainment products; the
company's dependence on key engineering, technical, and other personnel skilled
in government contracting; the ability of the government to terminate contracts
and subcontracts at any time; and other risks and uncertainties detailed from
time to time in the company's reports filed with the Securities and Exchange
Commission. One or more of these factors could affect the company's business and
financial results in future periods, and could cause actual results to differ
materially from plans and projections. There can be no assurance that the
forward-looking statements in this report will prove to be accurate, and
issuance of such forward-looking statements should not be regarded as a
representation by the company, or any other person, that the objectives and
plans of the company will be achieved. All forward-looking statements made in
this report are based on information presently available to management, and the
company assumes no obligation to update any forward-looking statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues for the three months ended June 30, 2000 were $540,044 as compared to
$459,570 for the three months ended June 30, 1999. During both of these periods,
the Government Strategic Business Unit (SBU) generated essentially all revenues.
The sales increase of $80,474 (or approximately 18%) between the periods was
primarily the result of additional tasking on current contracts and the
expansion of our government customer base. During this reporting period, the
Government SBU expanded its tasking on current contracts supporting the
military's Joint Forces SemiAutomated Forces simulation software and the Joint
Strike Fighter program. Additional delivery orders under GreyStone's Battlefield
Visualization contract with the U.S. Navy's Space and Naval Warfare Systems
Center - San Diego (SPAWARSYSCEN - San Diego) have also been awarded for new
engineering services work with the Marine Corps Warfighting Laboratory, Naval
Warfare Development Center, Naval Air Warfare Center Weapons Division and the
Space and Naval Warfare Systems Advanced Concepts and Technology Division. As of
June 30, 2000, the company's backlog was approximately $1,087,000. All of the
backlog is expected to be completed within the current fiscal year ending March
31, 2001. In March 1999, GreyStone was awarded the five year $15.1 million
delivery order contract from SPAWARSYSCEN - San Diego. Approximately $2.6
million in delivery orders have been authorized under this contract through June
30, 2000, leaving an available ceiling of approximately $12.5 million during the
remaining 43 months of the contract.
During the next twelve months, GreyStone's Commercial SBU expects to generate
revenues from the sale of its new Commercial entertainment product, the Mercury
motion base platform featuring the XSG game. The Commercial SBU may incur
additional losses during the next twelve months as it introduces its new
entertainment products to the market.
Cost of revenues increased to $423,502 for the current quarter compared to
$226,844 for the first quarter of the previous year. As a percentage of
revenues, costs of revenues were 78% in the current quarter compared to 49% for
the comparable quarter in the previous year. Cost of revenues increased in the
current quarter over the previous year's quarter due to an increase in purchased
engineering services costs in support of new contractual work and an increase in
the use of subcontractors for new work. Additionally, direct travel costs were
higher as a result of GreyStone's support of overseas military experiments. The
components that make up the cost of revenues include burdened labor, direct
travel, other direct costs, direct material, subcontracts and applicable SBU
burden. These cost components can vary significantly in amount from period to
period and are highly dependent on such factors as the nature of the work
performed, location and duration of the work (company vs. contractor site), who
performed the work (company personnel vs. subcontractors) and who provided any
required equipment (company vs. customer).
<PAGE> 14
Page 14
Marketing and sales expenses were $258,732 or 48% of revenues in the current
quarter compared to $166,511 or 36% of revenues for like quarter in the previous
year, an increase of $92,221. The increase in marketing and sales expenses was
due to the greater level of marketing effort of the Government SBU in support of
RAGETM, the company's real-time visualization software product and related
engineering services. Marketing and sales expenses result from bid and proposal
activity as well as attendance at trade shows, company product demonstrations
and in-house marketing related activities such as product brochures and
marketing software development. Marketing and sales expenses will vary from
period to period as they depend highly upon the extent and manner in which the
company alters its efforts regarding potential contract opportunities during the
reporting period.
Research and development expenses increased to $340,358 for the current year's
quarter compared to $237,302 for the previous year's quarter. The increase is in
the Commercial SBU and reflects work on a new motion base for the Mercury based
entertainment system, creating a new title for play on the Mercury system and
developing a 3D Virtual Info-Space(TM) environment.
General and administrative expenses increased to $1,189,188 compared to $515,968
for the previous year's quarter, an increase of $673,220. Of the $673,220
increase, $534,113 was a non-cash compensation expense increase associated with
the issuance of warrants and compensatory stock options. The remainder of the
increase was for consulting fees and public relations expenses.
Other income of $27,407 consisted of interest income, including $14,553 of
interest income from related parties' notes. Interest expense declined by $7,182
and was primarily the result of the conversion into stock of notes payable to
the principal stockholder.
The net loss of $1,644,329 increased by $950,092 or 137% from the $694,237 net
loss reported in the previous years first quarter. In summary, during the
current year, revenues were up by $80,474 or 18%. Total expenses and other
income (expense), increased by $1,030,566 or 89%.
GreyStone has previously cautioned that quarterly revenues and operating results
vary significantly and that period-to-period comparisons of its revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.
INVESTMENTS AND CAPITAL RESOURCES
On January 14, 2000, GreyStone executed a letter of intent for the acquisition
of a company that designs, builds, and sells forensic surveillance, mobile
intelligence, and communications platforms on a customized contract basis
primarily for domestic and international customers in law enforcement,
intelligence and military services. At the time of the filing of this report the
two companies are in discussions concerning the details of the form of
relationship. The transaction would allow GreyStone to use and expand our core
technologies and record revenues from the sale of products to a broad new
spectrum of customers. Our two companies have teamed for the recent submittal of
a proposal for forensic vehicles and command and control systems for a national
security agency in South America.
In support of the developing relationship between GreyStone and the target
company, GreyStone loaned the president (who is the sole shareholder) of the
company $500,000 in November 1999 and an additional $100,000 in February 2000.
The loans were originally due February 20, 2000. The maturity date of the loans
was extended to May 20, 2000 and subsequently extended to August 20, 2000. The
loans are collateralized by all of the borrower's stock in the target company.
In June 2000 GreyStone purchased forensic vehicle equipment from the target
company in the amount of $330,000 and paid the company $135,000 for the right to
receive future payment on invoices to be generated by the target company upon
the completion of work in progress. Until the business combination is complete,
GreyStone may elect in its sole discretion to provide more money to the target
company in an amount of approximately $500,000 during the remainder of the
business year ending March 31, 2001.
LIQUIDITY
GreyStone has incurred losses in each fiscal year since 1993, and as of June 30,
2000, GreyStone had an accumulated deficit of $39,308,840. To finance its
business plan and historic negative cash flow, GreyStone has
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continually needed to obtain debt and equity financing on a private basis and to
satisfy creditors with stock rather than by payment in cash to enable it to
develop its products. These losses have been primarily due to lack of any
significant entertainment revenues, substantial research and development program
expenses for Commercial and Government business units, and other costs incurred
for the development and introduction of GreyStone's products. Almost all of
GreyStone's sales have been in the government business area, which provides low
profit margins from which GreyStone has not been able to recover the costs of
its research and development programs. Although revenues are expected from the
sale of entertainment products, GreyStone is likely to incur additional losses
as it continues to market and develop its products. No assurance can be given
that GreyStone will ever derive material revenues from entertainment products or
that the sale of its products will ever be profitable.
Net cash used in operating activities for the three months ended June 30, 2000
was $1,242,731, which was essentially unchanged from the $1,261,308 of cash used
for operating activities in the three months ended June 30, 1999. Although the
net loss for the quarter was $1,644,329, an increase of $950,092 from the
previous reporting quarter net loss amount of $694,237, non cash outlays for
depreciation and compensation expense in the current quarter were $662,763, as
compared to $133,877 in the previous quarter, an increase of $528,886.
Additionally, cash was used to reduce accounts payable and accrued expenses by
$433,467, increase other assets by $15,120 and accounts receivable decreased by
$171,735.
Net cash used in investing activities was $515,871 during the current three
month period compared to $33,646 for the same reporting period in business year
2000. In addition to the transactions with the acquisition candidate discussed
above, current period investing activities included purchases of software
licenses and equipment of $50,871.
Net cash provided by financing activities was $4,449,253 in the current period
compared to $2,159,715 for the previous comparable period. The $4,449,253 was
the net result of the sale on May 22, 2000 of $5,000,000 in convertible
preferred stock to a group of private investors and is net of a 10% commission
and legal fees. The net proceeds will be used by the company for general
corporate purposes.
At June 30, 2000, the company had $2,858,050 in cash and cash equivalents, as
compared to $167,299 for the fiscal year ended March 31, 2000. Management
anticipates that in the future it will need to continue to obtain debt or equity
financing and, if GreyStone is unable to generate significant sales, then
GreyStone faces the risk of not having enough money or other resources to
continue to operate its current business plan. If additional money is needed and
is not available, then GreyStone could be forced to curtail product development
and the expansion of its operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this report, we are not a party to any legal proceedings that
are expected, individually, or in the aggregate, to have a material adverse
effect on our business, financial condition or operating results.
Pending legal proceedings which arose during the reporting period have been
previously reported on GreyStone's Annual Report on Form 10-K for the year
ended March 31, 2000, filed on June 29, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Changes in securities which occurred during the reporting period have been
previously reported on Registrant's Annual Report on Form 10-K for the year
ended March 31, 2000, filed on June 29, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
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<S> <C>
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the three months ended June 30, 2000, the Company filed no
reports on Form 8-K.
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
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<S> <C>
27.0 Financial Data Schedule
</TABLE>
