UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2007
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to ___________________________
Commission file number 000-29245
AIR INDUSTRIES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 20-4458244
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
1479 North Clinton Avenue Bay Shore, New York 11706
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code-(631) 968-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |X| No |_|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes | | No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. As of June 30, 2007, the aggregate market value of the common stock of
the registrant held by non-affiliates (excluding shares held by directors,
officers and others holding more than 5% of the outstanding shares of the class)
was $15,837,736, based upon a closing sale price of $0.27 as reported by
Bloomberg Finance.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. As of March 31, 2008, the
registrant had outstanding 69,262,227 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
2
Table of Contents
Page
PART I
Item 1. Business 5
Item 1A. Risk Factors 12
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 28
Item 9A. Controls and Procedures 28
Item 9B. Other Information 30
PART III
Item 10. Directors, Executive Officers and Corporate Governance 31
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 37
Item 13. Certain Relationships and Related Transactions, and
Director Independence 39
Item 14. Principal Accountant Fees and Services 40
PART IV
Item 15. Exhibits, Financial Statement Schedules 41
Signatures 44
Exhibits
-------------
Special Note Regarding Restatement of Quarterly Operating Results
As a result of (i) our determination to capitalize certain amounts related
to development expenditures made in the first three quarters of 2007 previously
expensed and (ii) the completion of the allocation of the price we paid to
acquire two entities during 2007 among certain intangible assets of those
entities that initially had been allocated to goodwill, we have included in this
report condensed restatements of our Consolidated Statement of Operations for
each of the first three quarters of 2007. See" Management's Discussion and
Analysis of Financial Condition and Results of Operations."
3
Cautionary Note Regarding Forward-Looking Statements
Our disclosure and analysis in this report contains some forward-looking
statements. Certain of the matters discussed concerning our operations, cash
flows, financial position and economic performance 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.
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.
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-K, Form 10-Q 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 report. 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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PART I
Item 1. Business.
Introduction
As used in this report, unless otherwise stated or the context requires
otherwise, the "Company" and terms such as "we," "us" "our," and "AIRI" 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 (iv) our
wholly-owned subsidiaries, Sigma Metals, Inc. ("Sigma Metals" or "Sigma") and
Welding Metallurgy, Inc. ("Welding Metallurgy"). The information in this report
reflects a 1-for-1.249419586 reverse split of our common stock which became
effective as of November 21, 2005.
Our Business
Air Industries Group, or AIRI, is a publicly traded aerospace and defense
company. AIRI designs and manufactures structural parts and assemblies that
focus on flight safety, including landing gear, arresting gear, engine mounts,
flight controls and throttle quadrants. The Company also provides sheet metal
fabrication, tube bending and welding services, as well as distributing
specialty metals that are a critical component in the aerospace supply chain.
AIRI's products are currently deployed on a wide range of high profile
military commercial aerospace platforms including Sikorsky's UH-60 Blackhawk
helicopter, Lockheed Martin's F-35 Joint Strike Fighter, Northrop Grumman's E2D
Hawkeye, Boeing's 777 and Airbus' 380 commercial airliners. We are the largest
supplier, in terms of number of components, of flight safety components to
Sikorsky for its Blackhawk helicopters.
Our AIM Subsidiary has manufactured components and subassemblies for the
defense and commercial aerospace industry for over 35 years and has established
long term relationships with leading defense and aerospace manufacturers such as
Boeing, Goodrich Landing Gear, Lockheed Martin, Northrop Grumman, Latecoere
Group, and United Technologies.
Air Industries Group was formed in 2005 through the merger of its platform
company Air Industries Machining Corporation, or AIM, into Gales Industries
Incorporated (a publicly traded company). Since the merger, we have made two
strategic acquisitions that have enabled us to further penetrate our existing
markets and develop new market opportunities. We operate three independent
companies which serve the aerospace industry and work cooperatively with each
other. These companies are Air Industries Machining Corporation, Sigma Metals
and Welding Metallurgy.
Air Industries Machining Corporation formed the initial platform of AIRI
in 2005. AIM manufactures machined aircraft parts and subassemblies and other
flight critical parts/assemblies for many of the major aircraft platforms in the
industry. Customers include original equipment manufacturers, or OEMs, and
members of the supply chain including Sikorsky, Lockheed Martin, Boeing,
Northrop Grumman, Latecoere (France) and Goodrich Landing Gear. AIM was founded
in 1969 and is based in Bay Shore, New York.
We acquired Sigma Metals, Inc., or Sigma, in April 2007. Sigma distributes
aluminum, stainless, and titanium raw materials for the aerospace industry to
customers in the United States, Europe and Asia. These materials are sold to
OEMs and lower supply chain companies, and are incorporated into products
produced by Sikorsky, Lockheed Martin, Boeing and Northrop Grumman and others.
Sigma was founded in 1994 and is based in Hauppauge, New York.
We acquired Welding Metallurgy in August 2007. Welding Metallurgy is a
supplier of welded assemblies and performs tube bending, sheet metal fabrication
and precision assembly. Welding Metallurgy also manufactures components for
various subsectors of the commercial and military aerospace industry. Its
customers include Sikorsky, Lockheed Martin, Boeing and Northrop Grumman.
Welding Metallurgy was founded in 1979 and is based in Hauppauge, New York.
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On June 26, 2007, we changed our name from Gales Industries Incorporated
to Air Industries Group, Inc.
Our principal offices are located at 1479 North Clinton Avenue, Bay Shore,
New York 11706 and our telephone number is (631) 968-5000.
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 in a private
placement. The series B convertible preferred stock is convertible into shares
of our common stock at a price per share of $0.276, subject to adjustment.
Loan and Security Agreement with Steel City Funding LLC
In connection with the acquisition of Welding Metallurgy, on August 24,
2007 AIM, Sigma and Welding Metallurgy entered into the Steel City Capital
Funding ("SCCF") Loan Agreement, under which we borrowed $4,500,000. Borrowings
under the SCCF Loan Agreement bear interest generally at a rate of 6% over the
base commercial lending rate of PNC Bank as publicly announced from time to
time, except under certain circumstances. To secure the payment of the
indebtedness under the SCCF Loan Agreement, AIM, Sigma and Welding Metallurgy
each granted SCCF a security interest in all its assets. The indebtedness and
security interest granted under the SCCF Loan Agreement are junior and
subordinate to the indebtedness and security interest under our Revolving
Credit, Term Loan and Security Agreement dated as of November 30, 2005 ( the
"PNC Bank Credit Facility") with the financial institutions named therein (the
"Lenders") and PNC Bank N.A., as agent for the Lenders, as amended. The amounts
due under the SCCF Loan Agreement are payable on August 24, 2010, or earlier
upon the termination of the PNC Bank Credit Facility, acceleration following the
occurrence of an event of default (as defined) or certain other circumstances.
To secure payment of the indebtedness under the SCCF Loan Agreement, AIR pledged
all of the outstanding shares of AIM and Sigma, which, in turn, pledged all of
the outstanding shares of Welding Metallurgy.
Amendments to Our Credit Facility with PNC Bank
To refinance the debt of Sigma Metals, on April 19, 2007, we entered into
a Third Amendment to our PNC Bank Credit Facility. 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 the Lenders 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. Subsequently, the maximum
revolving advance amount was increased from $11,000,000 to $14,000,000.
In connection with the acquisition of Welding Metallurgy, we entered into
the Fourth Amendment to the PNC Bank Credit Facility which adds Welding
Metallurgy as a borrower under that credit facility and us as a guarantor of the
obligations thereunder.
Increase in our Authorized Shares of Common Stock and Authorization of our Board
to Implement a Reverse Split of our Common Stock.
At a Special Meeting of Stockholders on April 3, 2008, our stockholders
approved an amendment to our certificate of incorporation increasing to
250,000,000 the number of shares of common stock we are authorized to issue and
authorized our Board of Directors to effect, at its discretion at any time not
later than December 31, 2008, if at all, a reverse stock split of our common
stock at a ratio within the range from one-for-ten to one-for-thirty, with the
ratio and timing to be selected and implemented by our Board. The reverse stock
split is part of a plan intended to enable us to obtain a listing for our common
stock on a national securities exchange. If the reverse stock split is effected,
the number of our authorized shares of common stock would be reduced to
125,000,000 shares.
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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 2007,
approximately 60% 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 40% of AIM's revenues for 2007 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 an individual parts manufacturer to a manufacturer of
subassemblies (i.e., being an assembly constructor) and 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 63% of AIM's
revenues during 2007, 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. The products produced by AIM historically have
been built to customer designs and specifications. AIM's investments have been
for manufacturing engineering, process engineering and tooling to achieve
manufacturing efficiency certifications and approvals that provide entry barrier
to competitors for follow-on procurements. More recently, however AIRI has
developed an in-house engineering and design capability for AIM that has
positioned us to manufacture products for customers to our propriety designs.
About Sigma Metals
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.
About Welding Metallurgy
Welding Metallurgy is a provider of specialty welding services and metal
products. Our welding services and products are provided to prime contractors in
the defense and commercial aerospace industries, aerospace engine manufacturers
and subcontractors to aerospace manufacturers throughout the United States.
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.
7
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. This includes our new
ability to participate as an initial design partner. Most recently we partnered
with Goodrich Landing Gear on a proposal for the Embraer business jet landing
gear.
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.
Sigma Metals has historically enjoyed loyal and ongoing relationships with
some of the world's leading aerospace companies. These relationships were based
on the company's ability to provide high quality materials or exotic materials,
on short notice, which are sought after in the aerospace industry. Since the
company was purchased by us, Sigma Metals has initiated a marketing effort that
is aimed at growth, with a focus on several strategic objectives including in
person sales, direct call campaigns, development of relationships and networking
opportunities.
Welding Metallurgy has historically enjoyed loyal and ongoing
relationships with some of the world's leading aerospace companies, including
Northrop Grumman, Boeing and Middle River Aircraft Systems. These relationships
were based on the company's ability to provide precision welding services, which
are sought after in the aerospace industry. Since we acquired Welding
Metallurgy, we have initiated a marketing effort that is aimed at growth, with a
focus on the following strategic objectives:
Favorable differentiation
Since we acquired Welding Metallurgy, our focus has been on providing
world class customer service, and we have restructured Welding Metallurgy's
pricing to improve its competitive position in the industry. Welding Metallurgy
has received positive feed-back from its key customers. Welding Metallurgy also
has embarked on a face-to-face marketing campaign with established customers,
using members of the top management team. We believe that this personal
approach, combined with improved pricing and performance, has increased customer
loyalty and resulted in new opportunities for Welding Metallurgy with existing
customers.
Diversification
In conjunction with the marketing efforts aimed at existing customers,
Welding Metallurgy also has aggressively marketed new customers to mitigate the
vulnerability associated with being a near "captive" shop to Northrop Grumman,
which historically represented 70-75% of its annual revenues. Through direct
marketing efforts by executive management, Welding Metallurgy has secured the
approval of Sikorsky Aircraft, Piper Aircraft, GKN Aerospace, M7 Aerospace,
Quartz Mountain Aerospace, Ametek/Hughes-Treitler, and Blair/HSM. Welding
Metallurgy also has executed a licensing agreement with Davis Aircraft for its
proprietary "Wolfbend" pre-insulated tubing, which is being incorporated into
many of the new regional aircraft currently in development. The net effect has
been a more diverse customer base, comprised of major commercial and military
aerospace customers.
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For the first time in its history, Welding Metallurgy has quotations
pending with companies outside the aerospace market, including Slant/Fin
corporation (home heating systems), and Halm Industries (printing machinery).
Target customers have been identified through trade shows, publications and news
subscriptions, pre-existing relationships between Welding Metallurgy's executive
management and key procurement personnel, and the selective use of independent
sales representatives.
Evolution from welder to turnkey provider
Through direct marketing efforts and the creation of new marketing
materials, Welding Metallurgy has made customers aware of the full scope of its
capabilities. As a result, customers that considered Welding Metallurgy only as
a supplier of welding services have now turned to Welding Metallurgy for
complete, fully-assembled products. This has increased the market share of
Welding Metallurgy with these customers and has resulted in more firmly embedded
relationships.
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 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.
Our Backlog
AIM has a number of long-term multi-year general purchase agreements with
several 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 obligate a customer to buy required
products from us. Nevertheless, generally, before a customer will award such an
agreement, we or any other potential 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 general
purchase agreements, or 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.
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As of March 15, 2008, AIM's 18-month "firm backlog" was approximately
$55.3 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 is
approximately $75 million. Because of the nature of the products and services
provided, Sigma Metals and Welding Metallurgy do not have a significant backlog
and their 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
and to develop entry barriers to others by establishing advanced quality
approvals, certifications and tooling investments that are uneconomical to
duplicate.
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.
Welding Metallurgy operates in an environment similar to AIM, where once
it is established as a source for a customer the entry barrier for competitors
is difficult to overcome.
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.
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
severely harmed.
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
and U.S. metals to foreign customers. Given the nature of its business, Sigma
Metals constantly seeks to develop new sources of materials and to develop
supply relationships with aerospace manufacturers.
As a specialty welding and manufacturing service provider, Welding
Metallurgy does not require significant amounts of materials to produce finished
products. Supplies required for its operations are readily available and do not
require significant inventories to be held on hand.
10
Future Expansion and Acquisition Strategy
Since the 1990s, the aerospace and defense 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.
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.
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.
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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.
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 to the project. 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 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 March 31, 2008, we employed approximately 225 people. AIM is a party
to a collective bargaining agreement with the United Service Workers, IUJAT,
Local 355 (the "Union") with which we believe we maintain good relations. Our
collective bargaining agreement is dated January 1st, 2008 and covers all of
AIM's production personnel. All other company employees including AIM's
management employees, all Sigma employees, all Welding Metallurgy's employees,
and AIRI employees are covered under a co-employment agreement with Administaff.
The terms and provisions of the Collective Bargaining Agreement are effective
for three (3) years and terminate December 31, 2011. AIM is required to make a
monthly contribution to each of the Union's United Welfare Fund and the United
Services Worker's Security Fund. The Collective Bargaining Agreements contains a
"no-strike" clause, whereby, during the terms of the Collective Bargaining
Agreements the Union will not strike and AIM will not lockout its employees.
Item 1A. 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 report. 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.
12
We cannot assure you that any business we acquire will benefit from its
acquisition by us.
We cannot assure you that any benefits to the business of AIM, Sigma
Metals, Welding Metallurgy or any other entities that we acquire will be
achieved from their acquisition by us or by our status as a public company, or
that the results of operations of AIM, Sigma Metals, Welding Metallurgy or such
other acquired entities will not be adversely impacted by their acquisition by
us. The process of combining the organizations of private companies into a
public company such as ours may cause fundamental changes to their businesses or
in their operations.
The past performance of AIM, Sigma Metals, Welding Metallurgy or any other
entity that we acquire is not necessarily indicative of our future performance.
Future performance may be adversely affected as a result of the integration of
the acquired business into our organization and the significant increase in
expenses relating to financial statement preparation and compliance with
controls and procedures standards established by the Sarbanes-Oxley Act of 2002.
The terms of the financing we obtain, if any, to acquire the Blair Companies may
not be favorable to our current stockholders.
On November 15, 2007, we entered into a Stock Purchase Agreement with the
shareholders of Blair Industries, Inc., a New York corporation, Blair
Accumulators, Inc., a New York corporation, H.S.M. Machine Works, Inc., a New
York corporation, and H.S.M. Machine Works, Inc., a North Carolina corporation
(collectively, the "Blair Companies") to acquire all of the outstanding capital
stock of the Blair Companies. We will need to raise funds to complete the
acquisition of the Blair Companies. We are currently working with a lender which
is considering lending us sufficient debt to complete this acquisition. Although
this lender is continuing its due diligence, we cannot assure you that this
lender will provide financing to complete the acquisition. In the current
economic environment, the terms on which financing to acquire the Blair
Companies may be made available to us, if it is available, may not be favorable
to us or our current shareholders.
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. This could
result in increased responsibilities for management.
Our future success will be highly dependent upon our ability to manage
successfully the expansion of our 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 failure to integrate a business or business segment we acquire could have a
material adverse effect on our results of operations and financial condition.
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.
13
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.
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.
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.
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, we have derived a material portion of our 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. One customer
accounted for approximately 46% of our consolidated sales during the year ended
December 31, 2007. 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 government 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.
14
Continued competition in our markets may lead to a reduction in our revenues.
The defense and aerospace component manufacturing market is highly
competitive and we expect that competition will 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.
Fluctuations in quarterly results, competition or announcements of
extraordinary events such as acquisitions or litigation may cause earnings to
fall below 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.
Our indebtedness may affect operations.
As described under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources", we have significant indebtedness. We are significantly leveraged and
our indebtedness is substantial in relation to our stockholders' equity. Our
15
ability to make principal and interest payments will depend on future
performance. In addition, our loan facilities are secured by substantially all
of our assets. In the case of a continuing default under either of our loan
facilities, 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 may limit our ability to pay cash dividends to our stockholders and the
documents governing our loans 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 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.
We may issue our debt securities to complete an acquisition, and if we are
unable to generate sufficient cash flow from operations to satisfy the debt
service associated with that indebtedness, our inability to do so may force us
to sell assets and restrict our ability to obtain additional financing or place
onerous restrictions on our operations.
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.
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.
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.
If our Board of Directors implements the reverse stock split, we cannot assure
you that the total market capitalization of our common stock after the reverse
stock split will be equal to or greater than the total market capitalization
before the reverse stock split or that the per share market price of our common
stock following the reverse stock split will either exceed or remain higher than
the pre-split per share market price.
16
We cannot assure you that if our Board implements a reverse stock split,
that the market price per new share of common stock after the reverse stock
split will rise or remain constant in proportion to the reduction in the number
of old shares of common stock outstanding before the reverse stock split. For
example, based on the closing market price of our common stock on March 26, 2008
of $0.21 per share, if the Board decided to implement a reverse stock split and
selected a reverse stock split ratio of one-for-fifteen, we cannot assure you
that the post-split market price of our common stock would be $3.15 per share.
Alternatively, if the Board decided to implement a reverse stock split and
selected a reverse stock split ratio of one-for-thirty we cannot assure you that
the post-split market price of our common stock would be $6.30 per share.
Accordingly, the total market capitalization of our common stock after the
reverse stock split may be lower than the total market capitalization before the
reverse stock split and, in the future, the market price of our common stock
following the reverse stock split may not exceed or remain higher than the
market price prior to the reverse stock split. In many cases, the total market
capitalization of a company following a reverse stock split is lower than the
total market capitalization before the reverse stock split.
A decline in the market price for our common stock after the reverse stock split
may result in a greater percentage decline than would occur in the absence of a
reverse stock split, and the liquidity of our common stock could be adversely
affected following a reverse stock split.
The market price of our common stock will be based on our performance and
other factors, some of which are unrelated to the number of shares outstanding.
If the reverse stock split is effected and the market price of our common stock
declines, the percentage decline as an absolute number and as a percentage of
our overall market capitalization may be greater than would occur in the absence
of a reverse stock split. In many cases, both the total market capitalization
and the market price of a share of a company's common stock following a reverse
stock split are lower than they were before the reverse stock split.
Furthermore, the liquidity of our common stock could be adversely affected by
the reduced number of shares that would be outstanding after the reverse stock
split.
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.
17
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. A
high proportion of our issued and outstanding shares, including those issuable
upon conversion of our series B convertible preferred stock, are eligible for
sale under the provisions of Rule 144 that do not limit the amount of shares
that may be sold by a holder. The number of our shares available for sale 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.
Item 2. Properties.
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. 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. 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 operations of Sigma Metals and Welding Metallurgy have been relocated
to a new 81,035 square foot facility located in Hauppauge, New York. This space
is occupied under a sublease which provides for an annual base rent of
approximately $514,572 for the first year of the sublease, with increases of 3%
per year for the remainder of the following eight years.
Item 3. Legal Proceedings
We were a defendant in an action by our former investor relations firm
filed on September 18, 2007 in the Supreme Court of the State of New York, New
York County captioned Porter, Levay & Rose, Inc. against Air Industries Group,
Inc. et al. (Index No. 003104/07). This case has been settled for $65,000.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matter to a vote of our stockholders during the
fourth quarter of 2007.
18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market for Our Common Stock
Our common stock is quoted on the OTC Bulletin Board under the trading
symbol "AIRI.OB" ("GLDS" prior to July 16, 2007 and "ASHN" prior to February 15,
2006). 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.
2007 Quarter Ended High Low
------------------ ---- ---
December 31, 2007 $0.35 $0.22
September 30, 2007 0.40 0.22
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
As of March 31, 2008, there were approximately 200 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.
Recent Sales of Unregistered Securities
We have reported all sales of our unregistered equity securities that
occurred during 2007 in our Reports on Form 10-QSB or Form 8-K, as applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the fourth quarter of our fiscal year ended December 31, 2007,
neither we nor any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under
the Exchange Act) purchased any shares of our common stock, the only class of
our equity securities registered pursuant to section 12 of the Exchange Act.
Item 6. Selected Financial Data.
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion of our results of operations constitutes
management's review of the factors that affected our financial and operating
performance for the years ended December 31, 2007 and 2006. This discussion
should be read in conjunction with the financial statements and notes thereto
contained elsewhere in this report.
19
General
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.
Sigma Metals distributes aluminum, stainless, and titanium raw materials
for the aerospace industry to customers in the United States, Europe and Asia.
These materials are sold to Major Aerospace Manufacturers and their lower tier
supply chain companies, and are incorporated into products produced by Sikorsky,
Lockheed Martin, Boeing and Northrop Grumman and others.
Welding Metallurgy is a supplier of welded assemblies and performs tube
bending, sheet metal fabrication and precision assembly. Welding Metallurgy also
manufactures components for various subsectors of the commercial and military
aerospace industry. Its customers include Sikorsky, Lockheed Martin, Boeing and
Northrop Grumman.
Sales of parts and services to one customer accounted for 46% of AIRI's
revenue in 2007, and are subject to General Ordering Agreements which were
recently renegotiated and extended through 2012.
Results of Operations
We completed the acquisition of Sigma Metals on April 16, 2007, and the
acquisition of Welding Metallurgy on August 26, 2007; consequently, the results
of Sigma and Welding Metallurgy from April 17, 2007, and August 27, 2007,
respectively, are included in our financial statements for the year ended
December 31, 2007, and reflected in the discussion below.
Year ended December 31, 2007 compared with year ended December 31, 2006
Segment Data
We follow SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), which establishes standards for reporting
information about operating segments in annual and interim financial statements,
and requires that companies report financial and descriptive information about
their reportable segments based on a management approach. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. As a result of the acquisition of Sigma in
April 2007 and Welding Metallurgy in August 2007, we have three reportable
segments: Air Industries Machining, Sigma Metals and Welding Metallurgy. Air
Industries Machining is primarily engaged in processing, cutting, milling,
machining and hardening metals into assemblies that are widely used in the
aerospace industry. Sigma Metals is a supplier of sheet metal, plate, forgings
and bar stock to converters who supply parts to major domestic and international
aerospace customers. Welding Metallurgy is a fabricator of parts primarily used
in the defense industry. Welding specializes in complex welding applications and
in tubular structures.
The accounting policies of each of the segments are the same as those
described in the Summary of Significant Accounting Policies. We evaluate
performance based on revenue, gross profit contribution and assets employed.
Operating costs that are not directly attributable to a segment are included in
the Air Industries Machining segment. These costs include corporate costs such
as legal, audit, tax and other professional fees related to being a public
company.
We are in the process of integrating Sigma Metals and Welding Metallurgy
into our fully integrated Enterprise Resource Program for operational and
financial control. This process is expected to be completed by the end of the
second quarter of 2008 and will enable our management to have more accurate and
current information when making decisions concerning sales, product pricing and
the reasonableness of related costs.
As a result of the acquisitions of Sigma Metals and Welding Metallurgy our
customer base has become more diversified and less dependent on one major
customer whose pre-acquisition percentage of revenue was in excess of 70% and is
now on a post-acquisition basis approximately 46%.
20
The following table sets forth, for the periods indicated, certain
components of our statements of operations
Year Ended December 31,
-----------------------
2007 2006
---- ----
Air Industries Machining
Revenue $ 34,088,056 $ 33,044,996
Gross Profit 8,361,046 5,042,054
Pre Tax Income 3,412,729 1,563,036
Assets 31,304,053 24,576,329
Sigma Metals
Revenue 9,890,659 --
Gross Profit 2,781,253 --
Pre Tax Income 303,996 --
--
Assets 11,463,079 --
Welding Metallurgy
Revenue 2,089,930 --
Gross Profit 1,588,347 --
Pre Tax Income 1,026,715 --
Assets 8,425,658 --
Corporate
Revenue -- --
Gross Profit -- --
Pre Tax Income (loss) (3,503,866) (1,409,636)
Assets 22,962,665 8,333,815
Consolidated
Revenue 46,068,645 33,044,996
Gross Profit 12,730,646 5,042,054
Pre Tax Income 1,239,573 153,400
Provision for Taxes 611,673 489,969
Net Income (loss) 627,900 (336,569)
Elimination of Assets (23,865,005) (8,017,962)
Assets 50,290,450 24,892,182
In the paragraphs below, the numbers for 2007 reflect the consolidated
results of our operations for 2007.
Net sales were $46,068,645 for the year ended December 31, 2007, or Fiscal
2007, an increase of $13,023,649, or 39%, from net sales of $33,044,996 for the
year ended December 31, 2006, or Fiscal 2006. This increase was attributable to
the consolidation of $11,980,589 of net sales from Sigma and Welding Metallurgy
from April 16, 2007 and August 27, 2007, respectively, augmented by an increase
in net sales at AIM of $1,043,060. The increase in net sales at AIM reflects a
slight increase in price being paid by our largest customer and an increase in
overall unit volume.
Gross profit was $12,730,646 in Fiscal 2007 (27.6% of net sales), compared
to gross profit of $5,042,054 in Fiscal 2006 (15.3% of net sales). The increase
in gross profit is primarily attributable to the revenues of Sigma Metals
($9,890,659) and Welding Metallurgy ($2,089,930). The increase in gross profit
as a percentage of sales reflects the continuation of the shift in our
production to higher margin military products.
Selling and marketing expenses were $1,476,111 in Fiscal 2007, an increase
of $875,100 (145.6%) from selling and marketing expenses of $601,011 in Fiscal
2006. This increase was attributable to inclusion of selling expenses of Sigma
Metals ($963,705) and Welding Metallurgy ($15,284), partially offset by
reductions in field engineering and out bound freight expenses.
21
General and administrative expenses were $8,418,508 in Fiscal 2007, an
increase of $4,628,921 (122%) from general and administrative expenses of
$3,789,587 in Fiscal 2006. The increase was primarily due to inclusion of
general and administrative expenses of Sigma Metals ($1,405,910) and Welding
Metallurgy ($336,976). This increase also reflects (i) a reclassification of the
cost of certain management personnel to better reflect their functions, (ii)
professional fees attributable to our reporting requirements as a public company
($365,678) and (iii) preparations for compliance with Sarbanes-Oxley ($340,000).
Fiscal 2007 also reflects an increase in non-cash compensation charges resulting
from the grant of options to management under our Stock Incentive Plan
($406,210). In addition, we incurred additional bad debt expense in 2007 as
compared to 2006 ($200,000) based upon managements' assessment of the
collectability of certain outstanding receivables.
Interest and financing costs was $1,578,337 in Fiscal 2007, an increase of
$538,229 (52%) from interest and financing costs of $1,040,108 in Fiscal 2006.
This increase is attributable to borrowings relating to the acquisition of Sigma
Metals and Welding Metallurgy in Fiscal 2007, higher interest rates and
borrowings for operations at Sigma and Welding Metallurgy.
Other income and other expense was $56,113 in Fiscal 2007 a decrease of
$245,081 (130%) and primarily reflects the 2006 present value gain realized as a
result of the sale and lease-back transaction for our real estate.
Income Before Provision for Income Taxes was $1,239,573 in Fiscal 2007, an
increase of $1,086,173 (708%) from income before income taxes of $153,400 in
Fiscal 2006. The increase in income during Fiscal 2007 resulted primarily from
the impact on AIRI's business of the acquisitions of Sigma and Welding
Metallurgy offset in part by expenses incurred by us to comply with our
reporting obligations as a public entity.
Provision for Income Taxes increased to $611,673 for Fiscal 2007, as
compared to $489,969 for Fiscal 2006, primarily reflecting the taxes payable as
a result of the increase in our net income for the reasons discussed above.
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Liquidity and Capital Resources
Since the PNC Loan Facility requires that all cash at our operating
subsidiaries be swept on a daily basis to our loan accounts, at December 31,
2007 and December 31, 2006, we had no cash or cash equivalents. At December 31,
2007, we had working capital of $5,699,360 as compared to working capital of
$4,911,354 as of December 31, 2006. This increase reflects the proceeds of the
placement of our series B convertible preferred stock, offset by the cash used
to acquire Sigma and Welding Metallurgy ($4,060,796 and $ 3,500,000
respectively) and our negative cash flows from operations during the year ended
December 31, 2007. It should be noted that included in current liabilities is an
aggregate of $15,960,716 payable to our bank lenders. Under the terms of our
loan agreements these amounts are not payable until April 30, 2010 and August
24, 2010, respectively, but have been included in current liabilities due to the
right of the banks to demand immediate repayment as a result of the subjective
nature of the acceleration clause upon the occurrence of certain events, which
management believes are not likely to occur, combined with the existence of a
lockbox arrangement. We believe that our cash requirements for operations in the
next twelve months will be met by revenues from operations, cash reserves, and
amounts available under the PNC Loan Facility.
As of December 31, 2007, our outstanding debt consisted of $16,489,046
under our loan facility made up of $15,960,716 classified as short-term and
$528,330 classified as long-term. Notes payable to the former shareholders of
our subsidiaries AIM, Sigma and Welding of $3,938,832 are classified as
$1,435,796 short-term and $2,503,036 as long-term. Capital lease obligations of
$1,478,791 are classified as $290,285 short-term with the remaining balance of
$1,188,506 classified as long-term. Additionally at December 31, 2007 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.
22
We used $5,948,396 in operations during the year ended December 31, 2007.
The use of cash in operations reflects an increase in inventory of $3,323,195,
an increase in our deposits with vendors of $724,607 , a decrease in prepaid
expenses of $47,643, and a decrease in our accounts payable and accrued
expenses of $3,104,447. The increase in our inventory and decrease in our
accounts payable noted above are associated with our pre-existing operations and
do not reflect the changes resulting from the acquisitions of Sigma and
Welding Metallurgy . The increase in the inventory in our pre-existing
operations is primarily related to the need to support the increase in
contractual business space for follow-on contracts in 2008 as well substantial
activity in new business products. The additional increase in inventory
reflected on our balance sheet results primarily from the acquisition of our
metals and welding operations. The increase in deposits with vendors and
decrease in accounts payable are due to advanced payment requirements imposed by
certain suppliers of our pre-existing operations. As a result of efforts to
reduce amounts due these suppliers, we anticipate that they may not require
prepayments in the immediate future.
In addition to the foregoing uses of cash, during 2007 AIM had capitalized
development costs in the amount of $1,533,215 in connection with engineering and
tooling outlays related to its successful efforts to win certain long-term
contracts. Included in these projects are contracts for Goodrich Landing Gear
related to the A380, Boeing, Latacoere and Sikorsky.
In connection with the acquisition of Air Industries Machining Corp., we
paid the sellers $2,040,103 in cash and incurred notes payable obligations to
the sellers in the aggregate principal amount of $1,627,262, of which $665,262,
plus accrued interest of $54,511 were in the form of convertible promissory
notes which were converted by the holders into 1,799,432 shares of common stock
at a conversion price of $0.40 per share on January 26, 2007. The remaining
principal amount, $625,300, is payable in equal quarterly installments of
$48,100 of principal, plus interest through March 2011.
In connection with the acquisition of Sigma Metals, we paid the sellers
$4,060,796 in cash and incurred notes payable obligations to the former
shareholders of Sigma Metals in the aggregate principal amount of $1,497,411.
The remaining principal balance as of December 31, 2007 is $1,216,488, and is
payable in equal monthly installments of $43,446 of principal plus interest,
through 2010, except that in April 2008 $247,090 was prepaid on the notes due
the former shareholders.
In connection with the acquisition of Welding Metallurgy, we paid the
sellers $3,500,000 in cash and incurred a notes payable obligation to the former
shareholders of Welding Metallurgy in the aggregate principal amount of
$2,000,000, which bears no interest until August 24, 2008, and bears interest
thereafter at 7% per annum. To reflect the fact that this note does not bear
interest for the first year, we have discounted the value of the note in our
balance sheet to $1,860,000, and will expense the imputed interest on a monthly
basis and accrete up the value of the note to its face value of $2,000,000. The
balance of this note at December 31, 2007 was $1,906,667. The indebtedness
evidenced by this note is subordinate to our indebtedness to PNC and SCCF and is
payable in one installment in the principal amount of $500,000 due on August 24,
2008 and twelve consecutive quarterly installments of principal in the amount of
$125,000, plus accrued interest, commencing on November 30, 2008 and continuing
through August 31, 2011. Under the stock purchase agreement, we are obligated to
pay the sellers an additional $190,377 as an adjustment to the purchase price.
We have agreed to pay this adjustment to the purchase price in four equal
monthly installments of $49,400 (which amount includes interest of 7% per annum
from November 1, 2007) commencing on March 31, 2008 and on the last day of each
calendar month thereafter through June 30, 2008.
The terms of the PNC Loan Facility are described in the notes to our
consolidated financial statements included in this report. Under the PNC Loan
Facility, as of December 31, 2007, we had revolving loan balances of
$11,332,940, a term loan balance of $244,906, and an equipment loan balance of
$411,200 as compared to balances of $5,027,043; $362,034 and $411,200 as of
December 31, 2006. In addition, as of December 31, 2007 we had capital lease
obligations to other parties totaling $1,478,791.
23
To finance the acquisition of Sigma Metals and to provide us with
additional working capital and funds for future acquisitions, we completed a
private placement of our series B convertible 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
Metals 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. The holders of
the series B preferred stock are entitled to a cumulative annual dividend of 7%
per annum, which we have the right to pay in additional shares of series B
preferred stock, except under certain circumstances. In October 2007 and January
2008, we issued an aggregate of 26,798 and 16,456 shares of series B preferred
stock in payment of accrued dividends. The shares of series B preferred stock
issued in the offering and in payment of accrued dividends are convertible into
approximately 30,439,944 shares of our common stock. On April 1, 2008, our Board
declared a dividend on our series B convertible preferred stock, payable in
19,825 additional shares of series B convertible preferred stock.
In connection with the acquisition of Sigma Metals, we also amended and
modified the terms of the Loan Facility with PNC to allow for Sigma to become a
borrower under the Loan Facility. The cost of this amendment was $42,500 and is
being amortized over the remaining term of the Credit Facility. As part of the
amendment, Sigma Metals' pledged all of its assets and to PNC to secure the
payment of its obligations under the Loan Facility. In addition the termination
date of the PNC Loan Facility was extended to April 30, 2010 and the maximum
revolving advance amount was increased by $2,000,000, to $11,000,000.
In connection with the acquisition of Welding Metallurgy, the terms of the
PNC Loan Facility were amended and modified to include Welding Metallurgy as a
borrower and Air Industries Group and Welding Metallurgy as guarantors of
amounts due under the PNC Loan Facility. In connection with that amendment,
Welding Metallurgy pledged all of its assets and properties to PNC to secure its
obligations under the PNC Loan Facility. The maximum revolving advance amount
was increased by an additional $3,000,000 to $14,000,000.
Additionally, in connection with the Welding Metallurgy acquisition, Steel
City Capital Funding LLC, or SCCF provided a Term Loan of $4,500,000. The Term
Loan is payable on August 24, 2010. Borrowings under the SCCF Loan Agreement
bear interest, payable monthly, generally at a rate of 6% over the base
commercial lending rate of PNC Bank as publicly announced to be in effect from
time to time. Under the terms of our loan agreements these amounts are not
payable until August 24, 2010, but have been included in current liabilities due
to the right of the banks to demand immediate repayment as a result of the
subjective nature of the acceleration clause upon the occurrence of certain
events, which management believes are not likely to occur, combined with the
existence of a lockbox arrangement. In addition, to secure the obligations due
SCCF, we pledged to SCCF the capital stock of Air Industries Machining Corp,
Sigma Metals, and Welding Metallurgy, and each of those entities granted to SCCF
a security interest on all of their assets.
During the year ended December 31, 2007, borrowings under the PNC Loan
Facility increased by $6,305,477. These funds were used to reduce a trade
payable ($3,323,195), for production engineering ($1,533,215), to purchase raw
materials inventory ($1,186,256) and to pay taxes ($262,811).
As of December 31, 2007, two customers accounted for approximately 22% and
11% of our accounts receivable. In addition, these customers accounted for
approximately 46% and 11% of net sales, respectively, for the year ended
December 31, 2007. In the event either of such customers is unable or unwilling
to pay amounts due or in the event our relationships with such customers are
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.
Agreement for the Acquisition of the Blair Companies
On November 15, 2007, we entered into a Stock Purchase Agreement (the
"Blair Purchase Agreement") with the shareholders of Blair Industries, Inc., a
New York corporation, Blair Accumulators, Inc., a New York corporation, H.S.M.
Machine Works, Inc., a New York corporation, and H.S.M. Machine Works, Inc., a
North Carolina corporation (collectively, the "Blair Companies") to acquire all
of outstanding capital stock of the Blair Companies.
Founded in 1951, the Blair Companies produce structural landing gear
components; complex airframe machined parts, as well as hydraulic components. In
1979 the Blair Companies expanded their operations to include hydraulic
actuators, mechanical assemblies, a wide variety of kits, and complete landing
gear assemblies. Currently, they also design and manufacture fully dressed
landing gear and other structural and hydraulic components primarily for
commercial and military aircraft. The Blair Companies operate out of one
facility in Medford, Long Island, New York, and another facility in Leland,
North Carolina. For over 10 years, Blair has been a certified supplier for
Goodrich Landing Gear, the world's largest provider of landing gear to the
aerospace industry's prime contractors, and maintains similar standing with
France-based Messier-Dowty, the world's second largest provider of landing gear.
24
We believe the acquisition of the Blair Companies will facilitate and
accelerate our transition from basic contract manufacturing to becoming a
provider of comprehensive integration services, particularly for fully dressed
landing gear and provide us with expanded capabilities and a high-end customer
base for landing gear and other critical flight safety components and
assemblies.
The purchase price for the Blair Companies is $16,358,000, subject to
adjustment based upon the Net Asset Value (as defined in the Blair Purchase
Agreement) of the Blair Companies as of the date of closing. The purchase price
is payable in a combination of cash, promissory notes and shares of our
preferred stock having a liquidation value of $1,000,000. However, we are
engaged in discussions with the shareholders of the Blair Companies to eliminate
the preferred stock as part of the purchase price and with respect to certain
other terms. The promissory notes will have a term of five years commencing on
the date of closing, accrue interest at rates of four percent (4%) per annum, as
to promissory notes in the initial principal amount of $1,358,000, and eight
percent (8%) per annum, as to principal notes in the initial principal amount of
$5,000,000, and contain other customary terms and conditions.
The closing is subject to certain conditions including, but limited to,
our ability to secure not less than $12 million in debt or equity financing. We
have agreed to pay the shareholders of the Blair Companies a break-up fee of
$150,000 under certain circumstances.
Concurrent with the closing, we will enter into employment agreements with
one of the shareholders and a key employee of the Blair Companies. The
employment agreements provide for annual base salaries aggregating initially to
$400,000, together with certain bonuses based upon performance and customary
increases. The employment agreements will contain customary terms and provisions
relating to severance, benefits and vacation. One of the employment agreements
will have an initial term of five (5) years and the other employment agreement
will have an initial term of three (3) years.
We cannot assure you that (i) we will be successful in negotiating an
amendment to the Blair Purchase Agreement on terms favorable to us, if at all,
(ii) we will be able to obtain the financing to complete the acquisition on
terms favorable to us, if at all, or (iii) even if we are able to amend the
Blair Purchase Agreement and obtain a commitment for financing, we will be able
to complete the acquisition. See Item 1A ("Risk Factors") under the risks
captioned "Our indebtedness may affect operations," "We may issue shares of our
capital stock to complete an acquisition, which would reduce the equity interest
of our stockholders" and "We may issue our debt securities to complete an
acquisition, and if we are unable to generate sufficient cash flow from
operations to satisfy the debt service associated with that indebtedness, our
inability to do so may force us to sell assets and restrict our ability to
obtain additional financing or place onerous restrictions on our operations."
Restatement of Quarterly Operating Results (unaudited)
As a result of (i) our determination to capitalize certain amounts related
to development expenditures made in the first three quarters of 2007 previously
expensed and (ii) the completion of the allocation of the purchase price we paid
for Sigma Metals and Welding Metallurgy among certain intangible assets of those
companies that initially had been allocated to goodwill there are set forth
below restated summarized results of operations for each of the first three
quarters of 2007. The table set forth below shows adjustments to the results
previously reported by the Company on Form 10-QSB for each of the first three
quarters of 2007.
Q1 2007 Q1 2007 Q2 2007 Q2 2007
As reported Adjustments (1) As restated As reported Adjustments (1)(2) As restated
Net Income $ 7,488,130 $ 7,488,130 $10,989,536 $10,989,536
Cost of Sales 6,239,484 $(418,014) 5,821,470 8,616,698 $(434,234) 8,182,464
-----------------------------------------------------------------------------------------------
Gross Profit 1,248,646 418,014 1,666,660 2,372,838 434,234 2,807,072
Cost and expenses 1,126,792 -- 1,126,792 2,330,498 55,881 2,386,379
-----------------------------------------------------------------------------------------------
Operating Income 121,854 418,014 539,868 42,340 378,353 420,693
Interest and financing costs 130,954 -- 130,954 280,869 -- 280,869
Other (Income) Expenses (2,377) -- (2,377) (1,224) -- (1,224)
-----------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,723) 418,014 411,291 (237,305) 378,353 141,048
Income tax provision 64,764 194,460 259,224 78,138 176,010 254,148
-----------------------------------------------------------------------------------------------
Net (Loss) Income (71,487) 223,554 152,067 (315,443) 202,343 (113,100)
Less: Dividend attributable to
preferred stockholders -- -- -- 110,964 -- 110,964
-----------------------------------------------------------------------------------------------
Net (loss) income attributable to
common stockholders $ (71,487) $ 223,554 $ 152,067 $ (426,407) $ 202,343 $ (224,064)
===============================================================================================
Loss per common share:
Net income (loss) per common share
(Basic) $ (0.00) $ 0.00 $ (0.01) $ (0.00)
============ ============================ ============
Net income (loss) per common share
(Diluted) $ (0.00) $ 0.00 $ (0.01) $ (0.00)
============ ============================ ============
Weighted average shares
outstanding (Basic) 58,833,681 58,833,681 65,667,564 65,667,564
============ ============================ ============
Weighted average shares
outstanding (Diluted) 58,833,681 60,202,835 65,667,564 65,667,564
============ ============================ ============
Q3 2007 Q3 2007
As reported Adjustments (1)(2) As restated Q4 2007 December 31, 2007
Net Income $12,845,821 $12,845,821 $14,745,158 $46,068,645
Cost of Sales 9,254,338 $(456,336) 8,798,002 10,536,063 33,337,999
-----------------------------------------------------------------------------
Gross Profit 3,591,483 456,336 4,047,819 4,209,095 12,730,646
Cost and expenses 2,617,134 112,921 2,730,055 3,651,393 9,894,619
-----------------------------------------------------------------------------
Operating Income 974,349 343,415 1,317,764 557,702 2,836,027
Interest and financing costs 478,920 -- 478,920 687,634 1,578,377
Other (Income) Expenses 26,074 -- 26,074 (4,396) 18,077
-----------------------------------------------------------------------------
Income (loss) before income taxes 469,355 343,415 812,770 (125,536) 1,239,573
Income tax provision 46,761 159,757 206,518 (108,217) 611,673
-----------------------------------------------------------------------------
Net (Loss) Income 422,594 183,658 606,252 (17,319) 627,900
Less: Dividend attributable to
preferred stockholders 136,578 -- 136,578 146,500 394,042
-----------------------------------------------------------------------------
Net (loss) income attributable to
common stockholders $ 286,016 $ 183,658 $ 469,674 $ (163,819) $ 233,858
=============================================================================
Net income (loss) per common share:
Net income (loss) per common share
(Basic) $ 0.00 $ 0.01 $ (0.00) $ 0.00
=========== ==========================================
Net income (loss) per common share
(Diluted) $ 0.00 $ 0.01 $ (0.00) $ 0.00
=========== ==========================================
Weighted average shares
outstanding (Basic) 67,838,959 67,838,959 69,122,227 65,402,711
=========== ==========================================
Weighted average shares
outstanding (Diluted) 70,734,615 70,734,615 70,738,078 67,861,015
=========== ==========================================
(1) The adjustments to Cost of Sales relates to our determination to capitalize
certain engineering costs initially expensed.
(2) The adjustments to costs and expenses relate to the amortization of amounts
attributable to intangibles that have been specifically identified among the
assets of Sigma and Welding Metallurgy that initially had been included in
goodwill.
As of June 30, 2007 and September 30, 2007, $3,720,000 and $2,434,225 was
reclassified from goodwill to intangibles, respectively, related to the
completion of the allocation of purchase prices. There was no impact on cash
flow for any of the periods.
25
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. Welding Metallurgy
generally produces pursuant to customer orders and maintains relatively low
inventory levels. AIM 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.
Sigma routinely acquires inventory without corresponding purchase orders. We
periodically evaluate inventory items that are not secured by purchase orders
and establish reserves for obsolescence accordingly. We also reserve an
allowance for excess quantities, slow-moving goods, and obsolete items.
Capitalized Pre Production Costs
We have contractual agreements with certain customers to produce parts,
which the customers design. The production of these parts require pre-production
engineering and programming of our machines. We account for these pre-production
costs pursuant to Emerging Issues Task Force Issue No. 99-5, "Accounting for
Pre-Production Costs Related to Long-Term Supply Arrangements" (EITF 99-5). The
pre-production costs associated with a particular contract are capitalized and
beginning with the first shipment of product pursuant to such contract,
amortized over a period determined as follows: (i) if deliverables are scheduled
for a period of three years or less, on a straight line basis over the
anticipated length of the contract and (ii) if deliverables are scheduled for
more than three years, on a straight line basis over three years. If we were to
be reimbursed for a portion of the pre-production expenses associated with a
particular contract only the unreimbursed portion would be capitalized under
EITF 99-5. We also may progress bill on certain engineering being expended.
These billings are recorded as progress billings (a reduction of the associated
inventory) until the appropriate revenue recognition criteria have been met. The
Terms and Conditions contained in our customer purchase orders provide for
liquidated damages in the event that a stop-work order is issued prior to the
final delivery of the product.
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. Air Industries utilizes a return
merchandise authorization procedure for determining whether to accept returned
products. Customer requests to return products are reviewed by the contracts
department and if the request is approved credit is issued upon receipt of the
product. Revenues are recorded net of returns and allowances.
26
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 $437,202 and
$167,126 for the years ended December 31, 2007 and 2006, 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. The Company performs 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
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.
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 12.61% to 14.73% for 2007. Our
evaluations for the year ended December 31, 2007 indicated there was no
impairment of our Goodwill.
Item 7A. Quantitative and Qualitative Disclosures 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.
27
Item 8. Financial Statements and Supplementary Data.
The financial information required by this item is set forth beginning on
page F-1 and is incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On December 3, 2007, we were notified that effective October 3, 2007,
certain of the partners of Goldstein Golub Kessler LLP, or GGK, became partners
of McGladrey & Pullen, LLP in a limited asset purchase agreement and that GGK
resigned as independent registered public accounting firm for the Company.
McGladrey & Pullen, LLP was appointed as our new independent registered public
accounting firm. We engaged GGK as our independent registered public accounting
firm on December 15, 2005.
The audit reports of GGK on the consolidated financial statements of Air
Industries Group, Inc. as of and for the years ended December 31, 2006 and 2005
did not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
The decision to engage McGladrey & Pullen, LLP was approved by the audit
committee of our board of directors.
During our two most recent fiscal years ended December 31, 2006 and 2005
and through December 3, 2007, we did not consult with McGladrey & Pullen, LLP on
(i) the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that may be rendered on our
financial statements, and McGladrey & Pullen, LLP did not provide either a
written report or oral advice to us that McGladrey & Pullen, LLP concluded was
an important factor considered by us in reaching a decision as to any
accounting, auditing, or financial reporting issue; or (ii) the subject of any
disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the
related instructions, or a reportable event within the meaning set forth in Item
304(a)(1)(v) of Regulation S-K.
In connection with the audits of our consolidated financial statements for
each of the fiscal years ended December 31, 2006 and 2005 and through the date
of our Current Report on Form 8-K reporting this event, there were: (i) no
disagreements between us and GGK on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of GGK, would have
caused GGK to make reference to the subject matter of the disagreement in their
reports on our financial statements for such years, and (ii) no reportable
events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
Item 9A. Controls and Procedures
(a) Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to
provide reasonable assurance that information required to be disclosed by us in
the reports that we file or submit to the Securities and Exchange Commission
("SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms, and that information is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), as appropriate to allow timely decisions
regarding required disclosure.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our CEO and CFO, of the effectiveness of our disclosure controls and
procedures as of December 31, 2007. As described below under Management's Annual
Report on Internal Control over Financial Reporting, our CEO and CFO have
concluded that, as of December 31, 2007, there were certain weaknesses in our
staffing and our internal controls over financial reporting that have prevented
us from accurately processing our accounts so as to be able to report our
results on a timely basis. It should be noted that a control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that it will detect or uncover failures within the our company to
disclose material information otherwise required to be set forth in our periodic
reports.
28
(b) Management's Annual Report on Internal Control over Financial
Reporting.
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that are intended to:
1. pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
2. provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
3. provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could
have a material effect on our financial statements.
Because of the inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In 2005, we, then a public shell company, acquired AIM. At such time we
adopted the system of financial controls and procedures of AIM as ours. Such
financial controls and procedures were not adequate for a public reporting
company and our management began the process of upgrading our financial controls
and procedures. During 2007 we acquired Sigma Metals and Welding Metallurgy.
Neither Sigma Metals nor Welding Metallurgy had financial controls and
procedures sufficient for an operating subsidiary of a reporting company.
Moreover, neither Sigma nor Welding Metallurgy had sufficient staffing in its
accounting department to perform the types and quantities of procedures required
of a reporting company. Immediately upon completing each acquisition we began
the procedure of incorporating the operations of the acquired company into our
financial systems and evaluating its personnel to determine what additional
staffing is required in anticipation of taking remedial action.
In connection with the closing of our accounts and the preparation of our
consolidated financial statements contained in this Report, we determined that
we had not yet sufficiently integrated and upgraded the reporting systems at our
operating subsidiaries and that we had insufficient staffing in our accounting
department and consequently, our internal controls over financial reporting were
not effective. This resulted in our auditor detecting errors in our consolidated
financial statements, which have been corrected. To address this issue, among
other things, we are planning to upgrade the financial controls and procedures
at our operating subsidiaries and to evaluate and enhance, where necessary, our
financial reporting personnel. Such improvements are intended to ensure that
information required to be disclosed in our periodic filings under the Exchange
Act is accumulated and communicated to our management, to allow timely decisions
regarding required disclosure and that all transactions are recorded,
accumulated and processed to permit the preparation of financials statements in
accordance with generally accepted accounting principles on a timely basis to
allow compliance with our reporting obligations under the Exchange Act. In
making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework.
The foregoing report shall not be deemed to be filed for purposes of
Section 18 of the Exchange Act or otherwise subject to the liabilities of that
section.
29
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting.
(c) Changes in Internal Control Over Financial Reporting. During the
fiscal quarter ended December 31, 2007, we initiated a number of changes to our
financial reporting controls and procedures, including the adoption of a
perpetual inventory and costing program.
Item 9B. Other Information.
None.
30
PART III
Item 10. Directors and Executive Officers of the Registrant.
Our directors and executive officers are:
Name Age Position
---- --- --------
James A. Brown 55 Chairman
Louis A. Giusto 65 Vice Chairman, Chief Financial Officer and Treasurer
Peter D. Rettaliata 57 Director, Chief Executive Officer and President
Dario A. Peragallo 43 Director and Executive Vice President, Manufacturing
Seymour G. Siegel 65 Director
M.Gen. Ira A.Hunt, Jr. 82 Director
(USA, Ret.)
David J. Buonanno 52 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.
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.
31
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.
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 us that are included in the table
below. Our Board accepted the resignation of Mr. Schaum effective as of April
13, 2007.
Upon the resignation of our former Chairman Mr. Brown was elected to the
position of non-executive Chairman. At such time we anticipated that he would
32
devote more time to our affairs than other non-management directors. Accordingly
we entered into an agreement with Mr. Brown under which we agreed to pay him a
fee at the rate of $175,000 per year, a "sign-on" bonus of $15,000 and issue to
him 200,000 shares of our common stock. Subsequently, we also gave Mr. Brown the
use of the automobile initially leased for the previous chairman. The term of
Mr. Brown's agreement was initially intended to expire as of December 31, 2007,
but has been extended on a month to month basis in light of our current needs.
The following table sets forth information concerning the compensation we
paid to our directors (other than Messrs. Gales, Rettaliata, Giusto and
Peragallo) during the fiscal year ended December 31, 2007.
-----------------------------------------------------------------------------------------------------------------------------------
Fees earned Non-equity
or paid in Stock Option incentive plan Change in pension value and All other
cash awards awards compensation nonqualified deferred compensation Total
Name ($) ($) ($) ($) compensation earnings ($) ($)
-----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
-----------------------------------------------------------------------------------------------------------------------------------
James A. Brown 150,791 52,000(1) 16,117 0 13,146(4) 245,238
-----------------------------------------------------------------------------------------------------------------------------------
Stephen M.
Nagler(2) 16,117 0 16,117
-----------------------------------------------------------------------------------------------------------------------------------
Seymour G. Siegel 31,978 16,117 0 48,905
-----------------------------------------------------------------------------------------------------------------------------------
Rounsevelle W. 0
Schaum(3)
-----------------------------------------------------------------------------------------------------------------------------------
M.Gen. Ira A.
Hunt, Jr. (USA
Ret.) 23,516 16,117 0 39,633
-----------------------------------------------------------------------------------------------------------------------------------
David J.
Buonanno 10,500 8,936 0 19,436
-----------------------------------------------------------------------------------------------------------------------------------
----------
(1) Represents the value of 200,000 shares of common stock issued to Mr. Brown
under a Restricted Stock Agreement dated March 30, 2007, 100,000 shares of which
vested on March 30, 2007 and the remaining 100,000 shares vested as of December
31, 2007. The closing market price of the common stock on March 30, 2007 was
$0.26.
(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
(4) Represents the cost of automobile, leasing and maintenance expenses.
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. Mr. Siegel serves as Chairman of the Audit Committee and
also qualifies as an "audit committee financial expert," as that term is defined
in Item 407(d)(5)(ii) of Regulation S-K. The Board has determined that each
member of our Audit Committee meets the financial literacy requirements under
the Sarbanes-Oxley Act and SEC rules and that Mr. Siegal and General Hunt meet
the independence requirements under Rule 10A-3 under the Exchange Act.
Compensation Committee. Our Compensation Committee is composed of General
Hunt (Chairman), and Messrs. Siegel and Brown.
We do not have a nominating committee and we have not adopted a written
policy for considering recommendations from stockholders for candidates to serve
as directors or with respect to communications from stockholders.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and beneficial owners of more than 10% of our
common stock to file with the SEC reports of their holdings of, and transactions
in, our common stock. Based solely upon our review of copies of such reports and
written representations from reporting persons that were provided to us, we
believe that our officers, directors and 10% stockholders complied with these
reporting requirements with respect to 2007, except that Mr. Buonanno's Form 4
reporting his acquisition of 5,000 shares of our common stock on December 19,
2007 was filed two days late.
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.
33
Item 11. Executive Compensation.
The following table shows compensation which we awarded or paid to, or
which was earned from us, in all capacities for fiscal years ended December 31,
2007 and 2006, by (i) each individual who served as our chief executive officer
for all, or a portion of, 2007 and (ii) each other individual who served as an
executive officer of our company (including AIM) and received total compensation
in excess of $100,000 for 2007.
----------------------------------------------------------------------------------------------------------------------------------
Change in
pension value
and
nonqualified
Non-equity deferred
Name and Stock Option incentive plan compensation All other
principal Salary Bonus awards awards compensation earnings compensation Total
position Year ($) ($) ($) ($) ($) ($) ($) ($)
----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
----------------------------------------------------------------------------------------------------------------------------------
Michael A.
Gales
Former 2007(1) 52,885(2) 93,386(3) 110,096(4) 256,367
Chairman 2006 250,000(2) -- -- 52,888(5) -- -- 15,938(13) 318,826
----------------------------------------------------------------------------------------------------------------------------------
Peter D.
Rettaliata 2007 230,000(2) 40,112(6) --(12) 270,112
CEO 2006 230,000(2) -- -- 31,733(7) -- -- --(12) 261,733
----------------------------------------------------------------------------------------------------------------------------------
Louis A.
Giusto 2007 230,000(2) 64,176(8) 17,322(13) 311,498
CFO 2006 230,000(2) -- -- 50,772(9) -- -- 14,768(12) 295,540
----------------------------------------------------------------------------------------------------------------------------------
Dario A.
Peragallo
Executive 2007 230,000(2) -- -- 40,112(10) -- -- 11,038(13) 281,150
VP 2006 230,000(2) -- -- 31,733(11) -- -- --(12) 261,733
----------------------------------------------------------------------------------------------------------------------------------
----------
(1) 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 were exercisable
through March 16, 2008, when they expired unexercised.
(2) Represents salary payments under the individual's employment agreement with
us. See "Employment Agreements," below.
(3) Represents the value of options to purchase 750,000 shares of the options
granted to Mr. Gales under his employment agreement with us, which vested on
March 16, 2007, at an exercise price per share of $0.22, under the terms of his
separation agreement with us, as determined using the Black-Scholes option
valuation model in accordance with FASB 123 (R). These options expired
unexercised on March 16, 2008.
(4) Represents the amount realized by Mr. Gales upon the cashless exercise of
options to purchase 250,000 shares at a per share exercise price of $0.22.
(5) Represents the value of options to purchase 250,000 shares of the options
granted to Mr. Gales under his employment agreement with us, which vested on
September 15, 2006, at an exercise price per share of $0.428, which under the
terms of his separation agreement with us expired on March 16, 2008, as
determined in using the Black-Scholes option valuation model in accordance with
FASB 123 (R).
(6) Represents the value of options to purchase 150,000 shares of the options
granted to Mr. Rettaliata under his employment agreement with us, which vested
on September 15, 2007, at an exercise price per share of $0.48, which expire on
November 30, 2015, as determined in using the Black-Scholes option valuation
model in accordance with FASB 123 (R).
(7) Represents the value of options to purchase 150,000 shares of the options
granted to Mr. Rettaliata under his employment agreement with us, which vested
on September 15, 2006, at an exercise price per share of $0.428, which expire on
November 30, 2015, as determined in using the Black-Scholes option valuation
model in accordance with FASB 123 (R).
(8) Represents the value of options to purchase 240,000 shares of the options
granted to Mr. Giusto under his employment agreement with us, which vested on
September 15, 2007 at an exercise price per share of $0.48, which expire on
November 30, 2015, as determined in using the Black-Scholes option valuation
model in accordance with FASB 123 (R).
(9) Represents the value of options to purchase 240,000 shares of the options
granted to Mr. Giusto under his employment agreement with us, which vested on
September 15, 2006 at an exercise price per share of $0.428, which expire on
November 30, 2015, as determined in using the Black-Scholes option valuation
model in accordance with FASB 123 (R).
(10) Represents the value of options to purchase 150,000 shares of the options
granted to Mr. Peragallo under his employment agreement with us, which vested on
September 15, 2007, at an exercise price per share of $0.48, which expire on
November 30, 2015, as determined in using the Black-Scholes option valuation
model in accordance with FASB 123 (R).
(11) Represents the value of options to purchase 150,000 shares of the options
granted to Mr. Peragallo under his employment agreement with us, which vested on
September 15, 2006, at an exercise price per share of $0.428, which expire on
November 30, 2015, as determined in using the Black-Scholes option valuation
model in accordance with FASB 123 (R).
(12) Does not include the cost of automobile leasing, maintenance, insurance and
parking, pursuant to instruction 4 of Item 402(c)(2)(ix) of Regulation S-K.
(13) Represents the cost of automobile leasing, maintenance, insurance and
parking.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information as of December 31, 2007,
concerning outstanding equity awards granted to the individuals listed in the
Summary Compensation Table. We did not grant options, or make stock awards, to
any of our executive officers in 2007.
34
Outstanding Equity Awards at Fiscal Year-End
------------------------------------------------------------------------------------------------------------------------------------
Option awards Stock awards
------------------------------------------------------------------------------------------------------------------------------------
Equity
incentive
Market Equity plan
value incentive awards:
of plan market or
shares awards: payout
Number or number of value of
of units unearned unearned
Number of Number of shares of shares, shares,
securities securities or units stock units or units or
underlying underlying Equity incentive plan of stock that other other
unexercised unexercised awards: number of Option Option that have rights rights
options options securities underlying exercise expiration have not not that have that have
(#) (#) unexercised unearned options price date vested vested not vested not vested
Name exercisable un-exercisable (#) ($) (#) (#) (#) ($)
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
------------------------------------------------------------------------------------------------------------------------------------
Michael A.
Gales
Former
Chairman 1,000,000 (1) 3/16/2008 n/a n/a n/a n/a
------------------------------------------------------------------------------------------------------------------------------------
Peter A.
Rettaliata
CEO 450,000 750,000 (2) 09/26/2015 n/a n/a n/a n/a
------------------------------------------------------------------------------------------------------------------------------------
Louis A.
Giusto
CFO 720,000 480,000 (3) 09/26/2015 n/a n/a n/a n/a
------------------------------------------------------------------------------------------------------------------------------------
Dario A.
Peragallo
Executive
VP 450,000 750,000 (2) 09/26/2015 n/a n/a n/a n/a
------------------------------------------------------------------------------------------------------------------------------------
----------
* On December 31, 2007, the last trading day of 2007, the last sale price of a
share of our common stock was $0.24.
(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, 250,000 vested on September 15, 2006 at an
exercise price of $0.428 per share, and another 250,000 shares vested on
September 15th 2007 at an exercise price of $0.48 cents 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 were exercisable through March 16, 2008
when they expired unexercised.
(2) One-eighth of these options vested as of November 30, 2005 at an
exercise price of $0.22 per share, 150,000 vested on September 15, 2006, at an
exercise price of $0.428 per share, and another 150,000 vested on September 15,
2007 at the exercise price of $0.48 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, 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, 2008, 2009, 2010, 2011 and September 15, 2012,
respectively.
(3) One-fifth of these options vested as of November 30, 2005 at an
exercise price of $0.22 per share 240,000 vested on September 15, 2006 at an
35
exercise price of $0.428 per share, and another 240, 000 vested on September 15,
2007 at an exercise price of $0.48 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, 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, 2008 and September 15, 2009, respectively.
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.
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.
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 vested as of December 31, 2007.
Prior to March 16, 2007, we employed Michael A. Gales under an employment
agreement effective November 30, 2005. Under his employment agreement, Mr. Gales
was entitled to a base salary at an annual rate of $250,000, subject to increase
by a minimum of 10% per year if our operating profits increased by at least 5%
36
over the preceding 12-month period. Mr. Gales also was entitled to an annual
bonus to be determined by our Board of Directors, in an amount not less than 50%
of his then annual base salary. Under the agreement, if we dismissed him without
cause, Mr. Gales would have been 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 three years. Mr. Gales'
employment agreement also contained the restrictive covenants included in Mr.
Giusto's employment agreement, discussed above. 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 terminated as of March
16, 2008.
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.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
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 March 31, 2008 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 March 31, 2008, we had outstanding 845,554 shares of our series B
convertible preferred stock and 69,262,227 shares of our common stock. Each
share of series B convertible preferred stock is convertible into 36 whole
shares of our common stock. If all outstanding shares of series B convertible
preferred stock had been converted at the close of business on March 31, 2008,
we would have had outstanding 99,702,171 shares of common stock. Except as
stated in the table, the address of the holder is c/o our company, 1479 North
Clinton Avenue, Bay Shore, New York 11706.
Number of Shares Percent of Class
Name Series B Preferred Common* Series B Preferred Common*
---- ------------------ ------- ------------------ -------
Owner of More than 5% of Class
Hillson Partners LP(2)
Hillson Private Partners II, LLLP(1) 137,200 4,939,200 16.23% 6.67%
110 N. Washington Street, Suite 401
Rockville, MD 20850
Michael A. Gales -- 3,885,779(2) -- 5.61%
333 East 66th Street
New York, NY 10022
George Elkins -- 3,615,340 -- 5.23%
Carole Tate -- 3,615,340 -- 5.23%
Directors and Executive Officers
James A. Brown 225 970,702(3) * 1.40%
Louis A. Giusto -- 4,124,538(4) -- 5.91%
Peter D. Rettaliata -- 1,468,139(5) -- 2.11%
Dario Peragallo 225 1,476,239(6) * 2.12%
Seymour G. Siegel 225 174,766(3) * **
Ira A. Hunt, Jr -- 875,763(3)(7) -- 1.27%
David J. Buonanno 225 51,433(8) * **
All directors and officers 900 9,095,581(3)(4)(5)(6)(7)(8)* -- 12.81%
as a group (7 persons)
37
----------
* 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) 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.
(2) Based upon information furnished by Mr. Gales.
(3) Includes, in each case, 66,666 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.
(4) Includes 720,000 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.
(5) Includes 450,000 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.
(6) Includes 450,000 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.
(7) Includes 709,097 shares owned by Mr. Hunt's spouse.
(8) Includes 33,333 shares we may issue to Mr. Buonanno upon exercise of the
vested portion of the 100,000 options granted to him on August 29, 2007.
Our Equity Compensation Plans
The following table provides information as of December 31, 2007 about our
equity compensation plans and arrangements.
Equity Compensation Plan Information - December 31, 2007
----------------------------------------------------------------------------------------------------------------
Number of securities remaining
Number of securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation plans
of outstanding options, outstanding options, (excluding securities reflected
Plan category warrants and rights warrants and rights in column (a))
----------------------------------------------------------------------------------------------------------------
(a) (b) (c)
----------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 7,417,233 $0.35 2,382,767
----------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders 7,846,076(1) $0.25 N/A
----------------------------------------------------------------------------------------------------------------
Total 15,263,309 $0.27 2,382,767
----------------------------------------------------------------------------------------------------------------
(1) Includes (i) 4,138,678 shares issuable upon exercise of the warrants
issued to the placement agent for private offerings of our securities
exercisable at $0.22 per share, and (ii) 2,900,578 shares issuable upon
exercise of warrants issued to the placement agent for a private offering
of our series B convertible preferred stock, which are exercisable at
$0.305 per share; and (iii) 125,000 shares issuable upon exercise of
warrants issued to a consulting firm exercisable at $0.28 per share.
38
Item 13. Certain Relationships and Related Transactions, and Director
Independence
Transactions with Related Persons
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, we issued to each of the non-management members of
the Board an option to purchase 100,000 shares of our common stock. The options
vested as to 33,333 shares upon grant, as to a total of 66,666 on March 1, 2008
and will vest as to all 100,000 shares on March 1, 2009 and are exercisable at a
price of $0.27 per share until March 1, 2014. On August 29, 2007, we granted
David Buonanno, a non-management director, an option to purchase 100,000 shares
of our common stock, which was immediately exercisable as to 33,333 shares. The
option will become exercisable as to a total of 66,666 shares on June 26, 2008,
and as to all 100,000 shares on June 26, 2009. The exercise price of the option
is $0.28 per share. The option expires on August 1, 2014. On April 11, 2008, we
granted each non-management director an option to purchase 100,000 shares of
common stock at an exercise price per share of $0.225 exercisable immediately
for five years. In addition, the terms of the options previously granted to
Messrs. Rettaliata, Giusto and Peragallo were modified to provide that the
options scheduled to vest from 2008 through 2012, 1,440,000 options in the
aggregate, will be exercisable at a per share price of $0.225.
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 $443,991 in 2007 and $500,000 in 2006 for legal fees and disbursements.
For information concerning our agreement with James A. Brown under which
he served as our Chairman during 2007 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."
Director Independence
Our Board has determined that based upon the criteria in Rule Section 803A of
the American Stock Exchange Company Guide (Corporate Governance Guidelines), as
of the date of this report, Seymour G. Siegel, General Ira A. Hunt, Jr. (USA
Ret) and David J. Buonanno are "independent directors."
39
Item 14. Principal Accountant Fees and Services.
As required by our Audit Committee charter, our Audit Committee
pre-approved the engagement of Goldstein Golub Kessler LLP (McGladrey & Pullen,
LLP subsequent to December 3, 2007) for all audit and permissible non-audit
services. The Audit Committee annually reviews the audit and permissible
non-audit services performed by our principal accounting firm and reviews and
approves the fees charged by our principal accounting firm. The Audit Committee
has considered the role of McGladrey & Pullen, LLP in providing tax and audit
services and other permissible non-audit services to us and has concluded that
the provision of such services, if any, was compatible with the maintenance of
such firm's independence in the conduct of its auditing functions.
During fiscal year 2006 and fiscal year 2007, the aggregate fees which we
paid to or were billed by Goldstein Golub Kessler LLP (McGladrey & Pullen, LLP
subsequent to December 3, 2007) for professional services were as follows:
Fiscal Year Ended December 31,
2006 2007
---- ----
Audit Fees - GGK (1) $341,879 $217,167
Audit Fees - M & P (1) $-0- $350,000
Audit-Related Fees (2) $-0- $-0-
Tax Fees (3) $-0- $-0-
All Other Fees $-0- $-0-
(1) Fees for services to perform an audit or review in accordance with generally
accepted auditing standards and services that generally only our independent
registered public accounting firm can reasonably provide, such as the audit of
our consolidated financial statements, the review of the financial statements
included in our quarterly reports on Form 10-QSB, and for services that are
normally provided by independent registered public accounting firms in
connection with statutory and regulatory engagements.
(2) Fees, if any, for assurance and related services that are traditionally
performed by our independent registered public accounting firm, such as audit
attest services not required by statute or regulation, and consultation
concerning financial accounting and reporting standards.
(3) Fees for tax compliance. Tax compliance generally involves preparation of
original and amended tax returns, claims for refunds and tax payment planning
services.
40
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Documents filed as part of this Report:
1. Financial Statements
Our consolidated financial statements required by this Item are submitted
in a separate section beginning on page F-1 of this Report
2. Financial Statement Schedules:
None
3. 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 changing our
corporate name (incorporated by reference to Exhibit 3.1 of Registrant's
Form 8-K report, filed July 2, 2007).
3.3 Certificate of Amendment to Certificate of Incorporation increasing the
number of shares of our authorized capital stock (incorporated by
reference to Exhibit 3.1 of the Registrant's Form 8-K report, filed April
7, 2008.
3.4 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).
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).
41
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).
10.1 Asset Purchase Agreement between the Registrant and TeeZee, Inc. dated
October 15, 2004 (incorporated by reference of the Registrant's Report on
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).
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 (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).
42
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).
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 Stock Purchase Agreement, dated January 2, 2007, between Gales Industries
Incorporated, Sigma Metals, Inc. ("Sigma Metals"), and George Elkins,
Carole Tate and Joseph Coonan, the shareholders of Sigma Metals
(incorporated by reference to Exhibit 10.01 of the Registrant's Form 8-K
report, filed January 2, 2007).
10.23 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).
10.24 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).
10.25 Agreement dated March 30, 2007 between Gales Industries Incorporated and
James A. Brown (incorporated by reference to Exhibit 10.11 of Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 2006).
10.26 Restricted Stock Agreement dated March 30, 2007 between Gales Industries
Incorporated and James A. Brown (incorporated by reference to Exhibit
10.12 of Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2006).
10.27 Stock Purchase Agreement, dated March 9, 2007, between Gales Industries
Incorporated and John Gantt and Lugenia Gantt, the shareholders of Welding
Metallurgy, Inc. (incorporated by reference to Exhibit 10.1 of the
Registrant's Form 8-K report, filed March 14, 2007).
10.28 Amendment No. 1 dated August 2, 2007 to the Stock Purchase Agreement,
dated March 9, 2007, between Gales Industries Incorporated and John Gantt
and Lugenia Gantt, the shareholders of Welding Metallurgy, Inc.
(incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K/A
report, filed August 3, 2007).
10.29 Separation Agreement and General Release dated March 16, 2007 between the
Registrant and Michael A. Gales (incorporated by reference from the
Registrant's Form 8-K filed on March 20, 2007).
10.30 7% Promissory Note of Registrant in the principal amount of $2,000,000 in
favor of John and Lugenia Gantt(incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007). .
10.31 Escrow Agreement dated as of August 24, 2007 by and among the Registrant,
John and Lugenia Gantt and Eaton & Van Winkle LLP, as escrow agent
(incorporated by reference from the Registrant's Form 8-K filed on August
26, 2007).
10.32 Registration Rights Agreement dated as of August 24, 2007 by and among the
Registrant and John and Lugenia Gantt (incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007).
10.33 Fourth Amendment to the Revolving Credit, Term Loan and Security Agreement
dated as of November 30, 2005 with the financial institutions named
therein (the "Lenders") and PNC Bank N.A., as agent for the Lenders, as
amended, dated as of August 24, 2007 (incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007).
10.34 Loan and Security Agreement dated as of August 24, 2007 among Air
Industries Machining, Corp., Sigma Metals, Inc., Welding Metallurgy, Inc.
and Steel City Capital Funding LLC incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007).
10.35 Pledge Agreement dated as of August 24, 2007 by and among Air Industries
Machining, Corp. and Sigma Metals, Inc., as pledgors, and Steel City
Capital Funding LLC., as pledge incorporated by reference from the
Registrant's Form 8-K filed on August 26, 2007).
10.36 Pledge Agreement dated as of August 24, 2007 by and among Air Industries
Machining, Corp. and Sigma Metals, Inc., as pledgors, and John and Lugenia
Gantt, as pledges (incorporated by reference from the Registrant's Form
8-K filed on August 26, 2007).
10.37 Pledge Agreement dated as of August 24, 2007 by and between Air Industries
Group, Inc., as pledgor, and Steel City Capital Funding LLC, as pledge
(incorporated by reference from the Registrant's Form 8-K filed on August
26, 2007).
10.38 Guarantor Suretyship Agreement dated as of August 24, 2007 between the
Registrant and Steel City Capital Funding LLC (incorporated by reference
from the Registrant's Form 8-K filed on August 26, 2007).
10.39 Stock Purchase Agreement, dated as of November 15, 2007, by and among Air
Industries Group, Inc. and the shareholders of Blair Industries, Inc.,
Blair Accumulators, Inc., H.S.M. Machine Works, Inc., and H.S.M. Machine
Works, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed with the SEC on November 15, 2007).
10.40 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).
10.41 Sublease agreement dated as of January 1, 2008 between Huttig Building
Products, Inc. and the Registrant.
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to the
Registrant's Registration Statement on Form SB-2 (Registration No.
333-144561) filed with the SEC on July 13, 2007 and declared effective on
July 27, 2007).
21.1 Subsidiaries
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
43
AIR INDUSTRIES GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 and 2006
F-1
AIR INDUSTRIES GROUP, INC.
Table of Contents
Consolidated Financial Information Page No.
Reports of Independent Registered Public Accounting Firms......... F-3 - F-4
Balance Sheet..................................................... F-5
Statement of Operations........................................... F-6
Statement of Stockholders' Equity................................. F-7
Statement of Cash Flows........................................... F-8
Notes to Consolidated Financial Statements....................... F-9 - F-30
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Air Industries Group, Inc. (formerly Gales Industries Incorporated)
We have audited the consolidated balance sheet of Air Industries Group, Inc.
(formerly Gales Industries Incorporated) and subsidiaries as of December 31,
2007, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Air Industries
Group, Inc. (formerly Gales Industries Incorporated) and subsidiaries as of
December 31, 2007, and the results of their operations and their cash flows for
the year then ended, in conformity with U.S. generally accepted accounting
principles.
We were not engaged to examine management's assertion about the effectiveness of
Air Industries Group, Inc. (formerly Gales Industries Incorporated) and
subsidiaries' internal control over financial reporting as of December 31, 2007
included in the accompanying Management's Annual Report on Internal Control over
Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/ McGladrey & Pullen, LLP
---------------------------
McGladrey & Pullen, LLP
New York, New York
April 14, 2008
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Air Industries Group, Inc. (formerly Gales Industries Incorporated)
We have audited the accompanying consolidated balance sheet of Air Industries
Group, Inc. (formerly Gales Industries Incorporated) and subsidiaries as of
December 31, 2006 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Air
Industries Group, Inc.(formerly Gales Industries Incorporated) and subsidiaries
as of December 31, 2006, and the results of their operations and their cash
flows for the year then ended in conformity with United States generally
accepted accounting principles.
/s/ GOLDSTEIN GOLUB KESSLER LLP
-------------------------------
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 30, 2007
F-4
AIR INDUSTRIES GROUP, INC.
Consolidated Balance Sheet At December 31,
ASSETS 2007 2006
---- ----
Current Assets
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $302,016 and $176,458 $ 7,674,647 $ 3,508,957
Inventory 21,820,514 15,257,641
Prepaid Expenses and Other Current Assets 230,209 232,749
Deposits - Suppliers 905,063 180,456
------------ ------------
Total Current Assets 30,630,433 19,179,803
Property and Equipment, net 4,786,143 3,565,316
Capitalized Engineering Costs - net of
Accumulated Amortization of $11,294 1,521,921 --
Deferred Financing Costs - net 575,502 369,048
Intangible Assets, net of accumulated amortization of $ 277,251 5,876,974 --
Goodwill 6,372,372 1,265,963
Deposits - Landlord 103,226 448,530
Other 423,469 63,522
------------ ------------
TOTAL ASSETS $ 50,290,040 $ 24,892,182
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes Payable - Revolver $ 11,332,940 $ 5,027,463
Accounts Payable and Accrued Expenses 6,549,122 7,648,426
Notes Payable - Current Portion 4,627,776 127,776
Notes Payable - Sellers - Current Portion 1,435,796 192,400
Capital Lease Obligations - Current Portion 290,285 407,228
Due to Sellers -- 53,694
Dividends Payable 266,503 120,003
Deferred Gain on Sale - Current Portion 38,036 38,033
Income Taxes Payable 390,615 653,426
------------ ------------
Total current liabilities 24,931,073 14,268,449
------------ ------------
Long term liabilities
Notes Payable - Net of Current Portion 528,330 645,458
Notes Payable - Sellers - Net of Current Portion 2,503,036 1,290,562
Capital Lease Obligations - Net of Current Portion 1,188,506 552,589
Deferred Tax Liability 1,878,677 512,937
Deferred Gain on Sale - Net of Current Portion 675,082 713,118
Deferred Rent 229,604 39,371
------------ ------------
Total liabilities 31,934,308 18,022,484
------------ ------------
Commitments and contingencies
Stockholders' Equity
Preferred Stock Par Value $.001-Authorized 8,003,716 shares
Designated as Series "A" Convertible Preferred -$.001 par Value,
1,000 Shares Authorized 0 Shares issued and outstanding as of
December 31, 2007 and December 31, 2006, respectively.
Designated as Series "B" Convertible Preferred -$.001 Par Value,
2,000,000 shares authorized, 829,098 and 0 shares issued and
outstanding as as December 31, 2007 and December 31, 2006, respectively.
Liquidation Value, $ 18,060,000 829 --
Common Stock - $.001 Par, 120,055,746 Shares Authorized,
69,122,189 and 57,269,301 Shares Issued and Outstanding as of
December 31, 2007 and 2006, respectively 69,122 57,269
Additional Paid-In Capital 18,744,154 7,898,702
Accumulated Deficit (458,373) (1,086,273)
------------ ------------
Total Stockholders' Equity $ 18,355,732 $ 6,869,698
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,290,040 $ 24,892,182
============ ============
See notes to consolidated financial statements
F-5
AIR INDUSTRIES GROUP, INC.
Consolidated Statement of Operations for the Years Ended December 31,
2007 2006
---- ----
Net sales $ 46,068,645 $ 33,044,996
Cost of Sales 33,337,999 28,002,942
------------ ------------
Gross profit 12,730,646 5,042,054
Operating costs and expenses:
Selling and marketing 1,476,111 601,011
General and administrative 8,418,508 3,789,587
------------ ------------
Income from operations 2,836,027 651,456
Interest and financing costs 1,578,377 1,040,108
Gain on Sale of Life Insurance Policy -- (53,047)
Gain on Sale of Real Estate (38,036) (300,037)
Other Income (25,014) (435,627)
Other Expenses 81,127 246,659
------------ ------------
Income before provision for
income taxes 1,239,573 153,400
Provision for income taxes 611,673 489,969
------------ ------------
Net Income (Loss) 627,900 (336,569)
Dividend attributable to preferred stockholders 394,042 420,003
------------ ------------
Net Income (Loss) attributable to common stockholders $ 233,858 $ (756,572)
============ ============
Income (Loss) per share (basic) $ 0.00 $ (0.02)
============ ============
Income (Loss) per share (diluted) $ 0.00 $ (0.02)
============ ============
Weighted average shares outstanding (basic) 65,402,711 32,208,029
============ ============
Weighted average shares outstanding (diluted)
67,861,015 32,208,029
============ ============
See notes to consolidated financial statements
F-6
AIR INDUSTRIES GROUP, INC.
Consolidated Statement of Stockholders' Equity For the Years
Ended December 31, 2006 and 2007
Series A Series B
Preferred Stock Preferred Stock Common Stock
-----------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
Balance, January 1, 2006 900 $ 1 14,723,421 $14,723
Non-Cash Stock Option
Compensation
Preferred Stock Dividend
Non-Cash Warrant
Expense
Conversion of Preferred
Shares to Common Shares in
connection with filing the
registration statement (900) (1) 40,909,500 40,910
Conversion of Preferred
Dividend to Common Shares in
connection with filing the
registration statement 1,636,380 1,636
Net Loss
----------------------------------------------------------------------------
Balance, December 31, 2006 57,269,301 57,269
Conversion of warrants 311,265 312
Conversion of Seller's Notes 1,799,432 1,799
Issuance of Restricted Shares 200,000 200
Preferred Series B Stock
Issuance 802,300 802
Transaction costs paid for
Series B Issuance
Issuance of Stock for
Acquisition of Sigma 7,416,082 7,416
Exercise of Stock Options 90,580 91
Issuance of Stock for
Acquisition of Welding 2,035,529 2,035
Non-cash stock option
compensation
Non-cash Warrants Expense
Preferred Dividend Paid
In Stock 26,798 27
Dividend on Series B
preferred stock
Net Income
--------------------------------------------------------------------------------------------------------------
Balance, December 31,2007 - $ - 829,098 $ 829 69,122,189 $69,122
==============================================================================================================
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
Balance, January 1, 2006 $ 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
Expense 49,510 49,510
Conversion of Preferred
Shares to Common Shares in
connection with filing the
registration statement (40,909)
Conversion of Preferred
Dividend to Common Shares in
connection with filing the
registration statement 358,364 360,000
Net Loss (336,569) (336,569)
---------------------------------------------
Balance, December 31, 2006 7,898,702 (1,086,273) 6,869,698
Conversion of warrants (312)
Conversion of Seller's Notes 717,974 719,773
Issuance of Restricted Shares 51,800 52,000
Preferred Series B Stock
Issuance 8,022,198 8,023,000
Transaction costs paid for
Series B Issuance (698,840) (698,840)
Issuance of Stock for
Acquisition of Sigma 1,949,584 1,957,000
Exercise of Stock Options (91)
Issuance of Stock for
Acquisition of Welding 564,465 566,500
Non-cash stock option
compensation 354,210 354,210
Non-cash Warrants Expense 30,991 30,991
Preferred Dividend Paid
In Stock (27)
Dividend on Series B
preferred stock (146,500) (146,500)
Net Income 627,900 627,900
-------------------------------------------------------------------------------
Balance, December 31,2007 $18,744,154 $ (458,373) $18,355,732
===============================================================================
See notes to consolidated financial statements
F-7
AIR INDUSTRIES GROUP, INC.
Consolidated Statement of Cash Flows For the
Years Ended December 31,
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 627,900 $ (336,569)
Adjustments to Reconcile Net Income (Loss) to Net
Cash used in Operating Activities, net of effect of acquisitions:
Depreciation and amortization of property and equipment 850,428 597,009
Amortization of Intangible Assets 277,251 --
Amortization of Capitalized Engineering Costs 11,294 --
Bad Debt Expense 356,240 177,444
Non-Cash Compensation Expense 406,210 167,126
Warrants issued for Services 30,991 49,510
Non-Cash Interest Expense 63,271 --
Amortization of Deferred Financing costs 161,046 117,159
Gain on Sale of Officers Life Insurance -- (53,047)
Gain on Sale of Real Estate (38,033) (300,037)
Deferred Taxes 389,060 (163,457)
Changes in Assets and Liabilities
(Increase) Decrease in Operating Assets:
Accounts Receivable (1,569,686) (1,062,789)
Inventory (3,323,195) (2,653,831)
Prepaid Expenses and Other Current Assets 47,643 (22,625)
Deposits - Suppliers (724,607) (114,861)
Cash Surrender Value - Officers Life Insurance -- 33,263
Other Assets (337,184) (22,216)
Increase (Decrease) in Operating Liabilities
Accounts payable and accrued expenses (3,104,447) 2,353,797
Income Taxes payable (262,811) 653,426
Deferred Rent 190,233 39,371
Advance Payments - Customers -- (188,199)
-----------------------------
NET CASH USED IN OPERATING ACTIVITIES (5,948,396) (729,526)
=============================
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for deposit on Leasehold improvements (24,040) (448,530)
Cash paid for acquisitions, including transaction costs of
$486,200, net of cash acquired of $94,448 (7,952,548) --
Cash paid for Capitalized Engineering costs (1,533,215) --
Cash Received for sale of real estate -- 5,417,704
Purchase of property and equipment (205,296) (812,372)
-----------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (9,715,099) 4,156,802
=============================
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Private Placement 8,023,000 --
Repayment of notes payable to Sellers (527,017) (181,838)
Payments for Issuance costs on Private Placement (698,840) --
Principal payments on capital lease obligations (154,026) (219,755)
Proceeds from notes payable 4,500,000 --
Net Proceeds from Revolver 6,305,477 --
Principal payments on notes payable (1,417,599) --
Cash Paid for Deferred Financing Costs (367,500) --
Proceed from Sale of Officer's life insurance -- 86,000
Repayment of Mortgage Notes Payable -- (4,170,099)
-----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15,663,495 (4,485,692)
-----------------------------
Net decrease in cash and cash equivalents -- (1,058,416)
Cash and cash equivalents at beginning of year -- 1,058,416
-----------------------------
Cash and cash equivalents at end of year -- --
=============================
Supplemental cash flow information
Cash paid during the year for interest $ 1,002,920 $ 828,807
============ ============
Cash paid during the year for income taxes $ 678,729 $ 12,758
============ ============
Supplemental schedule of non cash investing and financing activities
Property and Equipment acquired under capital leases $ 673,000
============
Non-cash Dividends on Preferred Stock $ 146,500 $ 480,003
============ ============
Conversion of Preferred Stock to Common Stock $ 40,909
============
Conversion of Preferred Dividends to Common stock $ 360,000
============
Conversion of Preferred Dividends to Preferred Stock $ 247,542
============
Notes Payable-Seller and accrued interest converted to
common Stock $ 719,773
============
Conversion of Warrants to common stock $ 312
============
Purchase of all capital stock of Sigma Metals, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ 5,590,164
Goodwill 1,549,931
Intangibles 3,720,000
Cash paid (includes transaction costs of $280,500) (4,341,296)
Notes payable issued to Sellers (1,497,411)
Common Stock issued (1,957,000)
------------
Liabilities Assumed $ 3,064,388
============
Purchase of all capital stock of Welding Metallurgy, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ 1,587,686
Goodwill 3,556,478
Intangibles 2,434,225
Cash paid (includes transaction costs of $205,700) (3,705,700)
Accrued Purchase Price (190,377)
Notes payable issued to Sellers (net of discount of $140,000) (1,860,000)
Common Stock issued (566,500)
------------
Liabilities Assumed $ 1,255,812
============
See notes to consolidated financial statements
F-8
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. FORMATION AND BASIS OF PRESENTATION
Merger and Acquisition
Ashlin Development Corp. (the "Company" or "Ashlin"), a Florida
corporation, entered into a Merger Agreement on November 14, 2005 with Gales
Industries Incorporated, a privately-held Delaware corporation ("Original
Gales"). 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.
Prior to the closing of the merger, Original Gales acquired 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 of AIM by Original Gales, 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.
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.
On February 15, 2006, Ashlin changed its name to Gales Industries
Incorporated and its state of domicile from Florida to Delaware. On June 26,
2007, the name of the Company was changed from Gales Industries Incorporated to
Air Industries Group, Inc.
The financial statements presented are those of Original Gales, now known
as Air Industries Group, Inc. ("AIRI") and its wholly owned subsidiaries; AIM,
Sigma Metals ("Sigma") and Welding Metallurgy ("WeldingMet"). Sigma and Welding
are included from the dates of acquisition to the current year end.
F-9
Note 2. ACQUISITIONS
On April 16, 2007, the Company purchased all of the outstanding capital
stock of Sigma for approximately $7.5 million. We paid $4,060,796 of the
purchase price in cash and issued to the former shareholders of Sigma our 7 %
promissory notes due April 1, 2010 in the aggregate principal amount of
$1,497,411 and 7,416,082 shares of our common stock having a value of
$1,957,000. The remaining principal balance of the promissory notes, $1,216,488
as of December 31, 2007, is repayable in equal monthly installments of $43,446
principal, plus accrued interest at the rate of 7% per annum, through April, 1,
2010. In connection with the acquisition of Sigma Metals we entered into
Employment Agreements, discussed below, with three members of the management of
Sigma.
The acquisition has been accounted for in accordance with the provisions
of SFAS No. 141, "Business Combinations." The total purchase price was allocated
to the net tangible assets based on the estimated fair values. The allocation of
the purchase price was based upon valuation data as of April 17, 2007. The final
valuation has been completed. For tax reporting purposes the Company will
amortize goodwill. The allocation of the purchase price is as follows:
F-10
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase of all capital stock of Sigma Metals, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ 5,590,164
Goodwill 1,549,931
Intangibles 3,720,000
Cash paid (includes transaction costs of $280,500) (4,341,296)
Notes payable issued to Sellers (1,497,411)
Common Stock issued (1,957,000)
-----------
Liabilities Assumed $ 3,064,388
===========
On August 24, 2007, we purchased, through a wholly-owned indirect
subsidiary, WMS Merger Corp, all of the issued and outstanding capital stock of
Welding Metallurgy, Inc pursuant to that certain Stock Purchase Agreement,
dated as of March 9, 2007, with the shareholders of Welding, as amended by
Amendment No.1 thereto dated as of August 2, 2007 (the "Welding Stock Purchase
Agreement").
In consideration for the shares of Welding, the Company paid the former
shareholders of Welding $3,500,000 in cash, and issued to them our promissory
note in the principal amount of $2,000,000 due August 31, 2011 and 2,035,529
shares of our common stock, having a value of $566,500. The promissory note
bears no interest until August 24, 2008, and thereafter bears interest at the
rate of 7% per annum. To reflect the fact that this note does not bear interest
for the first year, the Company has discounted the value of the note in its
balance sheet to $1,860,000, and will expense the imputed interest on a monthly
basis and accrete up the value of the note to its face value of $2,000,000.
Under the stock purchase purchase agreement, we are obligated to pay the sellers
an additional $190,377 as an adjustment to the purchase price. We have agreed to
pay this adjustment to the purchase price in four equal monthly installments of
$49,400 (which includes interest of 7% per annum from November 1, 2007)
commencing on March 31, 2008 and on the last day of each calendar month
thereafter through June 30, 2008. The cash portion of the purchase price was
provided by the proceeds of a term loan of $4,500,000 under a Loan and Security
Agreement dated as of August 24, 2007 by and among our wholly-owned
subsidiaries, Air Industries Machining, Corp., or AIM, Sigma and Welding, and
Steel City Capital Funding LLC (the SCCF Loan Agreement"). To secure payment of
the indebtedness under the promissory note, AIM and Sigma Metals pledged to the
former shareholders of Welding Metallurgy, and granted them a security interest
in, all of the outstanding shares of Welding, subject to the prior rights of
Steel City Capital Funding LLC.
Since the purchase price paid by the Company was in excess of the fair
market value of the assets acquired, the excess has been recorded as goodwill.
The acquisition has been accounted for in accordance with the provisions
of SFAS No. 141, "Business Combinations." The total purchase price was allocated
to the net tangible assets based on the estimated fair values. The allocation of
the purchase price was based upon valuation data as of August 27, 2007. The
final valuation has been completed. For tax reporting purposes, the Company will
amortize goodwill. The allocation of the purchase price is as follows:
Purchase of all capital stock of Welding Metallurgy, Inc and assumption
of liabilities in the acquisition as follows:
Fair Value of Assets acquired $ 1,587,686
Goodwill 3,556,478
Intangibles 2,434,225
Cash paid (includes transaction costs of $205,700) (3,705,700)
Accrued Purchase Price (190,377)
Notes payable issued to Sellers (net of discount of $140,000) (1,860,000)
Common Stock issued (566,500)
-----------
Liabilities Assumed $ 1,255,812
===========
F-11
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the intangibles acquired for Sigma and Welding are comprised
of the following:
Estimated
2007 Useful Lives
---- ------------
Trade Names $ 2,480,000 20 Years
Customer Relationships 2,900,000 11 to 14 Years
Technical know-how 660,000 10 Years
Professional Certification Certificates 114,225 0.25 to 2 years
-----------
Total 6,154,225
-----------
Less: Accumulated Amortization (277,251)
-----------
Intangibles, Net $ 5,876,974
===========
The expense for the amortization of the intangibles for the year ended December
31, 2007 amounted to $277,251.
The table set forth below indicates the amortization of intangibles over the
next five years:
Year Amount
---- ------
2008 $489,496
2009 $450,894
2010 $436,299
2011 $436,299
2012 $436,299
In the case of both Sigma and Welding, the fair value of the net assets acquired
was less than the amounts paid for the stock of the acquired entity. This excess
has been recognized as goodwill.
The following unaudited pro forma information assumes the acquisitions of Sigma
and Welding occurred as of the beginning of each year. The pro forma results are
not necessarily indicative of what actually would have occurred had the
acquisitions been in effect for the period presented.
(pro forma) (pro forma)
2007 2006
---- ----
(unaudited) (unaudited)
Net sales $54,412,000 $55,481,000
--------------------------
Gross Profit $16,410,000 $13,433,000
--------------------------
Net income $ 2,981,000 $ 1,971,000
--------------------------
Net income attributable to common
stockholders $ 2,586,958 $ 1,550,997
==========================
Earnings (loss) per share, basic $ 0.04 $ 0.05
==========================
Earnings (loss) per share, diluted $ 0.04 $ 0.04
==========================
Weighted average shares
outstanding (Basic) 68,889,275 41,659,640
==========================
Weighted average shares
outstanding (Diluted) 71,347,588 46,382,620
==========================
F-12
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
The Company is primarily engaged in manufacturing aircraft structural
parts, assemblies and the distribution of metals 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 subsidiaries, AIM, Sigma
Metals and Welding Metallurgy. Significant inter-company accounts and
transactions have been eliminated in consolidation.
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 the Loan Facility.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal
balances net of allowances for uncollectable accounts. The Company provides for
allowances for uncollectible receivables based on management's estimate of
uncollectible amounts considering age, collection history, and any other factors
considered appropriate. The Company writes off accounts receivable against the
Allowance for Doubtful Accounts when a balance is determined to be
uncollectible.
Inventory Valuation
The Company values 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. Welding Metallurgy
generally produces pursuant to customer orders and maintains relatively low
inventory levels. AIM 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.
Sigma routinely acquires inventory without corresponding purchase orders. The
Company periodically evaluates inventory items that are not secured by purchase
orders and establishes reserves for obsolescence accordingly. The Company also
reserves for excess quantities, slow-moving goods, and obsolete items.
Capitalized Engineering Cost
The Company has contractual agreements with certain customers to produce
parts, which the customers design. The production of these parts require
pre-production engineering and programming of our machines. The Company accounts
for these pre-production costs pursuant to Emerging Issues Task Force Issue No.
99-5, "Accounting for Pre-Production Costs Related to Long-Term Supply
Arrangements" (EITF 99-5). The pre-production costs associated with a particular
contract are capitalized and beginning with the first shipment of product
pursuant to such contract, amortized over a period determined as follows: (i) if
deliverables are scheduled for a period of three years or less, on a straight
line basis over the anticipated length of the contract and (ii) if deliverables
are scheduled for more than three years, on a straight line basis over three
years. If the Company were to be reimbursed for a portion of the pre-production
expenses associated with a particular contract only the unreimbursed portion
would be capitalized under EITF 99-5. The Company also may progress bill on
certain engineering being expended. These billings are recorded as progress
billings (a reduction of the associated inventory) until the appropriate revenue
recognition criteria have been met. The Terms and Conditions contained in
customer purchase orders provide for liquidated damages in the event that a
stop-work order is issued prior to the final delivery of the product.
F-13
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Lived Assets
The Company reviews long-lived assets for impairment if events or whenever
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 an asset 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 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. The
Terms and Conditions contained in our customer Purchase orders provide for
liquidated damages in the event that a stop work order is issued prior to the
final delivery. The Company utilizes an RMA process for determining whether to
accept returned products. Customer requests to return products are reviewed by
the contracts department and if the request is approved credit is issued upon
receipt of the product. Net sales represent gross sales less returns and
allowances. Shipping costs are included in cost of sales.
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,
2007 approximately 22% and 11% are attributable to two customers, respectively.
Of the account receivable balance at December 31, 2006, approximately 34% and
17% are attributable to these customers, respectively.
Two customers accounted for approximately 46% and 11% of net sales for
the years ended December 31, 2007. One of these customers accounted for
approximately 61% of net sales for the year ended December 31, 2006.
F-14
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the entire 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.
In June 2006, the FASB issued Financial Accounting Standards Board
("FASB") Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income
Taxes--An Interpretation of FASB Statement No. 109," 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. The Company will recognize interest
and penalties, if any, related to taxes not properly paid in prior periods in
tax expense. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 effective as of January 1, 2007.
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 3,025,578 warrants and 4,060,000 options to
purchase the Company's common stock for the year ended December 31, 2007 and
5,271,257 warrants and 4,850,000 options to purchase the Company's common stock
for the year ended December 31, 2006 in the calculation of diluted earnings per
share because the effects of their inclusion would have been anti-dilutive. The
shares of Series B Preferred Stock that are convertible into 30,039,783 shares
of common stock at December 31, 2007 are not included in the calculation of
diluted earnings per shares because the effect of the 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 $437,202 and $167,126 for the years ended
December 31, 2007 and 2006, respectively, in accordance with the measurement
requirements under SFAS No. 123(R). The Company adopted SFAS No. 123(R),
effective as of January 1, 2005.
Goodwill and Intangibles
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. The Company performs 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 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.
F-15
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 12.61% to 14.73% for 2007. Our
evaluations for the year ended December 31, 2007 indicated there was no
impairment of our Goodwill.
Recently Issued Accounting Standards
In September 2006, FASB issued SFAS 157 "Fair Value Measurements." This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. Management is currently
evaluating the effect of this pronouncement on its financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141(R)"), which establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; (b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and (c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS
141(R) requires contingent consideration to be recognized at its fair value on
the acquisition date and, for certain arrangements, changes in fair value to be
recognized in earnings until settled. SFAS 141(R) also requires
acquisition-related transaction and restructuring costs to be expensed rather
than treated as part of the cost of the acquisition. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.
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.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests
in Consolidated Financial Statements an Amendment of ARB No. 51" ("SFAS 160"),
which establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the non-controlling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest. SFAS 160
also provides guidance when a subsidiary is deconsolidated and requires
F-16
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent's owners and the
interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company is currently evaluating the impact this
statement will have on its financial position and results of operations.
Note 4 INVENTORY
The components of inventory consisted of the following:
2007 2006
---- ----
Raw Materials $ 9,050,196 $ 2,234,175
Work In Progress 7,755,367 7,546,178
Finished Goods 5,014,951 5,477,288
--------------------------
Total Inventory $21,820,514 $15,257,641
==========================
Note 5 PROPERTY AND EQUIPMENT
The components of property and equipment, at cost, consisted of the following:
Estimated
2007 2006 Useful Life
---- ---- -----------
Machinery and Equipment $ 3,105,545 $ 2,117,441 5 - 8 years
Capital Lease Machinery and Equipment 1,669,718 1,164,671 5 - 8 years
Tools and Instruments 827,351 555,164 3 - 7 years
Automotive Equipment 30,227 30,227 5 years
Furniture and fixtures 146,455 274,837 5 - 8 years
Leasehold Improvements 312,727 3,583 Term of Lease
Computer Software 131,168 4 years
-----------------------------
Total property and equipment 6,223,191 4,145,923
Less: Accumulated Depreciation and Amortization (1,437,048) (580,607)
-----------------------------
Property and equipment, net $ 4,786,143 $ 3,565,316
=============================
Depreciation and amortization expense for the years ended December 31,
2007 and 2006, amounted to $850,428 and $597,009 respectively.
Note 6 SALE-LEASEBACK TRANSACTION
On October 24, 2006, the Company consummated an agreement, whereby the
Company sold the buildings and real property located at its corporate
headquarters in Bay Shore, New York (the "Property") for a purchase price of
$6,200,000. As a result, 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 the twenty year lease, and is included in 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,
$621,000 for the sixth year, 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. As of December 31, 2007, the Company has completed
certain of the improvements and has reclassified the amounts to the appropriate
fixed asset accounts. The Company still has deposits of $103,226 deposited with
the landlord. This amount is included in the caption Deposits - Landlord 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
F-17
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the facilities, including, without limitation, insurance, taxes and maintenance.
These costs will be offset against the funds that are deposited with the
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 12).
Note 7. 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 substantially all of its assets.
The Loan Facility provided for maximum borrowings 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 issued 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.
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 cost of this
amendment was $42,500 and is being amortized over the remaining term of the
Credit 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.
To refinance the debt of Sigma Metals, on April 19, 2007, the Company
entered into a Third Amendment to the Loan Facility. 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.
In connection with the acquisition of Welding Metallurgy, the Company
entered into the Fourth Amendment to the Loan Facility, dated as of August 24,
2007, which adds Welding Metallurgy as a borrower under the Facility and the
Company as a guarantor of the obligations thereunder. Additionally, amendment
four increased the maximum revolving advance amount from $11,000,000 to
$14,000,000.
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 7.75% per annum
on December 31, 2007 and an outstanding balance of $11,332,940. The revolving
loans and equipment loans are payable in full on November 30, 2009.
The term loan is for a period of 4 years and bears interest, at the option
of the Company, 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 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, 2007 the balance of the term
loan was $244,906.
In connection with the Welding Metallurgy acquisition, Steel City Capital
Funding LLC ("SCCF") provided a Term Loan of $4,500,000,which is payable on
August 24, 2010. Borrowings under the SCCF Loan Agreement bear interest, payable
monthly, generally at a rate of 6% over the base commercial lending rate of PNC
Bank as publicly announced to be in effect from time to time. Under the terms of
the Loan Facility and the SCCF Loan Agreement, the amounts are not due to be
repaid until August 2010, but have been included in current liabilities due to
F-18
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the right of the banks to demand immediate repayment pursuant to a subjective
acceleration clause, which management believes are not likely to occur, combined
with the existence of a lockbox arrangement. To secure payment of the
indebtedness under the SCCF Loan Agreement, AIR pledged all of the outstanding
shares of AIM and Sigma, which, in turn, pledged all of the outstanding shares
of Welding Metallurgy.
In addition to the foregoing, the Loan Facility was further amended to
allow 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 November 30, 2009. At December 31, 2007 the
Company had an outstanding letter of credit in the amount of $127,500.
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 7.75% per annum at December 31, 2007. 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, 2007. 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, 2007, the equipment financing loan had a
balance of $411,200.
To the extent that the Company may dispose of collateral used to secure
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, 2007 the Company has met these terms. The Loan Facility also is
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.
Interest expense related to these credit facilities amounted to $821,492
and $686,917 for the years ended December 31, 2007 and 2006, respectively.
As of December 31, 2007, future minimum principal payments are as follows:
Year Amount
---- ------
2008 $ 4,627,776
2009 528,330
-----------
5,156,106
Less: current portion (4,627,776)
-----------
Total Long Term Portion $ 528,330
===========
The Company incurred an aggregate of $859,564 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. During the years ended December 31, 2007 and
2006, the Company amortized $161,046 and $117,159, respectively, of these costs.
On December 28, 2007, the Company and PNC entered into an amendment to the
Loan Facility modifying certain financial covenants.
F-19
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. 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 9. 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 $1,478,791 and
$959,817 as of December 31, 2007 and 2006, respectively.
As of December 31, 2007, the aggregate future minimum lease payments,
including imputed interest, with remaining terms of greater than one year are as
follows:
Year Amount
---- ------
2008 $ 409,861
2009 413,798
2010 409,861
2011 409,861
2012 145,310
------------
Total future minimum lease payments 1,788,691
Less: imputed interest (309,900)
Less: current portion (290,285)
------------
Total Long Term Portion $ 1,188,506
============
Note 10. NOTES PAYABLE - SELLERS
On November 30, 2005, in connection with the acquisition of AIM, the
Company 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 of the Company. On January 26, 2007, the two senior
management members converted $665,262 principal amount of their 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.
The remaining principal amount of the note of $625,300 matures on
September 30, 2010, is subordinated to all of the Company'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, 2007). 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, 2007.
In connection with the acquisition of Sigma, the Company incurred notes
payable obligations to the former shareholders of Sigma in the aggregate
principal amount of $1,497,411. The remaining principal balance, at December 31,
2007, of $1,216,488, is payable in equal monthly installments of $43,446 of
principal plus interest at 7% per annum through 2010, except that in April 2008
$247,090 was prepaid on the notes due the former shareholders.
These notes are subordinated to all of the Company's senior debt.
In connection with the acquisition of Welding, the Company incurred a note
payable to the former shareholders of Welding in the aggregate principal amount
of $2,000,000, which bears no interest until August 24, 2008, and bears interest
thereafter at 7% per annum.
To reflect the fact that this note does not bear interest for the first
year, at December 31, 2007 the Company has discounted the value of the note in
its balance sheet to $1,906,667. The Company will expense the imputed interest
on a monthly basis and accrete up the value of the note to its face value of
$2,000,000. This note was
F-20
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
originally recorded at the discounted value of $1,860,000 and resulted in a non
cash interest charge. The indebtedness evidenced by this note is subordinate to
the Company's indebtedness to PNC and SCCF and is payable in one installment in
the principal amount of $500,000 due on August 24, 2008 and twelve consecutive
quarterly installments of principal in the amount of $125,000, plus accrued
interest commencing on November 30, 2008 and continuing through August 31, 2011.
This note is subordinated to all of the Company's senior debt and accrues
interest at 7% per annum. Additionally the Company will pay an additional
$190,377 to the former owners as a working capital adjustment under the stock
purchase agreement. This will be paid in four monthly installments of $47,494
plus accrued interest at 7% per annum, commencing on March 31, 2008.
As of December 31, 2007, the aggregate future minimum note payments, with
remaining terms of greater than one year are as follows:
Year Amount
---- ------
2008 $ 1,529,130
2009 1,213,752
2010 866,184
2011 423,100
------------
Sellers Notes Payable 4,032,166
Less: Unaccreted Interest (93,334)
Less: Current portion (1,435,796)
------------
Long-term portion $ 2,503,036
============
Interest expense on these notes amounted to $107,111 and $132,193 for the
years ended December 31, 2007 and 2006 respectively.
Note 11. 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 $1,712,115 and $2,275,295 in union benefits during the years ended
December 31, 2007 and 2006 respectively.
Note 12. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under various operating lease
agreements, which contain renewal options and escalation provisions. Rent
expense was $ 842,795 and $111,775 for the years ended December 31, 2007 and
2006, respectively. The Company is responsible for paying all operating costs
under the term of the lease. As of December 31, 2007, the aggregate future
minimum lease payments are as follows:
Year Annual Rent
---- -----------
2008 $1,054,572
2009 1,069,968
2010 1,086,176
2011 1,126,206
2012 1,219,606
Thereafter 12,940,984
-----------
Total $18,497,512
===========
F-21
AIR INDUSTRIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 at inception of the
lease in excess of required lease payments. This excess is shown as deferred
rent in the accompanying balance sheet.
Litigation
We were a defendant in an action by our former investor relations firm
filed on September 18, 2007 in the Supreme Court of the State of New York, New
York County captioned Porter, Levay & Rose, Inc. against Air Industries Group,
Inc. et al. (Index No. 003104/07). This case has been settled for $65,000.
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.
The Company believes that it is in 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.
Governmental Regulation
The Company is 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 the Company. 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.
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. 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, and 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, 2007 and 2006 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 3,410,000 have been granted as of December 31, 2007.
The Company and one of its four senior executives mentioned above 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 mentioned above 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 terminated as of March 16, 2008.
On April 17, 2007, the Company entered into employment agreements (the
"Agreements") with three senior executives at Sigma Metals. The Agreements are
for a period of approximately five years.
F-22
AIR INDUSTRIES GROUP, INC.
NOTES ON CONSOLIDATED FINANCIAL STATEMENTS
The Agreements provide for annual base compensation aggregating $600,000.
Additionally, each of these Agreements provide for performance based bonus
compensation of up to 15% of the Executive's base salary and options to purchase
up to 100,000 shares per year, should Sigma achieve specified levels of growth
in its year over year earnings, as defined in the agreements. Sigma did not
achieve the requisite level of growth in earnings in 2007 and, accordingly, no
accrual was made for performance bonuses under these Agreements.
Note 13. INCOME TAXES:
The provision for income taxes at December 31, 2007 and 2006 consists of the
following:
2007 2006
-----------------------
Current
Federal $ 436,931 $ 504,585
State 13,877 148,841
-----------------------
Total Current Provision 450,808 653,426
Deferred
Federal (114,438) (127,595)
State 104,238 (35,862)
-----------------------
Total Deferred Taxes (10,200) (163,457)
Valuation Allowance 171,065 --
-----------------------
Net deferred taxes after valuation allowance 160,865 (163,457)
-----------------------
Net Provision for Income Taxes $ 611,673 $ 489,969
=======================
The components of deferred tax assets as of December 31, 2007 and 2006, are as
follows:
2007 2006
---- ----
Bad debts $ 120,014 $ 76,080
Inventory - 263A Adjustment 340,617 338,092
Non-cash compensation - warrants 43,108 40,121
Non-cash compensation - options 240,685 124,354
Deferred Rent 79,591 16,977
Deferred gain on sale of real estate 247,202 323,859
Federal tax benefit of State Tax -- (64,790)
--------------------------
Total deferred tax asset 1,071,217 854,693
Valuation allowance (1,071,217) (854,693)
--------------------------
Net deferred tax asset $ -- $ --
==========================
The components of the deferred tax liability as of December 31, 2007 and 2006
are as follows:
Property and equipment $ 772,895 $ 512,937
Amortization - Sigma Transaction 91,658 --
Amortization - Welding Transaction 1,014,124 --
-----------------------
Total deferred tax liability $1,878,677 $ 512,937
=======================
The difference between income taxes computed at the statutory federal rate and
the provision for income taxes for the years ended December 31, 2007 and 2006
relates to the following:
Tax benefit at federal statutory rate 34.00% 34.00%
State income taxes, net of federal
income tax benefit 1.06% 6.02%
Permanent differences -0.40% 6.66%
Other -0.36% --
True-up from prior year 2.04% -84.37%
Change in valuation allowance 13.01% 357.10%
-----------------
Total effective tax rate 49.35% 319.41%
=================
F-23
AIR INDUSTRIES GROUP, INC.
NOTES ON 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 14 STOCK-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 one and five years.
Weighted Weighted
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Shares Price Term Value
------ ----- ---- -----
Outstanding at January 1, 2006 2,370,000 $0.38 -- --
--------------------------------------------------
Outstanding at December 31, 2006 2,370,000 0.38 9 $ 20,540
Options granted 3,923,900 0.35 -- --
Options exercised (250,000) -- -- --
Options cancelled (66,667) -- -- --
Reserved for grant based on future market price 1,440,000 N/A -- --
--------------------------------------------------
Outstanding at December 31, 2007 7,417,233 $0.35 6 $ 8,100
==================================================
Options vested and exercisable
At December 31,2007 2,786,665 $0.44 6 $ 8,100
==================================================
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, 2007 and 2006 are $0.35 and $0.38. During the
year ended December 31, 2007, 250,000 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, 2007 and 2006 as follows:
2007 2006
---- ----
Risk Free Interest Rates 3.55%- 4.77% 4.77%
Expected Dividend Yields 0% 0%
Expected Terms to Exercise 1 - 8 Years 9 Years
Expected Volatility 78.07% -177.30% 180%
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 priced 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.
F-24
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2007 and 2006, 2,786,665 and 1,580,000 options are vested
and exercisable, respectively. The weighted average exercise price of
exercisable options at December 31, 2007 and 2006 was $0.44 and $0.32 per share,
respectively. A summary of the status of the Company's stock options as of
December 31, 2007, and changes during the year then ended is presented below.
The Company recorded expenses of $437,202 and $167,126 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, 2007 and 2006, respectively.
The following table summarizes information about stock options at December 31,
2007:
Options Outstanding Options Exercisable
Weighted Weighted Average
Number Average Remaining Exercise Number Weighted Average
Exercise Price Outstanding Contractual Life Price Exercisable Exercise Price
$0.22 - $0.29 3,897,233 6.87 $0.26 706,665 $0.23
$0.43 - $0.48 1,580,000 7.74 0.46 1,580,000 0.46
$0.67 500,000 0.21 0.67 500,000 0.67
Based on
Future Market
Price 1,440,000 -- N/A -- --
---------------------------------------------------------------------------------------------
7,417,233 4.94 $0.35 2,786,665 $0.44
=============================================================================================
A summary of the status of the Company's non-vested options as of December 31,
2007 and changes during the year ended December 31, 2007 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, 2007 3,270,000 $0.45 9
Options granted and priced 4,463,900 $0.32 --
Options vested (2,786,665) $0.44 --
Options forfeited ,expired or
exercised (316,667) $0.22 --
---------- ----- ----------
Non-vested Options at
December 31, 2007 4,630,568 $0.26 8
========== ===== ==========
F-25
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2007, there was $480,826 of unrecognized compensation
cost related to non vested stock option awards, which is to be recognized over
the remaining weighted average vesting period of five years.
On February 13, 2007, the Company granted each of the four non-management
members of the Board an option to purchase 100,000 shares of common stock. The
options vested as to 33,333 shares upon grant, as to a total of 66,666 on March
1, 2008 and will vest as to all 100,000 shares on March 1, 2009 and are
exercisable at a price of $0.27 per share until March 1, 2014. Options to
purchase 66,667 shares granted to Stephen M. Nagler lapsed upon his failure to
stand for re-election in June 2007. On August 29, 2007, the Company granted
David Buonanno, a non-management director, an option to purchase 100,000 shares
of common stock, which was immediately exercisable as to 33,333 shares. The
option will become exercisable as to a total of 66,666 shares on June 26, 2008,
and as to all 100,000 shares on June 26, 2009. The exercise price of the option
is $0.28 per share. The option expires on August 1, 2014.
Warrants to acquire 125,000 shares with a grant date of March 16, 2007
were issued to a consulting firm. These warrants are exercisable at a per share
price of $0.28, which was the average closing price of the Company's common
stock for the 20 days preceding the date of grant, and 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 year ended December 31, 2007.
The Company issued to a placement agent in the Private offering of the
Company's Series B Convertible Preferred Stock described in Note 14, warrants to
purchase 2,900,578 shares of Common Stock at a per share exercise price of
$0.305 in addition to other consideration. These warrants have a term of
five-years and a cashless exercise feature. These warrants were valued at
$32,000 using the Black-Scholes model and the value of such warrants was
deducted from the additional paid in capital resulting from the offering.
The following table summarizes the Company's outstanding warrants as of December
31, 2007 and changes during the year then ended:
Average Remaining
Weighted Number Weighted Average Contractual Life
of Shares Exercise Price (Years)
Outstanding at
January 1, 2006 5,229,589 $0.21 4.1
Granted 41,668 0.97 4.8
--------- ----- -----
Outstanding at December 31, 2006 5,271,257 $0.22 4.9
Granted 3,025,578 0.30 4.3
Cancelled (41,668) 0.97 3.7
Exercised (409,091) -- --
-----------------------------------------------
Outstanding at December 31, 2007 7,846,076 0.25 3.4
===============================================
The following tables summarizes the Company's outstanding restricted shares as
of December 31, 2007:
Weighted Number Exercise
of Shares Grant Date Price
------------------------------------
Outstanding at -- --
January 1, 2007
Granted 200,000 $ 0.26
Vested (200,000) 0.26
------------------------------------
Outstanding at December 31, 2007 -- --
====================================
F-26
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. EQUITY TRANSACTIONS AND ASSET ACQUISITIONS
Sigma Metals, Inc
On April 16, 2007, the Company purchased all of the outstanding capital
stock of Sigma Metals for approximately $7.5 million. The Company paid
$4,060,796 of the purchase price in cash and issued to the former shareholders
of Sigma Metals 7% promissory notes due April 1, 2010 in the aggregate
principal amount of $1,497,411 and 7,416,082 shares of the Company's common
stock having a value of $1,957,000. The remaining principal balance of the
promissory notes, $1,216,488 as of December 31, 2007, is repayable in equal
monthly installments of $43,446 principal, plus accrued interest at the rate of
7% per annum, through April, 1, 2010, except that in April 2008 $247,090 was
prepaid to the former shareholders.
To finance the acquisition of Sigma and provide us with additional working
capital, the Company completed a private placement of our Series B Convertible
Preferred Stock, par value $0.001 per share ("Series B Preferred Stock") in
which the Company 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 the Company received gross proceeds of
$3,068,000. The holders of the Series B Preferred Stock are entitled to a
cumulative annual dividend of 7% per annum which the Company has the right to
pay in additional shares of Series B Preferred Stock, except under certain
circumstances. In October 2007 and January 2008, an aggregate of 26,798 shares
and 16,456 shares of Series B Preferred Stock were issued in payment of accrued
dividends on the Series Preferred Stock of $247,542 and $146,500 respectively.
The shares of Series B Preferred Stock issued in the offering and in payment of
accrued dividends are convertible into approximately 30,439,944 shares of the
Company's common stock. The series B convertible preferred stock is convertible
into shares of the Company's common stock at a conversion price per share of
$0.276, subject to adjustment for certain anti-dilution events.
Welding Metallurgy, Inc.
On August 24, 2007, the Company purchased, through a wholly-owned indirect
subsidiary, all of the outstanding capital stock of Welding Metallurgy, Inc.
pursuant to that certain Stock Purchase Agreement, dated as of March 9, 2007, as
amended, with the shareholders of Welding Metallurgy (the "Welding Metallurgy
Stock Purchase Agreement"). In consideration for the shares of Welding
Metallurgy, the Company paid the former shareholders of Welding Metallurgy
$3,500,000 in cash, and issued to them a promissory note in the principal amount
of $2,000,000 due August 31, 2011 and 2,035,529 shares of common stock, having a
value of $566,500. The promissory note bears no interest until August 24, 2008,
and thereafter bears interest at the rate of 7% per annum. To reflect the fact
that this note does not bear interest for the first year, the Company has
discounted the value of the note in its balance sheet to $1,860,000, and will
expense the imputed interest on a monthly basis and accrete up the value of the
note to its face value of $2,000,000. The cash portion of the purchase price was
provided by the proceeds of a term loan of $4,500,000 under a Loan and Security
Agreement dated as of August 24, 2007 by and among the Company's wholly-owned
subsidiaries, Air Industries Machining, Corp., Sigma Metals and Welding
Metallurgy, and Steel City Capital Funding LLC (the "SCCF Loan Agreement"). To
secure payment of the indebtedness under the promissory note, AIM and Sigma
Metals pledged to the former shareholders of Welding Metallurgy, and granted
them a security interest in, all of the outstanding shares of Welding
Metallurgy, subject to the prior rights of Steel City Capital Funding LLC.
The Company has agreed to register for resale under the Securities Act the
shares of its common stock issued to the former shareholders of Welding
Metallurgy, at their request, in connection with certain registration statements
the Company may file in the future. One half of the shares of the common stock
issued to the former shareholders of Welding Metallurgy have been deposited in
escrow to secure their indemnity obligations under the Stock Purchase Agreement
until February 24, 2009.
F-27
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 RELATED PARTY TRANSACTIONS
Stephen M. Nagler, a director of the Company until June 26, 2007, is a partner
in Eaton & Van Winkle LLP, the Company's legal counsel. The Company paid Eaton &
Van Winkle LLP $443,991 in 2007 and $500,000 in 2006 for legal fees and
disbursements.
Note 17 SUBSEQUENT EVENTS
The operations of Sigma Metals and Welding Metallurgy have been relocated
to a new 81,035 square foot facility located in Hauppauge, New York. This space
is occupied under a sublease which provides for an annual base rent of
approximately $514,572 for the first year of the sublease, with increases of
approximately 3% per year for the remainder of the following eight years.
Sigma Metals operations had previously been conducted at a facility in
Deer Park, Long Island under a lease which expired on January 31, 2008. Welding
Metallurgy's operations had previously been conducted at a facility located in
West Babylon, New York under a lease which expired at the end of February 2008.
In February 2008, the Company and PNC entered into an amendment to the
Loan Facility increasing the inventory sublimit used in the borrowing base
calculation to $10,250,000.
On April 1, 2008, the Company declared a dividend on its series B
convertible preferred stock, payable in 19,825 shares of series B convertible
preferred stock.
At a Special Meeting of Stockholders on April 3, 2008, the stockholders
approved an amendment to the certificate of incorporation increasing to
250,000,000 the number of shares of common stock we are authorized to issue and
authorized the Board of Directors to effect, at its discretion at any time not
later than December 31, 2008, if at all, a reverse stock split of common stock
at a ratio within the range from one-for-ten to one-for-thirty, with the ratio
and timing to be selected and implemented by our Board. The reverse stock split
is part of a plan intended to enable the Company to obtain a listing for common
stock on a national securities exchange. If the reverse stock split is effected,
the number of authorized shares of common stock would be reduced to 125,000,000
shares.
On April 11, 2008, the Company granted each of its four non-management
directors an option to purchase 100,000 shares of common stock at an exercise
price per share of $0.225 exercisable immediately for five years. In addition,
the terms of the options previously granted to Messrs. Rettaliata, Giusto and
Peragallo were modified to provide that the options scheduled to vest from 2008
through 2012, 1,440,000 options in the aggregate, will be exercisable at a per
share price of $0.225.
F-28
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 SEGMENT REPORTING
Financial information about the Company's operating segments for the year
ended December 31, 2007 and 2006 as required under Statement of Financial
Accounting Standard 131 is as follows:
Year Ended December 31,
-----------------------
2007 2006
---- ----
Air Industries Machining
Net Sales $ 34,088,056 $ 33,044,996
Gross Profit 8,361,046 5,042,054
Pre Tax Income 3,412,729 1,563,036
Assets 31,304,053 24,576,329
Sigma Metals
Net Sales 9,890,659 --
Gross Profit 2,781,253 --
Pre Tax Income 303,996 --
Assets 11,463,079 --
Welding Metallurgy
Net Sales 2,089,930 --
Gross Profit 1,588,347 --
Pre Tax Income 1,026,715 --
Assets 8,425,658 --
Corporate
Net Sales -- --
Gross Profit -- --
Pre Tax Income (3,503,866) (1,409,636)
Assets 22,962,665 8,333,815
Consolidated
Net Sales $ 46,068,645 $ 33,044,996
Gross Profit 12,730,646 5,042,054
Pre Tax Income 1,239,573 153,400
Provision for Taxes 611,673 489,969
Net Income (loss) 627,900 (336,569)
Elimination of Assets (23,865,005) (8,017,962)
Assets 50,290,450 24,892,182
F-29
AIR INDUSTRIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 ADJUSTED UNAUDITED QUARTERLY DATA
As a result of (i) the Company's determination to capitalize certain
amounts related to development expenditures made in the first three quarters of
2007 previously expensed and (ii) the completion of the allocation of the
purchase price paid for Sigma Metals and Welding Metallurgy among certain
intangible assets of those companies that initially had been allocated to
goodwill there are set forth below restated summarized results of operations for
each of the first three quarters of 2007. The table set forth below shows
adjustments to the results previously reported by the Company on Form 10-QSB for
each of the first three quarters of 2007.
Q1 2007 Q1 2007 Q2 2007 Q2 2007
as reported Adjustments (1) as restated as reported Adjustments(1)(2) as restated
Net Sales $ 7,488,130 $ 7,488,130 $10,989,536 $10,989,536
Cost of Sales 6,239,484 $(418,014) 5,821,470 8,616,698 $(434,234) 8,182,464
---------------------------------------------------------------------------------------------
Gross Profit 1,248,646 418,014 1,666,660 2,372,838 434,234 2,807,072
Cost and expenses 1,126,792 -- 1,126,792 2,330,498 55,881 2,386,379
---------------------------------------------------------------------------------------------
Operating Income 121,854 418,014 539,868 42,340 378,353 420,693
Interest and financing costs 130,954 -- 130,954 280,869 -- 280,869
Other (Income) Expenses (2,377) -- (2,377) (1,224) -- (1,224)
---------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,723) 418,014 411,291 (237,305) 378,353 141,048
Income tax provision 64,764 194,460 259,224 78,138 176,010 254,148
---------------------------------------------------------------------------------------------
Net (Loss) Income (71,487) 223,554 152,067 (315,443) 202,343 (113,100)
Less:Dividend attributable to
preferred stockholders -- -- -- 110,964 -- 110,964
---------------------------------------------------------------------------------------------
Net income (loss) income attributable
to common stockholders $ (71,487) $ 223,554 $ 152,067 $ (426,407) $ 202,343 $ (224,064)
=============================================================================================
Loss per common share:
Net income (loss) per common share
(Basic) $ (0.00) $ 0.00 $ (0.01) $ (0.00)
=========== =========================== ===========
Net income (loss) per common share
(Diluted) $ (0.00) $ 0.00 $ (0.01) $ (0.00)
=========== =========================== ===========
Weighted average shares
outstanding (Basic) 58,833,681 58,833,681 65,667,564 65,667,564
=========== =========================== ===========
Weighted average shares
outstanding (Diluted) 58,833,681 60,202,835 65,667,564 65,667,564
=========== =========================== ===========
Q3 2007 Q3 2007 December 31,
As reported Adjustments(1)(2) As restated Q4 2007 2007
Net Sales $12,845,821 $12,845,821 $14,745,158 $46,068,645
Cost of Sales 9,254,338 $(456,336) 8,798,002 10,536,063 33,337,999
---------------------------------------------------------------------------
Gross Profit 3,591,483 456,336 4,047,819 4,209,095 12,730,646
Cost and expenses 2,617,134 112,921 2,730,055 3,651,393 9,894,619
---------------------------------------------------------------------------
Operating Income 974,349 343,415 1,317,764 557,702 2,836,027
Interest and financing costs 478,920 -- 478,920 687,634 1,578,377
Other (Income) Expenses 26,074 -- 26,074 (4,396) 18,077
---------------------------------------------------------------------------
Income (loss) before income taxes 469,355 343,415 812,770 (125,536) 1,239,573
Income tax provision 46,761 159,757 206,518 (108,217) 611,673
---------------------------------------------------------------------------
Net (Loss) Income 422,594 183,658 606,252 (17,319) 627,900
Less:Dividend attributable to
preferred stockholders 136,578 -- 136,578 146,500 394,042
---------------------------------------------------------------------------
Net income (loss) income attributable
to common stockholders $ 286,016 $ 183,658 $ 469,674 $ (163,819) $ 233,858
===========================================================================
Loss per common share:
Net income (loss) per common share
(Basic) $ 0.00 $ 0.01 $ (0.00) $ 0.00
=========== ===========================================
Net income (loss) per common share
(Diluted) $ 0.00 $ 0.01 $ (0.00) $ 0.00
=========== ===========================================
Weighted average shares 67,838,959 67,838,959 69,122,227 65,402,711
===========================================================================
outstanding (Basic)
Weighted average shares 70,734,615 70,734,615 70,738,078 67,861,015
===========================================================================
outstanding (Diluted)
(1) The adjustments to Cost of Sales relates to the Company's determination to
capitalize certain engineering costs initially expensed.
(2) The adjustments to costs and expenses relate to the amortization of amounts
attributable to intangibles that have been specifically identified among the
assets of Sigma and Welding Metallurgy that initially had been included in
goodwill.
As of June 30, 2007 and September 30, 2007, $3,720,000 and $2,434,225 was
reclassified from goodwill to intangibles, respectively, related to the
completion of the allocation of purchase prices. There was no impact on cash
flow for any of the periods.
F-30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AIR INDUSTRIES GROUP, INC.
Dated: April 14, 2008
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)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant on
April 14, 2008 in the capacities indicated.
Signature Capacity
--------- --------
/s/ James A. Brown
-----------------------
James A. Brown Chairman of the Board
/s/ Louis A. Giusto
-----------------------
Louis A. Giusto Vice Chairman, Chief Financial Officer,
Treasurer and a Director
/s/ Peter D. Rettaliata
-----------------------
Peter D. Rettaliata President, CEO and a Director
/s/ Dario A. Peragallo
-----------------------
Dario A. Peragallo Executive Vice President and a Director
/s/ Seymour G. Siegel
-----------------------
Seymour G. Siegel Director
/s/ Ira A. Hunt Jr.
-----------------------
Ira A. Hunt Jr. Director
/s/ David J. Buonanno
-----------------------
David J. Buonanno Director
44