UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended September 30, 2003
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to ______
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 Identification No.)
incorporation or organization)
42 Mercantile Way
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 is not 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 [X]
The issuer's revenues for the fiscal year ended September 30, 2003 were
$1,871,500.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of December
31, 2003 was $1,897,420
As of December 31, 2003, 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
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.
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, Western
Australia 6945. Our telephone number is +61 (8) 9248 3188. Our Internet
address is www.alloysteel.net.
OVERVIEW OF BUSINESS
We manufacture and distribute Arcoplate, a wear-resistant alloy overlay
wear plate, through a patented production process. We believe that wear in the
operating workplace is the largest single factor leading to production losses in
the mining, mineral-processing, and steel manufacturing industries, and
consequently, wear solutions are indispensable for businesses with wear-related
concerns. The wearing of metal parts is generally defined as a gradual decay or
breakdown of the metal. Because the wear of equipment may have multiple causes,
the selection of alloy wear plate solutions can be a relatively complex process.
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 plates, and quenched and tempered carbon steel
plates. We believe that each of these materials offers a limited solution to
the problem of wear. 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
Arcoplate provides businesses with solutions to most wear-related problems at a
cost competitive with conventional welded overlay wear plates and substantially
lower than tungsten carbide. In addition, we believe that the 3-D Pipefitting
Cladder process we are developing, when commercially available, will provide
businesses with solutions for the problem of wear and down time in pipefitting
systems, reducing the costs associated with lost production and the replacement
of worn pipefittings.
ARCOPLATE
The patented process by which we manufacture Arcoplate enables us to
smoothly and evenly apply an alloy overlay to a sheet of steel, creating a
metallurgical bond between the alloy and the steel backing plate that is
resistant to wear caused by impact and/or abrasion. 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 lost production for our customers.
Although conventional 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:
- 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, which result in poor material, flow when in use.
We believe Arcoplate has properties that allow it to overcome the
limitations of conventional welded wear plates. Based upon independent
laboratory and field tests, we believe that Arcoplate provides a wear-resistant
barrier superior to that provided by conventional single or multiple layer wear
plates, due to Arcoplate's higher carbide content and smoother surface layer.
In addition, Arcoplate wear plate sheets withstand rolling and pressing, within
their fabrication guidelines, into various shapes for commercial use.
Many of our claims with respect to the properties of Arcoplate, such as
bond strength, specific hardness, density, hardness, resonance and wear
resistance, have been subjected to studies and testing, performed by independent
laboratories, universities and other testing facilities.
Based upon these independent studies 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 structures
and machinery frequently occurs, including:
- the mining of iron, gold, nickel, coal, copper and other ores;
- 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 tray liners and bucket loader liners.
Our product lines include a range of alloy overlay plates. Our products
are designed for ease of handling and can be fabricated to suit our customers'
requirements regarding shape, size, weight, and special needs. 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.
We believe that our proprietary method of manufacturing Arcoplate results
in a product that has many technical advantages over conventional welded wear
plates. Conventional welded wear 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, a
conventional wear plate must be rolled and pressed after its layers of
hardfacing have been welded together. This postproduction 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 maintains a high carbide
content in the overlay, which makes the plate more resistant to wear than a
conventional welded wear plate.
Our existing production equipment is presently operating at 75% of
capacity. The completion of a new production machine, which we previously
expected in February 2003, was delayed because of an engineering problem
involving the alloy feeder. A prototype of a newly designed alloy feeder is
currently being constructed, and we expected to commence trial production with
the new machine in early 2004. If our existing production equipment fails or
malfunctions, our production capacity will be reduced. This would likely delay
deliveries to customers.
3
We are presently distributing 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 Korea, India, Indonesia, Singapore, South Africa, Japan
and China.
The Arcoplate Division of Collier Unit Trust, the predecessor operation to
Alloy Steel International, Inc., commenced operations in 1990 and was an entity
controlled by Gene Kostecki, our chief executive officer, director and principal
stockholder. The initial prototype equipment commenced producing Arcoplate for
sale to customers in 1991.
3-D PIPEFITTING CLADDER PROCESS
We intend to commercially develop the 3-D Pipefitting Cladder process, a
computer-driven and software-based mechanical system for depositing a profiled
layer of wear resistant alloy onto interior surfaces of pipefittings, targeted
for industrial use. Due to their angled and/or curved structures, material does
not flow uniformly through pipefittings, meaning pipefittings generally have
higher wear, resulting in a much shorter working life, than ordinary straight
pipe. The 3-D Pipefitting Cladder process will enable a wear resistant alloy
coating to be applied to interior surfaces of bends, elbow joints, "T" sections
and "Y" sections of pipefittings, where wear is most likely to occur.
We believe that the 3-D Pipefitting Cladder process will overcome many of
the problems associated with pipefitting wear and greatly reduce production
losses due to down time and pipe replacement. Pipefittings are extensively used
in the dredging, mining, mineral processing, coal-fired power generation, cement
manufacturing, and oil refinery industries, where materials are frequently
transported via closed pipe.
We have suspended development of the 3-D Pipefitting Cladder process until
we resolve the problems with the alloy feeder in our new Arcoplate production
machine.
INDEPENDENT LABORATORY AND FIELD TESTS
We base our beliefs regarding Arcoplate's high wear-resistance on records
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 in 1997 by the Central Power Research Institute of
Bangalore, India 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 kinds of multiple layer wear plates. A study
conducted in November 1997 by Metlabs (a division of AUST-AMET Pty. Ltd.) of
Welshpool, Australia reported that "the 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
field trial of Arcoplate conducted in October 1992 by the Hamersley Iron
Paraburdoo iron ore processing plant, located in Western Australia, concluded
that Arcoplate was eight times more wear resistant than its multiple layer wear
plate counterpart.
SALES AND MARKETING 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 subsequently the 3-D Pipefitting Cladder process,
within the mining, mineral-processing and steel industries. We intend to
accomplish our objectives by consolidating our 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 trained
to present and promote Arcoplate products as a solution for wear-related
problems.
To date, most of our orders have been the result of repeat business and
inquiries from customers who have learned of our Arcoplate products by
word-of-mouth in their respective industries. For the year ended September 30,
2003, four
4
customers accounted for 60% of sales. To strengthen our marketing presence, we
have appointed an Australian Marketing Manager based in Perth and a regional
Sales Manager based on the East coast of Australia. In addition, we have
appointed an American company as distributors for the North American market.
We anticipate incurring increased expenditures in connection with our
marketing activities. Our marketing activities are also expected to include
substantial engineering support to assist in the development of products for
specific customers and markets, evaluation of Arcoplate and the 3-D Pipefitting
Cladder by institutions that specialize in technology analysis for this type of
market; development of appropriate sales materials such as specification sheets
and corporate brochures, promotion through displays at selected trade shows and
advertising in journals and the trade press.
In order to develop our Australian and international customer base, we
intend to contact 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 of brochures and case histories. 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. We may then suggest
specific Arcoplate products, 3-D Pipefitting 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 and 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 and plant 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.
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 Pipefitting 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. Research and development is a continuing factor
for the improvement and development of new Arcoplate products.
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. Three of our suppliers, Cometals, Integrate Industries Pty Ltd and
Di Candilo Steel City, account for more than 50% of the raw material we require.
They supply us with Ferro Chrome and mild steel plates. We also rely heavily on
the use of fluxes, compounds 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 reasonable
prices and terms. We monitor
5
the quality of our products by frequent tests and material certification, and we
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 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.
COMPETITION
The wear plate solutions industry is highly competitive. We compete in
markets against several larger multi-national companies, all of which are
well-established in those markets and may 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. 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 12 persons on a full-time basis and 6 contract employees as of
December 20, 2003, including two executive officers, three administrative
personnel, two marketing personnel and eleven 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 in the 2004 calendar year.
ITEM 2. DESCRIPTION OF PROPERTY.
We conduct our business from leased premises located at 42 Mercantile Way,
Malaga, Western Australia.
Our current lease expires on June 30, 2005, and we have confirmation from
the building owners that this will be extended for a further 5 years on mutually
agreed terms. We believe this facility will be adequate for our needs for this
period of time. Our current monthly rent is $7083.
6
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
We held our Annual Meeting of Stockholders on June 30, 2003. The following
directors, constituting all of our directors, were elected at the meeting to
serve until their respective successors are duly elected and qualified. The
directors elected at the Annual Meeting received the number of votes set forth
opposite their respective names, as follows:
Withheld
For Election Authority/Abstained
------------ -------------------
Gene Kostecki 13,061,250 --
Alan C. Winduss 13,061,250 --
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our common stock is principally traded on the pink sheets, a facility
maintained by Pink Sheets LLC. The following table sets forth the range of high
and low bid quotations for our common stock for each calendar quarter within the
last two years.
Bid Price Per Share
----------------------
Year ended September 30, 2003 High Low
----------------------------------- ---------- ----------
October 1 - December 31, 2002 $ 0.15 $ 0.06
January 1 - March 31, 2003 $ 1.01 $ 0.11
April 1 - June 30, 2003 $ 0.19 $ 0.09
July 1 - September 30, 2003 $ 0.19 $ 0.10
Year ended September 30, 2003 High Low
----------------------------------- ---------- ----------
October 1, 2001 - December 31, 2001 $ 3.50 $ 1.02
January 1 - March 31, 2002 $ 1.01 $ 0.05
April 1 - June 30, 2002 $ 0.30 $ 0.07
July 1 - 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 31, 2003, there were approximately 23 holders of record of
our common stock.
Our Board of Directors may from time to time declare, and we may pay,
dividends on our outstanding shares in the manner and upon the terms and
conditions provided by law. To date, we have not declared or paid any dividend.
8
EQUITY COMPENSATION PLANS
-------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
-------------------------------------------------------------------------------------------------------
(a) (b) (c)
-------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders (1) None None 2,000,000
-------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by - - -
security holders
-------------------------------------------------------------------------------------------------------
Total None None 2,000,000
-------------------------------------------------------------------------------------------------------
(1) Includes our 2000 Stock Option Plan.
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 alloy overlay
wear plate, through a patented production process. The patented process by which
we manufacture Arcoplate enables us to smoothly and evenly apply an alloy
overlay to a sheet of steel, creating a metallurgical bond between the alloy and
the steel backing plate that is resistant to wear caused by impact and/or
abrasion. 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 lost production for
our customers.
We also intend to commercially develop the 3-D Pipefitting Cladder process,
a computer driven and software based mechanical system for depositing a profiled
layer of wear resistant alloy onto interior surfaces of pipefittings, targeted
for industrial use. Due to their angled and/or curved structures, material does
not flow uniformly through pipefittings, meaning pipefittings generally have
higher wear, resulting in a much shorter working life, than ordinary straight
pipe. The 3-D Pipefitting Cladder process will enable a wear resistant alloy
coating to be applied to interior surfaces of bends, elbow joints, "T" sections
and "Y" sections of pipefittings, where wear is most likely to occur. We have
suspended development of the 3-D Pipefitting Cladder process until we resolve
the problems with the alloy feeder in our new Arcoplate production machine.
PLAN OF OPERATION
Our objective during the next 12 months is to expand our capacity to
produce Arcoplate with the completion of additional equipment. The additional
machinery will supplement our existing production equipment. 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 intend to achieve market penetration through a multi-step process. 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 trained to present and promote Arcoplate products as a solution for
wear-related problems.
9
RESULTS OF OPERATIONS
SALES
We had sales of $1,871,500 for the year ended September 30, 2003, compared
to sales of $2,116,314 for the year ended September 30, 2002. These sales
consist solely of the sale of our Arcoplate product. Substantially all of our
sales during the periods were denominated in US dollars. Sales denominated in
Australian dollars were converted into U.S. dollars at the conversion rate of
$0.61274 and $.54314, representing the average foreign exchange rates for the
years ended September 30, 2003 and 2002, respectively. Sales have decreased
compared with the year ended September 2002 primarily due to a decrease in sales
to our South American customer together with the termination of the Australian
exclusive distributor agreement. The unsuccessful distribution has resulted in
the Company recommencing its own marketing awareness program.
COSTS OF SALES
We had cost of sales of $1,070,766 for the year ended September 30, 2003,
compared to cost of sales of $1,184,491 for the year ended September 30, 2002.
The gross profit amounted to $800,734 compared to $931,823 for the year ended
September 30, 2002. The gross profit percentage remained steady from 43% to 44%
in 2003 and 2002 respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
We had selling, general and administrative expenses of $1,000,107 for the
year ended September 30, 2003, compared to $1,128,238 in the year ended
September 30, 2002. The decrease was primarily due to our reduced activity
during the year ended September 30, 2003.
INCOME BEFORE TAXES
Our loss before taxes was $170,459 for the year ended September 30, 2003,
compared to a loss of $795,280 for the year ended September 30, 2002 The
decrease in the loss for the year ended September 30, 2003 is principally due to
the $600,000 write off in the year ended September 30 2002 of costs incurred in
connection with the issue of shares to the facilitators of an equity line of
credit arrangement that was terminated. These costs were previously charged
against capital in excess of par value in the year ended September 30, 2002.
INCOME TAXES
We had an income tax benefit of ($193,127) for the year ended September 30,
2003 compared to an expense $3,467 for the year ended September 30, 2002. The
2002 income tax expense related to taxes payable in Australia. The 2003 income
tax benefit was a result of Research and Development concessions being granted
by the Australian Taxation Office.
NET LOSS
We had net profit of $22,668, or $0.00 per share, for the year ended
September 30, 2003, compared to a net loss of $798,747, or $0.05 per share, for
the year ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended September 30, 2003, the total cash used by operating
activities was $92,433, principally as a result of an increase in inventories of
$153,187 and an increase in accounts receivable of $72,184 partially offset by
an increase in accounts payable of $173,538.
As of the year ended September 30, 2003, we had working capital of $9,684.
10
The Company is obligated under various contractual commitments over the
next five years. The following is a summary of the five-year commitments of the
Company as of September 30, 2003:
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
CONTRACTUAL OBLIGATIONS
Long-term debt $134,158 $ 43,664 $ 90,494 $ - $ -
Operating leases 148,750 85,000 63,750
Employment agreements 460,000 230,000 230,000
------------------------------------------------------
TOTAL CONTRACTUAL OBLIGATONS $742,908 $ 348,664 $ 384,244 $ - $ -
======================================================
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 to raise capital. The sale of additional equity or convertible debt
securities could result in dilution to our stockholders. Our working capital
may impair our ability to obtain certain types of financing, including a bank
line of credit. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, or at all.
SIGNIFICANT CHANGES IN NUMBERS OF EMPLOYEES
We anticipate hiring approximately four additional manufacturing employees
in the next 12 months and an additional marketing person was employed in
December 2003.
CRITICAL ACCOUNTING POLICIES
We have prepared our financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America. This has required us to make estimates, judgments, and assumptions
that affected the amounts we reported. Note 1 of Notes to Consolidated
Financial Statements contains the significant accounting principles that we used
to prepare our consolidated financial statements.
We have identified several critical accounting policies that require us to
make assumptions about matters that were uncertain at the time of our estimates.
Had we used different estimates and assumptions, the amounts we recorded could
have been significantly different. Additionally, actual results that would have
a material effect on our financial condition or results of operations could be
based on different assumptions or conditions. The critical accounting policies
that were affected by the estimates, assumptions, and judgments used in the
preparation of financial statements are listed below.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance of doubtful accounts is based on an evaluation of specific
customer accounts in which available facts and circumstances indicate
collectibility may be a problem. In addition, the allowance includes a general
reserve for all customers based on historical collection experience.
INVENTORIES
Our inventories are recorded at the lower of cost or market, with cost
based on a first-in, first-out basis. We periodically assess this inventory for
obsolescence and potential excess by reducing the difference between our cost
and the estimated market value of the inventory based on assumptions about
future demand and historical sales patterns. Our inventories consist of
materials and products that are subject to technological obsolescence and
competitive market conditions. If market conditions or future demand are less
favorable than our current expectations, additional inventory write downs or
reserves may be required, which could have an adverse effect on our reported
results in the period the adjustment are made.
11
LONG-LIVED ASSETS
We review our long-lived assets for potential impairment based on a review
of projected undiscounted cash flows associated with these assets. Long-lived
assets are included in impairment evaluations when events and circumstances
exist that indicate the carrying amount of those assets may not be recoverable.
Measurement of impairment losses for long-lived assets that we expect to hold
and use is based on the estimated fair value of the assets. We have recorded
asset impairment charges when the carrying value of certain assets was in excess
of their fair value. Should market conditions or the assumptions used by us in
determining the fair value of these assets change, or management change plans
for usage of certain assets, additional charges to operations may be required in
the period in which such conditions occur.
RISK FACTORS
We are 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.
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.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR PLAN OF EXPANSION, WE WILL NOT
ACHIEVE PROFITABILITY.
We plan to 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, President 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.
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.
12
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 MAY NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS OR EXPANSION.
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 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.
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
13
its purchases of our products, our revenue and profitability would be adversely
affected. For the year ended September 30, 2003, 14 customers accounted for 61%
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.
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.
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.
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 resources in research and development,
sales and marketing, and customer support.
14
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 previous 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. 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 marketing will depend on the efforts of these third parties.
ITEM 7. FINANCIAL STATEMENTS.
Our audited consolidated financial statements for the year ended September
30, 2003 appear following Item 13 of this report and are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 16, 2002, we dismissed HJ & Associates, LLC as our independent
certified public accountant. HJ & Associates reviewed our quarterly report for
the period ended June 30, 2001, but did not initiate an audit or render an audit
report on our financial statements. HJ & Associates' dismissal was recommended
and approved by our Board of Directors. For the interim periods reviewed by HJ
& Associates 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 HJ & Associates to make reference thereto in connection with
their opinion. For the interim periods reviewed by HJ & Associates prior to
dismissal, HJ & Associates did not advise us of any of the matters identified in
paragraph (a)(1)(iv)(B) of Item 304 of Regulation S-B.
On January 16, 2002, we engaged Rothstein, Kass & Company, P.C. as our
principal accountant to audit the our financial statements. We did not consult
Rothstein Kass on any matters described in paragraph (a)(2)(i) or (ii) of Item
304 of Regulation S-B during the period specified in paragraph (a)(1) of Item
304 of Regulation S-B prior to engaging Rothstein Kass.
15
PART III
ITEM. 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our present directors and executive officers are as follows:
NAME AGE POSITION
--------------- --- ----------------------------------------
Gene Kostecki 58 President, Chief Executive Officer and a
Director
Alan C. Winduss 62 Chief Financial Officer, Secretary and a
Director
The following is a brief summary of the background of each executive
officer and director:
Gene Kostecki has served as a director and as our President and Chief
Executive Officer 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. He acts as our President and Chief
Executive Officer on a full-time basis.
Alan C. Winduss has served as a director and as our Chief Financial Officer
and Secretary 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 & Associates Pty Ltd, an accounting
firm in Western Australia, which specializes in commercial accounting, corporate
finance and management. He intends to devote approximately 70% of his time to
his duties as one of our executive officers.
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.
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 our equity
securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of our common stock and other equity securities. Officers, directors, and
persons who beneficially own more than ten percent of a registered class of our
equity securities are required by the regulations of the Commission to furnish
us with
16
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, 2003, 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,
2003. 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, 2003:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------
LONG-TERM ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
------------------- ---- ---------- ----------- ------------ ------------
Gene Kostecki 2003 $ 150,000 $ 0 - -
President and Chief 2002 $ 150,000 $ 0 - -
Executive Officer 2001 $ 150,000 $ 0 - -
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 2,000,000 shares of common stock for issuance under the plan. As of
December 20, 2003, no options had 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 C. Winduss, our Chief Financial Officer and Secretary, 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. The employment agreement defines "good reason" as any violation of
the employment agreement by us, 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.
17
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 31, 2003, 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 December 20, 2003, 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, P.O. Box 3087, Malaga D C 6945, Western
Australia.
PERCENTAGE
OF
COMMON
NUMBER STOCK
BENEFICIALLY
NAME OF BENEFICIAL OWNER OF SHARES OWNED
--------------------------------------------------- --------------- -------------
Gene Kostecki 10,598,000 (1) 62.5%
Alan C. Winduss 1,893,250 (2) 11.2%
All 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.
18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Messrs. Gene Kostecki and Alan Winduss are both directors of Alloy Steel
International, Inc. and our 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 our subsidiary,
Alloy Steel Australia (Int.) Pty Ltd. These services are provided at normal
commercial rates and conditions. The cost of these services is 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, we acquired from Mr. Kostecki and Mr. Winduss the right to
utilize and commercially exploit the 3-D Pipefitting Cladder process in exchange
for 3,413,750 shares of common stock.
Our license to use the process to manufacture Arcoplate provides for
royalty payments to Kenside Investments, Ltd., an entity controlled by Mr.
Kostecki, in an amount equal to 2% of our net sales of Arcoplate products.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation*
3.2 By-laws*
4.1 Specimen Certificate*
10.1 2000 Stock Option Plan*
10.2 License Agreement, dated May 4, 2000, between Alloy Steel and Kenside Investments, Ltd.*
10.3 Employment Agreement, dated October 2, 2000, between Alloy Steel and Gene Kostecki*
10.4 Employment Agreement, dated October 2, 2000, between Alloy Steel and Alan Winduss*
10.5 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Berryhill Investments, Ltd.*
10.6 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Chartreuse Nominees Pty. Ltd.*
10.7 Amended and Restated Consulting Agreement, dated October 2, 2000, between Alloy Steel and Persia
Consulting Group, Inc.*
10.8 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Ragstar Investments, Ltd.*
10.9 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Alan Winduss Pty. Ltd.*
10.10 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Ames Nominees Pty. Ltd.*
10.11 Lease Agreement, dated July 1, 2000, between Alloy Steel and Raglan Securities Pty. Ltd.*
10.12 Asset Purchase Agreement, dated October 2, 2000 between Alloy Steel and Collier Unit Trust*
10.13 Equipment Purchase Agreement, dated October 2, 2000, between Alloy Steel and Collier Unit Trust*
10.14 Asset Purchase Agreement, dated October 2, 2000, by and among Alloy Steel and Gene Kostecki and Alan
Winduss*
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)**
32.1 Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C.
1350**
19
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------------------------------------------------------
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**
* Previously filed. See Exhibit Index.
** Filed herewith.
(b) Reports on Form 8-K.
None.
20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: January 9, 2003 ALLOY STEEL INTERNATIONAL, INC.
(Registrant)
/s/ Gene Kostecki
By:------------------------------------------
Gene Kostecki
President and 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.
/s/Gene Kostecki Director and
--------------------- President and Chief Executive January 9, 2003
Gene Kostecki Officer (Principal Executive Officer)
s/Alan Winduss Director and January 9, 2003
--------------------- Chief Financial Officer and
Alan C. Winduss Secretary (Principal Financial
and Accounting Officer)
21
Alloy Steel International, Inc.
Annual Report on Form 10-KSB for the
Year Ended September 30, 2003
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation [Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form
SB-2, SEC File No. 333-49146, filed on November 2, 2000, as amended (the "Registration Statement").]
3.2 By-laws [Incorporated by reference to Exhibit 3.2 to the Registration Statement.]
4.1 Specimen Certificate [Incorporated by reference to Exhibit 4.1 to the Registration Statement.]
10.1 2000 Stock Option Plan [Incorporated by reference to Exhibit 10.1 to the Registration Statement.]
10.2 License Agreement, dated May 4, 2000, between Alloy Steel and Kenside Investments, Ltd. [Incorporated by
reference to Exhibit 10.2 to the Registration Statement.]
10.3 Employment Agreement, dated October 2, 2000, between Alloy Steel and Gene Kostecki [Incorporated by
reference to Exhibit 10.3 to the Registration Statement.]
10.4 Employment Agreement, dated October 2, 2000, between Alloy Steel and Alan Winduss [Incorporated by
reference to Exhibit 10.4 to the Registration Statement.]
10.5 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Berryhill Investments, Ltd.
[Incorporated by reference to Exhibit 10.5 to the Registration Statement.]
10.6 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Chartreuse Nominees Pty. Ltd.
[Incorporated by reference to Exhibit 10.6 to the Registration Statement.]
10.7 Amended and Restated Consulting Agreement, dated October 2, 2000, between Alloy Steel and Persia
Consulting Group, Inc. [Incorporated by reference to Exhibit 10.7 to the Registration Statement.]
10.8 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Ragstar Investments, Ltd.
[Incorporated by reference to Exhibit 10.8 to the Registration Statement.]
10.9 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Alan Winduss Pty. Ltd. [Incorporated
by reference to Exhibit 10.9 to the Registration Statement.]
10.10 Consulting Agreement, dated October 2, 2000, between Alloy Steel and Ames Nominees Pty. Ltd.
[Incorporated by reference to Exhibit 10.10 to the Registration Statement.]
10.11 Lease Agreement, dated July 1, 2000, between Alloy Steel and Raglan Securities Pty. Ltd. [Incorporated by
reference to Exhibit 10.11 to the Registration Statement.]
10.12 Asset Purchase Agreement, dated October 2, 2000 between Alloy Steel and Collier Unit Trust [Incorporated
by reference to Exhibit 10.12 to the Registration Statement.]
10.13 Equipment Purchase Agreement, dated October 2, 2000, between Alloy Steel and Collier Unit Trust
[Incorporated by reference to Exhibit 10.13 to the Registration Statement.]
10.14 Asset Purchase Agreement, dated October 2, 2000, by and among Alloy Steel and Gene Kostecki and Alan
Winduss [Incorporated by reference to Exhibit 10.14 to the Registration Statement.]
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)
32.1 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**
22
ALLOY STEEL INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
SEPTEMBER 30, 2003
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, 2003 F-3
Consolidated Statements of Operations
Years Ended September 30, 2003 and 2002 F-4
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 2003 and 2002 F-5
Consolidated Statements of Cash Flows
Years Ended September 30, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7 - 15
F-1
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, 2003, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years ended September 30, 2003 and 2002. 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 financial position of the Company as of
September 30, 2003, and the results of its operations and its cash flows for the
years ended September 30, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/Rothstein, Kass & Company, P.C.
Roseland, New Jersey
December 12, 2003
F-2
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2003
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 213,381
Accounts receivable, less allowance for doubtful
accounts of $25,260 203,500
Inventories 311,456
Prepaid expenses and other current assets 31,269
-----------
Total current assets 759,606
-----------
PROPERTY AND EQUIPMENT, net 1,501,169
-----------
OTHER ASSETS
Intangibles 90,512
-----------
$2,351,287
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current portion $ 43,664
Accounts payable and other current liabilities 706,258
-----------
Total current liabilities 749,922
LONG-TERM LIABILITIES
Notes payable, less current portion 90,494
Loan payable, related party 133,914
-----------
Total liabilities 974,330
-----------
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 (939,277)
Accumulated other comprehensive income 373,352
-----------
Total stockholders' equity 1,376,957
-----------
$2,351,287
===========
See accompanying notes to consolidated financial statements.
F-3
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 2003 and 2002
2003 2002
----------- ------------
SALES $ 1,871,500 $ 2,116,314
COST OF SALES 1,070,766 1,184,491
------------ ------------
GROSS PROFIT 800,734 931,823
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,000,107 1,128,238
COST IN CONNECTION WITH EQUITY LINE OF CREDIT - 600,000
------------ ------------
1,000,107 1,728,238
------------ ------------
LOSS FROM OPERATIONS (199,373) (796,415)
------------ ------------
OTHER INCOME (EXPENSES)
Interest expense (8,603) (8,827)
Interest income 13,306 9,962
Insurance recovery 4,892 -
Export grant received 19,181 -
Profit on disposal of plant and equipment 138 -
------------ ------------
28,914 9,962
------------ -----------
LOSS BEFORE INCOME TAXES (170,459) (795,280)
INCOME TAX EXPENSE (BENEFIT) (193,127) 3,467
------------ -----------
NET INCOME (LOSS) $ 22,668 $ (798,747)
=========== ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ 0.00 $ (0.05)
=========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN COMPUTING BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE 16,950,000 16,950,000
=========== ============
See accompanying notes to consolidated financial statements.
F-4
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2003 and 2002
Capital
Common Shares In Excess Accumulated Comprehensive
Shares Amount of Par Value Deficit Income (Loss)
---------- -------- ------------- ------------
Balances, October 1, 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) ($798,747)
Other comprehensive loss, foreign currency
translation adjustment 119,947
---------------
Total comprehensive loss - Year ended September 30, 2002 ($678,800)
===============
---------- -------- ------------- ------------
Balances, September 30, 2002 16,950,000 169,500 1,773,382 (961,945)
Net income 22,668 $ 22,668
Other comprehensive income, foreign currency
translation adjustment 337,971
---------------
Total comprehensive income - Year ended September 30, 2003 $ 360,639
===============
---------- -------- ------------- ------------
Balances, September 30, 2003 16,950,000 $169,500 $ 1,773,382 ($939,277)
========== ======== ============= ============
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity
-------------- ---------------
Balances, October 1, 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)
Other comprehensive loss, foreign currency
translation adjustment 119,947 119,947
Total comprehensive loss - Year ended September 30, 2002
-------------- ---------------
Balances, September 30, 2002 35,381 1,016,318
Net income 22,668
Other comprehensive income, foreign currency
translation adjustment 337,971 337,971
Total comprehensive income - Year ended September 30, 2003
-------------- ---------------
Balances, September 30, 2003 $ 373,352 $ 1,376,957
=============== ===============
See accompanying notes to consolidated financial statements.
F-5
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2003 and 2002
2003 2002
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 22,668 ($798,747)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 90,974 82,158
Costs in connection with equity line of credit - 600,000
Gain on disposal of plant and equipment (138) -
Provision for loss on investment - 3,926
Plant under construction written off 8,458 40,211
Application of research and development credit
to income taxes payable (170,448) -
Increase (Decrease) in cash attributable to changes
in operating assets and liabilities:
Accounts receivable (72,184) 78,234
Inventories (153,187) 119,683
Prepaid expenses and other current assets 7,886 14,752
Accounts payable and other current liabilities 173,538 215,751
Income taxes payable - (81,641)
---------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (92,433) 274,327
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property plant and equipment (29,059) (219,077)
Proceeds on disposal of plant and equipment 368 -
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (28,691) (219,077)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings - 79,026
Repayment of borrowings (37,022) (26,183)
---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (37,022) 52,843
---------- -----------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 83,079 1,221
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (75,067) 109,314
CASH AND CASH EQUIVALENTS, beginning of year 288,448 179,134
---------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 213,381 $ 288,448
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
cash paid during the years for:
Income taxes $ 0 $ 108,622
========= ===========
Interest $ 8,603 $ 8,827
========= ===========
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 Equivalents
The Company considers all highly-liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its receivables
and establishes an allowance for doubtful accounts, based on the history of past
write-offs and collections and current credit conditions. Accounts are written
off as uncollectible once the Company has exhausted its collection efforts
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.
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 property 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 $4,365 and
$12,939 for the years ended September 30, 2003 and 2002, 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)
Income (Loss) Per Common Share
SFAS No. 128, "Earnings Per Share", requires dual presentation of basic and
diluted income (loss) per share for all periods presented. Basic income (loss)
per share excludes dilution and is computed by dividing net income (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 income (loss) per common share was the same as basic income (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 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 did not have a material impact on the Company's financial
position, results of operations or cash flows.
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 mandatorily
redeemable preferred stock, to be measured at fair value and classified as
liabilities. The Statement is generally effective for financial instruments
entered into or modified after May 31, 2003, and otherwise shall be effective at
the beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did have a material effect on the Company's financial
position, results of operations or cash flows.
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, 2003:
Raw materials $ 60,998
Finished goods 250,458
----------
$ 311,456
==========
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following at September
30, 2003:
Prepaid expenses $ 16,011
GST receivable 15,258
----------
$ 31,269
==========
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2003:
Plant and equipment $ 430,874
Furniture and fixtures 21,164
Vehicles 9,265
Office and computer equipment 48,036
----------
509,339
Less accumulated depreciation 254,929
----------
254,410
Construction in progress 1,246,759
----------
$1,501,169
==========
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, 2003 and 2002 was $90,974
and $82,158, respectively.
6. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consist of the following at
September 30, 2003:
Accounts payable and accrued expenses $ 258,204
Accrued officers salary 312,196
Royalties payable 135,858
----------
$ 706,258
==========
7. NOTES PAYABLE
Notes payable at September 30, 2003 consists of the following:
Note payable (a) $ 47,433
Note payable (b) 63,012
Note payable (c) 23,713
--------
134,158
Less current portion 43,664
--------
$ 90,494
========
(a) The note is payable in monthly installments of $1,339 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.
(b) The note is payable in monthly installments of $1,835 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 $669 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
================================================================================
9. NOTES PAYABLE (CONTINUED)
Aggregate annual principal payments for each of the following years are as
follows:
YEAR ENDING SEPTEMBER 30,
2004 $43,664
2005 46,598
2006 43,896
6. LOAN PAYABLE, RELATED PARTY
As of September 30, 2003, the Company has a non-interest bearing loan payable to
a related party with no stated repayment terms of approximately $134,000.
9. INCOME TAXES
Loss before income taxes for the years ended September 30, 2003 and 2002 were
derived in the following jurisdictions:
2003 2002
Australia $(118,191) $ (34,998)
US (52,268) (760,282)
---------- ----------
$(170,459) $(795,280)
========== ==========
The components of income tax expense (benefit) are as follows for the years
ended September 30, 2003 and 2002:
2003 2002
CURRENT
Foreign $(193,127) $3,467
---------- ------
DEFERRED
Foreign - -
---------- ------
$(193,127) $3,467
As of September 30, 2003, the Company had US net operating loss carryforwards of
approximately $1,445,000 expiring through 2023 and Australian net operating loss
carryforwards of approximately $48,000.
F-12
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. INCOME TAXES (CONTINUED)
The components of the net deferred income tax asset consist of the following at
September 2003 and 2002:
2003 2002
Deferred tax assets
Net operating loss carryforwards $542,764 $481,191
Other 6,488 7,355
-------- --------
549,252 488,546
Less valuation allowance 549,252 488,546
-------- --------
Deferred tax liabilities
Other
-------- --------
Net deferred income tax asset $ - $ -
======== ========
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 $61,000 and $271,000 for the years ended September 30, 2003 and
2002, 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 2003 and 2002 differs from the U.S. federal statutory
rate as follows:
2003 2002
U.S. federal statutory rate (34.0)% (34.0)%
Change in valuation allowance 35.6 34.0
Over-accrual of income taxes due to
application of research and development credit 111.7
------ -------
Effective tax rate 113.3% - %
===============
F-13
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. 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. For the
years ending September 30, 2003 and 2002 there were no stock options granted.
11. COMMITMENTS AND CONTINGENCIES
Operating Lease
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, 2003 and 2002 was approximately
$85,000 in each year.
Royalty Agreements
The Company has a licensing agreement with a related party, of which relates 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,
2003, approximately $136,000 was payable under this agreement and is included in
accounts payable and other current liabilities.
Royalty expense was approximately $37,000 and $42,000 for the years ended
September 30, 2003 and 2002, respectively.
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 either party gives written notice of non-renewal
within 180 days prior to their expiration. Approximately $230,000 has been
expensed under these agreements in each of the years ended September 30, 2003
and 2002, and is included in selling, general and administrative expenses.
F-14
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. STOCKHOLDERS' EQUITY
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 capital in excess of par was increased by $600,000.
13. MAJOR CUSTOMERS, SUPPLIERS AND GEOGRAPHIC INFORMATION
The Company had revenues from two customers for the years ended September 30,
2003 and 2002 aggregating approximately $817,000 and $1,260,000, respectively.
Accounts receivable due from these customers were approximately $35,000 and
$89,000 at September 30, 2003 and 2002, respectively.
For the years ended September 30, 2003 and 2002, the Company purchased
approximately 81% and 86% of its inventories from three suppliers.
For the years ended September 30, 2003 and 2002 revenues were derived from the
following:
2003 2002
Australia/Asia 29 % 35%
South America 31 % 42%
US & Other 40 % 23%
----- -----
100 % 100%
===== =====
14. LIQUIDITY
The Company has suffered recurring losses from operations, has an accumulated
deficit and is dependent upon its principal stockholders and their affiliated
companies for financial support. The stockholders and affiliates have agreed to
provide working capital and other financial support as needed at least through
October 1, 2004.
F-15