U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to ______________
Commission file number: 1-14219
Stelax Industries Ltd.
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(Exact name of small business issuer as specified in its charter)
British Columbia None
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
4287-A Belt Line Rd. #195, Addison, TX 75001
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(Address of principal executive offices) (Zip Code)
(972) 233-6041
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(Registrant's telephone number)
4004 Beltline Road, Suite 107, Dallas TX 75244
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(Former name, former address and former fiscal year, if changed since last
report)
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 ____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of June 30, 2002: 43,184,775
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Stelax Industries Ltd.
CONSOLIDATED BALANCE SHEETS
(Presented in United States Dollars)
ASSETS
Jun-30 Mar-31
2002 2002
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(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 4,412 $ 4,102
Note Receivable 141,480 141,480
Inventory-Raw Materials
Work in process 0 0
Finished Goods 0 0
Accounts Receivable-Trade (Allowance for 0 0
doubtful accounts at June 30 and March 31
2002, $0 and $0 respectively)
Receivables from related parties 3,000 3,000
Prepaid and other current assets 10,687 0
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Total Current Assets 159,579 148,582
PROPERTY & EQUIPMENT - AT COST
Plant & Machinery 0 0
Building 0 0
Land 0 0
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0 0
Accumulated Depreciation 0 0
Total Property & Equipment 0 0
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INTANGIBLE ASSETS ( Accumulated amortisation
of $ 0 and $ 0 at June 30 and March 31, 2002 0 0
respectively )
OTHER ASSETS 82,357 102,934
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TOTAL ASSETS 241,936 251,516
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Stelax Industries Ltd.
CONSOLIDATED BALANCE SHEETS
(Presented in United States Dollars)
LIABILITIES AND STOCKHOLDERS EQUITY
Jun-30 Mar-31
2002 2002
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(Unaudited)
CURRENT LIABILITIES
Accounts Payable $ 288,641 $ 206,653
Payable to related parties 1,152,064 1,035,730
Accrued interest 516,899 433,998
Note Payable - short term 3,645,833 3,645,833
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5,603,437 5,322,214
NOTE PAYABLE - LONG TERM
STOCKHOLDERS EQUITY Common stock - 50,000,000 shares
authorised, no stated parvalue; issued and outstanding
43,184,775 & 43,184,775 shares at June 30 and March 31,
2002 respectively. 25,281,717 25,281,717
Cumulative translation adjustments 83,684 83,684
Accumulated deficit (30,726,902) (30,436,099)
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Total Stockholders Equity (5,361,501) (5,070,698)
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 241,936 251,516
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Stelax Industries Ltd.
CONSOLIDATED STATEMENT OF OPERATIONS
(Presented in United States Dollars)
Unaudited
3 Months Ended
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Jun-30 Jun-30
2002 2001
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Sales $ 0 $ 266,497
Cost of Sales 0 492,977
Gross Loss 0 (226,480)
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Selling, general and administrative Expenses (including
depreciation and amortisation of $ 0 and $ 160048 for
the 3 months ending June 30, 2002 and 2001 respectively) 197,371 452,912
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Loss from operations (197,371) (679,392)
Other Income (expense):
Interest Income 0 1,589
Interest Expense (93,432) (106,965)
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Net loss (290,803) (784,768)
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Weighted average shares of common stock 41,220,912 39,299,280
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Net loss per share $ (0.007) $ (0.02)
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Stelax Industries Ltd.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Presented in United States Dollars)
Unaudited
3 Months Ended
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Jun-30 Jun-30
2002 2001
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OPERATING ACTIVITIES
Net Loss $ (290,803) $ (784,768)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation & amortisation 0 160,048
Foreign currency transaction gain (loss) 0 (6,280)
Changes in operating assets and liabilities :
Decrease (increase) in receivables 0 (144,206)
Decrease (increase) in inventory & other assets 9,890 72,218
Increase ( decrease) in accounts payable and 281,223 349,377
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accrued interest
Net cash (used) provided by operating activities 310 353,611
INVESTING ACTIVITIES
Purchase of property, equipment and intangibles 0 (8,202)
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Net cash used by investing activities 0 (8,202)
FINANCING ACTIVITIES
Common stock issue 0 85,380
Convertible note payable issue -
Note payable issue (payment) 0 (312,500)
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0 (227,120)
Increase (decrease) in cash and cash equivalents 310 (588,933)
Cash & cash equivalents at beginning of period 4,102 800,696
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Cash & Cash Equivalents at end of period 4,412 211,763
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Interest Paid 0 0
Income Taxes paid 0 0
STELAX INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Presented in United States Dollars)
Unaudited
(1) INTERIM FINANCIAL STATEMENTS
In the opinion of management, the interim financial statements reflect all
adjustments necessary to a fair statement of the results for the interim periods
presented. The results for the three months ended June 30, 2002 are not
necessarily indicative of results to be expected for the entire year. These
financial statements, notes and analyses should be read in conjunction with the
Company's annual financials for the fiscal year ended March 31, 2002.
(2) LOSS PER SHARE
Loss per share was based on the weighted average number of common shares of
41,220,912 and 39,299,280 outstanding during the three month period ended June
30, 2002 and 2001, respectively.
(3) INCOME TAXES
The Company has net operating loss carry forwards of approximately $420,000 for
Canada and $0 for the U.K.
(4) RELATED PARTY TRANSACTIONS
As of June 30,2002 funds are owed by the Company totaling $ 1,152,064 to the
President of the Company and his affiliates. As of June 30, 2001, funds owed by
the Company totalled $1,113,614 to the President of the Company and his
affiliates.
As of June 30,2002, the Company owed the President of the Company $ 970,312. As
of March 31, 2002, the Company owed the President of $906,065.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of the Form 10-Q contain forward-looking
information. The forward-looking information involves risks and uncertainties
that are based on current expectations, estimates, and projections about the
Company's business, management's beliefs and assumptions made by management.
Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates", and variations of such words and similar expressions are intended
to identify such forward-looking information. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including, but not limited
to, availability of financing for operations, successful performance of internal
operations, impact of competition and other risks detailed below as well as
those discussed elsewhere in this Form 10-QSB and from time to time in the
Company's Securities and Exchange Commission filings and reports. In addition,
general economic and market conditions and growth rates could affect such
statements.
General
For the fiscal years ended March 31, 1999, and March 31, 2000, the Company
developed the market for its Nuovinox product, a product that clads rebar with
stainless steel. Much of this product development involved extensive testing to
determine the product's utility for use in highways and bridges. This testing
occurred principally in the United States for federal and state transportation
authorities. By March 31, 2000, this testing process was completed sufficiently
to commence sales, and the Company's assets were, at that time, unencumbered.
In July 2000, the Company's United States subsidiary entered into a loan and
security agreement with Banc of America Commercial Finance Corporation (the
"Loan Agreement") whereby the Company obtained a term loan as well as a
revolving credit and credit accommodation. The maximum amount that can be
borrowed under the Loan Agreement is $5,750,000.
The Company shipped some product prior to entering into the Loan Agreement, but
the proceeds of the Loan Agreement were used to refine production processes so
that the Company could begin volume productions.
The Registrant's U.K. subsidiary commenced quantity production in the quarter
ended June 2001 but was unable to increase production for sufficiently large
volumes to obtain profitability or service debt. In March 2002 the Registrant's
U.K. subsidiary was placed into receivership and the receiver acquired the
assets of the U.K. subsidiary, and the assets were subsequently transferred to
Wells Fargo Business Credit, Inc. The Registrant's operations thus ceased.
The Registrant has entered into a letter of intent with Wells Fargo Business
Credit, Inc. to acquire for $1,750,000 all of the assets of Wells Fargo Business
Credit Inc. The letter of intent also contemplates granting to Wells Fargo
Business Credit Inc. a warrant to purchase 500,000 shares of the Registrant's
Common Stock. The Registrant anticipates entering in August 2002 into a formal
agreement to fund the reacquisition of these assets and obtain operating capital
and commence production soon thereafter.
Quarter ended June 30, 2002, compared to quarter ended June 30, 2001
The Company's revenues were $ zero in the quarter June 30, 2002 due to the U.K.
subsidiary being in receivership and not operational under the control of Stelax
Industries Ltd. Revenues in the quarter June 30, 2001 had been $ 266,497.
The Company's losses arising within the remainder of the Group amounted to
$290,803 of which $ 93,432 was interest expense. In the quarter June 30,2001 the
respective figures were loss $ 784,768 and $ 106,965 interest.
Quarter ended June 30, 2001, compared to quarter ended June 30, 2000
The Company's revenues increased to $266,497 in the later quarter compared to
revenues of $133,169 in the earlier period. The Company's revenues for the
quarter ended June 30, 2001, reflect the first successful volume production of
the Nuovinox product. Revenues in each of the quarters since June 30, 2000, have
been significantly below $100,000, and revenues for fiscal 2001, which ended
March 31, 2001, were approximately $300,000. The revenues for the quarter ended
June 30, 2001, reflect the Company's ability to produce Nuovinox successfully to
meet demand for the product.
Nonetheless, the Company lost $784,768 in the first quarter of fiscal 2002.
Revenues only began to occur in the later part of the quarter. Consequently,
labor costs and other fixed costs that the Company had in place throughout the
quarter were absorbed by a small relatively small amounts of revenue. General
and administrative expenses increased significantly as the Company began to
staff to levels required to support full production. Finally, the Company
incurred significant interest expense of approximately $106,000 in the June 30,
2001, quarter, essentially interest expense on the Loan Agreement.
Liquidity and Capital Resources
The proceeds from the Loan Agreement have been used to fund operational losses
to extent necessary to cover the start up period for Nuovinox sales and to
finance inventory and receivables to the extent that the Company need funds in
excess of borrowing under the Loan Agreement for inventory and receivables.
However, by the end of fiscal 2001 on March 31, 2001, the Company had used the
maximum amount available under the Loan Agreement.
Because of the losses incurred in fiscal 2001, at March 31, 2001, the Company
was in technical default under the Loan Agreement. During the first quarter of
fiscal 2002, the Company's operations were funded by sales of securities and
sales of product. The Company remained in technical default under the Loan
Agreement at March 31, 2002.
The Company's audit report for the fiscal year ended March 31, 2002, is
qualified because of the concern over the Company's ability to continue as a
going concern.
DECONSOLIDATION OF STELAX (U.K.)
Under generally accepted accounting principles consolidation is generally
required for investments of more than 50% of the outstanding voting stock of an
investee except when control is not held by the majority owner. Under these
principles, bankruptcy represents a condition which can preclude consolidation
as control rests with the bankruptcy court, rather than the majority owner.
March 7, 2002 an Administrative Receiver was appointed to Stelax (U.K.) pursuant
to a debenture instrument executed over the whole of the assets of the company
in favour of Bank of America Finance Corporation dated June 30 2000 and assigned
to Wells Fargo Business Credit Inc on April 20 20001. Accordingly from March
7,2002 control rests with the Receiver not Stelax Industries.
The results of Stelax (U.K.) have been consolidated up to March 7, 2002
thereafter Stelax (U.K) has been reported using the cost method. At March 7,2002
Stelax (U.K.) had net assets of $7,111,166 principally consisting of plant and
equipment at the Aberneath facility in South Wales, United Kingdom. However
Stelax Industries does not expect to recover any monies from the Receiver in
respect of this investment. This investment has therefore been written off, and
a loss of $7,111,166 has been recorded in the income statement for the year to
March 31,2002.
Inflation
The Company's operations may be impacted by the effects of inflation and
changing prices as increased prices may reduce the demand for steel products.
Additionally, the price of nickel has direct impact on the Company as nickel is
an integral component to the price of the stainless steel utilized in Nuovinox.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not engage in any hedging activities. In particular, the
Company does not hedge its sales for currency fluctuations, and, accordingly,
does not acquire market risk sensitive instruments. Over the last two fiscal
years, market risks have been negligible because of the small amount of
operations in which the Company has engaged.
The Company's primary market risk is anticipated to be a currency exchange rate
risk and the Company does not, at the present time, anticipate engaging in
management of that risk. For the next fiscal year, the Company's operations will
be principally conducted in the United Kingdom with sales anticipated in the
United States and Canada. In addition to currency market risk resulting from
trade accounts receivable, the Company's loan with Bank of America is
denominated in U.S. Dollars. The amounts available to the Company under the Bank
of America loan agreement are principally based upon assets located in the
United Kingdom, and a large increase in the value of the Dollar relative to the
Pound could diminish the amounts that could be available under that loan
agreement. A significant increase in the Pound relative to Dollar would make
United States trade receivables worth less in the United Kingdom, decreasing
profit margins for products produced in the United Kingdom and sold in the
United States.
PART - II
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities exchange Act of 1934, registrant
has duly caused this report to be signed on its behalf by the undersigned.
Stelax Industries, Ltd.
Dated: August 23, 2002 /s/ Harmon S. Hardy
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Harmon S. Hardy, President and
Principal Financial Officer