UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to _________
Commission file number 0-22375
American Stone Industries, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3704099
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
230 W. Main St., Amherst, Ohio 44001
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(Address of principal executive officer)
(440) 986-4501
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(Issuer's telephone number)
8705 Quarry Road, Amherst, OH 44001
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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. [X] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 3, 2004:
2,032,021
INDEX
AMERICAN STONE INDUSTRIES, INC.
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets September 30, 2004 and December 31, 2003........................... 1
Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2004 and 2003...... 2
Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2004 and 2003............ 3
Notes to Condensed Consolidated Financial Statements..................................................... 4
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................................... 12
Signatures.................................................................................................. 13
AMERICAN STONE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
------------- -------------
(Unaudited) (Audited)
ASSETS
Current Assets
Cash $ 934,261 $ 284,238
Accounts receivable 160,020 160,303
Inventory 712,435 837,438
Prepaid expenses 24,441 2,700
------------- -------------
Total Current Assets 1,831,157 1,284,679
------------- -------------
Property, Plant and Equipment, Net - At Cost 3,049,832 3,243,693
------------- -------------
Other Assets 51,727 44,225
------------- -------------
$ 4,932,716 $ 4,572,597
============= =============
LIABILITIES
Current Liabilities
Current portion of notes payable $ 34,492 $ 1,505,850
Accounts payable 180,505 516,345
Accrued liabilities 272,593 188,315
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Total Current Liabilities 487,590 2,210,510
------------- -------------
Long Term Liabilities 2,811,297 1,300,000
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SHAREHOLDERS' EQUITY
Common Stock, $.001 par value,
20 million shares authorized
2,032,021 issued and outstanding at 2,032 1,939
September 30, 2004, 1,939,169 at 5,199,597 4,829,708
December 31, 2003 (3,567,800) (3,769,560)
Additional capital ------------- -------------
1,633,829 1,062,087
Retained earnings (deficit) ------------- -------------
$ 4,932,716 $ 4,572,597
============= =============
Note: The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
See notes to condensed consolidated financial statements.
-1-
AMERICAN STONE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Net Sales $ 744,681 $ 590,183 $ 1,911,585 $ 1,672,933
Cost of Sales 448,160 490,363 1,226,382 1,621,675
----------- ----------- ----------- -----------
Gross Profit 296,521 99,820 685,203 51,258
Selling, General and Administrative
Expenses 172,858 165,716 515,583 570,081
----------- ----------- ----------- -----------
Income (Loss) From Operations 123,663 (65,896) 169,620 (518,823)
----------- ----------- ----------- -----------
Other Income (Expense)
Interest income 581 -0- 1,193 37
Interest expense (50,660) (41,070) (149,060) (124,367)
Sale of option to sell land -0- -0- 125,000 -0-
Other income 919 6,030 54,417 11,723
Gain/(loss) on sale of assets 40 (1,317) 590 (3,523)
----------- ----------- ----------- -----------
(49,120) (36,357) 32,140 (116,130)
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes 74,543 (102,253) 201,760 (634,953)
Provision For (Recovery of) Income Taxes -0- -0- -0- -0-
----------- ----------- ----------- -----------
Net Income/(Loss) $ 74,543 $ (102,253) $ 201,760 $ (634,953)
=========== =========== =========== ===========
Net Income (Loss) Per Common Share
Basic $ .04 $ (.05) $ .10 $ (.33)
=========== =========== =========== ===========
Diluted $ .04 $ (.05) $ .10 $ (.33)
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
-2-
AMERICAN STONE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Cash Flow From Operating Activities
Net income/(loss) $ 201,760 $ (634,953)
Noncash items included in income:
Depreciation and amortization 296,162 309,441
(Gain)/loss on sale of fixed assets (590) 3,523
Changes in assets and liabilities:
Accounts receivable 283 200,602
Inventory 125,003 84,457
Prepaid expenses (29,243) 21,803
Accounts payable - trade (335,840) (213,581)
Accrued expenses 84,278 19,965
----------- -----------
Net Cash From (Used In) Operating Activities 341,813 (208,743)
Cash Flows Used In Investing Activities (101,711) (24,337)
Cash Flows From Financing Activities 409,921 366,272
----------- -----------
Net Increase in Cash 650,023 133,192
Cash - Beginning of Period 284,238 5,697
----------- -----------
Cash - End of Period $ 934,261 $ 138,889
=========== ===========
Supplemental Disclosure of Cash Flows
Information
Interest paid $ 149,060 $ 124,367
Income taxes paid $ -0- $ -0-
Non Cash Investing and Financing Activities
On July 1, 2004, $220,000 of notes payable was converted to 62,852
shares of common stock. On September 30, 2004 an additional $150,000 of notes
payable was converted to 30,000 shares of common stock. Both stock conversions
were at the election of the holders in accordance with the terms of the notes.
See notes to condensed consolidated financial statements.
-3-
AMERICAN STONE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted for interim
financial information and with the instructions to Form 10-QSB and item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the American Stone Industries, Inc. Annual Report on Form
10-KSB for the year ended December 31, 2003.
NOTE B - FINANCIAL REPORTING FOR SEGMENTS OF THE COMPANY
The Company and its subsidiary operated predominantly in one industry, the
design, quarrying and cutting of sandstone primarily used in the construction
industry.
Following is the information regarding the Company's sales by geographic
location.
Nine Months Ended September 30,
2004 2003
---------------- ----------------
Net sales, including geographic transfers
United States $ 1,854,740 $ 1,515,829
Canada 56,845 157,104
---------------- ----------------
$ 1,911,585 $ 1,672,933
================ ================
NOTE C - STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APBO No. 25), and related
interpretations, in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), requires use of highly subjective assumptions in
option valuation models. Under APBO No. 25, because the exercise price of the
Company's stock options granted is not less than fair market price of the shares
at the date of grant, no compensation is recognized in the financial statements.
Pro forma information regarding net income and earnings per share,
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123, is required by that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions for all options granted: a
risk free interest rate of 2.00% and 1.03% for 2004 and 2003, respectively, and
expected life of the options of five years, no expected dividend yield and a
volatility factor of 10%. Additionally, a marketability discount of 50% has been
assumed for the third quarter of 2004 and 2003.
-4-
AMERICAN STONE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE C - STOCK OPTION PLANS (CONTINUED)
September 30,
2004 2003
----------- -----------
Net income/(loss), as reported $ 201,760 $ (634,953)
Deduct: (Loss), Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of tax effects (141,080) (34,257)
----------- -----------
Pro forma net income/(loss) $ 60,680 $ (669,210)
=========== ===========
Earnings (loss) per share:
Basic - as reported $ .10 $ (.33)
=========== ===========
Basic - pro forma $ .03 $ (.35)
=========== ===========
Diluted - as reported $ .10 $ (.33)
=========== ===========
Diluted - pro forma $ .03 $ (.35)
=========== ===========
NOTE D - OPTION AGREEMENT
The Company owns approximately 1,100 acres of land in Northern Ohio. On
May 24, 2004, American Stone Corporation, the operating subsidiary of the
Company, executed an option agreement with Trans European Securities
International LLP, ("Trans European"), under which Trans European acquired an
option to purchase approximately 900 acres of American Stone's real estate
located in Lorain County, Ohio, for a purchase price of $23,740,000.
The property has frontage on State Route 113 and Quarry Road. It is
approximately three miles from the Ohio Turnpike with access at Baumhart Road,
Route 58 and Route 57. Under the terms of the agreement, Trans European has an
option for a period of 15 months to purchase the real estate. To acquire the
option, Trans European will pay American Stone $250,000: $125,000 paid on May
29, 2004 and $125,000 to be paid February 18, 2005. If the second payment is not
made the option will expire.
Upon the exercise of the option, Trans European has agreed to purchase the
real estate and pay to American Stone: $5,000,000 within 30 days of the exercise
or the expiration of the option period, whichever is later; $10,000,000 one year
later; and the balance of the purchase price, or $8,490,000 on the second
anniversary of the closing date. In addition to the purchase price noted above,
Trans European has agreed to share with American Stone a portion of its earnings
that would relate to other than residential sales of the real estate. The sale
of this portion of American Stone's real estate will not interfere with any of
American Stone's existing or planned stone quarrying or processing operations.
American Stone will continue to operate Cleveland Quarries in all respects as it
has previous to the transaction on their remaining acres of land not included in
the option.
-5-
AMERICAN STONE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE E - STOCKHOLDER'S EQUITY
On July 1, 2004, $220,000 of notes payable was converted to 62,852 shares
of common stock. On September 30, 2004 an additional $150,000 of notes payable
was converted to 30,000 shares of common stock. Both stock conversions were at
the election of the holders in accordance with the terms of the notes.
-6-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Following is a discussion of the principal factors that affected the
Company's results of operations for the three months and the nine months ended
September 30, 2004 and 2003.
COMPANY OVERVIEW AND OUTLOOK
American Stone Industries, Inc. is a holding company that mines and sells
stone primarily for the building stone market through its wholly-owned
subsidiary, American Stone Corporation. American Stone Corporation owns and
operates the Cleveland Quarries in Amherst, Ohio. We produce sandstone slabs and
dimensional stone which are cut to size as specified in architectural designs
and used in commercial and government buildings as well as in all classes of
residential homes. The value of Berea Sandstone adds greatly to all types of
landscaping designs and pools, as well.
Looking forward, our goals include increasing our niche marketing area,
adding new equipment, and carrying block and finished slab inventory. We plan to
increase our niche by adding new outside marketing representatives to cover the
entire United States. With our new architectural brochure and dealer catalog,
new outside representatives and our sales team we are positioned to more
actively pursue new business. The addition of a second block saw and a second
new polisher will better equip us to meet peak demands that the new business
will produce. Quarry work has been difficult in 2004 due to the significant
amount of rainfall we have received which stops quarrying activity. However, our
expectation is to have 40,000-50,000 cubic feet of block in inventory before the
seasonal quarry closure, as well as 30 to 60 days' supply of finished slab. This
will give us a favorable position to continue meeting order requirements through
the colder months so that we are in good position when our busy season begins in
the spring.
2004 COMPARED TO 2003
For the third quarter of 2004, sales increased $154,498, or 26%, from 2003
due to better delivery and customer demands. Unusually cold weather in early
2004 adversely affected our ability to pull stone from the quarry for the first
quarter of 2004. For the nine months ended September 30, 2004, sales increased
$238,652, or 14% from 2003. We achieved these increases in sales despite being
more selective in choosing jobs with higher profit potential and focusing on
selling products that we produced from our own raw materials in an effort to
increase our opportunity for profitability.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
2004 COMPARED TO 2003 (CONTINUED)
Gross profit as a percentage of net sales improved to 40% in the third
quarter of 2004 compared with 17% in the same period a year ago. The improvement
was due to operating efficiencies and management's focus on only producing
products that it is confident the Company can manufacture and deliver at a
profit. Gross profit percentage for the nine months ended September 30, 2004,
was 36% compared with gross profit margin of 3% for the first nine months of
2003. The unfavorable result in 2003 was due primarily to the unusually harsh
winter weather that closed the Company's quarries from January through mid-March
2003.
Selling, general and administrative (SG&A) expenses were $172,858 in the
third quarter of 2004, a 4% increase compared with SG&A expenses of $165,716 in
the same period of 2003. The increase was due to an increase in sales volume. As
a percentage of net sales, SG&A expenses decreased to 23% in the third quarter
of 2004 compared with 28% in the third quarter of 2003 as a result of lower
increment cost as compared to the increase in sales in the most recent quarter.
For the nine months ended September 30, 2004, SG&A expenses as a percentage of
net sales were 28% compared to 34% for the same period in 2003. The decrease was
due to increased sales levels, cost reductions and debt forgiveness in the first
nine months of 2004 compared with the first nine months of 2003.
Net other income/expense fluctuated for the nine months ended September 30,
2004 compared to 2003 primarily due to the Company selling an option to sell
land and recognizing $125,000 of income from it in the second quarter of 2004.
We did not record a provision for income taxes in 2004. We have $6,500,000 of
unused net operating loss carryforwards that may be applied against future
taxable income. These carryforwards expire in various amounts from 2007 through
2023. Our ability to use the carryforwards will depend upon generating taxable
income in the future. There are no assurances that we will be profitable in the
future, and as a result we did not reflect a tax benefit in 2003 from the net
loss.
The net income for the nine months ended September 30, 2004 of $201,760 is a
significant improvement over the net loss in 2003 of $634,953. The net income
for the third quarter of 2004 was $74,543 compared to a loss of $102,253 for the
third quarter of 2003. The main drivers were improved gross profit margins
combined with lower SG&A expenses, as previously discussed.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates, judgments and assumptions in certain circumstances that affect
amounts reported in the accompanying consolidated financial statements. We
evaluate the accounting policies and estimates we use to prepare financial
statements, which we believe to be reasonable under the relevant circumstances.
In preparing these financial statements, we have made our best estimates and
judgments of certain amounts included in the financial statements related to the
accounting policies and estimates described in the text that follows. The
application of these critical accounting policies involves the exercise of
judgment and the use of assumptions as to future uncertainties, and as a result,
actual results could differ from these estimates. For additional information
regarding our accounting policies, see Note 1 to the consolidated financial
statements included in the annual report on Form 10-KSB for the fiscal year
ended December 31, 2003.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CONTINGENCIES
We are subject to various investigations, claims, and legal and
administrative proceedings covering a wide range of matters that arise in the
ordinary course of business activities. Any liability that may result from these
proceedings, and any liability that is judged to be probable and estimable, has
been accrued. Any potential liability not accrued is not currently expected to
have a material effect on our future financial position, results of operation or
cash flows.
CASH FLOWS
(ALL "CASH FLOWS" AMOUNTS IN THOUSANDS)
Nine Months Ended
September 30,
--------------------
2004 2003
-------- --------
Operating activities $ 341 $ (208)
Investing activities (102) (24)
Financing activities 410 366
Cash from operating activities in 2004 was $341. The net income of $201
included depreciation and amortization of $296. Major uses of cash were a $29
increase in prepaid expenses, and a $336 decrease in accounts payable. Major
sources, of cash were a $125 decrease in inventory and a $84 increase in accrued
expenses.
Cash used by operating activities in 2003 was $208. The net loss of $635
included depreciation and amortization of $309. Major sources of cash were a
$201 decrease in accounts receivable, an $84 decrease in inventory, a $22
decrease in prepaid expenses, and an increase of $20 in accrued expenses. The
major use of cash was a $214 decrease in accounts payable.
Cash used by investing activities in 2004 was $102 to purchase equipment to
improve productivity.
Cash used by investing activities in 2003 was $24 to purchase equipment to
improve productivity.
Cash provided by financing activities in 2004 was $410. Borrowings include a
secured note payable to BRM Quarry Co., LLC.
Cash provided by financing activities in 2003 was $366. Borrowings were from
an unsecured note payable to Roulston Venture Capital L.P., a significant
shareholder.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004 we had cash totaling $934,261. During 2003 we had a
line of credit with maximum borrowings of $500,000. This line of credit was paid
off and closed before December 31, 2003.
As of September 30, 2004 our current portion of long-term debt was $34,492,
which represents the principal portion of our debt that is due to be repaid by
September 30, 2005. Profitable operations for the remainder of 2004 will be an
important factor in helping us to extend or refinance these obligations.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Capital spending for the rest of 2004 is currently estimated at between
$50,000 and $100,000, primarily for equipment needed to maintain operations.
At September 30, 2004 none of our borrowing arrangements contained financial
covenants, and we do not believe we were subject to any unsatisfied judgments,
liens or settlement obligations.
Additionally on October 1, 2004 the Company renegotiated the $900,000 loan to
Madison/Route 20, LLC and extending its due date to October 13, 2005.
We have experienced significant operating losses over the previous three
years. As a result, we have had cash flow and liquidity problems. We have taken
steps to reduce administrative overhead, employment levels and other expenses,
have instituted strict controls over the granting of credit to customers and
have put new sales policies and procedures into place. There can be no
assurances that these measures will enable us to become profitable or achieve
positive cash flow in the foreseeable future. We are also currently exploring
additional long term funding sources, including debt placement, stock issuance
and other alternatives. If Trans European exercises the option to purchase a
portion of the Company's land, the proceeds of the option exercise will provide
substantial liquidity to the Company. There can be no assurance, however, that
Trans European will exercise the option or, if it does so, that the exercise
will be timely in relation to the liquidity requirements of the Company.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
In this quarterly report, statements that do not report financial results or
other historical information are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements give current expectations or forecasts of future events and are not
guarantees of future performance. They are based on management's expectations
that involve a number of business risks and uncertainties, any of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements. You can identify these statements by the fact
that they do not relate strictly to historic or current facts. Words are used
such as "anticipate", "estimate", "project", "intend", "plan", "believe" and
other words and terms of similar meaning in connection with the discussion of
future operating or financial performance. In particular, these include
statements relating to future actions; prospective changes in manufacturing
costs, product pricing or product demand; future performance or results of
current and anticipated market conditions and market strategies; sales efforts;
expenses; the outcome of contingencies such as legal proceedings; and financial
results.
Factors that could cause actual results to differ materially include, but
are not limited to: (1) general economic, business and market conditions, (2)
actions by competitors, (3) the success of advertising or promotional efforts,
(4) trends within the building construction industry, (5) the existence or
absence of adverse publicity, (6) changes in relationships with the Company's
major customers or in the financial condition of those customers, (7) equipment
and operational problems, and (8) the adequacy of the Company's financial
resources and the availability and terms of any additional capital.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS (CONTINUED)
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected. Investors should bear
this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our Form 10-QSB, 8-K and 10-KSB reports to the Securities and Exchange
Commission. You should understand that it is not possible to predict or identify
all risk factors. Consequently, you should not consider any such list to be a
complete set of all potential risks or uncertainties.
-11-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.1 Loan Agreement with Madison/Route 20, LLC
Exhibit 10.2 Loan Agreement with BRM Quarry Co., LLC
Exhibit 31 Certification of principal officer and principal
financial officer
Exhibit 32 Section 1350 Certification
(b) Reports on Form 8-K
None
-12-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Stone Industries, Inc.
(Registrant)
Date: November 6, 2004 /s/ Russell Ciphers, Sr.
--------------------------------------------
Russell Ciphers, Sr., President and
Chief Executive Officer (Principal
Executive Officer and Principal
Financial Officer)
-13-