UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended JUNE 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _______ to _______.
Commission file number 0-32875
ALLOY STEEL INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE
(State or other jurisdiction 98-0233941
of incorporation or organization (I.R.S. Employer Identification No.)
ALLOY STEEL INTERNATIONAL, INC.
42 MERCANTILE WAY MALAGA
P.O. BOX 3087 MALAGA D C 6945
WESTERN AUSTRALIA
(Address of principal executive offices)
61 (8) 9248 3188
(Issuer's telephone number)
There were 16,950,000 shares of Common Stock outstanding as of August 14
2003.
Transitional Small Disclosure Format (check one): Yes [ ] No [X]
PART I
ITEM 1. FINANCIAL STATEMENTS
---------------------
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
JUNE 30, SEPTEMBER 30,
2003 2002
(UNAUDITED)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 201,479 $ 288,448
Accounts receivable, less allowance for doubtful
accounts 189,139 131,316
Inventories 216,570 158,269
Prepaid expenses and other current assets 42,738 39,155
------------ ---------------
TOTAL CURRENT ASSETS 649,926 617,188
PROPERTY AND EQUIPMENT, net 1,535,446 1,266,856
OTHER ASSETS
Intangibles 90,512 90,512
------------ ---------------
TOTAL ASSETS $ 2,275,884 $ 1,974,556
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable, current portion $ 42,630 $ 32,814
Accounts payable and other current liabilities 823,059 666,634
Income taxes payable 151,188
------------ ---------------
TOTAL CURRENT LIABILITIES 865,689 850,636
LONG-TERM LIABILITIES
Notes payable, less current portion 99,686 107,602
TOTAL LIABILITIES 965,375 958,238
------------ ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock: $0.01 par value; authorized 3,000,000 shares; issued and outstanding - none
Common Stock: $0.01 par value; authorized 50,000,000 shares; 16,950,000 issued and outstanding 169,500 169,500
Additional paid-in-capital 1,773,382 1,773,382
Accumulated other comprehensive income 342,205 35,381
Accumulated deficit (974,578) (961,945)
------------ ---------------
TOTAL STOCKHOLDERS' EQUITY 1,310,509 1,016,318
------------ ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,275,884 $ 1,974,556
============ ===============
See accompanying notes to consolidated financial statements.
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ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations And Comprehensive Income (Loss)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
SALES $ 348,675 $ 456,334 $ 1,262,657 $ 1,524,172
COST OF SALES 251,737 302,830 779,012 886,864
---------------- ---------------- ---------------- ----------------
GROSS PROFIT 96,938 153,504 483,645 637,308
OPERATING EXPENSES
Selling, general and administrative expenses 238,496 215,455 715,119 710,336
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) FROM OPERATIONS (141,558) (61,951) (231,474) (73,028)
---------------- ---------------- ---------------- ----------------
OTHER INCOME
Interest income 2,930 2,695 9,371 7,571
Insurance recovery 89 - 2,450 -
Export grant received 681 - 18,691 -
Profit on disposal of plant & equipment 134 - 134 -
Unrealized foreign exchange gain - 5,240 - 5,315
---------------- ---------------- ---------------- ----------------
3,834 7,935 30,646 12,886
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) (137,724) (54,016) (200,828) (60,142)
Income tax expense (benefit) (188,198) - (188,198) 16,067
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ 50,474 $ (54,016) $ (12,630) $ (76,209)
================ ================ ================ ================
BASIC INCOME (LOSS) AND DILUTED
INCOME (LOSS) PER COMMON SHARE $ 0.003 $ (0.003) $ (0.001) $ (0.004)
================ ================ ================ ================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 16,950,000 16,950,000 16,950,000 16,950,000
================ ================ ================ ================
COMPREHENSIVE INCOME (LOSS)
NET INCOME (LOSS) $ 50,474 $ (54,016) $ (12,630) $ (76,209)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment 168,232 70,305 306,824 168,862
---------------- ---------------- ---------------- ----------------
COMPREHENSIVE INCOME (LOSS) $ 218,706 $ 16,289 $ 294,194 $ 92,653
================ ================ ================ ================
See accompanying notes to consolidated financial statements.
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ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
NINE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (12,630) $ (76,209)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 66,958 59,961
Profit on sale of plant (134) -
Increase (Decrease) in cash attributable to changes in operating assets
and liabilities:
Accounts receivable (57,827) (128,289)
Inventories (58,301) 154,615
Prepaid expenses and other current assets 21,109 20,384
Accounts payable and other current liabilities 156,522 153,863
Income taxes payable (175,878) (94,199)
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (60,181) 90,126
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (49,718) (259,227)
Proceeds on disposal of plant and equipment 358 -
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (49,360) (259,227)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings - 154,131
Repayment of borrowings (26,982) (15,134)
---------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (26,982) 138,997
---------------- ----------------
Effect of foreign exchange rate on cash 49,554 33,580
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (86,969) 3,476
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 288,448 179,135
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 201,479 $ 182,611
================ ================
See accompanying notes to consolidated financial statements.
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ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
NOTE - 1 UNAUDITED STATEMENTS
The accompany condensed consolidated financial statements of the Company as of
June 30, 2003 and for the nine month and three-month periods ended June 30, 2003
and 2002 are unaudited and reflect all adjustments of a normal and recurring
nature to present fairly the financial position, results of operations and cash
flows for the interim periods. These unaudited condensed consolidated financial
statements have been prepared by the Company pursuant to instructions to Form
10-QSB. Pursuant to such instructions, certain financial information and
footnote disclosures normally included in such financial statements have been
omitted. It is suggested that these condensed consolidated financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's September 30, 2002 audited financial statements included in the
registrant's annual report on Form 10-KSB. The results of operations for the
nine month and three-month periods ended June 30, 2003 are not necessarily
indicative of the results that may occur for the year ending September 30, 2003.
NOTE - 2 NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. The Statement is generally effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003 and should be applied prospectively. The implementation of
this standard is not expected to have a material impact on the company's
financial position or results of operations. In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 requires certain freestanding
financial instruments, such as mandatory redeemable preferred stock, to be
measured at fair value and classified as liabilities. The provisions of SFAS No.
150 are effective for beginning July 1, 2003. The implementation of this
standard is not expected to have a material impact on the company's financial
position or results of operations.
NOTE - 3 INVENTORIES
At June 30, 2003 (unaudited) and September 30, 2002 inventories consist of the
following:
Jun. 30, 2003 Sept. 30, 2002
Raw materials $ 83,865 $ 50,748
Finished goods 132,705 107,521
-------------- ---------------
$ 216,570 $ 158,269
-------------- ---------------
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
---------------------------------------
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. Wear is a primary
cause of down time and lost production in mining and mineral processing. We
believe 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. The new machinery to increase the production of Arcoplate is
currently undergoing testing to rectify any faults and to make minor
modifications where necessary. The additional machinery will supplement our
current 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 that we will generate such sales. We will also attempt to further
increase the capacity of our facility when it is apparent market demand requires
additional production capacity. 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:
- appointment of appropriately experienced agents in selected areas;
- presentation of technical papers at industry related seminars;
- initial discussions of the application highlighting the advantages of
Arcoplate;
- 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.
-5-
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE
AND NINE MONTHS ENDED JUNE 30, 2002
SALES
Alloy Steel had sales of $348,675 for the three months ended June 30, 2003,
compared to $456,334 for the three months ended June 30, 2002. These sales
consist solely 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 $ 0.59710, representing
the average foreign exchange rate for the nine months ended June 30, 2003. Sales
have decreased compared with the three months ended June 30, 2002 primarily due
to a discount structure negotiated with appointed distributors and the
termination of the Australian exclusive distribution agreement with Walkers Pty
Ltd.
Alloy Steel had sales of $ 1,262,657 and $ 1,524,172 for the nine months ended
June 30, 2003 and 2002, respectively. These sales consist solely of the sale of
our Arcoplate product.
GROSS PROFIT AND COSTS OF SALES
Alloy Steel had cost of sales of $ 251,737 for the three months ended June 30,
2003, compared to $ 302,830 for the three months ended June 30, 2002. The gross
profit amounted to $ 96,938 for the three months ended June 30, 2003 compared to
$ 153,504 for the three months ended June 30, 2002. The gross profit percentage
decreased from 39% to 26%. We attribute the decrease in cost of sales and
decrease in gross profit primarily due to lower production levels and the
discount structure being provided to our new distributors.
Alloy Steel had cost of sales of $ 779,012 and $ 886,864 for the nine months
ended June 30, 2003 and 2002, respectively. Alloy Steel's gross profit was $
483,645 or 38% of sales, and $ 637,308 or 41% of sales, for the respective
periods.
Operating Expenses
Alloy Steel had selling, general and administrative expenses of $ 238,496
for the three months ended June 30, 2003, compared to $ 215,455 for the three
months ended June 30, 2002. The increase was primarily due to research and
development being undertaken on the new wear plate machine.
Alloy Steel had operating expenses of $ 715,119 and $ 710,336 for the nine
months ended June 30, 2003 and 2002, respectively. Our operating expenses
consist primarily of management salaries, consulting expenses, and travel
expenses.
INCOME BEFORE TAXES
Alloy Steel's loss before taxes was $ 137,724 for the three months ended
June 30, 2003, compared to a loss of $ 54,016 for the three months ended June
30, 2002.
Alloy Steel had a net loss before income taxes of $ 200,828 and net loss of
$ 60,142 for the nine months ended June 30, 2003 and nine months ended June 30,
2002, respectively.
NET PROFIT
Alloy Steel had a net profit of $ 50,474, or $ 0.003 per share, for the
three months ended June 30, 2003, compared to a net loss of $ 54,016, or
$ (0.003) per share, for the three months ended June 30, 2002.
Alloy Steel had a net loss of $ 12,630 or $ (0.000) per share, and a net
loss of $ 76,209 or $ (0.004) per share, for the nine months ended June 30, 2003
and 2002, respectively.
-6-
LIQUIDITY
For the nine months ended June 30, 2003, the total cash used in operating
activities was $ 60,181 consisting of a net loss of $ 12,630, an increase in
accounts payable and other current liabilities of $ 156,522 an increase in
inventories of $ 58,301 an increase of accounts receivable of $ 57,827 and a
decrease of income tax payable of $ 175,878.
As of the nine months ended June 30, 2003, we had a working capital deficit
of $ 215,763.
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.
SIGNIFICANT CHANGES IN NUMBERS OF EMPLOYEES
No significant change in the number of employees is anticipated in the next
3 months.
PURCHASE OR SALE OF PLANT AND SIGNIFICANT EQUIPMENT
The machinery to expand our capacity to produce Arcoplate is currently
under going trials to rectify faults and make minor modifications where
necessary. 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 March 2004. 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
pipefittings. 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 2002, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 In 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, 2002. The Company does
not anticipate these pronouncements will have a significant impact on its
consolidated financial position and results of operations. In April 2003, the
FASB issued FAS 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, FAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FAS 133. The
Statement is generally effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003 and
should be applied prospectively. The implementation of this standard is not
expected to have a material impact on the company's financial position or
results of operations. In May 2003, the FASB issued FAS 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. FAS 150 requires certain freestanding financial instruments, such as
mandatory redeemable preferred stock, to be measured at fair value and
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classified as liabilities. The provisions of FAS 150 are effective for beginning
July 1, 2003. The implementation of this standard is not expected to have a
material impact on the company's financial position or results of operations.
ITEM 3. CONTROLS AND PROCEDURES
-----------------------
Based on their evaluation required by Rule 13a-15(b) or 15a-15(b) under the
Securities Exchange Act of 1934 (the "Exchange Act"), management, including our
Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) were effective as of the end of the period covered by
this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification of the Chief Executive Officer required by Rule 13a
- 14(a) or Rule 15d - 14(a).
31.2 Certification of the Chief Financial Officer required by Rule 13a
- 14(a) or Rule 15d - 14(a).
32.2 Certification of the Chief Executive Officer required by Rule 13a
- 14(b) or Rule 15d - 14(b) and 18 U.S.C. 1350.
32.2 Certification of the Chief Financial Officer required by Rule 13a
- 14(b) or Rule 15d - 14(b) and 18 U.S.C. 1350.
(b) Reports on Form 8-K.
None.
-8-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 14, 2003 ALLOY STEEL INTERNATIONAL, INC.
By: /s/ Alan Winduss
-------------------------------------
Alan Winduss, Chief Financial Officer
(Principal Financial Officer)
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