As filed with the Securities and Exchange Commission on February ___, 2006
Registration No. ______________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ASHLIN DEVELOPMENT CORPORATION
(Name being changed to GALES INDUSTRIES INCORPORATED)
(Name of small business issuer in its charter)
Florida 3728 65-0452156
(State or Jurisdiction (Primary Standard (IRS Employer
of Incorporation Industrial Identification
or Organization) Classification Number)
Code Number)
1479 North Clinton Avenue
Bay Shore, NY 11706
(631) 968-5000
(Address and telephone number of principal executive offices)
1479 North Clinton Avenue
Bay Shore, NY 11706
(Address of principal place of business)
Michael A. Gales, Executive Chairman
Gales Industries Incorporated
1479 North Clinton Avenue
Bay Shore, NY 11706
(631) 968-5000
(Name, address and telephone number of agent for service)
Copies of communications to:
Vincent J. McGill, Esq.
Eaton & Van Winkle LLP
3 Park Avenue, 16th Floor
New York, New York 10016
(212) 779-9910
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount Proposed Maximum Proposed Maximum Amount of Registration
Securities To Be Registered To Be Registered Offering Price Per Share(1) Aggregate Offering Price Fee
- ----------------------------------------------------------------------------------------------------------------------------------
$.001 par value per share
common stock (2) 60,924,388 $ 0.50 $30,462,194 $3,260
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(1) Pursuant to Rule 457(c), the fee calculation is based on $0.50, which is the
average of the high and low prices of the Registrant's common stock on the OTC
Bulletin Board on February 2, 2006.
(2) This registration statement relates to the resale by certain selling
security holders identified herein of up to 60,924,388 shares of common stock,
of which up to 11,485,725 shares of common stock are held by selling security
holders, up to 40,909,538 shares of common stock are issuable upon conversion of
Series A Convertible Preferred Stock purchased by investors in a recent
offering, up to 1,636,380 shares of common stock are issuable upon conversion of
Series A Convertible Preferred Stock which may be issued as payable-in-kind
dividends, up to 1,663,156 shares of common stock are issuable upon the
conversion of certain convertible promissory notes and up to 5,229,589 shares of
our common stock are issuable upon exercise of common stock purchase warrants.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Subject to Completion, Dated February ___, 2006
60,924,388 Shares
ASHLIN DEVELOPMENT CORPORATION
(name being changed to Gales Industries Incorporated)
Common Stock
This prospectus relates to the resale of up to 60,924,388 shares of our
common stock, $.001 par value per share ("Common Stock"), by the selling
security holders listed in the prospectus commencing on page 39, consisting of
up to 11,485,725 shares of Common Stock held by selling security holders, up to
40,909,538 shares of Common Stock issuable upon conversion of the outstanding
shares of our Series A Convertible Preferred Stock, up to 1,636,380 shares of
Common Stock issuable upon conversion of Series A Convertible Preferred Stock
which may be issued as payable-in-kind dividends, up to 1,663,156 shares of
Common Stock issuable upon the conversion of certain convertible promissory
notes and up to 5,229,589 shares of our Common Stock issuable upon exercise of
common stock purchase warrants. The transactions in which the selling security
holders acquired the shares of Common Stock covered by this prospectus are
described in the section of this prospectus entitled "Selling Security Holders."
We are in the process of changing our name from Ashlin Development
Corporation to Gales Industries Incorporated and changing our state of
incorporation from Florida to Delaware. We expect our name change and
reincorporation in Delaware to be effective on or about February 15, 2006.
The selling security holders, by themselves or through brokers and
dealers, may offer and sell the shares at prevailing market prices or in
transactions at negotiated prices. We will not receive any proceeds from the
selling security holders' resale of the shares of Common Stock. The selling
security holders will receive all proceeds from such sales. We will, in the
ordinary course of business, receive proceeds from the issuance of our Common
Stock upon exercise of the common stock purchase warrants.
It is not possible to determine the price to the public in any sale of the
shares of Common Stock by the selling security holders and the selling security
holders reserve the right to accept or reject, in whole or in part, any proposed
purchase of shares. Accordingly, the selling security holders will determine the
public offering price, the amount of any applicable underwriting discounts and
commissions and the net proceeds at the time of any sale. The selling security
holders will pay any underwriting discounts and commissions. The selling
security holders, and the brokers through whom sales of the securities are made,
will be "underwriters" within the meaning of Section 2(11) of the Securities Act
of 1933, as amended, referred to herein as the "Securities Act".
Our Common Stock is traded on the OTC Bulletin Board under the symbol
"ASHN". On February 2, 2006 the average of the high and low sale prices of our
Common Stock on the OTC Bulletin Board was $0.50.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE [7].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information from that
contained in this prospectus. The selling security holders are offering to sell
and seeking offers to buy shares of our Common Stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our Common Stock.
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No person is authorized in connection with this prospectus to give any
information or to make any representations about us, the selling security
holders, the securities or any matter discussed in this prospectus, other than
the information and representations contained in this prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or any
selling security holder. This prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy the securities in any circumstances under
which the offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any distribution of securities in accordance with this prospectus
shall, under any circumstances, imply that there has been no change in our
affairs since the date of this prospectus.
The date of this prospectus is February __, 2006
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, a registration statement on Form SB-2,
under the Securities Act for the common stock offered by this prospectus. We
have not included in this prospectus all the information contained in the
registration statement and you should refer to the registration statement and
its exhibits for further information.
Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
The registration statement and other information may be read and copied at
the Commission's Public Reference Room at 450 Fifth Street N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The SEC maintains a
web site (HTTP://WWW.SEC.GOV.) that contains the registration statements,
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC such as us.
You may also read and copy any reports, statements or other information
that we have filed with the SEC at the addresses indicated above and you may
also access them electronically at the web site set forth above. These SEC
filings are also available to the public from commercial document retrieval
services.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus contain some
forward-looking statements. Certain of the matters discussed concerning our
operations, cash flows, financial position, economic performance and financial
condition, including, in particular, future sales, product demand, competition
and the effect of economic conditions include forward-looking statements within
the meaning of section 27A of the Securities Act of 1933, referred to herein as
the Securities Act, and Section 21E of the Securities Exchange Act of 1934,
referred to herein as the 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. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. We expressly disclaim a duty to provide updates to these forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this filing to reflect events or changes in circumstances or changes in
expectations or the occurrence of anticipated events.
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We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
Form 10-KSB, Form 10-QSB and Form 8-K reports to the SEC. Also note that we
provide a cautionary discussion of risk and uncertainties under the caption
"Risk Factors" in this prospectus. These are factors that we think could cause
our actual results to differ materially from expected results. Other factors
besides those listed here could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our Common Stock. You should read the entire
prospectus, including "Risk Factors" and the consolidated financial statements
and the related notes before making an investment decision. The information in
this prospectus reflects a 1-for-1.249419586 reverse split of our Common Stock
(the "Reverse Split") which became effective as of November 21, 2005.
In this prospectus, the "Company" and terms such as "we," "us" and "our,"
refer to (i) Ashlin Development Corporation, a Florida corporation, (ii) our
100% owned Delaware subsidiary, Gales Industries Merger Sub, Inc. ("Merger
Sub"), and (iii) Air Industries Machining, Corp., a New York corporation ("AIM")
which is wholly owned by Merger Sub. When we refer to "Ashlin" in this
prospectus, we are referring to our Company prior to the transactions of
November 30, 2005. We are in the process of changing our name to Gales
Industries Incorporated and changing our state of incorporation from Florida to
Delaware.
Our Company
Through our wholly-owned subsidiary, AIM, we manufacture aircraft
structural parts and assemblies principally for prime defense contractors in the
aerospace industry including, Sikorsky, Lockheed Martin, Boeing and Northrop
Grumman. Approximately 85% of our revenues are derived from sales of parts and
assemblies directed toward military applications, although direct sales to the
military (U.S. and NATO) constitute less than 10% of our revenues. Parts
manufactured by us are installed onboard Sikorky's VH-3D, otherwise known as
Marine One, the primary Presidential helicopter, and onboard Air Force One,
Boeing's 747-2000B customized for use by the President.
Our principal offices are at 1479 North Clinton Avenue, Bay Shore, New
York 11706 and our telephone number is (631) 968-5000.
The Acquisition and Related Transactions
On October 15, 2004, Ashlin filed in the Southern District of Florida a
plan of reorganization under Chapter 11 of the United States bankruptcy code.
The Court confirmed Ashlin's plan of reorganization ("Plan of Reorganization")
on January 10, 2005 and the Plan of Reorganization was declared effective on
January 21, 2005. Ashlin formally emerged from bankruptcy protection on April
29, 2005, without any operating business.
On November 30, 2005 (the "Closing Date"), we acquired 100% of Gales
Industries Incorporated ("Gales Industries"), a Delaware corporation, in a stock
for stock exchange. Immediately prior to our acquisition of Gales Industries, it
acquired 100% of the capital stock of AIM. The funds used to acquire AIM were
obtained by Gales Industries through a $9 million private placement of preferred
stock. As a result of our acquisition of Gales Industries, AIM is indirectly
100% owned by us. Concurrently with its acquisition by Gales Industries, AIM
entered into a bank loan facility providing for up to $14 million and used
monies from such facility to purchase its corporate campus in Bay Shore, New
York. In connection with our acquisition of Gales Industries, we issued a
significant number of shares of our Common Stock to the stockholders of Gales
Industries, which resulted in a change of control of our Company.
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The Offering
This prospectus relates to the resale by the selling security holders of
up to 60,924,388 shares of our Common Stock, consisting of 11,485,725 shares of
Common Stock held by selling security holders, up to 40,909,538 shares of Common
Stock issuable upon conversion of the outstanding shares of our Series A
Convertible Preferred Stock ("Preferred Stock"), up to 1,636,380 shares of
Common Stock issuable upon conversion of Series A Convertible Preferred Stock
which may be issued as payable-in-kind dividends, up to 1,663,156 shares of
Common Stock issuable upon the conversion of certain convertible promissory
notes and up to 5,229,589 shares of our Common Stock issuable upon exercise of
common stock purchase warrants.
The issuances of such securities to the selling security holders was made
in reliance upon exemptions from the registration requirements of the Securities
Act provided by Section 4(2) of the Securities Act for private transactions.
Additional information concerning the transactions in which the rights to
acquire the shares covered by this prospectus were obtained by the selling
security holders are set forth in the section of this prospectus entitled
"Selling Security Holders."
Sales By Selling Security Holders
The selling security holders may offer the Common Stock pursuant to this
prospectus in varying amounts and transactions so long as this prospectus is
then current under the rules of the SEC and we have not withdrawn the
registration statement. The offering of Common Stock may be through the
facilities of the OTC Bulletin Board or such other exchange or reporting system
where the Common Stock may be traded. Brokerage commissions may be paid or
discounts allowed in connection with such sales; however, it is anticipated that
the discounts allowed or commissions paid will be no more than the ordinary
brokerage commissions paid on sales effected through brokers or dealers. To our
knowledge, as of the date hereof, no one has made any arrangements with a broker
or dealer concerning the offer or sale of the Common Stock. See "Plan of
Distribution."
Outstanding Securities
As of January 31, 2006, there were approximately 14,723,361 shares of our
Common Stock outstanding. On a fully-diluted basis, giving effect to and
assuming the exercise or conversion of all of our options, warrants and
derivative securities, we had outstanding an aggregate of approximately
67,375,606 shares of Common Stock as January 31, 2006. This number does not give
effect to any interest or dividends which may accrue on the outstanding
Preferred Stock or convertible notes or to any rounding up to the nearest whole
share in connection with the Reverse Split and in connection with the conversion
of Preferred Stock or convertible notes.
An investment in the shares of our Company is subject to a number of
risks. We have set forth these risk factors below under the heading "Risk
Factors" which you should carefully review.
Summary Financial Data
Set forth below is summary financial information of AIM. The data for the
years ended December 31, 2004 and 2003 are derived from audited financial
statements of AIM. The summary financial data at September 30, 2005 have been
derived from unaudited financial statements of AIM. The information below does
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not give effect to the transactions which we completed on November 30, 2005 or
Gales Industries' $9 million private placement which was completed on December
15, 2005. This summary financial information should be read in conjunction with
the financial statements which are a part of this prospectus.
Statement of Operations Data:
Nine Months Ended Year Ended December 31,
September 30, 2005 2004 2003
------------------- --------------------------
Revenues $21,851,532 $24,818,333 $22,334,926
Costs of Goods Sold 18,858,898 21,400,878 19,531,292
Gross Profit 2,992,634 3,417,455 2,803,634
Expenses:
Selling 244,125 321,727 309,479
General and Administrative 1,251,203 1,356,809 1,249,184
Interest expense 490,975 505,425 441,867
Income before Minority interest 1,006,483 1,236,067 803,204
Less: Minority interest 57,384 131,552 83,363
Net Income $ 949,099 $ 1,104,515 $ 719,841
Balance Sheet Data: At September 30, 2005 At December 31, 2004
--------------------- ---------------------
Working Capital $ 3,549,380 $ 7,695,227
Total Assets $18,588,831 $17,801,807
Total Current Liabilities $10,849,225 $ 6,030,947
Long-Term Liabilities $ 2,445,214 $ 7,109,696
Total Stockholders' Equity $ 5,294,392 $ 4,661,164
RISK FACTORS
The purchase of our Common Stock involves a high degree of risk. Before
you invest you should carefully consider the risks and uncertainties described
below and other information and our consolidated financial statements and
related notes included elsewhere in this prospectus. If any of the events
described below actually occur, our operating results would be dramatically
adversely affected, which in turn could cause the price of our Common Stock to
decline, perhaps significantly. Further, we may not be able to continue our
operations. This means you could lose all or a part of your investment.
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Risks of the Acquisition
There can be no assurance that any benefits to AIM's business will be
achieved from the Merger, Acquisition, Real Estate Acquisition, New Loan
Facility or Offering (each as defined below under the heading "The Acquisition
and Related Transactions") (collectively, the "Closing Transactions") or that
the results of operations of AIM prior to the Acquisition will be not be
adversely impacted by the Closing Transactions. As of November 30, 2005, Luis
Peragallo and Jorge Peragallo resigned from their positions with AIM. Even
though Peter Rettaliata and Dario Peragallo, two of AIM's officers (President
and Executive Vice President, respectively), will serve as officers of the
Company, there can be no assurance that the new management of the Company will
have the necessary experience to operate AIM's business. The process of
combining the organizations of Gales Industries, AIM and Ashlin Development
Corporation could interrupt the activities of part or all of AIM's business, and
could cause fundamental changes in AIM's business, which could have an adverse
effect on the results of our operations. The past results of AIM's operations
are not necessarily indicative of the future results of our operations.
Limited Recourse Against AIM Shareholders
Pursuant to the stock purchase agreement relating to the Acquisition, the
obligations of the former shareholders of AIM (the "AIM Shareholders") to
indemnify us for breaches of their representations and warranties are, with
certain exceptions, limited to $2.5 million. Consequently, we will have no
recourse against the AIM Shareholders for claims in excess of such amount.
The inability to successfully manage the growth of our business may have a
material adverse effect on our business, results or 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. Such activities
could result in increased responsibilities for management.
Our future success will be highly dependent upon our ability to manage
successfully the expansion of operations. Our ability to manage and support our
growth effectively will be substantially dependent on our ability to implement
adequate improvements to financial, inventory, management controls, reporting,
union relationships, order entry systems and other procedures, and hire
sufficient numbers of financial, accounting, administrative, and management
personnel. There can be no assurance that we will be able to identify, attract
and retain experienced accounting and financial personnel.
Our future success depends on our ability to address potential market
opportunities and to manage expenses to match our ability to finance operations.
The need to control our expenses will place a significant strain on our
management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations and financial condition may be
adversely affected.
The unsuccessful integration of a business or business segment we acquire
could have a material adverse effect on our results.
As part of our business strategy, we expect to acquire assets and
businesses relating to or complementary to our operations. These acquisitions
will involve risks commonly encountered in acquisitions. These risks include,
among other things, exposure to unknown liabilities of the acquired companies,
additional acquisition costs and unanticipated expenses. Our quarterly and
annual operating results will fluctuate due to the costs and expenses of
acquiring and integrating new businesses. We may also experience difficulties in
assimilating the operations and personnel of acquired businesses. Our ongoing
business may be disrupted and our management's time and attention diverted from
existing operations. Our acquisition strategy will likely require additional
debt or equity financing, resulting in additional leverage or dilution of
ownership. We cannot assure you that any future acquisition will be consummated,
or that if consummated, that we will be able to integrate such acquisition
successfully.
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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.
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 revenue from one or
a limited number of customers. We expect that in future periods we may enter
into contracts with customers which represent a significant concentration of our
revenues. If such contracts were terminated, our revenues and net income could
significantly decline. Our success will depend on our continued ability to
develop and manage relationships with significant customers. Sikorsky accounts
for more than 40% of our sales. Any adverse change in our relationship with such
customer could have a material adverse effect on our business. Although we are
attempting to expand our customer base, we expect that our customer
concentration will not change significantly in the near future. The markets in
which we sell our products are dominated by a relatively small number of
customers who have contracts with United States governmental agencies, thereby
limiting the number of potential customers. We cannot be sure that we will be
able to retain our largest customers or that we will be able to attract
additional customers, or that our customers will continue to buy our products in
the same amounts as in prior years. The loss of one or more of our largest
customers, any reduction or interruption in sales to these customers, our
inability to successfully develop relationships with additional customers or
future price concessions that we may have to make, could significantly harm our
business.
Continued competition in our markets may lead to a reduction in our
revenues and market share.
The defense and aerospace component manufacturing market is highly
competitive and we expect that competition will continue to increase. Current
competitors have significantly greater technical, manufacturing, financial and
marketing resources than we do. We expect that more companies will enter the
defense and aerospace component manufacturing market. We may not be able to
compete successfully against either current or future competitors. Increased
competition could result in reduced revenue, lower margins or loss of market
share, any of which could significantly harm our business.
Our future revenues are inherently unpredictable, our operating results
are likely to fluctuate from period to period and if we fail to meet the
expectations of securities analysts or investors, our stock price could decline
significantly.
Our quarterly and annual operating results are likely to fluctuate
significantly in the future 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
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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 the
expectations of securities analysts and investors. In this event, the trading
price of our Common Stock could significantly decline. In addition, there can be
no assurance that an active trading market will be sustained for our Common
Stock. These fluctuations, as well as general economic and market conditions,
may adversely affect the future market price of our Common Stock, as well as our
overall operating results.
We may lose sales if our suppliers fail to meet our needs.
Although we procure most of our parts and components from multiple sources
or believe that these components are readily available from numerous sources,
certain components are available only from sole sources or from a limited number
or sources. While we believe that substitute components or assemblies could be
obtained, use of substitutes would require development of new suppliers or would
require us to re-engineer our products, or both, which could delay shipment of
our products and could have a materially adverse effect on our operating results
and financial condition.
Attracting and retaining key personnel is an essential element of our
future success.
Our future success depends to a significant extent upon the continued
service of our executive officers and other key management and technical
personnel and on our ability to continue to attract, retain and motivate
executive and other key employees, including those in managerial, technical,
marketing and information technology support positions. Attracting and retaining
skilled workers and qualified sales representatives is also critical to us.
Experienced management and technical, marketing and support personnel in the
defense and aerospace industries are in demand and competition for their talents
is intense. The loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and results of
operations.
Terrorist acts and acts of war may seriously harm our business, results of
operations and financial condition.
United States and global responses to the Middle East conflict, terrorism,
perceived nuclear, biological and chemical threats and other global crises
increase uncertainties with respect to U.S. and other business and financial
markets. Several factors associated, directly or indirectly, with the Middle
East conflict, terrorism, perceived nuclear, biological and chemical threats,
and other global crises and responses thereto, may adversely affect the Company.
While some of our products may experience greater demand as a result of
increased U.S. Government defense spending, various responses could realign U.S.
Government programs and affect the composition, funding or timing of our
government programs and those of our customers. U.S. Government spending could
shift to defense programs in which we and our customers do not participate. As a
result of the September 11th terrorist attacks and given the current Middle East
and global situation, U.S. defense spending is generally expected to increase
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.
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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 terrorist attacks that took
place in the United States on September 11, 2001 were unprecedented events that
have created many economic and political uncertainties. 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.
Our indebtedness may affect operations.
As described below under "Management's Discussion and Analysis or Plan of
Operation - Financial Liquidity and Capital Resources", we incurred significant
indebtedness under the New Loan Facility. This indebtedness far exceeds the
amount of pre-Merger debt of AIM. As a result, we are significantly leveraged
and our indebtedness is substantial in relation to our stockholders' equity. Our
ability to make principal and interest payments will depend on future
performance, which is subject to many factors, some of which are outside our
control. In addition, the New Loan Facility is secured by substantially all of
our assets, including the real estate acquired in the Real Estate Acquisition.
In the case of a continuing default under the New Loan Facility, the lender will
have the right to foreclose on AIM's assets, which would have a material adverse
effect on the Company. Payment of principal and interest on the New Loan
Facility may limit our ability to pay cash dividends to shareholders and the
documents governing the New Loan Facility will prohibit the payment of cash
dividends. Our leverage may also adversely affect our ability to finance future
operations and capital needs, may limit our ability to pursue other business
opportunities and may make our results of operations more susceptible to adverse
economic conditions.
Absence of Principal Shareholders' Guarantees and Financial Accommodations
Historically, AIM obtained money and achieved other financial
accommodations through arrangements guaranteed by the AIM Shareholders. Since
they sold their shares of AIM in connection with the Acquisition, the AIM
Shareholders will not be providing any financial assistance to us or AIM on a
going-forward basis. Consequently, we are no longer able to rely upon the credit
of AIM's Shareholders when seeking to borrow money or obtain other financial
accommodations.
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. There can be no
assurance that we will ever achieve a listing of our securities on Nasdaq or a
stock exchange or that a more active trading market will ever develop, or, if
developed, that it will be sustained.
Our stock is considered Penny Stock.
The SEC has adopted regulations which generally define "penny stock" to be
an equity security that has a market price of less than $5.00 per share. Our
Common Stock falls within the definition of penny stock and is 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).
11
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 the Company's Common Stock and
may affect the ability of investors to sell our Common Stock in the secondary
market. Such rules may also 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.
Potential Adverse Effect on Market Price of Securities from Future Sales
of Common Stock
Future sales of 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 the Common Stock. Relative
to the number of shares of our freely-trading Common Stock outstanding, the
number of shares which will be sold into the marketplace pursuant to this
prospectus will be enormous. We believe that such sales will severely depress
the market price of our Common Stock. We also intend to register on Form S-8
under the Securities Act an additional 10,000,000 shares of Common Stock, which
are the shares available for issuance under our 2005 Stock Incentive Plan, of
which, as of January 31, 2006, we have granted stock options to purchase
4,850,000 shares of our Common Stock. In addition, shares of our Common Stock
held for one year or more will be eligible for public resale pursuant to Rule
144. In general, the shares of Common Stock which we issued in connection with
the Merger and the Acquisition will become eligible for public resale under Rule
144 as of November 30, 2006. 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.
Effect of Stock Options
Our 2005 Stock Incentive Plan allows for the issuance of up to 10,000,000
shares of Common Stock, either as stock grants or options, to employees,
officers, directors, advisors and consultants of the Company. As of November 30,
2005, options to purchase 4,850,000 shares of Gales' common stock became options
to purchase shares of our Common Stock under our 2005 Stock Incentive Plan. The
committee administering such plans will have sole authority and discretion to
grant options under such plans. We may grant options which become immediately
exercisable in the event of a change in control of the Company and in the event
of certain mergers and reorganizations of the Company. The existence of such
options could limit the price that certain investors might be willing to pay in
the future for shares of our Common Stock and may have the effect of delaying or
preventing a change in control of the Company. The issuance of additional shares
upon the exercise of such options could also decrease the amount of earnings and
assets available for distribution to the holders of the Common Stock and could
result in the dilution of voting power of the Common Stock.
Prior to November 30, 2005, AIM was not subject to Sarbanes-Oxley
regulations and, therefore, may have lacked the financial controls and
procedures of public companies.
12
Prior to November 30, 2005, AIM did not have the internal or financial
control infrastructure necessary to meet the standards of a public company,
including the standards required by the Sarbanes Oxley Act of 2002 ("Sarbanes
Oxley"). Because AIM was not subject to Sarbanes Oxley, its internal and
financial controls reflected its status as a non-public company. AIM did not
have the internal infrastructure necessary to complete an attestation about its
financial controls that would be required under Section 404 of Sarbanes Oxley.
We are now required to comply with Sarbanes Oxley, including standards for
internal and financial controls, in connection with AIM's operations. The cost
to us of such compliance could be substantial and could have a material adverse
effect our results of operations.
THE ACQUISITION AND RELATED TRANSACTIONS
Bankruptcy
On October 15, 2004, Ashlin filed in the Southern District of Florida a
plan of reorganization under Chapter 11 of the United States bankruptcy code.
The Court confirmed Ashlin's plan of reorganization ("Plan of Reorganization")
on January 10, 2005 and the Plan of Reorganization was declared effective on
January 21, 2005. Ashlin formally emerged from bankruptcy protection on April
29, 2005 without any operating business.
Transactions of November 30, 2005
On November 30, 2005 (the "Closing Date"), we acquired 100% of Gales
Industries Incorporated ("Gales Industries"), a Delaware corporation, in a stock
for stock exchange accomplished by causing Gales Industries to merge into our
wholly-owned subsidiary (the "Merger"). Immediately prior to our acquisition of
Gales Industries, it acquired 100% of the capital stock of AIM (the
"Acquisition"). As a result of our acquisition of Gales Industries, AIM is
indirectly 100% owned by us. Concurrently with its acquisition by Gales
Industries, AIM entered into a bank loan facility providing for up to $14
million and used funds from such facility to purchase its corporate campus in
Bay Shore, New York. In connection with our acquisition of Gales Industries, we
issued a significant number of shares of our Common Stock to the stockholders of
Gales Industries, which resulted in a change of control of our Company.
The aggregate purchase price paid to AIM's four shareholders for 100% of
the capital stock of AIM was: (i) $3,114,296 in cash, (ii) $1,627,262 principal
amount of promissory notes, of which notes in the principal amount of $665,262
are convertible into common stock at a conversion price of $.40 per share and
(iii) 490,060 shares of common stock. In addition, we distributed approximately
$690,000 to AIM's shareholders in satisfaction of loans from them to AIM and to
enable them to pay income taxes accrued while operating AIM as a Subchapter S
corporation.
Contemporaneously with the acquisition of Gales Industries by us, AIM
completed the acquisition from affiliates of AIM, for $4,190,000, of a
three-building (76,000 square feet), 5.4-acre corporate campus which was being
leased by AIM from its affiliates prior to the Closing Date in Bay Shore, New
York (the "Real Estate Acquisition"). In connection with such real estate
purchase, AIM entered into a loan facility (the "New Loan Facility") with PNC
Bank, secured by all of its assets, including the newly acquired real property.
The New Loan facility provides AIM with up to $14,000,000 in debt facilities as
follows: $9,000,000 in a revolving credit facility, $3,500,000 in a term loan,
and $1,500,000 in new equipment financing. In addition to the paying for the
Real Estate Acquisition, the proceeds of the New Loan Facility were used to pay
off debts of AIM to its prior lender and certain of its shareholders, totaling
approximately $5,800,000, and will be used for working capital
The funds used by Gales Industries to acquire AIM were obtained through a
$9 million private placement of its preferred stock (the "Offering"). In its
private placement, Gales Industries sold 90 Units, each Unit consisting of 10
shares of convertible preferred stock, and each share of preferred stock
initially was convertible into 45,455 shares of Gales Industries' common stock,
without giving effect to shares of common stock which may be issued upon
conversion of shares of preferred stock issuable to investors as dividends. In
addition to the payment of the cash portion of the purchase price for AIM, the
proceeds of Gales Industries' private placement were used to pay expenses
relating to the private placement, the Acquisition of AIM, the Merger with us
and related transactions, and to repay $150,000 in promissory note obligations
which Gales Industries incurred in bridge financings, and for working capital.
13
GunnAllen Financial, Inc., a Delaware corporation, acted as Placement
Agent ("Placement Agent") in Gales' Industries' private placement of preferred
stock and received: (i) a sales commission equal to 6% and a management fee
equal to 4%, of the aggregate purchase price of the Units sold and (ii) a
non-accountable expense allowance equal to 2% of the aggregate purchase price of
the Units sold. In addition, the Placement Agent received warrants (the
"Placement Agent Warrants"), exercisable at a price of $0.22 per share during a
five-year term, to purchase 4,090,950 shares of Common Stock, which is equal to
10% of the number of shares of Common Stock into which the Preferred Stock sold
in the Offering may be converted.
Prior to our acquisition of Gales Industries, we were required by it to
effect a reverse split of our Common Stock (the "Reverse Split"). The Reverse
Split became effective as of November 21, 2005. As a result of the Reverse
Split, the conversion pursuant to the Merger of the outstanding securities of
Gales Industries for new shares of our securities was on a one-for-one basis.
Any of our shareholders who, as a result of the Reverse Split, held a fractional
share of Common Stock received a whole share of Common Stock in lieu of such
fractional share. All share numbers set forth in this prospectus, unless
otherwise noted, give effect to the Reverse Split. After giving effect to the
Reverse Split, prior to the acquisition of Gales Industries, we had outstanding
approximately 3,723,980 shares of Common Stock and stock options exercisable
into approximately 44,020 shares of our Common Stock. Such 3,723,980 shares
continued to be outstanding after, and were not cancelled or redeemed pursuant
to, the Merger and such 44,020 stock options were cancelled pursuant to the
Merger. In connection with the Merger, we issued 10,999,381 shares of Common
Stock and 900 shares of Preferred Stock to pre-existing shareholders of Gales
Industries and to those who became shareholders of Gales Industries as a result
of the Offering and the Acquisition of AIM. On a fully-diluted basis, in
connection with the Merger and the Offering, we issued an aggregate of
approximately 63,651,626 shares of our Common Stock (or approximately 94.5% of
the outstanding on a fully-diluted basis), after taking into account the shares
underlying the Preferred Stock, placement agent warrants, stock options and
convertible notes which were previously convertible or exercisable into shares
of Gales Industries common stock. The approximately 3,723,980 shares of our
Common Stock outstanding immediately prior to the Merger constituted
approximately 5.5% of our Common Stock outstanding on a fully-diluted basis
after giving effect to the Merger, Acquisition and Offering.
USE OF PROCEEDS
We will not receive any of the proceeds from the selling stockholders'
sale of the shares offered under this prospectus.
DETERMINATION OF OFFERING PRICE
We are not selling any of the Common Stock that we are registering. The
Common Stock will be sold by the selling security holders listed in this
prospectus. The selling security holders may sell the Common Stock at the market
price as of the date of sale or a price negotiated in a private sale. Our Common
Stock is traded on the OTC Bulletin Board under the symbol "ASHN". On January
31, 2006 the reported closing price for our Common Stock on the OTC Bulletin
Board was $0.39.
We have agreed to pay certain expenses in connection with the registration
of the securities offered by the selling security holders for resale pursuant to
this prospectus.
14
BUSINESS
About AIM
Currently all of our operations are conducted by AIM, our wholly owned
subsidiary. 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.
Approximately 85% of AIM's revenues are derived from sales of parts and
assemblies directed toward military applications, although direct sales to the
military (U.S. and NATO) constitute less than 10% of AIM's revenues. The
remaining 15% of revenues represent sales in the airframe manufacturing sector
to major aviation manufacturers such as Boeing. AIM is a provider of flight
critical, technically complex structures: AIM's parts are installed onboard
Sikorky's VH-3D, otherwise known as Marine One, the primary Presidential
helicopter and on Air Force One, Boeing's 747-2000B customized for use by the
President.
AIM has evolved from being an individual parts manufacturer to being a
manufacturer of subassemblies (i.e. being an assembly constructor) and being an
engineering integrator. AIM currently produces over 2,400 individual products
(SKU's) that are assembled by a skilled labor force into electromechanical
devices, mixer assemblies, and rotorhub components for Blackhawk helicopters,
rocket launching systems for the F-22 Raptor Advanced Stealth Fighter, arresting
gear for E2C Hawkeye and other 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 include ISO 9001 and AS9100 Certifications 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 Northrup Grumman.
AIM is the largest supplier of flight safety components for Sikorsky.
Sales of parts and services to Sikorsky account for more than 40% of AIM's
revenue, and are subject to General Ordering Agreements which were recently
renegotiated and extended through 2010. These revised agreements included upward
price adjustments that the Company estimates will positively impact the
Company's profitability in 2006.
Sales and Marketing
Our 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 prime contractors and OEMs. We seek to position ourselves within the
supply chain of these contractors and OEMs to be selected for subcontracted
projects as they develop.
Successful positioning requires that a company be designated a preferred
supplier by maintaining specific customer quality system approvals, third party
ISO9001 and AS9100 quality system certifications 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 also 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. Our long-term business base
generally benefits from barriers to entry resulting from investments,
certifications and manufacturing techniques developed during the initial
manufacturing phase.
15
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.
The Market
During most of the 1990s, defense spending remained flat or experienced a
slight decline. In the late 1990's and the early years of the new decade, Boeing
experienced some market share loss to Airbus which adversely affected the
domestic aerospace business. The events of 9/11 caused a further deterioration
in the domestic commercial aircraft industry, which had been poised for growth
as a result of the anticipated replacement of aging airframes.
More recently, the United States defense budget is at an all time high and
is currently expected to continue at this level through the Bush Administration
and for the next several years. In addition, the world wide commercial aircraft
industry is experiencing an increase in activity as a consequence of significant
growth in passenger flights and air cargo traffic, and the development of the
Boeing 787 Fuel Efficient Dreamliner. Increased utilization of existing
resources in the commercial aircraft industry should result in demand for our
services. More specific to our business, the war on terrorism has hastened the
need to replace older helicopters in the various state Army and Air National
Guard Units with up to date Blackhawk models as these units have been mobilized
to serve in Afghanistan and Iraq. We are the largest supplier of flight critical
parts for the Sikorsky Blackhawk.
Backlog
We have a number of long-term exclusive multi-year agreements with several
of our customers. These agreements specify the part number, specifications and
price of the covered products for a specified period of performance, but do not
authorize immediate shipment. Customers issue release orders against these
contracts periodically to satisfy their needs. In addition to our long term
agreements, we regularly enter into firm fixed agreements with customers. Our
reported backlog only includes only dollar amounts under long term agreements
for which we have actual release orders with firm delivery dates and fixed
contracts. The backlog information set forth herein does not include the sales
that we expect to generate from long-term agreements associated with long-term
production programs but for which we do not have actual purchase orders with
firm delivery dates.
As of January 1, 2006, our continuing operations had outstanding purchase
orders representing an aggregate invoice price of approximately $38 million.
Competition
The markets for our products are highly competitive. For the most part we
manufacture items to customer design and compete against companies that have
similar manufacturing capabilities in a global marketplace. Consequently, our
ability to obtain contracts is tied to our ability to provide quality products
at competitive prices which requires continuous improvements in our capabilities
to assure competitiveness and value to our customers. Our marketing strategy
involves developing long term exclusive relationships with customers based on
large multi-year agreements which foster mutually advantageous relationships.
Many of our 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. Many of
our competitors are divisions of larger companies having significantly larger
infrastructures, greater resources and the capabilities to respond to much
larger contracts.
16
Raw Materials and Replacement Parts
As a product integrator our manufacturing processes requires 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.
Future Expansion and Acquisition Strategy
Since the 1990's, the aerospace and defense has 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 Northrup 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 work in a CATIA engineering environment interactively and
must have third party ISO9001/AS9100 quality system certifications.
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 "lynchpin" 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.
The Company 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. The Company will initially seek
enterprises whose products are synergistic and complementary to AIM's current
product line and which can benefit from the Company's existing engineering
talents and manufacturing capabilities. The Company 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. The Company intends
to focus on entities with reputations for high quality standards whose
management can be absorbed into the Company. When possible, the Company will
seek to combine existing operations to absorb excess capacity and eliminate
duplicative facilities. It is contemplated that these future acquisitions will
be facilitated by using either the Company's stock, cash or debt financing, or
some combination thereof.
The Company also intends to expand its operations through internal growth.
The Company 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, the Company
will seek to capitalize on its engineering capabilities by partnering with other
lower cost manufacturers which can benefit from the Company's expertise.
17
Government Regulation
Environmental Regulation
We are subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting
in cooperation with federal and state authorities. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution,
to protect against occupational exposure to chemicals, including health and
safety risks, and to require notification or reporting of the storage, use and
release of certain hazardous chemicals and substances. The extensive regulatory
framework imposes compliance burdens and risks on us. Governmental authorities
have the power to enforce compliance with these regulations and to obtain
injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 (CERCLA) imposes strict, joint and several liability on the present and
former owners and operators of facilities that release hazardous substances into
the environment. The Resource Conservation and Recovery Act of 1976 (RCRA)
regulates the generation, transportation, treatment, storage and disposal of
hazardous waste. In New York, the handling, storage and disposal of hazardous
substances are governed by the Environmental Conservation Law, which contains
the New York counterparts of CERCLA and RCRA. In addition, the Occupational
Safety and Health Act, which requires employers to provide a place of employment
that is free from recognized and preventable hazards that are likely to cause
serious physical harm to employees, obligates employers to provide notice to
employees regarding the presence of hazardous chemicals and to train employees
in the use of such substances.
Federal Aviation Administration Regulation
We are subject to regulation by the Federal Aviation Administration (FAA)
under the provisions of the Federal Aviation Act of 1958, as amended. The FAA
prescribes standards and licensing requirements for aircraft and aircraft
components. We are subject to inspections by the FAA and may be subjected to
fines and other penalties (including orders to cease production) for
noncompliance with FAA regulations. Our failure to comply with applicable
regulations could result in the termination of or our disqualification from some
of our contracts, which could have a material adverse effect on our operations.
Government Contract Compliance
Our government contracts and those of many of our customers are subject to
the procurement rules and regulations of the United States government, including
the Federal Acquisition Regulations ("FAR"). Many of the contract terms are
dictated by these rules and regulations. During and after the fulfillment of a
government contract, we may be audited in respect of the direct and allocated
indirect costs attributed thereto. These audits may result in adjustments to our
contract costs. Additionally, we may be subject to U.S. government inquiries and
investigations because of our participation in government procurement. Any
inquiry or investigation can result in fines or limitations on our ability to
continue to bid for government contracts and fulfill existing contracts.
We believe that we are in substantial compliance with all federal, state
and local laws and regulations governing our operations and have obtained all
material licenses and permits required for the operation of our business.
18
Employees
AIM employs approximately 160 principally union employees and maintains
what it believes are, and what historically have been, good relationships with
its union.
Real Property
Our headquarters are situated on a 5.4-acre corporate campus in Bay Shore,
New York. On such campus, we occupy three buildings consisting of 76,000 square
feet. Prior to November 30, 2005, AIM leased such real property. Simultaneously
with the closing of the Acquisition and the Merger, AIM purchased such property.
As a consequence of such purchase, AIM is no longer required to pay rent for the
use of such property.
From January 2005 to November 30, 2005, Ashlin's corporate office was
located at 4400 North Federal Highway, Suite 210, Boca Raton, Florida 33431. The
lease for this property expires on March 31, 2006 and provides for a monthly
rent of approximately $950. As a result of the Merger, our headquarters have
been relocated to AIM's corporate campus in Bay Shore, New York.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
Following the Merger, AIM constitutes all of our operations. The following
discussion and analysis summarizes the significant factors affecting (1) AIM's
results of operations for fiscal 2004 compared to fiscal 2003 and (2) our
combined financial liquidity and capital resources. Also discussed below are
AIM's results of operations for the nine-month period ended September 30, 2005
compared with AIM's results of operations for the nine-month period ended
September 30, 2004. This discussion and analysis should be read in conjunction
with the financial statements and notes, and pro forma financial statements,
included with this report.
The historical financial statements of AIM included herein take into
account the results of operations, assets and liabilities of the two real estate
entities (affiliated with AIM) which, as of November 30, 2005, owned the real
properties which AIM acquired in the Real Estate Acquisition as of such date.
Such real properties were the only assets of such real estate entities prior to
and as of November 30, 2005. For the periods following November 30, 2005, we
will account for such real properties at cost.
Ashlin emerged from bankruptcy protection on April 29, 2005 without any
business operations and after having divested the business in which Ashlin had
been engaged prior to its bankruptcy filing. Therefore, Ashlin's results of
operations, apart from those of AIM, are not taken into account in the below
discussion.
Results of Operations
Year ended December 31, 2004 compared to year ended December 31, 2003
Net Sales. Net sales were $24,818,333 in fiscal 2004, compared to net
sales of $22,334,926 in fiscal 2003. The increase in net sales in fiscal 2004
compared to fiscal 2003 was due to increased shipments and increased purchase
orders.
Gross Profit. Gross profit was $3,417,455 in fiscal 2004 (13.8% of net
sales), compared to gross profit of $2,803,634 in fiscal 2003 (12.6% of net
sales). The increase was primarily due to an increased efficiency in
manufacturing and the implementation of cost reduction methods.
19
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,678,536 in fiscal 2004, an increase of 7.7% from
selling, general and administrative expenses of $1,558,663 in fiscal 2003. The
increase was primarily due to adjustments in renumeration of officers' salaries,
pay increases to office personnel, increase in professional fees attributable to
legal costs in drafting a stockholders agreement among AIM's shareholders and
computer consulting costs in connection with modifications to AIM's IT network.
Other Expenses. Other expenses were $505,425 in fiscal 2004, an increase
of 14.4% from other expenses of $441,867 in fiscal 2003. The increase was due to
an increase in bank debt, the refinancing of existing equipment loans, financing
new equipment acquisitions and increased interest rates.
The nine months ended September 30, 2005 compared to the nine months ended
September 30, 2004
Net Sales: Net sales were $21,851,532 in the nine months ended September
30, 2005 compared to net sales of $18,322,866 in the nine months ended September
30, 2004. The increase of $3,528,666 or 19.3% was primarily due to increased
purchase orders and shipments and retroactive price adjustments on long term
contracts. As of September 30, 2005, AIM's revenue backlog approximated $35
million.
Gross Profit: Gross profit was $2,992,634 in the nine months ended
September 30, 2005 (13.7% of net sales), compared to gross profit of $2,382,230
in the nine months ended September 30, 2004 (13.0% of net sales). The increase
in gross profit as a percentage of net sales in the nine months ended September
30, 2005 was favorably affected by (i) renegotiated price adjustments on long
term contracts and (ii) increased efficiency in the manufacturing process. Our
gross profit margins were negatively affected in the nine months ended September
30, 2005 due to (i) increase in factory repairs and (ii) increases in cost of
labor.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $1,495,328 in the nine months ended September 30,
2005, an increase of 26.7% from selling, general and administrative expenses of
$1,180,439 in the nine months ended September 30, 2004. The increase was
primarily due to (i) an increase in professional fees and (ii) increase in fees
related to the implementation of a new computer software system.
Other Expenses: Other expenses were $490,975 in the nine months ended
September 30, 2005, an increase of 59.5% compared to $307,727 in the nine months
ended September 30, 2004, which increase was attributable to (i) financing of
additional equipment acquisitions and (ii) an increase in interest rates.
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Financial Liquidity and Capital Resources
We believe that our cash requirements in the next twelve months will be
met by our revenues from operations and our cash reserves which were $1.076
million as of December 31, 2005.
AIM had financed its operations and investments up to the Closing Date
principally through revenues from operations. As a private company, AIM did not
have many of the expenses which we have as a public company. As a result of the
AIM Acquisition, we have significantly increased cash requirements relating to
the preparation of financial statements, our compliance with the Exchange Act
requirements, the registration of shares under the Securities Act, and other
requirements applicable to public companies. We expect such increased cash
requirements to be approximately $400,000 in 2006.
20
In connection with the Acquisition of AIM, we incurred notes payable
obligations in the aggregate principal amount of $1,627,262, of which $665,262
are in the form of convertible promissory notes which we may convert into shares
of Common Stock at $.40 per share upon effectiveness of the registration
statement of which this prospectus is a part. The remaining $962,000 principal
amount of note is repayable by us in 20 equal quarterly installments of $48,100
principal plus interest. The holder of a convertible bridge note in the
principal amount of $22,500 has converted such note into shares of our Common
Stock.
As of November 30, 2005, under the New Loan Facility, we incurred
approximately $5,732,000 in debt under the revolving credit facility and
$3,500,000 under a term loan. We have not made any borrowings under our $1.5
million equipment line of credit available under the New Loan Facility. The
revolving credit facility requires us to pay interest monthly on the outstanding
principal amount. This monthly interest payment amount fluctuates because the
outstanding principal amount and interest rate under the revolving credit
facility varies from month to month. The term loan requires us to make 84 equal
monthly payments of $31,667 plus interest with the balance to be added to the
84th payment. We believe that all of the applicable interest rates under the New
Loan Facility are consistent with prevailing interest rates in the lending
industry.
All of the proceeds of the term loan and approximately $862,316 of the
borrowings under the revolving credit facility were used to complete the Real
Estate Acquisition. In addition, proceeds from the New Loan Facility were used
to pay off AIM's debt to its prior lender and will be used for working capital
for AIM's business.
As of November 30, 2005, we had equipment leases which required us to make
monthly payments of approximately $37,100.
As of November 30, 2005, we completed (through Gales Industries) the first
closing of the Offering to accredited investors for gross proceeds of
$6,793,280. Commissions, management fees and non-accountable expense allowance
which Gales Industries paid to the placement agent in such first closing
amounted to an aggregate of $815,193.60. The proceeds of the first closing of
the Offering, in general, were and will be used for paying the cash portion of
the purchase price for the Acquisition of AIM, for the repayment of $150,000 in
note obligations which Gales Industries incurred in bridge financings, for
payment of certain real estate taxes and accrued rent on AIM's real property,
for expenses of the Offering, Acquisition, Merger and related transactions, for
satisfaction of certain loans from the shareholders of AIM to AIM, and for
working capital for us and AIM. We received $2,206,720 in additional gross
proceeds from the second closing of the Offering on December 15, 2005.
The holders of Preferred Stock are entitled to receive payment-in-kind
dividends (payable in shares of Preferred Stock), prior to and in preference to
any declaration or payment of any dividend on the Common Stock, at the rate of
8% per annum. However, if a registration statement for the resale of the Common
Stock underlying the Preferred Stock is not declared effective by June 15, 2006,
the dividend on the Preferred Stock will be due in cash from the date of such
default until the default is cured.
We expect that cash flows from operations and our cash reserves will be
sufficient to pay our obligations for the next twelve months as they arise.
Further, we may be able to borrow additional funds under our revolving credit
facility provided that we have sufficient inventory, receivables and equipment
and machinery. However, we may require additional working capital and additional
financing to expand our business and make acquisitions. In the event we are not
able to increase working capital and obtain additional financing, we may not be
able to expand our business or make acquisitions.
21
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to
the audited financial statements of AIM. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates under different assumptions or conditions.
Quantitative and Qualitative Disclosure about Market Risk
Our primary exposure to market risk consists of changes in interest rates
on borrowings under the New 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 rates fluctuations by
optimizing the use of fixed and variable rate debt. Except with respect to the
interest rates under the New Loan Facility, we do not have debts or hold
instruments that are sensitive to changes in interest rates, foreign currency
exchange rates or commodity prices.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
EXECUTIVE OFFICERS AND RELATED SHAREHOLDER MATTERS
The following table sets forth information known to us regarding
beneficial ownership of our Common Stock as of January 31, 2006 by (i) each
person known by us to own beneficially more than 5% of the outstanding Common
Stock, (ii) each of our directors and executive officers, (iii) any other "Named
Executive Officer" identified in the Executive Compensation section, below, and
(iv) 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. The address of each executive officer and director is c/o the
Company, 1479 North Clinton Avenue, Bay Shore, NY 11706. The address of ACS
Holdings, LLC is 135 East 57th Street, New York, New York, 10022.
Percentage of
Name Number of Shares Shares Outstanding
- ---- ---------------- ------------------
Michael A. Gales 4,326,219 (1) 28.9%
Louis A. Giusto 3,644,538 (2) 24.4%
Peter Rettaliata 1,100,000 (3) 7.0%
Dario Peragallo 1,100,000 (4) 7.0%
Seymour G. Siegel 100,000 *
Rounsevelle W. Schaum 100,000 *
Ira A. Hunt, Jr. 100,000 *
Stephen Nagler 145,455 (5) 1.0%
James A. Brown 676,268 4.6%
Luis Peragallo 253,214 1.7%
Jorge Peragallo 0 *
ACS Holdings, LLC 876,705 (6) 6.0%
All Directors and
Officers as a group, 9 persons (1)(2)(3)(4)(5) 65.6%
- ----------
* Less than 1%
22
(1) Includes 250,000 shares of Common Stock underlying the vested portion
of the 1,250,000 options granted to Mr. Gales pursuant to his Employment
Agreement. For a more complete description of the terms of such options, see
note 1 to the table "Executive Compensation - Option Grants in Last Fiscal
Year", below.
(2) Includes 240,000 shares of Common Stock underlying the vested portion
of the 1,200,000 options granted to Mr. Giusto pursuant to his Employment
Agreement. For a more complete description of the terms of such options, see
note 2 to table "Executive Compensation - Option Grants in Last Fiscal Year",
below.
(3) Includes 150,000 shares of Common Stock underlying the vested portion
of the 1,200,000 options granted to Mr. Rettaliata pursuant to his Employment
Agreement. For a more complete description of the terms of such options, see
note 3 to table "Executive Compensation - Option Grants in Last Fiscal Year",
below. Includes 831,577 shares of Common Stock issuable upon conversion of the
$332,631 principal amount convertible note issued to Mr. Rettaliata in
connection with the Acquisition.
(4) Includes 150,000 shares of Common Stock underlying the vested portion
of the 1,200,000 options granted to Mr. Peragallo pursuant to his Employment
Agreement. For a more complete description of the terms of such options, see
note 3 to table "Executive Compensation - Option Grants in Last Fiscal Year",
below. Includes 831,577 shares of Common Stock issuable upon conversion of the
$332,631 principal amount convertible note issued to Mr. Peragallo in connection
with the Acquisition. Does not include 253,214 shares of Common Stock issued to
Luis Peragallo pursuant to the terms of the Acquisition. Luis Peragallo is the
father of Dario Peragallo.
(5) Includes 45,455 shares of Common Stock issuable upon exercise of
warrants held by Mr. Nagler. Does not include 150,000 shares of Common Stock
held by Eaton & Van Winkle LLP, a law firm of which Mr. Nagler is a partner.
(6) We believe that ACS Holdings, LLC is an affiliate of Atlas Capital
Services, LLC which had the right to receive 1,477,230 shares of Common Stock as
of the Closing Date and instructed us to issue such shares to its designees,
including the 876,705 shares to ACS Holdings, LLC. In addition, Atlas Capital
Services, LLC is the holder of 226,334 shares of Common Stock, and is also the
holder of warrants to purchase 409,091 shares of Common Stock at the exercise
price of $.055 per share.
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
The following table sets forth information with respect to our directors
and executive officers.
Name of Individual Age Position with the Company
- ----------------------------------- --- ----------------------------------------------------
Michael A. Gales 60 Executive Chairman of the Board
Louis A. Giusto 63 Vice Chairman, Chief Financial Officer and Treasurer
Peter D. Rettaliata 55 Director, Chief Executive Officer and President
Dario A. Peragallo 41 Director and Executive Vice President, Manufacturing
Stephen M. Nagler 67 Director and Secretary
Seymour G. Siegel 63 Director
Rounsevelle W. Schaum 72 Director
M.Gen. Ira A. Hunt, Jr. (USA, Ret.) 80 Director
James A. Brown 53 Director
23
The business experience of each of our directors and executive officers is
set forth below. Each of our directors and executive officers, except Mr. James
A. Brown, began their service with our Company as of November 30, 2005.
Mr. Gales has been our Executive Chairman of the Board since November 30,
2005. He is the Chairman of the Executive and Management Committees of the
Board. He has thirty-two years experience in Corporate Finance, Mergers &
Acquisitions and corporate management of both publicly and privately held middle
market companies. Since 1992, Mr. Gales has been Chairman and President of Gales
& Company, a Wall Street M&A Advisory and Principal firm. From March 2003 to
present, Mr. Gales has concentrated his efforts on the formation of Gales
Industries, the Acquisition, and the development of Gales Industries' business
strategy, including the future expansion of the business of AIM. From September
2001 to March 2003, Mr. Gales concentrated on the operation of Gales & Company.
From 1997 to 2001, Mr. Gales served as the Managing Director of Corporate
Finance and Executive Vice President of Corporate Finance for Janssen-Meyers
Associates, LP and Andrew, Alexander, Wise & Company, Inc., respectively. Prior
to 1997, Mr. Gales served in senior management and executive roles principally
focused in heavy industries, including tenure as Principal, Co-Founder and
President of American United Corporation, an international maritime engineering
and technical systems group, and as President and Chief Operating Officer of
Aquaglobal, Inc., a manufacturer and marketer of desalination systems serving
customers such as Exxon, Shell, Mobil, Gulf and the U.S. Navy. Mr. Gales was the
founding Chairman and CEO of AquaSciences International, Inc., a publicly traded
organization engaged in the design and manufacture of water purification
systems, and the founding Chairman of lntersearch Group, Inc., a publicly traded
international HR consulting firm. In addition Mr. Gales has served as a Director
of ProtoSource Corporation, a publicly traded internet service provider. Mr.
Gales attended Oklahoma University and has been a member of various professional
associations including the Royal Institute of Marine Engineers (London), Society
of Naval Architects & Marine Engineers, Society of Piping Engineers & Designers,
The Investment Company Institute and the President's Association of the American
Management Association.
Mr. Giusto, our Vice Chairman, Chief Financial Officer and Treasurer since
November 30, 2005, has over 30 years of financial control experience with
foreign and domestic banks, non-bank financial service entities and consumer
product companies. He is a member of the Executive and Compensation Committees
of the Board. Since 2003 in addition to his activities on behalf of Gales
Industries, Mr. Giusto has been acting 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 bringing to market advanced credit decisioning
platforms and sophisticated small business lending, insurance, securitization
and factoring products. 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 in
Long Island, New York. 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.
Mr. Rettaliata has been our President and Chief Executive Officer, and
also a member of our Board of Directors, since November 30, 2005. He has been
the President of AIM and has served in such capacity 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",
24
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. Recently, Mr. Rettaliata testified to the
President's Commission on aerospace in Washington, D.C. 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. Upon completion of the Acquisition,
Mr. Rettaliata began serving as corporate Chief Executive Officer and President
of AIM, reporting to the Executive Chairman of the Company. He is a member of
the Executive and Management Committees of the Board.
Mr. Peragallo, who since November 30, 2005 has been a member of our Board
of Directors, is also the Executive Vice President of Manufacturing for AIM. Mr.
Peragallo has been associated with AIM for over 25 years. He was elevated in
2000 to Director of Manufacturing. 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. He has led AIM on its "Lean" course of
evolution and has participated in seventeen "Lean" events. Mr. Peragallo became
Executive Vice President with overall responsibility for engineering,
manufacturing and customer-critical technical matters (including "Lean" and
"Supply Chain" activities) in 2003. He has been an active member of Diversity
Business since 2000, which is 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. Luis Peragallo is the father
of Jorge Peragallo and Dario Peragallo.
Mr. Nagler, who has been a member of our Board of Directors and our
Secretary since November 30, 2005, is a member of Eaton & Van Winkle LLP, a law
firm in New York City which he joined as a Partner in October 2004. Prior to
joining Eaton & Van Winkle, Mr. Nagler was affiliated with Phillips Nizer LLP as
Counsel since 1995. Mr. Nagler chairs TriState Ventures LLC, an angel investor
group in the New York area. Mr. Nagler is a graduate of the City College of New
York and NYU School of Law. The firm of Eaton & Van Winkle LLP served as counsel
to Gales Industries and will be serving as counsel to the Company.
Mr. Siegel, a member of our Board since November 30, 2005, has been a
principal in the Siegel Rich Division of Rothstein, Kass & Company, P.C. since
April 2000. Rothstein, Kass is a national firm of accountants and consultants
with approximately 650 members and offices in 7 cities. He specializes in
providing strategic advice to business owners including mergers acquisitions
strategies; 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 Siegal 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., as well as Emerging Vision Incorporated 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 a member of the audit
committee for Global Aircraft Solutions Incorporated. Mr. Siegel is the Chairman
of the Audit Committee of the Board.
Mr. Schaum has been a member of our Board since November 30, 2005. Since
1993, Mr. Schaum has served as Chairman of Newport Capital Partners, a private
investment banking and financial advisory firm specializing in providing
assistance to emerging growth companies in private placements, corporate
governance and negotiation of mergers and acquisitions. Mr. Schaum also serves
as a director and Chairman of the Audit Committee of the Quigley Corporation
(NASDAQ: "QGLY"); as Chairman of Mosaic Nutraceuticals, Inc. (OTC: "MCNJ.PK");
and as a director of Camelot Entertainment Group, Inc (OTC:BB "CMEG");
Intelligent Security Networks, Inc. (OTC: "ISNT.PK") and Turboworx, Inc., a
private firm specializing in high speed computation technologies. Mr. Schaum was
a founder, director and treasurer of Streaming Media Corporation, and has also
served as Chairman and CEO of BusinessNet Holdings Corporation; as a crisis
manager for Heller Financial Corporation; as Chairman of the California Small
Business Development Corporation, a private venture capital syndicate; and was
the founder and Managing Director of the Center of Management Sciences, a
consulting firm serving the aerospace industry. He has been a consultant on
25
project management procedures to the Departments of the Army, Navy and Air
Force, and numerous defense contractors, including General Dynamics,
MacDonald-Douglas, Raytheon, Hughes Aircraft and the Logistics Management
Institute. Mr. Schaum is a graduate of Phillips Andover Academy and holds a
Bachelor of Science degree in Mechanical Engineering from Stanford University
and an MBA degree from the Harvard Business School. He was also a member of the
faculty and Defense Research Staff of the Massachusetts Institute of Technology,
where he participated in the development of the computer programs for the
Ballistic Missile Early Warning System. Mr. Schaum is the Chairman of the
Compensation Committee of the Board.
General Hunt, a member of our Board since November 30, 2005, 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 a member of the Compensation Committee of
the Board.
Mr. Brown was Ashlin's Chief Executive Officer and Secretary from
September 2004 to November 30, 2005 and was Ashlin's Chairman of the Board from
May 2003 to November 30, 2005. Since November 30, 2005, Mr. Brown has served as
a member of our Board of Directors. We filed for bankruptcy protection while Mr.
Brown was our Chairman and CEO. Mr. Brown served as the Chief Operating Officer
of Private Investor Reserves Corp., a financial services firm, from May 2000
through 2004. Mr. Brown co-founded A.S. Partners.com, Inc., an internet
application service provider, and served as its Chief Executive Officer from
December 1998 to April 2000. Mr. Brown is a member of the Audit Committee of the
Board.
EXECUTIVE COMPENSATION
The following table shows for fiscal years ended December 31, 2005, 2004
and 2003, respectively, certain compensation which we (including AIM) awarded or
paid to, or which was earned from us by, the following persons (collectively,
the "Named Executive Officers").
o Michael A. Gales, our Executive Chairman since November 30, 2005;
o Peter D. Rettaliata, our Chief Executive Officer since November 30,
2005 and officer of AIM;
o Dario A. Peragallo, our Executive Vice President since November 30,
2005 and officer of AIM;
o Luis Peragallo, a former officer of AIM who is not employed by us;
o Jorge Peragallo, a former officer of AIM who is not employed by us;
and
o James A. Brown, our Chief Executive Officer from September 26, 2004
to November 30, 2005.
Luis Peragallo is the brother of Jorge Peragallo and the father of Dario
Peragallo. Other than the Named Executive Officers, none of our executive
officers earned more than $100,000 in salary and bonus for the 2005 fiscal year.
Unless otherwise indicated, we did not grant stock options or restricted stock
to them during the periods indicated.
26
Summary Compensation Table
Long Term
Annual Compensation Compensation
---------------------------------------------------------- --------------------
Securities Under
Options Granted
Name and Principal Fiscal Other Annual Or Restricted Stock
Position Year Salary($) Bonus($) Compensation($) Award (#)
Michael A. Gales, 2005 $ 16,837 $ -- $ -- 1,250,000 (1)
Executive Chairman 2004 -- -- -- --
of the Company 2003 -- -- -- --
Peter D. Rettaliata, 2005 241,510 -- -- 1,200,000 (1)
Chief Executive 2004 217,724 -- -- --
Officer of the Company 2003 219,182 -- -- --
Dario A. Peragallo, 2005 242,344 -- -- 1,200,000 (1)
Executive Vice 2004 197,211 -- -- --
President of the Company 2003 151,666 -- -- --
Luis Peragallo, 2005 297,063 -- -- --
Former officer of AIM 2004 322,536 -- -- --
2003 255,375 -- -- --
Jorge Peragallo, 2005 226,563 -- -- --
Former officer of AIM 2004 219,449 -- -- --
2003 230,301 -- -- --
James A. Brown, 2005 95,646 -- -- 596,231 (3)
Former Chief Executive 2004 27,817 (2) -- -- --
Officer 2003 -- -- -- 80,038 (3)
27
- ----------
(1) Consist of stock options to purchase shares of Common Stock, the vesting
schedule and other terms of which are set forth in the footnotes to the
table below under the caption "Option Grants In Last Fiscal Year (2005)".
(2) Prior to becoming our Chief Executive Officer, Mr. Brown received
approximately $59,000 in consulting fees in 2004 in consideration for his
services to us.
(3) Consists of shares of restricted stock and not stock options. As of August
13, 2003, Mr. Brown received 80,038 restricted shares of Common Stock,
valued at $10,000. Of the 596,231 restricted shares of Common Stock
granted to Mr. Brown in 2005, 100,000 shares were issued to him as of
November 30, 2005 upon cancellation of the same number of shares of Gales
Industries common stock (which, with a fair value of $7,000, were issued
to him as of November 14, 2005 in consideration for his agreement to serve
on our Board of Directors after the Merger), 240,112 shares were issued to
him in January 2005 (with a fair value of $12,000) upon our emergence from
bankruptcy protection, and 256,119 shares (with a fair value of $32,000)
were issued to him in March 2005.
Incentive Plans
Prior to January 28, 2005, the effective date of our Plan of
Reorganization, we had outstanding stock options under our 1998 Stock Option
Plan. As of January 28, 2005, all of our outstanding options were terminated
pursuant to the Plan of Reorganization except options to purchase 40,018 shares
of Common Stock held by Steven Pomerantz and options to purchase 4,002 shares of
Common Stock held by Ted Alflen, both of whom served on our Board of Directors
following our emergence from bankruptcy proceedings until the completion of the
Merger. As of November 30, 2005, such stock options held by Mr. Pomerantz and
Mr. Alflen were canceled.
Option Grants in Last Fiscal Year
In 2004, we did not grant to any of the Named Executive Officers options
to purchase shares of Common Stock. As set forth in the following table, during
2005 we granted, under our Stock Incentive Plan, the following stock options to
the Named Executive Officers:
Option Grants In Last Fiscal Year (2005)
Number of % of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Year Granted Fiscal Year Price Date
---- ----------- ------------- -------- ----------
Michael A. Gales .................... 2005 1,250,000 (1) 25.8% $.22 9/26/15
Louis A. Giusto ..................... 2005 1,200,000 (2) 24.7% $.22 9/26/15
Peter D. Rettaliata ................. 2005 1,200,000 (3) 24.7% $.22 9/26/15
Dario A. Peragallo................... 2005 1,200,000 (3) 24.7% $.22 9/26/15
- --------------------------------------------------------------------------------
(1) One-fifth of such options vested as of November 30, 2005 and the balance
will vest in equal increments of 250,000 shares each on the first through fourth
anniversaries of September 15, 2005. The options which vested on November 30,
2005 are exercisable at $0.22 per share and the exercise price of the options
vesting on each of September 15, 2006, 2007, 2008 and 2009 will be the higher of
(a) $0.22 per share or (b) the average trading price of the Common Stock for the
thirty trading days ending December 15, 2005, September 15, 2006, September 15,
2007 and September 15, 2008, respectively.
28
(2) One-fifth of such options vested as of November 30, 2005 and the balance
will vest in equal increments of 240,000 shares each on the first through fourth
anniversaries of September 15, 2005. The options which vested on November 30,
2005 are exercisable at $0.22 per share and the exercise price of the options
vesting on each of September 15, 2006, 2007, 2008 and 2009 will be the higher of
(a) $0.22 per share or (b) the average trading price of the Common Stock for the
thirty trading days ending December 15, 2005, September 15, 2006, September 15,
2007 and September 15, 2008, respectively.
(3) One-eighth of such options vested as of November 30, 2005 and the balance
will vest in equal increments of 150,000 shares each on the first through
seventh anniversaries of September 15, 2005. The options which vested on
November 30, 2005 are exercisable at $0.22 per share and the exercise price of
the options vesting on each of September 15, 2006, 2007, 2008, 2009, 2010, 2011
and 2012 will be the higher of (a) $0.22 per share or (b) the average trading
price of the Common Stock for the thirty trading days ending December 15, 2005,
September 15, 2006, September 15, 2007, September 15, 2008, September 15, 2009,
September 15, 2010 and September 15, 2011, respectively.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Option Value at December 31, 2005
Number of Securities Value of
Underlying Unexercised Unexercised In-The-Money
Options at December 31, 2005 Options at December 31, 2005
------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable (1)
----------- ------------- ----------- -----------------
Michael A. Gales ................ 250,000 1,000,000 $40,000 $160,000
Louis A. Giusto ................... 240,000 960,000 $38,400 $153,600
Peter D. Rettaliata .............. 150,000 1,050,000 $24,000 $168,000
Dario A. Peragallo ................ 150,000 1,050,000 $24,000 $168,000
(1) The values in this column are calculated based on an assumed exercise
price of $0.22 per share. However, the actual exercise price for the stock
options which have not yet vested may be greater than $0.22 per share, as
described in the footnotes to the table, "Option Grants In The Last Fiscal
Year", above.
The last sale price of the Common Stock was $0.38 on December 30, 2005, the last
trading day of 2005.
Employment Agreements
The employment agreement of Michael A. Gales became effective as of
November 30, 2005 and will terminate five years thereafter, but will be
extendable for successive three one-year renewal periods unless he decides not
to extend the agreement. Pursuant to his employment agreement, Mr. Gales will
29
receive a base salary at an annual rate of $250,000, 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. Gales will be entitled to an annual
bonus to be determined by our Board of Directors but which must equal at least
50% of Mr. Gales' annual base salary. If he is dismissed without cause, Mr.
Gales would be 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. In addition, we granted to Mr.
Gales, upon the execution of his employment agreement, options to purchase
1,250,000 shares of Common Stock, exercisable over a ten-year period commencing
on the date of grant. See the applicable footnote under the foregoing table
captioned, "Option Grants In Last Fiscal Year (2005)". Mr. Gales' employment
agreement also contains restrictive covenants prohibiting Mr. Gales (i) from
directly or indirectly competing with the Company, (ii) from soliciting any
customer of the Company or AIM for any competitive purposes and (iii) from
employing or retaining any employee of the Company or AIM or soliciting any such
employee to become affiliated with any entity other than the Company or AIM
during the twelve-month period commencing upon the termination of his agreement
(the "Employee Restrictive Covenants").
The employment agreement of Louis A. Giusto became effective as of
November 30, 2005, and will terminate five years thereafter, but will be
extendable for successive three one-year periods unless he decides not to extend
the agreement. Pursuant to his employment agreement, Mr. Giusto will receive a
base salary at an annual rate of $230,000. The terms of Mr. Giusto's employment
agreement relating to bonus, annual increases in base salary and severance upon
termination are the same as those provided for in Mr. Gales' employment
agreement, the terms of which are set forth above. In addition, the Company
granted to Mr. Giusto, upon the execution of his employment agreement, 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. Giusto's options are the same as those relating to Mr. Gales'
options set forth above. Mr. Giusto's employment agreement also contains the
Employee Restrictive Covenants.
The employment agreement of Peter Rettaliata became effective as of
November 30, 2005, and will terminate five years thereafter, but will be
extendable for successive three one-year periods unless he or the Company
decides not to extend the agreement. Pursuant to his employment agreement, Mr.
Rettaliata will receive a base salary at an annual rate 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. Gales' employment agreement, the terms of which are
set forth above. In addition, the Company granted to Mr. Rettaliata, upon the
execution of his employment agreement, 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 under the foregoing table captioned,
"Option Grants In Last Fiscal Year (2005)". Mr. Rettaliata's employment
agreement also contains the Employee Restrictive Covenants.
The employment agreement of Dario Peragallo became effective as of
November 30, 2005, and will terminate five years thereafter, but will be
extendable for successive three one-year periods unless he or the Company
decides not to extend the agreement. Pursuant to his employment agreement, Mr.
Peragallo will receive a base salary at an annual rate 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. Gales' employment agreement, the terms of which are
set forth above. In addition, the Company granted to Mr. Peragallo, upon the
execution of his employment agreement, 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 Employee
Restrictive Covenants.
30
Pursuant to our Plan of Reorganization, Ashlin had entered into an
employment agreement with James A. Brown, who at the time was Ashlin's chairman
and chief executive officer. As a result of the Merger, such employment
agreement was terminated as of November 30, 2005 and Mr. Brown waived all of his
rights under such employment agreement.
The Company has agreed with the Placement Agent that the employment
agreements of the above-mentioned individuals will not be changed or amended
without the prior consent of the Placement Agent during the two year period
following the completion of the Offering and no further stock options will be
granted to such individuals during such time period without the prior consent of
the Placement Agent.
Director Compensation
As a result of the Merger, we intend to adopt a new director compensation
policy. Currently, we intend to provide compensation to each of our non-employee
directors as follows: $10,000 per year and $1,250 per Board meeting. We
anticipate adopting a more comprehensive compensation policy for our directors
during the current fiscal year. In 2005, we granted to James A. Brown options to
purchase 100,000 shares of Common Stock for his agreement to serve on our Board.
We intend to reimburse each director for expenses related to attending Board
meetings. We intend to pay an additional $3,000 per year to each independent
director serving as the chairman of the audit committee or the compensation
committee of the Board.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions of Ashlin Prior to the Merger:
In connection with our Plan of Reorganization, in January 2005, we entered
into an employment agreement with James A. Brown, who was then our Chief
Executive Officer, and disposed of substantially all of our assets to an entity
controlled by another person who had been our former Chief Executive Officer.
Prior to becoming our Chief Executive Officer, James A. Brown received
approximately $59,000 in consulting fees in 2004 in consideration for his
services to us. As of August 13, 2003, Mr. Brown received 80,003 shares of
Common Stock, valued at $10,000.
Transactions Relating to Gales Industries Prior to the Merger:
In August 2005, Mr. Stephen Nagler, one of our directors, loaned $10,000
to Gales Industries. Co-investors of Mr. Nagler loaned an additional $35,000 to
Gales Industries in the same financing (the "$45,000 Financing"). In connection
with the $45,000 Financing, Gales Industries issued to such investors 12%
convertible bridge notes (the "$45,000 Bridge Notes") in the aggregate principal
amount of $45,000. The $45,000 Bridge Notes were repaid with a portion of the
proceeds of the Offering. In connection with the $45,000 Financing, Gales
Industries issued to the investors warrants ("$45,000 Bridge Warrants") to
purchase 204,547 shares of its common stock at $0.22 per share and, as a result
of the Merger, such warrants became warrants to purchase an equal number of
shares of our Common Stock. The $45,000 Bridge Warrants allow for cashless
exercise and have weighted-average anti-dilution protection with respect to the
exercise price.
31
Stephen Nagler is a partner of the law firm of Eaton & Van Winkle LLP,
which was counsel to Gales Industries until the Merger and has been our counsel
since November 30, 2005. In October 2004, Eaton & Van Winkle LLP and Mr. Nagler
subscribed for 150,000 shares and 100,000 shares, respectively, of Gales
Industries' common stock for $.00001 per share. Upon cancellation of such shares
in connection with the Merger, we issued to Eaton & Van Winkle 150,000 shares of
our Common Stock and issued to Mr. Nagler 100,000 shares of our Common Stock.
In October 2004, Gales Industries issued 4,401,219 shares of its common
stock to Michael Gales, its founder and Executive Chairman, and 3,404,538 shares
of its common stock to Louis Giusto, its Vice Chairman, pursuant to
subscriptions for such shares by such individuals. As of the same date, three of
our directors (Messrs. Schaum, Siegel and Hunt) subscribed for 100,000 shares
each of Gales Industries common stock. The subscription price for the shares
described in this paragraph was $.00001 per share.
Transactions Relating to Air Industries Machining, Corp. Prior to the Merger:
Prior to its Acquisition by Gales Industries, AIM leased manufacturing and
office space from KPK Realty Corp. which, since October, 1974, has been owned
49% by Luis Peragallo, an officer, a director and the largest shareholder of AIM
prior to its Acquisition by Gales Industries. The annual rent for such lease was
approximately $300,000 plus annual real estate taxes on the leased property.
Between 1989 and 1990, AIM advanced $208,233 to KPK Realty Corp. In partial
repayment of such advances from AIM, rent in the amount of $22,992 in 2003,
$127,737 in 2004 and $11,496 in 2005 was offset by KPK Realty Corp. from the
amounts due under such lease. In addition, from 1990 to 2005, AIM was a
guarantor of the mortgage (with a balance of approximately $677,000 as of
September 30, 2005) on such leased property. This guaranty was terminated in
connection with the Real Estate Acquisition.
Prior to its Acquisition by Gales Industries, AIM leased manufacturing
space at an annual rental of approximately $82,800, plus annual real estate
taxes on such property, from DPPR Realty Corp. which, since January, 2003 has
been 100% owned by Peter Rettaliata and Dario Peragallo. Prior to the
Acquisition, Messrs. Rettaliata and D. Peragallo owned an aggregate of 36.84% of
AIM's outstanding capital stock. Messrs. Rettaliata and D. Peragallo were
officers of AIM and are officers and directors of our Company. From February
2003 to November 30, 2005, AIM was also a guarantor of the mortgage (with a
balance of approximately $567,000 as of September 30, 2005) on such leased
property. This guaranty was terminated in connection with the Real Estate
Acquisition.
In December, 2002, Peter Rettaliata and Dario Peragallo purchased from AIM
for $257,058 an option to purchase DPPR Realty Corp. Subsequently, Mr.
Rettaliata and D. Peragallo purchased DPPR Realty Corp. and each now owns 50% of
DPPR Realty Corp.
In June, 1995, an individual who held 49% of the outstanding capital stock
of AIM sold such interest to Jorge Peragallo and Peter Rettaliata for cash and a
$625,000 principal amount promissory note from each of Mr. J. Peragallo and Mr.
Rettaliata ($1,250,000 in the aggregate). AIM guaranteed the repayment of these
promissory notes, which aggregated $1,250,000 in principal amount. These
promissory notes were repaid in full in June 2005.
32
Peter Retttaliata, who was an officer of AIM, advanced $5,000 to AIM
during 2003 and $42,678 to AIM during 2004. Dario Peragallo, who was an officer
of AIM, advanced $5,000 to AIM during 2003 and $39,334 to AIM during 2004. Luis
Peragallo, who was an officer of AIM, advanced $5,000 to AIM during 2003 and
$18,179 to AIM during 2004. Jorge Peragallo, who was an officer of AIM, advanced
$5,000 to AIM during 2003 and $38,344 to AIM during 2004. As of September 30,
2005, AIM had received an aggregate of $363,323 in loans from its officers and
was obligated to repay such amount to its officers. Such amount was repaid in
connection with our Acquisition of AIM. In October, 2005, AIM agreed to pay an
aggregate of $225,000 to its officers to enable them to pay income taxes accrued
while operating AIM as a Subchapter S corporation. Such amount was paid in
connection with our Acquisition of AIM.
Transactions Relating to the Merger, Acquisition and Other Closing Transactions:
On November 30, 2005, Gales Industries completed the acquisition (the
"Acquisition") from Messrs. Luis Peragallo, Jorge Peragallo, Peter Rettaliata
and Dario Peragallo (the "AIM Shareholders"), of all of the outstanding capital
stock of AIM. Gales Industries had entered into a Stock Purchase Agreement with
AIM and the AIM Shareholders ("Acquisition Agreement") as of July 25, 2005. The
aggregate purchase price paid to the AIM Shareholders consisted of (i)
$3,114,296 in cash, (ii) $1,627,262 principal amount of promissory notes,
payable over five years, of which $962,000 were in the form of a secured
subordinated promissory note payable to Mr. Luis Peragallo and $665,262 were in
the form of unsecured convertible promissory notes ($332,631 payable to Mr.
Peter Rettaliata and $332,631 payable to Mr. Dario Peragallo), convertible into
shares of Common Stock at a price of $0.40 per share, and (iii) 490,060 shares
of newly issued Common Stock. The 490,060 shares of Common Stock issued to the
AIM Shareholders were allocated as follows: 253,214 shares to Luis Peragallo,
118,423 shares to Peter Rettaliata and 118,423 shares to Dario Peragallo. The
unsecured convertible promissory notes issued to Messrs. Rettaliata and D.
Peragallo will automatically be converted into Common Stock if the shares into
which such notes may be converted are registered under the Securities Act and
such registration has become effective. In addition to paying the cash portion
of the purchase price for the Acquisition, Gales Industries distributed
approximately $690,000 to the AIM Shareholders in satisfaction of certain loans
from them and to enable them to pay income taxes accrued while operating AIM as
a Subchapter S corporation.
Pursuant to the Acquisition Agreement, Gales Industries paid $300,000 of
legal and accounting expenses incurred by the AIM Shareholders in connection
with the Acquisition.
Our employment agreements with Messrs. Gales, Giusto, Rettaliata and D.
Peragallo became effective on November 30, 2005 and we issued stock options to
them as of such date. See "Executive Compensation - Employment Agreements",
above.
As of November 30, 2005, Gales Industries Acquisition Corp., Inc.
completed the purchased from entities which are owned, in part, by affiliates of
AIM (KPK Realty Corp. and DPPR Realty Corp.), for the aggregate purchase price
$4,190,000, of the properties, described above, which were being leased by AIM
prior to November 30, 2005 from such entities. The purchase price paid to KPK
Realty Corp. was $2,690,000 and the purchase price paid to DPPR Realty Corp. was
$1,500,000. Gales Industries Acquisition Corp., Inc. contemporaneously merged
into AIM, with AIM being the surviving entity, so that AIM became the owner of
such properties.
PLAN OF DISTRIBUTION
All fees, costs, expenses and fees in connection with the registration of
the Common Stock offered by this prospectus will be borne by us. Brokerage
commissions, if any, attributable to the sale of the Common Stock will be borne
by the selling security holders.
33
The selling security holders may sell the Common Stock directly or through
brokers, dealers or underwriters who may act solely as agents or may acquire
Common Stock as principals. The selling stockholders may distribute the Common
Stock in one or more of the following methods:
o ordinary brokers transactions, which may include long or short
sales;
o transactions involving cross or block trades or otherwise on the
open market;
o purchases by brokers, dealers or underwriters as principal and
resale by these purchasers for their own accounts under this
prospectus;
o "at the market" to or through market makers or into an existing
market for the Common Stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales made through
agents;
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); or
o any combination of the above, or by any other legally available
means.
Selling security holders will not be restricted as to the price or prices
at which the selling security holders may sell their Common Stock. Sales of
Common Stock by the selling security holders may depress the market price of our
Common Stock since the number of shares which may be sold by the selling
security holders is very large compared to the historical average weekly trading
volume of our Common Stock, which has been quite low. Accordingly, if the
selling security holders were to sell, or attempt to sell, all of such
securities at once or during a short time period, we believe such a transaction
would dramatically adversely affect the market price of our Common Stock.
From time to time a selling security holder may pledge its Common Stock
under margin provisions of customer agreements with its brokers or under loans
with third parties. Upon a default by the selling security holder, the broker or
such third party may offer and sell any pledged securities from time to time.
In effecting sales, brokers and dealers engaged by a selling security
holder may arrange for other brokers or dealers to participate in the sales as
agents or principals. Brokers or dealers may receive commissions or discounts
from the selling security holder or, if the broker-dealer acts as agent for the
purchaser of such Common Stock, from the purchaser in amounts to be negotiated,
which compensation as to a particular broker dealer might be in excess of
customary commissions customary in the types of transactions involved.
Broker-dealers may agree with the selling security holders to sell a specified
number of shares of Common Stock at a stipulated price, and to the extent the
broker-dealer is unable to do so acting as agent for the selling security
holders, to purchase as principal any unsold securities at the price required to
fulfill the broker-dealer commitment to the selling security holder.
Broker-dealers who acquire securities as principal may then resell those
securities from time to time in transactions: in the over-the counter market or
otherwise; at prices and on terms prevailing at the time of sale; at prices
related to the then-current market price; or in negotiated transactions.
These resales may involve block transactions or sales to and through other
broker-dealers, including any of the transactions described above. In connection
with these sales, these broker-dealers may pay to or receive from the purchasers
of the Common Stock commissions as described above. The selling security holders
may also sell the Common Stock in open market transactions under Rule 144 under
the Securities Act, rather than under this prospectus.
The selling security holders and any broker-dealers or agents that
participate with the selling security holders in sales of the Common Stock may
be deemed to be "underwriters" within the meaning of the Securities Act in
connection with these sales. In this event, any commissions received by these
broker-dealers or agents and any profit on the resale of the Common Stock
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
The selling security holders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Common
Stock against certain liabilities, including liabilities arising under the
Securities Act.
34
GunnAllen Financial, Inc., is a registered broker dealer and NASD member
firm. GunnAllen Financial served as placement agent in our the Offering and
received, in addition to cash commissions, five-year warrants to purchase an
aggregate of 4,090,950 shares of our Common Stock with an exercise price of $.22
per share. It also served as placement agent in a September 2005 bridge note
financing in which Gales Industries raised $105,000 and, in connection
therewith, GunnAllen Financial received, in addition to a cash commission, a
five year warrant to purchase 47,728 shares of Common Stock with an exercise
price of $.22 per share. The registration statement of which this Prospectus
forms a part includes the shares underlying the warrants held by GunnAllen
Financial. In addition, GunnAllen Financial has been retained by us as a
financial consultant and receives cash compensation at the rate of $7,500 per
month. The advisory agreement is for a minimum period of six months (until
August 2006), after which we can terminate the agreement upon thirty days'
notice.
The 4,090,950 shares of Common Stock issuable upon conversion of placement
agent warrants received by GunnAllen Financial in connection with the Offering
are restricted from sale, transfer, assignment, pledge or hypothecation and may
not be the subject of any hedging, short sale, derivative, put, or call
transaction that would result in the effective economic disposition of the
securities by any person for a period of 180 days immediately following the
effective date of this registration statement except transfers of the warrants
to officers or partners or registered representatives of GunnAllen Financial.
GunnAllen Financial has indicated to us its willingness to act as selling
agent on behalf of the selling shareholders named in this Prospectus under
"Selling Security Holders" who purchased our privately placed securities. All
shares sold, if any, on behalf of selling shareholders by GunnAllen Financial
would be in transactions executed by GunnAllen Financial on an agency basis and
commissions charged to its customers in connection with each transaction shall
not exceed a maximum of 5% of the gross proceeds. GunnAllen Financial does not
have an underwriting agreement with us and/or the selling shareholders and no
selling shareholders are required to execute transactions through GunnAllen
Financial. Further, other than their existing brokerage relationship as
customers with GunnAllen Financial, no selling shareholder has any pre-arranged
agreement with GunnAllen Financial to sell their securities through GunnAllen
Financial.
NASD Notice to Members 88-101 states that in the event a selling
shareholder intends to sell any of the shares registered for resale in this
Prospectus through a member of the NASD participating in a distribution of our
securities, such member is responsible for insuring that a timely filing is
first made with the Corporate Finance Department of the NASD and disclosing to
the NASD the following:
o it intends to take possession of the registered securities or to
facilitate the transfer of such certificates;
o the complete details of how the selling shareholders shares are and
will be held, including location of the particular accounts;
o whether the member firm or any direct or indirect affiliates thereof
have entered into, will facilitate or otherwise participate in any
type of payment transaction with the selling shareholders, including
details regarding any such transactions; and
o in the event any of the securities offered by the selling
shareholders are sold, transferred, assigned or hypothecated by any
selling shareholder in a transaction that directly or indirectly
involves a member firm of the NASD or any affiliates thereof, that
prior to or at the time of said transaction the member firm will
timely file all relevant documents with respect to such
transaction(s) with the Corporate Finance Department of the NASD for
review.
35
We have advised the selling shareholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling shareholders and their affiliates. In
addition, we will make copies of this Prospectus available to the selling
shareholders for the purpose of satisfying the Prospectus delivery requirements
of the Securities Act. The selling security holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Stock against certain liabilities, including liabilities arising
under the Securities Act.
The selling security holders are subject to applicable provisions of the
Securities Exchange Act of 1934 and the SEC's rules and regulations, including
Regulation M, which provisions may limit the timing of purchases and sales of
the securities by the selling security holders.
In order to comply with certain states' securities laws, if applicable,
the Common Stock may be sold in those jurisdictions only through registered or
licensed brokers or dealers. In certain states the securities may not be sold
unless they have been registered or qualified for sale in such state, or unless
an exemption from registration or qualification is available and is obtained.
We have agreed to indemnify each selling stockholder whose shares we are
registering from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement.
DESCRIPTION OF SECURITIES
As of August 24, 2005, our shareholders approved an amendment to our
Articles of Incorporation which increased the number of our authorized shares of
Common Stock, $.001 par value per share, from 30,000,000 to 150,000,000 shares,
and authorized 10,000,000 shares of "blank check" preferred stock, $.001 par
value per share. In connection with the Reverse Split on November 21, 2005, our
total authorized Common Stock was reduced to 120,055,746 shares and our total
authorized preferred stock was reduced to 8,003,716 shares.
Common Stock
We have a total of 120,055,746 authorized shares of Common Stock, $.001
par value, of which approximately 14,723,361 shares were outstanding as of
January 31, 2006.
The holders of Common Stock are entitled to receive dividends when and as
declared by the Board out of funds legally available therefore. Upon dissolution
of the Company, the holders of Common Stock are entitled to share, pro rata, in
the Company's net assets after payment of or provision for all debts and
liabilities of the Company, and after provision for any class of Preferred Stock
or other senior security which may be issued by the Company. Each share of
Common Stock is entitled to participate on a pro rata basis with each other
share of such stock in dividends and other distributions declared on shares of
Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders and may not cumulate their votes
for the election of directors. The holders of Common Stock do not have
preemptive rights to subscribe for additional shares of any class that may be
issued by the Company, and no share of Common Stock is entitled in any manner to
any preference over any other share of such stock.
36
Preferred Stock
We also have authorized a total of 8,003,716 shares of "blank check"
preferred stock, $.001 par value, of which 1,000 shares have been designated
Series A Convertible Preferred Stock ("Preferred Stock"). 900 shares of
Preferred Stock were issued in connection with the Merger and are outstanding as
of January 31, 2006.
In accordance with the Company's Articles of Incorporation, the Board of
Directors may, by resolution, issue additional preferred stock in one or more
series at such time or times and for such consideration as the Board of
Directors may determine. The Board of Directors is expressly authorized to
provide for such designations, preferences, voting power (or no voting power),
relative, participating, optional or other special rights and privileges as it
determines.
The Company has the power to issue additional preferred stock, or
different classes or series of preferred stock ranking senior to or on parity
with the Preferred Stock as to dividend rights or rights upon liquidation,
winding up, or dissolution, only with the approval or consent of at least a
majority of the then-outstanding shares of Preferred Stock.
The Company may issue additional preferred stock to effect a business
combination, to raise capital or for other reasons. In addition, additional
preferred stock could be utilized as a method of discouraging, delaying or
preventing a change in control of the Company.
The Series A Convertible Preferred Stock
The holders of Preferred Stock are entitled to receive payment-in-kind
dividends (payable in shares of Preferred Stock), prior to and in preference to
any declaration or payment of any dividend on the Common Stock, at the rate of
8% per annum. Dividends are cumulative and accrue if not paid. No dividends will
accrue on shares of Preferred Stock which are issued as a dividend. If the
registration statement of which this prospectus is a part is not declared
effective by June 15, 2006, the dividend on the Preferred Stock will be paid in
cash from the date of such default until the default is cured. Such dividends
will be paid until the Preferred Stock is converted into shares of Common Stock.
Fractional shares of Preferred Stock may be issued as a dividend on the
Preferred Stock. Each share of Preferred Stock will have a stated value of
$10,000 and such stated value will be the basis for calculating dividends on the
Preferred Stock. For example, one share of Preferred Stock will accrue a
dividend of .08 share of Preferred Stock per year or .02 share of Preferred
Stock per quarter and, if dividends are due in cash, will accrue a dividend of
$800 per year.
Subject to adjustment, each share of Preferred Stock is convertible at the
option of the holder at any time into 45,455 shares of Common Stock, at the
conversion price of $0.22 per share. The Preferred Stock will be automatically
converted into Common Stock, at the then applicable conversion rate, at such
time as the shares of Common Stock underlying the Preferred Stock have been
registered for resale under the Securities Act and the registration statement
with respect to such shares has been declared effective. Any fractional share of
Common Stock issuable upon conversion of any holder's Preferred Stock will be
rounded up to a whole share of Common Stock.
Without the approval of the holders of at least a majority of the
outstanding Preferred Stock voting together as a single class on an
as-if-converted to Common Stock basis, the Company will not take any action to
(i) alter, change or amend preferences, privileges or rights of the Preferred
Stock, (ii) redeem shares of Preferred Stock or Common Stock, (iii) pay or
declare any dividends (other than dividends on the Preferred Stock) or make any
other distributions on the Company's capital stock, or (iv) authorize, create
and/or issue capital stock with rights or privileges that are or superior to the
Preferred Stock.
37
The Preferred Stock has anti-dilution protection on a weighted-average
basis in the event of future issuances of Common Stock (or securities
convertible into Common Stock) at a price (or conversion price) below the price
at which the Preferred Stock may be converted into Common Stock, which is $0.22
per share. No such anti-dilution adjustment will be made in the case of the
issuance of (i) any shares or other securities in connection with any employee,
management or director stock option or incentive plans; (ii) any shares or other
securities in connection with any acquisition or merger transactions entered
into by the Company or its subsidiaries; (iii) any shares or other securities to
the Placement Agent; (iv) any shares of Common Stock issuable upon conversion of
the Preferred Stock; and (v) any shares or other securities outstanding as of
November 30, 2005 or to be outstanding upon conversion or exercise of such
securities.
The holders of the Preferred Stock do not have any voting rights on
matters with respect to which the holders of the Common Stock may vote until six
months after the earlier of the termination or the final closing of the
Offering, except that the holders of Preferred Stock may vote as a class with
respect to the protective provisions relating to the Preferred Stock, set forth
in the second preceding paragraph. After such six-month period, the holders of
the Preferred Stock will have voting rights as though their shares of Preferred
Stock were converted into Common Stock. In addition, the holders of Preferred
Stock will vote on an as-if-converted basis if the Company defaults in its
obligation to timely file a registration statement with respect to the Common
Stock into which the Preferred Stock is convertible and such default is
continuing.
The registration statement of which this prospectus is a part registers
all shares of Common Stock issuable upon conversion of the outstanding Preferred
Stock and all shares of Preferred Stock which may be issued as dividends during
a six-month period following their date of issuance. The holder of the Preferred
Stock may transfer to a transferee of Preferred Stock the registration rights
with respect to the Preferred Stock. The registration rights of any holder of
Preferred Stock will terminate at the earlier of (i) two years from the earlier
of the termination or the final closing of the Offering, or (ii) the date as of
which all shares of Common Stock underlying such holder's Preferred Stock can be
sold in any three-month period without volume restriction in compliance with
Rule 144 under the Securities Act. If a registration statement is not declared
effective by June 15, 2006, the dividend on the Preferred Stock is required to
be paid in cash from the date of such default until the default is cured.
In the event of any liquidation or winding up of the Company, the holders
of Preferred Stock will be entitled to receive, in preference to the holders of
Common Stock, an amount equal to two times the stated value of the Preferred
Stock, plus any dividends thereon ("Liquidation Payment"). Thereafter, the
remaining assets of the Company will be distributed ratably to the holders of
Common Stock. If the assets of the Company are insufficient to permit the full
payment of the Liquidation Payment, then the assets will be distributed pro rata
among the holders of the Preferred Stock.
SELLING SECURITY HOLDERS
Based on information provided by the selling security holders, the table
below sets forth certain information, as of January 31, 2006 unless otherwise
noted, regarding the selling security holders.
Percentage ownership of common stock is based on 14,723,361shares of our
Common Stock outstanding as of January 31, 2006. In addition, the table below
assumes, for calculating each selling security holder's beneficial ownership,
that options, warrants and convertible securities held by such security holder
(but not, unless otherwise noted, those held by any other person) that are
38
exercisable within 60 days as of January 31, 2006, have been exercised and
converted and the shares underlying them added to the number of shares of our
Common Stock deemed to be outstanding. For purposes of calculating the
post-offering ownership of each selling security holder, the table also assumes
the sale of all of the securities being offered by such selling security holder.
The second column in the table below lists the number of shares of Common
Stock beneficially owned by each selling stockholder, based on his/her ownership
of the shares of our Common Stock.
The third column lists the shares of Common Stock being offered by this
prospectus by the selling stockholders.
The fourth column assumes the sale of all of the shares offered by the
selling stockholders pursuant to this prospectus.
Each of the nine members of our Board of Directors has agreed to a lock-up
of their restricted shares (including shares underlying any options, warrants or
convertible securities) of Common Stock until November 30, 2006.
The selling stockholders may sell all, some or none of their shares in
this offering. See "Plan of Distribution."
Common stock beneficially owned after
the offering
Name of selling security holders Number of
shares of
common stock
beneficially Number of
owned prior to shares being Percentage of
the offering offered Number of shares outstanding shares
Company Officers and Directors and Certain
Designees:
Michael Gales (1) 4,326,219 4,076,219 250,000 *
Louis Giusto (2) 3,644,538 3,404,538 240,000 *
Peter Rettaliata (3) 1,100,000 950,000 150,000 *
Dario Peragallo (3) 1,100,000 950,000 150,000 *
Luis Peragallo (4) 253,214 253,214 0 0
Seymour Siegel (5) 100,000 100,000 0 0
Rounsevelle Schaum (5) 100,000 100,000 0 0
Ira A. Hunt, Jr. (5) 100,000 100,000 0 0
Stephen Nagler (6) 145,455 145,455 0 0
ECH Consulting, Inc. (7) 325,000 325,000 0 0
Croft Investments Limited Partnership (8) 250,000 250,000 0 0
Atlas Capital Services, LLC and Designees: (9)
39
ACS Holdings, LLC 876,705 876,705 0 0
Edward Wahrsager 50,000 50,000 0 0
Robert A. Schecter 185,546 185,546 0 0
Shimon S. Fishman 46,387 46,387 0 0
Steven Pollan 318,592 318,592 0 0
Atlas Capital Services, LLC 635,425 635,425 0 0
$45,000 Bridge Financing Warrants: (10)
Rhoda Lewis 45,455 45,455 0 0
MTP Operating Corp. 45,455 45,455 0 0
Marilyn Thypin 68,182 68,182 0 0
$105,000 Bridge Financing Warrants: (11)
Stephen Caragol 340,909 340,909 0 0
Frank and Cynthia Gasztonyi 136,364 136,364 0 0
Placement Agent:
GunnAllen Financial Services, Inc.(12) 4,138,678 4,138,678 0 0
Previous Ashlin Shareholders:
James Brown (13) 676,268 676,268 0 0
Robert Africk (14) 80,038 80,038 0 0
Global Business Resources, Inc. (15) 80,038 80,038 0 0
Shares Representing Dividends for Preferred
Stockholders: (16) 1,636,380 1,636,380 0 0
Preferred Stockholders from
First Closing of Offering: (17)
IRA FBO James L.
Robbins
Pershing LLC As Custodian 227,275 227,275 0 0
IRA FBO James J. O'Neill
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Theodore Haberer
Pershing LLC As Custodian
Roth Account 113,638 113,638 0 0
IRA FBO John Carlson
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Larry W. Williams
Pershing LLC As Custodian 113,638 113,638 0 0
40
IRA FBO Joseph P. Chrisman
Pershing LLC As Custodian
Rollover Account 227,275 227,275 0 0
IRA FBO Thomas A. Ross
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Don
Walker
Pershing LLC As
Custodian
Rollover Account 113,638 113,638 0 0
IRA FBO Andrew McClure
Pershing LLC As Custodian
Rollover Account 113,638 113,638 0 0
IRA FBO Allen Ruth
Pershing LLC As Custodian
Rollover Account 113,638 113,638 0 0
IRA FBO Arthur Kenyon
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO George A.
Lee
Pershing LLC As
Custodian
Rollover Account 454,550 454,550 0 0
Michelle Levite DDS
PSP - Pershing LLC As Custodian 227,275 227,275 0 0
IRA FBO Sandra Rake
Pershing LLC As Custodian
Rollover Account 113,638 113,638 0 0
IRA FBO Walter G. Clemons
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Stanley
Watkins
Pershing LLC As Custodian 113,638 113,638 0 0
IRA FBO Mike
Cushner
Pershing LLC As Custodian 113,638 113,638 0 0
James Wickenden 909,100 909,100 0 0
Leon Cooprider 113,638 113,638 0 0
Jonathan Kratter
&
Lisa Kratter JT TEN 1,363,650 1,363,650 0 0
Mickey D. Tucker &
Shelley A. Tucker JT WROS
c/o Refinery Specialties 113,638 113,638 0 0
Dave Dhondt 227,275 227,275 0 0
Timothy Wallace &
Lisa B. Wallace JT TEN 159,093 159,093 0 0
TWM Capital, LP 1,136,375 1,136,375 0 0
Gordon Van Vliet 454,550 454,550 0 0
Mark Heiman 909,100 909,100 0 0
David C. Megan 454,550 454,550 0 0
Charles R. Costa &
Carol Costa JT TEN 227,275 227,275 0 0
Alan Harney &
Margie A. Harney JT TEN 227,275 227,275 0 0
Paul Whitcomb 227,275 227,275 0 0
Stuart A. Becker 227,275 227,275 0 0
Stuart Heller 454,550 454,550 0 0
41
James A. Mastrocola 340,913 340,913 0 0
Randy McFarland
Defined Benefit Plan 454,550 454,550 0 0
Lon Rake 227,275 227,275 0 0
Louis Suglia 454,550 454,550 0 0
Robert Olivadoti &
Lana Olivadoti JT TEN 340,913 340,913 0 0
Kaushik B. Patel 113,638 113,638 0 0
John Signorelli &
Kathleen Signorelli JT TEN 113,638 113,638 0 0
BNT Erosion Control
Attn: Toby Salgado 568,188 568,188 0 0
Mathew Zacharia 113,638 113,638 0 0
Barry A. Clark 113,638 113,638 0 0
Paul Gittelson 113,638 113,638 0 0
Chuck Ennis 227,275 227,275 0 0
Daniel Farrell &
Roni Farrell JT TEN 113,638 113,638 0 0
Andrew McClure 113,638 113,638 0 0
William Lynch Defined Benefit Pl
William H. Lynch TTEE 227,275 227,275 0 0
Steven S. Cole &
Anat Cole JT TEN 113,638 113,638 0 0
James F. Selander 113,638 113,638 0 0
Stephan Gais 909,100 909,100 0 0
Robert Wolf
L Wolf Company 113,638 113,638 0 0
Carl & Phillis Elkins Trust
UAD 8/17/98
Carl A. Elkins TTEE 454,550 454,550 0 0
Anthony Rakos &
Dorothy L. Rakos JT WROS 113,638 113,638 0 0
Off Shore Drywall, Inc.
c/o Glen R. Goodsell 227,275 227,275 0 0
J & B Rentals Inc. 227,275 227,275 0 0
Gerald W. Moreland 113,638 113,638 0 0
Moreland Crosby
Industries
Attn: Gerald Moreland 113,638 113,638 0 0
Jochen Burrichter
c/o Hengeler Mueller 454,550 454,550 0 0
Jack Friedman 454,550 454,550 0 0
Daniel A. Diaz 454,550 454,550 0 0
Dr. Herbert Goldberg &
Rosalie Goldberg JT TEN 172,729 172,729 0 0
Joe Pillari &
Loretta Pillari JT TEN 227,275 227,275 0 0
Theodore Brayer & Marilouise Brayer JT TEN 114,911 114,911 0 0
Joseph Zappulla &
Lawrence F. Frasca TEN COM 113,638 113,638 0 0
42
James Herold 113,638 113,638 0 0
Jerred D. Ruble 454,550 454,550 0 0
Patrick Boyce &
Sonja Boyce JT TEN 227,275 227,275 0 0
Eric Billingsley 227,275 227,275 0 0
George E. Foote 454,550 454,550 0 0
John Bridwell 454,550 454,550 0 0
Betty Bridwell 454,550 454,550 0 0
James Jones &
Diana Jones JT TEN 227,275 227,275 0 0
Greg Small
c/o Deloitte & Touche 227,275 227,275 0 0
Dave Tennant 454,550 454,550 0 0
Patrick Sherman 227,275 227,275 0 0
Kalman Pila 227,275 227,275 0 0
Tim P. Baldwin, Jr. 227,275 227,275 0 0
The Larsen 2000 Revocable Trust
UAD 7/26/00
David L. Larsen & Kristen B. Larsen TTEES 227,275 227,275 0 0
Paul P. Pompa, Jr. 454,550 454,550 0 0
Jerome A. Shinkay 113,638 113,638 0 0
Ty P. Johnston 227,275 227,275 0 0
David Kincheloe 454,550 454,550 0 0
Caroline Rispoli &
Joseph Rispoli JT TEN 227,275 227,275 0 0
Pedro Hernandez 159,093 159,093 0 0
Mansukh Pipaliya 113,638 113,638 0 0
Steve W. Thompson 340,913 340,913 0 0
Theodore Green 113,638 113,638 0 0
John Klopp 227,275 227,275 0 0
Ronnie Kirkland 113,638 113,638 0 0
Jerry H. Chitwood 172,729 172,729 0 0
Jason Salgado &
Jamie Salgado JT TEN 113,638 113,638 0 0
Joseph G. Albano &
Louise A. Albano JT TEN 113,638 113,638 0 0
Scott Evanter 227,275 227,275 0 0
Thomas Prendergast 454,550 454,550 0 0
Jeffrey A. Grossman
& Elizabeth Grace JT TEN 113,638 113,638 0 0
Ken W. Chism 454,550 454,550 0 0
Christopher P. Schlieker 113,638 113,638 0 0
Charles S. Madden 113,638 113,638 0 0
Dave Ertler 227,275 227,275 0 0
David Cheung
Kwok Shwg Import Export 454,550 454,550 0 0
PCR Inc. 113,638 113,638 0 0
Jay A. Hintze 227,275 227,275 0 0
Charles A. Rizzuto Sr. 113,638 113,638 0 0
John William Long Rev Trust
43
John William Long TTEE
DTD 7/2/92 113,638 113,638 0 0
Paul Goudie 113,638 113,638 0 0
Joseph J. Perrini &
Tessie Perrini JT TEN 213,639 213,639 0 0
Doug Ross & Lidia Ross JT TEN 681,825 681,825 0 0
Robert A. Loe 227,275 227,275 0 0
George D. Johnston
c/o Balfrey & Johnston Inc. 113,638 113,638 0 0
Pat McQuillan 113,638 113,638 0 0
James H. Landers &
Agnes L. Miller JT TEN 227,275 227,275 0 0
William H. Reynolds 113,638 113,638 0 0
Preston Morris 136,365 136,365 0 0
Joseph A. Santoro 318,185 318,185 0 0
George M. Martin 113,638 113,638 0 0
James E. Clark 227,275 227,275 0 0
Ira Agustus Hunt, Jr. & Maria P. Hunt (5) 454,550 454,550 0 0
Preferred Stockholders from
Second Closing of Offering: (18)
Douglas Coleman 113,638 113,638 0 0
John Duncan 454,550 454,550 0 0
J. J. Pierce 227,275 227,275 0 0
E. Scott Nolan 113,638 113,638 0 0
James E. Clark 227,275 227,275 0 0
D. Dale Bryant 113,638 113,638 0 0
Phillip E. Thompson 113,638 113,638 0 0
Abraham M. Fishoff 909,100 909,100 0 0
C & G Family Christopher J. Heller &
Geneva C. Heller TTEES UAD
12/26/1991 227,275 227,275 0 0
James Herold 113,638 113,638 0 0
James A. Dailey, Jr. & Lisa A. Dailey JT TEN 113,638 113,638 0 0
Piotr D. Moncarz 113,638 113,638 0 0
Doug Ross & Lidia Ross JT TEN 113,638 113,638 0 0
Joseph A. Santoro
PSP - Pershing LLC As Custodian 136,365 136,365 0 0
C. Eric Mayer 113,638 113,638 0 0
Jeffrey A. Grossman& Elizabeth Grace JT TEN 113,638 113,638 0 0
Joseph G. Albano & Louise A. Albano JT TEN 45,455 45,455 0 0
Joseph Zappulla & Lawrence F. Frasca TEN COM 45,455 45,455 0 0
Ira A. Hunt, Jr. & Maria P. Hunt (5) 227,275 227,275 0 0
Jason Salgado & Jamie Salgado JT TEN 227,275 227,275 0 0
Bernard Klein 227,275 227,275 0 0
Michael E. Rose 90,910 90,910 0 0
44
Mary O'Neil Revocable Trust
Mary R. & James J. O'Neil TTEE
UA DTD 3/25/00 86,365 86,365 0 0
Joseph J. Perrini & Tessie Perrini JT TEN 250,003 250,003 0 0
Randy McFarland
Defined Benefit Plan 454,550 454,550 0 0
Marty Johnson 113,638 113,638 0 0
Ronald M. Diaz & Sonja Diaz JT TEN 136,365 136,365 0 0
James A. Mastrocola 113,638 113,638 0 0
Jonathan Kratter & Lisa Kratter JT TEN 227,275 227,275 0 0
Jonathan Webb 113,638 113,638 0 0
Herman Moskowitz 113,638 113,638 0 0
Chuck Ennis 48,728 48,728 0 0
David Davis 113,547 113,547 0 0
Brooklyn Property Management, Ltd. 227,275 227,275 0 0
Huffman Development Corp
Attn: Mr. Rod Huffman 113,638 113,638 0 0
Shirlee Gordon 56,819 56,819 0 0
Melvin S. Jacobson & Cynthia Jacobson JT WROS 454,550 454,550 0 0
Adam Harris 113,638 113,638 0 0
Pat McQuillan 113,638 113,638 0 0
George E. Foote 227,275 227,275 0 0
Dave Tennant 454,550 454,550 0 0
Dr. Herbert Goldberg & Rosalie Goldberg JT TEN 54,546 54,546 0 0
Larry Edgar 113,638 113,638 0 0
Larry Gelbfish 454,550 454,550 0 0
Allan S. Kalt Revocable Trust
UAD 2/11/98 Alan S. Kalt TTEE 113,638 113,638 0 0
William B. Perillo & Martha Perillo 681,825 681,825 0 0
Lina R. Merlino 227,275 227,275 0 0
Luis Peragallo & Lucia Peragallo (4) 670,553 670,553 0 0
Totals: 61,714,388 60,924,388
- ----------
* Less than 1%
(1) Beneficially owned shares consist of 4,076,219 shares of Common Stock and
vested options exercisable for 250,000 shares of Common Stock at $0.22 per
share. Mr. Gales acquired the 4,076,219 shares of our Common Stock as of
November 30, 2005 in exchange for the cancellation of the same number of
shares of Gales Industries common stock. Mr. Gales was the Executive
Chairman of Gales Industries and, as of November 30, 2005, became our
Executive Chairman.
(2) Beneficially owned shares consist of 3,404,538 shares of Common Stock and
vested options exercisable for 240,000 shares of Common Stock at $0.22 per
share. Mr. Giusto acquired the 3,404,538 shares of our Common Stock as of
November 30, 2005 in exchange for the cancellation of the same number of
shares of Gales Industries common stock. Mr. Giusto was the Chief
Financial Officer of Gales Industries and, as of November 30, 2005, became
our Chief Financial Officer, Treasurer and Vice Chairman.
45
(3) Beneficially owned shares for each of Mr. Rettaliata and Mr. Peragallo
consist of 118,423 shares of Common Stock, vested options exercisable into
150,000 shares of Common Stock at $0.22 per share and a convertible note
in the principal amount of $332,631, convertible into 831,577 shares of
Common Stock, all of which were acquired as of November 30, 2005 in
connection with the Acquisition and the Merger. Mr. Rettaliata has been
President of AIM and, as of November 30, 2005, became a director of the
Company as well as its President and Chief Executive Officer. As of
November 30, 2005, Dario Peragallo became one of our directors as well as
our Executive Vice President.
(4) Mr. Luis Peragallo was an officer and major shareholder of AIM prior to
November 30, 2005 and is the brother of Jorge Peragallo and father of
Dario Peragallo. He acquired such 253,214 shares of Common Stock in
connection with the Acquisition on such date. In addition, jointly with
his spouse on December 15, 2005, Luis Peragallo acquired shares of our
Preferred Stock which can be converted at any time into 670,553 shares of
Common Stock.
(5) Messrs. Siegel, Schaum and Hunt are members of our Board of Directors.
General Hunt, jointly with his wife, is also the holder of Preferred
Stock, convertible into an aggregate of 681,775 shares of Common Stock,
which were purchased in the Offering.
(6) Beneficially owned shares consist of 100,000 shares of Common Stock, which
Mr. Nagler acquired in exchange for Gales Industries common stock which he
subscribed for in October 2004, and 45,455 shares of Common Stock issuable
upon exercise of a warrant at $0.22 per share. Such warrants were granted
to Mr. Nagler when he invested in a Gales Industries bridge financing in
August 2005. Mr. Nagler, our Secretary and a member of our Board, is a
partner of Eaton & Van Winkle LLP, a law firm which is our counsel and,
prior to November 30, 2005, was counsel to Gales Industries.
(7) ECH Consulting, Inc. is a consultant to us. Its 325,000 Shares of Common
Stock were part of a finders' fee which was paid in connection with our
PNC Bank loan facility which we entered into on November 30, 2005. Such
325,000 shares were contributed to ECH Consulting, Inc. by Michael Gales
and did not require the additional issuance of shares by us.
(8) Croft Investments Limited Partnership acquired the 250,000 shares of
Common Stock as of November 30, 2005 in exchange for the cancellation of
the same number of shares of Gales Industries common stock. Mr. Milton
Barbarosh who controls Croft Investments, acquired such Gales Industries
shares through subscription as of October 28, 2004.
(9) Atlas Capital Services, LLC, which we believe is currently one of the
largest holders of outstanding Common Stock, was entitled to acquire
1,477,230 shares of our Common Stock as of November 30, 2005 in exchange
for the cancellation of the same number of shares of its Gales Industries
common stock and instructed us to issue such 1,477,230 shares of Common
Stock to its designees (ACS Holdings, LLC, Edward Wahrsager, Robert A.
Schecter, Shimon S. Fishman and Steven Pollan) in the amounts set forth in
the table opposite the names of such designees. Atlas Capital Services,
LLC holds 226,334 shares of Common Stock, which it acquired by converting
a convertible promissory note issued by us in the principal amount of
$22,500, and also holds a warrant to purchase 409,091 shares of Common
Stock at the exercise price of $.055 per share. It acquired such warrant
from us in February 2005 in connection with its purchase of such $22,500
convertible note from us.
(10) Rhoda Lewis, MTP Operating Corp., Stephen Nagler and Marilyn Thypin were
investors in a convertible bridge note financing, completed in August
2005, in which Gales Industries raised $45,000 and issued to the
investors, along with $45,000 principal amount of convertible notes,
warrants exercisable into an aggregate of 204,545 shares of Gales
Industries common stock at the exercise price of $0.22 per share. These
warrants allow for cashless exercise. These warrants were automatically
46
converted as of November 30, 2005 into warrants exercisable into the same
number of shares of our Common Stock upon the same terms. The 45,455
shares set forth next to each of Rhoda Lewis' and MTP Operating Corp.'s
name, 45,455 of the shares set forth next to Stephen Nagler's name (see
note 6 to this table), and the 68,182 shares set forth next to Marilyn
Thypin's name, represent shares of Common Stock issuable upon exercise of
such warrants.
(11) Stephen Caragol and Frank and Cynthia Gasztonyi were investors in a bridge
note financing (the $105,000 Bridge Financing"), completed in September
2005, in which Gales Industries raised $105,000 and issued to the
investors, along with $105,000 principal amount of notes, warrants
exercisable into an aggregate of 477,273 shares of Gales Industries common
stock at the exercise price of $0.22 per share. These warrants allow for
cashless exercise. These warrants were automatically converted as of
November 30, 2005 into warrants exercisable into the same number of shares
of our Common Stock upon the same terms. The 340,909 shares set forth next
to Stephen Caragol's name, and the 136,364 shares set forth next to Frank
and Cynthia Gasztonyi's names, represent shares of Common Stock issuable
upon exercise of such warrants. A warrant to purchase 47,728 shares was
issued to the placement agent in the $105,000 Bridge Financing (see note
12).
(12) GunnAllen Financial, Inc. was the placement agent for the Offering and the
$105,000 Bridge Financing and serves as a consultant to us. The 4,138,678
shares represent shares of Common Stock issuable to GunnAllen upon
exercise of placement warrants which were issued to GunnAllen in
connection with the Offering in December 2005 and the $105,000 Bridge
Financing in September 2005. The placement agent warrants from the
Offering may be exercised until December 15, 2010 into a total of
4,090,950 shares of Common Stock and the placement agent warrants from the
$105,000 Bridge Financing may be exercised until September 2010 into a
total of 47,728 shares of Common Stock. All of such warrants have an
exercise price of $0.22 per share and allow for cashless exercise.
GunnAllen Financial is an NASD member brokerage firm and a registered
broker dealer. It is controlled by Richard A. Frueh, who has the control
and power to vote and/or sell the securities held by GunnAllen Financial.
(13) James A. Brown is a member of our Board of Directors and, until November
30, 2005, was our Chairman, Chief Executive Officer and Secretary. Of his
676,268 shares of Common Stock, 100,000 shares were issued to him on
November 30, 2005 upon cancellation of the same number of shares of Gales
Industries common stock (which were issued to him as of November 14, 2005
in connection with his agreement to serve on our Board), approximately
256,119 shares were issued to him in March 2005 in connection with our
Plan of Reorganization, approximately 240,112 shares were issued to him in
January 2005 in connection with our Plan of Reorganization, and
approximately 80,038 shares were issued to him in August 2003 in
connection with his services on our Board.
(14) Robert Africk was a consultant to us until November 30, 2005. We issued to
him his 80,038 shares of Common Stock as of September 16, 2005 in
consideration for consulting services.
(15) We issued to Global Business Resources, Inc. its 80,038 shares of Common
Stock in March 2005 in consideration for consulting services.
(16) The holders of Preferred Stock are entitled to receive dividends of 8% per
annum payable in shares of Preferred Stock (the "PIK Dividends"). The
1,636,380 shares of Common Stock represent shares of Common Stock issuable
upon conversion of PIK Dividends which would accrue if all of the
Preferred Stock remained outstanding for six months from the date of their
original issuance.
(17) These selling stockholders were investors in the first closing of the
Offering on November 30, 2005. All of the shares listed opposite their
names represent shares of Common Stock issuable upon conversion of the
Preferred Stock which they purchased in connection with the Offering. Ira
A. Hunt is a member of our Board of Directors.
47
(18) These selling stockholders were investors in the second closing of the
Offering on December 15, 2005. All of the shares listed opposite their
names represent shares of Common Stock issuable upon conversion of the
Preferred Stock which they purchased in connection with the Offering. Ira
A. Hunt is a member of our Board of Directors. Luis Peragallo was an
Officer and major shareholder of AIM prior to November 30, 2005 and is the
brother of Jorge Peragallo and the father of Dario Peragallo.
MARKET PRICE OF AND DIVIDENDS ON OUR
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Common Stock is quoted on the OTC Bulletin Board under the trading
symbol "ASHN" ("ASHD" prior to the Reverse Split on November 21, 2005). Prior to
the effectiveness of our Plan of Reorganization, our symbol was "HNNS". The
prices set forth below reflect the quarterly high and low sale price information
for shares of our Common Stock during the last two fiscal years. These
quotations reflect inter-dealer prices, without retail markup, markdown or
commission, and may not represent actual transactions. There were no trades of
our securities on the OTCBB prior to October 4, 2000.
2005 Quarter Ended High Low
- ------------------ ----- -----
December 31, 2005 $0.85 $0.11
September 30, 2005 $0.15 $0.07
June 30, 2005 0.10 0.06
March 31, 2005 0.18 0.05
2004 Quarter Ended High Low
- ------------------ ----- -----
December 31, 2004 $0.07 $0.01
September 30, 2004 0.25 0.06
June 30, 2004 0.75 0.18
March 31, 2004 0.68 0.13
2003 Quarter Ended High Low
- ------------------ ----- -----
December 31, 2003 $0.53 $0.11
September 30, 2003 0.60 0.07
June 30, 2003 0.10 0.04
March 31, 2003 0.05 0.04
As of January 13, 2006, there were approximately 77 holders of record of
our Common Stock and approximately 164 holders of record of our Preferred Stock.
Prior to June 29, 2000, we were not a reporting company and were not
required to file quarterly, annual, and other reports with the SEC.
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 the Company's income.
48
As of January 31, 2006, approximately 52,652,245 shares of our Common
Stock were subject to issuance upon exercise or conversion of outstanding
options or warrants to purchase, or securities convertible into, shares of
Common Stock.
The following table provides information as of December 31, 2005 about our
equity compensation plans and arrangements as of December 31, 2005.
Equity Compensation Plan Information - December 31, 2005
(c)
Number of securities
remaining available for
(a) (b) future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
- ------------------------------- ----------------------- -------------------- -----------------------
Equity compensation plans
approved by security holders
(1) -- $ -- --
- ------------------------------- ----------------------- -------------------- -----------------------
Equity compensation plans not
approved by security holders
(2) 4,850,000 $.22 5,150,000
- ------------------------------- ----------------------- -------------------- -----------------------
Total (1)(2) 4,850,000 $.22 5,150,000
=============================== ======================= ==================== =======================
(1) All of the options previously granted under our 1998 Stock Option Plan were
terminated or cancelled during 2005. We terminated our 1998 Stock Option Plan
following the Merger.
(2) Our 2005 Stock Incentive Plan has been approved by written consent of our
shareholders holding a majority of our voting stock and an information statement
with respect to such plan has been mailed to our shareholders pursuant to
Regulation 14C under the Exchange Act. In connection with the Merger, our Board
adopted our 2005 Stock Incentive Plan, and issued stock options to our new
executive officers. The vesting and exercise prices of the 4,850,000 options
which we granted to executive officers in 2005 are described above in the
footnotes under "Executive Compensation - Option Grants In Last Fiscal Period".
Transfer Agent
Florida Atlantic Stock Transfer, with offices at 7130 N. Nob Hill Road,
Tamarac, Florida 33321-1841, is the registrar and transfer agent for our Common
Stock. American Stock Transfer & Trust Company, with offices at 59 Maiden Lane,
New York, New York 10038, is the registrar and transfer agent for our Preferred
Stock.
49
Penny Stock Regulations
The SEC has adopted regulations which generally define "penny stock" to be
an equity security that has a market price of less than $5.00 per share. The
Company's Common Stock falls within the definition of penny stock and is 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 the Company's Common Stock and
may affect the ability of investors to sell our Common Stock in the secondary
market. Such rules may also 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.
LEGAL PROCEEDINGS
A legal action seeking $5,000,000 has been brought against AIM by an
independent contractor for personal injury allegedly caused by a fall in AIM's
premises. AIM has insurance coverage in the amount of $4,000,000. At a
settlement mediation, the plaintiff made a demand of $2,000,000. The Company
believes that any liability accruing to AIM in this case will not exceed the
insurance coverage maintained by AIM for personal injury.
We were involved in litigation with J.C. Herbert Bryant, III, a former
officer, director and shareholder of our Company, and KMS-Thin Tab 100, Inc.,
which was settled in September 2002. As part of the settlement, we entered into
a distribution agreement with Mr. Bryant, beginning on September 26, 2002 and
ending on September 25, 2007, permitting Mr. Bryant to purchase certain products
from us and to exclusively distribute those products in Florida from Orlando
south. In October 2003, we terminated the distribution agreement with KMS based
on KMS's breach of material terms of the agreement. On December 1, 2003, we
filed suit against KMS-Thin Tab 100, Inc. in the Palm Beach County Circuit Court
(Case No. 2003CA012757XXCDAN) for breach of contract, trademark infringement and
for a declaration of rights that the distribution agreement is terminated and of
no further force and effect. KMS answered the complaint and filed its own
counterclaim for fraud in the inducement, trademark infringement, dilution and
fraudulent misrepresentation; the fraud-based counterclaims were dismissed with
prejudice by the Court on summary judgment. KMS subsequently amended its
counterclaim to allege a breach of contract under the distribution agreement. In
January 2005, the State Court in Florida ruled that neither party should
prevail, and rejected a request for attorney's fees by KMS-Thin Tab 100 Inc.,
thus adjudicating the matter. KMS-Thin Tab 100 Inc. subsequently filed a notice
of appeal.
Subsequently, on July 29, 2005, the 4th District Court of Appeals granted
our motion to dismiss the appeal by KMS-Thin Tab 100 Inc. We are not aware of
any other outstanding litigation.
50
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
(a) On December 15, 2005, we appointed the firm of Goldstein Golub Kessler
LLP ("GGK") as our independent auditor and, as of such date, dismissed the firm
of Daszkal Bolton LLP ("DB"), which had been serving as our independent auditor
up to such date. The change in auditors is in connection with the Merger which
occurred on November 30, 2005 and the change in control of the Company relating
thereto.
(b) The reports of DB on our financial statements for the fiscal years
ended December 31, 2004 and December 31, 2003 did not contain an adverse
opinion, a disclaimer of opinion or any qualifications or modifications related
to uncertainty, limitation of audit scope or application of accounting
principles, except that such reports of DB express "substantial doubt about our
ability to continue as a going concern" and state that "The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty". These "going concern" qualifications relate only to periods prior
to November 30, 2005 and do not relate to the financial statements of Gales
Industries or AIM. During the fiscal years ending December 31, 2004 and December
31, 2003 and the period from January 1, 2005 to December 15, 2005, we did not
have any disagreements (within the meaning of Instruction 4 of Item 304 of
Regulation S-K) with DB as to any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure and there have
been no reportable events (as defined in Item 304 of Regulation S-K).
(c) We have not consulted with GGK regarding the application of accounting
principles to a specified transaction or the type of audit opinion that might be
rendered on our financial statements during the two most recent fiscal years
through the present.
(d) The dismissal of DB and appointment of GGK as our independent auditor
was approved by our Board of Directors on December 15, 2005.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Tenth of our Articles of Incorporation and VII of our By-laws
provide for the indemnification of directors to the fullest extent permissible
under Florida law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our Directors, officers and controlling persons, we have
been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
Director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
LEGAL MATTERS
Our counsel, Eaton & Van Winkle LLP, located in New York, New York, is
passing upon the validity of the issuance of the shares of Common Stock that are
being offered pursuant this prospectus.
EXPERTS
Bildner & Giannasco LLP, independent certified public accountants, located
at 420 Jericho Turnpike, Jericho, New York, has audited our Financial Statements
included in this registration statement to the extent, and for the periods set
forth in their reports. We have relied upon such reports, given upon the
authority of such firm as experts in accounting and auditing.
51
INTERESTS OF NAMED EXPERTS AND COUNSEL
Stephen Nagler, our Secretary and one of our directors, is also a partner
of Eaton & Van Winkle LLP, a law firm which serves as our counsel. Eaton & Van
Winkle LLP owns 150,000 shares of our Common Stock. Mr. Nagler is the beneficial
owner of 145,455 shares of our Common Stock.
FINANCIAL STATEMENTS
The financial statements of AIM, for the periods and the dates indicated,
are included in this prospectus. AIM's statement of operations for the fiscal
years ended December 31, 2004 and 2003 and its balance sheet data as of December
31, 2004 and December 31, 2003 are set forth below. Also included in this
prospectus are (i) AIM's balance sheet as of September 30, 2005 and statements
of operations and cash flows for the nine month periods ended September 30, 2005
and 2004, and (ii) pro forma consolidated balance sheet of the Company, as of
September 30, 2005 and the pro forma consolidated statements of operations for
the nine months ended September 30, 2005 and the year end December 31, 2004, as
if our business combination with AIM and Gales Industries had occurred on
January 1, 2004.
In addition, we have included the unaudited financial statements of each
of Ashlin Development Corporation and Gales Industries Incorporated as of, and
for the nine-months ended, September 30, 2005.
52
AIR INDUSTRIES MACHINING, CORP.
Table of Contents
December 31, 2004 and 2003
PAGES
Accountants' Report F-2
Balance Sheet F-3
Statement of Income and Retained Earnings F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
September 30, 2005 and 2004 (Unaudited)
Accountants' Report F-14
Balance Sheet F-15
Statement of Income and Retained Earnings F-17
Statement of Cash Flows F-18
Notes to Financial Statements F-19
F-1
Independent Accountants' Report
To the Board of Directors and Stockholders of
Air Industries Machining Corporation
We have audited the accompanying Consolidated Balance Sheets of Air
Industries Machining Corporation as of December 31, 2004 and 2003, and the
related Consolidated Statement of Income and Retained Earnings and Cash Flows
for the twelve months ended December 31, 2004 and December 31, 2003. These
consolidated financial statements are the responsibility of the Air Industries
Machining Corporation management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred above
present fairly, in all material respects, the financial position of Air
Industries Machining Corporation as of December 31, 2004 and December 31, 2003,
and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
Respectfully submitted,
BILDNER & GIANNASCO, LLP
Certified Public Accountants
Jericho, New York
January 13, 2006
F-2
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheets
December 31, 2004 December 31, 2003
----------------- -----------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 49,275 $ --
Accounts Receivable 2,643,536 1,200,806
Inventory 10,858,456 9,623,378
Advanced Rental -- 26,917
Prepaid Expenses 132,268 183,475
Other Current Assets 5,479 30,413
Deposits 37,160 --
----------- -----------
Total Current Assets $13,726,174 $11,064,989
Property, plant, and equipment, net 3,646,814 3,678,631
Security Deposits 18,522 18,522
Cash Surrender Value - Officer's Life 263,636 211,927
Unamortized Finance Costs 146,661 188,608
----------- -----------
TOTAL ASSETS $17,801,807 $15,162,677
=========== ===========
The accompanying audit report and notes are an integral
part of these statements.
F-3
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheets (continued)
December 31, 2004 December 31, 2003
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Cash Overdraft $ -- $ 153,831
Accounts Payable 3,692,060 2,649,160
Advance Payment - Customer 1,354,266 771,616
Mortgage Payable - Current 96,000 96,000
Obligations Under Capital Lease - Current 384,943 325,380
Accrued Operating Expenses 503,678 304,921
------------ ------------
Total current liabilities 6,030,947 4,300,908
Long term liabilities
Advances From Shareholders 267,557 132,846
Mortgage Payable 1,227,786 1,348,601
Notes Payable - Banks 5,280,000 4,900,000
Obligations Under Capital Lease - Long term 334,353 417,168
------------ ------------
Total long term liabilities 7,109,696 6,798,615
Total liabilities $ 13,140,643 $ 11,099,523
============ ============
Commitments and contingencies
Minority Interest 407,601 352,548
Stockholders' Equity
Capital Stock - 200 Shares Authorized 32,223 32,223
No Par Value, 95 Shares Issued and Outstanding as of
December 31, 2004 and 2003
Additional Paid-In Capital 182,628 182,628
Retained Earnings 4,134,712 3,591,755
Less: Treasury Stock at Cost (96,000) (96,000)
------------ ------------
Total Stockholders' Equity $ 4,661,164 $ 4,063,154
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,801,807 $ 15,162,677
============ ============
The accompanying audit report and notes are an integral
part of these statements.
F-4
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Statement of Income and Retained Earnings
Year Ended Year Ended
December 31, 2004 December 31, 2003
----------------- -----------------
Net sales $ 24,818,333 $ 22,334,926
Cost of Sales 21,400,878 19,531,292
------------ ------------
Gross profit 3,417,455 2,803,634
Other income 2,573 100
------------ ------------
3,420,028 2,803,734
Operating expenses
Selling 321,727 309,479
General and Administrative 1,356,809 1,249,184
Interest Expense 505,425 441,867
------------ ------------
Total operating expenses 2,183,961 2,000,530
------------ ------------
Income before minority interest in net income 1,236,067 803,204
------------ ------------
Less: Minority interest in net income 131,552 83,363
Net income $ 1,104,515 $ 719,841
------------ ------------
Retained Earnings, Beginning of Year $ 3,591,755 $ 3,300,449
Deduct: Distribution to Shareholders (561,557) (428,535)
------------ ------------
Retained Earnings, End of Year $ 4,134,713 $ 3,591,755
============ ============
The accompanying audit report and notes are an integral
part of these statements.
F-5
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Statement of Cash Flows
Year Ended Year Ended
December 31, 2004 December 31, 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,104,515 $ 719,841
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 509,518 591,200
Minority Interest in Net Income 131,552 83,363
Changes in Assets and Liabilities:
(Increase) Decrease In Assets -
Accounts Receivable (1,442,730) 342,771
Inventory (1,235,078) (1,141,128)
Advanced Rental 26,917 (26,917)
Prepaid Expenses 51,207 87,021
Other Current Assets 24,934 29,304
Deposits (37,160) 1,200
Cash Surrender Value - Officer's Life (51,709) (75,807)
Advances from Shareholders 134,711 7,439
Increase (Decrease) In Liabilities -
Accounts Payable 1,042,900 508,263
Advance Payment-Customer 582,650 79,722
Accrued Operating Costs 198,757 (131,868)
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,040,984 1,074,404
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment (477,700) (139,652)
----------- -----------
NET CASH (USED) IN INVESTING ACTIVITIES (477,700) (139,652)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (Repayments) from Credit Line Facilities 325,449 (427,607)
Payments for Obligations Under Capital Lease (23,252) (338,530)
Payments for Finance Related Costs (100,818) (200,853)
Distribution to Shareholders (561,557) (428,535)
(Repayment) Proceeds from Cash Overdraft (153,831) 153,831
NET CASH (USED) IN
FINANCING ACTIVITIES (514,009) (1,241,694)
----------- -----------
Net increase (decrease) in cash and cash equivalents 49,275 (306,942)
----------- -----------
Cash and cash equivalents, beginning of year -- 306,942
----------- -----------
Cash and cash equiavlents, end of the year $ 49,275 $ --
=========== ===========
Supplementary disclosure of cash flow information
Cash paid during the year for interest $ 482,087 $ 372,993
The accompanying audit report and notes are an integral
part of these statements.
F-6
1 - SIGNIFICANT ACCOUNTING POLICIES
Background of Company
Air Industries Machining Corporation ("Air" or "The Company"),
founded in 1969, was incorporated in the State of New York and
maintains its principal place of business in Bay Shore, New York.
The Corporation is primarily engaged in manufacturing aircraft
structural parts and assemblies principally for prime defense
contractors in the aerospace industry machining parts for the
aerospace industry predominantly located in the United States. The
Company's customer base consists mainly of publicly traded companies
in the aerospace industry.
Principles of Consolidation
The Company's consolidated financial statements include those of
variable interest entities. (See Note 11).
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments
with an original maturity of three months or less. Cash consists of
aggregate cash balances in the Company's bank accounts and cash
equivalents consist primarily of money market accounts.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid
principal balances. The Company writes off accounts when they are
deemed to be uncollectible. The Company has experienced
insignificant amounts of bad debts in such accounts.
Inventories
Raw materials, work in process, and finished goods are stated at the
lower of average cost or net realizable value on a first-in, first-
out basis.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation and amortization. The Company maintains a policy to
capitalize all property and equipment purchases in excess of $1,000.
Expenditures for repairs and improvements in excess of $1,000 that
add to the productive capacity or extend the useful life of an asset
are capitalized. Repair and maintenance charges are expensed as
incurred. Property under a capital lease is capitalized and
amortized over the lease terms. Upon disposition, the cost and
related accumulated depreciation are removed from the accounts and
any related gain or loss is reflected in earnings. Depreciation on
plant and equipment is calculated on the straight-line method over
the estimated useful lives of the assets.
F-7
The useful lives of property, plant and equipment for purposes of
computing depreciation are:
Tools and instruments ................. 7 Years
Leasehold improvements................. 25 Years
Machinery and equipment ............... 5-8 Years
Automotive Equipment................... 5 Years
Furniture and fixtures................. 5-8 Years
Buildings.............................. 25-31.5 Years
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility
level annually or if events or circumstances indicate that the
carrying value of such assets may not be fully recoverable.
Impairment is evaluated based on the sum of undiscounted estimated
future cash flows expected to result from use of the assets compared
to its carrying value. If impairment is recognized, the carrying
value of the impaired asset is reduced to its fair value, based on
discounted estimated future cash flows.
Finance Costs
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term
of the related debt.
Revenue Recognition
The Company generally recognizes revenue when products are shipped
and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive
evidence of an arrangement exists, and the sales price is fixed or
determinable. Payments received in advance from customers for
products delivered are recorded as customer advance payments until
earned, at which time revenue is recognized.
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs,
tooling and those indirect costs related to manufacturing, such as
indirect labor, supplies, tools, repairs and depreciation costs.
Expenses
Selling, general, and administrative costs are charged to expense as
incurred.
Income Taxes
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code and New York State law to be taxed as an "S"
corporation. In lieu of corporate income taxes, the stockholders are
taxed on their proportionate share of the company's net income.
Accordingly, no provision for federal income taxes has been made in
the accompanying financial statements.
F-8
Use of Estimates
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts in
the financial statements and accompanying notes. The more
significant management estimates are the useful lives of property
and equipment, provisions for inventory obsolescence, unamortized
finance costs, accrued expenses and various contingencies. Actual
results could differ from those estimates. Changes in facts and
circumstances may result in revised estimates, which are recorded in
the period in which they become known.
Credit Risk
Financial instruments involving potential credit risk include
accounts receivable. Of the accounts receivable balance outstanding
as of December 31, 2004 and 2003, approximately 78% is attributed to
three customers and 64% is attributed to four customers,
respectively.
Treasury Stock
The Company records treasury stock under the cost method.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments
using available market information and other valuation methodologies
in accordance with Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments."
Management of the Company believes that the fair value of financial
instruments, consisting of cash, accounts receivable, accounts
payable and accrued liabilities, approximates carrying value due to
the immediate or short-term maturity associated with these
instruments and that the notes payable is carried at fair value in
that it carries interest rates that are comparable to similar
instruments with similar maturities.
Reclassifications
Certain reclassifications have been made to prior year's financial
statement information to conform to the current year presentation.
2 - INVENTORIES
The components of inventories consisted of the following as of December
31, 2004 and 2003:
December 31, 2004 December 31, 2003
----------------- -----------------
Raw Materials $ 1,759,502 $ 1,365,429
Work in Progress 6,934,325 4,558,587
Finished Goods 2,164,629 3,699,362
----------- -----------
Total Inventory $10,858,456 $ 9,623,378
=========== ===========
F-9
3 - PROPERTY, PLANT AND EQUIPMENT
The components of property and equipment as of December 31, 2004 and 2003
include:
December 31, 2004 December 31, 2003
----------------- -----------------
Land $ 134,922 $ 134,922
Building 3,173,071 3,173,071
Machinery and Equipment 7,987,665 7,639,875
Tools and Instrument 279,803 279,803
Leasehold Improvements 489,328 418,431
Automotive Equipment 290,083 284,205
Furniture and fixtures 700,801 647,666
------------ ------------
Total property, plant, and equipment 13,055,673 12,577,973
------------ ------------
------------ ------------
Less: Accumulated Depreciation (9,408,859) (8,899,342)
------------ ------------
------------ ------------
Property, plant, and equipment, net $ 3,646,814 $ 3,678,631
============ ============
Depreciation and amortization expense for the period ended December 31,
2004 and 2003 was $509,518 and $591,200, respectively.
4 - NOTES PAYABLE - BANKS
The Company has negotiated a credit facility dated August of 2003 with a
major lending institution with a termination date of March of 2006. The
facility is secured by a first priority interest in all accounts
receivable, inventory and equipment presently owned or hereafter acquired
by the Company. The indebtedness bears interest at the rate of 1/2 percent
above the prime rate of interest or a libor margin of 3%.
The terms of the facility require that, among other things, the Company
maintain certain financial ratios and levels of working capital. As of
December 31, 2004, the Company has met these terms.
The loans are guaranteed jointly and severally by the principals of the
Company, as well as the affiliated companies KPK Realty Corporation and
DPPR Realty Corp. (See Note 9)
Interest expense related to the notes payable - bank approximately
amounted to $249,000 and $229,000 for the years ended December 31, 2004
and 2003, respectively.
F-10
5 - ADVANCES FROM SHAREHOLDERS
Advances represent non-interest bearing advances from shareholders to
cover the Company's working capital needs.
6 - MORTGAGE PAYABLE
As the Company consolidates the assets and liabilities of variable
interest entities (see Note 11) it has two mortgages covering buildings
and land. These mortgages carry interest rates of 6.15% and 7.18% per
annum.
Future mortgage payments are as follows for the year ended December 31,
2004:
Year Amount
----------- -----------
2005 $ 124,000
2006 126,000
2007 128,000
2008 139,000
2009 133,000
Thereafter 673,786
-----------
1,323,786
Less: current maturities 96,000
-----------
Long term $ 1,227,786
===========
7 - CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing
equipment and computer equipment. All leases have bargain purchase options
that the Company expects to exercise at the termination of each lease.
Capital lease obligations totaled $719,296 and $742,548 as of December 31,
2004 and 2003, respectively.
As of December 31, 2004, future minimum lease payments, including imputed
interest, with remaining terms of greater than one year are as follows:
F-11
Amount
----------
2005 $ 433,000
2006 232,000
2007 108,000
2008 25,000
2009 1,000
----------
Total future minimum lease payments 799,000
Less: imputed interest (79,704)
Less: current maturities (384,943)
----------
Total long-term capital lease obligation $ 334,353
==========
8 - EMPLOYEE BENEFITS PLANS
On January 1, 1997, the Company instituted a defined contribution plan
under Section 401(k) of the Internal Revenue Code ("the Plan"). Pursuant
to the Plan qualified employees may contribute a percentage of their
pretax eligible compensation to the Plan. The Company does not match any
contributions that employees may make to the Plan.
9 - RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and certain
related parties.
The Company presently leases manufacturing and office space from KPK
Realty Corp. a corporation in which 49% is owned by the majority
stockholder of the Company.
Additionally, the Company leases manufacturing space from DPPR Realty
Corp. which is 100% owned by two of the shareholders of the Corporation
who in the aggregate own 36.84% of the Company.
KPK Realty Corp. and DPPR Realty Corp. are considered variable interest
entities under FIN 46 (See Note 11) and accordingly, their assets,
liabilities and results of operations have been consolidated into the
Company's financial statement.
10 - COMMITMENTS AND CONTINGENCIES
Litigation
A legal action has been brought against the Company for personal injury
sustained by an independent contractor caused by a fall on the premises of
the Company in the amount of $5,000,000. This action is scheduled for
trial in June of 2005. The Company has insurance coverage in the amount of
$4,000,000. The plaintiff made a demand of $2,000,000 at a settlement
mediation. In the opinion of counsel representing the Company the full
value of the case would be well within the insurance coverage maintained
by the Company and accordingly, the Company has not recorded any loss
contingency related to this case.
F-12
11 - VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. Under FIN 46, we are required to consolidate variable interest
entities for which we are deemed to be the primary beneficiary by the
third quarter of 2003, and disclose information about those in which we
have significant variable interests effective immediately.
The Company has leasing arrangements for its operating and manufacturing
facilities with two lessors. Under FIN 46 these lessors are Variable
Interest Entities and the Company is the primary beneficiary. Therefore,
the Company has consolidated the respective lessors' assets and debt into
these consolidated statements. At December 31, 2004 and 2003, these
entities had gross assets of $1,901,000 and $1,902,000, respectively and
gross liabilities of $1,165,000 and $1,210,000, respectively. These
facilities were subsequently purchased in connection with a merger
transaction in November 2005. The minority interest on the Company's
financial statements consists of the non-controlling portion of these
respective entities (See Note 9).
12 - SUBSEQUENT EVENTS
On November 30, 2005 merger agreements were consummated between the
Company and an Acquisition Entity and between the Acquisition Entity and a
Public Entity whose stock is traded in Over the Counter Market.
Contemporaneously with the merger agreements, the Company secured
$14,000,000 in debt facilities from a major lending institution and used
funds from the facility to purchase real property that it had subsequently
leased and paid off debts to its prior lender. As part of the merger
agreements, the Acquisition Entity completed the first of two closings of
private placement stock offerings which grossed $9,000,000 in the
aggregate. These transactions and their associated costs have not been
reflected in these financial statements.
F-13
Independent Accountants' Report
To the Board of Directors and Stockholders of
Air Industries Machining Corporation
We have reviewed the Consolidated Balance Sheets of Air Industries
Machining Corporation at September 30, 2005 and 2004, the related Consolidated
Statement of Income and Retained Earnings and Cash Flows for the twelve months
ended September 30, 2005 and 2004. This consolidated financial information is
the responsibility of the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an examination in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying financial information for it to be in
conformity with generally accepted accounting principles in the United States
except for the fact that these consolidated financial statements do not include
the details and ramifications of a merger that occurred on November 30, 2005
(see Note 11), as of the date of these consolidated financial statements.
Our review was made for the purpose of expressing limited assurance that
there are no material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted
accounting principles in the United States.
Respectfully submitted,
BILDNER & GIANNASCO, LLP
Certified Public Accountants
Jericho, New York
January 13, 2006
F-14
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheets
September 30, 2005 September 30, 2004
------------------ ------------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 262,385 $ 235,618
Accounts Receivable 2,269,778 1,839,605
Inventory 11,784,369 9,690,195
Prepaid Expenses 76,709 75,204
Other Current Assets 5,364 17,342
Advances to Affiliates -- 110,492
----------- -----------
Total Current Assets $14,398,605 $11,968,456
Property, plant, and equipment, net 3,993,411 3,689,891
Security Deposits 34,522 18,522
Cash Surrender Value - Officer's Life 52,334 211,927
Unamortized Finance Costs 109,959 153,397
----------- -----------
TOTAL ASSETS $18,588,831 $16,042,193
=========== ===========
The accompanying review report and notes are an integral
part of these statements.
F-15
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Balance Sheets (continued)
September 30, 2005 September 30, 2004
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts Payable $ 3,926,603 $ 2,983,790
Advance Payment - Customer 667,772 554,420
Mortgage Payable - Current 72,000 96,000
Obligations Under Capital Lease - Current 413,300 380,489
Notes Payable - Banks 5,180,000 --
Accrued Operating Expenses 589,550 325,032
------------ ------------
Total current liabilities 10,849,225 4,339,731
Long term liabilities
Advances From Shareholders 363,323 187,484
Mortgage Payable 1,169,813 1,265,041
Notes Payable - Banks -- 5,180,000
Obligations Under Capital Lease - Long term 912,078 433,439
------------ ------------
Total long term liabilities 2,445,214 7,065,964
------------ ------------
Total liabilities $ 13,294,439 $ 11,405,695
============ ============
Commitments and contingencies
Minority Interest 429,285 393,838
Stockholders' Equity
Capital Stock - 200 Shares Authorized 32,223 32,223
No Par Value, 95 Shares Issued and Outstanding as of
December 31, 2004 and 2003
Additional Paid-In Capital 182,628 182,628
Retained Earnings 4,746,256 4,123,809
Less: Treasury Stock at Cost (96,000) (96,000)
------------ ------------
Total Stockholders' Equity $ 5,294,392 $ 4,636,498
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,588,831 $ 16,042,193
============ ============
The accompanying review report and notes are an integral
part of these statements.
F-16
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Statement of Income and Retained Earnings
Nine Months Ended Nine Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Net sales $ 21,851,532 $ 18,322,866
Cost of Sales 18,858,898 15,940,636
------------ ------------
Gross profit 2,992,634 2,382,230
Other income 152 752
------------ ------------
2,992,786 2,382,982
Operating expenses
Selling 244,125 224,542
General and Administrative 1,251,203 955,897
Interest expense 490,975 307,727
------------ ------------
Total operating expenses 1,986,303 1,488,166
------------ ------------
Income before Minority interest 1,006,483 894,817
Less: Minority interest 57,384 98,665
------------ ------------
Net income $ 949,099 $ 796,152
------------ ------------
Retained Earnings, Beginning of Year 4,134,712 3,591,755
Deduct: Distribution to Shareholders (337,555) (264,098)
------------ ------------
Retained Earnings, End of the Period $ 4,746,256 $ 4,123,809
============ ============
The accompanying review report and notes are an integral
part of these statements.
F-17
AIR INDUSTRIES MACHINING CORPORATION
Consolidated Statement of Cash Flows
Nine Months Ended Nine Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 949,099 $ 796,152
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 393,974 382,139
Minority Interest in Net Income 57,384 98,665
Changes in Assets and Liabilities:
(Increase) Decrease In Assets -
Accounts Receivable 373,758 (638,799)
Inventory (925,913) (66,817)
Advanced Rental -- 26,917
Prepaid Expenses 55,559 108,271
Other Current Assets 115 13,071
Deposits (16,000) --
Cash Surrender Value - Officer's Life 211,302 --
Increase (Decrease) In Liabilities -
Accounts Payable 234,543 334,630
Advance Payment-Customer (686,494) (217,196)
Accrued Operating Costs 85,872 20,111
NET CASH PROVIDED BY OPERATING
ACTIVITIES 733,199 857,144
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment (740,571) (472,536)
------------ ------------
NET CASH (USED) IN INVESTING ACTIVITIES (740,571) (472,536)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayment) Proceeds from Credit Line Facilities (48,045) 300,492
Proceeds from Obligations under capital lease 606,082 71,380
Payments for Finance Related Costs -- (102,932)
Distribution to Shareholders (337,555) (264,098)
Repayment of Cash Overdraft -- (153,831)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 220,482 (148,990)
------------ ------------
Net increase in cash and cash equivalents 213,110 235,618
------------ ------------
Cash and cash equivalents, beginning of year 49,275 --
------------ ------------
Cash and cash equiavlents, end of the period $ 262,385 $ 235,618
============ ============
Supplementary disclosure of cash flow information
Cash paid during the year for interest $ 467,637 $ 284,389
The accompanying review report and notes are an integral
part of these statements.
F-18
1 - SIGNIFICANT ACCOUNTING POLICIES
Background of Company
Air Industries Machining Corporation ("Air" or "The Company"),
founded in 1969, was incorporated in the State of New York and
maintains its principal place of business in Bay Shore, New York.
The Corporation is primarily engaged in manufacturing aircraft
structural parts and assemblies principally for prime defense
contractors in the aerospace industry machining parts for the
aerospace industry predominantly located in the United States. The
Company's customer base consists mainly of publicly traded companies
in the aerospace industry primarily located in the northeast and
west coast of the United States.
Principles of Consolidation
The Company's consolidated financial statements include those of
variable interest entities. (See Note 10).
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments
with an original maturity of three months or less. Cash consists of
aggregate cash balances in the Company's bank accounts and cash
equivalents consist primarily of money market accounts.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid
principal balances. The Company writes off accounts when they are
deemed to be uncollectible. The Company has experienced
insignificant amounts of bad debts in such accounts.
Inventories
The Company has consistently valued its finished goods inventory and
work-in-progress, following a physical count, on the basis of the
applicable invoiced selling prices for such finished goods,
discounted for both a general and administrative change and a profit
percentage as calculated for the Company's operations, generally as
follows:
Finished goods inventory that are not supported by an invoiced
selling price based on a purchase order from a Company customer, the
historic selling price of that item is reduced by 60% of the selling
price and then discounted for both a general and administrative
charge and a profit percentage; work-in-process inventory, in
certain instances, the percentage of completion as furnished by
management is applied to the invoiced selling price, and then
discounted for both a general and administrative charge and a profit
percentage in a manner consistent with prior years.
F-19
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation and amortization. The Company maintains a policy to
capitalize all property and equipment purchases in excess of $1,000.
Expenditures for repairs and improvements in excess of $1,000 that
add to the productive capacity or extend the useful life of an asset
are capitalized. Repair and maintenance charges are expensed as
incurred. Property under a capital lease is capitalized and
amortized over the lease terms. Upon disposition, the cost and
related accumulated depreciation are removed from the accounts and
any related gain or loss is reflected in earnings. Depreciation on
plant and equipment is calculated on the straight-line method over
the estimated useful lives of the assets.
The useful lives of property, plant and equipment for purposes of
computing depreciation are:
Tools and instruments ................. 7 Years
Leasehold improvements................. 25 Years
Machinery and equipment ............... 5-8 Years
Automotive Equipment................... 5 Years
Furniture and fixtures................. 5-8 Years
Buildings.............................. 25-31.5 Years
Impairment of Long Live Assets
The Company reviews long-lived assets for impairment at the facility
level annually or if events or circumstances indicate that the
carrying value of such assets may not be fully recoverable.
Impairment is evaluated based on the sum of undiscounted estimated
future cash flows expected to result from use of the assets compared
to its carrying value. If impairment is recognized, the carrying
value of the impaired asset is reduced to its fair value, based on
discounted estimated future cash flows.
Finance Costs
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term
of the related debt.
Revenue Recognition
The Company generally recognizes revenue when products are shipped
and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive
evidence of an arrangement exists, and the sales price is fixed or
determinable. Payments received in advance from customers for
products delivered are recorded as customer advance payments until
earned, at which time revenue is recognized.
F-20
Cost of Goods Sold
Costs for goods sold includes all direct material, labor costs,
tooling and those indirect costs related to manufacturing, such as
indirect labor, supplies, tools, repairs and depreciation costs.
Expenses
Selling, general, and administrative costs are charged to expense as
incurred.
Income Taxes
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code and New York State law to be taxed as an "S"
corporation. In lieu of corporate income taxes, the stockholders are
taxed on their proportionate share of the company's net income.
Accordingly, no provision for federal income taxes has been made in
the accompanying financial statements.
Use of Estimates
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts in
the financial statements and accompanying notes. The more
significant management estimates are the useful lives of property
and equipment, provisions for inventory obsolescence, unamortized
finance costs, accrued expenses and various contingencies. Actual
results could differ from those estimates. Changes in facts and
circumstances may result in revised estimates, which are recorded in
the period in which they become known.
Credit Risk
Financial instruments involving potential credit risk include
accounts receivable. Of the accounts receivable balance outstanding
as of September 30, 2005 and 2004, approximately 58% is attributed
to three customers and 61% is attributed to two customers,
respectively.
Treasury Stock
The Company records treasury stock under the cost method.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments
using available market information and other valuation methodologies
in accordance with Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments."
Management of the Company believes that the fair value of financial
instruments, consisting of cash, accounts receivable, accounts
payable and accrued liabilities, approximates carrying value due to
the immediate or short-term maturity associated with these
instruments and that the notes payable is carried at fair value in
that it carries interest rates that are comparable to similar
instruments with similar maturities.
F-21
Reclassifications
Certain reclassifications have been made to prior year's financial
statement information to conform to the current year presentation.
2 - PROPERTY, PLANT, & EQUIPMENT
The components of property and equipment as of September 30, 2005 and 2004
include:
September 30, 2005 September 30, 2004
------------------ ------------------
Land $ 134,922 $ 134,922
Building 3,173,070 3,173,071
Machinery and Equipment 8,541,083 7,984,165
Tools and Instrument 279,803 279,803
Leasehold Improvements 505,171 489,328
Automotive Equipment 290,083 289,558
Furniture and fixtures 872,112 699,662
------------ ------------
Total property, plant, and equipment 13,796,244 13,050,509
------------ ------------
------------ ------------
Less: Accumulated Depreciation (9,802,833) (9,360,618)
------------ ------------
------------ ------------
Property, plant, and equipment, net $ 3,993,411 $ 3,689,891
============ ============
Depreciation and amortization expense for the period ended September 30,
2005 and 2004 was $393,974 and $382,139, respectively.
3 - NOTES PAYABLE - BANKS
The Company has negotiated a credit facility dated August of 2003 with a
major lending institution with a termination date March of 2006. The
facility is secured by a first priority interest in all accounts
receivable, inventory and equipment presently owned or hereafter acquired
by the Company. The indebtedness bears interest at the rate of 1/2 percent
above the prime rate of interest or a libor margin of 3%.
The terms of the facility require that, among other things, the Company
maintain certain financial ratios and levels of working capital. As of
December 31, 2004, the Company has met these terms.
The loans are guaranteed jointly and severally by the principals of the
Company, as well as the affiliated companies KPK Realty Corporation and
DPPR Realty Corp. (See Note 8).
F-22
Interest expense related to the notes payable - bank approximately
amounted to $243,000 and $180,000 for the nine months ended September 30,
2005 and 2004, respectively.
4 - ADVANCES FROM SHAREHOLDERS
Advances represent non-interest bearing advances from shareholders to
cover the Company's working capital needs.
5 - MORTGAGE PAYABLE
As the Company consolidates the assets and liabilities of variable
interest entities (see Note 10) it has two mortgages covering buildings
and land. These mortgages carry interest rates of 6.15% and 7.18% per
annum.
Future mortgage payments, including interest, are as follows for the
period September 30, 2005:
Year Amount
---------- -----------
2006 126,000
2007 128,000
2008 139,000
2009 133,000
2010 142,000
Thereafter 573,813
-----------
1,241,813
Less: current maturities: 72,000
-----------
Long term $ 1,169,813
-----------
6 - CAPITAL LEASES PAYABLE-EQUIPMENT
The Company is committed under several capital leases for manufacturing
equipment and computer equipment. All leases have bargain purchase options
that the Company expects to exercise at the termination of each lease.
Capital lease obligations totaled $1,325,278 as of September 30, 2005.
As of September 30, 2005, future minimum lease payments, including imputed
interest, with remaining terms of greater than one year are as follows:
F-23
Year Amount
---- -----------
2006 $ 501,000
2007 430,000
2008 427,000
2009 141,000
-----------
Total future minimum lease payments 1,499,000
Less: imputed interest (173,622)
Less: current maturities (413,300)
-----------
Total long-term capital lease obligation $ 912,078
===========
7 - EMPLOYEE BENEFITS PLANS
On January 1, 1997, the Company instituted a defined contribution plan
under Section 401(k) of the Internal Revenue Code ("the Plan"). Pursuant
to the Plan qualified employees may contribute a percentage of their
pretax eligible compensation to the Plan. The Company does not match any
contributions that employees may make to the Plan.
8 - RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and certain
related parties.
The Company presently leases manufacturing and office space from KPK
Realty Corp. a corporation in which 49% is owned by the majority
stockholder of the Company.
Additionally, the Company leases manufacturing space from DPPR Realty
Corp. which is 100% owned by two of the shareholders of the Corporation
who in the aggregate own 36.84% of the Company.
KPK Realty Corp. and DPPR Realty Corp. are considered variable interest
entities under FIN 46 (See Note 10) and accordingly, their assets,
liabilities, and results of operations have been consolidated into the
Company's.
F-24
9 - COMMITMENTS AND CONTINGENCIES
Litigation
A legal action has been brought against the Company for personal injury
sustained by an independent contractor caused by a fall on the premises of
the Company in the amount of $5,000,000. This action is scheduled for
trial in June of 2005. The Company has insurance coverage in the amount of
$4,000,000. The plaintiff made a demand of $2,000,000 at a settlement
mediation. In the opinion of counsel representing the Company the full
value of the case would be well within the insurance coverage maintained
by the Company and accordingly, the Company has not recorded any loss
contingency related to this case.
10 - VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. Under FIN 46, we are required to consolidate variable interest
entities for which we are deemed to be the primary beneficiary by the
third quarter of 2003, and disclose information about those in which we
have significant variable interests effective immediately.
The Company has leasing arrangements for its operating and manufacturing
facilities with two lessors. Under FIN 46 these lessors are Variable
Interest Entities and the Company is the primary beneficiary. Therefore,
the Company has consolidated the respective lessors' assets and debt into
these consolidated statements. At September 30, 2005 and 2004, these
entities had gross assets of $1,918,000 and $1,982,000, respectively and
gross liabilities of $1,034,000 and $1,202,000, respectively. These
facilities were subsequently purchased in connection with a merger
transaction in November 2005. The minority interest on the Company's
financial statements consists of the non-controlling portion of these
respective entities (See Note 8).
11 - SUBSEQUENT EVENTS
On November 30, 2005 merger agreements were consummated between the
Company and an Acquisition Entity and between the Acquisition Entity and a
Public Entity whose stock is traded in Over the Counter Market.
Contemporaneously with the merger agreements, the Company secured
$14,000,000 in debt facilities from a major lending institution and used
funds from the facility to purchase real property that it had subsequently
leased and paid off debts to its prior lender. As part of the merger
agreements, the Acquisition Entity completed the first of two closings of
private placement stock offerings which grossed $9,000,000 in the
aggregate. These transactions and their associated costs have not been
reflected in these financial statements.
F-25
ASHLIN DEVELOPMENT CORPORATION
UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
F-26
ASHLIN DEVELOPMENT CORP.
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2005
(UNAUDITED)
ASSETS
Current assets:
Cash $ 68,557
---------
Total assets $ 68,557
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,667
Accrued expenses $ 9,542
---------
Total liabilities $ 76,209
---------
Stockholders' deficit:
Common stock, $0.001 par value, authorized 150,000,000
shares; 4,652,813 shares issued and outstanding 4,653
Additional paid-in capital 919,789
Accumulated deficit (932,094)
---------
Total stockholders' deficit (7,652)
---------
Total liabilities and stockholders' equity $ 68,557
=========
See accompanying notes to condensed financial statements.
F-27
ASHLIN DEVELOPMENT CORP.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
================================================================================
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Revenue $ -- $ -- $ -- $ --
Cost of sales -- -- -- --
----------- --------------- ----------- -----------
Gross Profit -- -- -- --
----------- --------------- ----------- -----------
Operating expenses:
General and administrative expense 127,879 -- 440,575 --
Advertising and promotion -- -- -- --
Depreciation and amortization -- -- -- --
----------- --------------- ----------- -----------
Total operating expense 127,879 -- 440,575 --
----------- --------------- ----------- -----------
Loss from operations continued operations (127,879) -- (440,575) --
Discontinued operations
Income (Loss) from discontinued operations -- 185,899 (155,701) (773,788)
Other (income) expense:
Gain on sale -- -- 1,794,893 --
Interest income 225 -- 310 --
----------- --------------- ----------- -----------
Income (Loss) before income taxes (127,654) 185,899 1,198,927 (773,788)
----------- --------------- ----------- -----------
Benefit (provision) for income taxes -- -- -- --
----------- --------------- ----------- -----------
Net income (loss) (127,654) 185,899 1,198,927 (773,788)
=========== =============== =========== ===========
Net loss per share from continuing operations-basic $ (0.03) $ -- $ (0.10) $ --
=========== =============== =========== ===========
Net loss per share from discontinued operations-basic $ -- $ -- (0.04) --
=========== =============== =========== ===========
Net income (loss) per share - basic and diluted $ (0.03) $ 0.05 $ 0.27 $ (0.20)
=========== =============== =========== ===========
Weighted average number of shares - basic and diluted $ 4,561,009 $ 3,832,813 $ 4,392,707 $ 3,832,813
=========== =============== =========== ===========
See accompanying notes to condensed financial statements.
F-28
ASHLIN DEVELOPMENT CORP.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
================================================================================
2005 2004
----------- -----------
Cash flow from operating activities:
Net income (loss) $ 1,198,927 $ (773,788)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Gain from sale of operating assets and assumption of liabilities (1,794,893) --
Common stock issued for services 62,000 --
Decrease in assets and liabilities:
Accounts receivable 138,581 473,852
Prepaid assets 73,124 (85,273)
Depreciation and amortization -- 21,666
Inventory 22,437 126,124)
Accounts payable (57,561) 751,304
Accrued expenses (24,179) (64,797)
----------- -----------
Net cash provided by (used in) operating activities (381,564) 449,088
----------- -----------
Cash flow from investing activities:
Proceeds from sale of assets 350,000 (32,576)
----------- -----------
Net cash provided by (used in) investing activities 350,000 (32,576)
----------- -----------
Cash flow from financing activities:
Repayments on notes payable (27,175) (406,957)
----------- -----------
Net cash used in financing activities (27,175) (406,957)
----------- -----------
Net increase (decrease) in cash (58,739) 9,555
----------- -----------
Cash, beginning of period 127,296 7,406
----------- -----------
Cash, end of period 68,557 16,961
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
- -----------------------------------
Note payable for purchase of automobile $ -- $ 23,357
----------- ===========
See accompanying notes to condensed financial statements.
F-29
ASHLIN DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited condensed financial statements of Ashlin Development
Corp. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the results for the
interim periods presented have been included.
These results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Company's Annual Financial Statements for the year ended December 31,
2004. Operating results for the nine months ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005.
It is recommended that the accompanying condensed financial statements be read
in conjunction with the financial statements and notes for the year ended
December 31, 2004, found in the Company's Form 10-KSB.
The Company's financial statements in the three and nine months ended September
2005 are not comparative to the financial statements for the three months ended
September 2004. The effective date of the Company's plan of reorganization was
January 28, 2005.
Effective January 28, 2005 the Company completed a plan to divest its core
operations of Health and Nutrition Systems, Int'l Inc. The results of operations
and financial position are shown in the accompanying financial statements as
discontinued operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. There are no cash
equivalents as of September 30, 2005.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Revenue Recognition
- -------------------
The Company recognizes revenue when
o Persuasive evidence of an arrangement exists
o Shipment has occurred
o Price is fixed or determinable, and
o Collectability is reasonably assured
Basic Earnings Per Share
- ------------------------
Basic income per common share is computed by dividing the net income by the
weighted average number of shares of common stock outstanding during the year.
F-30
ASHLIN DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
Diluted Earnings Per Share
- --------------------------
Diluted earnings per share reflect the potential dilution that could occur if
dilutive securities (stock options and stock warrants) to issue common stock
were exercised or converted into common stock that then shared in the earnings
of the Company.
Stock Compensation
- ------------------
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 encourages the
use of a fair-value-based method of accounting for stock-based awards, under
which the fair value of stock options is determined on the date of grant and
expensed over the vesting period. Under SFAS 123, companies may, however,
measure compensation costs for those plans using the method prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." Companies that apply APB No. 25 are required to include
pro forma disclosures of net earnings and earnings per share as if the
fair-value-based method of accounting had been applied. The Company elected to
account for such plans under the provisions of APB No. 25. The Company accounts
for stock options granted to consultants under SFAS 123.
Had the compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for Stock
Based Compensation," at September 30, the Company's net income and earnings per
share would have been effected to the pro forma amounts indicated below:
September 30, 2005
------------------
Net Income
As reported $ 1,198,927
============
Pro forma $ 1,198,927
============
Earnings per share
As reported $ 0.27
============
Pro forma $ 0.27
============
All but 55,000 options expired 30 days after January 28, 2005, the effective
date of the sale of substantially all of our operating assets.
NOTE 3 - GOING CONCERN
- ----------------------
The Company's condensed financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has ceased it's Health
and Nutrition business effective January 28th, 2005. The Company is currently
exploring its options which may include acquiring or otherwise entering into a
new business or merging with an as yet unidentified company or companies.
On October 15, 2004, the Company filed for protection under Chapter 11 of the
United States Bankruptcy Code. The Company has operated under the Chapter 11
guidelines since October 15, 2004 and under a plan of reorganization filed by
the Company. The effective date of the Company's plan of reorganization was
January 28, 2005.
There remains substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
F-31
ASHLIN DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
NOTE 4 - EQUITY
- ---------------
During the nine months ended September 30, 2005, 300,000 share of common stock
were issued to the Company's chief executive officer as per his employment
agreement. These shares were valued at $0.04 per share of common stock and the
Company recorded compensation expense of $12,000.
On March 3, 2005, the Company issued 320,000 shares of common stock to the
Company's chief executive officer in recognition of performance. These shares
were valued at $0.10 per share and the Company recorded compensation expense of
$32,000.
On March 3, 2005, the Company entered in to a consulting contract with a
consultant and issued 100,000 shares of common stock as part of this contract.
These shares were valued at $0.010 per share of common stock and $10,000 was
recorded as compensation expense.
On September 21, 2005, the Company entered in to a consulting contract with a
consultant and issued 100,000 shares of common stock as part of this contract.
These shares were valued at $0.08 per share of common stock and $8,000 was
recorded as compensation expense.
NOTE 5 - LEGAL MATTERS
- -----------------------
We were involved in litigation with J.C. Herbert Bryant, III, a former officer,
director and one of our shareholders, and KMS-Thin Tab 100, Inc., which was
settled in September 2002. As part of the settlement, we entered into a
distribution agreement with Mr. Bryant, beginning on September 26, 2002 and
ending on September 25, 2007, permitting Mr. Bryant to purchase certain products
from us and to exclusively distribute those products in Florida from Orlando
south. In October 2003, we terminated the distribution agreement with KMS based
on KMS's breach of material terms of the agreement. On December 1, 2003, we
filed suit against KMS-Thin Tab 100, Inc. in the Palm Beach County Circuit Court
(Case No. 2003CA012757XXCDAN) for breach of contract, trademark infringement and
for a declaration of rights that the distribution agreement is terminated and of
no further force and effect. KMS answered the complaint and filed its own
counterclaim for fraud in the inducement, trademark infringement, dilution and
fraudulent misrepresentation; the fraud-based counterclaims were dismissed with
prejudice by the Court on summary judgment. KMS subsequently amended its
counterclaim to allege a breach of contract under the distribution agreement. In
January 2005, the State Court in Florida ruled that neither party should
prevail, and rejected a request for attorney's fees by KMS-Thin Tab 100 Inc.,
thus adjudicating the matter. KMS-Thin Tab 100 Inc. subsequently filed a notice
of appeal.
Subsequently, on July 29, 2005, the 4th District Court of Appeals granted the
Company's motion to dismiss the appeal by KMS-Thin Tab 100 Inc.
The Company is not aware of any other outstanding litigation.
NOTE 6- ACCOUNTING PRONOUNCEMENT
- --------------------------------
SFAS No. 154, Accounting Changes and Error Corrections, was issued in May 2005
and replaces APB Opinion N0. 20 and SFAS No. 3. SFAS No. 154 requires
retrospective application for voluntary changes in accounting principle in most
instances and is required to be applied to all accounting changes made in fiscal
years beginning after December 15, 2005. The Company's expected April 1, 2006
adoption of SFAS No. 154 is not expected to have a material impact on the
Company's consolidated financial condition or results of operations.
F-32
ASHLIN DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
NOTE 7-SUBSEQUENT EVENTS
- ------------------------
On August 4, 2005, the shareholders approved an amendment to the Company's
Articles of Incorporation which increased the total number of authorized shares
of the Company to 160,000,000 shares, consisting of (i) 150,000,000 shares of
common stock and (ii) 10,000,000 shares of "blank check" preferred stock.
F-33
GALES INDUSTRIES INCORPORATED
UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
F-34
GALES INDUSTRIES INCORPORATED
Balance Sheet
September 30, 2005
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 84,331
Gunn Allen Receivable 25,000
Deferred Acquisition Costs 446,494
--------
TOTAL CURRENT ASSETS $555,821
--------
PROPERTY, PLANT, AND EQUIPMENT - NET $ --
--------
DEFERRED CHARGES AND OTHER ASSETS
Goodwill
--------
TOTAL DEFERRED CHARGES AND OTHER ASSETS $ --
--------
TOTAL ASSETS $555,825
========
F-35
GALES INDUSTRIES INCORPORATED
Balance Sheet
September 30, 2005
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $383,319
Interest Payable 3,093
Advance Payment - Customer --
Notes Payable - PNC
--------
TOTAL CURRENT LIABILITIES $386,412
--------
LONG-TERM LIABILITIES
Notes Payable - Bridge Loan 172,500
--------
TOTAL LONG-TERM LIABILITIES $172,500
--------
TOTAL LIABILITIES $558,912
--------
STOCKHOLDERS' EQUITY
Common Stock (Bridge)
Capital Stock - Gales 7
Capital Stock - Gales Preferred
Capital Stock - Ashlin --
Additional Paid-In Capital
Preferred Stock --
Retained Earnings (3,093)
Less: Treasury Stock at Cost
--------
TOTAL STOCKHOLDERS' EQUITY $ (3,087)
--------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $555,825
========
F-36
GALES INDUSTRIES INCORPORATED
Statement of Operations
September 30, 2005
(Unaudited)
NET INCOME FROM SALES $ --
--------
COST OF GOODS SOLD $ --
--------
GROSS PROFIT $ --
OTHER INCOME --
--------
TOTAL INCOME $ --
--------
EXPENSES
Selling $ --
General and Administrative
Interest and Amortization 3,093
Franchise Tax --
--------
TOTAL EXPENSES $ 3,093
--------
NET LOSS $ (3,093)
========
F-37
Note 1 - Organization and General
Gales Industries Incorporated (the "Company") was formed and incorporated
in October 2004. The Company has conducted no operations to date. In connection
with its acquisition of Air Industries Machining, Corp., and merger with Ashlin
Development Corporation, the Company has incurred certain related costs. The
Company has deferred capitalized costs of approximately $446,490 (unaudited) of
such costs at September 30, 2005. The Stock Purchase Agreement with Air
Industries and its owners was executed on July 25, 2005. The acquisition is to
be funded from the proceeds of a private placement of the Company's convertible
preferred stock. The Company intends, immediately prior to the acquisition of
Air Industries, to amend its certificate of incorporation to authorize
100,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
Company intends to denominate 900 shares of such preferred stock as Series A
Convertible Preferred Stock and to issue such shares in the proposed private
placement. The Company further intends to reserve 45,000,000 shares of its
common stock for issuance upon conversion of the shares of Series A Convertible
Preferred Stock issued in its private placement, inclusive of shares of common
stock issuable upon conversion of shares of preferred stock issued as interest
on the shares of Convertible Preferred Stock.
The Company maintains its books and records on the accrual basis of
accounting.
Common stock was issued to the Company's founders and principals at
nominal values, which approximated management's assessment of the fair values of
such securities at the date of issuance. At that time, the Company had conducted
no business and the probability of consummating an acquisition could not be
predicted with any degree of certainty.
The financial statements as of and for the nine months ended September 30,
2005 are unaudited; however in the opinion of management all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim period have been made.
Bridge Financings
In February 2005, the Company received $22,500 from an investor (the
"Initial Bridge"), and, in connection therewith, issued to the investor a 12%
convertible bridge note (the "Initial Note") in such principal amount. The
principal amount of the Initial Note, and the 12% interest accruing thereon,
must be paid by the first anniversary of the issuance of the Initial Note. The
Initial Note may be converted at any time at the option of the holder into
shares of common stock, in general, at a conversion price equal to 50% of the
purchase price to be paid by investors in the Company's anticipated private
placement, and the conversion price applicable to the Initial Note is $0.11 per
share. The Initial Note provides that, if the Company issues shares of capital
stock at a price per share lower than the conversion price of the Initial Note,
the conversion price of the Initial Note will be reduced to such lower price per
share. Although the Initial Note is unsecured, the Initial Note provides that,
F-38
in the event of default by the Company or an insolvency or similar proceeding
involving the Company, all sums due on the Initial Note will be paid before any
payment is made upon any other indebtedness of the Company. The investor may
elect to receive interest on the Initial Note in shares of common stock rather
than cash and, in such event, the conversion price applicable to the Initial
Note would be used to determine the number of shares issuable to the investor.
In connection with the Initial Note, the Company also issued to the investor
five-year warrants (the "Initial Warrants") to purchase the number of shares of
common stock (409,091) equal to 200% of the number of shares issuable upon
conversion of the Initial Note, exercisable in general at the price per share
equal to 50% of the conversion price of the Initial Note. The Initial Warrants
allow for cashless exercise.
In August 2005, the Company received $45,000 from investors (the "$45,000
Financing") and, in connection therewith, issued to such investors 12%
convertible bridge notes (the "$45,000 Bridge Notes") in such aggregate
principal amount. The $45,000 Bridge Notes are repayable on the earlier of the
first anniversary of their issuance or the completion by the Company of an
equity or debt financing resulting in gross proceeds of at least $5.5 million.
The $45,000 Bridge Notes will become payable upon completion of the Company's
anticipated private placement but the holders of the $45,000 Bridge Notes may
elect to convert the Notes on such date into shares of common stock, in general,
at a price of $0.22 per share. The $45,000 Bridge Notes are convertible into
204,545 shares of common stock. In connection with each of the $45,000 Bridge
Notes, the Company also issued to the investors warrants ("$45,000 Bridge
Warrants") to purchase the number of shares of common stock equal to the number
of shares into which such $45,000 Bridge Note can be converted, exercisable at
$0.22 per share. The $45,000 Bridge Warrants allow for cashless exercise and
have weighted-average anti-dilution protection with respect to the exercise
price. Mr. Stephen Nagler, the Company's secretary and one of the Company's
directors, invested $10,000 in the $45,000 Financing.
In September 2005, the Company received $105,000 from investors (the
"$105,000 Financing") and, in connection therewith, issued to such investors 12%
bridge notes (the "$105,000 Bridge Notes") in such aggregate principal amount.
The $105,000 Bridge Notes are repayable on the earlier of the first anniversary
of issuance or the completion by the Company of an equity or debt financing
resulting in gross proceeds of at least $5.5 million. The $105,000 Bridge Notes
are not convertible into Common Stock. The $105,000 Bridge Notes will become
payable upon completion of the Minimum Offering. In connection with the $105,000
Bridge Notes, the Company also issued to the investors warrants ("$105,000
Bridge Warrants") to purchase an aggregate of 477,273 of shares of Common Stock
at a price of $0.22 per share. The $105,000 Bridge Warrants allow for cashless
exercise and have weighted-average anti-dilution protection with respect to the
exercise price.
F-39
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
On November 30, 2005, Gales Industries Incorporated ("Gales Industries")
acquired (the "Acquisition") all of the outstanding shares of Air Industries
Machining, Corp. ("AIM"). Concurrent with the Acquisition, Gales Industries
consummated a merger with Ashlin Development Corporation (the "Merger"). As a
result of the Merger, Ashlin exchanged 10,999,381 shares of its common stock and
900 shares of its series A Preferred Stock for all of the issued and outstanding
shares of the common stock and preferred stock of Gales Industries. Pursuant to
the Merger, AIM became an indirect wholly-owned subsidiary of Ashlin.
As a result of the Merger, the former stockholders of Gales Industries
became the controlling stockholders of the Company. Prior to the Acquisition and
the Merger, neither Ashlin nor Gales Industries had substantial assets.
Accordingly, the Acquisition and the Merger have been treated as a reverse
acquisition under the purchase method of accounting.
The following unaudited pro forma statements of income combine the
historical statements of income of AIM, Ashlin and Gales Industries for the
nine-months ended September 30, 2005 and year ended December 31, 2004, giving
effect to the Merger and the Acquisition as if they had occurred on January 1,
2004.
We are providing this information to aid you in your analysis of the
financial aspects of the Merger and the Acquisition. The unaudited pro forma
financial statements contained herein should be read in conjunction with the
historical financial statements of AIM, Ashlin and Gales Industries and the
related notes thereto. The unaudited pro forma information is not necessarily
indicative of the financial position or results of operations that may have
actually occurred had the Merger and the Acquisition taken place on the dates
noted, or the future financial position or operating results of the combined
company.
F-40
COMBINED ENTITIES
UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
F-41
Consolidated Pro Forma Balance Sheet
UNADJUSTED CONSOLIDATED
SEPTEMBER 30, Adjustments SEPTEMBER 30,
ASSETS 2005 2005
CURRENT ASSETS
Cash and Cash Equivalents - See Contra $ 262,385 241,449 (a) $ 20,936
Accounts Receivable 2,269,778 -- 2,269,778.00
Inventory 11,784,369 (250,000) (l) 12,034,369.00
Advanced Rental -- -- --
Prepaid Expenses 76,709 -- 76,709.00
Other Current Assets 5,364 500 4,864.00
Lease Assignment Receivable -- -- --
Miscellaneous Receivables -- -- --
Deposits -- -- --
Advances to Affiliates -- --
-------------- --------------
TOTAL CURRENT ASSETS $ 14,398,605 $ 14,406,656
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT
Land $ 134,922 (955,627) (c) $ 1,090,549
Building 3,173,070 (98,697) (c) 3,271,767
Plant -- -- --
Machinery and Equipment 8,541,083 (1,733,494) (d) 10,274,577
Tools and Instruments 279,803 -- 279,803
Leasehold Improvements 505,171 505,171 (e) --
Automotive Equipment 290,083 -- 290,083
Furniture and Fixtures 872,112 -- 872,112
-------------- --------------
$ 13,796,244 $ 16,078,891
Less: Accumulated Depreciation 9,802,833 1,489,315 (f) (8,313,518)
-------------- --------------
PROPERTY, PLANT, AND EQUIPMENT - NET $ 3,993,411 $ 7,765,373
-------------- --------------
DEFERRED CHARGES AND OTHER ASSETS
Security Deposits $ 34,522 (6,600) $ 41,122
Cash Value Officer's Life 52,334 -- 52,334
Unamortized Finance Costs 109,959 (326,077) (g) 436,036
Due From Gunn Allen -- (25,000) (h) 25,000
Investment in Air -- -- --
Stock Subscription Receivable -- (1,565) 1,565
Advances to Affiliates -- -- --
Goodwill -- (1,738,766) (b) 1,738,766
-------------- --------------
TOTAL DEFERRED CHARGES AND OTHER ASSETS $ 196,815 $ 2,294,823
-------------- --------------
TOTAL ASSETS $ 18,588,831 (7,796,345) $ 24,466,852
============== ==============
See accompanying notes to pro forma financial statements.
F-42
Consolidated Pro Forma Balance Sheet
UNADJUSTED CONSOLIDATED
LIABILITIES AND SEPTEMBER 30, SEPTEMBER 30,
STOCKHOLDERS' EQUITY 2005 Adjustments 2005
CURRENT LIABILITIES
Accounts Payable $ 3,926,603 (287,085) (i) $ 3,639,518
Advance Payment - Customer 667,772 -- 667,772
Mortgage Payable - Current 72,000 (4,884) 67,116
Notes Payable - PNC -- 380,004 (j)(n) 380,004
Lease Payable - Equipment 413,300 (67,116) 346,184
Notes Payable - Banks 5,180,000 (5,180,000) (r) --
Notes Payable - Insurance -- 31,567 31,567
Accrued Operating Expenses 589,550 1,091,662 (k) 1,681,212
------------ ------------
--
TOTAL CURRENT LIABILITIES $ 10,849,225 6,813,373
------------ ------------
LONG-TERM LIABILITIES --
Advances From Shareholders $ 363,323 (363,323) (m) $ --
Term Loan - Real Estate -- 3,119,996 (n) 3,119,996
Notes Payable - PNC 5,731,507 (o) 5,731,507
Mortgage Payable 1,169,813 (1,169,813) (x) --
Obligations under Capital Lease - Long Term 912,078 (9,845) 902,233
Notes Payable - Bridge Loan -- 150,000 (p) 150,000
Notes Payable - Sellers -- 1,627,262 (q) 1,627,262
Notes Payable - Equipment 9,845 9,845
------------ ------------
-- --
TOTAL LONG-TERM LIABILITIES $ 2,445,214 11,540,843
------------ ------------
--
TOTAL LIABILITIES $ 13,294,439 18,354,216
------------ ------------
MINORITY INTEREST 429,285 (429,285)
STOCKHOLDERS' EQUITY --
Capital Stock - 200 Shares Authorized -- $ --
No Par Value, 95 Shares Issued $ 32,223 (32,223) (s) --
Common Stock - 7,480,757 Shares @ $.0001 per share -- -- --
Common Stock (Bridge) -- -- --
Capital Stock - Gales -- 110 (t) 110
Capital Stock - Gales Preferred -- 1 1
Capital Stock - Ashlin -- -- --
Additional Paid-In Capital 182,628 5,994,258 (u) 6,166,886
Retained Earnings 4,746,256 (4,800,617) (v) (54,361)
Less: Treasury Stock at Cost (96,000) 96,000 (w) --
------------ ------------
-- --
TOTAL STOCKHOLDERS' EQUITY $ 4,865,107 6,112,636
------------ ------------
--
COMMITMENTS AND CONTINGENCIES --
--
TOTAL LIABILITIES AND --
STOCKHOLDERS' EQUITY $ 18,588,831 $ 24,466,852
============ ============
See accompanying notes to pro forma financial statements.
F-43
Notes to Pro Forma Combined Balance Sheet
(a) Represents the effect of banking arrangements calling for cash receipts to
be applied to revolving loan balance.
(b) Represents the goodwill resulting from the excess of the purchase price
paid for the stock of AIM after adjusting the value of the assets acquired
and liabilities assumed to reflect the purchase price.
(c) Represents the purchase price of the company's corporate campus pursuant
to the Real Estate Purchase Agreements with DDPR Realty Corp. and KPK
Realty Corp.
(d) Represents an increase in the value of the Company's machinery to reflect
an appraisal conducted as of November 30, 2005.
(e) Represents the elimination of the value ascribed to leasehold improvements
as a result of the acquisition of the Company's corporate campus.
(f) Represents the impact of including the two real estate companies in the
preacquisition numbers and the post acquisition write-down of leasehold
improvements partially offset by the revaluation of equipment.
(g) Represents an adjustment to finance costs as a result of the costs
incurred in connection with the loan from PNC Bank.
(h) Represents an adjustment to reflect the credit due from Gunn Allen as a
result of the prepayment of a portion of its placement fee.
(i) Represents a reduction in accounts payable as a result of the application
of a portion of the proceeds of the new bank loan to certain accrued
expenses.
(j) Represents the portion of the amounts borrowed from PNC Bank payable
within 12 months.
(k) Represents the accrual for certain expenses including legal and accounting
related to the acquisition of AIM and the merger with Ashlin.
(l) Represents the post acquisition revaluation of raw material.
(m) Represents the payment of notes due from AIM to certain of its officers.
(n) Represents amounts borrowed to acquire real estate.
(o) Represents amounts borrowed to satisfy the old notes payable to banks and
a portion of the purchase price of the real estate.
(p) Represents amounts borrowed by Gales prior to the acquisition of AIM
(q) Represents notes issued to shareholders of AIM as part of the purchase
price for AIM.
(r) Represents the repayment of the loan due from AIM to Citibank, N.A.
(s) Represents the elimination of shares held by former shareholders of AIM.
(t) Represents the issuance of shares of Gales Industries.
(u) Represents the excess of amounts paid over par value for shares of Gales
Industries, including the net amount received upon issuance of preferred
shares.
(v) Represents elimination of retained earnings of AIM.
(w) Represents elimination of amounts allocated to shares held in treasury by
AIM.
(x) Represents mortgages paid in full when real estate was purchased at
closing.
F-44
Pro Forma Statement of Income
(Unaudited)
UNADJUSTED CONSOLIDATED
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 ADJUSTMENTS 2004
NET SALES $ 24,818,333 $ 24,818,333
COST OF SALES $ 21,400,878 (57,608) (a) $ 21,343,270
------------ ------------
GROSS PROFIT $ 3,417,455 $ 3,475,063
OTHER INCOME 2,573 2,573
------------ ------------
TOTAL INCOME $ 3,420,028 57,608 $ 3,477,636
------------ ------------
EXPENSES
Selling $ 321,727 -- $ 321,727
General and Administrative 1,356,809 333,409 (b) 1,690,218
Interest Expense 505,425 149,884 (c) 655,309
------------ ------------
TOTAL OPERATING EXPENSES $ 2,183,961 483,293 $ 2,667,254
------------ ------------
INCOME BEFORE MINORITY INTEREST IN NET INCOME $ 1,236,067 (425,685) $ 810,382
LESS: MINORITY INTEREST IN NET INCOME $ 131,552 $ --
------------ ------------
NET INCOME BEFORE INCOME TAXES $ 1,104,515 (294,133) $ 810,382
INCOME TAXES 441,806 117,653 324,153
------------ ------------
NET INCOME $ 662,709 (176,480) $ 486,229
============ ============
See accompanying notes to pro forma financial statements.
F-45
Pro Forma Statement of Income
(Unaudited)
UNADJUSTED CONSOLIDATED
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 ADJUSTMENTS 2005
NET SALES $ 21,851,532 $ 21,851,532
COST OF SALES $ 18,858,898 -74,545 (d) $ 18,784,353
------------ ------------
GROSS PROFIT $ 2,992,634 $ 3,067,179
OTHER INCOME 152 152
------------ ------------
TOTAL INCOME $ 2,992,786 74,545 $ 3,067,331
------------ ------------
EXPENSES
Selling $ 244,125 -- $ 244,125
General and Administrative 1,251,203 59,292 (e) 1,310,495
Interest Expense 490,975 84,834 (c) 575,809
------------ ------------
TOTAL OOERATING EXPENSES $ 1,986,303 144,126 $ 2,130,429
------------ ------------
INCOME BEFORE MINORITY INTEREST IN NET INCOME $ 1,006,483 (69,581) $ 936,902
LESS: MINORITY INTEREST IN NET INCOME $ 57,384 $ --
------------ ------------
NET INCOME BEFORE INCOME TAXES $ 949,099 -12,197 $ 936,902
INCOME TAXES 379,640 4,879 374,761
------------ ------------
NET INCOME $ 569,459 -7,318 $ 562,141
============ ============
See accompanying notes to pro forma financial statements.
F-46
Notes to Pro Forma Statements of Income and Retained Earnings
(a) Represents the combined net impact on manufacturing overhead of the
following:
(i) An increase in depreciation and amortization expense reflecting
the increase in the carrying value of the Company's machinery and
equipment, and
(ii) A reduction in indirect payroll expense as a result of the
elimination of an allocable portion of the salary and related
payroll expenses resulting from the termination of Luis Peragallo,
Jorge Peragallo and George Kfoury, partially offset by the inclusion
of an allocable portion of the salary and related payroll expenses
as a result of the employment of Louis Giusto, Michael Gales and a
reallocation of the salaries of Dario Peragallo and Peter Rettaliata
and the engagement of George Kfoury as a consultant.
(b) Represents the combined net impact on general and administrative expenses
of the following:
(i) Inclusion of $118,536 in expense for options and warrants pursuant
to the requirements of FASB 123, and
(ii) An increase in overhead as a result of the elimination of salary and
related payroll expenses as a result of the termination of Luis
Peragallo, Jorge Peragallo and George Kfoury, partially offset by
the inclusion of an allocable portion of the salary and related
payroll expenses as a result of the employment of Louis Giusto,
Michael Gales and a reallocation of the salaries of Dario Peragallo
and Peter Rettaliata and the engagement of George Kfoury as a
consultant.
(c) Represents the increase in interest expense and the amortization of costs
associated with the increase in bank debt partially offset by the
reduction in interest rates.
(d) Represents the combined net impact on manufacturing overhead of the
following:
(i) An increase in depreciation and amortization expense reflecting the
increase in the carrying value of the Company's machinery and
equipment, and
(ii) A reduction in indirect payroll expense as a result of the
elimination of an allocable portion of the salary and related
payroll expenses resulting from the termination of Luis Peragallo,
Jorge Peragallo and George Kfoury, partially offset by the inclusion
of an allocable portion of the salary and related payroll expenses
as a result of the employment of Louis Giusto, Michael Gales and a
reallocation of the salaries of Dario Peragallo and Peter Rettaliata
and the engagement of George Kfoury as a consultant.
(e) Represents the combined net impact on general and administrative expenses
of the following:
F-47
(i) Inclusion of $56,243 in expense directly related to the company's
management option program pursuant to FASB 123, and
(ii) An increase in overhead as a result of the elimination of salary and
related payroll expenses as a result of the termination of Luis
Peragallo, Jorge Peragallo and George Kfoury, partially offset by
the inclusion of an allocable portion of the salary and related
payroll expenses as a result of the employment of Louis Giusto,
Michael Gales and a reallocation of the salaries of Dario Peragallo
and Peter Rettaliata and the engagement of George Kfoury as a
consultant.
(iii) Elimination of premiums in the amount of $45,022 on life insurance
policies on former shareholders of the Company that have been sold
or terminated.
(f) Represents the increase in interest expense and the amortization of costs
associated with the increase in bank debt partially offset by the
reduction in interest rates.
F-48
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. Offers of these securities are not being made in any
state where the offer is not permitted. You should not assume that the
information contained in or incorporated by reference in this prospectus is
accurate as of any date other than the date of the document in which it is
contained.
TABLE OF CONTENTS
PAGE
WHERE YOU CAN FIND MORE INFORMATION 4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 4
PROSPECTUS SUMMARY 5
RISK FACTORS 7
THE ACQUISITION AND RELATED TRANACTIONS 13
USE OF PROCEEDS 14
DETERMINATION OF OFFERING PRICE 14
BUSINESS 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION 19
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
EXECUTIVE OFFICERS AND RELATED SHAREHOLDER MATTERS 22
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 23
EXECUTIVE COMPENSATION 26
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 31
PLAN OF DISTRIBUTION 33
DESCRIPTION OF SECURITIES 36
SELLING SECURITY HOLDERS 38
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 48
LEGAL PROCEEDINGS 50
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 51
INDEMNIFICATION OF DIRECTORS AND OFFICERS 51
LEGAL MATTERS 51
EXPERTS 51
INTERESTS OF NAMED EXPERTS AND COUNSEL 52
FINANCIAL STATEMENTS 52
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification Of Directors And Officers
Pursuant to Article VII of our By-Laws, we have agreed to indemnify our
officers, directors, employees and agents to the fullest extent permitted by the
laws of Florida, as amended from time to time.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, Officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore unenforceable.
Item 25. Other Expenses Of Issuance And Distribution
Our expenses in connection with the issuance and distribution of the
securities being registered, other than the underwriting discount, are estimated
as follows:
SEC Registration Fee $ 3,300
Legal Fees and Expenses $ 50,000
Accountants' Fees and Expenses $ 50,000
Miscellaneous Expenses $ 10,000
Total $113,300
Item 26. Recent Sales Of Unregistered Securities
Shares Issued By Gales Industries Prior to the Merger:
As of October 28, 2004, immediately after its incorporation, Gales
Industries issued 4,401,219 shares of its common stock to its founder and
Executive Chairman and 3,404,538 shares of its common stock to its Vice Chairman
pursuant to subscriptions for such shares by such individuals. As of the same
date, four of our directors subscribed for 100,000 shares each of Gales
Industries common stock. As of the same date, Gales Industries issued 150,000
shares of its common stock to a law firm and 100,000 shares of its common stock
to another law firm pursuant to their subscription for shares. As of the same
date, Gales Industries issued in the name of a consultant 250,000 shares of its
common stock pursuant to its subscription for such number of shares. The
subscription price for the shares described in this paragraph was $.00001 per
share.
Gales Industries entered into an Investment Banking/Advisory Agreement
("Atlas Agreement"), dated as of January 11, 2005, with Atlas Capital Services,
LLC ("Atlas"). The Atlas Agreement provided that Atlas would receive newly
issued shares equal to 4% of a publicly-held company introduced by Atlas to
Gales Industries, provided that Gales Industries enters into a reverse merger
transaction with such company. Immediately prior to the closing of the Merger,
Gales Industries issued to various designees of Atlas an aggregate of 1,477,230
shares of its common stock in satisfaction of such obligation to Atlas.
In connection with the Acquisition of AIM, Gales Industries issued
$332,631 principal amount convertible note to each of Mr. Rettaliata and D.
Peragallo. As a result of the Merger, each such convertible note is convertible
into shares of Common Stock at the conversion price of $0.40 per share. Also, in
II-1
connection with the Acquisition of AIM, Gales Industries issued shares of its
common stock which, pursuant to the Merger, have become 253,214 shares of Common
Stock in the name of Luis Peragallo, 118,423 shares of Common Stock in the name
of Peter Rettaliata and 118,423 shares of Common Stock to Dario Peragallo. See
"Certain Relationships and Related Transactions - Transactions Relating to the
Acquisition and Other Related Transactions."
In February 2005, Gales Industries, in consideration for an investment of
$22,500 (the "22,500 Financing"), issued to the investor a 12% convertible
promissory note in the principal amount of $22,500 convertible at the price of
$0.11 per share into shares of Common Stock. As of November 30, 2005, the holder
of such note converted the principal of, and interest accrued on, such note into
226,334 shares of Common Stock. For no additional consideration, Gales
Industries issued a warrant to the investor to purchase 409,091 shares of Common
Stock at $.055 per share.
In August 2005, Gales Industries, in consideration for $45,000 in
aggregate investment (the "$45,000 Financing"), issued to the investors
convertible promissory notes in the aggregate principal amount of $45,000,
convertible at the price of $0.22 per share of Common Stock. These notes have
been repaid. For no additional consideration, Gales Industries issued to such
investors warrants to purchase the number of shares of Common Stock equal to the
number of shares into which the $45,000 Notes can be converted (204,545),
exercisable at $0.22 per share. See "Certain Relationships and Related
Transactions - Transactions Relating to Gales Industries."
In September 2005, Gales Industries borrowed $105,000 from investors (the
"$105,000 Financing") and, in connection therewith, issued to such investors
warrants to purchase an aggregate of 477,273 of shares of Common Stock at a
price of $0.22 per share. The Placement Agent served as agent in the $105,000
Financing and received compensation upon the same terms as provided in the
Offering, including five-year warrants to purchase 47,728 shares of Common Stock
at $0.22 per share..
As of November 30, 2005, Gales Industries issued to its officers stock
options to purchase shares of common stock as follows: 1,250,000 options to Mr.
Gales, and 1,200,000 options each to Mr. Giusto, Rettaliata and D. Peragallo.
See "Executive Compensation - Employment Agreements."
As of November 30, 2005 and December 15, 2005, Gales Industries issued an
aggregate of 900 shares of its convertible preferred stock to investors and
five-year warrants to the placement agent on the same terms as described below
with respect to the "First Closing" and the "Second Closing".
We believe that the issuances of shares described above were exempt from
registration under Section 4(2) of the Securities Act.
Shares Issued by the Company in Connection with the Merger:
As of November 30, 2005, pursuant to the Merger, the shareholders of Gales
Industries were issued an aggregate of 10,999,381 shares of our Common Stock by
the Company.
Pursuant to the Merger, we issued the following securities as of November
30, 2005 in consideration for the cancellation of the corresponding Gales
Industries securities: (i) stock options to four of our executives to purchase
in the aggregate 4,850,000 shares of Common Stock (the terms of which are
described in the footnotes to the table, "Executive Compensation-Option Grants
in Last Fiscal Year", above); (2) a convertible note in the principal amount of
$332,631 to each of Mr. Rettaliata and D. Peragallo, convertible into shares of
Common Stock at $0.40 per share; (3) five-year warrants to the investors in the
$45,000 Financing to purchase an aggregate of 204,545 shares of Common Stock at
the exercise price of $0.22 per share; (5) five-year warrants to the placement
II-2
agent for the $105,000 Financing to purchase 47,728 share of Common Stock at the
exercise price of $0.22 per share; and (6) five-year warrants to the investor in
the $22,500 Financing to purchase 409,091 shares of Common Stock at the exercise
price of $0.055 per share. All of the warrants described in this paragraph
provide for "cashless exercise".
As of November 30, 2005, in connection with the Merger, 679.328 shares of
Gales Series A Convertible Preferred Stock were exchanged for the same number of
shares of Preferred Stock of the Company (the "First Closing"). Each share of
Preferred Stock is convertible at $0.22 per share into 45,455 shares of Common
Stock.
Such 679.328 shares of Preferred Stock (not including shares of Preferred
Stock issuable as dividends) are convertible into an aggregate of 30,878,855
shares of our Common Stock. On December 15, 2005, we privately issued 220.672
shares of our Preferred Stock to accredited investors (the "Second Closing").
In connection with the Second Closing, the gross purchase price of
$2,206,720 was paid by investors. Together, in the First Closing and the Second
Closing, we issued 900 shares of Preferred Stock to investors and the investors
paid an aggregate purchase price of $9,000,000. Our issuances of shares of
Preferred Stock to investors in connection with the First Closing and the Second
Closing were in exchange for the cancellation of the same number of shares of
series A convertible preferred stock of Gales Industries, which merged into our
wholly-owned subsidiary as of November 30, 2005. The investors had acquired such
shares of Gales Industries preferred stock by paying Gales Industries (and its
successor) the aggregate purchase price of $9,000,000 in connection with Gales'
Industries private offering to accredited investors of up to 900 shares of its
series A convertible preferred stock, which offering was completed by Gales
Industries on the date of the First Closing with respect to 679.328 shares of
its preferred stock and on the date of the Second Closing with respect to
220.672 shares of its preferred stock. The terms of our Preferred Stock and
Gales Industries series A convertible preferred stock are substantially the
same.
The 220.672 shares of Preferred Stock which we issued in the Second
Closing (not taking into account additional shares of Preferred Stock issuable
to the investors as dividends) are convertible at any time, at the option of the
holders, into an aggregate of approximately 10,030,645 shares of our Common
Stock (or 45,455 shares of Common Stock for each share of Preferred Stock), and
will automatically convert into shares of Common Stock if and when this
registration statement, which covers such shares of Common Stock underlying the
Preferred Stock, is declared effective and such shares thereby become available
for resale under the Securities Act.
In connection with the First Closing and the Second Closing, GunnAllen
Financial, Inc. acted as the placement agent and received warrants, exercisable
during a five-year term, to purchase the number of shares of Common Stock
(4,090,950 shares) equal to 10% of the number of shares of Common Stock into
which the Preferred Stock sold in the Offering may be converted. Such warrants
have a "cashless exercise" feature and are exercisable at $0.22 per share.
We believe that the issuances of shares described above were exempt from
registration under Section 4(2) of the Securities Act.
Shares Issued by Ashlin Development Corporation Prior to the Merger:
On July 30, 2003, Ashlin issued to two Board members an aggregate of
approximately 160,075 shares of Common Stock in return for services performed.
The fair value of such shares of Common Stock was recorded as $24,000 in the
aggregate.
During each of the years ended December 31, 2004 and 2003, Ashlin granted
options to purchase approximately 40,019 shares of Common Stock to its chief
executive officer.
II-3
As of January 2005, as part of the Plan of Reorganization, Ashlin issued
approximately 240,112 shares of Common Stock to James Brown (who was then its
chairman and chief executive officer) upon its emergence from bankruptcy
protection. The fair value of such shares was recorded as $12,000 in the
aggregate. In March 2005, Ashlin issued approximately 256,119 shares of Common
Stock to Mr. Brown. The fair value of such 256,119 shares was determined to be
$32,000 in the aggregate. On August 13, 2003, Ashlin issued approximately 80,038
shares of Common Stock to Mr. Brown in consideration of his services as a member
of its Board of Directors.
In March 2005, Ashlin issued approximately 80,038 shares of Common Stock
to Global Business Resources, Inc., a Fort Lauderdale based consulting firm, as
partial compensation for services to Ashlin.
As of September 16, 2005, Ashlin issued approximately 80,038 shares of
Common Stock to a consultant in return for consulting services.
Other than such sales of shares and the securities issued in connection
with the Merger and the Offering described above, during the past three years,
we and Gales Industries did not sell any securities which were not registered
under the Securities Act. We believe that the issuances in connection with such
sales, the Merger and the Offering were exempt from registration under Section
4(2) of the Securities Act.
Item 27. Exhibits
Exhibit Nos.
- ------------
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 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 of Registrant's Form
8-K report, filed November 28, 2005).
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit
3.2 of the Registrant's registration statement on Form 10-SB,
filed on January 31, 2000; Commission File Number 000-29245).
3.3 Amendment to the Restated By-Laws of the Registrant dated
September 25, 2000 (incorporated by reference to Exhibit 3.3 of
the Registrant's annual report on Form 10-KSB, filed on April 16,
2000.
3.4 Amendment to the Restated By-Laws of the Registrant dated
November 10, 2000 (incorporated by reference to Exhibit 3.4 of
the Registrant's annual report on Form 10-KSB, filed on April 16,
2000..
4.1 Convertible Promissory Note, dated November 30, 2005, in the
amount of $332,631, from Gales Industries Incorporated (and
assumed by the Registrant) to Peter Rettaliata (incorporated by
reference to Exhibit 4.1 of the Registrant's Form 8-K report,
filed December 6, 2005.
4.2 Convertible Promissory Note, dated November 30, 2005, in the
amount of $332,631, from Gales Industries Incorporated (and
assumed by the Registrant) to 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 to be 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 [Intentionally left blank.]
II-4
Exhibit Nos.
- ------------
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.
5.1* Opinion of Eaton & Van Winkle, LLP
10.1 Asset Purchase Agreement between the Registrant and TeeZee, Inc.
dated October 15, 2004 (incorporated by reference of the
Registrant's Report of Form 8-K, filed on January 14, 2005.
10.2 Stock Purchase Agreement, dated as of July 25, 2005, by and among
Gales Industries Incorporated, Air Industries Machining, Corp.,
Luis Peragallo, Jorge Peragallo, Peter Rettaliata and Dario
Peragallo (incorporated by reference to Exhibit 10.2 of the
Registrant's Form 8-K report, filed December 6, 2005.
10.3 Secured Subordinated Promissory Note, dated November 30, 2005, in
the amount of $962,000, from Gales Industries Incorporated (and
assumed by the Registrant) to Luis Peragallo (incorporated by
reference to Exhibit 10.3 of the Registrant's Form 8-K report,
filed December 6, 2005.
10.4 Security Agreement, dated as of November 30, 2005, by and between
Gales Industries Incorporated (and assumed by the Registrant) and
Luis Peragallo (incorporated by reference to Exhibit 10.4 of the
Registrant's Form 8-K report, filed December 6, 2005.
10.5 Contract of Sale, dated as of November 7, 2005, by and between
DPPR Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1480 North Clinton Avenue, Bay
Shore, NY (incorporated by reference to Exhibit 10.5 of the
Registrant's Form 8-K report, filed December 6, 2005.
10.6 Contract of Sale, dated as of November 7, 2005, by and between
KPK Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1460 North Fifth Avenue and
1479 North Clinton Avenue, Bay Shore, NY (incorporated by
reference to Exhibit 10.6 of the Registrant's Form 8-K report,
filed December 6, 2005.
10.7 Employment Agreement, dated as of September 26, 2005, by and
between Gales Industries Incorporated (and assumed by the
Registrant) and Michael A. Gales (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 8-K report, filed December
6, 2005.
10.8 Employment Agreement, dated as of September 26, 2005, by and
between Louis A. Giusto and Gales Industries Incorporated (and
assumed by the Registrant) (incorporated by reference to Exhibit
10.8 of the Registrant's Form 8-K report, filed December 6, 2005.
10.9 Employment Agreement, dated as of September 26, 2005, by and
among Gales Industries Incorporated (and assumed by the
Registrant), Air Industries Machining, Corp. and Peter D.
Rettaliata (incorporated by reference to Exhibit 10.9 of the
Registrant's Form 8-K report, filed December 6, 2005.
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.
II-5
Exhibit Nos.
- ------------
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.
10.12 [Intentionally left blank.]
10.13 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.
10.14 2005 Stock Incentive Plan of Gales Industries Incorporated
(incorporated by reference to Exhibit 10.14 of the Registrant's
Form 8-K report, filed December 6, 2005.
10.15 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Michael A. Gales (incorporated by reference to Exhibit 10.15 of
the Registrant's Form 8-K report, filed December 6, 2005.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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
Form 8-K report, filed December 6, 2005.
16.1 Letter of Daszkal Bolton LLP to the Securities and Exchange
Commission pursuant to the requirements of Item 304(a)(3) of
Regulation S-K (incorporated by reference to Exhibit 16.1 of the
Registrant's Form 8-K/A report, filed December 28, 2005.
21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1
of the Registrant's Form 8-K report, filed December 6, 2005.
23.1* Consent of Counsel (contained in the opinion annexed as Exhibit
5.1).
23.2* Consent of accountants for use of their report.
Numbers with (*) are filed herewith.
II-6
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the Securities Act;
ii. To reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement;
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is a part of the registration
statement or made in a document incorporated or deemed incorporated by reference
II-7
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Bay Shore, New York on February 6, 2006.
ASHLIN DEVELOPMENT CORPORATION
By: /s/ Michael A. Gales
---------------------------
Michael A. Gales
Executive Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints Michael A. Gales
and Louis A. Giusto, or either of them, his true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities to sign any or all amendments
to this registration statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacities Date
/s/ Michael A. Gales Executive Chairman February 6, 2006
- -------------------------
Michael A. Gales
/s/ Louis A. Giusto Vice Chairman, Chief Financial
- ------------------------- Officer and Treasurer February 6, 2006
Louis A. Giusto
/s/ Peter D. Rettaliata Director, President and Chief
- ------------------------- Executive Officer February 6, 2006
Peter D. Rettaliata
II-9
/s/ Dario A. Peragallo Director, Executive Vice
- ------------------------- President February 6, 2006
Dario A. Peragallo
/s/ Seymour G. Siegel Director February 6, 2006
- -------------------------
Seymour G. Siegel
/s/ Rounsevelle W. Schaum Director February 6, 2006
- -------------------------
Rounsevelle W. Schaum
/s/ Ira A. Hunt Jr. Director February 6, 2006
- -------------------------
Ira A. Hunt Jr.
/s/ Stephen M. Nagler Director, Secretary February 6, 2006
- -------------------------
Stephen M. Nagler
/s/ James A. Brown Director February 6, 2006
- -------------------------
James A. Brown
II-10
ASHLIN DEVELOPMENT CORPORATION
INDEX OF EXHIBITS FILED WITH REGISTRATION STATEMENT
Exhibit Nos.
- ------------
5.1 Opinion of Eaton & Van Winkle LLP
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.
23.1 Consent of Counsel (contained in the opinion annexed as Exhibit
5.1)
23.2 Consent of accountants for use of their report.
II-11
Exhibit 5.1 - Opinion re legality of the common stock being registered
EATON & VAN WINKLE LLP
3 Park Ave, 16th Floor
New York, New York 10016
February 6, 2006
Ashlin Development Corporation
(Name being changed to Gales Industries Incorporated)
1479 North Clinton Avenue
Bay Shore, NY 11706
Re: Registration Statement on Form SB-2
Gentlemen:
We have acted as counsel to Ashlin Development Corporation, a Florida
corporation (the "Company"), in connection with the filing of a Registration
Statement on Form SB-2 (the "Registration Statement") with the Securities and
Exchange Commission (the "Commission"), with respect to the registration under
the Securities Act of 1933, as amended (the "Act"), of 60,924,388 shares (the
"Shares")of the Company's $.001 par value per share common stock (the "Common
Stock"), of which 49,438,663 shares (the "Underlying Shares") are issuable upon
exercise or conversion of warrants, preferred stock or convertible notes.
In our capacity as counsel, we are familiar with the proceedings taken by
the Company in connection with the authorization, issuance and sale of the
Shares. In addition, in connection with the registration of the foregoing
securities, we have reviewed such documents and records as we have deemed
necessary to enable us to express an opinion on the matters covered hereby,
including, but not limited to, certain agreements relating to the authorization,
issuance, registration and sale of such securities and copies of resolutions of
the Company's Board of Directors authorizing the issuance of such securities and
their registration pursuant to the Registration Statement.
In rendering this opinion, we have (a) assumed (i) the genuineness of all
signatures on all documents examined by us, (ii) the authenticity of all
documents submitted to us as originals, and (iii) the conformity to original
documents of all documents submitted to us as photostatic or conformed copies
and the authenticity of the originals of such copies; and (b) relied on (i)
certificates of public officials and (ii) as to matters of fact, statements and
certificates of officers and representatives of the Company.
Based upon the foregoing, we are of the opinion that the Shares have been
validly issued and are fully paid and non-assessable except that the Underlying
Shares will be validly issued, fully paid and non-assessable when issued in
accordance with the terms of the corresponding warrants, preferred stock or
convertible notes, as the case may be.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement. In giving the foregoing consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section 7
of the Act or the rules and regulations of the Securities and Exchange
Commission thereunder.
Nothing herein shall be deemed to relate to or constitute an opinion
concerning any matters not specifically set forth above. The foregoing opinions
relate only to matters of the internal law of the State of Florida and Delaware
without reference to conflict of laws and to matters of federal law, and we do
not purport to express any opinion on the laws of any other jurisdiction. We
assume no obligation to supplement this opinion if, after the date hereof,
applicable laws change, or we become aware of any facts that might change our
opinions, as expressed herein.
The opinion expressed herein may be relied upon by the Company in
connection with the registration of the Shares, as contemplated by, and in
conformity with, the Registration Statement. With the exception of the
foregoing, the opinion expressed herein may not be relied upon by any other
person without our prior written consent.
We express no opinion as to compliance with the securities or "blue sky"
laws of any state or country in which the Shares are proposed to be offered and
sold.
Very truly yours,
Eaton & Van Winkle LLP
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTING FIRM
To the Board of Directors
Ashlin Development Corporation
(Name being changed to Gales Industries Incorporated)
We consent to the inclusion in the foregoing Registration Statement on Form SB-2
of (1) our report, dated January 13, 2006, relating to the financial statements
of Air Industries Machining, Corp. as of December 31, 2004 and 2003 and for the
years ended December 31, 2004 and 2003, and (2) our report, dated January 13,
2006, relating to the financial statements of Air Industries Machining, Corp. as
of September 30, 2005 and 2004 and for the nine-month periods ended September
30, 2005 and 2004. We also consent to the reference to our firm under the
caption "Experts".
/s/ Bildner & Giannasco, LLP
---------------------------
Bildner & Giannasco, LLP
New York, New York
February 6, 2006
GALES INDUSTRIES INCORPORATED
PLACEMENT AGENCY AGREEMENT
Dated as of September 26, 2005
GunnAllen Financial Inc.
5002 W. Waters Ave
Tampa, Florida 33634
Re: Private Placement Offering
Ladies and Gentlemen:
Gales Industries Incorporated, a Delaware corporation (the "Company"
or "GI") proposes to offer (the "Offering") for sale in a private offering
pursuant to Section 4(2) and/or Regulation D promulgated under the Securities
Act of 1933, as amended (the "Act"), an aggregate of up to $9,000,000 of units
("Units"), each Unit comprised of (i) ten (10) shares of Series A convertible
preferred stock, par value $.0001 per share ("Preferred Stock") of the Company.
The shares of Preferred Stock and Units are sometimes referred to as the
"Offering Securities". Sales of the Offering Securities shall be made solely to
"Accredited Investors" as defined in Rule 501 promulgated by the Securities and
Exchange Commission ("SEC"). This letter agreement shall confirm our agreement
concerning GunnAllen Financial, Inc. acting as our exclusive placement agent
(the "Placement Agent" or "GAF") in connection with the offer and sale of the
Offering Securities in the Offering.
The Company shall prepare and deliver to the Placement Agent copies
of a confidential offering memorandum ("Offering Memorandum"), relating to,
among other things, the Company, the Offering and the Offering Securities. The
Offering Memorandum, including all exhibits and appendices thereto (including,
without limitation, the Subscription Agreement and Investor Questionnaire,
referred to sometimes as "Subscription Documents" ) and documents delivered
therewith, are referred to herein as the "Disclosure Statement" and shall
include any supplements or amendments required thereto in accordance with this
Agreement.
l. Appointment of Placement Agent.
On the basis of the representations and warranties contained herein, and
subject to the terms and conditions set forth herein, the Company hereby
appoints GunnAllen Financial, Inc. as its exclusive Placement Agent and grants
to you the exclusive right to offer, as its agent, the Units and the Bridge
Offering (as defined in Section 2(h) below) pursuant to the terms of this
Agreement. On the basis of such representations and warranties, and subject to
such conditions, you hereby accept such appointment and agree to use your
reasonable best efforts to secure subscriptions to purchase up to $9,000,000 of
Units in the Offering and the Bridge Offering. The Company understands that, in
soliciting purchasers of Units and the Bridge Offering and in assuming its other
obligations hereunder, the Placement Agent will be acting solely as agent for
the Company, and not as principal, and that the Placement Agent's responsibility
is limited to acting on a "reasonable best efforts" basis under the
circumstances in attempting to arrange the sale of Units, with no understanding,
expressed or implied, of a commitment on the Placement Agent's part to
underwrite or purchase the Units or the Bridge Offering.
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2. Terms of the Offering and Bridge Offering.
(a) The Offering shall consist of up to 90 Units of the Company
comprised of an aggregate of 900 shares of Preferred Stock. The Offering shall
be made on a "best efforts - all or none" basis as to $6,500,000 of Units (the
"Minimum Offering") and on a "best efforts" basis as to an additional $1,500,000
of Units (the "Maximum Offering"). In addition, the Offering may be expanded at
the option of the Placement Agent and the Company by an additional $1,000,000 of
Units. Unless the Minimum Offering is sold, no Units will be sold prior to the
expiration of the Offering Period and all subscriptions will be returned to
subscribers without interest or deduction.
(b) The terms of the Preferred Stock shall be in form and substance
acceptable to the Placement Agent, and shall be substantially in accordance with
the terms and conditions contained in Exhibit A annexed hereto.
(c) The Offering shall commence on the date that the Company
delivers the Disclosure Statement, in form and substance satisfactory to the
Placement Agent and shall expire at 3:00 p.m., New York time, on October 31,
2005 and may be extended for up to one additional 45 day period at the
discretion of the Placement Agent; provided, however, the Minimum Offering must
be subscribed for prior to 3:00 pm on October 31, 2005. Such period, as same may
be so extended, shall hereinafter be referred to as the "Offering Period."
(d) Each prospective investor ("Prospective Investor") who desires
to purchase Units shall deliver to the Placement Agent one copy of the
Subscription Documents and immediately available funds in the amount necessary
to purchase the number of Units such Prospective Investor desires to purchase.
The minimum amount of Units purchased by each Prospective Investor shall equal
$100,000 unless lesser subscriptions are accepted mutually by the Placement
Agent and the Company. The Placement Agent shall not have any obligation to
independently verify the accuracy or completeness of any information contained
in any Disclosure Statement or the authenticity, sufficiency, or validity of any
check delivered by any Prospective Investor in payment for Units.
(e) The Placement Agent and the Company shall establish a
non-interest bearing escrow account (the "Escrow Account") with Signature Bank
of New York (the "Escrow Agent"), at the cost of the Company. The Placement
Agent shall deliver each check (or cause each wire of funds or funds transfers)
received from a Prospective Investor to the Escrow Agent for deposit in the
Escrow Account in accordance with applicable rules of the National Association
of Securities Dealers, Inc. ("NASD") and shall deliver the executed copies of
the Subscription Documents received from such Prospective Investor to the
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Company. The Company shall notify the Placement Agent promptly of the acceptance
or rejection or any subscription. In the event that the Company determines to
reject a subscription, it shall have a valid business or legal purpose in
rejecting such subscription. No funds shall be released from the escrow account
except upon written authorization of both parties.
(f) If subscriptions for the Minimum Offering are not received from
Prospective Investors prior to October 31, 2005 and accepted by the Company and
the Placement Agent, the Offering shall be canceled, all funds received and held
in the Escrow Account shall be refunded in full to te Prospective Investors
without interest or deduction. Assuming that the Minimum Offering is completed
on or before October 31, 2005, then additional subscriptions shall be accepted
into escrow up to the Maximum Offering (and any additional over subscriptions up
to $1,000,000) and additional closings shall be held from time to time.
(g) You may engage other persons selected by you to assist you in
the Offering (each such broker/dealers being hereinafter referred to as a
"Selling Group Member") and you may allow such Selling Group Member such part of
the compensation and payment of expenses payable to you under Section 6 hereof
as you shall determine. Any such Selling Group Member shall be a member firm in
good standing as a broker-dealer under the rules of the NASD. The Company hereby
makes such representations and warranties to, and covenants and agreements with,
any Selling Group Member (including an agreement to indemnify such Selling Group
Member on terms substantially similar to Section 17 hereof) as provided herein
and each Selling Group Member shall make representations, warranties and
covenants to the Company identical to those made by the Placement Agent to the
Company in Section 4 hereof and shall agree to indemnify the Company in the
manner set forth in Section 17 hereof. The Placement Agent shall indemnify and
hold harmless the Company from any and all claims of any selling group member
for fees or other compensation. In addition to the foregoing, the Placement
Agent hereby agrees that, at no additional cost to the Company, Atlas Capital
Services, LLC ("Atlas Capital") (subject to negotiation between GAF and Atlas
Capital of a mutually acceptable selling agent agreement) shall have the right
to participate as a selling agent in the Offering with respect to obtaining
subscriptions for gross proceeds of up to $3,000,000 and, in the event that the
Placement Agent is unable to secure subscriptions for at least $6,500,000 in
gross proceeds (excluding subscriptions secured by Atlas Capital) on or prior to
a date which is 45 days from the date of delivery of the final Disclosure
Statement to GAF, Atlas Capital shall have the right to participate as a selling
agent in the Offering with respect to such further amount equal to the
difference between $6,500,000 and the amount of subscriptions secured by GAF as
of such 45th day.
(h) The Company hereby grants GAF the right to obtain subscribers
for an offering of promissory notes and warrants prior to the commencment of the
Offering ("Bridge Offering") in order to provide the Company with operating
funds pending the initial Closing of the Offering. The principal amount of the
notes shall not exceed $105,000, and the notes shall be repayable in full upon
the earlier of (i) one year from the date of issuance or (ii) within five (5)
days of the initial Closing of the Offering. The notes shall be convertible at
the option of the holder into shares of Common Stock at a conversion price equal
to $0.22. In addition, the investors in the Bridge Offering shall have the
right, at their option, to subscribe in the Offering by utilizing the principal
amount of the notes for the subscription price in the Offering. The warrants to
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be issued to the Bridge Offering investor shall have an exercise price of $0.22
per share, and shall be exercisable for a period of five years from the date of
issue, and shall provide for piggyback registration rights for any registration
statement filed by the Company as contemplated for investors in the Offering.
GAF shall be entitled to receive compensation for the Bridge Offering in an
amount and of the same nature as provided in Section 5 below, which amounts
shall be paid at closing of the Bridge Offering.
3. Interim Closings/Final Closing
(a) Subject to the conditions set forth in Section 8 hereof, if
subscriptions for the Minimum Offering have been received in escrow prior to the
expiration of the Offering Period and accepted by the Company, a closing under
this Agreement (the "Initial Closing") shall be held at the offices of counsel
to the Placement Agent, or such other place as the parties may agree, as soon as
practicable following the date upon which the Placement Agent and the Company
confirm in writing to each other that subscriptions for the Minimum Offering
have been accepted or at such other place, time, or date as the Company and you
shall agree upon. The date upon which the Initial Closing is held shall
hereinafter be referred to as the "Initial Closing Date."
(b) At any time prior to the expiration of the Offering Period
following the Initial Closing and after receipt in escrow and acceptance by the
Company of subscriptions for the sale of additional Units in increments of at
least $500,000 ("Interim Closing Amount") or such other amounts as may be agreed
upon from time to time up to the Maximum Offering, one or more closings (each an
"Interim Closing") shall take place in the manner herein set forth with respect
to the Initial Closing. In the event that the Offering Period expires prior to
receipt in escrow and acceptance by the Company of an Interim Closing Amount, a
final closing shall be held at such time regardless of the amount then held in
escrow. The final Interim Closing to be held in accordance herewith shall be
deemed the "Final Closing" and the date thereof shall be the "Final Closing
Date". References herein to a "Closing" shall mean the Initial Closing, any
Interim Closing or the Final Closing, as the context requires, and the date
thereof shall be referred to as a "Closing Date."
4. Representation, Warranties and Covenants of the Placement Agent
The Placement Agent represent, warrants and covenants to the Company
as follows:
(a) The Placement Agent is duly formed and validly existing and in
good standing under the laws of its State of formation.
(b) The Placement Agent is, and at the time of each Closing will be,
a member in good standing of the NASD.
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(c) Sales of Units by the Placement Agent will only be made in such
jurisdictions in which the Placement Agent or a Selling Group Member is a
registered broker-dealer or where an applicable exemption from such registration
exists.
(d) Offers and sales of Units by the Placement Agent will be made
only in accordance with this Placement Agreement and in compliance with the
provisions of Regulation D an/or Section 4(2) of the Securities Act (it being
understood and agreed that the Placement Agent shall be entitled to rely upon
the information and statements provided by the Prospective Investor in the
Subscription Documents), and the Placement Agent will furnish to each
Prospective Investor a copy of the Disclosure Statement prior to accepting any
subscription for the Units.
5. Compensation
(a) If subscriptions for the Minimum Offering are received in escrow
prior to the expiration of the Offering Period and accepted by the Company, you
shall be entitled, on each Closing Date, as compensation for your services as
Placement Agent under this Agreement, to selling commissions equal to 6 % and a
management fee of 4% of the gross proceeds received by the Company from the sale
of the Units effected at each Closing. In addition, the Placement Agent will
receive a non-accountable expense allowance equal to 2% of the gross proceeds of
the Offering. Such amounts may be deducted by GAF out of the funds received from
the sale of the Units and deposited in the Escrow Account, on each Closing Date.
(b) In addition to the cash compensation payable pursuant to clause
(a) above, the Placement Agent shall be entitled to receive common stock
purchase warrants to purchase an aggregate of 10% ("Agent Warrants") of the
shares underlying the Preferred Stock sold in the Offering. The exercise price
shall be equal to $0.22 per share. The Agent Warrants shall include provisions
for "cashless exercise", be exercisable for term five years from the final
closing date of the Offering and contain registration rights similar to those
granted to investors in the Offering. The Agent Warrants shall otherwise be in
form and substance acceptable to the Placement Agent.
6. Representations and Warranties of the Company
(a) The Company represents and warrants to, and agrees with, the
Placement Agent that:
(i) Assuming the accuracy of the representations and
warranties of the Prospective Investors set forth in the Subscription Documents
and the representations and warranties of the Placement Agent set forth herein,
the Disclosure Statement (a) contains, and at all times during the period from
the date hereof to and including each Closing Date, will contain all information
required to be contained therein, if any, pursuant to Regulation D and all
applicable federal and/or state securities and "blue sky" laws, and (b) does
not, and during such period will not, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances made
therein not misleading. Each contract, agreement, instrument, lease, license, or
other document required to be described in the Disclosure Statement shall be,
and have been, accurately described therein.
5
(ii) No information provided by the Company to Prospective
Investors in addition to the Disclosure Statement shall contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein in light of
circumstances made therein not misleading.
(iii) All offers and sales by the Company of any of its
Securities prior to the date hereof have been in compliance with all federal and
state securities laws.
(iv) The Company is, and at all times during the period from
the date hereof to and including each Closing Date will be, a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware, with full corporate power and authority, and has obtained all
necessary consents, authorizations, approvals, orders, licenses, certificates,
and permits and declarations of and from, and has made filings with, all
foreign, federal, state and local authorities, to own, lease, license, and use
its properties and assets and to conduct its business as presently conducted as
described in the Disclosure Statement and/or in any such case where the failure
to have any of the foregoing would not have a material adverse effect on the
Company's presently conducted business. As of the date hereof, the Company is,
and at all times during the period from the date hereof to and including each
Closing Date, duly qualified to do business and is in good standing in every
jurisdiction in which its ownership, leasing, licensing, or use of property and
assets or the conduct of its business makes such qualification necessary except
where the failure to be so qualified would not have a material adverse effect on
the Company's business.
(v) The Company shall have at each Closing an authorized
capitalization consisting of (A) 100,000,000 shares of Common Stock, $.0001 par
value and (ii) 1,000,000 shares of preferred stock, par value $.0001 per share,
1,000 of which have been designated as Series A, and none of which are issued
and outstanding as of the date hereof). Each issued and outstanding share of
Common Stock and preferred stock is duly authorized, validly issued, fully paid,
and non-assessable, without any personal liability attaching to the ownership
thereof solely by being such a holder, and has not been issued and is not owned
or held in violation of any preemptive rights of stockholders. Other than as
described in the Disclosure Statement, there is no commitment, plan, or
arrangement to issue, and no outstanding option, warrant, or other right calling
for the issuance of, any share of capital stock of the Company or any security
or other instrument which by its terms is convertible into, exercisable for, or
exchangeable for capital stock of the Company. There is outstanding no security
or other instrument which by its terms is convertible into or exchangeable for
any class of capital stock of the Company, except as may be properly described
in the Disclosure Statement.
6
(vi) As of the date hereof there is no, and as of each Closing
Date shall not be any, litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending or to the Company's
knowledge threatened, with respect to the Company, or its respective operations,
businesses, properties, or assets, except as properly described in the
Disclosure Statement or such as individually or in the aggregate do not now have
and will not in the future have a material adverse effect upon the operations,
business, properties, or assets of the Company. The Company is not, nor as of
each Closing Date shall be, in violation of, or in default with respect to, any
law, rule, regulation, order, judgment, or decree, except as properly described
in the Disclosure Statement or such as individually or in the aggregate do not
have and will not in the future have a material adverse effect upon the
operations, business, properties, or assets of the Company; nor is the Company
required to take any action in order to avoid any such violation or default.
(vii) As of the date hereof, the Company has, and at all times
during the period from the date hereof to and including the Final Closing Date,
shall have, good and marketable title in fee simple absolute to all real
properties and good title to all other properties and assets which the
Disclosure Statement indicate are owned by it, free and clear of all liens other
than liens for taxes not yet due and payable, charges, pledges, mortgages,
security interests, and encumbrances, except as may be properly described in the
Disclosure Statement or such as in the aggregate do not now have and will not in
the future have a material adverse effect (individually or in aggregate) upon
the financial condition, results of operations, business, properties, or assets
of the Company.
(viii) As of the date hereof, the Company is not, and at all
times during the period from the date hereof to and including the Final Closing
Date, shall not be, in violation or breach of, or in default with respect to
complying with any material provision of any material contract, agreement,
instrument, lease, license, arrangement, other than any such violation or breach
which would not have, individually or in the aggregate, a material adverse
effect on the Company's business, and each such contract, agreement, instrument,
lease, license, arrangement, and understanding is in full force and effect and
is the legal, valid, and binding obligation of the parties thereto enforceable
as to them in accordance with its terms. The Company enjoys peaceful and
undisturbed possession under all leases and licenses under which it is operating
as of the date hereof. Except as disclosed in the Disclosure Statement or as
contemplated under Section 7(i) hereof, as of the date hereof, the Company is
not a party to or bound by any contract, agreement, instrument, lease, license,
arrangement, or understanding, or subject to any charter or other restriction,
which has had or may in the future have a material adverse effect on the
financial condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Company. The Company is not in violation
or breach of, or in default with respect to, any term of its Certificate of
Incorporation or By-Laws.
(ix) There is no right under any patent, patent application,
trademark, trademark application, trade name, service mark, copyright,
franchise, or other intangible property or asset (all of the foregoing being
herein called "Intangibles") necessary to the business of the Company as
presently conducted, except as disclosed in the Disclosure Statement. To the
knowledge of the Company, there is no Intangible of others which has had or may
in the future have a materially adverse effect on the financial condition,
results of operations, business, properties, assets, liabilities, or future
prospects of the Company.
7
(x) To its best knowledge, the Company has not infringed, is
infringing, or has received notice of infringement with respect to asserted
Intangibles of others. To the best knowledge of the Company, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company, materially infringe upon any like right of any other person or
entity. The Company (i) owns or has the right to use, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions of any kind whatsoever, sufficient patents, trademarks,
service marks, trade names, copyrights, licenses and right with respect to the
foregoing, to conduct its business as presently conducted except as set forth in
the Disclosure Statement, and (ii) except as set forth in the Disclosure
Statement, is not obligated or under any liability whatsoever to make any
payments by way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any patent, trademark, service mark, trade name, copyright,
know-how, technology or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business as now conducted or otherwise.
The Company has direct ownership of title to all its intellectual property
(including all United States and foreign patent applications and patents), other
proprietary rights, confidential information and know-how; owns all the rights
to its Intangibles as are currently used in or have potential for use in its
business.
(xi) The Company has all requisite corporate power and
authority to execute, deliver, and perform this Agreement and to consummate the
transactions contemplated hereby. All necessary corporate proceedings of the
Company have been duly taken to authorize the execution, delivery, and
performance by the Company of this Agreement and the consummation of the
transactions contemplated hereby. This Agreement has been duly authorized,
executed, and delivered by the Company, is a legal, valid, and binding
obligation of the Company, and is enforceable as to the Company in accordance
with its terms. Assuming the accuracy of the representations and warranties of
the Prospective Investors set forth in the Offering Memorandums and Subscription
Documents and the representations and warranties of the Placement Agent set
forth herein, no consent, authorization, approval, order, license, certificate,
or permit of or from, or registration, qualification, declaration, or filing
with, any federal, state, local, foreign, or other governmental authority or any
court or other tribunal is required by the Company for the execution, delivery,
or performance by the Company of this Agreement, the consummation of the
transactions contemplated hereby and thereby, and such consents, authorizations,
approvals, registrations, and qualifications as may be required under all
applicable federal and/or securities or "blue sky" laws in connection with the
issuance, sale, and delivery of the Units pursuant to this Agreement.
(xii) No consent of any party to any material contract,
agreement, instrument, lease, license, arrangement, or understanding to which
the Company is a party, or to which any of its properties or assets are subject,
is required for the execution, delivery, or performance of this Agreement, and
the consummation of the transactions contemplated hereby and thereby, and such
execution, delivery and performance will not violate, result in a breach of,
conflict with, or (with or without the giving of notice or the passage of time
or both) entitle any party to terminate or call a default under any such
8
contract, agreement, instrument, lease, license, arrangement, or understanding,
violate or result in a breach of any term of the certificate of incorporation or
by-laws of the Company, or assuming the accuracy of the representations and
warranties of the Prospective Investors set forth in the Disclosure Statement
and the representations and warranties of the Placement Agent set forth herein,
violate, result in a breach of, or conflict with any law, rule, regulation,
order, judgment, or decree binding on the Company or to which any of its
operations, businesses, properties, or assets are subject.
(xiii) The Offering Securities shall conform to all statements
relating thereto as contained in the Disclosure Statement. The Securities, when
issued and delivered to the Prospective Investor pursuant to the terms of this
Agreement, shall be duly authorized, validly issued, fully paid and
nonassessable, without any personal liability attaching to the ownership thereof
solely by being such holder and shall not have been issued in violation of any
preemptive rights of stockholders.
(xiv) Except and to the extent described in or referred to in
the Disclosure Statement (i) no holders of any securities of the Company or of
any options, warrants or other convertible or exchangeable securities of the
Company have the right to include any securities issued by the Company on any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Securities Act of 1933, as amended, and
(ii) no person or entity holds any anti-dilution or pre-emptive rights with
respect to any securities of the Company.
(xv) During the period commencing on the date hereof and
ending on the Final Closing Date, the Company shall not, without prior notice to
and consent of the Placement Agent: (A) issue any securities or incur any
liability or obligation, primary or contingent, for borrowed money; (B) except
as described under Section 7(i) hereof, enter into any transaction not in the
ordinary course of business; or (C) declare or pay any dividend on its capital
stock.
(xvi) Neither the Company nor any of its officers, directors,
or affiliates, has engaged or will engage, directly or indirectly, in any act or
activity that may jeopardize the status of the offering and sale of the Units as
an exempt transaction under the Act or under all applicable federal and/or state
securities or "blue sky" laws of any jurisdiction in which the Units may be
offered or sold.
(xvii) All contracts, agreements, licenses and leases
described in the Disclosure Statement have been accurately described and all
material terms are contained in such description.
9
(xviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xix) Subsequent to the dates as of which information is given in
the Offering Memorandum through the Closing Date, and except as may otherwise be
properly described in the Offering Documents, (A) the Company has not, except in
the ordinary course of business, incurred any liability or obligation, primary
or contingent, for borrowed money, (B) there has not been any material change in
the capital stock short-term debt or long-term debt of the Company, (C) the
Company has not purchased any of its outstanding capital stock nor declared or
paid any dividend or distribution of any kind on its capital stock, (D) the
Company has not sustained any material loss or interference with its businesses
or properties from fire, floor, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and (E) there has not been any material adverse change
or any development which the Company reasonably believes could result in a
prospective material adverse change, in the financial condition results of
operations, business, properties, assets, liabilities or future prospects of the
Company.
(xx) To the knowledge of the Company after reasonable investigation,
during the past five years, none of the current officers or directors of the
Company have been:
(a) The subject of a petition under the federal bankruptcy
laws or any state insolvency law filed by or against them, or by a receiver,
fiscal agent or similar officer appointed by a court for their business or
property, or any partnership in which any or them was a general partner at or
within two years before the time of such filing, or any corporation or business
association of which any of them was an executive officer at or within two years
before the time of such filing;
(b) Convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(c) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining any of them from, or
otherwise limiting, any of the following activities:
(i) acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the Commodity
Futures Trading Commission, or an associated person of any of the foregoing, or
as an investment adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment company, bank, savings
and loan association or insurance company, or engaging in or continuing any
conduct or practice in connection with any such activity;
10
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection with any
violation of federal or state securities law or federal commodity laws.
(d) the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any federal or state authority
barring, suspending or otherwise limiting for more than sixty (60) days their
right to engage in any activity described in paragraph (c)(i) above, or be
associated with persons engaged in any such activity;
(e) found by any court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission to have violated any federal
or state securities law, and the judgment in such civil action or finding by the
Commission has not been subsequently reversed, suspended or vacated; or
(f) found by a court of competent jurisdiction in a civil
action or by the Commodity Futures Trading Commission to have violated any
federal commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
(g) found by a court or an administrative agency to have or is
alleged to have violated any foreign securities laws.
(xxi) Except as disclosed in the Disclosure Documents, there are no
claims, payments, issuances, arrangements or understandings, whether oral or
written, for services in the nature of a consultant's, finder's or origination
fee with respect to the sale of the Securities other than to GAF or a selling
agent retained by GAF.
(xxii) All prior offerings of the Company's securities complied in
all respects with the Securities Act and the rules and regulations promulgated
thereunder and all applicable Blue Sky laws. To its knowledge, no person owning
securities of the Company is entitled to a right to require rescission of the
securities held by such person. The Company has not, directly or indirectly,
solicited any offer to buy or offered to sell any Securities or any other
securities of the Company during the twelve-month period ending on the date
hereof which offer to buy or offer to sell would be integrated with the Offering
contemplated hereunder.
7. Covenants of the Company
The Company covenants that it will:
11
(a) Notify you immediately, and confirm such notice in writing, (i)
when any event shall have occurred during the period commencing on the date
hereof and ending on the Final Closing Date, as a result of which the Disclosure
Statement would include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and (ii) of the receipt of any notification with respect to the
modification, rescission, withdrawal, or suspension of the qualification or
registration of the Units, or of an exemption from such registration or
qualification, in any jurisdiction. The Company will use its best efforts to
prevent the issuance of any such modification, rescission, withdrawal, or
suspension and if you so request, to obtain the lifting thereof as promptly as
possible.
(b) Not make any supplement or amendment to the Disclosure Statement
unless such supplement or amendment complies with the requirements of the Act
and Regulation D and the applicable federal and/or state securities and "blue
sky" laws and unless you shall have approved of such supplement or amendment in
writing. If, at any time during the period commencing on the date hereof and
ending on the Final Closing Date, any event shall have occurred as a result of
which the Disclosure Statement contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, or if, in the opinion of counsel
to the Company or counsel to the Placement Agent, it is necessary at any time to
supplement or amend the Disclosure Statement to comply with the Act, Regulation
D, or any applicable securities or "blue sky" laws, the Company will promptly
prepare an appropriate supplement or amendment (in form and substance
satisfactory to you) which will correct such statement or omission or which will
effect such compliance.
(c) Deliver without charge to the Placement Agent such number of
copies of the Disclosure Statement and any supplement or amendment thereto as
may reasonably be requested by the Placement Agent.
(d) Cooperate with counsel to the Placement agent to qualify the
offer and sale of the Securities for an exemption from registration under the
securities or "blue sky" laws of such jurisdictions as GAF may reasonably
request; provided, however, that the Company will not be obligated to qualify to
do business as a dealer in securities in any jurisdiction in which it is not so
qualified. The Company will not consummate any sale of its securities in any
jurisdiction or in any manner in which such sale may not be lawfully made; in
this regard the Company shall be entitled to rely on the representations of
Prospective Investors in the Subscription Documents.
(e) At all times during the period commencing on the date hereof and
ending on the Final Closing Date, provide to each Prospective Investor or his
Purchaser Representative (as defined in Regulation 501), if any, on request,
such information (in addition to that contained in the Disclosure Statement)
concerning the Offering, the Company and any other relevant matters, as it
possesses or can acquire without unreasonable effort or expense, and to extend
to each Prospective Investor or his Purchaser Representative, if any, the
opportunity to ask questions of, and receive answers from executives of the
Company concerning the terms and conditions of the Offering and the business of
12
the Company and to obtain any other additional information, to the extent it
possesses the same or can acquire it without reasonable effort or expense, as
such Prospective Investor or Purchaser Representative may consider necessary in
making an informed investment decision or in order to verify the accuracy of the
information furnished to such Prospective Investor or Purchaser Representative,
as the case may be.
(f) Disclose to each Prospective Investor, in writing, any material
relationship between such Prospective Investor's Purchaser Representative, if
any, or its affiliates, on the one hand, and the Company or its affiliates, on
the other hand, which, to the knowledge of the Company, then exists or is
understood to be contemplated or has existed at any time during the previous two
years and any compensation received or to be received as a result of such
relationship.
(g) Apply the net proceeds from the sale of the Units as set forth
in the Disclosure Statement.
(h) Not, during the period commencing on the date hereof and ending
on the Final Closing Date, issue any press release or other communication, or
hold any press conference with respect to the Company, its financial condition,
results of operations, business, properties, assets, or liabilities, or the
Offering, without the Placement Agent's prior written consent, except as
required by applicable securities laws.
(i) During the period commencing on the date hereof and ending on
the Initial Closing Date, provide the Placement Agent and the Prospective
Investors with all material information and/or changes ("Updated Information")
regarding the terms of (i) the acquisition ("AIM Acquisition") of Air Industries
Machining Corp. ("AIM") as set forth in Stock Purchase Agreement dated as of
July 25, 2005 among the Company, AIM and the other parties thereto (ii) the
execution and delivery of an agreement providing for the merger ("Shell Merger")
of the Company with a reporting company under the Securities and Exchange Act of
1934, as amended and the subsequent consummation of the Shell Merger as
contemplated under Section 9(f) hereof, and (iii) any credit facility obtained
by the Company to provided financing for the AIM Acquisition and related
transactions. Prior to the Initial Closing, the Company shall provide each
Prospective Investor with a supplement to the Disclosure Statement setting forth
in reasonable detail, satisfactory to the Placement Agent and its counsel, the
Updated Information.
8. Payment of Expenses
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The Company hereby agrees to pay all fees, charges, and expenses
incident to the performance by the Company of its obligations hereunder,
including, without limitation, all fees, charges, and expenses in connection
with: (i) the preparation, printing, filing, distribution, and mailing of the
Disclosure Statement and all other documents relating to the Offering, and any
supplements or amendments thereto, including the cost of all copies thereof;
(ii) the issuance, sale, transfer, and delivery of the Securities, including any
transfer or other taxes payable thereon and the fees of any transfer agent or
registrar; (iii) the registration or qualification of the or the securing of an
exemption therefrom under state or foreign "blue sky" or securities laws,
including without limitation, filing fees payable in the jurisdictions in which
such registration or qualification or exemption therefrom is sought and
disbursements in connection therewith; (iv) filing fees payable to the SEC, if
any; (v) the retention of the Escrow Agent, including the fees and expenses of
the Escrow Agent for serving as such and the fees and expenses of its counsel,
if any; (vi) the costs and expenses of an independent party to complete a
credit, criminal and other background due diligence search on the Company's
executive officers, which costs and expenses shall not exceed the sum of
approximately $1,500, in the event that the Placement Agent determines such
search is necessary and (vi) fees of Placement Agent's counsel in the amount of
$45,000, of which $5,000 has previously been paid and the remainder shall be
paid at the initial closing.
9. Conditions of Placement Agent's Obligations.
The obligations of the Placement Agent pursuant to this Agreement
shall be subject, in its discretion, to the continuing accuracy of the
representations and warranties of the Company contained herein and in each
certificate and document contemplated under this Agreement to be delivered to
the Placement Agent, as of the date hereof and as of each Closing Date, with
respect to the performance by the Company of its obligations hereunder, and to
the following conditions:
(a) At each Closing, the Placement Agent shall have received the
favorable opinion of Eaton & Van Winkle LLP, counsel for the Company, dated each
Closing Date, addressed to the Placement Agent, and in form and scope
satisfactory to counsel for the Placement Agent, to the effect that:
(i) the Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware, with
full corporate power and authority to own, lease, license, and use its
properties and assets and to conduct its business in the manner described in the
Disclosure Statement and is duly qualified to do business and is in good
standing as a foreign corporation in all jurisdictions where registered,
licensing or use of property and assets or the conduct of its business makes
such qualification necessary (except where the failure to so qualify would not
have a material adverse effect upon the Company or its business);
(ii) the Company has, as of the date hereof, an authorized,
and, to such counsel's knowledge, outstanding capitalization as set forth in the
Disclosure Statement. No owner of securities of the Company is entitled as a
result of the Offering, to pre-emptive rights to acquire securities of the
Company under either the general corporation laws of the State of Delaware or
14
the Certificate of Incorporation of the Company. To the best knowledge of such
counsel, there is no commitment, plan, or arrangement to issue, and no
outstanding option, warrant, or other right calling for the issuance of, any
share of capital stock of the Company or any security or other instrument which
by its terms is convertible into, exercisable for, or exchangeable for capital
stock of the Company, except as may be properly described in the Disclosure
Statement or in this Agreement. To the best knowledge of such counsel, there is
outstanding no security or other instrument which by its terms is convertible
into or exchangeable for capital stock of the Company, except as may be properly
described in the Disclosure Statement;
(iii) to the best knowledge of such counsel, there is no
litigation, arbitration, claim, governmental or other proceeding (formal or
informal), or investigation pending or threatened with respect to the Company or
any of its operations, businesses, properties, or assets except as may be
properly described in the Disclosure Statement, in this Agreement or such as
individually or in the aggregate do not now have and will not in the future have
a material adverse effect upon the operations, business, properties, or assets
of the Company or which could materially adversely affect the transactions or
other acts contemplated by this Agreement or the validity or enforceability of
this Agreement;
(iv) counsel has not received written notice, nor oral
communications, that the Company is in violation or breach of, or in default
with respect to, complying with any provision of any contract, agreement,
instrument, lease, license, arrangement, or understanding known to such counsel
and which is material to the business of the Company;
(v) the Company has all requisite corporate power and
authority to execute, deliver, and perform this Agreement, and to consummate the
transactions contemplated hereby. All necessary corporate proceedings of the
Company have been taken to authorize the execution, delivery, and performance by
the Company of this Agreement, and the consummation of the transactions
contemplated hereby. This Agreement has been duly authorized, executed, and
delivered by the Company, is the legal, valid, and binding obligation of the
Company, and is enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application now
or hereafter in effect relating to or affecting the enforcement of creditors'
right generally and the application of general equitable principles in any
action, legal or equitable and then except, as to those provisions relating to
indemnity or contribution, such opinion shall be limited as effected by any
Federal or state securities laws regarding indemnity and/or contribution;
(vi) the Preferred Stock conform to all statements relating
thereto contained in the Disclosure Statement. The Preferred Stock shall be
validly authorized, validly issued, fully paid, and nonassessable, with no
personal liability attaching to the ownership thereof and to such counsel's
knowledge shall not have been issued in violation of any preemptive rights of
stockholders;
15
(vii) assuming the accuracy of the representations and
warranties of the Proposed Investors set forth in the Subscription Agreement and
Investor Questionnaires and the representations and warranties of the Placement
Agent set forth herein, the Disclosure Statement (except that no opinion need be
expressed as to the financial statements, related schedules, or other financial
data contained therein) comply as to form (specifically excluding content and
substance) in all material respects with requirements of the Act and the
regulations thereunder;
(viii) counsel has not received any written notice, or oral
communication, of any modification, rescission, suspension, or withdrawal of
registration or qualification of the Units, or of an exemption from such
registration or qualification, has been issued and no proceedings for that
purpose have been instituted or threatened;
(ix) assuming that (i) the offer and the sale of the Units by
the Placement Agent was made in compliance with Regulation D and that the
Placement Agent's representations and warranties set forth herein are true and
correct, and (ii) that the representations of the Prospective Investors in the
Subscription Agreement and Investor Questionnaires signed by them are true and
correct (which facts will not be independently verified by such counsel), the
sale of Offering Securities in the Offering is exempt from registration under
the Securities Act of 1933 and is in compliance with Regulation D and/or Section
4(2) of the Securities Act of 1933;
(x) neither the execution and delivery of this Agreement, the
issuance of the Securities, nor compliance with the terms hereof or thereof will
(i) conflict with, result in a breach of, or constitute a default under the
Articles or Certificate of Incorporation or By-Laws of the Company, or, to the
best of such counsel's knowledge, any material contract, instrument, agreement
or document to which the Company is a party, or by which the assets or
properties of the Company are bound; or (ii) to the best knowledge of such
counsel, have any material adverse effect on any permit, certification,
registration, approval, consent, license or franchise necessary for the Company
to own or lease and operate any of its properties and to conduct its business or
the ability of the Company to make use thereof as described in the Disclosure
Statement.
In rendering such opinion, counsel for the Company may rely (A) as to matters of
fact, to the extent they deem proper, on certificates of responsible officers of
the Company; and (B) to the extent they deem proper, upon written statements or
certificates of officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to counsel for the Placement Agent.
(b) On or prior to the Initial Closing Date the Placement Agent
shall have been furnished such information, documents, certificates, and
opinions as it may reasonably require for the purpose of enabling it to review
the matters referred to in Section 7, and in order to evidence the accuracy,
completeness, or satisfaction of any of the representations, warranties,
covenants, agreements, or conditions herein contained, or as it may otherwise
reasonably request.
16
(c) At each Closing, the Placement Agent shall have received (i) a
certificate of the chief executive officer and of the chief financial officer of
the Company, dated the applicable Closing Date to the effect that, as of the
date of this Agreement and as of the applicable Closing Date the representations
and warranties of the Company contained herein were and are accurate, and that
as of the Closing Date the obligations to be performed by the Company hereunder
on or prior thereto have been fully performed; (ii) such other certificates or
documents as are usual and customary for Offerings; and (iii) a certificate
stating that the conditions for closing of the AIM Acquisition and Shell Merger
have been completed other than payment of the purchase price with respect to
each trasnaction.
(d) All proceedings taken in connection with the issuance, sale, and
delivery of the Preferred Stock shall be satisfactory in form and substance to
GAF and its counsel.
(e) There shall not have occurred after the date hereof, at any time
prior to each Closing: (A) any domestic or international event, act, or
occurrence which has materially disrupted, or in your opinion will in the
immediate future materially disrupt the securities markets; (B) a general
suspension of, or a general limitation on prices for, trading in securities on
the Nasdaq Stock Market or the over-the-counter market; (C) any banking
moratorium declared by a state or federal authority; (D) any material
interruption in the mail service or other means of communication within the
United States; (E) any material adverse change in the business, properties,
assets, results of operations, or financial condition of the Company; or (F) any
change in the market for securities in general or in political, financial, or
economic conditions which, in your judgment, makes it inadvisable to proceed
with the offering, sale, and delivery of the Units.
Any certificate or other document signed by any officer of the Company and
delivered to you or to your counsel at a Closing shall be deemed a
representation and warranty by the Company hereunder as to the statements made
therein. If any condition to your obligations hereunder has not been fulfilled
as and when required to be so fulfilled, you may terminate this Agreement or, if
you so elect, in writing waive any such conditions which have not been fulfilled
or extend the time for their fulfillment. In the event that you elect to
terminate this Agreement, you shall notify the Company of such election in
writing. Upon such termination, neither party shall have any further liability
or obligation to the other except as provided in Section 11 hereof.
(f) Prior to or concurrent with the Initial Closing Date, the
Company shall (i) consummate the AIM Acquisition of AIR Industries Machining
Corp., a New York corporation, upon terms acceptable to the Placement Agent and
the Prospective Investors; (ii) obtain a credit facility providing for loans in
the amount of not less than $8,000,000 and (iii) consummate the Shell Merger
upon terms acceptable to the Placement Agent and the Prospective Investors.
17
(g) Prior to or concurrent with the Initial Closing Date, the
Company shall have obtained the written agreement from all of the holders of
bridge notes (as described in the Offering Documents) (other than Atlas)
amending their notes to provide for repayment by the Company within five days of
the Initial Closing, subject to the right of the holder to convert such notes
into Common Stock of the Company at $0.22 per share.
10. Termination
The agency created hereby shall remain in effect until (i) the
completion of the Offering, or (ii) the earlier termination as herein provided.
If no Units are sold pursuant to the Offering prior to a date which is 60 days
following delivery of the Disclosure Statement, either party may terminate the
agency created hereby for any reason upon written notice to the Company. In
either case, neither party shall have any liability or continuing obligation to
the other except that, regardless of which party elects to terminate, (i) the
Company agrees to reimburse GAF for, or otherwise pay and bear, the expenses and
fees to be paid and borne by the Company as provided for in paragraph 5 above
and to reimburse GAF for the full amount of its actual out-of-pocket expenses
(which shall include, without limitation, the reasonable fees and disbursements
of GAF's counsel, travel and lodging expenses, mailing, printing and
reproduction expenses, and any expenses reasonably incurred by GAF in conducting
its due diligence) less amounts previously paid to GAF in reimbursement for such
expenses and the advance against the non-accountable expense allowance delivered
upon the execution of this Agreement, and (ii) the indemnification provisions in
paragraph 12 shall remain in full force and effect.
11. Solicitation Prohibition.
The Company agrees that, for a period of two years from the date
hereof, it shall not solicit any offer to buy from or offer to sell to any
person introduced to the Company by GAF in connection with the Offering,
directly or indirectly, any securities of the Company or of any other entity, or
provide the name of any such person to any other securities broker or dealer or
selling agent. In the event that the Company or any of its affiliates, directly
or indirectly, solicits, offers to buy from or offers to sell to any such person
any such securities, or provides the name of any such person to any other
securities broker or dealer or selling agent, and such person purchases such
securities or purchases securities from any other securities broker or dealer or
selling agent, the Company shall pay to GAF an amount in cash equal to 10% of
the aggregate purchase price of the securities so purchased by such person,
excluding the exercise of warrants issued as a result of the Offering.
12. Indemnification and Contribution
18
(a) The Company agrees to indemnify and hold harmless the Placement
Agent, its officers, directors, partners, employees, agents, and counsel, and
each person, if any, who controls the Placement Agent within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), against any and all loss, liability, claim,
damage, and expense whatsoever (which shall include, for all purposes of this
Section 12, but not be limited to, attorneys' fees and any and all expense
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation) as and when incurred
arising out of, based upon, or in connection with (i) any untrue statement or
alleged untrue statement of a material fact contained in the Disclosure
Statement or in any document delivered or written statement made pursuant to
Section 7(g), or (B) in any application or other document or communication (it
being understood that neither the Company nor any officer, director or employee
shall provide any infomation to any Prospective Investor which is not contained
in the Disclosure Statement) (in this Section 12 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify the Units under the "blue sky" or securities
laws thereof or in order to secure an exemption from such registration or
qualification or filed with the Commission; or any omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company as stated in Section 12(b) with respect to the Placement Agent expressly
for inclusion in the Disclosure Statement or in any application, as the case may
be; or (ii) any breach of any representation, warranty, covenant, or agreement
of the Company contained in this Agreement. The foregoing agreement to indemnify
shall be in addition to any liability the Company may otherwise have, including
liabilities arising under this Agreement.
If any action is brought against the Placement Agent or any of its
officers, directors, partners, employees, agent, or counsel, or any controlling
persons of the Placement Agent (an "indemnified party"), in respect of which
indemnify may be sought against the Company pursuant to the foregoing paragraph,
such indemnified party or parties shall promptly notify the Company (the
"Indemnifying party") in writing of the institution of such action (but the
failure so to notify shall not relieve the indemnifying party from any liability
it may have other than pursuant to this Section 12(a)) and the indemnifying
party shall promptly assume the defense of such action, including the employment
of counsel (reasonably satisfactory to such indemnified party or parties) and
payment of expenses. Such indemnified party shall have the right to employ its
own counsel in any such case, but the fees and expense of such counsel shall be
at the expense of such indemnified party unless the employment of such counsel
shall have been authorized in writing by the indemnifying party in connection
with the defense of such action or the indemnifying party shall not have
promptly employed counsel satisfactory to such indemnified party or parties to
have charge of the defense of such action or such indemnified party or parties
shall have reasonably concluded that there may be one or more legal defenses
available to it or them or to other indemnified parties which are different from
or additional to those available to one or more of the indemnifying parties, in
any of which events such fees and expenses of one such counsel shall be borne by
the indemnifying party and the indemnifying party shall not have the right to
direct the defense of such action on behalf of the indemnified party or parties.
Anything in this paragraph to the contrary notwithstanding, the indemnifying
party shall not be liable for any settlement of any such claim or action
effected without its written consent. The Company agrees promptly to notify the
Placement Agent of the commencement of any litigation or proceedings against the
Company or any of its officers or directors in connection with the sale of the
Units, the Disclosure Statement, or any application.
19
(b) The Placement Agent agrees to indemnify and hold harmless the
Company, its officers, directors, employees, agents, and counsel, and each other
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing
indemnity from the Company to the Placement Agent in Section 15(a), with respect
to any and all loss, liability, claim, damage, and expense whatsoever (which
shall include, for all purposes of this Section 12, but not be limited to,
attorneys' fees and any and all expense whatsoever incurred in investigating,
preparing, or defending against any litigation, commenced or threatened, or any
claim whatsoever and any and all amounts paid in settlement of any claim or
litigation) as and when incurred arising out of, based upon, or in connection
with (i) statements or omissions, if any, made in the Disclosure Statement in
reliance upon and in conformity with written infomation furnished to the Company
as stated in this Section 12(b) with respect to the Placement Agent expressly
for inclusion in the Disclosure Statement, and (ii) the failure of the Placement
Agent to comply with the provisions of Section 2(c) hereof or with the "blue
sky" or securities laws of the jurisdictions in which the Placement Agent
solicits offers to buy or offers to sell any Units or any breach of any
representation, warranty, covenant or agreement of the Placement Agent contained
in this Agreement. If any action shall be brought against the Company or any
other person so indemnified based on the Disclosure Statement and in respect of
which indemnity may be sought against the Placement Agent pursuant to this
Section 12(b), the Placement Agent shall have the rights and duties given to the
indemnifying party, and the Company and each other person so indemnified shall
have the rights and duties given to the indemnified parties, by the provisions
of Section 12(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 12(a) or
12(b) but it is found in a final judicial determination, not subject to further
appeal, that such indemnification may not be enforced in such case, even though
this Agreement expressly provides for indemnification in such case, or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the Exchange
Act, or otherwise, then the Company (including for this purpose any contribution
made by or on behalf of any officer, director, employee, agent, or counsel of
the Company, or any controlling person of the Company), on the one hand, and the
Placement Agent (including for this purpose any contribution by or on behalf of
an indemnified party), on the other hand, shall contribute to the losses,
liabilities, claims, damages, and expenses whatsoever to which any of them may
be subject, in such proportions as are appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Placement Agent, on
the other hand; provided, however, that if applicable law does not permit such
allocation, then other relevant equitable considerations such as the relative
fault of the Company and the Placement Agent in connection with the facts which
resulted in such losses, liabilities, claims, damages, and expenses shall also
be considered. The relative benefits received by the Company, on the one hand,
and the Placement Agent, on the other hand, shall be deemed to be in the same
proportion as (x) the total proceeds from the Offering (net of compensation
payable to the Placement Agent pursuant to Section 5(a) hereof but before
deducting expenses) received by the Company, and (y) the compensation received
by the Placement Agent pursuant to Section 5(a) hereof.
20
The relative fault, in the case of an untrue statement, alleged
untrue statement, omission, or alleged omission, shall be determined by, among
other things, whether such statement, alleged statement, omission, or alleged
omission relates to information supplied by the Company or by the Placement
Agent, and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement, alleged statement, omission,
or alleged omission. The Company and the Placement Agent agree that it would be
unjust and inequitable if the respective obligations of the Company and the
Placement Agent for contribution were determined by pro rata or per capita
allocation of the aggregate losses, liabilities, claims, damages, and expenses
or by any other method of allocation that does not reflect the equitable
considerations referred to in this Section 12(c). In no case shall the Placement
Agent by responsible for a portion of the contribution obligation in excess of
the compensation received by it pursuant to Section 5(a) hereof. No person
guilty of a fraudulent misrepresentation shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation. For purposes
of this Section l42c), each person, if any, who controls the Placement Agent
within the meaning of Section l5 of the Act or Section 20(a) of the Exchange Act
and each officer, director, partners, employee, agent, and counsel of the
Placement Agent, shall have the same rights to contribution as the Placement
Agent, and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act and each officer,
director, employee, agent, and counsel of the Company, shall have the same
rights to contribution as the Company, subject in each case to the provisions of
this Section 12(c). Anything in this Section 12(c) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
Section 12(c) is intended to supersede any right to contribution under the Act,
the Exchange Act, or otherwise.
13. Board of Directors.
Upon completion of the Minimum Proceeds and for a period of two
years from the final closing, GAF shall have the option to have one person
attend meetings of the Board of Directors as a non-voting observer. As a
condition to such person participating in GI meetings or otherwise obtaining
access to confidential information, such person shall execute a nondisclosure
agreement and an agreement to comply with applicable securities laws, which
agreement shall be in a form reasonably requested by GI.
14. Right of First Refusal.
21
The Company agrees that if the Minimum Proceeds are received in the
Offering, GAF shall have an irrevocable preferential right for a period of two
years from the date the Offering is completed to purchase for its account or to
sell for the account of the Company, or any subsidiary of or successor to the
Company, any securities of the Company or any such subsidiary or successor which
the Company, any such subsidiary or successor may seek to sell through itself,
through an underwriter, placement agent or broker-dealer, and whether pursuant
to registration under the Act or otherwise. The Company, any such subsidiary or
successor will consult GAF with regard to any such offering and will offer GAF
the opportunity to purchase or sell any such securities on terms not more
favorable to the Company, any such subsidiary or successor than it or they can
secure elsewhere. If GAF fails to accept such offer within five(5) business days
after the mailing of a notice containing such offer by registered mail addressed
to GAF (48 hours in the event the offer covers a sale under Rule 144), then GAF
shall have no further claim or right with respect to the financing proposal
contained in such notice. If, however, the terms of such proposal are
subsequently modified in any material respect, the preferential right referred
to herein shall apply to such modified proposal as if the original proposal had
not been made. GAF's failure to exercise its preferential right with respect to
any particular proposal shall not affect its preferential rights relative to
future proposals.
14. Consulting Agreement.
Upon completion of the Minimum Proceeds, GI shall enter into a
financial consulting agreement ("Advisory Agreement") with GAF which agreement
shall have a term of 18 months and provide for a monthly fee of $7,500 per month
plus out-of pocket expenses which have been approved by the Company. The
Advisory Agreement shall provide for early termination of the agreement after
the initial six (6) months by the Company upon 30 days written notice. Pursuant
to the Advisory Agreement, GAF shall provide advice to the Company with respect
to, among other things, business opportunities such as strategic mergers and
acquisitions and capital restructuring, if any. GAF shall be entitled, pursuant
to the Advisory Agreement, to such fees as may be negotiated by the parties in
consideration of services rendered for advising the Company in connection with
any particular mergers or acquisition transaction.
15. Representations and Agreements to Survive Delivery
All representations, warranties, covenants, and agreements contained
in this Agreement shall be deemed to be representations, warranties, covenants,
and agreements at the Closing Date and, such representations, warranties,
covenants, and agreements, including the indemnification and contribution
agreements contained in Section 12, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Placement
Agent or any indemnified person, or by or on behalf of the Company or any person
or entity which is entitled to be indemnified under Section 12(b), and shall
survive termination of this Agreement or the issuance, sale, and delivery of the
Units. In addition, notwithstanding any election hereunder or any termination of
this Agreement, and whether or not the terms of this Agreement are otherwise
carried out, the provisions of Sections 11, 12, 13 and 14 shall survive
termination of this Agreement and shall not be affected in any way by such
election or termination or failure to carry out the terms of this Agreement or
any part thereof.
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16. Notices
All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, shall be mailed,
delivered by hand, or sent by overnight courier service, to GunnAllen Financial,
Inc. at the address set forth above with a copy to Goldstein Digioia LLP 45
Broadway, 11th Floor, New York, New York 10006 Attention: Brian C. Daughney,
Esq.; or if sent to the Company, shall be mailed, delivered or telexed and
confirmed by letter, to Gales Industries, Inc. 333 East 66th Street, 9th Floor
New York, New York 10021 Attention: Michael A. Gales, Executive Chairman with a
copy to Eaton & Van Winkle LLP, 3 Park Avenue, New York, New York 10016 Attn:
Vincent J. McGill, Esq. All notices hereunder shall be effective upon delivery
to the address above.
17. Parties
This Agreement shall inure solely to the benefit of, and shall be
binding upon, the Placement Agent and the Company and the persons and entities
referred to in Section l8 who are entitled to indemnification or contribution,
and their respective successors, legal representatives, and assigns (which shall
not include any purchaser, as such, of Units), and no other person shall have or
be construed to have any legal or equitable right remedy, or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
18. Governing Law/Consent to Jurisdiction
(a) This Agreement shall be construed in accordance with the laws of
the State of New York, without giving effect to conflict of laws.
(b) The Company (a) agrees that any legal suit, action or proceeding
arising out of or relating to this Agreement shall be instituted exclusively in
New York State Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York, (b) waives any objection
which the Company may have now or hereafter to the venue of any such suit,
action or proceeding, and (c) irrevocably consents to the jurisdiction of the
New York State Supreme Court, County of New York and the United States District
Court for the Southern District of New York in any such suit, action or
procedure. Each of the Company and the Placement Agent further agrees to accept
and acknowledge service of any and all process which may be served in any suit,
action or proceeding in the New York State Supreme Court for the Southern
District of New York, and agrees that service of process upon the Company mailed
by certified mail to the Company's address shall be deemed in every respect
effective service of process upon the company in any such suit, action or
proceeding. In the event of litigation between the parties arising hereunder,
the prevailing party shall be entitled to costs and reasonable attorney's fees.
[signature page is next]
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19. Counterparts
This Agreement may be executed in counterparts, each of which shall
constitute an original and all of which, when taken together, shall constitute
one agreement.
If the foregoing correctly sets forth the understanding between us,
please so indicate in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement among us.
Very truly yours,
GALES INDUSTRIES INCORPORTED
By: /s/ Michael A. Gales
------------------------
Name: Michael A. Gales
Title: Executive Chairman
Accepted as of the date
first above written:
GUNNALLEN FINANCIAL, INC.
By:
-------------------------
Name:
Title:
24
Amendment No. 1 to Placement Agency Agreement
This Amendment No. 1 to Placement Agency Agreement is dated as of October
25, 2005 by and between Gales Industries Incorporated, a Delaware corporation
(the "Company" or "GI") and GunnAllen Financial, Inc. ("Placement Agent" or
"GAF").
Reference is made to the Placement Agency Agreement dated as of September
26, 2005 ("Original Agreement"). The parties hereto desire to amend the Original
Agreement upon the terms and conditions contained herein. All terms not
otherwise defined herein shall have the meaning ascribed to such term in the
Original Agreement.
1. Section 2(c) of the Original Agreement is hereby restated in its
entirety to read as follows:
(c) The Offering shall commence on the date that the Company delivers the
Disclosure Statement, in form and substance satisfactory to the Placement Agent
and shall expire at 3:00 p.m., New York time, on November 14, 2005 and may be
extended for up to one additional 45 day period at the discretion of the
Placement Agent; provided, however, the Minimum Offering must be subscribed for
prior to 3:00 pm on November 14, 2005. Such period, as same may be so extended,
shall hereinafter be referred to as the "Offering Period."
2. Section 2(f) of the Original Agreement is hereby restated in its
entirety to read as follows:
(f) If subscriptions for the Minimum Offering are not received from
Prospective Investors prior to November 14, 2005 and accepted by the Company and
the Placement Agent, the Offering shall be canceled, all funds received and held
in the Escrow Account shall be refunded in full to the Prospective Investors
without interest or deduction. Assuming that the Minimum Offering is completed
on or before November 14, 2005, then additional subscriptions shall be accepted
into escrow up to the Maximum Offering (and any additional over subscriptions up
to $1,000,000) and additional closings shall be held from time to time.
3. Section 2(g) of the Original Agreement is hereby restated in its
entirety to read as follows:
(g) You may engage other persons selected by you to assist you in the
Offering (each such broker/dealers being hereinafter referred to as a "Selling
Group Member") and you may allow such Selling Group Member such part of the
compensation and payment of expenses payable to you under Section 6 hereof as
you shall determine. Any such Selling Group Member shall be a member firm in
good standing as a broker-dealer under the rules of the NASD. The Company hereby
makes such representations and warranties to, and covenants and agreements with,
any Selling Group Member (including an agreement to indemnify such Selling Group
Member on terms substantially similar to Section 17 hereof) as provided herein
and each Selling Group Member shall make representations, warranties and
covenants to the Company identical to those made by the Placement Agent to the
Company in Section 4 hereof and shall agree to indemnify the Company in the
manner set forth in Section 17 hereof. The Placement Agent shall indemnify and
hold harmless the Company from any and all claims of any selling group member
for fees or other compensation.
1
4. The Company shall prepare a supplement, in form and substance
satisfactory to GAF and their respective counsel, to reflect the terms of this
Amendment No.1 to the Original Agreement, and such other matters as the parties
shall determine.
5. All other terms and conditions of the Original Agreement shall remain
in full force and effect.
This Agreement may be executed in counterparts, each of which shall
constitute an original and all of which, when taken together, shall constitute
one agreement.
GALES INDUSTRIES INCORPORATED
By: /s/ Michael A. Gales
-------------------------
Name: Michael A. Gales
Title: Executive Chairman
GUNNALLEN FINANCIAL, INC.
By:
-------------------------
Name:
Title:
2
Amendment No. 2 to Placement Agency Agreement
This Amendment No. 2 to Placement Agency Agreement is dated as of November
10, 2005 by and between Gales Industries Incorporated, a Delaware corporation
(the "Company" or "GI") and GunnAllen Financial, Inc. ("Placement Agent" or
"GAF").
Reference is made to the Placement Agency Agreement dated as of September
26, 2005, as previously amended ("Original Agreement"). The parties hereto
desire to amend the Original Agreement upon the terms and conditions contained
herein. All terms not otherwise defined herein shall have the meaning ascribed
to such term in the Original Agreement.
1. Section 2(c) of the Original Agreement is hereby restated in its
entirety to read as follows:
(c) The Offering shall commence on the date that the Company delivers the
Disclosure Statement, in form and substance satisfactory to the Placement Agent
and shall expire at 3:00 p.m., New York time, on November 18, 2005 unless
extended to November 30, 2005; provided, however, the Minimum Offering must be
subscribed for prior to 3:00 pm on November 18, 2005. Such period, as same may
be so extended, shall hereinafter be referred to as the "Offering Period."
2. Section 2(f) of the Original Agreement is hereby restated in its
entirety to read as follows:
(f) If subscriptions for the Minimum Offering are not received from
Prospective Investors prior to November 18, 2005 and accepted by the Company and
the Placement Agent, the Offering shall be canceled, all funds received and held
in the Escrow Account shall be refunded in full to the Prospective Investors
without interest or deduction. Assuming that the Minimum Offering is completed
on or before November 18, 2005, then additional subscriptions shall be accepted
into escrow up to the Maximum Offering (and any additional over subscriptions up
to $1,000,000) and additional closings shall be held from time to time.
3. The Company shall prepare a supplement, in form and substance
satisfactory to GAF and their respective counsel, to reflect the terms of this
Amendment No. 2 to the Original Agreement, and such other matters as the parties
shall determine.
4. All other terms and conditions of the Original Agreement shall remain
in full force and effect.
This Agreement may be executed in counterparts, each of which shall
constitute an original and all of which, when taken together, shall constitute
one agreement.
GALES INDUSTRIES INCORPORATED GUNNALLEN FINANCIAL, INC.
By: /s/ Michael A. Gales By:
--------------------------- ---------------------------
Name: Michael A. Gales Name:
Title: Executive Chairman Title: