As filed with the Securities and Exchange Commission on July __, 2007
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AIR INDUSTRIES GROUP,INC.
(Name of small business issuer in its charter)
Delaware 3728 20-4458244
(State or Jurisdiction (Primary Standard (IRS Employer
of Incorporation Industrial Identification
or Organization) Classification Number)
Code Number)
1479 North Clinton Avenue
Bay Shore, NY 11706
(631) 968-5000
(Address and telephone number of principal executive offices)
1479 North Clinton Avenue Bay Shore, NY 11706
(Address of principal place of business)
Peter Rettaliata, President and CEO
Air Industries Group, Inc.
1479 North Clinton Avenue Bay Shore, NY 11706
(631) 968-5000
(Name, address and telephone number of agent for service)
Copies of communications to:
Vincent J. McGill, Esq.
Eaton & Van Winkle LLP
Three Park Avenue, 16th Floor
New York, New York 10016
(212) 779-9910
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
___________
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Amount to be Proposed Maximum Proposed Maximum Amount of Registration
Registered Registered Offering Price Per Aggregate Offering Fee
Share Price
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Common Stock, $0.001 par value per share 36,358,001 (1) $0.265 $9,634,870(2) $295.79
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(1) Shares that the selling security holders are offering for resale
which they may acquire upon conversion of our series B convertible
preferred stock and in lieu of cash dividends and upon exercise of
warrants.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act.
__________
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
________
Explanatory Note
The prospectus in this registration statement also relates to the shares
registered for resale by the selling security holders in our registration
statement on Form SB-2, Registration No. 333-131709, declared effective on
August 4, 2006 in accordance with Rule 429 of the Securities Act.
The information in this prospectus is not complete and is subject to change. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission of which this prospectus is a part is
declared effective.
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Preliminary Prospectus dated July , 2007
(Subject to Completion)
Prospectus
85,000,000 Shares
Air Industries Group, Inc.
Common Stock
This prospectus relates to the resale of up to 85,000,000 shares of our
common stock, $.001 par value per share, by the selling security holders listed
under the caption "Selling Security Holders", commencing on page 46, and
consists of
o 43,412,410 shares held by selling security holders, 40,909,500 of
which we issued upon conversion of our series A convertible
preferred stock issued in connection with our reverse merger with
our predecessor, the proceeds of which were used to acquire Air
Industries Machining Corp.;
o up to 29,005,784 shares that we may issue upon conversion of the
outstanding shares of our series B convertible preferred stock,
which we issued principally to acquire Sigma Metals, Inc. and to
provide us with additional working capital;
o up to 4,673,232 shares that we may issue as pay-in-kind dividends on
our series B convertible preferred stock; and
o up to 7,908,574 shares that we may issue upon exercise of
outstanding common stock purchase warrants, including 7,039,256
shares we are obligated to issue upon exercise of warrants we issued
to the placement agents for our series A and B convertible preferred
stock and bridge note financings and 869,318 shares we are obligated
to issue upon exercise of warrants we issued in bridge financings.
The selling security holders acquired these securities in the private
transactions described above and under the caption "Selling Security Holders,"
that were exempt from the registration requirements of the Securities Act. Of
the selling security holders offering shares by this prospectus, other than the
placement agents for our private financings, only four, all of whom own shares
of our series B convertible preferred stock, are offering more than 1,400,000
shares, with only one, together with its affiliate, offering as many as
4,700,000 shares.
The selling security holders, by themselves or through brokers and
dealers, may offer and sell the shares at prevailing market prices or in
transactions at negotiated prices, and will pay any underwriting discounts and
commissions. The selling security holders, and the brokers through whom sales of
the securities are made, may be "underwriters" within the meaning of Section
2(11) of the Securities Act.
We will not receive any proceeds from the sale of the shares by the
selling security holders. However, we will receive proceeds to the extent they
exercise the common stock purchase warrants and do not utilize the "cashless"
exercise provision of the warrants. Our common stock is traded on the OTC
Bulletin Board under the symbol "GLDS.OB". For information concerning the market
for our common stock, see "Market for Our Common Stock."
An investment in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 10.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information from that
contained in this prospectus. The selling security holders are offering to sell
and seeking offers to buy shares of our common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock.
No person is authorized in connection with this prospectus to give any
information or to make any representations about us, the selling security
holders, the securities or any matter discussed in this prospectus, other than
the information and representations contained in this prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or any
selling security holder. This prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy the securities in any circumstances under
which the offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any distribution of securities in accordance with this prospectus
shall, under any circumstances, imply that there has been no change in our
affairs since the date of this prospectus.
The date of this prospectus is ____ __, 2007
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Where You Can Find More Information
We have filed a registration statement on Form SB-2 (Registration No.
333-______) under the Securities Act for the offer and sale by the selling
security holders of the shares of common stock included in this prospectus with
the U.S. Securities and Exchange Commission, 100 F Street, NE, Washington, D.C.
20549. In accordance with the rules of the SEC, we have not included in this
prospectus all the information contained in the registration statement.
Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
We are required to file reports with the SEC under Section 13 of the
Securities Exchange Act, including annual reports on Form 10-KSB, quarterly
reports on Form 10-QSB and current reports on Form 8-K. We intend to furnish our
stockholders with annual reports containing audited financial statements and
other reports as we think appropriate or as may be required by law.
You may read and copy the registration statement, and any amendments
thereto, including the information we are not required to include in this
prospectus and the exhibits we have filed with the registration statement (and
any amendments thereto), and the reports, statements and other information that
we have filed with the SEC, at the SEC's Public Reference Room at 100 F Street,
NE, Room 1580, Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You
also may access our SEC filings and information electronically on the internet
at the web site maintained by the SEC (http://www.sec.gov). You also may obtain
our SEC filings from commercial document retrieval services.
Cautionary Note Regarding Forward-Looking Statements
Our disclosure and analysis in this prospectus contains some
forward-looking statements. Certain of the matters discussed concerning our
operations, cash flows, financial position, economic performance and financial
condition, including, in particular, future sales, product demand, competition
and the effect of economic conditions include forward-looking statements within
the meaning of section 27A of the Securities Act and Section 21E of the
Securities Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures, distribution channels,
profitability, new products, adequacy of funds from operations, these statements
and other projections and statements contained herein expressing general
optimism about future operating results and non-historical information, are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Investors are cautioned that our forward-looking statements are not
guarantees of future performance and actual results or developments may differ
materially from the expectations expressed in the forward-looking statements.
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As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. We expressly disclaim a duty to provide updates to these forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this filing to reflect events or changes in circumstances or changes in
expectations or the occurrence of anticipated events.
We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
Form 10-KSB, Form 10-QSB and Form 8-K reports to the SEC. Also note that we
provide a cautionary discussion of risk and uncertainties under the caption
"Risk Factors" in this prospectus. These are factors that we think could cause
our actual results to differ materially from expected results. Other factors
besides those listed here could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
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Prospectus Summary
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our common stock. You should read the entire
prospectus, including "Risk Factors" and the consolidated financial statements
and the related notes before making an investment decision. The information in
this prospectus reflects a 1-for-1.249419586 reverse split of our common stock
which became effective as of November 21, 2005.
As used in this prospectus, unless otherwise stated or the context
requires otherwise, the "Company" and terms such as "we," "us" and "our," refer
to (i) Air Industries Group, Inc., a Delaware corporation (f/k/a Gales
Industries Incorporated) (ii) our 100% owned Delaware subsidiary, Gales
Acquisition Group, Inc. ("Merger Sub"), (iii) Air Industries Machining, Corp., a
New York corporation ("AIM") which is wholly owned by Merger Sub., and
subsequent to April 16, 2007, our wholly-owned subsidiary, Sigma Metals, Inc.
("Sigma Metals"). When we refer to "Ashlin" in this prospectus, we are referring
to our company prior to the transactions of November 30, 2005.
Our Business
We manufacture aircraft structural parts and assemblies principally for
prime defense contractors in the aerospace industry, including Sikorsky,
Lockheed Martin, Boeing and Northrop Grumman. During 2006, approximately 85% of
our revenues were derived from sales of parts and assemblies directed toward
military applications, although direct sales to the military (U.S. and NATO)
constituted less than 8.5% of our revenues. Parts manufactured by us are
installed onboard Sikorky's VH-3D, otherwise known as Marine One, the primary
Presidential helicopter, and onboard Air Force One, Boeing's 747-2000B
customized for use by the President.
Recent Developments
Sigma Metals, Inc
On April 16, 2007, we purchased all of the outstanding capital stock of
Sigma Metals for approximately $7.0 million, plus an amount, yet to be finalized
and paid, equal to Sigma Metal's earnings from January 1, 2007, to April 16,
2007. We paid the purchase price through a combination of cash, our promissory
notes and shares of our common stock. See "Management's Discussion & Analysis of
Financial Condition and Results of Operations."
Sigma Metals is a specialty distributor of strategic metals, primarily
aluminum, stainless steels of various grades, titanium and other exotic end user
specified materials sourced from suppliers throughout the world. Sigma Metal's
products are sold to both commercial and defense aerospace manufacturers,
throughout the U.S. and in numerous international markets. The customers of
Sigma Metals include prime contractors in the defense and commercial aerospace
industries, aerospace engine manufacturers and various subcontractors to
aerospace manufacturers.
Private Equity Financing -- Series B Convertible Preferred Stock.
To finance the acquisition of Sigma Metals, and to provide us with
additional working capital and funds for future acquisitions, on April 16 and
May 3, 2007, we sold a total of 802,300 shares of our series B convertible
preferred stock for an aggregate purchase price of $8,023,000, or $10.00 per
share, in a private placement to "accredited investors," as that term is defined
in Rule 501 under Regulation D. The series B convertible preferred stock is
convertible into shares of our common stock at an initial conversion price per
share of $0.2766. The terms of the series B convertible preferred stock are
discussed in greater detail under the section of this prospectus captioned
"Description of Our Securities - Series B Convertible Preferred Stock."
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Amendment to Our Credit Facility
To refinance the debt of Sigma Metals, on April 19, 2007, we entered into
a Third Amendment to our Revolving Credit, Term Loan, Equipment Line of Credit
and Security Agreement with PNC Bank. The amendment modified the terms of the
loan facility to add Sigma Metals as a borrower, but required Sigma Metals to
pledge all of its assets and properties to PNC Bank to secure its obligations
under the loan facility. In addition, the termination date of the loan facility
was extended to April 30, 2010 and the maximum revolving advance amount was
increased from $9,000,000 to $11,000,000.
Welding Metallurgy, Inc
On March 9, 2007, we entered into a Stock Purchase Agreement to acquire
all the outstanding shares of Welding Metallurgy, Inc., for aggregate
consideration of $6,050,000, subject to adjustment for working capital, payable
in a combination of cash, our secured promissory notes and shares of our common
stock.
The closing of the acquisition is subject to certain conditions, including
the consent of our lender and our ability to obtain additional financing to
complete the acquisition. We cannot assure you that we will be able to complete
the acquisition of Welding Metallurgy.
Our Corporate History
On November 30, 2005, our predecessor, Ashlin Development Corporation,
consummated a merger with Gales Industries Incorporated, a privately-held
Delaware corporation ("Original Gales"), and in connection with the merger, we
issued 10,673,107 shares of our common stock, representing 74% of our then
outstanding shares, and 900 shares of our series A convertible preferred stock,
initially convertible into 40,909,500 shares of our common stock, for all
outstanding common shares and preferred shares of Original Gales. As a result of
the transaction, the former stockholders of Original Gales became the
controlling stockholders of our company. The transaction was treated for
accounting purposes as a reverse acquisition and the transaction has been
accounted for as a recapitalization of Original Gales, rather than a business
combination. Consequently, the historical financial statements of Original Gales
are now the historical financial statements of our company.
Immediately prior to the closing of the merger, Original Gales acquired
all of the outstanding capital stock of AIM. Because of the change in ownership,
management and control that occurred in connection with the acquisition of AIM,
for financial reporting purposes the acquisition was accounted for as a
purchase. Immediately after the acquisition, AIM acquired its corporate campus
located in Bay Shore, New York, from among others, certain of the former
shareholders of AIM.
On February 15, 2006, we changed our state of incorporation from Florida
to Delaware and changed our name from Ashlin Development Corporation to Gales
Industries Incorporated. Subsequently, on June 26, 2007, we changed our name to
Air Industries Group, Inc. Prior to January 25, 2005, we were known as Health &
Nutrition Systems International, Inc. and we were organized under that name in
the State of Florida in October 1993.
Our principal offices are located at 1479 North Clinton Avenue, Bay Shore,
New York 11706 and our telephone number is (631) 968-5000.
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The Offering
This prospectus relates to the resale by the selling security holders of
up to 85,000,000 shares of our common stock, consisting of:
o 43,412,410 shares held by selling security holders
o up to 29,005,784 shares that we may issue upon conversion of the
outstanding shares of our series B convertible preferred stock
o up to 4,673,232 shares that we may issue as pay-in-kind dividends on
our series B convertible preferred stock
o up to 7,908,574 shares that we may issue upon exercise of
outstanding common stock purchase warrants.
All of these securities were issued to the selling security holders in
private transactions exempt from the registration requirements of the Securities
Act in reliance upon exemptions provided by Section 4(2) of the Securities Act
and Regulation D thereunder. Additional information concerning the transactions
in which these securities were acquired by the selling security holders are set
forth in the section of this prospectus entitled "Selling Security Holders."
Plan of Distribution
The selling security holders may offer and sell the shares of common stock
included in this prospectus through the facilities of the OTC Bulletin Board or
such other exchange or reporting system where the common stock may be traded or
in privately negotiated transactions. Although the selling security holders may
pay brokerage commissions, or discounts may be allowed, in connection with sales
of the shares, it is anticipated that the commissions paid or discounts allowed
will be no more than the ordinary brokerage commissions paid on sales effected
through brokers or dealers. To our knowledge, as of the date of this prospectus,
no one has made any arrangements with a broker or dealer concerning the offer or
sale of the shares of common stock included in this prospectus. See "Plan of
Distribution."
Outstanding Securities
As of June 30, 2007, we had outstanding 67,008,507 shares of common stock.
As of that date, on a fully-diluted basis, after giving effect to and assuming
the exercise or conversion of all of our outstanding options, warrants and
derivative securities, we had outstanding an aggregate of 109,972,865 shares of
common stock. This number does not give effect to any dividends or interest
which may accrue on the outstanding series B convertible preferred stock or
convertible notes.
An investment in our shares of common stock is subject to the risks
described under the heading "Risk Factors", which you should review carefully.
Summary Financial Data
The following table presents certain components of our consolidated
statements of operations and information derived from our consolidated balance
sheets included in this prospectus under the caption "Consolidated Financial
Statements." The columns in the table captioned "pro forma" show the pro forma
effects of the acquisition of Sigma Metals on April 16, 2007 and the issuance of
our series B convertible preferred stock on that date and on May 3, 2007, on our
results of operations and financial condition. The pro forma
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consolidated statement of operations data for the year ended December 31, 2006,
and three months ended March 31, 2007, shows the pro forma effects of the
acquisition of Sigma Metals and the issuance of the series B convertible
preferred stock as if they had occurred as of the first day of the applicable
fiscal period. The pro forma consolidated balance sheet is based on the
assumption that the acquisition of Sigma Metals and the issuance of the series B
convertible preferred stock had occurred effective on the last day of the
applicable fiscal period.
The information presented in the table should be read in conjunction with
our consolidated financial statements which are a part of this prospectus.
Statement of Operations Data:
Fiscal year ended December 31, Three months ended March 31,
2005 2006 2006 2006 2007 2007
---- ---- ---- ---- ---- ----
Pro Forma* Actual Pro Forma Actual Actual Pro Forma
--------- ------ --------- ------ ------ ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $30,735,103 $33,044,996 $51,024,410 $ 8,898,272 $ 7,488,130 $12,674,998
Gross profit 4,308,550 5,042,054 10,198,974 1,512,706 1,248,646 2,705,708
Income from
operations 1,510,502 651,456 2,666,476 507,621 121,854 630,917
Net income (loss) 676,046 (336,569) 744,496 136,635 (71,487) 199,921
Net income (loss)
attributable to common
stockholders 404,276 (756,572) 182,886** 43,635 (71,487) 59,519***
Income (loss) per share
(basic and diluted) $ 0.03 $ (0.02) $ 0.00 $ (0.00) $ (0.00) $ 0.00
Weighted average shares
outstanding
(basic and diluted) 12,722,060 32,208,029 65,314,694 14,723,421 58,833,681 67,645,391
----------
* Reflects the 11-months ended November 30, 2005 of AIM and the 1-month
ended December 31, 2005 of Original Gales.
** Reflects $561,610 dividend (at 7% per annum) on the $8,023,000 Series B
Convertible Preferred Stock.
*** Reflects $140,402 dividend (at 7% per annum) on the $8,023,000 series B
convertible preferred stock.
Balance Sheet Data:
At December 31, 2006 At March 31, 2007
-------------------- -----------------
Actual Pro Forma Actual Pro Forma
------ --------- ------ ---------
(Unaudited) (Unaudited) (Unaudited)
Working capital $ 4,911,354 $10,515,106 $ 5,159,821 $11,237,988
Total assets 24,892,182 38,736,016 25,335,661 39,379,249
Total current liabilities 14,268,449 16,947,475 14,611,740 17,206,464
Long term liabilities (excluding current portion) 3,754,035 5,665,183 2,967,036 4,878,184
Total stockholders' equity $ 6,869,698 $16,123,358 $ 7,756,885 $17,294,601
Risk Factors
The purchase of our common stock involves a high degree of risk. Before
you invest you should carefully consider the risks and uncertainties described
below and other information and our consolidated financial statements and
related notes included elsewhere in this prospectus. If any of the following
events actually occurs, our financial condition or operating results may be
materially and adversely affected, our business may be severely impaired, and
the price of our common stock may decline, perhaps significantly. This means you
could lose all or a part of your investment. We cannot assure you that any
business we acquire will benefit from its acquisition by us.
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We cannot assure you that any benefits to the business of AIM or Sigma
Metals will be achieved from their acquisition by us or by our status as a
public company, or that the results of operations of AIM or Sigma Metals prior
to their acquisition by us will not be adversely impacted by their acquisition
by us. The process of combining the organizations of Original Gales, AIM, our
company, Sigma Metals and any other company we may acquire may cause fundamental
changes in their operations, which could have an adverse effect on the results
of operations of AIM, Sigma Metals and any other company we may acquire. The
past results of AIM or Sigma Metals are not necessarily indicative of the future
results of our operations.
Our inability to successfully manage the growth of our business may have a
material adverse effect on our business, results of operations and financial
condition.
We expect to experience growth in the number of employees and the scope of
our operations as a result of internal growth and acquisitions. These activities
could result in increased responsibilities for management.
Our future success will be highly dependent upon our ability to manage
successfully the expansion of operations. Our ability to manage and support our
growth effectively will be substantially dependent on our ability to implement
adequate improvements to financial, inventory, management controls, reporting,
union relationships, order entry systems and other procedures, and hire
sufficient numbers of financial, accounting, administrative, and management
personnel. We may not succeed in our efforts to identify, attract and retain
experienced accounting and financial personnel.
Our future success also depends on our ability to address potential market
opportunities and to manage expenses to match our ability to finance operations.
The need to control our expenses will place a significant strain on our
management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations and financial condition may be
adversely affected.
The unsuccessful integration of a business or business segment we acquire could
have a material adverse effect on our results.
As part of our business strategy, we expect to acquire assets and
businesses relating to or complementary to our operations. These acquisitions
will involve risks commonly encountered in acquisitions. These risks include,
among other things, exposure to unknown liabilities of the acquired companies,
additional acquisition costs and unanticipated expenses. Our quarterly and
annual operating results will fluctuate due to the costs and expenses of
acquiring and integrating new businesses. We may also experience difficulties in
assimilating the operations and personnel of acquired businesses. Our ongoing
business may be disrupted and our management's time and attention diverted from
existing operations. Our acquisition strategy will likely require additional
debt or equity financing, resulting in additional leverage or dilution of
ownership. We cannot assure you that any future acquisition will be consummated,
or that if consummated, that we will be able to integrate such acquisition
successfully.
Any reduction in government spending on defense could materially adversely
impact our revenues, results of operations and financial condition.
There are risks associated with programs that are subject to appropriation
by Congress, which could be potential targets for reductions in funding to pay
for other programs. Future reductions in United States Government spending on
defense or future changes in the kind of defense products required by United
States Government agencies could limit demand for our products, which would have
a materially adverse effect on our operating results and financial condition.
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In addition, potential shifts in responsibilities and functions within the
defense and intelligence communities could result in a reduction of orders for
defense products by segments of the defense industry that have historically been
our major customers. As a result, demand for our products could decline,
resulting in a decrease in revenues and materially adversely affecting our
operating results and financial condition.
We depend on revenues from a few significant relationships, in particular with
Sikorsky Aircraft, and any loss, cancellation, reduction, or interruption in
these relationships could harm our business.
In general, AIM has derived a material portion of its revenues from one or
a limited number of customers. We expect that in future periods we may enter
into contracts with customers which represent a significant concentration of our
revenues. If such contracts were terminated, our revenues and net income could
significantly decline. Our success will depend on our continued ability to
develop and manage relationships with significant customers. Sikorsky accounted
for approximately 61% of our sales during 2006. Any adverse change in our
relationship with Sikorsky could have a material adverse effect on our business.
Although we are attempting to expand our customer base, we expect that our
customer concentration will not change significantly in the near future. The
markets in which we sell our products are dominated by a relatively small number
of customers who have contracts with United States governmental agencies,
thereby limiting the number of potential customers. We cannot be sure that we
will be able to retain our largest customers or that we will be able to attract
additional customers, or that our customers will continue to buy our products in
the same amounts as in prior years. The loss of one or more of our largest
customers, any reduction or interruption in sales to these customers, our
inability to successfully develop relationships with additional customers or
future price concessions that we may have to make, could significantly harm our
business.
Continued competition in our markets may lead to a reduction in our revenues and
market share.
The defense and aerospace component manufacturing market is highly
competitive and we expect that competition will continue to increase. Current
competitors have significantly greater technical, manufacturing, financial and
marketing resources than we do. We expect that more companies will enter the
defense and aerospace component manufacturing market. We may not be able to
compete successfully against either current or future competitors. Increased
competition could result in reduced revenue, lower margins or loss of market
share, any of which could significantly harm our business.
Our future revenues are inherently unpredictable, our operating results are
likely to fluctuate from period to period and if we fail to meet the
expectations of securities analysts or investors, our stock price could decline
significantly.
Our quarterly and annual operating results are likely to fluctuate
significantly due to a variety of factors, some of which are outside our
control. Accordingly, we believe that period-to-period comparisons of our
results of operations are not meaningful and should not be relied upon as
indications of performance. Some of the factors that could cause quarterly or
annual operating results to fluctuate include conditions inherent in government
contracting and our business such as the timing of cost and expense recognition
for contracts, the United States Government contracting and budget cycles,
introduction of new government regulations and standards, contract closeouts,
variations in manufacturing efficiencies, our ability to obtain components and
subassemblies from contract manufacturers and suppliers, general economic
conditions and economic conditions specific to the defense market. Because we
base our operating expenses on anticipated revenue trends and a high percentage
of our expenses are fixed in the short term, any delay in generating or
recognizing forecasted revenues could significantly harm our business.
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Fluctuations in quarterly results, competition or announcements of
extraordinary events such as acquisitions or litigation may cause earnings to
fall below the expectations of securities analysts and investors. In this event,
the trading price of our common stock could significantly decline. In addition,
we cannot assure you that an active trading market will develop or be sustained
for our common stock. These fluctuations, as well as general economic and market
conditions, may adversely affect the future market price of our common stock, as
well as our overall operating results.
We may lose sales if our suppliers fail to meet our needs.
Although we procure most of our parts and components from multiple sources
or believe that these components are readily available from numerous sources,
certain components are available only from sole sources or from a limited number
or sources. While we believe that substitute components or assemblies could be
obtained, use of substitutes would require development of new suppliers or would
require us to re-engineer our products, or both, which could delay shipment of
our products and could have a materially adverse effect on our operating results
and financial condition.
Attracting and retaining key personnel is an essential element of our future
success.
Our future success depends to a significant extent upon the continued
service of our executive officers and other key management and technical
personnel and on our ability to continue to attract, retain and motivate
executive and other key employees, including those in managerial, technical,
marketing and information technology support positions. Attracting and retaining
skilled workers and qualified sales representatives is also critical to us.
Experienced management and technical, marketing and support personnel in the
defense and aerospace industries are in demand and competition for their talents
is intense. The loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and results of
operations.
Terrorist acts and acts of war may seriously harm our business, results of
operations and financial condition.
United States and global responses to the Middle East conflict, terrorism,
perceived nuclear, biological and chemical threats and other global crises
increase uncertainties with respect to U.S. and other business and financial
markets. Several factors associated, directly or indirectly, with the Middle
East conflict, terrorism, perceived nuclear, biological and chemical threats,
and other global crises and responses thereto, may adversely affect the Company.
While some of our products may experience greater demand as a result of
increased U.S. Government defense spending, various responses could realign U.S.
Government programs and affect the composition, funding or timing of our
government programs and those of our customers. U.S. Government spending could
shift to defense programs in which we and our customers do not participate.
Given the current Middle East and global situation, U.S. defense spending is
generally expected to remain high over the next several years. Increased defense
spending does not necessarily correlate to increased business, because not all
the programs in which we participate or have current capabilities may be
earmarked for increased funding.
Terrorist acts of war (wherever located around the world) may cause damage
or disruption to us, our employees, facilities, partners, suppliers,
distributors and resellers, and customers, which could significantly impact our
revenues, expenses and financial condition. The potential for future terrorist
attacks, the national and international responses to terrorist attacks, and
other acts of war or hostility have created many economic and political
uncertainties, which could adversely affect our business and results of
operations in ways that cannot presently be predicted. In addition, as a company
with headquarters and significant operations located in the United States, we
may be impacted by actions against the United States.
13
Our indebtedness may affect operations.
As described under the caption "Management's Discussion and Analysis
Financial Condition and Results of Operations - Financial Condition - Liquidity
and Capital Resources", we have significant indebtedness. We are significantly
leveraged and our indebtedness is substantial in relation to our stockholders'
equity. Our ability to make principal and interest payments will depend on
future performance, which is subject to many factors, some of which are outside
our control. In addition, our Loan Facility is secured by substantially all of
our assets. In the case of a continuing default under our Loan Facility, the
lender will have the right to foreclose on our assets, which would have a
material adverse effect on our business. Payment of principal and interest on
the Loan Facility may limit our ability to pay cash dividends to shareholders
and the documents governing the Loan Facility prohibit the payment of cash
dividends in certain situations. Our leverage may also adversely affect our
ability to finance future operations and capital needs, may limit our ability to
pursue business opportunities and may make our results of operations more
susceptible to adverse economic conditions.
We may issue shares of our capital stock or debt securities to complete an
acquisition, which would reduce the equity interest of our stockholders.
We may issue our securities to acquire companies or businesses. Most
likely, we will issue additional shares of our common stock or preferred stock,
or both, to complete acquisitions. If we issue additional shares of our common
stock or shares of our preferred stock, the equity interest of our existing
stockholders may be reduced significantly, and the market price of our common
stock may decrease. The shares of preferred stock we issue are likely to provide
holders with dividend, liquidation and voting rights, and may include
participation rights, senior to, and more favorable than, the rights and powers
of holders of our common stock.
If we issue debt securities as part of an acquisition, and we are unable
to generate sufficient operating revenues to pay the principal amount and
accrued interest on that debt, we may be forced to sell all or a significant
portion of our assets to satisfy our debt service obligations, unless we are
able to refinance or negotiate an extension of our payment obligation. Even if
we are able to meet our debt service obligations as they become due, the holders
of that debt may accelerate payment if we fail to comply with, and/or are unable
to obtain waivers of, covenants that require us to maintain certain financial
ratios or reserves or satisfy certain other financial restrictions. In addition,
the covenants in the loan agreements may restrict our ability to obtain
additional financing and our flexibility in operating our business.
Limited Number of Common Shares Available for Future Issuance
We are authorized to issue 120,055,718 shares of common stock. We
currently have outstanding 67,008,507 shares of common stock or 109,972,865
shares of common stock after giving effect to the conversion of our Series B
Convertible Preferred Stock and the exercise of all outstanding options and
warrants. We are authorized to issue 8,003,716 shares of blank check preferred
stock of which 2,000,000 shares have been designated Series B Convertible
Preferred Stock. To facilitate the raising of additional capital or the
completion of acquisitions, it is likely that we will seek shareholder approval
to increase the number of shares of common stock we are authorized to issue.
Because of our limited resources and the significant competition for
acquisitions, we may not be able to consummate an acquisition with growth
potential, if at all.
We expect to encounter intense competition from other entities having a
business objective similar to ours, including venture capital funds, leveraged
buyout funds and operating businesses competing for acquisitions. Many of these
entities are well established and have extensive experience in identifying and
effecting business combinations. Many of these competitors possess greater
technical, human and other resources than we do and our financial resources will
be relatively limited when contrasted with those of many of these competitors.
While we believe that there are numerous potential target businesses that we
could acquire, our ability to compete in acquiring certain target businesses
will be limited by our available financial resources. This inherent competitive
limitation gives others an advantage in pursuing the acquisition of certain
target businesses.
14
We may be unable to obtain financing, if required, to complete an
acquisition or to fund the operations and growth of any business acquired, which
could compel us to abandon a particular prospective acquisition.
If we require financing to complete an acquisition, that financing may not
be available in amounts and on terms acceptable to us, if at all. To the extent
that financing proves to be unavailable when needed to consummate a particular
acquisition, we would be compelled to restructure the transaction or abandon
that particular acquisition. In addition, if we consummate an acquisition, we
may require financing to fund the operations or growth of the business acquired.
Our inability to secure additional financing could have a material adverse
effect on the continued development or growth of our business.
There is only a limited public market for our securities.
The trading market for our common stock is limited and conducted on the
OTC Bulletin Board. Our common stock is very thinly traded. We cannot assure you
that a more active trading market in our common stock will ever develop, or if
one does develop, that it will be sustained. We also cannot assure you that our
common stock will ever become eligible for listing on Nasdaq or a stock
exchange.
If our common stock becomes subject to the SEC's penny stock rules,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
If at any time our net tangible assets are $5,000,000 or less and our
common stock has a market price per share of less than $5.00, transactions in
our common stock may be subject to the SEC's "penny stock" rules under the
Securities Exchange Act. If our common stock falls within the definition of
penny stock it will become subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000, or annual incomes exceeding $200,000 or
$300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability of investors to sell our common stock in the secondary market. These
rules also may cause fewer broker-dealers to be willing to make a market in our
common stock, and it may affect the level of news coverage we receive.
Future sales of our common stock, or the perception that such sales could occur,
could have an adverse effect on the market price of our common stock.
Future sales of our common stock, pursuant to a registration statement or
Rule 144 under the Securities Act, or the perception that such sales could
occur, could have an adverse effect on the market price of our common stock. In
addition to the 85,000,000 shares included in this prospectus, as of June 30,
2007, we had outstanding options to purchase 6,125,000 shares of the 10,000,000
shares available and registered for issuance under our 2005 Stock Incentive Plan
in a Registration Statement on Form S-8 filed with the SEC. In addition, shares
15
of our common stock held for at least one year are eligible for public resale
pursuant to Rule 144. In general, the shares of common stock we issued in
connection with the acquisition of AIM became eligible for public resale under
Rule 144 as of November 30, 2006. The number of our shares available for sale
pursuant to registration statements or Rule 144 is enormous relative to the
trading volume of our shares. Any attempt to sell a substantial number of our
shares will severely depress the market price of our common stock. In addition,
we may use our capital stock in the future to finance acquisitions and to
compensate employees and management, which will further dilute the interests of
our existing shareholders and could eventually significantly depress the trading
price of our common stock.
The issuance of shares of our common stock, or the possible issuance of
shares, under our stock option plan may limit the price that investors are
willing to pay in the future for shares of our common stock and have the effect
of delaying or preventing a change in control of our company, and the issuance
of shares under the plan will decrease the amount of earnings and assets
available for distribution to existing holders of our common stock and dilute
their voting power.
Our 2005 Stock Incentive Plan allows for the issuance of up to 10,000,000
shares of common stock, either as stock grants or options, to employees,
officers, directors, advisors and consultants of the company. As of June 30,
2007, we had outstanding under the Plan options to purchase 6,125,000 shares.
The committee administering the Plan, which has sole authority and discretion to
grant options under the Plan, may grant options which become immediately
exercisable in the event of a change in control of our company and in the event
of certain mergers and reorganizations. The issuance of shares of our common
stock, or the possible issuance of shares, under our stock option plan may limit
the price that investors are willing to pay in the future for shares of our
common stock and have the effect of delaying or preventing a change in control
of our company, and the issuance of shares under the plan will decrease the
amount of earnings and assets available for distribution to existing holders of
our common stock and dilute their voting power.
Use of Proceeds
We will not receive any of the proceeds from the selling stockholders'
sale of the shares offered under this prospectus. However, we will receive
proceeds to the extent they exercise the common stock purchase warrants and do
not utilize the "cashless" exercise provision of the warrants.
Determination of Offering Price
The shares of common stock offered by this prospectus are being offered by
the selling security holders listed in this prospectus. The selling security
holders may sell the shares at prevailing market prices on the date of sale or
at a price negotiated in a private sale. Our common stock is traded on the OTC
Bulletin Board under the symbol "GLDS.OB".
We have agreed to pay certain expenses in connection with the registration
of the securities offered by the selling security holders for resale under this
prospectus.
16
Business
Introduction
Original Gales was formed as a private company in October 2004 to acquire
a company operating in the defense sector. While it was negotiating with the
shareholders of AIM, Original Gales determined that it would be more likely to
raise the funds necessary to acquire AIM if Original Gales were a public company
or were to be acquired by a public company. In August 2005, after the execution
of a purchase agreement with the former shareholders of AIM, and after it had
entered into a letter of intent for a private placement to finance the
acquisition of AIM, Original Gales was introduced to James Brown, then our
President. We entered into negotiations with Original Gales that resulted in the
execution of a merger agreement on November 14, 2005 (the "Merger Agreement").
Immediately prior to the consummation of the Merger Agreement, Original
Gales acquired all of the outstanding capital stock of AIM. The aggregate
purchase price paid to AIM's shareholders for 100% of the capital stock of AIM
was: (i) $3,114,296 in cash, (ii) $1,627,262 principal amount of promissory
notes, of which notes in the principal amount of $665,262 were convertible into
common stock at a conversion price of $.40 per share and (iii) 490,060 shares of
common stock. In addition, Original Gales paid an aggregate of $1,053,862 in
connection with the acquisition, which included legal and accounting expenses
($300,000) incurred by AIM and its shareholders and $270,403 to enable AIM's
shareholders to pay income taxes accrued prior to closing.
The funds used by Original Gales to acquire AIM were obtained through a $9
million private placement of its preferred stock. Original Gales sold 900 shares
of its convertible preferred stock, each convertible into 45,455 shares of
Original Gales' common stock, without giving effect to shares of common stock to
be issued in payment of dividends upon conversion of shares of preferred stock.
On an as converted basis, without giving any effect to the shares issued as
dividends, Original Gales sold its common stock in the private placement at a
price of approximately $0.22 per share. In addition to the payment of the cash
portion of the purchase price for AIM, the proceeds of Original Gales' private
placement were used to pay expenses relating to the private placement, the
acquisition of AIM, the merger with us and related transactions, and to repay
$150,000 in promissory note obligations which Original Gales incurred in bridge
financings, and for working capital. Each share of convertible preferred stock
of Original Gales was converted in the merger into one share of our series A
convertible preferred stock. Each share of our series A convertible preferred
stock was convertible into 45,455 shares of our common stock, or 40,909,500
shares in the aggregate.
Contemporaneously with its acquisition by Original Gales, AIM completed
the acquisition, for $4,190,000, of a three-building (76,000 square feet),
5.4-acre corporate campus in Bay Shore, New York, which was being leased by AIM
from its affiliates prior to the closing. In connection with the real estate
purchase, AIM entered into a loan facility with PNC Bank, secured by all of
AIM's assets, including the newly acquired real property. The new loan facility
provided AIM with up to $14,000,000 in debt facilities as follows: $9,000,000 in
a revolving credit facility, $3,500,000 in a term loan, and $1,500,000 in new
equipment financing. In addition to paying for the real estate acquisition, the
proceeds of the new loan facility were used to pay off debts of AIM totaling
approximately $5,800,000, and for working capital.
Immediately after its acquisition of AIM, on November 30, 2005, Original
Gales was merged into our wholly-owned subsidiary. In connection with the
merger, we issued 10,673,107 shares of our common stock, representing 73.6% of
our then outstanding shares, and 900 shares of our series A convertible
preferred stock convertible into an aggregate of 40,909,500 shares of our common
stock for all the outstanding shares of Original Gales. Those shares were the
only consideration we paid for Original Gales. Our stockholders prior to the
merger continued to own 3,823,980 shares of our common stock. Based upon a value
of approximately $0.22 per share (the price at which the common shares of
Original Gales were effectively sold in its private placement of preferred
stock) on an as converted basis, our shares issued in connection with the merger
were valued at approximately $11,348,174 and the shares that our stockholders
prior to the merger continued to hold were valued at approximately $800,000. As
a result of the merger, the former stockholders of Original Gales became the
controlling stockholders of our company.
17
Our offices are located at 1479 North Clinton Avenue, Bay Shore, New York
11706 and our telephone number is (631) 968-5000.
About AIM
Founded in 1969, AIM manufactures aircraft structural parts and assemblies
principally for prime defense contractors in the defense/aerospace industry
including, Sikorsky, Lockheed Martin, Boeing and Northrop Grumman. During 2006,
approximately 85% of AIM's revenues were derived from sales of parts and
assemblies directed toward military applications, although direct sales to the
military (U.S. and NATO) constituted less than 8.5% of AIM's revenues. The
remaining 15% of revenues for 2006 represented sales in the airframe
manufacturing sector to major aviation manufacturers such as Boeing. AIM is a
provider of flight critical, technically complex structures: AIM's parts are
installed onboard Sikorky's VH-3D, otherwise known as Marine One, the primary
Presidential helicopter and on Air Force One, Boeing's 747-2000B customized for
use by the President.
AIM has evolved from being an individual parts manufacturer to being a
manufacturer of subassemblies (i.e., being an assembly constructor) and being an
engineering integrator. AIM currently produces over 2,400 individual products
(SKU's) that are assembled by a skilled labor force into electromechanical
devices, mixer assemblies, and rotorhub components for Blackhawk helicopters,
rocket launching systems for the F-22 Raptor Advanced Stealth Fighter, arresting
gear for the E2C Hawkeye and US Navy Fighters, vibration absorbing assemblies
for a variety of Sikorsky helicopters, landing gear components for the F-35
Joint Strike Fighter, and many other subassembly packages. AIM's achievements in
manufacturing quality control have enabled it to receive various international
certifications that distinguish it from less qualified manufacturers, as well as
several highly technical, customer-based proprietary quality approvals,
including supplier of the year awards from notable customers such as United
Technologies and Northrop Grumman.
AIM is the largest supplier of flight safety components for Sikorsky.
Sales of parts and services to Sikorsky accounted for approximately 61% of AIM's
revenues during 2006, and are subject to General Ordering Agreements which were
recently renegotiated and extended through 2012.
The parts and subassemblies produced by AIM are built to customer
specifications and are not protected by patents, trademarks or other rights
owned or licensed by AIM. As a result, AIM is not required to procure product
liability insurance for such parts and subassemblies because such insurance is
provided for by the customer. Historically, AIM has spent little or no money on
the development of new proprietary products. We did not have any expenditures
for research and development in 2006 and 2005. In the past AIM has spent capital
to acquire and retool machinery and equipment to enable it to qualify to bid on
contracts to produce parts and subassemblies needed by its customers or, once
such a contract was obtained, to improve its manufacturing efficiencies to
increase its profits from a contractor or ensure that the contract would be
retained as future quantities of the product were required.
About Sigma Metals
In April 2007, we purchased all of the outstanding capital stock of Sigma
Metals, Inc. Sigma Metals is a specialty distributor of strategic metals,
primarily aluminum, stainless steels of various grades, titanium and other
exotic end user specified materials sourced from suppliers throughout the world.
Sigma Metal's products are sold to both commercial and defense aerospace
manufacturers, throughout the U.S. and in numerous international markets. The
customers of Sigma Metals include prime contractors in the defense and
commercial aerospace industries, aerospace engine manufacturers and
subcontractors to aerospace manufacturers.
18
Sales and Marketing
AIM's approach to sales and marketing can be best understood through the
concept of customer alignment. The aerospace industry is dominated by a small
number of large prime contractors and equipment manufacturers. We seek to
position ourselves within the supply chain of these contractors and
manufacturers to be selected for subcontracted projects as they develop.
Successful positioning requires that a company qualify to be a preferred
supplier by achieving and maintaining independent third party quality approval
certifications, specific customer quality system approvals and top supplier
ratings through strong performance on existing contracts.
In addition to maintaining our status as a preferred supplier, we work
closely with customers to assure that our investments are concentrated in
production capabilities that are aligned with customer sourcing and
subcontracting strategies. Also, we constantly work to support our customers in
their political, industrial and international initiatives.
Initial contracts are usually obtained through competitive bidding against
other qualified subcontractors, while follow-on contracts are usually obtained
by successfully performing initial contracts. AIM's long-term business base
generally benefits from barriers to entry resulting from investments,
certifications and manufacturing techniques developed during the initial
manufacturing phase.
As our business base grows with targeted customers and significant market
share is obtained, we endeavor to develop our relationship to one of a
partnership where initial contracts are also obtained as single source awards
and follow-on pricing is negotiated on a cost plus basis.
Sigma Metals generates customer loyalty through its willingness and
ability to supply metals in smaller quantities not available from larger
producers, on tight time schedules and not generally available in the market. We
anticipate that Sigma Metals will be able to increase its sales as a result of
its affiliation with AIM.
Our Market
During most of the 1990s, defense spending remained flat or experienced a
slight decline. In the late 1990s and the early years of the new millennium,
Boeing experienced some market share loss to Airbus which adversely affected the
domestic aerospace business. The events of 9/11 caused a further deterioration
in the domestic commercial aircraft industry, which had been poised for growth
as a result of the anticipated replacement of aging airframes.
More recently, the United States defense budget is at an all time high and
is currently expected to continue at this level through the Bush Administration
and for the next several years. In addition, the world wide commercial aircraft
industry is experiencing an increase in activity as a consequence of significant
growth in passenger flights and air cargo traffic, and the development of the
Boeing 787 Fuel Efficient Dreamliner. Increased utilization of existing
resources in the commercial aircraft industry should result in demand for our
services. More specific to our business, the war on terrorism has hastened the
need to replace older helicopters in the various state Army and Air National
Guard Units with up to date Blackhawk models as these units have been mobilized
to serve in Afghanistan and Iraq. We are the largest supplier of flight critical
parts for the Sikorsky Blackhawk.
19
Our Backlog
AIM has a number of long-term multi-year general purchase agreements with
several of our customers. These agreements specify the part number,
specifications and price of the covered products for a specified period, but do
not authorize immediate shipment. These agreements do not obligate a customer to
buy required products from us. Nevertheless, generally, before a customer will
award such an agreement, we or any other supplier must demonstrate the ability
to produce products meeting the customer's specifications at an acceptable
price. It is a time consuming process for a customer to qualify us or any other
supplier for a particular part or subassembly, so most customers tend to limit
the number of contracts awarded and, so long as performance is acceptable, will
only seek to re-bid a contract at lengthy intervals. Customers issue release
orders against these contracts periodically to satisfy their needs. In addition
to our long term agreements, we regularly enter into agreements with customers
calling for a specified quantity of a product at a fixed price on firm delivery
dates.
AIM's "firm backlog" includes all fully authorized orders received for
products to be delivered within the forward 18-month period. The "projected
backlog" includes the firm backlog and forecasted demand from our base of
leading prime aerospace/defense contractors for product releases against
existing general purchase agreements ("GPAs"). Although the forecasted releases
against GPAs within the forward 18-month period are included in the "projected
backlog", we may actually receive additional substantial "follow-on" awards
through the balance of a GPA period, some of which currently extend through
2012. The backlog information set forth herein does not include the sales that
we expect to generate from long-term agreements associated with long-term
production programs but for which we do not have actual purchase orders with
firm delivery dates.
As of June 30, 2007, AIM's 18-month "firm backlog" was approximately $45.7
million and our "projected backlog" as of that date for the same 18-month period
which includes both the firm backlog as well as anticipated order releases
against long term agreements with our prime aerospace contractors was
approximately $60.0 million. Because of the nature of the products and services
it provides, Sigma Metals does not have a significant backlog and its backlog is
not included in the numbers reported herein.
Competition
The markets for our products are highly competitive. For the most part AIM
manufactures items to customer design and competes against companies that have
similar manufacturing capabilities in a global marketplace. Consequently, its
ability to obtain contracts is tied to its ability to provide quality products
at competitive prices which requires continuous improvements in capabilities to
assure competitiveness and value to our customers. AIM's marketing strategy
involves developing long term ongoing working relationships with customers based
on large multi-year agreements which foster mutually advantageous relationships.
Sigma Metals seeks to supply customers with metals that are not readily
available in the market, in quantities smaller than those larger producers and
distributors are willing to supply, on tight timetables or cut to specifications
not generally available in the market. Sigma's ability to satisfy its customers'
needs is determined by its ability to source products, often from obscure
producers, its willingness to hold quantities of a product in excess of the
amount desired by a customer and its knowledge of the markets for metals.
Many of AIM's competitors are well-established subcontractors engaged in
the supply of aircraft parts and components to prime military contractors and
commercial aviation manufacturers, including Monitor Aerospace, a division of
Stellex Aerospace, Hydromil, a division of Triumph Aerospace Group, Heroux
Aerospace and Ellanef Manufacturing, a division of Magellan Corporation. The
competitors of Sigma Metals include the many mills which manufacture and
directly distribute the metals sought by its customers and the suppliers which
purchase and distribute such products. Many of our competitors are divisions of
larger companies having significantly larger infrastructures, greater resources
and the capabilities to respond to much larger contracts.
20
Raw Materials and Replacement Parts
As a product integrator our manufacturing processes require substantial
purchase of raw materials, hardware and subcontracted details. As a result, much
of our success in meeting customer demand involves effective subcontract
management. Price and availability of many raw materials utilized in the
aerospace industry are subject to volatile global markets. Most suppliers are
unwilling to commit to long-term contracts, which can represent a substantial
risk as our strategy often involves long term fixed pricing with our customers.
We believe that the availability of raw materials to us is adequate to support
our operations.
AIM has approximately 14 key sole-source suppliers of various parts that
are important for one or more of our products. These suppliers are our only
source for such parts and, therefore, in the event any of them were to go out of
business or be unable to provide us parts for any reason, our business could be
materially adversely affected.
As a specialty distributor much of Sigma Metals' success in meeting
customer demand involves sourcing various metals in quantities and at prices
that provide it with a competitive advantage. Given its knowledge of the
worldwide market, Sigma Metals often supplies foreign metals to U.S. customers.
Given the nature of its business, Sigma Metals constantly seeks to develop new
sources of materials and to develop supply relationship with aerospace
manufacturers.
Future Expansion and Acquisition Strategy
Since the 1990s, the aerospace and defense and industries have undergone
a radical restructuring and consolidation. The largest prime contractors have
merged, resulting in fewer, but larger, entities. A prime example is Boeing,
which acquired McDonnell Douglas. Others include Lockheed Martin, the result of
Lockheed's acquisition of Martin Marietta, and the aerospace divisions of
General Dynamics and Northrop Grumman, which fused together Northrop, Grumman,
Westinghouse and Litton Industries into one entity.
This trend has permeated through the industry eliminating many companies
as the prime contractors streamlined their supply chains. To survive, companies
must invest in systems and infrastructures that align their capabilities with
the needs of the prime contractors. At a minimum, Tier III and IV suppliers must
be fully capable to interactively work within a computer aided three dimensional
automated engineering environment and must have third party quality system
certifications attesting to their abilities.
We believe the industry's drive to efficiency will create enhanced
pressures on many aerospace/defense critical component manufacturers,
particularly those with $15-$100 million in annual sales, referred to herein as
the "Tier III/IV Manufacturing Sector", and these manufacturers will have to
either upgrade their systems to achieve quality approvals or leave the industry.
In response to this drive towards greater operating and economic
efficiency, our objective is to achieve a leading role in the consolidation of
the Tier III and IV Manufacturing Sectors. In this regard, our core strategy
will be to selectively acquire synergistic manufacturers of "linchpin" products
and technologies, upon which larger, more complex and key defense systems and
platforms can be established. We believe that numerous acquisition opportunities
of such kind exist, particularly given the evolutionary stage of a number of
existing businesses in the sector, the age of many of the owner-principals and
their perceived and stated desire to facilitate a liquidity event for their
investment in the near term. Furthermore, we believe that by executing a
well-defined consolidation strategy in the Tier III and IV Manufacturing
Sectors, we will be able to achieve significant cost savings, operational
efficiencies and overall economic synergies. AIM was our initial strategic
acquisition and will serve as our operating platform for subsequent acquisitions
and organic growth.
21
We will focus on acquiring profitable, privately held entities or
divisions of larger entities with annual sales between $15 and $100 million in
the aerospace and defense-related fields. Initially, we will seek enterprises
whose products are synergistic and complementary to AIM's current product line
and which can benefit from our existing engineering talents and manufacturing
capabilities, such as Sigma Metals. We will look for candidates whose products
are components of larger mission critical systems and which can be upgraded from
simple parts to complex, higher-margin component system subassemblies through
the use of AIM's engineering talents. We intend to focus on entities with
reputations for high quality standards whose management can be absorbed into our
company. When possible, we will seek to combine existing operations to absorb
excess capacity and eliminate duplicative facilities. It is contemplated that
future acquisitions will be facilitated by using our stock, cash or debt
financing, or some combination thereof. Given our limited available cash, it is
likely that we will have to rely upon seller financing or debt financing
provided by third parties to complete acquisitions for the foreseeable future.
We cannot assure you that such financing will be made available to us and, our
need to rely upon such sources may make it difficult for us to complete any
transaction in competition with larger better capitalized competitors.
We also intend to expand our operations through internal growth. We will
seek to attract new customers through proactive industry marketing efforts,
including direct sales programs, participation at trade shows, technical society
meetings and similar activities. Additionally, we will seek to capitalize on our
engineering capabilities by partnering with other lower cost manufacturers which
can benefit from our expertise.
Government Regulation
Environmental Regulation
We are subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting
in cooperation with federal and state authorities. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution,
to protect against occupational exposure to chemicals, including health and
safety risks, and to require notification or reporting of the storage, use and
release of certain hazardous chemicals and substances. The extensive regulatory
framework imposes compliance burdens and risks on us. Governmental authorities
have the power to enforce compliance with these regulations and to obtain
injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA") imposes strict, joint and several liability on the present
and former owners and operators of facilities that release hazardous substances
into the environment. The Resource Conservation and Recovery Act of 1976
("RCRA") regulates the generation, transportation, treatment, storage and
disposal of hazardous waste. In New York, the handling, storage and disposal of
hazardous substances are governed by the Environmental Conservation Law, which
contains the New York counterparts of CERCLA and RCRA. In addition, the
Occupational Safety and Health Act, which requires employers to provide a place
of employment that is free from recognized and preventable hazards that are
likely to cause serious physical harm to employees, obligates employers to
provide notice to employees regarding the presence of hazardous chemicals and to
train employees in the use of such substances.
22
Federal Aviation Administration Regulation
We are subject to regulation by the Federal Aviation Administration
("FAA") under the provisions of the Federal Aviation Act of 1958, as amended.
The FAA prescribes standards and licensing requirements for aircraft and
aircraft components. We are subject to inspections by the FAA and may be
subjected to fines and other penalties (including orders to cease production)
for noncompliance with FAA regulations. Our failure to comply with applicable
regulations could result in the termination of or our disqualification from some
of our contracts, which could have a material adverse effect on our operations.
Government Contract Compliance
Our government contracts and those of many of our customers are subject to
the procurement rules and regulations of the United States government, including
the Federal Acquisition Regulations ("FAR"). Many of the contract terms are
dictated by these rules and regulations. During and after the fulfillment of a
government contract, we may be audited in respect of the direct and allocated
indirect costs attributed thereto. These audits may result in adjustments to our
contract costs. Additionally, we may be subject to U.S. government inquiries and
investigations because of our participation in government procurement. Any
inquiry or investigation can result in fines or limitations on our ability to
continue to bid for government contracts and fulfill existing contracts.
We believe that we are in substantial compliance with all federal, state
and local laws and regulations governing our operations and have obtained all
material licenses and permits required for the operation of our business.
Employees
As of July 1, 2007, we employed approximately 190 people. AIM is a party
to two collective bargaining agreements with the United Services Workers, IUJAT,
Local 355 (the "Union") with which the company believes it maintains good
relations. One of our collective bargaining agreements is dated September 1,
2004, and covers all of AIM's full time production personnel (the "2004
Collective Bargaining Agreement"). The other is dated January 1, 2005, and
covers all of AIM's non-management administrative employees (the "2005
Collective Bargaining Agreement", together with the 2004 Collective Bargaining
Agreement, the "Collective Bargaining Agreements"). The terms and provisions of
each of the Collective Bargaining Agreements are substantially the same. Each of
the Collective Bargaining Agreements terminates on December 31, 2007; however,
the 2005 Collective Bargaining Agreement automatically renews from year to year
thereafter unless written notice is given by either party not less than sixty
(60) days prior to the termination date of its intention to terminate or modify
the 2005 Collective Bargaining Agreement. AIM is required to make a monthly
contribution to each of the Union's United Welfare Fund and the United Service
Worker's Security Fund. Each of the Collective Bargaining Agreements contains a
"no strike" clause, whereby, during the terms of each of the Collective
Bargaining Agreements, the Union will not strike and AIM will not lockout its
employees. Employees of AIM covered by the 2004 Collective Bargaining Agreement
have a sixty (60) day probationary period where they can be discharged by AIM
for any reason whatsoever; however, employees of AIM covered by the 2005
Collective Bargaining Agreement have a thirty (30) day probationary period. Any
discharge that occurs after the expiration of the probationary period may be
challenged by the Union through the grievance procedure set forth in the
Collective Bargaining Agreements.
Real Property
Our headquarters are situated on a 5.4-acre corporate campus in Bay Shore,
New York. We occupy three buildings on the campus, consisting of 76,000 square
feet.
On October 24, 2006, we sold the buildings and real property located at
the corporate campus for a purchase price of $6,200,000.
23
Simultaneous with the sale of the property, we entered into a 20-year
triple-net lease for the property. Base annual rent is approximately $540,000
for the first five years of the lease, increases to $621,000 for the sixth year
of the term, and increases by 3% for each subsequent year. The lease grants AIM
an option to renew the lease for an additional five years. We deposited $127,500
as security for the performance of our obligations under the lease, which we
subsequently replaced with a $127,500 letter of credit. In addition, we
deposited with the landlord an additional $393,000 as security for the
completion of certain repairs and upgrades to the property. Under the terms of
the lease, we are required to pay all of the costs associated with the operation
of the facilities, including, without limitation, insurance, taxes and
maintenance. The lease also contains customary representations, warranties,
obligations, conditions and indemnification provisions and grants the landlord
customary remedies upon our breach of the lease, including the right to
terminate the ease and hold us liable for any deficiency in future rent.
The operations of Sigma Metals are maintained in a building with
approximately 20,000 sq. feet in Deer Park, Long Island. The lease for those
premises continue until January 31, 2008, at an annual rental of $127,481,
exclusive of utilities and other common charges.
Legal Proceedings
In October 2006 a former salesperson of Sigma Metals commenced an action
alleging, among other items, that he was improperly dismissed in violation of
New York State's age discrimination statute. To date, the plaintiff has
repeatedly extended our time to respond to the complaint. The action seeks
damages of $2,000,000. We believe there is no merit to the claim, that it is
covered by insurance and intend to contest it vigorously.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
Original Gales was formed as a private company in October 2004 to acquire
a company operating in the defense sector. While it was negotiating with the
shareholders of AIM, Original Gales determined that it would be more likely to
raise the funds necessary to acquire AIM if Original Gales were a public company
or were to be acquired by a public company. In August 2005, after the execution
of a purchase agreement with the former shareholders of AIM, and after it had
entered into a letter of intent for a private placement to finance the
acquisition of AIM, Original Gales was introduced to James Brown, then our
President. We entered into negotiations with Original Gales that resulted in the
execution of a merger agreement on November 14, 2005, that was unanimously
approved by our board of directors. In determining to enter into the merger
agreement, we sought to ensure that our shareholders would retain shares valued,
in the aggregate, at approximately $800,000 based upon the price at which
Original Gales was offering its shares in its private placement.
Immediately prior to the closing of the merger with us, Original Gales
acquired all of the outstanding capital stock of AIM. The aggregate purchase
price paid to AIM's shareholders for 100% of the capital stock of AIM was: (i)
$3,114,296 in cash, (ii) $1,627,262 principal amount of promissory notes, of
which notes in the principal amount of $665,262 are convertible into common
stock at a conversion price of $.40 per share and (iii) 490,060 shares of common
stock. In addition, Original Gales paid an aggregate of $1,053,862 in connection
with the acquisition, which included legal and accounting expenses ($300,000)
incurred by AIM and its shareholders and $270,403 to enable AIM's shareholders
to pay income taxes accrued prior to closing.
The funds used by Original Gales to acquire AIM were obtained through a $9
million private placement of its preferred stock. Original Gales sold 900 shares
of its convertible preferred stock, each convertible into 45,455 shares of
Original Gales' common stock, without giving effect to shares of common stock to
be issued in payment of dividends upon conversion of shares of preferred stock.
On an as converted basis, without giving any effect to the shares which may be
issued as dividends, Original Gales sold its common stock in the private
placement at a price of approximately 22 cents per share. In addition to the
24
payment of the cash portion of the purchase price for AIM, the proceeds of
Original Gales' private placement were used to pay expenses relating to the
private placement, the acquisition of AIM, the merger with us and related
transactions, and to repay $150,000 in promissory note obligations which
Original Gales incurred in bridge financings, and for working capital. Each
share of convertible preferred stock of Original Gales was converted in the
merger into one share of our series A convertible preferred stock. Each share of
our series A convertible preferred stock was convertible into 45,455 shares of
our common stock, or 40,909,500 shares in the aggregate.
Contemporaneously with the acquisition, AIM completed the acquisition for
$4,190,000, of a three-building (76,000 square feet), 5.4-acre corporate campus
in Bay Shore, New York which was being leased by AIM from its affiliates prior
to the closing. In connection with the real estate purchase, AIM entered into a
loan facility with PNC Bank, secured by all of AIM's assets, including the newly
acquired real property. The new loan facility provided AIM with up to
$14,000,000 in debt facilities as follows: $9,000,000 in a revolving credit
facility, $3,500,000 in a term loan, and $1,500,000 in new equipment financing.
In addition to paying for the real estate acquisition, the proceeds of the new
loan facility were used to pay off debts of AIM totaling approximately
$5,800,000, and for working capital.
Because of the change in ownership, management and control that occurred,
for financial reporting purposes, the acquisition of AIM was accounted for as a
purchase by Original Gales. Accordingly, the purchase price was allocated among
AIM's assets and liabilities based upon their fair values as of the completion
of the acquisition. Because the purchase price, net of the liabilities assumed,
exceeded the fair value of the assets acquired, Original Gales recorded goodwill
of $1,265,963. Because the acquisition of AIM's corporate campus was completed
subsequent to the acquisition of AIM, the shareholders of the entities which
owned the real estate were not affiliates of AIM as of the time the real estate
acquisition was completed. Therefore, the acquisition of the real estate was
treated as a purchase by AIM and the purchase price and related acquisition
costs, which approximated the fair market value of the property, were reflected
on Original Gales' financial statements (which now form the basis of our
financial statements) as the basis of the real estate.
Prior to the acquisition of Original Gales, we had outstanding
approximately 3,823,980 shares of common stock and stock options exercisable
into approximately 44,020 shares of our common stock. Those 3,823,980 shares
continued to be outstanding after, and were not cancelled or redeemed pursuant
to, the merger and those 44,020 stock options expired in connection with the
merger. On a fully-diluted basis, in connection with the merger and the
offering, we issued an aggregate of approximately 63,325,352 shares of our
common stock (or approximately 94.3% of the outstanding on a fully-diluted
basis), after taking into account the shares that we may issue upon conversion
of the Preferred Stock, placement agent warrants, stock options and convertible
notes which were previously convertible or exercisable into shares of Original
Gales common stock.
Since we had no substantial assets immediately prior to the merger, the
merger was treated for accounting purposes as a reverse acquisition and has been
accounted for as a recapitalization of Original Gales rather than a business
combination. Consequently, the historical financial statements of our company
presented herein are the historical financial statements of Original Gales.
Further, since Original Gales had no significant operations before it acquired
the business of AIM, AIM is considered a predecessor of Original Gales and so
our financial statements and those of AIM for periods prior to December 1, 2005
have been included in this prospectus.
Prior to our acquisition of Sigma Metals, our business consisted of the
manufacture of aircraft structural parts and assemblies principally for prime
defense contractors in the defense/aerospace industry.
25
AIM has evolved from being an individual parts manufacturer to being a
manufacturer of subassemblies (i.e. being an assembly constructor) and being an
engineering integrator. AIM currently produces over 2,400 individual products
(SKU's) that are assembled by a skilled labor force into electromechanical
devices, mixer assemblies, rotor-hub components, rocket launching systems,
arresting gear, vibration absorbing assemblies, landing gear components and many
other subassembly packages.
During 2006, approximately 85% of AIM's revenues were derived from sales
of parts and assemblies directed toward military applications, although direct
sales to the military (U.S. and NATO) constituted less than 8.5% of AIM's
revenues. The remaining 15% of revenues for 2006 represent sales in the airframe
manufacturing sector to major aviation manufacturers. Sales of parts and
services to one customer accounted for 61% of AIM's revenue in 2006, and for
approximately 65.5% of AIM's revenue in the first quarter of 2007, and are
subject to General Ordering Agreements which were recently renegotiated and
extended through 2013.
Sigma Metals is a specialty distributor of strategic metals, primarily
aluminum, stainless steels of various grades, titanium and other exotic end user
specified materials sourced from suppliers throughout the world. Sigma Metal's
products are sold to both commercial and defense aerospace manufacturers,
throughout the U.S. and in numerous international markets. The customers of
Sigma Metals include prime contractors in the defense and commercial aerospace
industries, aerospace engine manufacturers and various subcontractors to
aerospace manufacturers.
Sales of Sigma Metals are more evenly distributed between the defense and
commercial aerospace industries than those of AIM. Similarly, approximately one
half of the sales of Sigma Metals are to customers outside the U.S.
Consequently, we anticipate that one result of the acquisition of Sigma Metals
will be to decrease the proportion of our sales derived from the aerospace
defense industry.
The following discussion and analysis does not include the operations of
Sigma Metals and should be read in conjunction with the consolidated financial
statements and notes of our company included in this prospectus under the
caption "Index to Consolidated Financial Statements." We have also included in
this prospectus under the caption "Index to Consolidated Financial Statements"
financial statements, including the notes thereto, of Sigma Metals and unaudited
pro forma financial statements to show the pro forma effects of the acquisition
of Sigma Metals and the issuance of our series B convertible preferred stock on
our results of operations and financial condition. See "Index to Consolidated
Financial Statements."
Results of Operations
Three months ended March 31, 2007 as compared to three months ended March 31,
2006
Three months ended Three months ended
March 31, 2007 March 31, 2006
(Unaudited) (Unaudited)
Net sales $ 7,488,130 $ 8,898,272
Cost of sales 6,239,484 7,385,566
Gross profit 1,248,646 1,512,706
Selling and marketing expenses 95,342 155,702
G&A expense 1,031,450 849,383
Interest expense 130,954 325,050
Gain on sale of life insurance policy (53,047)
Gain on sale of real estate (9,509) --
Other income (1,446) --
Other expenses 8,578 --
(Loss) Income before income taxes (6,723) 235,618
Provision for income taxes 64,764 99,253
Net (loss) income (71,487) 136,365
Net loss attributable to preferred stock -- 180,000
Net loss attributable to common stock $ (71,487) $ (43,633)
26
Net sales. Net sales were $7,488,130 for the three months ended March 31,
2007 ("First Quarter 2007"), a decrease of $1,410,142 (15.8%) from net sales of
$8,898,272 for the three months ended March 31, 2006 ("First Quarter 2006"). The
decrease in net sales was primarily attributable to decreased shipments of parts
and related defense components to one customer which caused the portion of our
revenues derived from such customer to decrease from approximately 69% in the
First Quarter 2006 to approximately 65.5% in the First Quarter 2007.
Gross profit. In the First Quarter 2007, gross profit was $1,248,646 or
16.7% of net sales, compared to gross profit of $1,512,706 or 17.0% of net sales
in First Quarter 2006. The decrease in gross profit primarily reflects the
decrease in net sales. The decrease in gross profit as a percentage of net sales
represents a slight decrease in the sales of higher margin products.
Selling and marketing expenses. Selling and marketing expenses were
$95,342 in First Quarter 2007, a decrease of $60,360 or 38.8% from selling and
marketing expenses of $155,702 in First Quarter 2006. The decrease in selling
and marketing expenses were primarily attributable to lower sales and a change
in the mix of products shipped, which translated into reduced cost of shipping
supplies and a concerted effort to control the costs of meetings and
conferences.
General and administrative expenses. General and administrative expenses
were $1,031,450 in First Quarter 2007, an increase of $182,067 or 21.4% from
general and administrative expenses of $849,383 in First Quarter 2006. The
increase primarily reflects the addition of professional staff to provide
adequate financial reporting and reporting capabilities.
Interest and financing costs. Interest and financing costs were $130,954
in First Quarter 2007, a decrease of $194,096 or 59.7% from interest and
financing costs of $325,050 in First Quarter 2006. The decrease in interest and
financing costs resulted from the decrease in the Company's debt outstanding as
a result of the sale and leaseback of its real estate.
Gain on the sale of life insurance policy. In First Quarter 2006 there was
a one-time gain on the sale of a life insurance policy of $53,047. There was no
such gain in the First Quarter of 2007.
Gain on sale of real estate. The company was required to defer recognition
of a portion of the gain on the sale of its real estate in the fourth quarter of
2006. This gain is being recognized ratably over the twenty year term of its
lease for the real estate. Accordingly, the Company recognized a gain of $9,509
during the First Quarter of 2007.
Other expenses. Other expenses in the First Quarter 2007 of $8,578 are
primarily franchise taxes There were no "other expenses" incurred during the
First Quarter of 2006.
Income (Loss) before income taxes. The loss before the impact of income
taxes was $6,723 in First Quarter 2007 reflecting lower quarterly sales compared
to income before the provision for income taxes of $235,618 in First Quarter
2006. There was an income tax expense of $64,764 for the First Quarter 2007 as
compared to an income tax expense of $99,253 for First Quarter 2006.
27
Net income. Net income decreased from $136,365 in First Quarter 2006 to a
net loss of $71,487 in First Quarter 2007. The decrease in net income was
primarily attributable to decreased shipments of parts and related defense
components to one customer which caused the portion of revenues derived from
such customer to decrease. Additionally, the decrease was due to the provision
for income taxes in the amount of $64,764 reflecting book to tax timing
differences.
Net loss attributable to common stock. The dividend payable on our series
A convertible preferred stock in the First Quarter 2006 exceeded our net income
during such period, resulting in a net loss attributable to common stock of
$43,635. Our series A convertible preferred stock was automatically converted
into common stock in August 2006, so there was no comparable charge in the First
Quarter 2007.
Year ended December 31, 2006 as compared to year ended December 31, 2005
The following table sets forth, for the periods indicated, certain
components of our statements of operations:
Year ended December 31,
2006 2005(1) 2004(2)
---- ------- -------
Net sales $ 33,044,996 $ 30,735,103 $ 24,818,333
Cost of sales 28,002,942 26,426,553 21,400,878
Gross profit 5,042,054 4,308,550 3,417,455
Selling expenses 601,011 357,854 321,727
G&A expense 3,789,587 2,440,194 1,356,809
Interest expense 1,040,108 759,552 505,425
Minority interest -- 74,904 131,552
Other expenses 246,659 -- --
Other income 788,711 -- 2,573
Income before provision for taxes 153,400 676,046 1,104,515
Provision for taxes (3) 489,969 271,770 444,015
Net income (loss) (3) (336,569) 404,276 660,550
(1) The information for the year ended December 31, 2005 combines the
operating results of Original Gales and AIM for the year ended December
31, 2005, and the operating results of AIM operating as a Subchapter S
corporation for the period January 1, 2005 through November 30, 2005.
(2) The information for December 31, 2004 is from the audited operating
statements of AIM.
(3) Prior to November 30, 2005, AIM elected to be treated under Subchapter "S"
of the Internal Revenue Code and incurred no income taxes. For purposes of
presentation, taxes were calculated using an effective 40.02% tax rate in
accordance with FAS 109.
Year ended December 31, 2006 compared to year ended December 31, 2005
Net sales. Net sales were $33,044,996 in the year ended December 31, 2006
("Fiscal 2006") an increase of $2,309,893 (7.5%) from net sales of $30,735,103
in Fiscal 2005. The increase in net sales was attributable to continued
significant growth in sales in the military aerospace sector resulting from
increased military activity, together with price increases that took effect in
late 2005 and continued through 2006 under a number of our long term agreements
with a significant customer.
Our net sales for Fiscal 2006 were substantially greater than our net sales for
Fiscal 2005. Nevertheless, net sales during the second half of 2006 were less
than the amount recorded during the first half of 2006, but modestly higher than
28
net sales in the second half of Fiscal 2005. This decrease in net sales during
the second half of 2006 resulted primarily from the need to prepare for
production of subassemblies for the Joint Strike Fighter ("JSF") landing gear,
and the E2D arresting gear. We delivered the first article for the JSF landing
gear during December 2006, and the first article of the E2D arresting gear in
the first quarter of 2007.
Sales during the second half of 2006 were also negatively impacted by a decision
by our largest customer to delay deliveries of units previously projected to be
delivered during this time period. These delivery delays have continued through
the first quarter of 2007 and are reflected in higher inventory levels and lower
revenue than anticipated. These delivery delays are the result of a strike at
the aforementioned customer's facility earlier in 2006 and its continued
inability to achieve complete production recovery.
Gross profit. Gross profit was $5,042,054 in Fiscal 2006 (15.3% of net sales),
compared to gross profit of $4,308,550 in Fiscal 2005 (14.0% of net sales). The
increase in gross profit reflects the increase in revenues and as well as the
increase in gross profit as a percentage of sales. The increase in gross profits
as a percentage of sales represents a continuation of the shift in our
production to higher margin military products.
Selling expenses. Selling expenses were $601,011 in Fiscal 2006, an increase of
$243,157(67.9%) from selling expenses of $357,854 in Fiscal 2005. The increase
in selling expenses reflects an increase in shipping supplies, transportation
expenses and depreciation of transportation equipment partially offset by
decreases in field engineering expenses and out bound freight expenses.
General and administrative expenses. General and administrative expenses were
$3,789,587 in Fiscal 2006, an increase of $1,349,393 (55.3%) from general and
administrative expenses of $2,440,194 in Fiscal 2005. The increase was primarily
due to an increase in officers' salaries, an increase in office personnel to
support the increased sales, an increase in professional fees attributable to
legal, accounting and audit fees and preparations for compliance with
Sarbanes-Oxley, as well as consulting costs incurred in connection with
modifications to AIM's information technology network. In addition, Fiscal 2006
reflects non-cash compensation charges resulting from the grant of options to
management pursuant to the Company's Stock Option Plan. In addition, the Company
incurred a bad debt expense of $177,444 based upon management's assessment of
the collectibility of certain outstanding receivables.
Interest and amortization expense. Interest and amortization expense was
$1,040,108 in Fiscal 2006 an increase of $280,556. (36.9%) from interest expense
of $759,552 in Fiscal 2005. The increase in interest expense resulted from an
increase in borrowing rates as well as additional interest expense as a result
of the financing of the acquisition of AIM and the purchase of AIM's real
estate.
Minority interest. Minority interest represents the income attributable to AIM's
real estate realized by the affiliates of AIM that owned the real estate prior
to its acquisition by AIM in 2005. Because the real estate was owned by AIM at
the beginning of 2006 there was no minority interest income in 2006, as compared
to minority interest income of $74,904 in Fiscal 2005.
Income before provision for income taxes was $153,400 in Fiscal 2006 a decrease
of $522,646 (77.3%) from income before income taxes of $676,046 in Fiscal 2005.
The income before taxes in 2005 combines the income earned by AIM during the
eleven month period ended November 30, 2005 of $1,425,750, with a $749,704 loss
incurred during December 2005. The decrease in income during Fiscal 2006,
resulted primarily from the impact on AIM's business of the acquisition,
together with expenses incurred by us to comply with our reporting obligations
as a public entity and orders deferred during the second half of 2006 due to a
strike at the aforementioned customer's facility earlier in 2006. Income during
2006 was positively impacted by a gain of $300,037 on the sale of our corporate
campus and a gain of $53,047 on the sale of a life insurance policy. Absent
these non-recurring items we would have incurred a pre-tax net loss of $199,684.
29
Provision for income taxes. The increase in the provision for income taxes to
$489,969 for Fiscal 2006 as compared to $271,770 for Fiscal 2005, primarily
reflects the taxes payable as a result of the sale of our corporate campus,
partially offset by the reduction in taxes payable as a result of the decrease
in our operating income.
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Financial Condition
Liquidity and Capital Resources
In connection with the acquisition of AIM and AIM's acquisition of its
headquarters in November 2005, we entered into a secured loan facility with PNC
Bank which included a $9,000,000 revolving credit facility, a $3,500,000 term
loan and a $1,500,000 equipment line; issued promissory notes in the principal
amount of $1,627,262 payable to the former shareholders of AIM; and issued our
series A convertible preferred stock providing for the payment of pay-in-kind,
in lieu of cash dividends, except under certain circumstances.
The loan facility with PNC Bank is secured by a lien on substantially all
of our assets, including all of AIM's assets. In addition to paying for the real
estate acquisition, the proceeds of the loan facility were used to pay off debts
of AIM totaling approximately $5,800,000 and for working capital.
Amounts outstanding under the revolving credit portion of the loan
facility accrue interest at a fluctuating rate that is paid monthly. The term
loan portion of the loan facility is payable in 34 equal monthly payments of
$10,648 plus interest with the balance due at the time of the final payment. We
believe that all of the applicable interest rates under the loan facility are
consistent with prevailing interest rates in the lending industry. The terms of
the PNC Bank loan facility are set forth in note 6 to our audited consolidated
financial statements and note 6 to our unaudited condensed consolidated
financial statements for the three months ended March 31, 2007 included in this
prospectus.
In October 2006, we sold and leased back AIM's corporate campus for
$6,200,000. We used a substantial portion of the net proceeds of this
transaction to reduce our obligations under the loan facility. The balance of
the term loan was reduced by $2,800,000 and the remaining balance of $383,330
became an Amended and Restated Term Note providing for principal payments of
$10,648 per month.
In August 2006, the outstanding shares of our series A convertible
preferred stock were converted automatically into 40,909,500 shares of our
common stock when the SEC declared effective our registration statement for the
resale of those and certain other shares of common stock included in this
prospectus, eliminating the dividend payable to the holders of the series A
convertible preferred stock, other than the amounts accrued during a period of
default.
As of December 31, 2006, our outstanding long term debt consisted of
$5,800,697 under our loan facility, $1,482,962 under the notes payable to the
former shareholders of AIM (which amount was reduced in January 2007 by $665,262
when Peter Rettaliata and Dario Peragallo converted their notes into shares of
our common stock) and capital lease obligations of $959,817. Additionally at
December 31, 2006 there was a standby letter of credit outstanding in the amount
of $127,500. In addition, reflecting the sale leaseback of AIM's corporate
campus, we now pay approximately $45,000 per month as rent, plus $15,662 to fund
real estate tax escrow accounts and other reserves held by the landlord.
30
In April 2007, we acquired all of the outstanding capital stock of Sigma
Metals in exchange for $3,988,501 in cash, our 7% promissory notes due 2010 in
the aggregate principal amount of $1,084,213, and 7,337,891 shares of our common
stock. In addition, upon determination of the earnings of Sigma Metal for the
period from January 1, 2007 through April 16, 2007, the principal of the notes
will be increased by an amount equal to the earnings.
In April and early May of 2007, we received gross proceeds of $8,023,000
from the sale of 802,300 shares of our series B convertible preferred stock,
part of which was devoted to the acquisition of Sigma Metals with the balance
available as working capital and for future acquisitions. The holders of the
series B convertible preferred stock are entitled to a cumulative annual
dividend of 7% per annum that we may pay in shares of our common stock, except
under certain circumstances. The shares of series B convertible preferred stock
are initially convertible into 29,005,784 shares of our common stock.
We paid the placement agent for the private placement of the series B
convertible preferred stock, a sales commission of $641,840, representing 8% of
the gross proceeds of that offering, plus $25,000 in reimbursement of its actual
and reasonable out-of-pocket expenses, including fees and expenses of its
counsel. We also issued to the placement agent warrants to purchase 2,900,578
shares of our common stock, representing 10% of the number of shares into which
the series B convertible preferred stock may be converted. These warrants, which
may be exercised over a period of five years, have an initial per share exercise
price of $0.305 and allow a "cashless exercise."
In connection with the acquisition of Sigma Metals, we amended and
modified the terms of the PNC Bank loan facility to allow Sigma Metals to become
a borrower under that loan facility. Sigma Metals was required to pledge all of
its assets and properties to PNC Bank to secure its obligations under the loan
facility. In addition, the termination date of the loan facility was extended to
April 30, 2010 and the maximum revolving advance amount was increased from
$9,000,000 to $11,000,000.
Prior to our acquisition of AIM, AIM was a Subchapter S corporation and
periodically made distributions to its shareholders. AIM distributed to its
shareholders $1,175,279 during the eleven months ended November 30, 2005 to
allow the shareholders of AIM to pay the taxes owed on their proportionate share
of AIM's income from the fiscal year immediately preceding such distributions
and, in the case of certain distributions, to allow two of AIM's shareholders to
pay the purchase price owed to a former shareholder of AIM who sold all of his
shares of AIM to those two shareholders. We do not anticipate paying dividends
to our stockholders in the foreseeable future.
We used approximately $729,526 in our operations during Fiscal 2006, as
compared to $1,162,972 used in operating activities during Fiscal 2005. The use
of cash reflects the net loss incurred by us of $336,569, increased by an
increase in accounts receivable of $1,062,789 and an increase in inventory of
$2,653,851, partially offset by an increase in accounts payable of $2,353,797,
an increase of $653,426 in income taxes payable and depreciation of $597,009.
The increase in inventories reflects a decision by one of our largest customers
to delay deliveries of units previously projected to be delivered during the
second half of 2006. These delivery delays are the result of a strike at the
customer's facility earlier in 2006.
We generated approximately $5,417,704 in Fiscal 2006 through the sale of
AIM's real estate campus, which amount was partially offset by purchases of
equipment in the amount of $812,372 and $448,530 deposited to secure obligations
under the lease for AIM's corporate campus. The funds generated from the sale of
AIM's corporate campus primarily were used to reduce amounts payable under our
loan facility by approximately $4,170,099.
As of March 31, 2007, we had outstanding under the PNC Bank loan facility,
revolving loan balances of $5,352,845 and a term loan balance of $330,090 and an
equipment loan balance of $411,200 and a standby letter of credit in the amount
$127,500. In addition, as of March 31, 2007 we had capital lease obligations to
other parties totaling $937,516.
31
During the quarter ended March 31, 2007, we used $175,935 in operations
due to an increase in inventory of $608,490, an increase in deposits with
vendors of $596,217, an increase in prepaid expenses of $223,209, and a decrease
in accounts payable and accrued expenses of $66,389, partially offset by a
reduction in accounts receivable of $808,050. The increase in inventory
resulted, in part, from work flow disruptions at our principal customer which
prevented us from shipping all of the inventory originally anticipated. The
increase in deposits with vendors and decrease in accounts payable is due to
advanced payment requirements imposed by certain suppliers. As a result of
efforts to reduce amounts due these suppliers, we anticipate that they may not
require prepayments in the immediate future.
At March 31, 2007, we had working capital of $5,159,821 as compared to
$4,911,354 as of December 31, 2006.
Prior to being acquired by us, AIM financed its operations and investments
principally through revenues from operations. As a private company, AIM did not
have many of the expenses which we have as a public company. In the near term,
AIM will have to bear significantly increased cash requirements relating to the
preparation of financial statements, compliance with requirements under the
Securities Exchange Act, the registration of shares under the Securities Act and
other requirements applicable to public companies. We expect those cash
requirements to be approximately $1,000,000 in 2007, since we are obligated to
comply with Section 404 of Sarbanes-Oxley.
In connection with the acquisition of AIM, we incurred notes payable
obligations to the former shareholders of AIM in the aggregate principal amount
of $1,627,262, of which $665,262 were in the form of convertible promissory
notes which they converted into 1,799,432 shares of common stock at a conversion
price of $0.40 per share in January 2007. The principal amount of the remaining
note is $769,600 and is repayable by us in equal quarterly installments of
$48,100 principal, plus interest.
In connection with the acquisition of Sigma Metals, we incurred notes
payable obligations to the former shareholders of Sigma Metals in the aggregate
principal amount of $1,084,213, subject to in increase upon determination of the
earnings of Sigma Metals from January 1, 2007 through April 16, 2007. The
principal balance of the remaining balance is $993,862 and is repayable by us in
equal monthly installments of $30,117 principal, plus interest.
One customer accounted for approximately 35.3% of our accounts receivable
at March 31, 2007. This customer accounted for approximately 65.5% of net sales
for the quarter ended March 31, 2007. If this customer is unable or unwilling to
pay amounts due or our relationship with this customer is severed or negatively
affected, our results of operations will be materially adversely affected and we
may not have the resources to meet our capital obligations.
In March 2007, we entered into an agreement to acquire all of the
outstanding capital stock of Welding Metallurgy, Inc. for $6,050,000, subject to
adjustment for working capital, payable in a combination of cash, our secured
promissory notes and shares of our common stock. The closing of this potential
acquisition is subject to certain conditions, including the consent of our
lender and our ability to obtain additional financing to complete the
acquisition. We cannot assure you that we will be able to complete the
acquisition of Welding Metallurgy.
We expect that the remaining net proceeds from the sale of our series B
convertible preferred stock, together with cash flows from operations and
amounts available under our loan facility, will be sufficient to pay our
obligations through the second quarter of 2008. However, we may require
financing to expand our business internally and will require financing to
complete our contemplated acquisitions. We intend to finance those acquisitions
through a combination of debt and equity. The incurrence of additional debt will
require the consent of PNC Bank and will increase the leverage of our business.
The issuance of equity securities, whether in the form of common or preferred
shares, may dilute the interests of our existing stockholders. We cannot assure
you that the necessary debt or equity financing will be available to us on
acceptable terms, if at all. If financing is not available, we may not be able
to expand our business internally or make acquisitions.
32
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our financial results.
Inventory Valuation
We value inventory at the lower of cost on a first-in-first-out basis or market.
AIM purchases inventory only when it has signed non-cancellable contracts with
its customers for orders of its finished goods. We occasionally produce finished
goods in excess of purchase order quantities in anticipation of future purchase
order demands but historically this excess has been used in fulfilling future
purchase orders. We occasionally evaluate inventory items that are not secured
by a purchase orders and reserves for obsolescence accordingly. We also reserve
an allowance for excess quantities, slow-moving goods, and obsolete items.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition." We generally recognize revenue when products are shipped
and the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement exists,
and the sales price is fixed or determinable. Payments received in advance from
customers for products delivered are recorded as customer advance payments until
earned, at which time revenue is recognized.
Income Taxes
Income taxes are calculated using an asset and liability approach as prescribed
by SFAS No. 109, Accounting for Income Taxes. The provision for income taxes
includes federal and state taxes currently payable and deferred taxes, due to
temporary differences between financial statement and tax bases of assets and
liabilities. In addition, future tax benefits are recognized to the extent that
realization of such benefits is more likely than not. Valuation allowances are
established when management determines that it is more likely than not that some
portion or all of the deferred asset will not be realized. The effect of a
change in tax rates is recognized as income or expense in the period of change.
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123(R) which is a revision of SFAS No.123
and supersedes Accounting Principles Board Opinion No. 25. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values at the date of grant. We recorded an expense of $167,126 and $121,297 for
the years ended December 31, 2006 and 2005, respectively, in accordance with the
measurement requirements under SFAS No. 123(R)
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over the
fair value of the identifiable net assets acquired. We apply SFAS No. 142,
Goodwill and Other Intangible Assets and accordingly do not amortize goodwill
but test it for impairment. We will perform impairment testing for goodwill
annually, or more frequently when indicators of impairment exist, using a
two-step approach. Step one compares the fair value of the net assets of the
33
relevant reporting unit (calculated using a discounted cash flow method) to its
carrying value, a second step is performed to compute the amount of the
impairment. In this process, a fair value for goodwill is estimated, based in
part on the fair value of the operations, and is compared to its carrying value.
The shortfall of the fair value below carrying value represents the amount of
goodwill impairment. Goodwill is reviewed for potential impairment at the
reporting unit level on an annual basis, or in interim periods if events or
circumstances indicate a potential impairment. The reporting units utilized for
this test were those that are one level below the business segments identified
at the beginning of Business Segment Operations. The impairment test is
performed in two phases. The first step of the Goodwill impairment test compares
the fair value of the reporting unit with its carrying amount, including
Goodwill. If the fair value of the reporting unit exceeds its carrying amount,
Goodwill of the reporting unit is considered not impaired; however, if the
carrying amount of the reporting unit exceeds its fair value, an additional
procedure must be performed. That additional procedure compares the implied fair
value of the reporting unit's Goodwill (as defined in SFAS 142) with the
carrying amount of that Goodwill. An impairment loss is recorded to the extent
that the carrying amount of Goodwill exceeds its implied fair value.
The fair values of the reporting units were determined using a combination of
valuation techniques consistent with the income approach. For purposes of the
income approach, discounted cash flows were calculated by taking the net present
value of estimated cash flows using a combination of historical results,
estimated future cash flows and an appropriate price to earnings multiple. We
use our internal forecasts to estimate future cash flows and actual results may
differ from forecasted results. However, these differences have not been
material and we believe that this methodology provides a reasonable means to
determine fair values. Cash flows were discounted using a discount rate based on
expected equity return rates, which ranged from 5.25% to 9.25% for 2006. Our
evaluations for the year ended December 31, 2006 indicated there was no
impairment of our Goodwill.
Quantitative and Qualitative Disclosure about Market Risk
Our primary exposure to market risk consists of changes in interest rates on
borrowings under the loan facility. An increase in interest rates would
adversely affect our operating results and the cash flow available after debt
service to fund operations. We manage exposure to interest rate fluctuations by
optimizing the use of fixed and variable rate debt. Except with respect to the
interest rates under the loan facility, we do not have debts or hold instruments
that are sensitive to changes in interest rates, foreign currency exchange rates
or commodity prices.
Security Ownership
The following table sets forth information known to us regarding
beneficial ownership of our series B convertible preferred stock and our common
stock as of June 30, 2007 by (i) each person known by us to own beneficially
more than 5% of the outstanding shares of each of those classes, (ii) each of
our directors, nominees for director, and executive officers, and (iii) all of
our officers and directors as a group. Except as otherwise indicated, we
believe, based on information provided by each of the individuals named in the
table below, that such individuals have sole investment and voting power with
respect to such shares, subject to community property laws, where applicable.
As of June 30, 2007, we had outstanding 802,300 shares of our series B
convertible preferred stock, with a face amount of $8,023,000, and 67,008,507
shares of our common stock. Each share of series B convertible preferred stock
is convertible into shares of our common stock at a rate of $0.2766 per share.
If all of our series B convertible preferred stock had been converted at the
close of business on June 30, 2007, we would have had outstanding 95,280,502
shares of common stock, without giving any effect to the additional shares that
we may issue pursuant to outstanding options and warrants exercisable at a range
of prices from $0.22 to $0.55 per share.
34
Name Number of Shares Percent of Class
Series B Preferred Common* Series B Preferred Common*
Owner of More than 5% of Class
Michael A. Gales -- 5,257,379(1) -- 7.73%
333 East 66th Street
New York, NY 10022
Hillson Partners LP(2)
Hillson Private Partners II, LLLP(2) 130,000 4,680,000 16.20% 6.53%
110 N. Washington Street, Suite 401
Rockville, MD 20850
Directors and Executive Officers
Louis A. Giusto -- 3,884,538(3) -- 5.76%
Peter Rettaliata -- 1,468,139(4) -- 2.18%
Dario Peragallo -- 1,468,139(5) -- 2.18%
Seymour G. Siegel -- 133,333(6) -- **
Ira A. Hunt, Jr -- 842,430(6)(7) -- 1.26%
James A. Brown -- 809,601(6) -- 1.21%
David J. Buonanno -- -- -- --
All Directors and officers as 8,606,180(3)(4)(5)(6)(7) -- 12.62%
a group (7 persons)
* Assumes the conversion of the shares of series B convertible preferred
stock owned by the stockholder listed in the table, but not by any other
holder.
** Less than 1%
(1) Includes 1,000,000 shares we may issue to Mr. Gales upon exercise of
options granted under his employment agreement that pursuant to his
separation agreement are exercisable until March 16, 2008.
(2) The general partner of Hillson Partners LP and Hillson Private
Partners II, LLLP is Daniel H. Abramowitz, who has the sole power to
vote and dispose of the shares.
(3) Includes 480,000 shares we may issue to Mr. Giusto upon exercise of
the vested portion of the 1,200,000 options granted to him under his
employment agreement.
(4) Includes 300,000 shares we may issue to Mr. Rettaliata upon exercise
of the vested portion of the 1,200,000 options granted to him under
his employment agreement.
(5) Includes 300,000 shares we may issue to Mr. Peragallo upon exercise
of vested portion of the 1,200,000 options granted to him under his
employment agreement.
(6) Includes, in each case, 33,333 shares we may issue to Messrs. Brown,
Hunt, and Siegel upon exercise of the vested portion of the 100,000
options granted to each of them on February 13, 2007.
(7) Includes 709,097 shares owned by Mr. Hunt's spouse.
(8) Excludes 100,000 shares which vest on January 1, 2008, provided Mr.
Brown continues to serve as our Chairman.
35
Our Directors and Executive Officers
Our directors and executive officers are:
Name Age Position
---- --- --------
James A. Brown 54 Chairman
Louis A. Giusto 64 Vice Chairman, Chief Financial Officer and Treasurer
Peter D. Rettaliata 56 Director, Chief Executive Officer and President
Dario A. Peragallo 42 Director and Executive Vice President, Manufacturing
Seymour G. Siegel 64 Director
M.Gen. Ira A.Hunt,Jr. 81 Director
(USA, Ret.)
David J. Buonanno 51 Director
James A. Brown became our Chairman on March 17, 2007, following his
appointment as Co-Chairman on February 13, 2007. Mr. Brown was Chief Executive
Officer and Secretary of our predecessor, Ashlin Development Corporation, from
September 2004 to November 30, 2005 and was Ashlin's Chairman of the Board from
May 2003 to November 30, 2005. Ashlin filed for bankruptcy protection while Mr.
Brown was its Chairman and CEO. Mr. Brown currently serves in a Board or
advisory capacity with other firms, including Preferred Commerce, a privately
held, seven year old technology solutions provider headquartered in West Palm
Beach. Mr. Brown also advises a development stage Florida-based firm focused on
bringing scientific breakthroughs in the acoustic arena to the consumer market.
Mr. Brown has served as a private equity manager, targeting undervalued
opportunities in both the public and private arenas. He has also served as a
work-out specialist for firms at the behest of creditors, management and
investors. Mr. Brown has advised more than thirty firms on matters including
strategy, corporate finance and business process.
Louis A. Giusto has been our Vice Chairman, Chief Financial Officer and
Treasurer since November 30, 2005. Mr. Giusto has over 30 years of financial
control experience with foreign and domestic banks, non-bank financial service
entities and consumer product companies. From 2003 to November 2005, Mr. Giusto
acted as an independent consultant to a number of private businesses. From 2000
to 2003, Mr. Giusto was an Account Manager for a public accounting firm and the
SVP Finance and Operations of Credit2B.com, a web-based internet company. Before
joining C2B, Mr. Giusto served for fourteen years in various positions with
Fleet Bank and, prior to its acquisition by Fleet Bank, NatWest PLC, London.
During his tenure at NatWest, Mr. Giusto served as Senior Financial Officer and
Treasurer of NatWest Commercial Services, Inc. (a billion dollar wholly owned
subsidiary of NatWest PLC, London) and a Credit Administrator (Risk Manager)
with Fleet Bank. Mr. Giusto serves as a director of Long Island Consultation
Center, a not-for-profit psychiatric care facility. Mr. Giusto graduated from
New York University with a BS in Economics and Accounting and from Long Island
University (with Distinction) with an MBA in Finance.
Peter D. Rettaliata has been our President and Chief Executive Officer
since November 30, 2005. He also has been the President of our wholly-owned
subsidiary, Air Industries Machining Corp., referred to as AIM, since 1994.
Prior to his involvement at AIM, Mr. Rettaliata was employed by Grumman
Aerospace Corporation for twenty-two years. Professionally, Mr. Rettaliata is
the Chairman of "ADAPT", an organization of regional aerospace companies, a past
member of the Board of Governors of the Aerospace Industries Association, and a
member of the Executive Committee of the AIA Supplier Council. He is a graduate
of Niagara University where he received a B.A. in History and the Harvard
Business School where he completed the PMD Program.
36
Dario Peragallo has been our Executive Vice President since November 30,
2005 and is also Executive Vice President of Manufacturing for AIM. Mr.
Peragallo has been associated with AIM for over 25 years. He became AIM's
Director of Manufacturing in 2000. In addition, he has helped develop and
maintain AIM's current business systems. Mr. Peragallo has been the company
"Lean Advocate" since the inception of the program at AIM to decrease its
inventory and increase productivity. Mr. Peragallo became Executive Vice
President with overall responsibility for engineering, manufacturing and
customer-critical technical matters in 2003. He has been an active member of
Diversity Business since 2000, an organization specializing in the promotion of
small and minority owned businesses. He is a graduate of SUNY Farmingdale where
he received a B.A. in Manufacturing Engineering. Mr. Peragallo oversees all
engineering and production matters relating to AIM.
Seymour G. Siegel has been a principal in the Business Consulting Group of
Rothstein, Kass & Company, P.C., a national firm of accountants and consultants
since April 2000. He specializes in providing strategic advice to business
owners including mergers and acquisitions; succession planning; capital
introductions and long range planning. In 1974, Mr. Siegel founded, and from
1974 to 1990 was managing partner of, Siegel Rich and Co, P.C., CPAs. In 1990,
Siegel Rich merged into Weiser LLP, then known as M.R.Weiser & Co., LLC, a large
regional firm where he had been a senior partner. In 1995, Mr. Siegel founded
another firm called Siegel Rich, which became a division of Rothstein, Kass in
April 2000. Mr. Siegel has been a director, trustee and officer of numerous
businesses, philanthropic and civic organizations. He serves as a director and
audit committee chairman of Hauppauge Digital Inc. and Emerging Vision
Incorporated and has served in a similar capacity at Oak Hall Capital Fund,
Prime Motor Inns Limited Partnership, Noise Cancellation Technologies and
Barpoint.com and serves as the chairman of the audit committee and as a member
of the compensation committee for Global Aircraft Solutions Incorporated. Mr.
Siegel is the Chairman of the Audit Committee of the Board.
General Ira A. Hunt, Jr. (USA, Ret) graduated from the United States
Military Academy in 1945 and subsequently served thirty-three years in various
command and staff positions in the U.S. Army, retiring from active military
service as a Major General in 1978. His last military assignment was as Director
of the Office of Battlefield Systems Integration. Subsequently, General Hunt was
president of Pacific Architects and Engineers in Los Angeles and Vice President
of Frank E. Basil, Inc. in Washington, D.C. Since 1990, General Hunt has been a
director of SafeNet Inc. (Nasdaq: SFNT), an information security technology
company. He is a Freeman Scholar of the American Society of Civil Engineers and
has a M.S. in Civil Engineering from the Massachusetts Institute of Technology,
a M.B.A. from the University of Detroit; a Doctor of the University Degree from
the University of Grenoble, France and a Doctor of Business Administration
Degree from the George Washington University. General Hunt is Chairman of the
Compensation Committee of our Board and is a member of the Audit Committee.
David J. Buonanno has been a Director since June 26, 2007. He is a
consultant to Dresser-Rand Corporation as well as other companies in the
aerospace and defense industries. Mr. Buonanno has extensive experience in
manufacturing, supply management and operations. He was employed by Sikorsky
Aircraft, Inc., a subsidiary of United Technologies Corporation, as Vice
President, Supply Management (from January 1997 to July 2006) and as Director,
Systems Subcontracts (from November 1992 to January 1997). From May 1987 to
November 1992, he was employed by General Electric Company and GE Astro Space,
serving as Operations Manager for GE in 1992 and Manager, Program Materials
Management of GE Astro Space from December 1989 to January 1992. From June 1977
to May 1987, he was employed by RCA and affiliated companies, including RCA
Astro Space. Mr. Buonanno attended Lehigh University College of Electrical
Engineering and holds a B.S. in Business Administration from Rutgers University.
He completed the Program for Management Development at Harvard Business School
in 1996.
37
Information Concerning our Board of Directors,
Board Committees and Corporate Governance
Board Composition
Our Board of Directors consists of seven (7) directors. Our Board has
determined that James A. Brown, Seymour G. Siegel, General Ira A. Hunt, Jr. (USA
Ret) and David J. Buonanno are "independent directors." Our Board held five
meetings in 2006.
Committees of the Board
Our Board of Directors has established an Audit Committee and a
Compensation Committee.
Audit Committee. Messrs. Siegel and Brown and General Hunt are members of
the Audit Committee, each of whom is a non-employee member of the Board of
Directors. Mr. Siegel serves as Chairman of the Audit Committee and also
qualifies as an "audit committee financial expert," as that term is defined
under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act. The
Board has determined that each member of our Audit Committee meets the current
independence and financial literacy requirements under the Sarbanes-Oxley Act
and SEC rules and regulations. Our Audit Committee met four times in 2006.
Compensation Committee. Our Compensation Committee is composed of General
Hunt (Chairman), and Messrs. Siegel and Brown, each of whom is a non-employee
member of our Board of Directors. Our Compensation Committee met once in 2006.
38
Code of Ethics
We have adopted a written code of ethics that applies to our principal
executive officers, senior financial officers and persons performing similar
functions. Upon written request to our corporate secretary, we will provide you
with a copy of our code of ethics, without cost.
Director Compensation
For services rendered from the commencement of their terms through our
next annual meeting of stockholders, each of the then non-management directors
(Mr. Brown, General Hunt, Mr. Siegel and Mr. Nagler) was granted an option to
purchase 100,000 shares of the our common stock. These options vest in equal
increments on March 1 of each of 2007, 2008 and 2009 and are exercisable at a
price of $0.27 per share for a period of seven years from the date of grant.
For their services, we will pay each non-management director a base fee of
$18,000 per year and $1,500 for each Board meeting attended. In addition, we
will pay the Chairman of the Audit Committee $12,000 for serving in that
capacity, members of the Audit Committee $1,000 for each meeting attended, and
the Chairman of the Compensation Committee $6,000 for serving in that capacity.
Beginning in December 2006 and continuing into 2007, we paid Mr. Rounsevelle W.
Schaum fees for certain per diem services to our company that are included in
the table below. Our Board accepted the resignation of Mr. Schaum effective as
of April 13, 2007.
The following table sets forth information concerning the compensation we
paid to our directors during the fiscal year ended December 31, 2006:
39
------------------------------------------------------------------------------------------------------------------------------------
DIRECTOR COMPENSATION
------------------------------------------------------------------------------------------------------------------------------------
Name Fees Earned Stock Awards Option Non-Equity Non-Qualified All Other Total ($)
or Paid in ($) Awards Incentive Plan Deferred Compensation ($)
Cash ($) ($) Compensation Compensation
($) Earnings ($)
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (j)
------------------------------------------------------------------------------------------------------------------------------------
Michael A. Gales (1) -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
James A. Brown 15,831 -- -- -- -- -- 15,831
------------------------------------------------------------------------------------------------------------------------------------
Louis A. Giusto -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Peter D. Rettaliata -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Dario A. Peragallo -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Stephen M. Nagler (2 ) 15,831 -- -- -- -- -- 15,831
------------------------------------------------------------------------------------------------------------------------------------
Seymour G. Siegel 24,231 -- -- -- -- -- 24,231
------------------------------------------------------------------------------------------------------------------------------------
Rounsevelle W.
Schaum (3) 26,498 -- -- -- -- -- 26,498 (1)
------------------------------------------------------------------------------------------------------------------------------------
M.Gen. Ira A Hunt, Jr.
(USA Ret.) 15,831 -- -- -- -- -- 15,831
------------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Gales resigned as a member of the Board on March 16, 2007.
(2) Mr. Nagler's term as a director ended on June 26, 2007.
(3) Our Board accepted the resignation of Mr. Schaum effective as of
April 13, 2007.
Compensation of Our Executive Officers
The following table shows compensation which we (including AIM)
awarded or paid to, or which was earned from us, in all capacities for
fiscal years ended December 31, 2006 and 2005, by (i) each individual who
served as our chief executive officer for all, or a portion of, 2006 and
(ii) each other individual who served as an executive officer of our
company (including AIM) and received total compensation in excess of
$100,000 for our 2006.
o Michael A. Gales, our former Executive Chairman, who resigned
all of his positions with us as of March 16, 2007;
o Louis A. Giusto, our Vice Chairman, Chief Financial Officer
and Treasurer since November 30, 2005;
o Peter D. Rettaliata, our Chief Executive Officer and President
since November 30, 2005 and an officer of AIM; and
o Dario A. Peragallo, our Executive Vice President since
November 30, 2005 and an officer of AIM.
Summary Compensation Table
Name Year Salary Bonus Stock Option Non-Equity Change in All Other Total
and ($) ($) Awards Awards Incentive Plan Pension Value Compensation Compensation
Principal ($) ($) Compensation and Nonqualified
Position ($) Deferred Compensation
Earnings ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
------------------------------------------------------------------------------------------------------------------------------------
Michael 2006 $250,000 -- -- 52,888(1) -- -- 15,938(2) $318,826
A.Gales, 2005 $ 21,233 -- -- 38,384(1) -- -- -- 59,617
Executive
Chairman
Louis A. 2006 $230,000 -- -- 50,772(1) -- -- 14,768(2) 295,540
Giusto, 2005 $ 19,534 -- -- 36,850(1) -- -- -- 56,384
Vice
Chairman,
CFO and
Treasurer
Peter D. 2006 $230,000 -- -- 31,733(1) -- -- -- 261,733
Rettaliatta 2005 $241,510 -- -- 23,031(1) -- -- -- 265,541
CEO
Dario A. 2006 $230,000 -- -- 31,773(1) -- -- -- 261,733
Peragallo 2005 $242,344 23,031(1) -- -- -- 265,375
Executive VP
----------
(1) Consists of stock options to purchase shares of common stock, the
vesting schedule and other terms of which are set forth in the
footnotes to the table below under the caption "Aggregated Option
Exercises in Last Fiscal Year and Fiscal Year-End Option Values".
(2) Consists of automobile leasing, maintenance, parking and insurance.
40
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information as of December 31, 2006,
concerning outstanding equity awards granted to the individuals listed in the
Summary Compensation Table. We did not grant options, or make stock awards, to
any of our executive officers in 2006.
Outstanding Equity Awards at Fiscal Year-End
Option Awards Stock Awards*
------------- -------------
Equity Incentive Equity Incentive
Plan Awards: Plan Awards:
Number of
Securities
Number Underlying Unearned Shares,
of Securities Unexercised Shares or Units of Units or Other
Underlying Unearned Stock that have Rights that have
Unexercised Options Options Exercise Expiration Not Vested Not Vested
Name Exercisable Unexercisable (#) Price Date Number Market Value Number Market Value
----------- ------------- ----------- -------- ---------- ------ ------------ ------ ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
Michael A. Gales (1) 1,250,000 -- (1) 03/16/2008 -- -- -- --
Louis A. Giusto (2) 480,000 720,000 -- (2) 11/30/2015 -- -- -- --
Peter D. Rettaliata (3) 300,000 900,000 -- (3) 11/30/2015 -- -- -- --
Dario A. Peragallo (3) 300,000 900,000 -- (3) 11/30/2015 -- -- -- --
----------
* On December 29, 2006, the last trading day of 2006, the last sale
price of a share of our common stock was $0.25.
(1) Represents options granted to Mr. Gales pursuant to his employment
agreement. One-fifth of these options vested as of November 30, 2005 at an
exercise price of $0.22 per share and another 250,000 vested on September
15, 2006 at an exercise price of $0.428 per share. Mr. Gales terminated
his employment with us and his employment agreement effective March 16,
2007. Under the terms of his separation agreement, 750,000 options vested
on March 16, 2007, and all of his options are exercisable through March
16, 2008.
(2) One-fifth of these options vested as of November 30, 2005 at an
exercise price of $0.22 per share and another 240,000 vested on September
15, 2006 at an exercise price of $0.428 per share. The balance will vest
in equal increments of 240,000 shares each on the second through fourth
anniversaries of September 15, 2005. The exercise price of the options
vesting on each of September 15, 2007, 2008 and 2009 will be the higher of
(a) $0.22 per share or (b) the average trading price of our common stock
for the thirty trading days ending September 15, 2007, 2008 and September
15, 2009, respectively.
(3) One-eighth of these options vested as of November 30, 2005 at an
exercise price of $0.22 per share and another 150,000 vested on September
15, 2006, at an exercise price of $0.428 per share. The balance will vest
in equal increments of 150,000 shares each on the second through seventh
anniversaries of September 15, 2005. The exercise price of the options
vesting on each of September 15, 2007, 2008, 2009, 2010, 2011 and 2012
will be the higher of (a)$0.22 per share or (b) the average trading price
of our common stock for the thirty trading days ending September 15, 2007,
2008, 2009, 2010, 2011 and September 15, 2012, respectively.
41
Equity Compensation Plan Information
The following table provides certain information with respect to all of
our equity compensation plans in effect as of December 31, 2006.
Remaining Available
Number of Securities Weighted-Average for Issuance under
to be Issued upon Exercise Exercise Price of Equity Compensation Plans
of Oustanding Options, Outstanding Options, (Excluding Securities
Warrants and Rights Warrants and Rights Referred to in Column (a))
(a) (b) (c)
Plan Category __________________________ ____________________ _________________________
Equity compensation
plans approved by
security holders None $ -- --
Equity compensation
plans not approved
by security holders (1) 9,030,346 $.23 5,150,000
Total (1) 9,030,346 $.23 5,150,000
----------
(1) Shareholder approval of our 2005 Stock Incentive Plan was completed as of
February 15, 2006. In connection with our merger, our Board adopted our 2005
Stock Incentive Plan, and issued stock options to purchase 4,850,000 shares to
our new executive officers. The vesting and exercise prices of the 4,850,000
options which we have granted to our executive officers are set forth under the
section captioned "Executive Compensation - Outstanding Equity Awards at Fiscal
Year-End." As of December 31, 2006, 5,150,000 shares remained available for
grant under our 2005 Stock Incentive Plan.
Of the 9,030,346 shares included above, (i) 4,138,678 shares may be
acquired upon exercise of warrants issued to GunnAllen Financial, Inc., at an
exercise price of $0.22 per share, and (ii) 41,668 shares may be acquired upon
exercise of warrants issued to an investor relations firm, at a weighted average
price of $0.70 per share.
Employment Agreements
The employment agreement of Louis Giusto became effective as of November
30, 2005 and will terminate on November 30, 2010, but will be extended for
successive three one-year renewal periods unless he or our company decides not
to extend the agreement. Under his employment agreement, Mr. Giusto will receive
an annual base salary of $230,000, which will increase a minimum of 10% per year
if our operating profits have increased by at least 5% over the preceding
12-month period. Mr. Giusto will be entitled to an annual bonus to be determined
by our Board of Directors but which must equal at least 50% of his annual base
salary. If he is dismissed without cause, Mr. Giusto is entitled to receive
salary and benefits for the period which is the greater of the remaining initial
term (or renewal period, as the case may be) of his employment agreement or one
year. In addition, upon the execution of his employment agreement, we granted
Mr. Giusto options to purchase 1,200,000 shares of common stock, exercisable
over a ten-year period commencing on the date of grant. See the applicable
footnote to the table captioned "Outstanding Equity Awards at Fiscal Year-End".
Mr. Giusto's employment agreement also contains restrictive covenants
prohibiting Mr. Giusto (i) from directly or indirectly competing with us, (ii)
from soliciting any customer of our company or AIM for any competitive purposes
and (iii) from employing or retaining any employee of our company or AIM or
soliciting any such employee to become affiliated with any entity other than our
company or AIM during the twelve-month period commencing upon the termination of
his agreement.
42
The employment agreement of Peter D, Rettaliata became effective as of
November 30, 2005, and will terminate on November 30, 2010, but will be extended
for successive three one-year periods unless he or our company decides not to
extend the agreement. Under his employment agreement, Mr. Rettaliata will
receive an annual base salary of $230,000, which will increase a minimum of 5%
per year if our operating profits have increased by at least 5% over the
preceding 12-month period, and such bonus compensation as the Board of Directors
may determine. The terms of Mr. Rettaliata's employment agreement relating to
severance upon termination without cause are the same as those provided for in
Mr. Giusto's employment agreement. In addition, upon the execution of his
employment agreement, we granted Mr. Rettaliata options to purchase 1,200,000
shares of common stock, exercisable over a ten-year period commencing on the
date of grant. Please see the applicable footnote to the table captioned
"Outstanding Equity Awards at Fiscal Year-End". Mr. Rettaliata's employment
agreement also contains the restrictive covenants included in Mr. Giusto's
employment agreement, discussed above.
The employment agreement of Dario A. Peragallo became effective as of
November 30, 2005, and will terminate on November 30, 2010, but will be extended
for successive three one-year periods, unless he or our company decides not to
extend the agreement. Under his employment agreement, Mr. Peragallo will receive
an annual base salary of $230,000, which will increase a minimum of 5% per year
if our operating profits have increased by at least 5% over the preceding
12-month period, and such bonus compensation as the Board of Directors may
determine. The terms of Mr. Peragallo's employment agreement relating to
severance upon termination without cause are the same as those provided for in
Mr. Giusto's employment agreement. In addition, upon the execution of his
employment agreement, we granted Mr. Peragallo options to purchase 1,200,000
shares of common stock, exercisable over a ten-year period commencing on the
date of grant. The vesting schedule and exercise price relating to Mr.
Peragallo's options are the same as those relating to Mr. Rettaliata's options
set forth above. Mr. Peragallo's employment agreement also contains the
restrictive covenants included in Mr. Giusto's employment agreement, discussed
above.
We have agreed with GunnAllen Financial, Inc., placement agent for our
private placement of series A convertible preferred stock, that we will not
change or modify the employment agreements with, or grant more stock options to,
Messrs. Giusto, Rettaliata and Peragallo before November 30, 2007, without its
prior consent.
In March 2007, we entered into an agreement with James A. Brown for his
service as our Chairman. Under the agreement, we have paid Mr. Brown $15,000 and
we will compensate him at a rate of $175,000 per annum until December 31, 2007,
or until such date as he shall cease to serve as Chairman. In addition to his
cash compensation, we issued to Mr. Brown, under a Restricted Stock Agreement,
200,000 shares of our common stock, of which 100,000 shares became vested on
March 30, 2007 and the second 100,000 will vest as of December 31, 2007.
Prior to March 16, 2007, we employed Michael A. Gales under an employment
agreement effective November 30, 2005. We entered into a Separation Agreement
and General Release with Mr. Gales, effective March 16, 2007, under which Mr.
Gales resigned from his positions with our company. Under the separation
agreement, our employment agreement with Mr. Gales was terminated effective
March 16, 2007. In lieu of the compensation payable to Mr. Gales under his
employment agreement, from March 16, 2007, to November 30, 2010, we will pay Mr.
Gales $100,000 per annum, and from December 1, 2010 to May 31, 2011, we will pay
him $50,000. In addition, if we achieve certain agreed-upon levels of
performance, he may receive up to an additional $50,000. Upon the execution of
his employment agreement we granted Mr. Gales options to purchase 1,250,000
shares of our common stock, subject to an agreed upon vesting schedule and
exercisable over a ten-year period commencing on the date of grant. Under the
separation agreement, all unvested options held by Mr. Gales vested as of March
16, 2007, and the right to exercise all of his options will terminate as of
March 16, 2008.
43
On May 11, 2007, we entered into a Letter Agreement with Mr. Gales
confirming that, due to an oversight between the parties, the Separation
Agreement and Release, dated March 15, 2007, failed to indicate that
notwithstanding that the former Chairman was resigning from his positions with
us, he would make himself available (i) from time to time for consultations with
members of our Board and senior management regarding our business and affairs,
potential acquisitions and strategic alliances, expansion and other business
opportunities and (ii) once each calendar quarter for meetings to be held in
Manhattan, New York, with one or more members of our Board to review our
strategic plan.
Certain Relationships and Related Transactions
On November 30, 2005, in connection with our acquisition of AIM, we issued
our convertible promissory notes in the principal amount of $332,631 to each of
Peter Rettaliata, our Chief Executive Officer and a Director, and Dario
Peragallo, our Executive Vice President and a Director, convertible into shares
of our common stock at the conversion price of $0.40 per share. On January 26,
2007, each of Mr. Rettaliata and Mr. Peragallo exercised their right to convert
their promissory notes, including accrued interest of $27,255, into 899,716
shares of common stock. In consideration for the shares of common stock issued,
all of our indebtedness under the promissory notes was cancelled.
On February 13, 2007, each of the non-management members of the Board was
issued an option to purchase 100,000 shares of our common stock. The options
will vest in equal thirds on March 1, 2007, 2008 and 2009 and are exercisable at
a price of $0.27 per share until March 1, 2014.
Stephen M. Nagler, a director of our company until June 26, 2007, is a
partner in Eaton & Van Winkle LLP, our legal counsel. We paid Eaton & Van Winkle
LLP $500,000 in 2006 and $630,000 in 2005 for legal fees and disbursements.
For information concerning our agreement with James A. Brown under which
he serves as our Chairman and the Separation Agreement and Release we entered
into with Michael A. Gales, our former Executive Chairman, see "Our Directors
and Executive Officers - Employment Agreements."
Transactions of Ashlin Prior to the Merger:
In connection with our Plan of Reorganization, in January 2005, we entered
into an employment agreement with James A. Brown, who was then our Chief
Executive Officer, and disposed of substantially all of our assets to an entity
controlled by another person who had been our former Chief Executive Officer.
Mr. Brown received 100,000 shares, with a fair value of $7,000, as of
November 2005 in connection with the merger.
Transactions Relating to Original Gales Prior to the Merger:
In August 2005, Mr. Stephen Nagler, at that time one of our directors and
our Secretary, loaned $10,000 to Original Gales, a privately-owned Delaware
corporation. Co-investors of Mr. Nagler loaned an additional $35,000 to Original
Gales in the same financing. In connection with that financing, Original Gales
issued to the investors its 12% convertible bridge notes in the aggregate
principal amount of $45,000. The bridge notes were
44
repaid with a portion of the proceeds of the offering. In connection with the
financing, Original Gales issued to the investors warrants to purchase 204,547
shares of its common stock at $0.22 per share and, as a result of the merger,
those warrants became warrants to purchase an equal number of shares of our
common stock. The warrants allow for cashless exercise and have weighted-average
anti-dilution protection with respect to the exercise price.
Transactions Relating to Air Industries Machining Corporation
Prior to the Merger:
Prior to its acquisition by Original Gales, AIM leased manufacturing and
office space from KPK Realty Corp. which, since October, 1974, has been owned
49% by Luis Peragallo, an officer, a director and the largest shareholder of AIM
prior to its acquisition by Original Gales. The annual rent under the lease was
approximately $300,000, plus annual real estate taxes on the leased property.
Between 1989 and 1990, AIM advanced $208,233 to KPK Realty Corp. In partial
repayment of the advances from AIM, rent in the amount of $11,496 in 2005 was
offset by KPK Realty Corp. from the amounts due under the lease. In addition,
from 1990 to 2005, AIM was a guarantor of the mortgage (with a balance of
approximately $677,000 as of September 30, 2005) on such leased property. This
guaranty was terminated in connection with the real estate acquisition.
Prior to its acquisition by Original Gales, AIM leased manufacturing space
at an annual rental of approximately $82,800, plus annual real estate taxes on
such property, from DPPR Realty Corp. which, since January 2003 has been 100%
owned by Peter Rettaliata and Dario Peragallo. Prior to the acquisition, Messrs.
Rettaliata and D. Peragallo owned an aggregate of 36.84% of AIM's outstanding
capital stock. Messrs. Rettaliata and D. Peragallo were officers of AIM and are
officers and directors of our company. From February 2003 to November 30, 2005,
AIM was also a guarantor of the mortgage (with a balance of approximately
$567,000 as of September 30, 2005) on such leased property. This guaranty was
terminated in connection with the real estate acquisition.
In June 1995, an individual who held 49% of the outstanding capital stock
of AIM sold such interest to Jorge Peragallo and Peter Rettaliata for cash and a
$625,000 principal amount promissory note from each of Mr. J. Peragallo and Mr.
Rettaliata ($1,250,000 in the aggregate). AIM guaranteed the repayment of these
promissory notes, which aggregated $1,250,000 in principal amount. These
promissory notes were repaid in full in June 2005.
Peter Rettaliata, who was an officer of AIM, advanced $5,000 to AIM during
2003 and $42,678 to AIM during 2004. Dario Peragallo, who was an officer of AIM,
advanced $5,000 to AIM during 2003 and $39,334 to AIM during 2004. Luis
Peragallo, who was an officer of AIM, advanced $5,000 to AIM during 2003 and
$18,179 to AIM during 2004. Jorge Peragallo, who was an officer of AIM, advanced
$5,000 to AIM during 2003 and $38,344 to AIM during 2004. As of September 30,
2005, AIM had received an aggregate of $363,323 in loans from its officers and
was obligated to repay such amount to its officers. Such amount was repaid in
connection with our acquisition of AIM. In October 2005, AIM agreed to pay an
aggregate of $225,000 to its officers to enable them to pay income taxes accrued
while operating AIM as a Subchapter S corporation. Such amount was paid in
connection with our acquisition of AIM.
Transactions Relating to the Merger and Acquisition of AIM:
On November 30, 2005, Original Gales completed the acquisition from
Messrs. Luis Peragallo, Jorge Peragallo, Peter Rettaliata and Dario Peragallo,
of all of the outstanding capital stock of AIM. Original Gales had entered into
a Stock Purchase Agreement with AIM and the shareholders of AIM as of July 25,
2005. The aggregate purchase price paid to the AIM shareholders consisted of (i)
$3,114,296 in cash, (ii) $1,627,262 principal amount of promissory notes,
payable over five years, of which $962,000 were in the form of a secured
45
subordinated promissory note payable to Mr. Luis Peragallo and $665,262 were in
the form of unsecured convertible promissory notes ($332,631 payable to Mr.
Peter Rettaliata and $332,631 payable to Mr. Dario Peragallo), convertible into
shares of our common stock at a price of $0.40 per share, and (iii) 490,060
shares of newly issued common stock. The 490,060 shares of common stock issued
to the AIM shareholders were allocated as follows: 253,214 shares to Luis
Peragallo, 118,423 shares to Peter Rettaliata and 118,423 shares to Dario
Peragallo. In addition to the purchase price, Original Gales paid an aggregate
of $1,053,862 in connection with the acquisition, a portion of which represented
legal and accounting expenses ($300,000) incurred by AIM and its shareholders
and $270,403 to enable AIM's shareholders to pay income taxes accrued prior to
closing. The purchase price paid to AIM's shareholders was the result of arms'
length negotiation between Original Gales and the AIM shareholders.
Our employment agreements with Messrs. Gales, Giusto, Rettaliata and D.
Peragallo became effective on November 30, 2005 and we issued stock options to
them as of that date. See "Our Directors and Executive Officers -- Employment
Agreements."
As of November 30, 2005, Original Gales Acquisition Corp., Inc. completed
the purchased from entities which are owned, in part, by affiliates of AIM (KPK
Realty Corp. and DPPR Realty Corp.), for the aggregate purchase price
$4,190,000, of the properties, described above, which were being leased by AIM
prior to November 30, 2005 from such entities. The purchase price paid to KPK
Realty Corp. was $2,690,000 and the purchase price paid to DPPR Realty Corp. was
$1,500,000. Gales Industries Acquisition Corp., Inc. contemporaneously merged
into AIM, with AIM being the surviving entity, so that AIM became the owner of
those properties.
Selling Security Holders
Based on information provided by the selling security holders, the table
below sets forth certain information, as of June 30, 2007, unless otherwise
noted, regarding the selling security holders.
As of June 30, 2007, we had outstanding 67,008,507 shares of our common
stock. The table below assumes, for calculating each selling security holder's
beneficial ownership, that options, warrants and convertible securities held by
that security holder (but not, unless otherwise noted, those held by any other
person) that may be exercised or converted within 60 days after the reference
date of June 30, 2007, have been exercised or converted and that the shares of
common stock issued upon exercise or conversion have been added to the number of
shares deemed to be outstanding. For purposes of calculating the post-offering
ownership of each selling security holder, the table also assumes the sale of
all of the shares being offered by each selling security holder. Where the name
of a natural person appears next to a selling security holder that is not a
natural person, that person has the power to exercise voting and/or investment
power over the shares owned by that selling security holder.
The second column in the table below lists the number of shares of common
stock beneficially owned by each selling security holder, including shares the
selling security holder has the right to acquire upon exercise or conversion of
a derivative security within 60 days of the reference date of June 30, 2007.
The third column lists the shares of common stock being offered by this
prospectus by the selling security holders. This column does not include shares
that the selling security holder may acquire in lieu of cash dividends. We have
registered, but not allocated among the selling security holders owning shares
of our series B convertible preferred stock, up to 4,673,232 shares that we may
issue in lieu of cash dividends.
The fourth column assumes the sale of all of the shares offered by the
selling security holders pursuant to this prospectus.
46
Each selling security holder may offer all or part of the shares of common
stock beneficially owned for resale from time to time. The table assumes that
the selling security holders will sell all of the shares offered for sale and
accordingly, own no shares of common stock upon completion of the offering.
However, a selling security holder is under no obligation to sell any shares
immediately pursuant to this prospectus, nor is a selling security holder
obligated to sell all or any portion of the shares at any time. Therefore, we
are not able to estimate the number of shares of common stock that will be sold
pursuant to this prospectus or the number of shares that will be owned by any
selling security holder upon termination of this offering. Each selling security
holder may sell all, some or none of the shares, depending upon our results of
operations, financial condition, business prospects, the market price of our
common stock and market conditions generally, the selling security holder's need
for liquidity and other factors that may influence the selling security holder's
decision to dispose of or continue to own our shares. Except as otherwise noted,
none of the selling security holders have held a position or office, or had any
other material relationship, with us.
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
ECH Consulting, Inc. (1) 325,000 * 325,000 0 0
Croft Investments Limited 250,000 * 250,000 0 0
Partnership (2)
Atlas Capital Services, LLC and
Designees: (3)
ACS Holdings, LLC 1,285,796 1,285,796 0 0
Edward Wahrsager 50,000 * 50,000 0 0
Robert A. Schecter 185,546 * 185,546 0 0
Shimon S. Fishman 46,387 * 46,387 0 0
Steven Pollan 303,592 * 303,592 0 0
Atlas Private Equity, LLC 635,425 * 635,425 0
American Friends of Neveh Zion 15,000 * 15,000
Holders of $45,000
Bridge Financing
Warrants: (4)
Rhoda Lewis 45,455 * 45,455 0 0
MTP Operating Corp. 45,455 * 45,455 0 0
Marilyn Thypin 68,182 * 68,182 0 0
Holders of $105,000 Bridge
Financing Warrants: (5)
Stephen 340,909 * 340,909 0 0
Caragol
Frank and Cynthia Gasztonyi 136,364 * 136,364 0 0
Placement Agent:
GunnAllen Financial 4,138,678 6.18 4,138,678 0 0
Services, Inc.(6)(8)
Global Business Resources, Inc. (7) 80,038 * 80,038 0 0
IRA FBO James L. Robbins
Pershing LLC As 236,366 * 236,366 0 0
Custodian
IRA FBO James J. 118,184 * 118,184 0 0
O'Neill
IRA FBO Theodore 118,184 * 118,184 0 0
Haberer
47
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
IRA FBO John 118,184 * 118,184 0 0
Carlson
IRA FBO Larry W. 118,184 * 118,184 0 0
Williams
IRA FBO Joseph P. Chrisman Pershing 236,366 * 236,366 0 0
LLC As Custodian Rollover
Account
IRA FBO Thomas A. 118,184 * 118,184 0 0
Ross
IRA FBO Don 118,184 * 118,184 0 0
Walker
IRA FBO Andrew 118,184 * 118,184 0 0
McClure
IRA FBO Allen 118,184 * 118,184 0 0
Ruth
IRA FBO Arthur 118,184 * 118,184 0 0
Kenyon
IRA FBO George A. Lee 497,732 * 472,732 25,000 *
Michelle Levite DDS 236,366 * 236,366 0 0
IRA FBO Sandra 118,184 * 118,184 0 0
Rake
IRA FBO Walter G. 118,184 * 118,184 0 0
Clemons
IRA FBO Stanley Watkins 118,184 * 118,184 0 0
IRA FBO Mike 118,184 * 118,184 0 0
Cushner
James 945,464 1.41 945,464 0 0
Wickenden
Leon Cooprider 118,184 * 118,184 0 0
Jonathan Kratter & 1,418,196 2.12 1,418,196 0 0
Lisa Kratter JT
TEN
Mickey D. Tucker & Shelley A. 118,184 * 118,184 0 0
Tucker JT
WROS
Dave 236,366 * 236,366 0 0
Dhondt
Timothy Wallace & 165,457 * 165,457 0 0
Lisa B. Wallace JT
TEN
TWM Capital, 1,181,830 1.76 1,181,830 0 0
LP
Gordon Van 472,732 * 472,732 1,000 *
Vliet
Jonathan Kratter & 1,418,196 2.12 1,418,196 0 0
Lisa Kratter JT
TEN
Mickey D. Tucker & Shelley A. 118,184 * 118,184 0 0
Tucker JT
WROS
Dave 236,366 * 236,366 0 0
Dhondt
Timothy Wallace & 165,457 * 165,457 0 0
Lisa B. Wallace JT
TEN
TWM Capital, LP 1,181,830 1.76 1,181,830 0 0
Gordon Van 472,732 * 472,732 1,000 *
Vliet
Mark 945,464 1.41 945,464 0 0
Heiman
David C. 472,732 * 472,732 0 0
Megan
Charles R. Costa & 236,366 * 236,366 0 0
Carol Costa JT
TEN
Alan Harney & 236,366 * 236,366 0 0
Margie A. Harney JT
TEN
Paul 236,366 * 236,366 0 0
Whitcomb
Stuart A. 236,366 * 236,366 0 0
Becker
Stuart 472,732 * 472,732 0 0
Heller
James A. 354,550 * 354,550 0 0
Mastrocola
Randy McFarland 472,732 * 472,732 0 0
Defined Benefit
Plan
Lon 236,366 * 236,366 0 0
Rake
Louis 472,732 * 472,732 0 0
Suglia
48
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Robert Olivadoti & 354,550 * 354,550 0 0
Lana Olivadoti JT
TEN
Kaushik B. 118,184 * 118,184 0 0
Patel
John Signorelli & 118,184 * 118,184 0 0
Kathleen Signorelli JT
TEN
Tobias 595,915 * 590,915 5,000 *
Salgado
Mathew 118,184 * 118,184 0 0
Zachariah
Beat the Street, Inc. 118,184 * 118,184 0 0
Paul 118,184 * 118,184 0 0
Gittelson
Chuck 236,366 * 236,366 0 0
Ennis
Daniel Farrell & 118,184 * 118,184 0 0
Roni Farrell JT
TEN
Andrew 118,184 * 118,184 0 0
McClure
William Lynch Defined Benefit Pl 236,366 * 236,366 0 0
William H. Lynch
TTEE
Steven S. Cole & 118,184 * 118,184 0 0
Anat Cole JT
TEN
James F. 118,184 * 118,184 0 0
Selander
Stephan 945,464 1.41 945,464 0 0
Gais
Robert Wolf
L Wolf Company 118,184 * 118,184 0 0
Carl & Phillis Elkins Trust 472,732 * 472,732 0 0
Anthony Rakos & 118,184 * 118,184 0 0
Dorothy L. Rakos JT
WROS
Off Shore Drywall, 236,366 * 236,366 0 0
Inc.
J & B Rentals Inc. (Neil 236,366 * 236,366 0 0
Kipp)
Gerald W. 118,184 * 118,184 0 0
Moreland
Moreland Crosby 118,184 * 118,184 0 0
Industries
Jochen 472,732 * 472,732 0 0
Burrichter
Jack Friedman and Rochelle 472,732 * 472,732 0 0
Friedman
Daniel A. 472,732 * 472,732 0 0
Diaz
Dr. Herbert Goldberg & 179,638 * 179,638 0 0
Rosalie Goldberg JT
TEN
Joe Pillari & 236,366 * 236,366 0 0
Loretta Pillari JT
TEN
Theodore Brayer & Marilouise Brayer 119,508 * 119,508 0 0
JT TEN
Joseph Zappulla & 118,184 * 118,184 0 0
Lawrence F. Frasca TEN
COM
James 118,184 * 118,184 0 0
Herold
Jerred D. 472,732 * 472,732 0 0
Ruble
Patrick Boyce & 236,366 * 236,366 0 0
Sonja Boyce JT
TEN
Eric 236,366 * 236,366 0 0
Billingsley
George E. 472,732 * 472,732 0 0
Foote
John 472,732 * 472,732 0 0
Bridwell
Betty 472,732 * 472,732 0 0
Bridwell
James Jones & 236,366 * 236,366 0 0
Diana Jones JT
TEN
Greg 236,366 * 236,366 0 0
Small
49
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Dave 472,732 * 472,732 0 0
Tennant
Patrick 236,366 * 236,366 0 0
Sherman
Kalman 236,366 * 236,366 0 0
Pila
Tim P. Baldwin, 236,366 * 236,366 0 0
Jr.
The Larsen 2000 Revocable Trust 236,366 * 236,366 0 0
Paul P. Pompa, 472,732 * 472,732 0 0
Jr.
Jerome A. 118,184 * 118,184 0 0
Shinkay
Ty P. 236,366 * 236,366 0 0
Johnston
David 472,732 * 472,732 0 0
Kincheloe
Caroline Rispoli & 236,366 * 236,366 0 0
Joseph Rispoli JT
TEN
Pedro 165,457 * 165,457 0 0
Hernandez
Mansukh 118,184 * 118,184 0 0
Pipaliya
Steve W. 354,550 * 354,550 0 0
Thompson
Theodore 118,184 * 118,184 0 0
Green
John 236,366 * 236,366 0 0
Klopp
Ronnie 118,184 * 118,184 0 0
Kirkland
Jerry H. 179,639 * 179,639 0 0
Chitwood
Jason Salgado & 118,184 * 118,184 0 0
Jamie Salgado JT
TEN
Joseph G. Albano & 118,184 * 118,184 0 0
Louise A. Albano JT
TEN
Scott Evanter 236,366 * 236,366 0 0
Thomas 472,732 * 472,732 0 0
Prendergast
Jeffrey A. Grossman 118,184 * 118,184 0 0
& Elizabeth Grace JT
TEN
Ken W. 472,732 * 472,732 0 0
Chism
Christopher P. 118,184 * 118,184 0 0
Schlieker
Charles S. 118,184 * 118,184 0 0
Madden
Dave 236,366 * 236,366 0 0
Ertler
David 472,732 * 472,732 0 0
Cheung
PCR Inc. (Jeffrey 118,184 * 118,184 0 0
Cox)
Jay A. 236,366 * 236,366 0 0
Hintze
Charles A. Rizzuto 118,184 * 118,184 0 0
Sr.
Kalman 236,366 * 236,366 0 0
Pila
Tim P. Baldwin, 236,366 * 236,366 0 0
Jr.
The Larsen 2000 Revocable 236,366 * 236,366 0 0
Trust
Paul P. Pompa, 472,732 * 472,732 0 0
Jr.
Jerome A. 118,184 * 118,184 0 0
Shinkay
John William Long 118,184 * 118,184 0 0
TTEE DTD
7/2/92
Paul 118,184 * 118,184 0 0
Goudie
Joseph J. Perrini & 222,185 * 222,185 0 0
Tessie Perrini JT
TEN
Doug Ross & Lidia Ross JT 709,098 1.06 709,098 0 0
TEN
Robert A. 236,366 * 236,366 0 0
Loe
George D. Johnston 118,184 * 118,184 0 0
Pat 118,184 * 118,184 0 0
McQuillan
Agnes L. 236,366 * 236,366 0 0
Miller
William H. 118,184 * 118,184 0 0
Reynolds
Preston 141,820 * 141,820 0 0
Morris
50
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Joseph A. 330,913 * 330,913 0 0
Santoro
George M. 118,184 * 118,184 0 0
Martin
James E. 236,366 * 236,366 0 0
Clark
Douglas 118,183 * 118,183 0 0
Coleman
John 472,731 * 472,731 0 0
Duncan
J. J. 236,365 * 236,365 0 0
Peirce
E. Scott Nolan 118,183 * 118,183 0 0
James E. Clark 236,365 * 236,365 0 0
D. Dale Bryant 118,183 * 118,183 0 0
Phillip E. Thompson 118,183 * 118,183 0 0
Abraham M. Fishoff 945,463 1.41 945,463 0 0
C & G Family Christopher J. Heller &
Geneva C. Heller 236,365 * 236,365 0 0
James Herold 118,183 * 118,183 0 0
James A. Dailey, Jr. & Lisa A. 118,183 * 118,183 0 0
Dailey JT TEN
Piotr D. Moncarz 118,183 * 118,183 0 0
Doug Ross & Lidia Ross JT TEN 118,183 * 118,183 0 0
Joseph A. Santoro 141,819 * 141,819 0 0
C. Eric Mayer 118,183 * 118,183 0 0
Jeffrey A. Grossman & Elizabeth 118,183 * 118,183 0 0
Grace JT TEN
Joseph G. Albano & Louise A. Albano 47,273 * 47,273 0 0
JT TEN
Joseph Zappulla & Lawrence F. Frasca 47,273 * 47,273 0 0
TEN COM
Jason Salgado & Jamie Salgado JT TEN 236,365 * 236,365 0 0
Bernard Klein 236,365 * 236,365 0 0
Michael E. Rose 94,546 * 94,546 0 0
Mary O'Neil Revocable 89,819 * 89,819 0 0
Trust
Mary R. & James J. O'Neil
TTEE
Joseph J. Perrini & Tessie Perrini 260,003 * 260,003 0 0
JT TEN
Randy McFarland 472,731 * 472,731
Defined Benefit Plan
Marty Johnson 118,183 * 118,183 0 0
Ronald M. Diaz & Sonja Diaz JT TEN 141,819 * 141,819 0 0
James A. Mastrocola 118,183 * 118,183 0 0
Jonathan Kratter & Lisa Kratter JT 257,365 * 236,365 21,000 *
TEN
Jonathan Webb 118,183 * 118,183 0 0
Herman Moskowitz 118,183 * 118,183 0 0
Chuck Ennis 50,677 * 50,677 0 0
David Davis 118,089 * 118,089 0 0
Global Capital Partners, LLC 236,365 * 236,365 0 0
Huffman General Contractors 118,183 * 118,183 0 0
Shirlee Gordon 59,091 * 59,091 0 0
Melvin S. Jacobson & Cynthia 472,731 * 472,731 0 0
Jacobson JT WROS
51
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Adam Harris 118,183 * 118,183 0 0
Pat McQuillan 118,183 * 118,183 0 0
George E. Foote 236,365 * 236,365 0 0
Dave Tennant 472,731 * 472,731 0 0
Dr. Herbert & Rosalie Goldberg 56,727 * 56,727 0 0
JT TEN
Larry Edgar 118,183 * 118,183 0 0
Larry Gelbfish 472,731 * 472,731 0 0
Allan S. Kalt Revocable Trust 118,183 * 118,183 0 0
William B. & Martha Perillo 709,098 1.06 709,098 0 0
Lina R. Merlino 236,365 * 236,365 0 0
Luis & Lucia Peragallo (9) 697,375 1.04 697,375 0 0
Holders of series B convertible
preferred stock (101):
Mike Taglich Poa Tag/Kent 180,766 * 180,766 0 0
Partnership F/B/O Garlinghouse/M
Taglich B Taglich
700 New York Ave Ste B
Huntington, NY 11743-4264
Michael N. Taglich 903,832 1.35 903,832 0 0
98 Bay St
Sag Harbor, NY 11963-3106
Donald V Moline 54,230 * 54,230 0 0
720 Old Howard Mill Rd
Duluth, Mn 55804
Robert W Allen & Susan M Allen 723,066 1.08 723,066 0 0
Jt/Wros
2400 Balleybunion Road
Center Valley, Pa 18034
Raymond M Beebe & Joan P Beebe Jtwros 90,383 * 90,383 0 0
17121 350th Street
Forest City, Ia 50436-7752
Garland S Sydnor Jr 90,383 * 90,383 0 0
559 Hunt Club Dr
Corolla, Nc 27927
Eh Arnold 903,832 1.35 903,832 0 0
Att Edward H Arnold 815 Tudor Ln
Lebanon, Pa 17042-6431
Ashok Kumar Narang 361,533 * 361,533 0 0
2007 W Joppa Rd
Lutherville Timoni, Md 21093-4703
Applebaum Famiily Ltd Partners 234,996 * 234,996 0 0
Irving Applebaum General Ptnr
4 Birnalwoods Lane
St Louis, Mo 63132-4406
Frank M Durrance
2699 Lee Road Ste 475
Winter Park, Fl 32789 180,766 * 180,766 0 0
52
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Joseph Martha 36,153 * 36,153 0 0
3365 Robin Burns Dr
Richfield, Oh 44286
Meadowbrook Opportunity Fd Llc 1,446,132 2.16 1,446,132 0 0
520 Lake Cook Rd Suite 690
Deerfield, Il 60015
Kevin C. Mance & Janet C. Rost Jtwros 180,766 * 180,766 0 0
393 Lumber Lane
Bridgehampton, Ny 11932
Jeremy Bond 180,766 * 180,766 0 0
8 Mount Wyndham Dr Apartment 11
Hamilton Parish
Bermuda Cr04
Hillson Private Partners Ii, Lllp 632,683 * 632,683 0 0
110 N Washington St Suite 401
Rockville, Md 20850
Hillson Partners Lp 4,067,245 6.07 4,067,245 0 0
110 N Washington St Suite 401
Rockville, Md 20850
Shadow Capitol Llc Attn B Kent 723,066 1.08 723,066 0 0
Garlinghouse
3601 Sw 29th Street
Topeka, Ks 66614-2015
Michael Fourticq 361,533 * 361,533 0 0
C/O Hancock Park Assoc
10323 Santa Monica Blvd Suite 101
Los Angeles, Ca 90025-5056
Richard C Clayton 180,766 * 180,766 0 0
1812 South Boggie
Atlanta, Tx 75551
Steven A Boggs 108,460 * 108,460 0 0
109 Hnath Rd
Ashford, Ct 06278-2323
Dennis Fortin 903,832 1.35 903,832 0 0
26 Brookside Drive
Easton, Ct 06612-1304
A F Lehmkuhl 54,230 * 54,230 0 0
102 Larkspur Terrace
Bellevue, Oh 44811
Phillip L Burnett & Allyson Burnett 54,230 * 54,230 0 0
Jtwros
3569 San Carlos Dr
Saint James City, Fl 33956-2201
Lucille Solomon 180,766 * 180,766 0 0
530 Park Ave Apt 17c
New York, Ny 10021-8015
53
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Maurice Solomon 90,383 * 90,383 0 0
530 Park Ave Apt 17c
New York, Ny 10021
Andrew K Light 180,766 * 180,766 0 0
7524 Brookview Circle
Indianapolis, In 46250
Douglas Friedrich & Melanie 180,766 * 180,766 0 0
Friedrich Jt/Wros
8643 Blue Flag Way
Naples, Fl 34109
Joseph Regan 180,766 * 180,766 0 0
4280 Tidewater Dr
Orlando, Fl 32812-7950
Guerino Deluca & Frances Deluca 180,766 * 180,766 0 0
Jt/Wros
43675 Wabeek Ct
Northville, Mi
Mark L Rochester 180,766 * 180,766 0 0
3511 Greensburg
North Canton, Oh 44720-1468
J. Nutie Dowdle 90,383 * 90,383 0 0
2413 Highway 45 N
Columbus, Ms 39705
Stephen C Radocchia 72,307 * 72,307 0 0
40 Greenswood Pl
South Glastonbury, Ct 06073
John R Wiencek 108,460 * 108,460 0 0
364 Newbridge Rd
East Meadow, Ny 11554-4116
James R Foutch 361,533 * 361,533 0 0
16039 Walden Road
Montgomery, Tx 77356-3297
Philip Baroni & Rachel Baroni Trust 180,766 * 180,766 0 0
Dtd 8/1/95
108 Breeds Hill Rd
Hyannis, Ma 02601-1860
Dr Richard V Nuttal & Annetta Mets 72,307 * 72,307 0 0
Nuttall Jtwros
9 Airy Hull Ct
Columbia, Sc 29209 0801
John R Worthington Tr John R 54,230 * 54,230 0 0
Worthington Trust
6025 Lake Geneva Dr
Reno, Nv 89511-5050
The Robert W Main Trust 126,537 * 126,537 0 0
3607 S 14th St
Alexandria, Va 22302
John R Bertsch Trust Dtd 723,066 1.08 723,066 0 0
4151 Reeds Lake Blvd Se
Grand Rapids, Mi 49506
180,766 * 180,766 0 0
Charles Brand
175 Boundary Road
Colts Neck, Nj 07722-2005
54
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Special Trust For Nina B Sando 180,766 * 180,766 0 0
Nina Bertsch Sando & John W. Mcneil
Ttees
101 Laurier Place
Bryn Mawr, Pa 19010-2247
Howard A Kalka 180,766 * 180,766 0 0
2 Knolls Drive
Old Westbury, Ny 11568-1511
Richard Buchakjian 90,383 * 90,383 0 0
185 Cohoes Ave
Green Island, Ny 12183
Thomas J Bean 180,766 * 180,766 0 0
5050 W Lemon St
Tampa, Fl 33609
Glenn Schabel 180,766 * 180,766 0 0
37 Weinmann Blvd
Dix Hills, Ny 11746
Norper Investments 90,383 * 90,383 0 0
32 Beaujolais Place
Candiac, Quebec
Canada J5r4b6
Astute Capital Special Opportunity 108,460 * 108,460 0 0
Fund L.P.
210 West 70th Street, Suite 1108
New York, Ny 10023
Sara Bower Penn Ttee 361,533 * 361,533 0 0
Sara Bower Penn Living Trust
1 Reelcraft Center
Columbus City, In 46725-0248
Wulf Paulick & Renate Paulick Jt/Wros 90,383 * 90,383 0 0
62 Old Stone Bridge
Cos Cob, Ct 06807-1510
William C Steele Ttee 289,226 * 289,226 0 0
Uad 5-11-98
3324 Radcliffe Drive
Plano, Tx 75093-7138
Arthur D Sterling & Marie E Sterling 361,533 * 361,533 0 0
Jt/Wros
3000 Northmore Trail
Michigan City, In 46360-1720
Robert Edmondson 180,766 * 180,766 0 0
1158 5th Ave 5b
New York, Ny 10029-6917
Stanley A Bornstein 108,460 * 108,460 0 0
23 Chatham Road
Newton, Ma 02461-1009
Michael P Hagerty 36,153 * 36,153 0 0
9838 Lake Louise Dr
Orlando, Fl 34786-8905
55
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Ira Fbo Albert Esposito 180,766 * 180,766 0 0
44 Thornhedge Road
Bellport, Ny 11713-2616
Ira Fbo Margaret Esposito 28,923 * 28,923 0 0
44 Thornhedge Road
Bellport, Ny 11713-2616
Robert L Debruyn Trust 180,766 * 180,766 0 0
Robert L Debruyn & Tracey H Debruyn
Ttee
7575 E Gainey Ranch Road The Estates
# 5
Scottsdale, Az 85258
Tracey H Debruyn Trust 180,766 * 180,766 0 0
Tracey H Debruyn & Robert L Debruyn
Ttee
2030 Pierre
Manhattan, Ks 66502-3900
Clyde Berg 361,533 * 361,533 0 0
10050 Brandley Dr
Cupentino, Ca 95014
Donald S Hall & June C Hall Jt Ten 54,230 * 54,230 0 0
Wros
113 Forest Road
Hancock, Nh 03449-6113
William Kehl 72,307 * 72,307 0 0
112 Crescent Ave
Greenville , Sc 29605-2813
Edward J Cook & Eleanor A Cook Jtwros 54,230 * 54,230 0 0
45 Fern Avenue
Amesburg, Ma 01913
Larry S Kaplan Marla B Kaplan 108,460 * 108,460 0 0
27 Carleton Dr
Freehold, Nj 07728-9273
D & M Partnership C/O Dean Weinberg 54,230 * 54,230 0 0
1299 S Lincoln Ave
Highland Park, Il 60035-3400
Austin Brown 54,230 * 54,230 0 0
3750 Peachtree Road Ne Apt 480
Atlanta, Ga 30319-1322
Charles E Klabunde Trust 72,307 * 72,307 0 0
4/9/03
219 E Vanderbilt Drive
Oak Ridge, Tn 37830-6183
56
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Robert B Cashion 54,230 * 54,230 0 0
833 Hinkle Road
Statesville, Nc 28677
Ira Fbo Juliana K. Taglich 36,153 * 36,153 0 0
54 Harrison Drive
East Northport, Ny 11731-1115
Angus Bruce Lauralee Bruce 72,307 * 72,307 0 0
30 Short Beach
Sag Harbor , Ny 11963-1253
James Wilen 361,533 * 361,533 0 0
3 Carolyn Court
Owings Mills, Md 21117-1653
Dr Baldev S Brar & Dr Gurmukh K Brar 90,383 * 90,383 0 0
762 Barnstable Lane
Franklin Lakes, Nj 07417
David L Allen 108,460 * 108,460 0 0
898 S. High Street
Denver, Co 80209-4549
Ronald C Hintz 90,383 * 90,383 0 0
3532 Blair Court W
Bloomfield, Mi 48323
James Tadych 180,766 * 180,766 0 0
3925 Snake Island Rd
Sturgeon Bay
Wi 54235-8403
Mark Ravich 108,460 * 108,460 0 0
11300 Overlook Dr
Minnetonka, Mn 55305
Richard S Benson 36,153 * 36,153 0 0
95 River Street Suite 402
Hoboken, Nj 07030-5625
Scot Holding Inc 180,766 * 180,766 0 0
8 Binford Ln
Wilmington, De 19810
Patricia Tschohl 90,383 * 90,383 0 0
4650 Nine Oaks Circle
Bloomington, Mn 55437-1836
Robert G Moussa 180,766 * 180,766 0 0
2115 Imperial Gc Blvd
Naples, Fl 34110
57
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Patrick R Gordon 72,307 * 72,307 0 0
5908 Quinta Real Ct
El Paso, Tx 79912
Glenn R Hubbard 180,766 * 180,766 0 0
6474 Blue Heron Pointe Dr.
Waterford, Wi 53185
Matthew A. Keefer 144,613 * 144,613 0 0
7390 Hunt Country Lane
Zionsville, In 46077-9373
Paul G Detkin 54,230 * 54,230 0 0
269-23h Grand Central Pkwy
Floral Park, Ny 11005
Robert Louis Fisher & Carroll Fisher 72,307 * 72,307 0 0
30545 Rhone Dr Rancho
Palos Verde, Ca 90275-5742
Louis And Judith Miller Family Trust 90,383 * 90,383 0 0
908 N Rexford Dr
Beverly Hills, Ca 90210-2911
T. Mark Sledge 54,230 * 54,230 0 0
Po Box 16570
Jackson, Ms 39236
Mark Bourque 54,230 * 54,230 0 0
6040 39th Ave 104
Kenosha, Wi 53142-7064
Lawrence D Feldhacker 90,383 * 90,383 0 0
14949 Chandler Road
Omaha, Ne 68138
Paul R Winter 180,766 * 180,766 0 0
8115 Xerxes Cir.
Bloomington, Mn 55431
Leo Jones 72,307 * 72,307 0 0
2117 Parkway Place
Tyler, Tx 75701-4754
Valdemar Skov 54,230 * 54,230 0 0
1241 Old Route 1
Waldoboro, Me 04572-6260
58
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Starr F. Schlobohm Trustee 180,766 * 180,766 0 0
10 Greenleaf Drive
Wolfebore, Nh 03894-4226
Howard Smith 72,307 * 72,307 0 0
822 3rd Ave
Brooklyn, Ny 11232
Jeffrey H Golden 72,307 * 72,307 0 0
1616 Valecroft Ave
Westlake Vlg, Ca 91361-1445
Joann Ruggiero 54,230 * 54,230 0 0
502 Mountain Ridge Drive
Mt. Sinai, Ny 11766
Nicholas Taglich 72,307 * 72,307 0 0
54 Harrison Drive
East Northport, Ny 11731
Douglas E. Hailey 90,383 * 90,383 0 0
861 Maggies Way
Waterbury Center, Vt 05677
John E. Sullivan 72,307 * 72,307 0 0
20 Southview Dr.
Boonton, Nj 07005
Shirley J Lewis & Guy W Lewis Co-Ttee 180,766 * 180,766 0 0
3167 E 87th Street
Tulsa, Ok 74137
Frank M Elliott 36,153 * 36,153 0 0
5171 Hamps Rd
Nichols, Sc 29581-5719
Pension Inc Trustee Fbo Thuemling 271,150 * 271,150 0 0
Industrial Products Inc Profit
Sharing Plan
136 North Maple Avenue
Green Bay, Wi 54303-2748
59
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
Robert G Paul 180,766 * 180,766 0 0
1965 Mornington Lane 14
Cleveland Heights, Oh 44106-2871
Fraydun Enterprises 361,533 * 361,533 0 0
3 New York Plaza
New York, Ny 10004
Warren Earl Fuller 90,383 * 90,383 0 0
2228 Gamble Rd
Savannah, Ga 31405
Ed Brody Pershing LLC 271,150 * 271,150 0 0
8 Gould St
East Hampton, Ny 11937-2222
54,230 * 54,230 0 0
Frank & Philomena Gimenez
22 Hayes Hill Dr.
Ft. Salonga,, Ny 11768
Neil A. Wiess 180,766 * 180,766 0 0
C/O Shelter Rock
450 Park Avenue, Suite 2703
New York, Ny 10022
Robert W Allen Jr 108,460 * 108,460 0 0
6085 Whitetail Drive
Coopersburg, Pa 18036-9592
Lighthouse Capital Llc 361,533 * 361,533 0 0
2620 Bellevue Way Ne #137
Bellevue, Wa 98004-4298
Randall S Knox 72,307 * 72,307 0 0
28 Milwaukee Ave
Fort Atkinson, Wi 53538-2018
Keith Becker 216,920 * 216,920 0 0
5411 Schliesmann Rd
Rio, Wi 53960
Jay Goldman 54,230 * 54,230 0 0
41 Vineyard Road
Newton, Ma 02459-1003
Sandra L Brecher 361,533 * 361,533 0 0
31 Hollyberry Court
Rockville, Md 20852-4222
Diana Simich John Simich 90,383 * 90,383 0 0
1 Via Del Ciello
Rch Palos Vrd, Ca 90275-4466
60
Shares Beneficially Owned Shares Beneficially Owned
Before Offering After Offering
------------------------- -------------------------
Names and Address Number Percent Shares Offered Number Percent
----------------- ------ ------- -------------- ------ -------
James Q Grimshaw 36,153 * 36,153 0 0
40 Shields Road
Darien, Ct 06820
Kyle G Buchakjian 36,153 * 36,153 0 0
3 Sandpiper Lane
Rexford, Ny 12148-1381
Ben Sevack 90,383 * 90,383 0 0
275 Melbourne Ave
Mont Royal, Quebec
Canada, H3p 1g7
Robert F Taglich 180,766 * 180,766 0 0
700 New York Ave Suite B
Huntington, Ny 11743-4264
Terry Schaefer & Company 36,153 * 36,153 0 0
117 South Spring Street,Suite 101
Aspen, Co 81611-2068
Dr Mordecai Bluth 36,153 * 36,153 0 0
256 Club Dr
Woodmere, Ny 11598
Louis Sirard Tod Dtd 01/23/06 54,230 * 54,230 0 0
34 Summer Ave 410
Springfield, Ma 01108-2375
Mary M. Schnurer 54,230 * 54,230 0 0
26442 Charford Way
Lake Forrest, Ca 92630-6520
Steve Redmon & Brenda Redmon 90,383 * 90,383 0 0
1966 Lawton Road
Selmer, Tn 38375-6220
Stephen Friedland & Linda Friedland 72,307 * 72,307 0 0
1130 South Orlando Ave
Los Angeles, Ca 90035-2512
Bruce Newell 361,533 * 361,533 0 0
303 Vanderpool Ln
Houston, Tx 77024-6122
Iroquois Master Fund, Ltd. 723,066 1.08 723,066 0 0
641 Lexington Avenue, 26th Floor
New York, Ny 10022
Ebs Microcap Partners, Lp A 723,066 1.08 723,066 0 0
Partnership
7777 Washington Village Dr., Suite
210
Dayton, Oh 45459
Taglich Brothers, Inc. (10) 2,900,578 4.33 2,900,578
405 Lexington Avenue
New York, NY 10017
Others (22 persons)** 848,060 1.27 0 0 0
* Less than 1%
** Selling security holders offering in the aggregate less than 1% of
the total number of shares offered by this prospectus.
61
(1) ECH Consulting, Inc. is a consultant to us, controlled by Edmund Chavez. It
received these 325,000 shares, contributed to us by Michael Gales, our then
Executive Chairman, as part of a finders' fee paid in connection with our PNC
Bank loan facility which we entered into on November 30, 2005.
(2) Croft Investments Limited Partnership, controlled by Milton Barbarosh,
acquired these 250,000 shares as of November 30, 2005 in exchange for the
cancellation of an equal number of shares of Original Gales common stock. Mr.
Barbarosh acquired the Original Gales shares through subscription as of October
28, 2004.
(3) Represents shares received by the designees of Atlas Capital Services, LLC,
listed in the table, as of November 30, 2005, in exchange for the cancellation
of an equal number of shares of Original Gales common stock owned by Atlas
Capital Services, LLC. Steven Pollan was originally issued 318,592 shares as a
designee of Atlas Capital Services, LLC but transferred 15,000 of those shares
to American Friends of Neveh Zion in July 2006. Atlas Private Equity, LLC holds
226,334 shares which it acquired by converting a convertible promissory note in
the principal amount of $22,500, and also holds 409,091 shares it acquired upon
exercise of a warrant with an initial per share exercise price of $0.055 that it
acquired from us in February 2005 in connection with its purchase of that
$22,500 convertible note. Atlas Capital Services, LLC, ACS Holdings, LLC and
Atlas Private Equity, LLC are directly or indirectly owned by the same entity.
(4) Rhoda Lewis, MTP Operating Corp., Marilyn Thypin and Stephen M. Nagler, our
corporate secretary and a member of our Board, were investors in a convertible
bridge note financing completed in August 2005, in which Original Gales raised
$45,000 and issued to the investors, together with $45,000 principal amount of
convertible notes, warrants to purchase an aggregate of 204,545 shares of
Original Gales common stock at an initial per share exercise price of $0.22.
Those warrants provided for a cashless exercise. As of November 30, 2005, those
warrants were automatically converted into warrants to purchase an equal number
of our shares of common stock on the same terms. The shares set opposite the
names of these selling security holders in the table represent the number of
shares each of them may obtain upon exercise of these warrants. The controlling
person of MTP Operating Corp. is David Avital.
(5) Stephen Caragol and Frank and Cynthia Gasztonyi were investors in a bridge
note financing completed in September 2005, in which Original Gales raised
$105,000 and issued to the investors, together with $105,000 principal amount of
notes, warrants to purchase an aggregate of 477,273 shares of Original Gales
common stock at an initial per share exercise price of $0.22. Those warrants
provided for a cashless exercise. As of November 30, 2005, those warrants were
automatically converted into warrants to purchase an equal number of our shares
of common stock on the same terms. The shares set opposite the names of these
selling security holders in the table represent the number of shares each of
them may obtain upon exercise of these warrants. A warrant to purchase 47,728
shares was issued to the placement agent for the $105,000 Bridge Financing (see
note 6).
(6) GunnAllen Financial, Inc. was the placement agent for our series A
convertible preferred stock offering in December 2005 and $105,000 Bridge
Financing in September 2005, and serves as a consultant to us. The 4,138,678
shares represent shares that GunAllen Financial may acquire upon exercise of
placement warrants issued in connection with our series A convertible preferred
stock offering and $105,000 Bridge Financing. The placement agent warrants from
our series A convertible preferred stock offering may be exercised until
December 15, 2010 into a total of 4,090,950 shares of our common stock and the
placement agent warrants from our $105,000 Bridge Financing may be exercised
until September 2010 into a total of 47,728 shares of our common stock. These
warrants have an initial per share exercise price of $0.22 and allow a cashless
exercise. GunnAllen Financial is an NASD member brokerage firm and a registered
broker dealer. It is controlled by Richard A. Frueh, who has the control and
power to vote and/or sell the securities held by GunnAllen Financial.
(7) In March 2005, we issued to Global Business Resources, Inc., controlled by
Peter Goldstein, these 80,038 shares in consideration for consulting services.
(8) This person is a broker dealer and therefore is deemed to be an underwriter
within the meaning of the Securities Act.
62
(9) Luis Peragallo was an officer and major shareholder of AIM prior to
November 30, 2005 and is the brother of Jorge Peragallo and the father of Dario
Peragallo. He acquired 253,214 shares in connection with our acquisition of AIM.
He, jointly with his spouse, acquired an additional 670,553 shares upon
conversion of our series A convertible preferred stock.
(10) Taglich Brothers, Inc. was placement agent for our private offering of
series B convertible preferred stock. These shares represent shares we are
obligated to issue upon exercise of warrants issued for services as placement
agent.
Plan of Distribution
All costs, expenses and fees in connection with the registration of the
shares of our common stock offered by this prospectus will be borne by us.
Brokerage commissions, if any, attributable to the sale of those shares will be
borne by the selling security holders.
The selling security holders may sell the shares of common stock included
in this prospectus directly or through brokers, dealers or underwriters who may
act solely as agents or may acquire shares of common stock as principals. The
selling stockholders may distribute the shares of common stock included in this
prospectus by one or more of the following methods:
o ordinary brokers transactions, which may include long or short
sales;
o transactions involving cross or block trades or otherwise on the
open market;
o purchases by brokers, dealers or underwriters as principal and
resale by these purchasers for their own accounts under this
prospectus;
o "at the market" to or through market makers or into an existing
market for the common stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales made through
agents;
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); or
o any combination of the above, or by any other legally available
means.
Selling security holders will not be restricted as to the price or prices
at which the selling security holders may sell their common stock. Sales of
common stock by the selling security holders may depress the market price of our
common stock since the number of shares which may be sold by the selling
security holders is very large compared to the historical average weekly trading
volume of our common stock, which has been quite low. Accordingly, if the
selling security holders were to sell, or attempt to sell, all of such
securities at once or during a short time period, we believe such a transaction
would dramatically adversely affect the market price of our common stock.
From time to time a selling security holder may pledge shares of common
stock under margin provisions of customer agreements with brokers or under loans
with third parties. Upon a default by the selling security holder, the broker or
other third party may offer and sell any pledged securities from time to time.
In effecting sales, brokers and dealers engaged by a selling security
holder may arrange for other brokers or dealers to participate in the sales as
agents or principals. Brokers or dealers may receive commissions or discounts
from the selling security holder or, if the broker-dealer acts as agent for the
purchaser of shares of common stock, from the purchaser in amounts to be
negotiated, which compensation as to a particular broker dealer might be in
excess of commissions customary in the types of transactions involved.
Broker-dealers may agree with the selling security holders to sell a specified
number of shares of common stock at a stipulated price, and to the extent the
broker-dealer is unable to do so acting as agent for the selling security
63
holders, to purchase as principal any unsold securities at the price required to
fulfill the broker-dealer commitment to the selling security holder.
Broker-dealers who acquire securities as principal may then resell those
securities from time to time in transactions: in the over-the counter market or
otherwise; at prices and on terms prevailing at the time of sale; at prices
related to the then-current market price; or in negotiated transactions.
These resales may involve block transactions or sales to and through other
broker-dealers, including any of the transactions described above. In connection
with these sales, these broker-dealers may pay to or receive from the purchasers
of the common stock commissions as described above. The selling security holders
may also sell the common stock in open market transactions under Rule 144 under
the Securities Act, rather than under this prospectus.
The selling security holders and any broker-dealers or agents that
participate with the selling security holders in sales of the common stock may
be deemed to be "underwriters" within the meaning of the Securities Act in
connection with these sales. In this event, any commissions received by these
broker-dealers or agents and any profit on the resale of the common stock
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
The selling security holders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the common
stock against certain liabilities, including liabilities arising under the
Securities Act.
GunnAllen Financial, Inc., a registered broker dealer and NASD member
firm, acted as placement agent for our private offering of series A convertible
preferred stock and received, in addition to cash commissions, five-year
warrants to purchase an aggregate of 4,090,950 shares of our common stock with
an exercise price of $0.22 per share. GunnAllen Financial also served as
placement agent for a September 2005 bridge note financing in which Original
Gales raised $105,000 and, in connection therewith, received, in addition to a
cash commission, a five year warrant to purchase 47,728 shares of common stock
with an exercise price of $0.22 per share. The registration statement of which
this prospectus forms a part includes the shares we are obligated to issue upon
exercise of those warrants. In addition, we have retained and pay GunnAllen
Financial, $7,500 per month to serve as our financial consultant. We have the
right to terminate our advisory agreement with GunnAllen Financial upon thirty
days' notice.
GunnAllen Financial has indicated to us its willingness to act as selling
agent on behalf of the selling shareholders named in this prospectus under
"Selling Security Holders" who purchased our privately placed securities. All
shares sold, if any, on behalf of selling shareholders by GunnAllen Financial
would be in transactions executed by GunnAllen Financial on an agency basis and
commissions charged to its customers in connection with each transaction shall
not exceed a maximum of 5% of the gross proceeds. GunnAllen Financial does not
have an underwriting agreement with us and/or the selling shareholders and no
selling shareholders are required to execute transactions through GunnAllen
Financial. To our knowledge, none of the selling shareholders has any
pre-arranged agreement with GunnAllen Financial to sell its securities through
GunnAllen Financial, other than an existing brokerage relationship as customers
with GunnAllen Financial.
NASD Notice to Members 88-101 states that in the event a selling
shareholder intends to sell any of the shares registered for resale in this
prospectus through a member of the NASD participating in a distribution of our
securities, such member is responsible for insuring that a timely filing is
first made with the Corporate Finance Department of the NASD and disclosing to
the NASD the following:
o it intends to take possession of the registered securities or to
facilitate the transfer of such certificates;
64
o the complete details of how the selling shareholders shares are and
will be held, including location of the particular accounts;
o whether the member firm or any direct or indirect affiliates thereof
have entered into, will facilitate or otherwise participate in any
type of payment transaction with the selling shareholders, including
details regarding any such transactions; and
o in the event any of the securities offered by the selling
shareholders are sold, transferred, assigned or hypothecated by any
selling shareholder in a transaction that directly or indirectly
involves a member firm of the NASD or any affiliates thereof, that
prior to or at the time of said transaction the member firm will
timely file all relevant documents with respect to such
transaction(s) with the Corporate Finance Department of the NASD for
review.
We have advised the selling shareholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling shareholders and their affiliates.
In addition, we will make copies of this prospectus available to the selling
shareholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The selling security holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of our common stock against certain liabilities, including liabilities arising
under the Securities Act.
The selling security holders are subject to applicable provisions of the
Exchange Act and the SEC's rules and regulations, including Regulation M, which
provisions may limit the timing of purchases and sales of the securities by the
selling security holders.
In order to comply with certain states' securities laws, if applicable,
the common stock may be sold in those jurisdictions only through registered or
licensed brokers or dealers. In certain states the securities may not be sold
unless they have been registered or qualified for sale in such state, or unless
an exemption from registration or qualification is available and is obtained.
We have agreed to indemnify each selling stockholder whose shares we have
included in this prospectus from all liability and losses resulting from any
misrepresentations we make in connection with the registration statement of
which this prospectus is a part.
Market for Our Common Stock
Our common stock is quoted on the OTC Bulletin Board under the trading
symbol "GLDS.OB" ("ASHN" prior to February 15, 2006). Prior to the effectiveness
of our Plan of Reorganization, our symbol was "HNNS". The prices set forth below
reflect the quarterly high and low sale price information for shares of our
common stock for the periods indicated, as reported by Bloomberg LLP. These
quotations reflect inter-dealer prices, without retail markup, markdown or
commission, and may not represent actual transactions.
2007 Quarter Ended High Low
------------------ ---- ---
September 30, 2007 (through July 9, 2007) $0.28 $0.26
June 30, 2007 $0.40 $0.25
March 31, 2007 0.33 0.22
2006 Quarter Ended High Low
------------------ ---- ---
December 31, 2006 $0.30 $0.24
September 30, 2006 1.01 0.27
June 30, 2006 1.65 0.76
March 31, 2006 2.25 0.33
2005 Quarter Ended High Low
------------------ ---- ---
December 31, 2005 $0.85 $0.11
September 30, 2005 0.15 0.07
June 30, 2005 0.10 0.06
March 31, 2005 0.18 0.05
65
The closing sale price of a share of our common stock on July 9, 2007 was
$0.27, as reported by Bloomberg LLP.
As of June 12, 2007, there were approximately 225 holders of record of our
common stock.
We have not declared or paid any cash dividends on our common stock since
our inception, and our Board of Directors currently intends to retain all
earnings for use in the business for the foreseeable future. Any future payment
of dividends will depend upon our results of operations, financial condition,
cash requirements, and other factors deemed relevant by our Board of Directors.
Prior to the merger, AIM was a Subchapter S corporation and made distributions
to its shareholders to enable them to pay income taxes on their allocable
portion of our income.
The following table provides information as of December 31, 2006 about
our equity compensation plans and arrangements as of December 31, 2006.
Equity Compensation Plan Information - December 31, 2006
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
(a) (b) (c)
----------------------------- ----------------------- -------------------- -----------------------
Equity compensation plans
approved by security holders -- $ -- --
----------------------------- ----------------------- -------------------- -----------------------
Equity compensation plans not
approved by security holders
(1) 9,030,436 $.23 5,150,000
----------------------------- ----------------------- -------------------- -----------------------
Total (1) 9,030,346 $.23 5,150,000
(1) Shareholder approval of our 2005 Stock Incentive Plan was completed as of
February 15, 2006. In connection with the Merger, our Board adopted our 2005
Stock Incentive Plan, and issued stock options to purchase 4,850,000 shares to
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our new executive officers. The vesting and exercise prices of the 4,850,000
options which we granted to executive officers in 2005 are described below in
the footnotes under "Executive Compensation - Aggregated Option Exercises in
last Fiscal Year and Fiscal Year-End Option Values". As of December 31, 2006,
5,150,000 shares remained available for grant under our 2005 Stock Incentive
Plan. Of the 9,030,346 shares included above, (i) 4,138,678 shares underlie
warrants issued to GunnAllen Financial, Inc. exercisable at $0.22 per share and
(ii) 41,668 shares underlie warrants issued to an investor relations company
exercisable at a weighted average price of $0.70 per share
Transfer Agent
Florida Atlantic Stock Transfer, with offices at 7130 N. Nob Hill Road,
Tamarac, Florida 33321-1841, is the registrar and transfer agent for our common
stock.
Description of Our Securities
We are authorized to issue 120,055,746 shares of common stock, $.001 par
value, and 8,003,716 shares of preferred stock, $.001 par value.
Common Stock
As of June 30, 2007, we had outstanding 67,008,507 shares of common stock
without giving effect to 41,587,590 common shares issuable upon conversion of
our Class B Preferred and outstanding options and warrants.
Holders of our common stock are entitled to receive dividends when and as
declared by our Board out of funds legally available therefor. Upon dissolution
of our company, the holders of common stock are entitled to share, pro rata, in
our net assets after payment of or provision for all of our debts and
liabilities, and subject to the preferential rights of any class of preferred
stock or other senior security which we may issue. Each share of common stock is
entitled to participate on a pro rata basis with each other share of such stock
in dividends and other distributions declared on shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders and may not cumulate their votes
for the election of directors. The holders of common stock do not have
preemptive rights to subscribe for additional shares of any class that we may
issue, and no share of common stock is entitled in any manner to any preference
over any other share of such stock.
Preferred Stock
We are authorized to issue a total of 8,003,716 shares of "blank check"
preferred stock, $.001 par value, of which 1,000 shares have been designated
Series A Convertible Preferred Stock and 2,000,000 shares have been designated
Series B Convertible Preferred Stock. We issued 900 shares of our series A
convertible preferred stock in connection with the merger, all of which were
converted automatically into an aggregate of 40,909,500 shares of our common
stock in August 2006 upon the effectiveness of the registration statement for
the resale of those shares which are included in this prospectus. We issued
802,300 shares of our series B convertible preferred stock in a private offering
in April and May of 2007, to finance the acquisition of Sigma Metals, provide
working capital and to finance future acquisitions.
In accordance with our Certificate of Incorporation, our Board of
Directors may, by resolution, issue additional preferred stock in one or more
series at such time or times and for such consideration as the Board of
Directors may determine. The Board of Directors is expressly authorized to
provide for such designations, preferences, voting power (or no voting power),
relative, participating, optional or other special rights and privileges as it
determines.
67
We have the power to issue additional preferred stock, or different
classes or series of preferred stock ranking senior to or on parity with our
series B convertible preferred stock as to dividend rights or rights upon
liquidation, winding up, or dissolution, only with the approval or consent of at
least a majority of the then-outstanding shares of our series B convertible
preferred stock.
We may issue additional preferred stock to effect a business combination,
to raise capital or for other reasons. In addition, additional preferred stock
could be utilized as a method of discouraging, delaying or preventing a change
in control of our company.
Our Series B Convertible Preferred Stock
Our board of directors authorized a series of preferred stock designated
as the "Series B Convertible Preferred Stock," having a par value of $0.001 per
share in an amount up to 2,000,000 shares, which may not be increased without
the written consent of all of the holders of that series. Each share of our
series B convertible preferred stock has an original issue price of $10.00. As
of July 1, 2007, we had outstanding 802,300 shares of series B convertible
preferred stock owned by approximately 150 stockholders of record.
Our series B convertible preferred stock has the powers, rights,
preferences and limitations set forth in the Certificate of Designation we filed
with the Secretary of State of the State of Delaware on April 11, 2007. The
following is a summary of certain material provisions of that certificate, which
summary is qualified in its entirety by reference to the Certificate of
Designation which we have filed as an exhibit to the registration statement of
which this prospectus is a part.
Voting Rights. Generally, holders of our series B convertible preferred
stock are entitled to vote, on all matters in which holders of our common stock
are entitled to vote, voting together with the common stock as a single class,
with the number of their votes determined on an as-converted basis, assuming
conversion of our series B convertible preferred stock into our common stock as
of the applicable record date, disregarding fractional shares, if any. Holders
of our series B convertible preferred stock are entitled to vote as a separate
class on the issuance of any class of equity securities which ranks equal to or
senior to our series B convertible preferred stock, or to change or repeal any
of the express terms of our series B convertible preferred stock.
Dividends. Holders of our series B convertible preferred stock are
entitled to cumulative preferential dividends payable quarterly, on January 2,
April 1, July 1, and October 1 of each year, commencing October 1, 2007, at the
rate of 7.0% per annum, with the first dividend payable on a pro rata basis. We
may pay dividends in cash or additional shares of our series B convertible
preferred stock at our option. For purposes of determining the number of shares
of our series B convertible preferred stock to be issued in lieu of cash in
payment of dividends, our series B convertible preferred stock is to be valued
at the lesser of its then per share conversion price or the average of the daily
"volume weighted average price for a share of our common stock" (the "Average
VWAP") for ten (10) consecutive trading days prior to the end of the quarter. If
the average closing price for our common stock during any sixty (60) day period
commencing May 1, 2010 is equal to the conversion price or less, holders of a
majority of outstanding our series B convertible preferred stock may elect to
have dividends paid in cash for as long as our series B convertible preferred
stock is outstanding. If we fail to honor a holder's election to receive payment
of dividends on our series B convertible preferred stock in cash, we must pay
dividends in additional shares of our series B convertible preferred stock
(valued at the lesser of the conversion price and the Average VWAP for ten (10)
consecutive trading days prior to the end of the quarter) and a majority of
holders of our series B convertible preferred stock shall have the right to
designate one (1) board member and we shall immediately appoint a designee and
use our best efforts to cause the election of the designee for so long as
68
twenty-five (25%) percent of our series B convertible preferred stock remains
outstanding. If the average closing price per share of our common stock during
the last thirty (30) day period of any quarter commencing with the first quarter
three years after the end of the quarter in which the initial closing of the
private offering occurred is the conversion price or less, annual dividends on
our series B convertible preferred stock will be automatically readjusted to ten
(10.0%) percent per annum for dividends paid in cash or twelve (12.0%) percent
per annum for dividends paid in additional shares of our series B convertible
preferred stock for as long as shares of our series B convertible preferred
stock are outstanding.
Liquidation Preference. In the event of a liquidation, dissolution or
winding up of our company, the holders of our series B convertible preferred
stock are entitled to receive cash in an amount equal to the greater of (i) (a)
$10.00 per share (subject to adjustment as provided in the Certificate of
Designation) plus (b) until the date fixed for payment, any declared and accrued
but unpaid dividends, or (ii) that amount per share which would have been
payable to them as holders of our common stock assuming a complete conversion of
our series B convertible preferred stock had occurred immediately prior to the
liquidation event; in each case before any distribution is made to the holders
of common stock and any other junior stock, but after distribution is made to
holders of senior stock (if any). If upon any such liquidation event our
remaining assets available for distribution to our stockholders shall be
insufficient to pay the holders of shares of our series B convertible preferred
stock the full amount to which they are entitled, the holders of shares of our
series B convertible preferred stock and any other class or series of stock
ranking on liquidation on a parity with our series B convertible preferred stock
will share ratably in any distribution of the remaining assets and legally
available funds of our company in proportion to the respective amounts that
would otherwise be payable in respect of the shares held by them upon such
distribution of the entire liquidation amount and such pari passu payments on
such other class or series of stock were paid in full.
Voluntary Conversion. Each share of our series B convertible preferred
stock is convertible at each holder's option into shares of our common stock, at
any time prior to the effective date of the forced conversion or redemption at
an initial conversion price of $0.2766, subject to adjustment (the "Conversion
Price"). In the event of a merger or consolidation (in which we are not the
surviving entity) or in the event of a sale of all or substantially all of our
assets, the holders of our series B convertible preferred stock will have a
right to convert their shares into shares of our common stock immediately prior
to any such transaction at a conversion price equal to the lesser of (a) the
Conversion Price or (b) the price per share of common stock paid in the change
of control transaction. We will not issue fractional shares of our common stock
upon conversion of our series B convertible preferred stock, but we will pay a
cash amount for fractional shares based upon the prevailing market price of a
share of our common stock.
Forced Conversion. We have the right to force conversion of our series B
convertible preferred stock into shares of our common stock, provided that on
the day that notice of forced conversion is given the following conditions are
satisfied: (a) the issuance of the shares of common stock issued or issuable
upon conversion of our series B convertible preferred stock or the resale
thereof have been registered pursuant to the Securities Act and such
registration is then currently effective; and (b) the closing price of the
common stock as listed on the Nasdaq Stock Market ("NASDAQ"), the New York Stock
Exchange ("NYSE"), the American Stock Exchange ("ASE") or wherever our common
stock then trades, is at least 250% of the Conversion Price for twenty (20)
trading days within a thirty (30) consecutive trading day period. Any notice of
forced conversion must be given to all holders no less than thirty (30) days nor
more than forty-five (45) days prior to the date set forth for conversion (the
"Forced Conversion Date"). On the Forced Conversion Date, we are obligated to
pay all registered holders of our series B convertible preferred stock all
accrued and unpaid dividends through and including the Forced Conversion Date.
69
Redemption. We may redeem all of the outstanding shares of our series B
convertible preferred stock at any time prior to May 3, 2010 upon thirty (30)
days notice at a redemption price equal to the par value plus accrued and unpaid
dividends to the date of redemption. Holders of our series B convertible
preferred stock called for redemption may exercise their right to convert any or
all of their shares into common stock at any time prior to the close of business
on the date set for redemption. After the redemption date, their right to
convert shares called for redemption shall cease and they will be entitled only
to the redemption price.
Information Rights. Holders of our series B convertible preferred stock
are entitled to receive all communications we send to the holders of our common
stock.
Registration rights. We have filed the registration statement of which
this prospectus is a part to register for resale the shares of our common stock
we may issue upon conversion of our series B convertible preferred stock, as
well as the shares of common stock we may issue upon the exercise of warrants we
issued to the placement agent for the offering in accordance with our
obligations under the subscription agreements we entered into with the
purchasers of the series B convertible preferred stock. We have agreed to
maintain the registration statement through April 2010. If the SEC does not
declare the registration statement effective by October 13, 2007, we are
obligated to pay a cash amount of two percent (2.0%) of the purchase price for
each thirty (30) day period, or any part thereof, after that date, until it is
declared effective, up to an aggregate maximum amount payable of 24.0%.
Changes and Disagreements with Accountants
On December 15, 2005, we appointed Goldstein Golub Kessler LLP as our
independent auditor and, as of that date, we dismissed the firm of Daszkal
Bolton LLP, which had been serving as our independent auditor until that date.
The change in auditors was in connection with the merger which occurred on
November 30, 2005 and the resulting change in control of our company. The
dismissal of Daszkal Bolton LLP and the appointment of Goldstein Golub Kessler
LLP as our independent auditor were approved by our Board of Directors on
December 15, 2005.
During the period from January 1, 2005 to December 15, 2005, we did not
have any disagreements within the meaning of Instruction 4 of Item 304 of
Regulation S-K) with Daszkal Bolton LLP as to any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure and there have been no reportable events (as defined in Item 304 of
Regulation S-K).
We have not consulted with Goldstein Golub Kessler LLP regarding the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on our financial statements during the two
most recent fiscal years through the present.
The reports of Daszkal Bolton LLP on our financial statements for the
fiscal years ended December 31, 2004 and December 31, 2003 did not contain an
adverse opinion, a disclaimer of opinion or any qualifications or modifications
related to uncertainty, limitation of audit scope or application of accounting
principles, except that such reports express "substantial doubt about our
ability to continue as a going concern" and state that "The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty". These "going concern" qualifications relate only to periods prior
70
to November 30, 2005 and do not relate to the financial statements of Original
Gales or AIM. During the fiscal years ended December 31, 2004 and December 31,
2003 and the period from January 1, 2005 to December 15, 2005, we did not have
any disagreements (within the meaning of Instruction 4 of Item 304 of Regulation
S-K) with Daszkal Bolton LLP as to any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure and
there have been no reportable events (as defined in Item 304 of Regulation S-K).
SEC Policy Concerning Indemnification for Securities Act Liabilities
Under Section (b) of Article TENTH of our Certificate of Incorporation, as
well as Article VII of our By-Laws, we have agreed to indemnify our officers,
directors, employees and agents to the fullest extent permitted by the laws of
the State of Delaware, as amended from time to time. In addition, under
paragraph (i) of Section (a) of Article TENTH of our Certificate of
Incorporation, our directors are not subject to personal liability to us or our
stockholders for monetary damages for breach of their fiduciary duties as a
director to the fullest extent provided by Delaware law. Section 102 (b) (7) of
the Delaware General Corporation Law provides for the elimination off such
personal liability, except for liability (i) for any breach of the director's
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law or (iv) for any transaction from which the director derived any improper
personal benefit
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons, we have
been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Legal Matters
Our counsel, Eaton & Van Winkle LLP, Three Park Avenue, New York, New York
10016, has issued a legal opinion concerning the validity of the issuance of the
shares of common stock offered by this prospectus. Stephen Nagler, until June
26, 2007, a director, is a partner of Eaton & Van Winkle LLP. Eaton & Van Winkle
LLP owns 150,000 shares of our common stock. Mr. Nagler is the beneficial owner
of 145,455 shares of our common stock.
Experts
Goldstein Golub Kessler LLP, independent certified public accountants,
located in New York, New York has audited our financial statements, and Bildner
& Giannasco LLP, independent certified public accountants, located in Jericho,
New York, has audited the financial statements of AIM and Sigma Metals included
in this registration statement to the extent, and for the periods set forth in
their reports. We have relied upon such reports, given upon the authority of
such firms as experts in accounting and auditing.
71
AIR INDUSTRIES GROUP, INC.
(formerly known as Gales Industries Incorporated)
Index to Consolidated Financial Statements
Audited Financial Statements
----------------------------
GALES INDUSTRIES INCORPORATED: Page No.
Report of Independent Registered Public Accounting Firm ................................................ F-3
Consolidated Balance Sheet at December 31, 2006 ........................................................ F-4
Consolidated Statement of Operations for the years ended December 31, 2006 and 2005 .................... F-5
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2006 and 2005 .......... F-6
Consolidated Statement of Cash Flows for the years ended December 31, 2006 and 2005 .................... F-7 - F-8
Notes to Consolidated Financial Statements ............................................................. F-9 - F-29
AIR INDUSTRIES MACHINING, CORP.
(Predecessor to Gales Industries Incorporated):
Accountants' Report .................................................................................... F-31
Consolidated Balance Sheet for the year ended November 30,2005 ......................................... F-32
Consolidated Statement of Income and Retained Earnings for the eleven months ended November 30,2005 .... F-34
Consolidated Statement of Cash Flows for the eleven months ended November 30,2005 ...................... F-35
Notes to Financial Statements .......................................................................... F-36 - F-43
SIGMA METALS, INC.:
Auditors' Report ....................................................................................... F-45
Comparative Balance Sheets at December 31, 2006 and 2005 ............................................... F-46 - F-47
Comparative Statements of Income and Retained Earnings for the years ended December 31, 2006 and 2005 .. F-48
Comparative Statements of Cash Flows for the years ended December 31, 2006 and 2005 .................... F-49 - F-50
Notes to Financial Statements .......................................................................... F-51 - F-55
F-1
Audited Financial Statements
----------------------------
GALES INDUSTRIES INCORPORATED:
Condensed Consolidated Balance Sheet at March 31, 2007 ................................................. F-57
Condensed Consolidated Statement of Operations for the three months ended March 31, 2007 ............... F-58
Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2007 ............... F-59
Notes to Condensed Consolidated Financial Statements ................................................... F-60
SIGMA METALS, INC.:
Balance Sheet at March 31, 2007 ........................................................................ F-66 - F-67
Statement of Income and Retained Earnings for the three months ended March 31, 2007 and 2006 ........... F-68
Statement of Cash Flows for the three months ended March 31, 2007 and 2006 ............................. F-69 - F-70
Notes to Financial Statements .......................................................................... F-71
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Gales Industries Incorporated
We have audited the accompanying consolidated balance sheet of Gales Industries
Incorporated and Subsidiary as of December 31, 2006 and 2005 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Air
Industries Group, Inc. and Subsidiary as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for the years then ended, in
conformity with United States generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 30, 2007
F-3
GALES INDUSTRIES INCORPORATED
Consolidated Balance Sheet At December 31,
2006 2005
ASSETS
Current Assets
Cash and Cash Equivalents -- $ 1,058,416
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $176,458 and $45,000 $ 3,508,957 2,623,612
Inventory 15,257,641 12,603,810
Prepaid Expenses and Other Current Assets 232,749 210,124
Deposits 180,456 65,595
------------ ------------
Total Current Assets 19,179,803 16,561,557
Property, Plant, and Equipment, net 3,565,316 7,716,469
Cash Surrender Value - Officer's Life Insurance -- 66,216
Deferred Financing Costs 369,048 486,207
Other Assets 63,522 41,306
Goodwill 1,265,963 1,265,963
Deposits 448,530 --
------------ ------------
TOTAL ASSETS $ 24,892,182 $ 26,137,718
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable and Accrued Expenses $ 7,648,426 $ 5,294,629
Advance Payment - Customers -- 188,199
Notes Payable - Revolver 5,027,463 6,322,665
Notes Payable - Current Portion 127,776 --
Notes Payable - Sellers - Current Portion 192,400 192,400
Capital Lease Obligations - Current Portion 407,228 359,197
Due to Sellers 53,694 91,232
Dividends Payable 120,003 --
Deferred Gain on Sale - Current Portion 38,033 --
Income Taxes Payable 653,426 --
------------ ------------
Total current liabilities 14,268,449 12,448,322
Long term liabilities
Notes Payable - Net of Current Portion 645,458 3,648,131
Notes Payable - Sellers - Net of Current Portion 1,290,562 1,434,862
Capital Lease Obligations - Net of Current Portion 552,589 820,375
Deferred Tax Liability 512,937 676,394
Deferred Gain on Sale - Net of Current Portion 713,118 --
Deferred Rent 39,371 --
------------ ------------
Total liabilities $ 18,022,484 $ 19,028,084
------------ ------------
Commitments and contingencies
Stockholders' Equity
Series A Convertible Preferred - $.001 Par value, 8,003,716
Shares Authorized, 0 Shares and 900 Shares Issued and Outstanding
as of December 31, 2006 and 2005, respectively
Liquidation Value, $ 18,060,000 -- $ 1
Common Stock - $.001 Par, 120,055,746 Shares Authorized,
57,269,301 and 14,723,421 Shares Issued and Outstanding as of December 31, 2006
and 2005, respectively $ 57,269 14,723
Additional Paid-In Capital 7,898,702 7,844,614
Accumulated Deficit (1,086,273) (749,704)
------------ ------------
Total Stockholders' Equity 6,869,698 7,109,634
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,892,182 $ 26,137,718
============ ============
See notes to financial statements
F-4
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Operations for the Year Ended December 31,
2006 2005
Net sales $ 33,044,996 $ 2,777,409
Cost of Sales 28,002,942 2,539,433
------------ ------------
Gross profit 5,042,054 237,976
Operating costs and expenses
Selling and marketing 601,011 34,987
General and administrative 3,789,587 774,401
------------ ------------
Income (Loss) from operations 651,456 (571,412)
Other (income) and expenses:
Interest and financing costs 1,040,108 178,292
Gain on Sale of Life Insurance Policy (53,047) --
Gain on Sale of Real Estate (300,037) --
Other Income (435,627) --
Other Expenses 246,659 --
------------ ------------
Net Income (Loss) before provision for income taxes 153,400 (749,704)
Provision for income taxes 489,969 --
------------ ------------
Net Loss (336,569) (749,704)
------------ ------------
Dividend attributable to preferred stockholders 420,003 60,000
------------ ------------
Net Loss attributable to common stockholders $ (756,572) $ (809,704)
============ ============
Loss per share (basic and diluted) $ (0.02) $ (0.06)
============ ============
Weighted average shares outstanding (basic and diluted) 32,208,029 12,722,060
============ ============
See notes to financial statements
F-5
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Stockholders' Equity For The Years
Ended December 31, 2006 and 2005
Series A
Preferred Stock Common Stock Additional Total
---------------------- --------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
-------- ----------- ---------- -------- ----------- ------------ -------------
Balance, January 1, 2005 12,529,737 $ 12,530 $ (136,864) $ (124,334)
Issuance of common stock to
merger and acquisition
intermediary on recapitalization 1,477,290 1,477 (1,477) --
Contribution of common stock from
shareholder in connection with
bank financing 71,500 71,500
Value of warrants issued in
connection with bridge financing 43,861 43,861
Beneficial conversion feature on
shares issued in connection with
bridge financing 24,897 24,897
Non-cash stock option compensation 121,297 121,297
Issuance of shares in connection
with convertible note 226,334 226 24,671 24,897
Issuance of common stock to Sellers 490,060 490 489,570 490,060
Private placement issued at
$10,000 per share 900 $ 1 8,999,999 9,000,000
Expenses of private placement (1,792,840) (1,792,840)
Net loss (749,704) (749,704)
-------- ----------- ---------- -------- ----------- ------------ -----------
Balance, Dec. 31, 2005 900 $ 1 14,723,421 $ 14,723 $ 7,844,614 $ (749,704) $ 7,109,634
Non-cash stock option compensation 167,126 167,126
Preferred stock dividend (480,003) (480,003)
Non-cash warrant compensation 49,510 49,510
Conversion of preferred shares to
common shares in connection
with filing of registration (900) (1) 40,909,500 40,910 (40,909) --
statement
Conversion of preferred dividend
to common shares in connection
with filing of registration
statement 1,636,380 1,636 358,364 360,000
Net Loss (336,569) (336,569)
-------- ----------- ---------- -------- ----------- ------------ -----------
Balance, December 31, 2006 -- -- 57,269,301 $ 57,269 $ 7,898,702 $ (1,086,273) $ 6,869,698
======== =========== ========== ======== =========== ============ ===========
See notes to financial statements
F-6
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Cash Flows For the Year Ended December 31,
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (336,569) $ (749,704)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation and Amortization 597,009 45,406
Write-off of building improvements -- 256,632
Non-Cash Interest Expense -- 93,655
Bad debt expense 177,444 45,000
Non-Cash Compensation Expense 167,126 121,297
Warrants issued for services 49,510 --
Amortization of deferred financing costs 117,159 33,253
Gain on Sale of officer's life insurance (53,047) --
Deferred Tax Liability (163,457) --
Gain on sale of real estate (300,037) --
Changes in Assets and Liabilities, net of effects of Acquisition
and recapitalization:
(Increase) Decrease in Operating Assets -
Accounts Receivable (1,062,789) 534,378
Inventory (2,653,831) (434,362)
Prepaid Expenses and Other Current Assets (22,625) (31,058)
Deposits (114,861) 168,499
Cash Surrender Value - Officer's Life Insurance 33,263 (3,455)
Other Assets (22,216) (41,306)
Increase (Decrease) In Operating Liabilities -
Accounts Payable and Accrued Expenses 2,353,797 (1,389,406)
Income Taxes Payable 653,426 --
Deferred Rent 39,371 --
Advance Payment-Customers (188,199) 188,199
------------ ------------
NET CASH USED IN OPERATING
ACTIVITIES $ (729,526) $ (1,162,972)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Paid for Deposit on Leasehold Improvements (448,530) --
Cash paid in acquisition, including transaction costs of $1,053,862,
net of cash received of $47,538 -- (4,120,620)
Cash received on sale of real estate 5,417,704
Cash received on recapitalization -- 1,684
Purchase of property and equipment (812,372) (4,322,975)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 4,156,802 $ (8,441,911)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Principal - Capital Lease Obligations (219,755) (29,277)
Repayment of notes payable to Officers and Sellers (181,838) (884,815)
Proceeds from notes payable -- 4,790,796
Repayment of Mortgage Note Payable (4,170,099) --
Proceeds from Private Placement -- 9,000,000
Payment of issuance costs on private placement -- (1,792,840)
Payment of Deferred Financing Costs -- (420,565)
Proceeds from sale of officer's life insurance 86,000 --
------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES $ (4,485,692) $ 10,663,299
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,058,416) 1,058,416
Cash and cash equivalents at beginning of year $ 1,058,416 --
Cash and cash equivalents at end of year -- $ 1,058,416
============ ============
F-7
GALES INDUSTRIES INCORPORATED
Consolidated Statement of Cash Flows For the Year Ended December 31,
2006 2005
------------ ------------
Supplemental cash flow information
Cash paid during the year for interest $ 828,807 $ 64,078
============ ============
Supplemental cash flow information
Cash paid during the year for Income taxes $ 12,758 --
============ ============
Supplemental schedule of non cash investing and financing activities
Non-cash Dividends on Preferred Stock $ 480,003 --
============ ============
Conversion of Preferred Stock to Common Stock $ 40,909 --
============ ============
Conversion of Preferred Dividends to Common Stock $ 360,000 --
============ ============
Shares issued in connection with deferred financing costs -- $ 71,500
============ ============
Beneficial conversion feature charged as interest on bridge financing -- $ 24,897
============ ============
Common stock issued on conversion of bridge note -- $ 24,897
============ ============
Issuance of warrants in bridge financing -- $ 43,861
============ ============
Common stock issued to Sellers in acquisition -- $ 490,060
============ ============
Net liabilities assumed on recapitalization restated to 2004 -- $ 124,334
============ ============
Notes payable issued for acquisition -- $ 1,627,262
============ ============
The Company purchased all of the outstanding stock of AIM for an
aggregate purchase price of $6,285,480,including transaction costs, and in
conjunction with this acquisition, liabilities assumed were as follows:
Fair value of assets acquired -- $ 20,884,787
Consideration given for acquisition -- 6,285,480
------------ ------------
Liabilities assumed -- $ 14,599,307
============ ============
See notes to financial statements
F-8
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Note 1. FORMATION AND BASIS OF PRESENTATION
Merger and Acquisition
Ashlin Development Corp. (the "Company" or "Ashlin"), a Florida corporation and
its subsidiary Gales Industries Merger Sub, Inc. ("Merger Sub"), entered into a
Merger Agreement (the "Merger Agreement") on November 14, 2005 with Air
Industries Group, Inc., a privately-held Delaware corporation ("Original
Gales"). On November 30, 2005 (the "Closing Date") Original Gales merged (the
"Merger") into Merger Sub. Pursuant to the Merger Agreement, the Company issued
10,673,107 shares of Common Stock (representing 73.6% of Ashlin's outstanding
shares) and 900 shares of Series A Convertible Preferred Stock which was
initially convertible into 40,909,500 shares of Common Stock of the Company for
all the issued and outstanding shares of Original Gales the "Successor". As a
result of the transaction, the former stockholders of Original Gales became the
controlling stockholders of Ashlin. Additionally, since Ashlin had no
substantial assets prior to the merger, the transaction was treated for
accounting purposes as a reverse acquisition of a public shell. Accordingly, for
financial statement presentation purposes, Original Gales is the surviving
entity.
On February 15, 2006, Ashlin changed its name to Air Industries Group, Inc. and
its state of domicile from Florida to Delaware.
Prior to the closing of the Merger, Original Gales, which did not have any
business operations other than in connection with the transactions contemplated
by the Merger Agreement, acquired (the "Acquisition") all of the outstanding
capital stock of Air Industries Machining, Corporation ("AIM"). Because of the
change in ownership, management and control that occurred in connection with the
Acquisition, in accordance with Statement of Financial Accounting Standards
("SFAS") 141, Business Combinations, the transaction was accounted for as a
purchase. Accordingly, the purchase price was allocated to assets acquired and
liabilities assumed based on SFAS No. 141. Simultaneously with the Acquisition,
AIM entered into a bank facility (the "Loan Facility") and used proceeds from
the Loan Facility to acquire real estate (the "Real Estate Acquisition").
Prior to the Acquisition, Original Gales raised bridge financing. In connection
with the Acquisition, Original Gales procured a private placement of Series A
Preferred Stock, the proceeds of which were used to acquire AIM. Immediately
prior to the Merger, Original Gales had outstanding certain bridge notes
convertible into shares of Original Gales' common stock and certain bridge
warrants to purchase shares of Original Gales' common stock.
Original Gales was formed in October 2004 and, since prior to the acquisition it
did not have any business operations or activity other then the transactions
contemplated with the merger and succeeded substantially all of the business
operations of AIM, AIM is the "Predecessor" to Original Gales. The Company is
required to separately present the historical statement of operations and cash
flows of the Predecessor. The financial information presented in these financial
statements may not reflect the combined financial position. The operating
results and cash flows of the Predecessor and the Successor are not compatible
in all material respects.
F-9
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The financial statements presented are those of Original Gales and its wholly
owed subsidiary AIM from the date of acquisition, November 30, 2005, to December
31, 2005 and its full year of operations for 2006. Original Gales was formed in
October 2004 and prior to the Acquisition did not have any business operations
or other activity. For presentation purposes, see Note 15 for the results of pro
forma operations if the acquisition occurred on January 1, 2005.
Reverse stock split
Pursuant to the terms of the Merger Agreement, prior to the Merger, Ashlin
effected a 1-for-1.249419586 reverse split of its Common Stock (the "Reverse
Split"). The Reverse Split became effective November 21, 2005. The Reverse Split
reduced the number of shares of Common Stock which the Company had outstanding
on a fully diluted basis to 3,868,000. As a result of the Reverse Split, the
conversion of the outstanding shares of Original Gales pursuant to the Merger
for new shares of the Company's Common Stock was on a one-for-one basis. Any of
the Company's shareholders who, as a result of the Reverse Split, held a
fractional share of Common Stock received a whole share of Common Stock in lieu
of such fractional share. After giving effect to the Reverse Split, prior to the
Merger, the Company had outstanding 3,823,980 shares of Common Stock which
continued to be outstanding after the Merger.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
The Company is primarily engaged in manufacturing aircraft structural parts and
assemblies principally for prime defense contractors in the aerospace industry
in the United States. The Company's customer base consists mainly of publicly
traded companies in the aerospace industry.
Principles of Consolidation
The accompanying consolidated financial statements include accounts of the
Company and Merger Sub and Merger Sub's wholly owned subsidiary, AIM.
Significant inter company accounts and transactions have been eliminated in
consolidation. The operations of the Company are conducted principally through
AIM.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid instruments with an original
maturity of three months or less. All cash is applied on a daily basis to
amounts outstanding under the revolving portion of our Loan Facility.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal balances
net of allowances for bad debt. The Company provides for allowances for
uncollectible receivables based on management's estimate of uncollectible
amounts at year-end, considering age, collection history, and any other factors
considered appropriate.
F-10
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Inventory Valuation
The Company values inventory at the lower of cost on a first-in-first-out basis
or market.
The Company purchases inventory only when it has signed non-cancellable
contracts with its customers for orders of its finished goods. The Company
periodically produces finished goods in excess of purchase order quantities in
anticipation of future purchase order demands but historically this excess has
been used in fulfilling future purchase orders. The Company occasionally
evaluates inventory items that are not secured by purchase orders and reserves
for obsolescence accordingly. The Company also reserves an allowance for excess
quantities, slow-moving goods, and obsolete items.
Property and Equipment
Property and equipment are carried at cost net of accumulated depreciation and
amortization. Repair and maintenance charges are expensed as incurred. Property,
equipment, and improvements are depreciated using the straight-line method over
the estimated useful lives of the assets. Expenditures for repairs and
improvements in excess of $1,000 that add to the productive capacity or extend
the useful life of an asset are capitalized. Upon disposition, the cost and
related accumulated depreciation are removed from the accounts and any related
gain or loss is reflected in earnings.
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility level
annually or if events or circumstances indicate that the carrying value of such
assets may not be fully recoverable. Impairment is evaluated based on the sum of
undiscounted estimated future cash flows expected to result from use of the
assets compared to its carrying value. The carrying amount of a long-lived asset
is not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset. If impairment is
recognized, the carrying value of the impaired asset is reduced to its fair
value, based on discounted estimated future cash flows.
Deferred Financing Cost
Costs connected with obtaining and executing debt arrangements are capitalized
and amortized on the straight-line basis over the term of the related debt.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No.
104, "Revenue Recognition." The Company generally recognizes revenue when
products are shipped and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists, and the sales price is fixed or determinable. Payments
received in advance from customers for products delivered are recorded as
customer advance payments until earned, at which time revenue is recognized.
F-11
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs, and those
indirect costs related to manufacturing, such as indirect labor, supplies,
tools, repairs and depreciation costs.
Use of Estimates
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. The more significant management estimates are the useful
lives of property and equipment, provisions for inventory obsolescence, accrued
expenses and various contingencies. Actual results could differ from those
estimates. Changes in facts and circumstances may result in revised estimates,
which are recorded in the period in which they become known.
Credit Risk
Financial instruments involving potential credit risk include accounts
receivable. Of the accounts receivable balance outstanding as of December 31,
2006 approximately 34%, 17%, and 16% are attributable to three customers
respectively. Of the account receivable balance at December 31, 2005,
approximately 23% and 10% are attributable to two customers, respectively.
One customer accounted for approximately 61% and 57% of the total revenues for
the years ended December 31, 2006 and 2005, respectively.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments."
Management of the Company believes that the fair value of financial instruments,
consisting of cash, accounts receivable, accounts payable and accrued
liabilities, approximates carrying value due to the immediate or short-term
maturity associated with these instruments and that the notes payable
approximate fair value in that they carry market-based interest rates.
Income Taxes
Income taxes are calculated using an asset and liability approach as prescribed
by SFAS No. 109, Accounting for Income Taxes. The provision for income taxes
includes federal and state taxes currently payable and deferred taxes, due to
temporary differences between financial statement and tax bases of assets and
liabilities. In addition, future tax benefits are recognized to the extent that
realization of such benefits is more likely than not. Valuation allowances are
established when management determines that it is more likely than not that some
portion or all of the deferred asset will not be realized. The effect of a
change in tax rates is recognized as income or expense in the period of change.
F-12
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Earnings per share
Basic earnings per share is computed by dividing the net income applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding for the period. Potentially dilutive shares, using the treasury
stock method, are included in the diluted per-share calculations for all periods
when the effect of their inclusion is dilutive.
The Company did not include 5,318,985 warrants and 4,850,000 options to purchase
the Company's common stock for the year ended December 31, 2006 and 5,229,589
warrants and 4,850,000 options to purchase the Company's common stock for the
year ended December 31, 2005 in the calculation of diluted earnings per share
because the effects of their inclusion would have been anti-dilutive.
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123(R) which is a revision of SFAS No.
123 and supersedes Accounting Principles Board Opinion No. 25. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values at the date of grant. The Company recorded in the accompanying
statement of operations an expense of $167,126 and $121,297 for the years ended
December 31, 2006 and 2005, respectively, in accordance with the measurement
requirements under SFAS No. 123(R). The Company adopted SFAS No. 123(R),
effective in 2005.
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over the
fair value of the identifiable net assets acquired. The Company applies SFAS No.
142, Goodwill and Other Intangible Assets and accordingly does not amortize
goodwill but tests it for impairment. Goodwill is reviewed for potential
impairment at the reporting unit level on an annual basis, or in interim periods
if events or circumstances indicate a potential impairment. The reporting units
utilized for this test were those that are one level below the business segments
identified at the beginning of Business Segment Operations. The impairment test
is performed in two phases. The first step of the Goodwill impairment test
compares the fair value of the reporting unit with its carrying amount,
including Goodwill. If the fair value of the reporting unit exceeds its carrying
amount, Goodwill of the reporting unit is considered not impaired; however, if
the carrying amount of the reporting unit exceeds its fair value, an additional
procedure must be performed. That additional procedure compares the implied fair
value of the reporting unit's Goodwill (as defined in SFAS 142) with the
carrying amount of that Goodwill. An impairment loss is recorded to the extent
that the carrying amount of Goodwill exceeds its implied fair value.
The fair values of the reporting units were determined using a combination of
valuation techniques consistent with the income approach. For purposes of the
income approach, discounted cash flows were calculated by taking the net present
value of estimated cash flows using a combination of historical results,
estimated future cash flows and an appropriate price to earnings multiple. We
use our internal forecasts to estimate future cash flows and actual results may
differ from forecasted results. However, these differences have not been
material and we believe that this methodology provides a reasonable means to
determine fair values. Cash flows were discounted using a discount rate based on
expected equity return rates, which ranged from 5.25% to 9.25% for 2006. Our
evaluations for the year ended December 31, 2006 indicated there was no
impairment of our Goodwill.
F-13
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Recently Issued Accounting Standards
In June 2006, Financial Accounting Standards Board ("FASB") Interpretation
("FIN") No. 48, "Accounting for Uncertainty in Income Taxes--An Interpretation
of FASB Statement No. 109," was issued regarding accounting for, and disclosure
of, uncertain tax positions. This interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with FASB Statement No. 109, "Accounting for Income Taxes," and
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
impact of this statement to its consolidated financial position and results of
operations.
In September 2006, the FASB issued SFAS No. 158, "Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans--An Amendment of SFAS No.
87, 88, 106 and 132(R)" ("SFAS No. 158"). The statement requires employers to
recognize the overfunded and underfunded portion of a defined benefit plan as an
asset or liability, respectively, and any unrecognized gains and losses or prior
service costs as a component of accumulated other comprehensive income. SFAS No.
158 also requires a plan's funded status to be measured at the employer's fiscal
year-end. The requirement to recognize the funded status of a defined benefit
plan and the disclosure requirements of SFAS No. 158 are effective for the
Company as of December 31, 2006. The requirement to measure plan assets and
benefit obligations as of the date of the employer's fiscal year end is
effective for the Company in 2008. The adoption of the requirements of SFAS No.
158 that became effective on December 31, 2006 did not have a material impact to
the financial position, results of operations or cash flows of the Company.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities" ("SFAS No. 159"). SFAS No. 159 provides
companies with an option to report selected financial assets and liabilities at
fair value, and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The new guidance is
effective for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the potential impact of the adoption of SFAS No. 159 on its
financial position and results of operations.
Note 3. INVENTORY
The components of inventory consisted of the following:
December 31, 2006 December 31, 2005
----------------- -----------------
Raw Materials $ 2,234,175 $ 2,319,523
Work in Progress 7,546,178 4,905,535
Finished Goods 5,477,288 5,378,752
------------- -------------
Total Inventory $ 15,257,641 $ 12,603,810
============= =============
F-14
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Note 4. PROPERTY AND EQUIPMENT
The components of property and equipment, at cost, consisted of the following:
December 31, 2006 December 31, 2005 Useful Lives
----------------- ----------------- ------------
Land $ -- $ 1,075,589 --
Building -- 3,226,767 25-31.5 years
Machinery and Equipment 2,117,441 1,766,829 5 - 8 years
Capital Lease Machinery and Equipment 1,164,671 1,145,171 5 - 8 years
Tools and Instrument 555,164 253,994 3 - 7 years
Building Improvements -- 17,700 25 years
Automotive Equipment 30,227 26,827 5 years
Furniture and fixtures 274,837 248,998 5 - 8 years
Leasehold Improvements 3,583 -- 5 years
----------- -----------
Total property, plant, and equipment 4,145,923 7,761,875
Less: Accumulated Depreciation (580,607) (45,406)
----------- -----------
Property, plant, and equipment, net $ 3,565,316 $ 7,716,469
=========== ===========
Depreciation and amortization expense for the year ended December 31, 2006 and
2005, amounted to $597,009 and $45,406, respectively.
Note 5. SALE-LEASEBACK TRANSACTION
On October 24, 2006, the Company consummated its agreement with STNLA-SPVEF Bay
Shore, LLC, successor in interest to Net Lease Advisors LLC (the "Purchaser"),
whereby the Company sold the buildings and real property located at its
corporate headquarters in Bay Shore, New York (the "Property") to the Purchaser
for a purchase price of $6,200,000. As a result, of this transaction the Company
had a gain on the sale of approximately $1,051,188 of which we recognized
$300,037 during the year ended December 31, 2006. The remaining $751,151 will be
recognized ratably over the remaining term of our twenty year lease, and is
included it the caption Deferred Gain on Sale of Real Estate in the accompanying
Balance Sheet.
Simultaneous with the closing of the sale of the Property, the Company entered
into a 20-year triple-net lease (the "Lease") with the Purchaser for the
property. Base annual rent is approximately $540,000 for the first five years of
the Lease, increases to $621,000 for the sixth year of the term, and thereafter
increases 3% per year. The Lease grants AIM an option to renew the Lease for an
additional period of five years. The Company deposited with the Purchaser
$127,500 as security for the performance of its obligations under the Lease,
which it subsequently replaced with a $127,500 letter of credit. In addition,
the Company deposited with the landlord $393,000 (Deposits) as security for the
completion of certain repairs and upgrades to the Property. This amount is
included in the caption Deposits on the accompanying Balance Sheet. Pursuant to
the terms of the Lease, the Company is required to pay all of the costs
associated with the operation of the facilities, including, without limitation,
insurance, taxes and maintenance, these costs will be offset against the funds
that are deposited with our landlord. The lease also contains customary
representations, warranties, obligations, conditions and indemnification
provisions and grants the Purchaser customary remedies upon a breach of the
Lease by the Company, including the right to terminate the Lease and hold the
Company liable for any deficiency in future rent. (See Note 11).
F-15
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Note 6. NOTES PAYABLE - BANKS AND CREDIT FACILITY
On November 30, 2005 the Company executed a credit facility with PNC Bank N.A.
(the "Loan Facility"), secured by all of its assets (see Note 14).
The Loan Facility provided for a maximum loan amount of $14,000,000 consisting
of (i) a $9,000,000 revolving loan, (ii) a $3,500,000 term loan, and (iii) a
$1,500,000 equipment financing loan. In connection with the Loan Facility the
Company paid a finder's fee of $196,500, consisting of $125,000 in cash and
325,000 shares of Common Stock, which is included in deferred financing costs.
The shares paid to the finder were valued at $0.22 per share and were
contributed by one of the Company's senior executives and accounted for as a
capital contribution.
The revolving loans bear interest, at the option of the Company, that is based
on (i) the higher of (A) PNC's base commercial lending rate as published from
time to time ("PNC Rate") plus 0.25% or (B) the Federal Funds rate plus 0.5%, or
(ii) the Eurodollar Rate for the Interest Period selected by the Company plus
2.5%. The revolving loans had an interest rate of 8.50% per annum on December
31, 2006 and an outstanding balance of $5,027,463. The revolving loans,
equipment loans and the term loan are payable in full on November 30, 2009
("Termination Date") unless PNC agrees to extend the Termination Date.
The term loan is for a period of 4 years and bears interest, at the option of
the Company at the end of an interest period, at the (i) PNC Rate plus 0.50% per
annum or (ii) the Eurodollar Rate for the interest period selected by the
Company plus 2.75 %. In October 2006 the Term Note was reduced by $2,800,000 and
the remaining balance of $383,330 became an Amended and Restated Term Note in
the principal amount of $383,330 providing for principal payments of $10,648 per
month and the Maturity Date was amended to become the first business day of
October 2009. At December 31, 2006, the balance of the term loan was $362,034
In addition to the foregoing, the Loan Facility was further amended to allow for
the Company to borrow or to obtain the issuance, renewal, extension and increase
of standby letters of credit, up to an aggregate availability of $500,000, for
its account until the Termination Date, which will occur on November 30, 2009.
The equipment loans bear interest, at the option of the Company, that is based
on (i) the PNC Rate plus 0.50% per annum or (ii) the Eurodollar Rate for the
interest period selected plus 2.75% per annum. The equipment loan had an
interest rate of 8.75% per annum at December 31, 2006. Such equipment financing
is limited to an aggregate of $750,000 in any fiscal year and amortized in equal
installments of sixty months following the close of each "borrowing period", the
first of which ended December 31, 2006. Each subsequent "borrowing period" ends
on each December 31 thereafter. All equipment loans are due and payable on
November 30, 2009. As of December 31, 2006, the equipment financing loan had a
balance of $411,200.
To the extent that the Company may dispose of collateral used to secure any of
the Loan Facility, other than inventory, the Company must promptly repay the
draws on the credit facility in amount equal to the net proceeds of such sale.
The terms of the Loan Facility require that, among other things, the Company
maintain certain financial ratios and levels of working capital. As of December
31, 2006 the Company has met these terms. The Loan Facility is also secured by
all assets of the Company and the Company's receivables are payable directly
into a lockbox controlled by PNC (subject to the terms of the Loan Facility).
PNC may use some elements of subjective business judgment in determining whether
a material adverse change has occurred in the Company's condition, results of
operations, assets, business, properties or prospects allowing it to demand
repayment of the Loan Facility, as such, the revolving loan has been classified
as a current liability.
On January 10, 2007, the Company and PNC further amended the terms of the Loan
Facility to revise the formula to determine the amounts of revolving advances
permitted to be borrowed under the Loan Facility. The amount that the Company is
permitted to borrow as a revolving advance under the Loan Facility is based on a
percentage of the Company's eligible receivables, which now includes government
receivables that have not been assigned by the Company.
F-16
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Interest expense related to these credit facilities amounted to $686,917 for the
year ended December 31, 2006.
The Company incurred an aggregate of $492,065 in finders' fees and legal costs
in connection with the Loan Facility which is being amortized over the 48 month
term of the Loan Facility. At December 31, 2005, the Company amortized $123,017
of these costs.
As of December 31, 2006, future minimum principal payments are as follows:
Year Amount
---------- ----------
2007 $ 127,776
2008 127,776
2009 517,682
----------
773,234
Less: Current portion (127,776)
----------
Long-term portion $ 645,458
==========
Note 7. CASH SURRENDER VALUE - OFFICER'S LIFE INSURANCE
During the year ended December 31, 2006, the Company sold its key-man life
insurance policies. Proceeds from the sale of the insurance policy were $86,000
which was offset by the cash surrender value of $33,263. The resulting gain of
$53,047 was recognized as Other Non-Operating Income in the accompanying
Statement of Operations for the year ended December 31, 2006.
Note 8. CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing and
computer equipment. All leases have bargain purchase options exercisable at the
termination of each lease. Capital lease obligations totaled $959,817 and
$1,179,572 as of December 31, 2006 and 2005, respectively.
F-17
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
As of December 31, 2006, future minimum lease payments, including imputed
interest, with remaining terms of greater than one year are as follows:
Year Amount
------ ----------
2007 $ 469,986
2008 468,212
2009 79,515
2010 42,396
----------
Total future minimum lease payments 1,060,109
Less: imputed interest (100,292)
Less: current portion (407,228)
----------
Total long-term capital lease obligation $ 552,589
==========
Note 9. NOTES PAYABLE - SELLERS
On November 30, 2005, as part of the stock purchase between Gales and AIM (See
Note 14), Gales issued notes payable for an aggregate of $1,627,262 to three
former AIM shareholders, two of whom have become part of the Company's senior
management and are also stockholders in the Company.
The balance of the notes payable to the two senior management members as of
December 31, 2006 aggregated $665,262. These notes bear an interest rate equal
to Prime Rate plus 0.5% per annum, (8.75% at December 31, 2006) and mature on
November 30, 2010. Interest shall accrue on any portion of the principal amount
of these notes outstanding after November 30, 2010 until payment thereof in
full, at a floating rate equal to the Prime Rate plus 7% per annum. All of the
outstanding principal amounts of these notes together with accrued interest are
convertible, at the option of the Company, into shares of the Company's common
stock at $0.40 per share. From and after the earlier of (i) January 1, 2007, and
(ii) the first date on which the Company intends to effect any capital
reorganization of the Company, any reclassification or recapitalization of the
capital stock of the Company, any merger, or consolidation or other combination
of the Company with or into any other Company, or any sale or transfer of all or
substantially all of the assets of the Company, the outstanding principal amount
of these notes together with interest accrued thereon is convertible, at the
option of the holder, into the Company's Common Stock at $0.40 per share.
The remaining note of $962,000 matures on September 30, 2010 is subordinated to
all of Gale's senior debt and is payable in twenty consecutive calendar quarters
of equal installments of principal plus accrued interest commencing on December
31, 2005. The interest rate on this note is equal to Prime Rate plus 0.5% per
annum (8.75% at December 31, 2006). Interest on outstanding balances at
September 30, 2010, in the event of nonpayment, shall accrue at a floating rate
equal to the Prime Rate plus 7% per annum. As of December 31, 2006, future
minimum principal payments on these notes to the three former shareholders are
as follows:
F-18
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Year Amount
------ -----------
2007 $ 192,400
2008 192,400
2009 192,400
2010 192,400
2011 713,362
-----------
1,482,962
Less: Current portion (192,400)
-----------
Long-term portion $ 1,290,562
===========
Interest expense on these notes amounted to $132,193 and $10,711 for the year
ended December 31, 2006 and 2005 respectively.
On January 26, 2007, the two senior management members exercised their right to
convert their $665,262 notes plus accrued interest of $54,511 into an aggregate
of 1,799,432 shares of common stock at a conversion price of $0.40 per share.
(See Note 16)
Note 10. EMPLOYEE BENEFITS PLANS
The Company has a defined contribution plan under Section 401(k) of the Internal
Revenue Code (the "Plan"). Pursuant to the Plan qualified employees may
contribute a percentage of their pretax eligible compensation to the Plan. The
Company does not match any contributions that employees may make to the Plan.
The Employees of the Company are members of the United Service Workers Union
TUJAT Local 355 (the "Union"), which provided medical benefit plans at defined
rates which are contributed in their entirety by the Company. The company paid
$2,275,295 and $133,570 in union benefits during the years ended December 31,
2006 and 2005 respectively.
Note 11. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under an operating lease agreement, which
contain renewal options and escalation provisions. Rent expense was $111,775 and
$0 for the years ended December 31, 2006 and 2005, respectively. The Company is
responsible for paying all operating costs under the term of the lease. As of
December 31, 2006, future minimum lease payments are as follows:
-------------------------------------
Year Amount
-------------------------------------
2007 $ 540,000
-------------------------------------
2008 540,000
-------------------------------------
2009 540,000
-------------------------------------
2010 540,000
-------------------------------------
2011 563,824
-------------------------------------
Thereafter 11,737,644
-------------------------------------
$14,461,468
-------------------------------------
The lease provides for scheduled increases in base rent. Rent expense is charged
to operations using the straight-line method over the term of the lease which
results in rent expense being charged to operations from inception of the lease
in excess of required lease payments. At December 31, 2006, this excess of
$39,371 is shown as deferred rent in the accompanying balance sheet.
F-19
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Litigation
A legal action was brought against the Company for personal injures sustained by
an independent contractor as a result of a fall on the Company's premises. The
carrier assumed the defense of this action and it was settled during 2006 by the
carrier at no cost to the Company.
The Company was involved in litigation with J.C. Herbert Bryant, III, a former
officer, director and shareholder of the Company, and KMS-Thin Tab 100, Inc.,
which was settled in September 2002. As part of the settlement, the Company
entered into a distribution agreement with KMS permitting it to purchase certain
products from the Company and to exclusively distribute those products in
Florida from Orlando south. In October 2003, the Company terminated the
distribution agreement with KMS. On December 1, 2003, the Company filed suit
against KMS in the Palm Beach County Circuit Court for breach of contract,
trademark infringement and for a declaration of rights that the distribution
agreement is terminated. KMS answered the complaint and filed its own
counterclaim for fraud in the inducement, trademark infringement, dilution and
fraudulent misrepresentation; the fraud-based counterclaims were dismissed with
prejudice by the Court on summary judgment. KMS subsequently amended its
counterclaim to allege a breach of contract under the distribution agreement. In
January 2005, the State Court in Florida ruled that neither party should prevail
and rejected a request for attorney's fees by KMS of approximately $60,000. KMS
subsequently filed a notice of appeal. Subsequent to the Company's emergence
from Bankruptcy, KMS requested that the Bankruptcy Court reopen our bankruptcy
case and award it the attorney's fees previously rejected by the Florida State
Court. The Bankruptcy Court granted the motion in so far as it allowed KMS to
prosecute in the Fourth District Court of Appeal in Florida its appeal of the
State Court decision. Subsequently, KMS filed its appeal and brief with the
Fourth District seeking attorney's fees. The Company intends to contest this
claim vigorously, local counsel has responded on behalf of the Company and we
await the decision of the Appellate Division. We note that even if a decision
adverse to the Company was rendered by the Appellate Division, the Bankruptcy
Court could elect to determine that the distribution of assets provided for was
appropriate and KMS would be unable to collect upon its judgment.
Customer Audits
The Company's government contracts and those of many of its customers are
subject to the procurement rules and regulations of the United States
government, including the Federal Acquisition Regulations ("FAR"). Many of the
contract terms are dictated by these rules and regulations. During and after the
fulfillment of a government contract, the Company may be audited in respect of
the direct and allocated indirect costs attributed thereto. These audits may
result in adjustments to its contract costs. Additionally, the Company may be
subject to U.S. government inquiries and investigations because of its
participation in government procurement. Any inquiry or investigation can result
in fines or limitations on the Company's ability to continue to bid for
government contracts and fulfill existing contracts.
F-20
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The Company believes that it is in substantial compliance with all federal,
state and local laws and regulations governing its operations and has obtained
all material licenses and permits required for the operation of its business.
Employment Contracts
In September 2005, the Company entered into employment agreements (the
"Agreements") with four senior executives that became effective November 30,
2005. The Agreements are for a period of approximately eight years.
Additionally, the Agreements provide for annual base compensation aggregating
$940,000. The Board, at its sole discretion, determines whether a bonus is
issued, provided that in the case of two executives, the amount of the bonus
shall be predicated on their performance and the achievement by the Company of
its operating targets set forth in its annual budget, in the case of these two
executives, provided further, in no event shall the amount of their bonuses be
less than 50% of their salary at that time. For the years ended December 31,
2006 and 2005 no bonuses were paid. Each senior executive's agreement also call
for grants of stock options to purchase the Company's common stock aggregating
4,850,000 shares of which 2,370,000 have been granted as of December 31, 2006.
Subsequent to year-end the Company and one of its four senior executives entered
into a Separation Agreement and General Release (the "Separation Agreement")
effective March 16, 2007, whereby the executive resigned from his positions with
the Company. Pursuant to the Separation Agreement, the Employment Agreement
between the executive and the Company terminated effective March 16, 2007. In
lieu of the compensation payable to the executive pursuant to his Employment
Agreement, from March 16, 2007, to November 30, 2010, the executive will be paid
$100,000 per annum; from December 1, 2010 to May 31, 2011, he will be paid
$50,000. In addition, if the Company achieves certain agreed-upon levels of
performance he may receive up to an additional $50,000. Upon the execution of
his employment agreement the Company granted this executive options to purchase
1,250,000 shares of Common Stock, subject to an agreed upon vesting schedule and
exercisable over a ten-year period commencing on the date of grant. Pursuant to
the Separation Agreement, all unvested options held by this executive vested as
of March 16, 2007, and the right to exercise all of his options will terminate
as of March 16, 2008.
Note 12. INCOME TAXES:
The provision for income taxes at December 31, 2006 consists of the following:
Current
Federal $ 504,585
State 148,841
----------
Total Current Provision 653,426
----------
Deferred
Federal (127,595)
State (35,862)
----------
Total Deferred Taxes (163,457)
----------
Net Provision for Income Taxes $ 489,969
==========
F-21
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The components of deferred income tax assets as of December 31, 2006 and 2005,
are as follows:
2006 2005
---- ----
Federal loss after M-1 adjustments -- $ 81,022
Bad debts $ 76,080 38,804
Inventory - 263A Adjustment 338,092 145,776
Non-cash compensation - warrants 40,121 18,774
Non-cash compensation - options 124,354 52,297
Deferred Rent 16,977 --
Deferred gain on sale of real estate 323,859 --
Federal tax benefit of State Tax (64,790) (24,200)
Total deferred tax asset 854,693 312,473
Valuation allowance (854,693) (312,473)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
The component of the deferred tax liability as of December 31, 2006 and 2005 is
as follows:
2006 2005
---- ----
Property and equipment $512,937 $676,394
-------- --------
Total deferred tax liability $597,671 $676,394
======== ========
The difference between income taxes computed at the statutory federal rate and
the provison for income taxes for the years ended December 31, 2006 and 2005
relates to the following:
2006 2005
---- ----
Tax benefit at federal statutory rate 34.00% 34.00%
State income taxes, net of federal
income tax benefit 6.02% 6.02%
Permanent differences 6.66% --
True-up (84.37)% --
Change in valuation allowance 357.10% --
-------- --------
Total 319.41% 40.02%
Valuation allowance -- (40.02)%
-------- --------
Total effective tax rate 319.41 --
======== ========
F-22
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Realization of deferred tax assets is dependent on future earnings. Due to the
uncertainty of realization of the net deferred tax assets, the Company has
provided a valuation allowance. In assessing the realizability of it, management
considers whether it is more likely than not that some or all of the deferred
tax asset will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making the assessment.
Note 13. STOCK-BASED COMPENSATION ARRANGEMENTS
During 2005, the Company's Board of Directors approved a stock option and
reserved 10,000,000 shares of its Common Stock for issuance under the plan. The
stock option plan permits the Company to grant non-qualified and incentive stock
options to employees, directors, and consultants. Awards granted under the
Company's plans vest over four and seven years.
The Company accounts for its stock option plans under the measurement provisions
of Statement of Financial Accounting Standards No. 123(R) (revised 2004),
Share-Based Payment ("SFAS 123(R)"). The weighted average fair values of options
granted for December 31, 2006 and 2005 are $0.38 and $0.17. During the twelve
months December 31, 2006 no stock options were exercised.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model using weighted average assumptions for grants
in the years ended December 31, 2006 and 2005 is as follows:
2006 2005
---- ----
Risk Free Interest Rates 4.77% 4.095 - 4.375%
Expected Dividend Yields n/a n/a
Expected Terms to Exercise 9 10
Expected Volatility 180% 35%
Certain of the Company's stock options contain features which include
variability in grant prices. A portion of the currently issued stock options
will be issued based on average trading prices of the Company's Common Stock at
the end of a given future period. Due to this variable feature, these stock
options are not deemed to be granted for purposes of applying SFAS 123(R) and
accordingly, their fair value will be calculated and expensed in future periods.
At December 31, 2006 and 2005, 1,580,000 and 790,000 options are vested and
exercisable, respectively. The weighted average exercise price of exercisable
options at December 31, 2006 and 2005 was $0.32 and $0.22 per share,
respectively.
F-23
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
A summary of the status of the Company's stock options as of December 31, 2006,
and changes during the year then ended is presented below:
Weighted Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Shares Price Term Value
--------- --------- ----------- ---------
Outstanding at January 1, 2006 2,370,000 $ 0.38
Reserved for grant based on future
market price 2,480,000
--------- --------- --------- ---------
Outstanding at December 31, 2006 4,850,000 $ 0.38 9 20,540
========= ========= ========= =========
Options vested and exercisable
At December 31,2006 1,580,000 $ 0.32 9 20,540
========= ========= ========= =========
The Company recorded expenses of $167,126 and $121,297 in its consolidated
statement of operations, which reflects the value of granted stock options over
the vesting period in accordance with SFAS No. 123R, for the years ended
December 31, 2006 and 2005, respectively.
The following table summarizes information about stock options at December 31,
2006:
Options Outstanding Options Exercisable
--------------------------------------- ----------------------------
Weighted-
Average Weighted-
Remaining average Weighted-
Number Contractual Exercise Number average
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Exercise Price
------------------------ ----------- ------------ --------- ----------- --------------
$0.220 790,000 9 $ 0.220 790,000 $ 0.220
$0.428 790,000 9 0.428 790,000 0.428
$0.480 790,000 9 0.480 -- --
Based on future market price 2,480,000 9 N/A -- --
---------- -------- -------- --------- ---------
4,850,000 9 $ 0.380 790,000 $ 0.324
========== ======== ======== ========= =========
F-24
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
A summary of the status of the Company's non-vested options as of December 31,
2006 and changes during the twelve months ended is presented below:
Weighted Weighted Average
Average Remaining
Number of Exercise Price Contractual Term
Options Per Option (in years)
---------- ---------- ----------------
Non-vested Options at
January 1, 2006 1,580,000 $ 0.453 10
Options based on future
market price 2,480,000 N/A N/A
Options granted -- -- --
Options vested (790,000) $ 0.428 --
Options forfeited or
expired -- -- --
---------- ---------- ----------
Non-vested Options at
December 31, 2006 3,270,000 $ 0.450 9
========== ========== ==========
As of December 31, 2006, there was $166,329 of unrecognized compensation cost
related to non vested stock option awards, which is to be recognized over the
remaining weighted average vesting period of eight months.
During the year ended December 31, 2006, the Company issued to a consulting
firm, in return for services an aggregate of 41,668 warrants, exercisable during
a five year term, to purchase 41,668 shares of the company's Common Stock. Such
warrants have a "cashless exercise" feature and have varying exercise prices
equal to 120% of the average closing price of the Company's Common Stock during
the month immediately preceding the date of issuance. The warrants were valued
using the Black-Scholes model and the Company recorded an expense of $49,510 in
its consolidated statement of operations for the year ended December 31, 2006.
The Company's agreement with this consultant was terminated during the first
week of September 2006.
F-25
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The following table summarizes the Company's outstanding warrants as of December
31, 2006 and changes during the year then ended:
Weighted Weighted
Number Average Average Remaining
of Exercise Contractual Life
Shares Price (Years)
--------- --------- -----------------
Outstanding at beginning of year 5,229,589 $ 0.21 4.1
Granted 41,668 $ 0.97 4.8
Cancelled -- --
Exercised -- --
--------- --------- ---------
Outstanding at end of year 5,271,257 $ 0.22 4.9
========= ========= =========
Note 14. EQUITY TRANSACTONS AND ASSET ACQUISITION
Private Placement
Immediately prior to, and shortly after the completion of the Merger, Original
Gales received gross proceeds of $9,000,000 from the closing of a private
placement ("Private Placement") to accredited investors of 900 shares of
convertible preferred stock at $10,000 per share which, pursuant to the Merger,
were exchanged for shares of the Company's Preferred Stock, $.001 par value per
share. The shares of Preferred Stock issued in connection with such private
placement are convertible into 40,909,500 shares of the Company's Common Stock.
The proceeds of the Private Placement, in general, were used for paying the cash
portion of the purchase price of the Acquisition, for paying expenses relating
to the Private Placements, Acquisition, Merger, and related transactions, for
the repayment of $150,000 in promissory note obligations which Gales incurred in
bridge financings, and for working capital for the Company.
The Placement Agent received 4,090,950 warrants, exercisable during a five year
term, to purchase 4,090,950 shares of the Company's Common Stock. Such warrants
have a "cashless exercise" feature and are exercisable at $0.22 per share. These
warrants were valued at $201,402 using the Black-Scholes model.
Acquisition
Pursuant to a stock purchase agreement between Gales and AIM dated July 25,
2005, original Gales acquired 100% of the capital stock of AIM. The total
aggregate price original Gales paid to acquire AIM was $5,231,618 as follows:
(i) $3,114,296 in cash, (ii) $1,627,262 in principal amount of promissory notes,
and (iii) 490,060 shares of Common Stock valued at a negotiated rate of $1.00
per share (concluded prior to the merger with the public company). The results
of AIM's operations have been included in the consolidated financial statements
since that date. A portion of the proceeds from original Gales' Private
Placement was used to pay such purchase price (See "Private Placement"),
including transaction costs of $1,053,862. This stock acquisition was accounted
for under the purchase method of accounting in accordance with SFAS No. 141,
Business Combinations. Under the purchase method of accounting, the total
purchase price was allocated to the assets acquired and liabilities assumed
based upon the fair values as of the completion of the acquisitions. As a result
of the stock purchase, the Company recorded $1,265,963 in goodwill which
represents the excess of the fair market value over book value of the assets
acquired and liabilities assumed from AIM. The liabilities assumed also included
$676,394 of a deferred tax liability representing book to tax differences on
assets acquired.
F-26
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of stock acquisition:
Current assets $15,640,164
Other assets 283,128
Property and equipment 3,695,532
-----------
Total assets acquired 19,618,824
-----------
Current liabilities 8,277,921
Long-term debt 5,644,992
Deferred tax liability 676,394
-----------
Total liabilities assumed 14,599,307
-----------
Net assets acquired 5,019,517
Consideration given 6,285,480
-----------
Goodwill $ 1,265,963
===========
Real estate acquisition
Contemporaneously with the close of the Merger and the Acquisition: (i) AIM
completed the acquisition from affiliates of AIM, for an aggregate purchase
price of $4,190,000, of three buildings and land which was being leased prior to
the closing of the Merger and the Acquisition by AIM (the "Real Estate
Acquisition"). The purchase price and related acquisition costs approximated the
appraised value of both the buildings and land (ii) AIM entered into the Loan
Facility with PNC Bank (See Note 6).
Preferred Stock
The Company currently has no shares of Preferred Stock outstanding. The 900
shares of preferred stock issued in connection with its private placement were
automatically converted into 40,909,500 shares of common stock upon the
effectiveness of its registration statement in August of 2006.
F-27
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Note 15. UNAUDITED PRO-FORMA FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed statement of operations gives
effect to the Merger Agreement, Acquisition, and Real Estate Acquisition as if
they occurred on January 1, 2005. The Acquisition was accounted for under the
purchase method of accounting in accordance with SFAS No. 141. Under the
purchase method of accounting, the total purchase price was allocated to the
assets acquired and liabilities assumed based upon the fair values at the
completion of the acquisitions.
The unaudited pro forma condensed combined statement of operations has been
prepared for illustrative purposes and are not necessarily indicative of the
condensed consolidated results of operations in future periods or the results
that actually would have been realized had the acquisition actually occurred on
January 1, 2005. The pro forma adjustments are based on the information
available at the time of the preparation of this document.
The unaudited pro forma condensed combined statement of operations should be
read in conjunction with the audited consolidated financial statements of Gales
Industries Incorporated as of December 31, 2005.
Year Ended
December 31, 2005
-----------------
(Unaudited)
-----------
Net sales $30,735,103
Cost of Sales 26,361,387
-----------
Gross profit 4,373,716
Operating costs and expenses
Selling and marketing 357,854
General and Administrative 2,583,375
-----------
Income from operations 1,432,487
Other expenses
Interest and financing costs 1,056,317
-----------
Income before income taxes 376,170
Provision for income taxes 151,031
-----------
Net Income $ 225,139
===========
Earnings per share
Basic $ 0.02
===========
Diluted $ 0.01
===========
Weighted average shares
outstanding Basic 14,723,421
===========
Diluted 40,282,810
===========
F-28
GALES INDUSTRIES INCORPORATED
Notes to the Consolidated Financial Statements
Note 16. SUBSEQUENT EVENTS
Sigma Metals, Inc
On January 2, 2007, the Company entered into a Stock Purchase Agreement (the
"Sigma Agreement") with Sigma Metals, Inc., a New York corporation ("Sigma
Metals"), and the holders of all of the outstanding shares of Sigma Metals (the
"Shareholders"). Pursuant to the Sigma Agreement, subject to the satisfaction of
various terms and conditions, the Company will acquire from the Shareholders all
of the issued and outstanding capital stock of Sigma Metals.
The closing of the Sigma Agreement is scheduled to occur in April 2007 or on
such other date as the Company and the Shareholders may agree. The purchase
price for all of the shares is $5,008,204 plus an amount equal to Sigma Metals'
earnings for the period from January 1, 2006, until the closing, subject to
certain adjustments as set forth in the Sigma Agreement.
Conversion of Notes Payable
On January 26, 2007, the two senior management members exercised their right to
convert their $665,262 notes plus accrued interest of $54,511 into an aggregate
of 1,799,432 shares of common stock at a conversion price of $0.40 per share.
(See Note 9)
Welding Metallurgy, Inc
On March 9, 2007, the Company entered into a Stock Purchase Agreement (the
"Welding Agreement") to acquire Welding Metallurgy, Inc., a New York corporation
("Welding Metuallurgy"), from the holders (the "Shareholders") of all of the
outstanding shares of Welding Metallurgy. Pursuant to the Welding Agreement,
subject to the satisfaction of various terms and conditions, the Company will
acquire from the Shareholders all of the issued and outstanding capital stock of
Welding Metallurgy for aggregate consideration of $6,050,000, subject to
adjustment for working capital, payable in a combination of cash, a secured
promissory note and shares of the Company's common stock.
On February 13, 2007, each of the non-management members of the Board was issued
an option to purchase 100,000 shares of the common stock of the Company. The
options will vest in equal thirds on March 1, 2007, 2008 and 2009 and are
exercisable at a price of $0.27 per share until March 1, 2014.
In March 2007, the Company entered into an Agreement to compensate James Brown
for services to be rendered as a director of the Company. Pursuant to such
Agreement Mr. Brown will receive a cash payment of $15,000 and will be
compensated at a rate of $175,000 per annum until December 31, 2007, or if prior
to December 31, 2007, until such date as he shall cease to serve as Chairman. In
addition to his cash compensation, Mr. Brown was issued 200,000 shares of common
stock of the Company, pursuant to a Restricted Stock Agreement, of which 100,000
vested on the date of grant and the second 100,000 shall vest on December 31,
2007.
The Company and Michael A. Gales entered into a Separation Agreement and General
Release (the "Separation Agreement") effective March 16, 2007, whereby Mr. Gales
resigned from his positions with the Company. Pursuant to the Separation
Agreement, the Employment Agreement between Mr. Gales and the Company terminated
effective March 16, 2007. In lieu of the compensation payable to Mr. Gales
pursuant to his Employment Agreement, from March 16, 2007, to November 30, 2010,
Mr. Gales will be paid $100,000 per annum; from December 1, 2010 to May 31,
2011, he will be paid $50,000. In addition, if the Company achieves certain
agreed-upon levels of performance he may receive up to an additional $50,000.
Upon the execution of his employment agreement the Company granted Mr. Gales
options to purchase 1,250,000 shares of Common Stock, subject to an agreed upon
vesting schedule and exercisable over a ten-year period commencing on the date
of grant. Pursuant to the Separation Agreement, all unvested options held by Mr.
Gales vested as of March 16, 2007, and the right to exercise all of his options
will terminate as of March 16, 2008.
F-29
AIR INDUSTRIES MACHINING, CORP.
Predecessor to Air Industries Group, Inc.
FINANCIAL STATEMENTS
(PRIOR TO MERGER)
NOVEMBER 30, 2005
F-30
Independent Accountants' Report
To the Board of Directors and Stockholders of Air Industries Machining
Corporation
We have audited the accompanying Consolidated Balance Sheets of Air
Industries Machining Corporation as of November 30, 2005, and the related
Consolidated Statement of Income and Retained Earnings and Cash Flows for the
eleven months ended November 30, 2005. These consolidated financial statements
are the responsibility of the Air Industries Machining Corporation management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred above
present fairly, in all material respects, the financial position of Air
Industries Machining Corporation as of November 30, 2005, and the results of its
operations and its cash flows for the eleven months then ended in conformity
with accounting principles generally accepted in the United States.
Respectfully submitted,
BILDNER & GIANNASCO, LLP
Certified Public Accountants
Jericho, New York
February 28, 2006
F-31
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheet
ASSETS November 30, 2005
-----------------
Current Assets
Cash and Cash Equivalents $ 71,197
Accounts Receivable 3,202,991
Inventory 11,588,521
Prepaid Expenses 174,850
Other Current Assets 4,215
Deposits 192,972
-----------
Total Current Assets $15,234,746
Property, plant and equipment, net 3,919,599
Security Deposits 34,522
Cash Surrender Value - Officer's Life 62,761
Unamortized Finance Costs 102,187
-----------
Total Assets $19,353,815
===========
The accompanying audit report and notes are an integral part of these
statements.
F-32
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheet
LIABILITIES AND STOCKHOLDERS' EQUITY November 30, 2005
-----------------
Current Liabilities
Accounts Payable $ 4,429,016
Advance Payment - Customer 293,226
Mortgage Payable - Current 96,000
Dividends Payable
511,055
Obligations Under Capital Lease - Current 359,197
Notes Payable - Banks 5,180,000
Accrued Operating Expenses 1,074,025
------------
Total Current Liabilities 11,942,519
Long Term Liabilities
Advances From Shareholders 464,992
Mortgage Payable 1,145,813
Obligations Under Capital Lease - Long Term 849,652
------------
Total Long Term Liabilities 2,460,457
------------
Total liabilities 14,402,976
------------
Commitments and contingencies
Minority interest 446,805
Stockholders' Equity
Capital Stock - 200 Shares Authorized
No Par Value, 95 Shares Issued and Outstanding
As of November 30, 2005 32,223
Additional Paid-In Capital 221,580
Retained Earnings 4,346,231
Less: Treasury Stock at Cost (96,000)
------------
Total Stockholders' Equity 4,950,839
------------
Total Liabilities and Stockholders' Equity $ 19,353,815
============
The accompanying audit report and notes are an integral part of these
statements.
F-33
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Statement of Income and Retained Earnings
Audited Unaudited Pro Forma (1)
ELEVEN MONTHS ENDED ELEVEN MONTHS ENDED
November 30, 2005 November 30, 2005
Net sales $27,957,694 $27,957,694
Cost of sales 23,887,120 23,887,120
----------- -----------
Gross profit 4,070,574 4,070,574
----------- -----------
Operating expenses
Selling 322,867 $ 322,867
General and administrative 1,665,793 1,665,793
----------- -----------
Total operating expenses 1,988,660 1,988,660
----------- -----------
Income from operations 2,081,914 2,081,914
Interest and financing costs 605,602 605,602
----------- -----------
Income before minority interest and
income taxes 1,476,312 1,476,312
Less: minority interest 74,904 74,904
----------- -----------
Income before provision for income taxes 1,401,408 1,401,408
Provision for income taxes (1) -- 560,843
----------- -----------
Net Income 1,401,408 $ 840,565
----------- ===========
Retained Earnings, Beginning of Period 4,120,102
Deduct: Distribution to Shareholders (1,175,279)
-----------
Retained Earnings, End of Period $ 4,346,231
===========
(1) Since our inception we have elected to be treated as a Subchapter " S"
corporation of the Internal Revenue Code and incurred no income taxes. The pro
forma amounts include income taxes that would have been incurred if the Company
had been a "C" corporation. The effective rate of the pro forma income tax is
40.02% and is based upon the combined Federal and State tax rates that were in
effect for the period December 1, 2005 to December 31, 2005 when the company
became a "C" corporation.
F-34
AIR INDUSTRIES MACHINING CORPORATION
Statement of Cash Flows
Eleven Months
Ended
November 30,
2005
-----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,401,408
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation And Amortization 522,299
Minority Interest in Net Income 74,904
Non Cash Interest Expense 24,342
Changes in Assets and Liabilities:
(Increase) Decrease In Assets-
Accounts Receivable (559,455)
Inventory (730,065)
Prepaid Expenses (42,582)
Other Current Assets 1,264
Deposits (171,812)
Cash Surrender Value - Officer's Life 200,875
Increase (Decrease) In Liabilities-
Accounts Payable 736,956
Dividends Payable 390,599
Advance Payments - Customers (1,061,040)
Accrued Expenses 570,347
Advances from Shareholders 197,435
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,555,475
-----------
CASH FLOWS (USED) IN INVESTING ACTIVITIES
Purchase of Equipment (301,051)
-----------
NET CASH (USED) IN INVESTING ACTIVITIES (301,051)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Credit Line Facilities 304,388
Principle Payments of Capital Lease Obligations (264,396)
Principle Payments of Mortgage (81,973)
Repayment of Notes Payable (100,000)
Distribution to Shareholders (1,090,521)
-----------
NET CASH (USED) IN FINANCING ACTIVITIES (1,232,502)
-----------
Net increase in cash and cash equivalents 21,922
Cash and cash equivalents, beginning of year 49,275
-----------
Cash and cash equivalents, end of year $ 71,197
===========
Supplementary disclosure of cash flow information
Cash Paid During The Year For Interest $ 566,467
===========
Supplementary noncash disclosure of financing activities
Equipment acquisition through capital lease financing $ 449,559
===========
The accompanying audit report and notes are an integral part of these
statements.
F-35
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
1- SIGNIFICANT ACCOUNTING POLICIES
Background of Company
Air Industries Machining Corporation ("Air" or "The Company"), founded in 1969,
was incorporated in the State of New York and maintains its principal place of
business in Bay Shore, New York. The Corporation is primarily engaged in
manufacturing aircraft structural parts and assemblies principally for prime
defense contractors in the aerospace industry machining parts for the aerospace
industry predominantly located in the United States. The Company's customer base
consists mainly of publicly traded companies in the aerospace industry.
Principles of Consolidation
The Company's consolidated financial statements include those of variable
interest entities ("VIEs"). Conditions in which the Company would consolidate
VIE's are cases in which the Company is the primary beneficiary. Conditions
under which the Company would consolidate entities that are not VIE's are cases
in which the Company would maintain a controlling interest (50% or more)
investment or exert significant management influence. (See Note 11).
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with an
original maturity of three months or less. Cash consists of aggregate cash
balances in the Company's bank accounts and cash equivalents consist primarily
of money market accounts.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal balances.
The Company writes off accounts when they are deemed to be uncollectible. The
Company has experienced insignificant amounts of bad debts in such accounts.
Inventories
The Company values inventory at the lower of cost on a first-in-first-out basis
or market.
The Company purchases inventory only when it has signed non-cancellable
contracts with its customers for orders of its finished goods. The Company
occasionally produces finished goods in excess of purchase order quantities in
anticipation of future purchase order demands but historically this excess has
been used in fulfilling future purchase orders. The Company occasionally
evaluates inventory items that are not secured by a purchase orders and reserves
for obsolescence accordingly. The Company also reserves an allowance for excess
quantities, slow-moving goods, and obsolete items.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. The Company maintains a policy to capitalize all property and
equipment purchases in excess of $1,000. Expenditures for repairs and
improvements in excess of $1,000 that add to the productive capacity or extend
the useful life of an asset are capitalized. Repair and maintenance charges are
expensed as incurred. Property under a capital lease is capitalized and
amortized over the lease terms. Upon disposition, the cost and related
accumulated depreciation are removed from the accounts and any related gain or
loss is reflected in earnings. Depreciation on plant and equipment is calculated
on the straight-line method over the estimated useful lives of the assets.
F-36
The useful lives of property, plant and equipment for purposes of computing
depreciation are:
Tools and instruments ................ 7 Years
Leasehold improvements................ 25 Years
Machinery and equipment .............. 5-8 Years
Automotive Equipment.................. 5 Years
Furniture and fixtures................ 5-8 Years
Buildings............................. 25-31.5 Years
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility level
annually or if events or circumstances indicate that the carrying value of such
assets may not be fully recoverable. Impairment is evaluated based on the sum of
undiscounted estimated future cash flows expected to result from use of the
assets compared to its carrying value. If impairment is recognized, the carrying
value of the impaired asset is reduced to its fair value, based on discounted
estimated future cash flows.
Finance Costs
Costs connected with obtaining and executing debt arrangements are capitalized
and amortized on the straight-line basis over the term of the related debt.
Revenue Recognition
The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists, and the
sales price is fixed or determinable. Payments received in advance from
customers for products delivered are recorded as customer advance payments until
earned, at which time revenue is recognized.
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs, tooling and
those indirect costs related to manufacturing, such as indirect labor, supplies,
tools, repairs and depreciation costs.
Expenses
Selling, general, and administrative costs are charged to expense as incurred.
F-37
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
Income Taxes
The Company, with the consent of its stockholders, elected under the Internal
Revenue Code and New York State law to be taxed as an "S" corporation. In lieu
of corporate income taxes, the stockholders are taxed on their proportionate
share of the company's net income. Accordingly, no provision for federal income
taxes has been made in the accompanying financial statements.
Use of Estimates
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. The more significant management estimates are the useful
lives of property and equipment, provisions for inventory obsolescence,
unamortized finance costs, accrued expenses and various contingencies. Actual
results could differ from those estimates. Changes in facts and circumstances
may result in revised estimates, which are recorded in the period in which they
become known.
Credit Risk
Financial instruments involving potential credit risk include accounts
receivable. Of the accounts receivable balance outstanding as of November 30,
2005, approximately 54% is attributed to two customers.
Treasury Stock
The Company records treasury stock under the cost method.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments." Management of the Company believes that
the fair value of financial instruments, consisting of cash, accounts
receivable, accounts payable and accrued liabilities, approximates carrying
value due to the immediate or short-term maturity associated with these
instruments and that the notes payable is carried at fair value in that it
carries interest rates that are comparable to similar instruments with similar
maturities.
Reclassifications
Certain reclassifications have been made to prior year's financial statement
information to conform to the current year presentation.
F-38
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
2- INVENTORY
The components of inventory consisted of the following as of November 30, 2005:
November 30, 2005
-----------------
Raw Materials $ 2,294,020
Work in Progress 2,639,006
Finished Goods 6,655,495
-------------
Total Inventory $ 11,588,521
=============
3- PROPERTY, PLANT AND EQUIPMENT
The components of property and equipment as of November 30, 2005 include:
November 30, 2005
-----------------
Land $ 134,922
Building 3,173,071
Machinery and Equipment 8,541,083
Tools and Instrument 279,803
Leasehold Improvements 515,211
Automotive Equipment 290,083
Furniture and fixtures 872,112
------------
Total property, plant, and equipment 13,806,285
------------
------------
Less: Accumulated Depreciation (9,886,686)
------------
------------
Property, plant, and equipment, net $ 3,919,599
============
Depreciation and amortization expense for the eleven months ended November 30,
2005 was $477,827.
F-39
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
4- NOTES PAYABLE - BANKS
The Company has negotiated a credit facility dated August of 2003 with a major
lending institution with a termination date of March of 2006. The facility is
secured by a first priority interest in all accounts receivable, inventory and
equipment presently owned or hereafter acquired by the Company. The indebtedness
bears interest at the rate of 1/2 percent above the prime rate of interest or a
libor margin of 3%.
The terms of the facility require that, among other things, the Company maintain
certain financial ratios and levels of working capital. As of November 30, 2005,
the Company has met these terms.
The loans are guaranteed jointly and severally by the principals of the Company,
as well as the affiliated companies KPK Realty Corporation and DPPR Realty Corp.
(See Note 9)
Interest expense related to the notes payable - bank amounted to $337,447 for
the eleven months ended November 30, 2005.
5- ADVANCES FROM SHAREHOLDERS
Advances represent non-interest bearing advances from shareholders to cover the
Company's working capital needs. The Company imputed as interest based on the
prime rate and recorded as interest expense and additional paid in capital an
amount of $24,342 for the eleven months ended November 30, 2005.
5A- DISTRIBUTIONS TO SHAREHOLDERS
The Company distributed to its shareholders $1,175,279 during the eleven months
ended November 30, 2005. These distributions were made from time to time to the
Company's shareholders in proportion to their ownership interests in the Company
at such times as it had sufficient cash on hand or availability under its lines
of credit.
6- MORTGAGE PAYABLE
As the Company consolidates the assets and liabilities of variable interest
entities (see Note 11) it has two mortgages covering buildings and land. These
mortgages carry interest rates of 6.15% and 7.18% per annum.
F-40
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
Future mortgage payments are as follows for the period ended November 30, 2005:
Year Amount
---- ----------
2006 $ 126,000
2007 128,000
2008 139,000
2009 133,000
2010 142,000
Thereafter 573,813
----------
1,241,813
Less: current maturities: 96,000
----------
Long term $1,145,813
==========
6A. CASH SURRENDER VALUE - LIFE INSURANCE
The Company is the owner and beneficiary of key-man life insurance policies
carried on the lives of certain key executives with cash surrender values. The
aggregate face amounts of the policies were $4,250,000 for the eleven months
ended November 30, 2005. There are loans in place against these policies. As of
November 30, 2005 the cash surrender value was $62,761, net of $226,632 in
loans. As the Company has the right to offset the loans against the cash
surrender value of the policies, the Company presents the net asset in its
consolidated financial statements.
7- CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing
equipment and computer equipment. All leases have bargain purchase options that
the Company expects to exercise at the termination of each lease. Capital lease
obligations totaled $1,208,849 as of November 30, 2005.
As of November 30, 2005, future minimum lease payments, including imputed
interest, with remaining terms of greater than one year are as follows:
Year Amount
---- ----------
2006 $ 404,000
2007 428,000
2008 427,000
2009 106,000
----------
Total future minimum lease payments 1,365,000
Less: imputed interest (156,151)
Less: current maturities (359,197)
----------
Total long-term capital lease obligation $ 849,652
==========
F-41
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
8- EMPLOYEE BENEFITS PLANS
On January 1, 1997, the Company instituted a defined contribution plan under
Section 401(k) of the Internal Revenue Code ("the Plan"). Pursuant to the Plan
qualified employees may contribute a percentage of their pretax eligible
compensation to the Plan. The Company does not match any contributions that
employees may make to the Plan.
The employees of the Company are members of the United Service Workers Union
IUJAT Local 355 (the "Union'), which provides a medical benefit plan at defined
rates which are contributed in their entirety by the Company. For the
eleven-month period ending November 30, 2005, the Company contributed $1,279,743
to the plan.
9- RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and certain related
parties.
The Company presently leases manufacturing and office space from KPK Realty
Corp. a corporation in which 49% is owned by the majority stockholder of the
Company.
Additionally, the Company leases manufacturing space from DPPR Realty Corp.
which is 100% owned by two of the shareholders of the Corporation who in the
aggregate own 36.84% of the Company.
KPK Realty Corp. and DPPR Realty Corp. are considered variable interest entities
under FIN 46 (See Note 11) and accordingly, their assets, liabilities and
results of operations have been consolidated into the Company's financial
statement.
10- COMMITMENTS AND CONTINGENCIES
Litigation
A legal action has been brought against the Company for personal injuries
sustained by an independent contractor as a result of a fall on the Company's
premises. The Company has insurance coverage for this claim in the amount of
$4,000,000. The carrier has assumed the defense of this action and at a
settlement mediation, the plaintiff made a demand of $2,000,000 which was
rejected by the carrier. The Company believes that any judgement or settlement
in this matter will be paid by the carrier.
F-42
AIR INDUSTRIES MACHINING CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2005
11- VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.
Under FIN 46, we are required to consolidate variable interest entities for
which we are deemed to be the primary beneficiary by the third quarter of 2003,
and disclose information about those in which we have significant variable
interests effective immediately.
The Company has leasing arrangements for its operating and manufacturing
facilities with two lessors. Under FIN 46 these lessors are Variable Interest
Entities and the Company is the primary beneficiary. Therefore, the Company has
consolidated the respective lessors' assets and debt into these consolidated
statements. At November 30, 2005, these entities had gross assets of $1,900,000
and gross liabilities of $985,000. These facilities were subsequently purchased
in connection with a merger transaction in November 2005. The minority interest
on the Company's financial statements consists of the non-controlling portion of
these respective entities (See Note 9).
12- SUBSEQUENT EVENTS
On November 30, 2005 merger agreements were consummated between the Company and
an Acquisition Entity and between the Acquisition Entity and a Public Entity
whose stock is traded in Over the Counter Market. Contemporaneously with the
merger agreements, the Company secured $14,000,000 in debt facilities from a
major lending institution and used funds from the facility to purchase real
property that it had subsequently leased and paid off debts to its prior lender.
As part of the merger agreements, the Acquisition Entity completed the first of
two closings of private placement stock offerings which grossed $9,000,000 in
the aggregate. These transactions and their associated costs have not been
reflected in these financial statements.
F-43
SIGMA METALS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2006
DECEMBER 31, 2005
F-44
Independent Auditors' Report
Board of Directors
Sigma Metals, Inc.
We have audited the accompanying Comparative Balance Sheets of Sigma
Metals, Inc. as of December 31, 2006 and December 31, 2005 and the related
Statements of Income and Retained Earnings, and Cash Flows for each of the years
then ended. These financial statements are the responsibility of the Sigma
Metals, Inc. management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sigma Metals, Inc. as of
December 31, 2006 and December 31, 2005, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
the accompanying schedules of expenses is presented only for supplementary
analysis purposes. Such information has not been subjected to the inquiry and
analytical procedures applied in the review of the basic financial statements,
but was compiled from information that is the representation of management,
without audit or review. Accordingly, we do not express an opinion or any other
form of assurance on the supplementary information.
Respectfully submitted,
BILDNER & GIANNASCO, LLP
Certified Public Accountants
Jericho, New York
March 19, 2007
F-45
SIGMA METALS, INC.
Comparative Balance Sheets
ASSETS DECEMBER 31, 2006 DECEMBER 31, 2005
------ ----------------- -----------------
CURRENT ASSETS
Cash and Cash Equivalents $ 44,798 $ 21,477
Accounts Receivable 2,392,947 975,951
Inventory 2,812,873 1,355,606
Prepaid Expenses 27,818 16,325
---------- ----------
TOTAL CURRENT ASSETS $5,278,436 $2,369,359
---------- ----------
FIXED ASSETS - AT COST
Property and Equipment $ 290,775 $ 200,320
Less: Accumulated Depreciation 158,780 135,018
---------- ----------
FIXED ASSETS - NET $ 131,995 $ 65,302
---------- ----------
OTHER ASSETS
Security Deposits $ 22,763 $ 19,117
Other Assets 851 400
---------- ----------
TOTAL OTHER ASSETS $ 23,614 $ 19,517
---------- ----------
TOTAL ASSETS $5,434,045 $2,454,178
========== ==========
The accompanying audit report and notes are an integral
part of these statements.
F-46
SIGMA METALS, INC.
Comparative Balance Sheets
LIABILITIES AND
STOCKHOLDERS' EQUITY DECEMBER 31, 2006 DECEMBER 31, 2005
-------------------- ----------------- -----------------
CURRENT LIABILITIES
Accounts Payable $2,035,030 $1,081,994
Notes Payable - SBA 7,345 17,054
Notes Payable - State Bank - Software 26,196 --
Notes Payable - State Bank 897,800 666,702
Lease Payable -- 3,061
Accrued Operating Expenses 282,592 157,552
---------- ----------
TOTAL CURRENT LIABILITIES $3,248,963 $1,926,363
---------- ----------
LONG-TERM LIABILITIES
Advances from Stockholders $ 257,000 $ 250,000
Notes Payable - SBA -- 7,338
---------- ----------
TOTAL LONG-TERM LIABILITIES $ 257,000 $ 257,338
---------- ----------
TOTAL LIABILITIES $3,505,963 $2,183,701
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock ($300 par value;
100 shares authorized and outstanding) $ 30,000 $ 30,000
Retained Earnings 1,898,082 240,477
---------- ----------
TOTAL STOCKHOLDERS' EQUITY $1,928,082 $ 270,477
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,434,045 $2,454,178
========== ==========
F-47
SIGMA METALS, INC.
Comparative Statements of Income and Retained Earnings
FOR THE YEAR ENDED
------------------
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------- -----------------
REVENUE $ 17,979,414 $ 11,783,651
------------ ------------
COST OF GOODS SOLD
Inventory, Beginning 1,355,606 $ 753,041
Purchases 13,375,354 8,769,224
Testing & Tolling $ 295,646 $ 194,838
Manufacturing Overhead 608,761 542,239
------------ ------------
$ 15,635,367 $ 10,259,342
Less: Inventory, Ending 2,812,873 1,355,606
------------ ------------
COST OF GOODS SOLD $ 12,822,494 $ 8,903,736
------------ ------------
GROSS PROFIT $ 5,156,920 $ 2,879,915
------------ ------------
EXPENSES
Selling 923,847 770,409
General and Administrative 2,218,053 1,865,417
Interest 129,490 139,553
Franchise Tax 425 425
------------ ------------
TOTAL EXPENSES $ 3,271,815 $ 2,775,804
------------ ------------
NET INCOME FOR YEAR $ 1,885,105 $ 104,111
DISTRIBUTIONS (227,500) (66,000)
RETAINED EARNINGS, BEGINNING OF YEAR 240,477 202,366
------------ ------------
RETAINED EARNINGS, END OF YEAR $ 1,898,082 $ 240,477
============ ============
The accompanying audit report and notes are an integral
part of these statements.
F-48
SIGMA METALS, INC.
Comparative Statements of Cash Flows
FOR THE YEAR ENDED
------------------
DECEMBER 31, DECEMBER 31,
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income for Year $ 1,885,105 $ 104,111
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Depreciation 23,761 17,338
Changes in Assets and Liabilities:
(Increase) Decrease In -
Accounts Receivable (1,416,996) 225,960
Inventory (1,457,267) (602,565)
Prepaid Expenses (11,493) 1,315
Other Current Assets (451) (400)
Deposits (3,646) (4,847)
Increase (Decrease) In -
Accounts Payable 953,037 101,237
Lease Payable (3,061) 3,061
Accrued Operating Costs 125,040 87,604
----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (Forward) $ 94,029 $ (67,186)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment $ (90,455) $ (26,123)
----------- -----------
NET CASH (USED) BY
INVESTING ACTIVITIES (Forward) $ (90,455) $ (26,123)
----------- -----------
F-49
SIGMA METALS, INC.
Comparative Statements of Cash Flows
(Continued)
FOR THE YEAR ENDED
------------------
DECEMBER 31, DECEMBER 31,
2006 2005
------------ ------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (Forward) $ 94,029 $ (67,186)
--------- ---------
NET CASH (USED) BY
INVESTING ACTIVITIES (Forward) $ (90,455) $ (26,123)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Bank Debt $ 231,098 $ 179,500
Increase (Decrease) in Notes Payable Equipment 9,149 (16,365)
Increase in Shareholders Loans 7,000 10,626
Distributions (227,500) (66,000)
--------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES $ 19,747 $ 107,761
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 23,321 $ 14,452
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 21,477 7,025
--------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 44,798 $ 21,477
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 122,490 $ 139,553
--------- ---------
Income Taxes Paid $ 425 $ 425
--------- ---------
The accompanying audit report and notes are an integral
part of these statements.
F-50
SIGMA METALS, INC.
Notes to Financial Statements
For the Years Ended
December 31, 2006
December 31, 2005
1- SIGNIFICANT ACCOUNTING POLICIES
Background of Company
Sigma Metals, Inc. ("The Company") is a stocking aircraft metals warehouse with
value added capability. The Company also services the critical needs of aircraft
manufacturers and the major airlines. The Company is located in Deer Park, New
York. Its customer base consists of both foreign and domestic Corporations.
Cash & Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with an
original maturity of three month or less. Cash consists of aggregate cash
balances in the Company's bank accounts and cash equivalents consist primarily
of money market accounts.
Accounts Receivable
Accounts receivable are presented at face value, net of the allowance for
doubtful accounts. The allowances for doubtful accounts are established through
provisions charged against income and are maintained at a level believed
adequate by management to absorb estimated bad debts based on current economic
conditions. Management considers all accounts to be collectible and, therefore,
has not established a provision for uncollectible accounts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of trade accounts receivable. The Company grants credits to
its customers, which are located in and out of the United States. The Company
does have foreign sales, but they are primarily with large corporations that the
Company has done business with for a number of years. The majority of these
transactions are insured.
Inventory
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. The Company maintains a policy to capitalize all property and
equipment purchases in excess of $1,000. Expenditures for repairs and
improvements in excess of $1,000 that add to the productive capacity or extend
the useful life of an asset are capitalized. Repair and maintenance charges are
expensed as incurred. Property under a capital lease is capitalized and
amortized over the lease terms. Upon disposition, the cost and related
accumulated depreciation are removed from the accounts and any related gain or
loss is reflected in earnings. Depreciation on property and equipment is
calculated on the straight-line method over the estimated useful lives of the
assets.
F-51
Property and Equipment - (Continued)
Depreciation and Amortization are provided by charges to operations over the
estimated useful lives, principally on the straight-line method. The estimated
useful lives are:
Tools 5 Years
Furniture, Fixtures and Office Equipment 5 Years
Transportation Equipment 5 Years
Machinery and Equipment 7 Years
Leasehold Improvements 3-15 Years
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment at the facility level
annually or when events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated based on the
sum of undiscounted estimated future cash flows expected to result from use of
the assets compared to their carrying value. If impairment is recognized, the
carrying value of the impaired asset is reduced to their fair value, based on
discounted estimated future cash flows.
Finance Costs
Costs connected with obtaining and executing debt arrangements are capitalized
and amortized on the straight-line basis over the term of the related debt.
Revenue Recognition
The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists, and the
sales price is fixed or determinable.
Expenses
Selling, general, and administrative costs are charged to expense as incurred.
Use of Estimates
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. The more significant management estimates are the useful
lives of property and equipment, provisions for inventory obsolescence,
unamortized finance costs, accrued expenses, and various contingencies. Actual
results could differ from those estimates. Changes in facts and circumstances
may result in revised estimates, which are recorded in the period in which they
become known.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments."
F-52
Fair Value of Financial Instruments -- (Continued)
Management of the Company believes that the fair value of financial instruments,
consisting of cash, accounts receivable, accounts payable and accrued
liabilities, approximates carrying value due to the immediate or short-term
maturity associated with these instruments and that the notes payable is carried
at fair value in that is carries interest rates that are comparable to similar
instruments with similar maturities.
Income Taxes
The Company has elected to be taxed as a Small Business Corporation and,
consequently, no Federal tax liability is reflected on the Comparative
Statements of Income and Retained Earnings.
2- INVENTORY
Inventory consists primarily of sheet metal and is considered all raw materials.
Raw Material (Sheet Metal) 2006 2005
---- ----
$2,812,873 $1,355,606
3- PROPERTY AND EQUIPMENT
A schedule of Property and Equipment as of December 31, 2006 and December 31,
2005 is set forth below:
2006 2005
---- ----
Tools, Machinery and Equipment $ 107,702 $ 92,724
Furniture, Fixtures and Office Equipment 112,578 59,337
Transportation Equipment 17,006 7,006
Leasehold Improvements 53,489 41,253
Total Property, and Equipment $ 290,775 $ 200,320
Less: Accumulated Depreciation (158,780) (135,018)
Property. and Equipment. Net $ 131,995 $ 65,302
Depreciation and amortization expense for the years ended December 31, 2006 and
December 31, 2005 was $23,761 and $17,338, respectively.
4- LINES OF CREDIT
The Company had a Bank Line of Credit expiring on May 31, 2006 with a maximum
borrowing limit of $800,000 and interest at one and one half over prime. The
prime interest rate at December 31, 2006 and December 31, 2005 was 8.25% and
7.25% respectively. The Line of Credit was renewed for a maximum borrowing limit
of $900,000 and interest at one and one half over prime. This new Line of Credit
is due to expire on May 31, 2007. As of December 31, 2006 and 2005 the balance
was $897,800 and $666,702, respectively.
F-53
4- LINES OF CREDIT - (Continued)
The Line of Credit is secured by a first security interest in all assets. The
Line of Credit is due on demand or, if no demand is made, in one payment of all
outstanding principal plus accrued unpaid interest on May 31, 2007, at which
time it is subject to annual review, pending receipt of the subject's financial
statements.
5- NOTES PAYABLE - SOFTWARE
In March of 2006, the Company financed the purchase of new computer software
with State Bank of Long Island in the amount of $50,000. The terms of the Note
are 2 years at 8% payable monthly in the amount of $2,261.36. As of the Balance
Sheet date, the current balance was $26,196. Interest incurred amounted to
$2,311.37.
Scheduled amortization payments for the following years are set forth below:
December 31, 2007 $25,980
December 31, 2008 216
6- LONG TERM DEBT
The Company has an SBA Loan of $50,000, payable in monthly installments of
$1,477 that started on June 17, 2004 with an interest rate of 4%. The loan is
secured by the Company's assets. This loan matures in May of 2007.
Scheduled amortization payments for the following years are set forth below:
2006 2005
---- ----
December 31, 2006 -- $17,054
December 31, 2007 $7,345 7,345
Retirement Plan
The Company adopted a 401(k) Profit Sharing Plan effective June 6, 1994. The
terms of the Plan are as follows:
CONTRIBUTION: Up to 25% of Plan Participations' Compensation.
ALLOCATION- EMPLOYER: 3.32% of Annual Compensation greater than Cov. Comp.
plus 3.32070% of Annual Compensation. Cov. Comp. is
based upon $72,001 year.
NORMAL RETIREMENT AGE: 65 or 5 years of Participation, if later.
FORFEITURES: Allocated to Participants' Accounts.
ELIGIBILITY: All Non-Union Employees over the Age of 21 who completed
1 year of service.
DEATH BENEFIT: 100% of the Total Account
F-54
Retirement Plan -- (Continued)
DISABILITY: 100% of the Total Account
EMPLOYEES CONTRIBUTIONS: Up to 100% of Annual Compensation. (Maximum $14,000)
MATCHING CONTRIBUTIONS: 0.00% of Employee deferral up to 0.00% of Compensation
deferred.
Vesting Schedule
----------------
Year Pct Vested
---- ----------
1 0
2 20
3 40
4 60
5 80
6-15 100
The contributions for December 31, 2006 and December 31, 2005 were $76,790 and
$76,551 respectively.
Shareholder Loans
Two of the major shareholders have advanced the Company $125,000 each for
working capital. These notes are payable on demand and bear interest at a rate
of 6%. They also have been subordinated to State Bank of Long Island.
Commitments and Contingencies
The Company presently leases manufacturing and office facilities under a lease
expiring January 31, 2008, at an annual rental of approximately $22,000, plus
annual real estate tax and utilities by the lessee.
This lease is between the Company and Giaquinto -- Lusting Associates, LLC, a
Limited Liability Company.
Subsequent Events
On January 2, 2007, the Company entered into a Stock Purchase Agreement (the
"Sigma Agreement") with Air Industries Group, Inc., a Delaware Corporation
and the holders of all of the outstanding shares of Sigma Metals (the
"Shareholder"). Pursuant to the Sigma Agreement, subject to the satisfaction of
various terms and conditions, the Company will acquire from the Shareholders all
of the issued and outstanding capital stock of Sigma Metals.
The closing of the Agreement is scheduled to occur in April of 2007 or on such
other date as the Company and the Shareholders may agree. The purchase price for
all of the shares is $5,008,204, plus an amount equal to Sigma Metals' earnings
for the period from January 1, 2006, until the closing, subject to certain
adjustments as set forth in the Sigma Agreement.
F-55
GALES INDUSTRIES INCORPORATED
Predecessor to Air Industries Group, Inc.
FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited)
F-56
GALES INDUSTRIES INCORPORATED
Condensed Consolidated Balance Sheet
March 31, 2007
(unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ --
Accounts Receivable, Net of Allowance for Doubtful
Accounts of $204,566 2,672,799
Inventory 15,866,131
Prepaid Expenses and Other Current Assets 455,958
Deposits 776,673
------------
Total Current Assets 19,771,561
Property, Plant, and Equipment, net 3,399,089
Deferred Financing Costs 338,294
Other Assets 65,122
Goodwill 1,265,963
Deposits 495,632
------------
TOTAL ASSETS $ 25,335,661
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable and Accrued Expenses $ 7,544,130
Notes Payable - Revolver 5,352,845
Notes Payable - Current Portion 127,776
Notes Payable - Sellers - Current Portion 192,400
Capital Lease Obligations - Current Portion 413,463
Due to Sellers 53,694
Dividends Payable 120,003
Deferred Gain on Sale - Current Portion 38,033
Income Taxes Payable 769,396
------------
Total current liabilities 14,611,740
Long term liabilities
Notes Payable - Net of Current Portion 613,514
Notes Payable - Sellers - Net of Current Portion 577,200
Capital Lease Obligations - Net of Current Portion 524,053
Deferred Tax Liability 461,731
Deferred Gain on Sale - Net of Current Portion 703,609
Deferred Rent 86,929
------------
Total liabilities 17,578,776
------------
Commitments and contingencies
Stockholders' Equity
Preferred Stock - 8,003,716 shares authorized;
Series A - 1,000 shares authorized, 0 shares issued
and outstanding; Series B - 2,000,000 shares authorized,
0 shares issued and outstanding --
Common Stock - $.001 Par, 120,055,746 Shares Authorized
59,579,998 Shares Issued and Outstanding
as of March 31, 2007 59,580
Additional Paid-In Capital 8,855,065
Accumulated Deficit (1,157,760)
------------
Total Stockholders' Equity 7,756,885
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,335,661
============
See notes to condensed consolidated financial statements
F-57
GALES INDUSTRIES INCORPORATED
Condensed Consolidated Statement of Operations
For the three month period ended March 31,
(unaudited)
2007 2006
---- ----
Net sales $ 7,488,130 $ 8,898,272
Cost of Sales 6,239,484 7,385,566
------------ ------------
Gross profit 1,248,646 1,512,706
Operating costs and expenses:
Selling and marketing 95,342 155,702
General and administrative 1,031,450 849,383
------------ ------------
Income from operations 121,854 507,621
Interest and financing costs 130,954 325,050
Gain on sale of life insurance policy -- (53,047)
Gain on Sale of Real Estate (9,509) --
Other Income (1,446) --
Other Expenses 8,578 --
------------ ------------
(Loss) income before income taxes (6,723) 235,618
Provision for income taxes 64,764 99,253
------------ ------------
Net (Loss) Income (71,487) 136,365
Less: Dividend attributable to preferred stockholders -- 180,000
------------ ------------
Net loss attributable to common stockholders $ (71,487) $ (43,635)
============ ============
Loss per share (basic and diluted) $ (0.00) $ (0.00)
============ ============
Weighted average shares outstanding (basic and diluted) 58,833,681 14,723,421
============ ============
See notes to condensed consolidated financial statements
F-58
GALES INDUSTRIES INCORPORATED
Condensed Consolidated Statement of Cash Flows
For the three month period ended March 31,
(Unaudited)
2007 2006
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $ (71,487) $ 136,365
Adjustments to Reconcile Net Income (Loss) to Net
Cash Used in Operating Activities:
Depreciation and amortization of property and equipment 166,227 138,111
Bad Debt Expense 28,108 --
Non-Cash Compensation Expense 207,598 25,905
Warrants issued for services 31,303 --
Accrued Interest on Notes Payable-Sellers 16,604 --
Amortization of deferred financing costs 30,754 35,148
Gain on Sale of Real Estate (9,509) --
Deferred Taxes (51,206) (13,573)
Changes in Assets and Liabilities
(Increase) Decrease in Assets:
Accounts receivable 808,050 (1,181,596)
Inventory (608,490) (926,672)
Prepaid expenses and Other Current Assets (223,209) (112,895)
Deposits (596,217) (11,329)
Cash surrender value - officer's life insurance -- 28,460
Other assets (1,600) 84
Increase (Decrease) in Liabilities:
Accounts payable and accrued expenses (66,389) 1,877,767
Income Taxes Payable 115,970 --
Deferred Rent 47,558 --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (175,935) (4,225)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Paid for Deposit on Leasehold Improvements (47,102) --
Purchase of property and equipment -- (99,645)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (47,102) (99,645)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Principal - Capital Lease Obligations (22,301) (88,944)
Repayment of notes payable to Officers and Sellers (48,100) (148)
Proceeds (repayments) from notes payable, net (31,944) 12,358
Proceeds from Notes Payable-Revolver 325,382 --
----------- -----------
NET CASH PROVIDED BY (USED IN) BY FINANCING ACTIVITIES 223,037 (76,734)
----------- -----------
Net decrease in cash and cash equivalents -- (180,604)
Cash and cash equivalents at the beginning of period -- 1,058,416
----------- -----------
Cash and cash equivalents at the end of period $ -- $ 877,812
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 126,616 $ 170,995
=========== ===========
Supplemental disclosure of non-cash investing
financing activity:
Note Payable-Seller and accrued interest
converted to common stock $ 719,773 --
=========== ===========
See notes to condensed consolidated financial statements
F-59
Note 1. FORMATION AND BASIS OF PRESENTATION
Merger and Acquisition
Ashlin Development Corp. (the "Company" or "Ashlin"), a Florida
corporation and its subsidiary Gales Industries Merger Sub, Inc. ("Merger
Sub"), entered into a Merger Agreement (the "Merger Agreement") on
November 14, 2005 with Air Industries Group, Inc., a privately-held
Delaware corporation ("Original Gales"). On November 30, 2005 (the
"Closing Date") Original Gales merged (the "Merger") into Merger Sub.
Pursuant to the Merger Agreement, the Company issued 10,673,107 shares of
Common Stock (representing 73.6% of Ashlin's outstanding shares) and 900
shares of Series A Convertible Preferred Stock which was initially
convertible into 40,909,500 shares of Common Stock of the Company for all
the issued and outstanding shares of Original Gales the "Successor". As a
result of the transaction, the former stockholders of Original Gales
became the controlling stockholders of Ashlin. Additionally, since Ashlin
had no substantial assets prior to the merger, the transaction was treated
for accounting purposes as a reverse acquisition of a public shell.
Accordingly, for financial statement presentation purposes, Original Gales
is the surviving entity.
On February 15, 2006, Ashlin changed its name to Air Industries Group,
Inc. and its state of domicile from Florida to Delaware.
Prior to the closing of the Merger, Original Gales, which did not have any
business operations other than in connection with the transactions
contemplated by the Merger Agreement, acquired (the "Acquisition") all of
the outstanding capital stock of Air Industries Machining, Corporation
("AIM"). Because of the change in ownership, management and control that
occurred in connection with the Acquisition, in accordance with Statement
of Financial Accounting Standards ("SFAS") 141, Business Combinations, the
transaction was accounted for as a purchase. Accordingly, the purchase
price was allocated to assets acquired and liabilities assumed based on
SFAS No. 141. Simultaneously with the Acquisition, AIM entered into a bank
facility (the "Loan Facility") and used proceeds from the Loan Facility to
acquire real estate (the "Real Estate Acquisition").
Prior to the Acquisition, Original Gales raised bridge financing. In
connection with the Acquisition, Original Gales procured a private
placement of Series A Preferred Stock, the proceeds of which were used to
acquire AIM. Immediately prior to the Merger, Original Gales had
outstanding certain bridge notes convertible into shares of Original
Gales' common stock and certain bridge warrants to purchase shares of
Original Gales' common stock.
Original Gales was formed in October 2004 and, since prior to the
acquisition it did not have any business operations or activity other then
the transactions contemplated with the merger and succeeded substantially
all of the business operations of AIM, AIM is the "Predecessor" to
Original Gales.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures are
adequate to make the financial information presented not misleading. These
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and the
F-60
notes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2006, filed with the Securities and Exchange
Commission on April 2, 2007. All adjustments were of a normal recurring
nature unless otherwise disclosed. In the opinion of management, all
adjustments necessary for a fair statement of the results of operations
for the interim period have been included. The results of operations for
such interim periods are not necessarily indicative of the results for the
full year.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant
management estimates are the useful lives of property and equipment,
provisions for inventory obsolescence, accrued expenses and various
contingencies. Actual results could differ from those estimates. Changes
in facts and circumstances may result in revised estimates, which are
recorded in the period in which they become known.
Share-Based Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 123(R) "Share Based
Payments" which is a revision of SFAS No. 123 "Accounting for Stock-Based
Compensation" and supersedes Accounting Principles Board Opinion No. 25.
SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the statement of
operations based on their fair values at the date of grant. The Company
recorded in the accompanying statement of operations an expense of
$207,598 and $25,905 for the three months period ended March 31, 2007 and
2006, respectively, in accordance with the measurement requirements under
SFAS No. 123(R) (See Note 4). The Company adopted SFAS No. 123(R),
effective in 2005.
Taxes
Effective January 1, 2007, the Company adopted the provisions of the
Financial Accounting Standards Board ("FASB") Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" ("FIN 48"). There were no unrecognized tax benefits as
of January 1, 2007 and as of March 31, 2007. FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected
to be taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by
taxing authorities. Management is currently unaware of any issues under
review that could result in significant payments, accruals or material
deviations from its position. The adoption of the provisions of FIN 48 did
not have a material impact on the Company's financial position, results of
operations and cash flows.
F-61
Recently Issued Accounting Standards
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities" ("SFAS No. 159"). SFAS No. 159 provides
companies with an option to report selected financial assets and
liabilities at fair value, and establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and
liabilities. The new guidance is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the potential
impact of the adoption of SFAS No. 159 on its financial position and
results of operations.
Note 2. CASH SURRENDER VALUE - LIFE INSURANCE
During the quarter ended March 31, 2006, the Company sold one of its
key-man life insurance policies. Proceeds from the sale of the insurance
policy were $86,000 which was offset by the cash surrender value of
$32,953. The resulting gain of $53,047 was recognized as Other
Non-Operating Income in the accompanying Statement of Operations for the
three month period ended March 31, 2006.
Note 3. Conversion of Notes Payable
On January 26, 2007, the two senior management members exercised their
right to convert their $665,262 notes plus accrued interest of $54,511
into an aggregate of 1,799,432 shares of common stock at a conversion
price of $0.40 per share.
Note 4. SHARE-BASED COMPENSATION ARRANGEMENTS
During 2005, the Company's Board of Directors approved a stock option plan
and reserved 10,000,000 shares of its Common Stock for issuance under the
plan. The stock option plan permits the Company to grant non-qualified and
incentive stock options to employees, directors, and consultants. Awards
granted under the Company's plans vest over three, four, five and seven
years.
The Company accounts for its stock option plans under the measurement
provisions of Statement of Financial Accounting Standards No. 123(R)
(revised 2004), Share-Based Payment ("SFAS 123R"). The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option pricing model. During the three months ended March 31, 2007 and
2006, 2,280,000 and 0 stock options were granted, respectively.
Certain of the Company's stock options contain features which include
variability in grant prices. A portion of the currently issued stock
options will be exercisable based on average trading prices of the
Company's Common Stock at the end of a given future period. Due to this
variable feature, these stock options are not deemed to be granted for
purposes of applying SFAS 123(R) and accordingly, their fair value will be
calculated and expensed in future periods.
At March 31, 2007 and 2006, 2,463,333 and 790,000 options are vested and
exercisable, respectively. The weighted average exercise price of
exercisable options at March 31, 2007 was $0.43 per share.
F-62
During the quarter ended March 31, 2007, for services rendered, the Company
accrued the expense related to an aggregate of 20,833 warrants, exercisable
during a five year term, to purchase 20,833 shares of the company's Common
Stock. Such warrants have a "cashless exercise" feature and have varying
exercise prices equal to 120% of the average closing price of the Company's
Common Stock during the month immediately preceding the date of issuance. The
warrants were valued using the Black-Scholes model and the Company recorded an
expense of $5,514 in its consolidated statement of operations for the quarter
ended March 31, 2007. The Company's agreement with this consultant was
terminated during the first week of September 2006.
In addition warrants to acquire 125,000 shares with a grant date of March 16,
2007, were issued to another consulting firm. These warrants are exercisable at
a per share price equal to the average closing price of Company's common stock
for the 20 days preceding the date of grant. These warrants have a cashless
exercise feature and vested on the grant date. The warrants were valued using
the Black-Scholes model and the Company recorded an expense of $25,789 in its
consolidated statement of operations for the quarter ended March 31, 2007.
Note 5. Change in Chairman in of the Board
The Company and its former Executive Chairman entered into a Separation
Agreement and General Release (the "Separation Agreement") effective March 16,
2007, whereby the Chairman resigned from his positions with the Company.
Pursuant to the Separation Agreement, the Employment Agreement between the
Chairman and the Company terminated effective March 16, 2007. In lieu of the
compensation payable to the Chairman pursuant to his Employment Agreement, from
March 16, 2007, to November 30, 2010, the Chairman will be paid $100,000 per
annum; from December 1, 2010 to May 31, 2011, he will be paid $50,000. In
addition, if the Company achieves certain agreed-upon levels of performance he
may receive up to an additional $50,000. These amounts will be expensed in the
period in which services are rendered. Additionally, upon the execution of his
employment agreement the Company granted to the former Chairman options to
purchase 1,250,000 shares of Common Stock, subject to an agreed upon vesting
schedule and exercisable over a ten-year period commencing on the date of grant.
Pursuant to the Separation Agreement, all unvested options then held by the
Executive Chairman, specifically, options to purchase 750,000 shares vested as
of March 16, 2007, and the right to exercise all of his options will terminate
as of March 16, 2008. The exercise price of the 750,000 options that vested as
of March 16, 2007, is $0.673 per shares and based on the Black-Scholes option
pricing model there was an expense of $93,386. This agreement has been further
clarified.
On May 11, 2007, the Company and its former Executive Chairman, entered into a
Letter Agreement, confirming that, due to an oversight between the parties, the
Separation Agreement and Release, dated March 15, 2007, by and between the
Company and this individual (the "Separation Agreement"), failed to indicate
that notwithstanding that the former Chairman was resigning from his positions
with the Company, he would make himself available (i) from time to time for
consultations with members of the Board and senior management of the Company
regarding the business and affairs of the Company, potential acquisitions and
strategic alliances, expansion and other business opportunities and (ii) once
each calendar quarter for meetings to be held in Manhattan, New York, with one
or more members of the Board of the Company to review the Company's strategic
plan.
In March 2007, the Company entered into an Agreement to compensate its new
Chairman for services to be rendered as a director of the Company. Pursuant to
such Agreement the new Chairman will receive a cash payment of $15,000 and will
be compensated at a rate of $175,000 per annum until December 31, 2007, or if
prior to December 31, 2007, until such date as he shall cease to serve as
Chairman. In addition to his cash compensation, this individual was issued
200,000 shares of common stock of the Company, pursuant to a Restricted Stock
Agreement, of which 100,000 vested on the date of grant and the second 100,000
shall vest on December 31, 2007. The Company incurred an expense of $26,000 as a
result of the Restricted Stock Agreement.
F-63
Note 6. Subsequent Events
On April 16, 2007, we acquired all of the issued and outstanding capital
stock of Sigma Metals, Inc. ("Sigma"), pursuant to that certain Stock Purchase
Agreement, dated as of January 2, 2007, by and among the Company, as purchaser,
and each of the three shareholders of Sigma, as sellers (the "Sellers"), in
exchange for $3,988,501 in cash, three promissory notes, one in favor of each
Seller, in total principal amount of $1,084,173, and 7,337,891 shares of our
Common Stock. In addition, upon determination of the earnings of Sigma Metals
for the period from January 1, 2007, through April 16, 2007, the principal of
the notes will be increased by an amount equal to the earnings.
Sigma Metals is a specialty distributor of strategic metals, primarily
aluminum, stainless steels of various grades, titanium and other exotic end user
specified metals. Sigma's products are sold to both aerospace/defense
contractors as well as commercial accounts throughout the U.S. and numerous
international markets. Customers include the world's largest aircraft
manufacturers, subcontractors, original equipment manufacturers and various
government agencies.
To finance the acquisition of Sigma and provide us with additional working
capital, portions of which may be used in connection with future acquisitions,
we completed a private placement (the "Offering") to accredited investors of our
Series B Convertible Preferred Stock, par value $0.001 per share ("Series B
Preferred Stock") in which we raised gross proceeds of $8,023,000. A first
closing, in which we received gross proceeds of $4,955,000 occurred
simultaneously with the acquisition of Sigma and was entirely devoted to the
acquisition. A second closing occurred on May 3, 2007, in which we received
gross proceeds of $3,068,000 which will be used as working capital and in
connection with future acquisitions.
Taglich Brothers, Inc. acted as Placement Agent in the Offering
("Placement Agent") and received: (i) a sales commission equal to 8% of the
gross proceeds of the Offering, (ii) $25,000 as reimbursement of its actual and
reasonable out-of-pocket expenses incurred in connection with Offering,
including fees and expenses of its counsel, and (iii) warrants (the "Placement
Agent Warrants"), exercisable during a five-year term, to purchase the number of
shares of Common Stock equal to 10% of the number of shares of Common Stock into
which the Preferred Stock sold in the Offering may be converted. The Placement
Agent Warrants have a "cashless exercise" feature and are exercisable at the
price per share equal to the per share conversion price-equivalent with respect
to the Preferred Stock.
On April 19, 2007, in connection with the acquisition of Sigma Metals, the
Company entered into a Third Amendment to the Revolving Credit, Term Loan,
Equipment Line of Credit and Security Agreement. The amendment modified the
terms of the Loan Facility with PNC to allow for Sigma to become a borrower
under the Loan Facility. As a result of Sigma becoming a borrower under the Loan
Facility, Sigma pledged all of its assets and properties to PNC to secure its
obligations under the Loan Facility. In addition, the termination date of the
Loan Facility was extended to April 30, 2010 and the maximum revolving advance
amount was increased by $2,000,000, from $9,000,000 to $11,000,000.
F-64
SIGMA METALS, INC.
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2007
F-65
SIGMA METALS, INC.
Balance Sheet
MARCH 31,
ASSETS 2007
------ -----------
CURRENT ASSETS
Cash and Cash Equivalents $ 26,895
Accounts Receivable 2,734,910
Inventory 2,874,510
Prepaid Expenses 32,234
-----------
TOTAL CURRENT ASSETS $ 5,668,549
-----------
FIXED ASSETS - AT COST
Property and Equipment $ 298,218
Less: Accumulated Depreciation 168,378
-----------
FIXED ASSETS - NET $ 129,840
-----------
OTHER ASSETS
Security Deposits $ 22,763
Other Assets 63
-----------
TOTAL OTHER ASSETS $ 22,826
-----------
TOTAL ASSETS $ 5,821,215
===========
The accompanying notes are an integral
part of these statements.
F-66
SIGMA METALS, INC.
Balance Sheet
LIABILITIES AND MARCH 31,
STOCKHOLDERS' EQUITY 2007
-------------------- -----------
CURRENT LIABILITIES
Accounts Payable $ 2,162,808
Notes Payable - SBA 4,451
Notes Payable - State Bank - Software 19,889
Notes Payable - State Bank 897,800
Accrued Operating Expenses 79,713
-----------
TOTAL CURRENT LIABILITIES $ 3,164,661
-----------
LONG-TERM LIABILITIES
Advances from Stockholders $ 257,000
-----------
TOTAL LONG-TERM LIABILITIES $ 257,000
-----------
TOTAL LIABILITIES $ 3,421,661
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock ($300 par value; 100 shares
authorized and outstanding) $ 30,000
Retained Earnings 2,369,554
-----------
TOTAL STOCKHOLDERS' EQUITY $ 2,399,554
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,821,215
===========
F-67
SIGMA METALS, INC.
Statements of Income and Retained Earnings
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2007 2006
----------- -----------
REVENUE $ 5,186,868 $ 4,406,314
----------- -----------
COST OF GOODS SOLD
Inventory, Beginning $ 2,812,873 $ 1,355,606
Purchases 3,503,662 2,813,588
Testing & Tolling 80,974 88,188
Manufacturing Overhead 206,807 165,652
----------- -----------
$ 6,604,316 $ 4,423,034
Less: Inventory, Ending 2,874,510 1,673,947
----------- -----------
COST OF GOODS SOLD $ 3,729,806 $ 2,749,087
----------- -----------
GROSS PROFIT $ 1,457,062 $ 1,657,227
----------- -----------
EXPENSES
Selling $ 442,454 $ 191,536
General and Administrative 505,120 431,190
Interest 37,591 24,067
Franchise Tax 425 425
----------- -----------
TOTAL EXPENSES $ 985,590 $ 647,218
----------- -----------
NET INCOME FOR PERIOD $ 471,472 $ 1,010,009
RETAINED EARNINGS, BEGINNING OF PERIOD 1,898,082 240,477
----------- -----------
RETAINED EARNINGS, END OF PERIOD $ 2,369,554 $ 1,250,486
=========== ===========
The accompanying notes are an integral
part of these statements.
F-68
SIGMA METALS, INC.
Statements of Cash Flows
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income for Period $ 471,472 $ 1,010,009
Adjustments to Reconcile Net Income to Net
Cash Provided by (Used in) Operating Activities:
Depreciation 9,598 9,599
Changes in Assets and Liabilities:
(Increase) Decrease In -
Accounts Receivable (341,963) (1,237,943)
Inventory (61,637) (318,341)
Prepaid Expenses (4,416) --
Other Current Assets 788 (900)
Deposits -- (3,646)
Increase (Decrease) In -
Accounts Payable 127,778 563,429
Accrued Operating Costs (202,879) 1,847
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (Forward) $ (1,259) $ 24,054
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment $ (7,443) $ (38,222)
----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (Forward) $ (7,443) $ (38,222)
----------- -----------
F-69
SIGMA METALS, INC.
Statements of Cash Flows
(Continued)
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2007 2006
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (Forward) $ (1,259) $ 24,054
----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (Forward) $ (7,443) $ (38,222)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Bank Debt $ -- $ (15,000)
Increase (Decrease) in Notes Payable Equipment (9,201) 9,149
----------- -----------
NET CASH USED IN
FINANCING ACTIVITIES $ (9,201) $ (5,851)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (17,903) $ (20,019)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 44,798 21,477
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 26,895 $ 1,458
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 37,591 $ 24,067
=========== ===========
Income Taxes Paid $ 425 $ 425
=========== ===========
The accompanying notes are an integral
part of these statements.
F-70
SIGMA METALS, INC.
Notes to Financial Statements
March 31, 2007
March 31, 2006
1- SIGNIFICANT ACCOUNTING POLICIES
Background of Company
Sigma Metals, Inc. ("The Company") is a stocking aircraft metals warehouse
with value added capability. The Company also services the critical needs
of aircraft manufacturers and the major airlines. The Company is located
in Deer Park, New York. Its customer base consists of both foreign and
domestic Corporations.
Cash & Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with
an original maturity of three month or less. Cash consists of aggregate
cash balances in the Company's bank accounts and cash equivalents consist
primarily of money market accounts.
Accounts Receivable
Accounts receivable are presented at face value, net of the allowance for
doubtful accounts. The allowances for doubtful accounts are established
through provisions charged against income and are maintained at a level
believed adequate by management to absorb estimated bad debts based on
current economic conditions. Management considers all accounts to be
collectible and, therefore, has not established a provision for
uncollectible accounts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of trade accounts receivable. The
Company grants credits to its customers, which are located in and out of
the United States. The Company does have foreign sales, but they are
primarily with large corporations that the Company has done business with
for a number of years. The majority of these transactions are insured.
Inventory
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation
and amortization. The Company maintains a policy to capitalize all
property and equipment purchases in excess of $1,000. Expenditures for
repairs and improvements in excess of $1,000 that add to the productive
capacity or extend the useful life of an asset are capitalized. Repair and
maintenance charges are expensed as incurred. Property under a capital
lease is capitalized and amortized over the lease terms. Upon disposition,
the cost and related accumulated depreciation are removed from the
accounts and any related gain or loss is reflected in earnings.
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets.
F-71
1- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment - (Continued)
Depreciation and Amortization are provided by charges to operations over
the estimated useful lives, principally on the straight-line method. The
estimated useful lives are:
Tools 5 Years
Furniture, Fixtures and Office
Equipment 5 Years
Transportation Equipment 5 Years
Machinery and Equipment 7 Years
Leasehold Improvements 3-15 Years
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment at the facility level
annually or when events or circumstances indicate that the carrying value
of such assets may not be fully recoverable. Impairment is evaluated based
on the sum of undiscounted estimated future cash flows expected to result
from use of the assets compared to their carrying value. If impairment is
recognized, the carrying value of the impaired asset is reduced to their
fair value, based on discounted estimated future cash flows.
Finance Costs
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term of the
related debt.
Revenue Recognition
The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement
exists, and the sales price is fixed or determinable.
Expenses
Selling, general, and administrative costs are charged to expense as
incurred.
Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. The more significant
management estimates are the useful lives of property and equipment,
provisions for inventory obsolescence, unamortized finance costs, accrued
expenses, and various contingencies. Actual results could differ from
those estimates. Changes in facts and circumstances may result in revised
estimates, which are recorded in the period in which they become known.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments."
F-72
1- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments (Continued)
Management of the Company believes that the fair value of financial
instruments, consisting of cash, accounts receivable, accounts payable and
accrued liabilities, approximates carrying value due to the immediate or
short-term maturity associated with these instruments and that the notes
payable is carried at fair value in that is carries interest rates that
are comparable to similar instruments with similar maturities.
Income Taxes
The Company has elected to be taxed as a Small Business Corporation and,
consequently, no Federal tax liability is reflected on the Comparative
Statements of Income and Retained Earnings.
2- INVENTORY
Inventory consists primarily of sheet metal and is considered all raw
materials.
2007 2006
---- ----
Raw Material (Sheet Metal) $2,874,510 $1,690,306
3- PROPERTY AND EQUIPMENT
A schedule of Property and Equipment at March 31 is set forth below:
2007 2006
---- ----
Tools, Machinery and Equipment $ 107,702 $ 96,991
Furniture, Fixtures and Office Equipment 120,021 110,075
Transportation Equipment 17,006 17,006
Leasehold Improvements 53,489 45,828
--------- ---------
Total Property and Equipment $ 298,218 $ 269,899
Less: Accumulated Depreciation (168,378) (144,616)
--------- ---------
Property, and Equipment, Net $ 129,840 $ 125,284
========= =========
Depreciation and amortization expense for the three months ended March 31,
2007 and March 31, 2006 were $9,598 and $9,853, respectively.
4- LINES OF CREDIT
The Company had a Bank Line of Credit that expired on May 31, 2006 with a
maximum borrowing limit of $800,000 and interest at one and one half over
prime. The prime interest rate at March 31, 2007 was 8.25%. The Line of
Credit was renewed for a maximum borrowing limit of $900,000 and interest
at one and one half over prime. This new Line of Credit expired on May 31,
2007. As of March 31, 2007 the balance was $897,800. Subsequent to the
Balance Sheet date, as part of the stock purchase agreement (see Note 10),
the line of credit was satisfied.
F-73
4- LINES OF CREDIT - (Continued)
The Line of Credit is secured by a first security interest in all assets.
The Line of Credit is due on demand or, if no demand is made, in one
payment of all outstanding principal plus accrued unpaid interest on May
31, 2007, at which time it is subject to annual review, pending receipt of
the subject's financial statements.
5- NOTES PAYABLE - SOFTWARE
In March of 2006, the Company financed the purchase of new computer
software with State Bank of Long Island in the amount of $50,000. The
terms of the Note are 2 years at 8% payable monthly in the amount of
$2,261.36. As of the Balance Sheet date, the current balance was $19,889.
Scheduled amortization payments for the following years are set forth
below:
December 31, 2007 $19,673
December 31, 2008 216
6- NOTES PAYABLE - SBA
The Company has an SBA Loan of $50,000, payable in monthly installments of
$1,477 that started on June 17, 2004 with an interest rate of 4%. The loan
is secured by the Company's assets. Subsequent to the date, at
the closing of the Stock Purchase Agreement with Gales Industries
Incorporated. Subsequent to the Balance Sheet Date, as part of the stock
purchase agreement (see Note 10), the SBA Loan was satisfied.
7- RETIREMENT PLAN
The Company adopted a 401(k) Profit Sharing Plan effective June 6, 1994.
The terms of the Plan are as follows:
CONTRIBUTION: Up to 25% of Plan Participations' Compensation.
ALLOCATION- EMPLOYER: 3.32% of Annual Compensation greater than Cov.
Comp. plus 3.32070% of Annual Compensation. Cov.
Comp. is based upon $72,001 year.
NORMAL RETIREMENT AGE: 65 or 5 years of Participation, if later.
FORFEITURES: Allocated to Participants' Accounts.
ELIGIBILITY: All Non-Union Employees over the Age of 21 who
completed 1 year of service.
DEATH BENEFIT: 100% of the Total Account
DISABILITY: 100% of the Total Account
F-74
7- RETIREMENT PLAN- (Continued)
EMPLOYEES CONTRIBUTIONS: Up to 100% of Annual Compensation. (Maximum
$15,000 for 2006 and $15,500 for 2007).
MATCHING CONTRIBUTIONS: 0.00% of Employee deferral up to 0.00% of
Compensation deferred.
Vesting Schedule
----------------
Year Pct Vested
---- ----------
1 0
2 20
3 40
4 60
5 80
6-15 100
8- SHAREHOLDER LOANS
Two of the major shareholders have advanced the Company $125,000 each for
working capital. These notes are payable on demand and bear interest at a
rate of 6%. They also have been subordinated to State Bank of Long Island.
Subsequent to the Balance Sheet Date, as part of the stock purchase
agreement (see Note 10), these notes were satisfied.
9- COMMITMENTS and CONTINGENCIES
The Company presently leases manufacturing and office facilities under a
lease expiring January 31, 2008, at an annual rental of approximately
$22,000, plus annual real estate tax and utilities by the lessee.
This lease is between the Company and Giaquinto - Lusting Associates, LLC,
a Limited Liability Company.
10- SUBSEQUENT EVENTS
On January 2, 2007, the Company entered into a stock purchase agreement
(the "Sigma Agreement") with Gales Industries Incorporated, a Delaware
Corporation and the holders of all of the outstanding shares of Sigma
Metals (the "Shareholders"). Pursuant to the Sigma Agreement, subject to
the satisfaction of various terms and conditions Gales will acquire from
the Shareholders all of the issued and outstanding capital stock of Sigma
Metals.
The closing of the Sigma Agreement occurred in April of 2007. The purchase
price for all of the shares is $5,008,204, plus an amount equal to Sigma
Metals' earnings for the period from January 1, 2006, until the closing
subject to certain adjustments as set forth in the Sigma Agreement.
F-75
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements and related notes are presented to show the pro forma effects of the
acquisition of Sigma Metals, Inc. and the issuance of Series B Convertible
Preferred Stock having an initial liquidation value of $8,023,000.
The pro forma condensed consolidated statement of operations for the
quarter ended March 31, 2007 is presented to show income from continuing
operations as if the acquisition of Sigma Metals, Inc. and the issuance of the
Series B Convertible Preferred Stock had occurred as of the beginning of the
period. The pro forma condensed consolidated balance sheet is based on the
assumption that the acquisition of Sigma Metals, Inc. and the issuance of the
Series B Convertible Preferred Stock had occurred effective March 31, 2007. The
pro forma condensed consolidated statement of operations for the year ended
December 31, 2006 is presented to show income from continuing operations as if
the acquisition of Sigma Metals, Inc. and the issuance of the Series B
Convertible Preferred Stock had occurred as of the beginning of the period. The
pro forma condensed consolidated balance sheet is based on the assumption that
the acquisition of Sigma Metals, Inc. and the issuance of the Series B
Convertible Preferred Stock had occurred effective December 31, 2006.
Pro forma data are based on assumptions and include adjustments as
explained in the notes to the unaudited pro forma condensed consolidated
financial statements. The pro forma data are not necessarily indicative of the
financial results that would have been attained had the acquisition of Sigma
Metals, Inc. and the issuance of the Series B Convertible Preferred Stock
occurred on the dates referenced above and should not be viewed as indicative of
operations in future periods. The unaudited pro forma condensed consolidated
financial statements should be read in conjunction with the notes thereto, our
consolidated financial statements as of and for the year ended December 31, 2006
included in our Annual Report on Form 10-KSB for the year ended December 31,
2006 and the consolidated financial statements as of and for the years ended
December 31, 2006 and 2005 of Sigma Metals, Inc. included in our Annual Report
on Form 10-KSB for the year ended December 31, 2006.
F-76
GALES INDUSTRIES INCORPORATED
Unaudited Pro Forma Consolidated Comparative Condensed Balance Sheet
December 31, 2006
Gales Gales Sigma
Industries Sigma Adjustments Consolidated
---------- ----- ----------- ------------
ASSETS
Current Assets
Cash and Cash Equivalents $ -- $ 44,798 $ 3,004,342 (a) $ 3,049,140
Accounts Receivable (Net of Allowance for Doubtful Accounts of
$176,458 for Gales) 3,508,957 2,392,947 -- 5,901,904
Inventory 15,257,641 2,812,873 -- 18,070,514
Prepaid Expenses and Other Current Assets 232,749 27,818 260,567
Deposits 180,456 -- -- 180,456
----------------------------------------- ------------
Total Current Assets 19,179,803 5,278,436 3,004,342 27,462,581
Property, Plant, and Equipment, net 3,565,316 131,995 -- 3,697,311
Deferred Financing Costs 369,048 -- -- 369,048
Other Assets 63,522 851 -- 64,373
Goodwill 1,265,963 -- 5,405,447 (b) 6,671,410
Deposits 448,530 22,763 -- 471,293
----------------------------------------- ------------
----------------------------------------- ------------
TOTAL ASSETS $ 24,892,182 $ 5,434,045 $ 8,409,789 $ 38,736,016
========================================= ============
Current Liabilities
Accounts Payable and Accrued Expenses $ 7,648,426 $ 2,317,622 $ -- $ 9,966,048
Notes Payable Current Portion 127,776 33,541 (33,541)(c) 127,776
Notes Payable - Revolver 5,027,463 897,800 (897,800)(c) 5,027,463
Notes Payable - Sellers AIM - Current Portion 192,400 -- 361,404 (d) 553,804
Capital Lease Obligations - Current Portion 407,228 -- -- 407,228
Due to Sellers AIM 53,694 -- -- 53,694
Dividends Payable 120,003 -- -- 120,003
Deferred Gain on Sale - Current Portion 38,033 -- -- 38,033
Income Taxes Payable 653,426 -- -- 653,426
----------------------------------------- ------------
Total current liabilities 14,268,449 3,248,963 (569,937) 16,947,475
Long term liabilities
Due to Sellers - Sigma - Net of Current Portion 257,000 (257,000)(c) --
Notes Payable - Net of Current Portion 645,458 -- 1,188,341 (c) 1,833,799
Notes Payable - Sellers AIM - Net of Current Portion 1,290,562 -- 1,290,562
Notes Payable - Sellers Sigma - Net of Current Portion -- -- 722,807 (d) 722,807
Capital Lease Obligations - Net of Current Portion 552,589 -- -- 552,589
Deferred Tax Liability 512,937 -- -- 512,937
Deferred Gain on Sale - Net of Current Portion 713,118 -- -- 713,118
Deferred Rent 39,371 -- -- 39,371
----------------------------------------- ------------
TOTAL LIABILITIES $ 18,022,484 $ 3,505,963 $ 1,804,211 $ 22,612,658
Commitments and contingencies
Stockholders' Equity
Preferred Stock - 8,003,716 shares authorized
Series A Convertible Preferred - $.001 Par value, 1,000
Shares authorized, 900 shares Issued and 0 Outstanding
Series B Convertible Preferred - $.001 Par value, 2,000,000 $ -- $ -- $ 8,023 (e) $ 8,023
Shares Authorized, 802,300 Shares Issued and Outstanding
with an initial liquidation value of $8,023,000 --
(Authorized, Issued and Oustanding for the Proforma
December 31, 2006)
Common Stock - $.001 Par value, 120,055,746 Shares Authorized, 57,269 30,000 (21,955)(f) 65,314
57,269,301 Shares Issued and Outstanding as of December 31, 2006
on a pro forma basis 65,314,694 Shares Issued and Outstanding as of
December 31,2006
Additional Paid-In Capital 7,898,702 -- -- 7,898,702
Additional Paid-In Capital Series B Preferred 7,345,637 (g) 7,345,637
Additional Paid-In Capital: Sigma Shares 1,891,955 (h) 1,891,955
Retained Earnings (Accumulated Deficit) (1,086,273) 1,898,082 (1,898,082)(i) (1,086,273)
----------------------------------------- ------------
Total Stockholders' Equity 6,869,698 1,928,082 7,325,578 16,123,358
----------------------------------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,892,182 $ 5,434,045 $ 8,409,789 $ 38,738,016
========================================= ============
F-77
Notes to Unaudited Pro Forma Consolidated Comparative Condensed Balance Sheet
(a) Represents the net cash from sale of Series B Convertible Preferred Stock
remaining after using a portion of the proceeds for the purchase of the
stock of Sigma Metals, Inc. and paying soft costs associated with the
acquisition.
(b) Represents the goodwill resulting from the excess of the purchase price
paid for the stock of Sigma over the value of the assets acquired less the
liabilities assumed.
(c) Represents the revolving loan facility put in place to pay the amounts due
third parties and the former Officers of Sigma for borrowed money.
(d) Represents the current and long term portions of the notes issued by Gales
Industries as part of the purchase price for the stock of Sigma.
(e) Represents the par value of the shares of Gales Industries Series B
Convertible Preferred stock issued, in part, to finance the purchase of
the stock of Sigma.
(f) Represents the elimination of Sigma's Stockholders' Equity ($30,000)
partially offset by the par value ($8,045) of the 8,045,393 shares issued
to the sellers as part of the purchase price for the stock of Sigma.
(g) Represents the excess of amounts paid by investors over the par value of
shares of Gales Industries Series B Convertible Preferred stock net of the
soft costs associated with the issuance of such shares.
(h) Represents the excess over par value of the fair value of the common stock
issued as part of the purchase price for the stock of Sigma.
(i) Represents the eliminations of Sigma's accumulated surplus.
F-78
GALES INDUSTRIES INCORPORATED
Pro Forma Combined Satement Of Income
For the Year Ended December 31, 2006
Gales Gales Sigma
Industries Sigma Adjustments Consolidated
---------- ----- ----------- ------------
Net Sales $ 33,044,996 $ 17,979,414 $ 51,024,410
Cost of Sales 28,002,942 12,822,494 40,825,436
------------ ------------ ------------ ------------
Gross Profit 5,042,054 5,156,920 -- 10,198,974
Operating costs and expenses
Selling and marketing 601,011 923,847 1,524,858
General and administrative 3,789,587 2,218,053 6,007,640
------------ ------------ ------------ ------------
Income (Loss) from operations 651,456 2,015,020 0 2,666,476
Other (income) and expenses:
Interest & financing costs 1,040,108 129,490 61,094 (b) 1,230,692
Gain on Sale of Life Insurance Policy (53,047) -- (53,047)
Gain on Sale of Real Estate (300,037) -- (300,037)
Other Income (435,627) -- (435,627)
Other Expenses 246,659 425 247,084
------------ ------------ ------------ ------------
Income (Loss) before provision for income taxes 153,400 1,885,105 (61,094) 1,977,411
Provision for income taxes 489,969 767,396 (a) (24,450) 1,232,915
------------ ------------ ------------ ------------
Net Income (Loss) $ (336,569) $ 1,130,686 $ (36,644) $ 744,496
------------ ------------ ------------ ------------
Pro Forma dividend attributable to preferred stockholders 561,610 (c) 561,610
------------
Pro Forma net earnings attribute to common stockholders $ 182,886
============
Pro Forma earnings per share (Basic) $ 0.00
============
Pro Forma earnings per share (Diluted) $ 0.00
============
Weighted Average Shares Outstanding (Basic) 40,253,422
============
Weighted Average Shares Outstanding (Diluted) 46,323,011
============
F-79
Notes to Pro Forma Combined Statement Of Income
(a) Represents the pro forma income tax expense for Sigma, as if it were
taxable as a "C" not an "S" corp.
(b) Represents one year's interest expense on $1,084,213 of notes issued as
part of purchase price for Sigma stock, being amortizing monthly with an
interest rate of 7%.
(c) Represents the 7% annual preferred stock dividend for the $8,023,000
Series B Convertible Preferred Stock used to purchase Sigma.
F-80
Gales and Sigma Proforma
3/31/2007
Balance Sheet
GALES SIGMA Gales/Sigma
March 31, 2007 March 31, 2007 Adjustments Consolidated
(unaudited) (unaudited) (unaudited) (unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ -- $ 26,895 $ 3,004,342 (a) $ 3,031,237
Accounts Receivable, Net of Allowance for Doubtful --
Accounts of 204,566 2,672,799 2,734,910 -- 5,407,709
Inventory 15,866,131 2,874,510 -- 18,740,641
Prepaid Expenses and Other Current Assets 455,958 32,234 -- 488,192
Deposits 776,673 -- -- 776,673
-------------------------------------------- -------------
Total Current Assets 19,771,561 5,668,549 3,004,342 28,444,452
Property, Plant, and Equipment, net 3,399,089 129,840 -- 3,528,929
Deferred Financing Costs 338,294 -- -- 338,294
Other Assets 65,122 -- -- 65,122
Goodwill 1,265,963 -- 5,218,031 (b) 6,483,994
Deposits 495,632 22,826 -- 518,458
-------------------------------------------- -------------
TOTAL ASSETS $ 25,335,661 $ 5,821,215 $ 8,222,373 $ 39,379,249
============================================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable and Accrued Expenses $ 7,544,130 $ 2,242,521 $ -- $ 9,786,651
Notes Payable - Revolver 5,352,845 897,800 (897,800) (c) 5,352,845
Notes Payable - Current Portion 127,776 24,340 (33,541) (c) 118,575
Notes Payable - Sellers - Current Portion 192,400 -- 361,404 (d) 553,804
Capital Lease Obligations - Current Portion 413,463 -- -- 413,463
Due to Sellers 53,694 -- -- 53,694
Dividends Payable 120,003 -- -- 120,003
Deferred Gain on Sale - Current Portion 38,033 -- -- 38,033
Income Taxes Payable 769,396 -- -- 769,396
-------------------------------------------- -------------
Total current liabilities 14,611,740 3,164,661 (369,937) 17,206,464
Long term liabilities
Due to Sellers - Sigma - Net of Current Portion -- 257,000 (257,000) (c) --
Notes Payable - Net of Current Portion 613,514 -- 1,188,341 (c) 1,801,855
Notes Payable - Sellers AIM - Net of Current Portion 577,200 -- -- 577,200
Notes Payable - Sellers Sigma - Net of Current Portion -- -- 722,807 (d) 722,807
Capital Lease Obligations - Net of Current Portion 524,053 -- -- 524,053
Deferred Tax Liability 461,731 -- -- 461,731
Deferred Gain on Sale - Net of Current Portion 703,609 -- -- 703,609
Deferred Rent 86,929 -- -- 86,929
-------------------------------------------- -------------
Total liabilities 17,578,776 3,421,661 1,084,211 22,084,648
Commitments and contingencies
Stockholders' Equity
Preferred Stock - 8,003,716 shares authorized;
Series - A 1,000 shares authorized,
900 shares Issued and 0 outstanding;
Series B - 2,000,000 shares authorized,
802,300 shares issued and outstanding on a pro forma basis
as of March 31, 2007 -- -- 8,023 (e) 8,023
Common Stock - .001 Par, 120,055,746 Shares Authorized
59,579,998 Shares Issued and Outstanding as of March 31, 2007;
on a pro forma basis 66,966,671 shares issued and outstanding
as of March 31, 2007 59,580 30,000 (22,613)(f) 66,967
Additional Paid-In Capital 8,855,065 -- -- 8,855,065
Additional Paid-In Capital Series B Preferred -- -- 7,345,637 (g) 7,345,637
Additional Paid-In Captial: Sigma Shares -- -- 2,176,669 (h) 2,176,669
Accumulated Deficit (1,157,760) 2,369,554 (2,369,554) (i) (1,157,760)
-------------------------------------------- -------------
Total Stockholders' Equity 7,756,885 2,399,554 7,138,162 17,294,601
-------------------------------------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,335,661 $ 5,821,215 $ 8,222,373 $ 39,379,249
============================================ =============
F-81
Notes to Unaudited Pro Forma Consolidated Comparative Condensed Balance Sheet
(a) Represents the net cash from sale of Series B Convertible Preferred Stock
remaining after using a portion of the proceeds for the purchase of the
stock of Sigma Metals, Inc. and paying soft costs associated with the
acquisition.
(b) Represents the goodwill resulting from the excess of the purchase price
paid for the stock of Sigma over the value of the assets acquired less the
liabilities assumed.
(c) Represents the revolving loan facility put in place to pay the amounts due
third parties and the former Officers of Sigma for borrowed money.
(d) Represents the current and long term portions of the notes issued by Gales
Industries as part of the purchase price for the stock of Sigma.
(e) Represents the par value of the shares of Gales Industries Series B
Convertible Preferred stock issued, in part, to finance the purchase of
the stock of Sigma.
(f) Represents the elimination of Sigma's Stockholders' Equity ($30,000)
partially offset by the par value ($7,387) of the 7,386,673 shares issued
to the sellers as part of the purchase price for the stock of Sigma.
(g) Represents the excess of amounts paid by investors over the par value of
shares of Gales Industries Series B Convertible Preferred stock net of the
soft costs associated with the issuance of such shares.
(h) Represents the excess over par value of the fair value of the common stock
issued as part of the purchase price for the stock of Sigma.
(i) Represents the eliminations of Sigma's accumulated surplus.
F-82
Gales and Sigma Proforma Statement of Income
for the three months ended 3/31/2007
GALES SIGMA Gales/Sigma
3/31/2007 3/31/2007 Adjustments Consolidated
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales 7,488,130 5,186,868 -- 12,674,998
Cost of Sales 6,239,484 3,729,806 -- 9,969,290
---------------------------- ---------- -----------
Gross profit 1,248,646 1,457,062 -- 2,705,708
Operating costs and expenses:
Selling and marketing 95,342 442,879 -- 538,221
General and administrative 1,031,450 505,120 -- 1,536,570
---------------------------- ---------- -----------
Income from operations 121,854 509,063 -- 630,917
Other (Income) and Expenses --
Interest and financing costs 130,954 37,591 18,974 (b) 187,519
Gain on Sale of Real Estate (9,509) -- -- (9,509)
Other Income (1,446) -- -- (1,446)
Other Expenses 8,578 -- -- 8,578
---------------------------- ---------- -----------
Net (Loss) income before provision for income taxes (6,723) 471,472 (18,974) 445,775
Provision for income taxes 64,764 188,683 (a) (7,593) 245,854
---------------------------- ---------- -----------
Net (Loss) Income (71,487) 282,789 (11,380) 199,921
---------------------------- ---------- -----------
Pro forma dividend attributable to preferred stockholders 140,402 (c) 140,402
-----------
Pro forma net earnings attributable to common stockholders 59,519
===========
Pro Forma earnings per share (Basic) $ 0.00
===========
Pro Forma earnings per share (Diluted) $ 0.00
===========
Weighted Average Shares Outstanding (Basic) 66,220,357
===========
Weighted Average Shares Outstanding (Diluted) 72,006,257
===========
F-83
Notes to Pro Forma Combined Statement Of Income
(a) Represents the pro forma income tax expense for Sigma, as if it were
taxable as a "C" not an "S" corp.
(b) Represents one year's interest expense on $1,084,213 of notes issued as
part of purchase price for Sigma stock, being amortizing monthly with an
interest rate of 7%.
(c) Represents the 7% preferred stock dividend for the $8,023,000 Series B
Convertible Preferred Stock used to purchase Sigma.
F-84
Part II
Information Not Required in the Prospectus
Item 24. Indemnification of Directors and Officers
Under Section (b) of Article TENTH of our Articles of Incorporation, as
well as Article VII of our By-Laws, we have agreed to indemnify our officers,
directors, employees and agents to the fullest extent permitted by the laws of
the State of Delaware, as amended from time to time. In addition, under
paragraph (i) of Section (a) of Article TENTH of our Certificate of
Incorporation, our directors are not subject to personal liability to the
Registrant or its stockholders for monetary damages for breach of their
fiduciary duties as a director to the fullest extent provided by Delaware law.
Section 102 (b) (7) of the Delaware General Corporation Law provides for the
elimination off such personal liability, except for liability (i) for any breach
of the director's duty of loyalty to the Registrant or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived any
improper personal benefit
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, Officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
Our expenses in connection with the issuance and distribution of the securities
being registered, other than the underwriting discount, are estimated as
follows:
SEC Registration Fee $ 295.79
Legal Fees and Expenses $ 25,000
Accountants' Fees and Expenses $ 10,000
Miscellaneous Expenses $ 5,000
Total $40,295.79
Item 26. Recent Sales Of Unregistered Securities
Shares Issued By Air Industries Group (then Gales Industries) Prior to the
Merger:
We have issued the following securities without registration under the
Securities Act since June 1, 2004:
As of October 28, 2004, immediately after its incorporation, Original
Gales issued 4,401,219 shares of its common stock to its founder and Executive
Chairman and 3,404,538 shares of its common stock to its Vice Chairman pursuant
to subscriptions for such shares by such individuals. As of the same date, four
of our directors subscribed for 100,000 shares each of Original Gales common
stock. As of the same date, Original Gales issued 150,000 shares of its common
stock to a law firm and 100,000 shares of its common stock to another law firm
pursuant to their subscription for shares. As of the same date, Original Gales
issued in the name of a consultant 250,000 shares of its common stock pursuant
to its subscription for such number of shares. The subscription price for the
shares described in this paragraph was $.00001 per share.
II-1
Original Gales entered into an Investment Banking/Advisory Agreement
("Atlas Agreement"), dated as of January 11, 2005, with Atlas Capital Services,
LLC ("Atlas"). The Atlas Agreement provided that Atlas would receive newly
issued shares equal to 4% of a publicly-held company introduced by Atlas to
Original Gales, provided that Original Gales enters into a reverse merger
transaction with such company. Immediately prior to the closing of the Merger,
Original Gales issued to various designees of Atlas an aggregate of 1,477,230
shares of its common stock in satisfaction of such obligation to Atlas.
In connection with the Acquisition of AIM, Original Gales issued $332,631
principal amount convertible note to each of Mr. Rettaliata and D. Peragallo. As
a result of the Merger, each such convertible note is convertible into shares of
Common Stock at the conversion price of $0.40 per share. Also, in connection
with the Acquisition of AIM, Original Gales issued shares of its common stock
which, pursuant to the Merger, have become 253,214 shares of Common Stock in the
name of Luis Peragallo, 118,423 shares of Common Stock in the name of Peter
Rettaliata and 118,423 shares of Common Stock to Dario Peragallo. See "Certain
Relationships and Related Transactions - Transactions Relating to the
Acquisition and Other Related Transactions."
In February 2005, Original Gales, in consideration for an investment of
$22,500 (the "22,500 Financing"), issued to the investor a 12% convertible
promissory note in the principal amount of $22,500, convertible at the price of
$0.11 per share into shares of Common Stock. As of November 30, 2005, the holder
of such note converted the principal of, and interest accrued on, such note into
226,334 shares of Common Stock. For no additional consideration, Original Gales
issued a warrant to the investor to purchase 409,091 shares of Common Stock at
$.055 per share.
In August 2005, Original Gales, in consideration for $45,000 in aggregate
investment (the "$45,000 Financing"), issued to the investors convertible
promissory notes in the aggregate principal amount of $45,000, convertible at
the price of $0.22 per share of Common Stock. These notes have been repaid. For
no additional consideration, Original Gales issued to such investors warrants to
purchase the number of shares of Common Stock equal to the number of shares into
which the $45,000 Notes can be converted (204,545), exercisable at $0.22 per
share. See "Certain Relationships and Related Transactions - Transactions
Relating to Original Gales."
In September 2005, Original Gales received $105,000 in financing from two
investors (the "$105,000 Financing") and, in connection therewith, issued to
such investors warrants to purchase an aggregate of 477,273 shares of Common
Stock at a price of $0.22 per share, exercisable until September 30, 2010.
GunnAllen Financial, Inc. served as our placement agent in the $105,000
Financing and received cash compensation equal to $10,500 and a non-accountable
expense allowance equal to $2,100. GunnAllen Financial also received a warrant
to purchase 47,728 shares of Common Stock, exercisable at $0.22 per share until
September 30, 2010. Such warrant provided for cashless exercise.
As of November 30, 2005, Original Gales issued to its officers stock
options to purchase shares of common stock as follows: 1,250,000 options to Mr.
Gales, and 1,200,000 options each to Mr. Giusto, Rettaliata and D. Peragallo.
See "Executive Compensation - Employment Agreements."
As of November 30, 2005 and December 15, 2005, Original Gales issued an
aggregate of 900 shares of its convertible preferred stock to investors and
five-year warrants to the placement agent on the same terms as described below
with respect to the "First Closing" and the "Second Closing".
We believe that the issuances of the shares described above were exempt
from registration under Section 4(2) of the Securities Act.
II-2
Shares Issued by in Connection with the Merger:
As of November 30, 2005, pursuant to the Merger Agreement, we issued an
aggregate of 10,673,107 shares of our Common Stock. In addition, as a condition
to the Merger Agreement, we agreed to nominate James Brown to serve on our Board
and issued 100,000 shares of our Common Stock to him in November 2005.
Pursuant to the Merger, we issued the following securities as of November
30, 2005 in consideration for the cancellation of the corresponding Original
Gales securities: (i) stock options to four of our executives to purchase in the
aggregate 4,850,000 shares of Common Stock (the terms of which are described in
the footnotes to the table, "Executive Compensation-Option Grants in Last Fiscal
Year", above); (2) a convertible note in the principal amount of $332,631 to
each of Peter D. Rettaliata and Dario Peragallo, convertible into shares of
Common Stock at $0.40 per share; (3) five-year warrants to the investors in the
$45,000 Financing to purchase an aggregate of 204,545 shares of Common Stock at
the exercise price of $0.22 per share; (5) five-year warrants to the placement
agent for the $105,000 Financing to purchase 47,728 share of Common Stock at the
exercise price of $0.22 per share; and (6) five-year warrants to the investor in
the $22,500 Financing to purchase 409,091 shares of Common Stock at the exercise
price of $0.055 per share. All of the warrants described in this paragraph
provide for "cashless exercise".
As of November 30, 2005, in connection with the Merger, 679.328 shares of
Gales Series A Convertible Preferred Stock were exchanged for the same number of
shares of Preferred Stock of the Company (the "First Closing"). Each share of
Preferred Stock is convertible at $0.22 per share into 45,455 shares of Common
Stock.
Such 679.328 shares of Preferred Stock (not including shares of Preferred
Stock issuable as dividends) are convertible into an aggregate of 30,878,855
shares of our Common Stock. On December 15, 2005, we privately issued 220.672
shares of our Preferred Stock to accredited investors (the "Second Closing").
In connection with the Second Closing, the gross purchase price of
$2,206,720 was paid by investors. Together, in the First Closing and the Second
Closing, we issued 900 shares of Preferred Stock to investors and the investors
paid an aggregate purchase price of $9,000,000. Our issuances of shares of
Preferred Stock to investors in connection with the First Closing and the Second
Closing were in exchange for the cancellation of the same number of shares of
series A convertible preferred stock of Original Gales, which merged into our
wholly-owned subsidiary as of November 30, 2005. The investors had acquired such
shares of Original Gales preferred stock by paying Original Gales (and its
successor) the aggregate purchase price of $9,000,000 in connection with Gales'
Industries private offering to accredited investors of up to 900 shares of its
series A convertible preferred stock, which offering was completed by Original
Gales on the date of the First Closing with respect to 679.328 shares of its
preferred stock and on the date of the Second Closing with respect to 220.672
shares of its preferred stock. The terms of our Preferred Stock and Original
Gales series A convertible preferred stock are substantially the same.
The 220,672 shares of Preferred Stock which we issued in the Second
Closing (not taking into account additional shares of Preferred Stock issuable
to the investors as dividends) are convertible at any time, at the option of the
holders, into an aggregate of approximately 10,030,645 shares of our Common
Stock (or 45,455 shares of Common Stock for each share of Preferred Stock), and
will automatically convert into shares of Common Stock if and when this
registration statement, which covers such shares of Common Stock underlying the
Preferred Stock, is declared effective and such shares thereby become available
for resale under the Securities Act.
In connection with the First Closing and the Second Closing, GunnAllen
Financial, Inc. acted as the placement agent and received warrants, exercisable
II-3
during a five-year term, to purchase the number of shares of Common Stock
(4,090,950 shares) equal to 10% of the number of shares of Common Stock into
which the Preferred Stock sold in the Offering may be converted. Such warrants
have a "cashless exercise" feature and are exercisable at $0.22 per share.
We believe that the issuances of shares described above were exempt from
registration under Section 4(2) of the Securities Act.
Shares Issued by Ashlin Development Corporation Prior to the Merger:
On July 30, 2003, Ashlin issued to two Board members an aggregate of
approximately 160,075 shares of Common Stock in return for services performed.
The fair value of such shares of Common Stock was recorded as $24,000 in the
aggregate.
During each of the years ended December 31, 2004 and 2003, Ashlin granted
options to purchase approximately 40,019 shares of Common Stock to its chief
executive officer.
On July 30, 2003, Ashlin issued to two Board members an aggregate of
approximately 160,075 shares of Common Stock in return for services performed.
The fair value of such shares of Common Stock was recorded as $24,000 in the
aggregate.
During each of the years ended December 31, 2004 and 2003, Ashlin granted
options to purchase approximately 40,019 shares of Common Stock to its chief
executive officer.
As of January 2005, as part of the Plan of Reorganization, Ashlin issued
approximately 240,112 shares of Common Stock to James Brown (who was then its
chairman and chief executive officer) upon its emergence from bankruptcy
protection. The fair value of such shares was recorded as $12,000 in the
aggregate. In March 2005, Ashlin issued approximately 256,119 shares of Common
Stock to Mr. Brown. The fair value of such 256,119 shares was determined to be
$32,000 in the aggregate. On August 13, 2003, Ashlin issued approximately 80,038
shares of Common Stock to Mr. Brown in consideration of his services as a member
of its Board of Directors.
In March 2005, Ashlin issued approximately 80,038 shares of Common Stock
to Global Business Resources, Inc., a Fort Lauderdale based consulting firm, as
partial compensation for services to Ashlin.
As of September 16, 2005, Ashlin issued approximately 80,038 shares of
Common Stock to a consultant in return for consulting services.
Other than such sales of shares and the securities issued in connection
with the Merger and the Offering described above, during the past three years,
we and Original Gales did not sell any securities which were not registered
under the Securities Act. We believe that the issuances in connection with such
sales, the Merger and the Offering were exempt from registration under Section
4(2) of the Securities Act.
Subsequent Issuances
We issued as of April 1, 2006 to a consulting firm, in return for services
on public relations matters, a warrant to purchase 10,417 shares of our Common
Stock at the exercise price of $0.73 per share and a warrant to purchase 10,417
shares of our Common Stock at the exercise price of $1.56 per share. We issued
to the same firm as of May 1, 2006 a warrant to purchase 10,417 shares of our
Common Stock at the exercise price of $1.82 per share and as of June 1, 2006 a
warrant to purchase 10,417 shares of our Common Stock at the exercise price of
II-4
$1.65 per share. All of such warrants expire five years after the date as of
which they were issued and provide for cashless exercise and piggyback
registration rights with respect to new registration statements which we may
file in the future. We will be issuing to the same firm a warrant for the same
number of shares (10,417) of our Common Stock as of the first day of each month
following June 1, 2006 until February 1, 2007 (except that the February 1, 2007
warrant will have the right to purchase 10,416 shares). The exercise price per
share for each such warrant to be issued will equal 120% of the average closing
price of the Common Stock during the month immediately preceding the date as of
which such warrant is issued and will have all other terms which are the same as
the terms of the April 1, 2006, May 1, 2006 and June 1, 2006 warrants. In all,
we will have issued 12 warrants to the same firm which are exercisable into an
aggregate of 125,000 shares of Common Stock.
Such issuances of warrants to our consulting firm were, and will be,
exempt from registration pursuant to Section 4(2) under the Securities Act of
1933, as amended.
On August 4, 2006, the date upon which our registration statement for the
resale of the shares of common stock issued upon the automatic conversion of our
series A convertible preferred stock was declared effective by the SEC, we
issued an aggregate of 40,909,500 of our common stock to holders of our series A
convertible preferred stock in accordance with the terms of the certificate of
designation for the series A convertible preferred stock. The shares were issued
without registration under the Securities Act in reliance upon the exemption
under Section 4(2) and Rule 506 of Regulation D. We issued an additional
1,636,380 shares of our common stock to holders of our series A convertible
preferred stock as a dividend. The issuance of these shares did not constitute a
"sale" as that term is defined in Section 2(3) of the Securities Act.
On January 26, 2007, we issued to Peter Rattaliata and Dario Peragallo,
two of our executive officers and directors, an aggregate of 1,799,432 shares of
our common stock upon their conversion of our promissory notes, each in the
principal amount of $665,262, plus accrued interest of $54,511, at a conversion
price of $0.40 per share. The issuance of these shares was exempt from the
registration requirements of the Securities Act under Section 4(2) and Rule 506
of Regulation D.
On February 13, 2007, we issued to each of our then non-management
directors options to purchase 100,000 shares of our common stock at an exercise
price of $0.27 per share. These securities were issued without registration
under the Securities Act in reliance upon the exemption from the registration
requirements provided by Section 4(2) of the Securities Act.
In accordance with our engagement letter dated March 16, 2007, with
Westbury Group, LLC, we issued to Westbury Group and Robert Africk options to
purchase an aggregate of 125,000 shares of our common stock. These securities
were issued without registration under the Securities Act in reliance upon the
exemption from the registration requirements provided by Section 4(2) of the
Securities Act.
In accordance with our agreement with James Brown, on March 30, 2007, we
issued to him 200,000 shares of our common stock. The right to 100,00 of such
shares vested immediately and the right to the remaining 100,00 shares will vest
as of December 31, 2006, provided Mr. Brown continues in the service of our
company through such date. These securities were issued without registration
under the Securities Act in reliance upon the exemption from the registration
requirements provided by Section 4(2) of the Securities Act.
On April 16, 2007, we issued an aggregate of 7,337,891 shares of our
common stock and our 7% promissory notes due 2010 in the aggregate principal
amount of $1,084,211 to the three shareholders of Sigma Metals, Inc. as part of
the purchase price for our acquisition of that company. These securities were
issued without registration under the Securities Act in reliance upon the
exemption from the registration requirements of the Securities Act provided by
Section 4(2) and Rule 506 of Regulation D.
On April 16, 2007, we issued and sold a total of 495,500 shares of our
series B convertible preferred stock to a total of 51 "accredited investors," as
that term is defined in Rule 501 under Regulation D, for an aggregate purchase
price of $4,955,000 ($10 per share) to finance our acquisition of Sigma Metals,
Inc.
On May 3, 2007, we issued and sold an additional 306,800 shares of our
series B convertible preferred stock to a total of 94 accredited investors, for
an aggregate purchase price of $3,068,000 ($10 per share). The net proceeds from
the sale of these shares has been used as working capital and is available for
future acquisitions.
The series B convertible preferred stock is convertible into shares of our
common stock at an initial conversion price per share is $0.2766.
II-5
Taglich Brothers, Inc., placement agent for the offering of the series B
convertible preferred stock, received: (i) a sales commission of $641,840, or 8%
of the gross proceeds of the offering, (ii) $25,000 in reimbursement of its
actual and reasonable out-of-pocket expenses, including fees and expenses of its
counsel, and (iii) warrants to purchase 2,900,578 shares of our common stock, or
10% of the total number of shares of common stock into which the shares of
series B convertible preferred stock sold in the offering may be converted.
These warrants may be exercised over period of five years at a per share
exercise price of $0.305, but have a "cashless exercise" feature.
The shares of series B convertible preferred stock and the warrants issued
to the placement agent were issued, and the shares of common stock that we will
issue upon conversion or exercise of those securities will be issued, without
registration under the Securities Act in reliance upon the exemption from the
registration requirements of the Securities Act provided by Section 4(2) and
Rule 506 of regulation D.
On May 21, 2007, we issued 90,580 shares to Michael A. Gales, our former
Executive Chairman, upon the cashless exercise of options previously granted to
him. The issuance of these shares was exempt from the registration requirements
of the Securities Act in reliance upon Section 4(2) and Rule 506 of Regulation
D. Mr. Gales is an "accredited investor," as that term is defined in Rule 501
(a) of Regulation D.
Item 27. Exhibits
Exhibit No. Description
----------- -----------
2.1 Debtor's Amended Plan of Reorganization (incorporated by reference to
Exhibit 2.1 of Registrant's Form 8-K, filed January 14, 2005.
2.2 Merger Agreement, dated as of November 14, 2005, among Gales Industries
Incorporated, two of its stockholders, Gales Industries Merger Sub, Inc.,
and Ashlin Development Corporation (incorporated herein by reference to
Exhibit 10.1 of Registrant's Form 8-K report filed November 21, 2005).
3.1 Certificate of Incorporation of the Registrant (incorporated by reference
to Exhibit 3.1 of Registrant's Form 8-K report, filed February 15, 2006).
3.2 Certificate of Amendment to Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of Registrant's Form 8-K report, filed July 2,
2007).
3.3 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of the
Registrant's Form 8-K report, filed February 15, 2006).
4.2 Form of Convertible Promissory Note, dated November 30, 2005, in the
amount of $332,631, from Gales Industries Incorporated (and assumed by the
Registrant) to each of Peter Rettaliata and Dario Peragallo (incorporated
by reference to Exhibit 4.2 of the Registrant's Form 8-K report, filed
December 6, 2005).
4.3 Form of Warrant issued by the Registrant to GunnAllen Financial, Inc.
after completion of the Offering (incorporated by reference to Exhibit 4.3
of the Registrant's Form 8-K report, filed December 6, 2005).
4.4 Form of Warrant issued by Original Gales to Atlas Private Equity, LLC (and
assumed by the Registrant) (Incorporated by reference to Exhibit 4.4 of
the Registrants Form 10-KSB, filed April 17, 2006).
4.5 Form of Warrant issued by Gales Industries Incorporated (and assumed by
the Registrant) to investors in the $45,000 Bridge Financing in or about
August 2005 (incorporated by reference to Exhibit 4.5 of the Registrant's
Form 8-K report, filed December 6, 2005).
4.6 Form of Warrant issued by Gales Industries Incorporated (and assumed by
the Registrant) to investors in the $105,000 Bridge Financing in or about
September, 2005 (incorporated by reference to Exhibit 4.6 of the
Registrant's Form 8-K report, filed December 6, 2005).
II-6
4.7 Form of Warrant issued and to be issued to Porter, LeVay & Rose, Inc.
(incorporated herein by reference to the exhibit of the same number to
Registrant's Amendment No. 1 on Form SB-2/A, filed June 16, 2006).
4.8 Certificate of Designation (incorporated by reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K filed with the SEC on April
18, 2007).
5.1 Opinion of Eaton & Van Winkle, LLP.
10.1 Asset Purchase Agreement between the Registrant and TeeZee, Inc. dated
October 15, 2004 (incorporated by reference of the Registrant's Report of
Form 8-K, filed on January 14, 2005).
10.2 Stock Purchase Agreement, dated as of July 25, 2005, by and among Gales
Industries Incorporated, Air Industries Machining, Corp., Luis Peragallo,
Jorge Peragallo, Peter Rettaliata and Dario Peragallo (incorporated by
reference to Exhibit 10.2 of the Registrant's Form 8-K report, filed
December 6, 2005.
10.3 Secured Subordinated Promissory Note, dated November 30, 2005, in the
amount of $962,000, from Gales Industries Incorporated (and assumed by the
Registrant) to Luis Peragallo (incorporated by reference to Exhibit 10.3
of the Registrant's Form 8-K report, filed December 6, 2005).
10.4 Security Agreement, dated as of November 30, 2005, by and between Gales
Industries Incorporated (and assumed by the Registrant) and Luis Peragallo
(incorporated by reference to Exhibit 10.4 of the Registrant's Form 8-K
report, filed December 6, 2005).
10.5 Contract of Sale, dated as of November 7, 2005, by and between DPPR Realty
Corp. and Gales Industries Incorporated for the purchase of the property
known as 1480 North Clinton Avenue, Bay Shore, NY (incorporated by
reference to Exhibit 10.5 of the Registrant's Form 8-K report, filed
December 6, 2005).
10.6 Contract of Sale, dated as of November 7, 2005, by and between KPK Realty
Corp. and Gales Industries Incorporated for the purchase of the property
known as 1460 North Fifth Avenue and 1479 North Clinton Avenue, Bay Shore,
NY (incorporated by reference to Exhibit 10.6 of the Registrant's Form 8-K
report, filed December 6, 2005).
10.7 Employment Agreement, dated as of September 26, 2005, by and between Gales
Industries Incorporated (and assumed by the Registrant) and Michael A.
Gales (incorporated by reference to Exhibit 10.7 of the Registrant's Form
8-K report, filed December 6, 2005).
10.8 Employment Agreement, dated as of September 26, 2005, by and between Louis
A. Giusto and Gales Industries Incorporated (and assumed by the
Registrant) (incorporated by reference to Exhibit 10.8 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.9 Employment Agreement, dated as of September 26, 2005, by and among Gales
Industries Incorporated (and assumed by the Registrant), Air Industries
Machining, Corp. and Peter D. Rettaliata (incorporated by reference to
Exhibit 10.9 of the Registrant's Form 8-K report, filed December 6, 2005).
II-7
10.10 Employment Agreement, dated as of September 26, 2005, by and among Gales
Industries Incorporated (and assumed by the Registrant), Air Industries
Machining, Corp. and Dario Peragallo (incorporated by reference to Exhibit
10.10 of the Registrant's Form 8-K report, filed December 6, 2005).
10.11 Form of Placement Agency Agreement, dated as of September 26, 2005,
between GunnAllen Financial Inc. and Gales Industries Incorporated
(including Amendments No.1 and No.2 thereto, dated October 25, 2005 and
November 10, 2005, respectively). (Incorporated by reference to Exhibit
10.11 of Registrant's registration statement on Form SB-2, No. 333-131709,
filed on February 9, 2006).
10.12 Registrant's 1998 Stock Option Plan (incorporated by reference to Exhibit
10.18 of the Registrant's annual report on Form 10-KSB, filed April 12,
2002).
10.13 2005 Stock Incentive Plan of Gales Industries Incorporated (incorporated
by reference to Exhibit 10.14 of the Registrant's Form 8-K report, filed
December 6, 2005).
10.14 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with Michael A.
Gales (incorporated by reference to Exhibit 10.15 of the Registrant's Form
8-K report, filed December 6, 2005).
10.15 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with Louis A.
Giusto (incorporated by reference to Exhibit 10.16 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.16 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with Peter
Rettaliata (incorporated by reference to Exhibit 10.17 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.17 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with Dario
Peragallo (incorporated by reference to Exhibit 10.18 of the Registrant's
Form 8-K report, filed December 6, 2005).
10.18 Revolving Credit, Term Loan, Equipment Line and Security Agreement, dated
as of November 30, 2005, by and between Air Industries Machining, Corp.,
PNC Bank, National Association, as Lender, and PNC Bank, National
Association, as Agent (incorporated by reference to Exhibit 10.19 of the
Registrant's Form 8-K report, filed December 6, 2005).
II-8
10.19 Mortgage and Security Agreement, dated as of November 30, 2005, by and
between Air Industries Machining, Corp. and PNC Bank (incorporated by
reference to Exhibit 10.20 of the Registrant's Form 8-K report, filed
December 6, 2005).
10.20 Long Term Agreement, dated as of August 18, 2000, between Air Industries
Machining, Corp. and Sikorsky Aircraft Corporation (incorporated by
reference to Exhibit 10.21 of the Registrant's Form 8-K report, filed
December 6, 2005).
10.21 Long Term Agreement, dated as of September 7, 2000, between Air Industries
Machining, Corp. and Sikorsky Aircraft Corporation (incorporated by
reference to Exhibit 10.22 of the Registrant's Current Report on Form 8-K
filed on December 6, 2005.
10.22 Form of Subscription Agreement (incorporated by reference to Exhibit 10.1
to the Registrant's Current Report on Form 8-K filed with the SEC on April
18, 2007).
10.23 Form of Promissory Note (incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K filed with the SEC on April 18,
2007).
10.24 Employment Agreement by and between Gales Industries Incorporated and
George Elkins, dated as of April 12, 2007 (incorporated by reference to
Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed with the
SEC on April 18, 2007).
10.25 Employment Agreement by and between Gales Industries Incorporated and
Carole Tate, dated as of April 12, 2007 (incorporated by reference to
Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed with the
SEC on April 18, 2007).
10.26 Employment Agreement by and between Gales Industries Incorporated and
Joseph Coonan, dated as of April 12, 2007 (incorporated by reference to
Exhibit 10.5 to the Registrant's Current Report on Form 8-K filed with the
SEC on April 18, 2007).
10.27 Letter of Clarification between the Company and Michael A. Gales dated May
11, 2007 (incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31,
2007).
14.1 Code of Ethics
16.1 Letter of Daszkal Bolton LLP to the Securities and Exchange Commission
pursuant to the requirements of Item 304 (a)(3) of Regulation S-K
(incorporated by reference to Exhibit 16.1 of the Registrant's Form 8-K/A
report, filed December 28, 2005).
21.1 Subsidiaries
23.1 Consent of Eaton & Van Winkle (included in Exhibit 5.1).
23.2 Consent of Goldstein Golub Kessler LLP
23.3 Consent of Bildner & Giannasco LLP
23.4 Consent of Bildner & Giannasco LLP
Item 28. Undertakings
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
II-9
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is a part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
II-10
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Bay Shore, New York on July 13, 2007.
AIR INDUSTRIES GROUP, INC.
By: /s/ Peter D. Rettaliata
----------------------------------------
Peter D. Rettaliata
President and CEO
(principal executive officer)
By: /s/ Louis A. Giusto
----------------------------------------
Louis A. Giusto
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter D. Rettaliata and Louis A. Giusto, and each
of them acting without the other, his true and lawful attorney-in-fact, with
full power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities to sign any and all amendments, including
post-effective amendments, to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute, each acting alone, may lawfully do or
cause to be done by virtue thereof.
In accordance with the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the dates indicated.
Signature Capacity
--------- --------
/s/ James A. Brown
-----------------------
James A. Brown Chairman July 13, 2007
/s/ Louis A. Giusto
-----------------------
Louis A. Giusto Chairman, Chief Financial Officer, Treasurer July 13, 2007
and a Director
/s/ Peter D. Rettaliata
-----------------------
Peter D. Rettaliata President, CEO and a Director July 13, 2007
/s/ Dario A. Peragallo
-----------------------
Dario A. Peragallo Executive Vice President and a Director July 13, 2007
-----------------------
Seymour G. Siegel Director July , 2007
/s/ Ira A. Hunt Jr.
-----------------------
Ira A. Hunt Jr. Director July 13, 2007
/s/ David J. Buonanno
-----------------------
David J. Buonanno Director July 11, 2007
II-11
AIR INDUSTRIES GROUP, INC.
INDEX OF EXHIBITS FILED WITH REGISTRATION STATEMENT
Exhibit No. Description
5.1 Opinion of Eaton & Van Winkle LLP
21.1 Subsidiaries
23.1 Consent of Eaton & Van Winkle LLP (included in Exhibit 5.1).
23.2 Consent of Goldstein Golub Kessler LLP for use of its report.
23.3 Consent of Bildner & Giannasco LLP for the use of its report.
23.4 Consent of Bildner & Giannasco LLP for the use of its report.
II-12