SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A 1
Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended SEPTEMBER 30, 2002
Commission File Number 000-32875
ALLOY STEEL INTERNATIONAL, INC.
(Name of Small Business Issuer in its charter)
Delaware 98-0233941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 Mercantile Way Malaga
P.O. Box 3087 Malaga D C 6945
Western Australia
(Address of Principal Executive Offices)
Issuer's telephone number: 61 + (8) + 9248 3188
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.01 Par Value
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes: [X] No: [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-KSB or any amendment to this Form 10-KSB [_]
The Issuer's revenue for the fiscal year ended September 30, 2002 was
$2,116,314.
As of December 20, 2002, the issuer had a total of 16,950,000 shares of
Common Stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Alloy Steel International, Inc. was incorporated in Delaware in May 2000.
Our principal executive office is located at 42 Mercantile Way Malaga, Malaga D
C 6945, Western Australia. Our telephone number is 61 + (8) + 9248 3188. Our
Internet address is www.alloysteel.net.
OVERVIEW OF BUSINESS
ARCOPLATE
We manufacture and distribute Arcoplate, a wear-resistant fused-alloy-clad
steel wear plate, through a patented production process. The Arcoplate process
enables an alloy overlay to be smoothly and evenly applied to a sheet of steel,
creating a metallurgical bond between the alloy and the steel that is resistant
to wear caused by impact, abrasion and erosion. We believe that, in the mining
and mineral processing industries, wear is the primary cause of down time, the
period of time when machinery is not in operation due to wear or malfunction. We
believe that our Arcoplate product line will substantially lower down time and
the resulting loss of production for our customers. Alloy Steel International
was incorporated in Delaware in May 2000.
Although welded wear plates have been used in the manufacturing, mining and
construction industries for more than half a century, they are characterized by
several functional limitations. Conventional welded wear plates have:
- the tendency to separate into chips or fragments when subjected to
high impact;
- uneven base metal dilution resulting in uneven alloy content; and
- rough surfaces resulting in poor material flow.
We believe that Arcoplate has properties that allow it to overcome the
limitations of conventional wear plate. Based upon independent laboratory and
field tests we believe that Arcoplate is up to six times more wear-resistant
than conventional single or multiple layer wear plates due to a higher carbide
content and a more homogeneous surface layer. In addition, based upon
independent laboratory and field tests, we believe that Arcoplate wear plate
sheets will withstand rolling and pressing, within the fabrication guidelines,
into various shapes for commercial distribution.
Our equipment is presently operating at full capacity. We anticipate that
additional machinery to expand our capacity will be completed in February, 2003.
Upon completion of the additional equipment, we intend to increase our sales and
marketing efforts.
We are presently marketing Arcoplate products to customers in the United
States, South America and Australia. We intend to expand our marketing to
include mining companies, original equipment manufacturers, cement plants and
dredging companies in Australia, as well as in Korea, India, Indonesia,
Singapore, South Africa, Japan and China.
Unless the context otherwise requires, the description of our business,
includes the operations of our predecessor, the Arcoplate Division of the
Collier Unit Trust and the following:
- the acquisition of a license for the worldwide rights to commercially
exploit the Arcoplate process, with the exception of the United
States, in May 2000;
- the acquisition of certain plant equipment assets of Collier Unit
Trust in October 2000; and
- the acquisition of the 3-D Pipe Fitting Cladder Process in October
2000.
The Arcoplate Division of Collier Unit Trust commenced operations in 1990
and is an entity controlled by Gene Kostecki, our chief executive officer,
director and principal stockholder. Our initial prototype equipment commenced
producing Arcoplate for sale to customers in 1991. Arcoplate Holdings (UK) PLC
holds the United States rights to the Arcoplate process through Arcoplate, Inc.
Arcoplate Holdings (UK) PLC received these rights from Kenside Investments Ltd.,
an entity controlled by Mr. Kostecki, our chief executive officer, director and
principal stockholder. Presently, such rights are not being exploited. Arcoplate
Holdings (UK) PLC is an affiliate of Mr. Kostecki, our chief executive officer,
director and principal stockholder and Mr. Winduss, our chief financial officer,
principal stockholder and a director. Arcoplate Holdings (UK) PLC is in
violation of this license and Kenside Investments Ltd. has attempted to revoke
the license. Certain directors of Arcoplate Holdings (UK) PLC are disputing this
revocation. Until this matter is resolved, neither Arcoplate Holdings (UK) PLC
nor Kenside Investments Ltd. are in a position to grant to us a U.S. license.
Once this matter is resolved, we will attempt to negotiate a U.S. license in an
arms-length transaction.
2
3-D PIPE FITTING CLADDER PROCESS
We intend to commercially utilize the 3-D Pipe Fitting Cladder process, a
computer-driven and software-based mechanical system for industrial use. The 3-D
Pipe Fitting Cladder process enables wear resistant alloy coatings to be applied
to pipe fittings, where wear is most likely to occur. In pipefittings, wear
generally occurs in pipe bends, elbow pipe joints, pipe "T" sections and pipe
"Y" sections. Through the 3-D Pipe Fitting Cladder process, we apply alloy
coatings to the interior surfaces of pipefittings. We believe that the mining
and mineral industries, among others, would benefit from the reduced abrasive
wear and downtime associated with the use of the 3-D Pipe-Fitting Cladder
process.
THE WEAR PLATE SOLUTIONS INDUSTRY
We believe that wear in the operating workplace is the largest factor
leading to production losses in the mining, mineral-processing, and steel
manufacturing industries and, consequently, wear plate solutions are an integral
resource for businesses with wear-related concerns. The wearing of metal parts
is generally defined as a gradual decay or breakdown of the metal. A metal part
is usually worn by combinations of two or more types of wear. Because the wear
of equipment may have multiple causes, the selection of alloy wear plate
solutions can be a relatively complex process. There are five major types of
wear: abrasive wear, sliding wear, erosion, fretting and gouging.
In order to minimize the effects of wear, businesses have traditionally
employed such wear-combating materials as rubber compounds, ceramics, alloy
castings, welded overlay wear plate, and quenched and tempered carbon steel
plate. We believe that each of these materials offers a limited solution to the
problem of wear, and that conventional welded overlay wear plate has a tendency
to spall (separate) under high impact conditions. While tungsten carbide is
generally recognized by the mining, mineral-processing and steel manufacturing
industries as the most wear-resistant material available for industrial use due
to its high carbide content, we believe that the costs associated with tungsten
carbide are too high to be a practical wear plate solution for most businesses.
We believe that the Arcoplate process provides businesses with solutions to most
wear-related problems at a cost competitive with traditional welded overlay wear
plate, and substantially lower than tungsten carbide. In addition, we believe
that the 3-D Pipe Fitting Cladder process will provide businesses with solutions
for the problem of wear and down time in pipe fitting systems, reducing the
costs associated with lost production and the replacement of worn pipe fittings.
OUR STRATEGY
Our objective is to become an international market leader in wear-resistant
alloy steel products and to establish significant market share and brand
awareness for Arcoplate and the 3-D Pipe Fitting Cladder process within the
mining, mineral-processing and steel industries. We intend to accomplish our
objectives by first establishing a market presence in Australia, and then
developing an international market presence, focusing on India, South America,
Brazil, Indonesia, the United States, and Canada. We believe that we can
capitalize on our existing patented process for producing Arcoplate through the
direct manufacture and sale of Arcoplate-based products to original equipment
manufacturers and distributors worldwide. At the local level, we intend to
combine targeted marketing with advertising in trade journals, newspapers and
magazines. At the international level, we intend to establish market presence by
visiting international trade shows, presenting technical papers at industry
conferences, and appointing distributors who will be supplied with samples of
Arcoplate and who will be trained to present Arcoplate products as a solution
for wear-related problems.
PRODUCTS AND APPLICATIONS
CHARACTERISTICS OF ARCOPLATE
Many of our claims with respect to the physical characteristics of
Arcoplate have been subjected to studies and testing, performed by independent
laboratories, universities and other testing facilities, of Arcoplate's various
properties such as bond strength, specific hardness, density, hardness,
resonance and wear resistance.
Based upon independent laboratory and field tests, we believe that
Arcoplate is adaptable to a wide range of industrial applications, and that
Arcoplate significantly reduces wear in any application where abrasive materials
come into contact with steel surfaces.
Arcoplate is designed for installation and use where the wear of parts and
machinery frequently occurs, including:
- the mining of iron, gold, nickel, copper and other ores;
3
- brick and cement works and power stations;
- the manufacture of ore feed bins, transfer chutes, dredging systems
and conveyor side skirts;
- bulldozer arms and blades; and
- truck box liners and bucket loader liners.
Our product lines include a range of standard alloy overlay plates. Our
products are designed for ease of handling and can be fabricated to suit our
customers' equipment and needs regarding shape, size, weight, and other factors.
Sheets of Arcoplate can be welded together to cover large surface areas, and can
be cut into a range of shapes, while still maintaining resistance to wear. We
also provide consultation services to customers and their design engineers with
particular wear-related problems, and we can formulate Arcoplate to meet the
specific requirements of our customers.
Based upon independent laboratory and field tests, we believe that our
proprietary method of manufacturing Arcoplate results in a product that has many
technical advantages over conventional weld clad plates. Conventional weld clad
plates are generally characterized by structural weaknesses and limited wear
resistance resulting from inefficient production methods. In order to achieve a
wear-resistant flat surface, conventional wear plates must be rolled and pressed
after its layers of hardfacing have been welded together. Post production
rolling and pressing can result in a weakened surface structure that cannot
withstand high impact conditions. The Arcoplate process does not require post
production rolling and pressing. During the Arcoplate process, the plate is
coated with the desired alloy thickness in one application, resulting in a
uniform and, therefore, structurally sound, surface. The Arcoplate process also
ensures that the overlay has a uniform and high carbide content, which makes the
plate more resistant to wear than a traditional welded wear plate. The higher
content of carbide in Arcoplate greatly increases its wear resistance.
CHARACTERISTICS OF THE 3-D PIPE FITTING CLADDER PROCESS
We believe that the 3-D Pipe Fitting Cladder process overcomes many of the
problems associated with pipe fitting wear. Pipefittings are extensively used in
the dredging, mineral processing, coal-fired power generation, cement
manufacturing, and oil refinery industries, where materials are frequently
transported in enclosed pipe. Due to their angled and/or curved structures,
pipefittings generally have higher wear resulting in a much shorter working life
than ordinary straight pipe, because material flow does not flow uniformly
through pipe fittings. In order to increase the wear-resistance of the
pipefittings, the 3-D Pipe Fitting Cladder process deposits a profiled layer of
wear-resistant alloy on to wear-susceptible interior surfaces.
We believe that the wear of pipefittings in industrial pipe results in
substantial production losses due to down time and cost expenditures for
replacement parts. By uniformly applying alloy coatings to the interior surfaces
of pipe fittings with the 3-D Pipe Fitting Cladder process, we believe that the
need for replacement parts, abrasive wear and down time will be greatly reduced.
We believe that the 3-D Pipe Fitting Cladder process enables a variety of
different alloys to coat the interior surfaces of pipefittings, and it will
therefore be adaptable for use in many different industrial settings.
INDEPENDENT LABORATORY AND FIELD TESTS
We base our beliefs regarding Arcoplate's high wear-resistance on our
observations of Arcoplate's performance in industrial use, our correspondence
with mining and mineral processing businesses that have used Arcoplate, and the
results of independent laboratory and field tests.
A study conducted by the Central Power Research Institute of Bangalore,
India, in 1997, concluded that Arcoplate has 13.6 times less erosion loss and
65.0 times less abrasion than mild steel. The study further concluded that
Arcoplate offers wear-resistance against low stress abrasion at a factor of
6.5:1 or greater over several times of multiple layer wear plates. A study
conducted by Metlabs (a division of AUST-AMET Pty. Ltd.) of Welshpool, Australia
in November 1997 reported that "[t]he abrasion and wear resistance of
[Arcoplate] would be expected to be good due to the consistency of the
microstructure and high hardness values and the underlying steel structures." A
trial of Arcoplate conducted by the Hamersley Iron Paraburdoo iron ore
processing plant, in October 1992 in Western Australia, concluded that Arcoplate
was eight times more wear resistant than its multiple layer wear plate
counterpart.
4
SALES AND MARKETING
To date, most of our orders have been the result of unsolicited inquiries
from prospective customers who have learned of our Arcoplate products on a
word-of-mouth basis in their respective industries. For the year ended September
30, 2002, 13 customers accounted for 90% of sales. Sales to such customers
ranged from 1% of sales to 25% of sales.
We intend to achieve market penetration in selected major markets through a
multi-step process consisting of:
- presentation of technical papers at industry related seminars;
- initial discussions of the application highlighting the advantages of
Arcoplate;
- initial discussions of the application highlighting the advantages of
the 3-D Pipe Fitting Cladder process;
- an engineering and marketing evaluation by the prospective customer of
sample material and demonstration products; and
- licensing a production program where appropriate expenditures are made
on tooling, equipment and quality control necessary to fulfill market
requirements.
We anticipate incurring increased expenditures in connection with our
marketing activities. Our marketing activities are also expected to include
substantial applications engineering support to assist in the development of
products for specific customers and markets, evaluation of Arcoplate and the 3-D
Pipe Fitting Cladder by institutions that specialize in technology and/or
markets of this type, development of appropriate sales materials such as
specification sheets and corporate brochures, and promotion through appearances
at selected trade shows and selective advertising in journals and the trade
press.
In order to develop our Australian and international customer base, we
intend to contact many major mining and mineral processing companies to
determine their current methods for minimizing down time due to wear-related
problems. We intend to establish initial contact with these companies by
telephone, followed by a targeted mailing containing a letter with brochures and
case histories provided to us by current customers. After prospective customers
have had the opportunity to review the contents of our targeted mailing, we will
attempt to set up a meeting with key employees of the prospective customer in
order to review their operations, materials, wear-related problems, and
frequency of shut-downs so that we may then suggest specific Arcoplate products,
3-D Pipe Fitting Cladder procedures and other solutions to reduce down time. For
original equipment manufacturers, we will attempt to review existing operations
in order to determine how our products may assist in enhancing equipment
performance. We intend to hold seminars in our offices, or at our customers'
places of business, with operations managers, maintenance superintendents and
maintenance schedulers, individuals who are directly responsible for production
and machinery performance.
In addition, we intend to market our Arcoplate products to consultant
engineering companies so that they may ultimately incorporate Arcoplate
materials into their equipment designs. We will offer the services of our own
engineering department to assist consultant engineers with design planning in
order to maximize material flow, and to minimize wear and down time.
ACQUISITION OF TECHNOLOGY
In May 2000 we acquired an exclusive license from Kenside Investments,
Ltd., for a 25 year term, to develop and market the proprietary Arcoplate
process, and to commercially exploit the patent rights and technology rights
related to the Arcoplate process worldwide, with the exception of the United
States in exchange for 4,760,000 shares of our common stock. The patent rights
include those rights encompassed by a U.S. patent and a Canadian patent which
were initially assigned to investors George W. Browne and Gene Kostecki, our
chief executive officer. The rights to the patents, and the underlying Arcoplate
process technology, were ultimately transferred to Kenside Investments, Ltd.
Pursuant to the license from Kenside Investments, we have the option to extend
the license for three terms of 10 years each. The license provides for royalty
payments to Kenside Investments, Ltd., in an amount equal to 2% of our net sales
of Arcoplate products. Gene Kostecki, our chief executive officer, director and
principal stockholder, controls Kenside Investments, Ltd.
In October 2000, we acquired, from Gene Kostecki and Alan Winduss, the
right to utilize and commercially exploit the 3-D Pipe Fitting Cladder process
in exchange for an aggregate of 3,413,750 shares of common stock. In October
2000, we acquired from Collier Unit Trust, certain mill and office equipment
assets relating to the manufacture, sale and
5
distribution of Arcoplate in exchange for 1,250,000 shares of common stock. In
October 2000, we acquired, from Collier Unit Trust, certain plant machinery
relating to the manufacture, sale and distribution of Arcoplate for a purchase
price of $880,891. Mr. Kostecki controls Collier Unit Trust.
INTELLECTUAL PROPERTY
We believe that protection of our licensed proprietary technology and
know-how is critical to the development of our business. We have obtained
patents for process in United States, Mexico, Brazil, Canada, Japan, Burma,
South Korea, Australia, France, Germany, Great Britain, Greece, Italy, Belgium,
Netherlands and Sweden. We do not have intellectual property protection for the
3-D Pipe Fitting Cladder process. We cannot assure you that our existing patent
rights, or any other patent rights that may be granted, will be valid and
enforceable or provide us with meaningful protection from competitors. We cannot
assure you that any pending patent application will issue as a patent or that
any claim thereof will provide protection against infringement. If our present
or future patent rights are ineffective in protecting us against infringement,
our marketing efforts and future revenues could be materially and adversely
affected. In addition, if a competitor were to infringe our patent rights, the
costs of enforcing our patent rights may be substantial or even prohibitive.
RESEARCH AND DEVELOPMENT
We are engaged in the development of new products and improvements to our
existing products and we intend to maintain laboratory facilities for these
purposes as well as a network of outside independent test laboratories and
specialty subcontractors. Our past research and development efforts were focused
on Arcoplate's wear resistance, as compared with the wear plate solutions of our
competitors. For the year ended September 30, 2002, we incurred no research and
development expenses. In the future, we intend to allocate one-half of 1% of
sales to research and development expenditures. We expect that our techniques
will continue to be developed and refined through empirical tests and prototype
development. We expect that we will devote substantial resources to research and
development efforts.
MANUFACTURING AND SUPPLY
The raw materials we employ are principally steel and a proprietary alloy
compound. We presently purchase steel from and alloy materials from various
suppliers. Two of our suppliers, Cometals and Di Candilo Steel City, account for
more than 10% of the raw material we require. They supply our Company with Ferro
Chrome and mild steel plates. We also rely heavily on the use of fluxes, devices
designed to remove impurities, during the manufacturing process. We purchase our
requirements for fluxes from various suppliers, we cannot assure you that we
will be able to continue to obtain desired quantities of steel, alloy and fluxes
on a timely basis at prices and terms deemed reasonable by us. We monitor the
quality of our products by frequent tests and material certification, and we
intend to maintain a strict internal quality control system to monitor the
quality of production at our facility.
GOVERNMENT REGULATION
Our Arcoplate manufacturing plant is subject to many laws and regulations
relating to the protection of the environment. These laws and regulations impose
requirements concerning, among other matters, the treatment, acceptance,
identification, storage, handling, transportation and disposal of industrial
by-products, hazardous and solid waste materials, waste water, air emissions,
noise emissions, soil contamination, electromagnetic radiation, surface and
groundwater pollution, employee health and safety, operating permit standards,
monitoring and spill containment requirements, zoning, and land use. We
frequently examine ways to minimize any impact on the environment and to effect
cost savings relating to environmental compliance. Our management believes that
we are in material compliance with all applicable environmental laws and that
our products and processes do not present any unusual environmental concerns.
Our management further believes that the cost of compliance with all applicable
environmental laws is approximately $5,000 per year.
Our operations are also governed by laws and regulations relating to
workplace safety and health, principally under the Australian Occupational
Safety and Health Act -- 1984 (WA), which, among other requirements, establish
employee training, supervision and general safety standards. Our management
believes that we are in material compliance with all applicable workplace safety
and health laws and that our products and processes do not present any unusual
safety concerns.
We require, and must comply with, various authorizations, permits and
licenses to conduct our operations. Government agencies continually monitor our
compliance with authorization, permits and licenses and our facilities are
subject to periodic unannounced inspection by local, state and federal
authorities. Violations of any permit or license, if not remedied, could result
in our incurring substantial fines, or suspension of our operations.
6
COMPETITION
The wear plate solutions industry is highly competitive. We compete in our
chosen markets against several larger multi-national companies, all of which are
well-established in those markets and have substantially greater financial and
other resources than we do. Competitive market conditions could adversely affect
our results of operations if we were required to reduce product prices to remain
competitive or if we are unable to achieve significant sales of our products.
Wear-resistant alloy steel plates are manufactured by numerous corporations
worldwide. In the United States and Canada, major manufacturers of wear plates
include Triton, Inc. and Trimay, Ltd. In Australia, major manufacturers of wear
plates include Australian National Industries, Ltd. and Australian Overseas,
Ltd. Other major manufacturers in the European Union and Asia include Vautid
(Gmd.) and Duraweld.
EMPLOYEES
We employed 11 persons on a full-time basis and 6 contract employees as of
December 20, 2002, including two executive officers, and nine manufacturing
personnel. None of our employees is a member of a labor union. We consider our
relationship with our employees to be good. We anticipate hiring approximately
four additional manufacturing employees, and one additional research and product
development employee in the next twelve months.
ITEM 2. DESCRIPTION OF PROPERTY
We lease our facility in Perth, Australia, at a monthly rental of $7,083
per month. The lease expires in June 2005. Of the total 26,000 square foot area
of the facility, approximately 4,000 square feet will be utilized for office
space and approximately 22,000 square feet will be utilized for manufacturing
operations dedicated to Arcoplate manufacturing, secondary processes and
warehousing. The facility is designed for expansion of capacity to match our
anticipated needs. We believe that the replacement value of the facility is
presently adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our best knowledge,
threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security-holders through the
solicitation of proxies or otherwise during the three months ended September 30,
2002.
7
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this filing may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. This information may involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from the
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
This filing contains forward-looking statements, including statements
regarding, among other things, (a) Alloy Steel's projected sales and
profitability, (b) Alloy Steel's growth strategies, (c) anticipated trends in
Alloy Steel's industry, (d) Alloy Steel's future financing plans and (e) Alloy
Steel's anticipated needs for working capital. These statements may be found
under "Management's Plan of Operation" and "Business," as well as in this filing
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this filing will in fact occur. In addition to the
information expressly required to be included in this filing, Alloy Steel will
provide such further material information, if any, as may be necessary to make
the required statements, in light of the circumstances under which they are
made, not misleading.
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Alloy Steel's common stock has been quoted on the Over-the-Counter Bulletin
Board maintained by National Association of Securities Dealers since August 2001
until October 2002. Since that date the Company's stock has been traded on the
pink sheets. Since August 28, 2001, Alloy Steel's common stock has been quoted
under the symbol "AYSI."
The following table sets forth the range of high and low bid quotations for
each calendar quarter for Alloy Steel's common stock since its stock began
trading on August 28,2001.
Bid Price Per Share
---------------------------
High Low
------------- ------------
August 28, 2001 - September 30, 2001 $ 2.50 $ 1.00
October 1, 2001 - December 31, 2001 $ 3.50 $ 1.02
January 1, 2002 - March 31, 2002 $ 1.01 $ 0.05
April 1, 2002 - June 30, 2002 $ 0.30 $ 0.07
July 1, 2002 - September 30, 2002 $ 0.20 $ 0.10
The above prices were obtained from Nasdaq, Inc. The quotations represent
inter-dealer quotations, without retail mark-up, markdown or commission, and may
not necessarily represent actual transactions.
As of December 20, 2002, Alloy Steel's believes there were approximately 34
holders of record of Alloy Steel's common stock.
The Directors may from time to time declare, and Alloy Steel may pay,
dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law. To date, no dividends have been declared or paid by
Alloy Steel.
EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION TABLE
------------------------------------------------------------------------------------------------------
(a) (b) (c)
------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation plans
(excluding securities
reflected in column (a))
------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by None None 2,000,000
security holders (1)
------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by ---- ---- ----
security holders
------------------------------------------------------------------------------------------------------
Total None None 2,000,000
------------------------------------------------------------------------------------------------------
(1) Includes the Company's 2000 Stock Plan.
9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial
statements, the notes to our financial statements and the other financial
information contained elsewhere in this filing.
OVERVIEW
We manufacture and distribute Arcoplate, a wear-resistant fused-alloy-clad
steel plate, which is manufactured by a patented production process. The
Arcoplate process enables an alloy overlay to be evenly applied to a mild steel
backing, creating a metallurgical bond between the alloy and the mild steel that
is resistant to wear caused by impact, abrasion and erosion. We believe that
wear is the primary cause of down time and lost production in mining and mineral
processing, and that our Arcoplate product line will substantially lower the
down time and lost production for our customers.
We are also developing, for manufacture and distribution, the 3-D Pipe
Fitting Cladder process, a computer-driven and software-based mechanical system
for industrial use. The 3-D Pipe Fitting Cladder process enables wear resistant
alloy coatings to be applied to pipefittings, where wear is most likely to
occur. In pipefittings, wear generally occurs in pipe bends, elbow pipe joints,
pipe "T" sections and pipe "Y" sections. Through the 3-D Pipe Fitting Cladder
process, we apply alloy coatings to the interior surfaces of pipefittings. We
believe that the mining and mineral industries, among others, would benefit from
the reduced abrasive wear and downtime associated with the use of the 3-D
Pipe-Fitting Cladder process.
PLAN OF OPERATION
Our objective during the next 12 months is to expand our capacity to
produce Arcoplate. We believe that additional machinery to produce Arcoplate
will be operational by February 2003. The additional machinery will supplement
our prototype machinery which we have utilized to generate our sales. We believe
that with the addition of new equipment we will have the capacity to produce
Arcoplate which will have a resale value of $7,500,000-$10,000,000. However, we
cannot assure you that we will achieve such capacity or generate such sales. We
will also attempt to further increase the capacity of our facility. In addition,
we intend to build the machinery for the 3-D Pipe Fitting Cladder Process, the
cost of which is approximately $500,000. We intend to seek additional financing
for these capital expenditures, but we cannot assure you that we will be able to
obtain such financing. In the event that we are not able to obtain such
additional financing, we will attempt to finance such expenditures out of
operations or we will attempt to continue operations without such capital
expenditures.
We intend to achieve market penetration through a multi-step process
consisting of:
- presentation of technical papers at industry related seminars;
- initial discussions of the application highlighting the advantages of
Arcoplate;
- an engineering and marketing evaluation by the prospective customer of
sample material and demonstration products; and
- licensing a production program where approximate expenditures are made
on tooling, equipment and quality control necessary to fulfill market
requirements.
We also intend to continue our research and development activities with
respect to our products. We intend to allocate approximately one-half of 1% of
sales to research and development activities.
RESULTS OF OPERATIONS
SALES
Alloy Steel had sales of $2,116,314 for the year ended September 30, 2002,
compared to sales of $2,862,228 for the year ended September 30, 2001. These
sales consist primarily of the sale of our Arcoplate product. Substantially all
of our sales during the periods were denominated in Australian dollars. Sales
were converted into U.S. dollars at the conversion rate of $0.54314 representing
the average foreign exchange rate for the year ended September 30, 2002. Sales
have decreased compared with the year ended September 2001 primarily due to a
discount structure negotiated with appointed distributors.
10
COSTS OF SALES
Alloy Steel had cost of sales of $1,184,491 for the year ended September
30, 2002, compared to cost of sales of $1,235,181 for the year ended September
30, 2001. The gross profit amounted to $931,823 compared to $1,627,047 for the
year ended September 30, 2001. The gross profit percentage decreased from 57% to
44% as a result of the discount structure previously referred to as well as
fixed costs representing a larger proportion of cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Alloy Steel had selling, general and administrative expenses of $1,128,238
for the year ended September 30, 2002, compared to $1,524,457 in the year ended
September 30, 2001. The decrease was primarily due to a reduction of consulting
and professional fees in the year ended September 30, 2002.
INCOME BEFORE TAXES
Alloy Steel's loss before taxes was $795,280 for the year ended September
30, 2002, compared to a profit of $103,733 for the year ended September 30, 2001
The increase in the loss for the year ended September 30, 2002 is due to the
write off of costs incurred in connection with the issue of shares to the
facilitators of an equity line of credit arrangement that was not finalized.
These costs were previously charged against capital in excess of par value in
the year ended September 30, 2001.
INCOME TAXES
Alloy Steel had income taxes of $3,467 for the year ended September 30,
2002 compared to $247,072 for the year ended September 30, 2001. This income tax
expense related to taxes payable in Australia.
NET LOSS
Alloy Steel had net loss of $798,747 or $0.05 per share, for the year ended
September 30, 2002, compared to a net loss of $143,339 or $0.01 per share for
the year ended September 30, 2001.
LIQUIDITY
For the year ended September 30, 2002, the total cash provided by operating
activities was $274,327, consisting of an increase in accounts payable and other
current liabilities of $215,751 and a decrease in inventories of $119,683 and a
decrease in income tax payable $81,641 and a decrease of accounts receivable of
$78,234.
As of the year ended September 30, 2002, we had a working capital deficit
of $233,377.
We anticipate that the funding of our working capital needs will come
primarily from the cash generated from our operations. To the extent that the
cash generated from our operations is insufficient to meet our working capital
needs or the purchase of machinery or equipment, then we will need to raise
capital from the sale of securities in private offerings or loans. We have no
commitments for capital. The sale of additional equity or convertible debt
securities could result in dilution to our stockholders. There can be no
assurance that financing will be available in amounts or on terms acceptable to
us, if at all.
We anticipate that the machinery to expand our capacity to produce
Arcoplate will be completed in February 2003 and will cost approximately
$175,000. In addition, we anticipate that the cost of the machinery necessary
for the 3-D Pipe Fitting Cladder process will be approximately $500,000. This
machine is expected to be in operation by December 2003. The 3-D Pipe Fitting
Cladder machinery includes a computer driven software mechanical system which
has been designed to overlay with super alloys wear resistant coating into pipe
fittings. We have no material commitments for the additional financing for the
addition of the machinery to expand our capacity to produce Arcoplate or the
machinery for the 3-D Pipe Fitting Cladder process.
In May 2000, we acquired an exclusive worldwide license, with the exception
of the United States, from Kenside Investments, Ltd., for a 25-year term, in
connection with certain patent and technology rights related to the Arcoplate
process, in exchange for 4,760,000 shares of our common stock. The license
provides for royalty payments to Kenside Investments, Ltd., in an amount equal
to 2% of our net sales of Arcoplate products. Our Chief Executive Officer,
director and principal shareholder, Gene Kostecki controls Kenside Investments,
Ltd.
11
In June 2000, we completed the sale of 2,217,500 shares of common stock at
a price of $0.16 and $0.25 per share in a private financing transaction to 18
accredited investors resulting in gross proceeds of $420,000. In August 2000, we
completed the sale of 1,718,750 shares of common stock to nine accredited
investors at a price of $0.16 per share in a private financing transaction
resulting in gross proceeds of $275,000. The net proceeds of the offerings were
utilized for construction of equipment in the amount of approximately $555,000
and the balance of the funds were utilized in connection with working capital
and registration expenses.
In October 2000, we acquired, from Gene Kostecki and Alan Winduss, the
right to utilize and commercially exploit the 3-D Pipe Fitting Cladder process
in exchange for an aggregate of 3,413,750 shares of common stock. In October
2000, we acquired from Collier Unit Trust, certain mill and office equipment
assets relating to the manufacture, sale and distribution of Arcoplate in
exchange for 1,250,000 shares of common stock. In October 2000, we acquired,
from Collier Unit Trust, certain plant machinery relating to the manufacture,
sale and distribution of Arcoplate for a purchase price of $880,891. Mr.
Kostecki controls Collier Unit Trust.
In October 2000 we entered into five-year employment agreements with Gene
Kostecki, our president and chief executive officer and Alan Winduss, our chief
financial officer, which provide for annual salaries of $150,000 and $80,000,
respectively.
SIGNIFICANT CHANGES IN NUMBERS OF EMPLOYEES
We anticipate hiring approximately four additional manufacturing employees,
one additional research and product development employee in the next 12 months.
PURCHASE OR SALE OF PLANT AND SIGNIFICANT EQUIPMENT
We anticipate that the machinery to expand our capacity to produce
Arcoplate will be completed in February, 2003 and will cost approximately
$175,000. In addition, we anticipate that the cost of the machinery necessary
for the 3-D Pipe Fitting Cladder process will be approximately $500,000. This
machine is expected to be in operation by December 2003. The 3-D Pipe Fitting
Cladder machinery includes a computer driven software mechanical system which
has been designed to overlay with super alloys wear resistant coating into pipe
fittings. We have no material commitments for the additional financing for the
addition of the machinery to expand our capacity to produce Arcoplate or the
machinery for the 3-D Pipe Fitting Cladder process.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangibles".
SFAS No. 141 requires all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method. Under SFAS No. 142, goodwill is no
longer subject to amortization over its estimated useful life. Rather, goodwill
is subjected to at least an annual assessment for impairment applying a
fair-market value based test. Additionally, an acquired intangible asset should
be separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's
intent to do so. SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), addresses the impairment for all tangible
assets. In July 2002, the FASB issued SFAS No. 146 "Accounting For Costs
Associated With Exit or Disposal Activities "SFAS No. 146", which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred I a Restructuring)." SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
application encouraged. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment
of FASB Statement No. 123" ("SFAS 148"), which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for voluntary changes to the fair value based
method made in fiscal years beginning after December 15, 2003. The Company does
not anticipate these pronouncements will have a significant impact on its
consolidated financial position and results of operations.
12
RISK FACTORS
Alloy Steel is subject to various risks that may materially harm our
business, financial condition and results of operations. YOU SHOULD CAREFULLY
CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION
IN THIS FILING BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. THESE ARE NOT THE
ONLY RISKS AND UNCERTAINTIES THAT WE FACE. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
WE HAVE A LIMITED OPERATING HISTORY AND WE MAY NOT BE ABLE TO ACHIEVE OR
MAINTAIN PROFITABILITY
We have a limited operating history. We may incur significant operating
losses as we attempt to develop and grow our business. We cannot assure you that
we will achieve or maintain profitability. Until we achieve the manufacturing
capacity sufficient to sustain continuous production of Arcoplate or
Arcoplate-based products, we will have substantial production under capacity,
and we may be unable to fill customer orders. Such events could cause us to
incur substantial operating losses.
WE WILL NOT GENERATE SUFFICIENT REVENUE TO CONTINUE OPERATIONS IF WE ARE
UNABLE TO PRODUCE SIGNIFICANT COMMERCIAL QUANTITIES OF ARCOPLATE AND FUTURE
ALLOY-BASED PRODUCTS
Although we have prototype equipment, we do not currently have the
equipment necessary for the manufacturing of Arcoplate in significant commercial
quantities. We do not anticipate the completion of additional equipment until
March, 2002 at the earliest. In addition, we do not currently manufacture the
commercial equipment necessary for the implementation of the 3-D Pipe Fitting
Cladder process. Accordingly, we have limited internal manufacturing capacity
and no experience in manufacturing our products in industrial or significant
commercial quantities. Due to our limited production capacity, we may be unable
to meet demand for our products. In addition, our manufacturing operations use
certain equipment which, if damaged or otherwise rendered inoperable or
unavailable, could result in the disruption of our manufacturing operations. Any
extended interruption of operations at our manufacturing facility would have a
material adverse effect on our business.
IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO EXPAND
OPERATIONS
We believe that the available cash and anticipated cash flow from
operations will be sufficient to satisfy our anticipated capital requirements
for approximately 6 months. Accordingly, we anticipate that we will require
additional financing to expand operations and pursue our plans for expansion.
Such financing may take the form of the issuance of common stock or preferred
stock or debt securities, or may involve bank or other lender financing. We
cannot assure you that we will be able to obtain such additional financing on a
timely basis, on favorable terms, or at all.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR PLAN OF EXPANSION, WE WILL NOT
ACHIEVE PROFITABILITY
We plan to rapidly expand all aspects of our operations. As a result, we
need to expand our financial and management controls, reporting systems and
procedures. We will also have to expand, train and manage our work force for
marketing, sales, engineering and technical support, product development, and
manage multiple relationships with various customers, vendors, strategic
partners and other third parties. We will need to continually expand and upgrade
our technology and develop new products. If we are unable to manage our growth
effectively, we may be unable to handle our operations, control costs or
otherwise function in a profitable manner, or at all.
THE LOSS OF ANY KEY PERSONNEL WOULD DISRUPT OUR OPERATIONS AND HURT OUR
PROFITABILITY
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, particularly, Gene
Kostecki, Chairman and Chief Executive Officer, and Alan Winduss, Chief
Financial Officer. We do not presently maintain keyman life insurance on the
life of either Mr. Kostecki or Mr. Winduss. The loss of the services of Mr.
Kostecki or Mr. Winduss would likely have a significantly detrimental effect on
our business. We currently have employment agreements with each of Mr. Kostecki
and Mr. Winduss. However, if Mr. Kostecki or Mr. Winduss becomes unwilling or
unable to continue in their current positions, it would be significantly more
difficult to operate our business, which could hurt our financial condition and
results of operations.
13
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WE COULD LOSE OUR
COMPETITIVE ADVANTAGE
We currently have only limited patent protection for our technology, and
may be unable to obtain even limited protection for our proprietary technology
in certain foreign countries. Currently, we have patents in various countries.
We cannot assure you that any granted patent or pending patent application will
provide protection against infringement.
IF WE DO NOT CORRECTLY ANTICIPATE THE MAGNITUDE AND DIRECTION OF CURRENCY
EXPOSURE, THERE COULD BE A MATERIAL ADVERSE IMPACT ON OUR PROSPECTS FOR
PROFITABILITY
All of our production will take place overseas, and many of the raw
materials and supplies for our products will be purchased in foreign currencies.
In addition, international sales will likely be denominated in local currencies.
These factors may combine to expose us to currency gains and losses in addition
to gains and losses from our basic operations. The magnitude and direction of
future currency exposure cannot be predicted, nor can we assure you that we will
be able to manage such exposure to our benefit or to a neutral effect.
OUR BUSINESS WOULD BE MATERIALLY AND ADVERSELY AFFECTED IF WE WERE UNABLE
TO RECEIVE MATERIALS AT PRICES AND ON TERMS PRESENTLY MADE AVAILABLE TO US
BY OUR PRINCIPAL SUPPLIERS
We presently purchase our principal raw materials, steel and alloy compound
components, from a limited number of suppliers. There are no written contracts
between us and our suppliers, and requirements are purchased using individual
purchase orders, with customary terms regarding payment, quality and delivery.
Although we believe that alternatives are readily available from other
suppliers, we cannot assure you that we will be able to continue to obtain
desired quantities of materials on a timely basis at prices and on terms deemed
reasonable by us. Our business would be materially and adversely affected if we
are unable to continue to receive materials at prices and on terms comparable to
those presently made available to us by our principal suppliers.
SINCE WE DEPEND HEAVILY UPON ELECTRICAL POWER FOR OUR OPERATIONS, ANY
INCREASE IN PRICES WOULD ADVERSELY AFFECT OUR BUSINESS AND PROFITABILITY
We consume a large amount of electrical power during production. The amount
of electrical power consumed during the Arcoplate process represents
approximately 5% of our overall production costs. There may be fluctuations in
the price of electricity due to changes in the regulation of utility companies
in Australia, and in other jurisdictions where we may engage in production. We
cannot assure you that we will be able to continue to obtain our energy supplies
at current prices, and any material increase in prices of electricity would
adversely affect our business and profitability.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY
FLUCTUATE SIGNIFICANTLY
There has been a limited public market for our common stock and there can
be no assurance that an active trading market for our common stock will develop.
As a result, this could adversely affect our shareholders' ability to sell our
common stock in short time periods, or possibly at all. Our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations, which could adversely affect the market price of our common
stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results and changes in
the overall economy or the condition of the financial markets could cause the
price of our common stock to fluctuate substantially.
WE NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
We have relied on significant external financing to fund our operations.
Such financing has historically come from a combination of borrowings from and
sale of common stock to third parties and funds provided by certain officers and
directors. We may need to raise additional capital to fund our anticipated
operating expenses and future expansion. We cannot assure you that financing
whether from external sources or related parties will be available if needed or
on favorable terms. The sale of our common stock to raise capital may cause
dilution to our existing shareholders. Our inability to obtain adequate
financing will result in the need to reduce or curtail our business operations.
Any of these events would be materially harmful to our business and may result
in a lower stock price.
14
WE HAVE A LIMITED CUSTOMER BASE
At present, our customer base consists primarily of companies involved in
the mining and dredging industries. Our ability to operate depends on increasing
our customer base and achieving sufficient gross profit margins. We cannot
assure you that we will be able to increase our customer base or to operate
profitably. If any of our major customers stop or delay its purchases of our
products, our revenue and profitability would be adversely affected. For the
year ended September 30, 2002, 13 customers accounted for 90% of our sales. We
anticipate that sales of our products to relatively few customers will continue
to account for a significant portion of our revenue. If these customers cancel
or delay their purchase orders, our revenue may decline and the price of our
common stock may fall. We cannot assure you that our current customers will
continue to place orders with us, that orders by existing customers will
continue at the levels of previous periods or that we will be able to obtain
orders from new customers. Although our financial performance depends on large
orders from a key customers and resellers, we do not have binding commitments
from any of them.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE
DIFFICULT FOR SHAREHOLDERS TO SELL THEIR SHARES DUE TO SUITABILITY
REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are stock:
- With a price of less than $5.00 per share;
- That are not traded on a "recognized" national exchange;
- Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
- In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last three
years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult our shareholders to resell
shares to third parties or to otherwise dispose of them. This could cause our
stock price to decline.
WE FACE SIGNIFICANT COMPETITION WITHIN OUR MARKET
We expect competition to persist and intensify in the future. The wear
plate solutions industry is highly competitive. We have numerous competitors
worldwide, including Triton, Inc., Trimay, Ltd., Australian National Industries,
Ltd., Australian Overseas, Ltd., Abresist Corporation and Duraweld, Ltd. We
compete in our chosen markets against several larger multi-national companies,
all of which are well-established and have substantially greater financial and
other resources than we maintain. Competitive market conditions could adversely
affect our results of operations if we are required to reduce product prices to
remain competitive or if we are unable to achieve significant sales of our
products.
Many of our competitors (including those identified above) are
substantially larger than we are and have significantly greater financial,
sales, marketing, technical, manufacturing and other resources and more
established distribution channels. These competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
devote greater resources to the development, promotion and sale of their
products than we can. Furthermore, some of our competitors may make strategic
acquisitions or establish cooperative relationships to increase their ability to
rapidly gain market share by addressing the needs of our prospective customers.
These competitors may enter our existing or future markets with solutions that
may be less expensive, provide higher performance or additional features or be
introduced earlier than our solutions. If any technology is more reliable,
resistant, and less expensive or has other advantages over our technology, then
the demand for our products and services would decrease, which would seriously
harm our business.
15
We expect our competitors to continue to improve the performance of their
current products and introduce new products and technologies as industry
standards and customer requirements evolve. These new products and technologies
could supplant or provide lower cost alternatives to our products. To be
competitive, we must continue to invest significant resources in research and
development, sales and marketing, and customer support.
Increased competition is likely to result in price reductions, reduced
gross margins, longer sales cycles, and loss of market share, any of which would
seriously harm our business and results of operations.
WE HAVE LIMITED MARKETING AND SALES CAPABILITY
Because of our limited working capital, we have not had the resources to
fully implement our marketing and sales strategy. In order to increase our
revenues, we are in the process of further implementing a marketing and sales
force with technical expertise and marketing capability. Currently, we are
dependant on the technical expertise, sales, and marketing capability, of Gene
Kostecki, our Chief Executive Officer, and distributors. There can be no
assurance that we will be able to:
- Establish and develop such a sales force;
- Gain market acceptance for our products;
- Obtain and retain qualified sales personnel on acceptable terms; and
- Meet our proposed marketing schedules or plans.
To the extent that we arrange with third parties to market our products,
the success of such products may depend on the efforts of such third parties.
MANAGEMENT CONTROLS APPROXIMATELY 74.0% OF OUR OUTSTANDING CAPITAL STOCK,
WHICH MEANS THAT MANAGEMENT HAS THE ABILITY TO APPROVE ANY MATTER REQUIRING
SHAREHOLDER APPROVAL
Management controls approximately 74.0% of our outstanding capital stock.
Management can approve any matter requiring the vote of our shareholders,
including the election of directors. As such, management could, without other
shareholders, vote to approve a transaction that is not necessarily in the best
interests of other shareholders or to reject a transaction that may be in the
best interests of other shareholders. For example, management's stock ownership
may prevent a third party from acquiring a controlling position in our common
stock. In many instances, a third party desiring to purchase a controlling
position is willing to pay a premium to the market price. Management's stock
ownership in Alloy Steel would likely prevent such an event from occurring.
16
ITEM 7. FINANCIAL STATEMENTS
Alloy Steel's audited consolidated financial statements for the year ended
September 30, 2002 are attached to this filing.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 14, 2001, Alloy Steel dismissed Feldman Sherb and Co., P.C. as
its independent certified public accountant. Feldman Sherb's report on Alloy
Steel's financial statements from May 4, 2000 (inception) to September 30, 2000
did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope, or accounting principles.
Feldman Sherb's dismissal was recommended and approved by Alloy Steel's Board of
Directors. Since May 4, 2000 (inception), as well as any subsequent interim
period prior to dismissal, there were no disagreements on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement. Since May 4, 2000 (inception), as well as
any subsequent interim period prior to dismissal, Feldman Sherb did not advise
Alloy Steel of any of the matters identified in paragraph (a)(1)(iv)(B) of Item
304 of Regulation S-B.
On August 14, 2001, Alloy Steel engaged HJ & Associates, LLC as its
principal accountant to audit Alloy Steel's financial statements. Alloy Steel
did not consult HJ & Associates, LLC on any matters described in paragraph
(a)(2)(i) or (ii) of Item 304 of Regulation S-B since Alloy Steel's inception on
May 4, 2000 or any subsequent interim period prior to engaging HJ & Associates,
LLC.
On January 16, 2002, Alloy Steel dismissed HJ & Associates, LLC as its
independent certified public accountant. HJ & Associates, LLC reviewed Alloy
Steel's quarterly reports for the period ended June 30, 2001, but did not
initiate an audit or render an audit report on Alloy Steel's financial
statements. HJ & Associates, LLC's dismissal was recommended and approved by
Alloy Steel's Board of Directors. For the interim periods reviewed by HJ &
Associates, LLC prior to dismissal, there were no disagreements on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement. For the interim periods reviewed by HJ &
Associates, LLC prior to dismissal, HJ & Associates, LLC did not advise Alloy
Steel of any of the matters identified in paragraph (a)(1)(iv)(B) of Item 304 of
Regulation S-B.
On January 16, 2002, Alloy Steel engaged Rothstein, Kass & Company, P.C. as
its principal accountant to audit the Alloy Steel's financial statements. Alloy
Steel did not consult Rothstein, Kass & Company, P.C. on any matters described
in paragraph (a)(2)(i) or (ii) of Item 304 of Regulation S-B since Alloy Steel's
inception on May 4, 2000 or any subsequent interim period prior to engaging
Rothstein, Kass & Company, P.C.
17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Alloy Steel's present directors and executive officers are as follows:
NAME AGE POSITION
-------------------- --- --------------------------------------
Gene Kostecki 57 President, Chief Executive Officer and
Director
Alan Charles Winduss 61 Chief Financial Officer, Director and
Corporate Secretary
The following is a brief summary of the background of each executive
officer and director:
Gene Kostecki has served as our Chief Executive Officer, President, and
Director since June 2000. From July 1997 to the present, Mr. Kostecki served as
the Chief Executive Officer and director of Arcoplate, Inc. and Arcoplate
Holdings (UK) PLC. From July 1995 to July 1997, Mr. Kostecki served as Managing
Director of the Collier Unit Trust, an engineering business and distributor
based in Western Australia. Mr. Kostecki intends to resign from his positions in
Arcoplate, Inc. and Arcoplate (UK) PLC. He intends to act as President and Chief
Executive Officer of Alloy Steel International on a full-time basis.
Alan Charles Winduss has served as our Chief Financial Officer, Vice
President and Director since June 2000. From July 1997 to the present, Mr.
Winduss served as the Chief Financial Officer and director of Arcoplate, Inc.
and Arcoplate Holdings (UK) PLC. From July 1979 to the present, Mr. Winduss has
served as the senior principal of Winduss & Cook, an accounting firm in Western
Australia, which specializes in commercial accounting, corporate finance and
management. Mr. Winduss intends to resign from his positions in Arcoplate, Inc.
and Arcoplate (UK) PLC. He intends to devote approximately 70% of his time to
his duties as Chief Financial Officer and a director of Alloy Steel
International.
BOARD COMPOSITION
Our board of directors currently consists of two directors. At each annual
meeting of our stockholders, all of our directors are elected to serve from the
time of election and qualification until the next annual meeting following
election. In addition, our bylaws provide that the maximum authorized number of
directors may be changed by resolution of the stockholders or by resolution of
the board of directors.
Each officer is elected by, and serves at the discretion of, our board of
directors. There are no family relationships among any of our directors,
officers or key employees.
CONTROL BY OFFICERS AND DIRECTORS
Our directors and executive officers own approximately 74.0% of the
outstanding shares of our common stock. Accordingly, these stockholders possess
substantial control over our operations. This control may allow them to amend
corporate filings, elect all of our board of directors, and substantially
control all matters requiring approval by our stockholders, including approval
of significant corporate transactions. If you purchase our common stock, you may
have no effective voice in our management.
DIRECTORSHIPS HELD IN REPORTING COMPANIES
None of the executive officers or directors held any directorships in
reporting companies.
18
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors and executive officers, and persons who
beneficially own more than ten percent of a registered class of Alloy Steel's
equity securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and the other equity securities of Alloy Steel. Officers,
directors, and persons who beneficially own more than ten percent of a
registered class of Alloy Steel's equities are required by the regulations of
the Commission to furnish Alloy Steel with copies of all Section 16(a) forms
they file. To our knowledge, based solely on review of the copies of such
reports furnished to us, during the fiscal year ended September 30, 2002, our
officers, directors, and greater than ten percent beneficial owners complied
with all Sections 16(a) filing requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the annual cash compensation for services
rendered by our chief executive officer for the fiscal year ended September 30,
2002. No other executive officer earned or secured more than $100,000 in salary
and bonus for services rendered during the fiscal year ended September 30, 2002:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------------------------------------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS AWARDS OPTIONS COMPENSATION
--------------------- ---- -------- ------ ------ ---------- ------------
Gene Kostecki 2002 $150,000 $ 0 -- -- --
President, Chief 2001 $150,000 $ 0 -- -- --
Executive Officer and 2000 $ 0 $ 0 -- -- --
Director
STOCK OPTION PLAN
In May 2000, we adopted the 2000 Stock Option Plan. The purpose of the plan
is to enable us to attract, retain and motivate key employees, directors, and
consultants, by providing them with stock options. Options granted under the
plan may be either incentive stock options, as defined in Section 422A of the
Internal Revenue Code of 1986, or non-qualified stock options. We have reserved
500,000 shares of common stock for issuance under the plan. As of the date of
December 20, 2002, no options have been granted pursuant to the plan.
Our board of directors will administer the plan. Our board has the power to
determine the terms of any options granted under the plan, including the
exercise price, the number of shares subject to the option, and conditions of
exercise. Options granted under the plan are generally not transferable, and
each option is generally exercisable during the lifetime of the holder only by
the holder. The exercise price of all incentive stock options granted under the
plan must be at least equal to the fair market value of the shares of common
stock on the date of the grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of our stock, the
exercise price of any incentive stock option granted must be equal to at least
110% of the fair market value on the grant date. Our board of directors approves
the terms of each option. These terms are reflected in a written stock option
agreement.
EMPLOYMENT AGREEMENTS
We have entered into five-year employment agreements, commencing as of
October 2, 2000, with Gene Kostecki, our President and Chief Executive Officer,
and Alan Charles Winduss, our Chief Financial Officer, which provide for an
annual salary of $150,000 and $80,000, respectively. The employment agreements
provide that each of Mr. Kostecki and Mr. Winduss are eligible to receive
incentive bonus compensation, at the discretion of the board of directors, based
on their respective performance and contributions to our success. The employment
agreements provide for termination based on death, disability or voluntary
resignation and each provides for severance payments upon termination in the
event that there is termination without cause, if the employee terminates his
employment for good reason or in the event of a change in control of Alloy
Steel. The employment agreement defines "good reason" as any violation of the
employment agreement by Alloy
19
Steel International, any reduction in the employee's salary or benefits or the
assignment to the employee of duties inconsistent with his position. If the
employment agreement is terminated without cause, as a result of change of
control, or terminated by the employee for good reason, the amount of the
severance payment will be equal to three times that average annual compensation
payable under the employment agreement.
We have entered into consulting agreements with Berryhill Investments,
Ltd., Chartreuse Nominees Pty., Ltd., Persia Consulting Group, Inc., Ames
Nominees Pty. Ltd., Alan Winduss Pty. Ltd and Ragstar Investments, Ltd.,
commencing as of October 2, 2000, which provide for compensation in the amount
of 150,000, 500,000, 1,350,000, 937,500, 312,500 and 90,000 shares,
respectively, of our common stock. Pursuant to the terms of each agreement, the
consultants shall provide certain advisory services with regard to corporate
development.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation and bylaws limit the liability of
directors and officers to the maximum extent permitted by Delaware law. We will
indemnify any person who was or is a party, or is threatened to be made a party
to, an action, suit or proceeding, whether civil, criminal, administrative or
investigative, if that person is or was a director, officer, employee or agent
of ours or serves or served any other enterprise at our request.
In addition, our certificate of incorporation provides that generally a
director shall not be personally liable to us or our stockholders for monetary
damages for breach of the director's fiduciary duty. However, in accordance with
Delaware law, a director will not be indemnified for a breach of its duty of
loyalty, acts or omissions not in good faith or involving intentional misconduct
or a knowing violation or any transaction from which the director derived
improper personal benefit.
20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 20, 2002, the number and
percentage of outstanding shares of common stock beneficially owned by:
- each person who we know beneficially owns more than 5% of the
outstanding shares of our common stock;
- each of our executive officers and directors; and
- all of our officers and directors as a group.
Except as otherwise noted, the persons named in this table, based upon
information provided by these persons, have sole voting and investment power
with respect to all shares of common stock owned by them. The number of shares
of common stock outstanding used in calculating the percentage for each listed
person includes the shares of common stock underlying options or warrants held
by such person that are exercisable within 60 days of the date of December 20,
2002, but excludes shares of common stock underlying options or warrants held by
any other person. Unless otherwise indicated, the address of each beneficial
owner is c/o Alloy Steel, 42 Mercantile Way Malaga, P.O. Box 3087 Malaga D C
6945, Western Australia.
PERCENTAGE
OF
COMMON
STOCK
NUMBER BENEFICIALLY
NAME OF BENEFICIAL OWNER OF SHARES OWNED
----------------------------------------------------------- ------------- -------------
Gene Kostecki 10,598,000(1) 62.5%
Alan Charles Winduss 1,893,250(2) 11.2%
All present officers and directors as a group (Two persons) 12,491,250 74.0%
(1) The number of shares of common stock beneficially owned by Mr. Kostecki
includes (i) 4,760,000 shares issued to Kenside Investments, Ltd., (ii)
1,250,000 shares issued to Collier Unit Trust, and (iii) 937,500 shares
issued to Ames Nominees Pty. Ltd.
(2) The number of shares of common stock beneficially owned by Mr. Winduss
includes (i) 500,000 shares issued to Chartreuse Nominees Pty. Ltd., (ii)
90,000 shares issued to Ragstar Investments, Ltd., and (iii) 312,500 shares
issued to Alan Winduss Pty. Ltd.
21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Gene Kostecki and AlanWinduss are both directors of Alloy Steel
International, Inc. and its subsidiary, Alloy Steel Australia (Int) Pty Ltd.
Mr. Winduss is a director of a public accounting firm Winduss & Associates
Pty Ltd, which provides accounting and secretarial services to Alloy Steel's
subsidiary, Alloy Steel Australia (Int.) Pty Ltd. These services are provided at
normal commercial rates and conditions. The cost of these services are recovered
under the fees paid by Mr Winduss' consulting agreement.
Alloy Steel Australia (Int.) Pty Ltd. paid rent of $85,000, for commercial
premises it occupied during the year, to Raglan Securities Pty Ltd., a company
controlled by Gene Kostecki.
In October 2000, Alloy Steel International, Inc. acquired from Mr. Kostecki
and Mr. Winduss the right to utilize and commercially exploit the 3-D Pipe
Fitting Cladder process in exchange for 3,413,750 shares of common stock.
In May 2000, we acquired an exclusive worldwide license from Kenside
Investments, Ltd., excluding the United States, for a 25-year term, in
connection with certain patent and technology rights related to the Arcoplate
process, in exchange for 4,760,000 shares of our common stock. The license
provides for royalty payments to Kenside Investments, Ltd., in an amount equal
to 2% of our net sales of Arcoplate products. Our Chief Executive Officer,
director and principal shareholder, Gene Kostecki controls Kenside Investments,
Ltd. Research and development expenses of approximately $1,800,000 were incurred
in developing the technology and building the equipment for the technology by
entities controlled by Mr. Kostecki.
Arcoplate Holdings (UK) PLC holds the United States rights to the Arcoplate
process through Arcoplate, Inc. Arcoplate Holdings (UK) PLC received these
rights from Kenside Investments Ltd., an entity controlled by Messrs. Kostecki
and Winduss. Presently, such rights are not being exploited. Arcoplate Holdings
(UK) PLC is an affiliate of Mr. Kostecki, our chief executive officer, director
and principal stockholder and Mr. Winduss, our chief financial officer,
principal stockholder, and a director. Arcoplate Holdings (UK) PLC is in
violation of this license and Kenside Investments Ltd. has attempted to revoke
the license. Certain directors of Arcoplate Holdings (UK) PLC are disputing this
revocation. Until this matter is resolved, neither Arcoplate Holdings (UK) PLC
nor Kenside Investments Ltd. are in a position to grant us a U.S. license. Once
this matter is resolved, we will attempt to negotiate a U.S. license in an
arms-length transaction.
In October 2000, we acquired certain assets of Collier Unit Trust in
exchange for 1,250,000 shares of our common stock. In October 2000, we also
acquired the Arcoplate manufacturing plant and plant equipment from Collier Unit
Trust for an aggregate purchase price of $880,891. Our Chief Executive Officer,
director and principal shareholder, Gene Kostecki controls the Collier Unit
Trust.
In October 2000, we entered into 12-month consulting agreements with
Chartreuse Nominees Pty., Ltd., Ames Nominees Pty. Ltd., Alan Winduss Pty. Ltd.
and Ragstar Investments, Ltd., which provide for compensation in the amount of
500,000, 937,500, 312,500 and 90,000 shares, respectively. Mr. Winduss controls
Chartreuse Nominees Pty. Ltd., Alan Winduss Pty. Ltd. and Ragstar Investments,
Ltd. Mr. Kostecki controls Ames Nominees Pty. Ltd. Each of the consultants
provided corporate development and other advisory services including strategic
planning, investigation of potential strategic alliances, structuring potential
capital transactions, preparation of internal financial statements, reports and
projections, and financial analysis of competitors and new operations.
We entered into a 12-month consulting agreement with Persia Consulting
Group, Inc. in October 2000. Pursuant to the consulting agreement we have issued
1,350,000 shares of common stock to Persia Consulting Group. The consulting
services to be performed by Persia will primarily be performed by Hamid
Fashandi. Mr. Fashandi has been in the financial services industry for six
years. Persia Consulting Group will provide services to us as we request. Persia
Consulting Group has provided us with due diligence on potential acquisition
candidates, provided advice on doing business in the United States and financial
advisory services with respect to our transition from a private company to a
public company. Persia Consulting Group will also provide investor and public
relations services as well as crisis management services.
22
In July 2000, we entered into a lease agreement with Raglan Securities Pty.
Ltd., for our office facilities, for a term of five years, at an annual rent of
$85,000. Mr. Kostecki controls Raglan Securities Pty. Ltd.
In June 2000, we sold 919,500 shares of our common stock to Gene Kostecki,
and 308,000 shares of our common stock to Alan Winduss at a price of $0.16 per
share.
Mr. Kostecki and Mr. Winduss may be deemed promoters of Alloy Steel
International.
23
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this registration
statement:
EXHIBIT NO. DESCRIPTION LOCATION
----------- ------------------------------------------------- -------------------------------------------------
3.1 Certificate of Incorporation Incorporated by reference to Exhibit 3.1 to Alloy
Steel's Registration Statement on Form SB-2, as
amended (the 'Registration Statement"), filed
with the SEC on November 2, 2000.
3.2 By-laws Incorporated by reference to Exhibit 3.2 to Alloy
Steel's Registration Statement.
4.1 Specimen Certificate Incorporated by reference to Exhibit 4.1 to Alloy
Steel's Registration Statement.
10.1 Stock Option Plan Incorporated by reference to Exhibit 10.1 to Alloy
Steel's Registration Statement.
10.2 License Agreement, dated May 4, 2000, between Incorporated by reference to Exhibit 10.2 to Alloy
Alloy Steel and Kenside Investments, Ltd. Steel's Registration Statement.
10.3 Employment Agreement, dated October 2, 2000, Incorporated by reference to Exhibit 10.3 to Alloy
between Alloy Steel and Gene Kostecki Steel's Registration Statement.
10.4 Employment Agreement, dated October 2, 2000, Incorporated by reference to Exhibit 10.4 to Alloy
between Alloy Steel and Alan Winduss Steel's Registration Statement.
10.5 Consulting Agreement, dated October 2, 2000, Incorporated by reference to Exhibit 10.5 to Alloy
between Alloy Steel and Berryhill Investments, Steel's Registration Statement.
Ltd.
10.6 Consulting Agreement, dated October 2, 2000, Incorporated by reference to Exhibit 10.6 to Alloy
between Alloy Steel and Chartreuse Nominees Pty. Steel's Registration Statement.
Ltd.
10.7 Amended and Restated Consulting Agreement, Incorporated by reference to Exhibit 10.7 to Alloy
dated October 2, 2000, between Alloy Steel and Steel's Registration Statement.
Persia Consulting Group, Inc.
10.8 Consulting Agreement, dated October 2, 2000, Incorporated by reference to Exhibit 10.8 to Alloy
between Alloy Steel and Ragstar Investments, Ltd. Steel's Registration Statement.
10.9 Consulting Agreement, dated October 2, 2000, Incorporated by reference to Exhibit 10.9 to Alloy
between Alloy Steel and Alan Winduss Pty. Ltd. Steel's Registration Statement.
10.10 Consulting Agreement, dated October 2, 2000, Incorporated by reference to Exhibit 10.10 to
between Alloy Steel and Ames Nominees Pty. Ltd. Alloy Steel's Registration Statement.
10.11 Lease Agreement, dated July 1, 2000, between Incorporated by reference to Exhibit 10.11 to
Alloy Steel and Raglan Securities Pty. Ltd. Alloy Steel's Registration Statement.
10.12 Asset Purchase Agreement, dated October 2, 2000 Incorporated by reference to Exhibit 10.12 to
between Alloy Steel and Collier Unit Trust Alloy Steel's Registration Statement.
10.13 Equipment Purchase Agreement, dated October 2, Incorporated by reference to Exhibit 10.13 to
2000, between Alloy Steel and Collier Unit Trust Alloy Steel's Registration Statement.
10.14 Asset Purchase Agreement, dated October 2, 2000, Incorporated by reference to Exhibit 10.14 to
by and among Alloy Steel and Gene Kostecki and Alloy Steel's Registration Statement.
Alan Winduss
24
(b) Reports on Form 8-K:
We filed a Current Report on Form 8-K on September 6, 2001. The form 8-K
related to a change in the registrant's certified accountants under Item 4.
We filed a Current Report on Form 8-K on August 16, 2001. The form 8-K
related to a change in the registrant's certified accountants under Item 4.
25
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 6, 2003 ALLOY STEEL INTERNATIONAL INC.
By: /s/ Gene Kostecki
--------------------------
Name: Gene Kostecki
Title: Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
-------------------------- ---------------------------- ----------------------
/s/ Gene Kostecki
--------------------------
Gene Kostecki Chairman, Chief Executive Date: February 6, 2003
Officer and Director
/s/ Alan Winduss
--------------------------
Alan Winduss Chief Financial Officer Date: February 6, 2003
(Principal Accounting
Officer) and Director
26
SECTION 906 CERTIFICATION
I, Gene Kostecki, Chief Executive Officer of Alloy Steel International
Inc., certify, pursuant to 18 U.S.C. Sec. 1350, as enacted by Sec. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Annual Report on Form 10-KSB for the year ended September 30,2002
(the "Annual Report") which this statement accompanies fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2) information contained in the Annual Report fairly presents, in all
material respects, the financial condition and results of operations of Alloy
Steel International Inc.
Dated: February 6, 2003 /s/ Gene Kostecki
-------------------------------
Gene Kostecki
Chief Executive Officer
27
SECTION 906 CERTIFICATION
I, Alan Winduss, Chief Financial Officer of Alloy Steel International Inc.,
certify, pursuant to 18 U.S.C. Sec. 1350, as enacted by Sec. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Annual Report on Form 10-KSB for the year ended September 30, 2002
(the "Annual Report") which this statement accompanies fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2) information contained in the Annual Report fairly presents, in all
material respects, the financial condition and results of operations of Alloy
Steel International Inc.
Dated: February 6, 2003 /s/ Alan Winduss
-------------------------------
Alan Winduss
Chief Financial Officer
28
SECTION 302 CERTIFICATION
I, Gene Kostecki, certify that:
1. I have reviewed this annual report on Form 10-KSB of Alloy Steel
International Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: February 6, 2003 /s/ Gene Kostecki
---------------- -------------------------------
Gene Kostecki
Chief Executive Officer
29
SECTION 302 CERTIFICATION
I, Alan Winduss, certify that:
1. I have reviewed this annual report on Form 10-KSB of Alloy Steel
International Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: February 6, 2003 /s/ Alan Winduss
---------------- -------------------------------
Alan Winduss
Chief Financial Officer
30
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(ITEM 7)
================================================================================
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet
September 30, 2002 F-3
Consolidated Statements of Operations
Years Ended September 30, 2002 and 2001 F-4
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 2002 and 2001 F-5
Consolidated Statements of Cash Flows
Years Ended September 30, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7 - 15
F-1
ALLOY STEEL INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
SEPTEMBER 30, 2002
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Alloy Steel International, Inc.
We have audited the accompanying consolidated balance sheet of Alloy Steel
International, Inc. and Subsidiary (the "Company") as of September 30, 2002,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended September 30, 2002 and 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of September 30, 2002, and the results of its operations and its cash
flows for the years ended September 30, 2002 and 2001, in conformity with
accounting principles generally accepted in the United States of America.
\\Rothstein, Kass & Company, P.C.
Roseland, New Jersey
January 9, 2003
F-2
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 288,448
Accounts receivable, less allowance for doubtful
accounts of $20,272 131,316
Inventories 158,269
Prepaid expenses and other current assets 39,155
---------------
Total current assets 617,188
---------------
PROPERTY AND EQUIPMENT, net 1,266,856
---------------
OTHER ASSETS
Intangibles 90,512
---------------
$ 1,974,556
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current portion $ 32,814
Accounts payable and other current liabilities 666,634
Income taxes payable 151,188
---------------
Total current liabilities 850,636
---------------
LONG-TERM LIABILITIES
Notes payable, less current portion 107,602
---------------
Total liabilities 958,238
---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 3,000,000
shares; issued and outstanding - none
Common stock, $.01 par value, authorized 50,000,000
shares; issued and outstanding 16,950,000 shares 169,500
Capital in excess of par value 1,773,382
Accumulated deficit (961,945)
Accumulated other comprehensive income 35,381
---------------
Total stockholders' equity 1,016,318
---------------
$ 1,974,556
===============
See accompanying notes to consolidated financial statements.
F-3
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 2002 and 2001
2002 2001
------------ ------------
SALES $ 2,116,314 $ 2,862,228
COST OF SALES 1,184,491 1,235,181
------------ ------------
GROSS PROFIT 931,823 1,627,047
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,128,238 1,524,457
COST IN CONNECTION WITH EQUITY LINE OF CREDIT 600,000 -
------------ ------------
1,728,238 1,524,457
------------ ------------
INCOME (LOSS) FROM OPERATIONS (796,415) 102,590
INTEREST EXPENSE (8,827) (3,140)
INTEREST INCOME 9,962 4,282
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (795,280) 103,732
INCOME TAXES 3,467 247,072
------------ ------------
NET LOSS $ (798,747) $ (143,340)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.05) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN COMPUTING BASIC AND DILUTED LOSS
PER COMMON SHARE 16,950,000 16,688,335
============ ============
See accompanying notes to consolidated financial statements.
F-4
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2002 and 2001
Common Stock Capital
---------------------- in excess Accumulated
Shares Amount of par value Deficit
------------ -------- -------------- -------------
Balances, October 1, 2000 8,696,250 $ 86,963 $ 512,449 $ (19,858)
Costs associated with issuance of common stock (89,442)
Common stock issued for services 3,390,000 33,900 508,500
Common stock issued in connection with acquisitions 4,663,750 46,637 243,875
Common stock issued in connection with the equity line of credit 200,000 2,000 598,000
Costs incurred in connection with issuance of common stock
related to the equity line of credit (600,000)
Net loss (143,340)
Other comprehensive loss, foreign currency
translation adjustment
Total comprehensive loss - Year ended September 30, 2001
------------ -------- -------------- -------------
Balances, September 30, 2001 16,950,000 169,500 1,173,382 (163,198)
Costs incurred in connection with issuance of
common stock related to the equity line of credit 600,000
Net loss (798,747)
Other comprehensive income, foreign currency
translation adjustment
Total comprehensive loss - Year ended September 30, 2002
------------ -------- -------------- -------------
Balances, September 30, 2002 16,950,000 169,500 $ 1,773,382 $ (961,945)
============ ======== ============== =============
Accumulated
Other Total
Comprehensive Comprehensive Stockholders
Loss Income (Loss) Equity
--------------- --------------- --------------
Balances, October 1, 2000 $ - $ - $ 579,554
Costs associated with issuance of common stock (89,442)
Common stock issued for services 542,400
Common stock issued in connection with acquisitions 290,512
Common stock issued in connection with the equity line of credit 600,000
Costs incurred in connection with issuance of common stock
related to the equity line of credit (600,000)
Net loss (143,340) (143,340)
Other comprehensive loss, foreign currency
translation adjustment (84,566) (84,566) (84,566)
---------------
Total comprehensive loss - Year ended September 30, 2001 $ (227,906)
===============
--------------- --------------- --------------
Balances, September 30, 2001 (84,566) 1,095,118
Costs incurred in connection with issuance of
common stock related to the equity line of credit 600,000
Net loss $ (798,747) (798,747)
Other comprehensive income, foreign currency
translation adjustment 119,947 119,947 119,947
---------------
Total comprehensive loss - Year ended September 30, 2002 $ (678,800)
===============
--------------- --------------
Balances, September 30, 2002 $ 35,381 $ 1,016,318
=============== ==============
See accompanying notes to consolidated financial statements.
F-5
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2002 and 2001
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(798,747) $(143,340)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 82,158 40,087
Costs in connection with equity line of credit 600,000
Common stock issued for compensation
and services 542,400
Deferred income taxes (3,343)
Provision for loss on investment 3,926
Plant under construction written off 40,211
Changes in operating assets and liabilities:
Accounts receivable 78,234 (222,365)
Inventories 119,683 (275,425)
Prepaid expenses and other current assets 14,752 (48,186)
Accounts payable and other current liabilities 215,751 398,320
Income taxes payable (81,641) 247,071
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 274,327 535,219
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES, purchases
of property and equipment (219,077) (270,365)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 79,026
Repayment of borrowings (26,183)
Costs associated with the issuance of common stock (89,442)
---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 52,843 (89,442)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,221 3,722
NET INCREASE IN CASH AND CASH EQUIVALENTS 109,314 179,134
CASH AND CASH EQUIVALENTS, beginning of period 179,134
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 288,448 $ 179,134
========== ==========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Common stock issued in connection with acquisitions $ - $ 290,512
========== ==========
Accrued legal services related to common stock issued $ - $ 48,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
cash paid during the years for:
Income taxes $ 108,622 $ -
========== ==========
Interest $ 8,827 $ 3,140
========== ==========
See accompanying notes to consolidated financial statements.
F-6
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. NATURE OF OPERATIONS
Alloy Steel International Inc. (ASII) and its wholly-owned subsidiary, Alloy
Steel Australia (Int.) Pty Limited (ASAI) (collectively the "Company")
manufacture and distribute Acroplate, a wear-resistant fused-alloy steel plate,
to customers throughout the world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company adheres to accounting principles generally accepted in the United
States of America. The Company's consolidated financial statements are
denominated in United States dollars.
Principles of Consolidation
The consolidated financial statements include the accounts of ASII and ASAI.
All material intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition
The Company recognizes revenues when products are shipped and title passes to
customers. Provisions are established, as appropriate, for uncollectible
accounts, returns and allowances and warranties in connection with sales.
Cash and Cash Equivalents
The Company considers all highly-liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities which qualify as
financial instruments under Statement of Financial Accounting Standards ("SFAS")
No. 107, "Disclosures About Fair Value of Financial Instruments," approximates
the carrying amounts presented in the accompanying consolidated balance sheet.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is
determined principally on the average cost method, which approximates the
first-in, first-out method.
F-7
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of the carrying amounts of
long-lived assets, including intangible assets. A loss is recognized when
expected undiscounted future cash flows are less than the carrying amount of the
asset. The impairment loss is the difference by which the carrying amount of
the asset exceeds its fair value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows:
ESTIMATED
ASSET USEFUL LIVES
Plant and equipment 5-10 years
Furniture and fixtures 5-7 years
Vehicles 3-5 years
Office and computer equipment 3-5 years
Maintenance and repairs are charged to operations, while betterments and
improvements are capitalized.
Intangibles
Intangibles include intellectual rights of $90,512, which will be amortized over
the lesser of the estimated useful or economic life, or five years.
Advertising
Advertising costs are charged to operations as incurred and were $12,939 and
$7,085 for the years ended September 30, 2002 and 2001, respectively.
Income Taxes
The Company complies with SFAS No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial reporting for income
taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that
will result in future taxable or deductible amounts, based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amount expected to be realized.
F-8
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss Per Common Share
SFAS No. 128, "Earnings Per Share", requires dual presentation of basic and
diluted income per share for all periods presented. Basic loss per share
excludes dilution and is computed by dividing net loss available to common
stockholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Diluted net loss per
common share was the same as basic net loss per common share since there were no
common stock equivalents outstanding.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.'s
141 and 142, "Business Combinations" and "Goodwill and Other Intangibles". SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS No. 142, goodwill is no
longer subject to amortization over its estimated useful life. Rather, goodwill
is subjected to at least an annual assessment for impairment applying a
fair-market value based test. Additionally, an acquired intangible asset should
be separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's
intent to do so. SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), addresses the impairment for all tangible
assets. In July 2002, the FASB issued SFAS No. 146 "Accounting For Costs
Associated With Exit or Disposal Activities "SFAS No. 146", which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred I a Restructuring)." SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
application encouraged. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment
of FASB Statement No. 123" ("SFAS 148"), which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for voluntary changes to the fair value based
method made in fiscal years beginning after December 15, 2003. The Company does
not anticipate these pronouncements will have a significant impact on its
consolidated financial position and results of operations.
F-9
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Translation
Assets and liabilities of the Company's wholly-owned subsidiary are translated
into U.S. dollars at year-end exchange rates, and revenues and expenses are
translated at average rates prevailing during the year. Resulting translation
adjustments are recorded as a component of accumulated other comprehensive
income.
3. INVENTORIES
Inventories consist of the following at September 30, 2002:
Raw materials $ 50,748
Finished goods 107,521
--------
$158,269
========
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following at September
30, 2002:
Prepaid expenses $20,727
GST receivable 18,428
-------
$39,155
=======
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2002:
Plant and equipment $ 358,986
Furniture and fixtures 16,985
Vehicles 7,435
Office and computer equipment 16,854
----------
400,260
Less accumulated depreciation 123,697
----------
276,563
Construction in progress 990,293
----------
$1,266,856
==========
F-10
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for the years ended September 30, 2002 and 2001 was $82,158
and $40,087, respectively.
6. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consist of the following at
September 30, 2002:
Trade accounts payable $345,053
Accrued salary 211,711
Royalties payable 98,244
11,626
--------
$666,634
========
As of September 30, 2002, approximately $116,000 of accounts payable and other
current liabilities are due to a related party.
7. NOTES PAYABLE
Notes payable at September 30, 2002 consists of the following:
Note payable (a) $ 49,441
Note payable (b) 66,255
Note payable (c) 24,720
--------
140,416
Less current portion 32,814
--------
$107,602
========
(a) The note is payable in monthly installments of approximately $1,186
including interest at a rate of 6.60% per annum, with a final payment in
November 2005. The note is collateralized by the underlying equipment.
(b) The note is payable in monthly installments of approximately $1,626
including interest at a rate of 6.435% per annum, with a final payment in
October 2005. The note is collateralized by the underlying equipment.
(c) The note is payable in monthly installments of approximately $593 including
interest at a rate of 6.6% per annum, with a final payment in November
2005. The note is collateralized by the underlying equipment.
F-11
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. NOTES PAYABLE (CONTINUED)
Aggregate annual principal payments for each of the following years areas
follows:
YEAR ENDING SEPTEMBER 30,
2003 $ 32,814
2004 35,019
2005 37,373
2006 35,210
8. INCOME TAXES
Income (loss) before income taxes for the years ended September 30, 2002 and
2001 were taxed in the following jurisdictions:
2002 2001
Australia $ (34,998) $ 725,370
US (760,282) (621,638)
---------- ----------
$(795,280) $ 103,732
========== ==========
The components of income tax expense (benefit) are as follows for the years
ended September 30, 2002 and 2001:
2002 2001
CURRENT
Foreign $3,467 $250,415
------ ---------
DEFERRED
Foreign - (3,343)
------ ---------
$3,467 $247,072
====== =========
As of September 30, 2002, the Company had US net operating loss carryforwards of
approximately $1,392,000 expiring through 2022 and Australian net operating loss
carryforwards of approximately $48,000.
F-12
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. INCOME TAXES (CONTINUED)
The components of the net deferred income tax asset consist of the following at
September 2002 and 2001:
2002 2001
Deferred tax assets
Net operating loss carryforwards $481,191 $217,783
Other 7,355 4,254
-------- --------
488,546 222,037
Less valuation allowance 488,546 217,783
-------- --------
- 4,254
-------- --------
Deferred tax liabilities
Other 1,104
-------- --------
Net deferred income tax asset $ - $ 3,150
======== ========
SFAS No. 109, requires that the Company record a valuation allowance when it is
more likely than not that some portion or all of the deferred income tax asset
will not be realized. The change in the valuation allowance amounted to
approximately $271,000 and $211,000 for the years ended September 30, 2002 and
2001, respectively. The ultimate realization of this deferred income tax asset
depends on the Company's ability to generate sufficient taxable income in future
years.
The effective tax rate in 2002 and 2001 differs from the U.S. federal statutory
rate as follows:
2002 2001
U.S. federal statutory rate (34.0)% 34.0%
Change in valuation allowance 34.0 % 204.0
------- -------
Effective tax rate - % 238.0%
======= =======
F-13
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. STOCK OPTIONS
During 2000, the Company's Board of Directors adopted, and the stockholders
approved, the 2000 stock option plan (the Plan) pursuant to which 500,000 shares
of common stock were reserved for issuance upon the exercise of options granted
to key employees, members of the Board of Directors and consultants of the
Company. Options under the Plan may be incentive stock options, nonqualified
stock options, or any combination thereof, and the Board of Directors
(Committee) may grant options at an exercise price which is not less than the
fair market value on the date such options are granted. The Plan further
provides that the maximum period in which stock options may be exercised will be
determined by the Committee, except that they may not be exercisable after ten
years from the date
of grant or five years from the date of grant for any person owning more than
ten percent of the voting power of all classes of the Company's stock. At
September 30, 2002, there were no stock options granted.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its office and manufacturing space from a related party, for
approximately $85,000 per annum plus certain expenses (as defined in the
agreement). The lease expires on June 30, 2005.
Rent expense for the years ended September 30, 2002 and 2001, was approximately
$86,000 and $90,000, respectively.
Royalty Agreements
The Company has a licensing agreement relating to the sale of certain products.
Under the terms of the agreement, the Company is required to pay royalties of 2%
on the net sales of the related products, calculated at the end of each quarter.
The agreement expires in 2025 and has three ten-year renewal options to extend
unless written notice of non-renewal is given by either party within 120 days
prior to its expiration. At September 30, 2002, approximately $98,244 was
payable under this agreement and is included in accounts payable and other
current liabilities.
Royalty expense was approximately $42,000 and $56,000, respectively, for the
years ended September 30, 2002 and 2001.
Employment Agreements
The Company has employment agreements with two of its executives, who are
principal stockholders, requiring the payment of a minimum annual base
compensation of approximately $80,000 and $150,000, adjusted annually for
increases approved by the Board of Directors, but not less than the base year
amount, plus incentive compensation based on the executives performance and the
Company's success. The agreements expire in 2005 and are automatically renewed
for an additional year unless written notice of non-renewal is given by either
party within 180 days prior to their expiration. Approximately $230,000 has
been expensed under these agreements in the years ended September 30, 2002 and
2001, and is included in selling, general and administrative expenses.
F-14
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. STOCKHOLDERS' EQUITY
Common Stock
In October 2000, the Company issued 1,250,000 shares of common stock to a
related party to acquire substantially all of the net assets of the Collier Unit
Trust-Acroplate Division. In addition the Company acquired equipment from the
related party, which is under construction for approximately $880,000.
In October 2000, the Company issued 3,413,750 shares of common stock to two of
its officers, directors and stockholders of the Company to acquire a license to
utilize the 3-D Pipe Fitting Cladder process. The Cladder is a computer-driven,
software-based mechanical system for industrial use, which the Company intends
to commercialize worldwide. The acquisition was recorded at $90,512.
In October 2000, the Company issued 3,340,000 shares of common stock in exchange
for consulting services. Aggregate compensation for such services amounted to
$534,400, of which approximately $486,400 relates to agreements with related
parties.
The Company issued 50,000 shares to an officer and director for legal services
amounting to $8,000 recorded in the year ended September 30, 2001.
In September 2001, the Company issued 200,000 shares to Cornell Capital Partners
("Cornell") relating to an equity line of credit agreement pursuant to which the
Company could sell up to $10,000,000 of common stock back to Cornell. During
the fiscal year ended September 30, 2002 this agreement was terminated and the
Company expensed the $600,000 relating to the stock issued for the equity line
of credit and paid in capital was increased by $600,000.
12. MAJOR CUSTOMERS, SUPPLIERS AND GEOGRAPHIC INFORMATION
The Company had revenues from two customers in the years ended September 30,
2002 and 2001 aggregating approximately $1,260,000 and $981,000, respectively.
Accounts receivable due from these customers were approximately $89,000 and
$62,000 at September 30, 2002 and 2001, respectively.
For the years ended September 30, 2002 and 2001, the Company purchased
approximately 86% and 62% of its inventories from three suppliers.
For the years ended September 30, 2002 and 2001 revenues were derived from the
following:
2002 2001
Australia/Asia 35 % 65%
South America 42 % 20%
US & Other 23 % 15%
----- -----
100 % 100%
===== =====
F-15