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, 2005
[ ] 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
incorporation or organization) Identification No.)
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 is not required to file reports pursuant to Section 13
or Section 15(d) of the Exchange Act [ ]
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]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes: [X] No: [ ]
The issuer's revenues for the fiscal year ended September 30, 2005 was
$3,620,457.
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 November
30, 2005 was $8,475,000.
As of November 30, 2005, the issuer had a total of 16,950,000 shares of common
stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). 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 Discussion and Analysis or Plan of Operation" and
"Description of 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 facsimile is +61
(8) 9248 3166. Our Email is info@alloysteel.net and our Internet address is
www.alloysteel.net.
OVERVIEW OF BUSINESS
We manufacture and distribute Arcoplate, a wear-resistant alloy overlay
wear plate produced through a patented process. We believe that wear is the
largest single factor leading to production losses in the mining,
mineral-processing, and steel manufacturing industries. Consequently, wear
solutions are indispensable for these businesses. The wearing of metal parts is
generally defined as a gradual decay or breakdown of the metal. This wear of
equipment may be due to many causes and accordingly, the selection of 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 offer 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 suitable for industrial use, because of its high carbide content, we
believe that the high costs associated with tungsten carbide make it impractical
for most businesses. We believe that Arcoplate provides industry with solutions
to most wear-related problems at a cost which is competitive with conventional
welded overlay wear plates and substantially lower than tungsten carbide. In
addition, the 3-D Pipefitting Cladder process which we are developing, will
provide business with solutions for the problem of wear and down time in
pipefitting systems.
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 our
Arcoplate product line will substantially lower down time and the lost
production resulting from this down time.
Conventional welded wear plates have been used in the manufacturing, mining
and construction industries for more than half a century and they are
characterized by several functional limitations:
1
- 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.
We believe Arcoplate has properties that allow it to overcome the
limitations of conventional welded wear plates. Independent laboratory and field
tests, have shown that Arcoplate provides a wear-resistant barrier superior to
that provided by conventional single or multiple-layer wear plates. This is
because of its higher carbide content and smoother surface layer. Arcoplate wear
plate sheets also can withstand rolling and pressing, within specified
fabrication guidelines.
The 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, by independent laboratories,
universities and other recognized testing facilities, including Aust-Amet Pty
Ltd and Central Power Research Institute of Bangalore, India. Commercial fees
were paid to Aust-Amet Pty Ltd while no fees were paid to the Power Research
Institute of Bangalore.
Arcoplate is designed for installation and use where structures and
machinery suffer wear and "hangup" problems. Common situations are:
- the mining of iron, gold, nickel, coal, copper and other ores;
- brick and cement works;
- 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.
Arcoplate is manufactured in a range of grades designed for specific
applications. Our products are designed for ease of handling and can be
fabricated to suit our customers' specific requirements of shape, size and
weight. Sheets of Arcoplate can be welded together to cover large surface
areas. We also provide technical 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 post-production rolling and pressing
can result in a weakened surface structure that cannot withstand high impact
conditions. The Arcoplate process does not require post-production rolling and
pressing. During the Arcoplate process, the plate is coated with the desired
alloy thickness in one application, resulting in a uniform and, therefore,
structurally sound surface. The Arcoplate process maintains a high carbide
content in the overlay, which makes the plate more wear resistant than
conventional welded wear plate.
The new production machine commenced operations in July 2005. The new
machine produces a 600mm wide plate and the original machine produces a 300mm
wide plate. The 300mm wide machine is currently being refurbished and will be
used for production, research and development purposes.
Arcoplate products are currently distributed to customers in the United
States, South America, India, Indonesia, Singapore, South Africa, Japan, China,
Canada, Malaysia and other countries.
3-D PIPEFITTING CLADDER PROCESS
We have recommenced the development of the 3-D Pipefitting Cladder
process. This is a computer-driven and software-based mechanical system for
depositing a profiled layer of wear resistant alloy onto interior surfaces of
pipefittings,
2
used in the dredging, mining, mineral processing, coat-fired power generation,
cement manufacturing, and oil refinery industries. Due to their angled and/or
curved structures, material does not flow uniformly through pipe fittings,
meaning pipe fittings generally have higher wear, resulting in a much shorter
working life, than ordinary straight pipe.
The 3-D Pipefitting Cladder process under development is based upon the
patented production process we use to make Arcoplate and will enable a wear
resistant alloy coating to be applied to interior surfaces of pipe fittings at
the point where wear is most likely to occur. We believe that the 3-D
Pipefitting Cladder process will overcome many of the problems associated with
pipe fitting wear and greatly reduce production losses due to down time and pipe
replacement.
With the new Arcoplate production machine now completed and operational,
engineering time is now being spent on development of the 3-D Pipefitting
Cladder process.
SALES AND MARKETING STRATEGY
The company's 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 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. We intend to establish
market presence by visiting international and domestic 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. The company is also looking at the feasibility of
licensing the process of Arcoplate production in certain countries to stimulate
growth.
To facilitate the marketing of Arcoplate in China, one of the largest
markets in the world, we are still negotiating with potential joint venture
partners. The proposed joint venture with Angng New Steel has not progressed
because of commercial differences between the parties. In the interim, we have
been selling direct to end users in China.
In the year ended September 30, 2005, one customer accounted individually
for at least 10% of our annual sales.
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 customer requirements, certain markets and further development of
specification sheets and corporate brochures.
We intend to market Arcoplate products to consultant engineering companies
both internationally and in Australia in order 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 these engineers
with design planning to optimize solutions for wear and material flow
situations.
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 yet 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.
3
RESEARCH AND DEVELOPMENT
We are continually engaged in the development of new products and
improvements to our existing products.
MANUFACTURING AND SUPPLY
The raw materials we employ are principally steel and a proprietary alloy
compound. We presently purchase steel plate and alloy materials from various
suppliers. Four of our suppliers, Cometals, Integrate Industries Pty Ltd,
Intersteel and Di Candilo Steel City, account for more than 70% of the raw
material we require. 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
materials and fluxes on a timely basis at reasonable prices and upon favorable
terms. We monitor the quality of our products by frequent tests and material
certification, and maintain a strict internal quality control system to monitor
the quality of production.
GOVERNMENT REGULATION
The 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 larger multi-national companies, all of which are
well-established and may have substantially greater financial and other
resources than us. Competitive market conditions could adversely affect our
results of operations if we were required to reduce product prices to remain
competitive. 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 eighteen persons on a full-time basis and three contract
employees as of November 30, 2005, including two executive officers, four
administrative personnel, three marketing personnel and nine manufacturing
personnel. None of our employees are members of a labor union. We consider our
relationship with our employees to be good. We do not anticipate hiring
additional manufacturing employees in the 2006 calendar year.
4
ITEM 2. DESCRIPTION OF PROPERTY.
Our business is conducted from leased premises located at 42 Mercantile Way
Malaga Western Australia.
This lease has been extended for a further five years at the current rental
of $7,083 per calendar month until June 2010.
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 8, 2005. The only
director nominee standing for election, Patrick Joseph O'Neil, was withdrawn
before the meeting.
5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the Over the Counter Bulletin Board. 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, 2005 High Low
----------------------------- ---------- ----------
October 1 - December 31, 2004 $ 0.40 $ 0.20
January 1 - March 31, 2005 $ 0.84 $ 0.28
April 1 - June 30, 2005 $ 0.50 $ 0.20
July 1 - September 30, 2005 $ 0.19 $ 0.18
Year ended September 30, 2004 High Low
----------------------------- ---------- ----------
October 1 - December 31, 2003 $ 0.28 $ 0.08
January 1 - March 31, 2004 $ 0.25 $ 0.12
April 1 - June 30, 2004 $ 0.17 $ 0.14
July 1 - September 30, 2004 $ 0.40 $ 0.13
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 November 30, 2005, there were approximately 131 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.
6
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 None None 2,000,000
security holders (1)
---------------------- --------------------------- --------------------- --------------------------
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. This patented process by
which we manufacture Arcoplate enables us to smoothly and evenly apply an alloy
overlay to a sheet of mild 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 processing industries, wear is
the primary cause of down time, the period of time where machinery is not in
operation because of the necessity of repairs or refurbishment. We believe that
our Arcoplate product line will substantially lower down time and the resulting
lost production.
We are commercially developing the 3-D Pipefitting Cladder process, a
computer driven and software based mechanical system depositing a profiled layer
of wear resistant alloy onto interior surfaces of pipe fittings, targeted for
industrial use. Due to their angles and/or curved structures, material does not
flow uniformly through pipe fittings, meaning pipe fittings generally have
higher wear, resulting in a much shorter working life, than ordinary straight
pipe. The 3-D Pipefitting Cladder process enables wear resistant alloy coating
to be applied to interior surfaces of bends, elbow joints, "T" sections and "Y"
sections of pipe fittings, where wear is most likely to occur. This is expected
to be in production by January 2007.
PLAN OF OPERATION
We intend to achieve market penetration through a multi-step process. In
Australia, we intend to combine targeted marketing with advertising in trade
journals 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. We are presently looking at the feasibility of licensing the
production of Arcoplate in certain countries and market areas.
7
RESULTS OF OPERATIONS
SALES
Alloy Steel had sales of $3,620,457 for the year ended September 30, 2005,
compared to sales of $2,986,915 for the year ended September 30, 2004. 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
$0.76618 and $0.72661, representing the average foreign exchange rate for the
years ended September 30, 2005 and 2004 respectively. The increase is due to an
increasing market acceptance of the product and supply to new customers.
COSTS OF SALES
Alloy Steel had cost of sales of $2,323,100 for the year ended September
30, 2005, compared to cost of sales of $1,739,059 for the year ended September
30, 2004. The gross profit amounted to $1,297,357 compared to $1,247,856 for the
year ended September 30, 2004. The gross profit percentage decreased due to
rising costs and competitive market situations to 35.8% in 2005 from 41.78% in
2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Alloy Steel had selling, general and administrative expenses of $1,382,548
for the year ended September 30, 2005, compared to $1,259,388 in the year ended
September 30, 2004. The increase was primarily due to the increased marketing
and promotional activity of the company in the year ending September 30, 2005.
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
Our income (loss) before tax expense (benefit) was ($74,518) for the year
ended September 30, 2005, compared to a profit before income tax expense
(benefit) of $9,825 for the year ended September 30, 2004.
INCOME TAX EXPENSE (BENEFIT)
Alloy Steel had income tax benefit of ($313,676) for the year ended
September 30, 2005 compared to an income tax expense of $14,050 for the year
ended September 30, 2004. The prior year's income tax expense relates to taxes
payable in Australia. The current year income tax benefit was a result of
research and development concessions granted by the Australian Taxation Office.
NET INCOME (LOSS)
We had net income of $239,158 or $0.01 per share, for the year ended
September 30, 2005, compared to a net loss of ($4,225) or $0.00 per share for
the year ended September 30, 2004.
LIQUIDITY
For the year ended September 30, 2005, the net cash provided by operating
activities was $379,464.
As of the year ended September 30, 2005, we had working capital of
$312,557.
8
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, 2005:
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
CONTRACTUAL OBLIGATIONS
Long term debt 514,793 140,731 199,650 134,524 39,888
Operating leases 403,750 85,000 170,000 148,750 -
-------------------------------------------------------------------------------------
Total contractual obligations $918,593 $ 225,731 $ 369,650 $ 283,274 $ 39,888
The Consolidated Balance Sheet as of September 30, 2005, reflects the
payment of a deposit for a capital commitment for a major item of plant, being a
plasma cutter. The commitment for this is $208,000 being financed over 60 months
at $3,900 per month commencing in November 2005. The cost of this arrangement
has been included in the contractual obligation table above.
We anticipate that the funding of our working capital needs will come
primarily from the cash generated from our operations. To the extent that the
cash generated from our operations is insufficient to meet our working capital
needs or the purchase of machinery or equipment, then we will need to raise
capital from the sale of securities in private offerings or loans. We have no
commitments for capital. The sale of additional equity or convertible debt
securities could result in dilution to our stockholders. There can be no
assurance that financing will be available in amounts or on terms acceptable to
us, if at all.
SIGNIFICANT CHANGES IN NUMBERS OF EMPLOYEES
We do not anticipate hiring any additional manufacturing employees in the
next 12 months.
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 the notes to consolidated financial
statements contains the significant principles that we used to prepare our
consolidated financial statements.
We have identified several critical accounting policies that require us to
make assumptions 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 material
effect on our financial condition or results of operation 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
We do not believe there is a need for a provision for doubtful accounts as
of September 30, 2005.
INVENTORIES
Our inventories are recorded at the lower of cost or net realizable market,
with cost based on an average cost method, which approximates the 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, and that could have an adverse effect on our reported results in the
period the adjustment are made.
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
9
that indicate the carrying amount of these 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
Alloy Steel is subject to various risks that may materially harm our
business, financial condition and results of operations. YOU SHOULD CAREFULLY
CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION
IN THIS FILING BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. THESE ARE NOT THE
ONLY RISKS AND UNCERTAINTIES THAT WE FACE. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED.
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, Chairman and Chief Executive Officer, and Alan Winduss, Chief
Financial Officer. We do not presently maintain keyman life insurance on the
life of either Mr. Kostecki or Mr. Winduss. The loss of the services of Mr.
Kostecki or Mr. Winduss would likely have a significantly detrimental effect on
our business. We currently have employment agreements with each of Mr. Kostecki
and Mr. Winduss. However, if Mr. Kostecki or Mr. Winduss becomes unwilling or
unable to continue in their current positions, it would be significantly more
difficult to operate our business, which could hurt our financial condition and
results of operations.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WE COULD LOSE OUR
COMPETITIVE ADVANTAGE.
We currently have only limited patent protection for our technology, and
may be unable to obtain even limited protection for our proprietary technology
in certain foreign countries. Currently, we have patents in various countries.
We cannot assure you that any granted patent or pending patent application will
provide protection against infringement.
IF WE DO NOT CORRECTLY ANTICIPATE THE MAGNITUDE AND DIRECTION OF CURRENCY
EXPOSURE, THERE COULD BE A MATERIAL ADVERSE IMPACT ON OUR PROSPECTS FOR
PROFITABILITY.
All of our production will take place overseas, and many of the raw
materials and supplies for our products will be purchased in foreign currencies.
In addition, international sales will likely be denominated in local currencies.
These factors
10
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 its purchases
of our products, our revenue and profitability would be adversely affected. For
the year ended September 30, 2005, five customers accounted for 43.0% 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.
11
Although our financial performance depends on large orders from 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 Alloy and have significantly greater financial,
marketing, technical and manufacturing resources with 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.
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.
12
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, 2005 appear following Item 14 of this report and are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Based on their evaluation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")), our principal executive officer and principal financial
officer have concluded that as of the end of the period covered by this Annual
Report on Form 10-KSB such disclosure controls and procedures are effective to
ensure that information required to be disclosed in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal control over financial reporting.
During the last quarter of the year under report, there was no change in
our internal control over financial reporting that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 8B. OTHER INFORMATION
None.
13
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 60 President, Chief Executive Officer and a
Director
Alan C. Winduss 64 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 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 1979 to the present, Mr. Winduss has
served as director 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 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, 2005, our officers, directors, and greater than
ten percent beneficial owners complied with all Sections 16(a) filing
requirements applicable to them.
14
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,
2005. 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, 2005:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------
LONG-TERM ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
------------------- ---- ---------- ----------- ------------ ------------
Gene Kostecki 2005 $ 150,000 $ 0 - -
President and Chief 2004 $ 150,000 $ 0 - -
Executive Officer 2003 $ 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
November 30 2005, 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
There are currently no employment agreements in place with either Mr. G.
Kostecki our President and Chief Executive Officer or Mr. A. Winduss our Chief
Financial Officer and Secretary. New agreements are currently being discussed
and negotiated.
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 November 30 2005, the number and
percentage of outstanding shares of common stock beneficially owned by:
15
- 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 November 30, 2005, but
excludes shares of common stock underlying options or warrants held by any other
person. Unless otherwise indicated, the address of each beneficial owner is c/o
Alloy Steel, 42 Mercantile Way Malaga, P.O. Box 3087 Malaga D C 6945, Western
Australia.
PERCENTAGE
OF
COMMON
STOCK
NUMBER BENEFICIALLY
NAME OF BENEFICIAL OWNER OF SHARES OWNED
--------------------------------------------------- ----------- ------------
Gene Kostecki 10,598,000 62.5%
Alan C. Winduss 1,893,250 11.2%
All officers and directors as a group (two persons) 12,491,250 74.0%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Messrs. Gene Kostecki and Alan Winduss are both directors of Alloy Steel
International, Inc. and its subsidiary, Alloy Steel Australia (Int) Pty Ltd.
Mr. Winduss is a director of a public accounting firm Winduss & Associates
Pty Ltd, which provides accounting and secretarial services to Alloy Steel's
subsidiary, Alloy Steel Australia (Int.) Pty Ltd. These services are provided
at normal commercial rates and conditions. The cost of these services are
recovered under the fees paid by Mr. Winduss' consulting agreement.
Alloy Steel Australia (Int.) Pty Ltd. paid rent of $85,000, for commercial
premises it occupied during the year, to Raglan Securities Pty Ltd., a company
controlled by Gene Kostecki.
The license granted to use the Alloy process provides for royalty payments
to Kenside Investments, Ltd., in an amount equal to 2% of our net sales of
Arcoplate products. Our Chief Executive Officer, director and principal
shareholder, Gene Kostecki controls Kenside Investments, Ltd.
At September 30, 2005 we had a non-interest bearing loan of approximately
$150,344 payable to an entity controlled by Mr Gene Kostecki. The loan has no
stated repayment terms and is unsecured.
ITEM 13. EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- ---------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation*
3.2 By-laws*
4.1 Specimen Certificate*
16
EXHIBIT NO. DESCRIPTION
----------- ---------------------------------------------------------------------------------------------------
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*
10.15 Amendment dated July 1, 2004, to Employment Agreement between Alloy Steel and Gene Kostecki*
10.16 Amendment dated July 1, 2004, to Employment Agreement between Alloy Steel 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**
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.
17
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Board of Directors reviewed all services performed for the company by
Rothstein Kass & Company, P.C, our independent auditors, for the fiscal year
ended September 30, 2005, within and outside the scope of their quarterly and
annual auditing function. The aggregate fees billed by our independent auditors
for each of the last two fiscal years are as follows:
2005 2004
------ ------
Audit Fees 48,212 20,500
Audit-Related Fees - -
Tax Fees - -
All Other Fees - -
The fees labeled Audit-Related Fees above principally involved the auditing of
the annual financial statements of the company and the economic entity and
review of the audit of the overseas operating entity, together with the review
of quarterly financial statements as lodged with regulatory authorities.
18
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: December 22, 2005 ALLOY STEEL INTERNATIONAL, INC.
(Registrant)
By: /s/ Gene Kostecki
-------------------------------------
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
Gene Kostecki Officer (Principal Executive Officer) December 22, 2005
Director and
/s/ Alan C. Winduss Chief Financial Officer and
---------------------- Secretary (Principal Financial and December 22, 2005
Alan C. Winduss Accounting Officer)
19
Alloy Steel International, Inc.
Annual Report on Form 10-KSB for the
Year Ended September 30, 2005
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.]
10.15 Amendment dated July 1, 2004, to Employment Agreement between Alloy Steel and Gene Kostecki.
10.16 Amendment dated July 1, 2004, to Employment Agreement between Alloy Steel 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
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
20
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(ITEM 7)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet
September 30, 2005 F-3
Consolidated Statements of Operations
Years ended September 30, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity
Years ended September 30, 2005 and 2004 F-5
Consolidated Statements of Cash Flows
Years ended September 30, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-7 - 15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years ended in the two year period September 30, 2005.
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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides 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, 2005, and the results of its operations and its cash flows for
each of the years ended in the two year period September 30, 2005, in conformity
with accounting principles generally accepted in the United States of America.
/s/Rothstein, Kass & Company, P.C.
Roseland, New Jersey
December 15, 2005
F-2
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 127,920
Accounts receivable 591,782
Inventories 656,434
Income taxes receivable 325,444
Prepaid expenses and other current assets 95,594
-----------
Total current assets 1,797,174
-----------
PROPERTY AND EQUIPMENT, net 1,720,501
-----------
OTHER ASSETS
Other 10,215
Deferred tax assets 21,209
Intangibles 90,512
-----------
Total other assets 121,936
-----------
$3,639,611
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current portion $ 62,567
Notes payable, officers, current portion 52,424
Accrued officers' salaries 224,096
Royalties payable, related party 262,578
Accounts payable and other current liabilities 882,952
-----------
Total current liabilities 1,484,617
-----------
LONG-TERM LIABILITIES
Notes payable, less current portion 35,750
Notes payable, officers, less current portion 146,895
Employee entitlement provisions 5,920
Loan payable, related party 150,344
-----------
Total long-term liabilities 338,909
-----------
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 (704,342)
Accumulated other comprehensive income 577,545
-----------
Total stockholders' equity 1,816,085
-----------
$3,639,611
===========
See accompanying notes to consolidated financial statements.
F-3
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 2005 and 2004
2005 2004
------------ ------------
SALES $ 3,620,457 $ 2,986,915
COST OF SALES 2,323,100 1,739,059
------------ ------------
GROSS PROFIT 1,297,357 1,247,856
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,382,548 1,259,388
------------ ------------
LOSS FROM OPERATIONS (85,191) (11,532)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 14,402 8,646
Interest expense (10,728) (10,895)
Insurance recovery 6,974 1,435
Commission received 25
Export grant received 19,611
Profit on disposal of property and equipment 2,560
------------ ------------
10,673 21,357
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (74,518) 9,825
INCOME TAX EXPENSE (BENEFIT) (313,676) 14,050
------------ ------------
NET INCOME (LOSS) $ 239,158 $ (4,225)
============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.00)
============ ============
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, 2005 and 2004
Accumulated
Common Stock Capital Compre- Other Total
-------------------- in excess Accumulated hensive Comprehensive Stockholders'
Shares Amount of par value Deficit Income Income Equity
---------- -------- ------------- ------------- --------- -------------- ---------------
Balances, September 30, 2003 16,950,000 $169,500 $ 1,773,382 $ (939,275) $ 373,352 $ 1,376,959
Net loss (4,225) $ (4,225) (4,225)
Other comprehensive income,
foreign currency translation
adjustment 101,189 101,189 101,189
---------
Total comprehensive income -
Year ended September 30, 2004 $ 96,964
=========
---------- -------- ------------- ------------- -------------- ---------------
Balances, September 30, 2004 16,950,000 169,500 1,773,382 (943,500) 474,541 1,473,923
Net income 239,158 $239,158 239,158
Other comprehensive income,
foreign currency translation
adjustment 103,004 103,004 103,004
---------
Total comprehensive income -
Year ended September 30, 2005 $342,162
=========
---------- -------- ------------- ------------- -------------- ---------------
Balances, September 30, 2005 16,950,000 $169,500 $ 1,773,382 $ (704,342) $ 577,545 $ 1,816,085
========== ======== ============= ============= ============== ===============
See accompanying notes to consolidated financial statements.
F-5
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2005 and 2004
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 239,158 $ (4,225)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 149,381 116,653
Deferred income taxes (209) (20,072)
Profit on disposal of property and equipment (2,560)
Increase (decrease) in cash and cash equivalents
attributable to changes in operating assets and liabilities:
Accounts receivable 279,004 (611,728)
Inventories (234,594) (70,694)
Income taxes receivable (327,960) -
Prepaid expenses and other current assets 2,176 (24,365)
Accrued officers' salaries 35,801 (123,901)
Accounts payable and other current liabilities 248,537 712,033
Income taxes payable (11,830) 11,220
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 379,464 (17,639)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (167,437) (104,992)
Payment on deposit for investment (6,847) (3,270)
Proceeds on disposal of property and equipment - 3,204
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (174,284) (105,058)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES, repayment on
notes and loan payables (239,358) (61,218)
---------- ----------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 120,060 12,572
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 85,882 (171,343)
CASH AND CASH EQUIVALENTS, beginning of year 42,038 213,381
---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 127,920 $ 42,038
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
cash paid during the years for:
Income taxes $ 26,325 $ 22,902
========== ==========
Interest $ 10,728 $ 10,895
========== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES,
Equipment acquired under notes payable $ 21,095 $ 44,120
========== ==========
Conversion of consulting fees payable to notes payable, officers $ - $ 242,925
========== ==========
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 Arcoplate, a wear-resistant fused-alloy steel plate,
to customers throughout the world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company adheres to accounting principles generally accepted in the United
States of America. The Company's consolidated financial statements are
denominated in United States dollars.
Principles of Consolidation
The consolidated financial statements include the accounts of ASII and ASAI.
All material intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition
The Company recognizes revenues when products are shipped and title passes to
customers. Provisions are established, as appropriate, for uncollectible
accounts, returns and allowances and warranties in connection with sales.
Cash and Cash Equivalents
The Company considers all highly-liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
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 5-20 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, commencing from the time the property rights are first commercially
exploited by the Company.
Advertising
Advertising costs are charged to operations as incurred and were approximately
$12,000 and $26,000 for the years ended September 30, 2005 and 2004,
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 for both years
presented.
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 May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections." This statement generally
requires retrospective application to prior periods' financial statements of
voluntary changes in accounting principles unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. Under the prior rules, changes in accounting principles were generally
recognized by including in net income of the period of the previous guidance for
reporting the correction of an error in previously issued financial statements,
change in accounting estimate or justification of a change in accounting
principle on the basis of preferability. This statement is effective for
accounting changes made in the fiscal years beginning after December 15, 2005.
Adoption of the provisions of the Statement is not expected to have a material
effect on the operations or financial position of the Company.
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based
Compensation (Revised)". SFAS No. 123(R) supersedes APB No. 25 and its related
implementation guidance. SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's instruments or that may be settled by the issuance of those
equity instruments. SFAS No. 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award during the requisite service period
(usually the vesting period). No compensation costs are recognized for equity
instruments for which employees do not render the requisite service. The
grant-date fair value of employee share options and similar instruments will be
estimated using option-pricing models adjusted for the unique characteristics of
those instruments (unless observable market prices for the same or similar
instruments are available). If an equity award is modified after the grant date,
incremental compensation cost will be recognized in an amount equal to the
excess of the fair value of the modified award over the fair value of the
original award immediately before the modification. The Company has not
completed its evaluation of SFAS No. 123(R) but expects that the adoption of
this new standard, which will take effect January 1, 2006, will not have a
material impact on the operating results of the Company.
F-9
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements (Continued)
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment
of Accounting Research Bulletin (ARB) No. 43, Chapter 4". This statement amends
the guidance in ARB No. 43 Chapter 4 "Inventory Pricing" to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. SFAS No. 151 requires that those items be recognized
as current period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of this statement will be effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The Company is currently evaluating the impact that this statement will have on
its consolidated financial statements, but does not believe it will have a
material effect on the Company's performance.
Foreign Currency Translation
Assets and liabilities of the Company's wholly-owned subsidiary are translated
into U.S. dollars at year-end exchange rates, revenues and expenses and cash
flows 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, 2005:
Raw materials $217,878
Work in progress 154,620
Finished goods 283,936
--------
$656,434
========
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following at September
30, 2005:
Prepaid expenses $ 55,363
GST receivable 40,231
--------
$ 95,594
========
F-10
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2005:
Plant and equipment $2,067,094
Furniture and fixtures 28,879
Vehicles 81,892
Office and computer equipment 95,998
----------
2,273,863
Less accumulated depreciation 553,362
----------
$1,720,501
==========
Depreciation expense for the years ended September 30, 2005 and 2004 was
approximately $149,000 and $117,000, respectively. At September 30, 2005,
property and equipment included approximately $298,000 and accumulated
depreciation included approximately $176,000, related to assets acquired under
notes payable.
6. NOTES PAYABLE
Notes payable at September 30, 2005 consists of the following:
Note payable (a) $ 18,010
Note payable (b) 22,269
Note payable (c) 9,004
Note payable (d) 14,710
Note payable (e) 14,620
Note payable (f) 19,704
--------
98,317
Less current portion 62,567
--------
$ 35,750
========
(a) The note is payable in monthly installments of $1,661 including interest at
a rate of 6.6% per annum, with a final balloon 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
6. NOTES PAYABLE (CONTINUED)
(b) The note is payable in monthly installments of $2,277 including interest at
a rate of 6.435% per annum, with a final balloon payment in October 2005.
The note is collateralized by the underlying equipment.
(c) The note is payable in monthly installments of $831 including interest at a
rate of 6.6% per annum, with a final balloon payment in November 2005. The
note is collateralized by the underlying equipment.
(d) The note is payable in monthly installments of $639 including interest at a
rate of 7.75% per annum, with a final balloon payment in April 2007. The
note is collateralized by the underlying equipment and is guaranteed by the
officers of the Company.
(e) The note is payable in monthly installments of $417 including interest at a
rate of 7.9% per annum, with a final balloon payment in January 2009. The
note is collateralized by the underlying equipment and is guaranteed by the
officers of the Company.
(f) The note is payable in monthly installments of $327 including interest at a
rate of 7.61% per annum, with a final balloon payment in March 2010. The
note is collateralized by the underlying equipment and is guaranteed by the
officers of the Company.
Aggregate annual principal payments for each of the following years are as
follows:
YEAR ENDING SEPTEMBER 30,
2006 $ 62,567
2007 14,346
2008 8,243
2009 4,846
2010 8,315
--------
$ 98,317
========
7. NOTES PAYABLE, OFFICERS
Notes payable, officers at September 30, 2005 consists of the following:
Note payable (a) $ 67,332
Note payable (b) 131,987
--------
199,319
Less Current Portion 52,424
--------
$146,895
========
(a) The note is payable in monthly installments of $1,524 including interest at
a rate of 1% per annum, with a final payment in June 2009. The note is
unsecured and is due to an officer of the Company.
(b) The note is payable in monthly installments of $2,989 including interest at
a rate of 1% per annum, with a final payment in June 2009. The note is
unsecured and is due to an officer of the Company.
Aggregate annual principal payments for each of the following years are as
follows:
YEAR ENDING SEPTEMBER 30,
2006 $ 52,424
2007 52,949
2008 53,482
2009 40,464
--------
199,319
========
8. LOAN PAYABLE, RELATED PARTY
As of September 30, 2005, the Company has a non-interest bearing loan payable to
a related party with no stated repayment terms of approximately $150,344. The
loan payable is not expected to be repaid before October 1, 2006.
F-12
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
Income (loss) before income tax expense (benefit) for the years ended September
30, 2005 and 2004 were derived in the following jurisdictions:
2005 2004
Australia $(66,515) $ 46,834
US (8,003) (37,009)
--------------------
$(74,518) $ 9,825
====================
The components of income tax expense (benefit) are as follows for the years
ended September 30, 2005 and 2004:
2005 2004
CURRENT
Foreign $(312,267) $ 33,850
DEFERRED
Foreign (1,409) (19,800)
---------------------
$(313,676) $ 14,050
=====================
As of September 30, 2005, the Company had US net operating loss carryforwards of
approximately $1,499,000 expiring through 2025.
The components of the deferred tax assets and liabilities consist of the
following at September 30, 2005 and 2004:
2005 2004
Deferred tax assets
Net operating loss carryforwards $ 509,680 $506,959
Other 28,564 32,934
--------------------
538,244 539,893
Less valuation allowance 509,680 506,959
--------------------
$ 28,564 $ 32,934
====================
Deferred tax liabilities
Other $ (7,355) $(13,134)
====================
Deferred taxes assets, net $ 21,209 $19,800
====================
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 $3,000 and $16,000 for the years ended September 30, 2005 and
2004, 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 Company also has certain foreign tax credits available for future use.
F-13
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED)
The effective tax rate in 2005 and 2004 differs from the U.S. federal statutory
rate as follows:
2005 2004
U.S. federal statutory rate (34.0)% 34.0%
Change in valuation allowance 128.0
Change in estimated research
and development credit (19.0)
Refund related to prior years
research and development credit (312.0)
Overaccrual from prior year (83.0)
Other 8.0
----------------
Effective tax rate (421.0)% 143.0%
================
10. STOCK OPTIONS
During 2000, the Company's Board of Directors (the Committee) 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 Committee and consultants of
the Company. Options under the Plan may be incentive stock options,
nonqualified stock options, or any combination thereof, and the 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, 2005 and 2004, there were no stock options granted or
outstanding stock options.
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, 2010.
Rent expense for the years ended September 30, 2005 and 2004 was approximately
$85,000 in each year.
Royalty Agreements
The Company has a licensing agreement with a related party, which relates to the
sale of all products sold in the United States of America. Under the terms of
the agreement, the Company is required to pay royalties of 2% on the net sales
of these 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, 2005, approximately $262,500 was payable under this agreement
and is included in accounts payable and other current liabilities.
Royalty expense was approximately $69,000 and $57,000 for the years ended
September 30, 2005 and 2004, respectively.
F-14
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 semi-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 were automatically renewed for an additional
year starting on June 13, 2005, since neither party gave notice of non-renewal
within 180 days prior to their expiration. Approximately $230,000 has been
expensed under these agreements in the years ended September 30, 2005 and 2004,
and is included in selling, general and administrative expenses.
Equipment Purchase
During August 2005, the Company entered into an agreement to purchase a Plasma
Cutter and paid a deposit of approximately $32,900 on the equipment. The Company
is committed to acquiring the equipment after fiscal year end with the balance
of approximately $208,000 to be financed upon delivery of the equipment. The
Company has arranged for financing the balance by issuing a note payable in
sixty monthly installments of $3,900 commencing in November 2005. The note is
collateralized by the underlying equipment and is guaranteed by the officers of
the Company.
12. MAJOR CUSTOMERS, SUPPLIERS AND GEOGRAPHIC INFORMATION
The Company had revenues from one customer for each of the years ended September
30, 2005 and 2004, of approximately $721,000 and $300,000, respectively.
Accounts receivable due from the respective customers were approximately $nil
and $300,000 at September 30, 2005 and 2004, respectively.
For the years ended September 30, 2005 and 2004, the Company purchased
approximately 41% and 54% of its inventories from two and three suppliers,
respectively.
For the years ended September 30, 2005 and 2004, revenues were derived from the
following:
2005 2004
Australia 50% 39%
Americas 26% 36%
Other 24% 25%
--------------
100% 100%
==============
13. 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. Certain stockholders and affiliates have agreed
to provide working capital and financial support as needed at least through
October 1, 2006, by deferring payments under various agreements with the
Company if necessary.
F-15